-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, VWKs0duTmYMsk9A8lUdAeZSwOExMgMgc/s/Y131sJaMCRQABu7liPpOTm8ZYeGgz WM7L081kRMUmTFOItCcX5w== 0000898430-94-000634.txt : 19940829 0000898430-94-000634.hdr.sgml : 19940829 ACCESSION NUMBER: 0000898430-94-000634 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19940531 FILED AS OF DATE: 19940826 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL MEDICAL ENTERPRISES INC /NV/ CENTRAL INDEX KEY: 0000070318 STANDARD INDUSTRIAL CLASSIFICATION: 8062 IRS NUMBER: 952557091 STATE OF INCORPORATION: NV FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07293 FILM NUMBER: 94546160 BUSINESS ADDRESS: STREET 1: P O BOX 4070 CITY: SANTA MONICA STATE: CA ZIP: 90404 BUSINESS PHONE: 3103158000 MAIL ADDRESS: STREET 1: P O BOX 4070 CITY: SANTA MONICA STATE: CA ZIP: 90404 10-K 1 FORM 10-K FOR 05-31-94 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 1994. [FEE REQUIRED] OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . [NO FEE REQUIRED] COMMISSION FILE NUMBER: I-7293 ---------------- NATIONAL MEDICAL ENTERPRISES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- NEVADA 95-2557091 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2700 COLORADO AVENUE 90404 SANTA MONICA, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) AREA CODE (310) 998-8000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- --------------------- Common Stock New York Stock Exchange Pacific Stock Exchange 12 1/8% Notes Due April 1, 1995 New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Pacific Stock Exchange
---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [_] As of July 29, 1994 (the last business day of July) there were 166,194,728 shares of Common Stock outstanding. The aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant, based on the closing price of these shares on the New York Stock Exchange, was approximately $2,802,198,043. For the purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates. Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended May 31, 1994, have been incorporated by reference into Parts I, II and IV of this Report. Portions of the definitive Proxy Statement for the Registrant's 1994 Annual Meeting of the Shareholders have been incorporated by reference into Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS FORM 10-K ANNUAL REPORT--1994 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
PAGE ---- Part I Item 1. Business................................................... 1 Item 2. Properties................................................. 14 Item 3. Legal Proceedings.......................................... 14 Item 4. Submission of Matters to a Vote of Security Holders........ 18 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 19 Item 6. Selected Financial Data.................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 19 Item 8. Financial Statements and Supplementary Data................ 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 19 Part III Item 10. Directors and Executive Officers of the Registrant......... 19 Item 11. Executive Compensation..................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................. 19 Item 13. Certain Relationships and Related Transactions............. 19 Part IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................................................... 20
- -------- Note: The responses to Items 5 through 8, Items 11 through 13 and portions of Items 1, 3, 10 and 14 are included in the Registrant's Annual Report to Shareholders for the year ended May 31, 1994, or the definitive Proxy Statement for the Registrant's 1994 Annual Meeting of Shareholders. The required information is incorporated into this Report by reference to those documents and is not repeated herein. PART I ITEM 1. BUSINESS GENERAL National Medical Enterprises, Inc. ("NME" or the "Company") is a leading investor-owned health care company, engaged primarily in the operation of domestic and international general hospitals. For all or a portion of fiscal year 1994, NME's operations were conducted through its Hospital Division (which includes the Company's general and rehabilitation hospitals), Psychiatric Division, Management Services Division, International Hospital Division and Other Businesses. NME's continuing operations are conducted through its Hospital Division, International Hospital Division, Management Services Division and Other Businesses. Fiscal year 1994 was a period of tremendous change for NME. For the first time in NME's history, it had a new management team. The year started with Jeffrey C. Barbakow becoming Chairman and Chief Executive Officer and Michael H. Focht becoming President and Chief Operating Officer. During the year the Company also appointed a new General Counsel and a new Chief Financial Officer. The Company determined that its top priority would be to resolve the unusual legal proceedings then facing NME. As fiscal year 1994 began, NME faced significant litigation with various insurers concerning NME's Psychiatric Division Facilities (as defined below), class-action lawsuits by certain shareholders, psychiatric patient litigation alleging fraud and conspiracy and investigations by various state and federal agencies aimed principally at NME's freestanding psychiatric hospitals, residential treatment centers and substance abuse recovery facilities (collectively, the "Psychiatric Division Facilities"). The legal challenges facing NME reached their peak in August 1993, when federal agents served NME's Psychiatric Division headquarters in Santa Monica, California as well as various regional offices and facilities with search warrants and subpoenas in connection with the government investigations. By the end of the year, NME had resolved the litigation between NME and the insurers, had resolved 90 of the cases brought by psychiatric patients alleging fraud and conspiracy (approximately two-thirds of such cases that had been filed to date) and had reached an agreement in principle to resolve claims by federal and state agencies. In the first quarter of fiscal year 1995, NME entered into definitive agreements that brought a close to all federal investigations and substantially all state claims pending against NME and its subsidiaries. These matters and other legal proceedings are discussed in more detail under Legal Proceedings on page 14. During the year NME's management also concluded that it would be in the best interest of the shareholders for NME to focus on its core business, operating domestic and international general hospitals. During fiscal year 1994, NME sold 29 of its 35 rehabilitation hospitals, retaining six rehabilitation hospitals located on the same campus as or nearby certain of its general hospitals (the "Campus Rehabilitation Hospitals"). 1 On November 30, 1993, the Company decided to discontinue its Psychiatric Division Facilities business and adopted a plan to dispose of those Facilities. Beginning as of November 30, 1993, the financial results of the Psychiatric Division Facilities have been treated as discontinued operations for accounting purposes. During fiscal year 1994, NME sold 15 Psychiatric Division Facilities. In addition, on March 29, 1994, NME entered into agreements to sell 47 of the remaining Psychiatric Division Facilities to Charter Medical Corporation ("Charter"). On June 30, 1994, NME sold 27 of those 47 facilities. The sale of 17 of the remaining 20 facilities to be sold to Charter is subject to approval by the Federal Trade Commission ("FTC"), which has requested additional information concerning such sales. The Company and Charter are responding to the FTC's request. No specific date has been set to close these sales, except that if such closings do not occur prior to September 30, 1994, and the parties do not extend that date, the agreement will terminate on September 30. Based on discussions to date with the FTC, the Company believes it may not be able to sell at least five facilities to Charter. However, it believes it will receive similar proceeds upon their sale to other parties. The other three facilities being sold to Charter have FTC approval and are expected to be sold at a later date. NME plans to sell or close all but four of the 15 Psychiatric Division Facilities remaining at May 31, 1994, and not being sold to Charter. During the first quarter of fiscal year 1995, NME sold four of those Psychiatric Division Facilities to other parties. The four Psychiatric Division Facilities being retained are located on the same campus as or nearby certain of its general hospitals (the "Campus Psychiatric Facilities"). At May 31, 1994, NME operated, domestically, 35 general hospitals (two of which were sold during the first quarter of fiscal year 1995) and six rehabilitation hospitals. In addition, NME continued to operate as a discontinued business 54 Psychiatric Division Facilities. The financial results of the general hospitals and the rehabilitation hospitals are included in the financial results of the Hospital Division. NME's Management Services Division manages 20 psychiatric units and 10 rehabilitation units within general hospitals owned by others and manages one freestanding psychiatric hospital for a third party. In addition, NME's Management Services Division manages eight psychiatric units, three substance abuse recovery facilities and seven rehabilitation units within NME's general hospitals. Beginning as of November 30, 1993, the financial results of the management of the psychiatric units and psychiatric hospital were reported in the financial results of the Hospital Division and prior to that were reported in the financial results of the Psychiatric Division. The financial results of the management of the rehabilitation units were reported in the financial results of the Hospital Division for all of fiscal year 1994. The financial results of NME's International Hospital Division, which operates and manages general hospitals and other health care businesses located outside the United States, are included in the financial results of the Hospital Division. NME's international operations continued to grow during fiscal year 1994. During the year NME entered into an agreement with Bumrungrad Hospital Corporation, a Thai company listed on the Stock Exchange of Thailand, to develop the 554-bed tertiary care Bumrungrad Medical Center in Bangkok, Thailand. That hospital is expected to open during the first quarter of fiscal year 1997. NME's 184-bed tertiary care hospital, Centro Medico Teknon, opened in Barcelona, Spain, in February 1994. In the first quarter of fiscal 1994, NME purchased the 50% interest of its joint venture partner in that hospital and now is the sole owner of the hospital. NME continues to operate and manage two general hospitals in Singapore and owns a minority interest in a 17-story medical office building adjacent to one of those hospitals. NME also provides management services for the Subang Jaya Medical Centre (in which it owns a 30% interest) in Kuala Lumpur, Malaysia. The Subang Jaya Medical Centre is expected to open a new 150-bed tower during the second quarter of fiscal 1995. NME also owns a 52% interest in Australian Medical Enterprises Limited ("AME"), an Australian hospital management company that operates four hospitals in the Perth area, five hospitals in the Sydney area and a large pathology laboratory in Western Australia. In fiscal year 1994, AME began building the new 202-bed St. George Hospital outside of Sydney. NME continues to own a 42% equity interest in Westminster Health Care Holdings PLC ("Westminster"). Westminster, formerly NME's 90% owned United Kingdom nursing home subsidiary, completed its initial public offering of common stock in fiscal year 1993. NME's share of Westminster's earnings are included in the financial results of NME's Other Businesses. 2 NME restructured its relationship with its former subsidiary, The Hillhaven Corporation ("Hillhaven"), in fiscal year 1994. Following Hillhaven's spinoff in fiscal year 1990, NME continued to lease facilities to, lend money (in connection with the sale of facilities) to and guaranty substantial obligations of, Hillhaven. As described in more detail on page 5, in fiscal year 1994 NME sold to Hillhaven all of the facilities previously leased by NME to Hillhaven, Hillhaven repaid to NME all amounts previously loaned by NME to Hillhaven and Hillhaven caused NME to be released from approximately $370,000,000 of the $706,000,000 of Hillhaven debt and lease obligations for which NME had been contingently liable. NME also exercised all of its Warrants to purchase 6,000,000 shares of Hillhaven Common Stock, following which NME owned at May 31, 1994, 8,878,147 shares (approximately 32.9%) of Hillhaven Common Stock, 35,000 shares of Hillhaven's cumulative non-voting 8 1/4% Series C Preferred Stock and 60,546 shares of Hillhaven's cumulative non-voting 6 1/2% payable-in- kind Series D Preferred Stock. NME did not transfer as part of the spinoff, and continued to operate through fiscal year 1994, freestanding and mobile kidney dialysis units (which were operated by NME's Medical Ambulatory Care ("MAC") subsidiary), and seven domestic long term care facilities (which are managed by Hillhaven) adjacent to NME hospitals. NME's share of Hillhaven's earnings, NME's lease income from Hillhaven prior to restructuring its relationship with Hillhaven, NME's guaranty fee income from Hillhaven, the financial results of MAC's operations and the financial results of NME's long term care facilities are included in the financial results of NME's Other Businesses. In September 1993, Hillhaven effected a one-for-five reverse stock split of its common stock. All of the numbers above have been adjusted to reflect that reverse stock split. In the first quarter of fiscal year 1995, MAC sold units (consisting primarily of debt but including some non-voting common stock) to the public and then sold shares constituting a majority interest in MAC to an affiliate of an investment banking firm and MAC's management, reducing NME's equity interest in MAC to approximately 25%. MAC paid NME a $75,500,000 dividend with the proceeds of MAC's public sale of the units and the proceeds of a loan to MAC from a group of banks. The health care industry in the United States is going through a period of great uncertainty. The federal government and various states have set the reform of the health care system as one of their primary goals. It is not clear at this time what form any such reforms may take or what impact such reforms will have on NME's financial performance, but NME believes that some of the pressures leading to the call for reform and the uncertainty concerning the scope and substance of any changes to the health care system have affected its operations. Furthermore, restrictions imposed by government and third party payors, including what commonly is referred to as "utilization review" and "managed care," have resulted in a reduction of payments for, or limited the availability of, certain treatments and procedures. These matters are discussed in more detail under Health Care Reform, Regulation, Licensing and Insurance on page 11. NME's fiscal year 1994 net operating revenues from continuing operations were derived 94.6% from its Hospital Division and 5.4% from its Other Businesses. Under segment reporting criteria, NME believes its only material business segment is "health care," which contributed substantially all of the Company's net operating revenues and operating profits in fiscal year 1994. See the discussion of NME's revenues and operations in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in NME's 1994 Annual Report to Shareholders. 3 HOSPITAL DIVISION NME's general hospitals offer acute care services with fully equipped operating and recovery rooms, radiology services, intensive care and coronary care nursing units, pharmacies, clinical laboratories, respiratory therapy services, physical therapy services and outpatient facilities. At May 31, 1994, NME's Hospital Division operated domestically 35 general hospitals (two of which were sold in the first quarter of fiscal year 1995), 27 of which are owned by NME's wholly-owned subsidiary, NME Hospitals, Inc., one of which is on leased land and eight of which are owned by and leased from others (including two leased from general partnerships in which NME owns interests). The Hospital Division also operates the Campus Psychiatric Facilities and Campus Rehabilitation Hospitals. At May 31, 1994, the Company's International Hospital Division (the operations of which are included in the financial results of the Hospital Division) operated two hospitals in Singapore (650 beds), operated 10 hospitals (689 beds) (the operations of one of which have been suspended pending their merger into the operations of a new hospital for which a license was granted in fiscal year 1994) and a laboratory business in Australia, a hospital (184 beds) in Barcelona, Spain (which now is wholly-owned by NME following its purchase in the first quarter of fiscal 1994 of its joint venture partner's 50% interest), and managed one hospital (225 beds) (in which it owns a 30% interest) in Kuala Lumpur, Malaysia. During the year NME also entered into a joint venture to develop a new 554-bed tertiary care hospital in Bangkok, Thailand. That hospital is expected to be completed during the first quarter of fiscal year 1997. During fiscal year 1994, the Company entered into a long-term lease of one general hospital (138 beds). In addition, the Company added a total of 67 beds to three existing general hospitals and eliminated 30 beds from four other existing general hospitals, all in the United States. The Company sold one domestic general hospital (120 beds) during fiscal year 1994 and two general hospitals (202 beds) during the first quarter of fiscal year 1995. The following table lists, by state, the number of general hospitals owned or leased by NME and operated domestically as of May 31, 1994 (including the two general hospitals sold in the first quarter of fiscal year 1995): OWNED OR LEASED GENERAL HOSPITALS
LICENSED STATE NO. BEDS ----- --- -------- California.......................... 17 2,943 Florida............................. 5 1,168 Louisiana........................... 5 849 Missouri............................ 2 527 Tennessee........................... 2 421 Texas............................... 4 965 --- ----- Totals.......................... 35 6,873 === =====
The above table does not include the Campus Rehabilitation Hospitals or the Campus Psychiatric Facilities. The following table shows certain information about the general hospitals owned or leased domestically by NME, for the fiscal years ended May 31:
1994 1993 1992 1991 1990 ----- ----- ----- ----- ----- Total number of facilities................ 35 35 35 35 37 Total number of licensed beds............. 6,873 6,818 6,559 6,591 6,731 Average occupancy during the period....... 47% 48% 51% 52% 51%
4 NME sold 28 of its 35 rehabilitation hospitals to HEALTHSOUTH Rehabilitation Corporation for approximately $350,000,000 and one rehabilitation hospital to a third party for approximately $14,000,000 in fiscal year 1994, retaining the six Campus Rehabilitation Hospitals. The financial results of the rehabilitation hospitals were included in the financial results of the Hospital Division in fiscal year 1994. OTHER BUSINESSES NME continues to own a 42% equity interest in Westminster. Westminster, formerly NME's 90% owned United Kingdom nursing home subsidiary, completed its initial public offering of common stock on April 15, 1993 (the "Offering"). At May 31, 1994, Westminster owned and operated 56 nursing homes in the United Kingdom. NME recognizes its share of Westminster's earnings using the equity method of accounting. Those earnings are included in the financial results of NME's Other Businesses. In connection with the Offering, NME and Westminster entered into an agreement governing their future relationship. That agreement provides that: (1) NME will be entitled to nominate three, two or one representative(s) to Westminster's nine-member board of directors so long as NME owns 30%, 20% or 10% or more, respectively, of Westminster's shares; (2) NME may not purchase or sell shares in Westminster prior to April 15, 1995, without the consent of Westminster's directors not nominated by NME; (3) NME may purchase or sell Westminster's shares during the third year following the Offering so long as it notifies Westminster before doing so and may purchase or sell shares without restriction after the third year following the Offering so long as it does not acquire 50% or more of Westminster's stock prior to the sixth anniversary of the Offering; and (4) as long as NME holds 30% or more of Westminster's stock (a) both companies have agreed not to operate facilities within 30 miles of each other and to seek to avoid conflicts of interest and minimize the extent of competition between their operations and (b) NME has agreed not to compete with Westminster in the business of nursing home care in the United Kingdom and Westminster has agreed not to compete with NME in the business of nursing home care in the United States or Australia. NME restructured its relationship with Hillhaven in fiscal year 1994. Following Hillhaven's spinoff in fiscal year 1990, NME continued to lease facilities to, lend money (in connection with the sale of facilities) to and guaranty substantial obligations of, Hillhaven. During fiscal year 1994 (1) NME sold to Hillhaven, for $111,800,000, the 23 remaining long term care facilities previously leased by NME to Hillhaven, (2) Hillhaven repaid to NME $149,000,000 previously loaned to Hillhaven, (3) Hillhaven caused NME to be released from approximately $370,000,000 of the $706,000,000 of Hillhaven debt and lease obligations for which NME had been contingently liable and (4) NME purchased 120,000 shares of Hillhaven non-voting Series D Preferred Stock for $120,000,000. Hillhaven continues to pay a guaranty fee to NME, calculated as a percentage of the debt and lease obligations on which NME remains contingently liable. On February 28, 1994, NME exercised all of its Warrants to purchase 6,000,000 shares of Hillhaven Common Stock. NME paid the $63,300,000 exercise price by tendering 63,300 shares of Hillhaven cumulative non-voting Series D Preferred Stock previously acquired by NME. The terms of the Series D Preferred Stock expressly provided that it could be tendered to pay the exercise price of the Warrants. Following NME's exercise of the Warrants, it owned at May 31, 1994, 8,878,147 shares of Hillhaven Common Stock, which constitutes approximately 32.9% of Hillhaven's outstanding Common Stock, 35,000 shares of Hillhaven's cumulative non-voting 8 1/4% Series C Preferred Stock and 60,546 shares of Hillhaven's cumulative non-voting 6 1/2% payable-in-kind Series D Preferred Stock. NME did not transfer as part of the spinoff, and continued to operate through fiscal year 1994, freestanding and mobile kidney dialysis units (which are operated by NME's MAC subsidiary), and seven domestic long term care facilities (all of which are managed by Hillhaven and are adjacent to NME hospitals and one of which, The John Douglas French Center, is a special care facility for victims of Alzheimer's disease). During fiscal year 1994, NME paid Hillhaven approximately $2,334,000 for managing those seven long term care facilities. NME's share of Hillhaven's earnings, NME's lease and guaranty fee income from Hillhaven, the financial results of MAC's operations and the financial results of NME's long term care facilities are included in the financial results of NME's Other Businesses. In September 1993, Hillhaven effected a one-for-five reverse stock split of its common stock. All of the numbers above have been adjusted to reflect that reverse stock split. 5 In the first quarter of fiscal year 1995, MAC sold units (consisting primarily of debt but including some non-voting common stock) to the public and then sold shares constituting a majority interest in MAC to an affiliate of an investment banking firm and MAC's management, reducing NME's equity interest in MAC to approximately 25%. MAC paid NME a $75,500,000 dividend with the proceeds of MAC's public sale of the units and the proceeds of a loan to MAC from a group of banks. PSYCHIATRIC DIVISION On November 30, 1993, the Company decided to discontinue its Psychiatric Division Facilities business and adopted a plan to dispose of those Facilities. Beginning as of November 30, 1993, the financial results of the Psychiatric Division Facilities have been treated as discontinued operations for accounting purposes. During fiscal year 1994, NME sold 15 Psychiatric Division Facilities. In addition, on March 29, 1994, NME entered into agreements to sell 47 of the remaining Psychiatric Division Facilities to Charter for a total purchase price of approximately $200,000,000. On June 30, 1994, NME sold 27 of those 47 facilities to Charter for a total purchase price of approximately $129,000,000. The sale to Charter of 17 other facilities is subject to approval by the FTC, which has requested additional information concerning such sales. The Company and Charter are responding to the FTC's request. No specific date has been set to close these sales, except that if such closings do not occur prior to September 30, 1994, and the parties do not extend that date, the agreement will terminate on September 30. Based on discussions to date with the FTC, the Company believes it may not be able to sell at least five facilities to Charter. However, it believes it will receive similar proceeds upon their sale to other parties. The other three facilities being sold to Charter have FTC approval and are expected to be sold at a later date. Except for the four Campus Psychiatric Facilities that are being retained, NME plans to sell or close all of the 62 Psychiatric Division Facilities that were remaining at May 31, 1994 (including the 47 facilities being sold to Charter). During the first quarter of fiscal year 1995, in addition to the 27 facilities sold to Charter, NME sold four of those Psychiatric Division Facilities to other parties. PROPERTIES The corporate headquarters of NME and of its operating divisions are located in an approximately 310,000 square foot office building owned by NME and located in Santa Monica, California. At May 31, 1994, NME and its operating subsidiaries also were leasing other office space in Fairfax, Virginia; Tampa, Florida; Irving, Texas; and Los Angeles, Modesto, Santa Ana and Santa Monica, California. As of May 31, 1994, NME operated domestically 28 medical office buildings, including 24 that are leased from others, most of which are adjacent to general hospitals. These buildings are occupied by approximately 700 physicians. The number of licensed beds and locations of the Company's general hospitals are described onpage 4. As of May 31, 1994, NME had approximately $171,000,000 of outstanding loans secured by real property and approximately $49,000,000 of capitalized lease obligations. The Company believes that all of these properties, as well as the administrative and medical office buildings described above, are suitable for their intended purposes. The Company has announced that it intends to sell its corporate headquarters building in Santa Monica, California, and established a reserve at May 31, 1994, to cover the loss that the Company expects to incur. The Company intends to announce whether it will be leasing back a portion of the building or moving to new space in southern California once a decision has been made. 6 MEDICAL STAFF AND EMPLOYEES NME's hospitals are staffed by licensed physicians who have been admitted to the medical staff of individual hospitals. Members of the medical staffs of NME's hospitals often serve on the medical staffs of hospitals not owned by the Company and may terminate their affiliation with the NME hospital or shift their admissions to competing hospitals at any time. With minor exceptions, physicians are not employees of the Company. Nurses, therapists, lab technicians, facility maintenance staff and the administrative staff of hospitals, however, normally are employees of the Company. The number of NME employees (of which approximately 31% were part-time employees) at May 31, 1994, was approximately as follows: Hospital Division (1).............................................. 28,500 International Hospital Division.................................... 4,800 Psychiatric Division (2)........................................... 4,400 Management Services Division....................................... 400 Other Businesses................................................... 200 Corporate Office................................................... 500 ------ Total.......................................................... 38,800 ======
- -------- (1) Includes employees whose employment relates to the operations of the Campus Psychiatric Facilities and the Campus Rehabilitation Hospitals. (2) Does not include employees whose employment relates to the operations of the Campus Psychiatric Facilities. The operations of the Psychiatric Division are treated as discontinued operations. This data is included for informational purposes only. NME is subject to the federal minimum wage and hour laws and maintains various employee benefit plans. Labor relations at NME's facilities have been satisfactory. A small percentage of NME's employees are represented by labor unions. Although the Company currently is not experiencing a shortage of nursing personnel, the availability of nursing personnel fluctuates from year to year, and the Company cannot predict the degree to which it will be affected by the future availability and cost of nursing personnel. During the fourth quarter of fiscal year 1994, NME hired a management consulting firm to conduct a study analyzing the functions being performed at NME's corporate and regional offices. The goal was to reduce overhead costs. As a result of that study, which is expected to result in projected annual savings for NME of approximately $32,000,000, 240 positions from NME's corporate office and the Hospital Division's district and regional offices have been or will be eliminated prior to the end of fiscal year 1995. NME established a reserve at May 31, 1994, to cover the cost of severance packages and other costs related to the reduction in force. 7 COMPETITION NME's general hospitals, Campus Psychiatric Facilities and Campus Rehabilitation Hospitals (collectively, "Health Care Facilities") operate in competitive environments. A Health Care Facility's competitive position within its "Primary Service Area" (the geographic area in which a facility is located and from which it receives the majority of its patients) is affected by such competitive factors as the quality of care provided, including the number, quality and specialties of the physicians, nurses and other health care professionals on staff, its reputation, the number of competitive facilities, the state of its physical plant, the quality and the state of the art of its medical equipment, its location and, in the case of private patients, its charges for services. Non-profit or government-owned competitors may have certain financial advantages such as endowments, charitable contributions and tax-exempt financing not available to NME facilities. The length of time a facility has been a part of the community and the availability of other health care alternatives are also competitive factors. An emerging factor in the competitive position of NME's facilities is the ability of NME to obtain managed care contracts with purchasers of group health care services such as health maintenance organizations ("HMO's"), preferred provider organizations ("PPO's"), employers and traditional health insurers (collectively, "Group Purchasers"). Group Purchasers contract with health care providers for discounted or per capita rates in exchange for sending some or all of their members/employees to those providers. The importance of obtaining managed care contracts has increased over the years as employers and others attempt to control rising health care costs. NME, as a national healthcare provider with 33 general hospitals, four Campus Psychiatric Facilities and six Campus Rehabilitation Facilities in six states, is well positioned to compete in the managed care market, and its Health Care Facilities have been actively pursuing and entering into such contracts both on a local and national level. To facilitate its managed care contracting, NME's facilities are exploring and entering into various physician-hospital alliances, which are expected to enable NME's facilities to offer an integrated delivery system of healthcare that will appeal to payors. The Company, and the health care industry as a whole, face the challenge of continuing to provide quality patient care while dealing with rising costs, strong competition for patients and a general reduction of reimbursement rates by both private and government payors. As both private and government payors reduce the scope of what may be reimbursed and reduce reimbursement levels for what is covered, national and state efforts to reform the United States health care system may further impact reimbursement rates. Changes in medical technology, existing and future legislation, regulations and interpretations and competitive contracting for provider services by private and government payors may require changes in the Company's facilities, equipment, personnel, rates and/or services in the future. The general hospital industry and the Company's general hospitals continue to have significant unused capacity, and thus there is substantial competition for patients. Inpatient utilization, average lengths of stay and average occupancy continue to be negatively affected by payor-required pre-admission authorization, utilization review and by payor pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Increased competition, admissions constraints and payor pressures are expected to continue. There continue to be increases in inpatient acuity and intensity of services as less intensive services shift from an inpatient to an outpatient basis or to alternative health care delivery services because of technology improvements and as cost controls by payors become greater. Allowances and discounts are expected to continue to rise, and to cause decreases in revenues, because of increasing cost controls by government and Group Purchasers and because of the increasing percentage of business (and related discounts) from Group Purchasers. To meet these challenges, the Company has expanded many of its general hospitals' facilities to include outpatient centers, offers discounts to private payor groups, enters into capitation contracts in some service areas, upgrades facilities and equipment and offers new programs and services. In most cases, hospital revenues depend on the physicians on staff who admit or refer patients to the hospital. Physicians refer patients to hospitals on the basis of the quality of services provided by the hospital to patients and their physicians, the hospital's location, the quality of the medical staff affiliated with the hospital and the quality of the hospital's facilities, equipment and employees. While a physician may 8 terminate his or her association with a hospital at any time, NME believes that by striving to maintain and improve the excellence of care of its hospitals and by maintaining high ethical and professional standards, it will retain qualified physicians with a variety of specialties and attract other qualified physicians to its hospitals' medical staffs. A hospital's revenues also may be affected by the ability of its management to negotiate favorable group health service contracts with Group Purchasers. The number of persons and the patient mix represented by such group contracts affect the impact such contracts have on hospital operating results. NME's Campus Rehabilitation Hospitals, whose patients primarily are referred from general hospitals by neurologists, neurosurgeons, orthopedists, internists and physiatrists, typically benefit from a broader geographic and other referral base than general hospitals. Because they must compete in both the Primary Service Area and a broader regional service area, they engage in comprehensive outreach programs. NME's Campus Rehabilitation Hospitals compete for patients and to attract qualified physicians and other health care professionals primarily with freestanding rehabilitation hospitals, rehabilitation units within general hospitals, freestanding sub-acute centers, sub-acute units within general hospitals and skilled nursing facilities. Each of NME's Campus Rehabilitation Hospitals and managed units offers highly specialized programs, such as treatment for closed head injuries, spinal cord injuries and neurological diseases and return to work programs. Some of those hospitals and managed units also provide less intensive services such as a transitional living program to help patients prepare for a return to their lives outside of the facility, skilled nursing care and outpatient care. OTHER BUSINESSES The value of NME's investments in Hillhaven, Westminster and MAC is affected by many factors. One important factor is the competitive position of Hillhaven, Westminster and MAC. NME believes that these companies are well positioned to take advantage of their relative competitive strengths within the long term care business in the United States and the United Kingdom, respectively, and the dialysis business in the United States. MEDICARE, MEDICAID AND OTHER REVENUES NME-operated facilities receive payments for patient care from private insurance carriers, federal Medicare programs for elderly and disabled patients, health maintenance organizations, preferred provider organizations, state Medicaid programs for indigent and cash grant patients, Civilian Health and Medical Program of Uniformed Services ("CHAMPUS"), employers and patients directly. In general, Medicare payments for general hospital outpatient services, psychiatric care and physical rehabilitation are based on allowable costs subject to certain limits. General hospital inpatient services are reimbursed under Medicare based on a prospective payment system ("PPS"), discussed below. Payments from state Medicaid programs are based on reasonable costs or are at fixed rates. Substantially all Medicare and Medicaid payments are below retail rates for NME-operated facilities. Payments from other sources usually are based on the hospital's established charges, a percentage discount or all-inclusive per diem rates. Medicare payments for general hospital inpatient care are based on a PPS that generally has been applicable to NME facilities since June, 1984. Under the PPS, a general hospital receives for each Medicare patient a fixed amount for operating costs based on each Medicare patient's assigned diagnostic related group ("DRG"). The DRG payments do not consider a specific hospital's costs, but are adjusted for area wage differentials. DRG payments exclude the reimbursement of (a) capital costs, including depreciation, interest relating to capital expenditures, property tax and lease expenses ("Capital Costs"), and (b) outpatient services. These exclusions are discussed below. 9 Medicare reimburses general hospitals' Capital Costs separately from DRG payments. Beginning June 1, 1992, a prospective payment system for Medicare reimbursement of general hospitals' inpatient Capital Costs ("PPS-CC"), described in the following paragraph, generally became effective with respect to the Company's general hospitals. The Omnibus Budget Reconciliation Act of 1990 ("OBRA '90") provides that through September 30, 1995, the total annual estimated aggregate payment to all PPS hospitals for Capital Costs under the PPS-CC is to be 10% less than the estimated aggregate amount that would be paid if all such hospitals were to be reimbursed for 100% of their actual Capital Costs. The PPS-CC applies an estimated national average of Medicare Capital Costs per patient discharge (the "Federal Rate") in making payments to each individual hospital based on its actual number of patient discharges. The Federal Rate is based on national 1989 Capital Costs and patient discharges and has been and will be updated annually to reflect estimated increases in Capital Costs per patient discharge. In addition, the Federal Rate actually applied to each hospital is adjusted based on various factors such as that hospital's case mix and geographic location. The Company expects PPS-CC payments for the 12 months beginning October 1, 1994, to be lower than the payments for the prior 12-month period. Rules adopted by the Health Care Financing Administration ("HCFA") provide that the PPS-CC will be phased in over a 10-year transition period, during which many hospitals' actual Capital Costs will be given less consideration, and the Federal Rate will be given more consideration, each year. The Company's general hospitals will receive a major portion of their reimbursement in the early years of the transition period based on their own Capital Costs. The impact in later years will depend on the Company's need for new capital as compared to the updated Federal Rate. Outpatient services provided at general hospitals, physical rehabilitation facilities and psychiatric facilities generally are reimbursed by Medicare at the lower of customary charges or 94.2% of actual cost. Notwithstanding the foregoing, Congress has established additional limits on the reimbursement of the following outpatient services: (i) clinical laboratory services, which are reimbursed based on a fee schedule, and (ii) ambulatory surgery procedures and certain imaging and other diagnostic procedures, which are reimbursed based on a blend of the hospital's specific cost and the rate paid by Medicare to non- hospital providers for such services. For several years the percentage increases to the DRG rates have been lower than the percentage increases in the cost of goods and services purchased by general hospitals. The index used by HCFA to adjust the DRG rates gives consideration to the cost of goods and services purchased by hospitals as well as non-hospitals (the "Market Basket"). The increase in the Market Basket for the year beginning October 1, 1994, has been estimated by HCFA to be 3.6%, but is subject to change. Based on the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"), the DRG rates for urban hospitals will be adjusted by the annual Market Basket percentage change: (1) minus 2.5%, effective October 1, 1994, (2) minus 2.0%, effective October 1, 1995, (3) minus .5%, effective October 1, 1996, and (4) without reduction, effective October 1, 1997 and each year thereafter, unless altered by subsequent legislation. Substantially all NME hospitals are urban hospitals. Hospitals exempt from the PPS, such as qualified psychiatric and physical rehabilitation facilities, are reimbursed by Medicare on a cost-based system wherein target rates for each facility are used in applying various limitations and incentives. Based on the provisions of OBRA '90, such NME facilities received a Market Basket increase of 3.3% in target rates effective June 1, 1994. Based on OBRA '93, the target rates for NME's hospitals exempt from the PPS are scheduled to be adjusted on June 1, 1995, 1996 and 1997 by the applicable annual Market Basket percentage change minus 1%. Proposals have been made that would change the method of payment for services provided at these facilities to a prospective payment system. OBRA '90 requires the Department of Health and Human Services to develop a proposal to modify the current target rate system or to replace it with a prospective payment system. It is not known if any such proposals will be implemented. 10 OBRA '93 provides for certain budget targets for the next four years which, if not met, may result in adjustments in payment rates. The Company is unable to predict whether there will be any future reductions in hospital payments due to existing or future legislation. The Medicare, Medicaid and CHAMPUS programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review and governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payments to facilities. The final determination of amounts earned under the programs often requires many years, because of audits by the program representatives, providers' rights of appeal and the application of numerous technical reimbursement provisions. Management believes that adequate provision has been made for such adjustments. Until final adjustment, however, significant issues remain unresolved and previously determined allowances could become either inadequate or more than ultimately required. The approximate percentages of NME's net patient revenue by payment sources for NME's general hospitals are as follows for the fiscal years ended May 31:
1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Medicare....................................... 35.9% 33.9% 32.1% 31.8% 33.4% Medicaid....................................... 8.5% 7.5 6.4 6.0 5.9 Private and Other.............................. 55.6% 58.6 61.5 62.2 60.7 ---- ---- ---- ---- ---- Totals..................................... 100% 100% 100% 100% 100% ---- ---- ---- ---- ----
HEALTH CARE REFORM, REGULATION, LICENSING AND INSURANCE CERTAIN BACKGROUND INFORMATION Health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. Medicare, Medicaid, mandatory and other public and private hospital cost-containment programs, proposals to limit health care spending, proposals to limit prices and industry competitive factors are highly significant to the health care industry. There continue to be federal and state proposals that would, and actions that do, impose more limitations on government and private payments to providers such as NME and proposals to increase co-payments and deductibles from program and private patients. NME's facilities also are affected by controls imposed by government and private payors designed to reduce admissions and lengths of stay. Such controls, including what is commonly referred to as "utilization review," have resulted in a reduction of patient access to certain treatments and procedures. Utilization review by third party peer review organizations ("PRO's") is required in connection with the provision of care paid for by Medicare and Medicaid. Utilization review by third parties also is a requirement of many managed care arrangements. Utilization review entails the review of the admission and course of treatment of a patient by a third party. Florida and Tennessee have adopted, and other states are considering adopting, legislation imposing a tax on revenues of hospitals to help finance or expand those States' Medicaid systems. The Company currently operates as part of its ongoing operations five general hospitals, two domestic long term care facilities (which are managed by Hillhaven), one Campus Psychiatric Facility and one Campus Rehabilitation Hospital in Florida and two general hospitals in Tennessee. Some states require state approval for construction and expansion of health care facilities, including findings of need for additional or expanded health care facilities or services. Certificates of Need, which are issued by governmental agencies with jurisdiction over health care facilities, are at times required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and certain other matters. Following a number of years of decline, the number of states requiring Certificates of Need is once again on the rise. State legislators once again are looking at the certificate- of-need process as a way to contain rising health care costs. 11 Participation in the Medicare program is regulated by federal statute. The fraud and abuse anti-kickback provisions contained in Section 1128B(b) of the Social Security Act (the "Act") essentially prohibit the payment or receipt of remuneration for the referral of patients whose care will be paid for by Medicare. As written, the statute technically prohibits many common arrangements between health care providers and their physicians. As guidance, however, the Office of the Inspector General of the Department of Health and Human Services has issued regulations which detail certain conduct and business arrangements permissible under Section 1128B(b) of the Act (the "Safe Harbors"). The fact that a given business arrangement does not fall within a Safe Harbor does not render the arrangement per se illegal, but the Company believes that the government intends to increase its scrutiny of arrangements that do not fall within the safe harbor. In addition, many states have adopted statutes similar to the federal antifraud statute. The state statutes, however, are broader because they prohibit the payment or receipt of remuneration for the referral of patients regardless of the source of the payment for the care. The Company systematically reviews all of its operations to ensure that it complies with the Act and similar state statutes. The Company's health care operations generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. The Company's operations also are subject to compliance with various other environmental laws, rules and regulations. Such compliance does not, and the Company anticipates that such compliance will not, materially affect the Company's capital expenditures, earnings or competitive position. See Note 7A of the Notes to Consolidated Financial Statements in the Company's Annual Report to Shareholders for the year ended May 31, 1994, for a description of NME's professional and general liability insurance. NME'S HEALTH CARE FACILITIES NME's Health Care Facilities are subject to extensive federal, state and local legislation and regulation. In order to maintain their operating licenses, Health Care Facilities must comply with strict standards concerning medical care, equipment and hygiene. Various licenses and permits also are required in order to dispense narcotics, operate pharmacies, handle radioactive materials and operate certain equipment. NME's Health Care Facilities hold all required governmental approvals, licenses and permits. Each operated Health Care Facility eligible for accreditation is fully accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), the Commission on Accreditation of Rehabilitation Facilities (in the case of the Campus Rehabilitation Hospitals) or another appropriate accreditation agency, which accreditation generally is required for participation in government- sponsored provider programs. NME's Health Care Facilities are subject to and comply with various forms of utilization review. In addition, under the Medicare PPS, each state must have a PRO to carry out a federally mandated system of review of Medicare patient admissions, treatments and discharges in general hospitals. Medical and surgical services and practices are extensively supervised by committees of staff doctors at each Health Care Facility, are reviewed by each Health Care Facility's local governing board, comprised of health care professionals, community members and hospital representatives, and are reviewed by NME's quality assurance personnel. The local governing boards also help maintain standards for quality care, develop long range plans, establish, review and enforce practices and procedures and approve the credentials of medical staff. COMPLIANCE PROGRAM One component of the Company's settlement with federal agencies executed in June 1994 is the adoption of a corporate compliance program under which the Company has agreed, among other things, to: complete the disposition of its Psychiatric Division Facilities (with the exception of the Campus Psychiatric Facilities) 12 no later than November 30, 1995; not own or operate other psychiatric facilities (defined for the purposes of the agreement to include residential treatment centers and substance abuse facilities) for five years from the date of completion of the disposition of its Psychiatric Division Facilities; and divest any psychiatric facilities acquired incidental to a corporate transaction within 180 days of such acquisition. In addition, the Company has agreed to implement certain oversight procedures pertaining to the matters that were the subject of the government investigations and to continue its ethics training program and ethics telephone hotline. Should the oversight procedures or hotline reveal, after investigation by the Company, violations of criminal, or potential material violations of civil laws, rules or regulations governing federally-funded programs, the Company will report any such violation to the Departments of Justice and Health and Human Services. HEALTH CARE REFORM In the past several years, there have been proposals at both the federal and state levels calling for significant reforms in the United States health care system. President Clinton has introduced to Congress a comprehensive reform plan, the primary goals of which are universal access to medical care and containment of escalating health care costs. President Clinton has proposed achieving these goals by requiring businesses to provide health insurance to all full-time and part-time employees and imposing government cost controls designed to reduce insurance premiums and the fees charged by health care providers. In addition, President Clinton has proposed significant reductions in the Medicare/Medicaid payments made by the government. At this time the focus on health care reform has shifted from the President's proposals to various bills being proposed in the United States House of Representatives and Senate. Prominent features of the leading health care reform proposals at this time would require employers to pay either 50% or 80% of their employees' health insurance premiums, subsidize the purchase of health care coverage for low income people and create a new category of Medicare to cover certain uninsured people. The Company anticipates that essential portions of these proposals will be revised before any final bill is voted on. Other bills include limits on malpractice liability, further restrictions on self-referrals by physicians, the establishment of price controls in conjunction with a global budget for United States health care in order to cap health care costs and a single-payor government health plan. The Company cannot predict whether any such proposals will be adopted or, if adopted, what effect, if any, such proposals would have on the Company's business. In addition to federal health reform efforts, several states have adopted or are considering health care reform legislation. Tennessee has enacted a revision to their Medicaid program intended to cover their Medicaid and uninsured population through a managed care program. California has created a voluntary health insurance purchasing cooperative that seeks to make health care coverage more affordable for businesses with five to 50 employees. In November, 1994, California voters will vote on a ballot initiative intended to create a single-payor government health plan. Florida has enacted a program creating a system of local purchasing cooperatives and has proposed other changes that have not yet been enacted. Louisiana and Texas are planning to consider wider use of managed care for their Medicaid populations. These proposals also may attempt to include coverage for some people who presently are uninsured. A number of other states are considering the enactment of managed care initiatives designed to provide universal low-cost coverage. 13 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of August 22, 1994, who also are not Directors are:
NAME POSITION AGE ---- -------- --- Barry P. Schochet Executive Vice President of NME and President--Hospital Division 43 Maris Andersons Executive Vice President and Treasurer 57 William S. Banowsky Executive Vice President 58 Vincent J. Lico Executive Vice President 60 Raymond L. Mathiasen Senior Vice President and Chief Financial Officer 51 Scott M. Brown Senior Vice President, General Counsel and Secretary 49
Mr. Schochet has been the President and Chief Operating Officer of NME's Hospital Division since March 1992. Prior to that he served as Assistant Vice President of hospital operations, Senior Vice President and then Executive Vice President of NME's Eastern region and most recently as Executive Vice President and Chief Operating Officer of the Hospital Division. Mr. Schochet began his service to NME as an Assistant Vice President of NME's Eastern region in 1979, prior to which he served as the Executive Director of a hospital in Florida. Mr. Andersons joined NME in 1976, as Senior Vice President, from Bank of America, where he was a Vice President. Mr. Andersons was elected Treasurer in 1981 and Executive Vice President in 1992. Mr. Banowsky has been an Executive Vice President of NME since October, 1988. Mr. Banowsky, also served as a director from 1977 to 1993. Mr. Banowsky's duties will be consolidated into the duties of other positions and Mr. Banowsky will no longer be an employee of NME after August 31, 1994. Mr. Lico, who is a certified public accountant, joined NME in 1979 with NME's acquisition of Medfield Corporation. Prior to becoming Executive Vice President in September, 1993, Mr. Lico served as Senior Executive Vice President and Chief Financial Officer of the Hospital Division from June, 1990 through August, 1993, and Executive Vice President and Chief Financial Officer of NME's Hospital Division from June, 1986 through May, 1990. Mr. Lico's duties will be consolidated into the duties of other positions and Mr. Lico will no longer be an employee of NME after October 31, 1994. Mr. Mathiasen is Senior Vice President and, since February 1994, Chief Financial Officer of the Company. From September 1993 to February 1994, Mr. Mathiasen was Senior Vice President and acting Chief Financial Officer. Prior to joining NME as a Vice President in 1985, he was a partner with Arthur Young & Company (now known as Ernst & Young). Mr. Mathiasen was elected to the position of Senior Vice President in 1990 and Chief Operating Financial Officer in 1991. Mr. Brown is Senior Vice President, Secretary and, since February, 1994, General Counsel of the Company. He joined NME in 1981. Mr. Brown was elected Secretary in 1984 and Senior Vice President in 1990. Mr. Brown was appointed acting General Counsel in July 1993 and General Counsel in February 1994. ITEM 2. PROPERTIES. The response to this item is included in Item 1. ITEM 3. LEGAL PROCEEDINGS. As previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1993, various government agencies have conducted investigations concerning whether NME and certain of its subsidiaries engaged in improper practices. As a result of negotiations between the Company and the Civil and Criminal Divisions of the Department of Justice, and the Department of Health and Human 14 Services, the Company entered into various agreements on June 29, 1994, which brought to a close all open investigations of the Company, its subsidiaries and its facilities by the federal government and its agencies. As a result of those agreements, on July 12, 1994, the United States District Court for the District of Columbia accepted a plea by a subsidiary operating the Company's psychiatric hospitals, to an information charging a six-count violation of 42 U.S.C. (S)1320-7(b)(2)(A) (paying remuneration to induce referrals) and a one-count violation of 18 U.S.C. (S)371 (conspiracy to make such payments). In addition, the Company agreed to pay $362,700,000 to the federal government. The court also accepted a plea agreement pursuant to which another subsidiary pled guilty to an information charging a one-count violation of 18 U.S.C. (S)666 (making illegal payments concerning programs receiving federal funds), which related to a single general hospital. The count relates to activities that occurred while an individual convicted of defrauding the hospital was its chief executive. On July 12, 1994, the Company, without admitting or denying liability, consented to the entry, by the United States District Court for the District of Columbia, of a civil injunctive order in response to a complaint by the Securities and Exchange Commission. The complaint alleged that the Company failed to comply with anti-fraud and recordkeeping requirements of the federal securities laws concerning the manner in which the Company recorded the revenues from the activities that were the subject of the federal government settlement referred to above. In the order, the Company is directed to comply with such requirements of the federal securities laws. In May, 1994, the Company also reached agreements in principle with 27 states and the District of Columbia to pay an additional $16.3 million to settle potential claims arising from matters involved in the federal investigations. The Company has signed agreements with 26 of those states and the District of Columbia, five of which contain errors or changes that the Company is attempting to resolve. The 27 states and the District of Columbia are all of the areas in which the Company's subsidiaries operated psychiatric facilities. The shareholder derivative actions filed in the Los Angeles Superior Court in October and November of 1991 were consolidated into one shareholder derivative action entitled Harry Polikoff, Harry Ackerman, and Bette Rita Grayson, Derivatively on Behalf of Nominal Defendant National Medical Enterprises, Inc. v. Richard K. Eamer, Leonard Cohen, John C. Bedrosian, William S. Banowsky, Ph.D., Jeffrey C. Barbakow, Bernice B. Bratter, Maurice J. DeWald, Peter de Wetter, Edward Egbert, M.D., Michael H. Focht, Sr., Raymond A. Hay, Nita P. Heckendorn, Taylor R. Jenson, Lloyd R. Johnson, James P. Livingston, A.J. Martinson, M.D., Howard F. Nachtman, M.D., Richard S. Schweiker, Richard L. Stever, Norman A. Zober, Maris Andersons, Scott M. Brown, Raymond L. Mathiasen and Marcus E. Powers, Defendants. Plaintiffs' suit was based primarily on alleged breaches of fiduciary duties and constructive fraud on the part of the individual defendants. The plaintiffs alleged that, among other things, the individual defendants knew or should have known of allegedly improper marketing, billing and other practices within what formerly was known as the Company's Specialty Hospital Group and failed to take appropriate action as required by their fiduciary responsibilities. Based on these claims, plaintiffs sought compensatory damages on behalf of the Company, punitive damages, injunctive relief, attorneys' fees, interest and costs. Defendants filed three separate demurrers that were sustained and resulted in dismissal of the action with prejudice on May 21, 1993. The derivative action was dismissed by the Court in May, 1993, but the dismissal is being appealed by the plaintiffs. The parties have been participating in a voluntary mediation process, which commenced in February 1994 and has included directors and officers liability insurance carriers. As a result of the voluntary mediation process, the Company, the other parties to this action and the Company's directors' and officers' liability insurance carriers have reached an agreement in principle to settle this matter, subject to agreement to contractual terms and court approval. The federal class action lawsuits filed in October and November of 1991 were consolidated into one action now pending in the U.S. District Court in the Central District of California entitled In Re National Medical Enterprises, Inc. Securities Litigation I. The defendants in this action are National Medical Enterprises, Inc., Richard K. Eamer, Leonard Cohen, John C. Bedrosian, William S. Banowsky, Michael H. Focht, Norman A. Zober, Marcus E. Powers and Maris Andersons. The action is a consolidated class action against each of the named defendants for alleged violations of Section 10(b) of the Securities Exchange Act of 1934. Specifically, plaintiffs allege that each defendant knew or recklessly disregarded that the public statements made by the Company and several of its officers and directors in reports to the Securities and 15 Exchange Commission, in press releases, communications with shareholders, and communications with the financial community were false and misleading because the financial data and projections were based upon a number of alleged illegal practices at many of NME's psychiatric facilities. Plaintiffs claim that each of the defendants was a direct participant in this wrongdoing and conspired with and aided and abetted each of the other defendants in perpetrating the alleged fraudulent scheme. Plaintiffs also challenge various transactions in which each of the defendants sold shares of NME stock. Based on these claims, plaintiffs seek compensatory damages, injunctive relief, attorneys' fees, interest and costs. Currently, this action is in the discovery stage and no trial date has been set. As a result of a voluntary mediation process commenced in February 1994, the Company, the other parties to this action and the Company's directors' and officers' liability insurance carriers have reached an agreement in principle to settle this matter, subject to agreement to contractual terms and court approval. On August 27, 1993, a federal lawsuit entitled Jerrold Schaffer and Jayne M. Furman v. National Medical Enterprises, Inc., Richard K. Eamer, Leonard Cohen, Jeffrey Barbakow and Michael H. Focht, Sr. was filed in the U.S District Court in the Central District of California. On August 31, 1993, a federal lawsuit entitled Bernard Weisfeld v. National Medical Enterprises, Inc., Richard K. Eamer, Leonard Cohen, Jeffrey Barbakow and Michael H. Focht, Sr. was filed in the U.S District Court in the Central District of California. On December 20, 1993, the United States District Court for the Central District of California ordered that these cases be consolidated into one action, captioned In re: National Medical Enterprises Securities Litigation II. These consolidated actions are on behalf of a purported class of shareholders who purchased or sold stock of the Company between January 14, 1993 and August 26, 1993, and allege that each of the defendants violated Section 10(b) of the Securities Exchange Act of 1934. Specifically, plaintiffs allege that each defendant knew or recklessly disregarded that the public statements made by the Company and several of its officers and directors in reports to the Securities and Exchange Commission, in press releases, communications with shareholders, and communications with the financial community were false and misleading because the financial data and projections were based upon a number of alleged illegal practices at many of NME's psychiatric facilities. Plaintiffs claim that each of the defendants was a direct participant in this wrongdoing and conspired with and aided and abetted each of the other defendants in perpetrating the alleged fraudulent scheme. Based on these claims, plaintiffs seek compensatory damages, injunctive relief, attorneys' fees, interest and costs. The parties commenced a voluntary mediation in July, 1994. If the mediation is not successful, plaintiffs will be required to file an amended and consolidated complaint in the action. The Company believes it has meritorious defenses to this action and, if the mediation is not successful, will defend this litigation vigorously. During the last fiscal year, the Company settled three lawsuits brought against it by the following insurance carriers: (1) The Travelers Insurance Company, Prudential Insurance Company, United of Omaha Life Insurance Company, Massachusetts Mutual Life Insurance Company, Northwestern National Life Insurance Company, Mutual of Omaha Insurance Companies, Time Insurance Company, Phoenix Home Life Mutual Insurance Company, Benefit Trust Life Insurance Company, Golden Rule Insurance Company, Hartford Life and Accident Insurance Company, Great Western Life and Annuity Insurance Company, and The New England Mutual Life Insurance Company filed in the United States District Court for the District of Columbia (referred herein as "Travelers lawsuits"); (2) Aetna Life Insurance Company and Metropolitan Life Insurance Company (referred herein as "Aetna lawsuit") filed in the U.S. District Court for the Northern District of Texas, Dallas Division; and (3) Connecticut General Life Insurance Company, Equitable Life Assurance Society of the United States, First Equicor Life Insurance Company and Equicor Inc. (referred herein collectively as "CIGNA lawsuit"), filed in the United States District Court for the Northern District of Texas, Dallas Division. Each of these cases alleged that psychiatric hospitals owned by NME subsidiaries engaged in fraudulent practices. On November 4, 1993 the Company signed a definitive settlement agreement with the insurers that are parties to the Aetna and CIGNA lawsuits. Under the terms of the settlement the Company paid $125,000,000. In return, the insurers agreed on an individual basis to resume standard business relations with the Company, including the opportunity to participate in managed care contracts and to 16 participate in other provider networks. The parties also have dismissed their respective lawsuits against each other. On February 18, 1994, the Company signed a definitive settlement agreement to settle the Travelers lawsuits. Under the settlement the Company paid $89,900,000. All claims between the parties, including the Company's claims in NME Psychiatric Properties, Inc. vs. Travelers Insurance Co., et al., have been dismissed with prejudice. In addition, under the terms of the settlement agreements, the insurers agreed to expeditiously process all outstanding claims for payment and agreed to meet with the Company, on an individual basis, with the express goal of strengthening the respective business relations with the Company, including, for example, allowing the Company to compete for managed care contracts and participate in provider networks. The Company has received inquiries from various other insurance companies and health benefit providers regarding the possible filing of claims with similar allegations. To date, the amounts involved are not significant. The Company and certain of its officers and directors also are subject to various lawsuits related to alleged malpractice occurring at individual psychiatric hospitals. Included are numerous cases that allege the existence of a corporate-wide conspiracy to commit wrongful acts. The underlying allegations in those cases are substantially similar to the allegations in the insurance litigation discussed above. NME has settled 90 of these lawsuits (more than two-thirds of the lawsuits of this type that have been filed to date). The Company expects that additional similar lawsuits will be filed from time to time. On August 16, 1993, the Company was served with a lawsuit in the matter of Nita P. Heckendorn vs. National Medical Enterprises, Inc., Jeffrey C. Barbakow, Raymond A. Hay, Maurice J. DeWald and Peter de Wetter. Ms. Heckendorn is a director and former officer of the Company. Ms. Heckendorn, who joined the Company in 1982, alleges sex discrimination in employment and retaliation; sexual harassment; breach of implied employment contract; constructive discharge in violation of public policy and the California Fair Employment and Housing Act; tortious interference with prospective economic advantage; defamation; and intentional infliction of emotional distress. The suit seeks damages in excess of $15,000,000 for wages, earnings and other benefits, punitive damages, attorneys fees and costs of suit and other equitable relief. The plaintiff filed an amended complaint on November 4, 1993. Defendants filed a demurrer to plaintiff's amended complaint. On January 6, 1994, the Court sustained defendants' demurrer in part, dismissing certain claims, and denied defendants' demurrer in part. The remaining claims are pending and the parties have engaged in discovery. In March, 1994, plaintiff filed a motion for summary judgment seeking judgment on her claim for retaliatory discharge. After taking plaintiff's deposition in the Spring of 1994, Defendants filed a cross-motion for Summary Judgment seeking dismissal of several of plaintiff's claims. In August, 1994, defendants filed an additional motion for summary judgment on plaintiff's remaining claims. All three of those motions are set for hearing on September 19, 1994, and the case is set for trial in mid-December, 1994. The Company believes that Ms. Heckendorn's claims are without merit. On October 5, 1993, John Bedrosian filed the lawsuit John C. Bedrosian vs. National Medical Enterprises, Inc., Jeffrey C. Barbakow, Michael H. Focht, Sr., Bernice B. Bratter, Maurice J. DeWald, Peter de Wetter and Lester B. Korn in the Los Angeles Superior Court. Mr. Bedrosian, who is a director of the Company and served as its Senior Executive Vice President until September 24, 1993, when his employment with the Company was terminated without cause pursuant to the terms of his employment agreement, alleged: breach of oral agreement; breach of implied in fact contract; breach of the covenant of good faith and fair dealing; negligent misrepresentation of material fact; bad faith denial of existence of a contract; breach of written agreement; age discrimination in employment; libel; tortious interference with contractual relations; conspiracy to interfere with contractual relations; and intentional infliction of emotional distress. The suit seeks damages in excess of $20,000,000, exemplary and punitive damages, declaratory relief, including relief from six loans he obtained from the Company totaling $3,730,251.27, attorneys fees and costs of suit and other equitable relief. The Company has filed a cross-complaint against him for his refusal to make repayment on his six loans. The Company also filed a motion to have the portion of Mr. Bedrosian's lawsuit that pertains to his employment agreement with the Company referred to a Superior Court Referee as provided in the employment agreement. The Company's motion was granted and Mr. Bedrosian's employment claims against the Company were referred to a Superior Court Referee for trial. Before that trial began, the Company filed 17 motions for summary judgment on several of Mr. Bedrosian's claims and on its cross-complaint against Mr. Bedrosian for his failure to repay his loans. The Company's motions for summary judgment were granted as to several of Mr. Bedrosian's claims against the Company, and also as to its claims against Mr. Bedrosian on three of his six loans totalling approximately $1,997,500. The Court declined to grant the Company's motion regarding Mr. Bedrosian's three remaining loans but allowed the Company to supplement its cross-complaint to reflect that those loans had since become due and payable. The Company has supplemented its cross-complaint and intends to renew its motion for summary judgment on Mr. Bedrosian's three remaining loans. The trial of Mr. Bedrosian's employment-related claims took place in June and July, 1994 before a retired California Superior Court Judge. During that trial, the Court granted defendants' motion to have certain other of Mr. Bedrosian's employment claims dismissed. The trial on Mr. Bedrosian's two remaining claims was concluded on July 29, 1994. A decision on those claims is expected in August 1994. In its normal course of business the Company also is subject to claims and lawsuits relating to injuries arising from patient treatment. The Company believes that its liability for damages resulting from such claims and lawsuits is adequately covered by insurance or is adequately provided for in its financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The response to this item is included on page 33 of the Registrant's Annual Report to Shareholders for the year ended May 31, 1994. The required information hereby is incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA. The response to this item is included on page 8 of the Registrant's Annual Report to Shareholders for the year ended May 31, 1994. The required information hereby is incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The response to this item is included on pages 9 through 13 of the Registrant's Annual Report to Shareholders for the year ended May 31, 1994. The required information hereby is incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The response to this item is included on pages 14 through 30 of the Registrant's Annual Report to Shareholders for the year ended May 31, 1994. The required information hereby is incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION. Information concerning the Directors of the Registrant, including executive officers of the Registrant who also are Directors, and other information required by Items 10 and 11, is included on pages 2 through 5 of the definitive Proxy Statement for Registrant's 1994 Annual Meeting of Shareholders and hereby is incorporated by reference. Similar information regarding executive officers of the Registrant who, except as noted therein, are not Directors is set forth on page 14 above. Information regarding compensation of executive officers and Directors of the Registrant is included on pages 9 through 18 and pages 26 through 29 of the definitive Proxy Statement for the Registrant's 1994 Annual Meeting of Shareholders and hereby is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The response to this item is included on pages 6, 7 and 33 of the definitive Proxy Statement for the Registrant's 1994 Annual Meeting of Shareholders. The required information hereby is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The response to this item is included on pages 29 through 31 of the definitive Proxy Statement for the Registrant's 1994 Annual Meeting of Shareholders. The required information hereby is incorporated by reference. 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS. The consolidated financial statements to be included in Part II, Item 8, are incorporated by reference to the Registrant's 1994 Annual Report to Shareholders. (See exhibit (13)). 2. FINANCIAL STATEMENT SCHEDULES. Schedule I Marketable Securities-Other Investments (included on page F- 1). Schedule II Amounts Receivable From Directors, Officers and Employees (included on pages F-2 and F-3) Schedule V Property, Plant and Equipment (included on page F-4) Schedule VI Accumulated Depreciation and Amortization of Property, Plant and Equipment (included on page F-5) Schedule VIII Valuation and Qualifying Accounts and Reserves (included on page F-6) Schedule IX Short-Term Borrowings (included on page F-7) Schedule X Supplementary Income Statement Information (included on page F-8)
All other schedules and Condensed Financial Statements of Registrant are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto. 3. EXHIBITS. (3) Articles of Incorporation and Bylaws (a) Restated Articles of Incorporation of Registrant, as amended October 13, 1987 (Incorporated by reference to Exhibit 3(a) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (b) Restated Bylaws of Registrant, as amended July 27, 1994 (4) Instruments Defining the Rights of Security Holders, Including Indentures (a) Form of Indenture for the Registrant's Convertible Floating Rate Debentures, dated as of February 1, 1992, among NME PIP Funding I, Inc., the Registrant and Bankers Trust Company, as Trustee (Incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-3, Registration No. 33- 45689, dated February 14, 1992) (b) Form of Convertible Floating Rate Debenture due April 3, 1996 (Incorporated by reference to Exhibit (e) to Registrant's Registration Statement on Form S-3, Registration No. 33-45689, dated February 14, 1992) (c) Agreement Providing for First Amendment to Convertible Floating Rate Debentures due April 3, 1996, dated as of December 11, 1991, between the Registrant and NME PIP Funding I, Inc. (Incorporated by reference to Exhibit (f) to Registrant's Registration Statement on Form S-3, Registration No. 33-45689, dated February 14, 1992) 20 (d) Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock (Incorporated by reference to Exhibit 4(d) to Registrant's Annual Report on Form 10-K dated August 23, 1991) (e) Form of Investment Option Agreement (Incorporated by reference to Exhibit 10(e) to Registrant's Annual Report on Form 10-K dated August 28, 1989) (f) Indenture, dated as of March 1, 1991, between the Registrant and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4(a) to Registrant's Annual Report on Form 10-K dated August 23, 1991) (g) Indenture, dated as of April 1, 1985, between the Registrant and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-3, File No. 2- 96780, filed with the Securities and Exchange Commission on April 3, 1985) (h) Certificate of Designation, Preference and Rights of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 4(h) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (10) Material Contracts (a) Guaranty Reimbursement Agreement, dated as of January 31, 1990, by and between the Registrant and The Hillhaven Corporation (Incorporated by reference to Exhibit 10(e) to Registrant's Annual Report on Form 10-K dated August 21, 1992) (b) First Amendment to Guarantee Reimbursement Agreement, dated as of May 30, 1991, by and between the Registrant and The Hillhaven Corporation (Incorporated by reference to Exhibit 10(g) to Registrant's Annual Report on Form 10-K dated August 23, 1991) (c) Second Amendment to Guarantee Reimbursement Agreement, dated as of October 2, 1991, between the Registrant and The Hillhaven Corporation (Incorporated by reference to Exhibit 10(w) to Registrant's Annual Report on Form 10-K dated August 21, 1992) (d) Third Amendment to Guarantee Reimbursement Agreement, dated as of April 1, 1992, between the Registrant and The Hillhaven Corporation (Incorporated by reference to Exhibit 10(dd) to Registrant's Annual Report on Form 10-K dated August 21, 1992) (e) Fourth Amendment to Guarantee Reimbursement Agreement, dated as of November 12, 1992, between the Registrant and Hillhaven (Incorporated by reference to Exhibit 10(pp) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (f) Fifth Amendment to Guarantee Reimbursement Agreement, dated as ofFebruary 19, 1993, between the Registrant and Hillhaven (Incorporated by reference to Exhibit 10(qq) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (g) Sixth Amendment to Guarantee Reimbursement Agreement, dated as of May 28, 1993, between the Registrant and Hillhaven (Incorporated by reference to Exhibit 10(rr) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (h) Seventh Amendment to Guarantee Reimbursement Agreement, dated as ofMay 28, 1993, between the Registrant and The Hillhaven Corporation 21 (i) Eighth Amendment to Guarantee Reimbursement Agreement, dated September 2, 1993, between the Registrant and The Hillhaven Corporation (j) Letter dated October 14, 1992 addressed to Robert F. Pacquer of Hillhaven from the Registrant and certain of its subsidiaries (Incorporated by reference to Exhibit 10(ll) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (k) Second Omnibus Amendment to Leases dated as of November 12, 1992 among NME Properties Corp., and certain subsidiaries of NME Properties Corp. and First Healthcare Corporation (Incorporated by reference to Exhibit 10(mm) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (l) Letter dated June 22, 1993 between the Registrant and Hillhaven (Incorporated by reference to Exhibit 10(ss) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (m) Agreement Concerning Purchase by NME Properties Corp. and Certain Sub-sidiaries of Series D Preferred Stock of The Hillhaven Corporation, dated September 1, 1993, among the Registrant, NME Properties Corp., NME Properties, Inc., NME Properties West, Inc., The Hillhaven Corporation and First Healthcare Corporation (n) Agreement and Waiver, dated September 2, 1993, among the Registrant, the subsidiaries of NME signatories thereto, The Hillhaven Corporation and First Healthcare Corporation (o) Shareholding Agreement, dated 30 March 1993, among the Registrant, Westminster Health Care Holdings PLC and P.R. Carter and Others (Incorporated by reference to Exhibit 10(tt) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (p) Agreement for Warranties and Indemnities, dated 31 March 1993, among the Registrant, the Executive Directors of Westminster Health Care Holdings PLC, the Non-Executive Directors of Westminster Health Care Holdings PLC, Ernst & Young Trustees Limited and Others and Westminster Health Care Holdings PLC (Incorporated by reference to Exhibit 10(uu) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (q) Agreement relating to the Placing and Offer of Ordinary Shares in Westminster Health Care Holdings PLC, dated 31 March 1993, among Westminster Health Care Holdings PLC, the Executive Directors, the Non-Executive Directors, the Registrant, Ernst & Young Trustees Limited and Others and Barclays de Zoete Wedd Limited (Incorporated by reference to Exhibit 10(vv) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (r) Subordinated Loan Note, dated 30 March 1993, in the amount of 10,000,000 Pounds Sterling payable by Westminster Health Care Limited, Westminster Health Care (Properties) Limited and Westminster Health Care Holdings to the Registrant (Incorporated by reference to Exhibit 10(ww) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (s) First Amended and Restated Letter of Credit and Reimbursement Agreement, dated as of October 1, 1993, between the Registrant and The Sanwa Bank Limited, Dallas Agency (Incorporated by reference to Exhibit 10(5) to Registrant's Quarterly Report on Form 10-Q dated October 15, 1993) 22 (t) Limited Waiver and Consent to First Amended and Restated Letter of Credit and Reimbursement Agreement, dated as of April 13, 1994, between the Registrant and The Sanwa Bank Limited, Dallas Agency (Incorporated by reference to Exhibit 10(f) to Registrant's Quarterly Report on Form 10-Q dated April 14, 1994) (u) First Amended and Restated Master Loan Agreement, dated as of November 30, 1988, as further Amended and Restated as of January 25, 1990 among MP Funding Corporation, the Registrant, various NME subsidiaries and various Hillhaven subsidiaries (Incorporated by reference to Exhibit 10(a) to Registrant's Annual Report on Form 10-K dated August 23, 1990) (v) Consent and Waiver Agreement, dated October 13, 1993, with respect to that certain First Amended and Restated Credit Agreement, dated as of January 25, 1990, among Credit Suisse, as letter of credit bank, the banks parties thereto, Credit Suisse as agent for the banks and MP Funding Corporation, and that certain First Amended and Restated Master Loan Agreement, dated as of January 25, 1990, among the Registrant, certain subsidiaries and affiliates of the Registrant and MP Funding Corporation (Incorporated by reference to Exhibit 10(3) to Registrant's Quarterly Report on Form 10-Q dated October 15, 1993) (w) Amendment No. 1 to Master Loan Agreement, dated as of November 2, 1993, between MP Funding Corporation and the Borrowers thereto (Incorporated by reference to Exhibit 10(c) to Registrant's Quarterly Report on Form 10-Q dated January 13, 1994) (x) Waiver and Amendment No. 2, dated as of April 13, 1994, between MP Funding Corporation and the Borrowers parties thereto (Incorporated by reference to Exhibit 10(c) to Registrant's Quarterly Report on Form 10-Q dated April 14, 1994) (y) Waiver Letter, dated October 14, 1993, from Bank of America to the Registrant, concerning Overdraft Financing Facility Agreement, dated December 16, 1992, between the Registrant and Bank of America, and Advance Account Agreement, dated December 17, 1992, between the Registrant and Bank of America (Incorporated by reference to Exhibit 10(4) to Registrant's Quarterly Report on Form 10-Q dated October 15, 1993) (z) Second Amendment to Overdraft Financing Facility Agreement, dated as ofApril 13, 1994, by and among Bank of America National Trust and Savings Association, the Registrant, and the corporations listed on Exhibit A to the Agreement (Incorporated by reference to Exhibit 10(g) to Registrant's Quarterly Report on Form 10-Q dated April 14, 1994) (aa) First Amendment to Advance Account Agreement, dated as of April 13, 1994, by and between the Registrant and Bank of America National Trust and Savings Association (Incorporated by reference to Exhibit 10(h) to Registrant's Quarterly Report on Form 10-Q dated April 14, 1994) (bb) Credit Agreement, dated as of April 13, 1994, among the Registrant, the Banks parties thereto, the Issuing Bank and Morgan Guaranty Trust Company of New York, as Administrative Agent (Incorporated by reference to Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q dated April 14, 1994) (cc) Asset Sale Agreement, dated December 3, 1993, by and between the Registrant, as Seller, and HEALTHSOUTH Rehabilitation Corporation, as Buyer (Incorporated by reference to Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q dated January 13, 1994) 23 (dd) Amendment No. 1 to Asset Sale Agreement, dated as of January 3, 1994, by and between the Registrant, as Seller, and HEALTHSOUTH Rehabilitation Corporation (Incorporated by reference to Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q dated January 13, 1994) (ee) Asset Sale Agreement (First Facilities), dated March 29, 1994, by and between the Registrant, as Seller, and Charter Medical Corporation, as Buyer (ff) Asset Sale Agreement (Subsequent Facilities), dated March 29, 1994, by and between the Registrant, as Seller, and Charter Medical Corporation, as Buyer (gg) Employment Agreement, dated as of December 5, 1990, between the Registrant and John C. Bedrosian (Incorporated by reference to Exhibit 10(m) to Registrant's Annual Report on Form 10-K dated August 23, 1991) (hh) Consulting, Severance, Noncompetition and Confidentiality Agreement made by and between Richard K. Eamer and the Registrant, effective July 20, 1993 (Incorporated by reference to Exhibit 10(h) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (ii) Consulting, Severance, Noncompetition and Confidentiality Agreement made by and between Leonard Cohen and the Registrant, effective July 20, 1993 (Incorporated by reference to Exhibit 10(j) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (jj) Letter from the Registrant to Jeffrey C. Barbakow, dated May 26, 1993 (Incorporated by reference to Exhibit 10(l) to Registrant's Annual Report onForm 10-K dated August 30, 1993) (kk) Letter from the Registrant to Jeffrey C. Barbakow, dated June 1, 1993 (Incorporated by reference to Exhibit 10(m) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (ll) Memorandum from the Registrant to Jeffrey C. Barbakow, dated June 14, 1993 (Incorporated by reference to Exhibit 10(n) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (mm) Board of Directors Retirement Plan, effective January 1, 1985 (Incorporated by reference to Exhibit 10(n) to Registrant's Annual Report on Form 10-K dated August 23, 1991) (nn) First Amendment to Board of Directors Retirement Plan, effective as of August 18, 1993 (Incorporated by reference to Exhibit 10(xx) to Registrant's Annual Report on Form 10-K dated August 30, 1993) (oo) Amendment to Directors Retirement Plan, dated as of April 25, 1994 (pp) Supplemental SHERT Plan and Trust, dated June 30, 1991 (Incorporated by reference to Exhibit 10(q) to Registrant's Annual Report on Form 10-K dated August 23, 1991) (qq) First Amendment to Supplemental SHERT, dated as of August 15, 1994 (rr) Supplemental Executive Retirement Plan, as amended May 31, 1986 (Incorporated by reference to Exhibit 10(o) to Registrant's Annual Report on Form 10-K datedAugust 21, 1992) (ss) Amendment to Supplemental Executive Retirement Plan, dated as of April 25, 1994 24 (tt) Amendment to Supplemental Executive Retirement Plan, dated as of July 25, 1994 (uu) 1994 NME Supplemental Executive Retirement Plan Trust Agreement, dated as of May 25, 1994, as amended July 25, 1994, between the Registrant, and United States Trust Company of New York (vv) Long Term Incentive Plan (Incorporated by reference to Exhibit 10(p) to Registrant's Annual Report on Form 10-K dated August 21, 1992) (ww) Annual Incentive Plan (Incorporated by reference to Exhibit 10(q) to Registrant's Annual Report on Form 10-K dated August 21, 1992) (xx) 1994 Annual Incentive Plan (Incorporated by reference to Exhibit B to the Definitive Proxy Statement for the Registrant's 1994 Annual Meeting of Shareholders) (yy) Deferred Compensation Plan, effective March 23, 1983 (Incorporated by reference to Exhibit 10(v) to Registrant's Annual Report on Form 10-K dated August 23, 1991) (zz) First Amendment to Deferred Compensation Plan, dated as of August 15, 1994 (aaa) 1994 NME Deferred Compensation Plan Trust Agreement, dated as of May 25, 1994, as amended July 25, 1994, between the Registrant and United States Trust Company of New York (bbb) Performance Investment Plan (Incorporated by reference to Exhibit 10(d) to Registrant's Annual Report on Form 10-K dated August 23, 1991) (ccc) Revolving Credit and Term Loan Agreement, dated as of December 11, 1991, between the Registrant and NME PIP Funding I, Inc. (Incorporated by reference to Exhibit 10(g) to Registrant's Registration Statement on Form S-3, Registration No. 33-45689, dated February 14, 1992) (ddd) Director Restricted Share Plan (Incorporated by reference to Exhibit A to the definitive Proxy Statement for the Registrant's 1991 Annual Meeting of Shareholders) (eee) 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit A to the Definitive Proxy Statement for the Registrant's 1994 Annual Meeting of Shareholders) (fff) 1991 Stock Incentive Plan (Incorporated by reference to Exhibit B to the definitive Proxy Statement for the Registrant's 1991 Annual Meeting of Shareholders) (ggg) Severance Protection Agreement, dated June 28, 1994, between the Registrant and Barry P. Schochet (11) Statement Re: Computation of Per Share Earnings, page 26 (13) 1994 Annual Report to Shareholders of Registrant (21) Subsidiaries of the Registrant (23) Consent of Experts (a) Accountants' Consent and Report on Consolidated Schedules (KPMG Peat Marwick LLP) (b) REPORTS ON FORM 8-K NME filed no reports on Form 8-K during the last quarter of the 1994 fiscal year 25 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES (1) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (EXHIBIT 11)
1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR PRIMARY EARNINGS PER SHARE Shares outstanding at beginning of period.......... 165,898 166,963 174,765 157,782 148,736 Shares issued upon conversion of notes and debentures...... -- -- 529 348 9,276 Shares issued upon exercise of stock options................ 60 27 299 722 936 Dilutive effect of outstanding stock options................ 1,114 172 495 1,156 1,462 Shares issued as grants of restricted stock, net of cancellations................ (48) (52) 75 2 (92) Shares repurchased as treasury stock........................ -- (999) (4,295) -- (1,502) Dilutive effect of 9% Convertible Subordinated Debentures(2)................ -- -- -- -- 1,402 Other......................... -- -- (15) -- -- -------- -------- -------- -------- -------- Weighted average number of shares and share equivalents outstanding.................. 167,024 166,111 171,853 160,010 160,218 ======== ======== ======== ======== ======== Income from continuing operations................... $215,901 $263,644 $218,199 $145,142 $123,486 Adjustments related to 9% Convertible Subordinated Debentures(2)................ -- -- -- -- 1,151 -------- -------- -------- -------- -------- Adjusted income from continuing operations........ $215,901 $263,644 $218,199 $145,142 $124,637 Earnings per share from continuing operations........ $ 1.29 $ 1.59 $ 1.27 $ 0.91 $ 0.78 ======== ======== ======== ======== ======== FOR FULLY DILUTED EARNINGS PER SHARE Weighted average number of shares used in primary calculation.................. 167,024 166,111 171,853 160,010 160,218 Additional dilutive effect of stock options................ 97 23 1 64 76 Assumed conversion of dilutive convertible notes and debentures................... 13,966 14,356 20,990 37,118 44,154 -------- -------- -------- -------- -------- Fully diluted weighted average number of shares............. 181,087 180,490 192,844 197,192 204,448 ======== ======== ======== ======== ======== Adjusted income from continuing operations used in primary calculation.......... $215,901 $263,644 $218,199 $145,142 $124,637 Adjustments for interest expense, contractual allowances and income taxes.. 5,981 4,628 12,207 25,991 30,070 -------- -------- -------- -------- -------- Adjusted income from continuing operations........ $221,882 $268,272 $230,406 $171,133 $154,707 Earnings per share from continuing operations........ $ 1.23 $ 1.49 $ 1.19 $ 0.87 $ 0.76 ======== ======== ======== ======== ========
- -------- (1) All numbers of shares in these tables are weighted on the basis of the number of days the shares were outstanding or assumed to be outstanding during each period. (2) During the quarter ended August 31, 1989 the 9% debentures were reflected as a common stock equivalent until they were all redeemed or converted on or before August 31, 1989. The income adjustments are for calculation purposes only and do not affect income from continuing operations as reported. 26 SIGNATURE PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, ON AUGUST 25, 1994. National Medical Enterprises, Inc. /s/ RAYMOND L. MATHIASEN /s/ SCOTT M. BROWN By: _____________________________ By: _________________________________ Raymond L. Mathiasen Scott M. Brown Senior Vice President Senior Vice President Chief Financial Officer and Chief Accounting Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON AUGUST 25, 1994, BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED:
SIGNATURE TITLE --------- ----- /s/ JEFFREY C. BARBAKOW - ------------------------------------------- Jeffrey C. Barbakow Chairman, Chief Executive Officer and Director (Principal Executive Officer) /s/ MICHAEL H. FOCHT, SR. - ------------------------------------------- Michael H. Focht, Sr. President, Chief Operating Officer and Director - ------------------------------------------- John C. Bedrosian Director /s/ BERNICE BRATTER - ------------------------------------------- Bernice Bratter Director /s/ MAURICE J. DEWALD - ------------------------------------------- Maurice J. DeWald Director /s/ PETER DE WETTER - ------------------------------------------- Peter de Wetter Director /s/ EDWARD EGBERT, M.D. - ------------------------------------------- Edward Egbert, M.D. Director /s/ RAYMOND A. HAY - ------------------------------------------- Raymond A. Hay Director
27
SIGNATURE TITLE --------- ----- Director - ----------------------------------------- Nita P. Heckendorn /s/ LESTER B. KORN Director - ----------------------------------------- Lester B. Korn /s/ JAMES P. LIVINGSTON Director - ----------------------------------------- James P. Livingston /s/ RICHARD S. SCHWEIKER Director - ----------------------------------------- Richard S. Schweiker
28 NATIONAL MEDICAL ENTERPRISES, INC., AND SUBSIDIARIES SCHEDULE I--MARKETABLE SECURITIES--OTHER INVESTMENTS AT MAY 31, 1994 (DOLLARS IN MILLIONS)
NUMBER OF MARKET AMOUNT SHARES OR VALUE AT AT WHICH PRINCIPAL BALANCE CARRIED IN AMOUNT OF COST OF SHEET BALANCE NAME OF ISSUER AND TITLE OF EACH ISSUE BONDS AND NOTES EACH ISSUE DATE SHEET - -------------------------------------- --------------- ---------- -------- ---------- The United States Government and its agencies................... $8 $ 8 $ 8 $ 8 Any state of the United States and its agencies............... 3 3 3 3 Corporations: American Express Credit Corporation................... 2 2 2 2 General Electric Capital Corporation................... 3 3 3 3 Morgan Guaranty Trust Company New York...................... 2 2 2 2 Various other issuers of short- term commercial paper (each less than $2 million)......... 41 41 42 ---- BALANCE SHEET CAPTION: SHORT- TERM INVESTMENTS............... $ 60 ==== Westminster Health Care Holdings, PLC common stock..... 21,500,000 $ 49 $105 $ 50 The Hillhaven Corporation common stock.......................... 8,878,147 89 170 69* The Hillhaven Corporation Series C preferred stock.............. 35,000 35 35 35 The Hillhaven Corporation Series D preferred stock.............. 60,546 120 n.a. 28** Health Care Property Partners... 23.0% 18 31 17 Other investments in common stock or corporate joint ventures, substantially all of which are accounted for by the equity method.................. 57 n.a. 77** Land held for expansion......... 33 n.a. 33** ---- BALANCE SHEET CAPTION: INVESTMENTS AND OTHER ASSETS... $309 ====
- -------- * Because of the Company's minority interest in Hillhaven, portions of the gains from sales of certain NME facilities to Hillhaven have been deferred and are offset against the cost of the Company's investment above. ** Market values are not available for the Company's Hillhaven Series D preferred stock, other investments and land held for expansion shown above. F-1 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II--AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS AND EMPLOYEES YEARS ENDED MAY 31, 1992, 1993, 1994
BALANCE AT BALANCE AT BALANCE AT MAY 31, AMOUNTS MAY 31, AMOUNTS AMOUNTS MAY 31, NAME OF DEBTOR 1991 ADDITIONS COLLECTED 1992 ADDITIONS COLLECTED WRITTEN OFF 1993 -------------- ----------- ---------- ----------- ---------- ----------- ----------- ----------- ----------- Maris Andersons..... $ 96,479 $100,903 $ -- $ 197,382 $ 957,773 $ (111,467) $ -- $ 1,043,688 William Banowsky.... -- 80,205 -- 80,205 53,641 (133,846) -- -- John C. Bedrosian... 1,928,349 683,918 (115,085) 2,497,182 2,089,043 (747,334) -- 3,838,891 Leonard Cohen....... -- -- -- -- 1,063,140 (1,063,140) -- -- Kenneth Courage..... 100,000 -- (39,196) 60,804 -- (60,804) -- -- Steven Dominguez.... -- 84,053 -- 84,053 158,991 -- -- 243,044 Richard K. Eamer.... 3,919,092 285,658 (4,204,750) -- 3,473,375 (350,958) -- 3,122,417 Alan Ewalt.......... 227,945 154,647 (114,480) 268,112 115,858 (42,854) -- 341,116 Michael H. Focht, Sr................. -- 346,850 -- 346,850 381,045 -- -- 727,895 Nita Heckendorn..... 21,048 93,246 (21,048) 93,246 133,817 (980) -- 226,083 Walter C. Kraujalis. 109,981 21,391 -- 131,372 21,683 -- (30,334)(3) 122,721 Vincent J. Lico..... -- 136,440 -- 136,440 95,641 (142,521) -- 89,560 Raymond L. Mathiason.......... -- 84,053 -- 84,053 104,875 (88,446) -- 100,482 Marcus E. Powers.... -- 163,323 -- 163,323 586,592 (1,873) -- 748,042 Joseph Roche........ 152,000 -- (36,000) 116,000 -- -- (116,000)(5) -- Michael Safran...... 370,000 74,000 (444,000) -- 196,150 -- -- 196,150 Sherwin Small....... 16,876 86,367 (16,234) 87,009 141,710 (228,719) -- -- Neil Sorrentino..... -- 90,338 -- 90,338 89,872 (180,210) -- -- David Spahr......... -- -- -- -- 170,000 (170,000) -- -- Richard L. Stever... 657,310 54,034 (53,976) 657,368 53,976 (53,976) -- 657,368 Barry G. Weinbaum... -- 125,000 (125,000) -- -- -- -- -- ----------- ---------- ----------- ---------- ---------- ----------- --------- ----------- $7,599,080 $2,664,426 $(5,169,769) $5,093,737 $9,887,182 $(3,377,128) $(146,334) $11,457,457 =========== ========== =========== ========== ========== =========== ========= =========== BALANCE AT MAY 31, 1994 ------------------------- BALANCE AT MAY 31, AMOUNTS CURRENT NOT CURRENT NAME OF DEBTOR 1993 ADDITIONS COLLECTED (1) (1) -------------- ----------- ---------- ----------- ---------- ----------- Maris Andersons..... $ 1,043,688 $ 132,990 $ (101,889) $1,074,789(2) $ -- William Banowsky.... -- 62,183 (62,183) 0.00 -- John C. Bedrosian... 3,838,891 262,793 -- 4,101,684(2) -- Steven Dominguez.... 243,044 93,336 (253,894) 82,486 -- Richard K. Eamer.... 3,122,417 120,707 (1,611,135) 231,989(2) 1,400,000(2) Alan Ewalt.......... 341,116 74,231 (350,070) 65,277 -- Michael H. Focht, Sr................. 727,895 226,474 (759,786) 194,583 -- Nita Heckendorn..... 226,083 6,649 (232,732) 0.00 -- Walter C. Kraujalis. 122,721 8,398 -- 131,119(4) -- Vincent J. Lico..... 89,560 87,632 (177,192) 0.00 -- Raymond L. Mathiason.......... 100,482 70,397 (105,602) 65,277 -- Marcus E. Powers.... 748,042 134,617 (381,884) 462,934(2) 37,841(2) Michael Safran...... 196,150 -- (196,150) 0.00 -- Neil Sorrentino..... -- 72,160 -- 72,160 -- Richard L. Stever... 657,368 53,976 (53,976) 657,368 -- ----------- ---------- ----------- ---------- ---------- $11,457,457 $1,406,543 $(4,286,493) $7,139,666 $1,437,841 =========== ========== =========== ========== ==========
F-2 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II--AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS AND EMPLOYEES-- (CONTINUED) YEARS ENDED MAY 31, 1992, 1993 AND 1994 - -------- (1) Except for Items (2) through (5) below, these loans consist of principal and interest on (a) full recourse five-year promissory notes bearing interest at rates of 6.5%, 8% and 9% given to purchase NME common stock under the Company's stock option plans, and (b) promissory notes given to NME upon its deposit of federal and state income taxes under withholding requirements. Shares purchased or vested are pledged as security for these notes. The tax notes bear interest at rates ranging from 6.5% to 8% and normally are payable on or before April 15 of the succeeding calendar year, unless such date otherwise is extended by the Company. Certain tax notes that were due on April 15, 1993, were extended to October 15, 1993. The tax benefit to the Company resulting from the exercise of nonstatutory stock options is reflected in the Company's financial statements as an increase in stockholder's equity. The current column represents demand loans and balances due on or before May 31, 1995. (2) On September 23, 1992, the Executive Committee of the Board authorized special loans in the aggregate principal amount of $3,000,000 from the Company to Mr. Richard K. Eamer, who was then the Chief Executive Officer of the Company. Pursuant to that authorization, an aggregate principal amount of $3,000,000 was loaned to Mr. Eamer. The loans initially were made on a demand basis with interest at the rate of 7% per annum. The Company did not obtain from Mr. Eamer either a promissory note or a pledge agreement with respect to such loans until the termination of Mr. Eamer's full-time employment with the Company. In connection with the termination of Mr. Eamer's full-time employment with the Company, the Company caused Mr. Eamer to execute a promissory note and a pledge agreement, accepted by the full Board of Directors, pursuant to which Mr. Eamer paid down the then-existing balance of his loans from $3,000,000 to $2,200,000 and such loans were converted into a term loan bearing interest at 7% per annum, payable through May 31, 1998. Among other rights that the Company has upon any default, the term loan is secured by (a) Mr. Eamer's investment options and other rights under the Company's Performance Investment Plan ("PIP"), including the Company's obligation to repurchase Mr. Eamer's investment options in April, 1996, for the approximately $2,200,000 he paid for them in April, 1989, if such investment options have not been exercised, and (b) all the proceeds thereof. During fiscal year 1993, the Company also made special loans to three other executive officers: $850,000 to Mr. Andersons, Executive Vice President and Treasurer, $450,000 to Mr. Powers, former General Counsel, and $1,300,000 to Mr. Bedrosian, former Senior Executive Vice President. These loans were made on a demand basis with interest at a fluctuating rate equal to at least the prime rate (which was 6% at that time). Although no notes or security agreements were signed at the time the loans were made, each of Messrs. Andersons, Powers and Bedrosian provided memoranda to the Company confirming that they understood that their loans would bear interest and were made on a demand basis. Since such time, Messrs. Andersons and Powers executed demand promissory notes, bearing interest at a fluctuating interest rate equal to at least the prime rate (which was 6% at that time), secured by their investment options and other rights under the PIP and, in the case of Mr. Andersons, certain additional collateral, including various other securities of the Company. Mr. Andersons' note was repaid in July 1994. On May 31, 1994, in a lawsuit brought by Mr. Bedrosian against the Company, the California Superior Court for the County of Los Angeles granted the Company's motions with respect to Mr. Bedrosian's repayment to NME of all of the principal and interest due with respect to the $1,300,000 and another $504,406 loan. The Company intends to ask the court to also order Mr. Bedrosian to repay all principal and interest owing on three other loans to Mr. Bedrosian that are outstanding. The Company does not intend to make any similar loans in the future. No similar loans may be made in the future without the prior approval of the Compensation Committee. (3) This loan was forgiven in consideration of services rendered. (4) Loan made to assist in job transfer at NME's request. The note is secured by real property and bears interest at 8%. (5) This amount was written off in lieu of severance compensation upon the termination of Mr. Roche's employment with the Company. F-3 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT YEARS ENDED MAY 31, 1992, 1993 AND 1994 (IN MILLIONS)
BALANCE AT ADDITIONS RETIREMENTS OTHER BALANCE AT BEGINNING OF AT COST OR SALES CHANGES END OF PERIOD (1) (2) (3) PERIOD ------------ --------- ----------- ------- ---------- 1992: Land.................... $ 261 $ 20 $ (12) $ 2 $ 271 Buildings and improvements........... 1,896 119 (195) 133 1,953 Construction in progress............... 156 205 (6) (178) 177 Equipment............... 870 160 (75) 45 1,000 ------ ---- ----- ----- ------ 3,183 504 (288) 2 3,401 Land held for expansion. 28 5 -- (2) 31 ------ ---- ----- ----- ------ $3,211 $509 $(288) $ 0 $3,432 ====== ==== ===== ===== ====== 1993: Land.................... $ 271 $ 5 $ (20) $ (7) $ 249 Buildings and improvements........... 1,953 77 (148) 75 1,957 Construction in progress............... 177 82 -- (212) 47 Equipment............... 1,000 128 (88) 21 1,061 ------ ---- ----- ----- ------ 3,401 292 (256) (123) 3,314 Land held for expansion. 31 14 (2) (10) 33 ------ ---- ----- ----- ------ $3,432 $306 $(258) $(133) $3,347 ====== ==== ===== ===== ====== 1994: Land.................... $ 249 $ 2 $ (81) $ 3 $ 173 Buildings and improvements........... 1,957 22 (610) 19 1,388 Construction in progress............... 47 61 (3) (46) 59 Equipment............... 1,061 94 (262) 23 916 ------ ---- ----- ----- ------ 3,314 179 (956) (1) 2,536 Land held for expansion. 33 6 (8) 1 32 ------ ---- ----- ----- ------ $3,347 $185 $(964) $ 0 $2,568 ====== ==== ===== ===== ======
- -------- (1) Includes amounts from purchased businesses of $13 in 1992 and $2 in 1993. (2) The retirement or sales column also includes the reclassification of property, plant and equipment accounts of facilities held for sale. (3) Other changes reflect transfers upon construction completion and in 1993, also include the property, plant and equipment accounts of the Company's United Kingdom nursing home subsidiary, which, as a result of an initial public offering of common stock in April, 1993, are no longer consolidated with the Company's financial statements. The annual provision for depreciation is computed principally using the straight-line method over the following estimated useful lives: generally 25 to 50 years for buildings and improvements, 3 to 15 years for equipment. F-4 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT YEARS ENDED MAY 31, 1992, 1993 AND 1994 (IN MILLIONS)
ADDITIONS CHARGED TO: BALANCE AT ----------------------- RETIREMENTS OTHER BALANCE AT BEGINNING OF CONTINUING DISCONTINUED OR SALES CHANGES END OF PERIOD OPERATIONS OPERATIONS (1) (2) PERIOD ------------ ---------- ------------ ----------- ------- ---------- 1992: Buildings and improvements.......... $312 $ 48 $24 $ (48) $ 0 $336 Equipment.............. 356 74 10 (20) 0 420 ---- ---- --- ----- --- ---- $668 $122 $34 $ (68) $ 0 $756 ==== ==== === ===== === ==== 1993: Buildings and improvements.......... $336 $ 49 $14 $ (66) $(3) $330 Equipment.............. 420 92 13 (29) (4) 492 ---- ---- --- ----- --- ---- $756 $141 $27 $ (95) $(7) $822 ==== ==== === ===== === ==== 1994: Buildings and improvements.......... $330 $ 48 $10 $(127) $50 $311 Equipment.............. 492 95 14 (144) 4 461 ---- ---- --- ----- --- ---- $822 $143 $24 $(271) $54 $772 ==== ==== === ===== === ====
- -------- (1) The retirement or sales column also includes the reclassification of property, plant and equipment accounts of facilities held for sale. (2) Other changes reflect transfers upon construction completion, translation adjustments and in 1993, also include the property, plant and equipment accounts of the Company's United Kingdom nursing home subsidiary, which as a result of an initial public offering of common stock in April, 1993, are no longer consolidated with the Company's financial statements. 1994 also includes a write-down of the Corporate headquarters building. F-5 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED MAY 31, 1992, 1993 AND 1994 (IN MILLIONS)
ADDITIONS CHARGED TO: --------------------------- BALANCE AT BALANCE AT BEGINNING OF CONTINUING DISCONTINUED END OF PERIOD OPERATIONS(1) OPERATIONS(1) DEDUCTIONS(2) PERIOD ------------ ------------- ------------- ------------- ---------- Allowance for doubtful accounts 1992................... $153 $132 $88 $221 $152 1993................... $152 $122 $40 $199 $115 1994................... $115 $111 $35 $184 $77
- -------- (1) Before considering recoveries on doubtful accounts or notes previously written off. (2) Accounts written off, net of beginning balances from purchased businesses.
BALANCE AT BALANCE AT BEGINNING OF ADDITIONS (CHARGED TO END OF PERIOD DISCONTINUED OPERATIONS) DEDUCTIONS(1) PERIOD ------------ ------------------------ ------------- ---------- Reserve for discontinued operations 1992................... -- $129 $16 $113 1993................... $113 $160 $172 $101 1994................... $101 $1,113 $749 $465
- -------- (1) Primarily cash disbursements and, in 1994, write-down of assets to net realizable value and reclassifications to other long-term liabilities. F-6 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE IX--SHORT-TERM BORROWINGS YEARS ENDED MAY 31, 1992, 1993 AND 1994 (IN MILLIONS)
MAXIMUM AVERAGE WEIGHTED WEIGHTED AMOUNT AMOUNT AVERAGE BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE CATEGORY OF AGGREGATE AT END OF INTEREST DURING THE DURING THE DURING THE SHORT-TERM BORROWINGS PERIOD RATE PERIOD PERIOD PERIOD --------------------- --------- -------- ----------- ----------- ------------- Amounts payable to banks for borrowings: 1992................... $148 4.7% $233 $109 5.3% 1993................... $133 3.7% $179 $119 4.0% 1994................... $ 66 4.2% $132 $ 87 4.1% Amounts payable to other financial institutions: 1992................... $ 20 4.1% $34 $ 7 4.2% 1993................... $ 30 3.1% $54 $ 21 3.0% 1994................... $ 1 3.1% $25 $ 4 3.1%
F-7 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION YEAR ENDED MAY 31, 1992, 1993 AND 1994 (IN MILLIONS)
1992: Maintenance and repairs................................................. $ 39 Depreciation............................................................ $122 Advertising............................................................. $ 20 1993: Maintenance and repairs................................................. $ 45 Depreciation............................................................ $142 Taxes other than payroll and income taxes............................... $ 35 1994: Maintenance and repairs................................................. $ 46 Depreciation............................................................ $143 Taxes other than payroll and income taxes............................... $ 31
- -------- Amortization of intangible assets for all years, taxes other than payroll and income taxes for 1992, advertising for 1993 and 1994, and royalties for all years are not presented because such amounts are less than one percent of operating revenues. F-8 EX-3.B 2 RESTATED BYLAWS OF NME BYLAWS EXHIBIT 3(B) RESTATED BY-LAWS OF NATIONAL MEDICAL ENTERPRISES, INC. A NEVADA CORPORATION AS AMENDED JULY 27, 1994 (AMENDMENT OF JULY 27, 1994 IS EFFECTIVE SEPTEMBER 28, 1994) ARTICLE I SHAREHOLDERS' MEETINGS SECTION 1.1 PLACE OF MEETINGS. All meetings of the shareholders shall be held at the principal office of the Corporation in the State of California, or at any other place within or without the State of Nevada as may be designated for that purpose from time to time by the Board of Directors. SECTION 1.2 ANNUAL MEETINGS. The Annual meeting of the shareholders shall be held not later than 210 days after the close of the fiscal year, on the date and at the time set by the Board of Directors, at which time the shareholders shall elect by plurality vote an annual Class of the Board of Directors, consider reports of the affairs of the Corporation, and transact such other business as may properly be brought before the meeting. SECTION 1.3 SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes whatsoever, may be called at any time by the Chief Executive Officer or by the Board of Directors. SECTION 1.4 NOTICE OF MEETINGS. 1.4.1. Notice of each meeting of shareholders, whether annual or special, shall be given at least 10 and not more than 60 days prior to the day thereof by the Secretary or any Assistant Secretary causing to be delivered to each shareholder of record entitled to vote at such meeting a written notice stating the time and place of the meeting and the purpose or purposes for which the meeting is called. Such notice shall be signed by the Chief Executive Officer, the President, the Secretary or any Assistant Secretary and shall be mailed postage prepaid to each shareholder at his address as it appears on the stock books of the Corporation. If any shareholder has failed to supply an address, notice shall be deemed to have been given if mailed to the address of the principal office of the Corporation, or published at least once in a newspaper having general circulation in the county in which the principal office is located. 1.4.2. It shall not be necessary to give any notice of the adjournment of or the business to be transacted at an adjourned meeting other -2- than by announcement at the meeting at which such adjournment is taken; provided that when a meeting is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. SECTION 1.5 CONSENT BY SHAREHOLDERS. Any action which may be taken at a regular meeting of the shareholders, except election of directors, may be taken without a meeting, if authorized by a writing signed by holders of the number of shares required under the law to give their approval for such purpose. SECTION 1.6 QUORUM. 1.6.1. The presence in person or by proxy of the persons entitled to vote a majority of the voting shares at any meeting constitutes a quorum for the transaction of business. Shares shall not be counted in determining the number of shares represented or required for a quorum or in any vote at a meeting, if voting of them at the meeting has been enjoined or for any reason they cannot be lawfully voted at the meeting. 1.6.2. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 1.6.3. In the absence of a quorum, a majority of the shares present in person or by proxy and entitled to vote may adjourn any meeting from time to time, but not for a period of more than 30 days at any one time, until a quorum shall attend. SECTION 1.7 VOTING RIGHTS. 1.7.1. Every shareholder of record of the Corporation shall be entitled at each meeting of the shareholders to one vote for each share of stock standing in his name on the books of the Corporation. Except as otherwise provided by law, or by the Articles of Incorporation or any amendment thereto, or by the By-Laws, if a quorum is present, the majority of votes cast in person or by proxy shall be binding upon all shareholders of the Corporation. 1.7.2. The Board of Directors shall designate a day not more than 60 days prior to any meeting of the shareholders as the day as of which shareholders entitled to notice of and to vote at such meetings shall be determined. SECTION 1.8 PROXIES. Every shareholder entitled to vote or to execute consents may do so either in person or by written proxy executed in accordance with the provisions of Section 78.355 of the Nevada Revised Statutes and filed with the Secretary of the Corporation. -3- SECTION 1.9 MANNER OF CONDUCTING MEETINGS. To the extent not in conflict with the provisions of the law relating thereto, the Articles of Incorporation, or express provisions of these By-Laws, meetings shall be conducted pursuant to such rules as may be adopted by the chairman presiding at, or a majority of the shares represented at, the meeting. ARTICLE II DIRECTORS - MANAGEMENT SECTION 2.1 POWERS. Subject to the limitation of the Articles of Incorporation, of the By- Laws, and of the laws of the State of Nevada as to action to be authorized or approved by the shareholders, all corporate powers shall be exercised by or under authority of, and the business and affairs of this Corporation shall be controlled by, a Board of Directors. SECTION 2.2 NUMBER AND QUALIFICATION. The authorized number of directors of this Corporation shall be 10, all of whom shall be of full age and at least a majority of whom shall be citizens of the United States. SECTION 2.3 CLASSIFICATION AND ELECTION. The Board of Directors shall be classified into three annual Classes, with three directors in Class 1, three directors in Class 2, and four directors in Class 3. Each Class of directors shall be elected for terms of three years. Each term shall continue for the number of years stated and until their successors are elected and have qualified. Their term of office shall begin immediately after election. These By-Laws are being adopted subsequent to the initial classification of directors in 1975. The directors in office as of the date of adoption hereof shall continue to serve the terms for which they have been previously elected. SECTION 2.4 INCREASE IN THE NUMBER OF DIRECTORS. The Board of Directors may change the number of directors from time to time; provided, however, neither the Board of Directors nor the shareholders may ever increase the number of directorships by more than one during any twelve- month period, except upon the affirmative vote of two-thirds of the directors of each Class, or the affirmative vote of the holders of two-thirds of all outstanding shares voting together and not by class. This provision may not be amended except by a like vote. -4- SECTION 2.5 VACANCIES. 2.5.1. Any vacancies in the Board of Directors, except vacancies first filled by the shareholders, may be filled by the affirmative vote of two- thirds of the remaining directors of each Class, though less than a quorum, or by a sole remaining director. Each director so elected shall hold office for the balance of the term of the resigning director and until his successor is elected. The power to fill vacancies shall in no event be delegated to any committee appointed in accordance with these By-Laws. 2.5.2. The shareholders may at any time elect a director to fill any vacancy not filled by the directors, and may elect the additional directors at the meeting at which an amendment of the By-Laws is voted authorizing an increase in the number of directors. 2.5.3. A vacancy or vacancies shall be deemed to exist in case of the death, resignation, or removal of any director, or if the directors or shareholders shall increase the authorized number of directors but shall fail at a meeting at which such increase is authorized or at an adjournment thereof to elect the additional director so provided for, or in case the shareholders fail at any time to elect the full number of authorized directors. 2.5.4. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board or the shareholders shall have power to immediately elect a successor who shall take office when the resignation shall become effective. 2.5.5. No reduction of the number of directors shall have the effect of removing any director prior to the expiration of his term of office. SECTION 2.6 REMOVAL OF DIRECTORS. The entire Board of Directors or any individual director may be removed from office, with or without cause, by the vote or written consent of shareholders representing two-thirds of the issued and outstanding capital stock entitled to vote. SECTION 2.7 RESIGNATIONS. Any director of the Corporation may resign at any time either by oral tender of resignation at any meeting of the Board or by giving written notice thereof to the Secretary, the Chief Executive Officer or the President. Such resignation shall take effect at the time it specifies, and the acceptance of such resignation shall not be necessary to make it effective. SECTION 2.8 PLACE OF MEETINGS. Meetings of the Board of Directors shall be held at the principal office of the Corporation in the State of California, or at such other place within or without the State of Nevada as may be designated for that purpose by the Board of Directors. Any meeting shall be valid, wherever held, if held by the written -5- consent of all members of the Board of Directors, given before or after the meeting and filed with the Secretary of the Corporation. SECTION 2.9 MEETINGS AFTER ANNUAL SHAREHOLDERS' MEETING. The first meeting of the Board of Directors held after the annual shareholders' meeting shall be held at such time and place within or without the State of Nevada as shall be fixed by announcement of the Chief Executive Officer or the President given at the annual shareholders' meeting, and no other notice of such meeting shall be necessary, provided a majority of the whole Board shall be present. Alternatively, such meeting may be held at such time and place as shall be fixed pursuant to notice given under other provisions of these By-Laws. SECTION 2.10 OTHER REGULAR MEETINGS. 2.10.1. Regular meetings of the Board of Directors shall be held at such time and place within or without the State of Nevada as may be agreed upon from time to time by the Board. 2.10.2. No notice need be given of regular meetings, except that a written notice shall be given to each director of the resolution establishing specific meeting dates or a regular meeting date, which notice shall set forth the date of the month, the time, and the place of the meetings. SECTION 2.11 SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held whenever called by the Chief Executive Officer or the President or by two-thirds of the directors of each Class. Notice of any such meeting shall be mailed to each director not later than three days before the day on which the meeting is to be held, or shall be sent to him by telegraph, or delivered personally or by telephone, not later than midnight of the day before the day of the meeting. Any meeting of the Board of Directors shall be a legal meeting without any notice thereof having been given, if each director consents to the holding thereof or waives notice by a writing filed with the Secretary, or is present thereat and their oral consents are entered on the minutes, or they take part in the deliberations thereat without objection. Except as otherwise provided in the By-Laws or as may be indicated in the notice thereof, any and all business may be transacted at any special meeting. SECTION 2.12 WAIVER OF NOTICE. Anything herein to the contrary notwithstanding, notice of any meeting of directors shall not be required as to any director who shall waive notice in writing (including telex, facsimile telephonic transmission, telegram, cablegram or radiogram) before or after such meeting. -6- SECTION 2.13 NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place is fixed at the meeting adjourned. SECTION 2.14 QUORUM. A majority of the number of directors as fixed by the Articles of Incorporation or By-Laws shall be necessary to constitute a quorum for the transaction of business, and the action of a majority of the directors present at any meeting at which there is a quorum, when duly assembled, is valid as a corporate act; provided, that a minority of the directors, in the absence of a quorum, may adjourn from time to time or fill vacant directorships in accordance with Section 2.5 but may not transact any business. SECTION 2.15 ACTION BY UNANIMOUS WRITTEN CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing thereto. Such written consent shall be filed with the minutes of the proceedings of the Board and shall have the same force and effect as a unanimous vote of such directors. SECTION 2.16 COMPENSATION. The directors may be paid their expenses of attendance at each meeting of the Board of Directors. Additionally, the Board of Directors may from time to time, in its discretion, pay to directors either or both a fixed sum for attendance at each meeting of the Board of Directors or a stated salary for services as a director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like reimbursement and compensation for attending committee meetings. SECTION 2.17 TRANSACTIONS INVOLVING INTERESTS OF DIRECTORS. In the absence of fraud, no contract or other transaction of the Corporation shall be affected or invalidated by the fact that any of the directors of the Corporation are in any way interested in, or connected with, any other party to, such contract or transaction or are themselves parties to such contract or transaction, provided that such transaction satisfies Section 78.140 of the Nevada Revised Statutes; and each and every person who may become a director of the Corporation is hereby relieved, to the extent permitted by law, from any liability that might otherwise exist from contracting in good faith with the Corporation for the benefit of himself or any person in which he may be in any way interested or with which he may be in any way connected. Any director of the Corporation may vote and act upon any matter, contract or transaction between the Corporation and any other person without regard to the fact that he is also a stockholder, director or officer of, or has any interest in, such other person. -7- SECTION 2.18 EMERITUS POSITIONS. The Board of Directors may authorize parties to serve in an emeritus position with respect to the Board of Directors, included by way of example but not by way of limitation, as an Emeritus Director, as a Chairman Emeritus of the Board of Directors or as a Vice-Chairman Emeritus of the Board of Directors. These positions shall be honorary positions and parties elected to those positions may be asked to attend meetings of the board of directors and meeting of the shareholders from time to time. A party holding an emeritus position shall not be an officer or director of the Company, shall have no vote at a director's meeting, shall receive no fees for service in that position and shall not be given access to material, non-published information pertaining, to the Company. A party filling an emeritus position shall be requested to do so because of his or her experience with and contributions to the Company. ARTICLE III OFFICERS SECTION 3.1 EXECUTIVE OFFICERS. The executive officers of the Corporation shall be a Chairman, a Vice Chairman, a Chief Executive Officer, a President, one or more Senior Executive Vice Presidents, one or more Executive Vice Presidents, one or more Group Presidents and Chief Executive Officers, one or more Senior Vice Presidents, one or more Vice Presidents, a Secretary, and a Treasurer. Any person may hold two or more offices. The executive officers of the Corporation shall be elected annually by the Board of Directors and shall hold office for one year or until their respective successors shall be elected and shall qualify. SECTION 3.2 APPOINTED OFFICERS: TITLES. 3.2.1. The Chief Executive Officer or the Secretary in the case of Assistant Secretaries or the Treasurer in the case of Assistant Treasurers may appoint one or more Assistant Secretaries or one or more Assistant Treasurers, each of whom shall hold such title at the pleasure of the appointing officer, have such authority and perform such duties as are provided in the By-Laws, or as the Chief Executive Officer or the appointing officer may determine from time to time. Any person appointed under this Section 3.2.1 to serve in any of the foregoing positions shall be deemed by reason of such appointment or service in such capacity to be an "officer" of the corporation. 3.2.2. The Chief Executive Officer or a person designated by the Chief Executive Officer may also appoint a president, one or more executive vice presidents, one or more senior vice presidents, one or more vice presidents and one or more assistant vice presidents for each operating group and division of the Corporation and one or more senior vice presidents, one or more vice presidents and one or more assistant vice presidents for each corporate staff function and a corporate controller and one or more assistant controllers. Each of such persons will hold such title at the pleasure of the Chief Executive -8- Officer and have authority to act for and shall perform duties with respect to only the group, division or corporate staff function for which the person is appointed. Any person appointed under this Section 3.2.2 to serve in any of the foregoing positions shall not be deemed by reason of such appointment or service in such capacity to be an "officer" of the Corporation. SECTION 3.3 REMOVAL AND RESIGNATION. 3.3.1. Any officer may be removed, either with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the Board. Any appointed person may be removed from such position at any time by the person making such appointment or his successor. 3.3.2. Any officer may resign at any time, by giving written notice to the Board of Directors, the Chief Executive Officer, the President or the Secretary of the Corporation. Any such resignation shall take effect at the date of the receipt of such notice, or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.4 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the By-Laws for regular appointments to such office. SECTION 3.5 CHAIRMAN AND VICE CHAIRMAN. The Chairman shall preside at all meetings of the Board of Directors and shall exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors. The Vice Chairman shall, in the absence of the Chairman, preside at all meetings of the Board of Directors and shall exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors. SECTION 3.6 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and affairs of the Corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board and the Vice Chairman of the Board, at all meetings of the Board of Directors. He shall be ex officio a member of the Executive Committee and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and such other powers and duties as may be prescribed by the Board of Directors. SECTION 3.7 PRESIDENT. In the absence or disability of the Chief Executive Officer, the President shall perform all of the duties of the Chief Executive Officer and when -9- so acting shall have all the powers and be subject to all the restrictions upon the Chief Executive Officer, including the power to sign all instruments and to take all actions which the Chief Executive Officer is authorized to perform by the Board of Directors or the By-Laws. The President shall have the general powers and duties usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Chief Executive Officer or the Board of Directors. SECTION 3.8 SENIOR EXECUTIVE VICE PRESIDENT, EXECUTIVE VICE PRESIDENT, SENIOR VICE PRESIDENT AND VICE PRESIDENT. In the absence or disability of the Chief Executive Officer and the President, a Senior Executive Vice President, an Executive Vice President or a Group President and Chief Executive Officer, in the order of his rank and seniority shall perform all of the duties of the Chief Executive Officer, and when so acting shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer, including the power to sign all instruments and to take all actions which the Chief Executive Officer is authorized to perform by the Board of Directors or the By-Laws. The Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents shall have the general powers and duties usually vested in the office of a vice president of a corporation; the Group Presidents and Chief Executive Officers shall have the general powers and duties of a principal executive officer of an operating group of a corporation; and each of them shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, the Executive Committee of the Board of Directors, the Chief Executive Officer or the By-Laws. SECTION 3.9 SECRETARY AND ASSISTANT SECRETARIES. 3.9.1. The Secretary shall (1) attend all sessions of the Board and all meetings of the shareholders; and (2) record and keep, or cause to be kept, all votes and the minutes of all proceedings in a book to be kept for that purpose at the principal office of the Corporation, or at such other place as the Board of Directors may from time to time determine, specifying therein (i) the time and place of holding, (ii) whether regular or special, and if special, how authorized, (iii) the notice thereof given, (iv) the names of those present at directors' meetings, (v) the number of shares present or represented at shareholders' meetings, and (vi) the proceedings thereof; and (3) perform like duties for the Executive and other standing committees, when required. In addition, he shall keep or cause to be kept, at the principal office of the Corporation in the State of Nevada, those documents required to be kept thereat by Section 5.2 of the By-Laws and Section 78.105 of the Nevada Revised Statutes. 3.9.2. The Secretary shall give, or cause to be given, notice of meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Officer, under whose supervision he shall be. He shall keep in safe custody the seal of the Corporation, and, when authorized by the Board, affix the same to any instrument requiring it, and when so affixed, it shall be attested by his signature or by the signature of the Treasurer or an -10- Assistant Secretary. The Secretary is hereby authorized to issue certificates, to which the corporate seal may be affixed, attesting to the incumbency of officers of this Corporation or to actions duly taken by the Board of Directors or the shareholders. 3.9.3. The Assistant Secretaries, in the order of their seniority, shall in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary, and shall perform such other duties as the Chief Executive Officer or the Secretary shall prescribe. SECTION 3.10 TREASURER AND ASSISTANT TREASURERS. 3.10.1. The Treasurer shall deposit all moneys and other valuables in the name, and to the credit, of the Corporation, with such depositories as may be ordered by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the Chief Executive Officer and directors, whenever they request it, an account of all his transactions as Treasurer, and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the By-Laws. 3.10.2. The Assistant Treasurers, in the order of their seniority, shall in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer, and shall perform such other duties as the Chief Executive Officer or the Treasurer shall prescribe. SECTION 3.11 ADDITIONAL POWERS, SENIORITY AND SUBSTITUTION OF OFFICERS. In addition to the foregoing powers and duties specifically prescribed for the respective officers, the Board of Directors may from time to time by resolution (i) impose or confer upon any of the officers such additional duties and powers as the Board of Directors may see fit, (ii) determine the order of seniority among the officers, and/or (iii) except as otherwise provided above, provide that in the absence of any officer or officers, any other officer or officers shall substitute for and assume the duties, powers and authority of the absent officer or officers. Any such resolution may be final, subject only to further action by the Board of Directors, or the resolution may grant such discretion, as the Board of Directors deems appropriate, to the Chairman, the Vice Chairman, the Chief Executive Officer, the President (or in his absence the Senior Executive Vice President or the Executive Vice President serving in his place) to impose or confer additional duties and powers, to determine the order of seniority among officers, and/or to provide for substitution of officers as above described. SECTION 3.12 COMPENSATION. The officers of the Corporation shall receive such compensation as shall be fixed from time to time by the Board of Directors. No officer shall be prohibited from receiving such salary by reason of the fact that he is also a director of the Corporation. -11- SECTION 3.13 TRANSACTION INVOLVING INTEREST OF OFFICER. In the absence of fraud, no contract or other transaction of the Corporation shall be affected or invalidated by the fact that any of the officers of the Corporation are in any way interested in, or connected with, any other party to such contract or transaction, or are themselves parties to such contract or transaction, provided that such transaction complies with Section 78.140 of the Nevada Revised Statutes; and each and every person who is or may become an officer of the Corporation is hereby relieved, to the extent permitted by law, when acting in good faith, from any liability that might otherwise exist from contracting with the Corporation for the benefit of himself or any person in which he may be in any way interested or with which he may be in any way connected. ARTICLE IV EXECUTIVE AND OTHER COMMITTEES SECTION 4.1 STANDING COMMITTEES. The Board of Directors shall appoint an Executive Committee, an Audit Committee and a Compensation and Stock Option Committee, consisting of such number of its members as it may designate, consistent with the Articles of Incorporation, the By-Laws and the laws of the State of Nevada. 4.1.1. The Executive Committee shall have and may exercise, when the Board is not in session, all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, but the Executive Committee shall not have the power to fill vacancies on the Board, or to change the membership of or to fill vacancies in the Executive Committee or any other Committee of the Board, or to adopt, amend or repeal the By-Laws, or to declare dividends. 4.1.2. The Audit Committee shall select and engage on behalf of the Corporation, subject to the consent of the shareholders, and fix the compensation of, a firm of certified public accountants whose duty it shall be to audit the books and accounts of the Corporation and its subsidiaries for the fiscal year in which they are appointed, and who shall report to such Committee. The Audit Committee shall confer with the auditors and shall determine, and from time to time shall report to the Board of Directors upon, the scope of the auditing of the books and accounts of the Corporation and its subsidiaries. The Audit Committee shall also be responsible for determining that the business practices and conduct of employees and other representatives of the Corporation and its subsidiaries comply with the policies and procedures of the Corporation. None of the members of the Audit Committee shall be officers or employees of the Corporation. 4.1.3. The Compensation and Stock Option Committee shall establish a general compensation policy for the Corporation and shall have responsibility for the approval of increases in directors' fees and in salaries -12- paid to officers and senior employees earning in excess of an annual salary to be determined by the Committee. The Compensation and Stock Option Committee shall have all of the powers of administration under all of the Corporation's employee benefit plans, including any stock option plans, long-term incentive plans, bonus plans, retirement plans, stock purchase plans and medical, dental and insurance plans. In connection therewith, the Compensation and Stock Option Committee shall determine, subject to the provisions of the Corporation's plans, the directors, officers and employees of the Corporation eligible to participate in any of the plans, the extent of such participation and the terms and conditions under which benefits may be vested, received or exercised. None of the members of the Compensation and Stock Option Committee shall be officers or employees of the Corporation. SECTION 4.2 OTHER COMMITTEES. Subject to the limitations of the Articles of Incorporation, the By-Laws and the laws of the State of Nevada as to action to be authorized or approved by the shareholders, or duties not delegable by the Board of Directors, any or all of the corporate powers may be exercised by or under authority of, and the business and affairs of this Corporation may be controlled by, such other committee or committees as may be appointed by the Board of Directors. The powers to be exercised by any such committee shall be designated by the Board of Directors. SECTION 4.3 PROCEDURES. Subject to the limitations of the Articles of Incorporation, the By-Laws and the laws of the State of Nevada regarding the conduct of business by the Board of Directors and its appointed committees, any committee created under this Article may use any procedures for conducting its business and exercising its powers, including but not limited to actions by the unanimous written consent of its members in the manner set forth in Section 2.15. A majority (but not less than two members) shall constitute a quorum. Notices of meetings may be in any reasonable manner and may be waived as for meetings of directors. ARTICLE V CORPORATE RECORDS AND REPORTS - INSPECTION SECTION 5.1 RECORDS. The Corporation shall maintain adequate and correct accounts, books and records of its business and properties. All of such books, records and accounts shall be kept at its principal place of business in the State of California, as fixed by the Board of Directors from time to time. SECTION 5.2 ARTICLES, BY-LAWS AND STOCK LEDGER. The Corporation shall maintain and keep the following documents at its principal place of business in the State of Nevada: (i) a certified copy of the -13- Articles of Incorporation and all amendments thereto; (ii) a certified copy of the By-Laws and all amendments thereto; and (iii) a statement setting forth the following: "The Secretary of the Corporation, whose address is 2700 Colorado Avenue, Santa Monica, California 90404, is the custodian of the duplicate stock ledger of the Corporation." SECTION 5.3 INSPECTION. Any person who has been a shareholder of record for at least six months immediately preceding his demand, or any person holding, or thereunto authorized in writing by the holders of, at least five percent of all of the Corporation's outstanding shares, upon at least five days' written demand, or any judgment creditor without prior demand, shall have the right to inspect in person or by agent or attorney, during usual business hours, the duplicate stock ledger of the Corporation and to make extracts therefrom; provided, however, that such inspection may be denied to any shareholder or other person upon his refusal to furnish to the Corporation an affidavit that such inspection is not desired for a purpose which is in the interest of a business or object other than the business of the Corporation and that he has not at any time sold or offered for sale any list of shareholders of any corporation or aided or abetted any person in procuring any such record of shareholders for any such purpose. SECTION 5.4 CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of, or payable to, the Corporation, shall be signed or endorsed by such person or persons, and in such manner as shall be determined from time to time by resolution of the Board of Directors. ARTICLE VI OTHER AUTHORIZATIONS SECTION 6.1 EXECUTION OF CONTRACTS. The Board of Directors, except as the By-Laws otherwise provide, may authorize any officer or officers or agent or agents to enter into any contract or execute any instrument in the name of and on behalf of the Corporation. Such authority may be general, or confined to specific instances. Unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority, except in the ordinary course of business, to bind the Corporation by any contract or engagement or to pledge its credit, or to render it liable for any purpose or in any amount. SECTION 6.2 REPRESENTATION OF OTHER CORPORATIONS. All shares of any other corporation, standing in the name of the Corporation, shall be voted, represented, and all rights incidental thereto exercised as directed by written consent or resolution of the Board of Directors expressly referring thereto. In general, such rights shall be delegated by the -14- Board of Directors under express instructions from time to time as to each exercise thereof to the Chief Executive Officer, the President, any Senior Executive Vice President, any Executive Vice President, any Senior Vice President, any Vice President, the Treasurer or the Secretary of this Corporation, or any other person expressly appointed by the Board of Directors. Such authority may be exercised by the designated officers in person, or by any other person authorized so to do by proxy, or power of attorney, duly executed by such officers. SECTION 6.3 DIVIDENDS. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and on the terms and conditions provided by the laws of the State of Nevada, and the Articles of Incorporation, subject to any contractual restrictions to which the Corporation is then subject. ARTICLE VII CERTIFICATES FOR AND TRANSFER OF SHARES SECTION 7.1 CERTIFICATES FOR SHARES. 7.1.1. Certificates for shares shall be of such form and device as the Board of Directors may designate and shall be numbered and registered as they are issued. Each shall state the name of the record holder of the shares represented thereby; its number and date of issuance; the number of shares for which it is issued; the par value; a statement of the rights, privileges, preferences and restrictions, if any; a statement as to rights of redemption or conversion, if any; and a statement of liens or restrictions upon transfer or voting, if any, or, alternatively, a statement that certificates specifying such matters may be obtained from the Secretary of the Corporation. 7.1.2. Every certificate for shares must be signed by the Chief Executive Officer or the President and the Secretary or an Assistant Secretary, or must be authenticated by facsimiles of the signatures of the Chief Executive Officer or the President and the Secretary or an Assistant Secretary. Before it becomes effective, every certificate for shares authenticated by a facsimile or a signature must be countersigned by a transfer agent or transfer clerk, and must be registered by an incorporated bank or trust company, either domestic or foreign, as registrar of transfers. 7.1.3. Even though an officer who signed, or whose facsimile signature has been written, printed, or stamped on a certificate for shares ceases, by death, resignation, or otherwise, to be an officer of the Corporation before the certificate is delivered by the Corporation, the certificate shall be as valid as though signed by a duly elected, qualified and authorized officer, if it is countersigned by the signature or facsimile signature of a transfer clerk or transfer agent and registered by an incorporated bank or trust company, as registrar of transfers. -15- 7.1.4. Even though a person whose facsimile signature as, or on behalf of, the transfer agent or transfer clerk has been written, printed or stamped on a certificate for shares ceases, by death, resignation, or otherwise, to be a person authorized to so sign such certificate before the certificate is delivered by the Corporation, the certificate shall be deemed countersigned by the facsimile signature of a transfer agent or transfer clerk for purposes of meeting the requirements of this section. SECTION 7.2 TRANSFER ON THE BOOKS. Upon surrender to the Secretary or transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 7.3 LOST OR DESTROYED CERTIFICATES. The Board of Directors may direct, or may authorize the Secretary to direct, a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate for shares so lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors or Secretary may, in its or his discretion, and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. SECTION 7.4 TRANSFER AGENTS AND REGISTRARS. The Board of Directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, who may be the same person, and may be the Secretary of the Corporation, or an incorporated bank or trust company, either domestic or foreign, who shall be appointed at such times and places as the requirements of the Corporation may necessitate and the Board of Directors may designate. SECTION 7.5 FIXING RECORD DATE FOR DIVIDENDS, ETC. The Board of Directors may fix a time, not exceeding 50 days preceding the date fixed for the payment of any dividend or distribution, or for the allotment of rights, or when any change or conversion or exchange of shares shall go into effect, as a record date for the determination of the shareholders entitled to receive any such dividend or distribution, or any such allotment of rights, or to exercise the rights in respect to any such change, conversion, or exchange of shares, and, in such case, only shareholders of record on the date so fixed shall be entitled to receive such dividend, distribution, or allotment -16- of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date fixed as aforesaid. SECTION 7.6 RECORD OWNERSHIP. The Corporation shall be entitled to recognize the exclusive right of a person registered as such on the books of the Corporation as the owner of shares of the Corporation's stock to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VIII AMENDMENTS TO BY-LAWS SECTION 8.1 BY SHAREHOLDERS. New or restated by-laws may be adopted, or these By-Laws may be repealed or amended, at the annual shareholders' meeting or at any other meeting of the shareholders called for that purpose, by a vote of shareholders entitled to exercise a majority of the voting power of the Corporation. SECTION 8.2 BY DIRECTORS. Subject to the right of the shareholders to adopt, amend, or repeal by- laws, as provided in Section 8.1, the Board of Directors may adopt, amend, or repeal any of these By-Laws by the affirmative vote of two-thirds of the directors of each Class except as otherwise provided in Section 2.4. This power may not be delegated to any committee appointed in accordance with these By- Laws. SECTION 8.3 RECORD OF AMENDMENTS. Whenever an amendment or a new By-Law is adopted, it shall be copied in the book of minutes with the original By-Laws, in the appropriate place. If any By-Law is repealed, the fact of repeal, with the date of the meeting at which the repeal was enacted, or written assent was filed, shall be stated in said book. ARTICLE IX INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 9.1 Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of -17- another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or inaction in an official capacity or in any other capacity while serving as a director, officer, employee, fiduciary or agent, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the laws of Nevada, as the same exist or may hereafter be amended, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, employee benefit plan exercise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee, fiduciary or agent and shall inure to the benefit of his heirs, executors and administrators; provided however, that, except as provided in Section 9.2, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in this Article IX shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Nevada Private Corporation Law requires, the payment of such expenses incurred by a director or officer in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to any employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section 9.1 or otherwise. The Corporation may, by action of the Board, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. SECTION 9.2 If a claim under Section 9.1 is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has failed to meet a standard of conduct which makes it permissible under Nevada law for the Corporation to indemnify the claimant for the amount claimed. Neither the failure of the Corporation (including the Board, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he has met such standard of conduct, nor an actual determination by the Corporation (including the Board, independent legal counsel, or its shareholders) that the claimant has not met such standard of conduct, shall be a defense to the action or create a presumption that the claimant has failed to meet such standard of conduct. -18- SECTION 9.3 The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, By-Law, agreement, vote of shareholders or disinterested directors or otherwise. SECTION 9.4 The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee, fiduciary or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Nevada law. SECTION 9.5 To the extent that any director, officer, employee, fiduciary or agent of the Corporation is by reason of such position, or a position with another entity at the request of the Corporation, a witness in any action, suit or proceeding, he shall be indemnified against all costs and expenses actually and reasonably incurred by him or on his behalf in connection therewith. SECTION 9.6 The Corporation may enter into agreements with any director, officer, employee, fiduciary or agent of the Corporation providing for indemnification to the full extent permitted by Nevada law. SECTION 9.7 For purposes of this Article IX, the term "Board" shall mean the Board of Directors of the Corporation or, to the extent permitted by the laws of Nevada, as the same exist or may hereafter be amended, its Executive Committee. On vote of the Board, the Corporation may assent to the adoption of this Article IX by any subsidiary, whether or not wholly owned. SECTION 9.8 The rights provided by this Article IX shall be available whether or not the claim asserted against the director, officer, employee, fiduciary or agent is based on matters which antedate the adoption of this Article IX. SECTION 9.9 If any provision of this Article IX shall for any reason be determined to be invalid, the remaining provisions hereof shall not be affected thereby but shall remain in full force and effect. SECTION 9.10 The rights provided by this Article IX shall be applicable to the officers (including without limitation the Chairman, Vice Chairman, treasurer and assistant treasurer) appointed from time to time by the Chief Executive Officer of the Corporation or his designee to serve in the administration and management of any separate, segregated fund established for purposes of collecting and distributing voluntary employee political contributions to federal election campaigns pursuant to the Federal Election Campaign Act of 1971, as amended. -19- ARTICLE X CORPORATE SEAL The corporate seal shall be circular in form and shall have inscribed thereon the name of the Corporation, and the date of its incorporation, and the word "Nevada". ARTICLE XI INTERPRETATION Reference in these By-Laws to any provision of the Nevada Revised Statutes shall be deemed to include all amendments thereto and the effect of the construction and determination of validity thereof by the Nevada Supreme Court. EX-10.UU 3 SUPP. EXEC. RETRMNT PLAN SERP.TRS EXHIBIT 10(uu) 1994 NME SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TRUST AS AMENDED JULY 25, 1994 This Trust Agreement (the "Agreement") is made and entered into this 25th day of May, 1994, by and between National Medical Enterprises, Inc., a Nevada corporation (the "Company") and United States Trust Company of New York (the "Trustee") with reference to the following facts: A. Company has adopted the NME Supplemental Executive Retirement Plan (the "Plan"), a copy of the Plan is attached hereto as Exhibit A. --------- B. Company has incurred or expects to incur liability under the terms of such Plan with respect to the individuals participating in such Plan. C. Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to Plan participants and for their beneficiaries in such manner and at such times as specified in the Plan. D. It is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"). 1 E. It is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. ESTABLISHMENT OF TRUST. ---------------------- (a) Company hereby deposits with Trustee in trust One Million shares of the $.075 par value per share common stock of Company, which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Agreement. (b) The Trust shall become irrevocable upon approval by the Board of Directors. Company shall provide a certified copy of the resolution of the Board of Directors stipulating that the Trust has been approved by them. (c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of participants in the Plan and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred 2 claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) Upon a Change of Control, as defined in Section 13(d) herein, and on the last day of every calendar quarter commencing with the first calendar quarter beginning after the month in which a Change in Control occurs (a "Quarter"). Company shall, as soon as possible, but in no event longer than thirty (30) days following the Change of Control and no longer than ten (10) days after the end of each Quarter, make an irrevocable contribution to the Trust in an amount that is sufficient together with all assets held by the Trust as of such date to pay to each Plan participant or beneficiary, on a pre-tax basis, the benefits to which Plan participants or their beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred, and as of the last day of each Quarter. Company shall notify the Trustee immediately following verification that a Change of Control has occurred. Section 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES. ----------------------------------------------------- (a) Company shall deliver to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of 3 commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall not be responsible for determining the accuracy of the amounts to be paid according to the Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. (c) Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, Company shall make the balance of each such payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient. 4 Section 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST -------------------------------------------------- BENEFICIARY WHEN COMPANY IS INSOLVENT. ------------------------------------- (a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (2) Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency. 5 (3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise. (4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. PAYMENTS TO COMPANY. ------------------- Except as provided in Section 3 hereof, after the Trust has become irrevocable, Company shall have no right or power to direct Trustee to return to 6 Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan. Section 5. INVESTMENT AUTHORITY. -------------------- It is the intent of Company that the Trustee shall invest the contributions to the Trust in shares of common stock of Company. Trustee may invest in securities (including stock or right to acquire stock) or obligations issued by Company. All rights associated with assets of the Trust shall be exercised by Trustee, or the person designated by Trustee, and shall in no event be exercisable by or rest with Plan participants. Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. The Trustee shall hold the stock until such time as the stock must be liquidated to pay Plan participants or their beneficiaries or until such time as the Trustee determines it to be clearly imprudent to retain the stock to preserve the principal balance required to maintain adequate funding for future payments due to Plan participants or their beneficiaries. Company represents and warrants that it has filed and will file with the Securities and Exchange Commission and with all applicable state agencies or authorities all required registration statements relating to shares of Company stock and other interests which may be issued under the Plan. The Employer acknowledges that it is and shall be responsible for, and that the Trustee shall 7 not be responsible for, preparing or filing such registration statements or for the accuracy of statements contained therein, or for preparing or filing any other reports, statements or filings required under federal or state securities laws with respect to the Trust's investment in Company stock. Section 6. DISPOSITION OF INCOME. --------------------- During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 7. ACCOUNTING BY TRUSTEE. --------------------- Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. 8 Section 8. RESPONSIBILITY OF TRUSTEE. ------------------------- (a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan or this Trust and is given in writing by Company. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If Trustee undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Company does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust. (c) Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. 9 (e) Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) Notwithstanding any powers granted to Trustee pursuant to this Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. (g) Notwithstanding any provision in this Agreement to the contrary, in the event of a Change of Control, the Trustee is hereby directed to sell any and all shares of Company stock, or other stock that is received by the Trustee in exchange for such Company stock as a result of the Change of Control, which the Trustee holds as a Trust asset, within thirty (30) days of such Change of Control. The Trustee shall invest any and all proceeds that it receives as a result of such sales that are not immediately needed in order to make distributions to Plan participants and their beneficiaries in United States government securities and/or securities of United States government agencies with average portfolio maturity of two (2) years. Additionally, if the Trustee sells any Company stock prior to a Change in Control the proceeds from any such sale that are not immediately needed in order to make distributions to Plan participants and their beneficiaries shall also be invested by the Trustee in 10 United States government securities and/or securities of United States government agencies with average portfolio maturity of two (2) years. Section 9. COMPENSATION AND EXPENSES OF TRUSTEE. ------------------------------------ Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust. In the event of a Change of Control or any other matter, which in the Trustee's reasonable discretion requires the Trustee to perform services in addition to the Trustee's custodial and investment responsibilities under this Agreement, the Trustee shall be entitled to an addition fee as provided in this Section 9. The Trustee shall be compensated at its normal hourly rates for all reasonable additional services and for the reasonable fees and expenses of its counsel or other experts required to be engaged by the Trustee. Such amounts shall be paid by Company to the Trustee within thirty (30) days of billing, provided that if timely payment is not made by the Company, the Trustee may discharge any such obligation out of the Trust assets, regardless of whether the Trust is fully funded. In the event of the termination of the Trust or the removal or resignation of the Trustee, the Trustee shall be entitled to withhold out of the Trust assets all amounts due to the Trustee pursuant to this Section 9. This Section 9 shall supersede any conflicting provision of this Agreement or the Plan. Section 10. RESIGNATION AND REMOVAL OF TRUSTEE. ---------------------------------- (a) Trustee may resign at any time by written notice to Company, which shall be effective ninety (90) days after receipt of such notice unless Company and Trustee agree otherwise. 11 (b) Subject to Section 10(c), Trustee may be removed by Company on ninety (90) days notice or upon shorter notice accepted by Trustee. (c) Upon a Change of Control, as defined herein, Trustee may not be removed by Company for ten (10) years. (d) If Trustee resigns or is removed within ten (10) years of a Change of Control, as defined herein, Trustee shall select a successor Trustee in accordance with the provisions of Section 11(b) hereof prior to the effective date of Trustee's resignation or removal. (e) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within ninety (90) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit. (f) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraphs (a) or (b) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 11. APPOINTMENT OF SUCCESSOR. ------------------------ (a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, Company may appoint any third party, such as a bank trust department 12 or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. (b) If Trustee resigns or is removed pursuant to the provisions of Section 10(e) hereof and selects a successor Trustee, Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under state law. The appointment of a successor Trustee shall be effective when accepted in writing by the new Trustee. The new Trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer. (c) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. 13 Section 12. AMENDMENT OR TERMINATION. ------------------------ (a) This Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable after it has become irrevocable in accordance with Section l(b) hereof. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan unless sooner revoked in accordance with Section 1(b) hereof. Upon termination of the Trust any assets remaining in the Trust shall be returned to Company. (c) Upon written approval of all participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plan, Company may terminate this Trust prior to the time all benefit payments under the Plan have been made. Company shall provide verification to the Trustee that all Plan participants or beneficiaries entitled to benefits under the Plan have in fact approved the termination of the Trust. All assets in the Trust at termination shall be returned to Company. (d) Sections 1(e), 4, 5, 8(g), 10(c), 10(d), 12(d) and 13(d) of this Agreement may not be amended by Company for ten (10) years following a Change in Control, as defined herein. 14 Section 13. MISCELLANEOUS. ------------- (a) Any provision of this Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of New York, except to the extent pre-empted by ERISA. (d) For purposes of this Trust, a Change of Control shall be deemed to have occurred if after April 1, 1994 (a) any person (as defined in Section 13(c) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) becomes the beneficial owner directly or indirectly of twenty percent (20%) or more of the combined voting power of Company's then outstanding securities or (b) individuals who, as of April 1, 1994, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that (i) any individual who becomes a director of the Company subsequent to April 1, 1994, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board and (ii) no individual who was elected initially (after April 1, 1994) as a director as a result of an 15 actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, or any other actual or threatened solicitations of proxies or consents by or on behalf of any person other than the Incumbent Board shall be deemed to have been a member of the Incumbent Board. (e) If a Plan participant or beneficiary of a Plan participant is required to institute a legal proceeding in order to enforce his or her rights under this Agreement and such Plan participant or beneficiary prevails in such legal proceeding then the Company shall reimburse such Plan participant or beneficiary for the reasonable legal fees and expenses incurred in bringing and prosecuting such legal proceeding. Section 14. EFFECTIVE DATE. -------------- The effective date of this Agreement shall be the date first written above. 16 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. "COMPANY" NATIONAL MEDICAL ENTERPRISES, INC. By: _______________________________________ Its:_______________________________________ "TRUSTEE" UNITED STATES TRUST COMPANY OF NEW YORK By: _______________________________________ Its:_______________________________________ 17 EX-10.AAA 4 DEF. COMP. PLAN TRUST EXHIBIT 10(aaa) 1994 NME DEFERRED COMPENSATION PLAN TRUST AS AMENDED JULY 25, 1994 This Trust Agreement (the "Agreement") is made and entered into this 25th day of May, 1994, by and between National Medical Enterprises, Inc., a Nevada corporation (the "Company") and United States Trust Company of New York (the "Trustee") with reference to the following facts: A. Company has adopted the National Medical Enterprises, Inc. Deferred Compensation Plan (the "Plan"), a copy of the Plan is attached hereto as Exhibit ------- A. - - B. Company has incurred or expects to incur liability under the terms of such Plan with respect to the individuals participating in such Plan. C. Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to Plan participants and for their beneficiaries in such manner and at such times as specified in the Plan. D. It is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"). 1 E. It is the intention of Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. ESTABLISHMENT OF TRUST. ---------------------- (a) Company hereby deposits with Trustee in trust Five Hundred Thousand shares of the $.075 par value per share common stock of Company, which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Agreement. (b) The Trust shall become irrevocable upon approval by the Board of Directors. Company shall provide a certified copy of the resolution of the Board of Directors stipulating that the Trust has been approved by them. (c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of participants in the Plan and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred 2 claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) Upon a Change of Control, as defined in Section 13(d) herein, and on the last day of every calendar quarter commencing with the first calendar quarter beginning after the month in which a Change in Control occurs (a "Quarter"). Company shall, as soon as possible, but in no event longer than thirty (30) days following the Change of Control and no longer than ten (10) days after the end of each Quarter, make an irrevocable contribution to the Trust in an amount that is sufficient together with all assets held by the Trust as of such date to pay to each Plan participant or beneficiary, on a pre-tax basis, the benefits to which Plan participants or their beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred, and as of the last day of each Quarter. Company shall notify the Trustee immediately following verification that a Change of Control has occurred. Section 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES. ----------------------------------------------------- (a) Company shall deliver to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of 3 commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall not be responsible for determining the accuracy of the amounts to be paid according to the Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. (c) Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. Company shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, Company shall make the balance of each such payment as it falls due. Trustee shall notify Company where principal and earnings are not sufficient. 4 Section 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST -------------------------------------------------- BENEFICIARY WHEN COMPANY IS INSOLVENT. ------------------------------------- (a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (2) Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency. 5 (3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan or otherwise. (4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. PAYMENTS TO COMPANY. ------------------- Except as provided in Section 3 hereof, after the Trust has become irrevocable, Company shall have no right or power to direct Trustee to return to 6 Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan. Section 5. INVESTMENT AUTHORITY. -------------------- It is the intent of Company that the Trustee shall invest the contributions to the Trust in shares of common stock of Company. Trustee may invest in securities (including stock or right to acquire stock) or obligations issued by Company. All rights associated with assets of the Trust shall be exercised by Trustee, or the person designated by Trustee, and shall in no event be exercisable by or rest with Plan participants. Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. The Trustee shall hold the stock until such time as the stock must be liquidated to pay Plan participants or their beneficiaries or until such time as the Trustee determines it to be clearly imprudent to retain the stock to preserve the principal balance required to maintain adequate funding for future payments due to Plan participants or their beneficiaries. Company represents and warrants that it has filed and will file with the Securities and Exchange Commission and with all applicable state agencies or authorities all required registration statements relating to shares of Company stock and other interests which may be issued under the Plan. Company acknowledges that it is and shall be responsible for, and that the Trustee shall 7 not be responsible for, preparing or filing such registration statements or for the accuracy of statements contained therein, or for preparing or filing any other reports, statements or filings required under federal or state securities laws with respect to the Trust's investment in Company stock. Section 6. DISPOSITION OF INCOME. --------------------- During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 7. ACCOUNTING BY TRUSTEE. --------------------- Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. 8 Section 8. RESPONSIBILITY OF TRUSTEE. ------------------------- (a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Company which is contemplated by, and in conformity with, the terms of the Plan or this Trust and is given in writing by Company. In the event of a dispute between Company and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If Trustee undertakes or defends any litigation arising in connection with this Trust, Company agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Company does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust. (c) Trustee may consult with legal counsel (who may also be counsel for Company generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. 9 (e) Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) Notwithstanding any powers granted to Trustee pursuant to this Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. (g) Notwithstanding any provision in this Agreement to the contrary, in the event of a Change of Control, the Trustee is hereby directed to sell any and all shares of Company stock, or other stock that is received by the Trustee in exchange for such Company stock as a result of the Change of Control, which the Trustee holds as a Trust asset, within thirty (30) days of such Change of Control. The Trustee shall invest any and all proceeds that it receives as a result of such sales that are not immediately needed in order to make distributions to Plan participants and their beneficiaries in United States government securities and/or securities of United States government agencies with average portfolio maturity of two (2) years. Additionally, if the Trustee sells any Company stock prior to a Change in Control the proceeds from any such sale that are not immediately needed in order to make distributions to Plan participants and their beneficiaries shall also be invested by the Trustee in 10 United States government securities and/or securities of United States government agencies with average portfolio maturity of two (2) years. Section 9. COMPENSATION AND EXPENSES OF TRUSTEE. ------------------------------------ Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust. In the event of a Change of Control or any other matter, which in the Trustee's reasonable discretion requires the Trustee to perform services in addition to the Trustee's custodial and investment responsibilities under this Agreement, the Trustee shall be entitled to an addition fee as provided in this Section 9. The Trustee shall be compensated at its normal hourly rates for all reasonable additional services and for the reasonable fees and expenses of its counsel or other experts required to be engaged by the Trustee. Such amounts shall be paid by Company to the Trustee within thirty (30) days of billing, provided that if timely payment is not made by the Company, the Trustee may discharge any such obligation out of the Trust assets, regardless of whether the Trust is fully funded. In the event of the termination of the Trust or the removal or resignation of the Trustee, the Trustee shall be entitled to withhold out of the Trust assets all amounts due to the Trustee pursuant to this Section 9. This Section 9 shall supersede any conflicting provision of this Agreement or the Plan. Section 10. RESIGNATION AND REMOVAL OF TRUSTEE. ---------------------------------- (a) Trustee may resign at any time by written notice to Company, which shall be effective ninety (90) days after receipt of such notice unless Company and Trustee agree otherwise. 11 (b) Subject to Section 10(c), Trustee may be removed by Company on ninety (90) days notice or upon shorter notice accepted by Trustee. (c) Upon a Change of Control, as defined herein, Trustee may not be removed by Company for ten (10) years. (d) If Trustee resigns or is removed within ten (10) years of a Change of Control, as defined herein, Trustee shall select a successor Trustee in accordance with the provisions of Section 11(b) hereof prior to the effective date of Trustee's resignation or removal. (e) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within ninety (90) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit. (f) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraphs (a) or (b) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 11. APPOINTMENT OF SUCCESSOR. ------------------------ (a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, Company may appoint any third party, such as a bank trust department 12 or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. (b) If Trustee resigns or is removed pursuant to the provisions of Section 10(e) hereof and selects a successor Trustee, Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under state law. The appointment of a successor Trustee shall be effective when accepted in writing by the new Trustee. The new Trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer. (c) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. 13 Section 12. AMENDMENT OR TERMINATION. ------------------------ (a) This Agreement may be amended by a written instrument executed by Trustee and Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable after it has become irrevocable in accordance with Section l(b) hereof. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan unless sooner revoked in accordance with Section 1(b) hereof. Upon termination of the Trust any assets remaining in the Trust shall be returned to Company. (c) Upon written approval of all participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plan, Company may terminate this Trust prior to the time all benefit payments under the Plan have been made. Company shall provide verification to the Trustee that all Plan participants or beneficiaries entitled to benefits under the Plan have in fact approved the termination of the Trust. All assets in the Trust at termination shall be returned to Company. (d) Sections 1(e), 4, 5, 8(g), 10(c), 10(d), 12(d) and 13(d) of this Agreement may not be amended by Company for ten (10) years following a Change in Control, as defined herein. 14 Section 13. MISCELLANEOUS. ------------- (a) Any provision of this Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of New York, except to the extent pre-empted by ERISA. (d) For purposes of this Trust, a Change of Control shall be deemed to have occurred if after April 1, 1994 (a) any person (as defined in Section 13(c) or 14(d)(2) of the Securities Exchange Act of 1934, as amended), becomes the beneficial owner directly or indirectly of twenty percent (20%) or more of the combined voting power of Company's then outstanding securities or (b) individuals who, as of April 1, 1994, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that (i) any individual who becomes a director of the Company subsequent to April 1, 1994, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board and (ii) no individual who was elected initially (after April 1, 1994) as a director as a result of an 15 actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, or any other actual or threatened solicitations of proxies or consents by or on behalf of any person other than the Incumbent Board shall be deemed to have been a member of the Incumbent Board. (e) If a Plan participant or beneficiary of a Plan participant is required to institute a legal proceeding in order to enforce his or her rights under this Agreement and such Plan participant or beneficiary prevails in such legal proceeding then the Company shall reimburse such Plan participant or beneficiary for the reasonable legal fees and expenses incurred in bringing and prosecuting such legal proceeding. Section 14. EFFECTIVE DATE. -------------- The effective date of this Agreement shall be the date first written above. 16 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. "COMPANY" NATIONAL MEDICAL ENTERPRISES, INC. By: _______________________________________ Its:_______________________________________ "TRUSTEE" UNITED STATES TRUST COMPANY OF NEW YORK By: _______________________________________ Its:_______________________________________ 17 EX-10.EE 5 ASSET SALE AGREEMENT EXHIBIT 10(ee) ASSET SALE AGREEMENT (FIRST FACILITIES) ****** NATIONAL MEDICAL ENTERPRISES, INC. As Seller AND CHARTER MEDICAL CORPORATION As Buyer Dated: March 29, 1994 ASSET SALE AGREEMENT (FIRST FACILITIES) Table of Contents PREAMBLE................................................ 1 ARTICLE 1....................... 2 DEFINITIONS Section 1.1 Certain Defined Terms...................... 2 Section 1.2 Index of Other Defined Terms............... 4 ARTICLE 2....................... 8 BASIC TRANSACTIONS Section 2.1 Purchased Assets........................... 8 Section 2.2 Excluded Assets............................ 13 Section 2.3 Assumed Liabilities........................ 15 Section 2.4 Excluded Liabilities....................... 17 Section 2.5 Purchase Price............................. 20 Section 2.6 Payment of Purchase Price.................. 20 (a) Payment of Tentative Purchase Price........... 20 (b) Determination of Interim Net Book Values...... 21 (c) Determination of Final Net Book Values........ 22 (d) Seller as Agent of Subsidiaries............... 24 Section 2.7 Allocation of Purchase Price............... 24 Section 2.8 Contingent Lease Obligations............... 25 Section 2.9 Remittances and Receivables................ 25 (a) In General.................................... 25 (b) Receivables................................... 27 (c) Straddle Patient Receivables.................. 28 (i) Cut-Off Billings........................ 28 (ii) Cut-Off Billings Not Accepted........... 29 (d) Cooperation in Collecting Receivables and Excluded Assets........................... 30 (e) Non-Assignable Receivables.................... 30 (f) Collection Fee................................ 31 (i) Section 2.10 Employee Matters.......................... 32 (a) Pension Plans................................. 32 (b) Retained Employees............................ 33 (c) Hiring of Retained Employees.................. 34 (d) Health Benefits............................... 35 (e) Acknowledgement of Responsibility............. 35 Section 2.11 Use of Names.............................. 36 Section 2.12 No Assignment If Breach; Seller's Discharge of Assumed Liabilities.................... 38 Section 2.13 Closings.................................. 40 (a) The First Closing............................. 40 (b) The Second Closing............................ 42 (c) The Final Closing............................. 42 (d) Deliveries by Seller.......................... 43 (e) Deliveries by Buyer........................... 44 (f) Escrow........................................ 44 Section 2.14 Purchase Price Adjustment................. 45 Section 2.15 Transfer of Assets in Corporate Form...... 47 Section 2.16 Assignment of Rights and Obligations to Buyer Subsidiaries........................ 47 Section 2.17 Data Processing Services.................. 49 Section 2.18 Rejection of Certain Contracts............ 50 Section 2.19 Remaining Schedules....................... 52 ARTICLE 3...................... 52 REPRESENTATIONS AND WARRANTIES OF SELLER Section 3.1 Organization and Corporate Power............ 52 Section 3.2 Subsidiaries 52 Section 3.3 Authority Relative to this Agreement........ 54 Section 3.4 Absence of Breach........................... 54 Section 3.5 Private Party Consents...................... 55 Section 3.6 Governmental Consents....................... 55 Section 3.7 Brokers..................................... 56 Section 3.8 Title to Property........................... 56 Section 3.9 Assumed Contracts........................... 57 Section 3.10 Licenses.................................... 58 Section 3.11 U.S. Person; Resident of Georgia............ 58 Section 3.12 Employee Relations.......................... 59 Section 3.13 Employee Plans.............................. 59 (ii) Section 3.14 Litigation.................................. 60 Section 3.15 Inventory................................... 60 Section 3.16 Hazardous Substances........................ 61 Section 3.17 Financial Information....................... 62 Section 3.18 Changes Since Balance Sheet................. 64 Section 3.19 Transferred Business Names.................. 66 Section 3.20 Compliance with Laws and Accreditation...... 66 Section 3.21 Cost Reports, Third Party Receivables and Conditions of Participation................. 67 Section 3.22 Medical Staff............................... 67 Section 3.23 Hill-Burton Care............................ 68 Section 3.24 Assets Used in the Operation of the Facilities.................................. 68 Section 3.25 Taxes....................................... 68 Section 3.26 Lists of Other Data......................... 69 Section 3.27 Certain Transactions........................ 70 ARTICLE 4....................... 70 REPRESENTATIONS AND WARRANTIES OF BUYER Section 4.1 Organization and Corporate Power............ 70 Section 4.2 Buyer Subsidiaries.......................... 70 Section 4.3 Authority Relative to this Agreement........ 71 Section 4.4 Absence of Breach........................... 72 Section 4.5 Private Party Consents...................... 72 Section 4.6 Governmental Consents....................... 73 Section 4.7 Brokers..................................... 73 Section 4.8 Qualified for Licenses...................... 73 Section 4.9 Financial Ability to Perform................ 73 Section 4.10 No Knowledge of Seller's Breach............. 73 Section 4.11 No Assurance................................ 74 ARTICLE 5....................... 74 COVENANTS OF EACH PARTY Section 5.1 Efforts to Consummate Transactions.......... 74 Section 5.2 Cooperation; Regulatory Filings............. 75 Section 5.3 Further Assistance.......................... 76 Section 5.4 Cooperation Respecting Proceedings.......... 76 (iii) Section 5.5 Expenses.................................... 77 Section 5.6 Announcements; Confidentiality.............. 79 Section 5.7 Preservation of and Access to Certain Records..................................... 80 ARTICLE 6....................... 82 ADDITIONAL COVENANTS OF SELLER Section 6.1 Conduct Pending Closing..................... 83 Section 6.2 Access and Information; Environmental Survey; Remediation or Adjustment................... 85 Section 6.3 Updating.................................... 88 Section 6.4 No Solicitation............................. 88 Section 6.5 Name Changes................................ 89 Section 6.6 Filing of Cost Reports...................... 89 Section 6.7 Purchase of Supplies........................ 89 Section 6.8 Covenant Not to Compete..................... 90 (a) Covenant....................................... 90 (b) Exceptions..................................... 91 (i) Psychiatric Facilities and Contracts Not Acquired By Buyer........................ 91 (ii) Facilities Outside Geographic Area....... 91 (iii) Acute Hospitals.......................... 91 (iv) Divestiture of Acquired Psychiatric Facilities............................... 92 (v) Acquiring Entities....................... 92 (c) Acute Hospital Affiliations.................... 92 (d) Covenant Period................................ 94 (e) Severability................................... 94 (f) Injunctive Relief.............................. 94 (g) Value.......................................... 95 Section 6.9 Audited Statements.......................... 95 Section 6.10 Post-Closing Insurance..................... 95 Section 6.11 Use of Controlled Substance Licenses....... 96 Section 6.12 Non-Disturbance Agreements................. 96 (iv) ARTICLE 7....................... 97 ADDITIONAL COVENANTS OF BUYER Section 7.1 Waiver of Bulk Sales Law Compliance......... 97 Section 7.2 Resale Certificate.......................... 97 Section 7.3 Cost Reports and Audit Contests............. 97 Section 7.4 Tax Matters................................. 98 Section 7.5 Letters of Credit........................... 98 Section 7.6 Conduct Pending Closing..................... 99 Section 7.7 Securities Offerings........................ 99 ARTICLE 8....................... 99 BUYER'S CONDITIONS TO CLOSING Section 8.1 Performance of Agreement.................... 99 Section 8.2 Accuracy of Representations and Warranties.. 100 Section 8.3 Officers' Certificate....................... 100 Section 8.4 Consents.................................... 100 Section 8.5 Absence of Injunctions...................... 101 Section 8.6 Opinion of Counsel.......................... 102 Section 8.7 Title to Real Property...................... 102 Section 8.8 Receipt of Other Documents.................. 104 Section 8.9 Licenses and Permits........................ 105 Section 8.10 Casualty; Condemnation...................... 105 Section 8.11 Reasonable Assurances....................... 106 Section 8.12 Certain Events.............................. 106 ARTICLE 9....................... 106 SELLER'S CONDITIONS TO CLOSING Section 9.1 Performance of Agreement.................... 107 Section 9.2 Accuracy of Representations and Warranties.. 107 Section 9.3 Officers' Certificate....................... 107 Section 9.4 Consents.................................... 107 Section 9.5 Absence of Injunctions...................... 108 Section 9.6 Opinion of Counsel.......................... 109 Section 9.7 Receipt of Other Documents.................. 109 (v) ARTICLE 10....................... 110 TERMINATION Section 10.1 Termination................................ 110 Section 10.2 Effect of Termination...................... 111 ARTICLE 11....................... 111 SURVIVAL AND REMEDIES; INDEMNIFICATION Section 11.1 Survival................................... 111 Section 11.2 Exclusive Remedy........................... 112 Section 11.3 Indemnity by Seller........................ 112 Section 11.4 Indemnity by Buyer......................... 116 Section 11.5 Further Qualifications Respecting Indemnification............................ 117 Section 11.6 Procedures Respecting Third Party Claims... 118 ARTICLE 12....................... 119 GENERAL PROVISIONS Section 12.1 Notices.................................... 119 Section 12.2 Attorneys' Fees............................ 120 Section 12.3 Successors and Assigns..................... 120 Section 12.4 Counterparts............................... 121 Section 12.5 Captions and Paragraph Headings............ 121 Section 12.6 Entirety of Agreement; Amendments.......... 121 Section 12.7 Construction............................... 122 Section 12.8 Waiver..................................... 122 Section 12.9 Governing Law.............................. 122 Section 12.10 Severability.............................. 123 Section 12.11 Consents Not Unreasonably Withheld........ 123 Section 12.12 Time Is of the Essence.................... 123 (vi) EXHIBITS A. Forms of Bill of Sale and Assignment B. Form of Assignments with Respect to Real Property Leases C. Forms of Assumption Agreement D. Form of Purchasing Contract E. Remaining Schedules F. Form of Data Processing Services Contract LIST OF SCHEDULES A-1 Subsidiaries and Their Respective States of Incorporation; Ownership of Subsidiary Stock A-2 Facilities 2.1(a) Real property owned in fee by Subsidiaries 2.1(b) Real Property Leases 2.1(c) Venture Agreements 2.1(f) Other Assigned Contracts 2.1(h) Transferred Business Names 2.1(k) Prepayments 2.2(j) Other Excluded Assets 2.3(a) Capitalized Leases and Capitalized Lease Liabilities (vii) 2.3(f) Other Assumed Liabilities 2.4(i) Indebtedness 2.4(j) Other Excluded Liabilities 2.7 Allocation Schedule 2.10(a) Pension Plans 2.12(c) Schedule of Required Consents 2.13B Assigned EBITDA 3.5 Private Party Consents 3.7 Seller's Brokers 3.8(a) Liens 3.8(b)(i) Other Real Property and 3.8(b)(ii) 3.9 Assumed Contracts 3.10 Licenses 3.12 Certain Employee Relations Matters 3.14 Litigation 3.16 Environmental Matters 3.17(a) EBITDA Statements 3.17(b) Balance Sheet 3.18 Changes Since Balance Sheet (viii) 3.19 Conflicts With Transferred Business Names 3.20 Compliance With Laws and Accreditations 3.21 Cost Reports, Third Party Receivables and Conditions of Participation 3.22 Medical Staff 3.23 Hill-Burton Care 3.24 Assets Used in the Operation of the Facilities 3.26(a) Depreciation Schedules 3.26(b) Insurance 3.26(c) Employee Benefit Arrangements 3.26(d) Paid Time Off 3.26(e) Certain Contracts 3.26(f) Certain Indebtedness 3.26(g) Certain Financing Arrangements 3.26(h) Certain Contracts Related to Liens 3.27 Certain Transactions 4.5 Private Party Consents 4.7 Buyer's Brokers 4.11 Certain Scheduled Meetings 6.1 Exceptions to Conduct 6.7 National Purchasing Contracts (ix) 7.5 Letters of Credit 6.8(c) Specified Acute Hospitals 8.7(b) Disapproved Title Exceptions (x) ASSET SALE AGREEMENT -------------------- (FIRST FACILITIES) This ASSET SALE AGREEMENT (the "Agreement") is made and entered into --------- as of the 29th day of March 1994 by and among NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation ("Seller"), the Subsidiaries (as ------ defined) and CHARTER MEDICAL CORPORATION, a Delaware corporation ("Buyer"), ----- with reference to the following facts: A. Through wholly-owned subsidiary corporations listed on the Schedule (as defined in Section 1.1) hereto identified as Schedule A-1 (the ----------- -------- --- "Subsidiaries"), Seller engages in the business of delivering psychiatric ------------ health care services to the public through the inpatient, outpatient and substance abuse recovery facilities, residential treatment centers and medical office buildings identified in Schedule A-2 under the following ------------ facility numbers (such facilities, centers and buildings being herein sometimes referred to as the "First Facilities" or simply the ---------------- "Facilities"): ----------
NME No./Name City State ------------ ---- ----- 1. Pinewood Hospital Texarkana AR 2. Tucson Psychiatric Institute Tucson AZ 5. Mill Creek Hospital Visalia CA 7. Canyon Springs Hospital Cathedral City CA 8. Oak Creek Hospital San Jose CA 12. Manatee Palms RTC Bradenton FL 20. Kingwood Hospital Michigan City IN 21. Arbor Hospital of Evansville Evansville IN 22. Acadian Oaks Hospital Lafayette LA 23. New Beginnings at Hidden Brook Bel Air MD 24. New Beginnings at Meadows Gambrills MD 26. New Beginnings at Waverly Waverly MN 28. Highland Hall Asheville NC 29. Nashua Brookside Hospital Nashua NH 30. New Beginnings at Lakehurst Lakehurst NJ 33. Baywood Hospital Webster TX 35. Tidewater Psychiatric Institute - Norfolk Norfolk VA 36. New Beginnings at Serenity Lodge Chesapeake VA 40. Centennial Peaks Hospital Louisville CO 44. New Beginnings at Warwick Manor E. New Market MD 45. Potomac Ridge Treatment Center Rockville MD 46. New Beginnings at White Oak Woolford MD 47. Fairbridge RTC Rockville MD 48. Fair Oaks Hospital Summit NJ 49. New Beginnings at Cove Forge Williamsburg PA 52. Springwood Psychiatric Institute Leesburg VA 53. Tidwater Psychiatric Institute - Virginia Beach Virginia Beach VA
55. Linden Oaks Hospital Naperville IL 69. NEPA Nashua NH 70. Alvarado Parkway Institute La Mesa CA
B. Buyer desires to purchase from the Subsidiaries, through wholly- owned subsidiaries of the Buyer (each, a "Buyer Subsidiary" and ---------------- collectively, the "Buyer Subsidiaries"), and Seller desires to cause the ------------------ Subsidiaries to sell to the applicable Buyer Subsidiaries, such Facilities together with related assets (the "Transactions"). ------------ C. Buyer and Seller are simultaneously with the execution of this Agreement entering into a separate asset sale agreement (the "Subsequent ---------- Facilities Agreement") in respect of the other inpatient, outpatient and -------------------- substance abuse recovery facilities, residential treatment centers and medical office buildings also identified in Schedule A-2 (the "Subsequent ------------ ---------- Facilities"). ---------- NOW, THEREFORE, in consideration of the foregoing recitals and the agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: ARTICLE 1 DEFINITIONS Section 1.1 Certain Defined Terms. For purposes of this Agreement, --------------------- the following terms shall have the following meanings: "Affiliate" of a specified person shall mean any corporation, partnership, sole proprietorship or other person or entity which directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with the person specified. The term "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person or entity. The term "Affiliate" shall include, without limitation, (i) with respect to Seller, each Subsidiary, and (ii) with respect to Buyer, each Buyer Subsidiary. "Cost Report" means the cost report required to be filed, as of the end of a provider cost year or for any other required period, with cost-based Payors with respect to cost reimbursement. - 2 - "Environmental Law" shall mean any Law regulating or otherwise relating to Hazardous Materials, the environment, natural resources, pollution, environmental protection, waste management, industrial hygiene, health, or safety. "Hazardous Materials" means any chemicals, materials, substances, or items in any form, whether solid, liquid, gaseous, semisolid, or any combination thereof, whether waste materials, raw materials, chemicals, finished products, by-products, or any other materials or articles, which are regulated by or form the basis of liability under any Environmental Laws, including, without limitation, any hazardous waste, medical waste, biohazardous waste, industrial waste, special waste, solid waste, hazardous substance, pollutant, hazardous air pollutant, contaminant, asbestos, polychlorinated biphenyls ("PCBs"), petroleum (including, but not limited to, petroleum-derived substances, waste or breakdown or decomposition products thereof, or any fraction thereof), coal (including, but not limited to, coal-derived substances, waste or breakdown or decomposition products thereof, or any fraction thereof), natural gas (including, but not limited to, natural gas-derived substances, waste or breakdown or decomposition products thereof, or any fraction thereof), formaldehyde, industrial solvents, flammables, explosives, and radioactive substances. "knowledge" of a party shall mean the best of the knowledge of any person who serves as of the date of this Agreement as a duly elected officer of such party. "Laws" shall mean all statutes, rules, regulations, ordinances, orders, codes, permits, licenses and agreements with or of federal, state, local and foreign governmental and regulatory authorities and any order, writ, injunction, settlement agreement or decree issued or approved by any court, arbitrator or governmental agency or in connection with any judicial, administrative or other non-judicial proceeding (including, without limitation, arbitration or reference). "Licenses" shall mean certificates of need, accreditations, registrations, licenses, permits and other consents or approvals of governmental agencies or accreditation organizations. "Payor" shall mean Medicare, Medicaid, CHAMPUS and Medically Indigent Assistance programs, Blue Cross, Blue Shield or any - 3 - other third party payor (including an insurance company and self-insured employer), or any health care provider (such as a health maintenance organization, preferred provider organization, peer review organization, or any other managed care program). "Release" means any release, spill, emission, leaking, pumping, emptying, dumping, injection, abandonment, deposit, disposal, discharge, dispersal, leaching, or migration of Hazardous Materials (including, but not limited to, the abandonment or discarding of Hazardous Materials in barrels, drums, or other containers) into or within the environment, including, without limitation, the migration of Hazardous Materials into, under, on, through, or in the air, soil, subsurface strata, surface water, groundwater, drinking water supply, any sediments associated with any water bodies, or any other environmental medium, regardless of where such migration originates. "Schedule" shall mean a schedule from the master set of schedules and attachments developed for this Agreement and the Subsequent Facilities Agreement and which is listed in the Table of Contents for this Agreement. The parties agree that to the extent information in a schedule from the master set of schedules and attachments is listed by a facility name and/or by a facility number, such schedule shall, for purposes of this Agreement, be deemed to include only the information contained therein that is related to the First Facilities, unless this Agreement expressly refers to information contained therein that is related to the Subsequent Facilities. "Taxes" shall mean (i) all federal, state, county and local sales, use, property, recordation and transfer taxes, (ii) all state, county and local taxes, levies, fees, assessments or surcharges (however designated, including privilege taxes, room or bed taxes and user fees) which are based on the gross receipts, net operating revenues or patient days of a Facility for a period ending on, before or including the relevant Closing Date (as defined in Section 2.13) or a formula taking any one of ------------ the foregoing into account, and (iii) any interest, penalties and additions to tax attributable to any of the foregoing, but shall not include income and other taxes described in Sections 2.4(a) and (b). --------------- --- Section 1.2 Index of Other Defined Terms. In addition to those terms ---------------------------- defined above, the following terms shall have the respective meanings given thereto in the sections indicated below: - 4 - Defined Term Section ------------ ------- Account Parties 2.9(b) Accrued Operating Assets 2.5(b) Accrued Operating Expenses 2.3(g) Acquired Acute Hospitals 6.8(c) Acquisition Date 6.8(c) Acute Hospitals 6.8(b)(iii) Adjustment Sections 2.14 Agreement Preamble Allocation Schedule 2.7 Assumed Contracts 2.3(a) Assumed Guaranties 2.3(a) Assumed Liabilities 2.3 Balance Sheet 3.17(b) Buyer Preamble Buyer Subsidiary Preamble Charter Documents 3.4 Claim Notice 11.6 Closing Date 2.13 COBRA 2.10(d) Code 3.11 Collection Fee Base 2.9(f) Combined Receivables 3.17(d) Combined Subsidiaries 3.17(a) Competing Business 6.8(a) Consents 8.5 Consultant 6.2(b) Contingent Contract 2.18 Cost Report Settlements 2.2(i) Covenant Period 6.8(d) Covered Facilities 6.8(b)(ii) Covered Parties 6.8(a) Deductible Amount 11.3(b)(i)(B) Document Retention Period 5.7(b) EBITDA 3.17(a) EBITDA Statements 3.17(a) Eligible Receivables 2.9(b)(ii) Employee Benefit Arrangements 3.26(c) Environmental Survey 6.2(b) Equipment 2.1(d) - 5 - ERISA 2.10(a) Escrow Agent 2.13(f) Estimated Net Book Values 2.6(a) Excess Interim Payments 2.1(l) Excluded Assets 2.2 Excluded Liabilities 2.4 Exempted Competing Business 6.8(c) Facilities Recitals Final Closing 2.13 Final Closing Date 2.13 Final Net Book Values 2.6(c) Financial Schedule 3.17(b) First Closing 2.13 First Facilities Recitals Hired Employees 2.10(c) Hospital Records 5.7(a) HSR Act 3.4 Indemnitee 11.5 Indemnitor 11.5(a) Insurance Program 6.10 Intercompany Transactions 2.1(f)(y) Interim Net Book Values 2.6(b) Inventory 2.1(e) JCAHO 3.20 Leased Real Property 2.1(b) Loan Commitment Agreements 2.1(f) Loan Commitment Notes 2.1(f) Losses 11.3(a) Manuals 2.11(b) Material Adverse Effect 3.4 Multiemployer Plans 2.10(a) Net Book Values 2.5(b) 1993 EBITDA 2.13(b) Other Assigned Contracts 2.1(f) Original Closing Date 2.14 Owned Real Property 2.1(a) Paid Time Off 2.3(c) Panel 2.14 Patient Records 5.7(a) Pension Plans 2.10(a) Permitted Encumbrances 3.8(a) - 6 - Permitted Expansions 6.8(b)(iv) PHIS Employees 2.10(b)(i) PHIS System 2.17 Prepayments 2.1(k) Purchase Price 2.5 Real Property Leases 2.1(b) Receivables 2.1(l) Related Agreements 3.4 Reorganization 6.8(b)(v) Required First Facilities 2.13 Retained Employees 2.10(b)(iii) Schedule of Required Consents 2.12(c) Scheduled Closing 2.13 Second Closing 2.13 Seller Preamble Specified Acute Hospital 6.8(c) Specified Capacity 6.8(a) Straddle Patients 2.9(c) Straddle Patient Payments 2.9(c)(ii) Subject Transferred Assets 2.13 Subsequent Facilities Recitals Subsequent Facilities Agreement Recitals Subsidiaries Recitals TEFRA 2.9(c)(ii) Tentative Purchase Price 2.6(a) Termination Date 10.1(b) Third Party Claims 11.5(a) Title Insurer 8.7 Title Policies 8.7 Transactions Recitals Transferred Business Names 2.1(h) Transition Period 2.17 Trigger Amount 11.3(b)(i)(B) Unusual Proceedings 3.14 Venture Agreements 2.1(c) Ventures 2.1(c) WARN Act 2.10(e) Working Capital Adjustment Date 2.6(c) - 7 - ARTICLE 2 BASIC TRANSACTIONS Section 2.1 Purchased Assets. On the terms and subject to the ---------------- conditions contained in this Agreement, Buyer shall, or shall cause the applicable Buyer Subsidiary to, purchase from each Subsidiary, and Seller shall cause each Subsidiary to sell, convey, assign, transfer and deliver to Buyer or the applicable Buyer Subsidiary, the following assets of each such Subsidiary that are used in and necessary for the conduct of the operations of the Facilities (the "Transferred Assets"), but excluding all ------------------ Excluded Assets as defined in Section 2.2: ----------- (a) All of the Subsidiary's right, title and interest in and to the real property owned in fee (the "Owned Real Property") that is ------------------- identified in Schedule 2.1(a) on which Facilities are located and all other --------------- real property owned in fee by the Subsidiary and used in and necessary for the conduct of the operations of the Facilities, together with the Facilities, construction work-in-progress, and all other buildings, fixtures and improvements thereon, and all rights, privileges, permits and easements appurtenant thereto. (b) All of the Subsidiary's right, title and interest, as lessee or sublessee, in and to the leasehold estates and the related lease or sublease agreements (the "Real Property Leases") respecting land, -------------------- Facilities, buildings, fixtures and real property improvements (whether owned or leased) (the "Leased Real Property") identified in Schedule -------------------- -------- 2.1(b), together with all construction work-in-progress in respect of same ------ and all rights, privileges and easements appurtenant thereto. (c) All of the Subsidiary's right, title and interest in and to the joint ventures or partnerships identified in Schedule 2.1(c) hereto --------------- (the "Ventures") that relate to partnerships or joint ventures that own or -------- lease Facilities or other Transferred Assets, together with all of the Subsidiary's right, title and interest in and to the joint venture or partnership agreements, also identified in such Schedule (the "Venture ------- Agreements"), that govern such partnerships or joint ventures, and, subject ---------- to the provisions of Section 7.6, in and to all distributions and ----------- allocations which the Subsidiary is entitled to receive as of the relevant Scheduled Closing (as defined in Section 2.13). ------------ - 8 - (d) All of the Subsidiary's right, title and interest in and to fixed machinery and equipment, other fixtures and fittings, moveable plant, machinery, equipment and furniture, trucks, tractors, trailers and other vehicles, tools and other similar items of tangible personal property (collectively "Equipment") (i) that are not consumed, disposed of or held --------- for sale or as inventory in the ordinary course of business, (ii) that are used, owned, held or leased by the Subsidiary as of the relevant Scheduled Closing, and (iii) that are used in and necessary for the conduct of the operations of the Facilities. (e) All of the Subsidiary's right, title and interest in and to inventories of supplies, drugs, food, janitorial and office supplies, maintenance and shop supplies, and other similar items of tangible personal property intended to be consumed, disposed of or sold in the ordinary course of business (collectively, the "Inventory") that are used, owned or --------- held by the Subsidiary as of the relevant Scheduled Closing and that are used by the Subsidiary in and necessary for the conduct of the operations of the Facilities. (f) All of the Subsidiary's right, title and interest in and to all written contracts and agreements (the "Other Assigned Contracts") to ------------------------ which the Subsidiary is a party at the relevant Scheduled Closing, other than the Real Property Leases and the Venture Agreements, (i) that are listed on Schedule 2.1(f), (ii) pursuant to which the Subsidiary paid or --------------- received less than $25,000 during its last fiscal year or pursuant to which it expects to pay or receive less than $25,000 during its current fiscal year, or (iii) with respect to Other Assigned Contracts not described in clauses (i) or (ii) above, for which Buyer has not provided Seller with --- ---- written notice of its rejection of such contract or agreement within sixty (60) days following the relevant Scheduled Closing, provided that the Other ------------- Assigned Contracts shall not include any contract or agreement that relates to or covers healthcare facilities or operations of Seller other than the Facilities that are being sold, assigned, transferred or conveyed at such relevant Scheduled Closing except to the extent the portion of such contract or agreement related to such Facilities may be assigned together with the sale, assignment, transfer or conveyance of such Facilities. Schedule 2.1(f) contains a list by Facility of the following categories of --------------- Other Assigned Contracts pursuant to which a Subsidiary paid or received $25,000 or more during its last fiscal year or expects to pay or receive $25,000 or more during its current fiscal year: construction contracts relating to construction work-in-progress at the Facilities; Equipment leases (whether operating or - 9 - capitalized leases) and installment purchase contracts where the annualized lease or installment payments exceed $25,000; contracts or arrangements binding on a Facility which contain any covenant not to compete or otherwise significantly restrict the nature of the business activities in which the Facility may engage; provider agreements with Payors other than Medicare and Medicaid (as defined in Section 1.1); bridge and other loan ----------- commitment agreements (the "Loan Commitment Agreements") pursuant to -------------------------- which a Subsidiary has agreed to provide advances or income guarantees from time to time to lessors or sublessors under the Real Property Leases or to healthcare professionals, groups or entities providing services to the Facilities, together with promissory notes (the "Loan Commitment Notes") --------------------- evidencing amounts owed to the Subsidiary as a result of any such advances or guarantees; agreements with healthcare professionals; leases as lessor or sublessor; and any other contracts in force pursuant to which the Subsidiary paid or received over $25,000 during its last fiscal year or expects to pay or receive $25,000 or more during its current fiscal year. Notwithstanding the foregoing, the Other Assigned Contracts shall not include and Schedule 2.1(f) need not contain: --------------- (w) Any contract which evidences indebtedness for money borrowed or the deferred portion of the purchase price for Owned Real Property and is therefore an Excluded Liability under the provisions of Section 2.4(i), unless the parties mutually agree, in accordance -------------- with the provisions of such Section 2.4(i), that such indebtedness -------------- will be assumed by Buyer, in which case the contract or contracts evidencing such indebtedness will be Transferred Assets, provided that ------------- if the indebtedness evidenced by any such contract is secured by a lien on any Transferred Asset, Seller shall cause such lien to be released at or prior to the relevant Scheduled Closing unless Buyer agrees to assume such indebtedness pursuant to Section 2.4(i); -------------- (x) Any contract respecting an intercompany transaction between the Subsidiary, on the one hand, and Seller or an Affiliate (as defined in Section 1.1) of Seller, on the other, whether or not ----------- such transaction relates to the provision of goods and services, tax sharing arrangements, payment arrangements, intercompany charges or balances, or the like ("Intercompany Transactions"), except that ------------------------- transactions arising in connection with open purchase orders where the Seller has acted as an intermediary for a Subsidiary and transactions between Seller or an Affiliate of Seller, on the one - 10 - hand, and the ventures and partnerships described in Section 2.1(c) -------------- that are not wholly owned by Seller and its Affiliates, on the other hand, shall not be regarded as Intercompany Transactions; (y) Employment contracts, if any, between the Subsidiary or a Facility and the chief executive or chief financial officer of such Facility, whether or not such officer is a Hired Employee (as defined in Section 2.10(c)); and --------------- (z) Collective bargaining agreements in respect of the employees of a Facility, unless Buyer elects to assume such agreements (it being understood, however, that nothing herein is intended to affect Buyer's obligations with respect thereto, if any, under the National Labor Relations Act). (g) All of the Subsidiary's right, title and interest in and to the right to receive mail and other communications addressed to Seller or the Subsidiary insofar as such mail or other communication relates to the operation of the Facilities after the relevant Scheduled Closing, or to Receivables, Inventory, Prepayments or Accrued Operating Expenses (as herein defined). (h) All of the Subsidiary's right, title and interest in and to the business names set forth in Schedule 2.1(h) (the "Transferred Business --------------- -------------------- Names"). ----- (i) All of the Subsidiary's right, title and interest in and to Licenses (as defined in Section 1.1) in favor of the Subsidiary as of the ----------- relevant Scheduled Closing that are related to, necessary for, or used in connection with the operation of the Facilities transferred in such Scheduled Closing as presently operated by the Subsidiary, provided that ------------- Licenses in favor of the Subsidiary shall be included in the Transferred Assets only to the extent they are lawfully transferable. (j) All of the Subsidiary's right, title and interest in and to unexpired warranties as of the relevant Scheduled Closing that are transferable to Buyer which the Subsidiary has received from third parties with respect to the Transferred Assets, including, but not limited to, such warranties as are set forth in any construction agreement, lease agreement, equipment purchase agreement, consulting agreement or agreement for architectural and engineering services. - 11 - (k) All of the Subsidiary's right, title and interest in and to advance payments, prepayments, prepaid expenses, deposits and the like (i) made by the Subsidiary or Seller on its behalf in the ordinary course of business with respect to Subject Transferred Assets (as defined in Section ------- 2.13) prior to the relevant Scheduled Closing, (ii) which exist as of such ---- Scheduled Closing, (iii) with respect to which Buyer will receive the benefit after the relevant Scheduled Closing, and (iv) which Buyer agrees --- to acquire (Buyer hereby agreeing not to withhold such agreement unreasonably) (collectively, "Prepayments"), which Prepayments are listed ----------- by Facility, category and approximate amount as of November 30, 1993 (or a later date if mutually agreed upon), in Schedule 2.1(k). --------------- (l) Subject to the further provisions of Section 2.9, all of the ----------- Subsidiary's right, title and interest as of the Closing in and to accounts receivable recorded by the Subsidiary as an account receivable from Payors, patients and other third parties (whether or not billed) arising from or in connection with the operation of the Facilities, together with rights to payment for services rendered through the relevant Closing Date to Straddle Patients referred to in Section 2.9(c) (collectively, "Receivables"), -------------- ----------- provided that any account receivable that would, under Sections -------- -------- 2.9(b)(ii)(B) or (C), qualify as an "Eligible Receivable" as of the end of -------------------- the month ending prior to the relevant Scheduled Closing shall, at the option of Buyer, not be a receivable included in the Scheduled Closing and shall be an Excluded Asset. The parties hereby acknowledge that interim payments made by a Payor that are in excess of the net carrying value of the Receivables with respect to which such interim payments are a credit against amounts that would otherwise be due from the Payor ("Excess Interim -------------- Payments") shall not be regarded as Receivables for any purpose of this -------- Agreement, because such Excess Interim Payments do not reflect amounts which the recipient is entitled to retain for services rendered and such Excess Interim Payments are Excluded Assets and Excluded Liabilities under this Agreement. (m) All of the Subsidiary's right, title and interest in and to the goodwill of the businesses evidenced by the Transferred Assets, and, except for Excluded Assets, any and all other assets of the Subsidiary used in and necessary for the conduct of the operations of the Facilities as conducted prior to the relevant Scheduled Closing, whether or not such assets have any value for accounting purposes, provided that with respect ------------- to NME Hospitals, Inc., NME Properties Corp., NME Psychiatric Properties, Inc., NME Specialty Hospitals, Inc. and any subsidiary of NME Specialty Hospitals, Inc. (including, without limitation, NME Psychiatric - 12 - Hospitals, Inc.), only those assets described in Section 2.1(a)-(l) above ------------------ (other than Excluded Assets) shall be included in the Transferred Assets. Section 2.2 Excluded Assets. The following properties and assets --------------- (the "Excluded Assets") are not included in Transferred Assets: --------------- (a) Except for the Inventory, Receivables, Prepayments and current amounts represented by the Loan Commitment Notes, all assets constituting working capital, whether cash, cash equivalents, securities, or other current assets, and all claims, choses in action, rights of recovery, rights of set-off, rights to refunds, and similar rights. (b) Except for the Transferred Business Names, Licenses and Other Assigned Contracts included in the Transferred Assets and except for manuals relating to equipment and other tangible property included in the Transferred Assets, all privileged or proprietary (to Seller or a Subsidiary) materials, documents, information, media, methods and processes owned by Seller or a Subsidiary, and any and all rights to use same, including, but not limited to, all intangible assets of an intellectual property nature such as trademarks, service marks and trade names (whether or not registered), computer software that is proprietary to Seller or a Subsidiary, all procedures and manuals that are proprietary to Seller or a Subsidiary, all promotional or marketing materials (including all marketing computer software), and any and all names under which the Subsidiaries or the Facilities have done business or offered programs, other than the Transferred Business Names, and all abbreviations and variations thereof, provided, however, that Buyer shall have the rights set forth in Section -------- ------- ------- 2.11. ---- (c) The rights of Seller or any Subsidiary under any insurance policy, if any, included in the Transferred Assets which relate to any Excluded Asset or Excluded Liability (as defined in Section 2.4) (it being ----------- understood, however, that Buyer shall have no obligation to take any action under any such policy to seek any recovery except at the reasonable request, and at the sole expense, of Seller or a Subsidiary or to continue any such policies in force). (d) The rights of Seller or of any Subsidiary to receive mail and other communications addressed to any of them with respect to Excluded Assets or Excluded Liabilities. - 13 - (e) Subject to the provisions of Section 5.7, any and all ----------- business and patient records of or related to the operation of the Facilities, whether or not maintained at or by the Facilities. (f) All property, plant, equipment and other assets pertaining to the psychiatric healthcare business of Seller or any subsidiary of Seller that relate primarily to any general hospital, acute hospital or so- called "campus facility" of Seller or any subsidiary of Seller and all outpatient facilities and other assets primarily related thereto. (g) Any and all contracts and agreements pursuant to which a Subsidiary provides management services to third parties other than a Facility, except for such contracts and agreements as are specifically listed on Schedule 2.1(f). --------------- (h) Subject to Sections 2.17 and 6.7, any and all rights ------------- --- respecting computer and data processing hardware or firmware that is proprietary to Seller or any Affiliate of Seller, and any computer and data processing hardware or firmware, whether or not located at a Facility, that is part of a computer system the central processing unit for which is not located at a Facility. (i) All of the right, title and interest of Seller and the Subsidiaries in assets resulting from any resolution with Payors of amounts due with respect to Cost Reports ("Cost Report Settlements") to the extent ----------------------- such Cost Reports cover any period through the relevant Scheduled Closing with respect to a Facility and other rights of Seller respecting Cost Reports described in Section 6.6, including any assets or liabilities ----------- resulting from any gain or loss on the sale of the Facilities in connection with the Transactions. (j) (i) All amounts due to the Subsidiaries arising from Intercompany Transactions, (ii) assets that are the subject of the Subsequent Facilities Agreement, and (iii) such other assets, if any, specifically described in Schedule 2.2(j) and assets which would be --------------- Transferred Assets except for the operation of Sections 2.12, 6.2(c), 8.5, ------------- ------ --- 8.7 or 9.5 or other provisions of this Agreement. --- --- (k) All "800" telephone lines and related Equipment and contract rights and all advertising containing any name other than a Transferred Business Name. - 14 - Seller shall remove at any time prior to or within thirty (30) days following the relevant Closing Date or, with respect to the Hospital Records (as defined in Section 5.7(a)), Seller may remove from time to time -------------- within the relevant Document Retention Period (as defined in Section ------- 5.7(b)) (in each case, at Seller's expense, but without charge by Buyer for ------- storage), any and all of the Excluded Assets from the Facilities, provided -------- that Seller shall do so in a manner that does not unduly or unnecessarily disrupt Buyer's normal business activities at the Facilities. Section 2.3 Assumed Liabilities. Subject to the terms and conditions ------------------- set forth in this Agreement, Buyer shall assume and pay, discharge and perform as and when due only the following obligations and liabilities of ---- Seller and the Subsidiaries and no others (the "Assumed Liabilities"), as ------------------- such obligations and liabilities may exist at the time they are assumed by Buyer in accordance with the terms hereof: (a) All liabilities and obligations of the Subsidiaries which pertain to or are to be performed during the period following the relevant Closing Date, and which arise under any contract, license, permit, agreement, arrangement, understanding or undertaking included in the Transferred Assets, including the Real Property Leases, the Venture Agreements, the Other Assigned Contracts and the Licenses, and any obligation or liability (the "Assumed Guarantees") of Seller or any ------------------ Affiliate of Seller (including letters of credit and performance bonds) which is in the nature of a guaranty of the foregoing (together, the "Assumed Contracts"), including without limitation, the capitalized lease ------------------ liabilities and obligations of the Facilities listed on Schedule 2.3(a). --------------- (b) Without affecting the provisions of Sections 2.1(k), 2.6(a), --------------- ------ 2.6(b) or 2.6(c), all liabilities and obligations under open purchase ------ ------ orders at a Facility included in the Subject Transferred Assets that were entered into by Seller or a Subsidiary in the ordinary course of business with respect to operation of such Facility on or prior to the relevant Closing Date and which provide for the delivery of goods or services subsequent to the relevant Closing Date. (c) All obligations and liabilities to any Hired Employee for paid time off that is vested and with respect to which the Hired Employee would be entitled to payment upon termination of his or her employment with Seller or an Affiliate of Seller (including, for all purposes of this Agreement, "old paid days leave," "paid time off," sick leave and vacation - 15 - pay to the extent that they are vested rights that are subject to payment upon termination of employment; collectively, "Paid Time Off") through the ------------- relevant Closing Date in accordance with the employment policies of Seller and its Affiliates as they exist on the date of this Agreement; provided -------- that if Seller satisfies any portion of such obligations and liabilities existing at the relevant Scheduled Closing by payment to a Hired Employee, then such payment shall be treated as a reduction of Accrued Operating Expenses (as defined in Section 2.3(g)). -------------- (d) Without limiting Seller's representations and warranties contained in Article 3 or Buyer's rights under Article 11 for a breach --------- ---------- thereof, all liabilities and obligations respecting any changes or improvements needed to the Facilities for them to be in material compliance following the relevant Scheduled Closing with respect to such Facilities with safety, building, fire, land use, access (including without limitation the Americans With Disabilities Act) or similar Laws (as defined in Section ------- 1.1) respecting the physical condition of the Facilities. --- (e) All liabilities and obligations respecting employee matters assumed by Buyer pursuant to the provisions of Section 2.10. ------------ (f) Any liability or obligation which becomes an Assumed Liability by operation of Section 2.4(i) and such other liabilities and -------------- obligations pertaining to the Facilities, if any, specifically described in Schedule 2.3(f). --------------- (g) Any accrued and unpaid liabilities (whether or not due) of the Subsidiaries in existence on the relevant Scheduled Closing Date which relate to the Facilities, which were incurred in the ordinary course of the operation of the Facilities and which represent (i) trade payables incurred to suppliers of goods or services; (ii) water, gas, electricity and other utility charges; (iii) license fees; (iv) rent, common area maintenance charges, operating expenses and other charges arising under the Real Property Leases; (v) insurance premiums (but only with respect to policies that will be continued in force by Buyer after the relevant Scheduled Closing); (vi) salaries and other payroll costs respecting Hired Employees accrued in accordance with the normal accounting practices of Seller and the Subsidiaries (but not including bonuses or other incentive compensation or accrued benefits with respect to benefit plans that are not assumed by Buyer); (vii) Taxes, except for Taxes referred to in Section 5.5 relating ----------- to expenses of the Transactions and payroll taxes respecting employees who - 16 - are not Hired Employees; and (viii) similar liabilities incurred in the ordinary course of the operation of the Facilities and customarily recorded as a current liability, other than the current portion of long-term liabilities and obligations (the liabilities referred to in this Section ------- 2.3(g), together with the liabilities and obligations for Paid Time Off ------ assumed under Section 2.3(c), being herein referred to as "Accrued -------------- ------- Operating Expenses"). ------------------ Section 2.4 Excluded Liabilities. The parties agree that liabilities -------------------- and obligations of Seller and the Subsidiaries not expressly described in Section 2.3 as Assumed Liabilities are not part of the Assumed Liabilities, ----------- and Buyer shall not assume or become obligated with respect to any other obligation or liability of Seller or any Subsidiary or any Affiliate of either of any nature whatsoever (whether express or implied, fixed or contingent, liquidated or unliquidated, known or unknown, accrued, due or to become due) (collectively, "Excluded Liabilities"), including, but not -------------------- limited to, the liabilities and obligations described in this Section, all of which shall remain the sole responsibility of Seller or the pertinent Subsidiary or Affiliate, as the case may be. Without limiting the generality of the foregoing, Buyer shall not assume and shall have no liability or obligation of any kind for or with respect to any of the following liabilities or obligations: (a) Subject to Section 5.5 respecting certain expenses incurred ----------- in connection with the Transactions, any of Seller's or any of the Subsidiaries' (or their respective Affiliates') liabilities or obligations (including, but not limited to, any liabilities or obligations under any tax sharing agreements) with respect to franchise taxes and with respect to foreign, federal, state or local taxes imposed upon or measured, in whole or in part, by the income for any period of Seller and/or such Subsidiaries or any member of a combined or consolidated group of companies of which Seller and/or such Subsidiaries are, or were at any time, a part, or with respect to interest, penalties or additions to any of such taxes, and any income, franchise, tax recapture, transfer tax, sales tax or use tax that may arise upon consummation of the transactions contemplated by this Agreement and be due or payable by Seller or any Subsidiary, it being understood that Buyer shall not be deemed to be Seller's or any Subsidiary's transferee with respect to any such tax liability. (b) Any of Seller's or any of its Subsidiaries' or Affiliates' liabilities or obligations with respect to the recapture of foreign, federal, state or local tax deductions or credits taken by Seller or such Subsidiary - 17 - imposed upon, or any taxable gain recognized by, Seller or such Subsidiary on account of the Transactions contemplated hereby. (c) Liabilities or obligations of Seller, its Affiliates or a Subsidiary arising from the breach by Seller or such Subsidiary on or prior to the relevant Closing Date of any term, covenant, or provision of any of the Assumed Contracts. (d) Liabilities or obligations of Seller, a Subsidiary or Seller's Affiliates now existing or which may hereafter exist by reason of any violation or alleged violation of Law or Laws by Seller or any of its Affiliates or by a Subsidiary, or by an employee or independent contractor of any of the foregoing where any of the foregoing is or is alleged to be responsible for the acts or omissions of any such person, occurring on or prior to the relevant Scheduled Closing Date. (e) Liabilities or obligations of Seller or a Subsidiary now existing or which may hereafter exist by reason of any liability to refund any payment or reimbursement received by Seller or a Subsidiary from any Payor which is attributable to any period of time ending on or prior to the relevant Closing Date respecting such Facilities for which such payment or reimbursement was received. (f) Liabilities or obligations of Seller or a Subsidiary under any Assumed Contract which would be included in the Transferred Assets but for the provisions of Section 2.12, unless Buyer is provided with the ------------ benefits thereunder as contemplated in Section 2.12. ------------ (g) Liabilities of Seller and the Subsidiaries arising from or in connection with litigation described in Section 3.14, including, but not ------------ limited to, the Unusual Proceedings described therein, and any and all liabilities or obligations of Seller and the Subsidiaries for claims for personal injury (including sickness, trauma, disease, pain and suffering, loss of future earnings, punitive damages and the like), property damage, and other damage and injury in existence (i.e., all elements of the claim ---- are complete) at or prior to the relevant Scheduled Closing, whether or not any claim has been made or litigation has been instituted with respect thereto and whether or not any claim is covered partially or fully by insurance. (h) Subject to Section 2.12, liabilities of Seller and the ------------ Subsidiaries incurred in connection with their obtaining any consent, - 18 - authorization or approval necessary for them to sell, convey, assign, transfer or deliver any Transferred Asset to Buyer hereunder. (i) Any liability of Seller or a Subsidiary representing indebtedness for money borrowed or the deferred portion of the purchase price for any Owned Real Property or Equipment (and any refinancing thereof), including without limitation the indebtedness identified on Schedule 2.4(i); provided that if, prior to the relevant Scheduled Closing, --------------- -------- the parties mutually agree that any such indebtedness or obligation will be assumed by Buyer and further agree upon an equitable reduction in the cash portion of the Purchase Price (as defined in Section 2.5) to reflect ----------- Buyer's assumption of such indebtedness or obligation, then any such indebtedness or obligation will be deemed to constitute an Assumed Liability for all purposes of this Agreement; and provided further that -------- ------- with respect to any such indebtedness or obligation not so assumed by Buyer that constitutes a lien or encumbrance upon any Transferred Asset, Seller agrees that on or prior to the relevant Scheduled Closing it will either pay or discharge such indebtedness or liability in full or otherwise cause such lien or encumbrance to be removed from such Transferred Asset, so that such Transferred Asset is sold, conveyed, assigned, transferred and delivered to Buyer at such Scheduled Closing free and clear of such lien or encumbrance. (j) Such other liabilities and obligations, if any, specifically described in Schedule 2.4(j) and liabilities which would be Assumed --------------- Liabilities but for the provisions of Sections 2.12, 8.5, 8.7 or 9.5. ------------- --- --- --- (k) Amounts due from the Subsidiaries arising from Intercompany Transactions. (l) Liabilities and obligations respecting Cost Report Settlements to the extent such Cost Reports cover any period through the relevant Closing Date and other obligations of Seller respecting Cost Reports described in Section 6.6. ----------- (m) Subject to Section 2.10(f), liabilities and obligations for --------------- bonuses, other incentive compensation and benefits under benefit plans to the extent not specifically included in Accrued Operating Expenses. Section 2.5 Purchase Price. The purchase price (the "Purchase -------------- -------- Price") in the aggregate for all of the Transferred Assets shall be equal to the sum of (a) Ninety-One Million Four Hundred Sixty-Eight Thousand - 19 - Dollars ($91,468,000), subject to such adjustments, if any, as may occur pursuant to Sections 2.12, 2.14, 6.2(c), 8.5, 8.7, or 9.5 or other ---- ---- ------ --- --- --- provisions of this Agreement, including the book value as of the relevant Scheduled Closing of capitalized lease liabilities assumed and the value of any assumption of debt pursuant to Section 2.4(i), plus (b) an amount equal -------------- ---- to the net book values as of the relevant Scheduled Closing of the Loan Commitment Notes, Inventory, Receivables and Prepayments (collectively, "Accrued Operating Assets") included in the Transferred Assets less Accrued ------------------------- ---- Operating Expenses, plus (c) an amount (determined on the basis of the Venture's balance sheet) equal to the net book value as of the relevant Scheduled Closing of (i) the sum of each Venture's current assets and distributions payable to partners or venturers, less (ii) the sum of each ---- such Venture's current liabilities, indebtedness for money borrowed and capitalized lease liabilities, pro-rated in each case to the equity percentage in such Venture held by Seller and the Subsidiaries (the amounts in clauses (b) and (c) being referred to as the ("Net Book Values"). In --- --- --------------- addition, at the First Closing, Buyer shall pay to Seller the sum of Two Million Dollars ($2,000,000) for the covenant not to compete described in Section 6.8. Notwithstanding anything in this Agreement or in a Schedule ----------- hereto that might be construed to the contrary, Net Book Values will not be reduced by Seller's retained liability for Excess Interim Payments made by a Payor prior to the relevant Scheduled Closing that are in excess of the net carrying value of the Receivables transferred at such Scheduled Closing with respect to which such interim payments are a credit against amounts that would otherwise be due from the Payor. Section 2.6 Payment of Purchase Price. That portion of the Purchase ------------------------- Price due and payable for the Transferred Assets actually sold, assigned, transferred and conveyed to Buyer and the applicable Buyer Subsidiaries hereunder shall be paid as follows: (a) Payment of Tentative Purchase Price. No less than five (5) ----------------------------------- business days prior to each Scheduled Closing, Seller shall deliver to Buyer a certificate executed on the Seller's behalf by a responsible officer setting forth the Seller's estimate of what the Net Book Values will be as of such Scheduled Closing for the Subject Transferred Assets (as defined in Section 2.13) (the "Estimated Net Book Values"), and ------------ ------------------------- additionally setting forth (i) the Net Book Values for the Subject Transferred Assets recorded by Seller as of the most recent month-end prior to the delivery of such certificate for which data is available, and (ii) the methodology used by Seller for updating changes in Net Book Values since such month-end data - 20 - to arrive at such estimate. All determinations made with respect to the Net Book Values shall be based upon the internal records of, and the valuation methods customarily used by, Seller and the Subsidiaries, absent error, and consistent with generally accepted accounting principles with respect to the recording and accruing of the types of assets and liabilities included in Net Book Values. On the terms and subject to the conditions contained in this Agreement, at each Scheduled Closing Buyer shall pay to Seller, in the manner set forth herein, an amount equal to (iii) the portion of the Purchase Price arising under Section 2.5(a) (including any debt assumptions -------------- pursuant to Section 2.4(i)) due at such Scheduled Closing as calculated on -------------- the basis of the values assigned to the pertinent Subject Transferred Assets in the Allocation Schedule (as defined in Section 2.7) plus (iv) an ----------- ---- amount equal to one hundred percent (100%) of the Estimated Net Book Values related to the Subject Transferred Assets,(the sum of clauses (iii) and ----- (iv) being referred to as the "Tentative Purchase Price"), less (v) the ---- ------------------------ ---- book value of any capitalized leases assumed at such Scheduled Closing, less (vi) the value of any debt assumed pursuant to Section 2.4(i) at such ---- -------------- Scheduled Closing. (b) Determination of Interim Net Book Values. As soon as ---------------------------------------- practicable, but in no event later than sixty (60) days after each Scheduled Closing, Seller shall cause a schedule to be prepared and delivered to Buyer showing an interim calculation of the Net Book Values with respect to the Subject Transferred Assets (the "Interim Net Book ---------------- Values") as of the relevant Closing Date derived by Seller from the ------ internal books and records of Seller and the Subsidiaries and otherwise in accordance with the second sentence of Section 2.6(a) with respect to the -------------- Facilities included in such Subject Transferred Assets, as well as from a physical inventory, taken after the date hereof and prior to or as of such relevant Closing Date, of property which would constitute Inventory if the relevant Scheduled Closing had occurred on the date of such physical inventory. If such schedule as submitted by Seller is not challenged in writing by Buyer within thirty (30) days of its receipt of same, then it shall be deemed accepted by Buyer. If it is so challenged, then, unless otherwise resolved by agreement of the parties within thirty (30) days from the date of Buyer's challenge or such later date as the parties may mutually agree upon, such disagreement shall be mutually submitted by the parties to their respective independent certified public accountants for resolution. If such accountants cannot resolve the disagreement within thirty (30) days of such submission, then they shall submit the matter to a third accounting firm of national standing selected by them, whose determination shall be final and binding, and shall be rendered - 21 - within thirty (30) days of the date on which the matter is submitted to such firm. Any such third accounting firm shall determine the issues in dispute following such procedures, consistent with the language of this Agreement, as it deems appropriate to the circumstances and with reference to the amounts in issue. No particular procedures are intended to be imposed upon such third accounting firm, it being the desire of the parties that any such dispute shall be resolved as expeditiously and inexpensively as reasonably practicable. In the event that the Interim Net Book Values differ from the Estimated Net Book Values, whether determined on the basis of the schedule prepared by Seller, or agreement of the parties, or decision by independent public accountants, as the case may be, then and in such event, within five (5) business days following such determination of the Interim Net Book Values, either Buyer shall pay to Seller, or Seller shall pay to Buyer, as the case may be, in immediately available funds, the amount by which the Interim Net Book Values differs from the Estimated Net Book Values. The pendency of a dispute shall not affect the payment obligation hereunder of either Buyer or Seller to the extent such payment is not disputed. (c) Determination of Final Net Book Values. Within ten (10) -------------------------------------- business days following expiration of six (6) months from each Scheduled Closing, Buyer shall provide a certificate to Seller, executed on Buyer's behalf by a responsible officer, setting forth a proposed calculation of final Net Book Values with respect to the Subject Transferred Assets (the "Final Net Book Values") as of the end of such six (6) month period (a ---------------------- "Working Capital Adjustment Date") which shall contain a reconciliation as -------------------------------- of the relevant Closing Date of the Interim Net Book Values, adjusted only for (i) errors claimed by Buyer to exist in Seller's accruals for Accrued Operating Assets and Accrued Operating Expenses and the Ventures' calculations of partners' equity, partners' distributions payable and the net book value of Venture fixed assets, (ii) Buyer's ability to collect Receivables and the Ventures' ability to collect their accounts receivable in existence as of the relevant Closing Date, on or before the Working Capital Adjustment Date, in excess of the carrying value therefor as of the relevant Closing Date net of reserves, and by Buyer's or a Venture's receipt of Excess Interim Payments, (iii) Buyer's inability to collect Receivables and the Ventures' inability to collect their accounts receivable in existence as of the relevant Closing Date, on or before the Working Capital Adjustment Date, in accordance with their net carrying values as of the relevant Closing Date, and (iv) Buyer's ability to pay Accrued Operating Expenses and the Ventures' ability to pay similar expenses of the Venture at less than their - 22 - book value as of the relevant Closing Date or Buyer's or the Ventures' payment of the same at more than their book value as of the relevant Closing Date to the extent legally required to do so. For purposes of any such calculation, (v) the accuracy of Seller's or the Ventures' accrual for real and personal property taxes shall be based upon the last notice of tax assessment respecting such property prior to the relevant Scheduled Closing that does not reflect the Transactions contemplated to occur at the relevant Scheduled Closing, (vi) variable or undetermined charges arising under Real Property Leases shall be accrued as of the relevant Scheduled Closing on an historical basis, (vii) payments received on account of Receivables shall be applied in accordance with Sections 2.9(b) and (c), --------------- --- and (viii) expenses for such items as real and personal property taxes, utility charges, charges arising under leases, insurance premiums and the like shall be pro-rated as of the relevant Scheduled Closing. In the event that Buyer elects to reassign to Seller any Loan Commitment Notes on or prior to the relevant Working Capital Adjustment Date, then the Final Net Book Values shall be deemed to be further reduced by an amount equal to the uncollected portion thereof, in which case Buyer shall execute such documents of re-assignment as are reasonably satisfactory to Seller and such Loan Commitment Notes as are reassigned shall thereafter to be deemed to be Excluded Assets. Any dispute concerning Buyer's calculation of the Final Net Book Values that is unresolved for thirty (30) days shall be submitted for resolution by the parties' independent certified public accountants in accordance with the procedures contained in Section 2.6(b). -------------- Within five (5) business days following determination of the Final Net Book Values for a Scheduled Closing, either Buyer shall pay to Seller, or Seller shall pay to Buyer, as the case may be, in immediately available funds, the amount by which the Final Net Book Values differ from the Estimated Net Book Values, as adjusted for payments, if any, on account of the Interim Net Book Values. The pendency of a dispute shall not affect the payment obligation hereunder of either Buyer or Seller to the extent such payment is not disputed. (d) Seller as Agent of Subsidiaries. Seller shall, at or prior ------------------------------- to the relevant Scheduled Closing, cause each Subsidiary transferring Subject Transferred Assets thereat to irrevocably designate (with an original copy being provided to Buyer) Seller as its agent to receive on its behalf delivery of that portion of all payments made by Buyer hereunder to which such Subsidiary may be entitled as a result of its participation in such Scheduled Closing, including without limitation that portion of the Purchase Price attributable to the Subject Transferred Assets sold to Buyer by it, and to acknowledge that delivery of such payments, including the Purchase - 23 - Price, to Seller in accordance with the terms of this Agreement shall be conclusive and binding evidence against such Subsidiary that any payments or consideration due to such Subsidiary in respect of the Subject Transferred Assets sold to Buyer by it, or in respect of other payments due to it from Buyer under the terms of this Agreement, have been delivered. Section 2.7 Allocation of Purchase Price. The Purchase Price shall ---------------------------- be allocated to the Transferred Assets on a Facility by Facility basis in accordance with Schedule 2.7 (the "Allocation Schedule"), except that the ------------ ------------------- portion of the Purchase Price attributable to the Net Book Values shall be allocated in accordance with the amounts actually paid therefor in accordance with the provisions of Sections 2.5(b) and (c). Notwithstanding --------------- --- the foregoing, at least five (5) days prior to the First Closing (as defined in Section 2.13), Buyer and Seller shall in good faith agree upon ------------ reasonable modifications to the Allocation Schedule set forth in Schedule -------- 2.7 to reduce the aggregate amounts allocated therein to the First --- Facilities by the sum of Five Million Dollars ($5,000,000), and such modified Allocation Schedule shall thereafter be the Allocation Schedule for all purposes of this Agreement. Seller and Buyer shall, and Seller shall cause the Subsidiaries to, allocate the Purchase Price in accordance with the Allocation Schedule and allocate the Net Book Values portion thereof in accordance with the amounts paid therefor, to be bound by such allocations for all purposes, to account for and report the purchases and sales contemplated hereby for all purposes (including, without limitation, financial, accounting, Medicare reimbursement and federal and state tax purposes) in accordance with such allocations, and not to take any position (whether in financial statements, Cost Reports, tax returns, Cost Report or tax audits, or otherwise), including without limitation any claim to an adjustment in the basis of such assets by Buyer or its successors and assigns for Medicare purposes which is inconsistent with such allocations without the prior written consent of the other party, except to the extent, if any, required by applicable Law or generally accepted accounting principles. Section 2.8 Contingent Lease Obligations. With respect to each Real ---------------------------- Property Lease for which Seller or a Subsidiary remains or will remain contingently liable after the relevant Scheduled Closing as lessee, sublessee, guarantor or assignor, Buyer hereby agrees to exercise its best efforts: (a) To cause the contingent liability of Seller or such Subsidiary, as the case may be, to be removed on or prior to any extension, - 24 - renewal or modification of such Real Property Lease by Buyer or a Buyer Subsidiary; (b) To procure for Seller and the applicable Subsidiaries a security interest, in form reasonably satisfactory to Seller, in all of the right, title and interest of Buyer and the applicable Buyer Subsidiaries in such Real Property Lease, junior only to the security interest of Buyer's most senior secured lenders, in order to secure the due and punctual performance by Buyer and the applicable Buyer Subsidiaries of the Assumed Liabilities represented by such Real Property Lease; and (c) To procure for Seller and the applicable Subsidiaries the right to acquire such right, title and interest in such Real Property Lease, at fair market value, in the event that Buyer and the applicable Buyer Subsidiaries fail to pay, perform and discharge when due the Assumed Liabilities represented by such Real Property Lease and such failure results in Seller or any Subsidiary being required to pay, perform or discharge any of such Assumed Liabilities. Section 2.9 Remittances and Receivables. --------------------------- (a) In General. ---------- (i) All remittances, mail and other communications relating to the Excluded Assets or Excluded Liabilities received by Buyer or a Buyer Subsidiary at any time after a relevant Scheduled Closing shall be promptly turned over by Buyer to the addressee thereof, or if the addressee is no longer affiliated with Seller, to Seller, and pending such delivery, Buyer shall have no interest in the same and shall hold such remittances, mail and other communications in trust for the benefit of Seller and the Subsidiaries. All remittances, mail and other communications relating to the Transferred Assets or the Assumed Liabilities received by Seller or any Subsidiary at any time after the relevant Scheduled Closing at which such Transferred Assets are transferred and such Assumed Liabilities are assumed by Buyer shall be promptly turned over by Seller or such Subsidiary to the addressee thereof, or if the addressee is no longer affiliated with Buyer, to Buyer, and pending such delivery, Seller or such Subsidiary shall have no interest in the same and shall hold such remittances, mail and other communications in trust for the benefit of Buyer. - 25 - (ii) With regard to the Medicare, Medicaid and CHAMPUS programs, and any Blue Cross program that requires a Cost Report or retains the right of offset, Buyer and Seller mutually covenant and agree as follows. Seller acknowledges that, from time to time, Buyer or Buyer Subsidiaries, after a relevant Scheduled Closing, may receive a demand for payment in connection with overpayments or alleged overpayments from one or more of such programs, or both, which demand relates to the operation of a Facility prior to the relevant Scheduled Closing at which such Facility was included in the Subject Transferred Assets. Buyer shall provide notice to Seller of such demand within ten (10) days of Buyer's receipt of same. Seller covenants and agrees with Buyer that Seller shall, within thirty (30) days of its receipt of written notice from Buyer of such request for any such payment, which notice shall state the basis thereof in reasonable detail, pay in cash to Buyer an amount equal to any and all such overpayments claimed or (by an election made in writing, within twenty (20) days after receiving notice of any such demand) diligently pursue a contest of such claim of overpayment and indemnify and hold Buyer harmless from any liability resulting therefrom, but the right to contest without first paying shall not be available to Seller if the programs collect the alleged overpayment by means of a setoff against Buyer, unless Seller first reimburses Buyer in an amount equal to the amount so setoff, provided that -------- in all events Buyer shall provide notice to Seller of such demand within ten (10) days of Buyer's receipt of same. Subject to the foregoing, if any such program, with or without notice, collects an alleged overpayment or other amount allegedly owed by Seller or a Subsidiary by offset against Buyer or Buyer Subsidiary, Seller shall promptly pay to Buyer an amount equal to such offset amount provided that Buyer shall have provided Seller -------- with any notice related to such offset within ten (10) days of Buyer's receipt of same, or, if no such notice was received by Buyer, Buyer shall have provided notice to Seller of such offset within ten (10) days of Buyer's obtaining notice of such offset being taken. Nothing in this Section 2.9(a)(ii) shall limit Buyer's obligations under Section 7.3. ------------------ ----------- (b) Receivables. ----------- (i) Buyer shall exercise commercially reasonable efforts to collect Receivables. Any payments received by Buyer or its successors and assigns after a Scheduled Closing Date, from patients, Payors, clients, customers or others who are the obligors on Receivables transferred as of such Scheduled Closing Date (collectively, "Account ------- Parties"), shall be applied to the oldest remaining ------- - 26 - Receivables transferred as of such Scheduled Closing Date from such Account Party in the order in which they arose unless, in the case of an Account Party who is a patient, otherwise indicated by the patient's Payor. (ii) On the tenth day of the first month that begins at least thirty (30) days after a Scheduled Closing, on the tenth day of each month thereafter until the Working Capital Adjustment Date with respect to such Scheduled Closing, and on the tenth day following such Working Capital Adjustment Date, Buyer shall execute appropriate instruments of assignment to re-assign back to Seller, and shall turn over to Seller all evidences of and documents pertaining to, any Receivable which, as of the end of the immediately preceding month and/or such Working Capital Adjustment Date, as the case may be, was uncollected and which either (A) is a Receivable in respect of a non- Medicare patient as to which Buyer has decided to cease collection activity, or (B) is a Receivable in respect of a non-Medicare patient which, as of such month end or such Working Capital Adjustment Date, has remained unpaid for a period of at least one hundred eighty (180) days following the date of such patient's discharge from a Facility, (C) is a Receivable in respect of a Medicare patient which relates to amounts that represent such patient's deductible or co-insurance obligations, and which, as of such month end or Working Capital Adjustment Date, has remained unpaid for a period of at least one hundred eighty (180) days following the date after which the patient is first billed, or (D) is a Receivable from Medicare in respect of a Medicare patient for which payment has been denied by Medicare provided that Buyer has filed a request for reconsideration within the -------- period required. Such Receivables which are eligible to be turned over to Seller are herein referred to as "Eligible Receivables." Any -------------------- Eligible Receivable that is assigned back to Seller within thirty (30) days following the first opportunity to do so under the provisions of this clause (ii) shall, for purposes of the adjustments contemplated ----------- by Section 2.6(c), be deemed to have not been collected by Buyer, and -------------- any Eligible Receivable that is not so assigned back to Seller within thirty (30) days following the first opportunity to do so under the provisions of this clause (ii) shall, for purposes of the adjustments ----------- contemplated by Section 2.6(c), be deemed to have been collected by -------------- Buyer. With respect to any such Eligible Receivable re-assigned back to Seller, Seller and the Subsidiaries shall be free to institute such collection - 27 - efforts, including, without limitation, initiating such legal proceedings, with respect thereto as they shall, in their sole discretion determine. (iii) In the event of any adjustment in the Net Book Values arising under Section 2.6(c)(iii), then upon such determination, Buyer ------------------- shall execute instruments of assignment, effective as of the relevant Working Capital Adjustment Date, respecting any unpaid Receivables which are not collected or deemed collected as of such date (it being agreed that any unpaid Receivables not so assigned shall be deemed collected as of or prior to such Working Capital Adjustment Date). (c) Straddle Patient Receivables. To compensate Seller and the ---------------------------- Subsidiaries for services rendered and medicine, drugs and supplies provided through a Scheduled Closing Date with respect to patients ("Straddle Patients") who were admitted to a Facility on or before the date ----------------- of the Scheduled Closing in which such Facility was transferred and were discharged by the Facility after such Scheduled Closing Date, the following shall apply: (i) Cut-Off Billings. Seller shall, or shall cause the ---------------- Subsidiaries to, prepare cut-off billings for all Straddle Patients as of the close of business on the relevant Closing Date. All payments (other than Excess Interim Payments) which are received by Buyer (or its successors in interest or assigns) after the relevant Closing Date with respect to Straddle Patients and which relate to such cut-off billings shall constitute Receivables for purposes of calculating the Tentative Purchase Price and the Interim Net Book Values for such Scheduled Closing. (ii) Cut-Off Billings Not Accepted. If the Payor of any ----------------------------- Straddle Patient cannot or does not for any reason accept cut-off billings, then Buyer shall notify Seller of same, and Seller shall, or shall cause the Subsidiaries to, deliver to Buyer a statement calculating the total charges made by Seller and the Subsidiaries for services rendered and medicine, drugs and supplies provided through the relevant Closing Date with respect to such Straddle Patient. Within ten (10) days following the discharge of each such Straddle Patient, Buyer shall deliver to Seller a statement reflecting the total charges for the services rendered and medicine, drugs and supplies - 28 - billed to such Straddle Patient after the relevant Closing Date and the patient receivable (the "Straddle Patient Payments") of Buyer with ------------------------- respect to such Straddle Patient (including any cost per discharge limit imposed by the Tax Equity and Fiscal Responsibility Act of 1982, as amended ("TEFRA") and all deductibles and co-insurance payments). ----- For purposes of calculating the Final Net Book Values for any Scheduled Closing, the pro rata share of the Straddle Patient Payments which shall be treated as a Receivable shall be equal to the amount obtained by multiplying the Straddle Patient Payments by a fraction, the numerator of which is the total charges of Seller and the Subsidiaries with respect to such Straddle Patient through the relevant Closing Date and the denominator of which is the total charges of Buyer, Seller and the Subsidiaries with respect to such Straddle Patient. Seller or Buyer, as may be applicable, may have such statements as submitted by Buyer or Seller verified by their respective independent public accountants within thirty (30) days from delivery. If such statements, as submitted by Buyer or Seller, are acceptable, then such statements shall fix the value of the services, medicine, drugs and supplies provided by Seller and the Subsidiaries, on the one hand, and by Buyer, on the other, to each such Straddle Patient. If any such statement is challenged by Seller or Buyer, then unless otherwise resolved by agreement of the parties within thirty (30) days of any such challenge, such statement shall be deemed in dispute, which dispute shall be resolved by the parties' independent certified public accountants. If such accountants cannot resolve the matter within thirty (30) days, then it shall be submitted by them to a third accounting firm in accordance with the procedures contained in Section 2.6(b). If Seller or Buyer does not give written notice to the -------------- party preparing the statement of its challenge of such statement within the first said thirty (30) day period, the receiving party shall be deemed to have accepted the same. (d) Cooperation in Collecting Receivables and Excluded Assets. --------------------------------------------------------- Buyer agrees to cooperate with Seller and the Subsidiaries and to provide access to records (both medical and financial) to assist in the collection, rebilling and auditing (by Seller or its representatives, including its independent public accountants) of the Receivables and the Excluded Assets (including, but not limited to, any and all Receivables from Account Parties or amounts due to or from any Payor). Without limiting the generality of the foregoing agreements of Buyer to cooperate with Seller, until six (6) months after the relevant Closing Date, (i) Seller may locate - 29 - one or more of its or its subsidiaries' employees at any or all of the Facilities transferred at such Closing Date, without charge, in order to facilitate such collection, rebilling and auditing, (ii) Buyer shall provide such employees, without charge, adequate and proper space to facilitate the performance of such duties, and (iii) Buyer shall provide reasonable assistance of the employees of Buyer, without charge. (e) Non-Assignable Receivables. Notwithstanding anything in -------------------------- this Agreement that might be construed to the contrary, this Agreement shall not constitute an agreement to assign any Receivable (including any Receivable respecting a Straddle Patient) the assignment of which is either prohibited by Law or by the terms of any contract with a Payor. However, without limiting the generality of the foregoing, the Net Book Value of such non-assignable Receivables shall be included in the Net Book Values for all purposes of this Agreement, including, but not limited to, Sections -------- 2.5 through 2.7 and this Section 2.9, as modified by the provisions of this --- --- ----------- Section 2.9(e). That portion of the Purchase Price which, but for the -------------- provisions of this Section 2.9(e), would otherwise be attributable to the -------------- Net Book Value of such non-assignable Receivables shall be deemed to be a loan from Buyer to Seller and to the pertinent Subsidiary that will be repaid from the proceeds of such Receivables collected and held by Buyer and from the adjustments to Estimated Net Book Values contemplated by Sections 2.6, 2.9(b), and 2.9(c). All procedures and requirements ------------ ------ ------ specified herein (including, without limitation, Buyer's obligations under Section 2.9(b)) for the collection of Receivables (including any -------------- Receivables in respect of a Straddle Patient) shall be fully applicable to such non-assignable Receivables, except that (i) Buyer shall be deemed to collect and hold the proceeds of such non-assignable Receivables as agent for the Seller and the Subsidiaries and shall apply such proceeds to the repayment of such loan, and (ii) any provision herein that would otherwise require or provide for Buyer's "reassignment" of a Receivable (including an Eligible Receivable) that is non-assignable to Buyer in the first instance shall be construed to require or provide that Buyer, as agent for Seller and the Subsidiaries, return pertinent documentation respecting such Receivable to Seller and the Subsidiaries to permit collection of such Receivable by them (in accordance with such collection efforts and procedures as they, in their sole discretion, shall determine). (f) Collection Fee. -------------- - 30 - (i) Buyer shall be entitled to a collection fee equal to fifteen percent (15%) of the sum of the following amounts (the "Collection Fee Base"): -------------------- (A) Cash collected, or deemed, under the provisions of this Agreement, to be collected by Buyer after a relevant Scheduled Closing in respect of (1) Receivables included in the Net Book Values that are acquired by Buyer at such Scheduled Closing, excluding Receivables that Buyer or a Buyer Subsidiary assigns or entrusts at or after such Scheduled Closing to an Affiliate of Seller for purposes of collection and (2) Excess Interim Payments; and (B) Cash remitted to a Facility after the relevant Scheduled Closing by any collection agency (excluding an Affiliate of Seller) with respect to accounts receivable that were assigned to such agency prior to such Scheduled Closing and that would be Receivables but for the provisions of paragraph 6 of Schedule 2.2(j), provided that for purposes of calculating the --------------- ------------- collection fee, such cash remitted shall be deemed to be net of any collection agency discounts, fees and charges. Five (5) days prior to each Scheduled Closing, Buyer and Seller shall in good faith agree to an estimate of Excess Interim Payments for each Facility included in such Scheduled Closing. Absent manifest error, such estimates shall be binding on Buyer and Seller. Fifteen percent (15%) of the total of such estimates for all Facilities included in each Scheduled Closing (the "Credit Amount") shall be credited against amounts due from Seller to Buyer as provided in Section 2.9(f)(ii). (ii) On the tenth day of the first month that begins at least sixty (60) days after a Scheduled Closing, on the tenth day of every other month thereafter until the Working Capital Adjustment Date, and on the tenth day following the Working Capital Adjustment Date, Buyer shall submit a report to Seller as of the nearest month- end specifying in reasonable detail its calculation of the Collection Fee Base for the period covered by such report. Within five (5) business days following receipt of each such report, Seller shall pay to Buyer, by wire transfer of immediately available funds, -31- the collection fee due with respect to the Collection Fee Base covered by such report less the amount of any Credit Amount not previously used to offset amounts due under this provision. Any Receivable for which a collection fee is so paid shall, to the extent of such Receivable on which such a fee is paid, no longer qualify as an Eligible Receivable. Section 2.10 Employee Matters. ---------------- (a) Pension Plans. Schedule 2.10(a) lists all "employee pension ------------- ---------------- benefit plans" ("Pension Plans") within the meaning of Section 3(2) of the ------------- Employee Retirement Income Security Act of 1974, as amended ("ERISA") in ----- which Retained Employees (as defined in Subsection (b) below) directly -------------- employed to work at the Facilities participate. Seller shall, or shall cause the Subsidiaries to, (i) terminate as of the relevant Closing Date the active participation of all such employees in the Pension Plans who constitute Hired Employees, (ii) cause the Pension Plans to make timely appropriate distributions following the relevant Closing Date, to the extent required, to such employees in accordance with, and to the extent permitted by, the terms and conditions of such Pension Plans, and (iii) in connection with the termination of the active participation of all such employees in such Pension Plans, comply, and cause each Pension Plan to comply, with all applicable Laws. Prior to the relevant Closing Date, Seller shall have delivered to Buyer, for information purposes only, forms of any letters or other written communications which Seller or the Subsidiaries shall distribute generally to such employees notifying them of their rights in respect of their cessation of active participation in the Pension Plans. There are no "multiemployer plans" within the meaning of Section 3(37) of ERISA ("Multiemployer Plans") in which Retained Employees ------------------- directly employed to work at the Facilities participate. (b) Retained Employees. ------------------ (i) Buyer shall have the right to offer to hire at each Scheduled Closing each of the direct employees of Seller or an Affiliate of Seller, who is not a Facility's chief executive or chief financial officer and who, as of such Scheduled Closing, works at the Facilities (including any such direct employees who are on medical disability or leaves of absence and who worked at the Facilities immediately prior to such disability or leave) included in the Subject Transferred Assets, and shall additionally have the right to -32- offer to hire at the First Closing up to five (5) employees of Seller selected by Buyer who are primarily employed at Seller's Fairfax, Virginia regional office in connection with Seller's PHIS System described in Section 2.17 (whether direct or indirect employees with ------------ respect to the PHIS System, the "PHIS Employees"), provided that Buyer -------------- -------- may not offer to hire those employees covered by this clause (i), if --- any, who are designated by Seller at least five (5) days prior to the relevant Scheduled Closing and provided further that Buyer shall ---------------- extend offers of employment to a sufficient number of employees at each Facility so as to avoid any liability on the part of Seller and the Subsidiaries under the WARN Act (as defined in Section 2.10(e)) --------------- with respect to the Transactions contemplated hereby. Seller will advise Buyer of the number of employees terminated at each Facility during the ninety (90) day period preceding the relevant Scheduled Closing. (ii) Buyer shall additionally have the right to offer to hire at each Scheduled Closing such other employees of Seller and its Affiliates who are mutually agreed upon by Buyer and Seller and who are either (A) indirect employees with respect to the operation of the Facilities included in the Subject Transferred Assets, or (B) a chief executive or chief financial officer of a Facility included in the Subject Transferred Assets, provided that in the event that Buyer -------- wishes to hire a chief executive or chief financial officer and Seller does not agree to such hiring, Seller shall not employ such chief executive or chief financial officer in such capacity at a healthcare facility operated or managed by Seller or its subsidiaries for a period of at least one (1) year following such Scheduled Closing. (iii) All such direct and indirect employees to whom Buyer has the right to make offers of employment pursuant to clauses (i) or --- (ii) above are herein referred to as the "Retained Employees." ---- ------------------ (iv) Any such offer of employment to a Retained Employee by Buyer shall be to perform comparable services, in such position and for such compensation as is comparable to the position such Retained Employee held with, and the compensation paid to such Retained Employee by, Seller or any of its subsidiaries as of the Scheduled Closing. Seller or its Affiliates shall have the right (but not the obligation) to employ or offer to employ any Retained -33- Employee (including, but not limited to, the chief executive officer and the chief financial officer of each Facility without regard to the provisions of Section 2.10(b)(ii)(B)) who declines Buyer's offer of ---------------------- employment. (c) Hiring of Retained Employees. Buyer shall hire at each ---------------------------- Scheduled Closing each Retained Employee who elects to accept employment with Buyer (the "Hired Employees") and shall continue to employ each such --------------- Hired Employee for a period of no less than ninety (90) days following the relevant Closing Date, unless the employment of such Hired Employee is terminated for cause or as a result of the Hired Employee's resignation. Subject to the proviso to Section 2.3(c), Buyer agrees to give the Hired -------------- Employees full credit for the Paid Time Off earned or accrued by them during, and to which they are entitled as a result of, their employment by Seller and/or its subsidiaries, by allowing such Hired Employees such Paid Time Off as to which such Hired Employees would have been entitled as of the relevant Closing Date under the policies of Seller and/or its subsidiaries if such Hired Employees had remained employees of Seller and/or its subsidiaries and, upon termination of employment, by making full payment to such Hired Employees of the Paid Time Off that such employees would have received had they taken such Paid Time Off. (d) Health Benefits. Buyer shall provide the Hired Employees a --------------- program of health care benefits which is comparable in the aggregate to the program of health care benefits currently provided by Seller or its pertinent Subsidiaries, as the case may be, provided, however, that such -------- ------- health care benefits shall be immediately available to the Hired Employees as of the relevant Closing Date, and the Hired Employees shall become as of the relevant Closing Date participants thereunder, without regard to any applicable waiting period or any limitation with respect to preexisting conditions except insofar as such waiting period or limitation gives full credit to such Hired Employees for the period of time during which he or she was employed by Seller and its Affiliates and, provided further, that ---------------- Buyer may make modifications or changes in such health care benefits at any time following a Scheduled Closing. Buyer acknowledges and agrees that, with respect to the Hired Employees, Buyer is a successor employer for purposes of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), that the Hired Employees will not, as a result, be ----- deemed to have had a termination of employment for purposes of COBRA and that any COBRA notices or coverages required to -34- be given or made available to any Hired Employee shall be given or made by Buyer and not Seller or the Subsidiaries, provided that Buyer does not -------- assume, and shall not be deemed to have assumed, any COBRA obligations which Seller or any Subsidiary may have to former employees of Seller or such Subsidiary whose employment was terminated on or prior to the relevant Closing Date, or to any Retained Employees who do not accept employment with Buyer, and provided further that Seller shall be responsible for any -------- COBRA coverages required to be made available to any Hired Employee who is entitled to COBRA coverage under existing plans of Seller or any Subsidiary as a result of the Transactions. (e) Acknowledgement of Responsibility. Buyer acknowledges and --------------------------------- agrees that as of the date and time a Scheduled Closing is effective, Buyer shall be considered for purposes of the Worker Adjustment and Retraining Notification Act (the "WARN Act") the employer of the Retained Employees -------- related to the Transferred Assets transferred at such Scheduled Closing and that Buyer (and not Seller or the Subsidiaries) shall thereupon be responsible for complying with the WARN Act with respect to such Retained Employees and that prior to such time none of such Retained Employees shall be, nor shall they be deemed to be, terminated. Buyer shall indemnify and hold Seller and its Affiliates harmless, in accordance with Sections 11.4, ------------- 11.5 and 11.6, from and against all Losses (i) resulting from any ---- ---- compliance obligation (including, without limitation, the obligation to give notice or pay money) that Seller and its Affiliates or Buyer has under the WARN Act arising from the termination of any Retained Employee or (ii) resulting from any claims of the Hired Employees (including, without limitation, claims for health care coverage or benefits); provided, -------- however, Buyer shall neither be responsible for, nor indemnify Seller and ------- its Affiliates for the consequences of any WARN event which may be caused by the actions of Seller or its Affiliates with respect to employees whom Seller and its Affiliates retain pursuant to rights set forth in Section ------- 2.10(b) above. ------- Notwithstanding the foregoing, nothing in this Section 2.10 shall, or shall ------------ be deemed to, create any rights in favor of any person not a party hereto or to constitute an employment agreement or condition of employment for any employee of Seller or any Affiliate of Seller or any Retained Employee. Section 2.11 Use of Names. ------------ -35- (a) Although trade names of Seller and the Subsidiaries, other than the Transferred Business Names, are Excluded Assets, such names appear on certain of the fixed Transferred Assets, such as certain fixtures and Equipment, and on supplies, materials, stationery and similar consumable items which will be on hand at the Facilities at a Scheduled Closing with respect to such Facilities. Notwithstanding that such names are Excluded Assets, Buyer shall be entitled to use such consumable items for a period of three (3) months following the Scheduled Closing in which such items are transferred and shall have up to six (6) months following such Scheduled Closing to remove such names from fixed Transferred Assets, provided that -------- Buyer shall not send correspondence or other materials to third parties on any stationery that contains a trade name (other than a Transferred Business Name) of Seller or any Affiliate of Seller. (b) Seller hereby grants to Buyer, for the period from the relevant Closing Date through the expiration of the ninetieth day thereafter, the non-exclusive right and license to use, solely in connection with the operation of the Facilities transferred on such Closing Date, the clinical policy and procedures manuals of Seller and/or the Subsidiaries (the "Manuals") presently used at such Facilities. Such ------- license shall be on the following terms and conditions: (i) Buyer shall accept the Manuals in their present condition, "AS IS" and "WITH ALL FAULTS" and without any representation or warranty of any kind whatsoever, either express or implied, by Seller, including, but not limited to, any representation or warranty that the Manuals are adequate for Buyer's operation of the relevant Facilities after the relevant Scheduled Closing or are in compliance with any Laws; (ii) Buyer agrees that Seller shall have no obligation whatsoever to update or otherwise revise the Manuals, even if Seller or its Affiliates are revising similar manuals at other healthcare facilities, and that Buyer shall have sole responsibility for updating and revising such manuals; (iii) Buyer acknowledges and agrees that the Manuals are confidential and proprietary information of Seller and its Affiliates and Buyer agrees that it will not, directly or indirectly, reproduce, distribute or disclose the contents of the Manuals except as may be required in the operation of such Facilities (including, but -36- not limited to, as may be required by any Laws) and shall exercise due care to otherwise preserve and protect the proprietary nature thereof, provided that Seller and the Subsidiaries acknowledge that the Manuals -------- used by Buyer and the Buyer Subsidiaries more likely than not contain information that is substantially similar to information contained in the Manuals; (iv) Upon the termination of Buyer's use of the Manuals pursuant to this Section, Buyer shall return to Seller all originals and copies of the Manuals; and (v) Buyer shall implement its own policy and procedure manuals promptly following the relevant Closing Date, and in any event by the date on which the license hereby granted to Buyer terminates. (c) Notwithstanding the assignment to Buyer of the Transferred Business Names, Seller and its Affiliates and their assignees shall have the nonexclusive right to use such Transferred Business Names, consistent with past practices, in connection with the operation of previously and currently operated healthcare facilities of Seller and its Affiliates not included in the Transferred Assets, and Buyer, on behalf of itself and each Buyer Subsidiary, hereby grants Seller and its Affiliates and their assignees a fully paid-up, perpetual right and license to use such Transferred Business Names in such manner in connection with the operation of such facilities, such license to be effective as of the relevant Scheduled Closing in which such Transferred Business Names are assigned to Buyer and the Buyer Subsidiaries. Section 2.12 No Assignment If Breach; Seller's Discharge of Assumed ------------------------------------------------------ Liabilities. ----------- (a) Notwithstanding anything contained in this Agreement to the contrary, this Agreement shall not constitute an agreement to assign any Transferred Asset, or assume any Assumed Liability, if the attempted assignment or assumption of the same, as a result of the absence of the consent or authorization of a third party or failure of a right of first refusal notice period to expire, would constitute a breach or default under any lease, agreement, encumbrance or commitment, would violate any Law or would in any way adversely affect the rights, or increase the obligations, -37- of Buyer, Seller or any Subsidiary with respect thereto; provided that the -------- assignment of any contract, including without limitation Medicare, Medicaid and similar provider agreements, which may lawfully be made subject to customary conditions subsequent (such as needs surveys, evaluations of Buyer or other determinations by the counterparties to such agreements) shall be deemed not to constitute a default under, or to in any way adversely affect the rights or increase the obligations of Buyer with respect to, such lease, agreement, encumbrance or commitment, whether or not such condition or conditions subsequent are met on or prior to the relevant Scheduled Closing. Except as provided in Section 2.12(c), if any --------------- such consent or authorization is not obtained, or if an attempted assignment or assumption would be ineffective or would adversely affect the rights or increase the obligations of Seller, a Subsidiary or Buyer, with respect to any such lease, agreement, encumbrance or commitment, so that Buyer would not, in fact, receive all such rights, or assume the obligations, of Seller or Subsidiary with respect thereto as they exist prior to such attempted assignment or assumption, then Seller and Buyer shall, and Seller shall cause each Subsidiary to, enter into such reasonable cooperative arrangements as may be reasonably acceptable to both Buyer and Seller (including without limitation, sublease, agency, management, indemnity or payment arrangements and enforcement at the cost and for the benefit of Buyer of any and all rights of Seller and the Subsidiaries against an involved third party) to provide for or impose upon Buyer the benefits of such Transferred Asset or the obligations of such Assumed Liability, as the case may be, and any transfer or assignment to Buyer by Seller or a Subsidiary of any such Transferred Asset, or any assumption by Buyer of any such Assumed Liability, which shall require such consent or authorization of a third party that is not obtained shall be made subject to such consent or authorization being obtained. Except as provided in Section 2.12(c), if the parties cannot agree on any such --------------- arrangement, or any such arrangement would not be reasonably practicable, to provide Buyer with materially all the benefits of such Transferred Asset or materially all the obligations of such Assumed Liability, then such Transferred Asset or Assumed Liability, as the case may be, shall be excluded from the Transactions and shall be deemed to be an Excluded Asset or an Excluded Liability, as the case may be, and Buyer and Seller shall negotiate in good faith an equitable adjustment in the Purchase Price, or resolve any disagreement respecting such adjustment, in accordance with the procedures of Section 2.14. ------------ (b) Notwithstanding any other provision of this Agreement, during the period between the date hereof and the relevant Scheduled -38- Closing, Seller may, for the purpose of facilitating consummation of the Transactions and with the consent of Buyer (which will not be unreasonably withheld), cause any Subsidiary to acquire a fixed asset, or any direct or indirect interest therein, that results in the simultaneous discharge of all or any part of a liability that exists as of the date hereof which, but for such acquisition, would be an Assumed Liability; provided that in each -------- such case it gives prompt notice of such acquisition to Buyer. In the event of any such acquisition, Buyer and Seller shall negotiate in good faith an equitable adjustment to the Purchase Price, or resolve any disagreement respecting such adjustment, in accordance with the procedures of Section 2.14. ------------ (c) The provisions of Section 2.12(a) notwithstanding, neither --------------- Buyer nor Seller shall be obligated to close with respect to a given Facility if any private third party consent or authorization in respect of Transferred Assets and Assumed Liabilities related to such Facility that is enumerated in Schedule 2.12(c) (the "Schedule of Required Consents") is not ---------------- ----------------------------- obtained, unless both Buyer and Seller waive in writing their respective conditions precedent that such consent or authorization be obtained prior to the transfer of such Facility. With respect to all other private third party consents or authorizations with respect to such Facility that have not been obtained by the relevant Scheduled Closing, if the parties have not entered into a cooperative arrangement in respect of the Transferred Asset or Assumed Liability to which such consent or authorization relates, then, subject to the provisions of Section 2.18 regarding Buyer's right to ------------ reject certain contracts within sixty (60) days following the Scheduled Closing at which such contracts are assigned or purported to be assigned, (i) Buyer hereby agrees to accept the assignment of any such pertinent Transferred Asset, and to assume any such pertinent Assumed Liability, as the case may be, whether or not such assignment or assumption is made subject to such consent or authorization being obtained after the relevant Scheduled Closing, and (ii) the parties agree to continue to cooperate with one another, pursuant to the provisions of Sections 5.2 and 5.3, to obtain ------------ --- any such requisite consent Section 2.13 Closings. All of Seller's and the Subsidiaries' right, -------- title and interest in a Facility and all other Transferred Assets and Assumed Liabilities which relate to, or constitute a part of, a Facility shall be transferred to Buyer or the applicable Buyer Subsidiaries at a "Scheduled Closing" (as defined below). Subject to the terms and conditions ----------------- hereof, the Transferred Assets shall be transferred to Buyer at one of three Scheduled Closings: The "First Closing" (as defined below), the ------------- "Second Closing" (as defined below) or the "Final Closing" (as defined -------------- ------------- below). The -39- First Closing, Second Closing and Final Closing, collectively, are the "Scheduled Closings" and each is a "Scheduled Closing." A date on which a Scheduled Closing actually occurs is a "Closing Date," and the Closing Date ------------ of the Final Closing is the "Final Closing Date." A Scheduled Closing shall ------------------ be effective for all purposes as to each Facility which is the subject of such Scheduled Closing (and the Transferred Assets and Assumed Liabilities related thereto or constituting a part thereof) (collectively, the "Subject ------- Transferred Assets") at 11:59 p.m. on the relevant Closing Date, as ------------------ determined by reference to the local time zone in which the Facility is located. Notwithstanding the foregoing, either the First or Second Closing may also be a Final Closing and if the First Closing is the Final Closing, there shall be no Second Closing. Scheduled Closings shall occur in accordance with the following provisions: (a) The First Closing. Provided that no Scheduled Closing shall ----------------- occur after the Termination Date set forth in Section 10.1(b), the "First --------------- ----- Closing" shall occur at a mutually agreeable time and place or places ------- within five (5) business days (unless another date is mutually agreed upon by Buyer and Seller) after the first date on which all of the conditions set forth in Article 8 and Article 9 hereof are capable of being satisfied --------- --------- or are waived (i) as to Facility Nos. 29, 48 and 55 (the "Required First -------------- Facilities"), and (ii) as to the Transferred Assets and Assumed Liabilities ---------- in respect of First Facilities that account in the aggregate for at least Twenty-Seven Million Dollars ($27,000,000) of the EBITDA (as defined in Section 3.17(a)) assigned to Facilities for this purpose as shown on --------------- Schedule 2.13B hereto, and all Facilities, Transferred Assets and Assumed -------------- Liabilities sold, assigned, conveyed, transferred, delivered and assumed at the First Closing shall be the Subject Transferred Assets with respect to the First Closing; provided that: ------------- (A) If the conditions set forth in Articles 8 and 9 with ---------- - respect to any of the Required First Facilities have not been met by the First Closing, then at the option of Buyer, the condition set forth in clause (a)(i) above may be waived to permit the First Closing ------ to occur, in which case any of the Required First Facilities not included in the First Closing will, to the extent the conditions set forth in Articles 8 and 9 with respect thereto are otherwise ---------- - satisfied, be Subject Transferred Assets at the Second Closing or the Final Closing; -40- (B) At the option of Buyer, exercisable by written notice to Seller at least five (5) business days prior to the First Closing, Buyer may elect to defer until the Second Closing or the Final Closing (but in no event later than the Termination Date) consummation of the Transactions respecting one or more of the Facilities denominated on Schedule A-2 as Facility Nos. 35, 36 and 53; and ------------ (C) In the event that Buyer elects to exercise either or both of the options set forth in paragraphs (A) or (B) above, then the --- --- amounts set forth in clause (a)(ii) above shall be reduced by the ------- EBITDA set forth on Schedule 2.13(B) for the Facilities that the Buyer ---------------- excludes from the Subject Transferred Assets pursuant to such options. Upon consummation at the First Closing of Transactions in compliance with the foregoing provisions, any remaining Transactions in respect of Facilities that were not consummated at such Closing may be consummated at a subsequent Closing subject to the provisions of Article 8 and Article 9 --------- --------- and to the provisions of this Section 2.13 with respect to such Closings. ------------ (b) The Second Closing. Provided that the First Closing has ------------------ occurred and that no Scheduled Closing shall occur after the Termination Date, the "Second Closing" shall occur at a mutually agreeable time and -------------- place or places, on the date which is within five (5) business days (unless another date is mutually agreed upon by Buyer and Seller) after the first date on which all of the conditions set forth in Article 8 and Article 9 --------- --------- hereof are capable of being satisfied or are waived as to any additional First Facilities and the Transferred Assets and Assumed Liabilities related thereto or constituting a part thereof that are not the subject of the First Closing, and the First Facilities and the Transferred Assets and Assumed Liabilities shall be the Subject Transferred Assets with respect to the Second Closing, provided that the Second Closing shall be held, in any -------- event, within thirty (30) days of the First Closing with respect to any First Facilities for which the conditions to Closing, including those set forth in this Section 2.13, have been met or waived as of such date. (c) The Final Closing. Provided that a First Closing has ----------------- occurred, the "Final Closing" shall occur with respect to First Facilities ------------- that are not the subject of the First or Second Closings at a mutually agreeable place or places and at a mutually agreeable time as follows: -41- (i) If all of the conditions set forth in Articles 8 and 9 ---------- - hereof and in this Section 2.13 are capable of being satisfied or are ------------ waived on or prior to the Termination Date as to all First Facilities that are not included in the First Closing or the Second Closing, then the Final Closing shall occur (A) within five (5) business days (unless another date is mutually agreed upon by Buyer and Seller) after the first date upon which such conditions may be satisfied or are waived, but in no event later than the Termination Date or (B) if the only Facilities subject to the Final Closing are one or more of Facilities Nos. 35, 36 and 53, on such date as the parties shall mutually agree, but no later than the Termination Date. (ii) If all of the conditions set forth in Articles 8 and 9 ---------- - hereof and in this Section 2.13 are capable of being satisfied or are ------------ waived on or prior to the Termination Date as to some, but not all, of the Facilities that are not included in the First Closing or the Second Closing, then the Final Closing shall occur within five (5) business days after the identity of the Facilities as to which such conditions will not be satisfied has become reasonably manifest or has been mutually agreed upon by the parties, but in no event shall such Final Closing occur later than the Termination Date. (d) Deliveries by Seller. At each Scheduled Closing Seller -------------------- shall deliver, or cause the Subsidiaries to deliver, to Buyer: (i) A Bill or Bills of Sale and Assignment in substantially the form of Exhibit A executed by each Subsidiary with respect to the --------- Subject Transferred Assets of the Subsidiary covered thereby; (ii) Grant deeds (or equivalent special or limited warranty deeds for Owned Real Properties outside California), properly executed and acknowledged by each Subsidiary with respect to the Owned Real Properties of the Subsidiary included in the Subject Transferred Assets; (iii) Separate assignments and assumptions in substantially the form of Exhibit B executed by each Subsidiary with respect to each --------- Real Property Lease of the Subsidiary included in the Subject Transferred Assets that is designated by either Buyer or Seller; -42- (iv) Instruments of transfer, sufficient to transfer personal property interests of each Subsidiary that are included in the Subject Transferred Assets but not otherwise transferred by the Bills of Sale and Assignment referred to in clause (i) above, executed ---------- by each Subsidiary in the form customarily used in commercial transactions in the areas in which such other personal property of such Subsidiary is located; (v) Such other instruments of transfer, executed by each of the pertinent Subsidiaries necessary to transfer to and vest in Buyer all of Seller's and the Subsidiaries' rights, title and interest in and to the Subject Transferred Assets or which may be required by the Title Insurer (as defined in Section 8.7), including owner's and ----------- lessee's affidavits, if any; and (vi) Possession of the Subject Transferred Assets. All such documents of transfer shall be in a form and substance reasonably satisfactory to Buyer. (e) Deliveries by Buyer. At each Scheduled Closing, Buyer shall ------------------- deliver to Seller: (i) Immediately available funds, by way of wire transfer to an account or accounts designated by Seller, in an amount equal to the amounts then due pursuant to Sections 2.5 and 2.6(a) (including, with ------------ ------ respect to the First Closing, the amount due for the covenant not to compete as specified by the last sentence of Section 2.5), as adjusted ----------- by the expenses due at such Scheduled Closing pursuant to Section 5.5; ----------- (ii) Separate assignments and assumptions in substantially the form of Exhibit C executed by Buyer and the applicable Buyer --------- Subsidiaries with respect to each Real Property Lease included in the Subject Transferred Assets that is designated by either Buyer or Seller; and (iii) An Assumption Agreement or Assumption Agreements with respect to the Assumed Liabilities assumed at such Scheduled Closing, in substantially the form of Exhibit C, executed --------- -43- by Buyer and the applicable Buyer Subsidiaries in favor of Seller and each of the applicable Subsidiaries. All such documents of transfer shall be in a form and substance reasonably satisfactory to Seller. (f) Escrow. If either of the parties desires to consummate a ------ Scheduled Closing through an escrow, an escrow shall be opened with, and the escrow agent shall be, Chicago Title Company (the "Escrow Agent"), by ------------ depositing a fully executed copy of this Agreement with Escrow Agent to serve as escrow instructions. This Agreement shall be considered the primary escrow instructions between the parties, but the parties shall execute such additional escrow instructions as Escrow Agent shall require and the parties may agree upon in order to clarify the duties and responsibilities of Escrow Agent. In the event of any conflict between this Agreement and such additional escrow instructions, this Agreement shall prevail. If a Scheduled Closing is to be consummated through the Escrow Agent, then on or prior to the Closing Date, Buyer shall cause the funds required by Subsection (e)(i) above to be wired to Escrow Agent, and ---------- ------ the parties shall deliver the instruments of sale, assignment, conveyance and assumption called for by Subsections (d) and (e) above to be delivered --------------- --- to the Escrow Agent, and on the Closing Date, the Escrow Agent shall close the escrow with respect to such Scheduled Closing by: (i) Causing the deeds for the Owned Real Properties, the assignments of the Real Property Leases, and any other documents which the parties may mutually designate to be recorded in the official records of the appropriate counties in which the pertinent Subject Transferred Assets are located; (ii) Delivering to Seller by wire transfer of immediately available funds, to an account or accounts designated by Seller, the amounts called for by Subsection (e)(i) above; and ----------------- (iii) Delivering to Buyer or Seller, as the case may be, the other instruments referred to in Subsections (d) and (e) above. --------------- --- (g) Ability To Close Without Regard To Subsequent Facilities. -------------------------------------------------------- Without limiting the generality of the foregoing, the parties hereby expressly acknowledge that the Transactions related to the First Facilities may be consummated if the conditions thereto are satisfied or -44- waived, irrespective of whether transactions in respect of the Subsequent Facilities that are contemplated by the Subsequent Facilities Agreement are previously, concurrently or subsequently consummated. Section 2.14 Purchase Price Adjustment. If circumstances exist that ------------------------- require the parties to negotiate in good faith equitable adjustments in the Purchase Price pursuant to the provisions of Section 2.12 (respecting ------------ absence of consents), Sections 8.5 and 9.5 (dealing with certain ------------ --- prohibitions and restraints), Section 6.2(c) (respecting Seller's -------------- obligations with respect to environmental conditions), Section 8.7 ----------- (respecting the condition of title to interests in real property) or Section 8.10 (respecting casualty losses or condemnation) (Sections 2.12, ------------ ------------- 6.2(c), 8.5, 8.7, 8.10, 9.5 and this Section 2.14 being collectively ------ --- --- ---- --- ------------- referred to as the "Adjustment Sections"), then and in any of such events, ------------------- such negotiations, and the resolution of disagreements arising therefrom, shall be conducted in accordance with the provisions of this Section 2.14. ------------ The parties shall negotiate such equitable adjustments in the Purchase Price in good faith prior to any relevant Closing Date (as may be extended by mutual agreement of the parties), provided, that any adjustment in the -------- Purchase Price shall be consistent with the Allocation Schedule. If the parties are unable to agree by the day prior to such relevant Closing Date, then such relevant Closing Date (the "Original Closing Date") (and the --------------------- Termination Date, if necessary) shall be extended for up to fifteen (15) business days to provide for the opportunity to resolve such disagreement pursuant to the provisions of this Section 2.14. On the day a Scheduled ------------ Closing would have occurred but for the absence of agreement between the parties, each party shall designate an individual (who may not be a present or former officer, director, partner or employee of the party or of any present or former investment banker, accounting firm, law firm or attorney of or for the party) to mediate such disagreement, and advise the other party in writing of the identity of such individual, which advice shall be accompanied by a list of up to ten (10) suggested neutral individuals to serve as a third mediator. The mediators originally designated by each party shall promptly confer about the selection of a third mediator from such lists, and within five (5) business days following the Original Closing Date (or Termination Date, as the case may be), the originally designated mediators shall agree upon and (subject to availability) select the third mediator from the lists submitted by the parties or otherwise, provided that if the originally designated mediators cannot agree upon a -------- third mediator by such date, the third mediator shall be a retired judge designated by Judicial and Arbitration Mediation Services, Inc., located in Los Angeles, California. The three mediators so selected -45- are herein referred to as the "Panel". Within two (2) business days ----- following the designation of the third mediator, each party shall submit to the Panel in writing, its proposed equitable adjustments in the Purchase Price. Such proposals shall be materially in accordance with the last proposals made by such party to the other party during the course of the aforementioned good faith negotiations between the parties. The parties shall additionally submit such memoranda, arguments, briefs and evidence in support of their respective positions, and in accordance with such procedures, as a majority of the Panel may determine. Within seven (7) business days following the designation of the third mediator, as to each adjustment of the Purchase Price about which there is disagreement, the Panel shall, by majority vote, select the proposed adjustment of the Purchase Price proposed by one of the parties, it being agreed that the Panel shall have no authority to alter any such proposal in any way. Thereafter, the parties shall, subject to the terms and conditions of this Agreement, consummate the Transactions on the basis of such adjustments at a mutually agreeable time and place or places, in accordance with and subject to the provisions of Section 2.13, which shall be no later than the ------------ fifteenth (15th) business day following the Original Closing Date or such later date as the parties may agree upon. Subject to the foregoing, the Panel may determine the issues in dispute following such procedures, consistent with the language of this Agreement, as it deems appropriate to the circumstances and with reference to the amounts in issue, but in any event consistent with the Allocation Schedule to the extent applicable. No particular procedures are intended to be imposed upon the Panel, it being the desire of the parties that any such disagreement shall be resolved as expeditiously and inexpensively as reasonably practicable. No member of the Panel shall have any liability to the parties in connection with service on the Panel, and the parties shall provide such indemnities to the members of the Panel as they shall request. Section 2.15 Transfer of Assets in Corporate Form. If Buyer consents ------------------------------------ in writing in its sole and absolute discretion, Seller may, prior to any Scheduled Closing, cause any Transferred Asset or Assumed Liability to be assigned and transferred by way of an assignment to Buyer of the stock of a subsidiary of Seller (including the stock of any Subsidiary), in which case all right, title and interest of Seller and any of its Affiliates in such subsidiary (which shall constitute all of the outstanding capital stock and rights to acquire capital stock in such subsidiary) shall be transferred to Buyer at the Scheduled Closing as a Subject Transferred Asset. Any -46- such agreement of the parties shall become an amendment to this Agreement. Section 2.16 Assignment of Rights and Obligations to Buyer --------------------------------------------- Subsidiaries. Notwithstanding any contrary provisions contained herein, ------------ the parties hereto agree that, prior to a Scheduled Closing, Buyer, in its sole discretion, may assign any or all of its rights and obligations with respect to the Subject Transferred Assets and the Assumed Liabilities to be transferred at such Scheduled Closing to one or more Buyer Subsidiaries, provided that no such assignment shall relieve Buyer of any obligation or -------- liability to Seller hereunder, and provided further that the following -------- shall apply: (a) Buyer will provide Seller with prompt written notice of any such assignment. (b) No such assignment shall be effected if the making of the assignment will result in Seller's inability to obtain any consent or authorization reasonably required to consummate the Transactions or to avoid economic detriment to the Seller arising from the consummation of the Transactions. (c) Each such Buyer Subsidiary that is an assignee of Buyer shall irrevocably appoint Buyer as its sole and exclusive representative and agent authorized to act for and to receive notices and payments on behalf of the Buyer Subsidiaries in all matters arising from or related to this Agreement and the Transactions. (d) As a condition to Seller's agreement to such assignments, Buyer hereby agrees that Buyer will at all times be the ultimate parent entity of the consolidated group of companies of which Buyer is a group member or that, in the event of any reorganization involving Buyer and its subsidiaries, the ultimate parent entity of the consolidated group of companies emerging from such reorganization that includes Buyer and its successors and assigns shall, prior to any such reorganization, execute such documents as are reasonably necessary to confirm the assumption by such ultimate parent entity of Buyer's obligations to Seller hereunder. (e) Buyer shall remain jointly and severally liable to Seller and the Subsidiaries and to third parties with respect to any Assumed Liabilities transferred to a Buyer Subsidiary, and, without limiting the -47- generality of the foregoing, hereby absolutely and unconditionally guarantees the full, prompt and faithful performance by each Buyer Subsidiary of all covenants and obligations to be performed by such Buyer Subsidiary under this Agreement and any Related Agreement (as defined in Section 3.4) which are assigned to such Buyer Subsidiary, including but not ----------- limited to, the payment of all sums stipulated to be paid by such Buyer Subsidiary pursuant to such assignment, it being understood that each such covenant and obligation constitutes the direct and primary obligation of Buyer and that a separate action or actions may be brought and prosecuted against Buyer whether action is brought against the pertinent Buyer Subsidiary or whether such Buyer Subsidiary is joined in any such action or actions (Buyer hereby waiving any right to require Seller or a Subsidiary to proceed against a Buyer Subsidiary). Buyer hereby authorizes Seller, without notice and without affecting Buyer's liability hereunder, from time to time to (x) renew, compromise, extend, accelerate, or otherwise change the terms of any obligation of a Buyer Subsidiary hereunder with the agreement of such Buyer Subsidiary, (y) take and hold security for the obligations guaranteed, and exchange, enforce, waive and release any such security, and (z) apply such security and direct the order or manner of sale thereof as Seller in its discretion may determine. Buyer hereby further waives: (i) Any defense that may arise by reason of the incapacity or lack of authority of any Buyer Subsidiary; (ii) Any defense based upon a statute or rule of law which provides that the obligations of a surety must be neither larger in amount nor in other respects more burdensome than those of the principal; and (iii) Any duty on the part of Seller or a Subsidiary to disclose to Buyer any facts that Seller or a Subsidiary may now or hereafter know about a Buyer Subsidiary. Section 2.17 Data Processing Services. In order to facilitate the ------------------------ transition of the Facilities from Seller's to Buyer's ownership, from and after the First Closing until the expiration of eight (8) months after the later of the Final Closing or the last closing to occur under the Subsequent Facilities Agreement (the "Transition Period"): ----------------- -48- (a) Seller will provide Buyer, at no charge, with data processing services from Seller's Psychiatric Hospital Information System (the "PHIS System") that support the collection of Receivables acquired by ----------- Buyer hereunder and of "Receivables," as defined in the Subsequent Facilities Agreement, acquired by Buyer, if any, pursuant to the Subsequent Facilities Agreement. (b) Seller shall, at no charge to Buyer, provide the PHIS Employees with reasonable access to the PHIS System on-site at Seller's Fairfax, Virginia offices from which the PHIS System is operated, and Buyer hereby agrees that such PHIS Employees will be made reasonably available to Seller, at no charge to Seller, to provide assistance to Seller in connection with Seller's operation of the PHIS System. Seller may require, as a condition of such access, that such PHIS Employees comply with such security and safety measures as Seller may reasonably impose. (c) Seller will provide Buyer, at no charge, with reasonable access to Seller's data processing training center in Fairfax, Virginia for the purpose of training employees with respect to data services utilized by the First Facilities and the Subsequent Facilities (to the extent any are acquired pursuant to the Subsequent Facilities Agreement). (d) Seller agrees to cause to be made available to the First Facilities and the Subsequent Facilities (to the extent any are acquired pursuant to the Subsequent Facilities Agreement) the customary support services that have been provided to the Facilities by up to three (3) employees at the so-called "Help Desk" of Seller located in Fairfax, Virginia, which provides telephone assistance to First and Subsequent Facilities in connection with management information services and facility accounting. At the First Closing, Buyer will be entitled to purchase from Seller certain excess computer equipment associated with the PHIS System (together with certain agreements related to such equipment) for One Dollar ($1.00). In addition, within thirty (30) days following Seller's closure of its operations at its Fairfax, Virginia offices, Seller shall notify Buyer of such event, and Buyer shall have the right to purchase certain additional equipment associated with the PHIS System (to the extent owned by Seller) (together with certain agreements related to such equipment), for the sum of One Dollar ($l.00). Such purchases, as well as Seller's provision of services pursuant to paragraphs (a) and (d) above, shall be subject to the further -49- terms and conditions of a Data Processing Services Contract to be executed by the parties at the First Closing substantially in the form of Exhibit F --------- hereto. Section 2.18 Rejection of Certain Contracts. The provisions of this ------------------------------ Section 2.18 shall apply to the following categories of Assumed Contracts: ------------ (i) those subject to the provisions of Section 2.1(f)(iii); (ii) those ------------------- subject to the provisions of the second sentence of Section 2.12(c); and --------------- (iii) those subject to Section 6.1(f) that are entered into by Seller or a -------------- Subsidiary after the date hereof in violation of Section 6.1(f). With -------------- respect to each such contract (a "Contingent Contract"): ------------------- (a) Buyer or the pertinent Buyer Subsidiary shall have the right to reject such Contingent Contract by giving a written notice of such rejection to Seller within sixty (60) days following the relevant Scheduled Closing, such written notice to be accompanied by originals of the contract then in Buyer's or the Buyer Subsidiary's possession, copies of any written communications between Buyer or the Buyer Subsidiary and the counterparty to such contract relating to the subject matter thereof, and instruments evidencing the reassignment of such contract to Seller or the pertinent Subsidiary in form reasonably satisfactory to Buyer and Seller, in which case such contract shall be treated as an Excluded Asset, and the liabilities related thereto shall be treated as an Excluded Liability, for all purposes of this Agreement, subject to the further provisions of this Section 2.18. ------------ (b) In the event that Seller or the pertinent Subsidiary incurs any costs in connection with the termination of any such Contingent Contract so rejected by Buyer (including payments during any applicable notice period required to terminate such contract) and Buyer or the pertinent Buyer Subsidiary continues to do business with the counterparty to such contract related to the subject matter thereof during any period for which Seller or the applicable Subsidiary is obligated to make payments to such counterparty, then Buyer will reimburse Seller for one-half of the payments that Seller or the applicable Subsidiary is obligated to make to such counterparty in connection with such termination, but not in excess of one-half of the payments that Seller or the applicable Subsidiary is obligated to make to such counterparty under such contract for a period of ninety (90) days. -50- (c) With respect to any Contingent Contract subject to clause (ii) of this Section 2.18 that is not also subject to either clause (i) or ---- ------------ --- clause (iii) of this Section 2.18 and that is not rejected by Buyer ----- ------------ pursuant to Subsection (a) above, Buyer agrees to indemnify and hold -------------- harmless Seller and the Subsidiaries, in accordance with the provisions of Sections 11.3 through 11.6, from and against any and all Losses arising ------------- ---- from or related to the lack of any consent or authorization in connection with the assignment of such Contingent Contract to Buyer (or the pertinent Buyer Subsidiary) hereunder. (d) In the event Buyer rejects a Contingent Contract pursuant to Subsection (a), then, notwithstanding any other provision of this -------------- Agreement, Seller shall have no liability to Buyer and the Buyer Subsidiaries for Losses under the provisions of Sections 11.3 through 11.6 ------------- ---- related to such Contingent Contract for the period prior to such rejection or for the amounts due Seller under Subsection (b) above. -------------- (e) With respect to any Contingent Contract subject to clause (iii) of this Section 2.18 that appears on an updated Schedule 2.1(f) ----- ------------ --------------- delivered pursuant to Section 6.3 and that is not rejected by Buyer ----------- --- pursuant to Subsection (a) above, then, notwithstanding any other provision -------------- of this Agreement, Seller shall have no liability to Buyer and the Buyer Subsidiaries for Losses under the provisions of Sections 11.3 through 11.6 ------------- ---- for violation of Section 6.1(f) with respect to such Contingent Contract. -------------- Section 2.19 Remaining Schedules. Notwithstanding anything to the ------------------- contrary herein, this Agreement shall be deemed cancelled and of no further force and effect if the parties shall have failed to agree upon the Schedules enumerated in Exhibit E, if any, within five (5) business days --------- following the date hereof, the parties hereby agreeing to cooperate with one another in good faith and to work expeditiously to agree upon such Schedules within such period. Such agreement shall be evidenced by a duly executed amendment of this Agreement that deletes this Section 2.19. ------------ ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer, as of the date hereof, as follows, except as set forth in Schedules numbered in relation to the Sections set forth below: -51- Section 3.1 Organization and Corporate Power. Seller is a -------------------------------- corporation duly incorporated and validly existing under the laws of, and is authorized to exercise its corporate powers, rights and privileges and is in good standing in, the State of Nevada and has full corporate power to carry on its business as presently conducted and to own or lease and operate its properties and assets now owned or leased and operated by it and to perform the transactions on its part contemplated by this Agreement and all other agreements contemplated hereby. Section 3.2 Subsidiaries. ------------ (a) Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation (which, in the case of Subsidiaries existing on the date of this Agreement, is indicated on Schedule A-1). Each Subsidiary has all requisite power and ------------ authority (corporate and otherwise) to carry on its business as presently conducted and to own or lease and operate its properties and assets now owned or leased and operated by it and to perform the transactions on its part contemplated by this Agreement and all other agreements contemplated hereby. (b) All of the outstanding capital stock of each Subsidiary has been duly authorized and is validly issued, fully paid and nonassessable and, except as indicated on Schedule A-1, is owned beneficially and of ------------ record by Seller or another subsidiary of Seller as indicated on Schedule -------- A-1. Except as provided in Schedule A-1, there are no (i) rights, --- ------------ subscriptions, warrants, options, conversion rights or agreements of any kind outstanding to purchase or otherwise acquire any shares of capital stock of any Subsidiary, or (ii) securities or obligations of any kind convertible into or exchangeable for any shares of capital stock of any Subsidiary, or (iii) obligations of any kind obligating Seller to sell or dispose of all or any part of Seller's ownership interest therein. The Subsidiaries listed on Schedule A-1 are, on the date hereof, the only ------------ subsidiaries of Seller that have any right or interest in, or title to the Facilities. (c) The board of directors of each Subsidiary and, if required, its shareholders, have duly and effectively authorized (i) the sale of the Transferred Assets to be sold by such Subsidiary and (ii) the execution, delivery and performance of the Related Agreements (as defined in Section ------- 3.4) and all other agreements contemplated hereby and thereby to which such ---- Subsidiary is a party. No other corporate act or proceeding on the -52- part of any Subsidiary, its board of directors or its shareholders is necessary to authorize any Related Agreement or other agreement contemplated hereby and thereby or the transactions contemplated hereby and thereby. (d) The Related Agreements and all other agreements contemplated hereby and thereby to which any Subsidiary is a party will, as of each Scheduled Closing, have been duly executed and delivered by each such Subsidiary, and each such agreement, when executed and delivered, will constitute a valid and binding obligation of such Subsidiary, enforceable against such Subsidiary in accordance with its terms, except as it may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought. Section 3.3 Authority Relative to this Agreement. The execution, ------------------------------------ delivery and performance of this Agreement and all other agreements contemplated hereby and the consummation of the transactions contemplated hereby and thereby have been duly and effectively authorized by the board of directors of Seller; no other corporate act or proceeding on the part of Seller, its board of directors or its shareholders is necessary to authorize this Agreement, any such other agreement or the transactions contemplated hereby and thereby. This Agreement has been, and each of the other agreements contemplated hereby will, as of each Scheduled Closing, have been, duly executed and delivered by Seller, and this Agreement constitutes, and each such other agreement when executed and delivered will constitute, a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as it may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought. Section 3.4 Absence of Breach. Subject to the provisions of Sections ----------------- -------- 3.5 and 3.6 below regarding private party and governmental consents, and --- --- except for compliance with the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and any ------- regulatory or licensing Laws applicable to the businesses -53- and assets represented by the Transferred Assets, the execution, delivery and performance by Seller of this Agreement and all other agreements contemplated hereby or executed in connection herewith (not including the Subsequent Facilities Agreement, the "Related Agreements"), and the ------------------ execution and delivery by any Subsidiary of the Related Agreements to which it is a party, and the performance by the Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements entered into by the Subsidiaries, do not, (a) conflict with or result in a breach of any of the provisions of the Articles or Certificates of Incorporation or Bylaws or similar charter documents (the "Charter Documents") of Seller or of any ----------------- of the Subsidiaries, (b) contravene any Law or cause the suspension or revocation of any License presently in effect, which affects or binds Seller or any of the Subsidiaries, or any of their properties, except where such contravention, suspension or revocation will not have a Material Adverse Effect (as defined below) on the Transferred Assets and will not affect the validity or enforceability of this Agreement and the Related Agreements or the validity of the Transactions contemplated hereby and thereby, or (c) conflict with or result in a breach of or default (with or without notice or lapse of time or both) under any indenture or loan or credit agreement or any other agreement or instrument to which Seller or any of the Subsidiaries is a party or by which it or they or any of their properties may be affected or bound, the effect of which conflict, breach, or default, either individually or in the aggregate, would be a Material Adverse Effect on the Transferred Assets. As used herein, a "Material -------- Adverse Effect": (x) when used with respect to the Transferred Assets, -------------- means a material adverse effect on the Transferred Assets and on the businesses operated therefrom, including their condition (financial or otherwise) and results of operations, taken as a whole; (y) when used with respect to any portion of the Transferred Assets (including, without limitation, a Facility), means a material adverse effect on such portion of the Transferred Assets and on the businesses operated therefrom, including their condition (financial or otherwise) and results of operations, taken as a whole; and (z) when used with respect to an entity, such as Seller, a Subsidiary or Buyer, means a material adverse effect on the business, condition (financial or otherwise) and results of operations of such entity taken as a whole (including any subsidiaries of such entity). Section 3.5 Private Party Consents. Except as set forth in Schedule ---------------------- -------- 3.5, the execution, delivery and performance by Seller of this Agreement --- and the Related Agreements, and the execution and delivery by any Subsidiary of the Related Agreements to which it is a party, and the -54- performance by the Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements to be performed by the Subsidiaries, do not require the authorization, consent or approval of any non- governmental third party of such a nature that the failure to obtain the same would have a Material Adverse Effect on the Transferred Assets or a Facility. Section 3.6 Governmental Consents. The execution, delivery and --------------------- performance by Seller of this Agreement and the Related Agreements, and the execution and delivery by any Subsidiary of the Related Agreements to which it is a party, and the performance by the Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements to be performed by the Subsidiaries, do not require the authorization, consent, approval, certification, license or order of, or any filing with, any court or governmental agency of such a nature that the failure to obtain the same would have a Material Adverse Effect on the Transferred Assets or a Facility, except for compliance with the HSR Act and except for such governmental authorizations, consents, approvals, certifications, licenses and orders that customarily accompany the transfer of health care facilities such as the Facilities. Section 3.7 Brokers. Except as shown on Schedule 3.7, no broker, ------- ------------ finder, or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with this Agreement or the Transactions contemplated hereby based upon any agreements or arrangements or commitments, written or oral, made by or on behalf of Seller or any of its Affiliates. Seller shall be solely responsible for the payment of any such fee or commission to any person or entity listed on Schedule 3.7 as an ------------ exception to the foregoing. Section 3.8 Title to Property. ----------------- (a) Each Subsidiary has good and defensible title, or valid and effective leasehold rights in the case of leased property, to all tangible personal property included in the Transferred Assets to be sold, conveyed, assigned, transferred and delivered to Buyer by such Subsidiary, free and clear of all liens, charges, claims, pledges, security interests, equities and encumbrances of any nature whatsoever, except for those created or allowed to be suffered by Buyer and except for the following (individually and collectively, the "Permitted Encumbrances"): (i) the lien of current ---------------------- taxes not delinquent, (ii) liens listed on Schedules 3.8(a) and 3.8(b), --------------------------- (iii) the -55- Assumed Liabilities, (iv) such consents, authorizations, approvals and licenses referred to in Sections 3.5 and 3.6, and (v) liens, charges, ------------ --- claims, pledges, security interests, equities and encumbrances which will be discharged or released either prior to, or substantially simultaneously with, the Scheduled Closing at which such property is sold, conveyed, assigned and transferred to Buyer and other possible minor matters that in the aggregate are not substantial in amount and do not materially detract from or interfere with the present or intended use of such property. All such tangible personal property is in good operating condition and repair, subject to ordinary wear and tear and ordinary and routine maintenance, and is reasonably adequate for the operation of the Facilities as they are presently operated. (b) Except as set forth on Schedule 3.8(b), and except for the --------------- Owned Real Property and the Leased Real Property, no Subsidiary owns any fee or leasehold or other interests in any real property used in and necessary for the conduct of the operations of any Facility as presently conducted. Each Subsidiary has good and marketable title to all Owned Real Property, or valid and effective leasehold rights in the case of the Leased Real Property, included in the Transferred Assets to be sold, conveyed, transferred and delivered to Buyer by such Subsidiary, free and clear of all liens except for those created or allowed to be suffered by Buyer and except for the following: (i) Permitted Encumbrances, (ii) liens (not including liens for borrowed money or the deferred purchase price of property) that do not materially impair the use of the Owned Real Property subject thereto, as such Owned Real Property is being used on the date hereof, (iii) easements and similar encumbrances disclosed by current standard ALTA Preliminary Title Reports, delivered to and approved by Buyer prior to the date hereof (except for such easements or similar encumbrances shown on Schedule 8.7(b)), and (iv) zoning, set back, building and other --------------- similar restrictions including, without limitation, restrictions and requirements affecting the Owned Real Property and the Leased Real Property imposed by deeds, leases, development agreements, declarations, and redevelopment authorities, which are not being violated in any manner that would cause a Material Adverse Effect on any Facility as currently used and operated. The condition of the Owned and Leased Real Property is such that it will not materially adversely affect the operations of the Transferred Assets on or from such Owned and Leased Real Property. All of the improvements on land included in the Transferred Assets are in good condition and repair, subject to those matters disclosed in Section 3.16 or ------------ Schedule 3.16, ordinary wear and tear and ------------- -56- ordinary and routine maintenance, and in view of the purpose for which such improvements are being used, free of any material structural or engineering defects. Section 3.9 Assumed Contracts. Except for such matters that, when ----------------- viewed in the aggregate, do not have a Material Adverse Effect on a Facility, (a) there is no liability to any person by reason of the default by Seller or a Subsidiary under any Assumed Contract, (b) neither Seller nor any Subsidiary has received written or other notice that any person intends to cancel or terminate any Assumed Contract, (c) all of the Assumed Contracts are in full force and effect and without any material default by any party or to the knowledge of Seller and the Subsidiaries, any event which, with the passage of time or the giving of notice or both would be such a material default, (d) subject to the provisions of Sections 3.5 and ------------ 3.6, the consummation of the transactions contemplated by this Agreement --- will not constitute and, to the best of Seller's current actual knowledge, no event has occurred which, with or without the passage of time or the giving of notice or both, would constitute a material breach or default by Seller or a Subsidiary of such Assumed Contract, or would cause the acceleration of any obligation of Seller or any Subsidiary or the creation of any lien (except for Permitted Encumbrances) upon any Transferred Asset, and (e) neither Seller nor any Subsidiary has waived any right under any Assumed Contract; provided that Seller makes no separate representation or -------- warranty under this Section 3.9 respecting compliance with the provisions ----------- of any Assumed Contract related to title to or condition of property, licenses, environmental conditions, hazardous substances or environmental laws, taxes, or compliance with laws generally, it being the intent of the parties that warranties respecting such matters shall be made exclusively under the provisions of Sections 3.8, 3.10, 3.16, 3.20, and 3.25. Seller ------------ ---- ---- ---- ---- has previously delivered to Buyer true and complete copies of all written Assumed Contracts except where the failure to so deliver a copy thereof will not have a Material Adverse Effect on a Facility. Section 3.10 Licenses. Except as set forth on Schedule 3.10, (a) the -------- ------------- Subsidiaries possess all Licenses necessary for their operation of the Facilities at the locations and in the manner presently operated (other than such Licenses the absence of which would not have a Material Adverse Effect on a Facility), (b) if required, such Facilities are accredited by applicable accrediting agencies as necessary for their operations in the manner presently operated, and (c) such Facilities are certified for participation in the Medicare program and have current and valid provider -57- contracts with such program. Schedule 3.10 lists each License held by a ------------- Subsidiary and related to the ownership or operation of a Facility and a true and correct copy of each has previously been delivered to Buyer by Seller (other than such Licenses the absence of which would not have a Material Adverse Effect on a Facility). All such Licenses are in full force and effect. Section 3.11 U.S. Person; Resident of Georgia. Neither Seller nor -------------------------------- any Subsidiary is a "foreign person" for purposes of Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code"), or any other Laws ---- requiring withholding of amounts paid to foreign persons. For purposes of the withholding tax imposed by Section 48-7-128 of the Official Code of Georgia Annotated, each Subsidiary that owns Transferred Assets constituting Owned Real Property located in Georgia and related tangible personal property is a corporation the principal place of business of which is located in the State of Georgia. The Seller shall, or shall cause the relevant Subsidiaries to, provide an appropriate affidavit of each such Subsidiary's residence. Seller acknowledges that jurisdictions other than Georgia may impose withholding obligations similar to those imposed by Georgia and that it is Seller's obligation to provide evidence of exemptions from such withholding taxes. Section 3.12 Employee Relations. With respect to the Retained ------------------ Employees, except as set forth on Schedule 3.12: ------------- (a) Neither Seller, nor any Subsidiary nor any Facility is a party to any agreement with any union, trade association or other similar employee organization, no written demand has been made for recognition by a labor organization, and to Seller's knowledge it has received no notice of any union organizing activities by or with respect to any such employees; (b) There are no controversies (including, without limitation, any unfair labor practice complaints, labor strikes, arbitrations, disputes, work slowdowns or work stoppages) pending, or to the best of Seller's current actual knowledge, threatened, which could have a Material Adverse Effect on any Facility; and (c) Each Subsidiary has been and is in material compliance with all federal and state laws respecting employment and employment practices, terms and conditions of employment, and wages and hours -58- (including, but not limited to, the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, as amended, the Occupational Safety and Health Act, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990 and the Family and Medical Leave Act). Section 3.13 Employee Plans. -------------- (a) With respect to each Multiemployer Plan, there has occurred no "complete withdrawal" or "partial withdrawal," as each is defined in Sections 4203 and 4205, respectively, of ERISA, and all payments required to be made to such Multiemployer Plans by a Subsidiary under any collective bargaining agreement have been made. (b) Neither Buyer nor any Buyer Subsidiary shall have any obligation or liability to Seller, any Subsidiary or any present or former employee of any of them for or with respect to any benefit plan, employee benefit plan or employee health or welfare program or other Employee Benefit Arrangements (as defined in Section 3.26(c)), except for --------------- specifically listed Assumed Liabilities and other express obligations of Buyer and the Buyer Subsidiaries under this Agreement. Section 3.14 Litigation. Except for (a) matters associated with or ---------- within the scope of the significant legal proceedings and investigations of an unusual nature referred to in Seller's filings with the Securities and Exchange Commission (the "Unusual Proceedings"), (b) ordinary routine ------------------- claims and litigation incidental to the businesses represented by the Facilities (including, but not limited to, actions for negligence, professional malpractice, workers' compensation claims, so-called "slip- and-fall" claims and the like), (c) governmental inspections and reviews customarily made of businesses such as those operated from the Facilities, and (d) as set forth on Schedule 3.14, there are no actions, suits, claims ------------- or proceedings pending, or to the knowledge of Seller or any Subsidiary, threatened against or affecting the Transferred Assets or relating to the operations of the Facilities, at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, agency or instrumentality. The claims and litigation referred to in clause ------ (b) above are covered by insurance currently maintained by Seller except --- where the failure to be so covered (i) would not have a Material Adverse Effect on any Facility or (ii) is of a nature that is not ordinarily subject to insurance coverage (e.g., demands for punitive damages). ---- Neither Seller nor any Subsidiary is in default under any judgment, order or decree of any governmental agency -59- or authority applicable to the conduct of the business conducted at the Facilities. Except as disclosed on Schedule 3.14, there is no condemnation ------------- proceeding pending or, to the knowledge of Seller or any Subsidiary, threatened against any of the Owned or Leased Real Property. Schedule 3.14 ------------- includes an accurate and complete list of each malpractice claim or lawsuit pending or to Seller's or any Subsidiary's knowledge, threatened against any Facility or Subsidiary. Section 3.15 Inventory. All Inventory included in the Transferred --------- Assets and included in the Net Book Values will consist of a quality and quantity usable and salable in the ordinary course of business, except for items of obsolete materials and materials of below-standard quality at any given Facility, all of which in the aggregate are immaterial to the financial condition or results of operations of the businesses operated from such Facility taken as a whole, or have been, or prior to the relevant Scheduled Closing will be, written down to realizable market value. Section 3.16 Hazardous Substances. To Seller's and the Subsidiaries' -------------------- knowledge, except as disclosed by the Environmental Survey (as defined in Section 6.2(b)) or otherwise on Schedule 3.16: -------------- ------------- (a) There has not been a Release of Hazardous Material on or otherwise affecting the Owned Real Properties or the Leased Real Properties, (other than Releases involving de minimis quantities of Hazardous Materials) that would: (i) constitute a violation of any Environmental Law by Seller or the Subsidiaries, or by any third party if the effect of such violation by such third party imposes a remediation obligation on the part of Seller or any Subsidiary; (ii) trigger any release-reporting obligations of Seller or the Subsidiaries under any Environmental Law; or (iii) trigger any clean-up or remediation obligations or Seller or the Subsidiaries under any Environmental Law; (b) Seller and the Subsidiaries have complied with and currently are in compliance in all material respects with all Environmental Laws that govern the Owned Real Properties, the Leased Real Properties, and the businesses operated from any such properties; (c) Seller and the Subsidiaries have obtained all material Licenses required under the Environmental Laws for operation of their businesses related to the Owned Real Properties and the Leased Real Properties, have complied with and currently are in compliance in all -60- material respects with all such Licenses, and have not received any notice that: (i) any such existing License will be revoked; or (ii) any pending application for any new such License will be denied; (d) Seller and the Subsidiaries have not received any currently outstanding notice of any proceedings, action, or other claim or liability arising under any Environmental Laws (including, without limitation, notice of potentially responsible party status under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. (S)(S)9601 et seq. or any state counterpart) from any person or governmental agency regarding the Owned Real Properties, the Leased Real Properties, or the businesses operated from such properties; (e) Neither Seller nor any Subsidiary has received any currently outstanding notice, which notice is specifically directed to an Owned or Leased Real Property (rather than to all property owners or operators in a given geographic area), that any of the Owned Real Properties or any of the Leased Real Properties is the subject of a material deed restriction, material title-transfer restriction, other material land-use restriction, or material lien arising in each case under any Environmental Law; (f) Neither the Owned Real Properties, the Leased Real Properties, nor any of the businesses conducted on any such properties is the subject of any outstanding order, decree, or agreement with or involving any governmental agency, court, or other party respecting any material aspect of the operation of such properties and businesses that relates to or arises under any Environmental Law (other than orders, decrees or agreements affecting or directed to the healthcare industry generally, or in the case of Leased Real Properties, lease agreements requiring compliance with applicable Environmental Law); (g) No portion of the Owned Real Properties or Leased Real Properties contains or has ever contained any underground storage tank, surface impoundment or similar device used for the management of wastewater, or other waste management unit dedicated to the disposal, treatment, or long-term (greater than 90 days) storage of waste materials; and (h) Neither Seller, any Subsidiary nor any other person has improperly disturbed or encroached upon any floodplain areas, waters, or -61- wetlands associated with any of the Owned Real Properties or Leased Real Properties in violation of any Environmental Law. Section 3.17 Financial Information. --------------------- (a) Attached hereto as Schedule 3.17(a) is an unaudited ---------------- statement of combined earnings from the operations of the Transferred Assets and Assumed Liabilities of the First Facilities and Subsequent Facilities (as they were comprised on the as of date of such Schedule) before interest, income taxes, depreciation and amortization ("EBITDA") ------ for the fiscal year ended May 31, 1993 and for the fiscal period ended November 30, 1993 (collectively, the "EBITDA Statements"). The EBITDA ----------------- Statements present fairly the combined EBITDA of such operations, taken as a whole, as of the dates and for the periods shown, and were derived from and are in accordance with the internal books and records of the Subsidiaries as well as the "Subsidiaries" defined in the Subsequent Facilities Agreement (the "Combined Subsidiaries") and the regularly --------------------- prepared unaudited internal financial statements of the First Facilities and the Subsequent Facilities, which are prepared in accordance with the generally accepted accounting principles utilized in the preparation of the published financial statements of Seller. (b) Attached hereto as Schedule 3.17(b) is an internally ---------------- prepared unaudited combined statement of certain assets and liabilities of the First Facilities and the Subsequent Facilities as of November 30, 1993 (the "Balance Sheet"; collectively, the Balance Sheet and the EBITDA ------------- Statements are the "Financial Schedule"). The Balance Sheet has been ------------------ prepared from, and is in accordance with, the internal books and records of the Combined Subsidiaries and presents fairly the financial condition of the First Facilities and the Subsequent Facilities with respect to the Transferred Assets and Assumed Liabilities that are the subject of this Agreement and the Subsequent Facilities Agreement, taken as a whole, as of the date shown. The Balance Sheet was prepared in accordance with Seller's practices for the preparation of internal financial statements, consistently applied, and is in accordance with the generally accepted accounting principles utilized in the preparation of the published financial statements of Seller. (c) Notwithstanding the foregoing, (i) the Financial Schedule does not (A) reflect all intercompany eliminations, adjustments and accruals that are reflected in financial statements of Seller, (B) reflect any reserves -62- for the Unusual Proceedings, (C) reflect any anticipation of the divestiture of the Transferred Assets that are the subject of this Agreement and the Subsequent Facilities Agreement and any adjustments to the carrying values of such assets occasioned thereby, (D) contain footnotes or other explanatory material associated with financial statements prepared in accordance with generally accepted accounting principles, or (E) contain normal year-end adjustments with respect to interim periods, (ii) the EBITDA Statements do not reflect allocations of indirect costs and non-hospital overhead or the corresponding cost reimbursement impact of claiming such costs in a Cost Report relating to First Facilities or Subsequent Facilities, and (iii) certain earnings, assets and liabilities have been excluded from the EBITDA Statements or the Balance Sheets, as applicable, as noted in the footnotes or other explanatory material associated with the Financial Statements. In addition, the Financial Schedule is to be read in conjunction with, and is subject to, all notes and other explanatory material set forth therein. (d) The Balance Sheet reflects the amount of Receivables, as well as "Receivables" as defined in the Subsequent Facilities Agreement (together, the "Combined Receivables"), which for this purpose may include -------------------- Eligible Receivables (including "Eligible Receivables" as defined in the Subsequent Facilities Agreement) as of the date thereof, net of allowances customarily recorded by the Combined Subsidiaries for uncollectible and doubtful accounts, and contractual allowances pursuant to agreements with Payors, all in conformity with Seller's practices for the preparation of internal financial statements and in accordance with the generally accepted accounting principles utilized in the preparation of the published financial statements of the Seller. To the knowledge of Seller and each such Subsidiary, all such Combined Receivables included in the Balance Sheet represent amounts validly owed to the applicable Combined Subsidiary by reason of the provision of goods, services and other consideration by such Combined Subsidiary, and, to the knowledge of Seller and each such Combined Subsidiary, are not valued in excess of the amounts expected to be collected with respect thereto. Each such Combined Subsidiary maintains its accounting records in sufficient detail to substantiate the Combined Receivables reflected on the Balance Sheet. Since the date of Seller's most recent audited financial statements, neither Seller nor any such Combined Subsidiary has changed any principle or practice with respect to the recordation of accounts receivable or the calculation of reserves therefor, or any material collection, discount or write-off policy or procedure. -63- Section 3.18 Changes Since Balance Sheet. Since the date of the --------------------------- Balance Sheet and up to and including the date of this Agreement, other than as contemplated or permitted by this Agreement, the Subsidiaries have conducted the businesses represented by the Transferred Assets only in the ordinary and normal course, except for (i) matters associated with the Unusual Proceedings, (ii) as shown on Schedule 3.18, (iii) the institution ------------- or completion of compliance programs, or (iv) events in anticipation of the divestiture of the Transferred Assets, and there has not been: (a) Any entry into or termination by Seller or a Subsidiary of any material commitment, contract, agreement or transaction (including, without limitation, any borrowing or lending transaction or capital expenditure) related to the Transferred Assets except for transactions in the ordinary course of business and renegotiation of credit agreements to which Seller and certain of its subsidiaries are parties which renegotiations will not have a Material Adverse Effect on the Transferred Assets or on any Facility; (b) Any casualty, physical damage, destruction or physical loss respecting, or change in the physical condition of, any Facility or Equipment that has had a Material Adverse Effect on a Facility; (c) Any transfer of or rights granted under any contract which would have been an Assumed Contract on the date of the Balance Sheet except for transactions in the ordinary course of business; (d) Other than in the ordinary course of business, (i) any sale or other disposition of any fixed asset included in the Balance Sheet having a net book value in excess of $100,000, or (ii) any material mortgage, pledge or imposition of any lien or other encumbrances on any such asset, or (iii) sales or dispositions of, or the imposition of material encumbrances on, fixed assets included in such Balance Sheet having a net book value that exceeds $1,000,000 in the aggregate, or (iv) any sale or other disposition of Inventories included in the Balance Sheet; (e) Any material amendment (other than general amendments which the carrier makes for a category of policy) or termination of any material insurance policy or failure to renew any material insurance policy covering the Transferred Assets; -64- (f) Any default or breach by Seller or a Subsidiary under any contract that would have been an Assumed Contract on the date of the Balance Sheet which, when viewed individually or in the aggregate of all such breaches or defaults, has had a Material Adverse Effect on any Facility; (g) Any material adverse change in the trend of the business, financial condition or results of operations of any Facility as compared to the trend of the business, financial condition or results of operations, as applicable, of such Facility for the two year period ended November 30, 1993; or (h) Any increase made in the compensation levels of any chief executive officer or chief financial officer of any Facility, or any general increase made in the compensation levels of the other Retained Employees, except in the ordinary course of business. Section 3.19 Transferred Business Names. Seller or one of the -------------------------- Subsidiaries owns or has the right to use the Transferred Business Names, free of any liens. Schedule 2.1(h) sets forth for each Transferred --------------- Business Name, if any, that is the subject of a trademark registration the date of registration, the registration number and the expiration date. To the knowledge of Seller and the Subsidiaries, no aspect of registered trademarks included in the Transferred Business Names, if any, has been adjudged invalid or unenforceable or has been cancelled or revoked. Except as set forth on Schedule 3.19, to the knowledge of Seller and the ------------- Subsidiaries, the use by the Subsidiaries of the Transferred Business Names in connection with the Facilities does not conflict with or violate any valid rights of third parties, including any patents, trademarks, trade names or copyrights of others, in any way which would have a Material Adverse Effect on the Transferred Assets or a Facility; neither Seller nor any Subsidiary has received any notice of a conflict with the asserted rights of others in connection therewith which, if determined adversely, would have a Material Adverse Effect on any Facility. Neither Seller nor any of the Subsidiaries is obligated to pay any amount, whether as a royalty, license fee or other payment, to any person in order to use any of the Transferred Business Names. Section 3.20 Compliance with Laws and Accreditation. To Seller's and -------------------------------------- each Subsidiary's knowledge, Seller and each Subsidiary has complied in all material respects with all laws, regulations and orders, and as -65- materially required for participation in the Medicare, CHAMPUS and Medicaid reimbursement programs and is in material compliance with the indigent care conditions, if any, contained in or related to certificates of need obtained by it except (a) as set forth in Schedule 3.20, (b) as described ------------- in Sections 3.10, 3.12, 3.16, and 3.21 and the Schedules, if any related ------------- ---- ---- ---- --------- thereto, and (c) for matters related to the Unusual Proceedings. With respect to each Facility, Seller has previously delivered to Buyer true and complete copies of the most recent Joint Commission on Accreditation of Health Care Organizations ("JCAHO") accreditation survey report and deficiency list, if any; the most recent Statement of Deficiencies and Plan of Correction on Form HCFA-2567; the most recent state licensing report and list of deficiencies, if any; the most recent fire marshall's survey and deficiency list, if any; and the corresponding plans of correction or other responses except, in each case, such surveys, reports or deficiency lists which do not reflect any deficiency which would have a Material Adverse Effect on any Facility. Seller or the relevant Subsidiary has taken or is in the process of taking all reasonable steps to correct all material deficiencies noted therein and a description of any material uncorrected deficiency is listed in Schedule 3.20. There are no provisions in, or other ------------- agreements to which Seller or a Subsidiary is a party relating to any Licenses, which would preclude or limit Buyer from operating the Transferred Assets substantially as they are now operated and using the beds of any Facility substantially as they are currently classified. Section 3.21 Cost Reports, Third Party Receivables and Conditions of ------------------------------------------------------- Participation. The Cost Reports of the Facilities for Medicare, Medicaid ------------- (if required) and Blue Cross (if required) reimbursement have been audited through the periods set forth in Schedule 3.21, and Blue Cross and Medicare ------------- Cost Reports of the Facilities were filed when due. Except for matters related to the Unusual Proceedings, and as set forth in Schedule 3.21: to ------------- the knowledge of Seller, (a) neither Seller nor any Subsidiary has received notice of any material dispute between a Facility and Blue Cross, governmental authorities or the Medicare fiscal intermediary regarding such Cost Reports for periods subsequent to the period specified in Schedule -------- 3.21 other than with respect to adjustments thereto made in the ordinary ---- course of business which do not involve individual amounts in excess of ten thousand dollars ($10,000) per Cost Report; (b) there are no pending or threatened material claims by any of such programs against any Facility; (c) each Facility currently meets, without material exception, the conditions for participation in the Medicare program; and (d) no Facility has been subject -66- to loss of waiver of liability for utilization review denials with respect to any such program during the past two years. Section 3.22 Medical Staff. Seller has previously delivered to ------------- Buyer, with respect to each Facility, a true and correct copy of the blank forms generally used with respect to medical staff privilege and membership application or delineation of privilege; all current medical staff bylaws, rules and regulations and amendments thereto respecting Facilities; and all written contracts with physicians, physician groups, or other members of the medical staffs of the Facilities. With regard to the active medical staffs of the Facilities, there are no material pending or threatened disciplinary or corrective actions or appeals therefrom involving physician applicants or active medical staff members except as set forth in Schedule -------- 3.22. Schedule 3.22 also sets forth a materially complete and accurate list ---- ------------- and description of (a) the name of each member of the medical staff of each Facility as of the date shown on such Schedule, (b) the approximate age of each active medical staff member as of such date, (c) the specialty, if any, of each medical staff member, (d) readily available reports regarding the number of patient admissions of each medical staff member for the period shown on such Schedule 3.22, and (e) readily available reports ------------- regarding the aggregate patient days of patients admitted by each medical staff member for the period shown on such Schedule 3.22. ------------- Section 3.23 Hill-Burton Care. Except as set forth in Schedule 3.23, ---------------- ------------- no Subsidiary or Facility has an outstanding loan, grant or loan guarantee pursuant to the Hill-Burton Act (42 U.S.C. (S)291a, et seq.) and the transactions contemplated hereby will not result in any obligation on the part of the Buyer or a Buyer Subsidiary to repay any such loans, grants or loan guarantees or provide uncompensated care in consideration thereof. Section 3.24 Assets Used in the Operation of the Facilities. There ---------------------------------------------- are no assets or properties that are used in and necessary for the conduct of the operations of the Facilities that are owned by Seller and the Subsidiaries, and which individually or in the aggregate, are necessary for the operation of the Facilities that are not included in the Transferred Assets except for such Assumed Contracts which Buyer has elected or will elect to reject pursuant to Section 2.18. Except as set forth in Schedule ------------ -------- 3.24 and subject to Section 2.18, the Transferred Assets include all assets ---- ------------ and properties that are properly recordable on the Balance Sheet, other than assets and properties disposed of by the Seller or a Subsidiary in the -67- ordinary course of business since the date of the Balance Sheet and without violation of this Agreement. Section 3.25 Taxes. All tax returns of every kind (including, ----- without limitation, returns of all income taxes, franchise taxes, real and personal property taxes, intangibles taxes, patient revenue or other healthcare taxes, withholding taxes, employee compensation taxes and all other taxes of any kind applicable to Seller or any Subsidiary) that are due to have been filed in accordance with applicable laws have been duly filed, and all taxes shown to be due and payable on such returns have been paid in full. Section 3.26 Lists of Other Data. Schedule 2.1(f) contains a list, ------------------- --------------- materially complete and correct as of the dates shown thereon, of the Other Assigned Contracts, and Schedules 3.26(a) through (h) contain lists or ----------------- --- other information, materially complete and correct as of the dates shown thereon, of the following: (a) The most recent regularly generated depreciation schedules related to tangible personal property constituting Equipment, together with copies of such schedules; (b) A brief description of all insurance in force covering (i) fixed assets that would constitute Transferred Assets, or (ii) the operations of any Facility as of such date; (c) All compensation, bonus, incentive, deferred payments, retirement, pension, severance, profit-sharing, stock purchase and stock option plans, group life, automobile, medical, dental, disability, welfare or other employee benefit plans or insurance policies, and other similar arrangements (collectively, "Employee Benefit Arrangements") generally ----------------------------- applicable to the Retained Employees or a substantial part thereof or generally applicable to the chief executive or chief financial officers, or a substantial part thereof, of the Facilities as of such date; (d) The aggregate accrued Paid Time Off for all employees at each Facility, as of the date shown; (e) Any contract relating to clean-up, abatement or other actions in connection with the remediation of any existing environmental liabilities or relating to the performance of any environmental audit or study -68- with respect to the Facilities other than with respect to the Environmental Survey and entered into in the three years preceding the date hereof; (f) Any indenture, mortgage, loan, credit or other written contract under which any of the Subsidiaries, directly or indirectly, is indebted for money borrowed or is the issuer of any note, bond, indenture or other evidence of indebtedness for money borrowed or guarantor of similar financial obligations of others, whether or not reflected on the Balance Sheet; (g) Any contract with any bank, finance company or similar organization pursuant to which such organization acquires receivables from the Subsidiaries; and (h) Any contract granting any person a lien, security interest or mortgage on any Transferred Asset (other than Permitted Encumbrances), including, without limitation, any factoring agreement or agreement for the assignment of accounts receivable or inventory. Section 3.27 Certain Transactions. Except as set forth in Schedule -------------------- -------- 3.27, and except for remuneration as employees, since November 30, 1992 (i) ---- no Facility has been a party to any transaction or series of similar transactions in which the amount involved exceeds $60,000 and in which the chief executive officer, chief financial officer or medical director of such Facility has a direct or indirect material interest, and (ii) no chief executive officer, chief financial officer or medical director of any Facility has been indebted to Seller or any Subsidiary in an amount in excess of $60,000. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller, as of the date hereof, as follows, except as set forth in Schedules numbered in relation to the Sections set forth below: Section 4.1 Organization and Corporate Power. Buyer is a corporation -------------------------------- duly incorporated and validly existing under the laws of, and is authorized to exercise its corporate powers, rights and privileges and is in good standing in, the State of Delaware and has full corporate power to carry on its business as presently conducted and to own or lease and operate -69- its properties and assets now owned or leased and operated by it and to perform the transactions on its part contemplated by this Agreement and all other agreements contemplated hereby. Section 4.2 Buyer Subsidiaries. ------------------ (a) As of each Scheduled Closing, each Buyer Subsidiary will be a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Each Buyer Subsidiary will have, at the First Closing and at each Scheduled Closing thereafter, all requisite power and authority (corporate and otherwise) to carry on its business as then conducted and to own or lease and operate its properties and assets then owned or leased and operated by it and to perform the transactions on its part contemplated by this Agreement and all other agreements contemplated hereby. (b) The board of directors of each Buyer Subsidiary and, if required, its shareholders, will have, by the date of the First Closing, duly and effectively authorized (i) the purchase of the Transferred Assets to be purchased by such Buyer Subsidiary; and (ii) the execution, delivery and performance of the Related Agreements and all other agreements contemplated hereby and thereby to which such Buyer Subsidiary is a party. No other corporate act or proceeding on the part of any Buyer Subsidiary, its board of directors or its shareholders will be necessary to authorize any Related Agreement or other agreement contemplated hereby and thereby or the transactions contemplated hereby and thereby. (c) The Related Agreements and all other agreements contemplated hereby and thereby to which any Buyer Subsidiary is a party will, as of each Scheduled Closing, have been duly executed and delivered by each such Buyer Subsidiary, and each such agreement, when executed and delivered will constitute, a valid and binding obligation of such Buyer Subsidiary, enforceable against such Buyer Subsidiary in accordance with its terms, except as it may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought. -70- Section 4.3 Authority Relative to this Agreement. The execution, ------------------------------------ delivery and performance of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and effectively authorized by the board of directors of Buyer; no other corporate act or proceeding on the part of Buyer, its board of directors or shareholders is necessary to authorize this Agreement, any such Related Agreement or the transactions contemplated hereby and thereby. This Agreement has been, and each of the Related Agreements contemplated hereby will, as of each Scheduled Closing, have been, duly executed and delivered by Buyer and by each applicable Buyer Subsidiary, and this Agreement constitutes, and each such Related Agreement when executed and delivered will constitute, a valid and binding obligation of Buyer and each Buyer Subsidiary party thereto, enforceable against Buyer and each Buyer Subsidiary party thereto, in accordance with its terms, except as it may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought. Section 4.4 Absence of Breach. Subject to the provisions of Sections ----------------- -------- 4.5 and 4.6 below regarding private party and governmental consents, and --- --- except for compliance with the requirements of the HSR Act and any regulatory or licensing Laws applicable to the businesses and assets represented by the Transferred Assets, the execution, delivery and performance by Buyer of this Agreement and the Related Agreements, and the execution and delivery by any Buyer Subsidiary of the Related Agreements to which it is a party, and the performance by the Buyer Subsidiaries of the transactions to be performed by them and contemplated by this Agreement and the Related Agreements entered into by the Buyer Subsidiaries, do not, (a) conflict with or result in a breach of any of the provisions of Charter Documents of Buyer or of any of the Buyer Subsidiaries, (b) contravene any Law or cause the suspension or revocation of any License presently in effect, which affects or binds Buyer or any of the Buyer Subsidiaries or any of their material properties, or (c) conflict with or result in a breach of or default under any indenture or loan or credit agreement or any other agreement or instrument to which Buyer or any of the Buyer Subsidiaries is a party or by which it or they or any of their properties may be affected or bound. -71- Section 4.5 Private Party Consents. Except as set forth on Schedule ---------------------- -------- 4.5, the execution, delivery and performance by Buyer of this Agreement and --- the Related Agreements and the execution and delivery by any Buyer Subsidiary of the Related Agreements to which it is a party, and the performance by the Buyer Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements to be performed by the Buyer Subsidiaries, do not require the authorization, consent or approval of any non-governmental third party. Section 4.6 Governmental Consents. The execution, delivery and --------------------- performance by Buyer of this Agreement and the Related Agreements, and the execution and delivery by any Buyer Subsidiary of the Related Agreements to which it is a party, and the performance by the Buyer Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements to be executed, delivered or performed by the Buyer Subsidiaries, do not require the authorization, consent, approval, certification, license or order of, or any filing with, any court or governmental agency, except for compliance with the HSR Act and except for such governmental authorizations, consents, approvals, certifications, licenses and orders that customarily accompany the transfer of health care facilities such as the Facilities. Section 4.7 Brokers. Except as set forth on Schedule 4.7, no broker, ------- ------------ finder, or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with this Agreement or the transactions contemplated hereby based upon any agreements or arrangements or commitments, written or oral, made by or on behalf of Buyer or any of its Affiliates. Buyer shall be solely responsible for the payment of any such fee or commission to any person or entity listed on Schedule 4.7 as an ------------ exception to the foregoing. Section 4.8 Qualified for Licenses. Buyer or a Buyer Subsidiary is ---------------------- qualified to obtain any Licenses and program participations necessary for the operation by Buyer or a Buyer Subsidiary of the Transferred Assets as of the relevant Scheduled Closing in the same manner as the Transferred Assets are presently operated by Seller and the Subsidiaries. Section 4.9 Financial Ability to Perform. Buyer has liquid capital ---------------------------- or committed sources therefor sufficient to permit it to perform timely its obligations hereunder, including, but not limited to, the payment of the Tentative Purchase Price to Seller at the Scheduled Closings and the other -72- payments to Seller required hereunder. Promptly after its receipt of letters of commitment or other documents related to the financing of its obligations hereunder, Buyer will provide copies of the same to Seller. Section 4.10 No Knowledge of Seller's Breach. Neither Buyer nor, to ------------------------------- the knowledge of Buyer, any of its Affiliates has knowledge of any breach of any representation or warranty by Seller or of any other condition or circumstance that would excuse Buyer from its timely performance of its obligations hereunder. Buyer shall notify Seller as promptly as practicable if any such information comes to its attention before any relevant Closing Date. Section 4.11 No Assurance. Buyer acknowledges and agrees that the ------------ rates or bases used in calculating payments or reimbursements to it or a Buyer Subsidiary by any Payor (including but not limited to Medicare) may differ from the rates and bases used in calculating such payments or reimbursements to Seller and the Subsidiaries. In entering into the transactions contemplated by this Agreement and the Related Agreements, Buyer is relying solely on the express representations, warranties and covenants of Seller and the Subsidiaries contained in this Agreement and the Related Agreements and upon no other representations or statements of Seller, the Subsidiaries or any of their representatives, and acknowledges and agrees that nothing in this Agreement or the Related Agreements shall be deemed to create any implied duty, disclosure obligation or responsibility on the part of Seller or the Subsidiaries. Buyer further acknowledges that during the course of the due diligence investigation, material information related to the matters that are the subject of the Unusual Proceedings may not have been discovered by or disclosed to it. Seller represents and warrants that, at those scheduled confidential meetings held among counsel for Buyer and Seller on the dates referenced in Schedule 4.11, which meetings were held for the purpose of conducting ------------- Buyer's due diligence regarding the Unusual Proceedings, statements of fact concerning the Unusual Proceedings made by Seller's counsel present at such meetings were not materially inaccurate. ARTICLE 5 COVENANTS OF EACH PARTY Section 5.1 Efforts to Consummate Transactions. Subject to the terms ---------------------------------- and conditions herein provided including, without limitation, Articles 8 ---------- and 9 hereof, each of the parties hereto agrees to use its reasonable - -73- commercial efforts to take, or to cause to be taken, all reasonable actions and to do, or to cause to be done, all reasonable things necessary, proper or advisable under applicable Laws to consummate and make effective, as soon as reasonably practicable, the Transactions contemplated hereby, including the satisfaction of all conditions thereto set forth herein. Such actions shall include, without limitation, exerting their reasonable efforts to obtain the consents, authorizations and approvals of all private parties and governmental authorities whose consent is reasonably necessary to effectuate the Transactions contemplated hereby, and effecting all other necessary registrations and filings, including but not limited to filings under Laws relating to the transfer or obtaining of necessary Licenses, under the HSR Act and all other necessary filings with governmental authorities. Inasmuch as the Transactions in respect of the First Facilities may be consummated without regard to consummation of the transactions contemplated by the Subsequent Facilities Agreement, the parties hereby agree that, in order potentially to expedite the timing of the First Closing, the parties will make separate filings under the HSR Act with respect to the First Facilities. The foregoing notwithstanding, it shall be the responsibility of Buyer to use its reasonable commercial efforts and to act diligently and at its expense to obtain any authorizations, approvals and consents in connection with acquiring Licenses and program participations that will permit it to operate the Facilities after the Scheduled Closings, provided that Buyer will seek to -------- obtain Licenses and program participations subject to the existing conditions under which the Subsidiaries operate the Facilities and will not seek to change the same until the Transferred Assets and Assumed Liabilities respecting the Facilities in question have been transferred to and assumed by Buyer. Seller and its Subsidiaries shall cooperate with Buyer's efforts to obtain the requisite regulatory consents, provided neither Seller nor any of its Subsidiaries shall be obligated to incur any liabilities or assume any obligations in connection therewith. Other than Buyer's and Seller's obligations under Section 5.5, neither party shall ----------- have any liability to the other if, after using its reasonable commercial efforts (and, in the case of Buyer's efforts to obtain requisite Licenses, acting diligently), it is unable to obtain any consents, authorizations or approvals necessary for such party to consummate the Transactions. As used herein, the terms "reasonable commercial efforts" or "reasonable efforts" ----------------------------- ------------------ do not include the provision of any consideration to any third party or the suffering of any economic detriment to a party's ongoing operations for the procurement of any such consent, authorization or approval except for the costs of gathering and supplying data or other information or making any filings, fees and -74- expenses of counsel and consultants and for customary fees and charges of governmental authorities and accreditation organizations. Section 5.2 Cooperation; Regulatory Filings. Prior to and after the ------------------------------- Final Closing, upon prior reasonable written request, each party agrees to cooperate with the other in every reasonable commercial way to consummate the Transactions. Notwithstanding the foregoing, all analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of either party hereto in connection with proceedings under or relating to the HSR Act or any other federal or state antitrust or fair trade law, or made or submitted by or on behalf of Buyer in connection with proceedings to obtain the Licenses and program participations referred to in Section 5.1 hereof, shall be subject to the ----------- joint approval or disapproval and the joint control of Buyer and Seller, acting with the advice of their respective counsel, it being the intent of the foregoing that the parties hereto will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any such analysis, presentation, memorandum, brief, argument, appearance, opinion or proposal; provided that nothing herein shall prevent -------- either party hereto or any of their Affiliates or their authorized representatives from (a) making or submitting any such analysis, appearance, presentation, memorandum, brief, argument, opinion or proposal in response to a subpoena or other legal process or as otherwise required by Law, or (b) submitting factual information to the United States Department of Justice, the Federal Trade Commission, any other governmental agency or any court or administrative law judge in response to a request therefor or as otherwise required by Law. Section 5.3 Further Assistance. From time to time, at the reasonable ------------------ request of either party, whether on or after a Scheduled Closing, without further consideration, either party, at its expense and within a reasonable amount of time after request hereunder is made, shall execute and deliver such further instruments of assignment, transfer and assumption and take such other action as may be reasonably required to more effectively assign and transfer the Transferred Assets to, and vest the Assumed Liabilities in, Buyer, deliver or make the payment of the Purchase Price to Seller or any amounts due from one party to the other pursuant to the terms of this Agreement or confirm Seller's ownership of the Excluded Assets and obligations with respect to the Excluded Liabilities. -75- Section 5.4 Cooperation Respecting Proceedings. After the Scheduled ---------------------------------- Closings, upon prior reasonable written request, each party shall cooperate with the other, at the requesting party's expense (but including only out- of-pocket expenses to third parties and not the costs incurred by any party for the wages or other benefits paid to its officers, directors or employees), in furnishing information, testimony and other assistance in connection with any inquiries, actions, tax or Cost Report audits, proceedings, arrangements or disputes involving either of the parties hereto (other than in connection with disputes between the parties hereto) and based upon contracts, arrangements or acts of Seller or any of the Subsidiaries which were in effect or occurred on or prior to any Scheduled Closing and which relate to the Transferred Assets, including, without limitation, arranging discussions with (and the calling as witness of) officers, directors, employees, agents, and representatives of Buyer. Section 5.5 Expenses. Whether or not the Transactions contemplated -------- hereby are consummated, except as otherwise provided in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. Notwithstanding the foregoing: (a) Costs associated with preliminary title reports and title policies shall be borne by Seller up to the costs that would have been incurred had the title policies been standard coverage policies of title insurance, and the remaining costs, if any, including costs for Extended Coverage and any surveys in connection therewith, shall be borne by Buyer; (b) All costs of the Environmental Survey referred to in Section ------- 6.2(b) shall be borne one-half by Buyer and one-half by Seller, other than ------ any cost incurred in connection with any "Phase II" investigation conducted by Buyer's environmental consultant (which shall be borne by Buyer); (c) All escrow charges, appraisal fees, and charges of any neutral independent public accountant or mediator, and related costs, shall be borne one-half by Buyer and one-half by Seller (it being agreed that each party shall bear the costs of its own independent public accountant or designated mediator); -76- (d) All recording costs and charges respecting real property will be borne one-half by Seller and one-half by Buyer; (e) All transfer taxes respecting real property will be borne one-half by Buyer and one-half by Seller; (f) All fees and expenses relating to the filings under the HSR Act shall be borne by the party incurring such fees and expenses; (g) All fees and charges of governmental authorities and accreditation agencies in connection with the transfer, issuance or authorization of any License, accreditation or program participation shall be borne by Buyer; (h) All fees or costs associated with the issuance of any bond or the establishment of any escrow required by Section 2.10(a) shall be --------------- borne by Buyer; (i) All fees, charges or costs (other than internal costs of Seller or any Subsidiary), including auditing fees and expenses, incurred as a result of Buyer's compliance with the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, and the rules and regulations thereunder, shall be borne by Buyer; (j) Out-of-pocket costs incurred by Seller and the Subsidiaries in connection with providing transitional assistance to Buyer shall be borne by Buyer, whether such assistance is provided before or after a Scheduled Closing, including costs associated with attendance at meetings requested by Buyer; (k) All liabilities or obligations of Seller or a Subsidiary for Taxes in the nature of sales taxes incurred as a result of the sale of the Transferred Assets hereunder to Buyer shall be borne one-half by Seller and one-half by Buyer; and (l) All fees, charges and costs of economists and other experts, if any, jointly retained by Buyer and Seller in connection with submissions made to any government agency and advice in connection therewith respecting approval of the Transactions, including proceedings under the HSR Act, will be borne one-half by Buyer and one-half by Seller. -77- All such charges and expenses shall be promptly settled between the parties at the relevant Scheduled Closing or upon termination or expiration of further proceedings under this Agreement, or with respect to such charges and expenses not determined as of such time, as soon thereafter as is reasonably practicable. Section 5.6 Announcements; Confidentiality. Prior to the Final ------------------------------ Closing Date, no press or other public announcement, or public statement or comment in response to any inquiry, relating to the transactions contemplated by this Agreement shall be issued or made by Buyer or Seller or any Subsidiary without the joint approval of Buyer and Seller; provided -------- that a press release or other public announcement, regulatory filing, statement or comment made without such joint approval shall not be in violation of this Section if it is made in order to comply with applicable securities Laws or stock exchange policies and in the reasonable judgment of the party making such release or announcement, based upon advice of counsel, prior review and joint approval, despite reasonable efforts to obtain the same, would prevent dissemination of such release or announcement in a timely enough fashion to comply with such Laws or policies, provided that in all instances prompt notice from one party to -------- the other shall be given with respect to any such release, announcement, statement or comment. Subject to the foregoing, the parties hereto recognize and agree that all information, instruments, documents and details concerning the businesses of Buyer, Seller and the Subsidiaries are strictly confidential, and Seller and Buyer expressly covenant and agree with each other that, prior to and after the Scheduled Closings, they will not, nor will they allow any of their respective officers, directors, employees, representatives or agents (including professional advisors) to disclose or publicly comment upon any matters relating to the business of the other or relating to this Agreement, including, without limitation, the terms, timing or progress of the transactions contemplated hereby, or its negotiation, terms, provisions or conditions, including Purchase Price, except for disclosure to their respective professional advisors and lenders or prospective financing sources (each of whom shall agree not to disclose the same) which is reasonably necessary to effectuate the Transactions contemplated hereby and in a manner consistent with the provisions of this Agreement. Each party shall keep all information (i) obtained from the other either before or after the date of this Agreement, or (ii) related to Buyer's proposed purchase of the Transferred Assets, Seller's proposed sale of the Transferred Assets, the contents of this Agreement or the negotiation of this Agreement confidential, and neither party shall reveal such information to, nor produce -78- copies of any written information for, any person outside its management group or its professional advisors (including lenders and prospective financing sources) without the prior written consent of the other party, unless such party is compelled to disclose such information by judicial or administrative process or by any other requirements of Law or disclosure is reasonably necessary to obtain a License or a consent listed on the Schedule of Required Consents. If the Transactions contemplated by this Agreement should fail to close for any reason, each party shall return to the other as soon as practicable all originals and copies of written information provided to such party by or on behalf of the other party and none of such information shall be used by either party, or their employees, agents or representatives in the business operations of any person. Notwithstanding the foregoing, (i) each party's obligations under this Section shall not apply to any information or document which is or becomes available to the public other than as a result of a disclosure by the other party in violation of this Agreement or other obligation of confidentiality under which such information may be held or becomes available to the party on a non-confidential basis from a source other than the other party or its officers, directors, employees, representatives or agents and (ii) without the prior written consent of Seller, or except as may be required by Law (as determined by the written opinion of independent counsel in form and substance satisfactory to Seller) the schedules to this Agreement shall not be disclosed to or filed with any person (including any governmental entity or regulatory board) if such filing or disclosure could result in such schedules becoming available to the public. The parties' obligations under this Section shall survive the termination of this Agreement. Nothing in this Section shall, or is intended to, impair or modify any of the rights or obligations of Buyer or its Affiliates under that certain letter agreement dated as of September 15, 1993, all of which remain in effect until termination of such letter agreement in accordance with its terms. Section 5.7 Preservation of and Access to Certain Records. --------------------------------------------- (a) As set forth in Section 2.2(e), all or any portion of the ------ medical, clinical and other records directly or indirectly associated with the admission, care and treatment of patients on or prior to the relevant Closing Date on which the relevant Facility is transferred (collectively, for all Facilities, the "Patient Records") and all financial and other --------------- records of, or located at, a Facility for the period ending on or prior to the relevant Closing Date, whether or not maintained at or by a Facility (the Patient Records and such other records for all Facilities are collectively referred to -79- as the "Hospital Records") shall be Excluded Assets. Notwithstanding the ---------------- foregoing, the parties will cooperate in providing copies and access to such records as set forth below. (b) Notwithstanding that the Hospital Records are Excluded Assets, to the extent required by applicable Law or at Seller's election, Seller may choose not to remove the Hospital Records from a transferred Facility or otherwise acquire possession of them after a Scheduled Closing. Unless and until removed by Seller, the Buyer shall, in accordance with applicable Laws, maintain the Hospital Records at the Facilities (or at such other mutually approved locations) at Buyer's cost, and as agent of and bailee for Seller, until the expiration of seven (7) years from the relevant Scheduled Closing (and, if at the expiration thereof any tax or Payor audit or judicial proceeding is in progress or the applicable statute of limitations has been extended, for such longer period as such audit or proceeding is in progress or such statutory period is extended)(the "Document Retention Period"). After a Scheduled Closing and subject to -------------------------- applicable Laws, Buyer shall grant Seller full access to the Hospital Records (including any Patient Records) as needed for any lawful purpose (including Seller's inspection and copying of same), and Seller shall have the same rights of access to inspect and copy (at Seller's cost) any or all of the Hospital Records that Seller had prior to the Scheduled Closing. Buyer shall instruct the appropriate employees of the Facilities to cooperate in providing access to such records to Seller and its authorized representatives as contemplated herein. Access to such records shall be, wherever reasonably possible, during normal business hours, with reasonable prior written notice to Buyer of the time when such access shall be needed. Seller's employees, representatives and agents shall conduct themselves in such a manner so that Buyer's normal business activities shall not be unduly or unnecessarily disrupted. After the expiration of the aforementioned Document Retention Period, Buyer shall not, without ninety- one (91) days' prior written notification to Seller, destroy any Hospital Records in its possession. Within ninety (90) days after its receipt of such notice of intent to destroy, Seller shall have the right, at its own expense, to require Buyer to deliver any such records to Seller in accordance with Seller's reasonable instructions. Buyer shall adopt a record retention policy with respect to the Hospital Records which requires that all Hospital Records be maintained for the Document Retention Period and destroyed only after compliance with the notice provisions of this Subsection (b) (including the passage of time), and shall take all -------------- reasonable steps necessary to inform its employees of such policy. -80- (c) Buyer acknowledges and agrees that Seller shall have the right to remove, and may remove, from time to time on or prior to the relevant Closing Date and during the Document Retention Period any or all of the Hospital Records. In the event of Seller's removal of any Hospital Records from a Facility, it shall, at Seller's cost and subject to applicable Laws, provide Buyer with copies (or originals, if required by applicable law or accreditation standards) of the following Hospital Records if Buyer elects to retain such copies: (i) the Patient Records for patients who are patients of the Facilities at the relevant Scheduled Closing or who are the subject of Receivables transferred to Buyer hereunder, (ii) the personnel records of the Hired Employees, and (iii) any records Buyer would be required to have to comply with accreditation standards. If the Hospital Records are removed by Seller, then it shall maintain such Hospital Records at its expense during such period of time and at such location as is deemed appropriate by Seller in its sole and absolute discretion. For so long as the Hospital Records are maintained by Seller, Seller shall make Hospital Records (other than those protected by or subject to the attorney-client privilege) available to Buyer, subject to applicable Laws, as needed by Buyer for any lawful purpose and if reasonably necessary to permit Buyer to operate the Facilities or other Transferred Assets. Seller shall instruct its appropriate employees to cooperate in providing access to such records to Buyer and its authorized representatives as contemplated herein. Buyer's access to such Hospital Records shall be during normal business hours, with reasonable prior written notice to Seller of the time when such access shall be needed. Buyer may make copies of or extracts from any such Hospital Records to which Buyer has access hereunder at Buyer's sole cost and expense. Notwithstanding the foregoing, Buyer's access to, or right to copies of, any Patient Records shall be subject to any applicable Law, accreditation standard or rule of confidentiality or privilege. (d) After Closing, Buyer or the applicable Buyer Subsidiary shall have the right to assign to an entity which purchases from Buyer or a Buyer Subsidiary a Facility or substantially all the assets of a Facility, all of the rights of Buyer under this Section 5.7, provided that such ----------- entity expressly assumes all obligations of Buyer under this Section 5.7 ----------- with respect to the purchased Facility. ARTICLE 6 ADDITIONAL COVENANTS OF SELLER Seller hereby additionally covenants, promises and agrees as follows: -81- Section 6.1 Conduct Pending Closing. Prior to consummation of the ----------------------- Transactions contemplated hereby or the termination or expiration of this Agreement pursuant to its terms, unless Buyer shall otherwise consent in writing, which consent shall not be unreasonably withheld or delayed, and except for actions taken pursuant to Assumed Contracts, or which arise from or are related to the anticipated transfer of the Transferred Assets, the conduct or resolution of the Unusual Proceedings or effectuation of ongoing compliance programs, or as otherwise contemplated by this Agreement or disclosed in Schedule 6.1 or another Schedule to this Agreement, Seller ------------ shall, and shall cause the Subsidiaries to: (a) Conduct the business represented by, and otherwise deal with, the Transferred Assets only in the usual and ordinary course, materially consistent with practices followed prior to the execution of this Agreement; (b) Use reasonable efforts to keep intact the Transferred Assets and the business they represent and to preserve relationships beneficial to such business that doctors, patients, Payors, suppliers, employees and others have with the Facilities; (c) Except as required by their terms, not amend, terminate, renew, fail to renew or renegotiate any material contract, except in the ordinary course of business and consistent with practices of the recent past, or default (or take or omit to take any action that, with or without the giving of notice or passage of time, would constitute a default) in any of its obligations under any such contracts, that would be an Assumed Contract as of the date hereof; (d) Not (i) sell, lease, transfer or dispose of, or make any contract for the sale, lease, transfer or disposition of, any assets or properties which would be included in the Transferred Assets in an amount in excess of $1,000,000 in the aggregate (other than sales in the ordinary course of business); (ii) incur, assume, guaranty, or otherwise become liable in respect of any indebtedness for money borrowed which would result in Buyer assuming such liability hereunder after the Closing; (iii) purchase or make any contract for the purchase of a material amount of assets or properties which would be included in the Transferred Assets (other than purchases in the ordinary course of business and other than capital expenditures within the aggregate thresholds set forth in clause (v) below); (iv) accelerate or delay the purchase of Inventory, or the -82- payment of amounts due to or from the Subsidiaries in a manner inconsistent with past practice; (v) make any new commitments which would require an expenditure of more than $50,000 in the aggregate other than in the ordinary course of business; (vi) encumber or voluntarily subject to any lien any Transferred Asset (except for Permitted Encumbrances); or (vii) assign or transfer accounts receivable to collection agencies in a manner inconsistent with past practice. (e) Maintain in force and effect the insurance policies identified in Section 3.26(b); --------------- (f) Not enter into any contract or amendment of a contract that, had such contract or amendment been entered into prior to the date hereof, would have been included on Schedule 2.1(f), unless Buyer has failed to --------------- disapprove of such contract or amendment in a written notice to Seller given within two (2) business days of Seller's written notice to Buyer of such contract or amendment accompanied by a copy thereof, provided that -------- Buyer's disapproval of such contract or amendment shall not be unreasonable, and provided further that any contract entered into in -------- violation of this Section 6.1(f) shall be subject to the provisions of -------------- Section 2.18; ------------ (g) Not grant any general or uniform increase in the rates of pay or benefits to Retained Employees (or a class thereof) or any increase in salary or benefits of any chief executive or financial officer of any Facility, except for compensation previously agreed to prior to the date hereof; or (h) Subject to Section 6.3, not take any action which would ----------- cause any of Seller's representations and warranties set forth in Article 3 --------- to be false as of the relevant Scheduled Closing; provided that nothing in this Section shall (i) obligate Seller or any -------- Subsidiary to make expenditures other than in the ordinary course of business and consistent with practices of the recent past or to otherwise suffer any economic detriment, (ii) preclude Seller from paying, prepaying or otherwise satisfying any liability which, if outstanding as of a Closing Date, would be an Assumed Liability or an Excluded Liability, (iii) preclude Seller from incurring any liabilities or obligations to any third party in connection with obtaining such party's consent to any transaction contemplated by this Agreement or the Related Agreements provided such -------- -83- liabilities and obligations under this clause (iii) shall be Excluded ------------ Liabilities pursuant to Section 2.4(h) hereof if not approved in advance by -------------- Buyer (which approval shall not be unreasonably withheld), or (iv) preclude Seller from instituting or completing any program designed to promote compliance or comply with Laws or other good business practices respecting the Facilities. Section 6.2 Access and Information; Environmental Survey; Remediation --------------------------------------------------------- or Adjustment. ------------- (a) Subject to the restrictions set forth in Section 5.6 ----------- respecting confidentiality and provided that Buyer has complied with each and every provision thereof, Seller shall, and shall cause the Subsidiaries to, afford Buyer, and the counsel, accountants and other representatives of Buyer, reasonable access, throughout the period from the date hereof to the relevant Closing Date, to the Transferred Assets and the employees, personnel and medical staff associated therewith and all the properties, books, contracts, commitments, Cost Reports and records respecting the Transferred Assets (regardless of where such information, may be located) which Seller has or to which it has access. Such access shall be afforded to Buyer after no less than 24 hours prior written notice, during normal business hours and only in such manner so as not to disturb patient care or to interfere with the normal operations of the Facilities; provided, -------- however, that, notwithstanding the foregoing and subject to the provisions concerning nondisclosure set forth in Section 5.6, without first obtaining ----------- the written consent of Mr. Donald Thayer which consent shall not be unreasonably withheld, neither Buyer nor its counsel, accountants and other representatives shall tour or visit the Facilities or contact any of the employees, personnel or medical staff thereof; and provided further that -------- until the first to occur of the Termination Date or the Final Closing, under no circumstances shall Buyer directly or indirectly solicit the employment of any employees of Seller or its Subsidiaries, except as Hired Employees pursuant to the terms hereof or except as may be permitted with the prior written consent of a responsible officer of Seller. Seller's covenants under this Section are made with the understanding that Buyer shall use all such information in compliance with all Laws. The foregoing notwithstanding, Buyer acknowledges and agrees that Buyer's access to the books and records of the Transferred Assets shall not include access to, and Seller shall not have any obligation to deliver to Buyer, any information concerning any alleged dispute or any pending litigation, investigation or proceeding involving Seller or its Affiliates that is protected by or subject -84- to the attorney-client privilege, or the disclosure of which is restricted by an agreement entered into in connection with such dispute, litigation, investigation or proceeding or an order entered by any court, or (in the case of the Unusual Proceedings) certain non-public information; moreover, Buyer shall not have access to patient or employee records or any other records the disclosure of which would be prohibited by any Law, accreditation standards, or rule or agreement (express or implied) of confidentiality, except that Buyer may be granted access to such records to the extent they are appropriately redacted and in conformity with such other reasonable procedures as may be required to conform to any such requirements of Law, accreditation standards or rule or agreement of confidentiality. (b) Seller has provided (or, with respect to Facility No. 30, will reasonably soon provide) to Buyer copies of an environmental survey conducted with respect to each of the Facilities (the "Environmental ------------- Survey"). The Environmental Survey was conducted by an environmental ------ consulting firm or firms (the "Consultant") in accordance with applicable ---------- professional standards in effect at the time the Environmental Survey was conducted and such reasonable procedures as were determined by Seller. In the event of a disagreement between Buyer and Seller concerning the procedures employed by the Consultant, Buyer may at Buyer's expense employ a separate environmental consultant to conduct such procedures requested by Buyer (subject to Seller's prior approval of such procedures, which shall not unreasonably be withheld), and the findings of the Buyer's Environmental consultant shall be included as an addendum to the Environmental Survey. The results of any such Environmental Survey shall be delivered to and owned by Seller, and all proceedings in connection with the Environmental Survey and the results thereof shall be subject to the confidentiality provisions of Section 5.6. Buyer acknowledges and agrees ----------- that the Environmental Survey is and shall be only an initial "Phase I" environmental site assessment. If subsequently determined by Seller, the Consultant and the Buyer, to be necessary or prudent to conduct sampling, laboratory analyses, or additional investigation work at any of the Facilities, Seller shall direct the Consultant to undertake a further "Phase II" investigation involving additional investigation and appropriate sampling and laboratory analyses respecting such Facilities the results of which are to be included in the Environmental Survey. In any "Phase II" investigation, Seller shall give Buyer no less than 24 hours' notice before the Consultant enters onto any Facility, and the "Phase II" Environmental Survey shall be conducted so as not to interfere with the normal operation of the Facilities. -85- Buyer shall be permitted to have one of its employees or agents present during all inspections of, and sample gatherings (including borings) from the soil or any floor tile, insulation or other internal component of, a Facility and shall be entitled to split samples upon Buyer's request. In the event that Buyer considers it necessary to conduct any "Phase II" investigation work that Seller refuses to order, Buyer may at Buyer's expense employ a separate environmental consultant to conduct such "Phase II" investigation work at least thirty (30) days before the First Closing. Buyer shall give Seller no less than 24 hours' notice before Buyer's environmental consultant enters onto any Facility, and any such "Phase II" work performed by Buyer's environmental consultant shall be conducted so as not to interfere with the normal operations of the Facilities. Seller shall be permitted to have one of its employees or agents present during all inspections of and sample gatherings (including borings) from the soil or any floor tile, insulation, or other internal component of a Facility performed by Buyer's environmental consultant and shall be entitled to split samples upon Seller's request. Buyer shall be liable for any repairs or other costs required to correct damage to the Facilities resulting from such "Phase II" investigation. The findings of any Phase II investigation prepared by Buyer's environmental consultant shall be included as an addendum to the Environmental Survey. Notwithstanding the foregoing, Seller may elect not to permit Buyer to conduct a "Phase II" investigation through its own environmental consultant, in which case Buyer can exclude the affected Facility, and the Transferred Assets and Assumed Liabilities respecting such Facility from the Transactions, in which case the parties shall negotiate in good faith an equitable adjustment to the Purchase Price, or if they cannot agree upon the same, such adjustment shall be determined in accordance with Section 2.14. ------------ (c) With respect to any matters disclosed by such Environmental Survey or listed on Schedule 3.16 that would constitute a breach of ------------- Seller's warranties in Section 3.16, but for the qualifications to such ------------ warranties based on Seller's knowledge or disclosures in the Environmental Survey or on such Schedule 3.16, Seller will at its election, either (i) ------------- clean up or otherwise remediate such matters in a reasonable manner prior to the Closing Date related to such Facility, at its expense; or (ii) agree in writing prior to the Closing Date to reimburse Buyer for the costs specified in such written agreement of such reasonable clean-up or remediation incurred by Buyer after the Closing Date related to such Facility, and to promptly reimburse Buyer after Buyer incurs such expenses subsequent to the Closing Date related to such Facility; or (iii) elect to exclude the affected Facility, -86- and Transferred Assets and Assumed Liabilities respecting such Facility, from the Transactions, in which case the parties shall negotiate in good faith an equitable adjustment to the Purchase Price, or if they cannot agree upon the same, such adjustment shall be determined in accordance with Section 2.14; provided, however, that in no case will Seller be required to ------------ -------- remove or otherwise remediate (or bear the costs of same) any Hazardous Materials used as construction materials in structures or improvements constituting the Facilities, or in equipment contained therein, unless the current condition of such Hazardous Materials has resulted in either: (i) noncompliance with any Environmental Law or License issued pursuant to an Environmental Law; or (ii) an unreasonable hazard to human health, human safety or the environment. Section 6.3 Updating. Seller shall notify Buyer of any changes or -------- additions to any of Seller's Schedules to this Agreement with respect to a particular Facility or the Transferred Assets or Assumed Liabilities related thereto by the delivery of updates thereof, if any, as of a reasonably current date prior to the relevant Scheduled Closing not later than three (3) business days prior to the Scheduled Closing with respect to such Subject Transferred Assets, provided, however, that the Financial -------- Schedule shall not be updated to cover any period or periods subsequent to the respective dates thereof. No such updates made pursuant to this Section shall be deemed to cure any breach of any representation or warranty made in this Agreement, unless Buyer specifically agrees thereto in writing, nor shall any such notification be considered to constitute or give rise to a waiver by Buyer of any condition set forth in this Agreement. Section 6.4 No Solicitation. Seller will not, and shall cause the --------------- Subsidiaries not to, and will use its best efforts to cause its and their officers, employees, agents and representatives (including any investment banker) not to, directly or indirectly, solicit, encourage or initiate any discussions with, or, subject to fiduciary duties to shareholders, negotiate or otherwise deal with, or provide any information to, any corporation, partnership, person or other entity or group, other than Buyer and its officers, employees and agents, concerning any sale of or similar transactions involving the Transferred Assets or the stock of the Subsidiaries. None of the foregoing shall prohibit providing information to others in a manner in keeping with the ordinary conduct of Seller's or the Subsidiaries' businesses. Seller shall notify Buyer promptly of any inquiry, proposal or offer received by Seller concerning the sale of or similar transactions involving the Transferred Assets or the stock of the -87- Subsidiaries. Subject to the foregoing, in the exercise of its aforementioned fiduciary duties to shareholders, Seller may terminate this Agreement on written notice to Buyer, which termination shall have the effect set forth in Section 10.2, provided that upon consummation prior to ------------ -------- the first anniversary of this Agreement of any transaction or transactions with one or more third parties covering substantially all of the Transferred Assets, Seller shall be obligated to pay Buyer the sum of Fifteen Million Dollars ($15,000,000), and provided further that the -------- payment of such sum shall be deemed to constitute liquidated damages in lieu of any and all other liability of Seller and the Subsidiaries to Buyer and the Buyer Subsidiaries in connection with or related to or arising from this Agreement or the transactions contemplated hereby, or in connection with or related to or arising from the termination hereof. Section 6.5 Name Changes. To the extent that the corporate names of ------------ any of the Subsidiaries incorporate or are substantially similar to the Transferred Business Names, Seller agrees to cause the Subsidiaries promptly after the relevant Scheduled Closing to take all action necessary to change such names so as not to incorporate or be substantially similar to the Transferred Business Names. Section 6.6 Filing of Cost Reports. Seller shall cause to be ---------------------- prepared and timely filed all Cost Reports and all other filings which are required to be filed with Medicare and any other cost-based Payors with respect to the operations of the Facilities for any and all periods ending on or prior to a relevant Closing Date. Seller and the Subsidiaries shall retain all rights to any amounts receivable from Medicare or other Payors with respect to such reports or filings or with respect to such periods and, as between Buyer, on the one hand, and Seller and Subsidiaries, on the other, shall remain obligated for all amounts due Medicare or such other Payors with respect to such reports or filings or with respect to such periods, and the parties hereby acknowledge and agree that Buyer is not being assigned or otherwise receiving and is not hereby assuming any of the same. Seller's rights shall include, without limitation, the right to dispute or to appeal any determinations relating to such reports. Section 6.7 Purchase of Supplies. Buyer may request Seller or its -------------------- Affiliates to permit Facilities transferred at such Scheduled Closing to participate in specified national purchasing contracts of Seller or its Affiliates for a fee to be agreed upon. If Buyer wishes to enter into such an agreement with Seller, it shall notify Seller no later than five (5) days -88- prior to such Scheduled Closing, and at the Scheduled Closing the parties shall execute a Purchasing Contract substantially in the form of Exhibit D hereto. Schedule 6.7 lists all of the national purchasing --------- ------------ contracts of Seller and its Affiliates in effect as of the date thereof which do not preclude participation by persons which are not Affiliates of Seller. Section 6.8 Covenant Not to Compete. ----------------------- (a) Covenant. Subject to the further provisions of this Section -------- ------- 6.8, during the "Covenant Period" (as defined in Section 6.8(d)), none of --- -------------- the Subsidiaries, Seller or any other subsidiaries of Seller in which Seller owns a majority of the voting interests (collectively, "Covered ------- Parties") shall, directly or indirectly (whether through a majority-owned ------- subsidiary or otherwise), in any Specified Capacity (as defined in this Section 6.8), engage in the business of delivering mental health or alcohol ----------- or substance abuse services through the operation of a hospital or otherwise, including without limitation through the delivery of inpatient, partial hospitalization, residential or outpatient services (as limited by the provisions of Section 6.8(b), a "Competing Business"). For purposes -------------- ------------------ hereof, the term "Specified Capacity" shall mean, subject to Section ------------------ ------- 6.8(b), each of the following capacities: ------ (i) As an operator, manager or sole owner of the Competing Business, whether directly or indirectly; (ii) As a constituent partner, joint venturer or equity shareholder of an entity engaged in the Competing Business if the voting equity interest held is greater than 10% of all voting equity interests in such entity; (iii) As a lender of money to, or a guarantor of indebtedness for money borrowed by, any other entity engaged in a Competing Business in a principal amount in excess of $1,000,000, except for (A) loans or guarantees made in the ordinary course of business and not as an investment in such entity; (B) loans or guarantees made or entered into in connection with the sale of a Competing Business by a Covered Party; or (C) loans represented by publicly traded instruments. (b) Exceptions. The provisions of this Section 6.8 shall not ---------- ----------- apply to and shall not prohibit the following: -89- (i) Psychiatric Facilities and Contracts Not Acquired By ---------------------------------------------------- Buyer. The conduct of a Competing Business from any facility ----- (including renovations and expansions thereof) at which a Covered Party, in any Specified Capacity, primarily engages in a Competing Business as of the Final Closing, or pursuant to any contract (including modifications, extensions and renewals thereof) under which a Covered Party, in any Specified Capacity, engages in a Competing Business as of the Final Closing, if (A) such facility, contract or Specified Capacity is not acquired or assumed by Buyer or a Buyer --- Subsidiary pursuant to this Agreement, or (B) such facility, contract or Specified Capacity, is, after the Final Closing, reacquired by a Covered Party from Buyer or a Buyer Subsidiary pursuant to this Agreement; (ii) Facilities Outside Geographic Area. The conduct of a ---------------------------------- Competing Business from any location that is not within twenty-five (25) miles of a Facility (not including satellite locations) that (A) was acquired by Buyer or a Buyer Subsidiary pursuant to this Agreement, and (B) at the time in question, is still owned, operated or managed by Buyer or by a person or entity which, directly or indirectly, controls, is controlled by or is under common control with Buyer (Facilities meeting the requirements of both clauses (A) and (B) --- --- being herein referred to as "Covered Facilities"); ------------------ (iii) Acute Hospitals. The conduct of a Competing Business --------------- from or through any hospital, commonly referred to as an acute care hospital, that is licensed to provide general medical and surgical services, including related facilities that operate on the same campus as, or under the auspices of, such acute care hospital (such hospitals and related facilities being herein referred to as "Acute Hospitals"), --------------- including the provision of management services to an Acute Hospital, provided that the conduct of any Competing Business from or through ------------- a Specified Acute Hospital or an Acquired Acute Hospital (as each such term is defined in Section 6.8(c)) shall be subject to the -------------- further provisions of Section 6.8(c); -------------- (iv) Divestiture of Acquired Psychiatric Facilities. Other ---------------------------------------------- than an Acquired Acute Hospital, the conduct of a Competing Business in a Specified Capacity first acquired by any Covered Party after the date hereof as part of the acquisition of interests in healthcare assets other than the Competing Business, provided that ------------- - 90 - no Covered Party engages in such Competing Business after the expiration of twelve (12) months from such acquisition and no such Competing Business is expanded during such twelve (12) month period, except for expansions for which regulatory approval exists, or for which capital expenditures have been undertaken or are in process, or which are required by existing contracts (together, "Permitted --------- Expansions"); or ---------- (v) Acquiring Entities. The conduct of a Competing ------------------ Business for, on behalf of, or by (A) any entity that is not a Covered Party that acquires majority ownership or substantially all the assets of a Covered Party after the date hereof, (B) any entity that is not a Covered Party that acquires a Competing Business from a Covered Party after the date hereof, (C) any surviving entity (other than a Covered Party) of a consolidation, merger, reorganization or spinoff (each, a "Reorganization") involving a Covered Party as a result of which -------------- shareholders directly or indirectly owning a majority of such Covered Party immediately before such Reorganization do not own a majority of such surviving entity immediately after such Reorganization, or (D) any majority-owned subsidiary of any such acquiring or surviving entity that is not a Covered Party. (c) Acute Hospital Affiliations. With respect to an Acute --------------------------- Hospital listed on Schedule 6.8(c) (a "Specified Acute Hospital"), and --------------- ------------------------ except as set forth below, the exception provided by Section 6.8(b)(iii) ------------------- above shall apply but only to the extent such Specified Acute Hospital conducts a Competing Business (including Permitted Expansions, the "Exempted Competing Business") on the Scheduled Closing Date with respect ----------------------------- to the Facility shown on Schedule 6.8(c) as the Specified Acute Hospital's --------------- "Affiliation Facility." On and after such Scheduled Closing Date, a Specified Acute Hospital shall not expand its services or its Competing Business beyond the Exempted Competing Business except in accordance with, and subject to, clauses (i) through (iii) below. With respect to any Acute ----------- ----- Hospital acquired by a Covered Party after the date of this Agreement and which is within twenty (20) miles of a Covered Facility (an "Acquired Acute -------------- Hospital"), the exception provided by Section 6.8(b)(iii) shall apply but ---------- ------------------- only to the extent of such Acquired Acute Hospital's Exempted Competing Business on the date the acquisition of such Acquired Acute Hospital is consummated (the "Acquisition Date"). On and after such Acquisition Date, ---------------- an Acquired Acute Hospital shall not expand its services or its Competing Business beyond the Exempted Competing - 91 - Business except in accordance with, and subject to, clauses (i) through ----------- (iii) below. ----- (i) Seller or its relevant Affiliate must first provide Buyer notice that it proposes to expand its services or Competing Business beyond the Exempted Competing Business, and shall briefly describe the nature and scope of the expanded Competing Business in which it proposes to engage. Within thirty (30) days following its receipt of such notice, Buyer shall cause (A) the Affiliation Facility with respect to a Specified Acute Hospital (as noted in Schedule -------- 6.8(c)) to offer the Specified Acute Hospital the opportunity to enter ------ into an affiliation agreement with its Affiliation Facility, or (B) the closest Covered Facility with respect to an Acquired Acute Hospital to offer the Acquired Acute Hospital the opportunity to enter into an affiliation agreement. All affiliation agreements must be on customary industry terms, pursuant to which the relevant Covered Facility will agree to provide all services comprising the expanded Competing Business to Payors and patients of, and to subscribers or other participants in services or programs provided by, the Acute Hospital at the Covered Facility's usual and customary prices, terms and conditions which the parties shall negotiate expeditiously and in good faith. The term of the affiliation agreement shall be for the Covenant Period for such Specified or Acquired Acute Hospital and shall give the Specified Acute Hospital or Acquired Acute Hospital, as the case may be, the right to extend the agreement for two successive one-year periods. (ii) The Covered Facility must have the capacity to provide the desired services in a quantity and manner comparable to the quantity and manner in which such services are proposed to be provided by the Specified or Acquired Acute Hospital. (iii) The entry into such affiliation agreement by the Specified Acute Hospital or Acquired Acute Hospital, and the performance thereof by the Specified Acute Hospital or Acquired Acute Hospital (including, without limitation, the failure to provide such Competing Business by the Specified Acute Hospital or Acquired Acute Hospital) will not violate or conflict with, or cause a default under, the terms of any License, accreditation standard or Payor contract to which the Specified Acute Hospital or Acquired Acute Hospital is then subject. - 92 - If the terms and conditions set forth in clause (i) through (iii) (other ---------- ----- than the first sentence of clause (i)) are not met as to the expanded ---------- Competing Business of a Specified or Acquired Acute Hospital, the exception provided by Section 6.8(b)(iii) above shall apply to such expanded ------------------- Competing Business of such Specified or Acquired Acute Hospital. (d) Covenant Period. The term of the covenant (the "Covenant --------------- -------- Period") set forth in Section 6.8(a) shall expire on the third anniversary ------ -------------- of the Final Closing, except (i) as to a Specified Acute Hospital, the covenant shall expire on the earlier of the third anniversary of the Final Closing or the date on which such Specified Acute Hospital's Affiliation Facility is no longer a Covered Facility, and (ii) as to an Acquired Acute Hospital, the covenant shall expire on the earlier of the third anniversary of the Final Closing or the second anniversary of the Acquisition Date for such Acquired Acute Hospital. (e) Severability. To the extent that this covenant or any ------------ provision of this Section 6.8 shall be deemed illegal or unenforceable by a ----------- court or other tribunal of competent jurisdiction with respect to (i) any geographic area, (ii) any part of the time period covered by this covenant, (iii) any activity or Specified Capacity covered by this covenant, or (iv) any other aspect of this covenant, such determination shall not affect this covenant with respect to any other geographic area, time period, activity or other aspect covered by this covenant. (f) Injunctive Relief. Each of the parties to this Agreement ----------------- acknowledges that (i) the covenant and restrictions contained in this Section 6.8 are necessary, fundamental and required for the protection of ----------- the business of Buyer and its operation (through the Buyer Subsidiaries) of the Facilities; (ii) this covenant relates to matters which are of a special character and which give this covenant a special value; and (iii) a breach of the covenant contained in this Section 6.8 will result in ----------- irreparable harm and damages to Buyer and Buyer Subsidiaries which cannot be adequately compensated for by a monetary award. Accordingly, it is expressly agreed that in addition to all other remedies available in law or in equity, Buyer and Buyer Subsidiaries shall be entitled to the remedy of a temporary restraining order, preliminary injunction or such other form of injunctive or equitable relief as may be issued by any court of competent jurisdiction to restrain or enjoin a Covered Party from breaching this covenant or any provision of this Section 6.8 or otherwise to specifically ----------- enforce the provisions of this covenant. - 93 - (g) Value: The parties agree that the value of the covenant ----- contained in this Section 6.8 is the value assigned to it in Section 2.5 ----------- ----------- and that each will account for and report the value of such covenant in accordance with such valuation and all of the terms and provisions of Section 2.7. ----------- Section 6.9 Audited Statements. Prior to and after any relevant ------------------ Scheduled Closing, Seller shall make the books and records (other than those protected by or subject to the attorney-client privilege) and unaudited financial statements of the Subsidiaries which are related to the Facilities and are for periods prior to such Scheduled Closing available to Buyer and Buyer's and Seller's independent accountants at reasonable times and in a manner so as to not unduly interfere with Seller's operations, and otherwise cooperate with Buyer in order to permit an audit of the Subsidiaries' financial statements for periods prior to such Scheduled Closing. Seller shall reasonably cooperate in assisting Buyer in obtaining and preparing all necessary information for the timely filing of any documents required to be filed by Buyer under the Securities Exchange Act of 1934 related to the transactions contemplated hereby. Without limiting the effect of Section 5.5 of this Agreement, the audit and the out-of- ----------- pocket costs of Seller's cooperation in obtaining and preparing any information (including, without limitation, all services of Seller's independent accountants rendered in connection therewith) will be paid for by Buyer. Section 6.10 Post-Closing Insurance. Seller for five years after the ---------------------- Final Closing, shall maintain its existing comprehensive general liability and hospital professional liability insurance coverages with respect to the Facilities for all periods prior to the Closing in substantially their present form as described on Schedule 3.26(b) (the "Insurance Program"), ---------------- ----------------- provided that (a) Seller shall have the right to reduce (but not increase beyond $2,000,000 per occurrence) the existing deductible under the Insurance Program and (b) shall have the right to cancel or terminate, or have cancelled or terminated, the coverages under the Insurance Program so long as Seller acquires (from (i) its present insurance company or (ii) another reasonably acceptable insurance company under a reasonably acceptable policy) an extended discovery period of not less than five years after any such cancellation or termination for periods prior to the Final Closing. Such Insurance Program, if maintained, shall be maintained at Seller's expense, and if such Insurance Program is maintained Seller shall cause Buyer and each Buyer Subsidiary to be named as an additional insured with respect to the applicable Facility and Seller shall provide Buyer with copies - 94 - thereof and copies of renewals prior to the expiration of the prior policy or policies. Seller shall use commercially reasonable efforts to avoid invalidating the insurance policies referred to in this Section 6.10. ------------ Section 6.11 Use of Controlled Substance Licenses. To the extent ------------------------------------ permitted by Law, Buyer shall have the right, for a period not to exceed sixty (60) days following a relevant Scheduled Closing, to operate under the Licenses of the Subsidiaries relating to controlled substances and the operation of pharmacies, until Buyer is able to obtain such Licenses for itself. Seller shall cause the pertinent Subsidiaries to execute and deliver to Buyer any powers of attorney and other instruments which Buyer or the appropriate governmental agency may reasonably require in connection with Buyer's use of such Licenses. Buyer acknowledges that it shall apply for all such Licenses as soon as reasonably possible before or after the relevant Scheduled Closing and diligently pursue such applications in accordance with Section 5.1. ----------- Section 6.12 Non-Disturbance Agreements. Seller hereby agrees to -------------------------- exercise its reasonable commercial efforts, prior to the relevant Scheduled Closing, to obtain from each existing mortgagee of each Facility identified below a non-disturbance agreement providing in substance that in the event the lessor or sublessor of such Facility defaults in its obligations to the mortgagee respecting indebtedness existing at the relevant Scheduled Closing and as a result thereof the mortgagee forecloses upon, exercises a power of sale or otherwise succeeds to the ownership of such property, then and in such event, such foreclosure or other change in ownership shall not terminate or affect the validity of the Real Property Lease respecting such Facility assigned to Buyer hereunder, provided that Buyer hereby agrees ------------- that, in connection with Seller's obtaining any such non-disturbance agreement, Buyer will execute such reasonable agreements in favor of such mortgagee confirming the attornment of Buyer to such mortgagee or its assigns, and subordinating the Real Property Lease to the interest of such mortgagee, under such circumstances. In the event that Seller shall be unable to obtain any such non-disturbance agreement and the lessor's or sublessor's default under indebtedness existing at the relevant Scheduled Closing results in the termination of any such Real Property Lease prior to the expiration of the current term and any renewal terms available in the Real Property Lease as of the relevant Scheduled Closing, then Seller shall indemnify Buyer, in accordance with the provisions of Section 11.3(a)(ii), ------------------- for Losses arising therefrom but not in excess of the portion of the Purchase Price allocated to such Facility in the Allocation Schedule, provided that ------------- - 95 - Buyer shall provide Seller with notice of any such default or claimed default by the lessor or sublessor reasonably promptly following Buyer's receipt of any notice or knowledge respecting same. The Facilities and Real Property Leases to which this Section shall apply are the Real Property Leases respecting the hospitals numbered as Facility Nos. 40, 44, 46, and 49. ARTICLE 7 ADDITIONAL COVENANTS OF BUYER Section 7.1 Waiver of Bulk Sales Law Compliance. Subject to the ----------------------------------- indemnification provisions of Section 11.3(a)(iii) hereof, Buyer hereby -------------------- waives compliance by Seller and the Subsidiaries with the requirements, if any, of Article 6 of the Uniform Commercial Code as in force in any state in which Transferred Assets are located and all other similar laws applicable to bulk sales and transfers. Section 7.2 Resale Certificate. Buyer agrees to furnish to Seller ------------------ and the Subsidiaries any resale certificate or certificates or other similar documents reasonably requested by Seller to comply with pertinent sales and use tax laws. Section 7.3 Cost Reports and Audit Contests. After each Scheduled ------------------------------- Closing and for the period of time necessary to conclude any pending or potential audit or contest of any Cost Reports with respect to the Facilities transferred at such Scheduled Closing that include periods ending on or before the relevant Closing Date, Buyer shall (a) properly keep and preserve all financial books and records delivered to Buyer by Seller and the Subsidiaries (if any) and utilized in preparing such Cost Reports, including, without limitation, accounts payable invoices, Medicare logs and billing information in accordance with Section 5.7, and ----------- (b) within five (5) days of Buyer's receipt of the same, forward to Seller all information received from Payors relating to periods prior to and as of the relevant Closing Date including, without limitation, Cost Report Settlements, notices of program reimbursements, demand letters for payment and proposed audit adjustments. Upon reasonable written notice by Seller, Seller (or its agents) shall be entitled, at Seller's expense, during regular business hours, to have access to, inspect and make copies of all such books and records. Upon the reasonable request of Seller, Buyer shall assist Seller and the Subsidiaries in obtaining information deemed by Seller to be necessary or desirable in connection with any audit or contest of such reports. To the extent required - 96 - to meet its obligations under this Section, Buyer shall provide the reasonable support of its employees at no cost to Seller. Section 7.4 Tax Matters. After each Scheduled Closing, Buyer shall ----------- be responsible for causing its employees, at no cost to Seller, to assist Seller and the Subsidiaries, in the same manner and to the extent that personnel of the Facilities currently provide such assistance, in the preparation and filing of all returns relating to taxes imposed upon the businesses operated through the Transferred Assets that relate to periods ending on or prior to the relevant Scheduled Closing but are due after the relevant Closing Date and that are not related to Taxes included in the Assumed Liabilities, including without limitation, income tax and information returns. It is further acknowledged by Buyer that Taxes (including, without limitation, the Florida indigent care tax) imposed upon the right or privilege to do business from the Facilities after the Closing shall be Buyer's responsibility even if measured by gross receipts, net operating revenues or patient days for a period ending on, before or including a Closing Date and that Taxes included in Accrued Operating Expenses shall be only those properly accruable, in accordance with generally accepted accounting principles, for the right or privilege of doing business through the relevant Closing Date. Buyer further agrees to exercise its reasonable commercial efforts to have the income tax year of any venture or partnership referred to in Section 2.1(c) terminated as of -------------- the relevant Scheduled Closing with respect to the pertinent Subsidiary or Subsidiaries transferring its interests therein. Section 7.5 Letters of Credit. Subject to the terms and conditions ----------------- hereof, at the relevant Scheduled Closing, Buyer shall cause letters of credit and indemnity or performance bonds to be provided to substitute for those letters of credit and bonds listed in Schedule 7.5, so that at and as ------------ of such Scheduled Closing Seller and its Affiliates shall have no further obligation to provide such designated letters of credit or bonds. Section 7.6 Conduct Pending Closing. Prior to consummation of the ----------------------- Transactions contemplated hereby or the termination or expiration of this Agreement pursuant to its terms, unless Seller shall otherwise consent in writing, Buyer shall not, and shall not permit any Buyer Subsidiary to, take any action which would cause any of Buyer's representations and warranties set forth in Article 4 to be false as of the relevant Scheduled --------- Closing. - 97 - Section 7.7 Securities Offerings. Buyer hereby agrees to indemnify -------------------- and hold harmless Seller and each of its Affiliates, in accordance with the provisions of Section 11.4(a)(ii), against any and all Losses, as incurred, ------------------- arising out of the offer or sale by Buyer of securities, except to the extent that such Loss arises from any untrue statement or alleged untrue statement of a material fact contained in any such securities offering materials or prospectus used by Buyer or its representatives, or from the omission or alleged omission therefrom of a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, which untrue or alleged untrue statement or omission or alleged omission is made in reliance upon and in conformity with written information furnished to Buyer by Seller under a cover letter from Seller's counsel stating that such information is expressly for use in such offering materials or prospectus. ARTICLE 8 BUYER'S CONDITIONS TO CLOSING The obligations of Buyer to consummate the Transactions with respect to a Facility and the Transferred Assets and Assumed Liabilities related thereto shall be subject to the requirements of Section 2.13 and to the ------------ fulfillment at or prior to the relevant Scheduled Closing of the following conditions, unless Buyer waives in writing such fulfillment: Section 8.1 Performance of Agreement. Seller shall have performed in ------------------------ all material respects its agreements and obligations contained in this Agreement required to be performed on or prior to the Scheduled Closing. Section 8.2 Accuracy of Representations and Warranties. The ------------------------------------------ representations and warranties of Seller set forth in Article 3 of this --------- Agreement shall be true in all respects as of the date of this Agreement (unless the inaccuracy or inaccuracies which would otherwise result in a failure of this condition have been cured by the Scheduled Closing) and as of the Scheduled Closing (as updated by the revising of Schedules contemplated by Section 6.3) as if made as of such time, except where such ----------- inaccuracy or inaccuracies would not individually or in the aggregate result in a Material Adverse Effect on the Facility in question. Section 8.3 Officers' Certificate. Buyer shall have received from --------------------- Seller an officers' certificate, executed on Seller's behalf by its chief executive officer, president, chief financial officer or treasurer (in his or her - 98 - capacity as such) dated the Closing Date and stating that to the knowledge of such individual, the conditions in Sections 8.1 and 8.2 above ------------ --- have been met. Section 8.4 Consents. The waiting period under the HSR Act shall -------- have expired or been terminated, and, subject to the provisions of Section ------- 2.12, all approvals, consents, authorizations and waivers from ---- governmental and accreditation agencies the absence of which would render Buyer unable to operate the facility in the manner operated prior to such Scheduled Closing, and all approvals, consents, authorizations and waivers from other third parties to the extent shown on the Schedule of Required Consents (collectively "Consents") required for Buyer to consummate the -------- Transactions with respect to such Facility, shall have been obtained, except that a Consent from a third party to the sale and assignment of a Transferred Asset, such as a Medicare or Medicaid provider agreement, or the assumption of an Assumed Liability with respect thereto, shall not constitute a condition to Buyer's consummation of the Transactions with respect to a Facility if such sale, assignment or assumption may lawfully be made subject to a customary condition subsequent that the Consent be obtained from the third party based upon determinations of such third party, including without limitation needs surveys or evaluations of Buyer, to be completed after the Scheduled Closing. As to each of the Real Property Leases listed on the Schedule of Required Consents, Buyer shall have received an estoppel certificate, identifying the lease and stating that such lease is in full force and effect, that the lessee under such lease is current in all of its obligations under such lease and that the lessor is not aware of any default by lessee under such lease. Section 8.5 Absence of Injunctions. There shall be no: ---------------------- (a) Injunction, restraining order or order of any nature issued by any court of competent jurisdiction or governmental agency which directs that the Transactions related to such Facility contemplated hereby shall not be consummated as herein provided or compels or would compel Buyer to dispose of or discontinue, or materially restrict the operations of, such Facility or any significant portion of the Transferred Assets with respect thereto as a result of the consummation of the Transactions contemplated hereby; (b) Suit, action or other proceeding by any governmental agency pending before any court, governmental agency or non-governmen - 99 - tal, self-regulatory organization, or threatened (pursuant to a written notification), wherein such complainant seeks the restraint or prohibition of the consummation of the Transactions related to such Facility or asserts the illegality of the Transactions related to such Facility; or (c) Action taken, or law enacted, promulgated or deemed applicable to the Transactions related to such Facility, by any governmental agency which would render consummation of such Transactions illegal or which would threaten the imposition of any penalty or material economic detriment upon Buyer if such Transactions were consummated; provided that: -------- ---- (i) The parties will use their reasonable efforts to litigate against, or to obtain the lifting of, any such injunction, restraining or other order, restraint, prohibition, action, suit, law or penalty; (ii) In the event that (A) the First Closing has occurred, (B) there is such a pending or threatened suit, action, proceeding, injunction, restraining order or other order, made, sought, issued, initiated or obtained by a governmental agency in respect of Transactions contemplated to occur at the Final Closing, and (C) on or prior to the original Termination Date for the Final Closing, the parties and such agency have entered into a written agreement which would resolve such controversy but such agreement is subject to final agency approval that has not been obtained on or prior to the fifth business day before the original Termination Date for the Final Closing, then and in such events the original Termination Date for the Final Closing shall be extended to the fifth business day following such final agency approval if the date of such approval is within five (5) business days of the end of a month or the original Termination Date for the Final Closing shall be extended to the end of the month in which such approval is obtained if the date of such approval is not within five (5) business days of the end of a month, but in no event shall the original Termination Date for the Final Closing be extended for more than three (3) calendar months from the original Termination Date; and (iii) Clauses (a) through (c) above notwithstanding, the effect --- --- of any such event, action or suit shall be to exclude the affected Facility from the Scheduled Closing and, if such Facility is not transferred in a subsequent Closing, to adjust the Purchase Price pursuant to the Allocation Schedule. - 100 - Section 8.6 Opinion of Counsel. Buyer shall have received, on and as ------------------ of the Closing Date, an opinion of Mr. Scott Brown, general counsel to Seller, substantially as to the matters set forth in Sections 3.1, 3.2, ------------ --- 3.3, 3.4, 3.5, 3.6 and 3.14, subject to customary conditions and --- --- --- --- ---- limitations. Section 8.7 Title to Real Property. Title to Transferred Assets ---------------------- related to the Facility comprised of interests in real property shall have been evidenced by the willingness of Chicago Title Insurance Company (or an Affiliate thereof) (the "Title Insurer") to issue at regular rates ALTA (or ------------- the local equivalents thereof) owner's, or lessee's, as the case may be, extended coverage policies of title insurance (1990 Form B) (the "Title ----- Policies"), with the survey exception removed, in amounts equal to the -------- respective portions of the Purchase Price allocated to such interests, showing title to such interests in such real property vested in Buyer subject to transfer of such interest to Buyer. Each such Title Policy shall be free of exceptions relating to (i), except for Title Policies respecting Facilities located in Texas, any claim which arises out of the transaction vesting in Buyer the estate or interest insured by the Title Policy, by reason of the operation of federal bankruptcy, state insolvency or similar creditors's rights laws, and (ii) rights of the United States of America, and the state in which the real property covered by the Title Policy is located, or either or them, to recover any federal funds advanced as provided in the Hill-Burton Act, 42 U.S.C (S)(S) 291 et. seq. Such Title Policies shall additionally be free of all other exceptions, including other standard exceptions, other than the following: (a) A lien or liens to secure payment of real estate taxes, not delinquent; (b) Exceptions, other than those listed on Schedule 8.7(b), --------------- disclosed by current standard ALTA Preliminary Title Reports, delivered to and approved (except as shown on Schedule 8.7(b)) by Buyer prior to the --------------- date hereof (as indicated by Buyer's signature of approval appended thereto) together with copies of all documents underlying the exceptions contained therein; and (c) Other possible minor matters that in the aggregate are not substantial in amount and do not materially detract from or interfere with the present or intended use of such real property, including such minor matters as may be disclosed by surveys taken after the date hereof. - 101 - The willingness of the Title Insurer to issue the Title Policies shall be evidenced either by the issuance thereof at the relevant Scheduled Closing or the written commitments or binders, dated as of the relevant Scheduled Closing, of the Title Insurer to issue such Title Policies within a reasonable time after the relevant Closing Date, subject to actual transfer of the real property in question. If the Title Insurer is unwilling to issue any such Title Policy, it shall be required to provide Buyer and Seller, in writing, notice setting forth the reason(s) for such unwillingness on or before the relevant Closing Date. Seller shall have the right to seek to cure any defect which is the reason for such unwillingness, and, if such notice by the Title Insurer is given less than ten (10) business days prior to the then Scheduled Closing, then the relevant Closing Date (and, to the extent necessary, the Termination Date) shall be extended for a period of up to ten (10) business days to provide to Seller such opportunity to cure. In the event that, despite Seller's efforts to cure, the Title Insurer remains unwilling to issue any such Title Policy on the Final Closing Date (as may be extended as provided herein), then, at the election of Buyer, and without affecting the other conditions of the parties to consummation of the Transactions, such real property interests not covered by such a Title Policy shall not be included in the Transferred Assets and shall be deemed to be Excluded Assets, and liabilities associated therewith that would otherwise be Assumed Liabilities shall be deemed to be Excluded Liabilities; and Buyer and Seller shall negotiate in good faith prior to the Final Closing Date an adjustment in the Purchase Price based on the Allocation Schedule. If the parties cannot agree upon such adjustment, then the disagreement shall be resolved in accordance with Section 2.14. Notwithstanding the foregoing, ------------ Buyer may accept such title to any such interests as the pertinent Subsidiary may be able to convey, and such title insurance with respect to the same as the Title Insurer is willing to issue, in which case such interests shall be conveyed as part of the Transferred Assets without reduction of the Purchase Price or any credit or allowance against the same and without any other liability on the part of Seller or the Subsidiaries. Section 8.8 Receipt of Other Documents. Buyer shall have received -------------------------- the following: (a) Certified copies of the resolutions of Seller's and each relevant Subsidiary's board of directors respecting this Agreement, the Related Agreements and the Transactions, together with certified copies of any shareholder resolutions which are necessary to approve the execution and delivery of this Agreement and any Agreements and/or the - 102 - performance of the obligations of Seller and the Subsidiaries hereunder and thereunder; (b) Certified copies of Seller's and each relevant Subsidiary's Charter Documents, together with a certificate of the corporate secretary of each that none of such documents have been amended; (c) One or more certificates as to the incumbency of each officer of Seller or of any Subsidiary who has signed the Agreement, any Related Agreement or any certificate, document or instrument delivered pursuant to the Agreement or any Related Agreement; (d) Good standing certificates for Seller and each of the relevant Subsidiaries from the Secretaries of State of their respective states of incorporation, dated as of a date not earlier than fifteen (15) business days prior to the relevant Closing Date; (e) Copies of all third party and governmental consents, permits and authorizations that Seller or any Subsidiary has received in connection with the Agreement, the Related Agreements and the Transactions to occur at the relevant Scheduled Closing; and (f) Certificates of non-foreign status in the form required by Section 1445 of the Code duly executed by Seller and the relevant Subsidiaries. Section 8.9 Licenses and Permits. The Buyer shall have obtained any -------------------- and all authorizations, approvals and consents in connection with acquiring Licenses that will permit it to operate the Facility after the relevant Scheduled Closing substantially as operated by the relevant Subsidiary immediately prior to the relevant Scheduled Closing. Section 8.10 Casualty; Condemnation. ---------------------- (a) Casualty. If any part of the Transferred Assets related to -------- the Facility are damaged, lost or destroyed (whether by fire, theft, vandalism or other casualty) in whole or in part prior to the relevant Scheduled Closing, and the fair market value of such damage or destruction is less than thirty percent (30%) of the allocated portion of the Purchase Price for such Facility set forth in the Allocation Schedule, Seller shall, at its option, either (i) reduce the Purchase Price by the fair market value of - 103 - the assets destroyed, such value to be determined as of the date immediately prior to such destruction or, as the case may be, by the estimated cost to restore damaged assets, (ii) provided that the proceeds are obtainable without delay and are sufficient to fully restore the damaged assets, upon the relevant Scheduled Closing transfer the proceeds or the rights to the proceeds of applicable insurance to Buyer, and Buyer may restore the improvements, or (iii) repair or restore such damages or destroyed improvements. If any part of the Transferred Assets related to the Facility are damaged, lost or destroyed (whether by fire, theft, vandalism or other cause or casualty) in whole or in part prior to the relevant Scheduled Closing and the fair market value of such damages is greater than thirty percent (30%) of such allocated portion of the Purchase Price, Buyer may elect either to (i) require Seller upon the relevant Scheduled Closing to transfer the proceeds (or the right to the proceeds) of applicable insurance to Buyer and Buyer may restore the improvements, or (ii) terminate this Agreement with respect to the damaged assets or Facility only, with a reduction in the Purchase Price determined as follows. The reduction in Purchase Price shall be mutually determined by Buyer and Seller on the basis of the Allocation Schedule, or if the Buyer and Seller fail to agree, then such reduction shall be determined in accordance with Section 2.14. ------------ (b) Condemnation. From the date hereof until the relevant ------------ Scheduled Closing, in the event that any portion of the Transferred Assets related to the Facility becomes subject to or is threatened with any condemnation or eminent domain proceedings (except for an immaterial portion), then Buyer, at its sole option, may elect to terminate this Agreement with respect only to that part which is condemned or threatened to be condemned with a reduction in the Purchase Price determined as provided in Section 8.10(a). --------------- Section 8.11 Reasonable Assurances. There shall not have been any --------------------- actions taken by the United States government to indicate that it is reasonably likely that either the Unusual Proceedings or any proceeding, investigation, claim or lawsuit relating thereto, in each case relating to periods prior to the relevant Scheduled Closing, (a) shall be applied to or be expanded to include an assertion against Buyer or the applicable Buyer Subsidiaries with respect to their operation of the Facility after the relevant Scheduled Closing, or (b) would be the basis of any investigation or proceeding to exclude Buyer or the applicable Buyer Subsidiaries from participation in any government healthcare program with respect to the operations of the Facility after the relevant Scheduled Closing, or (c) would - 104 - result in the Transferred Assets being subjected to forfeiture under 18 U.S.C. (S)1961-1966 or otherwise. Section 8.12 Certain Events. During the thirty (30) days preceding -------------- the date of the relevant Scheduled Closing, there shall not have occurred or be continuing (a) any suspension of trading on the New York Stock Exchange or material governmental restrictions (not in force on the date hereof) on trading in securities generally, or (b) any banking moratorium declared by Federal, California or New York authorities, or (c) any material disruption of or any material adverse change in the financial, banking or capital markets, or (d) any outbreak or material escalation of hostilities affecting the United States of America or other calamity, panic or crisis, the effect of which on the financial markets of the United States in each case described in clauses (a), (b), (c) or (d) above, is that lending institutions have generally ceased providing funding for transactions of the size contemplated hereby, provided that the occurrence -------- of such event shall operate only to delay the Scheduled Closing (and extend the Termination Date, if necessary) until the tenth day following the date upon which lending institutions generally have resumed providing funding for transactions of the size contemplated hereby and that such delay may not extend the original Termination Date for more than sixty (60) days, after which time there shall be deemed to be a failure of this condition. ARTICLE 9 SELLER'S CONDITIONS TO CLOSING The obligations of Seller to consummate the Transactions with respect to a Facility and the Transferred Assets and Assumed Liabilities related thereto shall be subject to the fulfillment at or prior to the relevant Scheduled Closing of the following conditions, unless Seller waives in writing such fulfillment: Section 9.1 Performance of Agreement. Buyer shall have performed in ------------------------ all material respects its agreements and obligations contained in this Agreement required to be performed on or prior to the Scheduled Closing. Section 9.2 Accuracy of Representations and Warranties. The ------------------------------------------ representations and warranties of Buyer set forth in Article 4 of this --------- Agreement shall be true in all material respects as of the date of this Agreement (unless the inaccuracy or inaccuracies which would otherwise - 105 - result in a failure of this condition have been cured by the Scheduled Closing) and as of the Scheduled Closing as if made as of such time. Section 9.3 Officers' Certificate. Seller shall have received from --------------------- Buyer an officers' certificate, executed on Buyer's behalf by its chief executive officer, president, chief financial officer or treasurer (in his or her capacity as such) dated the Closing Date and stating that to the actual knowledge of such individual, the conditions in Sections 9.1 and 9.2 ------------ --- above have been met. Section 9.4 Consents. The waiting period under the HSR Act shall -------- have expired or been terminated, and, subject to the provisions of Section ------- 2.12, all Consents required for Seller to consummate the Transactions with ---- respect to such Facility shall have been obtained, except that a Consent from a third party to the sale and assignment of a Transferred Asset, such as a Medicare or Medicaid provider agreement, or the assumption of an Assumed Liability with respect thereto, shall not constitute a condition to Seller's consummation of the Transactions with respect to such Facility if such sale, assignment or assumption may lawfully be made subject to a customary condition subsequent that the Consent be obtained from the third party based upon determinations of such third party, including without limitation needs surveys or evaluations of Buyer, to be completed after the Scheduled Closing, whether or not such third party indicates prior to the Scheduled Closing that any such Consent is likely or not likely to be given. Section 9.5 Absence of Injunctions. There shall be no: ---------------------- (a) Injunction, restraining order or order of any nature issued by any court of competent jurisdiction or governmental agency which directs that the Transactions related to such Facility contemplated hereby shall not be consummated as herein provided; (b) Suit, action or other proceeding by any governmental agency pending before any court, governmental agency or non-governmental, self- regulatory organization, or threatened (pursuant to a written notification), wherein such complainant seeks the restraint or prohibition of the consummation of the Transactions related to such Facility or asserts the illegality of the Transactions related to such Facility; or (c) Action taken, or law enacted, promulgated or deemed applicable to the Transactions related to such Facility, by any governmental - 106 - agency which would render consummation of such Transactions illegal or which would threaten the imposition of any penalty or material economic detriment upon Seller or the Subsidiaries if such Transactions were consummated; provided that: -------- ---- (i) The parties will use their reasonable efforts to litigate against, or to obtain the lifting of, any such injunction, restraining or other order, restraint, prohibition, action, suit, law or penalty; (ii) In the event that (A) the First Closing has occurred, (B) there is such a pending or threatened suit, action, proceeding, injunction, restraining order or other order, made, sought, issued, initiated or obtained by a governmental agency in respect of Transactions contemplated to occur at the Final Closing, and (C) on or prior to the original Termination Date for the Final Closing, the parties and such agency have entered into a written agreement which would resolve such controversy but such agreement is subject to final agency approval that has not been obtained on or prior to the fifth business day before the original Termination Date for the Final Closing, then and in such events the original Termination Date for the Final Closing shall be extended to the fifth business day following such final agency approval if the date of such approval is within five (5) business days of the end of the month or the original Termination Date for the Final Closing shall be extended to the end of the month in which such approval is obtained if the date of such approval is not within five (5) business days of the end of a month, but in no event shall the original Termination Date for the Final Closing be extended for more than three (3) calendar months from the original Termination Date; and (iii) Clauses (a) through (c) above notwithstanding, the effect --- --- of any such event, action or suit shall be to exclude the affected Facility from the Scheduled Closing and, if such Facility is not transferred in a subsequent Closing, to adjust the Purchase Price pursuant to the Allocation Schedule. Section 9.6 Opinion of Counsel. Seller shall have received, on and ------------------ as of the Closing Date, an opinion of King & Spalding, counsel to Buyer, substantially as to the matters set forth in Sections 4.1, 4.2, 4.3, 4.4, ------------ --- --- --- and 4.5, subject to customary conditions and limitations. --- - 107 - Section 9.7 Receipt of Other Documents. Seller shall have received -------------------------- the following: (a) Certified copies of the resolutions of Buyer's and each relevant Buyer Subsidiary's board of directors respecting this Agreement, the Related Agreements and the Transactions; (b) Certified copies of Buyer's and each relevant Buyer Subsidiary's Charter Documents, together with a certificate of Buyer's and each Buyer Subsidiary's corporate secretary that none of such documents have been amended; (c) One or more certificates as to the incumbency of each officer of Buyer who has signed the Agreement, any Related Agreement, or any certificate, document or instrument delivered pursuant to the Agreement or any Related Agreement; (d) Good standing certificates for Buyer and for each relevant Buyer Subsidiary from the Secretaries of State of their respective states of incorporation, dated as of a date not earlier than fifteen (15) business days prior to the relevant Closing Date; (e) Copies of all third party and governmental consents, permits and authorizations that Buyer has received in connection with the Agreement, the Related Agreements and the Transactions; and (f) A certificate of Buyer executed on its behalf by the Chief Executive Officer and the Chief Financial Officer of Buyer stating that to the best of their knowledge and belief, specifying in reasonable detail their basis for same, after giving effect to the Transactions, neither Buyer nor any relevant Buyer Subsidiary is insolvent or will be rendered insolvent by obligations incurred in connection therewith, or will be left with unreasonably small capital with which to engage in their businesses, or will have incurred obligations beyond their respective abilities to perform the same as and when due. ARTICLE 10 TERMINATION Section 10.1 Termination. Any Transactions contemplated hereby that ----------- have not been consummated may be terminated: - 108 - (a) At any time, by mutual written consent of Seller and Buyer; or (b) By either Buyer or Seller upon written notice to the other party, if (i) the relevant Scheduled Closing shall not have occurred by its Termination Date; or (ii)(A) in the case of termination by Seller, the conditions set forth in Section 2.13 and Article 9 for the relevant ------------ --------- Scheduled Closing cannot reasonably be met by its Termination Date or Seller has terminated this Agreement pursuant to Section 6.4, and (B) in ----------- the case of termination by Buyer, the conditions set forth in Section 2.13 ------------ and Article 8 for the relevant Scheduled Closing cannot reasonably be met --------- by its Termination Date, unless in either of the cases described in clauses ------- (A) or (B), the failure of the condition is the result of the material --- --- breach of this Agreement by the party seeking to terminate. The Termination Date for the First Closing shall be September 1, 1994, and provided the First Closing has occurred, the Termination Date for any subsequent Scheduled Closing and the Final Closing shall be September 30, 1994; provided that if the "Termination Date" for the "Final Closing" under ------------- the Subsequent Facilities Agreement has been extended beyond September 30, 1994, then the Termination Date for the Final Closing under this Agreement shall likewise be extended, and provided further that, notwithstanding any --------------------- provisions in this Agreement which may be construed to the contrary, under no circumstances shall the Termination Date for the Final Closing under this Agreement occur after the first to occur of the "Final Closing" or the "Termination Date" therefor under the Subsequent Facilities Agreement. Each such date, or such later date as may be specifically provided for in this Agreement (including any date arising under operation of Sections -------- 8.5(c)(ii) and 9.5(c)(ii) hereof) or agreed upon by the parties, is herein --------- --------- referred to as the "Termination Date." ---------------- Each party's right of termination hereunder is in addition to any other rights it may have hereunder or otherwise. Section 10.2 Effect of Termination. If there has been a termination --------------------- pursuant to Section 10.1 prior to the First Closing, then this Agreement ------------ shall be deemed terminated, and all further obligations of the parties hereunder shall terminate, except that the obligations set forth in Sections 5.5 and 5.6 and in Articles 11 and 12 shall survive. In the event ------------ --- ----------- -- of termination of this Agreement as provided above, there shall be no liability on the part of a party to another under and by reason of this Agreement or the transactions contemplated hereby except as set forth in Article 11 and ---------- - 109 - except for intentionally fraudulent acts by a party, the remedies for which shall not be limited by the provisions of this Agreement. In the event of a termination after the First Closing, then all further obligations of the parties respecting Transactions that have not been consummated shall terminate, except that the obligations set forth in Sections 5.5 and 5.6 and in Articles 11 and 12 shall survive, and there ------------ --- ----------- -- shall be no liability on the part of a party to another in respect of such unconsummated Transactions except as set forth in Article 11 and except for ---------- intentionally fraudulent acts by a party, the remedies for which shall not be limited by this Agreement. The foregoing provisions shall not, however, limit or restrict the availability of specific performance or other injunctive or equitable relief to the extent that specific performance or such other relief would otherwise be available to a party hereunder. ARTICLE 11 SURVIVAL AND REMEDIES; INDEMNIFICATION Section 11.1 Survival. Except as may be otherwise expressly set -------- forth in this Agreement, the representations, warranties, covenants and agreements of Buyer and Seller set forth in this Agreement, or in any writing required to be delivered in connection with this Agreement, shall survive the Scheduled Closings and the consummations of the Transactions. Section 11.2 Exclusive Remedy. Absent intentional fraud or unless ---------------- otherwise specifically provided herein, the sole exclusive remedy for damages of a party hereto for any breach of the representations, warranties, covenants and agreements of the other party contained in this Agreement and the Related Agreements shall be the remedies contained in this Article 11. Notwithstanding the foregoing, with respect to any ---------- matters associated with any of the Owned Real Properties or Leased Real Properties involving environmental contamination or noncompliance with any applicable Environmental Law, if the First Closing occurs, nothing in this Article 11 shall limit or restrict a party's rights or remedies against, or ---------- obligations to, another party or any third party arising under any Environmental Law, if such matter (a) was in existence on or prior to the relevant Scheduled Closing, (b) was not identified in the Environmental Survey or Schedule 3.16 (or an update thereto pursuant to Section 6.3), (c) ------------- ----------- was unknown to Seller or any Subsidiary as of the relevant Scheduled Closing, and (d) would not constitute a breach of Seller's warranties in Section 3.16. ------------ Section 11.3 Indemnity by Seller. ------------------- - 110 - (a) Seller shall indemnify Buyer and the Buyer Subsidiaries and hold them harmless from and against any and all claims, demands, suits, loss, liability, damage and expense, including reasonable attorneys' fees and costs of investigation, litigation, settlement and judgment (collectively "Losses"), which they may sustain or suffer or to which they ------ may become subject as a result of: (i) The inaccuracy of any representation or the breach of any warranty made by Seller herein or by Seller or a Subsidiary in a Related Agreement, provided, that any such inaccuracy or breach shall -------- be determined without regard to any qualification of such representation or warranty relating to materiality or any Material Adverse Effect; (ii) The nonperformance or breach of any covenant or agreement made or undertaken by Seller in this Agreement or by Seller or a Subsidiary in a Related Agreement; and (iii) If a Scheduled Closing occurs, the failure of Seller or any Subsidiary to pay, discharge or perform as and when due, any of the Excluded Liabilities (including, without limitation, the Excluded Liabilities enumerated in Sections 2.4(c), (d), (e) and (g), and any --------------- --- --- --- Losses as a result of or in connection with the failure of Seller and the Subsidiaries to comply with any Bulk Sales Laws referred to in Section 7.1). ----------- (b) The indemnification obligations of Seller provided above shall, in addition to the qualifications and conditions set forth in Sections 11.5 and 11.6, be subject to the following qualifications: ------------- ---- (i) Buyer and the Buyer Subsidiaries shall not be entitled to indemnity under Subsection (a)(i) above (except for claims arising ----------------- under Sections 3.1, 3.2, 3.3 and 3.7) unless: ------------ --- --- --- (A) Written notice to Seller of such claim specifying the basis thereof is made, or an action at law or in equity with respect to such claim is served, before the second anniversary of the earlier to occur of the relevant Closing Date or the date on which this Agreement is terminated, as the case may be; - 111 - (B) If a Scheduled Closing occurs, the Losses sustained or suffered by Buyer and the Buyer Subsidiaries or to which they may be subject as a result of circumstances described in such Subsection (a)(i) and in Section 11.3(a)(i) of the ----------------- ------------------ Subsequent Facilities Agreement exceed, in the aggregate, the sum of Three Million Dollars ($3,000,000) (the "Trigger Amount"), in -------------- which case Buyer and the Buyer Subsidiaries shall be entitled only to recover the amount by which such aggregate Losses exceed Two Million Dollars ($2,000,000) (the "Deductible Amount"), ----------------- provided, however, that individual claims of Two Thousand Dollars -------- ($2,000) or less shall not be aggregated for purposes of calculating either the Trigger Amount, the Deductible Amount or the excess of Losses over the Deductible Amount; (C) If a Scheduled Closing occurs, in no event shall Seller be liable to Buyer and the Buyer Subsidiaries under Subsection (a)(i) for Losses in the nature of consequential ----------------- damages, lost profits, damage to reputation or the like, but such damages shall be limited to out-of-pocket Losses and diminution in value; and (D) If a Scheduled Closing occurs, in no event shall Seller be liable to Buyer and the Buyer Subsidiaries under Subsection (a)(i) of this Agreement and under Section 11(a)(i) of ----------------- --------------- the Subsequent Facilities Agreement for amounts which, in the aggregate, exceed the sum of (x) that portion of the Purchase Price paid pursuant to Section 2.5(a) of this Agreement and -------------- pursuant to Section 2.5(a) of the Subsequent Facilities Agreement ------------- for assets actually acquired and (y) the amount paid pursuant to the penultimate sentence of Section 2.5 of this Agreement and ----------- pursuant to the penultimate sentence of Section 2.5(a) of the ------------- Subsequent Facilties Agreement; provided that in the event Buyer -------- and the Buyer Subsidiaries make claims in the aggregate for Losses with respect to a Facility that exceed seventy-five percent (75%) of the portion of the Purchase Price allocated to such Facility in the Allocation Schedule, then substantially concurrently with the making of such claim or claims, Buyer shall cause such Facility to be offered in writing for resale to Seller at a cash price equal to such allocated portion of the Purchase Price - 112 - less amounts, if any, previously paid by Seller to Buyer with respect to Buyer's claims for Losses with respect to such Facility and on an "as is, where is" basis, in which case: (1) Seller shall have thirty (30) days to accept such offer in writing; (2) If Seller accepts such offer, it shall have one hundred fifty (150) days to close such transaction; (3) At the closing of such transaction, Buyer shall cause all of the right, title and interest of its Affiliates in such Facility and related assets to be conveyed to Seller (or a designee of Seller) in the same condition of title as the Facility and related assets were originally sold, assigned, transferred and conveyed by Seller and the Subsidiaries hereunder, and Seller (or such designee) shall assume disclosed operating liabilities of the Facility of the same types as the Assumed Liabilities provided that if -------- the dollar amount of such liabilities exceeds the dollar amount of the Assumed Liabilities respecting such Facility originally assumed by Buyer hereunder, then there shall be a dollar-for-dollar reduction in the purchase price payable by Seller (or its designee) to the extent of such excess; and (4) Simultaneous with such closing, Buyer and the Buyer Subsidiaries shall release Seller from further liability under Subsection (a)(i) for Losses with respect to ----------------- such Facility. (ii) If a Scheduled Closing occurs, Buyer and the Buyer Subsidiaries shall not be entitled to indemnity under Subsections ----------- (a)(ii)-(iii) above except for out-of-pocket Losses actually suffered ------------- or sustained by them or to which they may become subject as a result of circumstances described in such Subsections (a)(ii)-(iii), and such ------------------------- indemnity shall not include Losses in the nature of consequential damages, lost profits, diminution in value, damage to reputation or the like; except that the provisions of this clause (b)(ii) shall not ------- apply to breaches of Sections 5.6 and 6.8, provided that the ------------ --- -------- - 113 - liability of Seller and the Subsidiaries for breaches of such Sections shall be subject to the provisions of Subsection (b)(i)(D) above and -------------------- that the liability of Seller and the Subsidiaries for breaches of such Sections shall be aggregated with the liability of Seller under Subsection (a)(i) for purposes of Subsection (b)(i)(D). ----------------- -------------------- (iii) Seller shall have no liability for Losses arising from the breach of any warranty related to Net Book Values, including without limitation the warranties contained in Sections 3.17 and 3.18, ------------- ---- and no such Losses shall be applied against the Trigger Amount or the Deductible Amount or the excess of Losses over the Deductible Amount, it being agreed that the liability of the Seller with respect to Net Book Values, if any, shall be resolved in accordance with the provisions of Sections 2.6(a), (b) and (c). --------------- --- --- Section 11.4 Indemnity by Buyer. ------------------ (a) Buyer shall indemnify Seller and the Subsidiaries and hold Seller and the Subsidiaries harmless from and against any and all Losses which they may sustain or suffer or to which they may become subject as a result of: (i) The inaccuracy of any representation or the breach of any warranty made by Buyer herein or by Buyer or a Buyer Subsidiary in a Related Agreement, provided that any such inaccuracy or breach shall -------- be determined without regard to any qualification of such representation or warranty relating to materia-lity or any Material Adverse Effect; (ii) The nonperformance or breach of any covenant or agreement made or undertaken by Buyer in this Agreement or by Buyer or a Buyer Subsidiary in a Related Agreement; (iii) If a Scheduled Closing occurs, the failure of Buyer to pay, discharge or perform as and when due, any of the Assumed Liabilities; and (iv) If a Scheduled Closing occurs, the ongoing operations of Buyer and the Transferred Assets after the relevant Closing Date, including but not limited to the continuation or - 114 - performance by Buyer after the relevant Closing Date of any agreement or practice of the Seller or the Subsidiaries. (b) The indemnification obligations of Buyer provided above shall, in addition to the qualifications and conditions set forth in Sections 11.5 and 11.6, be subject to the following qualifications: ------------- ---- (i) Seller and the Subsidiaries shall not be entitled to indemnity under Subsection (a)(i) above (except for claims under ----------------- Sections 4.1, 4.2, 4.3 and 4.7) unless: ------------ --- --- --- (A) Written notice to Buyer of such claim specifying the basis thereof is made, or an action at law or in equity with respect to such claim is served, before the second anniversary of the earlier to occur of the relevant Closing Date or the date on which this Agreement is terminated, as the case may be; (B) If a Scheduled Closing occurs, the Losses sustained or suffered by Seller and the Subsidiaries or to which they may be subject as a result of circumstances described in such Subsection (a)(i) and in Section 11.4(a)(i) of the ----------------- ------------------ Subsequent Facilities Agreement exceed, in the aggregate, the Trigger Amount, in which case Seller and the Subsidiaries shall be entitled only to recover the amount by which such Losses exceed, in the aggregate, the Deductible Amount, provided, -------- however, that individual claims of Two Thousand Dollars ($2,000) or less shall not be aggregated for purposes of calculating either the Trigger Amount, the Deductible Amount or the excess of Losses over the Deductible Amount; and (C) If a Scheduled Closing occurs, in no event shall Buyer be liable to Seller and the Subsidiaries under Subsection ---------- (a)(i) for Losses in the nature of consequential damages, lost ------ profits, damage to reputation or the like, but such damages shall be limited to out-of-pocket Losses and diminution in value. (ii) If a Scheduled Closing occurs, Seller and the Subsidiaries shall not be entitled to indemnity under Subsections ----------- (a)(ii)- ------- - 115 - (iv) above except for out-of-pocket Losses actually suffered or ---- sustained by them or to which they may become subject as a result of circumstances described in such Subsections (a)(ii)-(iv), and such ------------------------ indemnity shall not include Losses in the nature of consequential damages, lost profits, diminution in value, damage to reputation or the like, except that the provisions of this clause (b)(ii) shall not ------- apply to breaches of Sections 5.6 or 5.7. ------------ --- Section 11.5 Further Qualifications Respecting Indemnification. The ------------------------------------------------- right of a party (an "Indemnitee") to indemnity hereunder shall be subject ---------- to the following additional qualifications: (a) The Indemnitee shall promptly upon its discovery of facts or circumstances giving rise to a claim for indemnification, including receipt by it of notice of any demand, assertion, claim, action or proceed- ing, judicial, governmental or otherwise, by any third party (such third party actions being collectively referred to herein as "Third Party ----------- Claims"), give notice thereof to the indemnifying party (the "Indemnitor"), ------ ---------- such notice in any event to be given within sixty (60) days from the date the Indemnitee obtains actual knowledge of the basis or alleged basis for the right of indemnity or such shorter period as may be necessary to avoid material prejudice to the Indemnitor; and (b) In computing Losses, such amounts shall be computed net of any related recoveries to which the Indemnitee is entitled under insurance policies or other related payments received or receivable from third parties and net of any tax benefits actually received by the Indemnitee or for which it is eligible, taking into account the income tax treatment of the receipt of indemnification. Section 11.6 Procedures Respecting Third Party Claims. In providing ---------------------------------------- notice to the Indemnitor of any Third Party Claim (the "Claim Notice"), the ------------ Indemnitee shall provide the Indemnitor with a copy of such Third Party Claim or other documents received and shall otherwise make available to the Indemnitor all relevant information material to the defense of such claim and within the Indemnitee's possession. The Indemnitor shall have the right, by notice given to the Indemnitee within fifteen (15) days after the date of the Claim Notice, to assume and control the defense of the Third Party Claim that is the subject of such Claim Notice, including the employment of counsel selected by the Indemnitor after consultation with the Indemnitee, and the Indemnitor shall pay all expenses of, and the - 116 - Indemnitee shall cooperate fully with the Indemnitor in connection with, the conduct of such defense. The Indemnitee shall have the right to employ separate counsel in any such proceeding and to participate in (but not control) the defense of such Third Party Claim, but the fees and expenses of such counsel shall be borne by the Indemnitee unless the Indemnitor shall agree otherwise; provided, however, if the named parties to any such -------- ------- proceeding (including any impleaded parties) include both the Indemnitee and the Indemnitor, the Indemnitor requires that the same counsel represent both the Indemnitee and the Indemnitor, and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor. If the Indemnitor shall have failed to assume the defense of any Third Party Claim in accordance with the provisions of this Section, then the Indemnitee shall have the absolute right to control the defense of such Third Party Claim, and, if and when it is finally determined that the Indemnitee is entitled to indemnification from the Indemnitor hereunder, the fees and expenses of Indemnitee's counsel shall be borne by the Indemnitor, provided that the Indemnitor shall be entitled, at its -------- expense, to participate in (but not control) such defense. The Indemnitor shall have the right to settle or compromise any such Third Party Claim for which it is providing indemnity so long as such settlement does not impose any obligations on the Indemnitee (except with respect to providing releases of the third party). The Indemnitor shall not be liable for any settlement effected by the Indemnitee without the Indemnitor's consent except where the Indemnitee has assumed the defense because Indemnitor has failed or refused to do so. The Indemnitor may assume and control, or bear the costs, of any such defense subject to its reservation of a right to contest the Indemnitee's right to indemnification hereunder, provided that -------- it gives the Indemnitee notice of such reservation within fifteen (15) days of the date of the Claim Notice. ARTICLE 12 GENERAL PROVISIONS Section 12.1 Notices. All notices, requests, demands, waivers, ------- consents and other communications hereunder shall be in writing, shall be delivered either in person, by telegraphic, facsimile or other electronic means, by overnight air courier or by mail, and shall be deemed to have been duly given and to have become effective (a) upon receipt if delivered in person or by telegraphic, facsimile or other electronic means, (b) one business day after having been delivered to an air courier for overnight - 117 - delivery or (c) three business days after having been deposited in the mails as certified or registered mail, return receipt requested, all fees prepaid, directed to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by a party hereto): If to Seller, addressed to: National Medical Enterprises 2700 Colorado Avenue Santa Monica, CA 90404 Attn: Treasurer Facsimile: (310) 998-6507 with a copy to counsel for Seller: National Medical Enterprises 2700 Colorado Avenue Santa Monica, CA 90404 Attn: General Counsel Facsimile: (310) 998-6956 and Munger, Tolles & Olson 355 South Grand Avenue 35th Floor Los Angeles, CA 90071 Attn: Robert L. Adler Facsimile: (213) 687-3702 If to Buyer, addressed to: Charter Medical Corporation 577 Mulberry St. Macon, GA 31298 Attn: Executive Vice President - Finance Facsimile: (912) 751-2832 - 118 - with a copy to counsel for Buyer: King & Spalding 191 Peachtree Street Atlanta, GA 30303-1763 Attn: Robert W. Miller Facsimile: (404) 572-5144 Section 12.2 Attorneys' Fees. In any litigation or other proceeding --------------- relating to this Agreement, including litigation with respect to any Related Agreement (but excluding any proceedings under Sections 2.6(b), --------------- 2.6(c) or 2.14), the prevailing party shall be entitled to recover its ------ ----- costs and reasonable attorneys' fees. Section 12.3 Successors and Assigns. The rights under this Agreement ---------------------- shall not be assignable or transferable nor the duties delegable by either party without the prior written consent of the other; and nothing contained in this Agreement, express or implied, is intended to confer upon any person or entity, other than the parties hereto and their permitted successors-in-interest and permitted assignees, any rights or remedies under or by reason of this Agreement unless so stated to the contrary. Notwithstanding the foregoing, (a) Buyer may grant to its lenders a security interest in its rights under this Agreement, and (b) subject to the terms and provisions of Section 5.7, Buyer may assign its rights under ----------- Section 5.7 to the entities and in the circumstances described in Section ----------- ------- 5.7(d). ------ Section 12.4 Counterparts. This Agreement may be executed in one or ------------ more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 12.5 Captions and Paragraph Headings. Captions and paragraph ------------------------------- headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. Section 12.6 Entirety of Agreement; Amendments. This Agreement --------------------------------- (including the Schedules and Exhibits hereto), the other documents and instruments specifically provided for in this Agreement, and the Subsequent Facilities Agreement contain the entire understanding between the parties concerning the subject matter of this Agreement and such other documents and instruments and, except as expressly provided for herein, supersede all prior understandings and agreements, whether oral or written, between - 119 - them with respect to the subject matter hereof and thereof. There are no representations, warranties, agreements, arrangements or understandings, oral or written, between the parties hereto relating to the subject matter of this Agreement and such other documents and instruments which are not fully expressed herein or therein. This Agreement may be amended or modified only by an agreement in writing signed by each of the parties hereto. All Exhibits and Schedules attached to or delivered in connection with this Agreement are integral parts of this Agreement as if fully set forth herein. Without limiting the generality of the foregoing, this Agreement and the Subsequent Facilities Agreement shall, upon their execution, replace and substitute for that certain Asset Sale Agreement between the parties dated as of March 29, 1994 related to both the First Facilities and the Subsequent Facilities which shall be of no further force and effect, it being agreed that the effectiveness of this Agreement and of the Subsequent Facilities Agreement shall relate back from their actual date of execution to and including March 29, 1994. The representations and warranties of the parties made herein shall likewise be deemed to have been made as of March 29, 1994. Section 12.7 Construction. This Agreement and any documents or ------------ instruments delivered pursuant hereto shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. Section 12.8 Waiver. The failure of a party to insist, in any one or ------ more instances, on performance of any of the terms, covenants and conditions of this Agreement shall not be construed as a waiver or relinquishment of any rights granted hereunder or of the future performance of any such term, covenant or condition, but the obligations of the parties with respect thereto shall continue in full force and effect. No waiver of any provision or condition of this Agreement by a party shall be valid unless in writing signed by such party or operational by the terms of this Agreement. A waiver by one party of the performance of any covenant, condition, representation or warranty of the other party shall not invalidate this Agreement, nor shall such waiver be construed as a waiver of any other covenant, condition, representation or warranty. A waiver by any party of - 120 - the time for performing any act shall not constitute a waiver of the time for performing any other act or the time for performing an identical act required to be performed at a later time. Section 12.9 Governing Law. This Agreement shall be governed in all ------------- respects, including validity, interpretation and effect, by the laws of the State of California, without regard to the principles of conflicts of law thereof, provided that the validity, interpretation and effect of any -------- instruments by which real property is conveyed at a Scheduled Closing shall be governed by the laws of the state in which such real property is located. Any action arising under this Agreement shall be adjudicated (a) in Los Angeles, California, if brought by Buyer or its Affiliates against Seller, any Subsidiary or their respective Affiliates, and (b) in [Atlanta], Georgia, if brought by Seller or its Affiliates against Buyer, any Buyer Subsidiary or their respective Affiliates, provided that any cross-claim or counterclaim shall also be adjudicated in the court in which the underlying action has been brought in accordance with this Section ------- 12.9. ---- Section 12.10 Severability. Whenever possible, each provision of ------------ this Agreement shall be interpreted in such manner as to be valid, binding and enforceable under applicable law, but if any provision of this Agreement is held to be invalid, void (or voidable) or unenforceable under applicable law, such provision shall be ineffective only to the extent held to be invalid, void (or voidable) or unenforceable, without affecting the remainder of such provision or the remaining provisions of this Agreement. Section 12.11 Consents Not Unreasonably Withheld. Wherever the ---------------------------------- consent or approval of any party is required under this Agreement, such consent or approval shall not be unreasonably withheld, unless such consent or approval is to be given by such party at the sole or absolute discretion of such party or is otherwise similarly qualified. Section 12.12 Time Is of the Essence. Time is hereby expressly made ---------------------- of the essence with respect to each and every term and provision of this Agreement. The parties acknowledge that each will be relying upon the timely performance by the other of its obligations hereunder as a material inducement to each party's execution of this Agreement. - 121 - IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first above written. Buyer: CHARTER MEDICAL CORPORATION By __________________________ Name _______________________ Title ______________________ Seller: NATIONAL MEDICAL ENTERPRISES, INC. By __________________________ Name ____________________ Title ___________________ - 122 - EXHIBIT A --------- BULK BILL OF SALE AND ASSIGNMENT (General Closing) FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the "Seller"), and each subsidiary of Seller set forth in Rider A hereto (individually a "Subsidiary" and collectively, the "Subsidiaries"), pursuant to, and subject to the terms, provisions and conditions of, that certain Asset Sale Agreement (First Facilities) dated ________________, 1994 (the "Agreement"), by and between Seller and CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), do hereby sell, convey, assign, transfer and deliver to Buyer, its successors and assigns, the Transferred Assets of Seller and the Subsidiaries described in the Agreement, except for those Transferred Assets sold, conveyed, assigned, transferred or delivered by Seller or a Subsidiary to Buyer or to a subsidiary of Buyer pursuant to separate instruments of sale, conveyance, assignment, transfer or delivery, including, without limitation, any Facility Specific Bill of Sale and Assignment, any deed, or any Assignment and Assumption of Real Property Lease. The sale, conveyance, assignment, transfer and delivery made hereunder is made without warranty of any kind, except as may be provided in the Agreement, including the warranty of merchantability or fitness for any purpose. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Agreement. A-1 IN WITNESS WHEREOF, the Seller and each Subsidiary have executed this Bulk Bill of Sale and Assignment this ___ day of _________, 1994, effective as of the date and time specified in the Agreement. NATIONAL MEDICAL ENTERPRISES, INC. For Itself And As Attorney-In-Fact For The Subsidiaries Listed In Rider A By: ___________________________ Title: ________________________ A-2 RIDER A ------- TO -- BULK BILL OF SALE AND ASSIGNMENT -------------------------------- (List of Subsidiaries) A-3 FACILITY SPECIFIC BILL OF SALE AND ASSIGNMENT (Facility No. ___) FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the "Seller"), and each subsidiary of Seller set forth in Rider A hereto (individually a "Subsidiary" and collectively, the "Subsidiaries"), pursuant to, and subject to the terms, provisions and conditions of, that certain Asset Sale Agreement (First Facilities) dated __________________, 1994 (the "Agreement"), by and between Seller and CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), do hereby sell, convey, assign, transfer and deliver to the subsidiary of Buyer identified in Rider A hereto (the "Buyer's Subsidiary"), its successors and assigns, the Transferred Assets of Seller and the Subsidiaries described in the Agreement that are related to the healthcare facilities identified in Rider A hereto (together with related outpatient or satellite clinics, if any, the "Facilities"), except for those Transferred Assets sold, conveyed, assigned, transferred or delivered by Seller or a Subsidiary to Buyer or to Buyer's Subsidiary pursuant to separate instruments of sale, conveyance, assignment, transfer or delivery, of even date herewith, including, without limitation, any deed, or any Assignment and Assumption of Real Property Lease. The sale, conveyance, assignment, transfer and delivery made hereunder is made without warranty of any kind, except as may be provided in the Agreement, including the warranty of merchantability or fitness for any purpose. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Agreement. A-4 IN WITNESS WHEREOF, the Seller and each Subsidiary have executed this Facility Specific Bill of Sale and Assignment this ___ day of _________, 1994, effective as of the date and time specified in the Agreement. NATIONAL MEDICAL ENTERPRISES, INC. For Itself And As Attorney-In-Fact For The Subsidiaries Listed In Rider A By: ___________________________ Title: ________________________ A-5 RIDER A ------- TO -- FACILITY SPECIFIC BILL OF SALE AND ASSIGNMENT --------------------------------------------- 1. Subsidiaries of Seller: ---------------------- ______________________________ ______________________________ NME Psychiatric Properties, Inc. NME Psychiatric Hospitals, Inc. NME Hospitals, Inc. 2. Facilities: ---------- ______________________________ ______________________________ ______________________________ Related outpatient facilities: ______________________________ ______________________________ ______________________________ 3. Buyer's Subsidiary: ------------------ ______________________________ A-6 EXHIBIT B --------- ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE (Facility No. ___) WHEN RECORDED, MAIL TO: THIS ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE (this "Assignment") is entered into as of _____________, 1994, by and between the undersigned assignor (the "Assignor") and the undersigned assignee (the "Assignee"), pursuant to that certain Asset Sale Agreement (First Facilities) dated __________, 1994 (the "Asset Sale Agreement"), by and between the parent corporation of the Assignor, National Medical Enterprises, Inc., a Nevada corporation (the "Assignor's Parent"), and the parent corporation of the Assignee, Charter Medical Corporation, a Delaware corporation (the "Assignee's Parent"). WITNESSETH: ----------- WHEREAS, Assignor is the tenant under that certain real property lease described in Rider A attached hereto wherein Assignor leases that certain real property described in Rider B attached hereto (the "Real Property Lease"); and WHEREAS, Assignor desires to assign all of its right, title and interest under the Real Property Lease and Assignee desires to assume all of Assignor's obligations thereunder; NOW, THEREFORE, the parties agree as follows: 1. Assignment of Lease. Assignor hereby assigns unto Assignee ------------------- all of the Assignor's right, title and interest in the Real Property B-1 Lease, including, without limitation, any rights to renew, terminate or extend the term of the Real Property Lease, and any rights of first refusal respecting and options to purchase the leased premises that are the subject of the Real Property Lease. 2. Assumption of Real Property Lease Obligations. Assignee and --------------------------------------------- Assignee's Parent, jointly and severally, do hereby assume all of the obligations of the Assignor under the Real Property Lease and all of the obligations of any guarantor of the Assignor's obligations under the Real Property Lease. 3. General Provisions. Assignee and Assignee's Parent hereby ------------------ confirm that Assignee has irrevocably appointed Assignee's Parent as its sole and exclusive representative, agent and attorney-in-fact with respect to all matters arising from or related to this Assignment. Notices hereunder to the Assignor or the Assignor's Parent, or to the Assignee or the Assignee's Parent, as the case may be, shall be given to the Assignor's Parent or the Assignee's Parent, as the case may be, in accordance with the provisions of the Asset Sale Agreement. The provisions of this Assignment shall be binding upon and inure to the benefit of each party hereto, the Assignor's Parent, any guarantor of the Assignor's obligations under the Real Property Lease, the lessor under the Real Property Lease, and the respective predecessors, successors and permitted assigns of each of the foregoing. Unless otherwise expressly provided by the Real Property Lease, nothing in this Assignment and Assumption shall relieve the Assignor of its obligations to the lessor under the Real Property Lease or any such guarantor of its obligations under any such guaranty. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Asset Sale Agreement. B-2 IN WITNESS WHEREOF, the undersigned have executed this Assignment as of the day and year first above written. ASSIGNOR: ______________________________, a _______________ corporation By: __________________________ Title: _________________________ And By: ______________________ Title: _________________________ ASSIGNEE: ______________________________, a ________________ corporation By: _____________________________ Title: ___________________________ And By: _________________________ Title: ___________________________ CHARTER MEDICAL CORPORATION By: _____________________________ Title: ___________________________ And By: ________________________ Title: ___________________________ B-3 STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On ___________________, 1994, before me, the undersigned, a Notary Public in and for said County and State, personally appeared, ____________________ and _____________________, proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities as ____________________ and _______________, respectively, of ___________________________________, a _____________ corporation, and that by their signatures on the instrument, the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. _____________________________ Notary Public (Notary Seal) STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On ___________________, 1994, before me, the undersigned, a Notary Public in and for said County and State, personally appeared, ____________________ and _____________________, proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities as ____________________ and _______________, respectively, of ___________________________________, a _______________ corporation, and that by their signatures on the instrument, the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. _____________________________ Notary Public B-4 (Notary Seal) STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On ___________________, 1994, before me, the undersigned, a Notary Public in and for said County and State, personally appeared, ____________________ and _____________________, proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities as ____________________ and _______________, respectively, of Charter Medical Corporation, a Delaware corporation, and that by their signatures on the instrument, the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. _____________________________ Notary Public (Notary Seal) B-5 RIDER A ------- TO -- ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE ------------------------------------------------ (Description of Lease and Any Separate First Refusal Rights and/or Purchase Options) __________________________________. B-6 RIDER B ------- TO -- ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE ------------------------------------------------ (Description of Leased Premises) ______________________________ ______________________________ ______________________________ B-7 EXHIBIT C --------- GENERAL ASSUMPTION AGREEMENT FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, and pursuant to, and subject to the terms, provisions and conditions of, that certain Asset Sale Agreement (First Facilities) dated ___________, 1994 (the "Agreement"), by and between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the "Seller") and CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), Buyer does hereby assume, and does hereby agree to pay, discharge and perform as and when due, the Assumed Liabilities described in the Agreement of Seller and of each subsidiary of Seller set forth in Rider A hereto (individually a "Subsidiary" and collectively, the "Subsidiaries"), except for those Assumed Liabilities assumed, jointly and severally, by Buyer and a subsidiary of Buyer pursuant to separate instruments of assumption, including, without limitation, any Facility Specific Assumption Agreement or any Assignment and Assumption of Real Property Lease executed by Buyer and/or any subsidiary of Buyer in favor of Seller and/or any of the Subsidiaries. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Agreement. This Assumption Agreement is being delivered in favor of Seller and each of the Subsidiaries. C-1 IN WITNESS WHEREOF, Buyer has executed this Assumption Agreement this ___ day of ________, 1994, effective as of the date and time specified in the Agreement. CHARTER MEDICAL CORPORATION By: _____________________________ Title: __________________________ C-2 RIDER A ------- TO -- GENERAL ASSUMPTION AGREEMENT ---------------------------- (List of Subsidiaries) C-3 FACILITY SPECIFIC ASSUMPTION AGREEMENT (Facility No. ___) FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, and pursuant to, and subject to the terms, provisions and conditions of, that certain Asset Sale Agreement (First Facilities) dated _____________, 1994 (the "Agreement"), by and between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the "Seller") and CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), Buyer and the subsidiary of Buyer identified in Rider A hereto (the "Buyer's Subsidiary"), jointly and severally, do hereby assume, and do hereby agree to pay, discharge and perform as and when due, the Assumed Liabilities described in the Agreement of Seller and of each subsidiary of Seller set forth in Rider A hereto (individually a "Subsidiary" and collectively, the "Subsidiaries") that are related to the healthcare facilities identified in Rider A hereto (together with related outpatient or satellite clinics, if any, the "Facilities"), except for those Assumed Liabilities assumed, jointly and severally, by Buyer and the Buyer's Subsidiary pursuant to separate instruments of assumption, of even date herewith, including, without limitation, Assignment and Assumption of Real Property Lease executed by Buyer and/or the Buyer's Subsidiary in favor of Seller and/or any of the Subsidiaries. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Agreement. This Facility Specific Assumption Agreement is being delivered in favor of Seller and each of the Subsidiaries. C-4 IN WITNESS WHEREOF, Buyer and the Buyer's Subsidiary have executed this Facility Specific Assumption Agreement this ___ day of _________, 1994, effective as of the date and time specified in the Agreement. BUYER'S SUBSIDIARY: ______________________________, a _______________ corporation By: __________________________ Title: ________________________ CHARTER MEDICAL CORPORATION By: ______________________________ Title: _____________________________ C-5 RIDER A ------- TO -- FACILITY SPECIFIC ASSUMPTION AGREEMENT -------------------------------------- 1. Subsidiaries of Seller: ---------------------- ______________________________ ______________________________ NME Psychiatric Properties, Inc. NME Psychiatric Hospitals, Inc. NME Hospitals, Inc. 2. Facilities: ---------- ______________________________ ______________________________ ______________________________ Related outpatient facilities: ______________________________ ______________________________ ______________________________ 3. Buyer's Subsidiary: ------------------ ______________________________ C-6 EXHIBIT D --------- NATIONAL PURCHASING PARTICIPATION AGREEMENT ------------------------------------------- THIS NATIONAL PURCHASING PARTICIPATION AGREEMENT (the "Agreement") is --------- made and entered into as of the ___ day of _____________, 1994, by and between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation ("Seller"), and CHARTER MEDICAL CORPORATION, a Delaware corporation ------ ("Buyer"), with reference to the following facts. ----- A. Buyer and Seller are parties to a Asset Sale Agreement (First Facilities) dated ___________, 1994 (the "Asset Sale Agreement"), pursuant -------------------- to which Seller is causing certain of its wholly-owned subsidiaries (the "Subsidiaries") to sell, and Buyer and certain of its wholly-owned ------------- subsidiaries (the "Buyer Subsidiaries") are buying, certain mental health ------------------ facilities (the "Facilities") and related assets (such Facilities and ---------- related assets being referred to as the "Transferred Assets") through which ------------------ the Subsidiaries have provided mental health services to the public. B. To assist in the orderly transition in the ownership of the Facilities following the purchases and sales contemplated by the Asset Sale Agreement (the "Transactions"), Seller has agreed to, or will cause its ------------ pertinent Affiliates (as such term is defined in the Asset Sale Agreement) to, permit the Facilities to participate in certain national purchasing contracts of Seller and its Affiliates (together, the "Seller Group") to ------------ the extent such Facilities have previously participated therein, all in accordance with the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and the agreements contained herein and in the Asset Sale Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: Section 1 Participation In National Purchasing Contracts. On the ---------------------------------------------- terms and subject to the conditions hereof, Seller hereby agrees to exercise its reasonable commercial efforts for the term set forth in Section 6.1 to permit Buyer and the Buyer Subsidiaries to participate to the extent they D-1 choose in the national purchasing contracts or programs of Seller and its Affiliates set forth in Rider A hereto (as modified from time to time, the "National Contracts") on substantially the same basis as members of the ------------------ Seller Group participate in such National Contracts, provided that such -------- participation shall be solely for the purpose of supporting and shall be limited to the operations of the Facilities. Section 2 Primary Negotiating Party. Buyer agrees that Seller or ------------------------- pertinent members of the Seller Group shall remain the primary negotiating party (the "Primary Negotiating Party") with respect to dealing with third ------------------------- parties under all such National Contracts, and Buyer agrees that without the prior written consent of Seller or the pertinent member of the Seller Group (which consent shall be in the absolute discretion of Seller or such pertinent member of the Seller Group), neither Buyer nor any Affiliate of Buyer (the "Buyer Group") shall initiate any discussions or engage in any ----------- dealings with third parties with respect to matters arising under or related to such National Contracts. Seller agrees to cause the Primary Negotiating Party to consider the unique needs of the Facilities when negotiating terms, provisions and purchasing arrangements under such National Contracts, but the Primary Negotiating Party shall be under no obligation to expend any efforts, reasonable or otherwise, to address such needs if to do so would cause any economic detriment to any member of the Seller Group. Section 3 Fees and Charges. In consideration for participation in ---------------- the National Contracts, Buyer agrees as follows: 3.1 Buyer shall pay Seller a monthly participation fee (the "Participation Fee") as set forth in Rider B hereto. Such Participation ------------------ Fee shall be payable on the first day of each month during the term of this Agreement, pro-rated for partial periods. 3.2 In the event that, pursuant to arrangements applicable to a particular purchase or purchases under a National Contract, a member of the Buyer Group becomes directly obligated to third parties for the Cost of goods and services provided to such member of the Buyer Group, then such member of the Buyer Group shall promptly pay to such third parties the Costs billed to such member of the Buyer Group upon presentation to it of reasonably detailed invoices therefor, such payments to be made in accordance with the terms and tenor of such invoices. D-2 3.3 Buyer hereby agrees to indemnify and hold harmless Seller and each member of the Seller Group from and against any and all loss, liability, damage and expense, including reasonable attorneys' fees and costs of investigation, litigation, settlement and judgment, which Seller and each member of the Seller Group may sustain or suffer or to which they may become subject as a result of any failure of any member of the Buyer Group to comply with the foregoing provisions of this Section 3. --------- Section 4 Disclaimer of Warranties. Seller agrees to use reasonable ------------------------ efforts to permit members of the Buyer Group to participate in the National Contracts to the extent set forth in Section 1, but no member of the Seller --------- Group shall be liable to any member of the Buyer Group for any loss, damage or expense which may result from such participation, for negligent performance by any member of the Seller Group in connection with such participation, or for any changes in the terms, manner, method or mode by which goods and services are procured under the National Contracts. Neither Seller nor any member of the Seller Group makes any warranty, express or implied, to Buyer or any member of the Buyer Group respecting goods and services supplied under a National Contract or this Agreement, including without limitation warranties of merchantability or fitness for a particular purpose, and as between members of the Seller Group and members of the Buyer Group, goods and services shall be provided and accepted "AS IS" and "WITH ALL FAULTS." Without limiting the generality of the foregoing, Seller agrees to exercise reasonable efforts, and to cause members of the Seller Group to exercise reasonable efforts, to pass through to pertinent members of the Buyer Group the benefit of any warranties provided by third parties, to the extent permitted by the warranties in question, with respect to goods and services supplied by such third parties to such members of the Buyer Group, provided that such reasonable efforts -------- shall not include the initiation of any legal proceedings and provided -------- further that Buyer shall, or shall cause the pertinent member or members of ------- the Buyer Group to, reimburse Seller and each member of the Seller Group for any expenses incurred by them in connection with passing through the benefit of any such warranty or warranties. Section 5 Limitation on Obligations of Seller Group. The parties ----------------------------------------- agree that the sole obligation of Seller and members of the Seller Group under this Agreement is to exercise reasonable efforts to permit, subject to the terms hereof and the terms of the National Contracts, members of the Buyer Group to participate in the National Contracts. Nothing herein shall obligate any member of the Seller Group to enforce any rights of any D-3 member of the Buyer Group arising under any National Contract or with respect to any third party. Absent fraud or conversion, and notwithstanding the form in which any claim or action may be brought or asserted, the liability of members of the Seller Group for acts or omissions arising from or relating to the performance of this Agreement shall be limited to repayment, as general damages, of the Participation Fee paid by Buyer for the month or months in which such acts or omissions occurred, and no member of the Seller Group shall, under any circumstances, have any other financial liability hereunder to members of the Buyer Group whatsoever. Buyer agrees, and shall cause each participating member of the Buyer Group to agree, that the provisions of this Section 5 limiting their --------- remedies and liquidating their damages are reasonable in the circumstances existing on the date of this Agreement. Section 6 Term and Termination. -------------------- 6.1 This Agreement is effective on the date first written above, and shall remain in effect for the term set forth herein unless sooner terminated in accordance with the provisions hereof. The initial term of this Agreement shall be for a period of ___________ ( ) days from the date first written above. The term of this Agreement may be extended by mutual agreement of the parties, provided that such mutual agreement shall ------------- be evidenced by a duly executed amendment to this Agreement. 6.2 Buyer may terminate this Agreement upon written notice if Seller or any member of the Seller Group commits any material breach of this Agreement, and fails to cure the breach within thirty (30) days after written notice or, if the breach cannot be cured within thirty (30) days, fails to commence diligent efforts to cure the breach within that period. 6.3 Seller may terminate the participation of Buyer or any member of the Buyer Group with respect to any National Contract in accordance with Section 7.2. In addition, Seller may terminate this Agreement upon written notice to Buyer if Buyer or any member of the Buyer Group (i) fails to pay any amount when due hereunder, or (ii) commits any material breach of this Agreement and, if such breach is other than a failure to pay any amount when due hereunder, fails to cure the breach within thirty (30) days after written notice or, if the breach cannot be cured within thirty (30) days, fails to commence diligent efforts to cure the breach within that period. D-4 6.4 Buyer may terminate this Agreement, with or without cause, upon forty-five (45) days' written notice. 6.5 Seller may terminate this Agreement if Buyer or any Buyer Subsidiary becomes insolvent or admits in writing its insolvency or inability to pay its debts as they become due; is unable or does not pay its debts as they become due; makes or proposes an assignment for the benefit of creditors; convenes or proposes to convene a meeting of its creditors or any class thereof, for purposes of effecting a moratorium upon or extension or composition of its debts; proposes any such moratorium, extension or composition; or commences or has filed against it any bankruptcy, reorganization, liquidation or insolvency proceeding under any law in any jurisdiction for the relief of debtors; or if any receiver, trustee, liquidator or custodian is appointed to take possession of any substantial portion of its assets. 6.6 Termination of this Agreement in whole or in part, for cause, shall be without prejudice to any other remedy otherwise available to the innocent party. Section 7 General Provisions. ------------------ 7.1 Force Majeure. If any party's performance is prevented, ------------- hindered or delayed by reason of any cause(s) beyond such party's reasonable control ("Force Majeure") which cannot be overcome by reasonable ------------- diligence, including without limitation, war, labor disputes, civil disorders, governmental acts, epidemics, quarantines, embargoes, fires, earthquakes, storms, power failures, equipment failures, transmission failures, or acts of God, such party shall be excused from performance to the extent that it is prevented, hindered or delayed thereby, during the continuance of such cause(s); and such party's obligations hereunder shall be excused so long as and to the extent that such cause(s) prevent or delay performance. 7.2 Requirements of Third Parties. Notwithstanding any other ----------------------------- provision hereof, Buyer acknowledges and agrees that members of the Buyer Group shall not be entitled to participate in one or more National Contracts to the extent that to do so would violate the contractual arrangements that may exist from time to time between members of the Seller Group and third party suppliers and vendors or to the extent that such participation is unacceptable to any such third party supplier or vendor, and D-5 that the continued participation of any member of the Buyer Group in one or more National Contracts may be terminated immediately upon written notice to Buyer in such event. 7.3 Entirety of Agreement; Amendments. This Agreement --------------------------------- (including the Riders hereto), the Asset Sale Agreement (including the Schedules and Exhibits thereto), and the other documents and instruments specifically provided for herein and therein contain the entire understanding between the parties concerning the subject matter of this Agreement and such other documents and instruments and, except as expressly provided for herein or therein, supersede all prior understandings and agreements, whether oral or written, between them with respect to the subject matter hereof and thereof. The are no representations, warranties, agreements, arrangements or understandings, oral or written, between the parties hereto relating to the subject matters of this Agreement and such other documents and instruments which are not fully expressed herein or therein. This Agreement may be amended or modified only by an agreement in writing signed by each of the parties hereto. 7.4 Incorporation of Provisions of Asset Sale Agreement. The --------------------------------------------------- following provisions of the Asset Sale Agreement are incorporated herein by reference mutatis mutandis: Sections 2.16, 12.1 through 12.5, and 12.7 ------------- ---- ---- ---- through 12.12. ----- D-6 IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first above written. Buyer: CHARTER MEDICAL CORPORATION For Itself and as Duly Authorized Agent and Attorney-In-Fact for each Buyer Subsidiary By __________________________ Name _______________________ Title ______________________ Seller: NATIONAL MEDICAL ENTERPRISES, INC. By __________________________ Name ____________________ Title ___________________ D-7 RIDER A ------- TO -- NATIONAL PURCHASING PARTICIPATION AGREEMENT ------------------------------------------- [List of National Purchasing Contracts Attached Hereto] D-8 RIDER B ------- TO -- NATIONAL PURCHASING PARTICIPATION AGREEMENT ------------------------------------------- (Participation Fee To Come) D-9 EXHIBIT E REMAINING SCHEDULES None E-1 EXHIBIT F FORM OF DATA PROCESSING SERVICES CONTRACT F-1 EX-10.FF 6 ASSET SALE AGREEMENT EXHIBIT 10(ff) CHARTER.SF ASSET SALE AGREEMENT (SUBSEQUENT FACILITIES) ****** NATIONAL MEDICAL ENTERPRISES, INC. As Seller AND CHARTER MEDICAL CORPORATION As Buyer Dated: March 29, 1994 ASSET SALE AGREEMENT (SUBSEQUENT FACILITIES) Table of Contents
PREAMBLE..................................................... 1 ARTICLE 1............................ 2 DEFINITIONS Section 1.1 Certain Defined Terms........................... 2 Section 1.2 Index of Other Defined Terms.................... 4 ARTICLE 2............................ 8 BASIC TRANSACTIONS Section 2.1 Purchased Assets................................ 8 Section 2.2 Excluded Assets................................. 13 Section 2.3 Assumed Liabilities............................. 15 Section 2.4 Excluded Liabilities............................ 17 Section 2.5 Purchase Price.................................. 20 Section 2.6 Payment of Purchase Price....................... 20 (a) Payment of Tentative Purchase Price................ 21 (b) Determination of Interim Net Book Values........... 21 (c) Determination of Final Net Book Values............. 22 (d) Seller as Agent of Subsidiaries.................... 24 Section 2.7 Allocation of Purchase Price.................... 24 Section 2.8 Contingent Lease Obligations.................... 25 Section 2.9 Remittances and Receivables..................... 25 (a) In General......................................... 25 (b) Receivables........................................ 27 (c) Straddle Patient Receivables....................... 28 (i) Cut-Off Billings.............................. 28 (ii) Cut-Off Billings Not Accepted................ 29 (d) Cooperation in Collecting Receivables and Excluded Assets.................................... 30 (e) Non-Assignable Receivables......................... 30 (f) Collection Fee..................................... 31
(i) Section 2.10 Employee Matters............................... 32 (a) Pension Plans...................................... 32 (b) Retained Employees................................. 32 (c) Hiring of Retained Employees....................... 34 (d) Health Benefits.................................... 34 (e) Acknowledgement of Responsibility.................. 35 Section 2.11 Use of Names................................... 36 Section 2.12 No Assignment If Breach; Seller's Discharge of Assumed Liabilities......................... 37 Section 2.13 Closings....................................... 40 (a) The First Closing.................................. 40 (b) The Second Closing................................. 41 (c) The Final Closing.................................. 41 (d) Deliveries by Seller............................... 42 (e) Deliveries by Buyer................................ 43 (f) Escrow............................................. 43 Section 2.14 Purchase Price Adjustment...................... 44 Section 2.15 Transfer of Assets in Corporate Form........... 46 Section 2.16 Assignment of Rights and Obligations to Buyer Subsidiaries............................. 46 Section 2.17 Data Processing Services....................... 48 ARTICLE 3............................ 50 REPRESENTATIONS AND WARRANTIES OF SELLER Section 3.1 Organization and Corporate Power................ 50 Section 3.2 Subsidiaries.................................... 50 Section 3.3 Authority Relative to this Agreement............ 51 Section 3.4 Absence of Breach............................... 52 Section 3.5 Private Party Consents.......................... 53 Section 3.6 Governmental Consents........................... 53 Section 3.7 Brokers......................................... 53 Section 3.8 Title to Property............................... 54 Section 3.9 Assumed Contracts............................... 55 Section 3.10 Licenses....................................... 56 Section 3.11 U.S. Person; Resident of Georgia............... 56 Section 3.12 Employee Relations............................. 57 Section 3.13 Employee Plans................................. 57 Section 3.14 Litigation..................................... 58 Section 3.15 Inventory...................................... 58
(ii) Section 3.16 Hazardous Substances........................... 58 Section 3.17 Financial Information.......................... 60 Section 3.18 Changes Since Balance Sheet.................... 62 Section 3.19 Transferred Business Names..................... 63 Section 3.20 Compliance with Laws and Accreditation......... 64 Section 3.21 Cost Reports, Third Party Receivables and Conditions of Participation.................... 65 Section 3.22 Medical Staff.................................. 65 Section 3.23 Hill-Burton Care............................... 66 Section 3.24 Assets Used in the Operation of the Facilities..................................... 66 Section 3.25 Taxes.......................................... 66 Section 3.26 Lists of Other Data............................ 66 Section 3.27 Certain Transactions........................... 68 ARTICLE 4............................ 68 REPRESENTATIONS AND WARRANTIES OF BUYER Section 4.1 Organization and Corporate Power................ 68 Section 4.2 Buyer Subsidiaries.............................. 68 Section 4.3 Authority Relative to this Agreement............ 69 Section 4.4 Absence of Breach............................... 70 Section 4.5 Private Party Consents.......................... 70 Section 4.6 Governmental Consents........................... 70 Section 4.7 Brokers......................................... 71 Section 4.8 Qualified for Licenses.......................... 71 Section 4.9 Financial Ability to Perform.................... 71 Section 4.10 No Knowledge of Seller's Breach................ 71 Section 4.11 No Assurance................................... 71 ARTICLE 5............................ 72 COVENANTS OF EACH PARTY Section 5.1 Efforts to Consummate Transactions.............. 72 Section 5.2 Cooperation; Regulatory Filings................. 73 Section 5.3 Further Assistance.............................. 74 Section 5.4 Cooperation Respecting Proceedings.............. 74 Section 5.5 Expenses........................................ 75 Section 5.6 Announcements; Confidentiality.................. 76
(iii) Section 5.7 Preservation of and Access to Certain Records......................................... 78 ARTICLE 6............................ 80 ADDITIONAL COVENANTS OF SELLER Section 6.1 Conduct Pending Closing......................... 80 Section 6.2 Access and Information; Environmental Survey; Remediation or Adjustment....................... 83 Section 6.3 Updating........................................ 86 Section 6.4 No Solicitation................................. 86 Section 6.5 Name Changes.................................... 87 Section 6.6 Filing of Cost Reports.......................... 87 Section 6.7 Purchase of Supplies............................ 87 Section 6.8 Covenant Not to Compete......................... 88 (a) Covenant........................................... 88 (b) Exceptions......................................... 88 (i) Psychiatric Facilities and Contracts Not Acquired By Buyer............................. 88 (ii) Facilities Outside Geographic Area........... 89 (iii) Acute Hospitals............................. 89 (iv) Divestiture of Acquired Psychiatric Facilities................................... 89 (v) Acquiring Entities............................ 90 (c) Acute Hospital Affiliations........................ 90 (d) Covenant Period.................................... 92 (e) Severability....................................... 92 (f) Injunctive Relief.................................. 92 (g) Value.............................................. 93 Section 6.9 Audited Statements.............................. 93 Section 6.10 Post-Closing Insurance......................... 93 Section 6.11 Use of Controlled Substance Licenses........... 94 Section 6.12 Non-Disturbance Agreements..................... 94 ARTICLE 7............................ 95 ADDITIONAL COVENANTS OF BUYER Section 7.1 Waiver of Bulk Sales Law Compliance............. 95 Section 7.2 Resale Certificate.............................. 95
(iv) Section 7.3 Cost Reports and Audit Contests................ 95 Section 7.4 Tax Matters.................................... 96 Section 7.5 Letters of Credit.............................. 96 Section 7.6 Conduct Pending Closing........................ 96 ARTICLE 8........................... 97 BUYER'S CONDITIONS TO CLOSING Section 8.1 Performance of Agreement....................... 97 Section 8.2 Accuracy of Representations and Warranties..... 97 Section 8.3 Officers' Certificate.......................... 98 Section 8.4 Consents....................................... 98 Section 8.5 Absence of Injunctions......................... 98 Section 8.6 Opinion of Counsel............................. 100 Section 8.7 Title to Real Property......................... 100 Section 8.8 Receipt of Other Documents..................... 102 Section 8.9 Licenses and Permits........................... 102 Section 8.10 Casualty; Condemnation........................ 102 Section 8.11 Reasonable Assurances......................... 103 ARTICLE 9........................... 104 SELLER'S CONDITIONS TO CLOSING Section 9.1 Performance of Agreement....................... 105 Section 9.2 Accuracy of Representations and Warranties..... 105 Section 9.3 Officers' Certificate.......................... 105 Section 9.4 Consents....................................... 105 Section 9.5 Absence of Injunctions......................... 105 Section 9.6 Opinion of Counsel............................. 107 Section 9.7 Receipt of Other Documents..................... 107 ARTICLE 10.......................... 108 TERMINATION Section 10.1 Termination................................... 108 Section 10.2 Effect of Termination......................... 108
(v) ARTICLE 11........................... 109 SURVIVAL AND REMEDIES; INDEMNIFICATION Section 11.1 Survival....................................... 109 Section 11.2 Exclusive Remedy............................... 109 Section 11.3 Indemnity by Seller............................ 110 Section 11.4 Indemnity by Buyer............................. 113 Section 11.5 Further Qualifications Respecting Indemnification................................ 115 Section 11.6 Procedures Respecting Third Party Claims....... 116 ARTICLE 12........................... 117 GENERAL PROVISIONS Section 12.1 Notices........................................ 117 Section 12.2 Attorneys' Fees................................ 118 Section 12.3 Successors and Assigns......................... 118 Section 12.4 Counterparts................................... 119 Section 12.5 Captions and Paragraph Headings................ 119 Section 12.6 Entirety of Agreement; Amendments.............. 119 Section 12.7 Construction................................... 119 Section 12.8 Waiver......................................... 120 Section 12.9 Governing Law.................................. 120 Section 12.10 Severability.................................. 120 Section 12.11 Consents Not Unreasonably Withheld............ 121 Section 12.12 Time Is of the Essence........................ 121
(vi) EXHIBITS A. Forms of Bill of Sale and Assignment B. Form of Assignments with Respect to Real Property Leases C. Forms of Assumption Agreement D. Form of Purchasing Contract E. Remaining Schedules LIST OF SCHEDULES A-1 Subsidiaries and Their Respective States of Incorporation; Ownership of Subsidiary Stock A-2 Facilities 2.1(a) Real property owned in fee by Subsidiaries 2.1(b) Real Property Leases 2.1(c) Venture Agreements 2.1(f) Other Assigned Contracts 2.1(h) Transferred Business Names 2.1(k) Prepayments 2.2(j) Other Excluded Assets 2.3(a) Capitalized Leases and Capitalized Lease Liabilities 2.3(f) Other Assumed Liabilities (vii) 2.4(i) Indebtedness 2.4(j) Other Excluded Liabilities 2.7 Allocation Schedule 2.10(a) Pension Plans 2.12(c) Schedule of Required Consents 2.13B Assigned EBITDA 3.5 Private Party Consents 3.7 Seller's Brokers 3.8(a) Liens 3.8(b)(i) Other Real Property and 3.8(b)(ii) 3.9 Assumed Contracts 3.10 Licenses 3.12 Certain Employee Relations Matters 3.14 Litigation 3.16 Environmental Matters 3.17(a) EBITDA Statements 3.17(b) Balance Sheet 3.18 Changes Since Balance Sheet 3.19 Conflicts With Transferred Business Names 3.20 Compliance With Laws and Accreditations (viii) 3.21 Cost Reports, Third Party Receivables and Conditions of Participation 3.22 Medical Staff 3.23 Hill-Burton Care 3.24 Assets Used in the Operation of the Facilities 3.26(a) Depreciation Schedules 3.26(b) Insurance 3.26(c) Employee Benefit Arrangements 3.26(d) Paid Time Off 3.26(e) Certain Contracts 3.26(f) Certain Indebtedness 3.26(g) Certain Financing Arrangements 3.26(h) Certain Contracts Related to Liens 3.27 Certain Transactions 4.5 Private Party Consents 4.7 Buyer's Brokers 4.11 Certain Scheduled Meetings 6.1 Exceptions to Conduct 6.7 National Purchasing Contracts 7.5 Letters of Credit 6.8(c) Specified Acute Hospitals (ix) 8.7(b) Disapproved Title Exceptions (x) ASSET SALE AGREEMENT -------------------- (SUBSEQUENT FACILITIES) This ASSET SALE AGREEMENT (the "Agreement") is made and entered into --------- as of the 29th day of March 1994 by and among NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation ("Seller"), the Subsidiaries (as ------ defined) and CHARTER MEDICAL CORPORATION, a Delaware corporation ("Buyer"), ----- with reference to the following facts: A. Through wholly-owned subsidiary corporations listed on the Schedule (as defined in Section 1.1) hereto identified as Schedule A-1 (the ----------- ------------ "Subsidiaries"), Seller engages in the business of delivering psychiatric ------------ health care services to the public through the inpatient, outpatient and substance abuse recovery facilities, residential treatment centers and medical office buildings identified in Schedule A-2 under the following ------------ facility numbers (such facilities, centers and buildings being herein sometimes referred to as the "Subsequent Facilities" or simply the --------------------- "Facilities"): ----------
NME No. Name City State - ------- ---- ---- ----- 4. Los Altos Hospital & Medical Center Long Beach CA 6. Yorba Hills Hospital and Mental Health Center Yorba Linda CA 11. Bay Harbor Residential Treatment Center Largo FL 13. Laurel Oaks Hospital Orlando FL 14. Medfield Hospital Largo FL 15. Laurel Heights Hospital Atlanta GA 16. Brawner South Mental Health System Stockbridge GA 17. Brawner Midtown Mental Health System Atlanta GA 18. Arbor Hospital of Greater Indianapolis Indianapolis IN 19. Jefferson Hospital Jeffersonville IN 32. MidSouth Hospital Memphis TN 34. Psychiatric Institute of Richmond Richmond VA 37. Northbrooke Hospital Brown Deer WI 38. New Beginnings at Lakewood Lakewood CA 42. Brawner North Mental Health System Smyrna GA 50. Fenwick Hall Johns Island SC 59. Laurel Oaks Residential Treatment Center Orlando FL
B. Buyer desires to purchase from the Subsidiaries, through wholly- owned subsidiaries of the Buyer (each, a "Buyer Subsidiary" and ---------------- collectively, the "Buyer Subsidiaries"), and Seller desires to cause the ------------------ Subsidiaries to sell to the applicable Buyer Subsidiaries, such Facilities together with related assets (the "Transactions"). ------------ C. Buyer and Seller are simultaneously with the execution of this Agreement entering into a separate asset sale agreement (the "First ----- Facilities Agreement") in respect of the other inpatient, outpatient and -------------------- substance abuse recovery facilities, residential treatment centers and medical office buildings also identified in Schedule A-2 (the "First ------------ ----- Facilities"). ---------- NOW, THEREFORE, in consideration of the foregoing recitals and the agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: ARTICLE 1 DEFINITIONS Section 1.1 Certain Defined Terms. For purposes of this Agreement, --------------------- the following terms shall have the following meanings: "Affiliate" of a specified person shall mean any corporation, partnership, sole proprietorship or other person or entity which directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with the person specified. The term "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person or entity. The term "Affiliate" shall include, without limitation, (i) with respect to Seller, each Subsidiary, and (ii) with respect to Buyer, each Buyer Subsidiary. "Cost Report" means the cost report required to be filed, as of the end of a provider cost year or for any other required period, with cost-based Payors with respect to cost reimbursement. "Environmental Law" shall mean any Law regulating or otherwise relating to Hazardous Materials, the environment, natural resources, pollution, environmental protection, waste management, industrial hygiene, health, or safety. "Hazardous Materials" means any chemicals, materials, substances, or items in any form, whether solid, liquid, gaseous, semisolid, or any combination thereof, whether waste materials, raw materials, chemicals, finished products, by-products, or any other materials or articles, which are regulated by or form the basis of liability under any Environmental Laws, including, without limitation, any hazardous waste, -2- medical waste, biohazardous waste, industrial waste, special waste, solid waste, hazardous substance, pollutant, hazardous air pollutant, contaminant, asbestos, polychlorinated biphenyls ("PCBs"), petroleum (including, but not limited to, petroleum-derived substances, waste or breakdown or decomposition products thereof, or any fraction thereof), coal (including, but not limited to, coal-derived substances, waste or breakdown or decomposition products thereof, or any fraction thereof), natural gas (including, but not limited to, natural gas-derived substances, waste or breakdown or decomposition products thereof, or any fraction thereof), formaldehyde, industrial solvents, flammables, explosives, and radioactive substances. "knowledge" of a party shall mean the best of the knowledge of any person who serves as of the date of this Agreement as a duly elected officer of such party. "Laws" shall mean all statutes, rules, regulations, ordinances, orders, codes, permits, licenses and agreements with or of federal, state, local and foreign governmental and regulatory authorities and any order, writ, injunction, settlement agreement or decree issued or approved by any court, arbitrator or governmental agency or in connection with any judicial, administrative or other non-judicial proceeding (including, without limitation, arbitration or reference). "Licenses" shall mean certificates of need, accreditations, registrations, licenses, permits and other consents or approvals of governmental agencies or accreditation organizations. "Payor" shall mean Medicare, Medicaid, CHAMPUS and Medically Indigent Assistance programs, Blue Cross, Blue Shield or any other third party payor (including an insurance company and self-insured employer), or any health care provider (such as a health maintenance organization, preferred provider organization, peer review organization, or any other managed care program). "Release" means any release, spill, emission, leaking, pumping, emptying, dumping, injection, abandonment, deposit, disposal, discharge, dispersal, leaching, or migration of Hazardous Materials (including, but not limited to, the abandonment or discarding of Hazardous Materials in barrels, drums, or other containers) into or within the environment, including, without limitation, the migration of Hazardous -3- Materials into, under, on, through, or in the air, soil, subsurface strata, surface water, groundwater, drinking water supply, any sediments associated with any water bodies, or any other environmental medium, regardless of where such migration originates. "Schedule" shall mean a schedule from the master set of schedules and attachments developed for this Agreement and the First Facilities Agreement and which is listed in the Table of Contents for this Agreement. The parties agree that to the extent information in a schedule from the master set of schedules and attachments is listed by a facility name and/or by a facility number, such schedule shall, for purposes of this Agreement, be deemed to include only the information contained therein that is related to the Subsequent Facilities, unless this Agreement expressly refers to information contained therein that is related to the First Facilities. "Taxes" shall mean (i) all federal, state, county and local sales, use, property, recordation and transfer taxes, (ii) all state, county and local taxes, levies, fees, assessments or surcharges (however designated, including privilege taxes, room or bed taxes and user fees) which are based on the gross receipts, net operating revenues or patient days of a Facility for a period ending on, before or including the relevant Closing Date (as defined in Section 2.13) or a formula taking any one of ------------ the foregoing into account, and (iii) any interest, penalties and additions to tax attributable to any of the foregoing, but shall not include income and other taxes described in Sections 2.4(a) and (b). --------------- --- Section 1.2 Index of Other Defined Terms. In addition to those terms ---------------------------- defined above, the following terms shall have the respective meanings given thereto in the sections indicated below:
Defined Term Section ------------ ------- Account Parties 2.9(b) Accrued Operating Assets 2.5(b) Accrued Operating Expenses 2.3(g) Acquired Acute Hospitals 6.8(c) Acquisition Date 6.8(c) Acute Hospitals 6.8(b)(iii) Adjustment Sections 2.14 Agreement Preamble Allocation Schedule 2.7
-4- Assumed Contracts 2.3(a) Assumed Guaranties 2.3(a) Assumed Liabilities 2.3 Balance Sheet 3.17(b) Buyer Preamble Buyer Subsidiary Preamble Charter Documents 3.4 Claim Notice 11.6 Closing Date 2.13 COBRA 2.10(d) Code 3.11 Collection Fee Base 2.9(f) Combined Receivables 3.17(d) Combined Subsidiaries 3.17(a) Competing Business 6.8(a) Consents 8.5 Consultant 6.2(b) Contingent Contract 2.18 Cost Report Settlements 2.2(i) Covenant Period 6.8(d) Covered Facilities 6.8(b)(ii) Covered Parties 6.8(a) Deductible Amount 11.3(b)(i)(B) Document Retention Period 5.7(b) EBITDA 3.17(a) EBITDA Statements 3.17(a) Eligible Receivables 2.9(b)(ii) Employee Benefit Arrangements 3.26(c) Environmental Survey 6.2(b) Equipment 2.1(d) ERISA 2.10(a) Escrow Agent 2.13(f) Estimated Net Book Values 2.6(a) Excess Interim Payments 2.1(l) Excluded Assets 2.2 Excluded Liabilities 2.4 Exempted Competing Business 6.8(c) Facilities Recitals Final Closing 2.13 Final Closing Date 2.13 Final Net Book Values 2.6(c)
-5- Financial Schedule 3.17(b) First Closing 2.13 First Facilities Recitals First Facilities Agreement Recitals Hired Employees 2.10(c) Hospital Records 5.7(a) HSR Act 3.4 Indemnitee 11.5 Indemnitor 11.5(a) Insurance Program 6.10 Intercompany Transactions 2.1(f)(y) Interim Net Book Values 2.6(b) Inventory 2.1(e) JCAHO 3.20 Leased Real Property 2.1(b) Loan Commitment Agreements 2.1(f) Loan Commitment Notes 2.1(f) Losses 11.3(a) Manuals 2.11(b) Material Adverse Effect 3.4 Multiemployer Plans 2.10(a) Net Book Values 2.5(b) 1993 EBITDA 2.13(b) Other Assigned Contracts 2.1(f) Original Closing Date 2.14 Owned Real Property 2.1(a) Paid Time Off 2.3(c) Panel 2.14 Patient Records 5.7(a) Pension Plans 2.10(a) Permitted Encumbrances 3.8(a) Permitted Expansions 6.8(b)(iv) Prepayments 2.1(k) Purchase Price 2.5 Real Property Leases 2.1(b) Receivables 2.1(l) Related Agreements 3.4 Reorganization 6.8(b)(v) Retained Employees 2.10(b)(iii) Schedule of Required Consents 2.12(c) Scheduled Closing 2.13
-6- Second Closing 2.13 Seller Preamble Specified Acute Hospital 6.8(c) Specified Capacity 6.8(a) Straddle Patients 2.9(c) Straddle Patient Payments 2.9(c)(ii) Subject Transferred Assets 2.13 Subsequent Facilities Recitals Subsidiaries Recitals TEFRA 2.9(c)(ii) Tentative Purchase Price 2.6(a) Termination Date 10.1(b) Third Party Claims 11.5(a) Title Insurer 8.7 Title Policies 8.7 Transactions Recitals Transferred Business Names 2.1(h) Trigger Amount 11.3(b)(i)(B) Unusual Proceedings 3.14 Venture Agreements 2.1(c) Ventures 2.1(c) WARN Act 2.10(e) Working Capital Adjustment Date 2.6(c)
-7- ARTICLE 2 BASIC TRANSACTIONS Section 2.1 Purchased Assets. On the terms and subject to the ---------------- conditions contained in this Agreement, Buyer shall, or shall cause the applicable Buyer Subsidiary to, purchase from each Subsidiary, and Seller shall cause each Subsidiary to sell, convey, assign, transfer and deliver to Buyer or the applicable Buyer Subsidiary, the following assets of each such Subsidiary that are used in and necessary for the conduct of the operations of the Facilities (the "Transferred Assets"), but excluding all ------------------ Excluded Assets as defined in Section 2.2: ----------- (a) All of the Subsidiary's right, title and interest in and to the real property owned in fee (the "Owned Real Property") that is ------------------- identified in Schedule 2.1(a) on which Facilities are located and all other --------------- real property owned in fee by the Subsidiary and used in and necessary for the conduct of the operations of the Facilities, together with the Facilities, construction work-in-progress, and all other buildings, fixtures and improvements thereon, and all rights, privileges, permits and easements appurtenant thereto. (b) All of the Subsidiary's right, title and interest, as lessee or sublessee, in and to the leasehold estates and the related lease or sublease agreements (the "Real Property Leases") respecting land, -------------------- Facilities, buildings, fixtures and real property improvements (whether owned or leased) (the "Leased Real Property") identified in Schedule -------------------- -------- 2.1(b), together with all construction work-in-progress in respect of same ------ and all rights, privileges and easements appurtenant thereto. (c) All of the Subsidiary's right, title and interest in and to the joint ventures or partnerships identified in Schedule 2.1(c) hereto --------------- (the "Ventures") that relate to partnerships or joint ventures that own or -------- lease Facilities or other Transferred Assets, together with all of the Subsidiary's right, title and interest in and to the joint venture or partnership agreements, also identified in such Schedule (the "Venture ------- Agreements"), that govern such partnerships or joint ventures, and, subject ---------- to the provisions of Section 7.6, in and to all distributions and ----------- allocations which the Subsidiary is entitled to receive as of the relevant Scheduled Closing (as defined in Section 2.13). ------------ -8- (d) All of the Subsidiary's right, title and interest in and to fixed machinery and equipment, other fixtures and fittings, moveable plant, machinery, equipment and furniture, trucks, tractors, trailers and other vehicles, tools and other similar items of tangible personal property (collectively "Equipment") (i) that are not consumed, disposed of or held --------- for sale or as inventory in the ordinary course of business, (ii) that are used, owned, held or leased by the Subsidiary as of the relevant Scheduled Closing, and (iii) that are used in and necessary for the conduct of the operations of the Facilities. (e) All of the Subsidiary's right, title and interest in and to inventories of supplies, drugs, food, janitorial and office supplies, maintenance and shop supplies, and other similar items of tangible personal property intended to be consumed, disposed of or sold in the ordinary course of business (collectively, the "Inventory") that are used, owned or --------- held by the Subsidiary as of the relevant Scheduled Closing and that are used by the Subsidiary in and necessary for the conduct of the operations of the Facilities. (f) All of the Subsidiary's right, title and interest in and to all written contracts and agreements (the "Other Assigned Contracts") to ------------------------ which the Subsidiary is a party at the relevant Scheduled Closing, other than the Real Property Leases and the Venture Agreements, (i) that are listed on Schedule 2.1(f), (ii) pursuant to which the Subsidiary paid or --------------- received less than $25,000 during its last fiscal year or pursuant to which it expects to pay or receive less than $25,000 during its current fiscal year, or (iii) with respect to Other Assigned Contracts not described in clauses (i) or (ii) above, for which Buyer has not provided Seller with --- ---- written notice of its rejection of such contract or agreement within sixty (60) days following the relevant Scheduled Closing, provided that the Other ------------- Assigned Contracts shall not include any contract or agreement that relates to or covers healthcare facilities or operations of Seller other than the Facilities that are being sold, assigned, transferred or conveyed at such relevant Scheduled Closing except to the extent the portion of such contract or agreement related to such Facilities may be assigned together with the sale, assignment, transfer or conveyance of such Facilities. Schedule 2.1(f) contains a list by Facility of the following categories of --------------- Other Assigned Contracts pursuant to which a Subsidiary paid or received $25,000 or more during its last fiscal year or expects to pay or receive $25,000 or more during its current fiscal year: construction contracts relating to construction work-in-progress at the Facilities; Equipment leases (whether operating or -9- capitalized leases) and installment purchase contracts where the annualized lease or installment payments exceed $25,000; contracts or arrangements binding on a Facility which contain any covenant not to compete or otherwise significantly restrict the nature of the business activities in which the Facility may engage; provider agreements with Payors other than Medicare and Medicaid (as defined in Section 1.1); bridge and other loan ----------- commitment agreements (the "Loan Commitment Agreements") pursuant to which -------------------------- a Subsidiary has agreed to provide advances or income guarantees from time to time to lessors or sublessors under the Real Property Leases or to healthcare professionals, groups or entities providing services to the Facilities, together with promissory notes (the "Loan Commitment Notes") --------------------- evidencing amounts owed to the Subsidiary as a result of any such advances or guarantees; agreements with healthcare professionals; leases as lessor or sublessor; and any other contracts in force pursuant to which the Subsidiary paid or received over $25,000 during its last fiscal year or expects to pay or receive $25,000 or more during its current fiscal year. Notwithstanding the foregoing, the Other Assigned Contracts shall not include and Schedule 2.1(f) need not contain: --------------- (w) Any contract which evidences indebtedness for money borrowed or the deferred portion of the purchase price for Owned Real Property and is therefore an Excluded Liability under the provisions of Section 2.4(i), unless the parties mutually agree, in accordance -------------- with the provisions of such Section 2.4(i), that such indebtedness -------------- will be assumed by Buyer, in which case the contract or contracts evidencing such indebtedness will be Transferred Assets, provided that ------------- if the indebtedness evidenced by any such contract is secured by a lien on any Transferred Asset, Seller shall cause such lien to be released at or prior to the relevant Scheduled Closing unless Buyer agrees to assume such indebtedness pursuant to Section 2.4(i); -------------- (x) Any contract respecting an intercompany transaction between the Subsidiary, on the one hand, and Seller or an Affiliate (as defined in Section 1.1) of Seller, on the other, whether or not ----------- such transaction relates to the provision of goods and services, tax sharing arrangements, payment arrangements, intercompany charges or balances, or the like ("Intercompany Transactions"), except that ------------------------- transactions arising in connection with open purchase orders where the Seller has acted as an intermediary for a Subsidiary and transactions between Seller or an Affiliate of Seller, on the one -10- hand, and the ventures and partnerships described in Section 2.1(c) -------------- that are not wholly owned by Seller and its Affiliates, on the other hand, shall not be regarded as Intercompany Transactions; (y) Employment contracts, if any, between the Subsidiary or a Facility and the chief executive or chief financial officer of such Facility, whether or not such officer is a Hired Employee (as defined in Section 2.10(c)); and --------------- (z) Collective bargaining agreements in respect of the employees of a Facility, unless Buyer elects to assume such agreements (it being understood, however, that nothing herein is intended to affect Buyer's obligations with respect thereto, if any, under the National Labor Relations Act). (g) All of the Subsidiary's right, title and interest in and to the right to receive mail and other communications addressed to Seller or the Subsidiary insofar as such mail or other communication relates to the operation of the Facilities after the relevant Scheduled Closing, or to Receivables, Inventory, Prepayments or Accrued Operating Expenses (as herein defined). (h) All of the Subsidiary's right, title and interest in and to the business names set forth in Schedule 2.1(h) (the "Transferred Business --------------- -------------------- Names"). ----- (i) All of the Subsidiary's right, title and interest in and to Licenses (as defined in Section 1.1) in favor of the Subsidiary as of the ----------- relevant Scheduled Closing that are related to, necessary for, or used in connection with the operation of the Facilities transferred in such Scheduled Closing as presently operated by the Subsidiary, provided that ------------- Licenses in favor of the Subsidiary shall be included in the Transferred Assets only to the extent they are lawfully transferable. (j) All of the Subsidiary's right, title and interest in and to unexpired warranties as of the relevant Scheduled Closing that are transferable to Buyer which the Subsidiary has received from third parties with respect to the Transferred Assets, including, but not limited to, such warranties as are set forth in any construction agreement, lease agreement, equipment purchase agreement, consulting agreement or agreement for architectural and engineering services. -11- (k) All of the Subsidiary's right, title and interest in and to advance payments, prepayments, prepaid expenses, deposits and the like (i) made by the Subsidiary or Seller on its behalf in the ordinary course of business with respect to Subject Transferred Assets (as defined in Section ------- 2.13) prior to the relevant Scheduled Closing, (ii) which exist as of such ---- Scheduled Closing, (iii) with respect to which Buyer will receive the benefit after the relevant Scheduled Closing, and (iv) which Buyer agrees --- to acquire (Buyer hereby agreeing not to withhold such agreement unreasonably) (collectively, "Prepayments"), which Prepayments are listed ----------- by Facility, category and approximate amount as of November 30, 1993 (or a later date if mutually agreed upon), in Schedule 2.1(k). --------------- (l) Subject to the further provisions of Section 2.9, all of the ----------- Subsidiary's right, title and interest as of the Closing in and to accounts receivable recorded by the Subsidiary as an account receivable from Payors, patients and other third parties (whether or not billed) arising from or in connection with the operation of the Facilities, together with rights to payment for services rendered through the relevant Closing Date to Straddle Patients referred to in Section 2.9(c) (collectively, "Receivables"), -------------- ----------- provided that any account receivable that would, under Sections -------- -------- 2.9(b)(ii)(B) or (C), qualify as an "Eligible Receivable" as of the end of -------------------- the month ending prior to the relevant Scheduled Closing shall, at the option of Buyer, not be a receivable included in the Scheduled Closing and shall be an Excluded Asset. The parties hereby acknowledge that interim payments made by a Payor that are in excess of the net carrying value of the Receivables with respect to which such interim payments are a credit against amounts that would otherwise be due from the Payor ("Excess Interim -------------- Payments") shall not be regarded as Receivables for any purpose of this -------- Agreement, because such Excess Interim Payments do not reflect amounts which the recipient is entitled to retain for services rendered and such Excess Interim Payments are Excluded Assets and Excluded Liabilities under this Agreement. (m) All of the Subsidiary's right, title and interest in and to the goodwill of the businesses evidenced by the Transferred Assets, and, except for Excluded Assets, any and all other assets of the Subsidiary used in and necessary for the conduct of the operations of the Facilities as conducted prior to the relevant Scheduled Closing, whether or not such assets have any value for accounting purposes, provided that with respect ------------- to NME Hospitals, Inc., NME Properties Corp., NME Psychiatric Properties, Inc., NME Specialty Hospitals, Inc. and any subsidiary of NME Specialty Hospitals, Inc. (including, without limitation, NME Psychiatric -12- Hospitals, Inc.), only those assets described in Section 2.1(a)-(l) above ------------------ (other than Excluded Assets) shall be included in the Transferred Assets. Section 2.2 Excluded Assets. The following properties and assets --------------- (the "Excluded Assets") are not included in Transferred Assets: --------------- (a) Except for the Inventory, Receivables, Prepayments and current amounts represented by the Loan Commitment Notes, all assets constituting working capital, whether cash, cash equivalents, securities, or other current assets, and all claims, choses in action, rights of recovery, rights of set-off, rights to refunds, and similar rights. (b) Except for the Transferred Business Names, Licenses and Other Assigned Contracts included in the Transferred Assets and except for manuals relating to equipment and other tangible property included in the Transferred Assets, all privileged or proprietary (to Seller or a Subsidiary) materials, documents, information, media, methods and processes owned by Seller or a Subsidiary, and any and all rights to use same, including, but not limited to, all intangible assets of an intellectual property nature such as trademarks, service marks and trade names (whether or not registered), computer software that is proprietary to Seller or a Subsidiary, all procedures and manuals that are proprietary to Seller or a Subsidiary, all promotional or marketing materials (including all marketing computer software), and any and all names under which the Subsidiaries or the Facilities have done business or offered programs, other than the Transferred Business Names, and all abbreviations and variations thereof, provided, however, that Buyer shall have the rights set forth in Section -------- ------- ------- 2.11. ---- (c) The rights of Seller or any Subsidiary under any insurance policy, if any, included in the Transferred Assets which relate to any Excluded Asset or Excluded Liability (as defined in Section 2.4) (it being ----------- understood, however, that Buyer shall have no obligation to take any action under any such policy to seek any recovery except at the reasonable request, and at the sole expense, of Seller or a Subsidiary or to continue any such policies in force). (d) The rights of Seller or of any Subsidiary to receive mail and other communications addressed to any of them with respect to Excluded Assets or Excluded Liabilities. -13- (e) Subject to the provisions of Section 5.7, any and all ----------- business and patient records of or related to the operation of the Facilities, whether or not maintained at or by the Facilities. (f) All property, plant, equipment and other assets pertaining to the psychiatric healthcare business of Seller or any subsidiary of Seller that relate primarily to any general hospital, acute hospital or so- called "campus facility" of Seller or any subsidiary of Seller and all outpatient facilities and other assets primarily related thereto. (g) Any and all contracts and agreements pursuant to which a Subsidiary provides management services to third parties other than a Facility, except for such contracts and agreements as are specifically listed on Schedule 2.1(f). --------------- (h) Subject to Sections 2.17 and 6.7, any and all rights ------------- --- respecting computer and data processing hardware or firmware that is proprietary to Seller or any Affiliate of Seller, and any computer and data processing hardware or firmware, whether or not located at a Facility, that is part of a computer system the central processing unit for which is not located at a Facility. (i) All of the right, title and interest of Seller and the Subsidiaries in assets resulting from any resolution with Payors of amounts due with respect to Cost Reports ("Cost Report Settlements") to the extent ----------------------- such Cost Reports cover any period through the relevant Scheduled Closing with respect to a Facility and other rights of Seller respecting Cost Reports described in Section 6.6, including any assets or liabilities ----------- resulting from any gain or loss on the sale of the Facilities in connection with the Transactions. (j) (i) All amounts due to the Subsidiaries arising from Intercompany Transactions, (ii) assets that are the subject of the First Facilities Agreement, and (iii) such other assets, if any, specifically described in Schedule 2.2(j) and assets which would be Transferred Assets --------------- except for the operation of Sections 2.12, 6.2(c), 8.5, 8.7 or 9.5 or other ------------- ------ --- --- --- provisions of this Agreement. (k) All "800" telephone lines and related Equipment and contract rights and all advertising containing any name other than a Transferred Business Name. -14- Seller shall remove at any time prior to or within thirty (30) days following the relevant Closing Date or, with respect to the Hospital Records (as defined in Section 5.7(a)), Seller may remove from time to time -------------- within the relevant Document Retention Period (as defined in Section ------- 5.7(b)) (in each case, at Seller's expense, but without charge by Buyer for ------ storage), any and all of the Excluded Assets from the Facilities, provided -------- that Seller shall do so in a manner that does not unduly or unnecessarily disrupt Buyer's normal business activities at the Facilities. Section 2.3 Assumed Liabilities. Subject to the terms and conditions ------------------- set forth in this Agreement, Buyer shall assume and pay, discharge and perform as and when due only the following obligations and liabilities of ---- Seller and the Subsidiaries and no others (the "Assumed Liabilities"), as ------------------- such obligations and liabilities may exist at the time they are assumed by Buyer in accordance with the terms hereof: (a) All liabilities and obligations of the Subsidiaries which pertain to or are to be performed during the period following the relevant Closing Date, and which arise under any contract, license, permit, agreement, arrangement, understanding or undertaking included in the Transferred Assets, including the Real Property Leases, the Venture Agreements, the Other Assigned Contracts and the Licenses, and any obligation or liability (the "Assumed Guarantees") of Seller or any ------------------ Affiliate of Seller (including letters of credit and performance bonds) which is in the nature of a guaranty of the foregoing (together, the "Assumed Contracts"), including without limitation, the capitalized lease ----------------- liabilities and obligations of the Facilities listed on Schedule 2.3(a). --------------- (b) Without affecting the provisions of Sections 2.1(k), 2.6(a), --------------- ------ 2.6(b) or 2.6(c), all liabilities and obligations under open purchase ------ ------ orders at a Facility included in the Subject Transferred Assets that were entered into by Seller or a Subsidiary in the ordinary course of business with respect to operation of such Facility on or prior to the relevant Closing Date and which provide for the delivery of goods or services subsequent to the relevant Closing Date. (c) All obligations and liabilities to any Hired Employee for paid time off that is vested and with respect to which the Hired Employee would be entitled to payment upon termination of his or her employment with Seller or an Affiliate of Seller (including, for all purposes of this Agreement, "old paid days leave," "paid time off," sick leave and vacation -15- pay to the extent that they are vested rights that are subject to payment upon termination of employment; collectively, "Paid Time Off") through the ------------- relevant Closing Date in accordance with the employment policies of Seller and its Affiliates as they exist on the date of this Agreement; provided -------- that if Seller satisfies any portion of such obligations and liabilities existing at the relevant Scheduled Closing by payment to a Hired Employee, then such payment shall be treated as a reduction of Accrued Operating Expenses (as defined in Section 2.3(g)). -------------- (d) Without limiting Seller's representations and warranties contained in Article 3 or Buyer's rights under Article 11 for a breach --------- ---------- thereof, all liabilities and obligations respecting any changes or improvements needed to the Facilities for them to be in material compliance following the relevant Scheduled Closing with respect to such Facilities with safety, building, fire, land use, access (including without limitation the Americans With Disabilities Act) or similar Laws (as defined in Section ------- 1.1) respecting the physical condition of the Facilities. --- (e) All liabilities and obligations respecting employee matters assumed by Buyer pursuant to the provisions of Section 2.10. ------------ (f) Any liability or obligation which becomes an Assumed Liability by operation of Section 2.4(i) and such other liabilities and -------------- obligations pertaining to the Facilities, if any, specifically described in Schedule 2.3(f). --------------- (g) Any accrued and unpaid liabilities (whether or not due) of the Subsidiaries in existence on the relevant Scheduled Closing Date which relate to the Facilities, which were incurred in the ordinary course of the operation of the Facilities and which represent (i) trade payables incurred to suppliers of goods or services; (ii) water, gas, electricity and other utility charges; (iii) license fees; (iv) rent, common area maintenance charges, operating expenses and other charges arising under the Real Property Leases; (v) insurance premiums (but only with respect to policies that will be continued in force by Buyer after the relevant Scheduled Closing); (vi) salaries and other payroll costs respecting Hired Employees accrued in accordance with the normal accounting practices of Seller and the Subsidiaries (but not including bonuses or other incentive compensation or accrued benefits with respect to benefit plans that are not assumed by Buyer); (vii) Taxes, except for Taxes referred to in Section 5.5 relating ----------- to expenses of the Transactions and payroll taxes respecting employees who -16- are not Hired Employees; and (viii) similar liabilities incurred in the ordinary course of the operation of the Facilities and customarily recorded as a current liability, other than the current portion of long-term liabilities and obligations (the liabilities referred to in this Section ------- 2.3(g), together with the liabilities and obligations for Paid Time Off ------ assumed under Section 2.3(c), being herein referred to as "Accrued -------------- ------- Operating Expenses"). ------------------ Section 2.4 Excluded Liabilities. The parties agree that liabilities -------------------- and obligations of Seller and the Subsidiaries not expressly described in Section 2.3 as Assumed Liabilities are not part of the Assumed Liabilities, ----------- and Buyer shall not assume or become obligated with respect to any other obligation or liability of Seller or any Subsidiary or any Affiliate of either of any nature whatsoever (whether express or implied, fixed or contingent, liquidated or unliquidated, known or unknown, accrued, due or to become due) (collectively, "Excluded Liabilities"), including, but not -------------------- limited to, the liabilities and obligations described in this Section, all of which shall remain the sole responsibility of Seller or the pertinent Subsidiary or Affiliate, as the case may be. Without limiting the generality of the foregoing, Buyer shall not assume and shall have no liability or obligation of any kind for or with respect to any of the following liabilities or obligations: (a) Subject to Section 5.5 respecting certain expenses incurred ----------- in connection with the Transactions, any of Seller's or any of the Subsidiaries' (or their respective Affiliates') liabilities or obligations (including, but not limited to, any liabilities or obligations under any tax sharing agreements) with respect to franchise taxes and with respect to foreign, federal, state or local taxes imposed upon or measured, in whole or in part, by the income for any period of Seller and/or such Subsidiaries or any member of a combined or consolidated group of companies of which Seller and/or such Subsidiaries are, or were at any time, a part, or with respect to interest, penalties or additions to any of such taxes, and any income, franchise, tax recapture, transfer tax, sales tax or use tax that may arise upon consummation of the transactions contemplated by this Agreement and be due or payable by Seller or any Subsidiary, it being understood that Buyer shall not be deemed to be Seller's or any Subsidiary's transferee with respect to any such tax liability. (b) Any of Seller's or any of its Subsidiaries' or Affiliates' liabilities or obligations with respect to the recapture of foreign, federal, state or local tax deductions or credits taken by Seller or such Subsidiary -17- imposed upon, or any taxable gain recognized by, Seller or such Subsidiary on account of the Transactions contemplated hereby. (c) Liabilities or obligations of Seller, its Affiliates or a Subsidiary arising from the breach by Seller or such Subsidiary on or prior to the relevant Closing Date of any term, covenant, or provision of any of the Assumed Contracts. (d) Liabilities or obligations of Seller, a Subsidiary or Seller's Affiliates now existing or which may hereafter exist by reason of any violation or alleged violation of Law or Laws by Seller or any of its Affiliates or by a Subsidiary, or by an employee or independent contractor of any of the foregoing where any of the foregoing is or is alleged to be responsible for the acts or omissions of any such person, occurring on or prior to the relevant Scheduled Closing Date. (e) Liabilities or obligations of Seller or a Subsidiary now existing or which may hereafter exist by reason of any liability to refund any payment or reimbursement received by Seller or a Subsidiary from any Payor which is attributable to any period of time ending on or prior to the relevant Closing Date respecting such Facilities for which such payment or reimbursement was received. (f) Liabilities or obligations of Seller or a Subsidiary under any Assumed Contract which would be included in the Transferred Assets but for the provisions of Section 2.12, unless Buyer is provided with the ------------ benefits thereunder as contemplated in Section 2.12. ------------ (g) Liabilities of Seller and the Subsidiaries arising from or in connection with litigation described in Section 3.14, including, but not ------------ limited to, the Unusual Proceedings described therein, and any and all liabilities or obligations of Seller and the Subsidiaries for claims for personal injury (including sickness, trauma, disease, pain and suffering, loss of future earnings, punitive damages and the like), property damage, and other damage and injury in existence (i.e., all elements of the claim ---- are complete) at or prior to the relevant Scheduled Closing, whether or not any claim has been made or litigation has been instituted with respect thereto and whether or not any claim is covered partially or fully by insurance. (h) Subject to Section 2.12, liabilities of Seller and the ------------ Subsidiaries incurred in connection with their obtaining any consent, -18- authorization or approval necessary for them to sell, convey, assign, transfer or deliver any Transferred Asset to Buyer hereunder. (i) Any liability of Seller or a Subsidiary representing indebtedness for money borrowed or the deferred portion of the purchase price for any Owned Real Property or Equipment (and any refinancing thereof), including without limitation the indebtedness identified on Schedule 2.4(i); provided that if, prior to the relevant Scheduled Closing, --------------- -------- the parties mutually agree that any such indebtedness or obligation will be assumed by Buyer and further agree upon an equitable reduction in the cash portion of the Purchase Price (as defined in Section 2.5) to reflect ----------- Buyer's assumption of such indebtedness or obligation, then any such indebtedness or obligation will be deemed to constitute an Assumed Liability for all purposes of this Agreement; and provided further that -------- ------- with respect to any such indebtedness or obligation not so assumed by Buyer that constitutes a lien or encumbrance upon any Transferred Asset, Seller agrees that on or prior to the relevant Scheduled Closing it will either pay or discharge such indebtedness or liability in full or otherwise cause such lien or encumbrance to be removed from such Transferred Asset, so that such Transferred Asset is sold, conveyed, assigned, transferred and delivered to Buyer at such Scheduled Closing free and clear of such lien or encumbrance. (j) Such other liabilities and obligations, if any, specifically described in Schedule 2.4(j) and liabilities which would be Assumed --------------- Liabilities but for the provisions of Sections 2.12, 8.5, 8.7 or 9.5. ------------- --- --- --- (k) Amounts due from the Subsidiaries arising from Intercompany Transactions. (l) Liabilities and obligations respecting Cost Report Settlements to the extent such Cost Reports cover any period through the relevant Closing Date and other obligations of Seller respecting Cost Reports described in Section 6.6. ----------- (m) Subject to Section 2.10(f), liabilities and obligations for --------------- bonuses, other incentive compensation and benefits under benefit plans to the extent not specifically included in Accrued Operating Expenses. Section 2.5 Purchase Price. The purchase price (the "Purchase -------------- -------- Price") in the aggregate for all of the Transferred Assets shall be equal to the sum of (a) Fifty-Two Million Four Hundred Two Thousand Dollars -19- ($52,402,000), subject to such adjustments, if any, as may occur pursuant to Sections 2.12, 2.14, 6.2(c), 8.5, 8.7, or 9.5 or other provisions of ---- ---- ------ --- --- --- this Agreement, including the book value as of the relevant Scheduled Closing of capitalized lease liabilities assumed and the value of any assumption of debt pursuant to Section 2.4(i), plus (b) an amount equal to -------------- ---- the net book values as of the relevant Scheduled Closing of the Loan Commitment Notes, Inventory, Receivables and Prepayments (collectively, "Accrued Operating Assets") included in the Transferred Assets less Accrued ------------------------- ---- Operating Expenses, plus (c) an amount (determined on the basis of the Venture's balance sheet) equal to the net book value as of the relevant Scheduled Closing of (i) the sum of each Venture's current assets and distributions payable to partners or venturers, less (ii) the sum of each ---- such Venture's current liabilities, indebtedness for money borrowed and capitalized lease liabilities, pro-rated in each case to the equity percentage in such Venture held by Seller and the Subsidiaries (the amounts in clauses (b) and (c) being referred to as the ("Net Book Values"). In --- --- --------------- addition, at the "First Closing" under this Agreement, Buyer shall pay to Seller the sum of One Million Dollars ($1,000,000) for the covenant not to compete described in Section 6.8. Notwithstanding anything in this ----------- Agreement or in a Schedule hereto that might be construed to the contrary, Net Book Values will not be reduced by Seller's retained liability for Excess Interim Payments made by a Payor prior to the relevant Scheduled Closing that are in excess of the net carrying value of the Receivables transferred at such Scheduled Closing with respect to which such interim payments are a credit against amounts that would otherwise be due from the Payor. Section 2.6 Payment of Purchase Price. That portion of the Purchase ------------------------- Price due and payable for the Transferred Assets actually sold, assigned, transferred and conveyed to Buyer and the applicable Buyer Subsidiaries hereunder shall be paid as follows: (a) Payment of Tentative Purchase Price. No less than five (5) ----------------------------------- business days prior to each Scheduled Closing, Seller shall deliver to Buyer a certificate executed on the Seller's behalf by a responsible officer setting forth the Seller's estimate of what the Net Book Values will be as of such Scheduled Closing for the Subject Transferred Assets (as defined in Section 2.13) (the "Estimated Net Book Values"), and ------------- ------------------------- additionally setting forth (i) the Net Book Values for the Subject Transferred Assets recorded by Seller as of the most recent month-end prior to the delivery of such certificate for which data is available, and (ii) the methodology used by Seller for updating changes in Net Book Values since such month-end data -20- to arrive at such estimate. All determinations made with respect to the Net Book Values shall be based upon the internal records of, and the valuation methods customarily used by, Seller and the Subsidiaries, absent error, and consistent with generally accepted accounting principles with respect to the recording and accruing of the types of assets and liabilities included in Net Book Values. On the terms and subject to the conditions contained in this Agreement, at each Scheduled Closing Buyer shall pay to Seller, in the manner set forth herein, an amount equal to (iii) the portion of the Purchase Price arising under Section 2.5(a) (including any debt assumptions -------------- pursuant to Section 2.4(i)) due at such Scheduled Closing as calculated on --------------- the basis of the values assigned to the pertinent Subject Transferred Assets in the Allocation Schedule (as defined in Section 2.7) plus (iv) an ----------- ---- amount equal to one hundred percent (100%) of the Estimated Net Book Values related to the Subject Transferred Assets,(the sum of clauses (iii) and ----- (iv) being referred to as the "Tentative Purchase Price"), less (v) the ---- ------------------------ ---- book value of any capitalized leases assumed at such Scheduled Closing, less (vi) the value of any debt assumed pursuant to Section 2.4(i) at such ---- -------------- Scheduled Closing. (b) Determination of Interim Net Book Values. As soon as ---------------------------------------- practicable, but in no event later than sixty (60) days after each Scheduled Closing, Seller shall cause a schedule to be prepared and delivered to Buyer showing an interim calculation of the Net Book Values with respect to the Subject Transferred Assets (the "Interim Net Book ---------------- Values") as of the relevant Closing Date derived by Seller from the ------ internal books and records of Seller and the Subsidiaries and otherwise in accordance with the second sentence of Section 2.6(a) with respect to the -------------- Facilities included in such Subject Transferred Assets, as well as from a physical inventory, taken after the date hereof and prior to or as of such relevant Closing Date, of property which would constitute Inventory if the relevant Scheduled Closing had occurred on the date of such physical inventory. If such schedule as submitted by Seller is not challenged in writing by Buyer within thirty (30) days of its receipt of same, then it shall be deemed accepted by Buyer. If it is so challenged, then, unless otherwise resolved by agreement of the parties within thirty (30) days from the date of Buyer's challenge or such later date as the parties may mutually agree upon, such disagreement shall be mutually submitted by the parties to their respective independent certified public accountants for resolution. If such accountants cannot resolve the disagreement within thirty (30) days of such submission, then they shall submit the matter to a third accounting firm of national standing selected by them, whose determination shall be final and binding, and shall be rendered -21- within thirty (30) days of the date on which the matter is submitted to such firm. Any such third accounting firm shall determine the issues in dispute following such procedures, consistent with the language of this Agreement, as it deems appropriate to the circumstances and with reference to the amounts in issue. No particular procedures are intended to be imposed upon such third accounting firm, it being the desire of the parties that any such dispute shall be resolved as expeditiously and inexpensively as reasonably practicable. In the event that the Interim Net Book Values differ from the Estimated Net Book Values, whether determined on the basis of the schedule prepared by Seller, or agreement of the parties, or decision by independent public accountants, as the case may be, then and in such event, within five (5) business days following such determination of the Interim Net Book Values, either Buyer shall pay to Seller, or Seller shall pay to Buyer, as the case may be, in immediately available funds, the amount by which the Interim Net Book Values differs from the Estimated Net Book Values. The pendency of a dispute shall not affect the payment obligation hereunder of either Buyer or Seller to the extent such payment is not disputed. (c) Determination of Final Net Book Values. Within ten (10) -------------------------------------- business days following expiration of six (6) months from each Scheduled Closing, Buyer shall provide a certificate to Seller, executed on Buyer's behalf by a responsible officer, setting forth a proposed calculation of final Net Book Values with respect to the Subject Transferred Assets (the "Final Net Book Values") as of the end of such six (6) month period (a ---------------------- "Working Capital Adjustment Date") which shall contain a reconciliation as -------------------------------- of the relevant Closing Date of the Interim Net Book Values, adjusted only for (i) errors claimed by Buyer to exist in Seller's accruals for Accrued Operating Assets and Accrued Operating Expenses and the Ventures' calculations of partners' equity, partners' distributions payable and the net book value of Venture fixed assets, (ii) Buyer's ability to collect Receivables and the Ventures' ability to collect their accounts receivable in existence as of the relevant Closing Date, on or before the Working Capital Adjustment Date, in excess of the carrying value therefor as of the relevant Closing Date net of reserves, and by Buyer's or a Venture's receipt of Excess Interim Payments, (iii) Buyer's inability to collect Receivables and the Ventures' inability to collect their accounts receivable in existence as of the relevant Closing Date, on or before the Working Capital Adjustment Date, in accordance with their net carrying values as of the relevant Closing Date, and (iv) Buyer's ability to pay Accrued Operating Expenses and the Ventures' ability to pay similar expenses of the Venture at less than their -22- book value as of the relevant Closing Date or Buyer's or the Ventures' payment of the same at more than their book value as of the relevant Closing Date to the extent legally required to do so. For purposes of any such calculation, (v) the accuracy of Seller's or the Ventures' accrual for real and personal property taxes shall be based upon the last notice of tax assessment respecting such property prior to the relevant Scheduled Closing that does not reflect the Transactions contemplated to occur at the relevant Scheduled Closing, (vi) variable or undetermined charges arising under Real Property Leases shall be accrued as of the relevant Scheduled Closing on an historical basis, (vii) payments received on account of Receivables shall be applied in accordance with Sections 2.9(b) and (c), --------------- --- and (viii) expenses for such items as real and personal property taxes, utility charges, charges arising under leases, insurance premiums and the like shall be pro-rated as of the relevant Scheduled Closing. In the event that Buyer elects to reassign to Seller any Loan Commitment Notes on or prior to the relevant Working Capital Adjustment Date, then the Final Net Book Values shall be deemed to be further reduced by an amount equal to the uncollected portion thereof, in which case Buyer shall execute such documents of re-assignment as are reasonably satisfactory to Seller and such Loan Commitment Notes as are reassigned shall thereafter to be deemed to be Excluded Assets. Any dispute concerning Buyer's calculation of the Final Net Book Values that is unresolved for thirty (30) days shall be submitted for resolution by the parties' independent certified public accountants in accordance with the procedures contained in Section 2.6(b). -------------- Within five (5) business days following determination of the Final Net Book Values for a Scheduled Closing, either Buyer shall pay to Seller, or Seller shall pay to Buyer, as the case may be, in immediately available funds, the amount by which the Final Net Book Values differ from the Estimated Net Book Values, as adjusted for payments, if any, on account of the Interim Net Book Values. The pendency of a dispute shall not affect the payment obligation hereunder of either Buyer or Seller to the extent such payment is not disputed. (d) Seller as Agent of Subsidiaries. Seller shall, at or prior ------------------------------- to the relevant Scheduled Closing, cause each Subsidiary transferring Subject Transferred Assets thereat to irrevocably designate (with an original copy being provided to Buyer) Seller as its agent to receive on its behalf delivery of that portion of all payments made by Buyer hereunder to which such Subsidiary may be entitled as a result of its participation in such Scheduled Closing, including without limitation that portion of the Purchase Price attributable to the Subject Transferred Assets sold to Buyer by it, and to acknowledge that delivery of such payments, including the Purchase -23- Price, to Seller in accordance with the terms of this Agreement shall be conclusive and binding evidence against such Subsidiary that any payments or consideration due to such Subsidiary in respect of the Subject Transferred Assets sold to Buyer by it, or in respect of other payments due to it from Buyer under the terms of this Agreement, have been delivered. Section 2.7 Allocation of Purchase Price. The Purchase Price shall ---------------------------- be allocated to the Transferred Assets on a Facility by Facility basis in accordance with Schedule 2.7 (as the same will, pursuant to the First ------------ Facilities Agreement, be amended with respect to the First Facilities, the "Allocation Schedule"), except that the portion of the Purchase Price ------------------- attributable to the Net Book Values shall be allocated in accordance with the amounts actually paid therefor in accordance with the provisions of Sections 2.5(b) and (c). Seller and Buyer shall, and Seller shall cause --------------- --- the Subsidiaries to, allocate the Purchase Price in accordance with the Allocation Schedule and allocate the Net Book Values portion thereof in accordance with the amounts paid therefor, to be bound by such allocations for all purposes, to account for and report the purchases and sales contemplated hereby for all purposes (including, without limitation, financial, accounting, Medicare reimbursement and federal and state tax purposes) in accordance with such allocations, and not to take any position (whether in financial statements, Cost Reports, tax returns, Cost Report or tax audits, or otherwise), including without limitation any claim to an adjustment in the basis of such assets by Buyer or its successors and assigns for Medicare purposes which is inconsistent with such allocations without the prior written consent of the other party, except to the extent, if any, required by applicable Law or generally accepted accounting principles. Section 2.8 Contingent Lease Obligations. With respect to each Real ---------------------------- Property Lease for which Seller or a Subsidiary remains or will remain contingently liable after the relevant Scheduled Closing as lessee, sublessee, guarantor or assignor, Buyer hereby agrees to exercise its best efforts: (a) To cause the contingent liability of Seller or such Subsidiary, as the case may be, to be removed on or prior to any extension, renewal or modification of such Real Property Lease by Buyer or a Buyer Subsidiary; (b) To procure for Seller and the applicable Subsidiaries a security interest, in form reasonably satisfactory to Seller, in all of the -24- right, title and interest of Buyer and the applicable Buyer Subsidiaries in such Real Property Lease, junior only to the security interest of Buyer's most senior secured lenders, in order to secure the due and punctual performance by Buyer and the applicable Buyer Subsidiaries of the Assumed Liabilities represented by such Real Property Lease; and (c) To procure for Seller and the applicable Subsidiaries the right to acquire such right, title and interest in such Real Property Lease, at fair market value, in the event that Buyer and the applicable Buyer Subsidiaries fail to pay, perform and discharge when due the Assumed Liabilities represented by such Real Property Lease and such failure results in Seller or any Subsidiary being required to pay, perform or discharge any of such Assumed Liabilities. Section 2.9 Remittances and Receivables. --------------------------- (a) In General. ---------- (i) All remittances, mail and other communications relating to the Excluded Assets or Excluded Liabilities received by Buyer or a Buyer Subsidiary at any time after a relevant Scheduled Closing shall be promptly turned over by Buyer to the addressee thereof, or if the addressee is no longer affiliated with Seller, to Seller, and pending such delivery, Buyer shall have no interest in the same and shall hold such remittances, mail and other communications in trust for the benefit of Seller and the Subsidiaries. All remittances, mail and other communications relating to the Transferred Assets or the Assumed Liabilities received by Seller or any Subsidiary at any time after the relevant Scheduled Closing at which such Transferred Assets are transferred and such Assumed Liabilities are assumed by Buyer shall be promptly turned over by Seller or such Subsidiary to the addressee thereof, or if the addressee is no longer affiliated with Buyer, to Buyer, and pending such delivery, Seller or such Subsidiary shall have no interest in the same and shall hold such remittances, mail and other communications in trust for the benefit of Buyer. (ii) With regard to the Medicare, Medicaid and CHAMPUS programs, and any Blue Cross program that requires a Cost Report or retains the right of offset, Buyer and Seller mutually covenant and agree as follows. Seller acknowledges that, from time to time, Buyer or Buyer Subsidiaries, after a relevant Scheduled Closing, may receive a -25- demand for payment in connection with overpayments or alleged overpayments from one or more of such programs, or both, which demand relates to the operation of a Facility prior to the relevant Scheduled Closing at which such Facility was included in the Subject Transferred Assets. Buyer shall provide notice to Seller of such demand within ten (10) days of Buyer's receipt of same. Seller covenants and agrees with Buyer that Seller shall, within thirty (30) days of its receipt of written notice from Buyer of such request for any such payment, which notice shall state the basis thereof in reasonable detail, pay in cash to Buyer an amount equal to any and all such overpayments claimed or (by an election made in writing, within twenty (20) days after receiving notice of any such demand) diligently pursue a contest of such claim of overpayment and indemnify and hold Buyer harmless from any liability resulting therefrom, but the right to contest without first paying shall not be available to Seller if the programs collect the alleged overpayment by means of a setoff against Buyer, unless Seller first reimburses Buyer in an amount equal to the amount so setoff, provided that -------- in all events Buyer shall provide notice to Seller of such demand within ten (10) days of Buyer's receipt of same. Subject to the foregoing, if any such program, with or without notice, collects an alleged overpayment or other amount allegedly owed by Seller or a Subsidiary by offset against Buyer or Buyer Subsidiary, Seller shall promptly pay to Buyer an amount equal to such offset amount provided that Buyer shall have provided Seller -------- with any notice related to such offset within ten (10) days of Buyer's receipt of same, or, if no such notice was received by Buyer, Buyer shall have provided notice to Seller of such offset within ten (10) days of Buyer's obtaining notice of such offset being taken. Nothing in this Section 2.9(a)(ii) shall limit Buyer's obligations under Section 7.3. ------------------ ----------- (b) Receivables. ----------- (i) Buyer shall exercise commercially reasonable efforts to collect Receivables. Any payments received by Buyer or its successors and assigns after a Scheduled Closing Date, from patients, Payors, clients, customers or others who are the obligors on Receivables transferred as of such Scheduled Closing Date (collectively, "Account ------- Parties"), shall be applied to the oldest remaining Receivables ------- transferred as of such Scheduled Closing Date from such Account Party in the order in which they arose unless, in the case of an Account Party who is a patient, otherwise indicated by the patient's Payor. -26- (ii) On the tenth day of the first month that begins at least thirty (30) days after a Scheduled Closing, on the tenth day of each month thereafter until the Working Capital Adjustment Date with respect to such Scheduled Closing, and on the tenth day following such Working Capital Adjustment Date, Buyer shall execute appropriate instruments of assignment to re-assign back to Seller, and shall turn over to Seller all evidences of and documents pertaining to, any Receivable which, as of the end of the immediately preceding month and/or such Working Capital Adjustment Date, as the case may be, was uncollected and which either (A) is a Receivable in respect of a non- Medicare patient as to which Buyer has decided to cease collection activity, or (B) is a Receivable in respect of a non-Medicare patient which, as of such month end or such Working Capital Adjustment Date, has remained unpaid for a period of at least one hundred eighty (180) days following the date of such patient's discharge from a Facility, (C) is a Receivable in respect of a Medicare patient which relates to amounts that represent such patient's deductible or co-insurance obligations, and which, as of such month end or Working Capital Adjustment Date, has remained unpaid for a period of at least one hundred eighty (180) days following the date after which the patient is first billed, or (D) is a Receivable from Medicare in respect of a Medicare patient for which payment has been denied by Medicare provided that Buyer has filed a request for reconsideration within the -------- period required. Such Receivables which are eligible to be turned over to Seller are herein referred to as "Eligible Receivables." Any -------------------- Eligible Receivable that is assigned back to Seller within thirty (30) days following the first opportunity to do so under the provisions of this clause (ii) shall, for purposes of the adjustments ----------- contemplated by Section 2.6(c), be deemed to have not been -------------- collected by Buyer, and any Eligible Receivable that is not so assigned back to Seller within thirty (30) days following the first opportunity to do so under the provisions of this clause (ii) shall, ----------- for purposes of the adjustments contemplated by Section 2.6(c), be -------------- deemed to have been collected by Buyer. With respect to any such Eligible Receivable re-assigned back to Seller, Seller and the Subsidiaries shall be free to institute such collection efforts, including, without limitation, initiating such legal proceedings, with respect thereto as they shall, in their sole discretion determine. -27- (iii) In the event of any adjustment in the Net Book Values arising under Section 2.6(c)(iii), then upon such determination, Buyer ------------------- shall execute instruments of assignment, effective as of the relevant Working Capital Adjustment Date, respecting any unpaid Receivables which are not collected or deemed collected as of such date (it being agreed that any unpaid Receivables not so assigned shall be deemed collected as of or prior to such Working Capital Adjustment Date). (c) Straddle Patient Receivables. To compensate Seller and the ---------------------------- Subsidiaries for services rendered and medicine, drugs and supplies provided through a Scheduled Closing Date with respect to patients ("Straddle Patients") who were admitted to a Facility on or before the date ----------------- of the Scheduled Closing in which such Facility was transferred and were discharged by the Facility after such Scheduled Closing Date, the following shall apply: (i) Cut-Off Billings. Seller shall, or shall cause the ---------------- Subsidiaries to, prepare cut-off billings for all Straddle Patients as of the close of business on the relevant Closing Date. All payments (other than Excess Interim Payments) which are received by Buyer (or its successors in interest or assigns) after the relevant Closing Date with respect to Straddle Patients and which relate to such cut-off billings shall constitute Receivables for purposes of calculating the Tentative Purchase Price and the Interim Net Book Values for such Scheduled Closing. (ii) Cut-Off Billings Not Accepted. If the Payor of any ----------------------------- Straddle Patient cannot or does not for any reason accept cut- off billings, then Buyer shall notify Seller of same, and Seller shall, or shall cause the Subsidiaries to, deliver to Buyer a statement calculating the total charges made by Seller and the Subsidiaries for services rendered and medicine, drugs and supplies provided through the relevant Closing Date with respect to such Straddle Patient. Within ten (10) days following the discharge of each such Straddle Patient, Buyer shall deliver to Seller a statement reflecting the total charges for the services rendered and medicine, drugs and supplies billed to such Straddle Patient after the relevant Closing Date and the patient receivable (the "Straddle Patient ---------------- Payments") of Buyer with respect to such Straddle Patient (including -------- any cost per discharge limit imposed by the Tax Equity and Fiscal Responsibility Act of -28- 1982, as amended ("TEFRA") and all deductibles and co-insurance ----- payments). For purposes of calculating the Final Net Book Values for any Scheduled Closing, the pro rata share of the Straddle Patient Payments which shall be treated as a Receivable shall be equal to the amount obtained by multiplying the Straddle Patient Payments by a fraction, the numerator of which is the total charges of Seller and the Subsidiaries with respect to such Straddle Patient through the relevant Closing Date and the denominator of which is the total charges of Buyer, Seller and the Subsidiaries with respect to such Straddle Patient. Seller or Buyer, as may be applicable, may have such statements as submitted by Buyer or Seller verified by their respective independent public accountants within thirty (30) days from delivery. If such statements, as submitted by Buyer or Seller, are acceptable, then such statements shall fix the value of the services, medicine, drugs and supplies provided by Seller and the Subsidiaries, on the one hand, and by Buyer, on the other, to each such Straddle Patient. If any such statement is challenged by Seller or Buyer, then unless otherwise resolved by agreement of the parties within thirty (30) days of any such challenge, such statement shall be deemed in dispute, which dispute shall be resolved by the parties' independent certified public accountants. If such accountants cannot resolve the matter within thirty (30) days, then it shall be submitted by them to a third accounting firm in accordance with the procedures contained in Section 2.6(b). If Seller or Buyer does not give written notice to -------------- the party preparing the statement of its challenge of such statement within the first said thirty (30) day period, the receiving party shall be deemed to have accepted the same. (d) Cooperation in Collecting Receivables and Excluded Assets. --------------------------------------------------------- Buyer agrees to cooperate with Seller and the Subsidiaries and to provide access to records (both medical and financial) to assist in the collection, rebilling and auditing (by Seller or its representatives, including its independent public accountants) of the Receivables and the Excluded Assets (including, but not limited to, any and all Receivables from Account Parties or amounts due to or from any Payor). Without limiting the generality of the foregoing agreements of Buyer to cooperate with Seller, until six (6) months after the relevant Closing Date, (i) Seller may locate one or more of its or its subsidiaries' employees at any or all of the Facilities transferred at such Closing Date, without charge, in order to facilitate such collection, rebilling and auditing, (ii) Buyer shall provide such employees, without charge, adequate and proper space to facilitate the -29- performance of such duties, and (iii) Buyer shall provide reasonable assistance of the employees of Buyer, without charge. (e) Non-Assignable Receivables. Notwithstanding anything in -------------------------- this Agreement that might be construed to the contrary, this Agreement shall not constitute an agreement to assign any Receivable (including any Receivable respecting a Straddle Patient) the assignment of which is either prohibited by Law or by the terms of any contract with a Payor. However, without limiting the generality of the foregoing, the Net Book Value of such non-assignable Receivables shall be included in the Net Book Values for all purposes of this Agreement, including, but not limited to, Sections -------- 2.5 through 2.7 and this Section 2.9, as modified by the provisions of this --- --- ----------- Section 2.9(e). That portion of the Purchase Price which, but for the -------------- provisions of this Section 2.9(e), would otherwise be attributable to the -------------- Net Book Value of such non-assignable Receivables shall be deemed to be a loan from Buyer to Seller and to the pertinent Subsidiary that will be repaid from the proceeds of such Receivables collected and held by Buyer and from the adjustments to Estimated Net Book Values contemplated by Sections 2.6, 2.9(b), and 2.9(c). All procedures and requirements ------------ ------ ------ specified herein (including, without limitation, Buyer's obligations under Section 2.9(b)) for the collection of Receivables (including any -------------- Receivables in respect of a Straddle Patient) shall be fully applicable to such non-assignable Receivables, except that (i) Buyer shall be deemed to collect and hold the proceeds of such non-assignable Receivables as agent for the Seller and the Subsidiaries and shall apply such proceeds to the repayment of such loan, and (ii) any provision herein that would otherwise require or provide for Buyer's "reassignment" of a Receivable (including an Eligible Receivable) that is non-assignable to Buyer in the first instance shall be construed to require or provide that Buyer, as agent for Seller and the Subsidiaries, return pertinent documentation respecting such Receivable to Seller and the Subsidiaries to permit collection of such Receivable by them (in accordance with such collection efforts and procedures as they, in their sole discretion, shall determine). (f) Collection Fee. -------------- (i) Buyer shall be entitled to a collection fee equal to fifteen percent (15%) of the sum of the following amounts (the "Collection Fee Base"): -------------------- -30- (A) Cash collected, or deemed, under the provisions of this Agreement, to be collected by Buyer after a relevant Scheduled Closing in respect of (1) Receivables included in the Net Book Values that are acquired by Buyer at such Scheduled Closing, excluding Receivables that Buyer or a Buyer Subsidiary assigns or entrusts at or after such Scheduled Closing to an Affiliate of Seller for purposes of collection and (2) Excess Interim Payments; and (B) Cash remitted to a Facility after the relevant Scheduled Closing by any collection agency (excluding an Affiliate of Seller) with respect to accounts receivable that were assigned to such agency prior to such Scheduled Closing and that would be Receivables but for the provisions of paragraph 6 of Schedule 2.2(j), provided that for purposes of calculating the --------------- ------------- collection fee, such cash remitted shall be deemed to be net of any collection agency discounts, fees and charges. Five (5) days prior to each Scheduled Closing, Buyer and Seller shall in good faith agree upon an estimate of Excess Interim Payments for each Facility included in such Scheduled Closing. Absent manifest error, such estimates shall be binding on Buyer and Seller. Fifteen percent (15%) of the total of such estimates for all Facilities included in each Scheduled Closing (the "Credit Amount") shall be credited against amounts due from Seller to Buyer as provided in Section 2.9(f)(ii). (ii) On the tenth day of the first month that begins at least sixty (60) days after a Scheduled Closing, on the tenth day of every other month thereafter until the Working Capital Adjustment Date, and on the tenth day following the Working Capital Adjustment Date, Buyer shall submit a report to Seller as of the nearest month- end specifying in reasonable detail its calculation of the Collection Fee Base for the period covered by such report. Within five (5) business days following receipt of each such report, Seller shall pay to Buyer, by wire transfer of immediately available funds, the collection fee due with respect to the Collection Fee Base covered by such report less the amount of any Credit Amount not previously used to offset amounts due under this provision. Any Receivable for which a collection fee is so paid shall, to the extent -31- of such Receivable on which such a fee is paid, no longer qualify as an Eligible Receivable. Section 2.10 Employee Matters. ---------------- (a) Pension Plans. Schedule 2.10(a) lists all "employee pension ------------- ---------------- benefit plans" ("Pension Plans") within the meaning of Section 3(2) of the ------------- Employee Retirement Income Security Act of 1974, as amended ("ERISA") in ----- which Retained Employees (as defined in Subsection (b) below) directly -------------- employed to work at the Facilities participate. Seller shall, or shall cause the Subsidiaries to, (i) terminate as of the relevant Closing Date the active participation of all such employees in the Pension Plans who constitute Hired Employees, (ii) cause the Pension Plans to make timely appropriate distributions following the relevant Closing Date, to the extent required, to such employees in accordance with, and to the extent permitted by, the terms and conditions of such Pension Plans, and (iii) in connection with the termination of the active participation of all such employees in such Pension Plans, comply, and cause each Pension Plan to comply, with all applicable Laws. Prior to the relevant Closing Date, Seller shall have delivered to Buyer, for information purposes only, forms of any letters or other written communications which Seller or the Subsidiaries shall distribute generally to such employees notifying them of their rights in respect of their cessation of active participation in the Pension Plans. There are no "multiemployer plans" within the meaning of Section 3(37) of ERISA ("Multiemployer Plans") in which Retained Employees ------------------- directly employed to work at the Facilities participate. (b) Retained Employees. ------------------ (i) Buyer shall have the right to offer to hire at each Scheduled Closing each of the direct employees of Seller or an Affiliate of Seller, who is not a Facility's chief executive or chief financial officer and who, as of such Scheduled Closing, works at the Facilities (including any such direct employees who are on medical disability or leaves of absence and who worked at the Facilities immediately prior to such disability or leave) included in the Subject Transferred Assets, provided that Buyer may not offer to hire those -------- employees covered by this clause (i), if any, who are designated by --- Seller at least five (5) days prior to the relevant Scheduled Closing and provided further that Buyer shall extend offers of employment to a ---------------- sufficient number of employees at each -32- Facility so as to avoid any liability on the part of Seller and the Subsidiaries under the WARN Act (as defined in Section 2.10(e)) with --------------- respect to the Transactions contemplated hereby. Seller will advise Buyer of the number of employees terminated at each Facility during the ninety (90) day period preceding the relevant Scheduled Closing. (ii) Buyer shall additionally have the right to offer to hire at each Scheduled Closing such other employees of Seller and its Affiliates who are mutually agreed upon by Buyer and Seller and who are either (A) indirect employees with respect to the operation of the Facilities included in the Subject Transferred Assets, or (B) a chief executive or chief financial officer of a Facility included in the Subject Transferred Assets, provided that in the event that Buyer -------- wishes to hire a chief executive or chief financial officer and Seller does not agree to such hiring, Seller shall not employ such chief executive or chief financial officer in such capacity at a healthcare facility operated or managed by Seller or its subsidiaries for a period of at least one (1) year following such Scheduled Closing. (iii) All such direct and indirect employees to whom Buyer has the right to make offers of employment pursuant to clauses (i) or --- (ii) above are herein referred to as the "Retained Employees." ---- ------------------ (iv) Any such offer of employment to a Retained Employee by Buyer shall be to perform comparable services, in such position and for such compensation as is comparable to the position such Retained Employee held with, and the compensation paid to such Retained Employee by, Seller or any of its subsidiaries as of the Scheduled Closing. Seller or its Affiliates shall have the right (but not the obligation) to employ or offer to employ any Retained Employee (including, but not limited to, the chief executive officer and the chief financial officer of each Facility without regard to the provisions of Section 2.10(b)(ii)(B)) who declines Buyer's offer of ---------------------- employment. (c) Hiring of Retained Employees. Buyer shall hire at each ---------------------------- Scheduled Closing each Retained Employee who elects to accept employment with Buyer (the "Hired Employees") and shall continue to employ each such --------------- Hired Employee for a period of no less than ninety (90) -33- days following the relevant Closing Date, unless the employment of such Hired Employee is terminated for cause or as a result of the Hired Employee's resignation. Subject to the proviso to Section 2.3(c), Buyer -------------- agrees to give the Hired Employees full credit for the Paid Time Off earned or accrued by them during, and to which they are entitled as a result of, their employment by Seller and/or its subsidiaries, by allowing such Hired Employees such Paid Time Off as to which such Hired Employees would have been entitled as of the relevant Closing Date under the policies of Seller and/or its subsidiaries if such Hired Employees had remained employees of Seller and/or its subsidiaries and, upon termination of employment, by making full payment to such Hired Employees of the Paid Time Off that such employees would have received had they taken such Paid Time Off. (d) Health Benefits. Buyer shall provide the Hired Employees a --------------- program of health care benefits which is comparable in the aggregate to the program of health care benefits currently provided by Seller or its pertinent Subsidiaries, as the case may be, provided, however, that such -------- ------- health care benefits shall be immediately available to the Hired Employees as of the relevant Closing Date, and the Hired Employees shall become as of the relevant Closing Date participants thereunder, without regard to any applicable waiting period or any limitation with respect to preexisting conditions except insofar as such waiting period or limitation gives full credit to such Hired Employees for the period of time during which he or she was employed by Seller and its Affiliates and, provided further, that ---------------- Buyer may make modifications or changes in such health care benefits at any time following a Scheduled Closing. Buyer acknowledges and agrees that, with respect to the Hired Employees, Buyer is a successor employer for purposes of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), that the Hired Employees will not, as a result, be ----- deemed to have had a termination of employment for purposes of COBRA and that any COBRA notices or coverages required to be given or made available to any Hired Employee shall be given or made by Buyer and not Seller or the Subsidiaries, provided that Buyer does not assume, and shall not be deemed -------- to have assumed, any COBRA obligations which Seller or any Subsidiary may have to former employees of Seller or such Subsidiary whose employment was terminated on or prior to the relevant Closing Date, or to any Retained Employees who do not accept employment with Buyer, and provided further -------- that Seller shall be responsible for any COBRA coverages required to be made available to any -34- Hired Employee who is entitled to COBRA coverage under existing plans of Seller or any Subsidiary as a result of the Transactions. (e) Acknowledgement of Responsibility. Buyer acknowledges and --------------------------------- agrees that as of the date and time a Scheduled Closing is effective, Buyer shall be considered for purposes of the Worker Adjustment and Retraining Notification Act (the "WARN Act") the employer of the Retained Employees -------- related to the Transferred Assets transferred at such Scheduled Closing and that Buyer (and not Seller or the Subsidiaries) shall thereupon be responsible for complying with the WARN Act with respect to such Retained Employees and that prior to such time none of such Retained Employees shall be, nor shall they be deemed to be, terminated. Buyer shall indemnify and hold Seller and its Affiliates harmless, in accordance with Sections 11.4, ------------- 11.5 and 11.6, from and against all Losses (i) resulting from any ---- ---- compliance obligation (including, without limitation, the obligation to give notice or pay money) that Seller and its Affiliates or Buyer has under the WARN Act arising from the termination of any Retained Employee or (ii) resulting from any claims of the Hired Employees (including, without limitation, claims for health care coverage or benefits); provided, -------- however, Buyer shall neither be responsible for, nor indemnify Seller and ------- its Affiliates for the consequences of any WARN event which may be caused by the actions of Seller or its Affiliates with respect to employees whom Seller and its Affiliates retain pursuant to rights set forth in Section ------- 2.10(b) above. ------- Notwithstanding the foregoing, nothing in this Section 2.10 shall, or shall ------------ be deemed to, create any rights in favor of any person not a party hereto or to constitute an employment agreement or condition of employment for any employee of Seller or any Affiliate of Seller or any Retained Employee. Section 2.11 Use of Names. ------------ (a) Although trade names of Seller and the Subsidiaries, other than the Transferred Business Names, are Excluded Assets, such names appear on certain of the fixed Transferred Assets, such as certain fixtures and Equipment, and on supplies, materials, stationery and similar consumable items which will be on hand at the Facilities at a Scheduled Closing with respect to such Facilities. Notwithstanding that such names are Excluded Assets, Buyer shall be entitled to use such consumable items for a period of three (3) months following the Scheduled Closing in which such items are transferred and shall have up to six (6) months following -35- such Scheduled Closing to remove such names from fixed Transferred Assets, provided that Buyer shall not send correspondence or other materials to -------- third parties on any stationery that contains a trade name (other than a Transferred Business Name) of Seller or any Affiliate of Seller. (b) Seller hereby grants to Buyer, for the period from the relevant Closing Date through the expiration of the ninetieth day thereafter, the non-exclusive right and license to use, solely in connection with the operation of the Facilities transferred on such Closing Date, the clinical policy and procedures manuals of Seller and/or the Subsidiaries (the "Manuals") presently used at such Facilities. Such ------- license shall be on the following terms and conditions: (i) Buyer shall accept the Manuals in their present condition, "AS IS" and "WITH ALL FAULTS" and without any representation or warranty of any kind whatsoever, either express or implied, by Seller, including, but not limited to, any representation or warranty that the Manuals are adequate for Buyer's operation of the relevant Facilities after the relevant Scheduled Closing or are in compliance with any Laws; (ii) Buyer agrees that Seller shall have no obligation whatsoever to update or otherwise revise the Manuals, even if Seller or its Affiliates are revising similar manuals at other healthcare facilities, and that Buyer shall have sole responsibility for updating and revising such manuals; (iii) Buyer acknowledges and agrees that the Manuals are confidential and proprietary information of Seller and its Affiliates and Buyer agrees that it will not, directly or indirectly, reproduce, distribute or disclose the contents of the Manuals except as may be required in the operation of such Facilities (including, but not limited to, as may be required by any Laws) and shall exercise due care to otherwise preserve and protect the proprietary nature thereof, provided that Seller and the Subsidiaries acknowledge that the Manuals -------- used by Buyer and the Buyer Subsidiaries more likely than not contain information that is substantially similar to information contained in the Manuals; -36- (iv) Upon the termination of Buyer's use of the Manuals pursuant to this Section, Buyer shall return to Seller all originals and copies of the Manuals; and (v) Buyer shall implement its own policy and procedure manuals promptly following the relevant Closing Date, and in any event by the date on which the license hereby granted to Buyer terminates. (c) Notwithstanding the assignment to Buyer of the Transferred Business Names, Seller and its Affiliates and their assignees shall have the nonexclusive right to use such Transferred Business Names, consistent with past practices, in connection with the operation of previously and currently operated healthcare facilities of Seller and its Affiliates not included in the Transferred Assets, and Buyer, on behalf of itself and each Buyer Subsidiary, hereby grants Seller and its Affiliates and their assignees a fully paid-up, perpetual right and license to use such Transferred Business Names in such manner in connection with the operation of such facilities, such license to be effective as of the relevant Scheduled Closing in which such Transferred Business Names are assigned to Buyer and the Buyer Subsidiaries. Section 2.12 No Assignment If Breach; Seller's Discharge of Assumed ------------------------------------------------------ Liabilities. ----------- (a) Notwithstanding anything contained in this Agreement to the contrary, this Agreement shall not constitute an agreement to assign any Transferred Asset, or assume any Assumed Liability, if the attempted assignment or assumption of the same, as a result of the absence of the consent or authorization of a third party or failure of a right of first refusal notice period to expire, would constitute a breach or default under any lease, agreement, encumbrance or commitment, would violate any Law or would in any way adversely affect the rights, or increase the obligations, of Buyer, Seller or any Subsidiary with respect thereto; provided that the -------- assignment of any contract, including without limitation Medicare, Medicaid and similar provider agreements, which may lawfully be made subject to customary conditions subsequent (such as needs surveys, evaluations of Buyer or other determinations by the counterparties to such agreements) shall be deemed not to constitute a default under, or to in any way adversely affect the rights or increase the obligations of Buyer with respect -37- to, such lease, agreement, encumbrance or commitment, whether or not such condition or conditions subsequent are met on or prior to the relevant Scheduled Closing. Except as provided in Section 2.12(c), if any --------------- such consent or authorization is not obtained, or if an attempted assignment or assumption would be ineffective or would adversely affect the rights or increase the obligations of Seller, a Subsidiary or Buyer, with respect to any such lease, agreement, encumbrance or commitment, so that Buyer would not, in fact, receive all such rights, or assume the obligations, of Seller or Subsidiary with respect thereto as they exist prior to such attempted assignment or assumption, then Seller and Buyer shall, and Seller shall cause each Subsidiary to, enter into such reasonable cooperative arrangements as may be reasonably acceptable to both Buyer and Seller (including without limitation, sublease, agency, management, indemnity or payment arrangements and enforcement at the cost and for the benefit of Buyer of any and all rights of Seller and the Subsidiaries against an involved third party) to provide for or impose upon Buyer the benefits of such Transferred Asset or the obligations of such Assumed Liability, as the case may be, and any transfer or assignment to Buyer by Seller or a Subsidiary of any such Transferred Asset, or any assumption by Buyer of any such Assumed Liability, which shall require such consent or authorization of a third party that is not obtained shall be made subject to such consent or authorization being obtained. Except as provided in Section 2.12(c), if the parties cannot agree on any such --------------- arrangement, or any such arrangement would not be reasonably practicable, to provide Buyer with materially all the benefits of such Transferred Asset or materially all the obligations of such Assumed Liability, then such Transferred Asset or Assumed Liability, as the case may be, shall be excluded from the Transactions and shall be deemed to be an Excluded Asset or an Excluded Liability, as the case may be, and Buyer and Seller shall negotiate in good faith an equitable adjustment in the Purchase Price, or resolve any disagreement respecting such adjustment, in accordance with the procedures of Section 2.14. ------------ (b) Notwithstanding any other provision of this Agreement, during the period between the date hereof and the relevant Scheduled Closing, Seller may, for the purpose of facilitating consummation of the Transactions and with the consent of Buyer (which will not be unreasonably withheld), cause any Subsidiary to acquire a fixed asset, or any direct or indirect interest therein, that results in the simultaneous discharge of all or any part of a liability that exists as of the date hereof which, but for such acquisition, would be an Assumed Liability; provided that in each -------- such case it gives prompt notice of such acquisition to Buyer. In the event of any -38- such acquisition, Buyer and Seller shall negotiate in good faith an equitable adjustment to the Purchase Price, or resolve any disagreement respecting such adjustment, in accordance with the procedures of Section ------- 2.14. ---- (c) The provisions of Section 2.12(a) notwithstanding, neither --------------- Buyer nor Seller shall be obligated to close with respect to a given Facility if any private third party consent or authorization in respect of Transferred Assets and Assumed Liabilities related to such Facility that is enumerated in Schedule 2.12(c) (the "Schedule of Required Consents") is not ---------------- ----------------------------- obtained, unless both Buyer and Seller waive in writing their respective conditions precedent that such consent or authorization be obtained prior to the transfer of such Facility. With respect to all other private third party consents or authorizations with respect to such Facility that have not been obtained by the relevant Scheduled Closing, if the parties have not entered into a cooperative arrangement in respect of the Transferred Asset or Assumed Liability to which such consent or authorization relates, then, subject to the provisions of Section 2.18 regarding Buyer's right to ------------ reject certain contracts within sixty (60) days following the Scheduled Closing at which such contracts are assigned or purported to be assigned, (i) Buyer hereby agrees to accept the assignment of any such pertinent Transferred Asset, and to assume any such pertinent Assumed Liability, as the case may be, whether or not such assignment or assumption is made subject to such consent or authorization being obtained after the relevant Scheduled Closing, and (ii) the parties agree to continue to cooperate with one another, pursuant to the provisions of Sections 5.2 and 5.3, to obtain ------------ --- any such requisite consent Section 2.13 Closings. All of Seller's and the Subsidiaries' right, -------- title and interest in a Facility and all other Transferred Assets and Assumed Liabilities which relate to, or constitute a part of, a Facility shall be transferred to Buyer or the applicable Buyer Subsidiaries at a "Scheduled Closing" (as defined below). Subject to the terms and ------------------ conditions hereof, the Transferred Assets shall be transferred to Buyer at one of three Scheduled Closings: The "First Closing" (as defined below), ------------- the "Second Closing" (as defined below) or the "Final Closing" (as defined -------------- ------------- below). The First Closing, Second Closing and Final Closing, collectively, are the "Scheduled Closings" and each is a "Scheduled Closing." A date on which a Scheduled Closing actually occurs is a "Closing Date," and the ------------ Closing Date of the Final Closing is the "Final Closing Date." A Scheduled ------------------ Closing shall be effective for all purposes as to each Facility which is the subject of such Scheduled Closing (and the Transferred Assets and Assumed Liabilities related thereto or constituting a part thereof) (collectively, the -39- "Subject Transferred Assets") at 11:59 p.m. on the relevant Closing Date, -------------------------- as determined by reference to the local time zone in which the Facility is located. Notwithstanding the foregoing, either the First or Second Closing may also be a Final Closing and if the First Closing is the Final Closing, there shall be no Second Closing. Scheduled Closings shall occur in accordance with the following provisions: (a) The First Closing. Provided that no Scheduled Closing shall ----------------- occur (i) before there is a "First Closing" under the First Facilities Agreement with respect to First Facilities, or (ii) after the Termination Date set forth in Section 10.1(b), the "First Closing" with respect to --------------- ------------- Subsequent Facilities shall occur at a mutually agreeable time and place or places within five (5) business days (unless another date is mutually agreed upon by Buyer and Seller) after the first date on which all of the conditions set forth in Article 8 and Article 9 hereof are capable of being --------- --------- satisfied or are waived as to the Transferred Assets and Assumed Liabilities in respect of Subsequent Facilities that account in the aggregate for at least Eight Million Dollars ($8,000,000) of the EBITDA (as defined in Section 3.17(a)) assigned to Facilities for this purpose as --------------- shown on Schedule 2.13B hereto, and all Facilities, Transferred Assets and -------------- Assumed Liabilities sold, assigned, conveyed, transferred, delivered and assumed at the First Closing shall be the Subject Transferred Assets with respect to the First Closing. Upon consummation at the First Closing of Transactions in compliance with the foregoing provisions, any remaining Transactions in respect of Facilities that were not consummated at such Closing may be consummated at a subsequent Closing subject to the provisions of Article 8 and Article 9 and to the provisions of this Section --------- --------- ------- 2.13 with respect to such Closings. ---- (b) The Second Closing. Provided that the First Closing has ------------------ occurred and that no Scheduled Closing shall occur after the Termination Date, the "Second Closing" shall occur at a mutually agreeable time and -------------- place or places, on the date which is within five (5) business days (unless another date is mutually agreed upon by Buyer and Seller) after the first date on which all of the conditions set forth in Article 8 and Article 9 --------- --------- hereof are capable of being satisfied or are waived as to any additional Subsequent Facilities and the Transferred Assets and Assumed Liabilities related thereto or constituting a part thereof that are not the subject of the First Closing, and the Subsequent Facilities and the Transferred Assets and Assumed Liabilities related thereto that are included in the Transactions occurring at the Second Closing shall, for purposes of this Agreement, be the Subject Transferred Assets with respect to the Second Closing, provided -------- -40- that the Second Closing shall be held, in any event, within thirty (30) days of the First Closing with respect to any Subsequent Facilities for which the conditions to Closing, including those set forth in this Section ------- 2.13, have been met or waived as of such date. ---- (c) The Final Closing. Provided that a First Closing has ----------------- occurred, the "Final Closing" shall occur with respect to Subsequent ------------- Facilities that are not the subject of the First or Second Closings at a mutually agreeable place or places and at a mutually agreeable time as follows: (i) If all of the conditions set forth in Articles 8 and 9 ---------- - hereof and in this Section 2.13 are capable of being satisfied or are ------------ waived on or prior to the Termination Date as to all Subsequent Facilities that are not included in the First Closing or the Second Closing, then the Final Closing shall occur within five (5) business days (unless another date is mutually agreed upon by Buyer and Seller) after the first date upon which such conditions may be satisfied or are waived, but in no event later than the Termination Date. (ii) If all of the conditions set forth in Articles 8 and 9 ---------- - hereof and in this Section 2.13 are capable of being satisfied or are ------------ waived on or prior to the Termination Date as to some, but not all, of the Facilities that are not included in the First Closing or the Second Closing, then the Final Closing shall occur within five (5) business days after the identity of the Facilities as to which such conditions will not be satisfied has become reasonably manifest or has been mutually agreed upon by the parties, but in no event shall such Final Closing occur later than the Termination Date. (d) Deliveries by Seller. At each Scheduled Closing Seller -------------------- shall deliver, or cause the Subsidiaries to deliver, to Buyer: (i) A Bill or Bills of Sale and Assignment in substantially the form of Exhibit A executed by each Subsidiary with respect to the --------- Subject Transferred Assets of the Subsidiary covered thereby; (ii) Grant deeds (or equivalent special or limited warranty deeds for Owned Real Properties outside California), properly executed and acknowledged by each Subsidiary with respect -41- to the Owned Real Properties of the Subsidiary included in the Subject Transferred Assets; (iii) Separate assignments and assumptions in substantially the form of Exhibit B executed by each Subsidiary with respect to each --------- Real Property Lease of the Subsidiary included in the Subject Transferred Assets that is designated by either Buyer or Seller; (iv) Instruments of transfer, sufficient to transfer personal property interests of each Subsidiary that are included in the Subject Transferred Assets but not otherwise transferred by the Bills of Sale and Assignment referred to in clause (i) above, executed ---------- by each Subsidiary in the form customarily used in commercial transactions in the areas in which such other personal property of such Subsidiary is located; (v) Such other instruments of transfer, executed by each of the pertinent Subsidiaries necessary to transfer to and vest in Buyer all of Seller's and the Subsidiaries' rights, title and interest in and to the Subject Transferred Assets or which may be required by the Title Insurer (as defined in Section 8.7), including ----------- owner's and lessee's affidavits, if any; and (vi) Possession of the Subject Transferred Assets. All such documents of transfer shall be in a form and substance reasonably satisfactory to Buyer. (e) Deliveries by Buyer. At each Scheduled Closing, Buyer shall ------------------- deliver to Seller: (i) Immediately available funds, by way of wire transfer to an account or accounts designated by Seller, in an amount equal to the amounts then due pursuant to Sections 2.5 and 2.6(a), as adjusted by ------------ ------ the expenses due at such Scheduled Closing pursuant to Section 5.5; ----------- (ii) Separate assignments and assumptions in substantially the form of Exhibit C executed by Buyer and the applicable Buyer --------- Subsidiaries with respect to each Real Property Lease included -42- in the Subject Transferred Assets that is designated by either Buyer or Seller; and (iii) An Assumption Agreement or Assumption Agreements with respect to the Assumed Liabilities assumed at such Scheduled Closing, in substantially the form of Exhibit C, executed by Buyer and the --------- applicable Buyer Subsidiaries in favor of Seller and each of the applicable Subsidiaries. All such documents of transfer shall be in a form and substance reasonably satisfactory to Seller. (f) Escrow. If either of the parties desires to consummate a ------ Scheduled Closing through an escrow, an escrow shall be opened with, and the escrow agent shall be, Chicago Title Company (the "Escrow Agent"), by ------------ depositing a fully executed copy of this Agreement with Escrow Agent to serve as escrow instructions. This Agreement shall be considered the primary escrow instructions between the parties, but the parties shall execute such additional escrow instructions as Escrow Agent shall require and the parties may agree upon in order to clarify the duties and responsibilities of Escrow Agent. In the event of any conflict between this Agreement and such additional escrow instructions, this Agreement shall prevail. If a Scheduled Closing is to be consummated through the Escrow Agent, then on or prior to the Closing Date, Buyer shall cause the funds required by Subsection (e)(i) above to be wired to Escrow Agent, and the ---------- ------ parties shall deliver the instruments of sale, assignment, conveyance and assumption called for by Subsections (d) and (e) above to be delivered to --------------- --- the Escrow Agent, and on the Closing Date, the Escrow Agent shall close the escrow with respect to such Scheduled Closing by: (i) Causing the deeds for the Owned Real Properties, the assignments of the Real Property Leases, and any other documents which the parties may mutually designate to be recorded in the official records of the appropriate counties in which the pertinent Subject Transferred Assets are located; (ii) Delivering to Seller by wire transfer of immediately available funds, to an account or accounts designated by Seller, the amounts called for by Subsection (e)(i) above; and ----------------- -43- (iii) Delivering to Buyer or Seller, as the case may be, the other instruments referred to in Subsections (d) and (e) above. --------------- --- Section 2.14 Purchase Price Adjustment. If circumstances exist that ------------------------- require the parties to negotiate in good faith equitable adjustments in the Purchase Price pursuant to the provisions of Section 2.12 (respecting ------------ absence of consents), Sections 8.5 and 9.5 (dealing with certain ------------ --- prohibitions and restraints), Section 6.2(c) (respecting Seller's -------------- obligations with respect to environmental conditions), Section 8.7 ----------- (respecting the condition of title to interests in real property) or Section 8.10 (respecting casualty losses or condemnation) (Sections 2.12, ------------ ------------- 6.2(c), 8.5, 8.7, 8.10, 9.5 and this Section 2.14 being collectively ------ --- --- ---- --- ------------- referred to as the "Adjustment Sections"), then and in any of such events, ------------------- such negotiations, and the resolution of disagreements arising therefrom, shall be conducted in accordance with the provisions of this Section 2.14. ------------ The parties shall negotiate such equitable adjustments in the Purchase Price in good faith prior to any relevant Closing Date (as may be extended by mutual agreement of the parties), provided, that any adjustment in the -------- Purchase Price shall be consistent with the Allocation Schedule. If the parties are unable to agree by the day prior to such relevant Closing Date, then such relevant Closing Date (the "Original Closing Date") (and the --------------------- Termination Date, if necessary) shall be extended for up to fifteen (15) business days to provide for the opportunity to resolve such disagreement pursuant to the provisions of this Section 2.14. On the day a Scheduled ------------ Closing would have occurred but for the absence of agreement between the parties, each party shall designate an individual (who may not be a present or former officer, director, partner or employee of the party or of any present or former investment banker, accounting firm, law firm or attorney of or for the party) to mediate such disagreement, and advise the other party in writing of the identity of such individual, which advice shall be accompanied by a list of up to ten (10) suggested neutral individuals to serve as a third mediator. The mediators originally designated by each party shall promptly confer about the selection of a third mediator from such lists, and within five (5) business days following the Original Closing Date (or Termination Date, as the case may be), the originally designated mediators shall agree upon and (subject to availability) select the third mediator from the lists submitted by the parties or otherwise, provided that if the originally designated mediators cannot agree upon a -------- third mediator by such date, the third mediator shall be a retired judge designated by Judicial and Arbitration Mediation Services, Inc., located in Los Angeles, California. The three mediators so selected are herein referred to as the "Panel". Within two (2) business days ----- -44- following the designation of the third mediator, each party shall submit to the Panel in writing, its proposed equitable adjustments in the Purchase Price. Such proposals shall be materially in accordance with the last proposals made by such party to the other party during the course of the aforementioned good faith negotiations between the parties. The parties shall additionally submit such memoranda, arguments, briefs and evidence in support of their respective positions, and in accordance with such procedures, as a majority of the Panel may determine. Within seven (7) business days following the designation of the third mediator, as to each adjustment of the Purchase Price about which there is disagreement, the Panel shall, by majority vote, select the proposed adjustment of the Purchase Price proposed by one of the parties, it being agreed that the Panel shall have no authority to alter any such proposal in any way. Thereafter, the parties shall, subject to the terms and conditions of this Agreement, consummate the Transactions on the basis of such adjustments at a mutually agreeable time and place or places, in accordance with and subject to the provisions of Section 2.13, which shall be no later than the ------------ fifteenth (15th) business day following the Original Closing Date or such later date as the parties may agree upon. Subject to the foregoing, the Panel may determine the issues in dispute following such procedures, consistent with the language of this Agreement, as it deems appropriate to the circumstances and with reference to the amounts in issue, but in any event consistent with the Allocation Schedule to the extent applicable. No particular procedures are intended to be imposed upon the Panel, it being the desire of the parties that any such disagreement shall be resolved as expeditiously and inexpensively as reasonably practicable. No member of the Panel shall have any liability to the parties in connection with service on the Panel, and the parties shall provide such indemnities to the members of the Panel as they shall request. Section 2.15 Transfer of Assets in Corporate Form. If Buyer consents ------------------------------------ in writing in its sole and absolute discretion, Seller may, prior to any Scheduled Closing, cause any Transferred Asset or Assumed Liability to be assigned and transferred by way of an assignment to Buyer of the stock of a subsidiary of Seller (including the stock of any Subsidiary), in which case all right, title and interest of Seller and any of its Affiliates in such subsidiary (which shall constitute all of the outstanding capital stock and rights to acquire capital stock in such subsidiary) shall be transferred to Buyer at the Scheduled Closing as a Subject Transferred Asset. Any such agreement of the parties shall become an amendment to this Agreement. -45- Section 2.16 Assignment of Rights and Obligations to Buyer --------------------------------------------- Subsidiaries. Notwithstanding any contrary provisions contained herein, ------------ the parties hereto agree that, prior to a Scheduled Closing, Buyer, in its sole discretion, may assign any or all of its rights and obligations with respect to the Subject Transferred Assets and the Assumed Liabilities to be transferred at such Scheduled Closing to one or more Buyer Subsidiaries, provided that no such assignment shall relieve Buyer of any obligation or -------- liability to Seller hereunder, and provided further that the following -------- shall apply: (a) Buyer will provide Seller with prompt written notice of any such assignment. (b) No such assignment shall be effected if the making of the assignment will result in Seller's inability to obtain any consent or authorization reasonably required to consummate the Transactions or to avoid economic detriment to the Seller arising from the consummation of the Transactions. (c) Each such Buyer Subsidiary that is an assignee of Buyer shall irrevocably appoint Buyer as its sole and exclusive representative and agent authorized to act for and to receive notices and payments on behalf of the Buyer Subsidiaries in all matters arising from or related to this Agreement and the Transactions. (d) As a condition to Seller's agreement to such assignments, Buyer hereby agrees that Buyer will at all times be the ultimate parent entity of the consolidated group of companies of which Buyer is a group member or that, in the event of any reorganization involving Buyer and its subsidiaries, the ultimate parent entity of the consolidated group of companies emerging from such reorganization that includes Buyer and its successors and assigns shall, prior to any such reorganization, execute such documents as are reasonably necessary to confirm the assumption by such ultimate parent entity of Buyer's obligations to Seller hereunder. (e) Buyer shall remain jointly and severally liable to Seller and the Subsidiaries and to third parties with respect to any Assumed Liabilities transferred to a Buyer Subsidiary, and, without limiting the generality of the foregoing, hereby absolutely and unconditionally guarantees the full, prompt and faithful performance by each Buyer Subsidiary of all covenants and obligations to be performed by such Buyer -46- Subsidiary under this Agreement and any Related Agreement (as defined in Section 3.4) which are assigned to such Buyer Subsidiary, including but not ----------- limited to, the payment of all sums stipulated to be paid by such Buyer Subsidiary pursuant to such assignment, it being understood that each such covenant and obligation constitutes the direct and primary obligation of Buyer and that a separate action or actions may be brought and prosecuted against Buyer whether action is brought against the pertinent Buyer Subsidiary or whether such Buyer Subsidiary is joined in any such action or actions (Buyer hereby waiving any right to require Seller or a Subsidiary to proceed against a Buyer Subsidiary). Buyer hereby authorizes Seller, without notice and without affecting Buyer's liability hereunder, from time to time to (x) renew, compromise, extend, accelerate, or otherwise change the terms of any obligation of a Buyer Subsidiary hereunder with the agreement of such Buyer Subsidiary, (y) take and hold security for the obligations guaranteed, and exchange, enforce, waive and release any such security, and (z) apply such security and direct the order or manner of sale thereof as Seller in its discretion may determine. Buyer hereby further waives: (i) Any defense that may arise by reason of the incapacity or lack of authority of any Buyer Subsidiary; (ii) Any defense based upon a statute or rule of law which provides that the obligations of a surety must be neither larger in amount nor in other respects more burdensome than those of the principal; and (iii) Any duty on the part of Seller or a Subsidiary to disclose to Buyer any facts that Seller or a Subsidiary may now or hereafter know about a Buyer Subsidiary. Section 2.17 Data Processing Services. In order to facilitate the ------------------------ transition of the Facilities from Seller's to Buyer's ownership, the parties acknowledge that in the event Buyer acquires Subsequent Facilities hereunder from Seller, then Seller shall provide certain telephone assistance in connection with management information services and Facility accounting and shall also provide certain data processing services support for the collection of Receivables all in accordance with the terms of and for the period stated in the First Facilities Agreement. -47- Section 2.18 Rejection of Certain Contracts. The provisions of this ------------------------------ Section 2.18 shall apply to the following categories of Assumed Contracts: ------------ (i) those subject to the provisions of Section 2.1(f)(iii); (ii) those ------------------- subject to the provisions of the second sentence of Section 2.12(c); and --------------- (iii) those subject to Section 6.1(f) that are entered into by Seller or a -------------- Subsidiary after the date hereof in violation of Section 6.1(f). With -------------- respect to each such contract (a "Contingent Contract"): ------------------- (a) Buyer or the pertinent Buyer Subsidiary shall have the right to reject such Contingent Contract by giving a written notice of such rejection to Seller within sixty (60) days following the relevant Scheduled Closing, such written notice to be accompanied by originals of the contract then in Buyer's or the Buyer Subsidiary's possession, copies of any written communications between Buyer or the Buyer Subsidiary and the counterparty to such contract relating to the subject matter thereof, and instruments evidencing the reassignment of such contract to Seller or the pertinent Subsidiary in form reasonably satisfactory to Buyer and Seller, in which case such contract shall be treated as an Excluded Asset, and the liabilities related thereto shall be treated as an Excluded Liability, for all purposes of this Agreement, subject to the further provisions of this Section 2.18. ------------ (b) In the event that Seller or the pertinent Subsidiary incurs any costs in connection with the termination of any such Contingent Contract so rejected by Buyer (including payments during any applicable notice period required to terminate such contract) and Buyer or the pertinent Buyer Subsidiary continues to do business with the counterparty to such contract related to the subject matter thereof during any period for which Seller or the applicable Subsidiary is obligated to make payments to such counterparty, then Buyer will reimburse Seller for one-half of the payments that Seller or the applicable Subsidiary is obligated to make to such counterparty in connection with such termination, but not in excess of one-half of the payments that Seller or the applicable Subsidiary is obligated to make to such counterparty under such contract for a period of ninety (90) days. (c) With respect to any Contingent Contract subject to clause (ii) of this Section 2.18 that is not also subject to either clause (i) or ---- ------------ --- clause (iii) of this Section 2.18 and that is not rejected by Buyer ----- ------------ pursuant to Subsection (a) above, Buyer agrees to indemnify and hold -------------- harmless Seller and the Subsidiaries, in accordance with the provisions of Sections -------- -48- 11.3 through 11.6, from and against any and all Losses arising from or ---- ---- related to the lack of any consent or authorization in connection with the assignment of such Contingent Contract to Buyer (or the pertinent Buyer Subsidiary) hereunder. (d) In the event Buyer rejects a Contingent Contract pursuant to Subsection (a), then, notwithstanding any other provision of this -------------- Agreement, Seller shall have no liability to Buyer and the Buyer Subsidiaries for Losses under the provisions of Sections 11.3 through 11.6 ------------- ---- related to such Contingent Contract for the period prior to such rejection or for the amounts due Seller under Subsection (b) above. -------------- (e) With respect to any Contingent Contract subject to clause (iii) of this Section 2.18 that appears on an updated Schedule 2.1(f) ----- ------------ --------------- delivered pursuant to Section 6.3 and that is not rejected by Buyer ----------- --- pursuant to Subsection (a) above, then, notwithstanding any other provision -------------- of this Agreement, Seller shall have no liability to Buyer and the Buyer Subsidiaries for Losses under the provisions of Sections 11.3 through 11.6 ------------- ---- for violation of Section 6.1(f) with respect to such Contingent Contract. -------------- Section 2.19 Remaining Schedules. Notwithstanding anything to the ------------------- contrary herein, this Agreement shall be deemed cancelled and of no further force and effect if the parties shall have failed to agree upon the Schedules enumerated in Exhibit E, if any, within five (5) business days --------- following the date hereof, the parties hereby agreeing to cooperate with one another in good faith and to work expeditiously to agree upon such Schedules within such period. Such agreement shall be evidenced by a duly executed amendment of this Agreement that deletes this Section 2.19. ------------ ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer, as of the date hereof, as follows, except as set forth in Schedules numbered in relation to the Sections set forth below: Section 3.1 Organization and Corporate Power. Seller is a -------------------------------- corporation duly incorporated and validly existing under the laws of, and is authorized to exercise its corporate powers, rights and privileges and is in good standing in, the State of Nevada and has full corporate power to -49- carry on its business as presently conducted and to own or lease and operate its properties and assets now owned or leased and operated by it and to perform the transactions on its part contemplated by this Agreement and all other agreements contemplated hereby. Section 3.2 Subsidiaries. ------------ (a) Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation (which, in the case of Subsidiaries existing on the date of this Agreement, is indicated on Schedule A-1). Each Subsidiary has all requisite power and ------------ authority (corporate and otherwise) to carry on its business as presently conducted and to own or lease and operate its properties and assets now owned or leased and operated by it and to perform the transactions on its part contemplated by this Agreement and all other agreements contemplated hereby. (b) All of the outstanding capital stock of each Subsidiary has been duly authorized and is validly issued, fully paid and nonassessable and, except as indicated on Schedule A-1, is owned beneficially and of ------------ record by Seller or another subsidiary of Seller as indicated on Schedule -------- A-1. Except as provided in Schedule A-1, there are no (i) rights, --- ------------ subscriptions, warrants, options, conversion rights or agreements of any kind outstanding to purchase or otherwise acquire any shares of capital stock of any Subsidiary, or (ii) securities or obligations of any kind convertible into or exchangeable for any shares of capital stock of any Subsidiary, or (iii) obligations of any kind obligating Seller to sell or dispose of all or any part of Seller's ownership interest therein. The Subsidiaries listed on Schedule A-1 are, on the date hereof, the only ------------ subsidiaries of Seller that have any right or interest in, or title to the Facilities. (c) The board of directors of each Subsidiary and, if required, its shareholders, have duly and effectively authorized (i) the sale of the Transferred Assets to be sold by such Subsidiary and (ii) the execution, delivery and performance of the Related Agreements (as defined in Section ------- 3.4) and all other agreements contemplated hereby and thereby to which such ---- Subsidiary is a party. No other corporate act or proceeding on the part of any Subsidiary, its board of directors or its shareholders is necessary to authorize any Related Agreement or other agreement contemplated hereby and thereby or the transactions contemplated hereby and thereby. -50- (d) The Related Agreements and all other agreements contemplated hereby and thereby to which any Subsidiary is a party will, as of each Scheduled Closing, have been duly executed and delivered by each such Subsidiary, and each such agreement, when executed and delivered, will constitute a valid and binding obligation of such Subsidiary, enforceable against such Subsidiary in accordance with its terms, except as it may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought. Section 3.3 Authority Relative to this Agreement. The execution, ------------------------------------ delivery and performance of this Agreement and all other agreements contemplated hereby and the consummation of the transactions contemplated hereby and thereby have been duly and effectively authorized by the board of directors of Seller; no other corporate act or proceeding on the part of Seller, its board of directors or its shareholders is necessary to authorize this Agreement, any such other agreement or the transactions contemplated hereby and thereby. This Agreement has been, and each of the other agreements contemplated hereby will, as of each Scheduled Closing, have been, duly executed and delivered by Seller, and this Agreement constitutes, and each such other agreement when executed and delivered will constitute, a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as it may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought. Section 3.4 Absence of Breach. Subject to the provisions of Sections ----------------- -------- 3.5 and 3.6 below regarding private party and governmental consents, and --- --- except for compliance with the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and any ------- regulatory or licensing Laws applicable to the businesses and assets represented by the Transferred Assets, the execution, delivery and performance by Seller of this Agreement and all other agreements contemplated hereby or executed in connection herewith (not including the First Facilities Agreement, the "Related Agreements"), and the execution ------------------ and delivery by any Subsidiary of the Related Agreements to which it is a -51- party, and the performance by the Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements entered into by the Subsidiaries, do not, (a) conflict with or result in a breach of any of the provisions of the Articles or Certificates of Incorporation or Bylaws or similar charter documents (the "Charter Documents") of Seller or of any ----------------- of the Subsidiaries, (b) contravene any Law or cause the suspension or revocation of any License presently in effect, which affects or binds Seller or any of the Subsidiaries, or any of their properties, except where such contravention, suspension or revocation will not have a Material Adverse Effect (as defined below) on the Transferred Assets and will not affect the validity or enforceability of this Agreement and the Related Agreements or the validity of the Transactions contemplated hereby and thereby, or (c) conflict with or result in a breach of or default (with or without notice or lapse of time or both) under any indenture or loan or credit agreement or any other agreement or instrument to which Seller or any of the Subsidiaries is a party or by which it or they or any of their properties may be affected or bound, the effect of which conflict, breach, or default, either individually or in the aggregate, would be a Material Adverse Effect on the Transferred Assets. As used herein, a "Material -------- Adverse Effect": (x) when used with respect to the Transferred Assets, -------------- means a material adverse effect on the Transferred Assets and on the businesses operated therefrom, including their condition (financial or otherwise) and results of operations, taken as a whole; (y) when used with respect to any portion of the Transferred Assets (including, without limitation, a Facility), means a material adverse effect on such portion of the Transferred Assets and on the businesses operated therefrom, including their condition (financial or otherwise) and results of operations, taken as a whole; and (z) when used with respect to an entity, such as Seller, a Subsidiary or Buyer, means a material adverse effect on the business, condition (financial or otherwise) and results of operations of such entity taken as a whole (including any subsidiaries of such entity). Section 3.5 Private Party Consents. Except as set forth in Schedule ---------------------- -------- 3.5, the execution, delivery and performance by Seller of this Agreement --- and the Related Agreements, and the execution and delivery by any Subsidiary of the Related Agreements to which it is a party, and the performance by the Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements to be performed by the Subsidiaries, do not require the authorization, consent or approval of any non- governmental third party of such a nature that the failure to obtain the same -52- would have a Material Adverse Effect on the Transferred Assets or a Facility. Section 3.6 Governmental Consents. The execution, delivery and --------------------- performance by Seller of this Agreement and the Related Agreements, and the execution and delivery by any Subsidiary of the Related Agreements to which it is a party, and the performance by the Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements to be performed by the Subsidiaries, do not require the authorization, consent, approval, certification, license or order of, or any filing with, any court or governmental agency of such a nature that the failure to obtain the same would have a Material Adverse Effect on the Transferred Assets or a Facility, except for compliance with the HSR Act and except for such governmental authorizations, consents, approvals, certifications, licenses and orders that customarily accompany the transfer of health care facilities such as the Facilities. Section 3.7 Brokers. Except as shown on Schedule 3.7, no broker, ------- ------------ finder, or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with this Agreement or the Transactions contemplated hereby based upon any agreements or arrangements or commitments, written or oral, made by or on behalf of Seller or any of its Affiliates. Seller shall be solely responsible for the payment of any such fee or commission to any person or entity listed on Schedule 3.7 as an ------------ exception to the foregoing. Section 3.8 Title to Property. ----------------- (a) Each Subsidiary has good and defensible title, or valid and effective leasehold rights in the case of leased property, to all tangible personal property included in the Transferred Assets to be sold, conveyed, assigned, transferred and delivered to Buyer by such Subsidiary, free and clear of all liens, charges, claims, pledges, security interests, equities and encumbrances of any nature whatsoever, except for those created or allowed to be suffered by Buyer and except for the following (individually and collectively, the "Permitted Encumbrances"): (i) the lien of current ---------------------- taxes not delinquent, (ii) liens listed on Schedules 3.8(a) and 3.8(b), --------------------------- (iii) the Assumed Liabilities, (iv) such consents, authorizations, approvals and licenses referred to in Sections 3.5 and 3.6, and (v) liens, ------------ --- charges, claims, pledges, security interests, equities and encumbrances which will be discharged or released either prior to, or substantially simultaneously with, -53- the Scheduled Closing at which such property is sold, conveyed, assigned and transferred to Buyer and other possible minor matters that in the aggregate are not substantial in amount and do not materially detract from or interfere with the present or intended use of such property. All such tangible personal property is in good operating condition and repair, subject to ordinary wear and tear and ordinary and routine maintenance, and is reasonably adequate for the operation of the Facilities as they are presently operated. (b) Except as set forth on Schedule 3.8(b), and except for the --------------- Owned Real Property and the Leased Real Property, no Subsidiary owns any fee or leasehold or other interests in any real property used in and necessary for the conduct of the operations of any Facility as presently conducted. Each Subsidiary has good and marketable title to all Owned Real Property, or valid and effective leasehold rights in the case of the Leased Real Property, included in the Transferred Assets to be sold, conveyed, transferred and delivered to Buyer by such Subsidiary, free and clear of all liens except for those created or allowed to be suffered by Buyer and except for the following: (i) Permitted Encumbrances, (ii) liens (not including liens for borrowed money or the deferred purchase price of property) that do not materially impair the use of the Owned Real Property subject thereto, as such Owned Real Property is being used on the date hereof, (iii) easements and similar encumbrances disclosed by current standard ALTA Preliminary Title Reports, delivered to and approved by Buyer prior to the date hereof (except for such easements or similar encumbrances shown on Schedule 8.7(b)), and (iv) zoning, set back, building and other --------------- similar restrictions including, without limitation, restrictions and requirements affecting the Owned Real Property and the Leased Real Property imposed by deeds, leases, development agreements, declarations, and redevelopment authorities, which are not being violated in any manner that would cause a Material Adverse Effect on any Facility as currently used and operated. The condition of the Owned and Leased Real Property is such that it will not materially adversely affect the operations of the Transferred Assets on or from such Owned and Leased Real Property. All of the improvements on land included in the Transferred Assets are in good condition and repair, subject to those matters disclosed in Section 3.16 or ------------ Schedule 3.16, ordinary wear and tear and ordinary and routine maintenance, ------------- and in view of the purpose for which such improvements are being used, free of any material structural or engineering defects. -54- Section 3.9 Assumed Contracts. Except for such matters that, when ----------------- viewed in the aggregate, do not have a Material Adverse Effect on a Facility, (a) there is no liability to any person by reason of the default by Seller or a Subsidiary under any Assumed Contract, (b) neither Seller nor any Subsidiary has received written or other notice that any person intends to cancel or terminate any Assumed Contract, (c) all of the Assumed Contracts are in full force and effect and without any material default by any party or to the knowledge of Seller and the Subsidiaries, any event which, with the passage of time or the giving of notice or both would be such a material default, (d) subject to the provisions of Sections 3.5 and ------------ 3.6, the consummation of the transactions contemplated by this Agreement --- will not constitute and, to the best of Seller's current actual knowledge, no event has occurred which, with or without the passage of time or the giving of notice or both, would constitute a material breach or default by Seller or a Subsidiary of such Assumed Contract, or would cause the acceleration of any obligation of Seller or any Subsidiary or the creation of any lien (except for Permitted Encumbrances) upon any Transferred Asset, and (e) neither Seller nor any Subsidiary has waived any right under any Assumed Contract; provided that Seller makes no separate -------- representation or warranty under this Section 3.9 respecting compliance ----------- with the provisions of any Assumed Contract related to title to or condition of property, licenses, environmental conditions, hazardous substances or environmental laws, taxes, or compliance with laws generally, it being the intent of the parties that warranties respecting such matters shall be made exclusively under the provisions of Sections 3.8, 3.10, 3.16, ------------ ---- ---- 3.20, and 3.25. Seller has previously delivered to Buyer true and complete ---- ---- copies of all written Assumed Contracts except where the failure to so deliver a copy thereof will not have a Material Adverse Effect on a Facility. Section 3.10 Licenses. Except as set forth on Schedule 3.10, (a) the -------- ------------- Subsidiaries possess all Licenses necessary for their operation of the Facilities at the locations and in the manner presently operated (other than such Licenses the absence of which would not have a Material Adverse Effect on a Facility), (b) if required, such Facilities are accredited by applicable accrediting agencies as necessary for their operations in the manner presently operated, and (c) such Facilities are certified for participation in the Medicare program and have current and valid provider contracts with such program. Schedule 3.10 lists each License held by a ------------- Subsidiary and related to the ownership or operation of a Facility and a true and correct copy of each has previously been delivered to Buyer by Seller (other than such Licenses the absence of which would not have a Material -55- Adverse Effect on a Facility). All such Licenses are in full force and effect. Section 3.11 U.S. Person; Resident of Georgia. Neither Seller nor -------------------------------- any Subsidiary is a "foreign person" for purposes of Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code"), or any other Laws ---- requiring withholding of amounts paid to foreign persons. For purposes of the withholding tax imposed by Section 48-7-128 of the Official Code of Georgia Annotated, each Subsidiary that owns Transferred Assets constituting Owned Real Property located in Georgia and related tangible personal property is a corporation the principal place of business of which is located in the State of Georgia. The Seller shall, or shall cause the relevant Subsidiaries to, provide an appropriate affidavit of each such Subsidiary's residence. Seller acknowledges that jurisdictions other than Georgia may impose withholding obligations similar to those imposed by Georgia and that it is Seller's obligation to provide evidence of exemptions from such withholding taxes. Section 3.12 Employee Relations. With respect to the Retained ------------------ Employees, except as set forth on Schedule 3.12: ------------- (a) Neither Seller, nor any Subsidiary nor any Facility is a party to any agreement with any union, trade association or other similar employee organization, no written demand has been made for recognition by a labor organization, and to Seller's knowledge it has received no notice of any union organizing activities by or with respect to any such employees; (b) There are no controversies (including, without limitation, any unfair labor practice complaints, labor strikes, arbitrations, disputes, work slowdowns or work stoppages) pending, or to the best of Seller's current actual knowledge, threatened, which could have a Material Adverse Effect on any Facility; and (c) Each Subsidiary has been and is in material compliance with all federal and state laws respecting employment and employment practices, terms and conditions of employment, and wages and hours (including, but not limited to, the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, as amended, the Occupational Safety and Health Act, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990 and the Family and Medical Leave Act). -56- Section 3.13 Employee Plans. -------------- (a) With respect to each Multiemployer Plan, there has occurred no "complete withdrawal" or "partial withdrawal," as each is defined in Sections 4203 and 4205, respectively, of ERISA, and all payments required to be made to such Multiemployer Plans by a Subsidiary under any collective bargaining agreement have been made. (b) Neither Buyer nor any Buyer Subsidiary shall have any obligation or liability to Seller, any Subsidiary or any present or former employee of any of them for or with respect to any benefit plan, employee benefit plan or employee health or welfare program or other Employee Benefit Arrangements (as defined in Section 3.26(c)), except for --------------- specifically listed Assumed Liabilities and other express obligations of Buyer and the Buyer Subsidiaries under this Agreement. Section 3.14 Litigation. Except for (a) matters associated with or ---------- within the scope of the significant legal proceedings and investigations of an unusual nature referred to in Seller's filings with the Securities and Exchange Commission (the "Unusual Proceedings"), (b) ordinary routine ------------------- claims and litigation incidental to the businesses represented by the Facilities (including, but not limited to, actions for negligence, professional malpractice, workers' compensation claims, so-called "slip- and-fall" claims and the like), (c) governmental inspections and reviews customarily made of businesses such as those operated from the Facilities, and (d) as set forth on Schedule 3.14, there are no actions, suits, claims ------------- or proceedings pending, or to the knowledge of Seller or any Subsidiary, threatened against or affecting the Transferred Assets or relating to the operations of the Facilities, at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, agency or instrumentality. The claims and litigation referred to in clause ------ (b) above are covered by insurance currently maintained by Seller except --- where the failure to be so covered (i) would not have a Material Adverse Effect on any Facility or (ii) is of a nature that is not ordinarily subject to insurance coverage (e.g., demands for punitive damages). ---- Neither Seller nor any Subsidiary is in default under any judgment, order or decree of any governmental agency or authority applicable to the conduct of the business conducted at the Facilities. Except as disclosed on Schedule 3.14, there is no condemnation proceeding pending or, to the ------------- knowledge of Seller or any Subsidiary, threatened against any of the Owned or Leased Real Property. Schedule 3.14 includes an accurate and complete ------------- list of each malpractice claim or -57- lawsuit pending or to Seller's or any Subsidiary's knowledge, threatened against any Facility or Subsidiary. Section 3.15 Inventory. All Inventory included in the Transferred --------- Assets and included in the Net Book Values will consist of a quality and quantity usable and salable in the ordinary course of business, except for items of obsolete materials and materials of below-standard quality at any given Facility, all of which in the aggregate are immaterial to the financial condition or results of operations of the businesses operated from such Facility taken as a whole, or have been, or prior to the relevant Scheduled Closing will be, written down to realizable market value. Section 3.16 Hazardous Substances. To Seller's and the Subsidiaries' -------------------- knowledge, except as disclosed by the Environmental Survey (as defined in Section 6.2(b)) or otherwise on Schedule 3.16: -------------- ------------- (a) There has not been a Release of Hazardous Material on or otherwise affecting the Owned Real Properties or the Leased Real Properties, (other than Releases involving de minimis quantities of Hazardous Materials) that would: (i) constitute a violation of any Environmental Law by Seller or the Subsidiaries, or by any third party if the effect of such violation by such third party imposes a remediation obligation on the part of Seller or any Subsidiary; (ii) trigger any release-reporting obligations of Seller or the Subsidiaries under any Environmental Law; or (iii) trigger any clean-up or remediation obligations or Seller or the Subsidiaries under any Environmental Law; (b) Seller and the Subsidiaries have complied with and currently are in compliance in all material respects with all Environmental Laws that govern the Owned Real Properties, the Leased Real Properties, and the businesses operated from any such properties; (c) Seller and the Subsidiaries have obtained all material Licenses required under the Environmental Laws for operation of their businesses related to the Owned Real Properties and the Leased Real Properties, have complied with and currently are in compliance in all material respects with all such Licenses, and have not received any notice that: (i) any such existing License will be revoked; or (ii) any pending application for any new such License will be denied; -58- (d) Seller and the Subsidiaries have not received any currently outstanding notice of any proceedings, action, or other claim or liability arising under any Environmental Laws (including, without limitation, notice of potentially responsible party status under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. (S)(S)9601 et seq. or any state counterpart) from any person or governmental agency regarding the Owned Real Properties, the Leased Real Properties, or the businesses operated from such properties; (e) Neither Seller nor any Subsidiary has received any currently outstanding notice, which notice is specifically directed to an Owned or Leased Real Property (rather than to all property owners or operators in a given geographic area), that any of the Owned Real Properties or any of the Leased Real Properties is the subject of a material deed restriction, material title-transfer restriction, other material land-use restriction, or material lien arising in each case under any Environmental Law; (f) Neither the Owned Real Properties, the Leased Real Properties, nor any of the businesses conducted on any such properties is the subject of any outstanding order, decree, or agreement with or involving any governmental agency, court, or other party respecting any material aspect of the operation of such properties and businesses that relates to or arises under any Environmental Law (other than orders, decrees or agreements affecting or directed to the healthcare industry generally, or in the case of Leased Real Properties, lease agreements requiring compliance with applicable Environmental Law); (g) No portion of the Owned Real Properties or Leased Real Properties contains or has ever contained any underground storage tank, surface impoundment or similar device used for the management of wastewater, or other waste management unit dedicated to the disposal, treatment, or long-term (greater than 90 days) storage of waste materials; and (h) Neither Seller, any Subsidiary nor any other person has improperly disturbed or encroached upon any floodplain areas, waters, or wetlands associated with any of the Owned Real Properties or Leased Real Properties in violation of any Environmental Law. Section 3.17 Financial Information. --------------------- -59- (a) Attached hereto as Schedule 3.17(a) is an unaudited ---------------- statement of combined earnings from the operations of the Transferred Assets and Assumed Liabilities of the First Facilities and Subsequent Facilities (as they were comprised on the as of date of such Schedule) before interest, income taxes, depreciation and amortization ("EBITDA") for ------ the fiscal year ended May 31, 1993 and for the fiscal period ended November 30, 1993 (collectively, the "EBITDA Statements"). The EBITDA Statements ----------------- present fairly the combined EBITDA of such operations, taken as a whole, as of the dates and for the periods shown, and were derived from and are in accordance with the internal books and records of the Subsidiaries as well as the "Subsidiaries" defined in the First Facilities Agreement (the "Combined Subsidiaries") and the regularly prepared unaudited internal ---------------------- financial statements of the First Facilities and the Subsequent Facilities, which are prepared in accordance with the generally accepted accounting principles utilized in the preparation of the published financial statements of Seller. (b) Attached hereto as Schedule 3.17(b) is an internally ---------------- prepared unaudited combined statement of certain assets and liabilities of the First Facilities and the Subsequent Facilities as of November 30, 1993 (the "Balance Sheet"; collectively, the Balance Sheet and the EBITDA ------------- Statements are the "Financial Schedule"). The Balance Sheet has been ------------------ prepared from, and is in accordance with, the internal books and records of the Combined Subsidiaries and presents fairly the financial condition of the First Facilities and the Subsequent Facilities with respect to the Transferred Assets and Assumed Liabilities that are the subject of this Agreement and the First Facilities Agreement, taken as a whole, as of the date shown. The Balance Sheet was prepared in accordance with Seller's practices for the preparation of internal financial statements, consistently applied, and is in accordance with the generally accepted accounting principles utilized in the preparation of the published financial statements of Seller. (c) Notwithstanding the foregoing, (i) the Financial Schedule does not (A) reflect all intercompany eliminations, adjustments and accruals that are reflected in financial statements of Seller, (B) reflect any reserves for the Unusual Proceedings, (C) reflect any anticipation of the divestiture of the Transferred Assets that are the subject of this Agreement and the First Facilities Agreement and any adjustments to the carrying values of such assets occasioned thereby, (D) contain footnotes or other explanatory material associated with financial statements prepared in accordance with generally accepted accounting principles, or (E) contain normal year-end -60- adjustments with respect to interim periods, (ii) the EBITDA Statements do not reflect allocations of indirect costs and non-hospital overhead or the corresponding cost reimbursement impact of claiming such costs in a Cost Report relating to First Facilities or Subsequent Facilities, and (iii) certain earnings, assets and liabilities have been excluded from the EBITDA Statements or the Balance Sheets, as applicable, as noted in the footnotes or other explanatory material associated with the Financial Statements. In addition, the Financial Schedule is to be read in conjunction with, and is subject to, all notes and other explanatory material set forth therein. (d) The Balance Sheet reflects the amount of Receivables, as well as "Receivables" as defined in the First Facilities Agreement (together, the "Combined Receivables"), which for this purpose may include -------------------- Eligible Receivables (including "Eligible Receivables" as defined in the First Facilities Agreement) as of the date thereof, net of allowances customarily recorded by the Combined Subsidiaries for uncollectible and doubtful accounts, and contractual allowances pursuant to agreements with Payors, all in conformity with Seller's practices for the preparation of internal financial statements and in accordance with the generally accepted accounting principles utilized in the preparation of the published financial statements of the Seller. To the knowledge of Seller and each such Subsidiary, all such Combined Receivables included in the Balance Sheet represent amounts validly owed to the applicable Combined Subsidiary by reason of the provision of goods, services and other consideration by such Combined Subsidiary, and, to the knowledge of Seller and each such Combined Subsidiary, are not valued in excess of the amounts expected to be collected with respect thereto. Each such Combined Subsidiary maintains its accounting records in sufficient detail to substantiate the Combined Receivables reflected on the Balance Sheet. Since the date of Seller's most recent audited financial statements, neither Seller nor any such Combined Subsidiary has changed any principle or practice with respect to the recordation of accounts receivable or the calculation of reserves therefor, or any material collection, discount or write-off policy or procedure. Section 3.18 Changes Since Balance Sheet. Since the date of the --------------------------- Balance Sheet and up to and including the date of this Agreement, other than as contemplated or permitted by this Agreement, the Subsidiaries have conducted the businesses represented by the Transferred Assets only in the ordinary and normal course, except for (i) matters associated with the Unusual Proceedings, (ii) as shown on Schedule 3.18, (iii) the institution ------------- or -61- completion of compliance programs, or (iv) events in anticipation of the divestiture of the Transferred Assets, and there has not been: (a) Any entry into or termination by Seller or a Subsidiary of any material commitment, contract, agreement or transaction (including, without limitation, any borrowing or lending transaction or capital expenditure) related to the Transferred Assets except for transactions in the ordinary course of business and renegotiation of credit agreements to which Seller and certain of its subsidiaries are parties which renegotiations will not have a Material Adverse Effect on the Transferred Assets or on any Facility; (b) Any casualty, physical damage, destruction or physical loss respecting, or change in the physical condition of, any Facility or Equipment that has had a Material Adverse Effect on a Facility; (c) Any transfer of or rights granted under any contract which would have been an Assumed Contract on the date of the Balance Sheet except for transactions in the ordinary course of business; (d) Other than in the ordinary course of business, (i) any sale or other disposition of any fixed asset included in the Balance Sheet having a net book value in excess of $100,000, or (ii) any material mortgage, pledge or imposition of any lien or other encumbrances on any such asset, or (iii) sales or dispositions of, or the imposition of material encumbrances on, fixed assets included in such Balance Sheet having a net book value that exceeds $1,000,000 in the aggregate, or (iv) any sale or other disposition of Inventories included in the Balance Sheet; (e) Any material amendment (other than general amendments which the carrier makes for a category of policy) or termination of any material insurance policy or failure to renew any material insurance policy covering the Transferred Assets; (f) Any default or breach by Seller or a Subsidiary under any contract that would have been an Assumed Contract on the date of the Balance Sheet which, when viewed individually or in the aggregate of all such breaches or defaults, has had a Material Adverse Effect on any Facility; -62- (g) Any material adverse change in the trend of the business, financial condition or results of operations of any Facility as compared to the trend of the business, financial condition or results of operations, as applicable, of such Facility for the two year period ended November 30, 1993; or (h) Any increase made in the compensation levels of any chief executive officer or chief financial officer of any Facility, or any general increase made in the compensation levels of the other Retained Employees, except in the ordinary course of business. Section 3.19 Transferred Business Names. Seller or one of the -------------------------- Subsidiaries owns or has the right to use the Transferred Business Names, free of any liens. Schedule 2.1(h) sets forth for each Transferred --------------- Business Name, if any, that is the subject of a trademark registration the date of registration, the registration number and the expiration date. To the knowledge of Seller and the Subsidiaries, no aspect of registered trademarks included in the Transferred Business Names, if any, has been adjudged invalid or unenforceable or has been cancelled or revoked. Except as set forth on Schedule 3.19, to the knowledge of Seller and the ------------- Subsidiaries, the use by the Subsidiaries of the Transferred Business Names in connection with the Facilities does not conflict with or violate any valid rights of third parties, including any patents, trademarks, trade names or copyrights of others, in any way which would have a Material Adverse Effect on the Transferred Assets or a Facility; neither Seller nor any Subsidiary has received any notice of a conflict with the asserted rights of others in connection therewith which, if determined adversely, would have a Material Adverse Effect on any Facility. Neither Seller nor any of the Subsidiaries is obligated to pay any amount, whether as a royalty, license fee or other payment, to any person in order to use any of the Transferred Business Names. Section 3.20 Compliance with Laws and Accreditation. To Seller's and -------------------------------------- each Subsidiary's knowledge, Seller and each Subsidiary has complied in all material respects with all laws, regulations and orders, and as materially required for participation in the Medicare, CHAMPUS and Medicaid reimbursement programs and is in material compliance with the indigent care conditions, if any, contained in or related to certificates of need obtained by it except (a) as set forth in Schedule 3.20, (b) as described ------------- in Sections 3.10, 3.12, 3.16, and 3.21 and the Schedules, if any related ------------- ---- ---- ---- --------- thereto, and (c) for matters related to the Unusual Proceedings. With -63- respect to each Facility, Seller has previously delivered to Buyer true and complete copies of the most recent Joint Commission on Accreditation of Health Care Organizations ("JCAHO") accreditation survey report and deficiency list, if any; the most recent Statement of Deficiencies and Plan of Correction on Form HCFA-2567; the most recent state licensing report and list of deficiencies, if any; the most recent fire marshall's survey and deficiency list, if any; and the corresponding plans of correction or other responses except, in each case, such surveys, reports or deficiency lists which do not reflect any deficiency which would have a Material Adverse Effect on any Facility. Seller or the relevant Subsidiary has taken or is in the process of taking all reasonable steps to correct all material deficiencies noted therein and a description of any material uncorrected deficiency is listed in Schedule 3.20. There are no provisions in, or other ------------- agreements to which Seller or a Subsidiary is a party relating to any Licenses, which would preclude or limit Buyer from operating the Transferred Assets substantially as they are now operated and using the beds of any Facility substantially as they are currently classified. Section 3.21 Cost Reports, Third Party Receivables and Conditions of ------------------------------------------------------- Participation. The Cost Reports of the Facilities for Medicare, Medicaid ------------- (if required) and Blue Cross (if required) reimbursement have been audited through the periods set forth in Schedule 3.21, and Blue Cross and Medicare ------------- Cost Reports of the Facilities were filed when due. Except for matters related to the Unusual Proceedings, and as set forth in Schedule 3.21: to ------------- the knowledge of Seller, (a) neither Seller nor any Subsidiary has received notice of any material dispute between a Facility and Blue Cross, governmental authorities or the Medicare fiscal intermediary regarding such Cost Reports for periods subsequent to the period specified in Schedule -------- 3.21 other than with respect to adjustments thereto made in the ordinary ---- course of business which do not involve individual amounts in excess of ten thousand dollars ($10,000) per Cost Report; (b) there are no pending or threatened material claims by any of such programs against any Facility; (c) each Facility currently meets, without material exception, the conditions for participation in the Medicare program; and (d) no Facility has been subject to loss of waiver of liability for utilization review denials with respect to any such program during the past two years. Section 3.22 Medical Staff. Seller has previously delivered to ------------- Buyer, with respect to each Facility, a true and correct copy of the blank forms generally used with respect to medical staff privilege and membership application or delineation of privilege; all current medical staff bylaws, -64- rules and regulations and amendments thereto respecting Facilities; and all written contracts with physicians, physician groups, or other members of the medical staffs of the Facilities. With regard to the active medical staffs of the Facilities, there are no material pending or threatened disciplinary or corrective actions or appeals therefrom involving physician applicants or active medical staff members except as set forth in Schedule -------- 3.22. Schedule 3.22 also sets forth a materially complete and accurate ---- ------------- list and description of (a) the name of each member of the medical staff of each Facility as of the date shown on such Schedule, (b) the approximate age of each active medical staff member as of such date, (c) the specialty, if any, of each medical staff member, (d) readily available reports regarding the number of patient admissions of each medical staff member for the period shown on such Schedule 3.22, and (e) readily available ------------- reports regarding the aggregate patient days of patients admitted by each medical staff member for the period shown on such Schedule 3.22. ------------- Section 3.23 Hill-Burton Care. Except as set forth in Schedule 3.23, ---------------- ------------- no Subsidiary or Facility has an outstanding loan, grant or loan guarantee pursuant to the Hill-Burton Act (42 U.S.C. (S)291a, et seq.) and the transactions contemplated hereby will not result in any obligation on the part of the Buyer or a Buyer Subsidiary to repay any such loans, grants or loan guarantees or provide uncompensated care in consideration thereof. Section 3.24 Assets Used in the Operation of the Facilities. There ---------------------------------------------- are no assets or properties that are used in and necessary for the conduct of the operations of the Facilities that are owned by Seller and the Subsidiaries, and which individually or in the aggregate, are necessary for the operation of the Facilities that are not included in the Transferred Assets except for such Assumed Contracts which Buyer has elected or will elect to reject pursuant to Section 2.18. Except as set forth in Schedule ------------ -------- 3.24 and subject to Section 2.18, the Transferred Assets include all assets ---- ------------ and properties that are properly recordable on the Balance Sheet, other than assets and properties disposed of by the Seller or a Subsidiary in the ordinary course of business since the date of the Balance Sheet and without violation of this Agreement. Section 3.25 Taxes. All tax returns of every kind (including, ----- without limitation, returns of all income taxes, franchise taxes, real and personal property taxes, intangibles taxes, patient revenue or other healthcare taxes, withholding taxes, employee compensation taxes and all other taxes of any kind applicable to Seller or any Subsidiary) that are due -65- to have been filed in accordance with applicable laws have been duly filed, and all taxes shown to be due and payable on such returns have been paid in full. Section 3.26 Lists of Other Data. Schedule 2.1(f) contains a list, ------------------- --------------- materially complete and correct as of the dates shown thereon, of the Other Assigned Contracts, and Schedules 3.26(a) through (h) contain lists ----------------- --- or other information, materially complete and correct as of the dates shown thereon, of the following: (a) The most recent regularly generated depreciation schedules related to tangible personal property constituting Equipment, together with copies of such schedules; (b) A brief description of all insurance in force covering (i) fixed assets that would constitute Transferred Assets, or (ii) the operations of any Facility as of such date; (c) All compensation, bonus, incentive, deferred payments, retirement, pension, severance, profit-sharing, stock purchase and stock option plans, group life, automobile, medical, dental, disability, welfare or other employee benefit plans or insurance policies, and other similar arrangements (collectively, "Employee Benefit Arrangements") generally ----------------------------- applicable to the Retained Employees or a substantial part thereof or generally applicable to the chief executive or chief financial officers, or a substantial part thereof, of the Facilities as of such date; (d) The aggregate accrued Paid Time Off for all employees at each Facility, as of the date shown; (e) Any contract relating to clean-up, abatement or other actions in connection with the remediation of any existing environmental liabilities or relating to the performance of any environmental audit or study with respect to the Facilities other than with respect to the Environmental Survey and entered into in the three years preceding the date hereof; (f) Any indenture, mortgage, loan, credit or other written contract under which any of the Subsidiaries, directly or indirectly, is indebted for money borrowed or is the issuer of any note, bond, indenture or other evidence of indebtedness for money borrowed or guarantor of -66- similar financial obligations of others, whether or not reflected on the Balance Sheet; (g) Any contract with any bank, finance company or similar organization pursuant to which such organization acquires receivables from the Subsidiaries; and (h) Any contract granting any person a lien, security interest or mortgage on any Transferred Asset (other than Permitted Encumbrances), including, without limitation, any factoring agreement or agreement for the assignment of accounts receivable or inventory. Section 3.27 Certain Transactions. Except as set forth in Schedule -------------------- -------- 3.27, and except for remuneration as employees, since November 30, 1992 (i) ---- no Facility has been a party to any transaction or series of similar transactions in which the amount involved exceeds $60,000 and in which the chief executive officer, chief financial officer or medical director of such Facility has a direct or indirect material interest, and (ii) no chief executive officer, chief financial officer or medical director of any Facility has been indebted to Seller or any Subsidiary in an amount in excess of $60,000. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller, as of the date hereof, as follows, except as set forth in Schedules numbered in relation to the Sections set forth below: Section 4.1 Organization and Corporate Power. Buyer is a corporation -------------------------------- duly incorporated and validly existing under the laws of, and is authorized to exercise its corporate powers, rights and privileges and is in good standing in, the State of Delaware and has full corporate power to carry on its business as presently conducted and to own or lease and operate its properties and assets now owned or leased and operated by it and to perform the transactions on its part contemplated by this Agreement and all other agreements contemplated hereby. Section 4.2 Buyer Subsidiaries. ------------------ -67- (a) As of each Scheduled Closing, each Buyer Subsidiary will be a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Each Buyer Subsidiary will have, at the First Closing and at each Scheduled Closing thereafter, all requisite power and authority (corporate and otherwise) to carry on its business as then conducted and to own or lease and operate its properties and assets then owned or leased and operated by it and to perform the transactions on its part contemplated by this Agreement and all other agreements contemplated hereby. (b) The board of directors of each Buyer Subsidiary and, if required, its shareholders, will have, by the date of the First Closing, duly and effectively authorized (i) the purchase of the Transferred Assets to be purchased by such Buyer Subsidiary; and (ii) the execution, delivery and performance of the Related Agreements and all other agreements contemplated hereby and thereby to which such Buyer Subsidiary is a party. No other corporate act or proceeding on the part of any Buyer Subsidiary, its board of directors or its shareholders will be necessary to authorize any Related Agreement or other agreement contemplated hereby and thereby or the transactions contemplated hereby and thereby. (c) The Related Agreements and all other agreements contemplated hereby and thereby to which any Buyer Subsidiary is a party will, as of each Scheduled Closing, have been duly executed and delivered by each such Buyer Subsidiary, and each such agreement, when executed and delivered will constitute, a valid and binding obligation of such Buyer Subsidiary, enforceable against such Buyer Subsidiary in accordance with its terms, except as it may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought. Section 4.3 Authority Relative to this Agreement. The execution, ------------------------------------ delivery and performance of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and effectively authorized by the board of directors of Buyer; no other corporate act or proceeding on the part of Buyer, its board of directors or shareholders is necessary to authorize this Agreement, any such Related Agreement or the transactions contemplated hereby and -68- thereby. This Agreement has been, and each of the Related Agreements contemplated hereby will, as of each Scheduled Closing, have been, duly executed and delivered by Buyer and by each applicable Buyer Subsidiary, and this Agreement constitutes, and each such Related Agreement when executed and delivered will constitute, a valid and binding obligation of Buyer and each Buyer Subsidiary party thereto, enforceable against Buyer and each Buyer Subsidiary party thereto, in accordance with its terms, except as it may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding may be brought. Section 4.4 Absence of Breach. Subject to the provisions of Sections ----------------- -------- 4.5 and 4.6 below regarding private party and governmental consents, and --- --- except for compliance with the requirements of the HSR Act and any regulatory or licensing Laws applicable to the businesses and assets represented by the Transferred Assets, the execution, delivery and performance by Buyer of this Agreement and the Related Agreements, and the execution and delivery by any Buyer Subsidiary of the Related Agreements to which it is a party, and the performance by the Buyer Subsidiaries of the transactions to be performed by them and contemplated by this Agreement and the Related Agreements entered into by the Buyer Subsidiaries, do not, (a) conflict with or result in a breach of any of the provisions of Charter Documents of Buyer or of any of the Buyer Subsidiaries, (b) contravene any Law or cause the suspension or revocation of any License presently in effect, which affects or binds Buyer or any of the Buyer Subsidiaries or any of their material properties, or (c) conflict with or result in a breach of or default under any indenture or loan or credit agreement or any other agreement or instrument to which Buyer or any of the Buyer Subsidiaries is a party or by which it or they or any of their properties may be affected or bound. Section 4.5 Private Party Consents. Except as set forth on Schedule ---------------------- -------- 4.5, the execution, delivery and performance by Buyer of this Agreement and --- the Related Agreements and the execution and delivery by any Buyer Subsidiary of the Related Agreements to which it is a party, and the performance by the Buyer Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements to be performed by the Buyer -69- Subsidiaries, do not require the authorization, consent or approval of any non-governmental third party. Section 4.6 Governmental Consents. The execution, delivery and --------------------- performance by Buyer of this Agreement and the Related Agreements, and the execution and delivery by any Buyer Subsidiary of the Related Agreements to which it is a party, and the performance by the Buyer Subsidiaries of the transactions contemplated by this Agreement and the Related Agreements to be executed, delivered or performed by the Buyer Subsidiaries, do not require the authorization, consent, approval, certification, license or order of, or any filing with, any court or governmental agency, except for compliance with the HSR Act and except for such governmental authorizations, consents, approvals, certifications, licenses and orders that customarily accompany the transfer of health care facilities such as the Facilities. Section 4.7 Brokers. Except as set forth on Schedule 4.7, no broker, ------- ------------ finder, or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with this Agreement or the transactions contemplated hereby based upon any agreements or arrangements or commitments, written or oral, made by or on behalf of Buyer or any of its Affiliates. Buyer shall be solely responsible for the payment of any such fee or commission to any person or entity listed on Schedule 4.7 as an ------------ exception to the foregoing. Section 4.8 Qualified for Licenses. Buyer or a Buyer Subsidiary is ---------------------- qualified to obtain any Licenses and program participations necessary for the operation by Buyer or a Buyer Subsidiary of the Transferred Assets as of the relevant Scheduled Closing in the same manner as the Transferred Assets are presently operated by Seller and the Subsidiaries. Section 4.9 Financial Ability to Perform. Buyer has liquid capital ---------------------------- or committed sources therefor sufficient to permit it to perform timely its obligations hereunder, including, but not limited to, the payment of the Tentative Purchase Price to Seller at the Scheduled Closings and the other payments to Seller required hereunder. Promptly after its receipt of letters of commitment or other documents related to the financing of its obligations hereunder, Buyer will provide copies of the same to Seller. Section 4.10 No Knowledge of Seller's Breach. Neither Buyer nor, to ------------------------------- the knowledge of Buyer, any of its Affiliates has knowledge of any -70- breach of any representation or warranty by Seller or of any other condition or circumstance that would excuse Buyer from its timely performance of its obligations hereunder. Buyer shall notify Seller as promptly as practicable if any such information comes to its attention before any relevant Closing Date. Section 4.11 No Assurance. Buyer acknowledges and agrees that the ------------ rates or bases used in calculating payments or reimbursements to it or a Buyer Subsidiary by any Payor (including but not limited to Medicare) may differ from the rates and bases used in calculating such payments or reimbursements to Seller and the Subsidiaries. In entering into the transactions contemplated by this Agreement and the Related Agreements, Buyer is relying solely on the express representations, warranties and covenants of Seller and the Subsidiaries contained in this Agreement and the Related Agreements and upon no other representations or statements of Seller, the Subsidiaries or any of their representatives, and acknowledges and agrees that nothing in this Agreement or the Related Agreements shall be deemed to create any implied duty, disclosure obligation or responsibility on the part of Seller or the Subsidiaries. Buyer further acknowledges that during the course of the due diligence investigation, material information related to the matters that are the subject of the Unusual Proceedings may not have been discovered by or disclosed to it. Seller represents and warrants that, at those scheduled confidential meetings held among counsel for Buyer and Seller on the dates referenced in Schedule 4.11, which meetings were held for the purpose of conducting ------------- Buyer's due diligence regarding the Unusual Proceedings, statements of fact concerning the Unusual Proceedings made by Seller's counsel present at such meetings were not materially inaccurate. ARTICLE 5 COVENANTS OF EACH PARTY Section 5.1 Efforts to Consummate Transactions. Subject to the terms ---------------------------------- and conditions herein provided including, without limitation, Articles 8 ---------- and 9 hereof, each of the parties hereto agrees to use its reasonable - commercial efforts to take, or to cause to be taken, all reasonable actions and to do, or to cause to be done, all reasonable things necessary, proper or advisable under applicable Laws to consummate and make effective, as soon as reasonably practicable, the Transactions contemplated hereby, including the satisfaction of all conditions thereto set forth herein. Such actions shall include, without limitation, exerting their reasonable efforts to -71- obtain the consents, authorizations and approvals of all private parties and governmental authorities whose consent is reasonably necessary to effectuate the Transactions contemplated hereby, and effecting all other necessary registrations and filings, including but not limited to filings under Laws relating to the transfer or obtaining of necessary Licenses, under the HSR Act and all other necessary filings with governmental authorities. Inasmuch as the Transactions in respect of the First Facilities may be consummated without regard to consummation of the transactions contemplated by the Subsequent Facilities Agreement, the parties hereby agree that, in order potentially to expedite the timing of the First Closing, the parties will make separate filings under the HSR Act with respect to the First Facilities and the Second Facilities. The foregoing notwithstanding, it shall be the responsibility of Buyer to use its reasonable commercial efforts and to act diligently and at its expense to obtain any authorizations, approvals and consents in connection with acquiring Licenses and program participations that will permit it to operate the Facilities after the Scheduled Closings, provided that Buyer -------- will seek to obtain Licenses and program participations subject to the existing conditions under which the Subsidiaries operate the Facilities and will not seek to change the same until the Transferred Assets and Assumed Liabilities respecting the Facilities in question have been transferred to and assumed by Buyer. Seller and its Subsidiaries shall cooperate with Buyer's efforts to obtain the requisite regulatory consents, provided neither Seller nor any of its Subsidiaries shall be obligated to incur any liabilities or assume any obligations in connection therewith. Other than Buyer's and Seller's obligations under Section 5.5, neither party shall ----------- have any liability to the other if, after using its reasonable commercial efforts (and, in the case of Buyer's efforts to obtain requisite Licenses, acting diligently), it is unable to obtain any consents, authorizations or approvals necessary for such party to consummate the Transactions. As used herein, the terms "reasonable commercial efforts" or "reasonable efforts" ----------------------------- ------------------ do not include the provision of any consideration to any third party or the suffering of any economic detriment to a party's ongoing operations for the procurement of any such consent, authorization or approval except for the costs of gathering and supplying data or other information or making any filings, fees and expenses of counsel and consultants and for customary fees and charges of governmental authorities and accreditation organizations. Section 5.2 Cooperation; Regulatory Filings. Prior to and after the ------------------------------- Final Closing, upon prior reasonable written request, each party agrees to cooperate with the other in every reasonable commercial way to consum- -72- mate the Transactions. Notwithstanding the foregoing, all analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of either party hereto in connection with proceedings under or relating to the HSR Act or any other federal or state antitrust or fair trade law, or made or submitted by or on behalf of Buyer in connection with proceedings to obtain the Licenses and program participations referred to in Section 5.1 hereof, shall be subject ----------- to the joint approval or disapproval and the joint control of Buyer and Seller, acting with the advice of their respective counsel, it being the intent of the foregoing that the parties hereto will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any such analysis, presentation, memorandum, brief, argument, appearance, opinion or proposal; provided that nothing herein -------- shall prevent either party hereto or any of their Affiliates or their authorized representatives from (a) making or submitting any such analysis, appearance, presentation, memorandum, brief, argument, opinion or proposal in response to a subpoena or other legal process or as otherwise required by Law, or (b) submitting factual information to the United States Department of Justice, the Federal Trade Commission, any other governmental agency or any court or administrative law judge in response to a request therefor or as otherwise required by Law. Section 5.3 Further Assistance. From time to time, at the reasonable ------------------ request of either party, whether on or after a Scheduled Closing, without further consideration, either party, at its expense and within a reasonable amount of time after request hereunder is made, shall execute and deliver such further instruments of assignment, transfer and assumption and take such other action as may be reasonably required to more effectively assign and transfer the Transferred Assets to, and vest the Assumed Liabilities in, Buyer, deliver or make the payment of the Purchase Price to Seller or any amounts due from one party to the other pursuant to the terms of this Agreement or confirm Seller's ownership of the Excluded Assets and obligations with respect to the Excluded Liabilities. Section 5.4 Cooperation Respecting Proceedings. After the Scheduled ---------------------------------- Closings, upon prior reasonable written request, each party shall cooperate with the other, at the requesting party's expense (but including only out- of-pocket expenses to third parties and not the costs incurred by any party for the wages or other benefits paid to its officers, directors or employees), in furnishing information, testimony and other assistance in connection with any inquiries, actions, tax or Cost Report audits, proceed- -73- ings, arrangements or disputes involving either of the parties hereto (other than in connection with disputes between the parties hereto) and based upon contracts, arrangements or acts of Seller or any of the Subsidiaries which were in effect or occurred on or prior to any Scheduled Closing and which relate to the Transferred Assets, including, without limitation, arranging discussions with (and the calling as witness of) officers, directors, employees, agents, and representatives of Buyer. Section 5.5 Expenses. Whether or not the Transactions contemplated -------- hereby are consummated, except as otherwise provided in this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. Notwithstanding the foregoing: (a) Costs associated with preliminary title reports and title policies shall be borne by Seller up to the costs that would have been incurred had the title policies been standard coverage policies of title insurance, and the remaining costs, if any, including costs for Extended Coverage and any surveys in connection therewith, shall be borne by Buyer; (b) All costs of the Environmental Survey referred to in Section ------- 6.2(b) shall be borne one-half by Buyer and one-half by Seller, other than ------ any cost incurred in connection with any "Phase II" investigation conducted by Buyer's environmental consultant (which shall be borne by Buyer); (c) All escrow charges, appraisal fees, and charges of any neutral independent public accountant or mediator, and related costs, shall be borne one-half by Buyer and one-half by Seller (it being agreed that each party shall bear the costs of its own independent public accountant or designated mediator); (d) All recording costs and charges respecting real property will be borne one-half by Seller and one-half by Buyer; (e) All transfer taxes respecting real property will be borne one-half by Buyer and one-half by Seller; (f) All fees and expenses relating to the filings under the HSR Act shall be borne by the party incurring such fees and expenses; -74- (g) All fees and charges of governmental authorities and accreditation agencies in connection with the transfer, issuance or authorization of any License, accreditation or program participation shall be borne by Buyer; (h) All fees or costs associated with the issuance of any bond or the establishment of any escrow required by Section 2.10(a) shall be --------------- borne by Buyer; (i) All fees, charges or costs (other than internal costs of Seller or any Subsidiary), including auditing fees and expenses, incurred as a result of Buyer's compliance with the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, and the rules and regulations thereunder, shall be borne by Buyer; (j) Out-of-pocket costs incurred by Seller and the Subsidiaries in connection with providing transitional assistance to Buyer shall be borne by Buyer, whether such assistance is provided before or after a Scheduled Closing, including costs associated with attendance at meetings requested by Buyer; (k) All liabilities or obligations of Seller or a Subsidiary for Taxes in the nature of sales taxes incurred as a result of the sale of the Transferred Assets hereunder to Buyer shall be borne one-half by Seller and one-half by Buyer; and (l) All fees, charges and costs of economists and other experts, if any, jointly retained by Buyer and Seller in connection with submissions made to any government agency and advice in connection therewith respecting approval of the Transactions, including proceedings under the HSR Act, will be borne one-half by Buyer and one-half by Seller. All such charges and expenses shall be promptly settled between the parties at the relevant Scheduled Closing or upon termination or expiration of further proceedings under this Agreement, or with respect to such charges and expenses not determined as of such time, as soon thereafter as is reasonably practicable. Section 5.6 Announcements; Confidentiality. Prior to the Final ------------------------------ Closing Date, no press or other public announcement, or public statement or comment in response to any inquiry, relating to the transactions contem- -75- plated by this Agreement shall be issued or made by Buyer or Seller or any Subsidiary without the joint approval of Buyer and Seller; provided -------- that a press release or other public announcement, regulatory filing, statement or comment made without such joint approval shall not be in violation of this Section if it is made in order to comply with applicable securities Laws or stock exchange policies and in the reasonable judgment of the party making such release or announcement, based upon advice of counsel, prior review and joint approval, despite reasonable efforts to obtain the same, would prevent dissemination of such release or announcement in a timely enough fashion to comply with such Laws or policies, provided that in all instances prompt notice from one party to -------- the other shall be given with respect to any such release, announcement, statement or comment. Subject to the foregoing, the parties hereto recognize and agree that all information, instruments, documents and details concerning the businesses of Buyer, Seller and the Subsidiaries are strictly confidential, and Seller and Buyer expressly covenant and agree with each other that, prior to and after the Scheduled Closings, they will not, nor will they allow any of their respective officers, directors, employees, representatives or agents (including professional advisors) to disclose or publicly comment upon any matters relating to the business of the other or relating to this Agreement, including, without limitation, the terms, timing or progress of the transactions contemplated hereby, or its negotiation, terms, provisions or conditions, including Purchase Price, except for disclosure to their respective professional advisors and lenders or prospective financing sources (each of whom shall agree not to disclose the same) which is reasonably necessary to effectuate the Transactions contemplated hereby and in a manner consistent with the provisions of this Agreement. Each party shall keep all information (i) obtained from the other either before or after the date of this Agreement, or (ii) related to Buyer's proposed purchase of the Transferred Assets, Seller's proposed sale of the Transferred Assets, the contents of this Agreement or the negotiation of this Agreement confidential, and neither party shall reveal such information to, nor produce copies of any written information for, any person outside its management group or its professional advisors (including lenders and prospective financing sources) without the prior written consent of the other party, unless such party is compelled to disclose such information by judicial or administrative process or by any other requirements of Law or disclosure is reasonably necessary to obtain a License or a consent listed on the Schedule of Required Consents. If the Transactions contemplated by this Agreement should fail to close for any reason, each party shall return to the other as soon as practicable all originals and copies of written information -76- provided to such party by or on behalf of the other party and none of such information shall be used by either party, or their employees, agents or representatives in the business operations of any person. Notwithstanding the foregoing, (i) each party's obligations under this Section shall not apply to any information or document which is or becomes available to the public other than as a result of a disclosure by the other party in violation of this Agreement or other obligation of confidentiality under which such information may be held or becomes available to the party on a non-confidential basis from a source other than the other party or its officers, directors, employees, representatives or agents and (ii) without the prior written consent of Seller, or except as may be required by Law (as determined by the written opinion of independent counsel in form and substance satisfactory to Seller) the schedules to this Agreement shall not be disclosed to or filed with any person (including any governmental entity or regulatory board) if such filing or disclosure could result in such schedules becoming available to the public. The parties' obligations under this Section shall survive the termination of this Agreement. Nothing in this Section shall, or is intended to, impair or modify any of the rights or obligations of Buyer or its Affiliates under that certain letter agreement dated as of September 15, 1993, all of which remain in effect until termination of such letter agreement in accordance with its terms. Section 5.7 Preservation of and Access to Certain Records. --------------------------------------------- (a) As set forth in Section 2.2(e), all or any portion of the ------ medical, clinical and other records directly or indirectly associated with the admission, care and treatment of patients on or prior to the relevant Closing Date on which the relevant Facility is transferred (collectively, for all Facilities, the "Patient Records") and all financial and other --------------- records of, or located at, a Facility for the period ending on or prior to the relevant Closing Date, whether or not maintained at or by a Facility (the Patient Records and such other records for all Facilities are collectively referred to as the "Hospital Records") shall be Excluded ---------------- Assets. Notwithstanding the foregoing, the parties will cooperate in providing copies and access to such records as set forth below. (b) Notwithstanding that the Hospital Records are Excluded Assets, to the extent required by applicable Law or at Seller's election, Seller may choose not to remove the Hospital Records from a transferred Facility or otherwise acquire possession of them after a Scheduled Closing. Unless and until removed by Seller, the Buyer shall, in accordance with -77- applicable Laws, maintain the Hospital Records at the Facilities (or at such other mutually approved locations) at Buyer's cost, and as agent of and bailee for Seller, until the expiration of seven (7) years from the relevant Scheduled Closing (and, if at the expiration thereof any tax or Payor audit or judicial proceeding is in progress or the applicable statute of limitations has been extended, for such longer period as such audit or proceeding is in progress or such statutory period is extended)(the "Document Retention Period"). After a Scheduled Closing and subject to ------------------------- applicable Laws, Buyer shall grant Seller full access to the Hospital Records (including any Patient Records) as needed for any lawful purpose (including Seller's inspection and copying of same), and Seller shall have the same rights of access to inspect and copy (at Seller's cost) any or all of the Hospital Records that Seller had prior to the Scheduled Closing. Buyer shall instruct the appropriate employees of the Facilities to cooperate in providing access to such records to Seller and its authorized representatives as contemplated herein. Access to such records shall be, wherever reasonably possible, during normal business hours, with reasonable prior written notice to Buyer of the time when such access shall be needed. Seller's employees, representatives and agents shall conduct themselves in such a manner so that Buyer's normal business activities shall not be unduly or unnecessarily disrupted. After the expiration of the aforementioned Document Retention Period, Buyer shall not, without ninety- one (91) days' prior written notification to Seller, destroy any Hospital Records in its possession. Within ninety (90) days after its receipt of such notice of intent to destroy, Seller shall have the right, at its own expense, to require Buyer to deliver any such records to Seller in accordance with Seller's reasonable instructions. Buyer shall adopt a record retention policy with respect to the Hospital Records which requires that all Hospital Records be maintained for the Document Retention Period and destroyed only after compliance with the notice provisions of this Subsection (b) (including the passage of time), and shall take all -------------- reasonable steps necessary to inform its employees of such policy. (c) Buyer acknowledges and agrees that Seller shall have the right to remove, and may remove, from time to time on or prior to the relevant Closing Date and during the Document Retention Period any or all of the Hospital Records. In the event of Seller's removal of any Hospital Records from a Facility, it shall, at Seller's cost and subject to applicable Laws, provide Buyer with copies (or originals, if required by applicable law or accreditation standards) of the following Hospital Records if Buyer elects to retain such copies: (i) the Patient Records for patients who are patients -78- of the Facilities at the relevant Scheduled Closing or who are the subject of Receivables transferred to Buyer hereunder, (ii) the personnel records of the Hired Employees, and (iii) any records Buyer would be required to have to comply with accreditation standards. If the Hospital Records are removed by Seller, then it shall maintain such Hospital Records at its expense during such period of time and at such location as is deemed appropriate by Seller in its sole and absolute discretion. For so long as the Hospital Records are maintained by Seller, Seller shall make Hospital Records (other than those protected by or subject to the attorney-client privilege) available to Buyer, subject to applicable Laws, as needed by Buyer for any lawful purpose and if reasonably necessary to permit Buyer to operate the Facilities or other Transferred Assets. Seller shall instruct its appropriate employees to cooperate in providing access to such records to Buyer and its authorized representatives as contemplated herein. Buyer's access to such Hospital Records shall be during normal business hours, with reasonable prior written notice to Seller of the time when such access shall be needed. Buyer may make copies of or extracts from any such Hospital Records to which Buyer has access hereunder at Buyer's sole cost and expense. Notwithstanding the foregoing, Buyer's access to, or right to copies of, any Patient Records shall be subject to any applicable Law, accreditation standard or rule of confidentiality or privilege. (d) After Closing, Buyer or the applicable Buyer Subsidiary shall have the right to assign to an entity which purchases from Buyer or a Buyer Subsidiary a Facility or substantially all the assets of a Facility, all of the rights of Buyer under this Section 5.7, provided that such ----------- entity expressly assumes all obligations of Buyer under this Section 5.7 ----------- with respect to the purchased Facility. ARTICLE 6 ADDITIONAL COVENANTS OF SELLER Seller hereby additionally covenants, promises and agrees as follows: Section 6.1 Conduct Pending Closing. Prior to consummation of the ----------------------- Transactions contemplated hereby or the termination or expiration of this Agreement pursuant to its terms, unless Buyer shall otherwise consent in writing, which consent shall not be unreasonably withheld or delayed, and except for actions taken pursuant to Assumed Contracts, or which arise from or are related to the anticipated transfer of the Transferred Assets, the conduct or resolution of the Unusual Proceedings or effectuation of ongoing -79- compliance programs, or as otherwise contemplated by this Agreement or disclosed in Schedule 6.1 or another Schedule to this Agreement, Seller ------------ shall, and shall cause the Subsidiaries to: (a) Conduct the business represented by, and otherwise deal with, the Transferred Assets only in the usual and ordinary course, materially consistent with practices followed prior to the execution of this Agreement; (b) Use reasonable efforts to keep intact the Transferred Assets and the business they represent and to preserve relationships beneficial to such business that doctors, patients, Payors, suppliers, employees and others have with the Facilities; (c) Except as required by their terms, not amend, terminate, renew, fail to renew or renegotiate any material contract, except in the ordinary course of business and consistent with practices of the recent past, or default (or take or omit to take any action that, with or without the giving of notice or passage of time, would constitute a default) in any of its obligations under any such contracts, that would be an Assumed Contract as of the date hereof; (d) Not (i) sell, lease, transfer or dispose of, or make any contract for the sale, lease, transfer or disposition of, any assets or properties which would be included in the Transferred Assets in an amount in excess of $1,000,000 in the aggregate (other than sales in the ordinary course of business); (ii) incur, assume, guaranty, or otherwise become liable in respect of any indebtedness for money borrowed which would result in Buyer assuming such liability hereunder after the Closing; (iii) purchase or make any contract for the purchase of a material amount of assets or properties which would be included in the Transferred Assets (other than purchases in the ordinary course of business and other than capital expenditures within the aggregate thresholds set forth in clause (v) below); (iv) accelerate or delay the purchase of Inventory, or the payment of amounts due to or from the Subsidiaries in a manner inconsistent with past practice; (v) make any new commitments which would require an expenditure of more than $50,000 in the aggregate other than in the ordinary course of business; (vi) encumber or voluntarily subject to any lien any Transferred Asset (except for Permitted Encumbrances); or (vii) assign or transfer accounts receivable to collection agencies in a manner inconsistent with past practice. -80- (e) Maintain in force and effect the insurance policies identified in Section 3.26(b); --------------- (f) Not enter into any contract or amendment of a contract that, had such contract or amendment been entered into prior to the date hereof, would have been included on Schedule 2.1(f), unless Buyer has failed to --------------- disapprove of such contract or amendment in a written notice to Seller given within two (2) business days of Seller's written notice to Buyer of such contract or amendment accompanied by a copy thereof, provided that -------- Buyer's disapproval of such contract or amendment shall not be unreasonable, and provided further that any contract entered into in -------- violation of this Section 6.1(f) shall be subject to the provisions of -------------- Section 2.18; ------------ (g) Not grant any general or uniform increase in the rates of pay or benefits to Retained Employees (or a class thereof) or any increase in salary or benefits of any chief executive or financial officer of any Facility, except for compensation previously agreed to prior to the date hereof; or (h) Subject to Section 6.3, not take any action which would ----------- cause any of Seller's representations and warranties set forth in Article 3 --------- to be false as of the relevant Scheduled Closing; provided that nothing in this Section shall (i) obligate Seller or any -------- Subsidiary to make expenditures other than in the ordinary course of business and consistent with practices of the recent past or to otherwise suffer any economic detriment, (ii) preclude Seller from paying, prepaying or otherwise satisfying any liability which, if outstanding as of a Closing Date, would be an Assumed Liability or an Excluded Liability, (iii) preclude Seller from incurring any liabilities or obligations to any third party in connection with obtaining such party's consent to any transaction contemplated by this Agreement or the Related Agreements provided such -------- liabilities and obligations under this clause (iii) shall be Excluded ------------ Liabilities pursuant to Section 2.4(h) hereof if not approved in advance by -------------- Buyer (which approval shall not be unreasonably withheld), or (iv) preclude Seller from instituting or completing any program designed to promote compliance or comply with Laws or other good business practices respecting the Facilities. -81- Section 6.2 Access and Information; Environmental Survey; Remediation --------------------------------------------------------- or Adjustment. ------------- (a) Subject to the restrictions set forth in Section 5.6 ----------- respecting confidentiality and provided that Buyer has complied with each and every provision thereof, Seller shall, and shall cause the Subsidiaries to, afford Buyer, and the counsel, accountants and other representatives of Buyer, reasonable access, throughout the period from the date hereof to the relevant Closing Date, to the Transferred Assets and the employees, personnel and medical staff associated therewith and all the properties, books, contracts, commitments, Cost Reports and records respecting the Transferred Assets (regardless of where such information, may be located) which Seller has or to which it has access. Such access shall be afforded to Buyer after no less than 24 hours prior written notice, during normal business hours and only in such manner so as not to disturb patient care or to interfere with the normal operations of the Facilities; provided, -------- however, that, notwithstanding the foregoing and subject to the provisions concerning nondisclosure set forth in Section 5.6, without first obtaining ----------- the written consent of Mr. Donald Thayer which consent shall not be unreasonably withheld, neither Buyer nor its counsel, accountants and other representatives shall tour or visit the Facilities or contact any of the employees, personnel or medical staff thereof; and provided further that -------- until the first to occur of the Termination Date or the Final Closing, under no circumstances shall Buyer directly or indirectly solicit the employment of any employees of Seller or its Subsidiaries, except as Hired Employees pursuant to the terms hereof or except as may be permitted with the prior written consent of a responsible officer of Seller. Seller's covenants under this Section are made with the understanding that Buyer shall use all such information in compliance with all Laws. The foregoing notwithstanding, Buyer acknowledges and agrees that Buyer's access to the books and records of the Transferred Assets shall not include access to, and Seller shall not have any obligation to deliver to Buyer, any information concerning any alleged dispute or any pending litigation, investigation or proceeding involving Seller or its Affiliates that is protected by or subject to the attorney-client privilege, or the disclosure of which is restricted by an agreement entered into in connection with such dispute, litigation, investigation or proceeding or an order entered by any court, or (in the case of the Unusual Proceedings) certain non-public information; moreover, Buyer shall not have access to patient or employee records or any other records the disclosure of which would be prohibited by any Law, accreditation standards, or rule or agreement (express or implied) of -82- confidentiality, except that Buyer may be granted access to such records to the extent they are appropriately redacted and in conformity with such other reasonable procedures as may be required to conform to any such requirements of Law, accreditation standards or rule or agreement of confidentiality. (b) Seller has provided to Buyer copies of an environmental survey conducted with respect to each of the Facilities (the "Environmental ------------- Survey"). The Environmental Survey was conducted by an environmental ------ consulting firm or firms (the "Consultant") in accordance with applicable ---------- professional standards in effect at the time the Environmental Survey was conducted and such reasonable procedures as were determined by Seller. In the event of a disagreement between Buyer and Seller concerning the procedures employed by the Consultant, Buyer may at Buyer's expense employ a separate environmental consultant to conduct such procedures requested by Buyer (subject to Seller's prior approval of such procedures, which shall not unreasonably be withheld), and the findings of the Buyer's Environmental consultant shall be included as an addendum to the Environmental Survey. The results of any such Environmental Survey shall be delivered to and owned by Seller, and all proceedings in connection with the Environmental Survey and the results thereof shall be subject to the confidentiality provisions of Section 5.6. Buyer acknowledges and agrees ----------- that the Environmental Survey is and shall be only an initial "Phase I" environmental site assessment. If subsequently determined by Seller, the Consultant and the Buyer, to be necessary or prudent to conduct sampling, laboratory analyses, or additional investigation work at any of the Facilities, Seller shall direct the Consultant to undertake a further "Phase II" investigation involving additional investigation and appropriate sampling and laboratory analyses respecting such Facilities the results of which are to be included in the Environmental Survey. In any "Phase II" investigation, Seller shall give Buyer no less than 24 hours' notice before the Consultant enters onto any Facility, and the "Phase II" Environmental Survey shall be conducted so as not to interfere with the normal operation of the Facilities. Buyer shall be permitted to have one of its employees or agents present during all inspections of, and sample gatherings (including borings) from the soil or any floor tile, insulation or other internal component of, a Facility and shall be entitled to split samples upon Buyer's request. In the event that Buyer considers it necessary to conduct any "Phase II" investigation work that Seller refuses to order, Buyer may at Buyer's expense employ a separate environmental consultant to conduct such "Phase II" investigation work at least thirty (30) days before the First Closing. -83- Buyer shall give Seller no less than 24 hours' notice before Buyer's environmental consultant enters onto any Facility, and any such "Phase II" work performed by Buyer's environmental consultant shall be conducted so as not to interfere with the normal operations of the Facilities. Seller shall be permitted to have one of its employees or agents present during all inspections of and sample gatherings (including borings) from the soil or any floor tile, insulation, or other internal component of a Facility performed by Buyer's environmental consultant and shall be entitled to split samples upon Seller's request. Buyer shall be liable for any repairs or other costs required to correct damage to the Facilities resulting from such "Phase II" investigation. The findings of any Phase II investigation prepared by Buyer's environmental consultant shall be included as an addendum to the Environmental Survey. Notwithstanding the foregoing, Seller may elect not to permit Buyer to conduct a "Phase II" investigation through its own environmental consultant, in which case Buyer can exclude the affected Facility, and the Transferred Assets and Assumed Liabilities respecting such Facility from the Transactions, in which case the parties shall negotiate in good faith an equitable adjustment to the Purchase Price, or if they cannot agree upon the same, such adjustment shall be determined in accordance with Section 2.14. ------------ (c) With respect to any matters disclosed by such Environmental Survey or listed on Schedule 3.16 that would constitute a breach of ------------- Seller's warranties in Section 3.16, but for the qualifications to such ------------ warranties based on Seller's knowledge or disclosures in the Environmental Survey or on such Schedule 3.16, Seller will at its election, either (i) ------------- clean up or otherwise remediate such matters in a reasonable manner prior to the Closing Date related to such Facility, at its expense; or (ii) agree in writing prior to the Closing Date to reimburse Buyer for the costs specified in such written agreement of such reasonable clean-up or remediation incurred by Buyer after the Closing Date related to such Facility, and to promptly reimburse Buyer after Buyer incurs such expenses subsequent to the Closing Date related to such Facility; or (iii) elect to exclude the affected Facility, and Transferred Assets and Assumed Liabilities respecting such Facility, from the Transactions, in which case the parties shall negotiate in good faith an equitable adjustment to the Purchase Price, or if they cannot agree upon the same, such adjustment shall be determined in accordance with Section 2.14; provided, however, ------------ -------- that in no case will Seller be required to remove or otherwise remediate (or bear the costs of same) any Hazardous Materials used as construction materials in structures or improvements constituting the Facilities, or in equipment contained therein, unless the current condition -84- of such Hazardous Materials has resulted in either: (i) noncompliance with any Environmental Law or License issued pursuant to an Environmental Law; or (ii) an unreasonable hazard to human health, human safety or the environment. Section 6.3 Updating. Seller shall notify Buyer of any changes or -------- additions to any of Seller's Schedules to this Agreement with respect to a particular Facility or the Transferred Assets or Assumed Liabilities related thereto by the delivery of updates thereof, if any, as of a reasonably current date prior to the relevant Scheduled Closing not later than three (3) business days prior to the Scheduled Closing with respect to such Subject Transferred Assets, provided, however, that the Financial -------- Schedule shall not be updated to cover any period or periods subsequent to the respective dates thereof. No such updates made pursuant to this Section shall be deemed to cure any breach of any representation or warranty made in this Agreement, unless Buyer specifically agrees thereto in writing, nor shall any such notification be considered to constitute or give rise to a waiver by Buyer of any condition set forth in this Agreement. Section 6.4 No Solicitation. Seller will not, and shall cause the --------------- Subsidiaries not to, and will use its best efforts to cause its and their officers, employees, agents and representatives (including any investment banker) not to, directly or indirectly, solicit, encourage or initiate any discussions with, or, subject to fiduciary duties to shareholders, negotiate or otherwise deal with, or provide any information to, any corporation, partnership, person or other entity or group, other than Buyer and its officers, employees and agents, concerning any sale of or similar transactions involving the Transferred Assets or the stock of the Subsidiaries. None of the foregoing shall prohibit providing information to others in a manner in keeping with the ordinary conduct of Seller's or the Subsidiaries' businesses. Seller shall notify Buyer promptly of any inquiry, proposal or offer received by Seller concerning the sale of or similar transactions involving the Transferred Assets or the stock of the Subsidiaries. Subject to the foregoing, in the exercise of its aforementioned fiduciary duties to shareholders, Seller may terminate this Agreement on written notice to Buyer, which termination shall have the effect set forth in Section 10.2, provided that upon consummation prior to ------------ -------- the first anniversary of this Agreement of any transaction or transactions with one or more third parties covering substantially all of the Transferred Assets, Seller shall be obligated to pay Buyer the sum of Fifteen Million Dollars ($15,000,000), and provided further that the -------- payment of such sum shall be -85- deemed to constitute liquidated damages in lieu of any and all other liability of Seller and the Subsidiaries to Buyer and the Buyer Subsidiaries in connection with or related to or arising from this Agreement or the transactions contemplated hereby, or in connection with or related to or arising from the termination hereof. Section 6.5 Name Changes. To the extent that the corporate names of ------------ any of the Subsidiaries incorporate or are substantially similar to the Transferred Business Names, Seller agrees to cause the Subsidiaries promptly after the relevant Scheduled Closing to take all action necessary to change such names so as not to incorporate or be substantially similar to the Transferred Business Names. Section 6.6 Filing of Cost Reports. Seller shall cause to be ---------------------- prepared and timely filed all Cost Reports and all other filings which are required to be filed with Medicare and any other cost-based Payors with respect to the operations of the Facilities for any and all periods ending on or prior to a relevant Closing Date. Seller and the Subsidiaries shall retain all rights to any amounts receivable from Medicare or other Payors with respect to such reports or filings or with respect to such periods and, as between Buyer, on the one hand, and Seller and Subsidiaries, on the other, shall remain obligated for all amounts due Medicare or such other Payors with respect to such reports or filings or with respect to such periods, and the parties hereby acknowledge and agree that Buyer is not being assigned or otherwise receiving and is not hereby assuming any of the same. Seller's rights shall include, without limitation, the right to dispute or to appeal any determinations relating to such reports. Section 6.7 Purchase of Supplies. Buyer may request Seller or its -------------------- Affiliates to permit Facilities transferred at such Scheduled Closing to participate in specified national purchasing contracts of Seller or its Affiliates for a fee to be agreed upon. If Buyer wishes to enter into such an agreement with Seller, it shall notify Seller no later than five (5) days prior to such Scheduled Closing, and at the Scheduled Closing the parties shall execute a Purchasing Contract substantially in the form of Exhibit D hereto. Schedule 6.7 lists all of the national purchasing --------- ------------ contracts of Seller and its Affiliates in effect as of the date thereof which do not preclude participation by persons which are not Affiliates of Seller. Section 6.8 Covenant Not to Compete. ----------------------- -86- (a) Covenant. Subject to the further provisions of this Section -------- ------- 6.8, during the "Covenant Period" (as defined in Section 6.8(d)), none of --- -------------- the Subsidiaries, Seller or any other subsidiaries of Seller in which Seller owns a majority of the voting interests (collectively, "Covered ------- Parties") shall, directly or indirectly (whether through a majority-owned ------- subsidiary or otherwise), in any Specified Capacity (as defined in this Section 6.8), engage in the business of delivering mental health or alcohol ----------- or substance abuse services through the operation of a hospital or otherwise, including without limitation through the delivery of inpatient, partial hospitalization, residential or outpatient services (as limited by the provisions of Section 6.8(b), a "Competing Business"). For purposes -------------- ------------------ hereof, the term "Specified Capacity" shall mean, subject to Section ------------------ ------- 6.8(b), each of the following capacities: (i) As an operator, manager or sole owner of the Competing Business, whether directly or indirectly; (ii) As a constituent partner, joint venturer or equity shareholder of an entity engaged in the Competing Business if the voting equity interest held is greater than 10% of all voting equity interests in such entity; (iii) As a lender of money to, or a guarantor of indebtedness for money borrowed by, any other entity engaged in a Competing Business in a principal amount in excess of $1,000,000, except for (A) loans or guarantees made in the ordinary course of business and not as an investment in such entity; (B) loans or guarantees made or entered into in connection with the sale of a Competing Business by a Covered Party; or (C) loans represented by publicly traded instruments. (b) Exceptions. The provisions of this Section 6.8 shall not ---------- ----------- apply to and shall not prohibit the following: (i) Psychiatric Facilities and Contracts Not Acquired By ---------------------------------------------------- Buyer. The conduct of a Competing Business from any facility ----- (including renovations and expansions thereof) at which a Covered Party, in any Specified Capacity, primarily engages in a Competing Business as of the Final Closing, or pursuant to any contract (including modifications, extensions and renewals thereof) under which a Covered Party, in any Specified Capacity, engages in a -87- Competing Business as of the Final Closing, if (A) such facility, contract or Specified Capacity is not acquired or assumed by Buyer or --- a Buyer Subsidiary pursuant to this Agreement, or (B) such facility, contract or Specified Capacity, is, after the Final Closing, reacquired by a Covered Party from Buyer or a Buyer Subsidiary pursuant to this Agreement; (ii) Facilities Outside Geographic Area. The conduct of a ---------------------------------- Competing Business from any location that is not within twenty-five (25) miles of a Facility (not including satellite locations) that (A) was acquired by Buyer or a Buyer Subsidiary pursuant to this Agreement, and (B) at the time in question, is still owned, operated or managed by Buyer or by a person or entity which, directly or indirectly, controls, is controlled by or is under common control with Buyer (Facilities meeting the requirements of both clauses (A) and (B) --- --- being herein referred to as "Covered Facilities"); ------------------ (iii) Acute Hospitals. The conduct of a Competing Business --------------- from or through any hospital, commonly referred to as an acute care hospital, that is licensed to provide general medical and surgical services, including related facilities that operate on the same campus as, or under the auspices of, such acute care hospital (such hospitals and related facilities being herein referred to as "Acute Hospitals"), --------------- including the provision of management services to an Acute Hospital, provided that the conduct of any Competing Business from or through a ------------- Specified Acute Hospital or an Acquired Acute Hospital (as each such term is defined in Section 6.8(c)) shall be subject to the further -------------- provisions of Section 6.8(c); -------------- (iv) Divestiture of Acquired Psychiatric Facilities. Other ---------------------------------------------- than an Acquired Acute Hospital, the conduct of a Competing Business in a Specified Capacity first acquired by any Covered Party after the date hereof as part of the acquisition of interests in healthcare assets other than the Competing Business, provided that no Covered ------------- Party engages in such Competing Business after the expiration of twelve (12) months from such acquisition and no such Competing Business is expanded during such twelve (12) month period, except for expansions for which regulatory approval exists, or for which capital expenditures have been undertaken or are in process, or which are required by existing contracts (together, "Permitted Expansions"); or --------------------- -88- (v) Acquiring Entities. The conduct of a Competing ------------------ Business for, on behalf of, or by (A) any entity that is not a Covered Party that acquires majority ownership or substantially all the assets of a Covered Party after the date hereof, (B) any entity that is not a Covered Party that acquires a Competing Business from a Covered Party after the date hereof, (C) any surviving entity (other than a Covered Party) of a consolidation, merger, reorganization or spinoff (each, a "Reorganization") involving a Covered Party as a result of which -------------- shareholders directly or indirectly owning a majority of such Covered Party immediately before such Reorganization do not own a majority of such surviving entity immediately after such Reorganization, or (D) any majority-owned subsidiary of any such acquiring or surviving entity that is not a Covered Party. (c) Acute Hospital Affiliations. With respect to an Acute --------------------------- Hospital listed on Schedule 6.8(c) (a "Specified Acute Hospital"), and --------------- ------------------------ except as set forth below, the exception provided by Section 6.8(b)(iii) ------------------- above shall apply but only to the extent such Specified Acute Hospital conducts a Competing Business (including Permitted Expansions, the "Exempted Competing Business") on the Scheduled Closing Date with respect ----------------------------- to the Facility shown on Schedule 6.8(c) as the Specified Acute Hospital's --------------- "Affiliation Facility." On and after such Scheduled Closing Date, a Specified Acute Hospital shall not expand its services or its Competing Business beyond the Exempted Competing Business except in accordance with, and subject to, clauses (i) through (iii) below. With respect to any Acute ----------- ----- Hospital acquired by a Covered Party after the date of this Agreement and which is within twenty (20) miles of a Covered Facility (an "Acquired Acute -------------- Hospital"), the exception provided by Section 6.8(b)(iii) shall apply but -------- ------------------- only to the extent of such Acquired Acute Hospital's Exempted Competing Business on the date the acquisition of such Acquired Acute Hospital is consummated (the "Acquisition Date"). On and after such Acquisition Date, ---------------- an Acquired Acute Hospital shall not expand its services or its Competing Business beyond the Exempted Competing Business except in accordance with, and subject to, clauses (i) through (iii) below. ----------- ----- (i) Seller or its relevant Affiliate must first provide Buyer notice that it proposes to expand its services or Competing Business beyond the Exempted Competing Business, and shall briefly describe the nature and scope of the expanded Competing Business in which it proposes to engage. Within thirty (30) days following its -89- receipt of such notice, Buyer shall cause (A) the Affiliation Facility with respect to a Specified Acute Hospital (as noted in Schedule -------- 6.8(c)) to offer the Specified Acute Hospital the opportunity to enter ------ into an affiliation agreement with its Affiliation Facility, or (B) the closest Covered Facility with respect to an Acquired Acute Hospital to offer the Acquired Acute Hospital the opportunity to enter into an affiliation agreement. All affiliation agreements must be on customary industry terms, pursuant to which the relevant Covered Facility will agree to provide all services comprising the expanded Competing Business to Payors and patients of, and to subscribers or other participants in services or programs provided by, the Acute Hospital at the Covered Facility's usual and customary prices, terms and conditions which the parties shall negotiate expeditiously and in good faith. The term of the affiliation agreement shall be for the Covenant Period for such Specified or Acquired Acute Hospital and shall give the Specified Acute Hospital or Acquired Acute Hospital, as the case may be, the right to extend the agreement for two successive one-year periods. (ii) The Covered Facility must have the capacity to provide the desired services in a quantity and manner comparable to the quantity and manner in which such services are proposed to be provided by the Specified or Acquired Acute Hospital. (iii) The entry into such affiliation agreement by the Specified Acute Hospital or Acquired Acute Hospital, and the performance thereof by the Specified Acute Hospital or Acquired Acute Hospital (including, without limitation, the failure to provide such Competing Business by the Specified Acute Hospital or Acquired Acute Hospital) will not violate or conflict with, or cause a default under, the terms of any License, accreditation standard or Payor contract to which the Specified Acute Hospital or Acquired Acute Hospital is then subject. If the terms and conditions set forth in clause (i) through (iii) (other ---------- ----- than the first sentence of clause (i)) are not met as to the expanded ---------- Competing Business of a Specified or Acquired Acute Hospital, the exception provided by Section 6.8(b)(iii) above shall apply to such expanded ------------------- Competing Business of such Specified or Acquired Acute Hospital. -90- (d) Covenant Period. The term of the covenant (the "Covenant --------------- -------- Period") set forth in Section 6.8(a) shall expire on the third anniversary ------ -------------- of the Final Closing, except (i) as to a Specified Acute Hospital, the covenant shall expire on the earlier of the third anniversary of the Final Closing or the date on which such Specified Acute Hospital's Affiliation Facility is no longer a Covered Facility, and (ii) as to an Acquired Acute Hospital, the covenant shall expire on the earlier of the third anniversary of the Final Closing or the second anniversary of the Acquisition Date for such Acquired Acute Hospital. (e) Severability. To the extent that this covenant or any ------------ provision of this Section 6.8 shall be deemed illegal or unenforceable by a ----------- court or other tribunal of competent jurisdiction with respect to (i) any geographic area, (ii) any part of the time period covered by this covenant, (iii) any activity or Specified Capacity covered by this covenant, or (iv) any other aspect of this covenant, such determination shall not affect this covenant with respect to any other geographic area, time period, activity or other aspect covered by this covenant. (f) Injunctive Relief. Each of the parties to this Agreement ----------------- acknowledges that (i) the covenant and restrictions contained in this Section 6.8 are necessary, fundamental and required for the protection of ----------- the business of Buyer and its operation (through the Buyer Subsidiaries) of the Facilities; (ii) this covenant relates to matters which are of a special character and which give this covenant a special value; and (iii) a breach of the covenant contained in this Section 6.8 will result in ----------- irreparable harm and damages to Buyer and Buyer Subsidiaries which cannot be adequately compensated for by a monetary award. Accordingly, it is expressly agreed that in addition to all other remedies available in law or in equity, Buyer and Buyer Subsidiaries shall be entitled to the remedy of a temporary restraining order, preliminary injunction or such other form of injunctive or equitable relief as may be issued by any court of competent jurisdiction to restrain or enjoin a Covered Party from breaching this covenant or any provision of this Section 6.8 or otherwise to specifically ----------- enforce the provisions of this covenant. (g) Value: The parties agree that the value of the covenant ----- contained in this Section 6.8 is the value assigned to it in Section 2.5 ----------- ----------- and that each will account for and report the value of such covenant in accordance with such valuation and all of the terms and provisions of Section 2.7. ----------- -91- Section 6.9 Audited Statements. Prior to and after any relevant ------------------ Scheduled Closing, Seller shall make the books and records (other than those protected by or subject to the attorney-client privilege) and unaudited financial statements of the Subsidiaries which are related to the Facilities and are for periods prior to such Scheduled Closing available to Buyer and Buyer's and Seller's independent accountants at reasonable times and in a manner so as to not unduly interfere with Seller's operations, and otherwise cooperate with Buyer in order to permit an audit of the Subsidiaries' financial statements for periods prior to such Scheduled Closing. Seller shall reasonably cooperate in assisting Buyer in obtaining and preparing all necessary information for the timely filing of any documents required to be filed by Buyer under the Securities Exchange Act of 1934 related to the transactions contemplated hereby. Without limiting the effect of Section 5.5 of this Agreement, the audit and the out-of- pocket costs of Seller's cooperation in obtaining and preparing any information (including, without limitation, all services of Seller's independent accountants rendered in connection therewith) will be paid for by Buyer. Section 6.10 Post-Closing Insurance. Seller for five years after the ---------------------- Final Closing, shall maintain its existing comprehensive general liability and hospital professional liability insurance coverages with respect to the Facilities for all periods prior to the Closing in substantially their present form as described on Schedule 3.26(b) (the "Insurance Program"), ---------------- ----------------- provided that (a) Seller shall have the right to reduce (but not increase beyond $2,000,000 per occurrence) the existing deductible under the Insurance Program and (b) shall have the right to cancel or terminate, or have cancelled or terminated, the coverages under the Insurance Program so long as Seller acquires (from (i) its present insurance company or (ii) another reasonably acceptable insurance company under a reasonably acceptable policy) an extended discovery period of not less than five years after any such cancellation or termination for periods prior to the Final Closing. Such Insurance Program, if maintained, shall be maintained at Seller's expense, and if such Insurance Program is maintained Seller shall cause Buyer and each Buyer Subsidiary to be named as an additional insured with respect to the applicable Facility and Seller shall provide Buyer with copies thereof and copies of renewals prior to the expiration of the prior policy or policies. Seller shall use commercially reasonable efforts to avoid invalidating the insurance policies referred to in this Section 6.10. ------------ Section 6.11 Use of Controlled Substance Licenses. To the extent ------------------------------------ permitted by Law, Buyer shall have the right, for a period not to exceed -92- sixty (60) days following a relevant Scheduled Closing, to operate under the Licenses of the Subsidiaries relating to controlled substances and the operation of pharmacies, until Buyer is able to obtain such Licenses for itself. Seller shall cause the pertinent Subsidiaries to execute and deliver to Buyer any powers of attorney and other instruments which Buyer or the appropriate governmental agency may reasonably require in connection with Buyer's use of such Licenses. Buyer acknowledges that it shall apply for all such Licenses as soon as reasonably possible before or after the relevant Scheduled Closing and diligently pursue such applications in accordance with Section 5.1. ----------- Section 6.12 Non-Disturbance Agreements. Seller hereby agrees to -------------------------- exercise its reasonable commercial efforts, prior to the relevant Scheduled Closing, to obtain from each existing mortgagee of each Facility identified below a non-disturbance agreement providing in substance that in the event the lessor or sublessor of such Facility defaults in its obligations to the mortgagee respecting indebtedness existing at the relevant Scheduled Closing and as a result thereof the mortgagee forecloses upon, exercises a power of sale or otherwise succeeds to the ownership of such property, then and in such event, such foreclosure or other change in ownership shall not terminate or affect the validity of the Real Property Lease respecting such Facility assigned to Buyer hereunder, provided that Buyer hereby agrees ------------- that, in connection with Seller's obtaining any such non-disturbance agreement, Buyer will execute such reasonable agreements in favor of such mortgagee confirming the attornment of Buyer to such mortgagee or its assigns, and subordinating the Real Property Lease to the interest of such mortgagee, under such circumstances. In the event that Seller shall be unable to obtain any such non-disturbance agreement and the lessor's or sublessor's default under indebtedness existing at the relevant Scheduled Closing results in the termination of any such Real Property Lease prior to the expiration of the current term and any renewal terms available in the Real Property Lease as of the relevant Scheduled Closing, then Seller shall indemnify Buyer, in accordance with the provisions of Section 11.3(a)(ii), ------------------- for Losses arising therefrom but not in excess of the portion of the Purchase Price allocated to such Facility in the Allocation Schedule, provided that Buyer shall provide Seller with notice of any such default or ------------- claimed default by the lessor or sublessor reasonably promptly following Buyer's receipt of any notice or knowledge respecting same. The Facility and Real Property Lease to which this Section shall apply is the Real Property Lease respecting the hospital numbered as Facility No. 50. -93- ARTICLE 7 ADDITIONAL COVENANTS OF BUYER Section 7.1 Waiver of Bulk Sales Law Compliance. Subject to the ----------------------------------- indemnification provisions of Section 11.3(a)(iii) hereof, Buyer hereby -------------------- waives compliance by Seller and the Subsidiaries with the requirements, if any, of Article 6 of the Uniform Commercial Code as in force in any state in which Transferred Assets are located and all other similar laws applicable to bulk sales and transfers. Section 7.2 Resale Certificate. Buyer agrees to furnish to Seller ------------------ and the Subsidiaries any resale certificate or certificates or other similar documents reasonably requested by Seller to comply with pertinent sales and use tax laws. Section 7.3 Cost Reports and Audit Contests. After each Scheduled ------------------------------- Closing and for the period of time necessary to conclude any pending or potential audit or contest of any Cost Reports with respect to the Facilities transferred at such Scheduled Closing that include periods ending on or before the relevant Closing Date, Buyer shall (a) properly keep and preserve all financial books and records delivered to Buyer by Seller and the Subsidiaries (if any) and utilized in preparing such Cost Reports, including, without limitation, accounts payable invoices, Medicare logs and billing information in accordance with Section 5.7, and (b) within ----------- five (5) days of Buyer's receipt of the same, forward to Seller all information received from Payors relating to periods prior to and as of the relevant Closing Date including, without limitation, Cost Report Settlements, notices of program reimbursements, demand letters for payment and proposed audit adjustments. Upon reasonable written notice by Seller, Seller (or its agents) shall be entitled, at Seller's expense, during regular business hours, to have access to, inspect and make copies of all such books and records. Upon the reasonable request of Seller, Buyer shall assist Seller and the Subsidiaries in obtaining information deemed by Seller to be necessary or desirable in connection with any audit or contest of such reports. To the extent required to meet its obligations under this Section, Buyer shall provide the reasonable support of its employees at no cost to Seller. Section 7.4 Tax Matters. After each Scheduled Closing, Buyer shall ----------- be responsible for causing its employees, at no cost to Seller, to assist Seller and the Subsidiaries, in the same manner and to the extent that personnel of the Facilities currently provide such assistance, in the -94- preparation and filing of all returns relating to taxes imposed upon the businesses operated through the Transferred Assets that relate to periods ending on or prior to the relevant Scheduled Closing but are due after the relevant Closing Date and that are not related to Taxes included in the Assumed Liabilities, including without limitation, income tax and information returns. It is further acknowledged by Buyer that Taxes (including, without limitation, the Florida indigent care tax) imposed upon the right or privilege to do business from the Facilities after the Closing shall be Buyer's responsibility even if measured by gross receipts, net operating revenues or patient days for a period ending on, before or including a Closing Date and that Taxes included in Accrued Operating Expenses shall be only those properly accruable, in accordance with generally accepted accounting principles, for the right or privilege of doing business through the relevant Closing Date. Buyer further agrees to exercise its reasonable commercial efforts to have the income tax year of any venture or partnership referred to in Section 2.1(c) terminated as of -------------- the relevant Scheduled Closing with respect to the pertinent Subsidiary or Subsidiaries transferring its interests therein. Section 7.5 Letters of Credit. Subject to the terms and conditions ----------------- hereof, at the relevant Scheduled Closing, Buyer shall cause letters of credit and indemnity or performance bonds to be provided to substitute for those letters of credit and bonds listed in Schedule 7.5, so that at and as ------------ of such Scheduled Closing Seller and its Affiliates shall have no further obligation to provide such designated letters of credit or bonds. Section 7.6 Conduct Pending Closing. Prior to consummation of the ----------------------- Transactions contemplated hereby or the termination or expiration of this Agreement pursuant to its terms, unless Seller shall otherwise consent in writing, Buyer shall not, and shall not permit any Buyer Subsidiary to, take any action which would cause any of Buyer's representations and warranties set forth in Article 4 to be false as of the relevant Scheduled --------- Closing. Section 7.7 Securities Offerings. Buyer hereby agrees to indemnify -------------------- and hold harmless Seller and each of its Affiliates, in accordance with the provisions of Section 11.4(a)(ii), against any and all Losses, as incurred, ------------------- arising out of the offer or sale by Buyer of securities, except to the extent that such Loss arises from any untrue statement or alleged untrue statement of a material fact contained in any such securities offering materials or prospectus used by Buyer or its representatives, or from the omission or alleged omission therefrom of a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, which untrue or alleged untrue statement or omission or -95- alleged omission is made in reliance upon and in conformity with written information furnished to Buyer by Seller under a cover letter from Seller's counsel stating that such information is expressly for use in such offering materials or prospectus. ARTICLE 8 BUYER'S CONDITIONS TO CLOSING The obligations of Buyer to consummate the Transactions with respect to a Facility and the Transferred Assets and Assumed Liabilities related thereto shall be subject to the requirements of Section 2.13 and to the ------------ fulfillment at or prior to the relevant Scheduled Closing of the following conditions, unless Buyer waives in writing such fulfillment: Section 8.1 Performance of Agreement. Seller shall have performed in ------------------------ all material respects its agreements and obligations contained in this Agreement required to be performed on or prior to the Scheduled Closing. Section 8.2 Accuracy of Representations and Warranties. The ------------------------------------------ representations and warranties of Seller set forth in Article 3 of this --------- Agreement shall be true in all respects as of the date of this Agreement (unless the inaccuracy or inaccuracies which would otherwise result in a failure of this condition have been cured by the Scheduled Closing) and as of the Scheduled Closing (as updated by the revising of Schedules contemplated by Section 6.3) as if made as of such time, except where ----------- such inaccuracy or inaccuracies would not individually or in the aggregate result in a Material Adverse Effect on the Facility in question. Section 8.3 Officers' Certificate. Buyer shall have received from --------------------- Seller an officers' certificate, executed on Seller's behalf by its chief executive officer, president, chief financial officer or treasurer (in his or her capacity as such) dated the Closing Date and stating that to the knowledge of such individual, the conditions in Sections 8.1 and 8.2 above ------------ --- have been met. Section 8.4 Consents. The waiting period under the HSR Act shall -------- have expired or been terminated, and, subject to the provisions of Section ------- 2.12, all approvals, consents, authorizations and waivers from ---- governmen- -96- tal and accreditation agencies the absence of which would render Buyer unable to operate the facility in the manner operated prior to such Scheduled Closing, and all approvals, consents, authorizations and waivers from other third parties to the extent shown on the Schedule of Required Consents (collectively "Consents") required for Buyer to consummate the -------- Transactions with respect to such Facility, shall have been obtained, except that a Consent from a third party to the sale and assignment of a Transferred Asset, such as a Medicare or Medicaid provider agreement, or the assumption of an Assumed Liability with respect thereto, shall not constitute a condition to Buyer's consummation of the Transactions with respect to a Facility if such sale, assignment or assumption may lawfully be made subject to a customary condition subsequent that the Consent be obtained from the third party based upon determinations of such third party, including without limitation needs surveys or evaluations of Buyer, to be completed after the Scheduled Closing. As to each of the Real Property Leases listed on the Schedule of Required Consents, Buyer shall have received an estoppel certificate, identifying the lease and stating that such lease is in full force and effect, that the lessee under such lease is current in all of its obligations under such lease and that the lessor is not aware of any default by lessee under such lease. Section 8.5 Absence of Injunctions. There shall be no: ---------------------- (a) Injunction, restraining order or order of any nature issued by any court of competent jurisdiction or governmental agency which directs that the Transactions related to such Facility contemplated hereby shall not be consummated as herein provided or compels or would compel Buyer to dispose of or discontinue, or materially restrict the operations of, such Facility or any significant portion of the Transferred Assets with respect thereto as a result of the consummation of the Transactions contemplated hereby; (b) Suit, action or other proceeding by any governmental agency pending before any court, governmental agency or non-governmental, self- regulatory organization, or threatened (pursuant to a written notification), wherein such complainant seeks the restraint or prohibition of the consummation of the Transactions related to such Facility or asserts the illegality of the Transactions related to such Facility; or (c) Action taken, or law enacted, promulgated or deemed applicable to the Transactions related to such Facility, by any governmental -97- agency which would render consummation of such Transactions illegal or which would threaten the imposition of any penalty or material economic detriment upon Buyer if such Transactions were consummated; provided that: -------- ---- (i) The parties will use their reasonable efforts to litigate against, or to obtain the lifting of, any such injunction, restraining or other order, restraint, prohibition, action, suit, law or penalty; (ii) In the event that (A) the "First Closing" has occurred under the First Facilities Agreement, (B) there is such a pending or threatened suit, action, proceeding, injunction, restraining order or other order, made, sought, issued, initiated or obtained by a governmental agency in respect of Transactions contemplated to occur at the Final Closing under this Agreement, and (C) on or prior to the original Termination Date for such Final Closing, the parties and such agency have entered into a written agreement which would resolve such controversy but such agreement is subject to final agency approval that has not been obtained on or prior to the fifth business day before the original Termination Date for the Final Closing, then and in such events the original Termination Date for the Final Closing shall be extended to the fifth business day following such final agency approval if the date of such approval is within five (5) business days of the end of a month or the original Termination Date for the Final Closing shall be extended to the end of the month in which such approval is obtained if the date of such approval is not within five (5) business days of the end of a month, but in no event shall the original Termination Date for the Final Closing be extended for more than three (3) calendar months from the original Termination Date; and (iii) Clauses (a) through (c) above notwithstanding, the effect --- --- of any such event, action or suit shall be to exclude the affected Facility from the Scheduled Closing and, if such Facility is not transferred in a subsequent Closing, to adjust the Purchase Price pursuant to the Allocation Schedule. Section 8.6 Opinion of Counsel. Buyer shall have received, on and as ------------------ of the Closing Date, an opinion of Mr. Scott Brown, general counsel to Seller, substantially as to the matters set forth in Sections 3.1, 3.2, ------------ --- 3.3, 3.4, 3.5, 3.6 and 3.14, subject to customary conditions and --- --- --- --- ---- limitations. -98- Section 8.7 Title to Real Property. Title to Transferred Assets ---------------------- related to the Facility comprised of interests in real property shall have been evidenced by the willingness of Chicago Title Insurance Company (or an Affiliate thereof) (the "Title Insurer") to issue at regular rates ALTA (or ------------- the local equivalents thereof) owner's, or lessee's, as the case may be, extended coverage policies of title insurance (1990 Form B) (the "Title ----- Policies"), with the survey exception removed, in amounts equal to the -------- respective portions of the Purchase Price allocated to such interests, showing title to such interests in such real property vested in Buyer subject to transfer of such interest to Buyer. Each such Title Policy shall be free of exceptions relating to (i), except for Title Policies respecting Facilities located in Texas, any claim which arises out of the transaction vesting in Buyer the estate or interest insured by the Title Policy, by reason of the operation of federal bankruptcy, state insolvency or similar creditors's rights laws, and (ii) rights of the United States of America, and the state in which the real property covered by the Title Policy is located, or either or them, to recover any federal funds advanced as provided in the Hill-Burton Act, 42 U.S.C (S)(S) 291 et. seq. Such Title Policies shall additionally be free of all other exceptions, including other standard exceptions, other than the following: (a) A lien or liens to secure payment of real estate taxes, not delinquent; (b) Exceptions, other than those listed on Schedule 8.7(b), --------------- disclosed by current standard ALTA Preliminary Title Reports, delivered to and approved (except as shown on Schedule 8.7(b)) by Buyer prior to the --------------- date hereof (as indicated by Buyer's signature of approval appended thereto) together with copies of all documents underlying the exceptions contained therein; and (c) Other possible minor matters that in the aggregate are not substantial in amount and do not materially detract from or interfere with the present or intended use of such real property, including such minor matters as may be disclosed by surveys taken after the date hereof. The willingness of the Title Insurer to issue the Title Policies shall be evidenced either by the issuance thereof at the relevant Scheduled Closing or the written commitments or binders, dated as of the relevant Scheduled Closing, of the Title Insurer to issue such Title Policies within a reasonable time after the relevant Closing Date, subject to actual transfer of the real -99- property in question. If the Title Insurer is unwilling to issue any such Title Policy, it shall be required to provide Buyer and Seller, in writing, notice setting forth the reason(s) for such unwillingness on or before the relevant Closing Date. Seller shall have the right to seek to cure any defect which is the reason for such unwillingness, and, if such notice by the Title Insurer is given less than ten (10) business days prior to the then Scheduled Closing, then the relevant Closing Date (and, to the extent necessary, the Termination Date) shall be extended for a period of up to ten (10) business days to provide to Seller such opportunity to cure. In the event that, despite Seller's efforts to cure, the Title Insurer remains unwilling to issue any such Title Policy on the Final Closing Date (as may be extended as provided herein), then, at the election of Buyer, and without affecting the other conditions of the parties to consummation of the Transactions, such real property interests not covered by such a Title Policy shall not be included in the Transferred Assets and shall be deemed to be Excluded Assets, and liabilities associated therewith that would otherwise be Assumed Liabilities shall be deemed to be Excluded Liabilities; and Buyer and Seller shall negotiate in good faith prior to the Final Closing Date an adjustment in the Purchase Price based on the Allocation Schedule. If the parties cannot agree upon such adjustment, then the disagreement shall be resolved in accordance with Section 2.14. Notwithstanding the foregoing, ------------ Buyer may accept such title to any such interests as the pertinent Subsidiary may be able to convey, and such title insurance with respect to the same as the Title Insurer is willing to issue, in which case such interests shall be conveyed as part of the Transferred Assets without reduction of the Purchase Price or any credit or allowance against the same and without any other liability on the part of Seller or the Subsidiaries. Section 8.8 Receipt of Other Documents. Buyer shall have received -------------------------- the following: (a) Certified copies of the resolutions of Seller's and each relevant Subsidiary's board of directors respecting this Agreement, the Related Agreements and the Transactions, together with certified copies of any shareholder resolutions which are necessary to approve the execution and delivery of this Agreement and any Agreements and/or the performance of the obligations of Seller and the Subsidiaries hereunder and thereunder; -100- (b) Certified copies of Seller's and each relevant Subsidi-ary's Charter Documents, together with a certificate of the corporate secretary of each that none of such documents have been amended; (c) One or more certificates as to the incumbency of each officer of Seller or of any Subsidiary who has signed the Agreement, any Related Agreement or any certificate, document or instrument delivered pursuant to the Agreement or any Related Agreement; (d) Good standing certificates for Seller and each of the relevant Subsidiaries from the Secretaries of State of their respective states of incorporation, dated as of a date not earlier than fifteen (15) business days prior to the relevant Closing Date; (e) Copies of all third party and governmental consents, permits and authorizations that Seller or any Subsidiary has received in connection with the Agreement, the Related Agreements and the Transactions to occur at the relevant Scheduled Closing; and (f) Certificates of non-foreign status in the form required by Section 1445 of the Code duly executed by Seller and the relevant Subsidiaries. Section 8.9 Licenses and Permits. The Buyer shall have obtained any -------------------- and all authorizations, approvals and consents in connection with acquiring Licenses that will permit it to operate the Facility after the relevant Scheduled Closing substantially as operated by the relevant Subsidiary immediately prior to the relevant Scheduled Closing. Section 8.10 Casualty; Condemnation. ---------------------- (a) Casualty. If any part of the Transferred Assets related to -------- the Facility are damaged, lost or destroyed (whether by fire, theft, vandalism or other casualty) in whole or in part prior to the relevant Scheduled Closing, and the fair market value of such damage or destruction is less than thirty percent (30%) of the allocated portion of the Purchase Price for such Facility set forth in the Allocation Schedule, Seller shall, at its option, either (i) reduce the Purchase Price by the fair market value of the assets destroyed, such value to be determined as of the date immediately prior to such destruction or, as the case may be, by the estimated cost to restore damaged assets, (ii) provided that the proceeds are obtainable -101- without delay and are sufficient to fully restore the damaged assets, upon the relevant Scheduled Closing transfer the proceeds or the rights to the proceeds of applicable insurance to Buyer, and Buyer may restore the improvements, or (iii) repair or restore such damages or destroyed improvements. If any part of the Transferred Assets related to the Facility are damaged, lost or destroyed (whether by fire, theft, vandalism or other cause or casualty) in whole or in part prior to the relevant Scheduled Closing and the fair market value of such damages is greater than thirty percent (30%) of such allocated portion of the Purchase Price, Buyer may elect either to (i) require Seller upon the relevant Scheduled Closing to transfer the proceeds (or the right to the proceeds) of applicable insurance to Buyer and Buyer may restore the improvements, or (ii) terminate this Agreement with respect to the damaged assets or Facility only, with a reduction in the Purchase Price determined as follows. The reduction in Purchase Price shall be mutually determined by Buyer and Seller on the basis of the Allocation Schedule, or if the Buyer and Seller fail to agree, then such reduction shall be determined in accordance with Section 2.14. ------------ (b) Condemnation. From the date hereof until the relevant ------------ Scheduled Closing, in the event that any portion of the Transferred Assets related to the Facility becomes subject to or is threatened with any condemnation or eminent domain proceedings (except for an immaterial portion), then Buyer, at its sole option, may elect to terminate this Agreement with respect only to that part which is condemned or threatened to be condemned with a reduction in the Purchase Price determined as provided in Section 8.10(a). --------------- Section 8.11 Reasonable Assurances. There shall not have been any --------------------- actions taken by the United States government to indicate that it is reasonably likely that either the Unusual Proceedings or any proceeding, investigation, claim or lawsuit relating thereto, in each case relating to periods prior to the relevant Scheduled Closing, (a) shall be applied to or be expanded to include an assertion against Buyer or the applicable Buyer Subsidiaries with respect to their operation of the Facility after the relevant Scheduled Closing, or (b) would be the basis of any investigation or proceeding to exclude Buyer or the applicable Buyer Subsidiaries from participation in any government healthcare program with respect to the operations of the Facility after the relevant Scheduled Closing, or (c) would result in the Transferred Assets being subjected to forfeiture under 18 U.S.C. (S)1961-1966 or otherwise. -102- Section 8.12 Certain Events. During the thirty (30) days preceding -------------- the date of the relevant Scheduled Closing, there shall not have occurred or be continuing (a) any suspension of trading on the New York Stock Exchange or material governmental restrictions (not in force on the date hereof) on trading in securities generally, or (b) any banking moratorium declared by Federal, California or New York authorities, or (c) any material disruption of or any material adverse change in the financial, banking or capital markets, or (d) any outbreak or material escalation of hostilities affecting the United States of America or other calamity, panic or crisis, the effect of which on the financial markets of the United States in each case described in clauses (a), (b), (c) or (d) above, is that lending institutions have generally ceased providing funding for transactions of the size contemplated hereby, provided that the occurrence -------- of such event shall operate only to delay the Scheduled Closing (and extend the Termination Date, if necessary) until the tenth day following the date upon which lending institutions generally have resumed providing funding for transactions of the size contemplated hereby and that such delay may not extend the original Termination Date for more than sixty (60) days, after which time there shall be deemed to be a failure of this condition. ARTICLE 9 SELLER'S CONDITIONS TO CLOSING The obligations of Seller to consummate the Transactions with respect to a Facility and the Transferred Assets and Assumed Liabilities related thereto shall be subject to the fulfillment at or prior to the relevant Scheduled Closing of the following conditions, unless Seller waives in writing such fulfillment: Section 9.1 Performance of Agreement. Buyer shall have performed in ------------------------ all material respects its agreements and obligations contained in this Agreement required to be performed on or prior to the Scheduled Closing. Section 9.2 Accuracy of Representations and Warranties. The ------------------------------------------ representations and warranties of Buyer set forth in Article 4 of this --------- Agreement shall be true in all material respects as of the date of this Agreement (unless the inaccuracy or inaccuracies which would otherwise result in a failure of this condition have been cured by the Scheduled Closing) and as of the Scheduled Closing as if made as of such time. -103- Section 9.3 Officers' Certificate. Seller shall have received from --------------------- Buyer an officers' certificate, executed on Buyer's behalf by its chief executive officer, president, chief financial officer or treasurer (in his or her capacity as such) dated the Closing Date and stating that to the actual knowledge of such individual, the conditions in Sections 9.1 and 9.2 ------------ --- above have been met. Section 9.4 Consents. The waiting period under the HSR Act shall -------- have expired or been terminated, and, subject to the provisions of Section ------- 2.12, all Consents required for Seller to consummate the Transactions with ---- respect to such Facility shall have been obtained, except that a Consent from a third party to the sale and assignment of a Transferred Asset, such as a Medicare or Medicaid provider agreement, or the assumption of an Assumed Liability with respect thereto, shall not constitute a condition to Seller's consummation of the Transactions with respect to such Facility if such sale, assignment or assumption may lawfully be made subject to a customary condition subsequent that the Consent be obtained from the third party based upon determinations of such third party, including without limitation needs surveys or evaluations of Buyer, to be completed after the Scheduled Closing, whether or not such third party indicates prior to the Scheduled Closing that any such Consent is likely or not likely to be given. Section 9.5 Absence of Injunctions. There shall be no: ---------------------- (a) Injunction, restraining order or order of any nature issued by any court of competent jurisdiction or governmental agency which directs that the Transactions related to such Facility contemplated hereby shall not be consummated as herein provided; (b) Suit, action or other proceeding by any governmental agency pending before any court, governmental agency or non-governmental, self- regulatory organization, or threatened (pursuant to a written notification), wherein such complainant seeks the restraint or prohibition of the consummation of the Transactions related to such Facility or asserts the illegality of the Transactions related to such Facility; or (c) Action taken, or law enacted, promulgated or deemed applicable to the Transactions related to such Facility, by any governmental agency which would render consummation of such Transactions illegal or which would threaten the imposition of any penalty or material economic -104- detriment upon Seller or the Subsidiaries if such Transactions were consummated; provided that: -------- ---- (i) The parties will use their reasonable efforts to litigate against, or to obtain the lifting of, any such injunction, restraining or other order, restraint, prohibition, action, suit, law or penalty; (ii) In the event that (A) the "First Closing" has occurred under the First Facilities Agreement, (B) there is such a pending or threatened suit, action, proceeding, injunction, restraining order or other order, made, sought, issued, initiated or obtained by a governmental agency in respect of Transactions contemplated to occur at the Final Closing under this Agreement, and (C) on or prior to the original Termination Date for such Final Closing, the parties and such agency have entered into a written agreement which would resolve such controversy but such agreement is subject to final agency approval that has not been obtained on or prior to the fifth business day before the original Termination Date for the Final Closing, then and in such events the original Termination Date for the Final Closing shall be extended to the fifth business day following such final agency approval if the date of such approval is within five (5) business days of the end of a month or the original Termination Date for the Final Closing shall be extended to the end of the month in which such approval is obtained if the date of such approval is not within five (5) business days of the end of a month, but in no event shall the original Termination Date for the Final Closing be extended for more than three (3) calendar months from the original Termination Date; and (iii) Clauses (a) through (c) above notwithstanding, the effect --- --- of any such event, action or suit shall be to exclude the affected Facility from the Scheduled Closing and, if such Facility is not transferred in a subsequent Closing, to adjust the Purchase Price pursuant to the Allocation Schedule. Section 9.6 Opinion of Counsel. Seller shall have received, on and ------------------ as of the Closing Date, an opinion of King & Spalding, counsel to Buyer, substantially as to the matters set forth in Sections 4.1, 4.2, 4.3, 4.4, ------------ --- --- --- and 4.5, subject to customary conditions and limitations. --- -105- Section 9.7 Receipt of Other Documents. Seller shall have received -------------------------- the following: (a) Certified copies of the resolutions of Buyer's and each relevant Buyer Subsidiary's board of directors respecting this Agreement, the Related Agreements and the Transactions; (b) Certified copies of Buyer's and each relevant Buyer Subsidiary's Charter Documents, together with a certificate of Buyer's and each Buyer Subsidiary's corporate secretary that none of such documents have been amended; (c) One or more certificates as to the incumbency of each officer of Buyer who has signed the Agreement, any Related Agreement, or any certificate, document or instrument delivered pursuant to the Agreement or any Related Agreement; (d) Good standing certificates for Buyer and for each relevant Buyer Subsidiary from the Secretaries of State of their respective states of incorporation, dated as of a date not earlier than fifteen (15) business days prior to the relevant Closing Date; (e) Copies of all third party and governmental consents, permits and authorizations that Buyer has received in connection with the Agreement, the Related Agreements and the Transactions; and (f) A certificate of Buyer executed on its behalf by the Chief Executive Officer and the Chief Financial Officer of Buyer stating that to the best of their knowledge and belief, specifying in reasonable detail their basis for same, after giving effect to the Transactions, neither Buyer nor any relevant Buyer Subsidiary is insolvent or will be rendered insolvent by obligations incurred in connection therewith, or will be left with unreasonably small capital with which to engage in their businesses, or will have incurred obligations beyond their respective abilities to perform the same as and when due. ARTICLE 10 TERMINATION Section 10.1 Termination. Any Transactions contemplated hereby that ----------- have not been consummated may be terminated: -106- (a) At any time, by mutual written consent of Seller and Buyer; or (b) By either Buyer or Seller upon written notice to the other party, if (i) the relevant Scheduled Closing shall not have occurred by its Termination Date; or (ii)(A) in the case of termination by Seller, the conditions set forth in Section 2.13 and Article 9 for the relevant ------------ --------- Scheduled Closing cannot reasonably be met by its Termination Date or Seller has terminated this Agreement pursuant to Section 6.4, and (B) in ----------- the case of termination by Buyer, the conditions set forth in Section 2.13 ------------ and Article 8 for the relevant Scheduled Closing cannot reasonably be met --------- by its Termination Date, unless in either of the cases described in clauses ------- (A) or (B), the failure of the condition is the result of the material --- --- breach of this Agreement by the party seeking to terminate. The Termination Date for the First Closing shall be September 1, 1994, unless on or prior to such date there has been a "First Closing" under the First Facilities Agreement, in which case, the Termination Date for all Closings under this Agreement shall be September 30, 1994. Each such date, or such later date as may be specifically provided for in this Agreement (including any date arising under the operation of Sections 8.5(c)(ii) and 9.5(c)(ii) ------------------- ---------- hereof) or agreed upon by the parties, is herein referred to as the "Termination Date." ---------------- Each party's right of termination hereunder is in addition to any other rights it may have hereunder or otherwise. Section 10.2 Effect of Termination. If there has been a termination --------------------- pursuant to Section 10.1 prior to the First Closing, then this Agreement ------------ shall be deemed terminated, and all further obligations of the parties hereunder shall terminate, except that the obligations set forth in Sections 5.5 and 5.6 and in Articles 11 and 12 shall survive. In the event ------------ --- ----------- -- of termination of this Agreement as provided above, there shall be no liability on the part of a party to another under and by reason of this Agreement or the transactions contemplated hereby except as set forth in Article 11 and except for intentionally fraudulent acts by a party, the ---------- remedies for which shall not be limited by the provisions of this Agreement. In the event of a termination after the First Closing, then all further obligations of the parties respecting Transactions that have not been consummated shall terminate, except that the obligations set forth in Sections 5.5 and 5.6 and in Articles 11 and 12 shall survive, and there ------------ --- ----------- -- shall be no liability on the part of a party to another in respect of such unconsummated Transactions except as set forth in Article 11 and except for ---------- intentionally fraudulent acts by a party, -107- the remedies for which shall not be limited by this Agreement. The foregoing provisions shall not, however, limit or restrict the availability of specific performance or other injunctive or equitable relief to the extent that specific performance or such other relief would otherwise be available to a party hereunder. ARTICLE 11 SURVIVAL AND REMEDIES; INDEMNIFICATION Section 11.1 Survival. Except as may be otherwise expressly set -------- forth in this Agreement, the representations, warranties, covenants and agreements of Buyer and Seller set forth in this Agreement, or in any writing required to be delivered in connection with this Agreement, shall survive the Scheduled Closings and the consummations of the Transactions. Section 11.2 Exclusive Remedy. Absent intentional fraud or unless ---------------- otherwise specifically provided herein, the sole exclusive remedy for damages of a party hereto for any breach of the representations, warran- ties, covenants and agreements of the other party contained in this Agreement and the Related Agreements shall be the remedies contained in this Article 11. Notwithstanding the foregoing, with respect to any ---------- matters associated with any of the Owned Real Properties or Leased Real Properties involving environmental contamination or noncompliance with any applicable Environmental Law, if the First Closing occurs, nothing in this Article 11 shall limit or restrict a party's rights or remedies against, or ---------- obligations to, another party or any third party arising under any Environmental Law, if such matter (a) was in existence on or prior to the relevant Scheduled Closing, (b) was not identified in the Environmental Survey or Schedule 3.16 (or an update thereto pursuant to Section 6.3), (c) ------------- ----------- was unknown to Seller or any Subsidiary as of the relevant Scheduled Closing, and (d) would not constitute a breach of Seller's warranties in Section 3.16. ------------ Section 11.3 Indemnity by Seller. ------------------- (a) Seller shall indemnify Buyer and the Buyer Subsidiaries and hold them harmless from and against any and all claims, demands, suits, loss, liability, damage and expense, including reasonable attorneys' fees and costs of investigation, litigation, settlement and judgment (collectively "Losses"), which they may sustain or suffer or to which they ------ may become subject as a result of: -108- (i) The inaccuracy of any representation or the breach of any warranty made by Seller herein or by Seller or a Subsidiary in a Related Agreement, provided, that any such inaccuracy or breach shall -------- be determined without regard to any qualification of such representation or warranty relating to materiality or any Material Adverse Effect; (ii) The nonperformance or breach of any covenant or agreement made or undertaken by Seller in this Agreement or by Seller or a Subsidiary in a Related Agreement; and (iii) If a Scheduled Closing occurs, the failure of Seller or any Subsidiary to pay, discharge or perform as and when due, any of the Excluded Liabilities (including, without limitation, the Excluded Liabilities enumerated in Sections 2.4(c), (d), (e) and (g), and any --------------- --- --- --- Losses as a result of or in connection with the failure of Seller and the Subsidiaries to comply with any Bulk Sales Laws referred to in Section 7.1). ----------- (b) The indemnification obligations of Seller provided above shall, in addition to the qualifications and conditions set forth in Sections 11.5 and 11.6, be subject to the following qualifications: ------------- ---- (i) Buyer and the Buyer Subsidiaries shall not be entitled to indemnity under Subsection (a)(i) above (except for claims arising ----------------- under Sections 3.1, 3.2, 3.3 and 3.7) unless: ------------ --- --- --- (A) Written notice to Seller of such claim specifying the basis thereof is made, or an action at law or in equity with respect to such claim is served, before the second anniversary of the earlier to occur of the relevant Closing Date or the date on which this Agreement is terminated, as the case may be; (B) If a Scheduled Closing occurs, the Losses sustained or suffered by Buyer and the Buyer Subsidiaries or to which they may be subject as a result of circumstances described in such Subsection (a)(i) and in Section 11.3(a)(i) of the First ----------------- ------------------ Facilities Agreement exceed, in the aggregate, the sum of Three Million Dollars ($3,000,000) (the "Trigger Amount"), in which -------------- case Buyer and the Buyer Subsidiaries -109- shall be entitled only to recover the amount by which such aggregate Losses exceed Two Million Dollars ($2,000,000) (the "Deductible Amount"), provided, however, that individual claims ------------------ -------- of Two Thousand Dollars ($2,000) or less shall not be aggregated for purposes of calculating either the Trigger Amount, the Deductible Amount or the excess of Losses over the Deductible Amount; (C) If a Scheduled Closing occurs, in no event shall Seller be liable to Buyer and the Buyer Subsidiaries under Subsection (a)(i) for Losses in the nature of consequential ----------------- damages, lost profits, damage to reputation or the like, but such damages shall be limited to out-of-pocket Losses and diminution in value; and (D) If a Scheduled Closing occurs, in no event shall Seller be liable to Buyer and the Buyer Subsidiaries under Subsection (a)(i) of this Agreement and under Section 11(a)(i) of ---------------- --------------- the First Facilities Agreement for amounts which, in the aggregate, exceed the sum of (x) that portion of the Purchase Price paid pursuant to Section 2.5(a) of this Agreement and -------------- pursuant to Section 2.5(a) of the First Facilities Agreement for ------------- assets actually acquired and (y) the amount paid pursuant to the penultimate sentence of Section 2.5 of this Agreement and ----------- pursuant to the penultimate sentence of Section 2.5(a) of the -------------- First Facilities Agreement; provided that in the event Buyer and -------- the Buyer Subsidiaries make claims in the aggregate for Losses with respect to a Facility that exceed seventy-five percent (75%) of the portion of the Purchase Price allocated to such Facility in the Allocation Schedule, then substantially concurrently with the making of such claim or claims, Buyer shall cause such Facility to be offered in writing for resale to Seller at a cash price equal to such allocated portion of the Purchase Price less amounts, if any, previously paid by Seller to Buyer with respect to Buyer's claims for Losses with respect to such Facility and on an "as is, where is" basis, in which case: (1) Seller shall have thirty (30) days to accept such offer in writing; -110- (2) If Seller accepts such offer, it shall have one hundred fifty (150) days to close such transaction; (3) At the closing of such transaction, Buyer shall cause all of the right, title and interest of its Affiliates in such Facility and related assets to be conveyed to Seller (or a designee of Seller) in the same condition of title as the Facility and related assets were originally sold, assigned, transferred and conveyed by Seller and the Subsidiaries hereunder, and Seller (or such designee) shall assume disclosed operating liabilities of the Facility of the same types as the Assumed Liabilities provided that if -------- the dollar amount of such liabilities exceeds the dollar amount of the Assumed Liabilities respecting such Facility originally assumed by Buyer hereunder, then there shall be a dollar-for-dollar reduction in the purchase price payable by Seller (or its designee) to the extent of such excess; and (4) Simultaneous with such closing, Buyer and the Buyer Subsidiaries shall release Seller from further liability under Subsection (a)(i) for Losses with respect to ----------------- such Facility. (ii) If a Scheduled Closing occurs, Buyer and the Buyer Subsidiaries shall not be entitled to indemnity under Subsections ----------- (a)(ii)-(iii) above except for out-of-pocket Losses actually suffered ------------- or sustained by them or to which they may become subject as a result of circumstances described in such Subsections (a)(ii)-(iii), and such ------------------------- indemnity shall not include Losses in the nature of consequential damages, lost profits, diminution in value, damage to reputation or the like; except that the provisions of this clause (b)(ii) shall not ------- apply to breaches of Sections 5.6 and 6.8, provided that the liability ------------ --- -------- of Seller and the Subsidiaries for breaches of such Sections shall be subject to the provisions of Subsection (b)(i)(D) above and that the -------------------- liability of Seller and the Subsidiaries for breaches of such Sections shall be aggregated with the liability of Seller under Subsection ---------- (a)(i) for purposes of Subsection (b)(i)(D). ------ -------------------- -111- (iii) Seller shall have no liability for Losses arising from the breach of any warranty related to Net Book Values, including without limitation the warranties contained in Sections 3.17 and 3.18, ------------- ---- and no such Losses shall be applied against the Trigger Amount or the Deductible Amount or the excess of Losses over the Deductible Amount, it being agreed that the liability of the Seller with respect to Net Book Values, if any, shall be resolved in accordance with the provisions of Sections 2.6(a), (b) and (c). --------------- --- --- Section 11.4 Indemnity by Buyer. ------------------ (a) Buyer shall indemnify Seller and the Subsidiaries and hold Seller and the Subsidiaries harmless from and against any and all Losses which they may sustain or suffer or to which they may become subject as a result of: (i) The inaccuracy of any representation or the breach of any warranty made by Buyer herein or by Buyer or a Buyer Subsidiary in a Related Agreement, provided that any such inaccuracy or breach shall -------- be determined without regard to any qualification of such representation or warranty relating to materiality or any Material Adverse Effect; (ii) The nonperformance or breach of any covenant or agreement made or undertaken by Buyer in this Agreement or by Buyer or a Buyer Subsidiary in a Related Agreement; (iii) If a Scheduled Closing occurs, the failure of Buyer to pay, discharge or perform as and when due, any of the Assumed Liabilities; and (iv) If a Scheduled Closing occurs, the ongoing operations of Buyer and the Transferred Assets after the relevant Closing Date, including but not limited to the continuation or performance by Buyer after the relevant Closing Date of any agreement or practice of the Seller or the Subsidiaries. (b) The indemnification obligations of Buyer provided above shall, in addition to the qualifications and conditions set forth in Sections 11.5 and 11.6, be subject to the following qualifications: ------------- ---- -112- (i) Seller and the Subsidiaries shall not be entitled to indemnity under Subsection (a)(i) above (except for claims under ----------------- Sections 4.1, 4.2, 4.3 and 4.7) unless: ------------ --- --- --- (A) Written notice to Buyer of such claim specifying the basis thereof is made, or an action at law or in equity with respect to such claim is served, before the second anniversary of the earlier to occur of the relevant Closing Date or the date on which this Agreement is terminated, as the case may be; (B) If a Scheduled Closing occurs, the Losses sustained or suffered by Seller and the Subsidiaries or to which they may be subject as a result of circumstances described in such Subsection (a)(i) and in Section 11.4(a)(i) of the First ----------------- ------------------ Facilities Agreement exceed, in the aggregate, the Trigger Amount, in which case Seller and the Subsidiaries shall be entitled only to recover the amount by which such Losses exceed, in the aggregate, the Deductible Amount, provided, however, -------- that individual claims of Two Thousand Dollars ($2,000) or less shall not be aggregated for purposes of calculating either the Trigger Amount, the Deductible Amount or the excess of Losses over the Deductible Amount; and (C) If a Scheduled Closing occurs, in no event shall Buyer be liable to Seller and the Subsidiaries under Subsection ---------- (a)(i) for Losses in the nature of consequential damages, lost ------ profits, damage to reputation or the like, but such damages shall be limited to out-of-pocket Losses and diminution in value. (ii) If a Scheduled Closing occurs, Seller and the Subsidiaries shall not be entitled to indemnity under Subsections ----------- (a)(ii)-(iv) above except for out-of-pocket Losses actually suffered ------------ or sustained by them or to which they may become subject as a result of circumstances described in such Subsections (a)(ii)-(iv), and such ------------------------ indemnity shall not include Losses in the nature of consequential damages, lost profits, diminution in value, damage to reputation or the like, except that the provisions of this clause (b)(ii) shall not ------- apply to breaches of Sections 5.6 or 5.7. ------------ --- -113- Section 11.5 Further Qualifications Respecting Indemnification. The ------------------------------------------------- right of a party (an "Indemnitee") to indemnity hereunder shall be subject ---------- to the following additional qualifications: (a) The Indemnitee shall promptly upon its discovery of facts or circumstances giving rise to a claim for indemnification, including receipt by it of notice of any demand, assertion, claim, action or proceeding, judicial, governmental or otherwise, by any third party (such third party actions being collectively referred to herein as "Third Party Claims"), ------------------ give notice thereof to the indemnifying party (the "Indemnitor"), such ---------- notice in any event to be given within sixty (60) days from the date the Indemnitee obtains actual knowledge of the basis or alleged basis for the right of indemnity or such shorter period as may be necessary to avoid material prejudice to the Indemnitor; and (b) In computing Losses, such amounts shall be computed net of any related recoveries to which the Indemnitee is entitled under insurance policies or other related payments received or receivable from third parties and net of any tax benefits actually received by the Indemnitee or for which it is eligible, taking into account the income tax treatment of the receipt of indemnification. Section 11.6 Procedures Respecting Third Party Claims. In providing ---------------------------------------- notice to the Indemnitor of any Third Party Claim (the "Claim Notice"), the ------------ Indemnitee shall provide the Indemnitor with a copy of such Third Party Claim or other documents received and shall otherwise make available to the Indemnitor all relevant information material to the defense of such claim and within the Indemnitee's possession. The Indemnitor shall have the right, by notice given to the Indemnitee within fifteen (15) days after the date of the Claim Notice, to assume and control the defense of the Third Party Claim that is the subject of such Claim Notice, including the employment of counsel selected by the Indemnitor after consultation with the Indemnitee, and the Indemnitor shall pay all expenses of, and the Indemnitee shall cooperate fully with the Indemnitor in connection with, the conduct of such defense. The Indemnitee shall have the right to employ separate counsel in any such proceeding and to participate in (but not control) the defense of such Third Party Claim, but the fees and expenses of such counsel shall be borne by the Indemnitee unless the Indemnitor shall agree otherwise; provided, however, if the named parties to any such -------- ------- proceeding (including any impleaded parties) include both the Indemnitee and the Indemnitor, the Indemnitor requires that the same counsel represent -114- both the Indemnitee and the Indemnitor, and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor. If the Indemnitor shall have failed to assume the defense of any Third Party Claim in accordance with the provisions of this Section, then the Indemnitee shall have the absolute right to control the defense of such Third Party Claim, and, if and when it is finally determined that the Indemnitee is entitled to indemnification from the Indemnitor hereunder, the fees and expenses of Indemnitee's counsel shall be borne by the Indemnitor, provided that the Indemnitor shall be entitled, at its expense, -------- to participate in (but not control) such defense. The Indemnitor shall have the right to settle or compromise any such Third Party Claim for which it is providing indemnity so long as such settlement does not impose any obligations on the Indemnitee (except with respect to providing releases of the third party). The Indemnitor shall not be liable for any settlement effected by the Indemnitee without the Indemnitor's consent except where the Indemnitee has assumed the defense because Indemnitor has failed or refused to do so. The Indemnitor may assume and control, or bear the costs, of any such defense subject to its reservation of a right to contest the Indemnitee's right to indemnification hereunder, provided that it gives the -------- Indemnitee notice of such reservation within fifteen (15) days of the date of the Claim Notice. ARTICLE 12 GENERAL PROVISIONS Section 12.1 Notices. All notices, requests, demands, waivers, ------- consents and other communications hereunder shall be in writing, shall be delivered either in person, by telegraphic, facsimile or other electronic means, by overnight air courier or by mail, and shall be deemed to have been duly given and to have become effective (a) upon receipt if delivered in person or by telegraphic, facsimile or other electronic means, (b) one business day after having been delivered to an air courier for overnight delivery or (c) three business days after having been deposited in the mails as certified or registered mail, return receipt requested, all fees prepaid, directed to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by a party hereto): If to Seller, addressed to: -115- National Medical Enterprises 2700 Colorado Avenue Santa Monica, CA 90404 Attn: Treasurer Facsimile: (310) 998-6507 with a copy to counsel for Seller: National Medical Enterprises 2700 Colorado Avenue Santa Monica, CA 90404 Attn: General Counsel Facsimile: (310) 998-6956 and Munger, Tolles & Olson 355 South Grand Avenue 35th Floor Los Angeles, CA 90071 Attn: Robert L. Adler Facsimile: (213) 687-3702 If to Buyer, addressed to: Charter Medical Corporation 577 Mulberry St. Macon, GA 31298 Attn: Executive Vice President - Finance Facsimile: (912) 751-2832 with a copy to counsel for Buyer: King & Spalding 191 Peachtree Street Atlanta, GA 30303-1763 Attn: Robert W. Miller Facsimile: (404) 572-5144 Section 12.2 Attorneys' Fees. In any litigation or other proceeding --------------- relating to this Agreement, including litigation with respect to any Related -116- Agreement (but excluding any proceedings under Sections 2.6(b), --------------- 2.6(c) or 2.14), the prevailing party shall be entitled to recover its ------ ----- costs and reasonable attorneys' fees. Section 12.3 Successors and Assigns. The rights under this Agreement ---------------------- shall not be assignable or transferable nor the duties delegable by either party without the prior written consent of the other; and nothing contained in this Agreement, express or implied, is intended to confer upon any person or entity, other than the parties hereto and their permitted successors-in-interest and permitted assignees, any rights or remedies under or by reason of this Agreement unless so stated to the contrary. Notwithstanding the foregoing, (a) Buyer may grant to its lenders a security interest in its rights under this Agreement, and (b) subject to the terms and provisions of Section 5.7, Buyer may assign its rights under ----------- Section 5.7 to the entities and in the circumstances described in Section ----------- ------- 5.7(d). ------ Section 12.4 Counterparts. This Agreement may be executed in one or ------------ more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 12.5 Captions and Paragraph Headings. Captions and paragraph ------------------------------- headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. Section 12.6 Entirety of Agreement; Amendments. This Agreement --------------------------------- (including the Schedules and Exhibits hereto), the other documents and instruments specifically provided for in this Agreement, and the First Facilities Agreement contain the entire understanding between the parties concerning the subject matter of this Agreement and such other documents and instruments and, except as expressly provided for herein, supersede all prior understandings and agreements, whether oral or written, between them with respect to the subject matter hereof and thereof. There are no representations, warranties, agreements, arrangements or understandings, oral or written, between the parties hereto relating to the subject matter of this Agreement and such other documents and instruments which are not fully expressed herein or therein. This Agreement may be amended or modified only by an agreement in writing signed by each of the parties hereto. All Exhibits and Schedules attached to or delivered in connection with this Agreement are integral parts of this Agreement as if fully set forth herein. Without limiting the generality of the foregoing, this Agreement and the First Facilities Agreement shall, upon their execution, replace and -117- substitute for that certain Asset Sale Agreement between the parties dated as of March 29, 1994 related to both the First Facilities and the Subsequent Facilities which shall be of no further force and effect, it being agreed that the effectiveness of this Agreement and of the First Facilities Agreement shall relate back from their actual date of execution to and including March 29, 1994. The representations and warranties of the parties made herein shall likewise be deemed to have been made as of March 29, 1994. Section 12.7 Construction. This Agreement and any documents or ------------ instruments delivered pursuant hereto shall be construed without regard to the identity of the person who drafted the various provisions of the same. Each and every provision of this Agreement and such other documents and instruments shall be construed as though the parties participated equally in the drafting of the same. Consequently, the parties acknowledge and agree that any rule of construction that a document is to be construed against the drafting party shall not be applicable either to this Agreement or such other documents and instruments. Section 12.8 Waiver. The failure of a party to insist, in any one or ------ more instances, on performance of any of the terms, covenants and conditions of this Agreement shall not be construed as a waiver or relinquishment of any rights granted hereunder or of the future performance of any such term, covenant or condition, but the obligations of the parties with respect thereto shall continue in full force and effect. No waiver of any provision or condition of this Agreement by a party shall be valid unless in writing signed by such party or operational by the terms of this Agreement. A waiver by one party of the performance of any covenant, condition, representation or warranty of the other party shall not invalidate this Agreement, nor shall such waiver be construed as a waiver of any other covenant, condition, representation or warranty. A waiver by any party of the time for performing any act shall not constitute a waiver of the time for performing any other act or the time for performing an identical act required to be performed at a later time. Section 12.9 Governing Law. This Agreement shall be governed in all ------------- respects, including validity, interpretation and effect, by the laws of the State of California, without regard to the principles of conflicts of law thereof, provided that the validity, interpretation and effect of any -------- instruments by which real property is conveyed at a Scheduled Closing shall be governed by the laws of the state in which such real property is located. Any action arising under this Agreement shall be adjudicated (a) in Los -118- Angeles, California, if brought by Buyer or its Affiliates against Seller, any Subsidiary or their respective Affiliates, and (b) in [Atlanta], Georgia, if brought by Seller or its Affiliates against Buyer, any Buyer Subsidiary or their respective Affiliates, provided that any cross-claim or counterclaim shall also be adjudicated in the court in which the underlying action has been brought in accordance with this Section ------- 12.9. ---- Section 12.10 Severability. Whenever possible, each provision of ------------ this Agreement shall be interpreted in such manner as to be valid, binding and enforceable under applicable law, but if any provision of this Agreement is held to be invalid, void (or voidable) or unenforceable under applicable law, such provision shall be ineffective only to the extent held to be invalid, void (or voidable) or unenforceable, without affecting the remainder of such provision or the remaining provisions of this Agreement. Section 12.11 Consents Not Unreasonably Withheld. Wherever the ---------------------------------- consent or approval of any party is required under this Agreement, such consent or approval shall not be unreasonably withheld, unless such consent or approval is to be given by such party at the sole or absolute discretion of such party or is otherwise similarly qualified. Section 12.12 Time Is of the Essence. Time is hereby expressly made ---------------------- of the essence with respect to each and every term and provision of this Agreement. The parties acknowledge that each will be relying upon the timely performance by the other of its obligations hereunder as a material inducement to each party's execution of this Agreement. -119- IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first above written. Buyer: CHARTER MEDICAL CORPORATION By __________________________ Name _______________________ Title ______________________ Seller: NATIONAL MEDICAL ENTERPRISES, INC. By __________________________ Name ____________________ Title ___________________ -120- EXHIBIT A --------- BULK BILL OF SALE AND ASSIGNMENT (General Closing) FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the "Seller"), and each subsidiary of Seller set forth in Rider A hereto (individually a "Subsidiary" and collectively, the "Subsidiaries"), pursuant to, and subject to the terms, provisions and conditions of, that certain Asset Sale Agreement (Subsequent Facilities) dated ________________, 1994 (the "Agreement"), by and between Seller and CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), do hereby sell, convey, assign, transfer and deliver to Buyer, its successors and assigns, the Transferred Assets of Seller and the Subsidiaries described in the Agreement, except for those Transferred Assets sold, conveyed, assigned, transferred or delivered by Seller or a Subsidiary to Buyer or to a subsidiary of Buyer pursuant to separate instruments of sale, conveyance, assignment, transfer or delivery, including, without limitation, any Facility Specific Bill of Sale and Assignment, any deed, or any Assignment and Assumption of Real Property Lease. The sale, conveyance, assignment, transfer and delivery made hereunder is made without warranty of any kind, except as may be provided in the Agreement, including the warranty of merchantability or fitness for any purpose. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Agreement. A-1 IN WITNESS WHEREOF, the Seller and each Subsidiary have executed this Bulk Bill of Sale and Assignment this ___ day of _________, 1994, effective as of the date and time specified in the Agreement. NATIONAL MEDICAL ENTERPRISES, INC. For Itself And As Attorney-In-Fact For The Subsidiaries Listed In Rider A By: ___________________________ Title: ________________________ A-2 RIDER A ------- TO -- BULK BILL OF SALE AND ASSIGNMENT -------------------------------- (List of Subsidiaries) A-3 FACILITY SPECIFIC BILL OF SALE AND ASSIGNMENT (Facility No. ___) FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the "Seller"), and each subsidiary of Seller set forth in Rider A hereto (individually a "Subsidiary" and collectively, the "Subsidiaries"), pursuant to, and subject to the terms, provisions and conditions of, that certain Asset Sale Agreement (Subsequent Facilities) dated __________________, 1994 (the "Agreement"), by and between Seller and CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), do hereby sell, convey, assign, transfer and deliver to the subsidiary of Buyer identified in Rider A hereto (the "Buyer's Subsidiary"), its successors and assigns, the Transferred Assets of Seller and the Subsidiaries described in the Agreement that are related to the healthcare facilities identified in Rider A hereto (together with related outpatient or satellite clinics, if any, the "Facilities"), except for those Transferred Assets sold, conveyed, assigned, transferred or delivered by Seller or a Subsidiary to Buyer or to Buyer's Subsidiary pursuant to separate instruments of sale, conveyance, assignment, transfer or delivery, of even date herewith, including, without limitation, any deed, or any Assignment and Assumption of Real Property Lease. The sale, conveyance, assignment, transfer and delivery made hereunder is made without warranty of any kind, except as may be provided in the Agreement, including the warranty of merchantability or fitness for any purpose. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Agreement. A-4 IN WITNESS WHEREOF, the Seller and each Subsidiary have executed this Facility Specific Bill of Sale and Assignment this ___ day of _________, 1994, effective as of the date and time specified in the Agreement. NATIONAL MEDICAL ENTERPRISES, INC. For Itself And As Attorney-In-Fact For The Subsidiaries Listed In Rider A By: ___________________________ Title: ________________________ A-5 RIDER A ------- TO -- FACILITY SPECIFIC BILL OF SALE AND ASSIGNMENT --------------------------------------------- 1. Subsidiaries of Seller: ---------------------- ______________________________ ______________________________ NME Psychiatric Properties, Inc. NME Psychiatric Hospitals, Inc. NME Hospitals, Inc. 2. Facilities: ---------- ______________________________ ______________________________ ______________________________ Related outpatient facilities: ______________________________ ______________________________ ______________________________ 3. Buyer's Subsidiary: ------------------ ______________________________ A-6 EXHIBIT B --------- ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE (Facility No. ___) WHEN RECORDED, MAIL TO: THIS ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE (this "Assignment") is entered into as of _____________, 1994, by and between the undersigned assignor (the "Assignor") and the undersigned assignee (the "Assignee"), pursuant to that certain Asset Sale Agreement (Subsequent Facilities) dated __________, 1994 (the "Asset Sale Agreement"), by and between the parent corporation of the Assignor, National Medical Enterprises, Inc., a Nevada corporation (the "Assignor's Parent"), and the parent corporation of the Assignee, Charter Medical Corporation, a Delaware corporation (the "Assignee's Parent"). WITNESSETH: ----------- WHEREAS, Assignor is the tenant under that certain real property lease described in Rider A attached hereto wherein Assignor leases that certain real property described in Rider B attached hereto (the "Real Property Lease"); and WHEREAS, Assignor desires to assign all of its right, title and interest under the Real Property Lease and Assignee desires to assume all of Assignor's obligations thereunder; NOW, THEREFORE, the parties agree as follows: B-1 1. Assignment of Lease. Assignor hereby assigns unto Assignee ------------------- all of the Assignor's right, title and interest in the Real Property Lease, including, without limitation, any rights to renew, terminate or extend the term of the Real Property Lease, and any rights of first refusal respecting and options to purchase the leased premises that are the subject of the Real Property Lease. 2. Assumption of Real Property Lease Obligations. Assignee and --------------------------------------------- Assignee's Parent, jointly and severally, do hereby assume all of the obligations of the Assignor under the Real Property Lease and all of the obligations of any guarantor of the Assignor's obligations under the Real Property Lease. 3. General Provisions. Assignee and Assignee's Parent hereby ------------------ confirm that Assignee has irrevocably appointed Assignee's Parent as its sole and exclusive representative, agent and attorney-in-fact with respect to all matters arising from or related to this Assignment. Notices hereunder to the Assignor or the Assignor's Parent, or to the Assignee or the Assignee's Parent, as the case may be, shall be given to the Assignor's Parent or the Assignee's Parent, as the case may be, in accordance with the provisions of the Asset Sale Agreement. The provisions of this Assignment shall be binding upon and inure to the benefit of each party hereto, the Assignor's Parent, any guarantor of the Assignor's obligations under the Real Property Lease, the lessor under the Real Property Lease, and the respective predecessors, successors and permitted assigns of each of the foregoing. Unless otherwise expressly provided by the Real Property Lease, nothing in this Assignment and Assumption shall relieve the Assignor of its obligations to the lessor under the Real Property Lease or any such guarantor of its obligations under any such guaranty. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Asset Sale Agreement. B-2 IN WITNESS WHEREOF, the undersigned have executed this Assignment as of the day and year first above written. ASSIGNOR: ______________________________, a _______________ corporation By: __________________________ Title: _________________________ And By: ______________________ Title: _________________________ ASSIGNEE: ______________________________, a ________________ corporation By: _____________________________ Title: ___________________________ And By: _________________________ Title: ___________________________ CHARTER MEDICAL CORPORATION By: _____________________________ Title: ___________________________ And By: ________________________ Title: ___________________________ B-3 STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On ___________________, 1994, before me, the undersigned, a Notary Public in and for said County and State, personally appeared, ____________________ and _____________________, proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities as ____________________ and _______________, respectively, of ___________________________________, a _____________ corporation, and that by their signatures on the instrument, the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. _____________________________ Notary Public (Notary Seal) STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On ___________________, 1994, before me, the undersigned, a Notary Public in and for said County and State, personally appeared, ____________________ and _____________________, proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities as ____________________ and _______________, respectively, of ___________________________________, a _______________ corporation, and that by their signatures on the instrument, the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. _____________________________ Notary Public B-4 (Notary Seal) STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On ___________________, 1994, before me, the undersigned, a Notary Public in and for said County and State, personally appeared, ____________________ and _____________________, proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities as ____________________ and _______________, respectively, of Charter Medical Corporation, a Delaware corporation, and that by their signatures on the instrument, the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. _____________________________ Notary Public (Notary Seal) B-5 RIDER A ------- TO -- ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE ------------------------------------------------ (Description of Lease and Any Separate First Refusal Rights and/or Purchase Options) __________________________________. B-6 RIDER B ------- TO -- ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE ------------------------------------------------ (Description of Leased Premises) ______________________________ ______________________________ ______________________________ B-7 EXHIBIT C --------- GENERAL ASSUMPTION AGREEMENT FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, and pursuant to, and subject to the terms, provisions and conditions of, that certain Asset Sale Agreement (Subsequent Facilities) dated ___________, 1994 (the "Agreement"), by and between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the "Seller") and CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), Buyer does hereby assume, and does hereby agree to pay, discharge and perform as and when due, the Assumed Liabilities described in the Agreement of Seller and of each subsidiary of Seller set forth in Rider A hereto (individually a "Subsidiary" and collectively, the "Subsidiaries"), except for those Assumed Liabilities assumed, jointly and severally, by Buyer and a subsidiary of Buyer pursuant to separate instruments of assumption, including, without limitation, any Facility Specific Assumption Agreement or any Assignment and Assumption of Real Property Lease executed by Buyer and/or any subsidiary of Buyer in favor of Seller and/or any of the Subsidiaries. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Agreement. This Assumption Agreement is being delivered in favor of Seller and each of the Subsidiaries. C-1 IN WITNESS WHEREOF, Buyer has executed this Assumption Agreement this ___ day of ________, 1994, effective as of the date and time specified in the Agreement. CHARTER MEDICAL CORPORATION By: _____________________________ Title: ___________________________ C-2 RIDER A ------- TO -- GENERAL ASSUMPTION AGREEMENT ---------------------------- (List of Subsidiaries) C-3 FACILITY SPECIFIC ASSUMPTION AGREEMENT (Facility No. ___) FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, and pursuant to, and subject to the terms, provisions and conditions of, that certain Asset Sale Agreement (Subsequent Facilities) dated _____________, 1994 (the "Agreement"), by and between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the "Seller") and CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), Buyer and the subsidiary of Buyer identified in Rider A hereto (the "Buyer's Subsidiary"), jointly and severally, do hereby assume, and do hereby agree to pay, discharge and perform as and when due, the Assumed Liabilities described in the Agreement of Seller and of each subsidiary of Seller set forth in Rider A hereto (individually a "Subsidiary" and collectively, the "Subsidiaries") that are related to the healthcare facilities identified in Rider A hereto (together with related outpatient or satellite clinics, if any, the "Facilities"), except for those Assumed Liabilities assumed, jointly and severally, by Buyer and the Buyer's Subsidiary pursuant to separate instruments of assumption, of even date herewith, including, without limitation, Assignment and Assumption of Real Property Lease executed by Buyer and/or the Buyer's Subsidiary in favor of Seller and/or any of the Subsidiaries. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This instrument is governed by and subject to all of the representations, warranties, covenants, indemnities and other terms and conditions of the Agreement. This Facility Specific Assumption Agreement is being delivered in favor of Seller and each of the Subsidiaries. C-4 IN WITNESS WHEREOF, Buyer and the Buyer's Subsidiary have executed this Facility Specific Assumption Agreement this ___ day of _________, 1994, effective as of the date and time specified in the Agreement. BUYER'S SUBSIDIARY: ______________________________, a _______________ corporation By: __________________________ Title: ________________________ CHARTER MEDICAL CORPORATION By: ______________________________ Title: _____________________________ C-5 RIDER A ------- TO -- FACILITY SPECIFIC ASSUMPTION AGREEMENT -------------------------------------- 1. Subsidiaries of Seller: ---------------------- ______________________________ ______________________________ NME Psychiatric Properties, Inc. NME Psychiatric Hospitals, Inc. NME Hospitals, Inc. 2. Facilities: ---------- ______________________________ ______________________________ ______________________________ Related outpatient facilities: ______________________________ ______________________________ ______________________________ 3. Buyer's Subsidiary: ------------------ ______________________________ C-6 EXHIBIT D --------- NATIONAL PURCHASING PARTICIPATION AGREEMENT ------------------------------------------- THIS NATIONAL PURCHASING PARTICIPATION AGREEMENT (the "Agreement") is --------- made and entered into as of the ___ day of _____________, 1994, by and between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation ("Seller"), and CHARTER MEDICAL CORPORATION, a Delaware corporation ------ ("Buyer"), with reference to the following facts. ----- A. Buyer and Seller are parties to a Asset Sale Agreement (Subsequent Facilities) dated ___________, 1994 (the "Asset Sale Agreement"), pursuant -------------------- to which Seller is causing certain of its wholly-owned subsidiaries (the "Subsidiaries") to sell, and Buyer and certain of its wholly-owned ------------- subsidiaries (the "Buyer Subsidiaries") are buying, certain mental health ------------------ facilities (the "Facilities") and related assets (such Facilities and ---------- related assets being referred to as the "Transferred Assets") through which ------------------ the Subsidiaries have provided mental health services to the public. B. To assist in the orderly transition in the ownership of the Facilities following the purchases and sales contemplated by the Asset Sale Agreement (the "Transactions"), Seller has agreed to, or will cause its ------------ pertinent Affiliates (as such term is defined in the Asset Sale Agreement) to, permit the Facilities to participate in certain national purchasing contracts of Seller and its Affiliates (together, the "Seller Group") to ------------ the extent such Facilities have previously participated therein, all in accordance with the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and the agreements contained herein and in the Asset Sale Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: Section 1 Participation In National Purchasing Contracts. On the ---------------------------------------------- terms and subject to the conditions hereof, Seller hereby agrees to exercise its reasonable commercial efforts for the term set forth in Section 6.1 to permit Buyer and the Buyer Subsidiaries to participate to the extent they D-1 choose in the national purchasing contracts or programs of Seller and its Affiliates set forth in Rider A hereto (as modified from time to time, the "National Contracts") on substantially the same basis as members of the ------------------ Seller Group participate in such National Contracts, provided that such -------- participation shall be solely for the purpose of supporting and shall be limited to the operations of the Facilities. Section 2 Primary Negotiating Party. Buyer agrees that Seller or ------------------------- pertinent members of the Seller Group shall remain the primary negotiating party (the "Primary Negotiating Party") with respect to dealing with third ------------------------- parties under all such National Contracts, and Buyer agrees that without the prior written consent of Seller or the pertinent member of the Seller Group (which consent shall be in the absolute discretion of Seller or such pertinent member of the Seller Group), neither Buyer nor any Affiliate of Buyer (the "Buyer Group") shall initiate any discussions or engage in any ----------- dealings with third parties with respect to matters arising under or related to such National Contracts. Seller agrees to cause the Primary Negotiating Party to consider the unique needs of the Facilities when negotiating terms, provisions and purchasing arrangements under such National Contracts, but the Primary Negotiating Party shall be under no obligation to expend any efforts, reasonable or otherwise, to address such needs if to do so would cause any economic detriment to any member of the Seller Group. Section 3 Fees and Charges. In consideration for participation in ---------------- the National Contracts, Buyer agrees as follows: 3.1 Buyer shall pay Seller a monthly participation fee (the "Participation Fee") as set forth in Rider B hereto. Such Participation ------------------ Fee shall be payable on the first day of each month during the term of this Agreement, pro-rated for partial periods. 3.2 In the event that, pursuant to arrangements applicable to a particular purchase or purchases under a National Contract, a member of the Buyer Group becomes directly obligated to third parties for the Cost of goods and services provided to such member of the Buyer Group, then such member of the Buyer Group shall promptly pay to such third parties the Costs billed to such member of the Buyer Group upon presentation to it of reasonably detailed invoices therefor, such payments to be made in accordance with the terms and tenor of such invoices. D-2 3.3 Buyer hereby agrees to indemnify and hold harmless Seller and each member of the Seller Group from and against any and all loss, liability, damage and expense, including reasonable attorneys' fees and costs of investigation, litigation, settlement and judgment, which Seller and each member of the Seller Group may sustain or suffer or to which they may become subject as a result of any failure of any member of the Buyer Group to comply with the foregoing provisions of this Section 3. --------- Section 4 Disclaimer of Warranties. Seller agrees to use reasonable ------------------------ efforts to permit members of the Buyer Group to participate in the National Contracts to the extent set forth in Section 1, but no member of the Seller --------- Group shall be liable to any member of the Buyer Group for any loss, damage or expense which may result from such participation, for negligent performance by any member of the Seller Group in connection with such participation, or for any changes in the terms, manner, method or mode by which goods and services are procured under the National Contracts. Neither Seller nor any member of the Seller Group makes any warranty, express or implied, to Buyer or any member of the Buyer Group respecting goods and services supplied under a National Contract or this Agreement, including without limitation warranties of merchantability or fitness for a particular purpose, and as between members of the Seller Group and members of the Buyer Group, goods and services shall be provided and accepted "AS IS" and "WITH ALL FAULTS." Without limiting the generality of the foregoing, Seller agrees to exercise reasonable efforts, and to cause members of the Seller Group to exercise reasonable efforts, to pass through to pertinent members of the Buyer Group the benefit of any warranties provided by third parties, to the extent permitted by the warranties in question, with respect to goods and services supplied by such third parties to such members of the Buyer Group, provided that such reasonable efforts -------- shall not include the initiation of any legal proceedings and provided -------- further that Buyer shall, or shall cause the pertinent member or members of ------- the Buyer Group to, reimburse Seller and each member of the Seller Group for any expenses incurred by them in connection with passing through the benefit of any such warranty or warranties. Section 5 Limitation on Obligations of Seller Group. The parties ----------------------------------------- agree that the sole obligation of Seller and members of the Seller Group under this Agreement is to exercise reasonable efforts to permit, subject to the terms hereof and the terms of the National Contracts, members of the Buyer Group to participate in the National Contracts. Nothing herein shall obligate any member of the Seller Group to enforce any rights of any D-3 member of the Buyer Group arising under any National Contract or with respect to any third party. Absent fraud or conversion, and notwithstanding the form in which any claim or action may be brought or asserted, the liability of members of the Seller Group for acts or omissions arising from or relating to the performance of this Agreement shall be limited to repayment, as general damages, of the Participation Fee paid by Buyer for the month or months in which such acts or omissions occurred, and no member of the Seller Group shall, under any circumstances, have any other financial liability hereunder to members of the Buyer Group whatsoever. Buyer agrees, and shall cause each participating member of the Buyer Group to agree, that the provisions of this Section 5 limiting their --------- remedies and liquidating their damages are reasonable in the circumstances existing on the date of this Agreement. Section 6 Term and Termination. -------------------- 6.1 This Agreement is effective on the date first written above, and shall remain in effect for the term set forth herein unless sooner terminated in accordance with the provisions hereof. The initial term of this Agreement shall be for a period of ___________ ( ) days from the date first written above. The term of this Agreement may be extended by mutual agreement of the parties, provided that such mutual agreement shall ------------- be evidenced by a duly executed amendment to this Agreement. 6.2 Buyer may terminate this Agreement upon written notice if Seller or any member of the Seller Group commits any material breach of this Agreement, and fails to cure the breach within thirty (30) days after written notice or, if the breach cannot be cured within thirty (30) days, fails to commence diligent efforts to cure the breach within that period. 6.3 Seller may terminate the participation of Buyer or any member of the Buyer Group with respect to any National Contract in accordance with Section 7.2. In addition, Seller may terminate this Agreement upon written notice to Buyer if Buyer or any member of the Buyer Group (i) fails to pay any amount when due hereunder, or (ii) commits any material breach of this Agreement and, if such breach is other than a failure to pay any amount when due hereunder, fails to cure the breach within thirty (30) days after written notice or, if the breach cannot be cured within thirty (30) days, fails to commence diligent efforts to cure the breach within that period. D-4 6.4 Buyer may terminate this Agreement, with or without cause, upon forty-five (45) days' written notice. 6.5 Seller may terminate this Agreement if Buyer or any Buyer Subsidiary becomes insolvent or admits in writing its insolvency or inability to pay its debts as they become due; is unable or does not pay its debts as they become due; makes or proposes an assignment for the benefit of creditors; convenes or proposes to convene a meeting of its creditors or any class thereof, for purposes of effecting a moratorium upon or extension or composition of its debts; proposes any such moratorium, extension or composition; or commences or has filed against it any bankruptcy, reorganization, liquidation or insolvency proceeding under any law in any jurisdiction for the relief of debtors; or if any receiver, trustee, liquidator or custodian is appointed to take possession of any substantial portion of its assets. 6.6 Termination of this Agreement in whole or in part, for cause, shall be without prejudice to any other remedy otherwise available to the innocent party. Section 7 General Provisions. ------------------ 7.1 Force Majeure. If any party's performance is prevented, ------------- hindered or delayed by reason of any cause(s) beyond such party's reasonable control ("Force Majeure") which cannot be overcome by reasonable ------------- diligence, including without limitation, war, labor disputes, civil disorders, governmental acts, epidemics, quarantines, embargoes, fires, earthquakes, storms, power failures, equipment failures, transmission failures, or acts of God, such party shall be excused from performance to the extent that it is prevented, hindered or delayed thereby, during the continuance of such cause(s); and such party's obligations hereunder shall be excused so long as and to the extent that such cause(s) prevent or delay performance. 7.2 Requirements of Third Parties. Notwithstanding any other ----------------------------- provision hereof, Buyer acknowledges and agrees that members of the Buyer Group shall not be entitled to participate in one or more National Contracts to the extent that to do so would violate the contractual arrangements that may exist from time to time between members of the Seller Group and third party suppliers and vendors or to the extent that such participation is unacceptable to any such third party supplier or vendor, and D-5 that the continued participation of any member of the Buyer Group in one or more National Contracts may be terminated immediately upon written notice to Buyer in such event. 7.3 Entirety of Agreement; Amendments. This Agreement --------------------------------- (including the Riders hereto), the Asset Sale Agreement (including the Schedules and Exhibits thereto), and the other documents and instruments specifically provided for herein and therein contain the entire understanding between the parties concerning the subject matter of this Agreement and such other documents and instruments and, except as expressly provided for herein or therein, supersede all prior understandings and agreements, whether oral or written, between them with respect to the subject matter hereof and thereof. The are no representations, warranties, agreements, arrangements or understandings, oral or written, between the parties hereto relating to the subject matters of this Agreement and such other documents and instruments which are not fully expressed herein or therein. This Agreement may be amended or modified only by an agreement in writing signed by each of the parties hereto. 7.4 Incorporation of Provisions of Asset Sale Agreement. The --------------------------------------------------- following provisions of the Asset Sale Agreement are incorporated herein by reference mutatis mutandis: Sections 2.16, 12.1 through 12.5, and 12.7 ------------- ---- ---- ---- through 12.12. ----- D-6 IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first above written. Buyer: CHARTER MEDICAL CORPORATION For Itself and as Duly Authorized Agent and Attorney-In-Fact for each Buyer Subsidiary By __________________________ Name _______________________ Title ______________________ Seller: NATIONAL MEDICAL ENTERPRISES, INC. By __________________________ Name ____________________ Title ___________________ D-7 RIDER A ------- TO -- NATIONAL PURCHASING PARTICIPATION AGREEMENT ------------------------------------------- [List of National Purchasing Contracts Attached Hereto] D-8 RIDER B ------- TO -- NATIONAL PURCHASING PARTICIPATION AGREEMENT ------------------------------------------- (Participation Fee To Come) D-9 EXHIBIT E REMAINING SCHEDULES None E-1 EX-10.III 7 SEV. PROT. AGREEMENT EXHIBIT 10(iii) SEVERANCE PROTECTION AGREEMENT This Agreement dated as of June 28, 1994 (this "Agreement"), between National Medical Enterprises, Inc., a Nevada corporation (the "Company"), and Barry Schochet (the "Executive"). WITNESSETH: WHEREAS, the Executive is currently employed by the Company as its President and Chief Operating Officer, Hospital Division; and WHEREAS, the Executive has extensive management experience in acute hospital management and the operation of the Company, and such experience is very important to the continued success of the Company, as well as to the orderly transition of the Company should a change in corporate control and ownership occur; and WHEREAS, the Company believes that it is in the best interests of the Company and its shareholders to enter into agreements with certain key officers, including the Executive, in order to ensure their retention. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the terms set forth ----------- in this Section shall have the following meanings: a. A "Change of Control" of the Company shall be deemed to have occurred if: (i) any Person is or becomes the beneficial owner directly or indirectly of securities of the Company representing 30% or more of the combined Voting Stock of the Company or; (ii) individuals who, as of April 1, 1994, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that (a) any individual who becomes a director of the Company subsequent to April 1, 1994, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board and (b) no individual who was elected initially (after April 1, 1994) as a director as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, or any other actual or threatened solicitations of proxies or consents by or on behalf of any person other than the Incumbent Board shall be deemed to have been a member of the Incumbent Board. b. "Person" shall mean an individual, firm, corporation or other entity or any successor to such entity, together with all Affiliates and Associates of such Person, but "Person" shall not include the Company, any subsidiary of the Company, any employee benefit plan or employee stock plan of the Company or any subsidiary of the Company, or any Person organized, appointed, established or holding Voting Stock by, for or pursuant to the terms of such a plan. c. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. d. "Voting Stock" with respect to a corporation shall mean shares of that corporation's capital stock having general voting power, with "voting power" meaning the power under ordinary circumstances (and not merely upon the happening of a contingency) to vote in the election of directors. e. "Cause" shall mean: the willful, substantial, continued and unjustified refusal of the Executive to perform the duties of his office to the extent of his ability to do so; any conduct on the part of the Executive which constitutes a breach of any statutory or common law duty of loyalty to the Company; any illegal or publicly immoral act by the Executive which materially and adversely affects the business of the Company; the physical or mental disability of the Executive as determined by the Board of Directors of the Company resulting in his inability to perform his duties hereunder; or the death of the Executive. 2. PAYMENTS UPON CHANGE OF CONTROL. If a Change of Control of the ------------------------------- Company occurs within two years from the date of this Agreement and at any time during the two-year period thereafter, the Executive's employment is Terminated without cause or the Executive voluntarily Terminates Employment from his position as President and Chief Operating Officer of the Hospital Division following (a) a material downward change in the functions, duties, or responsibilities which reduce the rank or position of the Executive; (b) (i) a reduction in the Executive's annual base salary, or (ii) a material reduction in the Executive's annual incentive plan bonus payment other than for financial performance as it broadly applies to all similarly situated Executives in the same plan, or (iii) a material reduction in the Executive's retirement or supplemental retirement benefits that does not broadly apply to all Executives in the same plan or; (c) transfer of the Executive's office to a location that is more than fifty (50) miles from the Executive's current principal office location, then in any such event, the Company shall pay the Executive a severance benefit in cash within 30 days after such termination in an amount equal to two times the Executive's annual base salary then in effect. 3. GOLDEN PARACHUTE CAP. Notwithstanding any provision in this Agreement -------------------- to the contrary, in no event shall the total payments under this Agreement that are deemed to be contingent upon a Change of Control in accordance with the rules set forth in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), when added to the present value of all other payments that are payable to the Executive and are contingent upon a Change of Control, exceed an amount equal to two hundred and ninety-nine percent (299%) of the -2- Executive's "base amount" as that term is defined in Section 280G of the Code and regulations thereunder. 4. WAIVER OF CONDITION PRECEDENT. In the event of termination of ----------------------------- employment per Paragraph 2 of this Agreement, then Paragraph 5.7(ii) of the Supplemental Executive Retirement Plan is waived. 5. ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any rights or -------------------------- obligations hereunder may be assigned or pledged by the Executive. This Agreement and the rights and obligations of the parties hereunder shall be binding upon, and inure to the benefit of, the parties hereto, the heirs and legal representatives of the Executives and the successors and assigns of the Company. 6. NO RIGHT TO EMPLOYMENT. Nothing herein shall confer upon the ---------------------- Executive any right to continue in the employ of the Company or a subsidiary thereof or shall interfere in any way with the right of the Company or any subsidiary to terminate such employment at any time. 7. SEVERABILITY. Should any provision of this Agreement be declared ------------ illegal or unenforceable by any court of competent jurisdiction in any action or proceeding, and such provision cannot be modified to be enforceable, such provision shall immediately become null and void and the parties shall renegotiate such provision in good faith, leaving the remainder of this Agreement in full force and effect. 8. NOTICES. Any notice to be given hereunder shall be effective upon ------- receipt, shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid to the following address or such other places as either party shall designate in writing: If to the Company: National Medical Enterprises, Inc. 2700 Colorado Avenue Santa Monica, California Attention: Chief Executive Officer with a copy to: National Medical Enterprises, Inc. 2700 Colorado Avenue Santa Monica, California Attention: General Counsel If to the Executive: _________________________________________ _________________________________________ _________________________________________ _________________________________________ 9. NO ORAL MODIFICATIONS. This Agreement shall not be amended or --------------------- modified except by a written instrument executed by both parties to this Agreement. 10. ENTIRE AGREEMENT. This Severance Protection Agreement contains the ---------------- entire agreement between the parties hereto regarding the subject matter hereof, and fully supersedes any and all prior agreements or understandings between the -3- parties hereto regarding the subject matter hereof. Each party hereto acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement regarding the subject matter hereof will be binding. Each party hereto further acknowledges and agrees that any modifications of this Agreement will be effective only if it is in writing and signed by the party to be charged. 11. GOVERNING LAW. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California, other than its rules for choice of laws. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. NATIONAL MEDICAL ENTERPRISES, INC. By: /s/ MICHAEL H. FOCHT, SR. ----------------------------------- Its: President & Chief Operating Officer ----------------------------------- ___________________________________ Barry Schochet -4- EX-10.H 8 7TH AMEND. TO G.R.A. EXHIBIT 10(h) SEVENTH AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT THIS SEVENTH AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT (the "Amendment") is made and dated as of May 28, 1993, between National Medical Enterprises, Inc., a Nevada corporation ("NME") and The Hillhaven Corporation, a Nevada corporation ("Hillhaven"). RECITALS -------- A. NME and Hillhaven are parties to that certain Guarantee Reimbursement Agreement, dated as of January 31, 1990 (as the same has been or may from time to time be amended, restated, renewed, replaced, modified or supplemented from time to time, the "Reimbursement Agreement"). B. Hillhaven has requested that NME enter into that certain Pledge and Security Agreement and Master Assignment of Mortgages, dated as of May 28, 1993 (the "Pledge Agreement"), pursuant to which NME is assigning certain promissory notes from Hillhaven to NME, and the mortgages securing such promissory notes, to Swiss Bank Corporation, as Collateral Agent, to secure NME's obligations under a guaranty of certain of Hillhaven's "Obligations" (as defined in the Reimbursement Agreement). C. In order to induce NME to enter into the Pledge Agreement, Hillhaven has agreed to amend the Reimbursement Agreement as set forth in this Agreement. NOW THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: AGREEMENT --------- 1. Section 1(a) of the Reimbursement Agreement hereby is amended and restated to read in its entirety as follows: (a) Reimbursement. New Hillhaven shall reimburse NME, promptly on ------------- demand, for all Obligations (including those Obligations set forth in Appendix B to the Reimbursement Agreement) paid by NME or its subsidiaries after the Distribution Date not theretofore reimbursed by New Hillhaven. Without limiting the generality of the foregoing, in the event that NME pledges or assigns collateral directly or indirectly to secure any Obligations or NME's obligations with respect thereto, under a guaranty or otherwise, the amount to be reimbursed by New Hillhaven to NME hereunder with respect to such Obligations shall be the greater of (x) the face value of any collateral applied to the satisfaction of the Obligations, and any other sums then outstanding with respect to such collateral, including accrued and unpaid interest thereon, and (y) the fair market value of any collateral, and any proceeds thereon, applied to the satisfacton of the Obligations (provided, however, that if the collateral is a note secured by a mortgage or deed of trust, the fair market value of such note shall not include the fair market value of the real property securing such note). Payments and notices shall be made or given, as the case may be, in accordance with the provisions of Sections 1(c), 3 and 9(b). 2. Reimbursement Agreement Remains in Effect. Except as expressly ----------------------------------------- amended hereby, the Reimbursement Agreement shall remain in full force and effect. 3. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California. 4. Counterparts. This Agreement may be executed in several counterparts, ------------ each of which shall be deemed an original, but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written. NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation By: /s/ Maris Andersons -------------------------------- Title: Exec. Vice President ----------------------------- THE HILLHAVEN CORPORATION a Nevada corporation By: /s/ Robert Schneider -------------------------------- Title: VP Treasurer ----------------------------- -2- EX-10.I 9 8TH AMEND. TO G.R.A. EXHIBIT 10(i) EIGHTH AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT This Eighth Amendment to Guarantee Reimbursement Agreement ("Amendment") dated as of September 2, 1993, is entered into by and between National Medical Enterprises, Inc., a Nevada corporation ("NME") and The Hillhaven Corporation, a Nevada corporation ("New Hillhaven"). RECITALS A. New Hillhaven and NME are parties to that certain Guarantee Reimbursement Agreement, dated as of January 31, 1990 (as the same has been or may be amended, restated, modified, supplemented, renewed or replaced from time to time, the "Reimbursement Agreement"), which provides, among other things, for the reimbursement by New Hillhaven of all Obligations (as defined in the Reimbursement Agreement) paid by NME. Unless otherwise defined herein, all capitalized terms used herein shall have the same meaning ascribed to such terms in the Reimbursement Agreement. B. New Hillhaven, NME, and certain subsidiaries of New Hillhaven and NME, have entered into that certain letter agreement dated June 22, 1993 (the "June 22 Letter"), which among other things, restructures certain relationships of the companies. Among the provisions contained in the June 22 Letter that are pertinent to this Reimbursement Agreement, are the following: (1) New Hillhaven will obtain financing consisting of (a) third party bank financing in the approximate amount of $400 million, and (b) public or private debt financing in the approximate amount of $175 million (collectively, the "Financing"), a portion of the proceeds of which Financing will be used to (i) repay certain Obligations currently guaranteed by NME, and (ii) cause NME and/or certain of its subsidiaries to be released from certain other Obligations currently guaranteed by NME and/or certain of its subsidiaries; (2) The annual guarantee fee payable by New Hillhaven under this Reimbursement Agreement in connection with the Obligations shall be limited to a maximum of 2% of the Obligations outstanding and the manner of calculating the fee charged on the Obligations outstanding shall be revised; and (3) NME and/or certain subsidiaries of NME shall assign to New Hillhaven's subsidiary, First Healthcare Corporation ("FHC"), and FHC shall assume the renewal and/or purchase options contained in the Assumed Leases (as that term is defined in the Reimbursement Agreement) that were not assigned to FHC on or before the Distribution Date for those facilities described in Exhibit 1 attached hereto and incorporated herein by this reference (the "Assumed Lease Options"), and those Assumed Lease Options shall be added to the Obligations covered by this Reimbursement Agreement, as more specifically provided herein. C. New Hillhaven and NME desire to amend the Reimbursement Agreement as set forth in this Agreement. NOW THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree to amend, modify and supplement the Reimbursement Agreement as follows: AGREEMENT 1. Calculation of the Guarantee Fee After Completion of Financing. The --------------------------------------------------------------- provisions of Section 2(c) of the Reimbursement Agreement are hereby amended to provide that, commencing with the quarterly payment due for the fiscal quarter ending February 28, 1993, the guarantee fee for each quarter shall be the product of (i) the amount of the Obligations outstanding at the close of business on the last day of the preceding fiscal quarter multiplied by (ii) a fraction which is equal to the applicable fraction for the previous fiscal year multiplied by 1.2; provided, however, that at no time shall the fraction to be used in calculating the guarantee fee exceed 2%. Furthermore, notwithstanding the foregoing guaranty fee provisions, the principal amounts of the Obligations described in Exhibit 2 and Exhibit 3 attached hereto shall not be included as part of the Obligations for the purposes of calculating the guarantee fee in the foregoing sentence. Instead, in accordance with prior agreements, (x) New Hillhaven shall pay to NME a guarantee fee of 1% per annum on those Obligations described in Exhibit 2, and (y) no guarantee fee shall be charged on those Obligations described in Exhibit 3. 2. Proration of Guarantee Fee on Obligations Paid With Proceeds of Financing. -------------------------------------------------------------------------- Notwithstanding any provisions to the contrary, the guarantee fee paid with respect to those Obligations that are paid in full, or as to which NME's guaranty has been released, with proceeds of the Financing during the fiscal year ending May 31, 1994 shall be prorated to the date of payoff, based on the actual number of days elapsed until such Obligation is paid in full or such guaranty has been released. 3. Inclusion of the Assumed Lease Options as Obligations. The Assumed Lease ------------------------------------------------------ Options are hereby added as, and shall be deemed to be, "Obligations" under (and as defined in) the Reimbursement Agreement, and all terms, covenants and conditions of the Reimbursement Agreement shall apply; provided, however, that the guarantee fee set forth in Paragraph 1 above shall be charged on the aggregate amount of the rents that will become due for the renewal period for any such Assumed Lease, commencing on the earlier of the date that FHC exercises or is required to exercise such Assumed Lease Option, as provided by the terms of the assignment of such Assumed Lease Option. -2- 4. Inclusion of Certain Assumed Obligations. To the extent NME or any ----------------------------------------- subsidiary or affiliate of NME remains primarily or contingently liable therefor, each of the Assumed Existing Debt and the Assumed Lease described in Exhibit 4 attached hereto is hereby added as, and shall be deemed to be, an "Obligation" under (and as defined in) the Reimbursement Agreement, and all terms, covenants and conditions of the Reimbursement Agreement, including payment of a guarantee fee as provided in Paragraph 1 above, shall apply to such Assumed Existing Debt and Assumed Lease. 5. Reaffirmation of Reimbursement Agreement. New Hillhaven reaffirms that ----------------------------------------- the Reimbursement Agreement, as amended hereby, shall remain in full force and effect, and shall continue to be binding upon New Hillhaven. 6. Captions. The captions and headings used herein are for the convenience --------- of reference and shall not be construed in any manner to limit or modify any of the terms hereof. 7. Governing Law. This Amendment shall be governed by and construed in -------------- accordance with the laws of the State of California. 8. Counterparts. This Amendment may be executed in counterparts, each of ------------- which shall be an original, but all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed on its behalf as of the date first set forth above. NATIONAL MEDICAL ENTERPRISES, INC. By: /s/ Maris Andersons ------------------------------ Title: Executive Vice President ---------------------------- THE HILLHAVEN CORPORATION By: /s/ Robert Schneider ------------------------------ Title: VP Treasurer ---------------------------- -3- EXHIBIT 1 No. Facility Name - --- ------------- 272 Hughes Springs Nursing Home Hughes Springs, Texas 273 Pinecrest Convalescent Home Daingerfield, Texas 274 Coastal Care Center Texas City, Texas 275 Great Southwest Convalescent Center Grand Prairie, Texas 292 Twin City Nursing Home Gas City, Indiana 298 Driftwood Convalescent Hospital Yuba City, California 299 Marysville Convalescent Hospital Marysville, California 305 University Nursing Center Upland, Indiana 880 Four States Nursing Home Texarkana, Texas 881 Southwest Senior Care Center Las Vegas, New Mexico 760 Ridgeview Nursing and Convalescent Center Wichita Falls, Texas 76392 860 Blue Hills Centre Kansas City, Missouri 849 Iliff Care Center Denver, Colorado 295 Whitehouse Country Manor Whitehouse, Ohio 184 Greystone Healthcare Center Blountville, Tennessee 183 Hillhaven Convalescent Center - Ripley Ripley, Tennessee Exhibit 1 (Continued) 189 Fairpark Healthcare Center Maryville, Tennessee 179 Hillhaven Convalescent Center of Huntington Huntington, Tennessee 175 Hillhaven of Jefferson City Jefferson City, Tennessee 171 Hillhaven Convalescent Center Bolivar, Tennessee EXHIBIT 2 A ONE PERCENT GUARANTEE FEE IS PAYABLE ON OBLIGATIONS COVERING THE FOLLOWING FACILITIES: FACILITY 462: Queen Anne Care Center, WA FACILITY 158: Bellingham Care Center, Bellingham, WA FACILITY 461: Edmonds Care Center, Edmonds, WA FACILITY 825: Nansemond Convalescent Center, Suffolk, VA FACILITY 829: Holmes Convalescent Center, Virginia Beach, VA EXHIBIT 3 NO GUARANTEE FEE IS PAYABLE ON OBLIGATIONS COVERING THE FOLLOWING FACILITIES: FACILITY 525: Hillhaven Convalescent Hospital, Orange, CA FACILITY 781: Bashford East Health Care Center, Bashford, KY FACILITY 804: Hillhaven Convalescent Center and Nursing Home, Birmingham, AL FACILITY 824: Hillhaven Convalescent Center & Nursing Home, Mobile, AL FACILITY 160: First Hill Care Center, WA FACILITY 560: Franklin Woods Healthcare Center, OH FACILITY 570: Pickerington Health Care Center, OH FACILITY 822: Hillhaven Convalescent Center, Memphis, TN FACILITY 416: Park Place Hillhaven Convalescent Center, Great Falls, MT FACILITY 572: Canal Winchester, OH -- No guarantee fee shall be payable on the Assumed Lease. A guarantee shall be payable on the Assumed Existing Debt as provided in Paragraph 1 of the Amendment. EXHIBIT 4 ASSUMED OBLIGATIONS ASSUMED EXISTING DEBT - --------------------- Facility 572: Canal Winchester Loan Agreement, dated April 1, 1983, between County of Franklin and Aeon, Inc., with an outstanding principal balance as of September 2, 1993 of $1,955,000, secured by an Open-End Mortgage and Security Agreement dated April 1, 1983. Facility 416: Park Place All-Inclusive Promissory Note Secured by Mortgage, dated September 1, 1983, in favor of B.G.M. Enterprises, with an outstanding principal balance as of September 2, 1993 of $257,998.44. All-Inclusive Promissory Note Secured by Mortgage, dated September 1, 1983, in favor of B.G.M. Enterprises, with an outstanding principal balance as of September 2, 1993 of $1,357,016.39. ASSUMED LEASE Facility 572: Canal Winchester Lease and Sublease Agreement, dated October 10, 1985, between Aeon, Inc. and First Healthcare Corporation, and any amendments thereto. EX-10.M 10 AGREE. OF HILLHAVEN STOC EXHIBIT 10(m) AGREEMENT CONCERNING PURCHASE BY NME PROPERTIES CORP. AND CERTAIN SUBSIDIARIES OF SERIES D PREFERRED STOCK OF THE HILLHAVEN CORPORATION This Agreement is made and dated as of September 1, 1993, among National Medical Enterprises, Inc., a Nevada corporation ("NME"), NME Properties Corp., a Tennessee corporation ("NMEP Corp."), NME Properties, Inc., a Delaware corporation ("NMEP Inc."), NME Properties West, Inc., a Delaware corporation ("NMEP West"), The Hillhaven Corporation, a Nevada corporation ("Hillhaven") and First Healthcare Corporation, a Delaware corporation ("First Healthcare"). NMEP Corp., NMEP Inc. and NMEP West are sometimes herein referred to collectively as the "NMEP Entities." RECITALS A. As part of the January, 1990 spinoff by NME to its shareholders of shares of Hillhaven, First Healthcare, a wholly-owned subsidiary of Hillhaven, delivered to NMEP Corp., a wholly-owned subsidiary of NME, a promissory note dated as of January 31, 1990, in the original principal amount of $127,300,000.00, which amount subsequently was adjusted (as reflected in the addendum thereto) to reflect the actual adjusted principal amount of $135,859,396.00. Such promissory note, as adjusted, and as amended by that certain First Amendment to Promissory Note, dated as of May 1, 1991, is referred to herein as the "FHC Promissory Note." As of the Closing Date (as defined in Section 3 herein), the outstanding balance of the FHC Promissory Note, including unpaid accrued interest thereon is $49,072,836.93. B. Pursuant to that certain Note Guarantee Agreement, dated as of January 31, 1990 (the "Note Guarantee Agreement"), Hillhaven has guarantied First Healthcare's obligations under the FHC Promissory Note. C. Pursuant to that certain letter agreement dated May 31, 1990, as amended by that certain Amendment No. One to Commitment Letter dated as of May 1, 1991, First Healthcare has borrowed from NMEP West the sum of $6,000,000.00, which loan is evidenced by a promissory note dated July 20, 1992, in favor of NMEP West, and is secured by a mortgage on the facility known as Clayton House (Facility No. 445) (the "Clayton House Note"). As of the Closing Date, the outstanding balance of the Clayton House Note, including unpaid accrued interest thereon, is $5,911,097.51. D. In connection with First Healthcare's purchase of Greenbriar Terrace (Facility No. 592), NMEP Corp. provided a loan to First Healthcare in the original sum of $1,452,626.42, evidenced by promissory note and secured by a mortgage against the real property (the "Greenbriar Note"). As of the Closing Date, the outstanding balance of the Greenbriar Note, including unpaid accrued interest thereon, is $969,110.79. -2- E. In connection with First Healthcare's purchase of Birchwood Terrace (Facility No. 559), NMEP, Inc. provided a loan to First Healthcare in the original sum of $893,194.45, evidenced by a promissory note and secured by a mortgage against the real property (the "Birchwood Note"). As of the Closing Date, the outstanding balance of the Birchwood Note, including unpaid accrued interest thereon, is $647,522.06. F. On the terms and subject to the conditions set forth in this Agreement, NME Properties desires to purchase from Hillhaven, and Hillhaven desires to sell to the NMEP Entities, 120,000 shares of Hillhaven's Series D Preferred Stock (the "Series D Preferred"), which Series D Preferred shall have the rights and preferences specified in that certain Certificate of Designation, Preferences and Rights of Series D Preferred Stock of Hillhaven (the "Certificate of Designation"), a copy of which is attached hereto as Exhibit A, --------- for consideration of $120,000,000.00. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: AGREEMENT 1. Purchase of Series D Preferred. The NMEP Entities hereby agrees to ------------------------------ purchase from Hillhaven, and Hillhaven hereby agrees to sell to the NMEP Entities, on the Closing Date, 120,000 shares of Series D Preferred for a purchase price of $120,000,000.00 (the "Purchase Price"), payable as provided in Section 3 below. 2. Representations and Warranties. ------------------------------ (a) In order to induce the NMEP Entities and NME to enter into this Agreement and to consummate the transactions contemplated hereby, Hillhaven hereby covenants, represents and warrants to the NMEP Entities and NME that: (i) Hillhaven is duly organized, validly existing and in good standing under the laws of the State of Nevada. (ii) Hillhaven has the corporate power, authority and legal right to make, deliver and perform its obligations under this Agreement and the Series D Preferred and has taken all corporate action to authorize the execution, delivery and performance of this Agreement and the Series D Preferred. No consent of any other person (including, without limitation, stockholders and creditors of Hillhaven), and no authorization of, notice to or other act by or in respect of Hillhaven by, any governmental authority, agency or instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement or the Series D Preferred. This Agreement has been duly executed and delivered by Hillhaven, each certificate evidencing shares -3- of Series D Preferred has been duly executed and delivered by Hillhaven and each of this Agreement and each share of Series D Preferred constitutes a legal, valid and binding obligation of Hillhaven enforceable against Hillhaven in accordance with its terms. (iii) The execution, delivery and performance by Hillhaven of this Agreement and the Series D Preferred will not violate any provision of any existing law or regulation applicable to Hillhaven or any of its significant subsidiaries or of any award, order or decree applicable to Hillhaven or any of its significant subsidiaries of any court, arbitrator or governmental authority, or of the Articles of Incorporation or Bylaws of Hillhaven, or of any security issued by Hillhaven or any material mortgage, indenture, lease, contract or other agreement or undertaking to which Hillhaven is a party or by which Hillhaven or any of its properties or assets may be bound, and will not result in, or require, the creation or imposition of any lien on any of its or their respective properties or revenues pursuant to the provisions of any such mortgage, indenture, contract, lease or other agreement. Without limiting the generality of the foregoing, no material mortgage, indenture, lease, contract or other agreement or undertaking to which Hillhaven is a party or by which Hillhaven or any of its properties or assets may be bound prohibits or restricts Hillhaven from executing, delivering or performing its obligations hereunder or under the Series D Preferred or from declaring or paying the dividends contemplated by the Certificate of Designation, except for the Guarantee Reimbursement Agreement dated as of January 30, 1990 between NME and Hillhaven (as amended, the "Guarantee Reimbursement Agreement"), the provisions of which that so prohibit or restrict the payment or declaration of the dividends contemplated by the Certificate of Designation are being waived by NME pursuant to this Agreement. (iv) No litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of Hillhaven, threatened by or against Hillhaven or any of its subsidiaries or any of its or their respective properties or revenues (a) with respect to this Agreement or the Series D Preferred or any of the transactions contemplated hereby or thereby, or (b) which, if adversely determined, would have a material adverse effect on Hillhaven's ability to perform its obligations under this Agreement or the Series D Preferred. (v) Neither Hillhaven nor any of its significant subsidiaries is in default in any material respect under or with respect to any material contract, agreement or other instrument to which it is a party or by which it or its assets is bound. Except as would not have a material adverse effect on the business, operations, properties or financial condition of Hillhaven and its subsidiaries taken as a whole or on the ability of Hillhaven to perform its obligations under this Agreement and the Series D Preferred, Hillhaven is not in default under any order, award or decree of any court, arbitrator, or other governmental authority binding upon or affecting it or by which any of its assets is bound or affected. Hillhaven is not subject to any order, award or decree which would materially adversely affect the ability of Hillhaven to perform its obligations under any other order, award or decree or under this Agreement or the Series D Preferred. -4- (vi) Hillhaven's guaranty referred to in Recital B above remains in full force and effect and continues to be a legal, valid and binding obligation of Hillhaven enforceable against Hillhaven in accordance with its terms. (vii) The Series D Preferred has been duly authorized and issued by Hillhaven. The holders of the Series D Preferred shall be entitled to all of the benefits of the Series D Preferred as described in the Certificate of Designation. Upon Hillhaven's receipt of the Purchase Price and its issuance of the 120,000 shares of Series D Preferred, such 120,000 shares of Series D Preferred will be fully paid and non-assessable and will not have been issued or delivered in violation of, or subject to, any preemptive rights or other rights of any person to subscribe for or purchase the Series D Preferred. (b) In order to induce the NMEP Entities and NME to enter into this Agreement and to consummate the transactions contemplated hereby, First Healthcare hereby covenants, represents and warrants to each of the NMEP Entities and NME that: (i) First Healthcare is duly organized, validly existing and in good standing under the laws of the State of Delaware. (ii) First Healthcare has the corporate power, authority and legal right to make, deliver and perform its obligations under this Agreement and has taken all corporate action to authorize the execution, delivery and performance of this Agreement. No consent of any other person (including, without limitation, stockholders and creditors of First Healthcare), and no authorization of, notice to or other act by or in respect of First Healthcare by, any governmental authority, agency or instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. This Agreement has been duly executed and delivered by First Healthcare and this Agreement constitutes a legal, valid and binding obligation of First Healthcare enforceable against First Healthcare in accordance with its terms. (iii) The execution, delivery and performance by First Healthcare of this Agreement will not violate any provision of any existing law or regulation applicable to First Healthcare or any of its significant subsidiaries or of any award, order or decree applicable to First Healthcare or any of its significant subsidiaries of any court, arbitrator or governmental authority, or of the Articles of Incorporation or Bylaws of First Healthcare, or of any security issued by First Healthcare or any material mortgage, indenture, lease, contract or other agreement or undertaking to which First Healthcare is a party or by which First Healthcare or any of its properties or assets may be bound, and will not result in, or require, the creation or imposition of any lien on any of its or their respective properties or revenues pursuant to the provisions of any such mortgage, indenture, contract, lease or other agreement. -5- (iv) No litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of First Healthcare, threatened by or against First Healthcare or any of its subsidiaries or any of its or their respective properties or revenues (a) with respect to this Agreement or any of the transactions contemplated hereby, or (b) which, if adversely determined, would have a material adverse effect on First Healthcare's ability to perform its obligations under this Agreement. (v) Neither First Healthcare nor any of its significant subsidiaries is in default in any material respect under or with respect to any material contract, agreement or other instrument to which it is a party or by which it or its assets is bound. Except as would not have a material adverse effect on the business, operations, properties or financial condition of First Healthcare and its subsidiaries taken as a whole or on the ability of First Healthcare to perform its obligations under this Agreement, First Healthcare is not in default under any order, award or decree of any court, arbitrator, or other governmental authority binding upon or affecting it or by which any of its assets is bound or affected. First Healthcare is not subject to any order, award or decree which would materially adversely affect the ability of First Healthcare to perform its obligations under this Agreement. (vi) Each of the FHC Promissory Note, the Clayton House Note, the Greenbriar Note, and the Birchwood Note remains in full force and effect and continues to be a legal, valid and binding obligation of First Healthcare, enforceable against First Healthcare in accordance with its terms. First Healthcare is current in the payment and performance of its obligations under, and has not assigned its interests in any of, the FHC Promissory Note, the Clayton House Note, the Greenbriar Note, and the Birchwood Note. (c) In order to induce Hillhaven and First Healthcare to enter into this Agreement and to consummate the transactions contemplated hereby, NME hereby covenants, represents and warrants to Hillhaven and First Healthcare that: (i) NME is duly organized, validly existing and in good standing under the laws of the State of Nevada. (ii) NME has the corporate power, authority and legal right to make, deliver and perform its obligations under this Agreement and has taken all corporate action to authorize the execution, delivery and performance of this Agreement. No consent of any other person (including, without limitation, stockholders and creditors of NME), and no authorization of, notice to or other act by or in respect of NME by, any governmental authority, agency or instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. This Agreement has been duly executed and delivered by NME and this Agreement constitutes a legal, valid and binding obligation of NME enforceable against NME in accordance with its terms. -6- (iii) The execution, delivery and performance by NME of this Agreement will not violate any provision of any existing law or regulation applicable to NME or any of its significant subsidiaries or of any award, order or decree applicable to NME or any of its significant subsidiaries of any court, arbitrator or governmental authority, or of the Articles of Incorporation or Bylaws of NME, or of any security issued by NME or any material mortgage, indenture, lease, contract or other agreement or undertaking to which NME is a party or by which NME or any of its properties or assets may be bound, and will not result in, or require, the creation or imposition of any lien on any of its or their respective properties or revenues pursuant to the provisions of any such mortgage, indenture, contract, lease or other agreement. (iv) No litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of NME, threatened by or against NME or any of its subsidiaries or any of its or their respective properties or revenues (a) with respect to this Agreement or any of the transactions contemplated hereby, or (b) which, if adversely determined, would have a material adverse effect on NME's ability to perform its obligations under this Agreement. (v) Neither NME nor any of its significant subsidiaries is in default in any material respect under or with respect to any material contract, agreement or other instrument to which it is a party or by which it or its assets is bound. Except as would not have a material adverse effect on the business, operations, properties or financial condition of NME and its subsidiaries taken as a whole or on the ability of NME to perform its obligations under this Agreement, NME is not in default under any order, award or decree of any court, arbitrator, or other governmental authority binding upon or affecting it or by which any of its assets is bound or affected. NME is not subject to any order, award or decree which would materially adversely affect the ability of NME to perform its obligations under this Agreement. (d) In order to induce Hillhaven and First Healthcare to enter into this Agreement and to consummate the transactions contemplated hereby, each of NMEP Corp., NMEP Inc., and NMEP West hereby covenants, represents and warrants to Hillhaven and First Healthcare that: (i) It is duly organized, validly existing and in good standing under the laws of the state of incorporation of the corporation. (ii) It has the corporate power, authority and legal right to make, deliver and perform its obligations under this Agreement and has taken all corporate action to authorize the execution, delivery and performance of this Agreement. No consent of any other person (including, without limitation, stockholders and creditors of the corporation), and no authorization of, notice to or other act by or in respect of the corporation by, any governmental authority, agency or instrumentality is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement. This Agreement has been duly executed and delivered by the corporation and this Agreement constitutes a legal, valid and binding obligation of the corporation enforceable against the corporation in accordance with its terms. -7- (iii) The execution, delivery and performance by the corporation of this Agreement will not violate any provision of any existing law or regulation applicable to the corporation or any of its significant subsidiaries or of any award, order or decree applicable to the corporation or any of its significant subsidiaries of any court, arbitrator or governmental authority, or of the Articles of Incorporation or Bylaws of the corporation, or of any security issued by the corporation or any material mortgage, indenture, lease, contract or other agreement or undertaking to which the corporation is a party or by which the corporation or any of its properties or assets may be bound, and will not result in, or require, the creation or imposition of any lien on any of its or their respective properties or revenues pursuant to the provisions of any such mortgage, indenture, contract, lease or other agreement. (iv) No litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of the corporation, threatened by or against the corporation or any of its subsidiaries or any of its or their respective properties or revenues (a) with respect to this Agreement or any of the transactions contemplated hereby, or (b) which, if adversely determined, would have a material adverse effect on its ability to perform its obligations under this Agreement. (v) Neither the corporation nor any of its significant subsidiaries is in default in any material respect under or with respect to any material contract, agreement or other instrument to which it is a party or by which it or its assets is bound. Except as would not have a material adverse effect on the business, operations, properties or financial condition of the corporation and its subsidiaries taken as a whole or on the ability of the corporation to perform its obligations under this Agreement, the corporation is not in default under any order, award or decree of any court, arbitrator, or other governmental authority binding upon or affecting it or by which any of its assets is bound or affected. The corporation is not subject to any order, award or decree which would materially adversely affect the ability of the corporation to perform its obligations under this Agreement. (vi) Except to the extent that the promissory notes have been pledged and assigned to Swiss Bank Corporation pursuant to that certain unrecorded Pledge and Security Agreement and Master Assignment of Mortgages dated as of May 28, 1993 (the "Pledge Agreement"), the NME Entities have not assigned their interests in the promissory notes described in the above Recitals. Upon release of the Pledge Agreement which shall occur upon Hillhaven's repayment of the THC Facilities Corp. loan evidenced by the Credit Agreement (as defined in the Pledge Agreement) on September 2, 1993, NMEP Corp. will be the holder of the FHC Promissory Note and the Greenbriar Note, NMEP West will be the holder of the Clayton House Note, and NMEP Inc. will be the holder of the Birchwood Note, free and clear of any liens or encumbrances. (vii) It is purchasing the Series D Preferred for investment purposes and not in connection with or with a view towards the distribution thereof. -8- 3. The Closing. On September 2, 1993 (the "Closing Date"), the parties ----------- hereto shall take the following actions: (a) NMEP Corp. shall deposit with Escrow cash or immediately available funds in the amount of $63,399,432.71, and shall give written instructions to Escrow to transfer said funds to First Healthcare's account at PNC Bank. (b) NMEP Corp. shall assign to Hillhaven its interest in the FHC Promissory Note, with an outstanding balance in the sum of $49,072,836.93; (c) NMEP Corp. shall assign to Hillhaven its interest in the Greenbriar Note, with an outstanding balance in the sum of $969,110.79; (d) NMEP West shall assign to Hillhaven its interest in the Clayton House Note, with an outstanding balance in the sum of $5,911,097.51; (e) NMEP Inc. shall assign to Hillhaven its interest in the Birchwood Note, with an outstanding balance in the sum of $647,522.06; (f) In consideration of (i) payment of the cash sum described in subparagraph (a) above, and (ii) the assignment to Hillhaven of the promissory notes described in subparagraphs (b), (c), (d) and (e) above, Hillhaven shall deliver to the NME Entities the following certificates representing a total of 120,000 shares of Series D Preferred: (i) Certificate representing 63,399 shares of Series D Preferred in the name of NME Properties Corp.; (ii) Certificate representing 50,042 shares of Series D Preferred in the name of NME Properties Corp.; (iii) Certificate representing 5911 shares of Series D Preferred in the name of NME Properties West, Inc.; and (iv) Certificate representing 648 shares of Series D Preferred in the name of NME Properties, Inc. 4. NME Waivers. NME hereby waives the provisions of Section 5(h) of that ----------- certain Guarantee Reimbursement Agreement to the extent that such provisions would prohibit Hillhaven from paying dividends on the Series D Preferred; provided, however, that such waiver shall be limited to Hillhaven being permitted to pay dividends only on the Series D Preferred (and on Series C Preferred for which a waiver was previously obtained) and not on any other series or class of stock of Hillhaven or any of its subsidiaries. 5. Survival of Certain Representations and Warranties and Covenants. ---------------------------------------------------------------- Hillhaven's representations and warranties set forth in Section 2(a)(vii) shall survive the execution, delivery and performance of this Agreement. -9- 6. Miscellaneous. ------------- (a) This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute one and the same agreement. (b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. (c) No waiver or modification of any provision of this Agreement shall be (i) valid or enforceable unless it is in writing and has been executed by the party against whom such enforcement is sought, or (ii) construed as a waiver or modification of any other provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the day and year first above written. National Medical Enterprises, Inc., a Nevada corporation By: /s/ Maris Andersons -------------------------------- Title: Executive Vice President NME Properties Corp., a Tennessee corporation By: /s/ Maris Andersons -------------------------------- Title: Senior Vice President NME Properties, Inc., a Delaware corporation By: /s/ Maris Andersons -------------------------------- Title: Senior Vice President NME Properties West, Inc., a Delaware corporation By: /s/ Maris Andersons -------------------------------- Title: Senior Vice President -10- The Hillhaven Corporation, a Nevada corporation By: /s/ Robert Schneider -------------------------------- Title: Vice President and Treasurer First Healthcare Corporation, a Delaware corporation By: /s/ Robert Schneider -------------------------------- Title: Vice President and Treasurer EX-10.N 11 AGREEMENT & WAIVER EXHIBIT 10(n) AGREEMENT AND WAIVER This AGREEMENT AND WAIVER (this "Agreement") dated as of September 2, 1993, by and among National Medical Enterprises, Inc., a Nevada corporation ("NME"), the subsidiaries of NME which are signatories hereto, The Hillhaven Corporation, a Nevada corporation ("Hillhaven"), and First Healthcare Corporation, a Delaware corporation ("FHC"). WITNESSETH: ---------- WHEREAS, pursuant to that certain Revolving Credit and Term Loan Agreement dated as of January 31, 1990 between NME and Hillhaven, as amended by that certain First Amendment thereto dated as of November 12, 1992 (as amended, the "Revolving Credit Agreement"), NME agreed to make certain loans to Hillhaven through May 31, 1994 subject to the conditions set forth therein; and WHEREAS, pursuant to that certain Commitment Letter dated May 31, 1990, between NME and FHC, as amended by that certain Amendment No. One thereto dated as of May 1, 1991 (as amended, the "Commitment Letter"), NME agreed to make certain loans to FHC subject to the conditions set forth therein; and WHEREAS, pursuant to that certain Master Loan Agreement dated as of April 1, 1992 among the lenders parties thereto, NME, FHC and Hillhaven, as amended by that certain First Amendment thereto dated as of November 12, 1992 (as amended, the "Master Loan Agreement"), the lenders which were parties thereto agreed to finance up to 100% of the purchase price of the facilities referred to therein; and WHEREAS, pursuant to that certain Guaranty dated as of April 1, 1992 from Hillhaven in favor of the lenders listed thereon (the "Master Loan Agreement Guaranty"), Hillhaven guaranteed the obligations of FHC under the Master Loan Agreement; and WHEREAS, pursuant to that certain Master Loan Agreement for Purchase of Nine Facilities dated as of June 1, 1992 among the lenders parties thereto and FHC (the "Second Master Loan Agreement"), the lenders which were parties thereto agreed to finance up to 100% of the purchase price of the facilities referred to therein; and WHEREAS, pursuant to that certain Guaranty dated as of June 1, 1992 from Hillhaven in favor of the lenders listed thereon (the "Second Master Loan Agreement Guaranty"), Hillhaven guaranteed FHC's obligations under the Second Master Loan Agreement; and WHEREAS, pursuant to that certain Promissory Note dated January 31, 1990 (the "Promissory Note") by FHC in favor of NME Properties Corp., a Tennessee corporation (formerly known as The Hillhaven Corporation), FHC owes certain monies to NME Properties Corp.; and WHEREAS, pursuant to that certain Note Guarantee Agreement dated as of January 31, 1990 among Hillhaven, NME and the payees identified therein (the "Note Guarantee Agreement"), Hillhaven guaranteed FHC's obligations under the Promissory Note; and WHEREAS, Hillhaven is restructuring its relationship with NME to, inter alia, repay amounts owing to NME pursuant to the Master Loan Agreement, - ----- ---- the Second Master Loan Agreement and the Promissory Note, and terminate NME's commitment to loan funds pursuant to the Revolving Credit Agreement and the Master Loan Agreement; and WHEREAS, in connection therewith the parties desire to eliminate NME's commitments under the Revolving Credit Agreement, and the Master Loan Agreement, and to terminate Hillhaven's obligations under the Master Loan Agreement Guaranty, Second Master Loan Agreement Guaranty and Note Guarantee Agreement; and WHEREAS, the aforesaid restructuring will be financed through (1) the issuance by Hillhaven to NME or its subsidiaries of $120 million of a newly created series of payable-in-kind preferred stock, (2) the incurrence by FHC of up to $360 million of indebtedness in the form of term loans, letters of credit and working capital loans under a secured credit facility with Morgan Guaranty Trust Company of New York and a syndicate of other lenders (the "Bank Financing"), (3) the sale by Hillhaven of senior subordinated notes in the approximate amount of $175 million (the "Notes"), (4) the extension of FHC's commercial paper program backed by certain of its (and certain of its subsidiaries') Medicaid accounts receivable and increase in permitted borrowings under such program from $30.0 million to $40.0 million and (5) the use of available cash; and WHEREAS, in connection with the Bank Financing, Hillhaven has transferred its bank accounts to FHC; and WHEREAS, pursuant to Sections 5(a), 5(b) and 5(i) of that certain Guarantee Reimbursement Agreement, as amended (as so amended, the "Guarantee Reimbursement Agreement"), Hillhaven agreed, inter, alia, to certain covenants ----- ---- which may be violated as a result of the Bank Financing, the Notes and the transfer of bank accounts to FHC; NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto intending to be legally bound, hereby agree as follows: 1. TERMINATION OF OBLIGATIONS TO LEND. NME's obligations to loan ---------------------------------- funds to Hillhaven under the Revolving Credit Agreement, the Master Loan Agreement, the Second Master Loan Agreement, the Promissory Note and the Commitment Letter shall terminate as of the date hereof. 2. TERMINATION OF GUARANTEES. Hillhaven's obligations under the ------------------------- Master Loan Agreement Guaranty, Second Master Loan Agreement Guaranty and Note Guarantee Agreement shall terminate as of the date hereof. -2- 3. WAIVER. NME hereby waives compliance with the following provisions of ------ the Guarantee Reimbursement Agreement; (a) Sections 5(a) and 5(b) of the Guarantee Reimbursement Agreement are hereby waived to the extent necessary to permit (i) the transactions contemplated by the Bank Financing, including the placement of mortgages on facilities owned by FHC or its subsidiaries, the substitution of facilities as collateral and any subsequent addition of collateral, and (ii) the issuance of the Notes. (b) Section 5(i) of the Guarantee Reimbursement Agreement is hereby waived to the extent necessary to permit Hillhaven to transfer any or all of its bank accounts to FHC. 4. COSTS. Each party shall bear its own cost and expenses in connection ----- with the transactions contemplated in this Agreement. 5. COOPERATION. The parties agree to execute and deliver such other ----------- documents and instruments and do all such other acts and things as may be reasonably required to give effect to the agreements contained in this Agreement. 6. AMENDMENT. No amendment or modifications of this Agreement shall be --------- effective unless in writing signed by the parties. 7. GOVERNING LAW. This Agreement shall be governed by and construed in ------------- accordance with California law. 8. COUNTERPARTS. This Agreement may be executed in counterparts, each of ------------ which shall be an original, but all of which together shall constitute but one and the same instrument. 9. NO FURTHER WAIVER. The waivers set forth herein shall be effective ----------------- only for the specific purposes for which given. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed on its behalf as of the date first set forth above. NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation By: /s/ MARIS ANDERSONS ------------------------------- Its: Executive Vice President ------------------------------- NME PROPERTIES CORP., a Tennessee corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- -3- NME PROPERTIES, INC., a Delaware corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- NME PROPERTY HOLDING CO., INC., a Delaware corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- NME PROPERTIES WEST, INC., a Delaware corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- HAMMOND HOLIDAY HOME, INC., a Kansas corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- SEDGWICK CONVALESCENT CENTER, INC., a Kansas corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- NORTHWEST CONTINUUM CARE CENTER, INC., a Washington corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- -4- FLAGG INDUSTRIES, INC., a California corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- GUARDIAN MEDICAL SERVICES, INC., a North Carolina corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- NME ARIZONA, INC., an Arizona corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- LAKE HEALTH CARE FACILITIES, INC., a Delaware corporation By: /s/ TIMOTHY L. PULLEN ------------------------------- Its: Vice President ------------------------------- THE HILLHAVEN CORPORATION, a Nevada corporation By: /s/ ROBERT SCHNEIDER ------------------------------- Its: Vice President & Treasurer ------------------------------- FIRST HEALTHCARE CORPORATION, a Delaware corporation By: /s/ ROBERT SCHNEIDER ------------------------------- Its: Vice President & Treasurer ------------------------------- -5- EX-10.SS 12 AMEND. TO NME ERP EXHIBIT 10(ss) Amendment to National Medical Enterprises, Inc. Supplemental Executive Retirement Plan Dated November 1, 1984 As Amended May 21, 1986 THIS AMENDMENT TO NATIONAL MEDICAL ENTERPRISES, INC. SUPPLEMENTAL RETIREMENT PLAN (the "Amendment") is made, entered into and effective as of the 25th day of April, 1994. R E C I T A L S : - - - - - - - - WHEREAS, National Medical Enterprises, Inc., a Nevada corporation ("NME") adopted the Supplemental Executive Retirement Plan (the "Plan"), pursuant to a document dated November 1, 1984 and amended May 21, 1986; WHEREAS, Section 5.4 provides that NME reserves the right, in its sole discretion, to amend the Plan; and WHEREAS, NME now desires to amend the Plan. NOW, THEREFORE, intending to be legally bound, NME hereby agrees to amend the Plan as follows: A M E N D M E N T : - - - - - - - - - 1. Section 2.5 of the Plan is hereby amended by deleting such Section in its entirety and replacing it with the following: "2.5 Change of Control. "Change of Control" shall be deemed to have ----------------- occurred if (a) any person as such term is used in Sections 13(c) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, is or becomes the beneficial owner directly or indirectly of securities of NME representing 30% or more of the combined voting power of NME's then outstanding securities or (b) during any two year period commencing after April 1, 1994, individuals who at the beginning of such period constitute the Board of Directors of NME cease for any reason other than death or disability to constitute a majority of the Board." 2. Section 2.14 of the Plan is hereby amended by deleting such Section in its entirety and replacing it with the following: "2.14 Existing Retirement Benefit Plans Adjustment Factor. "Existing --------------------------------------------------- Retirement Benefit Plans Adjustment Factor or Factors" means the assumed benefit the Participant would be eligible for under Social Security and all retirement plans of NME and its Subsidiaries whether or not he participates in such plans. This Factor will be used for calculating all benefits under the Plan and is a projection of the benefits payable under the Social Security regulations in effect June 1, 1984, and retirement plans of NME in effect on June 1, 1984, or the participant's Date of Enrollment in the Plan, if later. Once established for a Participant this Factor will not thereafter be altered to reflect any reduction in benefits under Social Security. This Factor will be adjusted to reflect changes in -1- benefits under NME retirement plans if a Participant is transferred to different retirement plans or the Company contribution to a retirement plan is increased or decreased from the percentage used for original calculation of the Participant's Factor or the Participant becomes eligible for other retirement plans adopted by the Company which would provide benefits greater or less than the Plan considered in calculating the Participant's original Factor, except that such Factor for Participant's who are regular full time employees actively at work with the Company on April 1, 1994, with the corporate office or a division or subsidiary that is not announced as a discontinued operation shall be revised based upon the Participant's actual base salary as of April 1, 1994, but no Factor will be increased as a result of revision of the Factor to use the base salary as of April 1, 1994." 3. Section 2.19 of the Plan is hereby amended by deleting such Section in its entirety and replacing it with the following: "2.19 Projected Earnings. "Projected Earnings means the (a) actual ------------------ Earnings of the Participant on the Date of Enrollment plus an assumed increase of eight percent per annum, or (b) for Participants who are regular full time employees actively at work on April 1, 1994, with the corporate office or a division or a subsidiary that has not been declared to be a discontinued operation, the actual Earnings of the Participant on April 1, 1994 plus an assumed increase of eight percent per annum." 4. Section 3.8 of the Plan is hereby amended by designating the first paragraph of Section 3.8 as subparagraph (a) and by adding the following as a new subparagraph 3.8(b): "3.8(b) For a Participant who is a regular full time employee actively at work on April 1, 1994, with the corporate office or a division or a subsidiary which has not been declared to be a discontinued operation, who has not yet begun to receive benefit payments under the Plan and whose employment is Terminated without cause or who voluntarily Terminates Employment following (a) a material downward change in the functions, duties, or responsibilities which reduce the rank or position of the Participant, (b) (i) a reduction in the Participant's annual base salary, or (ii) a material reduction in the Participant's annual incentive plan bonus payment other than for financial performance as it broadly applies to all similarly situated active Participants in the same plan, or (iii) a material reduction in the Participant's retirement or supplemental retirement benefits that does not broadly apply to all active Participant's in the same plan or; (c) transfer of a Participant's office to a location that is more than fifty (50) miles from the Participant's current principal office location, if such Termination of Employment occurs within two years following a Change of Control of NME while this Plan remains in effect, the provisions of Section 3.8a above shall not apply and (i) a Participant's Early or Normal Retirement Benefits under this Plan (a) will be determined on the basis of (I) receiving full Prior Service Credit under Sections 3.1 and 3.2 for all Years of Service prior to his or her Date of Enrollment and (II) being credited with three additional years to his or her Years of Service (with total Years of -2- Service not to exceed twenty years) and (b) will be fully vested in the Participant without regard to his or her Years of Service with NME and its Subsidiaries, (ii) will be determined by replacing the definition of "Earnings" under Section 2.10 hereof with the following "the base salary and the annual cash bonus paid to a Participant by NME or a Subsidiary, excluding (A) any cash bonus paid under the LTIP, (B) any car and other allowances and (C) other cash and non-cash compensation" and (iii) notwithstanding any other provision of this Plan to the contrary, a Participant will be entitled to receive the Normal Retirement Benefit on or after the age of sixty, without reduction, and after the age of fifty-five with a reduction of 0.42% per month for each month for which the benefit commences to be paid prior to the Participant's attaining the age of sixty and after the age of fifty with the foregoing reduction from age sixty to age fifty- five and with a reduction to 0.56% per month for each month for which the benefit commences to be paid prior to the Participant's attaining the age of fifty-five. No other reductions set forth in Sections 3.2a(iii) and 3.2b will apply." 5. The following language shall be added as a new Paragraph 3.9: "3.9 Golden Parachute Cap. Notwithstanding any provision in this Plan to the contrary, in no event shall the total present value of all payments under this Plan that are payable to a Participant and are contingent upon a Change of Control in accordance with the rules set forth in Section 280G of the Internal Revenue Service Code of 1986, as amended (the "Code") and the Treasury Regulations thereunder, when added to the present value of all other payments, other than payments that are made pursuant to this Plan, that are payable to a Participant and are contingent upon a Change of Control, exceed an amount equal to two hundred and ninety-nine percent (299%) of the Participant's "base amount" as that term is defined in Section 280G of the Code." 6. The following language shall be added as new Section 4.5 to the Plan: "4.5 Lump Sum Distributions. At any time following a Termination of ---------------------- Employment which occurs within two (2) years after a Change of Control or following an Early Retirement or a Normal Retirement, a Participant, or the Surviving Spouse of a Participant, who has a vested interest in the Plan may elect to receive a lump sum payment, in an amount determined below, sixty (60) days after giving notice to the Committee of the Participant's, or the Participant's Surviving Spouse's, desire to receive such lump sum benefit. The date of the notice shall be the "Commencement Date." The lump sum payment shall be determined in accordance with the following provisions of this Section 4.5, and then shall be reduced by a penalty equal to ten percent (10%) of such payment which shall be forfeited to NME. However, the penalty shall not apply if the Committee determines, based on the advice of counsel or a final determination by the Internal Revenue Service or any court of competent jurisdiction, that by reason of the foregoing elective provisions of this Section 4.5 any Participant, Surviving Spouse or Eligible Children has recognized or will recognize gross income for federal income tax purposes under this Plan in advance of payment to him or her of Plan benefits. NME shall notify all -3- Participants (and Surviving Spouses or Eligible Children of deceased Participants) of any such determination. Wherever any such determination is made, NME shall refund all penalties which were imposed hereunder on account of making lump sum payments at any time during or after the first year to which such determination applies (i.e., the first year when gross income is recognized for federal income tax purposes). Interest shall be paid on any such refunds based on an interest factor determined under Section 4.5(b) hereof. The Committee may also reduce or eliminate the penalty if it determines that this action will not cause any Participant to recognize gross income for federal income tax purposes under this Plan in advance of payment to him or her of Plan benefits. Notwithstanding any other provision of this Plan, a penalty shall not apply if a retired Participant or the Surviving Spouse or Eligible Children of a deceased Participant receives a lump sum distribution due to a financial hardship. The Committee shall determine whether a financial hardship exists in its sole discretion, but in good faith and on a uniform, nondiscriminatory and reasonable basis. A hardship distribution shall be a cash payment not to exceed the amount necessary to relieve the hardship. (a) When monthly benefit payments have not yet commenced and the Participant is living on the Commencement Date, the lump sum payment (prior to the ten percent (10%) reduction) shall equal the lump sum value of the Participant's Early Retirement Benefit or Normal Retirement Benefit accrued through the Commencement Date. The amount described in this Section 4.5(a) shall include, in addition, in the case of a Participant who has a spouse or Eligible Children on the Commencement Date, the lump sum value, determined as of such date, of any benefit payable to a Surviving Spouse or Eligible Children by reason of the Participant's death on or after such date assuming such spouse would qualify as a Surviving Spouse on and after such date. The lump sum amount representing the value of the benefits described in the preceding two sentences shall be computed (i) first by reducing the amount of the Participant's monthly benefit payable under Section 3.2 hereof, if the Participant's Commencement Date occurs before the Participant's Normal Retirement date, (ii) then determining the survivor benefit which would be payable to a Surviving Spouse or Eligible Children in respect of such monthly benefit under Section 3.1(c) or Section 3.2(c) whichever is applicable, and (iii) next commuting such benefits to their lump sum equivalent at the Commencement Date by reference to the factor described in Section 4.5(b). In computing the Participant's monthly benefit under clause (i) of the preceding sentence, if the Commencement Date occurs before the earliest date when the Participant may commence to receive his or her Early Retirement Benefit, the Participant's Early Retirement Benefit shall be computed as the annual actuarial equivalent of the Early Retirement Benefit which would be payable to him or her at the earliest date when benefits could commence under the Early Retirement provisions of Section 3.2, in the form of a single life annuity. -4- When annual benefits have previously commenced, the lump sum payment (prior to the ten percent (10%) reduction) shall be equal to the difference between (A) minus (B) below, determined as of the Participant's Commencement Date, accumulated to the date of the lump sum payment using the same interest rate which is used in calculating the amounts (A) and (B): (A) The lump sum value of the monthly benefits payable to the Participant (including any benefit payable to the Surviving Spouse or Eligible Children) determined as of the Participant's Commencement Date in the same manner as described in the previous paragraph. (B) The lump sum value of the monthly benefits previously paid to the Participant discounted to the Participant's Commencement Date. When a Surviving Spouse of a deceased Participant elects to receive a lump sum payment, the amount of the lump sum payment shall be determined by the Committee in a manner similar to that used for a Participant, except that the lump sum payment shall only reflect the benefit which would be payable to a Surviving Spouse and Eligible Children. All lump sum equivalents hereunder shall be determined by reference to the factor described in Section 4.5(b). (b) The factor described in this Section 4.5(b) is the actuarial equivalence factor of the Pension Benefit Guaranty Corporation applicable to plans terminating on the Commencement Date." 7. The Plan, as amended by this Amendment, remains in full force and effect. IN WITNESS WHEREOF, NME has signed this Amendment on the date set forth above. NATIONAL MEDICAL ENTERPRISES, INC. By: /s/ SCOTT M. BROWN -------------------------------- Its: Senior Vice President ------------------------------- -5- EX-10.TT 13 AMEND. TO NME ERP EXHIBIT 10(tt) Amendment to National Medical Enterprises, Inc. Supplemental Executive Retirement Plan Dated November 1, 1984 As Amended May 21, 1986 As Amended April 25, 1994 THIS AMENDMENT TO NATIONAL MEDICAL ENTERPRISES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (the "Amendment") is made, entered into and effective as of the 25th day of July, 1994. R E C I T A L S : - - - - - - - - WHEREAS, National Medical Enterprises, Inc., a Nevada corporation ("NME") adopted the Supplemental Executive Retirement Plan (the "Plan"), pursuant to a document dated November 1, 1984 and amended May 21, 1986 and April 25, 1994; WHEREAS, Section 5.4 of the Plan provides that NME reserves the right, in its sole discretion, to amend the Plan; and WHEREAS, NME desires to amend the Plan to amend the definition of "Change of Control" contained in the Plan and to waive certain "Conditions Precedent" under certain circumstances; NOW, THEREFORE, intending to be legally bound, NME hereby agrees to amend the Plan as follows: A M E N D M E N T : - - - - - - - - - 1. Section 2.5 of the Plan is hereby amended by deleting such Section in its entirety and replacing it with the following: "2.5 Change of Control. "Change of Control" of NME shall be deemed ----------------- to have occurred if either (a) any person as such term is used in Sections 13(c) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, is or becomes the beneficial owner directly or indirectly of securities of NME representing 20% or more of the combined voting power of NME's then outstanding securities or (b) individuals who, as of April 1, 1994, constitute the Board of Directors of NME (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that (i) any individual who becomes a director of NME subsequent to April 1, 1994, whose election, or nomination for election by the NME's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board, and (ii) no individual who was elected initially (after April 1, 1994) as a director as a result of an actual or threatened election contest, as such terms are used in Rule 14a- 11 of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, or any other actual or threatened solicitations of proxies or consents by or on behalf of any person other than the Incumbent Board shall be deemed to have been a member of the Incumbent Board." -1- 2. Section 3.8 of the Plan is hereby amended by adding the following as new subparagraph 3.8(c): "c. For a Participant who (a) is an active, full-time employee, (b) has not yet begun to receive benefit payments under the Plan and (c) is involuntarily terminated from employment without cause or voluntarily terminates employment pursuant to Section 3.8(c) above, within two years following a Change of Control of NME while this Plan remains in effect, the provisions of Section 5.7(ii) below shall not apply." 3. The Plan, as amended by this Amendment, remains in full force and effect. IN WITNESS WHEREOF, NME has signed this Amendment on the date set forth above. NATIONAL MEDICAL ENTERPRISES, INC. By: /s/ SCOTT M. BROWN ------------------------------- Its: Senior Vice President ------------------------------ -2- EX-10.ZZ 14 1ST AMEND. TO DEF. COMP. EXHIBIT 10(zz) FIRST AMENDMENT TO DEFERRED COMPENSATION PLAN I, Scott M. Brown, the Secretary of National Medical Enterprises, Inc. ("NME"), hereby certify that on December 1, 1993 and April 13, 1994, the Compensation and Stock Option Committee of the Board of Directors of NME approved the following amendments to the Deferred Compensation Plan (the "Plan"): 1. The second paragraph of Section 5 of the Plan is hereby amended by deleting such paragraph in its entirety and replacing it with the following: "In the event of the death of the Participant, compensation that has been deferred together with the accumulated interest will be distributed to the beneficiary named by the Participant or to the estate of the Participant in 120 approximateley equal monthly payments unless the Committee, in its sole discretion, determines upon written request of the beneficiary that payment shall be made voer a shorter period or in a lump sum. Payment shall commence within 30 days after the death of the Participant, with interest continuing to accrue pursuant to Section 3(b) hereof until the full amount of deferred compensation is paid." 2. The following language shall be added as new Paragraph 8 to the Plan: "8. Lump Sum Distributions. At any time either (a) prior to an event ---------------------- causing distribution in accordance with Paragraph 4 hereto or (b) after a Participant or his or her beneficiary is receiving distributions in installments in accordance with Paragraph 5 hereof and has not received the entire balance of a Participant's deferred compensation account, a Participant in the Plan or his or her beneficiary may elect to receive a lump sum payment, in an amount determined below, sixty (60) days after giving notice to the Committee of the Participant's or beneficiary's desire to receive such lump sum benefit. The date of the notice shall be the "Commencement Date." The lump sum payment shall be equal to (a) the Participant's remaining deferred compensation account under the Plan or (b) a beneficiary's share of the Participant's remaining deferred compensation account under the Plan, whichever is applicable, reduced by a penalty equal to ten percent (10%) of such account which shall be forfeited to the Company. However, the penalty shall not apply if the Committee determines, based on the advice of counsel or a final determination by the Internal Revenue Service or any court of competent jurisdiction, that by reason of the foregoing elective provisions of this Paragraph 8 any Participant or beneficiary has recognized or will recognize gross income for federal income tax purposes under this Plan in advance of payment to him or her of Plan benefits. The Company shall notify all Participants or beneficiaries of any such determination. Wherever any such determination is made, the Company shall refund all penalties which were imposed hereunder on account of making lump sum payments at any time during or after the first year to which such determination applies (i.e., the first year when gross income is ---- recognized for federal income tax purposes). Interest shall be paid on any such refunds based on an interest factor determined under Paragraph 3(b) hereof. The Committee may also reduce or eliminate the penalty if it determines that this action will not cause any Participant or beneficiary to recognize gross income for federal income tax purposes under this Plan in advance of payment to him or her of Plan benefits. Notwithstanding any other provision of this Plan, a penalty shall not apply if a retired Participant receives a lump sum distribution pursuant to Paragraph 5 hereof. Any Participant who receives a lump-sum distribution in accordance with this Paragraph 8 shall be prohibited from making any deferral of compensation under this Plan for a period of one-year commencing on the date on which the lump-sum distribution is made to such Participant." IN WITNESS WHEREOF, I have caused this certificate to be executed as of August 15, 1994. National Medical Enterprises, Inc. By: /s/ SCOTT M. BROWN ------------------------------- Name: Scott M. Brown Title: Secretary EX-10.QQ 15 1ST AMEND. TO SUPP. SHER EXHIBIT 10(qq) FIRST AMENDMENT TO SUPPLEMENTAL SHERT I, Scott M. Brown, the Secretary of National Medical Enterprises, Inc. ("NME"), hereby certify that on December 1, 1993, the Compensation and Stock Option Committee of the Board of Directors of NME approved the following amendment to the Supplemental Specialty Hospital Employee Retirement Trust (the "Supplemental SHERT"): The unvested balances in the Supplemental SHERT as of December 31, 1992 shall be vested effective as of December 31, 1992. IN WITNESS WHEREOF, I have caused this certificate to be executed as of August 15, 1994. National Medical Enterprises, Inc. By: /s/ SCOTT M. BROWN ------------------------------- Name: Scott M. Brown Title: Secretary EX-10.OO 16 B.O.D. RETIRE PLAN EXHIBIT 10(oo) Amendment to National Medical Enterprises, Inc. Board of Directors Retirement Plan Dated January 1, 1985 As Amended August 18, 1993 THIS AMENDMENT TO NATIONAL MEDICAL ENTERPRISES, INC. BOARD OF DIRECTORS RETIREMENT PLAN (the "Amendment") is made, entered into and effective as of the 25th day of April, 1994. R E C I T A L S : - - - - - - - - WHEREAS, National Medical Enterprises, Inc., a Nevada corporation ("NME") adopted the Board of Directors Retirement Plan (the "Plan"), pursuant to a document dated January 1, 1985 and amended August 18, 1993; WHEREAS, Section 5.4 of the Plan provides that NME reserves the right, in its sole discretion, to amend the Plan; and WHEREAS, NME desires to amend the Plan to allow a Director (as defined in the Plan) who is a participant in the NME Supplemental Executive Retirement Plan to qualify as a Participant (as defined in the Plan) under the Plan; NOW, THEREFORE, intending to be legally bound, NME hereby agrees to amend the Plan as follows: A M E N D M E N T : - - - - - - - - - 1. Section 2.10 of the Plan is hereby amended by deleting it in its entirety and replacing it with the following: "2.10 Participant. "Participant" shall include any Director who, with the ----------- permission of the Committee, enters into an Agreement to participate in this Plan." 2. Section 2.16 of the Plan is hereby amended by deleting it in its entirety and replacing it with the following: "2.16 Year of Service. "Year of Service" means each complete year of --------------- Service as a Director of NME, but shall specifically exclude any year of Service included in the definition of "Service" under Section 2.13 of the National Medical Enterprises, Inc. Supplemental Executive Retirement Plan, dated November 1, 1984, as amended. Years of Service shall be deemed to have begun as of the first day of the calendar month of Service and to have ceased on the last day of the calendar month of Service." 3. The Plan, as amended by this Amendment, remains in full force and effect. IN WITNESS WHEREOF, NME has signed this Amendment as of the date set forth above. NATIONAL MEDICAL ENTERPRISES, INC. BY: /s/ SCOTT M. BROWN ------------------------------- ITS: Senior Vice President ------------------------------ EX-13 17 ANNUAL REPORT NATIONAL MEDICAL ENTERPRISES, INC [ARTWORK] 1994 ANNUAL REPORT National Medical Enterprises, Inc. National Medical Enterprises, Inc. (NME), headquartered in Santa Monica, Calif., owns and operates general hospitals and related health care businesses in the United States and overseas. NME was founded in 1969 as a publicly held hospital management company. The company employs approximately 35,000 people. The Year's Highlights . Implemented companywide ethics program . Changed top executive management . Restructured board of directors . Settled federal government investigations . Resolved major litigation . Refocused on core general hospital business . Divested nearly all psychiatric and physical rehabilitation hospitals . Increased general hospital operating margins . Reduced total debt by $341 million; lowered total debt-to-equity from .67 to .63 . Simplified corporate structure and reduced overhead . Increased market value 73 percent, from $1.57 billion to $2.72 billion in fiscal 1994 Cover illustration by Steve Dininno 2 NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES' To Our Shareholders: Any way you look at it, it was an unforgettable year at National Medical Enterprises. It was a period of painful adjustments and acknowledgments, hard work and gratifying successes. Ultimately, we believe it will be remembered as a year of transition for NME. We have finally cleared up the most significant of the legal difficulties that have been casting a shadow over our company for the past two years. As we said in last year's annual report, resolving these problems was our top priority. We are pleased to have met our goal. Most importantly, soon after the fiscal year ended, we signed a final settlement agreement with the federal government that ended its investigations of NME and subsidiaries. Now we can fully dedicate our energies and resources to our profitable general hospital business and on ways to enhance shareholder value. NME is in good financial condition to support aggressive growth as our nation's health care system changes. In fiscal 1994 NME's fully diluted earnings from continuing operations were $1.23 per share, compared with $1.49 per share in fiscal 1993. However, after excluding the impact of restructuring charges and gains on the disposals of assets, NME's fully diluted earnings from continuing operations would have been $1.19 per share in both years. Despite the heavy costs the company has incurred during the past year, NME's balance sheet and cash flow remain strong. Our core business of general hospitals continues to perform well. Even though our revenue base declined due to the sale of noncore assets, earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations before restructuring charges were $553 million, only $10 million below last year. Let's review major events at NME since we assumed management responsibilities in June 1993. We have accomplished a lot in that short time. First, we reduced our board from 18 members to 12, most of whom are outside directors. We are the only two board members employed by NME. A majority of the board's executive committee members are also outside directors. Following the annual meeting of shareholders in September, the number of directors will be further reduced to 10. We have a new general counsel, a new chief financial officer and a new executive in charge of public affairs. These appointments complete changes to NME's top tier of executives, the first major management transition in our company's 25-year history. NME's legal problems and resulting public relations woes got worse before they got better in fiscal 1994. In August 1993 federal investigators searched a number of our facilities and offices. We cooperated fully with them in their widely publicized examination of our operations. We improved our outlook significantly in September when we agreed to settle litigation over disputed psychiatric claims with six insurers for $125 million. In December we agreed to settle with another 13 insurers for $90 million. This resolved all major insurance litigation and allowed us to get back to business as usual with these companies. We also have resolved approximately two-thirds of the psychiatric patient claims that faced us involving fraud and conspiracy allegations. Two class-action lawsuits filed by shareholders are now in voluntary mediation. Effective in December, our board of directors suspended the payment of dividends on NME's common stock. This helped us conserve cash otherwise needed to solve our legal problems. Executing a final agreement with the federal 3 government on June 29 resolved our company's most pressing problem. NME agreed to pay $363 million to conclude the federal investigations, which had been focused principally on our psychiatric subsidiaries. Most importantly, the agreement allows us to continue to participate in Medicare and other federally funded health care programs essential to our operations. We also have agreed in principle to pay $16 million to settle potential claims with all the states in which our former psychiatric subsidiary operated. Having built up cash reserves during the year, we were prepared to pay these federal and state settlements. To ensure our ongoing integrity, NME has implemented what we believe is the most comprehensive ethics program in the health care industry. Nearly all of our 35,000 employees, including every one of our executive-level managers, have participated in our ethics awareness and training workshops. The program makes employees more alert to potential ethical dilemmas and gives them the tools to make the right decisions. And, because we know that our written code of conduct cannot anticipate every ethical issue in our complex business, we have established a toll-free ethics hotline that employees can call with questions and concerns. Our compliance program is directed by a management-level committee, chaired by Michael H. Focht Sr., president and chief operating officer, and supervised by the ethics and quality assurance committee of the board. We have made it very clear that NME will not tolerate ethical misconduct. Much of our fiscal 1994 efforts have gone into refocusing on the company's core general hospital business. We now operate 33 domestic and 13 international general hospitals. We have divested or are in the process of divesting almost all of our rehabilitation and psychiatric hospitals and have reduced our involvement in other lines of business. In fiscal 1994 we completed a series of transactions that simplified NME's relationship with a former subsidiary, The Hillhaven Corporation, a Tacoma, Wash.-based owner and operator of nursing centers. NME received $135 million in cash before taxes from these transactions and reduced contingent liabilities during fiscal 1994 by approximately $420 million. Although NME is no longer a lender or lessor to Hillhaven, we now own approximately 33 percent of Hillhaven's common shares. In January we sold 28 inpatient physical rehabilitation hospitals and 45 outpatient clinics to HEALTHSOUTH Rehabilitation Corporation for approximately $350 million. We have kept six physical rehabilitation hospitals located on or near NME general hospital campuses. In May NME signed an agreement with DLJ Merchant Banking Partners, L.P. and affiliated investment partnerships through which they will acquire a controlling interest in Total Renal Care, Inc. (formerly Medical Ambulatory Care). Total Renal Care provides dialysis services at 37 outpatient facilities and on an inpatient basis at 28 hospitals. NME received a $76 million dividend from the company in August 1994 and retains a 25 percent interest in it. We have also sold, closed or are in the process of selling or closing nearly all of our psychiatric hospitals. As of August 12, 1994, we had sold 27 psychiatric facilities to Charter Medical Corporation and 25 facilities to other buyers. Charter has agreed to buy 20 additional facilities; those sales are pending. We also intend to sell 11 more facilities to other buyers. We are retaining four 4 psychiatric hospitals located near NME general hospitals. As we moved to concentrate our business on our general hospitals and hospital campuses, we also moved quickly to bring our corporate staffing levels in line with the new NME. In July with the help of McKinsey & Co., a leading management consulting firm, we completed a comprehensive analysis of our corporate, regional and divisional operations, which eliminated about 240 positions. This reorganization will result in a leaner, more efficient central operation and will reduce annual overhead by approximately $32 million. Clearly, we've had an extraordinary number of problems to confront and adjustments to make this year. We even contended with a major earthquake. The quake didn't affect service at or damage our Southern California hospitals, but it did result in extensive cosmetic damage at our headquarters. All this has been played out against a backdrop of enormous, accelerating change in the health care business. A wave of mergers and takeovers has transformed our industry, while legislators continue to debate how to provide health care to more people and how to pay for it. The changes we're making today at NME will serve us well in the new age of health care. Already, we are (Stock price in dollars per share) - --------------------------------------------------------------------------------
Date Description Stock Price 2/28/92 Earnings outlook revised downward. $14.625 4/23/92 $250 million charge to divest certain $14.500 psych hospitals announced. 6/3/92 Psych settlement reached with Texas $14.500 attorney general. 7/30/92 Eight insurers sue NME. $16.250 9/14/92 Two insurers sue NME. $13.500 11/11/92 Ethics program implemented. $13.000 1/8/93 Negative Wall Street Journal article on $ 9.875 NME published. 4/27/93 Stock at 6 1/2 , the lowest level in more $ 6.500 than 10 years, on 4/27/93. 4/28/93 Barbakow named CEO; Focht COO on 4/28/93. $ 7.500 6/23/93 Restructuring of Hillhaven relationship announced. $ 9.500 8/27/93 Trading resumed after Department of $ 7.750 Justice searches. 9/29/93 Settlement reached with three insurers. $10.000 10/28/93 Dividend suspended. $11.250 11/16/93 59 psych patient cases settled. $11.500 12/3/93 Rehab hospitals' sale announced. $12.500 12/13/93 Settlement reached with 13 insurers. $13.625 1/11/94 Discontinuance of psych business announced. $14.625 3/8/94 23 psych patient cases settled. $16.500 3/30/94 Psych hospitals' sale announced. $16.500 4/5/94 Corporate downsizing announced. $16.125 4/14/94 Agreement in principle with federal government $16.875 announced. 4/19/94 Dialysis sale announced. $15.375 6/28/94 Government settlement finalized. $15.875 6/30/94 27 psych hospitals sold. $15.625 7/11/94 Corporate downsizing implemented. $16.625 8/5/94 Stock closed at 18 1/4 on 8/5/94. $18.250
- -------------------------------------------------------------------------------- NATIONAL MEDICAL ENTERPRISES' STOCK PRICE: In recent years the company's stock price has reflected its problemsbut has recovered during the past 15 months as those problems were resolved. NME's stock price increased from 9-1/2 to 16-3/8 in fiscal 1994. 5 pursuing innovative ways to work with the increasingly demanding, powerful and large groups that buy medical care; we are strengthening our base in the medical community; and we are actively looking for strategic acquisitions. As always, we are continually improving our facilities and our patient service, as well as finding new ways to reduce costs. We see opportunities to expand internationally. Our existing successful operations overseas, our resources and our hospital management expertise put us in a good position to meet growing foreign demand for quality health care. The investment community has reacted positively to our efforts to refocus our company. Although we've made substantial progress, we still have much to do. We must satisfy rapidly changing markets. We must be prepared to adjust to health care reform at the national and state levels. We must look for ways to enlarge our company -- through mergers or acquisitions, through the purchase or lease of single facilities, or through strengthening the provider networks within our key geographic markets. Even as we return to our general hospital roots, we realize that running hospitals is a much different business than it used to be. The economics of health care has changed the way we operate, while new technology has transformed the way we care for patients. Although no one yet knows how the rules will change under health care reform, we can be sure that providing the best possible care to patients and vigilantly controlling expenses will always serve us well. We will build our business on these tenets and on a strengthened ethical foundation. We thank you, our shareholders, for your support during this critical period. We also thank NME's employees, their families and our board for their extra efforts, which have made our company's many accomplishments possible this year. Sincerely, Jeffrey C. Barbakow Chairman and Chief Executive Officer Michael H. Focht Sr. President and Chief Operating Officer August 12, 1994 6 Operations Review In fiscal 1994 we refocused on the profitable core business of National Medical Enterprises -- general hospitals -- and on our hospital campuses. Today NME operates 33 general hospitals in six U.S. states and 13 hospitals in four foreign countries. We spun off most of our long-term-care operations in 1990, sold most of our physical rehabilitation hospitals in fiscal 1994, and are in the process of divesting our psychiatric facilities. To maintain strategic service networks in some key metropolitan areas, we have retained seven long-term-care facilities, six rehabilitation hospitals and four psychiatric hospitals on or near our general hospital campuses. GENERAL HOSPITALS Amid major changes in the health care industry, our general hospitals continue to perform well both in the fee-for-service arena and in the managed care environment. Admission and utilization rates at our hospitals declined slightly as more patients utilize managed care. In fiscal 1994 we reduced the impact of these declines through outstanding expense control. For example, NME works closely with hospital medical staffs to more effectively manage the use of ancillary services and supplies. Another important cost-control component is restructuring the staffing and functions of hospital personnel. A new multidisciplinary approach to patient care, in place at five NME hospitals, allows staff to provide more services on the patient floors instead of in ancillary departments. Through national purchasing, NME negotiates money-saving contracts for hospital supplies. For example, we save an average of 30 percent to 40 percent off the list price on pharmaceuticals and IV therapy products. Cost control is not the only way to improve our performance. At NME, we've known for years that the market for traditional fee-for-service medicine will continue to shrink; managed care is the future of health care. In many areas, the future is already here. Managed care -- in different forms in different marketplaces -- is the basis of the development plans of every one of our hospitals. Our goal is to be a key player in an integrated health care delivery system. Toward that end, we are ensuring that NME hospitals can provide effective capitated services. Under capitation, providers contract with a health plan to offer comprehensive services to plan members in return for a flat monthly per-member fee. Consequently, doctors and hospitals share the financial risks as well as the rewards of capitation. This gives physicians more incentive than ever to treat patients cost-efficiently and to form physician/hospital alliances to better manage financial risks. Providing physicians with access to excellent hospital facilities and staff always has been central to NME's business philosophy. Today we also provide specialized management services to help them navigate the increasing complexities of the health care business under capitation and other forms of managed care. Of course, cost-efficiency and physician support are only means to an end: Outstanding patient care and patient satisfaction is the mission of our business. To measure satisfaction and further improve our service, this fiscal year we began a centralized, standardized survey of every patient who stays overnight or has outpatient surgery at NME hospitals. Results have been positive and indicate that most patients are very happy with the care at our hospitals. 7 Additionally, we continue efforts to measure our patients' clinical outcomes from medical records. Ultimately, we believe patient satisfaction and outcome study data will provide the kind of information patients and payors look for when they select hospitals and physicians for their provider networks. Our acquisition goals, too, focus on expanding NME's role in the integrated health care system. In May 1994 NME signed an operating lease for the 138-bed Doctors Hospital of Jefferson near New Orleans that was well-suited to these goals. NME owns four other general hospitals in the area, along with two psychiatric hospitals, two long-term-care facilities and one physical rehabilitation hospital. This move gives our company improved ability to serve a greater portion of the New Orleans metropolitan area and to develop a stronger provider network to contract with health plans. In early fiscal 1995 NME sold Doctors Hospital of Montclair and Ontario Community Hospital, two smaller Southern California community hospitals that do not fit in our future of integrated health care. National Health Plans, an NME subsidiary in Modesto, Calif., the location of NME's largest domestic hospital, does complement our strategic plans. This subsidiary has grown dramatically in its decade of involvement in managed care. Its preferred provider organization (PPO) includes more than 1,500 providers and serves more than 20,000 members; its health maintenance organization (HMO) has more than 40,000 members; and its insurance products and services firm serves approximately 23,000 policyholders. We are expanding National Health Plans' service area in California and elsewhere and are offering new programs and products. Systemwide, we are careful to maintain, upgrade and remodel our hospitals. Most of our capital expenditures go toward these ends, rather than toward increasing the number of licensed beds. An important element of modernization, which also reflects the influence of managed care, is the expansion of outpatient services at many of our hospitals. In addition, NME has six medical office buildings under construction to meet physicians' demands for space near NME hospitals and to serve patients more conveniently. We currently operate 28 medical office buildings domestically, most adjacent to our hospitals. Where there is a need and where market conditions warrant, we continue to introduce new medical equipment and procedures that promise to improve patient care and assist our physicians. For example, two of our more-sophisticated hospitals recently acquired gamma knives to treat some patients with certain brain tumors and vascular malformations. With this tool, which is not a knife but a device that focuses multiple beams of gamma radiation on a precise spot, surgeons can perform brain surgery in a single short session without opening a patient's skull. Gamma knives can reduce the attendant risks of neurosurgery and minimize hospitalization and recovery time. Only 16 other U.S. hospitals have this equipment. INTERNATIONAL HOSPITALS NME is well-positioned to take full advantage of a world of health care opportunities. In Asia, we are helping to meet the rapidly growing middle class's demand for quality care. In Australia, NME is modernizing hospitals and foresees solid growth in the private health care industry. In Europe, where some 8 countries are beginning to shift toward the private sector as an alternative to overburdened public health systems, we are pursuing selective expansion. Our Singapore operations, which include two hospitals plus lab and radiology services, are thriving. They provide a sturdy base for continued development in Southeast Asia. One of the region's largest private tertiary hospitals, 505-bed Mount Elizabeth Hospital in Singapore draws 30 percent of its patients from outside the country and has a reputation as a regional center of medical excellence. Mount Elizabeth has established medical affiliations with China, Indonesia, Myanmar and neighboring countries. Subang Jaya Medical Centre, our successful joint venture in Malaysia, will expand to 375 beds when it opens a 150-bed inpatient tower in November. In June 1996 NME will open and manage another Asian venture -- the 554-bed Bumrungrad Hospital in Bangkok. We own 40 percent of the project, which will be Thailand's largest private hospital. We plan further expansion in Malaysia and Thailand. Other countries we're examining include Indonesia, India and China. NME owns 52 percent of Australian Medical Enterprises Limited (AME), which has been expanding and upgrading its nine hospitals and improving its successful pathology business. The company issued new shares in June 1994 to raise funds for expansion. Additionally, AME is building the 202-bed St. George Medical Complex adjacent to one of metropolitan Sydney's leading public teaching hospitals. Scheduled to open in late 1995, it will be one of Australia's largest private hospitals. NME has just begun to operate private hospitals in Europe. In June 1994 we assumed full ownership of Centro Medico Teknon, a 184-bed, full-service hospital in Barcelona, Spain. We previously owned 50 percent of the hospital, which opened in February 1994. Internationally and domestically, NME's 35,000 employees continue to work closely with physicians to find new ways to better serve our patients and to adapt successfully to the world's changing health care delivery systems. The result should be high-quality health care and satisfied patients. 9 Selected Financial Data and Ratios Continuing Operations
Years Ended May 31, (dollar amounts, except per-share ------------------------------------------------------------- amounts, are expressed in millions) 1994 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------- Operating Results Net operating revenues $2,967 $3,191 $2,941 $2,610 $2,917 Total costs and expenses(1) (2,723) (2,915) (2,642) (2,394) (2,746) Investment earnings 28 21 29 29 29 Gain on sale of subsidiary's common stock 0 29 0 0 0 Net gain on disposals of facilities and long-term investments 88 93 31 0 0 ------------------------------------------------------------ Income from continuing operations 360 419 359 245 200 Taxes on income (144) (155) (141) (100) (77) ------------------------------------------------------------ Income from continuing operations 216 264 218 145 123 ------------------------------------------------------------ Earnings per share from continuing operations: Primary 1.29 1.59 1.27 0.91 0.78 Fully diluted 1.23 1.49 1.19 0.87 0.76 Cash dividends per common share 0.12 0.48 0.46 0.40 0.36 - ----------------------------------------------------------------------------------------------------- Balance Sheet Data Total assets 3,697 4,173 4,236 4,060 3,807 Long-term debt 223 892 1,066 1,140 1,361 Total debt 834 1,177 1,305 1,243 1,638 Stockholders' equity 1,320 1,752 1,674 1,762 1,257 Book value per common share 7.95 10.56 10.03 10.08 7.97 - ----------------------------------------------------------------------------------------------------- Ratios Pretax margin 12.1% 13.1% 12.2% 9.4% 6.9% ------------------------------------------------------------ Current ratio 0.88/1 1.17/1 1.26/1 1.58/1 1.36/1 ------------------------------------------------------------ Total debt/equity ratio 0.63/1 0.67/1 0.78/1 0.71/1 1.30/1 ------------------------------------------------------------ Return on assets, after tax 5.5% 6.2% 5.3% 3.7% 3.2% ------------------------------------------------------------ Return on equity, after tax 13.8% 15.2% 12.2% 10.4% 9.9% ------------------------------------------------------------ Interest expense coverage 6.1 6.6 5.0 3.0 2.5 ------------------------------------------------------------ - -----------------------------------------------------------------------------------------------------
(1) Total costs and expenses for 1994, 1993 and 1992 include unusual restructuring charges of $77 million, $52 million and $18 million respectively, which are explained elsewhere in this report. 10 Management's Discussion and Analysis of Financial Condition and Results of Operations (All references to years are to fiscal years, and all note references are to the accompanying Notes to Consolidated Financial Statements.) Liquidity and Capital Resources A number of events occurred in 1994 that had a significant impact on the Company's financial statements, liquidity and results of operations. These events included the settlement of insurance company litigation, settlement of the government investigations, adoption of a formal plan to discontinue the psychiatric hospital business, the sale of most of the Company's rehabilitation hospitals, and a corporate restructuring to significantly reduce overhead. In November 1993 and in February 1994 the Company executed settlement agreements covering the three lawsuits previously filed by several insurance companies. Under the settlements, the Company paid an aggregate of $214.9 million as complete and final resolution of these disputed claims alleging that certain psychiatric hospitals engaged in fraudulent practices. In June 1994 the Company agreed to settle for $362.7 million all investigations by federal government agencies and in May 1994 reached agreements in principle with 27 states and the District of Columbia to settle all investigations by them for $16.3 million. (See Note 7B). In April 1994 the Company announced and initiated a formal plan to reduce corporate and division staffing levels, to review the resulting office space needs of all corporate operations, and to otherwise lower the Company's corporate overhead. As a result, the Company announced in July 1994 that 240 staff positions were being eliminated and that it had decided to sell its corporate headquarters building and to lease less office space in that building or at an alternative site. A reserve of $77 million was recorded in the quarter ended May 31, 1994, to cover the costs of a write-down of the building, employee severance benefits and other expenses directly related to the overhead reduction plan. The Company expects its annual overhead savings from implementation of this plan to approximate $32 million and that the sale of its corporate headquarters building, which may take two years to consummate, should generate after-tax proceeds in excess of $40 million. The Company's cash and cash equivalents at May 31, 1994, were $313 million, an increase of $172 million over May 31, 1993. The ratio of total debt to equity was 0.63:1, compared with 0.67:1 at May 31, 1993, and 0.78:1 at May 31, 1992. Working capital (deficit) at May 31, 1994, was ($196) million, compared with $155 million at May 31, 1993, and $223 million at May 31, 1992. The principal reasons for the decline in working capital in 1994 were 1) a $424 million increase in current portion of long-term debt, most of which matures in April 1995, and 2) a $393 million increase in current reserves related to discontinued operations and restructuring charges. During 1994 net cash provided by operating activities was $466 million before pretax expenditures of $319 million related to the discontinued psychiatric hospital business and for restructuring charges. (See Notes 2 and 16.) Corresponding figures for 1993 were $494 million and $96 million, respectively. In 1992 they were $583 million and $24 million, respectively. Proceeds from the sales of facilities, investments and other assets were $569 million during 1994, compared with $70 million in 1993 and $109 million in 1992. Sales in 1994 included 23 long-term-care facilities previously leased to The Hillhaven Corporation, 29 inpatient rehabilitation hospitals and 45 related satellite outpatient clinics, 15 psychiatric facilities and one general hospital. In June 1994 the Company sold 31 more psychiatric facilities for $137 million in cash. The Company has agreed to sell 20 more psychiatric facilities for $71 million in cash. (See Note 2.) In August 1994 the Company received a $75.5 million dividend from a wholly owned subsidiary in connection with a debt/equity offering in which the Company's interest in the subsidiary will be reduced to approximately 25%. (See Notes 13 and 15.) Cash payments for property, plant and equipment were $185 million in 1994, compared with $319 million in 1993 and $421 million in 1992. The estimated cost to complete major approved construction projects at wholly owned subsidiaries is approximately $120 million, all of which is related to expansion, improvement and equipping of existing domestic hospital facilities, and the significant portion of which will be spent over the next three years. The Company expects to finance all such expenditures with either internally generated or borrowed funds. The Company intends to continue to invest domestically and internationally in existing and new facilities within its existing health care business. During 1994 the Company had a net reduction in current and long-term debt of approximately $337 million. In September 1993 the Company repaid $50 million of its then-outstanding bank borrowings under its unsecured revolving credit and term loan agreement and refinanced the $246.2 million balance of such loans with new term loans maturing in April 1995 and requiring quarterly installments aggregating $56.4 million through February 1995. These loans were repaid in April 1994 with $222 million in loans under a new $464.7 million revolving credit and letter of credit agreement with four banks. Indebtedness under the new agreement is secured by a pledge of all the outstanding capital stock of a wholly owned subsidiary of the Company, which also guarantees the loans. The new agreement also provides for $242.7 million in letters of credit to support certain of the 11 Management's Discussion and Analysis of Financial Condition and Results of Operations Company's obligations relating to commercial paper and remarketable bond programs. All of the outstanding revolving loans under the new agreement mature on April 12, 1995, and there are no earlier installments of principal due or reductions of availability. The Company has no unused revolving credit availability under the new agreement and has no other unused committed credit facilities. The Company is having discussions with several banks regarding the establishment of new lines of credit that could be utilized to repay the current portion of long-term debt, most of which matures in April 1995, and believes that, based on the progress to date of these discussions, such new lines of credit will be available if needed. In June 1993 Moody's Investors Service, Inc. lowered its rating on the Company's senior debt from Baa1 to Baa3 and in August 1993 placed the Baa3 rating under review for possible further downgrading. In September 1993 Standard and Poor's Corporation lowered its rating on the Company's senior debt from BBB- to BB. In April 1994 the BB rating was upgraded to BB+. The Company suspended the payment of quarterly dividends in October 1993. Management believes that patient volumes, cash flows and operating results at the Company's principal health care businesses have been adversely affected by the legal proceedings and investigations described elsewhere in this annual report. The most significant of these legal proceedings and investigations have now been resolved. The Company has recorded reserves for the remaining legal proceedings not yet settled as of May 31, 1994, and an estimate of the legal fees related to these matters to be incurred subsequent to May 31, 1994, totaling approximately $81 million, of which $69 million is expected to be paid within one year. These reserves represent management's estimate of the net costs of the ultimate disposition of these matters. However, there can be no assurance that the ultimate liability will not exceed such estimates. The Company's liquidity, including cash proceeds from operating activities, anticipated disposals of assets and the realization of current deferred tax assets ($372 million), is believed to be adequate to finance planned capital expenditures and known operating needs, including the settlements of the federal and state investigations and other unusual legal proceedings referred to herein. Results of Operations The most significant transactions affecting the results of continuing operations were the sale of most of the Company's rehabilitation hospitals and related outpatient clinics in 1994 (see Note 13) and other unusual pretax items as shown below. Table I Unusual Items -- Continuing Operations:
(in millions) 1994 1993 1992 --------------------------------------------------------------------- Gains on sales of facilities and long-term investments (see Note 13) 88 93 31 Gain on sale of subsidiary's stock (see Note 15) -- 29 -- Restructuring charges (see Note 16) $(77) $(52) $(18) ------------------ Net unusual pretax items (after-tax $0.04 fully diluted per share in 1994, $0.30 in 1993and $0.04 in 1992) $11 $70 $ 13 ==================
In November 1993 the Company decided to discontinue its psychiatric hospital business and adopted a plan to dispose of its psychiatric hospitals and substance abuse recovery facilities within one year. In 1994 the Company had a loss from the psychiatric operations of $701 million net of income tax benefits of $412 million. The loss includes the costs of settling federal and state investigations of the psychiatric business, provisions for losses during the phase-out period, including the costs of settling unusual psychiatric litigation, and the write-down of assets to net realizable value. Losses from discontinued operations in 1993 and 1992 were $104 million and $85 million, net of income tax benefits, respectively. Results for 1993 and 1992 have been restated to reflect the operating results for the discontinued business separately from continuing operations. 12 Income from continuing operations before income taxes and cumulative effect of a change in accounting was $360 million in 1994, compared with $419 million and $359 million in 1993 and 1992, respectively. Excluding the unusual items as shown in Table I, income from continuing operations before income taxes and cumulative effect of a change in accounting would have been $349 million in both 1994 and 1993 and $346 million in 1992. Net operating revenues and operating profits from continuing operations before interest are shown in Table II. The revenues and expenses of the sold rehabilitation hospitals and related outpatient clinics are included in the Company's results of operations through December 1993. Net operating revenues of the sold facilities were $266 million in 1994 and $470 million in 1993. Pretax income of the sold facilities, before general corporate overhead costs, was $22 million in 1994 and $55 million in 1993. Table II Operating Revenues and Profits:
Increase (Decrease) 1993 to 1994 ------------------- (in millions) 1994 1993 1992 Amount Percent ---------------------------------------------------------------------------- Net Operating Revenues: Hospitals $2,807 $2,979 $2,757 $(172) (6)% Other Businesses 160 212 184 (52) (25)% ---------------------------------------------- Total $2,967 $3,191 $2,941 $(224) (7)% ==============================================
Operating Profits Before Interest and Net Unusual Items (Table I): Hospitals $358 $359 $369 $(1) -- Other Businesses 42 54 44 (12) (22)% ---------------------------------------------- Total $400 $413 $413 $(13) (3)% ==============================================
The hospital line of business includes primarily the operations of the Company's domestic and international general hospitals, its rehabilitation hospitals and the management services business. Net operating revenues decreased in 1994 due to the sale of the rehabilitation facilities. Operating profits were virtually unchanged from the prior year. The hospitals' operating profit margin was 12.8% in 1994, compared with 12.1% in 1993 and 13.4% in 1992. The operating profit margin increase from 1993 to 1994 was primarily due to more effective cost-control programs and the sale of the rehabilitation hospitals, which, as a whole, had lower margins than the general hospitals. Selected statistics for domestic general hospital operations are shown below: Table III
Increase (Decrease) 1993 to 1994 1993 1992 1994 ---------------------------------------------------------------------------------- General Hospitals: Facilities owned or operated 35 35 35 -- Year-end licensed beds 6,873 6,818 6,559 0.8% Average licensed beds in period 6,760 6,811 6,563 (0.7)% Average occupancy 46.8% 47.8% 50.5% (1.0)%* Patient days 1,154,030 1,187,181 1,211,187 (2.8)% Net inpatient revenues (in millions) $1,568 $1,529 $1,445 2.6% Net inpatient revenue per patient day $1,359 $1,288 $1,193 5.5% Admissions 207,868 210,669 208,307 (1.3)% Average length of stay (days) 5.6 5.6 5.8 -- Net outpatient revenues (in millions) $557 $535 $465 4.1% % of net patient revenues from Medicare and Medicaid 44.4% 41.4% 38.5% 3.0%*
*This % change is the difference between the 1994 and 1993 percentages shown. 13 Management's Discussion and Analysis of Financial Condition and Results of Operations Domestic General Hospitals Domestic general hospital net patient revenues were $2.1 billion in 1994 and 1993 and $1.9 billion in 1992. There continue to be increases in inpatient acuity and intensity of services and higher inpatient revenue per patient day as less intensive services shift from an inpatient to an outpatient basis or to alternative health care delivery services because of technology improvements and as cost controls by payors become greater. Allowances and discounts are expected to continue to rise because of increasing cost controls by government and group health payors and because the percentage of business from managed care programs (and related discounts) continues to grow. The Medicare program accounted for approximately 36% of the net patient revenues of the domestic general hospitals in 1994 and 34% and 32% in 1993 and 1992, respectively. Historically, rates paid under the Medicare's prospective payment system have increased, but such increases have been less than cost increases. The general hospital industry in the United States and the Company's general hospitals continue to have significant unused capacity, and thus there is substantial competition for patients. Inpatient utilization continues to be negatively affected by payor-required pre-admission authorization and by payor pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Increased competition, admissions constraints and payor pressures are expected to continue. The Company offers discounts to private payor groups, enters into capitation contracts in some service areas, upgrades facilities and equipment and offers new programs and services. The Company has been implementing various cost-control programs focused on reducing operating costs. The Company's general hospitals have been successful in increasing operating profits in a very competitive environment, due in large part to enhanced cost control and efficiencies being achieved throughout the Company. The Company, however, does not expect to be able to sustain the growth rates from its existing domestic general hospitals that were achieved in recent years. Psychiatric Hospitals Psychiatric hospitals' statistics and commentary have not been included herein because of the Company's decision on November 30, 1993, to discontinue its psychiatric hospital business by disposing of its psychiatric hospitals and substance abuse recovery facilities. The Company entered into two separate asset sale agreements, each dated as of March 1994, to sell 47 psychiatric facilities, and the Company currently has reached an agreement to sell or is negotiating with various other parties for the sale of 10 psychiatric hospitals and is seeking a buyer for one other facility. (See Note 2.) Even though the Company will continue to operate its psychiatric hospital business until the completion of the divestiture program, the expected results of operations already have been reported as discontinued operations in the Company's financial statements. The action to discontinue its psychiatric hospital business and the sale of the psychiatric and off-campus rehabilitation hospitals described above comprise significant elements of the Company's previously announced decision to focus on its core general hospital business. Other Businesses During 1994 other businesses included the operating results of the Company's dialysis centers, seven domestic long-term-care facilities, the Company's equity interest in the net income of The Hillhaven Corporation, loan and lease guarantee fees from Hillhaven, leasing of long-term-care facilities and retirement centers to Hillhaven, the Company's equity interest in the net income of Westminster Health Care Holdings PLC, and other smaller businesses. Most of the declines in net operating revenues of other businesses for the 1994 year compared with the 1993 year are due to a reduction in the Company's ownership of Westminster from approximately 90% to approximately 42% and the restructuring of its relationship with Hillhaven described below. Operating profits have been affected for the same reasons. 14 In September 1993 the Company and Hillhaven substantially completed a series of transactions that resulted in: 1) the Company selling to Hillhaven all remaining leased long-term-care nursing facilities, and no longer being a lessor to Hillhaven, but remaining a significant holder of Hillhaven common and preferred stock; 2) all indebtedness owed to the Company from Hillhaven being paid in full; and 3) reducing Hillhaven obligations guaranteed by the Company. After reflecting these transactions, including the sale of long-term-care facilities to Hillhaven, the Company's lease income for 1994 was $3 million, compared with $20 million in 1993. The Company's equity in Hillhaven's net income was $15 million in 1994, compared with $8 million in 1993. The significant increase in equity earnings is due to Hillhaven's improved overall earnings and the Company's increasing its investment in Hillhaven in 1994. (See Note 14.) In May 1994 the Company entered into an agreement pursuant to which DLJ Merchant Banking Funding, Inc. and certain of its affiliates will acquire a controlling interest in the Company's wholly owned subsidiary that operates its dialysis centers. After completion of the transaction in August 1994, the Company will own approximately 25% of the outstanding common stock of the subsidiary. Thereafter, the Company's share of the operating results of the subsidiary will be recognized using the equity method of accounting and is expected to be minimal in 1995. Net operating revenues of the subsidiary were $80.5 million in 1994, and net income was $5.7 million. (See Note 15.) Other Operating Results Depreciation and amortization expense as a percentage of net operating revenues was 5.4% in 1994, 5.0% in 1993 and 4.8% in 1992. Interest expense was 2.4% in 1994 and 1993 and 3.0% in 1992. Investment earnings were $28 million in 1994, $21 million in 1993 and $29 million in 1992, and were derived primarily from notes receivable and investments in short-term marketable securities. Effective tax rates on income from continuing operations before extraordinary charges were 40.0% in 1994, 37.0% in 1993 and 39.3% in 1992. The 1993 effective rate on pretax income from continuing operations excluding the gain on the sale of Westminster's common stock would have been 39.7%. (See Note 15.) The financial statements reflect operating and depreciation expenses based on historical cost. Except for depreciation expense, the expenses are recorded in the amounts approximating current purchasing power. Depreciation expense would be greater if based on current costs of the Company's property, plant and equipment rather than historical costs. The Company mitigates the impact of inflation on its operating costs and provision for depreciation by price increases and by continuing renovation and replacement of the physical plant and equipment. As a result, the Company believes that inflation does not have a significant impact on its earnings, except when Medicare and Medicaid rate increases are inadequate in relation to rising costs and when other payors also implement programs to control their health costs as discussed above. Business Outlook Because of intense national, state and private industry efforts to reform the health care delivery and payment systems in this country, the health care industry as a whole faces increased uncertainty. While the Company is unable to predict which, if any, proposals for health care reform will be adopted, it continues to monitor their progress and analyze their potential impacts in order to formulate its future business strategies. Another factor impacting operating results is the slow recovery of the California economy from the recent recession. At May 31, 1994, 43% of the Company's domestic general hospital beds were in California. The challenge facing the Company and the health care industry is to continue to provide quality patient care in an environment of rising costs, strong competition for patients, and a general reduction of reimbursement by both private and government payors. 15 Consolidated Statements of Operations
Years Ended May 31, (dollar amounts, except per-share amounts, ------------------------------------------ are expressed in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------------- Net operating revenues $2,967 $3,191 $2,941 ------------------------------------------ Operating and administrative expenses (2,492) (2,680) (2,412) Depreciation and amortization (161) (160) (141) Interest, net of capitalized portion ($4 in 1994, $9 in 1993, $11 in 1992) (70) (75) (89) ------------------------------------------ Total costs and expenses (2,723) (2,915) (2,642) ------------------------------------------ Investment earnings 28 21 29 Net gain on disposals of facilities and long-term investments 88 93 31 Gain on sale of subsidiary's common stock 0 29 0 ------------------------------------------ Income from continuing operations before income taxes 360 419 359 Taxes on income (144) (155) (141) ------------------------------------------ Income from continuing operations 216 264 218 ------------------------------------------ Discontinued operations (701) (104) (85) Extraordinary charges -- net of tax 0 0 (29) Cumulative effect of a change in accounting for income taxes 60 0 0 ------------------------------------------ Net income (loss) $(425) $160 $104 ========================================== Earnings (loss) per share: Primary: Continuing operations $1.29 $1.59 $1.27 Discontinued operations (4.19) (0.63) (0.50) Extraordinary charges 0.00 0.00 (0.17) Cumulative effect of a change in accounting principle 0.36 0.00 0.00 ------------------------------------------ $(2.54) $0.96 $0.60 ========================================== Fully diluted: Continuing operations $1.23 $1.49 $1.19 Discontinued operations (4.10) (0.58) (0.44) Extraordinary charges 0.00 0.00 (0.15) Cumulative effect of a change in accounting principle 0.33 0.00 0.00 ------------------------------------------ $(2.54) $0.91 $0.60 ========================================== Weighted average shares and share equivalents outstanding--primary (in thousands) 167,024 166,111 171,853 - -------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 16 Consolidated Balance Sheets
May 31, ----------------------- (dollar amounts are expressed in millions) 1994 1993 - ------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 313 $ 141 Short-term investments, at cost which approximates market 60 98 Accounts and notes receivable, less allowance for doubtful accounts ($77 in 1994and $115 in 1993) 385 502 Inventories of supplies, at cost 55 62 Deferred income taxes 372 120 Assets held for sale 204 56 Prepaid expenses and other current assets 55 89 ----------------------- Total current assets 1,444 1,068 ----------------------- Long-term receivables 73 190 Investments and other assets 309 205 Property, plant and equipment, net 1,764 2,492 Intangible assets, at cost, less accumulated amortization ($54 in 1994 and $176 in 1993) 107 218 ----------------------- $3,697 $4,173 ======================= - ------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings and notes $ 67 $ 163 Accounts payable 176 140 Employee compensation and benefits 93 104 Reserves related to discontinued operations 465 101 Other current liabilities 236 254 Income taxes 58 30 Current portion of long-term debt 545 121 ----------------------- Total current liabilities 1,640 913 ----------------------- Long-term debt, net of current portion 223 892 Other long-term liabilities 389 299 Deferred income taxes 125 317 Commitments and contingencies (see accompanying notes) Stockholders' equity: Common stock, $0.075 par value; authorized 450,000,000 shares; 185,587,666 shares issued at May 31, 1994, and 185,698,524 shares at May 31, 1993 14 14 Additional paid-in-capital 1,015 1,007 Notes receivable on exercise of stock options (2) (2) Retained earnings 575 1,019 Less common stock in treasury, at cost, 19,507,161 shares at May 31, 1994, and 19,800,103 at May 31, 1993 (282) (286) ----------------------- Total stockholders' equity 1,320 1,752 ----------------------- $3,697 $4,173 ======================= - -------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 17 Consolidated Statements of Cash Flows
Years Ended May 31, ------------------------------ (dollar amounts are expressed in millions) 1994 1993 1992 - --------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income (loss) $(425) $ 160 $ 104 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 198 199 196 Deferred income taxes (253) (32) (96) Gains on sales of facilities and long-term investments (88) (93) (31) Gain on sale of subsidiary's common stock 0 (29) 0 Extraordinary charges 0 0 34 Additions to reserves related to discontinued operations andrestructuring charges 1,175 189 218 Cumulative change in accounting principle (60) 0 0 Other items 38 33 35 Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses: Accounts and notes receivable, net (65) 65 46 Inventories, prepaid expenses and other current assets (21) (43) (13) Accounts payable, accrued expenses and income taxes payable (31) 21 55 Noncurrent accrued expenses and other liabilities (2) 24 35 ------------------------------ Net cash provided by operating activities, before expenditures for discontinued operations and restructuring charges 466 494 583 Net expenditures for discontinued operations and restructuring charges (319) (96) (24) ------------------------------ Net cash provided by operating activities 147 398 559 ------------------------------ Cash Flows From Investing Activities: Purchases of property, plant and equipment (185) (319) (421) Purchases of new businesses, net of cash acquired (5) (3) (14) Proceeds from sales of facilities, investments and other assets 569 70 109 Investments in Hillhaven (63) 0 0 Collections on notes 100 27 74 Increase in intangible and other assets (24) (29) (53) Increase in notes receivable (4) (21) (24) Equity investments in partnerships (11) (8) 0 Other items 9 (16) (8) ------------------------------ Net cash provided by (used in) investing activities 386 (299) (337) ------------------------------
18 Consolidated Statements of Cash Flows
Years Ended May 31, --------------------------- (dollar amounts are expressed in millions) 1994 1993 1992 - --------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net proceeds from (payments of) unsecured lines of credit and reverse purchase agreements (151) (10) 220 Payments of other borrowings (217) (93) (103) Proceeds from other borrowings 31 131 271 Redemptions of notes and debentures 0 0 (383) Cash dividends paid to shareholders (40) (78) (76) Purchases of treasury stock 0 (19) (150) Other items 16 (3) (3) --------------------------- Net cash used in financing activities (361) (72) (224) --------------------------- Net increase (decrease) in cash and cash equivalents 172 27 (2) Cash and cash equivalents at beginning of year 141 114 116 --------------------------- Cash and cash equivalents at end of year $ 313 $ 141 $ 114 =========================== - --------------------------------------------------------------------------------- Supplemental Disclosures: Interest paid, net of amounts capitalized $ 62 $ 87 $ 78 Income taxes paid 30 125 186 Notes received in connection with sales of facilities 0 92 4 Conversions of notes and debentures into common stock 0 0 15 - ---------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 19 Consolidated Statements of Changes in Stockholders' Equity
Years Ended May 31, 1992, 1993, 1994 ----------------------------------------------------------------------- Common Stock Stock ---------------------- Additional Option (dollar amounts are expressed in millions, Outstanding Issued Paid-in Notes Retained Treasury share amounts in thousands) Shares Amount Capital Receivable Earnings Stock - ----------------------------------------------------------------------------------------------------------------------- Balances, May 31, 1991 174,765 $14 $ 969 $(2) $ 914 $(133) Net income 104 Cash dividends ($0.46 per share) (79) Purchases of treasury stock (9,288) (150) Stock options exercised 457 6 (2) 2 Notes receivable collections 2 Restricted share awards, net of cancellations 129 13 1 Conversions of notes and debentures 915 8 7 Other (15) - ----------------------------------------------------------------------------------------------------------------------- Balances, May 31, 1992 166,963 14 996 (2) 939 (273) Net income 160 Cash dividends ($0.48 per share) (80) Purchases of treasury stock (1,034) (15) Stock options exercised 36 1 Restricted share cancellations (67) 11 1 - ----------------------------------------------------------------------------------------------------------------------- Balances, May 31, 1993 165,898 14 1,007 (2) 1,019 (286) Net loss (425) Cash dividends ($0.12 per share) (19) Stock options exercised 293 (1) 4 Restricted share cancellations (110) 9 - ----------------------------------------------------------------------------------------------------------------------- Balances, May 31, 1994 166,081 $14 $1,015 $(2) $ 575 $(282) =================================================================== - -----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 20 Notes to Consolidated Financial Statements Note 1 Significant Accounting Policies A. Principles of Consolidation The consolidated financial statements include the accounts of National Medical Enterprises, Inc. and its wholly owned and majority-owned subsidiaries. Investments in other affiliated companies are accounted for by the equity method. Significant intercompany accounts and transactions are eliminated in consolidation. The Company is primarily engaged in the operation of domestic and international general hospitals. During 1994 the Company sold most of its physical rehabilitation hospitals and decided to discontinue its psychiatric hospital business, adopting a plan to dispose of its psychiatric hospitals and substance abuse recovery facilities within one year. (See Note 2.) B. Net Operating Revenues These revenues consist primarily of net patient service revenues, which are based on the hospitals' established billing rates less allowances and discounts principally for patients covered by Medicare, Medicaid and other contractual programs. These allowances and discounts were $2.7 billion, $2.6 billion and $2.3 billion for the years ended May 31, 1994, 1993 and 1992, respectively. Payments under these programs are based on either predetermined rates or the costs of services. Settlements for retrospectively determined rates are estimated in the period the related services are rendered and are adjusted in future periods as final settlements are determined. Management believes that adequate provision has been made for adjustments that may result from final determination of amounts earned under these programs. Approximately 40% of fiscal 1994 consolidated net operating revenues is from participation of domestic general and physical rehabilitation hospitals in Medicare and Medicaid programs. In 1993 it was approximately 37%, and in 1992 it was approximately 35%. The Company provides care to patients who meet certain financial or economic criteria without charge or at amounts substantially less than its established rates. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported as gross revenue and are not included in deductions from revenue or in operating and administrative expenses. C. Provision for Doubtful Accounts A provision for estimated uncollectible accounts and notes receivable, net of recoveries, is included in operating and administrative expenses and was $107 million, $115 million and $123 million for 1994, 1993 and 1992, respectively. D. Property, Plant and Equipment The Company uses the straight-line method of depreciation for buildings, improvements and equipment over their estimated useful lives as follows: buildings and improvements -- generally 25 to 50 years; equipment -- three to 15 years. E. Intangible Assets Preopening costs generally are amortized over four years. Costs in excess of the fair value of identifiable net assets of purchased businesses generally are amortized over 40 years. Deferred financing costs and the costs of acquiring certain management contracts are amortized over the lives of the related loans or contracts. The straight-line method is used to amortize most intangible assets. F. Stock Benefit Plans The fair market value of restricted shares on the date of award and the fair market value of the Company's common shares on the date of grant of discounted stock options in excess of the exercise price are expensed, with appropriate credits to additional paid-in capital, over the periods that the restrictions as to forfeiture or exercise lapse. For restricted units, an amount equivalent to the fair market value of shares of the Company's common stock on the date of vesting, subject to a maximum amount, is expensed over the vesting period. (See Note 10.) G. Leases Capital leases are recorded at the beginning of the lease term as assets and liabilities at the lower of the present value of the minimum lease payments or the fair value of the assets. H. Cash Equivalents The Company treats highly liquid investments with an original maturity of three months or less as cash equivalents. I. Interest Rate Swap Agreements The differential to be paid or received under interest rate swap agreements is accrued as the interest rates change and is recognized over the life of the agreements as an adjustment to interest expense. (See Note 8B.) 21 Notes to Consolidated Financial Statements J. Sales of Common Stock of Subsidiaries At the time a subsidiary sells existing or newly issued common stock to unrelated parties at a price in excess of its book value, the Company's policy is to record a gain reflecting its share of the increase in the subsidiary's stockholders' equity resulting from the sale. (See Note 15.) K. Translation of Foreign Currencies The financial statements of the Company's foreign subsidiaries have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52. All balance sheet accounts have been translated at fiscal year-end exchange rates. Income statement amounts have been translated at the average exchange rate for the year. The resulting currency translation adjustments and the effect of transaction gains and losses are insignificant for all years presented. Note 2 Discontinued Operations -- Psychiatric Hospital Business At November 30, 1993, the Company decided to discontinue its psychiatric hospital business and adopted a plan to dispose of its psychiatric hospitals and substance abuse recovery facilities within one year. Also, in connection with the settlement of federal investigations of the Company described in Note 7B, the Company agreed to dispose of its psychiatric hospital business and not to re-enter such business for five years. The Consolidated Statements of Operations reflect the net operating results of the discontinued business separately from continuing operations, and previously issued financial statements have been restated to report these operations as discontinued. Operating results for periods subsequent to November 30, 1993, are charged to the reserve for estimated operating losses during the phase-out period. The discontinued operations are summarized as follows:
Twelve Months Ended May 31, (in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------- Net operating revenues $ 476 $ 571 $1,010 Loss from operations: Loss before income taxes (266) (160) (129) Income tax benefit 111 56 44 ----------------------- (155) (104) (85) ----------------------- Loss on disposal: Estimated losses upon disposal (414) -- -- Estimated operating losses during the phase-out period (433) -- -- Income tax benefit 301 -- -- ----------------------- (546) -- -- ----------------------- Total loss from discontinued operations $(701) $(104) $(85) =======================
The estimated losses upon disposal consist primarily of provisions for the write-down of assets to estimated net realizable value and other costs associated with the disposal of assets. The estimated net realizable value is included in assets held for sale in the accompanying consolidated balance sheet. The estimated operating losses during the phase-out period include the costs of settling federal and state investigations and other unusual legal costs related to the psychiatric hospital business. The loss from operations also includes provisions for unusual legal costs and certain asset write-downs related to the psychiatric business that were recorded prior to November 30, 1993. (See Note 7B.) The Company entered into two separate sale agreements, each dated as of March 29, 1994, to sell 47 psychiatric facilities to Charter Medical Corporation for approximately $200 million, including the net book values of certain inventory, receivables and other items of working capital, subject to certain adjustments. One agreement provides for the sale of 30 hospitals for an approximate sales price of $134 million. In June 1994 the Company sold 27 of the 30 hospitals for a sales price of approximately $129 million. The sales of the remaining three hospitals are anticipated to close in the near future. The second agreement provides for the sale of 17 psychiatric hospitals. The Federal Trade Commission (FTC) issued a request for additional information regarding 22 these remaining hospitals. The Company and Charter are responding to the FTC's request. No specific date has been set to close these sales, except that if such closings do not occur prior to September 30, 1994, and the parties do not extend that date, the agreement will terminate on September 30. Based on discussions to date with the FTC, the Company believes it may not be able to sell at least five facilities to Charter. However, it believes it will receive similar proceeds upon their sale to other parties. During fiscal year 1994 and through July 27, 1994, the Company sold an additional 16 psychiatric hospitals, two substance abuse recovery facilities and one residential treatment center to other parties. The aggregate sales price for the 19 facilities approximated $44 million. The Company currently has reached an agreement to sell or is negotiating with various other parties for the sale of 10 psychiatric hospitals and is seeking a buyer for one other facility. Note 3 Disclosures About Fair Value of Financial Instruments The carrying amounts of cash, accounts receivable, accounts payable and interest payable approximate fair value because of the short maturity of these instruments. The carrying values of investments, both short-term and long-term (excluding investments accounted for by the equity method), long-term receivables and long-term debt are not materially different than the estimated fair values of these instruments. The estimated fair values of interest rate swap agreements and foreign currency contracts also are not material to the Company's financial position. Note 4 Property, Plant and Equipment Property, plant and equipment is stated at cost and consists of the following:
(in millions) 1994 1993 - -------------------------------------------------------------------------------- Land $ 173 $ 249 Buildings and improvements 1,388 1,957 Construction in progress 59 47 Equipment 916 1,061 ------ ------ 2,536 3,314 Less accumulated depreciation and amortization 772 822 ------ ------ Net property, plant and equipment $1,764 $2,492 ====== ======
Note 5 Long-Term Debt and Lease Obligations A. Long-Term Debt Long-term debt consists of the following:
(in millions) 1994 1993 - -------------------------------------------------------------------------------- Unsecured loans payable to banks $ -- $ 86 Secured loans payable to banks 13 -- Secured loans payable 143 158 Convertible floating rate debentures due 1996 219 220 Unsecured medium-term notes due through 1997 111 175 12-1/8% unsecured notes due April 1995 (not redeemable) 93 93 Notes secured by property, plant and equipment, weighted average interest rate of approximately 9.5% in 1994 and 10.4% in 1993, payable in installments to 2012 28 88 7-3/8% unsecured notes due 1997 (not redeemable) 58 58 Obligations under capital leases 49 80 Other, primarily unsecured 54 55 ------------ 768 1,013 Less current portion 545 121 ------------ $223 $ 892 ============
23 Notes to Consolidated Financial Statements Unsecured Loans Payable to Banks In September 1993 the Company repaid $50 million of its then-outstanding revolving bank borrowings under its $300 million unsecured bank revolving credit and term loan agreement and refinanced the $246.2 million balance of such loans with new term loans maturing in April 1995 and requiring quarterly installments of $11.4 million through May 1994 and $15 million through February 1995. These loans were repaid in April 1994 with new secured bank loans, as described below. The weighted average interest rate on these and other unsecured loans payable to banks was 4.7% during 1994, 3.9% during 1993 and 5.3% during 1992. Also in September 1993 the Company canceled its $120 million short-term revolving credit agreement entered into in December 1992. No loans were ever outstanding under this agreement. Secured Loans Payable In April 1994 the Company entered into a new $464.7 million revolving credit and letter of credit agreement with several banks. Indebtedness of the Company under the new agreement is secured by a pledge of all the outstanding capital stock of NME Hospitals, Inc., a wholly owned subsidiary of the Company, and is also guaranteed by NME Hospitals, Inc. The new agreement provides for revolving loans of up to $222 million and for letters of credit in an aggregate amount of $242.7 million to support certain of the Company's obligations relating to commercial paper and remarketable bond programs. Loans of $222 million under the new agreement were used to repay all of the Company's obligations under, and to effect termination of, its then-existing unsecured bank term loan agreement described above. All of this amount, including $209 million related to the convertible floating rate debentures discussed below, was outstanding at May 31, 1994. All outstanding revolving loans under the new agreement mature on April 12, 1995, and there are no earlier installments of principal due or reductions of availability thereunder. Revolving loans under the new agreement bear interest at a base rate that is equal to the prime rate announced by Morgan Guaranty Trust of New York or, if higher, the federal funds rate plus 0.5% or, at the option of the Company, a London Interbank Offered Rate (LIBOR) plus 1.0% per annum, for interest periods of one, two, three or six months. The Company also has $143 million of secured loans payable outstanding at May 31, 1994, that were used for project financings and are secured by liens on real property or leasehold interests. These loans expire on April 12, 1995, and provide for interest at the lender's fluctuating cost of funds plus 1/8%. The weighted average interest rate during 1994 was 5.1%. It was 4.6% in 1993 and 6.4% in 1992. Floating Rate Debentures -- Convertible The floating rate debentures consist of two components: $209 million of secured loans payable to banks and $10 million (5% of the debenture face amount) of generally nontransferable performance investment options to key employees of the Company. Because the proceeds from the exercise of the investment options must be used by the Company to retire the debt underlying the debentures, these loans, together with the outstanding balance of the investment options, are classified as convertible floating rate debentures. The weighted average interest rate for the debentures was 4.8% during 1994, 3.6% in 1993 and 6.3% in 1992. The debentures are subject to mandatory redemption in April 1996 and after the occurrence of certain events. The performance investment options permit the holder to purchase debentures at 95% of their $105,264 face value. The debentures are convertible into preferred stock, which in turn is convertible into common stock. The investment options ultimately are convertible into 13,977,549 shares of common stock at an exercise price equivalent to $15.83 per share. The 13,977,549 shares include 1,828,652 shares that are the subject of litigation between the Company and two of its former executive officers. The Company believes that the investment options held by those executive officers no longer are exercisable but has included these shares pending final resolution of the dispute. The investment options became fully vested in March 1994. The Company may repurchase the investment options without a premium with the consent of the holder or by paying a redemption premium sufficient to provide the holder a 6% annual return. Under certain conditions, the investment options are subject to mandatory redemption at a redemption price including a 6% annual return. When investment options are exercised, the Company reduces taxable income by any excess of the fair market value of the stock at the date of conversion over the principal amount of the debentures redeemed. The resulting tax benefit increases additional paid-in capital. Unsecured Medium-Term Notes These notes have had both fixed and floating rates of interest. The floating rate notes were repaid during fiscal 1994. The weighted average interest rate on these notes was 8.1% during 1994, 7.3% during 1993 and 8.6% during 1992. The notes are not redeemable. 24 Loan Covenants Certain loan agreements have, among other requirements, limitations on dividends, investments, borrowings, and acquisitions and dispositions of assets and require maintenance of specified operating ratios, as well as specified levels of working capital and net worth. The Company is in compliance with the loan covenants. There are no compensating balance requirements for any credit line or borrowing. B. Long-Term Debt Maturities and Lease Obligations Future long-term debt maturities and minimum operating lease payments are as follows:
Later (in millions) 1995 1996 1997 1998 1999 Years - -------------------------------------------------------------------------------- Long-term debt $545 $60 $61 $66 $ 3 $ 33 Long-term leases $ 69 $64 $60 $55 $52 $250
Rental expense under operating leases, including short-term leases, was approximately $98 million in 1994, $114 million in 1993 and $113 million in 1992. Note 6 Income Taxes Taxes on income from continuing operations consist of the following amounts:
(in millions) 1994 1993 1992 - ------------------------------------------------------------------------------- Currently payable: Federal $159 $148 $148 State 31 30 26 Foreign 6 7 7 -------------------- 196 185 181 Deferred: Federal (46) (29) (39) State (6) (3) (6) -------------------- (52) (32) (45) Charges equivalent to federal and state income taxes, primarily the benefit associated with stock benefit plans -- 2 5 -------------------- $144 $155 $141 ====================
The difference between the Company's effective income tax rate and the statutory federal income tax rate is shown below:
1994 1993 1992 ------------------------------------------------------ (in millions of dollars and as a percent of pretax income) Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------- Tax provision at statutory federal rate $126 35.0% $142 34.0% $122 34.0% State income taxes, net of federal income tax benefit 17 4.6% 18 4.3% 14 3.9% Gain on sale of subsidiary's common stock -- -- (10) (2.4)% -- -- Other 1 .4% 5 1.1% 5 1.4% ---------------------------------------------------- Taxes on income from continuing operations and effective tax rates $144 40.0% $155 37.0% $141 39.3% ====================================================
No tax provision has been made for U.S. or additional foreign taxes on $68 million of undistributed earnings of foreign subsidiaries or on a $29 million gain on the sale of a foreign subsidiary's common stock as the Company's overseas investments are intended to be permanent. Such earnings would become taxable upon the remittance of dividends or upon the sale or liquidation of the investments. 25 Notes to Consolidated Financial Statements Effective June 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Among other provisions, this standard requires deferred tax balances to be determined using enacted income tax rates for the years in which the taxes actually are paid or refunds actually are received instead of when the deferrals were initiated. The Company has recognized $60 million as income in the fiscal year ended May 31, 1994, for the cumulative effect on prior years of adopting this standard based on tax rates in effect at June 1, 1993. Deferred tax assets and liabilities as of May 31, 1994, relate to the following:
Deferred Tax ------------------- (in millions) Assets Liabilities - ----------------------------------------------------------------------------------------- Depreciation and fixed asset basis differences $ -- $182 Reserves related to discontinued operations and restructuring charges 306 -- Receivables -- doubtful accounts and adjustments 69 -- Cash-basis accounting change -- 23 Accruals for insurance risks 35 -- Intangible assets -- 7 Other long-term liabilities 20 -- Benefit plans 18 -- Other accrued liabilities 10 -- Investments 9 -- Valuation allowance (7) -- Other items -- 1 ---- ---- $460 $213 ==== ====
Management believes that the deferred tax assets at May 31, 1994, will be realized by offsetting current tax provisions against future income or through tax loss carrybacks. Prior-year financial statements are not restated to reflect the new accounting standard. The following reflect the principal sources of deferred income tax credits for those years:
(in millions) 1993 1992 - ------------------------------------------------------------------------------- Depreciation and asset disposition differences $ 4 $ 9 Cash-basis accounting (8) (9) Doubtful accounts and adjustments (5) (15) Costs included in intangible assets, net of amortization -- (2) Equity method accounting 2 (5) Accruals for insurance risks (7) (7) Restructuring charges (14) (14) Other items (4) (2) ---- ---- $(32) $(45) ==== ====
Note 7 Claims and Lawsuits A. Professional and General Liability Insurance The Company currently insures all of its professional and comprehensive general liability risks through an insurance company owned by several health care companies and in which the Company has a significant minority interest. Risks in excess of $3 million per occurrence are reinsured with major independent insurance companies. Through May 31, 1994, the Company insured its professional and comprehensive general liability risks related to its psychiatric and physical rehabilitation hospitals through a wholly owned insurance subsidiary that reinsured risks in excess of $500,000 with major independent insurance companies. The Company has reached the policy limits provided by its insurance subsidiary related to the psychiatric hospitals in certain years, and, in addition, damages, if any, arising from fraud and conspiracy claims in psychiatric malpractice cases may not be insured. (See Note 7B.) 26 The Company's estimated liability for the self-insured portion of professional and comprehensive general liability claims is $93 million at May 31, 1994, after discounting the liability to its present value based on expected loss reporting patterns and a weighted average discount rate of 8.8%. The Company believes that claims and lawsuits arising in the ordinary course of business are adequately covered by insurance or are adequately provided for in the Company's consolidated financial statements. However, the final liability may vary from the estimated liability. B. Significant Legal Proceedings The Company has been involved in significant legal proceedings and investigations of an unusual nature related principally to its psychiatric business. During the years ended May 31, 1994, and 1993, the Company recorded provisions to estimate the cost of the ultimate disposition of all these proceedings and investigations and to estimate the legal fees that it expects to incur. As discussed further below, the Company has settled the most significant of these matters. The remaining reserves for unusual litigation costs that relate to the matters that have not been settled as of May 31, 1994, and an estimate of the legal fees to be incurred subsequent to May 31, 1994, total approximately $81 million and represent management's estimate of the net costs of the ultimate disposition of these matters. There can be no assurance, however, that the ultimate liability will not exceed such estimates. All of the costs associated with these legal proceedings and investigations are classified in discontinued operations. (See Note 2.) 1) Insurance Litigation -- In November 1993 the Company signed agreements to settle two of its lawsuits with certain insurance companies, and in February 1994 the Company signed an agreement to settle the remaining lawsuit. Under the settlements, the Company agreed to pay up to $125 million and $89.9 million, respectively, as complete and final resolution of the disputed claims alleging that the psychiatric hospitals engaged in certain fraudulent practices. The final installment of these settlements was paid in March 1994. In return, the insurers agreed on an individual basis to strengthen standard business relations with the Company, including, for example, allowing the Company to compete for managed care contracts and participate in provider networks. The settlements also addressed the processing by the insurance companies of pending claims from psychiatric facilities owned by the Company's subsidiaries. The Company has received inquiries from various other insurance companies and health benefit providers regarding the possible filing of claims with similar allegations. To date, the amounts involved are not significant. 2) Investigations -- On June 29, 1994, the Company executed plea agreements that were approved by a federal judge and other settlement agreements under which it agreed to pay a total of $362.7 million to conclude the federal investigations of the Company and its subsidiaries: $324.2 million in civil restitution and penalties, $34 million in criminal fines, $2 million to the Department of Health and Human Services to support a children's mental health program, and $2.5 million to the National Institute of Mental Health to fund research relating to federally funded health care in substance abuse recovery or mental health treatment facilities. Under the agreements, the Company's remaining hospitals will continue to be eligible to participate in all federally funded health care programs. As part of the settlement, a subsidiary operating the Company's psychiatric hospitals pled guilty to six counts of paying illegal remuneration for referral of Medicare patients and one count of conspiracy to make such payments and paid a $33 million fine. Another subsidiary operating a single general hospital pled guilty to one count of illegal payments and paid a $1 million fine. The count relates to activities that occurred while an individual convicted of defrauding the hospital was its chief executive. The federal settlement agreements pertain only to the Company and its subsidiaries and will not extend to individuals. The Company is obligated to cooperate with the government in its investigation of individuals. The Company has numerous other obligations under the agreements, including disposing of its psychiatric hospital business and not re-entering it for five years, implementation and maintenance of compliance programs, and reporting requirements to the federal government, designed to assure that the Company complies with federal laws relating to the provision of health care. In May 1994 the Company also reached agreements in principle with 27 states and the District of Columbia to pay an additional $16.3 million to settle investigations. The Company has signed agreements with 26 of those states and the District of Columbia, five of which contain errors or changes that the Company is attempting to resolve. The 27 states and the District of Columbia are all of the areas in which the Company's subsidiaries operated psychiatric facilities. On July 12, 1994, the Company, without admitting or denying liability, consented to the entry of a civil injunctive order in response to a complaint filed that day by the Securities and Exchange Commission. The complaint alleged that the Company failed to comply with anti-fraud and recordkeeping requirements of the federal securities laws concerning the manner in which the Company recorded the revenues from the activities that were the subject of the federal government settlement referred to above. In the order, the Company consented to comply with such requirements of the federal securities laws. 27 Notes to Consolidated Financial Statements 3) Shareholders' Lawsuits -- In October and November 1991 shareholder derivative actions and federal shareholder class-action suits were filed against the Company and certain of its officers and directors. Those derivative and federal class-action suits have been consolidated into one derivative and one federal class action, respectively. The consolidated derivative action, purportedly brought on behalf of the Company, alleged breach of fiduciary duty and other causes of action against the directors and various officers of the Company. The derivative action was dismissed by the court in May 1993; the dismissal is being appealed by the plaintiffs. The consolidated federal class action alleges violations of federal securities laws against the Company and certain of its executive officers. All parties in the federal class action and the derivative action have been participating in a voluntary mediation process, which has included directors and officers liability insurance carriers. Through this mediation process, the parties have reached an agreement in principle for the settlement of both lawsuits, including contributions to the settlement by certain insurance companies. Any agreement in principle is conditioned upon the execution of formal settlement documentation and court approval. Two additional federal class actions filed in August 1993 now have been consolidated into one action. The consolidated action alleges violations of federal securities laws against the Company and certain of its executive officers. The parties commenced a voluntary mediation in July 1994. 4) Psychiatric Malpractice Cases Involving Fraud and Conspiracy Claims -- The Company and certain of its officers and directors are defendants in numerous lawsuits filed on behalf of psychiatric patients making various claims, including conspiracy, false imprisonment, fraud and gross negligence. The Company has settled 90 of these patient care lawsuits for approximately $20.5 million. These cases represent approximately two-thirds of the psychiatric patient care cases filed to date that contain allegations of conspiracy or fraud. The Company expects that additional similar lawsuits will be filed. Note 8 Other Contingencies and Financial Instruments With Off-Balance-Sheet Risks A. Guarantees and Letters of Credit The Company is contingently liable for $503 million under various guarantees, standby letters of credit and lease obligations not included in Note 5. Included in this amount are The Hillhaven Corporation's obligations to third parties totaling $286 million, including $216 million of lease obligations and $70 million of long-term debt and other obligations. During the year, Hillhaven reduced by approximately $420 million its obligations that were guaranteed by the Company. Also included in the $503 million is approximately $208 million in obligations, substantially all of which are lease obligations, relating to rehabilitation hospitals sold to HEALTHSOUTH Rehabilitation Corporation in January 1994. B. Interest Rate Swaps At May 31, 1994, and 1993, the Company had outstanding interest rate swap agreements, generally with commercial banks, having a total notional principal of $120 million, expiring through 2000. These agreements call for the payment of fixed rate interest by the Company in return for the assumption by other contracting parties of the variable rate cost, which effectively changes the Company's interest rate on a portion of its dollar-denominated floating rate debt to a fixed rate of 8.5%. Additionally, on May 31, 1994, and 1993, the Company had outstanding swap agreements with a notional amount of $29 million expiring through 1997, in which it receives interest from other contracting parties at a weighted average fixed interest rate of 7.0% and pays interest at variable rates to those parties. The Company's exposure to credit loss under these agreements is limited to the interest rate spread in the event of nonperformance by the other parties. Nonperformance is not anticipated due to the credit rating of the other parties. The weighted average interest rates in Note 5A do not include the effects of these agreements. C. Currency Swap and Forward Exchange Contracts The Company has entered into currency swap agreements and forward exchange contracts to hedge the foreign currency exposure attributable to its net investment in foreign operations. At May 31, 1994, the Company had outstanding agreements with commercial banks having a total notional principal amount of 75,800,000 Australian dollars, 1,650,000,000 Spanish pesetas and 10,000,000 British pounds at average exchange rates to the U.S. dollar of 1.38, 123.48 and 0.67, expiring through 1999, 1998 and fiscal 1995, respectively. Note 9 Preferred Stock Purchase Rights and Preferred Stock A. Preferred Stock Purchase Rights In 1988 the Company distributed Preferred Stock Purchase Rights to holders of the Company's common stock and authorized the issuance of additional rights for common stock issued after that date. The Company may redeem the rights at $.025 per right at 28 any time until they become exercisable. The rights become exercisable 10 days after a public announcement that an investor has acquired 20% or more of the Company's common stock or has commenced a tender or exchange offer for 30% or more of the common stock. The rights may be exchanged for one two-thousandth (.0005) of a share of Series A Junior Participating Preferred Stock at an exercise price of $40.61. In the event the Company is acquired or merged into another company and the rights have not been redeemed, rights holders will be entitled to purchase, for the then-current exercise price of the rights, common stock of the surviving company having a market value equal to two times the exercise price of the rights. The rights expire in December 1998 unless exercised or redeemed and do not entitle the holders thereof to vote as shareholders or receive dividends. B. Preferred Stock The Series A Junior Participating Preferred Stock for which the Preferred Stock Purchase Rights may be exchanged is non-redeemable and has a par value of $0.15 per share. None of the 225,000 authorized shares are outstanding. The Company has also authorized a Series B Convertible Preferred Stock, issuable solely upon conversion of the Company's convertible floating rate debentures. (See Note 5A.) The par value of the stock is $0.15 per share; its liquidation and redemption value is $105,264 per share; 2,087 shares are reserved for future issuance; and no shares are outstanding. Since it is likely that this preferred stock would be converted immediately to common stock, all references in Note 5A are to common stock rather than preferred stock. Note 10 Stock Benefit Plans Under the Company's 1983 and 1991 stock incentive plans, stock options and incentive stock awards (restricted shares and restricted units) have been made to certain officers and other key employees. Stock options generally are granted at an exercise price equal to the fair market value of the shares on the date of grant (except for discounted stock options granted at an exercise price equal to 50% of the fair market value of the shares and options for 600,000 shares granted during fiscal 1993 at an exercise price equal to 110% of the fair market value of the shares) and are exercisable at the rate of one-third per year beginning one year from the date of grant. In addition, during fiscal 1994 526,000 options were granted to certain senior officers that are exercisable on May 31, 1996. Stock options generally expire 10 years from the date of grant. Certain 1991 plan stock options may be canceled in connection with the vesting of restricted units under circumstances described below. Restricted shares generally are issued at no cost to the recipient and are held in trust by the Company for release in generally equal amounts over five to seven years from the date of the award (as long as the recipient continues to be employed by the Company). Restricted units were granted in fiscal 1992, 1993 and 1994. A restricted unit is a grant that entitles the recipient to a payment of cash at the end of each vesting period equivalent to the fair market value of a share of the Company's common stock on the date of vesting subject to a maximum value per unit, which is equivalent to the fair market value of a share of the Company's common stock on the date of grant. These restricted units were granted along with stock options. Restricted units vest normally one-third each year over three years and also earn dividend equivalents during the vesting period. Subject to approval by the shareholders in September 1994, a new Directors Stock Option Plan will replace the 1991 Director Restricted Share Plan and will make available options to purchase 500,000 shares of common stock for issuance to nonemployee directors. Under the plan each nonemployee director will be entitled to receive a stock option for 5,000 common shares upon initially being elected to the Board of Directors and each January, beginning retroactively in January 1994 when the plan was approved by the Board of Directors. Awards will vest one year after the date of grant, will have an exercise price equal to the fair market value of the Company's common stock on the date of grant, and will expire 10 years after the date of grant. All awards granted under the 1983 and 1991 plans will vest under circumstances defined in the plans or under certain employment arrangements, including, with the consent of the Compensation and Stock Option Committee of the Board of Directors, a change in control of the Company. Charges to continuing operations associated with discounted stock options, restricted shares (including the Director Restricted Share Plan) and restricted units were $12 million in fiscal 1994, $11 million in fiscal 1993 and $11 million in fiscal 1992. The remaining amount to be charged to future operations, principally over the next two years, is approximately $7 million. 29 Notes to Consolidated Financial Statements Differences in accrued income tax benefits associated with restricted shares and discounted stock options and the amounts realized in income tax returns are reflected as adjustments to additional paid-in capital. Income tax benefits associated with stock options having exercise prices equal to fair market value at date of grant are credited to additional paid-in capital as realized. Stock awards may be made only under the 1991 Plan. At May 31, 1994, there were 8,331,456 shares of common stock available under the 1991 Plan for future awards. The table below summarizes the transactions in all stock option plans in which employees participate, including discounted stock options but excluding restricted shares and units:
(shares of common stock) 1994 1993 - -------------------------------------------------------------------------------- Outstanding at beginning of year (1983 and 1991 Plans) 11,682,204 9,597,490 Granted 5,719,175 2,977,745 Exercised ($4.60 to $16.813 per share in 1994 and 1993) (282,482) (36,650) Canceled and other adjustments (1,692,304) (856,381) ------------------------ Outstanding at end of year ($4.41 to $22.44 per share at May 31, 1994) 15,426,593 11,682,204 ======================== Exercisable at end of year 6,472,708 4,131,859 ========================
The Company has received full recourse interest-bearing notes in connection with the exercise of certain stock options. The notes, secured by the common stock purchased, reduce stockholders' equity. See Note 5A for information regarding Performance Investment Options (debenture purchase rights) sold to certain key employees of the Company. Note 11 Earnings Per Share Primary earnings per share of common stock are based on after-tax income applicable to common stock and the weighted average number of shares of common stock and common stock equivalents outstanding during each period as appropriate. Fully diluted earnings-per-share calculations are based on the assumption that all dilutive convertible debentures were converted into shares of common stock as of the beginning of the year, or as of the issue date if later, and 1) that those shares are added to the weighted average number of common shares and share equivalents outstanding used in the calculation of primary earnings per share, and 2) that after-tax income is adjusted accordingly. Note 12 Employee Retirement Plans Substantially all domestic employees upon qualification are eligible to participate in a defined contribution 401(k) plan, the NME Retirement Savings Plan. Employees who elect to participate make mandatory contributions equal to 3% of their eligible compensation, and such contributions are matched by the Company. Company contributions from continuing operations to all plans for the fiscal years 1994, 1993 and 1992 were approximately $17 million, $18 million and $16 million, respectively. The Company does not have a plan that provides postretirement benefits other than pensions to retired employees. Note 13 Disposals and Acquisition of Facilities In January 1994 the Company sold 28 inpatient rehabilitation hospitals and 45 related satellite outpatient clinics for approximately $350 million in cash, including the net book values of certain inventory, receivables and other items of working capital, subject to certain adjustments. The sale resulted in a gain of $66.2 million. The Company retained six rehabilitation hospitals on or near general hospital campuses and in March 1994 sold its other remaining rehabilitation hospital for approximately $14 million. For the fiscal year ended May 31, 1994, net operating revenues of the sold rehabilitation hospitals were $266 million, while pretax income, before general corporate overhead costs, was $22 million. During fiscal year 1994 The Hillhaven Corporation purchased the remaining 23 nursing centers it previously leased from the Company for $112 million. (See Note 14.) The sales resulted in a gain of $17 million. In May 1994 the Company entered into a long-term operating lease of a 138-bed general hospital in the New Orleans area. In July 1993 the Company sold a 120-bed general hospital in Tennessee. In June 1994 the Company announced the sale of two general hospitals in Southern California. Also in June 1994 the Company acquired, through a wholly owned subsidiary, an additional 50% interest in Centro Medico Teknon, its general hospital project in Barcelona, Spain, to bring the Company's ownership of the hospital to 100%. None of these transactions were significant. 30 Note 14 The Hillhaven Corporation In September 1993 the Company substantially completed a series of transactions with The Hillhaven Corporation that resulted in: 1) the Company selling to Hillhaven all remaining leased long-term-care nursing facilities, and no longer being a lessor to Hillhaven; 2) all indebtedness owed to the Company from Hillhaven being paid in full; 3) reducing Hillhaven obligations guaranteed by the Company; and 4) the Company purchasing 120,000 shares of Hillhaven nonvoting Series D Preferred Stock for $120 million. In February 1994 the Company exercised its warrants to purchase 6 million shares of Hillhaven common stock at the exercise price of $10.55 per share (after giving effect to Hillhaven's 5-to-1 reverse stock split). The total exercise price of $63.3 million was paid by liquidating 63,300 shares of Hillhaven Series D Preferred Stock acquired in September 1993. The Company, as of May 31, 1994, owned: 1) approximately 33% (8,878,147 shares) of the outstanding common stock of Hillhaven; 2) 35,000 shares of Hillhaven 8-1/4% accumulative nonvoting Series C Preferred Stock; and 3) 60,546 shares of Hillhaven nonvoting 6-1/2% payable in kind Series D Preferred Stock. Note 15 Sales of Subsidiaries' Common Stock In May 1994 the Company entered into an agreement pursuant to which DLJ Merchant Banking Funding, Inc. and certain of its affiliates (DLJMB) will acquire a controlling interest in the Company's wholly owned subsidiary that operates its 37 outpatient renal dialysis facilities. Under the terms of the agreement, and as subsequently agreed among the parties, the subsidiary is expected to consummate a public debt/equity offering in August 1994, the proceeds of which will be used to partially fund the payment of a $75.5 million dividend to the Company. Immediately after payment of the dividend, DLJMB will purchase common stock of the subsidiary for $10.5 million, and certain members of the subsidiary's management are expected to purchase common stock for approximately $1.9 million. After consummation of these transactions, the Company will own approximately 25% of the outstanding common stock of the subsidiary. Net operating revenues of the subsidiary were $80.5 million in the fiscal year ended May 31, 1994, and net income was $5.7 million. This transaction is expected to result in a gain to the Company of approximately $35 million in the first quarter of fiscal 1995. In March 1993 the Company's long-term-care subsidiary in the United Kingdom, Westminster Health Care Holdings PLC, issued 3,500,000 shares of its common stock to third parties in a private placement and in April 1993 sold 26,001,923 shares in an initial public offering; those transactions resulted in a gain to the Company of $29 million. As a result of the sale and issuance of shares, the Company's percentage ownership of Westminster changed from 90% to approximately 42%. Note 16 Restructuring Charges In April 1994 the Company initiated a plan to significantly decrease overhead costs through a reduction in corporate and division staffing levels and to review the resulting office space needs of all corporate operations. Accordingly, in July 1994 the Company announced that approximately 240 positions were being eliminated and other cost-saving efficiencies were implemented. The Company also decided to sell its corporate headquarters building and to lease substantially less office space in that building or at an alternative site. Costs of the write-down of the building, employee severance benefits and other expenses directly related to the overhead reduction plan are estimated to be approximately $77 million and have been expensed in the quarter ended May 31, 1994. In the quarter ended May 31, 1993, the Company recorded a charge of $52 million for restructuring costs related to continuing operations that were associated with the combination of the Rehabilitation Hospital Division into the General Hospital Division, a corporate overhead reduction program that began in April 1993, and severance costs incurred in connection with a change in senior executive management. These restructuring charges, as well as $18 million in the year ended May 31, 1992, have been charged to operating and administrative expenses. Note 17 Information About Lines of Business On June 1, 1993, the Company combined its former Rehabilitation Hospital Division and its General Hospital Division into a new division called the Hospital Division. In January 1994 the Company sold substantially all of its rehabilitation hospitals. (See Note 13.) Also during fiscal 1994 the Company announced that it had discontinued its psychiatric hospital business. (See Note 2.) At May 31, 1994, the Company operated 35 general hospitals and six rehabilitation hospitals in the United States and 12 general hospitals overseas, which accounted for approximately 95% of the Company's consolidated net revenues. The net revenues and operating profits of the overseas general hospitals accounted for approximately 5.9% and 7.6% of the Company's consolidated net revenues and operating profits in 1994 and approximately 5.1% and 7.3%, respectively, in 1993. 31 Report of Independent Auditors The Board of Directors National Medical Enterprises, Inc. We have audited the accompanying consolidated balance sheets of National Medical Enterprises, Inc. and subsidiaries as of May 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Notes 2, 7B and 13 to the consolidated financial statements, during 1994 the Company has discontinued its psychiatric hospital operations, settled a number of lawsuits and governmental investigations, and sold a significant number of its rehabilitation hospitals. These events have had a significant impact on the Company's consolidated financial position and results of operations. In our opinion, the consolidated financial statements referred to above present fairly the financial position of National Medical Enterprises, Inc. and subsidiaries as of May 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California July 27, 1994 Supplementary Financial Information Selected Quarterly Financial Data (unaudited)
Fiscal 1994 Quarters Fiscal 1993 Quarters ------------------------------- ------------------------------ (in millions, except per-share data) First Second Third Fourth First Second Third Fourth - ---------------------------------------------------------------------------------------------------------- Net operating revenues $775 $ 770 $ 720 $ 702 $ 791 $ 785 $ 795 $ 820 ============================== ============================== Income from continuing operations $ 53 $ 61 $ 91 $ 11 $ 50 $ 78 $ 65 $ 70 Net income (loss) $(41) $(226) $(164) $ 6 $ 51 $ 52 $ 54 $ 3 ============================== ============================== Income per share from continuing operations: Primary $0.32 $0.37 $0.55 $0.07 $0.30 $0.47 $0.39 $0.42 Fully diluted $0.30 $0.35 $0.51 $0.07 $0.29 $0.44 $0.37 $0.40 ============================== ==============================
Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including levels of occupancy, interest rates, acquisitions, disposals, revenue allowance and discount fluctuations, the timing of price changes, unusual litigation costs, restructuring charges and fluctuations in quarterly tax rates. 32 Board of Directors - ------------------ Jeffrey C. Barbakow(1,4) Chairman and Chief Executive Officer, NME Michael H. Focht Sr.(1,5) President and Chief Operating Officer, NME Bernice B. Bratter(1,3,4) Executive Director, Senior Health and Peer Counseling Maurice J. DeWald(1,3,6) Chairman, Verity Financial Group, Inc. Peter de Wetter(1) Executive Vice President, NME, Retired Edward Egbert, M.D.(2,4,6) Physician, Retired Raymond A. Hay(2,4,5) Chairman, Aberdeen Associates Lester B. Korn(1,3) Chairman, Korn Tuttle Capital Group James P. Livingston(2,4,5) Executive Vice President, NME, Retired Richard S. Schweiker(2,5) President, American Council of Life Insurance John C. Bedrosian+ Former Senior Executive Vice President, NME Nita Puig-Heckendorn+ Former Executive Vice President, NME Board Committees 1. Executive Committee 2. Audit Committee 3. Compensation and Stock Option Committee 4. Nominating Committee 5. Ethics and Quality Assurance Committee 6. Performance Investment Plan Committee + Term expires at the 1994 annual meeting. Not renominated for a new term. Executive Officers - ------------------ Jeffrey C. Barbakow Chairman and Chief Executive Officer Michael H. Focht Sr. President and Chief Operating Officer Maris Andersons Executive Vice President and Treasurer William S. Banowsky, Ph.D. Executive Vice President (Retiring 8/31/94) Scott M. Brown Senior Vice President, General Counsel and Secretary Vincent J. Lico Executive Vice President (Retiring 10/31/94) Raymond L. Mathiasen Senior Vice President and Chief Financial Officer Barry P. Schochet Executive Vice President, President and Chief Operating Officer, Hospital Division Corporate Staff Senior Vice Presidents - ---------------------- Peter J. Andriet Materiel Management Bruce G. Carpenter Associate General Counsel Thomas J. Dey Government Relations Steven Dominguez Government Programs Edward A. Elliott Taxation Wajeeh Ersheid Internal Audit Alan R. Ewalt Human Resources Lawrence G. Hixon Corporate Controller 33 Corporate Staff (continued) Senior Vice Presidents - --------------------------- T. Dennis Jorgensen Administration William Loorz Construction and Design David R. Mayeux Strategic Planning and Development Terence P. McMullen Financial Services Kim Mendenhall Facilities Administration John A. Meyers Assistant General Counsel Paul J. Russell Investor Relations Christi R. Sulzbach Public Affairs and Associate General Counsel Operating Divisions and Subsidiary Staff - ----------------------- Hospital Division Barry P. Schochet President and Chief Operating Officer Neil M. Sorrentino Senior Executive Vice President, Western District Michael W. Gallo Executive Vice President and Chief Financial Officer Alan E. London, M.D. Executive Vice President, Medical Affairs Thomas B. Mackey Executive Vice President Frank Tidikis Executive Vice President, Eastern District Senior Vice Presidents - ---------------------- Barry S. Ganley Information Systems Ben F. King Finance William W. Leyhe Integrated Delivery Systems Nancee E. Mendenhall Managed Care Business Development Martin J. Paris, M.D., M.P.H. Technology Assessment Medical Director, General Hospitals Clive E. Riddle National Health Plans Arnold M. Robin President, Syndicated Office Systems Robert L. Smith Operations Leann L. Strasen, R.N. Patient Care Services Davis L. Watts Revenue and Receivable Management William R. Wilson Finance International Hospital Division Michael H. Ford President and Chief Operating Officer Carl V. Stanifer Executive Vice President, Operations 34 Corporate Finance Common Stock Transfer Agent and Registrar The Bank of New York 101 Barclay St. New York, NY 10286 Stock Exchanges for Common Stock New York Stock Exchange Pacific Stock Exchange London Exchange 12 1/8% Notes Trustee/Registrar The Bank of New York 101 Barclay St. New York, NY 10286 Listing New York Stock Exchange Annual Meeting The annual meeting of the shareholders of National Medical Enterprises, Inc. will be held at 10 a.m., Wednesday, Sept 28, 1994, at Loews Santa Monica Beach Hotel, 1700 Ocean Ave., Santa Monica, Calif. Availability of Form 10-K The company reports annually to the Securities and Exchange Commission on Form 10-K. You may obtain a copy at no charge by writing to NME Investor Relations or by telephoning (310) 998-8200. Corporate Office National Medical Enterprises, Inc. 2700 Colorado Ave. P.O. Box 4070 Santa Monica, CA 90411-4070 (310) 998-8000 This annual report is printed on recycled paper. Supplementary Financial Information Common Stock Information (unaudited)
Fiscal 1994 Quarters Fiscal 1993 Quarters ---------------------------------------- --------------------------------------------- First Second Third Fourth First Second Third Fourth - ---------------------------------------------------------------------------------------------------------- Price range: High 12 1/4 12 16 1/4 18 1/8 16 3/4 14 1/4 13 1/4 9 7/8 Low 7 7 3/8 11 1/2 14 3/8 13 3/4 9 5/8 9 1/4 6 1/2
At May 31, 1994, there were approximately 16,000 holders of record of the Company's common stock. The Company's common stock is listed and traded on the New York, Pacific and London stock exchanges. The stock prices above are the high and low sales prices as reported in the NYSE Composite Tape for the last two fiscal years. On October 27, 1993, the Board of Directors suspended payments of dividends on the Company's common stock in order to give the Company maximum flexibility to respond to rapidly developing opportunities, to refocus on its general hospital core business and to resolve its legal issue. The Company's cash dividends per share were $0.12 in 1994 and $0.48 in 1993. The Company suspended the payment of quarterly cash dividends following the first quarter of fiscal 1994. 35 GRAPHICS APPENDIX LIST PAGE WHERE GRAPHIC APPEARS DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE - ---------- ------------------------------------------ Page 1 of Cover of NME's 1994 Annual Report to Shareholders Exhibit 13 (Exhibit 13). The cover of the 1994 Annual Report to Shareholders contains an illustration of people putting blocks into a sun. The illustration symbolizes NME building a brighter future. Page 5 of Stock Price Graph Exhibit 13 A graph showing the price of NME's common stock on various dates between February 28, 1992 and August 5, 1994 is included on page 5 of the 1994 Annual Report to Shareholders of NME (Exhibit 13). The dates shown are the dates of significant events for the Company which occurred during such period. Figures indicating the stock price on each significant date are shown on page 5 of Exhibit 13. EX-21 18 SUBSIDIARIES EXHIBIT 21 NATIONAL MEDICAL ENTERPRISES, INC. Subsidiary Corporations Revised August 17, 1994 Note: All subsidiaries are 100% owned by "NME" unless otherwise indicated. Assured Investors Life Company (a) Stanislaus Life Insurance Company Cornerstone - West, Inc. H.F.I.C. Management Company, Inc. (a) Health Facilities Insurance Corp., Ltd. - Bermuda International-NME, Inc. (a) LEIR Canada, Inc. (a) N.M.E. International (Cayman) Limited - Cayman Islands, B.W.I.- (99%) (b) B.V. Hospital Management - Netherlands (b) Pacific Medical Enterprises Sdn. Bhd. - Malaysia (c) Hyacinth Sdn. Bhd. - Joint Venture - (49%) (a) Subang Jaya Medical Center Sdn. Bhd. (30%) (a) NME Asia Pte Limited (b) Bumrungrad Medical Center Limited (40%) (b) Mount Elizabeth Healthcare Holdings Ltd. (80.54%) (Formerly: NME (Singapore) Holdings Limited) (19.46% owned by International - NME, Inc.) (c) Mount Elizabeth Hospital Ltd. (d) East Shore Hospital Pte Ltd (e) Renalcare (Katong) Pte Ltd (d) Medi-Rad Associates Pte Ltd - (71.2%) (e) Khim Medicare Pte Ltd - (67.3%) (d) MENA Services Pte Ltd (d) Mount Elizabeth Healthcare Services Pte Ltd (d) Mount Elizabeth Health Care Sdn Bhd - Malaysia (d) Mount Elizabeth Managed Care Services Pte Ltd (d) Mount Elizabeth Ophthalmic Investments Pte Ltd - (66.5%) (d) Radiology Consultants Pte Ltd (d) Renalcare Mount Elizabeth Pte Ltd - (20%) (a) Medicalia International, B.V. - Netherlands National Medical Enterprises Corp. (a) Westminster Health Care Holdings Plc (UK) (42%) (Formerly: NME (UK) Limited) (b) Westminster Health Care Limited -(UK) (90%) (c) Westminster Health Care (Properties) Limited - (UK) (c) Burleigh House Properties Limited (a) Newbridge Hospitals Limited -(UK) (b) NME Management Services (UK) Ltd. (a) NME UK Properties, Limited NME (Australia) Pty., Limited (a) Australian Medical Enterprises Ltd. (51.94%) (b) AME Trust (Formerly: Markalinga Trust) (b) AME Hospitals Pty Limited (Formerly: Markalinga Nom Pty Ltd.) (b) Victoria House Holdings Pty Ltd. NME Headquarters, Inc. NME Hospitals, Inc. (a) Brookhaven Hospital, Inc. 1 (b) Brookhaven Pavilion, Inc. (a) Germantown Community Hospital-Methodist East, Inc. (a) Instant Care Centers of America, Inc. (80%) (Inactive) (a) National Managed Med, Inc. (a) National Med, Inc. (a) National Medical Hospital of Tullahoma, Inc. (a) National Medical Hospital of Wilson County, Inc. (a) National Medical Services, Inc. (a) National Medical Ventures, Inc. (b) Litho I - LP (b) McHenry Surgery Center Partners, Ltd - LP (b) Redding Surgi Center - LP (a) NM Ventures - California, Inc. (a) NM Ventures of North County, Inc. (a) NME Hospitals Dallas, Inc. (a) NME Medical de Mexico, S.A. de C.V. (a) NMV Alvarado, Inc. (DISSOLVED 6/9/93) (a) NMV Dallas, Inc. (DISSOLVED 11/1/93) (a) NMV Hollywood, Inc. (b) Hollywood Medical Center - LP (a) NMV Tennessee (a) NMV-I, Inc. (DISSOLVED 6/1/93) (a) NMV-II, Inc. (b) West Boca OB Unit - LP (a) NMV Texas, Inc. (a) Preferred Medical Systems of California, Inc. (a) Rehabilitative Driving Resources, Inc. (non-profit) (a) West Coast PT Clinic, Inc. (a) Who Advertising, Inc. (DISSOLVED 11/22/93) NME Medical, Inc. NME PIP Funding I, Inc. NME Properties Corp. (a) AK, Inc. (a) Cascade Insurance Company, Ltd. (a) Guardian Medical Services, Inc. (a) Hammond Holiday Home, Inc. (a) Total Renal Care. Inc. (25%) (b) Medical Ambulatory Care, Inc. (c) Arizona-New Mexico Community Hemodialysis Services, Inc. (c) Continental at Home, Inc. (DISSOLVED 8/9/94) (c) Continental Dialysis Center, Inc. (90%) (c) Continental Dialysis Center of Springfield-Fairfax, Inc. (90%) (c) Continental Dialysis Center of Sterling-Dulless, Inc. (90%) (c) Garey Dialysis Center - GP (60%) (c) Kidney Dialysis Care Units, Inc. (c) Los Angeles Dialysis Center - GP (65%) (c) New Mexico Dialysis Services, Inc. (c) Nova Therapeutic Supply, Inc. (c) Pacific Coast Dialysis Center - GP (63%) (c) University Park Dialysis Center - GP (50%) (c) Valley Dialysis Associates, Inc. (c) Wilshire Dialysis Center - GP (50%) (a) NME Properties, Inc. 2 (b) Lake Health Care Facilities, Inc. (b) NME Properties of Western Michigan, Inc. (b) NME Properties West, Inc. (c) Morgan Manors, Inc. (b) Northwest Continuum Care Center, Inc. (a) NME Property Corp of Texas (a) NME Property Holding Co., Inc. (a) Sedgwick Convalescent Center, Inc. NME Property Partners, Limited Partnership (90%) NME Rehabilitation Properties, Inc. NME Specialty Hospitals, Inc. (a) National Medical Specialty Hospital of Redding (a) NME Management Services, Inc. (a) NME New Beginnings, Inc. (b) Addiction Treatment Centers of Maryland, Inc. (b) Alcoholism Treatment Centers of New Jersey, Inc. (b) Health Institutes, Inc. (c) Fenwick Hall, Inc. (c) Health Institutes Investments, Inc. (b) NME New Beginnings-Western, Inc. (c) Norquest/RCA-W Bitter Lake Partnership (a) NME Partial Hospital Services Corporation (a) NME Psychiatric Hospitals, Inc. (b) The Huron Corporation (a) NME Rehabilitation Hospitals, Inc. (a) Psychiatric Management Services Company NME Psychiatric Properties, Inc. (a) Alvarado Parkway Institute, Inc. (a) Baywood Hospital, Inc. (a) Brawner Hospital, Inc. (b) Evaluation and Assistance Programs of Atlanta, Inc. (50%) (DISSOLVED 9/2/92) (a) Contemporary Psychiatric Hospitals, Inc. (a) Elmcrest Manor Psychiatric Institute, Inc. (b) Elmcrest Manor Joint Venture (50%) (a) Gwinnett Psychiatric Institute, Inc. (a) Jefferson Hospital, Inc. (a) Lake Hospital and Clinic, Inc. (97.875%) (a) Lakewood Psychiatric Hospitals, Inc. (a) Laurel Oaks Residential Treatment Center, Inc. (a) Leesburg Institute, Inc. (a) Manatee Palms Residential Treatment Center, Inc. (a) Manatee Palms Therapeutic Group Home, Inc. (a) Medfield Residential Treatment Center, Inc. (a) Modesto Psychiatric Hospitals, Inc. (a) Modesto Psychiatric Realty, Inc. (b) Modesto Associates Limited Partnership (CANCELED 8/31/93) (a) Naperville Psychiatric Ventures (a) Nashua Brookside Hospital, Inc. (a) North Houston Healthcare Campus, Inc. (a) Northeast Behavioral Health, Inc. (a) Northeast Psychiatric Associates - 2, Inc. (a) Outpatient Recovery Centers, Inc. 3 (a) P.D. at New Baltimore, Inc. (a) P.I.A. Alexandria, Inc. (a) P.I.A. Canoga Park, Inc. (a) P.I.A. Cape Girardeau, Inc. (a) P.I.A. Capital City, Inc. (a) P.I.A. Central Jersey, Inc. (a) P.I.A. Colorado, Inc. (a) P.I.A. Connecticut Development Company, Inc. (b) P.I.A. Connecticut Development/Ameen-Fierman (50%) (a) P.I.A. Cook County, Inc. (a) P.I.A. Denton, Inc. (a) P.I.A. Detroit, Inc. (b) Harbor Oaks Hospital Limited Partnership (a) P.I.A. Educational Institute, Inc. (a) P.I.A. of Fort Worth, Inc. (a) P.I.A. Green Bay, Inc. (a) P.I.A. Highland, Inc. (b) Highland Psychiatric Associates (50%) (a) P.I.A. Highland Realty, Inc. (b) Highland Realty Associates (49%) (partnership) (a) P.I.A. Indianapolis, Inc. (a) P.I.A. Kansas City, Inc. (a) P.I.A. Lincoln, Inc. (a) P.I.A. Long Beach, Inc. (a) P.I.A. Maryland, Inc. (a) P.I.A. Michigan City, Inc. (a) P.I.A. Milwaukee, Inc. (a) P.I.A. Modesto, Inc. (a) P.I.A. Modesto Realty, Inc. (DISSOLVED 8/27/93) (b) Modesto Realty Limited Partnership (CANCELED 8/27/93) (a) P.I.A. Naperville, Inc. (a) P.I.A. New Jersey, Inc. (a) P.I.A. North Jersey, Inc. (a) P.I.A. Northern New Mexico, Inc. (a) P.I.A. Panama City, Inc. (a) P.I.A. Randolph, Inc. (a) P.I.A. Rockford, Inc. (a) P.I.A. of Rocky Mount, Inc. (a) P.I.A. Salt Lake City, Inc. (a) P.I.A. San Antonio, Inc. (a) P.I.A. San Ramon, Inc. (a) P.I.A. Sarasota Palms, Inc. (a) P.I.A. Seattle, Inc. (a) P.I.A. Slidell, Inc. (a) P.I.A. Solano, Inc. (a) P.I.A. Specialty Press, Inc. (a) P.I.A. Stafford, Inc. (a) P.I.A. Stockton, Inc. (a) P.I.A. Tacoma, Inc. (a) P.I.A. Tidewater Realty, Inc. (b) I.P.T. Associates (50%) (partnership) (a) P.I.A. Topeka, Inc. (a) P.I.A. Visalia, Inc. 4 (a) P.I.A. Waxahachie, Inc. (a) P.I.A. Westbank, Inc. (a) P.I.A.C. Realty Company, Inc. (a) PIAFCO, Inc. (a) Pinewood Hospital, Inc. (a) Potomac Ridge Treatment Center, Inc. (a) Psychiatric Division Consolidation, Inc. (a) Psychiatric Facility at Amarillo, Inc. (a) Psychiatric Facility at Asheville, Inc. (a) Psychiatric Facility at Azusa, Inc. (a) Psychiatric Facility at Evansville, Inc. (a) Psychiatric Facility at Lafayette, Inc. (a) Psychiatric Facility at Lawton, Inc. (a) Psychiatric Facility at Medfield, Inc. (a) Psychiatric Facility at Memphis, Inc. (a) Psychiatric Facility at Palm Springs, Inc. (a) Psychiatric Facility at Yorba Linda, Inc. (a) Psychiatric Institute of Alabama, Inc. (a) Psychiatric Institute of Atlanta, Inc. (a) Psychiatric Institute of Bedford, Inc. (a) Psychiatric Institute of Bucks County, Inc. (a) Psychiatric Institute of Chester County, Inc. (a) Psychiatric Institute of Columbus, Inc. (a) Psychiatric Institute of Delray, Inc. (a) Psychiatric Institute of Northern Kentucky, Inc. (a) Psychiatric Institute of Northern New Jersey, Inc. (a) Psychiatric Institute of Orlando, Inc. (a) Psychiatric Institute of Richmond, Inc. (a) Psychiatric Institute of San Jose, Inc. (a) Psychiatric Institute of Sherman, Inc. (a) Psychiatric Institute of Washington, D.C., Inc. (a) Residential Treatment Center of Memphis, Inc. (a) Residential Treatment Center of Montgomery County, Inc. (a) The Residential Treatment Center of the Palm Beaches, Inc. (a) RiverWood Center, Inc. (a) Sandpiper Company, Inc. (a) Southern Crescent Psychiatric Institute, Inc. (a) Southwood Psychiatric Centers, Inc. (a) Springwood Residential Treatment Centers, Inc. (a) Tidewater Psychiatric Institute, Inc. (a) The Treatment Center at Bedford, Inc. (a) Tucson Psychiatric Institute, Inc. (a) Tulsa County Health Services, Inc. Northshore Hospital Management Corporation RHSC Hospitals, Inc. (a) Allegheny Health Corporation (a) Blair County Health Corporation (a) Broward County Health Corporation (a) C.C. Health Corporation (a) Capital Hospital Corporation (a) Corpus Christi Rehab Realty, Inc. (b) Corpus Christi Realty Limited Partnership (a) Edison Rehab Corporation 5 (a) El Paso Health Corporation (a) Extended Care Centers, Inc. (a) FC Health Corporation (a) Healthcare Development, Inc. (a) Intervalley Health Corporation (a) Lakeside Health Corporation (a) LEIR Institute, Inc. (a) Montgomery Rehabilitation Hospital, Inc. (a) Neuro-Rehab Associates, Inc. (51%) (a) Outpatient Rehab of Montgomery County, Inc. (a) Pennsylvania Health Corp. (b) MRS Orthotics, Inc. (b) Mechanicsburg Sub-Acute Rehab Associates (a) Pinecrest Rehabilitation Hospital, Inc. (a) Rehab Health Corporation of New Jersey (a) Rehab Hospital of Florida, Inc. (a) Rehab of Melbourne, Inc. (a) Rehab-Salt Lake, Inc. (b) RHSC/Salt Lake Limited Partnership (a) Rehabilitation Hospital Division Consolidation, Inc. (a) Rehabilitation Facility at Austin, Inc. (a) Rehabilitation Facility at Salt Lake City, Inc. (a) Rehabilitation Facility at San Diego, Inc. (a) Rehabilitation Facility at San Ramon, Inc. (a) Rehabilitation Facility at Texarkana, Inc. (a) Rehabilitation Hospital of Gaston County, Inc. (a) Rehabilitation Hospital of Wilmington, Inc. (a) RHD Alternative Services, Inc. (a) R.H.S.C. Columbus, Inc. (a) RHSC Corpus Christi, Inc. (b) Corpus Christi Rehab Associates Limited Partnership (a) R.H.S.C. El Paso, Inc. (a) R.H.S.C. Hartford, Inc. (a) R.H.S.C. Midland, Inc. (a) R.H.S.C. Modesto, Inc. (a) R.H.S.C. New London, Inc. (a) R.H.S.C. Orlando, Inc. (a) R.H.S.C. Prosthetics, Inc. (a) R.H.S.C. Rockford, Inc. (a) R.H.S.C. San Antonio, Inc. (b) San Antonio Associates Limited Partnership (b) HCPI/San Antonio Limited Partnership (a) R.H.S.C. Stamford, Inc. (a) R.H.S.C. Wichita, Inc. (a) Sahara Development Company, Inc. (a) Salt Lake Rehab Realty, Inc. (b) Realty Salt Lake Limited Partnership (a) San Antonio Rehab Corporation (a) Sebastian County Health Services, Inc. (a) South Texas Rehab Corporation (a) Transitional Living Center of Broward County, Inc. (a) Transitional Living Center of Dallas County, Inc. (a) Treasure Coast Health Corporation 6 (a) University Rehabilitation Services, Inc. (a) York County Health Corporation Syndicated Office Systems T.A.D. Avanti, Inc. Wilshire Rental Corp. Women's Medical Center of America, Inc. INACTIVE CORPORATIONS Ambulatory Health Systems, Inc. (Inactive) Medfield Corporation (Inactive) Medical Investors Management Corporation (Inactive) MICA of New York, Inc. (Inactive) National Medical Specialties, Inc. (Inactive) NME Acquisition, Inc. (Inactive) NME Partners, Inc. (Inactive) Westbank Medical Center. Ltd. (Inactive) 7 EX-23 19 KPMG CONSENT EXHIBIT 23 ACCOUNTANTS' CONSENT AND REPORT ON CONSOLIDATED SCHEDULES The Board of Directors and Stockholders National Medical Enterprises, Inc.: Under date of July 27, 1994, we reported on the consolidated balance sheets of National Medical Enterprises, Inc. and subsidiaries as of May 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended May 31, 1994, as contained in the 1994 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, based on our audits, such schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also consent to the incorporation by reference of our report dated July 27, 1994, in the Company's Registration Statements on Form S-3 (Nos. 2-96780, 33-39130, 33-39563, 33-40212 and 33-45689) and Registration Statements on Form S-8 (Nos. 33-11478, 2-95774, 2-87611, 2-69472, 2-79401, 33-35688, 33-50180 and 33-50182). KPMG Peat Marwick LLP Los Angeles, California August 25, 1994 -----END PRIVACY-ENHANCED MESSAGE-----