MERIT BEHAVIORAL CARE CORP
8-K, 1997-10-29
HEALTH SERVICES
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                                 UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 8-K

                                CURRENT REPORT
                   PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934


Date of report  (Date of earliest event reported): October 24, 1997

                       Merit Behavioral Care Corporation
             (Exact Name of Registrant as Specified in Charter)

                                   Delaware
            (State or Other Jurisdiction of Incorporation)


33-80987                                                 22-3236927
(Commission                                            (IRS Employer
File Number)                                        Identification No.)


                 One Maynard Drive, Park Ridge, New Jersey    07656
               (Address of Principal Executive Offices)    (Zip Code)

                                (201) 391-8700
           (Registrant's telephone number, including area code)

                                    N/A
        (Former Name or Former Address, if Changed Since Last Report)



<PAGE>



ITEM 2.           ACQUISITION OR DISPOSITION OF ASSETS

On October 24, 1997, Merit Behavioral Care Corporation ("Merit") entered into an
Agreement and Plan of Merger (the "Agreement"), pursuant to which a wholly owned
subsidiary of Magellan Health Services,  Inc.  ("Magellan")  will merge with and
into Merit (the  "Merger").  Pursuant to the Merger,  Merit will become a wholly
owned subsidiary of Magellan.

Pursuant to the Agreement, holders of Merit's outstanding shares of common stock
and other equity  interests  will receive in the  aggregate  approximately  $460
million  in cash,  subject to certain  adjustments  set forth in the  Agreement.
Magellan will also refinance  Merit's existing debt,  including its $100 million
of 11 1/2% senior  subordinated notes due 2005. The Merger is subject to certain
conditions,   including  the   expiration  of  the  waiting   period  under  the
Hart-Scott-Rodino  Antitrust Improvements Act of 1976 and receipt by Magellan of
financing for the Merger.

A copy of the  Agreement  and the press  release  issued  by Merit and  Magellan
announcing the execution of the Agreement are attached as exhibits.

 ITEM 7.          FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
                  AND EXHIBITS

                  (a)      Financial Statements of Business Acquired.

                           Not Applicable.

                  (b)      Pro Forma Financial Information.

                           Not Applicable.

                  (c)      Exhibits.

The following exhibit is filed with this Report on Form 8-K.

Regulation S-K
Exhibit Number                     Exhibit

10.1                               Agreement and Plan of Merger, dated as of
                                   October 24, 1997, among Merit Behavioral
                                   Care Corporation, Magellan Health Services,
                                   Inc. and MBC Merger Corporation.

99.1                               Press release dated October 27, 1997.




<PAGE>




                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned hereunto duly authorized.


                        MERIT BEHAVIORAL CARE CORPORATION


                                       /s/ John A. Budnick
                                       ------------------------------------

                                        John A. Budnick
                                        Chief Financial Officer


Date: October 29, 1997





                 AGREEMENT AND PLAN OF MERGER, dated as of October 24, 1997 (the
"Agreement"),  among  MAGELLAN  HEALTH  SERVICES,  INC., a Delaware  corporation
("Parent"),  MERIT  BEHAVIORAL CARE  CORPORATION,  a Delaware  corporation  (the
"Company"),  and MBC MERGER  CORPORATION,  a Delaware  corporation  and a wholly
owned Subsidiary of Parent ("Merger Sub").

                              W I T N E S S E T H:

                  WHEREAS,   the  Directors  of  the  Company  have  unanimously
determined  that the  merger of Merger Sub with and into the  Company,  upon the
terms and subject to the conditions set forth in this Agreement (the  "Merger"),
is fair to and in the best interests of the Company and its stockholders;

                  WHEREAS,  in the  Merger,  the Company  will be the  surviving
corporation,  and each share of common stock,  par value $.01 per share,  of the
Company  (the "Common  Stock")  will be converted  into the right to receive the
cash consideration specified in Section 2.07(c) hereof;

                  WHEREAS,  the Boards of Directors  of the Company,  the Parent
and Merger Sub have each  approved and adopted this  Agreement  and approved the
Merger and the other  transactions  contemplated  hereby,  and the  Company  has
recommended  approval  and  adoption  of this  Agreement  and the  Merger by its
stockholders;

                  WHEREAS, MBC Associates,  L.P., a Delaware limited partnership
("MBC  Associates"),  and KKR Partners II, L.P., a Delaware limited  partnership
("KKR Partners"), collectively own 21,000,000 shares of Common Stock, 38 Newbury
Ventures/MBC   Limited   Partnership,   a  Massachusetts   limited   partnership
("Newbury"),  owns 600,000 shares of Common Stock,  Albert S. Waxman, the Albert
S. Waxman Family Charitable Remainder Unitrust (the "Waxman Trust") collectively
own 2,055,100  shares of Common Stock,  Arthur H. Halper owns 100,000  shares of
Common Stock, Michael G. Lenahan owns 100,000 shares of Common Stock and John A.
Budnick owns 50,000 shares of Common Stock, all of which shares represent, as of
the date hereof, in the aggregate  approximately 81.3% of the outstanding Common
Stock; and

                  WHEREAS,  MBC Associates,  KKR Partners,  Newbury,  the Waxman
Trust and  Messrs.  Waxman,  Halper,  Lenahan  and  Budnick  (collectively,  the
"Company Stockholders") have approved this Agreement and the Merger.

                  NOW,  THEREFORE,  in  consideration of the premises and of the
mutual agreements and covenants  hereinafter set forth,  Parent, the Company and
Merger Sub agree as follows:



<PAGE>
                                   ARTICLE I.

                                   DEFINITIONS

                  SECTION 1.01.     Certain Defined Terms.
As used in this Agreement, the following terms have the following meanings:

                  "Action" means any claim, action, suit or proceeding, arbitral
action,  governmental inquiry, criminal prosecution or other investigation as to
which written notice has been provided to the applicable party.

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

                  "Aggregate  Cash  Consideration"  means an amount equal to (i)
$750,000,000,  plus (ii) Aggregate  Option Exercise Price,  less (iii) Net Debt,
less (iv) fees and  expenses  incurred  by the  Company in  connection  with the
transactions   contemplated   hereby  (including  without  limitation  the  fees
referenced  in Section  3.21 and  specifically  excluding  any fees and expenses
associated with obtaining the financing under the Commitment Letter).

                  "Aggregate Option Exercise Price" means an amount equal to the
aggregate dollar amount of the exercise price on all Company Options outstanding
immediately prior to the Effective Time.

                  "Agreement" means this Agreement and Plan of Merger,  dated as
of October 24, 1997, by and among Parent,  the Company and Merger Sub (including
the  Disclosure  Schedule and Parent  Disclosure  Schedule)  and all  amendments
hereto made in accordance with Section 9.10.

                  "Balance Sheet" means the unaudited consolidated balance sheet
of the  Company  and the  Company  Subsidiaries  as of the  Balance  Sheet Date,
together with related notes thereto.

                  "Balance Sheet Date" means August 31, 1997.

                  "Books  and  Records"  means  all books of  account  and other
financial records pertaining to the Company and the Company Subsidiaries.

                  "Business"  means the business of  providing or  administering
managed  behavioral  health care  services or providing  behavioral  health care
services,  including managed mental health programs and substance abuse programs
and employee assistance programs and utilization management, care management and
network management  concerning  behavioral health care services,  throughout the
United States, as conducted by the Company and the Company Subsidiaries.

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

                  "Company  Financial  Statements"  means  audited  consolidated
financial  statements of the Company for the twelve  months ended  September 30,
1996,  September  30,  1995  and  September  30,  1994 and  unaudited  condensed
financial statements for the eleven months ended on the Balance Sheet Date.

                  "Company  Options"  means  options to  purchase  Common  Stock
granted pursuant to the 1995 Plan and the 1996 Plan.

                  "Company  Subsidiaries"  means the Subsidiaries of the Company
(each of which is individually referred to as a "Company Subsidiary").

                  "Compensation   Arrangement"   means  any   written   plan  or
compensation arrangement, other than an Employee Plan, with respect to which the
Company  or any ERISA  Affiliate  contributes,  which the  Company  or any ERISA
Affiliate sponsors or maintains or to which it or any ERISA Affiliate  otherwise
is bound,  which provides to employees,  or former employees,  of the Company or
any  ERISA  Affiliate,  with  respect  to the  period of their  employment,  any
compensation  or other  benefits,  whether  deferred  or not,  in excess of base
salary or wages,  including,  but not limited to, any bonus or  incentive  plan,
stock rights plan,  deferred  compensation  arrangement,  life insurance,  stock
purchase plan,  severance pay plan,  vacation pay and any other employee  fringe
benefit plan.

                  "Confidentiality Agreement" means the letter agreement between
the Company and Parent dated as of September 2, 1997.

                  "Contract"  means any contract,  agreement,  indenture,  note,
bond, loan,  letter of credit,  instrument,  lease,  conditional sales contract,
mortgage, license, franchise agreement,  insurance policy, binding commitment or
other agreement, whether written or oral.

                  "Debt" means any indebtedness,  obligation or liability of the
Company or any Company  Subsidiary for borrowed money,  capitalized  leases, and
obligations  under  reimbursement   agreements  related  to  letters  of  credit
(excluding  intercompany  indebtedness).   The  amount  of  Debt  related  to  a
capitalized  lease shall equal that amount required by GAAP to be set forth on a
balance sheet.

                  "DGCL" means the General Corporation Law of the State of
Delaware.

                  "Disclosure  Schedule" means the Disclosure  Schedule dated as
of the date of this Agreement delivered to Parent by the Company.

                  "Employee  Plan" means any pension,  profit-sharing,  deferred
compensation,  vacation, bonus, severance,  incentive,  medical, vision, dental,
disability,  life  insurance  or any other  employee  benefit plan as defined in
Section 3(3) of ERISA to which the Company or any ERISA  Affiliate  contributes,
which the Company or any ERISA Affiliate sponsors or maintains,  or to which the
Company or any ERISA Affiliate otherwise is bound.

                  "Encumbrance" means any security interest,  pledge,  mortgage,
lien,  charge,  adverse  claim of ownership or use,  option,  right to purchase,
right to convert, judgement or other encumbrance of any kind.

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

                  "ERISA  Affiliate"  means any trade or business  under  common
control with the Company within the meaning of Sections 414(b),  (c), (m) or (o)
of the Code.

                  "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

                  "GAAP" means generally accepted accounting principles in
the United States.

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

                  "Governmental  Order"  means any  statute,  rule,  regulation,
order,  judgment,  injunction,  decree,  stipulation  or  determination  issued,
promulgated or entered by or with any Governmental Authority.

                  "HSR Act" means the Hart Scott Rodino  Antitrust  Improvements
Act of 1976, as amended, and the rules and regulations thereunder.

                  "Internal  Revenue  Code" or "Code"  each  means the  Internal
Revenue Code of 1986, as amended, and the regulations thereunder.

                  "IRS" means the United States Internal Revenue Service.

                  "Knowledge"  or "known"  means,  with respect to any matter in
question, if any of Albert Waxman, Arthur Halper, John Budnick, Michael Lenahan,
Richard  Surles,  David  Stone,  Doug Wiley,  Ken Hawes,  John  Docherty and Pat
Schmiedeler  of the  Company and the  members of the Board of  Directors  of the
Company  designated by KKR Partners  have actual  knowledge of such matter as of
the date of this Agreement.

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

                  "Leased Real Property"  means the real property  leased by the
Company and the Company  Subsidiaries,  as tenant,  together with, to the extent
leased by the Company  and the Company  Subsidiaries,  all  buildings  and other
structures,  facilities or improvements  currently or hereafter located thereon,
all fixtures,  systems,  equipment and items of personal property of the Company
and the Company Subsidiaries attached or appurtenant thereto, and all easements,
licenses, rights and appurtenances relating to the foregoing.

                  "Leases" means the leases for the Leased Real Property.

                  "Liabilities"  means  any  and  all  debts,   liabilities  and
obligations,  whether  accrued  or fixed,  absolute  or  contingent,  matured or
unmatured or determined or determinable.

                  "Licenses"  means  all  of the  licenses,  permits  and  other
governmental  authorizations  required  for the  operation  of the  Business  as
conducted as of the date of this Agreement.

                  "Material  Adverse  Effect" means any change or effect that is
materially adverse to the operations,  business,  financial condition or results
of  operations  of the Company and the Company  Subsidiaries,  taken as a whole,
except for any such changes or effects resulting  directly or primarily from (i)
the  announcement  or  other  disclosure  or  consummation  of the  transactions
contemplated  by this Agreement,  (including,  without  limitation,  the breach,
termination,  cancellation  or  non-renewal  by any  customer  of  any  customer
contracts   primarily  as  a  result  of  such   announcement,   disclosure   or
consummation),  (ii)  regulatory  changes or changes in the  managed  behavioral
health care services industry, or (iii) general economic conditions.

                  "Merger" shall mean the merger of Merger Sub with and into the
Company,  with the Company being the surviving  corporation,  in accordance with
this Agreement and the Certificate of Merger.

                  "Multiemployer Plan" means a plan, as defined in ERISA
Section 3(37).

                  "Net Debt" means an amount  equal to (i) Debt  outstanding  at
September 30, 1997,  less (ii)  Unrestricted  Cash at September  30, 1997,  less
(iii) the amount of notes receivable from officers of the Company outstanding at
September 30, 1997, plus (iv) $8,200,000.

                  "Parent  Disclosure  Schedule"  means  the  Parent  Disclosure
Schedule  dated as of the date of this  Agreement  delivered  to the  Company by
Parent.

                  "Permitted  Encumbrances"  means (i) Encumbrances for inchoate
mechanics' and  materialmen's  liens for construction in progress and workmen's,
repairmen's,  warehousemen's  and carriers' liens arising in the ordinary course
of the Business, (ii) Encumbrances for Taxes not yet payable and for Taxes being
contested  in good faith,  (iii)  Encumbrances  in favor of Parent or Merger Sub
arising out of, under or in connection with this Agreement and (iv) Encumbrances
and  imperfections  of title that do not secure payment of indebtedness  and the
existence of which would not materially  affect the use of the property  subject
thereto, consistent with past practice.

                  "Person" means any individual, partnership, firm, corporation,
association,  trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Exchange Act.

                  "Subsidiaries" with respect to a Person means any other Person
in which such Person has a direct or indirect  equity or  ownership  interest in
excess of 50% or has the right to appoint a majority of  directors,  in the case
of a corporation,  or managers,  in the case of a limited  liability company (or
persons performing similar functions).

                  "Tax" or "Taxes" means all federal,  state,  local and foreign
income,   estimated  income,  gross  receipts,   sales,  use,  social  security,
employees' withholding,  unemployment,  disability,  excise, franchise, profits,
property,  capital  stock,  premium,  minimum and  alternative  minimum or other
taxes,  fees,  stamp  taxes  and  duties,  assessments  or  charges  of any kind
whatsoever  (whether  payable  directly or by  withholding),  together  with any
interest and any penalties,  additions to tax or additional  amounts  imposed by
any taxing authority with respect thereto.

                  "Unrestricted   Cash"  means  the  aggregate  of  all  amounts
included on the  consolidated  September  30, 1997 balance  sheet of the Company
under  the line  items  "Operating  - MBC,"  "Operating  - CMG"  and  "Temporary
Borrowings," plus $4,735,000

                  SECTION 1.02.     Other Defined Terms.

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


 The  following  terms have the meanings  defined for such terms in the Sections
set forth below:

         Term                                                                   Section

         Annual Gross Revenue Amount                                            5.05(b)
         Antitrust Laws                                                         5.05(b)
         Bank Debt                                                              5.10
         Cash Consideration                                                     2.07(c)
         Certificate of Merger                                                  2.02
         Certificates                                                           2.08(b)
         Closing                                                                2.03
         Closing Date                                                           2.03
         Commitment Letter                                                      4.05
         Common Stock                                                           Recitals
         Company                                                                Preamble
         Company Active Entity                                                  3.04
         Company Inactive Entity                                                3.04
         Company Other Entity                                                   3.04
         Company Stockholders                                                   Recitals
         Dissenting Shares                                                      2.10
         Effective Time                                                         2.02
         Excess Amount                                                          5.05(b)
         Exchange Agent                                                         2.08(a)
         Exchange Fund                                                          2.08(a)
         Hardware                                                               3.12
         Indemnified Parties                                                    5.09(a)
         Listed Contracts                                                       3.16(a)
         KKR Partners                                                           Recitals
         MBC Associates                                                         Recitals
         Merger Sub                                                             Preamble
         Newbury                                                                Recitals
         1995 Plan                                                              2.10(a)
         1996 Plan                                                              2.10(b)
         Option Certificate                                                     2.08(b)
         Parent                                                                 Preamble
         Preliminary Schedule                                                   2.07(d)
         Section 3.13 Leases                                                    3.13
         Section 3.19 Affiliates                                                3.19
         Senior Subordinated Notes                                              5.10
         Software                                                               3.12
         Stock Certificate                                                      2.08(b)
         Sub Capital Stock                                                      2.07(a)
         Subsidiary Shares                                                      3.04(b)
         Surviving Corporation                                                  2.04
         Threshhold Amount                                                      5.05(b)
         Waxman Trust                                                           Recitals

</TABLE>

<PAGE>
                                   ARTICLE II.

                                     MERGER

SECTION 2.01.  The Merger.  Upon the terms and subject to the provisions of this
Agreement,  and in accordance with the DGCL, Merger Sub will merge with and into
the Company at the Effective Time (as defined in Section 2.02).

SECTION 2.02.  Effective  Time of the Merger.  Subject to the provisions of this
Agreement,  a  certificate  of merger  with  respect  to the  Merger in form and
substance  satisfactory  to the  parties  and in such form as is required by the
relevant  provisions  of the DGCL (the  "Certificate  of Merger")  shall be duly
prepared, executed and acknowledged and thereafter delivered to the Secretary of
State of the State of Delaware for filing,  as provided in the DGCL, as early as
practicable on the Closing Date (as defined in Section  2.03).  The Merger shall
become  effective at such time as is specified in the Certificate of Merger (the
time at which the Merger has become fully effective being  hereinafter  referred
to as the "Effective Time").

SECTION 2.03. Closing. The closing of the Merger (the "Closing") will take place
at 10:00  a.m.,  New York  time,  on a date to be  specified  by Parent  and the
Company,  which shall be no earlier than the 45th day following the date of this
Agreement  and after such date,  shall be no later than the second  Business Day
after  satisfaction  or, if  permissible,  waiver of the conditions set forth in
Article VII (the "Closing Date"), at the offices of Latham & Watkins,  885 Third
Avenue,  Suite 1000, New York, New York,  10022,  unless another date,  place or
time is agreed to in writing by Parent and the  Company.  At the Closing (i) the
documents,  certificates  and  instruments  referred  to in Article VII shall be
executed and delivered,  (ii) the cash to be deposited (in immediately available
funds) with the Exchange Agent for  disbursement  pursuant to Section 2.08 shall
be deposited,  and (iii) all amounts  contemplated by Section 5.10(i) to be paid
at Closing shall be paid.

SECTION  2.04.  Effect of the Merger.  As a result of the Merger,  the  separate
corporate  existence of Merger Sub shall cease and the Company shall continue as
the  surviving   corporation  (the  "Surviving   Corporation").   Upon  becoming
effective,  the Merger  shall have the  effects  set forth in the DGCL.  Without
limiting the generality of the foregoing,  and subject thereto, at the Effective
Time, all properties,  rights, privileges,  powers and franchises of the Company
and  Merger  Sub  shall  vest  in the  Surviving  Corporation,  and  all  debts,
liabilities  and duties of the  Company  and Merger Sub shall  become the debts,
liabilities and duties of the Surviving Corporation.

SECTION  2.05.   Certificate  of  Incorporation  and  Bylaws  of  the  Surviving
Corporation . At the Effective Time, the Certificate of Incorporation and Bylaws
of the Surviving Corporation shall be amended to be identical to the Certificate
of  Incorporation  and  Bylaws,  respectively,   of  Merger  Sub  as  in  effect
immediately  prior to the Effective  Time until duly amended in accordance  with
applicable laws.

SECTION 2.06. Directors and Officers of the Surviving Corporation. The directors
of Merger Sub  immediately  prior to the Effective Time shall become the initial
directors of the Surviving  Corporation,  each to hold office from the Effective
Time  until  their  respective  successors  are duly  elected or  appointed  and
qualified in accordance with the Certificate of Incorporation  and Bylaws of the
Surviving Corporation.  The officers of the Company specified in the Certificate
of Merger shall be the initial  officers of the Surviving  Corporation,  each to
hold office until their respective  successors are duly elected or appointed and
qualified in accordance with the Certificate of Incorporation  and Bylaws of the
Surviving  Corporation.  The Company shall use reasonable  efforts to cause each
director of the Company to tender his or her resignation  prior to the Effective
Time, each such resignation to be effective as of the Effective Time.

SECTION 2.07. Conversion of Securities.  At the Effective Time, by virtue of the
Merger and without  any action on the part of any of the  parties  hereto or the
holders of any shares of the following securities:

                  (a) Capital Stock of Merger Sub.  Each issued and  outstanding
share of  capital  stock,  par value  $.01 per  share,  of Merger  Sub (the "Sub
Capital  Stock")  shall  be  converted  into  and  become  one  fully  paid  and
nonassessable  share of common stock, par value $.01 per share, of the Surviving
Corporation.  At the  Effective  Time,  Parent,  as the sole  holder  of the Sub
Capital Stock,  shall surrender any and all certificates  representing  such Sub
Capital Stock to the Surviving  Corporation  and shall be entitled to receive in
exchange  therefor  a  certificate  representing  the number of shares of common
stock of the Surviving  Corporation into which the Sub Capital Stock theretofore
represented  by the  certificates  so  surrendered  shall have been converted as
provided in this Section  2.07(a).  From and after the Effective Time,  until so
surrendered,  each  certificate  theretofore  representing  shares of issued and
outstanding  Sub  Capital  Stock shall be deemed for all  corporate  purposes to
evidence the number of shares of common stock of the Surviving  Corporation into
which such shares of Sub Capital Stock shall have been converted.

                  (b) Cancellation of Treasury Stock. All shares of Common Stock
that are owned by the Company as treasury stock shall be automatically canceled,
retired  and   extinguished   and  shall  cease  to  exist  and  no  payment  or
consideration shall be made or delivered with respect thereto.

                  (c) Common Stock of the Company.  Each issued and  outstanding
share of Common  Stock  (other than shares to be  canceled  in  accordance  with
Section 2.07(b) and any Dissenting  Shares, as defined below) shall be converted
into and  represent  the  right to  receive  an  amount,  in cash,  equal to the
quotient obtained by dividing (i) the Aggregate Cash Consideration,  by (ii) the
total  number of shares of Common  Stock  outstanding  immediately  prior to the
Effective  Time (other than shares to be  cancelled in  accordance  with Section
2.07(b)) plus the number of shares  issuable  upon  exercise of Company  Options
outstanding  immediately prior to the Effective Time (the "Cash Consideration").
All  such  shares  of  Common  Stock,  when so  converted,  shall no  longer  be
outstanding and shall  automatically  be canceled,  retired and extinguished and
shall  cease to  exist,  and each  certificate  which  immediately  prior to the
Effective Time  represented  any such shares (other than any Dissenting  Shares)
shall  thereafter  represent  the  right  to  receive,  upon  surrender  of such
certificate  in  accordance  with  the  provisions  of  Section  2.08,  the Cash
Consideration into which such shares have been converted in accordance herewith.

                  (d)  Establishing the Cash  Consideration.  Five days prior to
the  Effective  Time,  the Company  shall  provide  Parent with a schedule  (the
"Preliminary Schedule"),  setting forth in reasonable detail, the estimated Cash
Consideration  as of the  Effective  Time.  Parent  shall  promptly  review such
schedule  and  provide any  disagreements  on such  schedule  within two days of
receipt of such  schedule.  The Company and Parent shall resolve any disputes on
the  preparation  of the  Preliminary  Schedule  and  agree  upon a  final  Cash
Consideration  which reflects  changes,  if any, between the date of delivery of
the Preliminary Schedule and the Effective Time.

SECTION  2.08.   Exchange  of   Certificates.   The  procedures  for  exchanging
certificates  which prior to the  Effective  Time  represented  shares of Common
Stock for the Cash Consideration pursuant to the Merger are as follows:

                  (a) Exchange  Agent.  As of the Effective  Time,  Parent shall
deposit with a bank or trust  company  designated by Parent and the Company (the
"Exchange Agent"),  for the benefit of the holders of shares of Common Stock and
Company Options outstanding  immediately prior to the Effective Time (other than
Dissenting  Shares),  for exchange in accordance with this Section 2.08, through
the Exchange  Agent,  cash in the  aggregate  amount  sufficient to pay the Cash
Consideration  for all  shares of Common  Stock  converted  pursuant  to Section
2.07(c) and to pay  amounts  payable to holders of Company  Options  pursuant to
Section 2.10 (such cash being  hereinafter  referred to in the  aggregate as the
"Exchange   Fund").   The  Exchange   Agent  shall,   pursuant  to   irrevocable
instructions,  deliver  the cash  required to be  delivered  pursuant to Section
2.07(c) and Section 2.10 out of the Exchange Fund to holders of shares of Common
Stock and  Company  Options,  respectively.  Except as  contemplated  by Section
2.08(e), the Exchange Fund shall not be used for any other purpose.

                  (b) Exchange Procedures.  Commencing on the 35th day after the
date hereof,  Parent shall cause the Exchange Agent to promptly  deliver to each
holder of record  of a  certificate  or  certificates  representing  outstanding
shares of Common Stock (the "Stock  Certificates")  and to each holder of record
of a certificate  or instrument  which  immediately  prior to the Effective Time
represented any  outstanding  Company  Options (the "Option  Certificates"  and,
collectively together with the Stock Certificates, the "Certificates") from whom
the Exchange Agent receives a written request (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates  shall  pass,  only at or  following  the  Effective  Time and upon
delivery of the  Certificates  to the Exchange  Agent and which shall be in such
form and have such other  provisions  as Parent and the Company  may  reasonably
specify) and (ii)  instructions  for effecting the surrender of the Certificates
in exchange for the cash  payable  pursuant to Section  2.07(c) or 2.10,  as the
case may be,  with  respect  to the shares of Common  Stock or  Company  Options
formerly  represented  thereby. The letter of transmittal with respect to Option
Certificates  shall contain  language waiving any claims the holders thereof may
have against  Parent or the Company or any  Affiliates of either with respect to
the Company  Options.  As soon as reasonably  practicable  (and in any event not
later than three (3) Business Days) after the Effective Time, Parent shall cause
the  Exchange  Agent  to mail a  letter  of  transmittal  and  the  instructions
described above to each holder of record of a Certificate who has not previously
requested such documents from the Exchange Agent.

Each holder of a Certificate  shall be entitled to surrender such Certificate to
the Exchange  Agent at the  Effective  Time in  accordance  with the  procedures
described herein.  Upon surrender of a Stock Certificate or Option  Certificate,
as the  case may be,  to the  Exchange  Agent,  together  with  such  letter  of
transmittal,  duly executed,  (x) the holder of such Stock  Certificate shall be
entitled to receive promptly in exchange therefor the Cash  Consideration (to be
paid in immediately  available funds) which such holder has the right to receive
pursuant to the provisions of Section 2.07(c) (provided that Stock  Certificates
delivered to the Exchange Agent at the Closing shall be paid at the Closing) and
the Stock Certificate so surrendered shall immediately be canceled,  and (y) the
holder of such  Option  Certificate  shall be entitled to receive (to be paid in
immediately available funds) promptly (but no earlier than the seventh day after
the Closing Date) in exchange therefor the  consideration  which such holder has
the right to receive  pursuant to Section 2.10 hereof  (which shall  include the
interest payment specified in Section 2.10). (c)  Distributions  With Respect to
Unexchanged  Shares. No payment shall be made to the holder of any unsurrendered
Certificate  in respect  thereof until the holder of record of such  Certificate
shall surrender such Certificate to Parent in accordance herewith.

                  (d) No  Further  Ownership  Rights in Common  Stock or Company
Options.  The payment made upon the  surrender for exchange of  Certificates  in
accordance  with the terms  hereof  shall be deemed to have been  issued in full
satisfaction  of all rights  pertaining to the shares of Common Stock or Company
Options, as appropriate, theretofore represented by such Certificates.

                  (e)  Termination of Exchange Fund. Any portion of the Exchange
Fund which remains  undistributed for 180 days after the Effective Time shall be
delivered to Parent upon demand, and any former holder of shares of Common Stock
or Company Options,  as appropriate,  who has not previously  complied with this
Section  2.08 shall  thereafter  look only to Parent for  payment of such former
holder's claim for payment in respect of such holder's shares of Common Stock or
Company Options, as appropriate.

                  (f) No Liability.  None of the Company,  Parent, Merger Sub or
the  Exchange  Agent shall be liable to any holder of shares of Common Stock for
any cash, stock or other property delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.

                  (g) Withholding Rights.  Parent, the Surviving  Corporation or
the  Exchange   Agent  shall  be  entitled  to  deduct  and  withhold  from  the
consideration  otherwise  payable  pursuant to this  Agreement  to any holder of
Certificates  such amounts as it is required by Law to deduct and withhold  with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law  provided,  however,  that if a zero or reduced rate is
available by Law,  Parent,  the Surviving  Corporation  and Exchange Agent shall
deduct or  withhold  such lower  amounts.  To the  extent  that  amounts  are so
withheld by Parent, the Surviving Corporation or the Exchange Agent, as the case
may be,  such  withheld  amounts  shall  be  treated  for all  purposes  of this
Agreement  as having  been paid to the holder of the  shares of Common  Stock or
Company  Options,  as  appropriate,  in  respect  of which  such  deduction  and
withholding was made.

                  (h) Lost  Certificates.  If any  Certificate  shall  have been
lost,  stolen or destroyed,  upon the making of an affidavit of that fact by the
Person claiming such Certificate to be lost, stolen or destroyed in such form as
Parent may  reasonably  require  and,  if  required  by Parent or the  Surviving
Corporation,  the posting by such Person of a bond in such reasonable  amount as
Parent or the Surviving  Corporation  may direct as indemnity  against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
will  issue in  exchange  for such lost,  stolen or  destroyed  Certificate  the
payment deliverable in respect thereof pursuant to this Agreement.

SECTION 2.09. Stock Transfer Books. From and after the Effective Time, the stock
transfer  books of the  Company  shall be closed,  and there shall be no further
registration  of transfers of shares of Common Stock on the books and records of
the Company or the  Surviving  Corporation.  If, after the Effective  Time,  any
Certificates  are presented to the Exchange  Agent or the Surviving  Corporation
for any reason, they shall be canceled and exchanged as provided in this Section
2.09.

SECTION 2.10.     Company Options.

                  (a)  1995  Option  Plan.  Prior  to the  Effective  Time,  the
Compensation   Committee  of  the  Board  of   Directors  of  the  Company,   as
administrator  of the 1995 Stock  Purchase and Option Plan for  Employees of the
Company (the "1995 Plan"),  shall  pursuant to its authority  under Section 9 of
the 1995 Plan provide that each option issued under the 1995 Plan shall (i) upon
stockholder   approval  pursuant  to  Code  Section   280G(b)(5)(A)(ii)   become
exercisable  immediately  prior  to the  Effective  Time,  and  (ii)  after  the
Effective  Time be  exercisable  only for an amount of cash  equal to that which
would have been  received by the holder of such option as a result of the Merger
if such holder had  exercised  such option  immediately  prior to the  Effective
Time. The Company shall, prior to the Effective Time, pursuant to the provisions
of Section  2.08,  offer to pay,  subject to  consummation  of the Merger,  each
holder of an  option  issued  under  the 1995  Plan an  amount  equal to (x) the
aggregate Cash Consideration into which the shares of Common Stock issuable upon
exercise  of such  option  would  have been  converted  if such  option had been
exercised  immediately  prior to the  Effective  Time,  reduced  by  (y)(I)  the
aggregate  exercise  price for the  shares of Common  Stock then  issuable  upon
exercise of such option,  and (II) the amount of any withholding taxes which may
be required thereon,  in return for the cancellation of such option, plus (z) an
amount equal to the interest which would accrue at a fluctuating  rate per annum
equal to the prime interest rate announced by The Chase  Manhattan  Bank,  N.A.,
from time to time, compounded daily, on such remainder for the period commencing
on the  Closing  Date and  ending on the such  payment  is made (but in no event
shall interest accrue for more than seven days).

                  (b)  1996  Option  Plan.  Prior  to the  Effective  Time,  the
Compensation   Committee  of  the  Board  of   Directors  of  the  Company,   as
administrator  of the Company 1996 Employee Stock Option Plan (the "1996 Plan"),
shall  pursuant to its authority  under Section 11 of the 1996 Plan provide that
each  option  issued  under the 1996 Plan  shall  after  the  Effective  Time be
exercisable  only for an  amount of cash  equal to that  which  would  have been
received  by the holder of such  option as a result of the Merger if such holder
had exercised such option  immediately  prior to the Effective Time.  Subject to
stockholder  approval  pursuant to Code Section  280G(b)(5)(A)(ii),  the Company
shall, prior to the Effective Time,  pursuant to the provisions of Section 2.08,
offer to pay,  subject to consummation  of the Merger,  each holder of an option
issued  under  the  1996  Plan  an  amount  equal  to  (x)  the  aggregate  Cash
Consideration  into which the shares of Common Stock  issuable  upon exercise of
such  option  would  have  been  converted  if such  option  had been  exercised
immediately  prior to the  Effective  Time,  reduced  by  (y)(i)  the  aggregate
exercise  price for the shares of Common Stock then  issuable  upon  exercise of
such option,  and (ii) the amount of any withholding taxes which may be required
thereon, in return for the cancellation of such option, plus (z) an amount equal
to the interest which would accrue at a fluctuating  rate per annum equal to the
prime interest rate announced by The Chase  Manhattan  Bank,  N.A., from time to
time,  compounded  daily,  on such  remainder  for the period  commencing on the
Closing  Date and  ending on the such  payment  is made  (but in no event  shall
interest accrue for more than seven days).

                  SECTION 2.11.     Dissenting Shares.

                  (a)  Notwithstanding  any other provision of this Agreement to
the contrary,  shares of Common Stock that are outstanding  immediately prior to
the  Effective  Time and  which  are held by  stockholders  who  shall  have not
consented  to the Merger in  writing  and who shall have  properly  delivered  a
written  demand for appraisal of such shares in  accordance  with Section 262 of
the DGCL and shall  not have  failed to  perfect  or shall not have  effectively
withdrawn such demand or otherwise lost their appraisal  rights (the "Dissenting
Shares")  shall not be  converted  into or  represent  the right to receive Cash
Consideration. Such stockholders shall be entitled to have such shares of Common
Stock held by them appraised in accordance with the provisions of Section 262 of
the DGCL,  except that all Dissenting Shares held by stockholders who shall have
failed to perfect or shall have  effectively  withdrawn or otherwise  lost their
right to  appraisal  of such shares of Common Stock under such Section 262 shall
thereupon be deemed to have been converted into and to have become  exchangeable
for,  as of the  Effective  Time,  the right to receive,  without  any  interest
thereon,  the Cash  Consideration  therefor,  upon surrender in accordance  with
Section  2.08(b) of the Stock  Certificate or Stock  Certificates  that formerly
evidenced such shares of Common Stock.

                  (b) The  Company  shall give  Parent (i) prompt  notice of any
demands  for  appraisal  received  by the  Company,  withdrawals  of demands for
appraisal, and any other instruments served pursuant to the DGCL and received by
the Company and (ii) the  opportunity  to participate  in all  negotiations  and
proceedings  with respect to demands for appraisal  under the DGCL.  The Company
will not, except with the prior written consent of Parent, make any payment with
respect to any demands for appraisal,  or offer to settle,  or settle,  any such
demand for appraisal rights.

                                  ARTICLE III.

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

                  The Company  represents  and warrants to Parent and Merger Sub
as follows:

SECTION  3.01.  Incorporation  and  Authority of the  Company.  The Company is a
corporation duly  incorporated,  validly existing and in good standing under the
laws of the  State  of  Delaware  and  has all  necessary  corporate  power  and
authority to enter into this Agreement,  to carry out its obligations  hereunder
and to  consummate  the  transactions  contemplated  hereby.  The  execution and
delivery of this Agreement by the Company, the performance by the Company of its
obligations  hereunder and the  consummation by the Company of the  transactions
contemplated  hereby have been duly authorized by all requisite corporate action
on the part of the Company.  This Agreement has been duly executed and delivered
by the Company and (assuming due authorization, execution and delivery by Parent
and Merger Sub) this Agreement constitutes a legal, valid and binding obligation
of the Company  enforceable  against the Company in  accordance  with its terms,
subject to the effect of any applicable bankruptcy, reorganization,  insolvency,
moratorium  or similar laws  affecting  creditors'  rights  generally and to the
effect  of  general   principles   of  equity   (regardless   of  whether   such
enforceability is considered in a proceeding in equity or at law).

SECTION 3.02.  Incorporation  and  Qualification  of the Company and the Company
Subsidiaries. The Company and each Company Subsidiary is duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization
and has the requisite corporate or other  organizational  power and authority to
own, operate or lease the properties and assets now owned, operated or leased by
it and to carry on its business in all material respects as currently  conducted
by the  Company  or such  Company  Subsidiary.  The  Company  and  each  Company
Subsidiary is duly qualified as a foreign organization to do business, and is in
good standing, in each jurisdiction where the character of its properties owned,
operated  or leased or the nature of its  activities  makes  such  qualification
necessary,  except for such failures  which,  when taken together with all other
such failures,  would not have a Material Adverse Effect. Except as set forth on
Section  3.02 of the  Disclosure  Schedule,  true  and  complete  copies  of the
Certificate  of  Incorporation  and  Bylaws  and stock and  minute  books of the
Company and each  Company  Subsidiary,  each of the  foregoing as amended to the
date of this Agreement, have been made available for review by Parent.

SECTION 3.03. Capital Stock of the Company.  The authorized capital stock of the
Company  consists of 40,000,000  shares of Common Stock and 1,000,000  shares of
Preferred  Stock,  par value $.01 per share.  As of the date of this  Agreement,
29,396,158  shares of Common Stock are issued and outstanding;  and no shares of
Preferred Stock are outstanding;  and the Company has no other voting securities
outstanding.  Such shares of Common Stock have been duly  authorized and validly
issued and are fully paid and  nonassessable and were not issued in violation of
any preemptive rights. Section 3.03 of the Disclosure Schedule sets forth, as of
the date hereof,  all of the record owners of the  outstanding  Common Stock and
their  respective  holdings  of shares of Common  Stock.  Except as set forth on
Section  3.03 of the  Disclosure  Schedule,  there are no  options,  warrants or
rights of conversion or other rights,  agreements,  arrangements  or commitments
relating to the capital stock of the Company  obligating the Company to issue or
sell any of its  shares of capital  stock  other  than the  outstanding  Company
Options  representing  the right to  purchase up to  6,992,725  shares of Common
Stock. Except as set forth on Section 3.03 of the Disclosure Schedule, there are
no voting trusts, stockholder agreements,  proxies or other agreements in effect
to which the Company is a party with respect to the governance of the Company or
voting or  transfer  of its  shares  of  capital  stock.  Except as set forth on
Section 3.03 of the Disclosure Schedule, there are no outstanding obligations of
the Company to  repurchase,  redeem or  otherwise  acquire any capital  stock or
other securities or equity interests of the Company.

                  Subsidiaries 2 .  Subsidiaries

                  (a) Other  than the  Company  Subsidiaries,  and except as set
forth  in  Section  3.04(a)  of the  Disclosure  Schedule,  there  are no  other
corporations,   partnerships,   joint  ventures,  limited  liability  companies,
associations  or other  entities in which the Company or any Company  Subsidiary
owns, of record or  beneficially,  any direct or indirect equity interest or any
right  (contingent or otherwise) to acquire such an equity  interest.  Except as
set forth in Section 3.04(a) of the Disclosure Schedule, neither the Company nor
any Company Subsidiary is a member of any partnership, nor is the Company or any
Company  Subsidiary a participant  in any joint  venture or similar  arrangement
constituting a legal entity.  The entities  disclosed on Section  3.04(a) of the
Disclosure  Schedule  are  referred  to each as a  "Company  Other  Entity"  and
collectively as the "Company Other Entities."  Section 3.04(a) of the Disclosure
Schedule  sets forth the  jurisdiction  of  organization  of each Company  Other
Entity and the current  ownership  of the Company or any Company  Subsidiary  of
such equity  interest of each Company Other Entity.  The equity interest of each
such  Company  Other Entity  owned by the Company or any Company  Subsidiary  is
owned  free and clear of all  Encumbrances,  except  those set forth on  Section
3.04(a) of the Disclosure  Schedule and  Encumbrances  arising  pursuant to this
Agreement.  Except as disclosed on Section  3.04(a) of the Disclosure  Schedule,
neither  the  Company  nor any  Company  Subsidiary  is  required  to  make  any
additional capital contribution or provide additional funding to, or acquire any
securities or equity interests of any Company Other Entity.

                  Section  3.04(aa) of the Disclosure  Schedule sets forth those
Company Other Entities which are currently inactive and have not previously been
actively engaged in any material  business  activity or operations (the "Company
Inactive  Entities";  and those  Company  Other  Entities  that are not  Company
Inactive  Entities  are  referred  to as  "Company  Active  Entities").  To  the
Knowledge  of the  Company as of the date  hereof,  each of the  Company  Active
Entities is duly organized, validly existing and in good standing under the laws
of its  jurisdiction  of organization  and has the requisite  corporate or other
organizational  power and authority to own,  operate or lease the properties and
assets now owned,  operated or leased by it and to carry on its  business in all
material  respects as currently  conducted by such Company  Active Entity and is
duly  qualified  as a  foreign  organization  in  each  jurisdiction  where  the
character  of its  properties  owned,  operated  or leased or the  nature of its
activities  makes such  qualification  necessary,  except for such failure which
would  not have a  Material  Adverse  Effect.  Except  as set  forth on  Section
3.04(aa) of the Disclosure  Schedule,  to the Company's Knowledge as of the date
hereof, there are no voting trusts,  stockholders  agreements,  proxies or other
agreements in effect to which any Company  Active Entity is a party with respect
to the voting or transfer of any equity  interest of such Company  Active Entity
or the  repurchase,  redemption or  acquisition  of any equity  interest of such
Company Active Entity.

                  (b) Section 3.04(b) of the Disclosure  Schedule sets forth the
jurisdiction of organization of each Company Subsidiary,  its authorized capital
stock,  the  number and type of its  issued  and  outstanding  shares of capital
stock, and the current ownership by the Company and the Company  Subsidiaries of
such shares  (collectively,  the  "Subsidiary  Shares").  The Subsidiary  Shares
constitute all the issued and outstanding shares of capital stock of the Company
Subsidiaries  owned by the  Company  and Company  Subsidiaries.  The  Subsidiary
Shares  have been duly  authorized  and  validly  issued  and are fully paid and
nonassessable and were not issued in violation of any preemptive  rights.  There
are no options,  warrants or rights of conversion  or other rights,  agreements,
arrangements  or  commitments  relating  to the  capital  stock  of any  Company
Subsidiary  obligating any Company Subsidiary to issue or sell any of its shares
of capital  stock.  Either the Company or another  Company  Subsidiary  owns the
Subsidiary Shares issued by the respective Company Subsidiaries,  free and clear
of  all  Encumbrances,  except  (i) as  set  forth  in  Section  3.04(b)  of the
Disclosure  Schedule and (ii)  Encumbrances  arising pursuant to this Agreement.
Except as set forth in Section 3.04(b) of the Disclosure Schedule,  there are no
voting trusts, stockholder agreements,  proxies or other agreements in effect to
which the  Company or any  Company  Subsidiary  is a party  with  respect to the
governance  of a Company  Subsidiary,  the voting or transfer of the  Subsidiary
Shares or the  repurchase,  redemption  or  acquisition  of any capital stock or
other securities or equity interests of such Company Subsidiary.

                  (c)  Section  3.04(a)  and  (b)  of  the  Disclosure  Schedule
describe any material earnout  arrangement or similar  obligation of the Company
or any Company Subsidiary arising from any merger,  consolidation or acquisition
of stock or assets or other  similar  acquisition  by the Company or any Company
Subsidiary.

SECTION 3.05. No Conflict. Assuming all consents, approvals,  authorizations and
other  actions  described in Section 3.11 have been obtained and all filings and
notifications  listed in Section 3.11 of the Disclosure Schedule have been made,
and  except as may result  from any facts or  circumstances  relating  solely to
Parent  or as  described  in  Section  3.05  of  the  Disclosure  Schedule,  the
execution,  delivery and  performance  of this Agreement by the Company does not
and will not (a) violate or conflict with the  Certificate of  Incorporation  or
Bylaws of the Company,  (b) conflict with or violate in any material respect any
material  Law or  Governmental  Order  applicable  to the  Company,  any Company
Subsidiary or, to the Company's  Knowledge,  any Company  Active Entity,  or (c)
result in any breach of, or constitute a default (or event which with the giving
of notice or lapse of time, or both,  would become a default)  under, or give to
others any rights of termination, amendment, acceleration or cancellation of, or
result in the creation of any  Encumbrance on any of the assets or properties of
the Company or any Company  Subsidiary  pursuant  to, any material  note,  bond,
mortgage,  indenture,  contract, agreement, lease, license, permit, franchise or
other  instrument  relating to such assets or properties to which the Company or
any Company  Subsidiary  is a party or by which any of such assets or properties
is bound or affected.

SECTION 3.06.  Financial  Statements.  The Company has caused to be prepared and
delivered  to Parent  the  Company  Financial  Statements  (copies  of which are
included in the Disclosure Schedule). The Company Financial Statements have been
prepared  in  accordance  with  GAAP and  except  as set  forth  in the  Company
Financial Statements, on a consistent basis, and present fairly, in all material
respects,  the consolidated  financial position,  results of operations and cash
flows of the  Company at the date and for the period  indicated,  subject in the
case of unaudited interim  financial  statements,  to normal recurring  year-end
adjustments.

SECTION 3.07. Labor Matters. Neither the Company nor any Company Subsidiary is a
party to any  labor  agreement  with  respect  to its  employees  with any labor
organization, group or association nor within the last year, have there been any
material  attempts  to  organize.  Except  as set forth in  Section  3.07 of the
Disclosure  Schedule,  to the Company's Knowledge as of the date hereof, (a) the
Company  and  each  Company  Subsidiary  is  in  material  compliance  with  all
applicable  Laws  respecting  employment  practices,  terms  and  conditions  of
employment and wages and hours,  (b) there is no unfair labor practice charge or
complaint  against  the  Company or any Company  Subsidiary  pending  before the
National Labor Relations Board or any comparable  state agency,  (c) there is no
material complaint, charge or claim pending or threatened in writing against the
Company or any Company Subsidiary with any Governmental  Authority,  arising out
of, in connection  with, or otherwise  relating to the employment by the Company
or any Company  Subsidiary of any individual,  and (d) there is no labor strike,
labor  disturbance or work stoppage  pending  against the Company or any Company
Subsidiary.

SECTION 3.08.  Absence of Certain Changes or Events.  Since June 30, 1997 to the
date of this Agreement and except as set forth in Section 3.08 of the Disclosure
Schedule or as expressly contemplated by this Agreement, there has not been:

(a) any damage,  destruction or loss to any of the material assets or properties
of the Company or any Company Subsidiary;

(b) any declaration, setting aside or payment of any dividend or distribution or
capital  return in  respect  of any  shares of Common  Stock or any  redemption,
purchase or other acquisition by the Company or any Company  Subsidiaries of any
shares of Common Stock;

(c) any sale, assignment,  transfer,  lease or other disposition or agreement to
sell, assign,  transfer,  lease or otherwise dispose of any of the assets of the
Company  or  any  Company  Subsidiary  having  a  value  individually  exceeding
$2,000,000;

(d) any  acquisition  (by  merger,  consolidation,  or  acquisition  of stock or
assets) by the Company or any Company Subsidiary of any corporation, partnership
or  other  business   organization   or  division   thereof  for   consideration
individually in excess of $1,000,000;

(e) except as reflected in the Company Financial Statements,  (i) any incurrence
by the Company or any Company Subsidiary of any indebtedness for borrowed money,
(ii)  any  issuance  by  the  Company  or any  Company  Subsidiary  of any  debt
securities or (iii) any assumption, granting, guarantee or endorsement, or other
accommodation   arrangement   making  the  Company  or  any  Company  Subsidiary
responsible  for, the  indebtedness for borrowed money of any Person (other than
another Company Subsidiary), in the case of (i), (ii) and (iii) above, having an
aggregate value exceeding $2,000,000 for all such occurrences;

(f) except as reflected in the Company Financial  Statements,  any change in any
method of accounting  or accounting  practice used by the Company or any Company
Subsidiary, other than such changes required by GAAP;

(g) any Material Adverse Effect;

(h) (i) any employment,  deferred  compensation,  severance or similar agreement
entered  into or amended by the  Company or any Company  Subsidiary,  except any
employment  agreement providing for compensation of less than $100,000 per annum
entered  into  in  the  ordinary  course  of  business,  (ii)  increase  in  the
compensation  payable  or to become  payable  by it to any of its  directors  or
officers,  or (iii) any increase in the coverage or benefits available under any
severance  pay,   termination  pay,   vacation  pay,   company  awards,   salary
continuation or disability,  sick leave, deferred  compensation,  bonus or other
incentive  compensation,  insurance,  pension or other  employee  benefit  plan,
payment or arrangement made to, for or with such directors, officers, employees,
agents or  representatives,  other  than,  in the case of (ii) and (iii)  above,
normal  increases  in the  ordinary  course  of  business  consistent  with past
practice and that in the aggregate  have not resulted in a material  increase in
the benefits or compensation expense of the Company or the Company Subsidiaries;

(i) any material  adverse change in the business  relationship of the Company or
any Company Subsidiary with any customer referred to in Section 3.17;

(j) except as reflected in the Company Financial  Statements,  any writing down,
in accordance with GAAP and consistent  with past practice,  of the value of any
material  accounts  receivable or any  revaluation by the Company or any Company
Subsidiary of any of its material  assets or any  cancellation or writing off as
worthless  and  uncollectible  of any debt,  note or account  receivable  by the
Company  or  any  Company   Subsidiary,   excluding   writeoffs  and  writedowns
individually less than $50,000;

(k) any cancellation, termination or non-renewal of any contract with a customer
which was one of the Company's  largest 30 customers  (measured by  contribution
margin) during the nine months ended June 30, 1997;

(l) Except as set forth in the Company Financial Statements,  any loans, letters
of credit,  advances or material capital contributions made by or issued for the
account of the Company or any Company  Subsidiary to, or investments by any such
party in, any Person (other than another wholly-owned Company Subsidiary,  as to
which  the  uses  of the  transferred  cash  or  property  are  not  subject  to
restrictions  greater than those  imposed  prior to such  transfer),  including,
without limitation, to any employee, officer or member of the Board of Directors
of the Company or any Company Subsidiary; or

(m) any agreement to take any actions specified in this Section 3.08, except for
this Agreement.

SECTION 3.09.  Absence of Litigation.  Section 3.09 of the  Disclosure  Schedule
sets forth as of the date hereof,  all  material  pending  Actions,  and, to the
Company's  Knowledge,  material  Actions  threatened  in writing  or  otherwise,
against the Company or any Company  Subsidiary or to the Company's  Knowledge as
of the date hereof,  against any Company Active  Entity.  Except as set forth in
Section 3.09 of the Disclosure Schedule, (a) there are no Actions pending or, to
the  Company's  Knowledge,  threatened,  against  the  Company  or  any  Company
Subsidiary  or any of the assets or  properties  of the  Company or any  Company
Subsidiary that, individually or in the aggregate,  reasonably could be expected
to have a Material Adverse Effect and (b) the Company,  each Company  Subsidiary
and their  respective  assets and  properties  are not  subject to any  material
order, judgment,  injunction, decree, stipulation or determination entered by or
with any Governmental Authority.

SECTION 3.10.  Compliance with Laws. The Company and each Company Subsidiary and
the conduct of their  respective  businesses and operations are in compliance in
all material respects with all applicable  material Laws. As of the date hereof,
neither the Company nor any Company  Subsidiary nor, to the Company's  Knowledge
as of the date hereof, any Company Active Entity has received any written notice
to the effect  that the  Company or any  Company  Subsidiary  or Company  Active
Entity is not in material compliance with any applicable material Laws except as
set forth in Section 3.10 of the Disclosure Schedule.

SECTION 3.11.  Consents,  Approvals,  Licenses.  No material consent,  approval,
authorization,   license,  order  or  permit  of,  or  declaration,   filing  or
registration with, or notification to, any Governmental Authority or third party
is required to be made or obtained by the Company or the Company Subsidiaries in
connection  with the execution,  delivery and  performance of this Agreement and
the consummation of the transactions  contemplated  hereby,  except:  (a) as set
forth in Section 3.11 of the Disclosure Schedule;  (b) applicable  requirements,
if any, of the DGCL, the Exchange Act, state securities or blue sky laws and the
HSR Act; and (c) as may be  necessary as a result of any facts or  circumstances
relating  solely to Parent.  The  Company,  each Company  Subsidiary  and to the
Company's  Knowledge as of the date hereof,  each Company  Active Entity has all
material  Licenses  necessary to conduct its business and operations and is duly
qualified  and in good  standing  under the HMO laws,  utilization  review laws,
third  party  administrative  laws,  preferred  provider  organization  laws  or
insurance laws of each State in which the conduct of its business  requires such
qualification or  authorization,  except for such failures,  when taken together
with all such other  failures,  would not  materially  impair the  Company,  the
Company  Subsidiaries  and the Company Active Entities,  taken as a whole,  from
conducting  their respective  businesses and operations as presently  conducted.
Other than as set forth in Section 3.11 of the  Disclosure  Schedule,  as of the
date hereof no audit of the Company or any Company Subsidiary is pending before,
or to the Company's  Knowledge as of the date hereof has been threatened by, any
Governmental  Authority  (other than the IRS).  As of the date hereof all of the
material Licenses of the Company,  each Company Subsidiary and, to the Company's
Knowledge as of the date hereof,  each Company  Active  Entity are in full force
and  effect  and the  Company,  each  Company  Subsidiary  and to the  Company's
Knowledge  as of the date  hereof,  each  Company  Active  Entity is in material
compliance with the respective  material  Licenses issued to it, except for such
failures, when taken together with all such other failures, would not materially
impair the Company,  the Company  Subsidiaries  and the Company Active Entities,
taken as a whole, from conducting their respective  businesses and operations as
presently conducted.

SECTION 3.12. Personal Property; Information Systems.

(a) Except as set forth in Section 3.12 of the Disclosure Schedule,  the Company
and the Company  Subsidiaries  collectively own, have a valid leasehold interest
in or have legal right to use all of the  material  tangible  personal  property
necessary  to carry on their  business  and  operations,  free and  clear of all
Encumbrances,  except Permitted  Encumbrances and Encumbrances  reflected on the
Company Financial Statements.

(b) To the  Company's  Knowledge  as of  the  date  hereof,  the  operating  and
applications computer programs and data bases ("Software") which the Company and
the Company  Subsidiaries  currently use or have  available for use are adequate
and sufficient in all material  respects to service their existing  customers on
the date hereof  through the end of the current term of the contracts  with such
customers.  All  material  Software  is owned  outright  by the  Company  or the
applicable  Company  Subsidiary or, if not so owned, the Company or such Company
Subsidiary has the right to use the same pursuant to valid licenses thereof.  To
the  Company's  Knowledge as of the date hereof,  none of the material  Software
owned by the  Company  or any  Company  Subsidiaries  and  none of the  Software
licensed by the Company or any Company Subsidiary infringes upon or violates any
patent, copyright, trade secret or other proprietary right of any other Person.

(c) To the  Company's  Knowledge as of the date hereof,  the central  processing
units, monitors, printers and other computer-related hardware ("Hardware") which
the Company and any Company Subsidiaries currently use or have available for use
are adequate and  sufficient  to service  their  existing  customers on the date
hereof through the end of the current term of the contracts with such customers.
All such  Hardware is owned  outright by the Company or the  applicable  Company
Subsidiary or if not so owned,  the Company or such Company  Subsidiary  has the
right to use the same pursuant to valid licenses  therefor,  except as would not
materially impair the ability of the Company and the Company Subsidiaries, taken
as a whole, to conduct their business and operations, as presently conducted

SECTION 3.13.     Real Property

(a) Neither the Company nor any Company Subsidiary owns any real property.

(b) Section 3.13 of the Disclosure  Schedule lists all material  Leases to which
the  Company  or any  Company  Subsidiary  is a party or is bound as of the date
hereof. Except as disclosed in Section 3.13 of the Disclosure Schedule as of the
date of this Agreement, the Company or Company Subsidiary party to the Leases on
Section 3.13 of the  Disclosure  Schedule  which relate to Leased Real  Property
with square  footage in excess of 15,000 (the  "Section  3.13 Leases") (i) has a
valid and subsisting leasehold interest in each such Section 3.13 Lease, (ii) is
in undisturbed  possession of all space that it is currently entitled to possess
under each such  Section  3.13 Lease and no rights  adverse to the rights of the
Company or Company  Subsidiary  have,  to the  Knowledge  of the  Company,  been
asserted by any third Persons,  and (iii) has not received any written notice of
material default under any such Section 3.13 Lease which is still in effect.

(c) Each of the Section 3.13 Leases is in full force and effect and is valid and
enforceable  in accordance  with its terms,  subject to  applicable  bankruptcy,
insolvency,  reorganization,  moratorium and similar laws  affecting  creditors'
rights and remedies  generally and general  principles of equity  (regardless of
whether enforcement is sought in a proceeding at law or in equity), and there is
no default  under any  Section  3.13 Lease  either by the Company or the Company
Subsidiary party thereto,  and no event has occurred that with the lapse of time
or the giving of notice or both would constitute a default thereunder.

SECTION 3.14. Employee Benefit Matters

                  (a)  All of  the  material  Employee  Plans  and  Compensation
Arrangements  are listed in  Section  3.14(a) of the  Disclosure  Schedule,  and
complete and accurate  copies of (including any amendments to) any such Employee
Plans and Compensation  Arrangements (or related insurance policies),  including
any related  trust  documents,  have been made  available  to Parent  along with
copies of any current  employee  handbook of general  circulation.  Any material
unwritten  arrangements which would be Compensation  Arrangements except for the
fact  that  they are  unwritten  also  are  listed  in  Section  3.14(a)  of the
Disclosure  Schedule.  Except as disclosed in Section  3.14(a) of the Disclosure
Schedule or expressly  contemplated in this  Agreement,  neither the Company nor
any ERISA Affiliate has any obligations to put into effect any plan, arrangement
or other scheme which will become an Employee Plan or  Compensation  Arrangement
(including,  but not  limited  to, any  bonus,  cash or  deferred  compensation,
severance,  medical,  pension,  profit sharing or thrift, stock option, employee
stock ownership, life or group insurance,  death benefit,  vacation, sick leave,
disability or trust agreement or  arrangement),  or any amendment to an Employee
Plan or Compensation Arrangement.

                  (b) The  Company has made  available  to Parent the Forms 5500
filed for each of the Employee Plans  (including all attachments and schedules),
actuarial reports, summaries of material modifications,  summary annual reports,
and any other  governmental  filings relating to the Employee Plans for the last
three plan years, and also has furnished the current summary plan  descriptions.
Copies of the most recent  determination  letters issued by the IRS with respect
to any Employee Plan have been furnished to Parent.

                  (c) Each Employee Plan and  Compensation  Arrangement has been
administered  in  material  compliance  with  its  own  terms  and  in  material
compliance  with the provisions of ERISA,  the Code, the Age  Discrimination  in
Employment Act and any other applicable federal or state laws.

                  (d)  Neither  the   Company   nor  any  ERISA   Affiliate   is
contributing  to, is required to contribute  to, or has  contributed  within the
last six years to, any Multiemployer Plan, and neither the Company nor any ERISA
Affiliate  has  incurred  within the last six years,  or  reasonably  expects to
incur,  any  "withdrawal  liability,"  as defined  under  Section 4201 et seq of
ERISA.

                  (e) Except as set forth in Section  3.14(e) of the  Disclosure
Schedule,  to the Company's  Knowledge as of the date hereof,  there are neither
any active governmental inspections,  investigations,  audits or examinations of
any Employee Plans or Compensation Arrangements nor any actions, suits or claims
(other than routine  claims for  benefits)  with respect to any Employee Plan or
Compensation  Arrangement  pending  or  threatened  against  any  such  plan  or
arrangement.

                  (f) Except as described in Section  3.14(f) of the  Disclosure
Schedule,  neither the Company nor any ERISA  Affiliate  sponsors,  maintains or
contributes  to any Employee  Plan or  Compensation  Arrangement  that  provides
medical or death  benefit  coverage  to former  employees  of the Company or any
ERISA Affiliate, except to the extent required by Section 4980B of the Code.

                  (g) Except as described in Section  3.14(g) of the  Disclosure
Schedule, with respect to each Employee Plan and, to the extent applicable, each
Compensation  Arrangement:  (i)  each  Employee  Plan  that  is  intended  to be
tax-qualified,  and  each  amendment  thereto,  is the  subject  of a  favorable
determination  letter,  and no  plan  amendment  that is not  the  subject  of a
favorable  determination  letter would affect the validity of an Employee Plan's
letter;  (ii) no Employee  Plan is subject to Code Section 412; and (iii) to the
Knowledge  of the  Company as of the date  hereof,  no  prohibited  transaction,
within the  definition  of Section 4975 of the Code or Title I, Part 4 of ERISA,
has  occurred  which would  subject the  Company or any ERISA  Affiliate  to any
material liability.

                  (h) Except as disclosed on Section  3.14(h) of the  Disclosure
Schedule,  neither  the  execution  and  delivery  of  this  Agreement  nor  the
consummation  of the  transactions  contemplated  hereby  will (i) result in any
material payment  (including,  without  limitation,  severance,  or unemployment
compensation)  becoming  due to any  director or employee of the  Company;  (ii)
result in the  acceleration  of vesting under any Employee Plan or  Compensation
Arrangement;  or (iii) materially  increase any benefits otherwise payable under
any  Employee  Plan.   Subject  to  stockholder   approval  under  Code  Section
280G(b)(5)(A)(ii), any such payment or increase in benefits shall not fail to be
deductible by reason of Code Sections  162(m),  280G or 404. Except as disclosed
on  Section  3.14(h)  of  the  Disclosure  Schedule,   deductibility  of  future
compensation  payments  to  employees  of the  Company  are not  subject  to the
limitations  of  Code  Section  280G  solely  as a  result  of  prior  corporate
transactions involving the Company.

                  (i) The Company has made available to Parent (i) copies of all
employment  agreements with officers of the Company and each Company  Subsidiary
involving payments in excess of $100,000 and not terminable within 60 days, (ii)
copies of all material  severance  agreements  and plans of the Company and each
Company Subsidiary with or relating to their employees,  and (iii) copies of all
material plans and agreements of the Company and each Company Subsidiary with or
relating to its respective employees which contain change in control provisions.
Section  3.14(i) of the  Disclosure  Schedule  sets forth a list of all employee
agreements described in this Section 3.14(i).

                  (j) Except as set forth on Section  3.14(j) of the  Disclosure
Schedule,  there are no third party agreements which could affect the ability of
the Company and the ERISA  Affiliates  to  terminate  or modify the terms of the
Employee Plans or Compensation Arrangements.

                  (k) Section  3.14(k) of the Disclosure  Schedule is a document
received by the Company  from Merck & Co.,  Inc.  ("Merck")  indicating  Merck's
records of the employees of the Company and its ERISA  Affiliates  who currently
possess the right to exercise  options to purchase shares of the common stock of
Merck,  the  number of  shares  covered  by such  options  and their  respective
exercise prices.

                  SECTION 3.15.     Taxes.

                   (a) (i) All material  Tax returns and reports  required to be
filed  before  the  Closing  Date in  respect of the  Company  and each  Company
Subsidiary have been filed on a timely basis;  (ii) the Company and each Company
Subsidiary  has paid  when due all  Taxes  shown to be due on such  returns  and
reports in respect of the periods  covered by such Tax returns and reports,  has
paid when due all  estimated  Taxes in respect of periods ended on or before the
Closing  Date and has  adequately  reserved  for the  payment  of all Taxes with
respect to periods  ended on or before the  Closing  Date for which Tax  returns
have not yet been filed; (iii) there are no proposed  additional Tax assessments
against the Company or any Company Subsidiary not adequately provided for in the
Company Financial Statements;  (iv) there are no unpaid Taxes which are or could
become a lien on the property of the Company or any Company  Subsidiary,  and no
Tax liens have been filed  against  the  property  of the Company or any Company
Subsidiary;  (v) the charges, accruals and reserves with respect to Taxes on the
Books and Records and Company  Financial  Statements are adequate (as determined
in  accordance  with GAAP);  and (vi) all Taxes that the Company and the Company
Subsidiaries  are or were legally required to withhold or collect have been duly
withheld or collected and, to the extent required,  have been paid to the proper
Governmental Authority.

                  (b) As of the date hereof  except as set forth in Section 3.15
of the  Disclosure  Schedule,  with  respect  to  the  Company  or  any  Company
Subsidiary,  no waivers of statutes of limitations  have been given with respect
to any Tax returns and reports,  which waivers are  currently in effect,  and no
request  for any such waiver is  currently  pending.  No requests  for ruling or
determination  letters or competent authority relief with respect to the Company
or any Company  Subsidiary is pending with any taxing agency with respect to any
Taxes. Section 3.15 of the Disclosure Schedule identifies all Tax returns of the
Company or any Company  Subsidiary with respect to which an audit is in progress
as of the date hereof.

                  (c)  Except as set  forth on  Section  3.15 of the  Disclosure
Schedule,  no material  issues have been  raised in writing  (and are  currently
pending) by any Governmental Authority in connection with any of the Tax returns
and  reports  referred  to in Section  3.15(a),  and all  material  deficiencies
asserted  or  assessments  made  as a  result  of any  examination  by a  taxing
authority  of the Tax returns and reports  referred to in Section  3.15(a)  have
been paid in full.

                  (d) The Company  has  delivered  to Parent  true and  complete
copies of each of the  federal  and state  income Tax returns of the Company and
Company Subsidiaries, as well as tax depreciation and amortization schedules and
schedules of any tax carryforward items of the Company and Company  Subsidiaries
set forth on Section 3.15 of the Disclosure Schedule.

                  (e)  Except as set  forth in  Section  3.15 of the  Disclosure
Schedule,  neither the Company nor any Company  Subsidiary  has been a member of
any  affiliated  group (as defined in Section  1504(a) of the Code or as defined
for  applicable  state,  local or  foreign  Tax  purposes)  that has filed or is
required to file  consolidated  or combined  federal or state income Tax returns
for any period.

                  (f)  Except as set  forth in  Section  3.15 of the  Disclosure
Schedule,  neither the Company nor any Company  Subsidiary has any liability for
Taxes,  whether  currently  due  or  deferred,  of  any  Person  under  Treasury
Regulation  Section  1.1502-6 (or any similar  provision of state or local law).
Except as set forth in Section 3.15 of the Disclosure Schedule, there will be no
tax sharing agreement or tax indemnification  agreement in effect on the Closing
Date under which the Company or any Company  Subsidiary  has liability for Taxes
of  any  other  Person.  All  tax  sharing  agreements  or  tax  indemnification
agreements  in effect on the date hereof  under which the Company or any Company
Subsidiary has the right to  indemnification  against any other Person for Taxes
of the Company or such Company  Subsidiary shall remain in full force and effect
on the Closing Date.

                  (g) Neither the  Company  nor any Company  Subsidiary  will be
required  to include  any amount in its  income or exclude  any amount  from its
deductions  in any taxable  period  ending after the Closing Date by reason of a
change in method of accounting or use of the installment method of accounting in
any period ending on or prior to the Closing Date.

                  (h) Section 3.15(h) of the Disclosure Schedule sets forth each
state and  locality  with  jurisdiction  to impose  any Tax on the  property  or
business of the Company  and the Company  Subsidiaries  at any time prior to the
Closing Date.

                  SECTION 3.16.     Certain Contracts.

                  (a)  Section  3.16  of  the  Disclosure   Schedule  lists  the
following  agreements  or  contracts,  written or oral  (collectively,  with the
Section 3.13 Leases and the customer  contracts with those customers  referenced
in  Section  3.17,  the  "Listed  Contracts"),  in effect as of the date of this
Agreement to which the Company or any Company Subsidiary is a party:

(i) any  commitment,  contract or  agreement  (other  than the Leases  listed on
Section  3.13 of the  Disclosure  Schedule,  the  customer  contracts  listed on
Section  3.17 of the  Disclosure  Schedule and  provider  contracts),  involving
aggregate  payments by the Company or any Company  Subsidiary for the six months
ended on the Balance Sheet Date of more than $500,000 and that is not cancelable
by the Company without liability within 60 days;

(ii) any lease of personal  property  involving any annual  expense in excess of
$500,000 and not cancelable by the Company without liability within 60 days;

(iii) any material joint venture agreement for a Company Active Entity;

(iv) any  agreement  with a  hospital  or  provider,  including  a  professional
corporation,  involving  payments by or to the Company or any Company Subsidiary
in the six months ended on the Balance  Sheet Date in excess of  $2,500,000  and
not cancelable by the Company without liability within 90 days;

(v) any note, loan, letter of credit,  bond or contract relating to indebtedness
for borrowed money or capitalized  leases, or other Contract in respect of which
the Company or any Company  Subsidiaries are obligated in any way after the date
hereof to provide  funds in respect  of, or to  guarantee  or assume,  any debt,
obligation  or  dividend  of any Person,  other than  intercompany  indebtedness
between the Company and a wholly-owned Subsidiary;

(vi)  any  indemnity   arrangement  arising  in  connection  with  any  sale  or
disposition  of assets for proceeds in excess of $1,000,000  wherein the Company
or any Company Subsidiary is the indemnitor;

(vii) any agreement  containing  covenants presently  limiting,  in any material
respect, the freedom of the Company, any Company Subsidiary or, to the Company's
Knowledge as of the date hereof,  any Company Active Entity, to compete with any
person  in  any  line  of  business  or in  any  area  or  territory  (including
exclusivity  arrangements binding upon the Company or any Company Subsidiary) or
which contains a "most favored nations" provision or similar provision affecting
the pricing of customer contracts;

(viii) contracts for capital  expenditures  requiring payments by the Company or
any  Company  Subsidiary  after the date  hereof in excess of  $500,000  for any
single project;

(ix) any  "Administrative  Services  Only"  contract  relating to plans (whether
public or  private)  with  more  than  10,000  covered  lives or any  risk-based
customer  contracts  which  provided in excess of $10 million in annual  revenue
during fiscal year 1997; and

(x) any  executory  contracts of the Company or any Company  Subsidiary  for the
acquisition or disposition of assets or businesses for proceeds  individually in
excess of $1,000,000.

(b) Except as set forth in Section 3.16(b) of the Disclosure  Schedule,  neither
the Company nor any Company Subsidiary is in material breach or violation of, or
material  default  under,  any of the Listed  Contracts.  Except as set forth on
Section  3.16(b) of the  Disclosure  Schedule,  each Listed  Contract is a valid
agreement,  arrangement or commitment of the Company or Company Subsidiary which
is a party  thereto,  enforceable  against the Company or Company  Subsidiary in
accordance with its terms and is a valid agreement, arrangement or commitment of
each other party thereto,  enforceable against such party in accordance with its
terms,  except in each case where  enforceability  may be limited by bankruptcy,
insolvency or other similar laws affecting  creditors'  rights generally and the
application of equitable principles or remedies.

SECTION 3.17.  Customers.  Section 3.17 of the  Disclosure  Schedule  contains a
complete and accurate list, as of the date of this Agreement,  of the 30 largest
customers  (together with the  commencement  and expiration date of the contract
with each such customer) of the Company and the Company  Subsidiaries taken as a
whole in terms of revenues  during the nine months ended on June 30,  1997,  and
certain other customers  showing the approximate  total sales by the Company and
the Company  Subsidiaries  to each such customer  during such period.  As of the
date hereof, neither the Company nor any Company Subsidiary has been notified by
any such  customer that it intends to terminate its contract with the Company or
any Company  Subsidiary  or not renew any such  contract or received  any threat
that such customer may terminate or not renew its contract.

SECTION  3.18.  Undisclosed  Liabilities.  Neither  the  Company nor any Company
Subsidiary  nor, to the Company's  Knowledge as of the date hereof,  any Company
Active  Entity has any material  liability or  obligation  of any kind or nature
(fixed or contingent)  that is required to be reflected on a balance sheet or in
the  financial  footnotes  thereto  in  accordance  with GAAP  except  those (i)
reflected,  reserved against or disclosed in the Company  Financial  Statements,
(ii) disclosed in Section 3.18 of the Disclosure Schedule, (iii) incurred in the
ordinary course of business since the Balance Sheet Date, or (iv) that would not
have a Material Adverse Effect.

SECTION 3.19. Transactions with Affiliates.  Except as disclosed in Section 3.19
of the Disclosure Schedule,  no Company  Stockholder,  or director or officer of
the Company  listed in the  definition  of  "Knowledge"  in Section  1.01 or any
entity  (other than the  Company)  in which any such Person owns any  beneficial
interest  (other  than a publicly  held  corporation  whose stock is traded on a
national securities exchange or in the over-the-counter  market and less than 1%
of the stock of which is beneficially owned by all such Persons)  (collectively,
"Section 3.19 Affiliates") has any interest in: (i) any contract, arrangement or
understanding with, or relating to, the business or operations of the Company or
any Company Subsidiary or, to the Company's Knowledge as of the date hereof, any
Company Active Entity; (ii) any loan, arrangement,  understanding,  agreement or
contract  for or  relating  to  indebtedness  of  the  Company  or  any  Company
Subsidiary  or, to the  Company's  Knowledge as of the date hereof,  any Company
Active  Entity;  or (iii) any property  (real,  personal or mixed),  tangible or
intangible,  used in the  business or  operations  of the Company or any Company
Subsidiary  or, to the  Company's  Knowledge as of the date hereof,  any Company
Active  Entity;  excluding  any such  contract,  arrangement,  understanding  or
agreement constituting an Employee Plan or Compensation  Arrangement.  Following
the Closing,  except for obligations  set forth herein,  neither the Company nor
any Company  Subsidiary  nor, to the Company's  Knowledge as of the date hereof,
any Company  Active Entity will have any  obligations of any kind to any Section
3.19  Affiliate  except for (i)  accrued  salary  for the pay period  commencing
immediately  prior to the  Closing  Date and (ii) the  obligations  set forth in
Section 3.19 of the Company Disclosure Schedule.

SECTION  3.20.  Section 3.20 of the  Disclosure  Schedule  sets forth a true and
correct list of all material liability insurance policies which are in force and
under  which  the  Company  or any  Company  Subsidiary  is a named  insured  or
beneficiary.  All such policies are (i) binding and  effective  upon the issuers
thereof in accordance with their  respective  terms and (ii) based solely on the
past claims  experience of the Company and each Company  Subsidiary,  reasonably
likely to  adequately  cover any loss  contingencies  of a type  covered by such
policies relating to occurrences on or prior to the Balance Sheet Date,  subject
to any applicable reserves, deductibles, copayments or self retention amounts.

SECTION 3.21. Brokers. Except for Morgan Stanley & Co. Incorporated and Kohlberg
Kravis  Roberts & Co.  (the fees and  expenses of each of which shall be paid in
full by the  Company,  and the amount of which has been  disclosed to Parent) no
broker,  finder or investment  banker is entitled to any brokerage,  finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company.

SECTION 3.22.  Restricted  Cash.  As of the date hereof,  except as set forth on
Section 3.22 of the Disclosure Schedule,  there are no regulatory or contractual
restrictions  on the  ability of the Company  and any  Company  Subsidiaries  to
freely transfer their respective cash and cash equivalents.

SECTION 3.23. SEC Documents.  As of their respective  filing dates,  none of the
documents filed by the Company with the Securities and Exchange Commission since
October 1, 1996  pursuant to Section  15(d) of the  Exchange Act  contained  any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements made therein,  in light
of the circumstances  under which they were made, not misleading,  except to the
extent  corrected  by any  document  subsequently  filed by the Company with the
Securities and Exchange Commission.

SECTION 3.24.  Accounts  Receivable.  Except as set forth in Section 3.24 of the
Disclosure  Schedule,  the accounts  receivable of the Company  reflected on the
Balance  Sheet  arose  from bona fide  transactions  in the  ordinary  course of
business,  have  been  recorded  on a GAAP  basis  and  are not  subject  to any
counterclaims  or  setoffs  (except  for the amount of any  applicable  existing
reserves for counterclaims or setoffs) and are fully collectable, except for any
allowances for doubtful  accounts  reflected on the Balance Sheet. The amount of
allowance  for  doubtful  accounts  on a GAAP  basis in the  Balance  Sheet  was
calculated consistent with past practice and is adequate.

                                   ARTICLE IV.

             REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

                  Except as set forth on the Parent Disclosure Schedule, each of
Parent and Merger Sub represents and warrants to the Company as follows:

SECTION  4.01.  Incorporation  and  Authority of Parent and Merger Sub.  Each of
Parent and Merger Sub is a corporation duly  incorporated,  validly existing and
in good  standing  under the laws of the State of Delaware and has all necessary
corporate  power and  authority to enter into this  Agreement,  to carry out its
obligations  hereunder and to consummate the transactions  contemplated  hereby.
The execution  and delivery of this  Agreement by each of Parent and Merger Sub,
the  performance by each of Parent and Merger Sub of its  obligations  hereunder
and the  consummation  by each of  Parent  and  Merger  Sub of the  transactions
contemplated  hereby have been duly authorized by all requisite corporate action
on the part of each of Parent  and  Merger  Sub.  This  Agreement  has been duly
executed  and  delivered  by each of Parent and Merger Sub,  and  (assuming  due
authorization, execution and delivery by Company) constitutes a legal, valid and
binding  obligation of each of Parent and Merger Sub  enforceable  against it in
accordance with its terms,  subject to the effect of any applicable  bankruptcy,
reorganization,  insolvency,  moratorium  or similar laws  affecting  creditors'
rights generally and to the effect of general  principles of equity  (regardless
of whether such  enforceability  is  considered  in a proceeding in equity or at
law).

SECTION 4.02. No Conflict. Assuming all consents, approvals,  authorizations and
other  actions  described in Section 4.03 have been obtained and all filings and
notifications  listed on Section 4.03 of the Parent  Disclosure  Schedule,  have
been made,  and except as may result  from any facts or  circumstances  relating
solely to the Company, the execution, delivery and performance of this Agreement
by each of Parent and Merger Sub does not and will not:  (a) violate or conflict
with the  Certificate  of  Incorporation  or Bylaws of Parent or Merger Sub; (b)
conflict with or violate any Law or Governmental  Order  applicable to Parent or
its  Subsidiaries;  or (c) result in any breach of, or  constitute a default (or
event which with the giving of notice or lapse of time, or both,  would become a
default)  under,  or  give to  others  any  rights  of  termination,  amendment,
acceleration or cancellation of, or result in the creation of any Encumbrance on
any of the assets or properties of Parent pursuant to, any note, bond, mortgage,
indenture,  contract,  agreement,  lease,  license,  permit,  franchise or other
instrument  relating to such assets or  properties to which Parent or any of its
Subsidiaries is a party or by which any of such assets or properties is bound or
affected, except, in the case of clauses (b) and (c), as would not, individually
or in the aggregate,  have a material adverse effect on the ability of Parent or
Merger Sub to consummate the transactions contemplated by this Agreement.

SECTION  4.03.  Consents and  Approvals.  No consent,  approval,  authorization,
license,  order or permit of, or declaration,  filing or  registration  with, or
notification  to, any  Governmental  Authority  or third party is required to be
made or obtained by Parent or any of its  Subsidiaries  in  connection  with the
execution  and  delivery  of  this  Agreement  and  the   consummation   of  the
transactions contemplated hereby, except (a) as set forth on Section 4.03 of the
Parent Disclosure Schedule, (b) applicable requirements, if any of the DGCL, the
Exchange  Act,  state  securities  or blue sky laws and the HSR Act,  (c)  where
failure to obtain such consent,  approval,  authorization or action,  or to make
such filing or  notification,  would not prevent or delay,  Parent or Merger Sub
from performing any of its material  obligations under this Agreement (including
obtaining the financing  contemplated in the Commitment Letter),  and (d) as may
be necessary as a result of any facts or  circumstances  relating  solely to the
Company.

SECTION 4.04. Absence of Litigation.  As of the date of this Agreement (a) there
are no Actions pending  against Parent or any of its  Subsidiaries or any of the
assets or properties of Parent or any of its Subsidiaries that,  individually or
in the  aggregate,  would  prevent  Parent from  consummating  the  transactions
contemplated hereby and (b) Parent, its Subsidiaries and their respective assets
and  properties  are not  subject to any order,  judgment,  injunction,  decree,
stipulation or determination entered by or with any Governmental  Authority that
would prevent Parent from consummating the transactions contemplated hereby.

SECTION  4.05.  Financing.  Parent has provided to the Company true and complete
copies of the  commitment  letter  for the  benefit of Parent  (the  "Commitment
Letter") relating to the Merger and the transactions  contemplated  thereby. The
financing  outlined in the Commitment Letter is sufficient,  assuming funding of
such amounts, to make the payments required under Article II with respect to all
outstanding  shares of Common Stock and Company Options,  to repay the Bank Debt
and the Senior Subordinated Notes and to pay all fees and expenses to be paid by
Parent in connection with the transactions contemplated hereby.

SECTION  4.06.  Other  Transactions.  Set forth on  Section  4.06 of the  Parent
Disclosure  Schedule is a description  of each  executory  contract,  agreement,
commitment or other  arrangement of Parent or any of its Subsidiaries to acquire
(by merger,  consolidation  or acquisition of stock or assets) any  corporation,
partnership or other business  organization  or division  thereof (other than as
contemplated  by the  Merger)  which is in the  business  of  providing  managed
behavioral  health care services  within the United  States,  including  managed
mental  health  programs,  substance  abuse  programs  and  employee  assistance
programs, for consideration in excess of $10,000,000.

SECTION 4.07.  Brokers.  Except for Chase  Securities Inc. and Smith Barney Inc.
(the fees and  expenses of which  shall be paid in full by  Parent),  no broker,
finder or investment banker is entitled to any brokerage,  finder's or other fee
or commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Parent or its Affiliates.

                                   ARTICLE V.

                              ADDITIONAL AGREEMENTS

                  SECTION 5.01.     Conduct of Business Prior to the Closing.

                  (a) Unless  Parent  otherwise  agrees in writing and except as
expressly contemplated by this Agreement, between the date of this Agreement and
the Closing Date, the Company will,  and will cause each Company  Subsidiary to,
and will use reasonable efforts to cause each Company Active Entity with respect
to which the Company or any Company Subsidiary has a representative on the board
of directors or other  managing body to, (i) conduct its business and operations
only in the ordinary course consistent with past practice; (ii) use commercially
reasonable  best  efforts,  subject  to the  limitations  set forth  herein,  to
preserve the current  relationships of the Company and the Company  Subsidiaries
with their respective customers, suppliers, distributors, officers and other key
employees and other Persons with which the Company and the Company  Subsidiaries
have  significant  business  relationships;  (iii)  use  reasonable  efforts  to
maintain  its assets and  properties  in good repair  condition  in all material
respects,  normal wear and tear excepted;  (iv) maintain its books, accounts and
records in the usual,  regular and ordinary manner, on a GAAP basis consistently
applied;  (v) keep in full force and effect  insurance  and bonds  comparable in
amount and scope of  coverage  to that  currently  maintained;  (vi)  deliver to
Parent,  within fifteen (15) Business Days after the end of each calendar month,
an unaudited,  consolidated balance sheet, statement of operations, statement of
stockholders' equity and cash flow statement for the Company for such month just
ended prepared on a GAAP basis,  schedules showing the results of operations and
variances in revenue for each of the items set forth  therein and within 45 days
after the end of each fiscal  quarter,  an unaudited,  condensed  balance sheet,
statement  of  operations,  statement  of  stockholders'  equity  and cash  flow
statement for the Company for such fiscal  quarter just ended;  and (vii) notify
Parent of any material Action commenced by or against the Company or any Company
Subsidiary  or  any  Actions   commenced  or  threatened  which  relate  to  the
transactions contemplated by this Agreement.

                  (b) Except as expressly  provided in this Agreement or Section
5.01(b) of the Disclosure  Schedule,  between the date of this Agreement and the
Closing Date, the Company will not, and shall cause the Company Subsidiaries not
to, and will use reasonable efforts,  consistent with their fiduciary duties, to
cause its Company  Active  Entities not to, do any of the following  without the
prior written consent of Parent:

                  (i) create any  Encumbrance  of any kind on any  properties or
         assets  (whether  tangible or intangible) of the Company or any Company
         Subsidiary,  other than (A) Permitted  Encumbrances,  (B)  Encumbrances
         that will be released  at or prior to the Closing and (C)  Encumbrances
         on assets having a value not exceeding $250,000 in the aggregate;

                  (ii)  except for  transactions  among the  Company and Company
         Subsidiaries,  sell, assign, transfer, lease or otherwise dispose of or
         agree to sell, assign,  transfer,  lease or otherwise dispose of any of
         the assets of the  Company  or any  Company  Subsidiary  having a value
         individually of more than $500,000 or $1,000,000 in the aggregate;

                  (iii) acquire (by merger,  consolidation,  or  acquisition  of
         stock  or  assets)  any  corporation,  partnership  or  other  business
         organization or division  thereof or equity or other interest  therein,
         other than in  connection  with the  transactions  set forth in Section
         5.01(b) of the Disclosure  Schedule and except for transactions with an
         individual fair market value of less than $500,000 or $1,000,000 in the
         aggregate;

                  (iv) (A)  increase  the  rate of  compensation  payable  or to
         become  payable to any of its  employees  or agents,  other than normal
         increases  in the  ordinary  course of  business  consistent  with past
         practice to Persons  receiving cash  compensation of less than $100,000
         per annum; (B) pay or provide for any bonus,  profit sharing,  deferred
         compensation,   pension,   retirement  or  other  similar   payment  or
         arrangement  to or in respect of any such  employee or agent  except to
         the extent the  Company or the  Company  Subsidiaries  are, on the date
         hereof,  contractually obligated to do so or required to do so by Law ;
         and (C)  enter  into any new,  or amend  in any  material  respect  any
         existing employment,  severance, or consulting agreement,  sales agency
         or other Contract with respect to the performance of personal services,
         except (x) any such new agreement  providing for cash  compensation  of
         less than  $100,000 per annum  entered  into in the ordinary  course of
         business,  which  such  new  agreements  shall  not  provide  for  cash
         compensation of more than $500,000 per annum in the aggregate;  and (y)
         any individuals  hired on an at-will basis to replace current employees
         or to service customer contracts which commence after the date hereof;

                  (v)      change any method of accounting or accounting
         practice used by the Company or any Company Subsidiary, other than
         such changes required by changes in GAAP;

                  (vi)  issue or sell any  shares  of the  capital  stock of, or
         other equity  interests in, the Company or any Company  Subsidiary,  or
         securities  convertible  into or exchangeable for such shares or equity
         interests,  or  issue  or  grant  of  any  options,   warrants,  calls,
         subscription  rights or other rights of any kind to acquire  additional
         shares of such  capital  stock,  such other equity  interests,  or such
         securities;  except  the  issuance  of Common  Stock upon  exercise  of
         Company  Options  outstanding  on the date  hereof or pursuant to other
         rights set forth on Section 3.03 of the Disclosure Schedule;

                  (vii)    amend the Company's or any Company Subsidiary's
         Certificate of Incorporation or By laws or equivalent organizational
         documents;

                  (viii) take any action which would  materially  interfere with
         the consummation of the transactions  contemplated hereby, or make such
         consummation  more difficult or materially  delay the  consummation  of
         such transactions;

                  (ix) incur,  guarantee or assume any indebtedness for borrowed
         money or assume any reimbursement  obligations  relating to any letters
         of credit,  including  borrowings under revolving credit  agreements in
         existence on the date  hereof,  including  any  renewals or  extensions
         thereof,  to finance  ordinary course working  capital needs,  provided
         that the amount of such indebtedness  outstanding at any time shall not
         exceed $15,000,000 in the aggregate in excess of the amount outstanding
         as of the date hereof  (provided,  however,  that this limitation shall
         not  restrict  the  Company  and  its   Subsidiaries   from   incurring
         indebtedness  in order to pay the fees  and  expenses  relating  to the
         transactions  contemplated  hereby,  including  the fees  and  expenses
         referenced in Section 3.21);

                  (x) declare,  set aside or pay any dividend or distribution or
         capital  return in respect of any  shares of Common  Stock,  or redeem,
         purchase  or  acquire  any  shares  of  Common  Stock or  other  equity
         interests in the Company,  any Company Subsidiary or any Company Active
         Entity;

                  (xi) make any loans or advances to any Person,  except for (x)
         travel advances or for other routine business  expenses incurred in the
         ordinary  course of business;  (y) loans or advances made in connection
         with  obtaining  or  commencing  new customer  contracts  not to exceed
         $1,000,000  outstanding at any time in the aggregate;  and (z) loans or
         advances made in the ordinary course of business not to exceed $100,000
         outstanding at any time in the aggregate;

                  (xii) settle or compromise any Action for any amount in excess
         of $250,000  or which  involves a  commitment  that may have a Material
         Adverse Effect;

                  (xiii) (A) enter into any new customer contract, excluding any
         customer  contract  entered  into in the  ordinary  course of  business
         consistent  with  past  practices  (and in the case of risk  contracts,
         consistent  with  reasonable  and  customary  underwriting  practices),
         provided  such  contract  does not have  estimated  annual  revenues in
         excess  of   $10,000,000;   provided,   further  that  the  prohibition
         applicable  to  contracts  in  excess  of  $10,000,000   shall  not  be
         applicable  if the  Company  has  received  a  written  opinion  of the
         Company's   outside  legal  counsel  that  such  prohibition  would  be
         reasonably likely to violate applicable Law (which opinion will be made
         available  to  Parent);   or  (B)  make  any   material   amendment  or
         modification to those customer contracts which are Listed Contracts;

                  (xiv)  make  capital   expenditures   in  excess  of  $500,000
         individually  or $2,300,000 in the aggregate per month during the first
         three months  following the date hereof and $1,800,000 in the aggregate
         during each month thereafter;

                  (xv) enter into any  contract  or  agreement  which would have
         been required to be listed on Section 3.16 of the  Disclosure  Schedule
         as a result of clauses (iii),  (iv), (vi), (vii) or (x) of Section 3.16
         had such  contract or  agreement  been  entered  into prior to the date
         hereof or make any material  amendments or  modifications to the Listed
         Contracts that are set forth on Section 3.16 of the Disclosure Schedule
         as a result of such clauses;

                  (xvi)    enter into any new contract or agreement with a
         Section 3.19 Affiliate; or

                  (xvii)   agree to take any of the actions specified in this
         Section 5.01(b).

SECTION 5.02. Parent Action Prior to the Closing.

                  (a) Between the date of this  Agreement  and the Closing Date,
Parent shall not, and shall cause its  Subsidiaries  not to, (a) take any action
which would  materially  interfere  with the  consummation  of the  transactions
contemplated  hereby,  or make such  consummation  more  difficult or materially
delay  the  consummation  of such  transactions,  or (b)  except as set forth on
Section  5.02 of the  Disclosure  Schedule,  solicit,  initiate or continue  any
discussions  or  negotiations  with, or encourage or respond to any inquiries or
proposals  by,  or  participate  in any  negotiations  with or  enter  into  any
agreement or  commitment  with, or provide or request any  information  from, or
otherwise cooperate in any way with, any Person,  other than the Company and its
officers,  directors,  employees,  agents and  representatives,  concerning  any
acquisition  of assets,  contracts,  securities,  businesses  or other  property
(whether by merger,  consolidation  or otherwise)  with an aggregate fair market
value in excess of $10,000,000 that relate to the business of providing  managed
behavioral  health care services in the United States,  including managed mental
health programs, substance abuse programs and employee assistance programs.

                  (b) Parent  shall  notify the Company of any  material  Action
commenced  by or  against  Parent  or any  Subsidiary  thereof  or  any  Actions
commenced or threatened  which relate to the  transactions  contemplated by this
Agreement.

                  (c) Parent shall use its best efforts to obtain the  financing
contemplated  by the Commitment  Letter as promptly as  practicable,  including,
without limitation:  (i) negotiating and executing definitive agreements for the
financing  contemplated by the Commitment  Letter;  (ii)  consummating the Green
Springs  Transactions (as defined in the Commitment Letter);  (iii) repurchasing
the necessary  percentage of the 11-1/4% Senior Subordinated Notes of Parent and
the Senior Subordinated Notes, and amending the terms thereof upon the terms set
forth on Section 5.02(c) of the Parent Disclosure Schedule; and (iv) not taking,
or failing to take, any action that would result in any of the conditions to the
funding of such financing not being satisfied.

SECTION 5.03. Access to Information. Subject to the terms of the Confidentiality
Agreement,  from the date of this Agreement  until the Closing,  upon reasonable
notice, the Company shall, and shall cause the officers, employees, auditors and
agents of the Company and each Company Subsidiary,  to, (i) afford the officers,
employees and authorized agents and representatives of Parent reasonable access,
during normal business hours, to the offices,  properties,  books and records of
the   Company  and  the  Company   Subsidiaries   and  furnish   Parent  or  its
representatives  copies of such  documents and other  information  as reasonably
requested,  including  communications with any Governmental Authority,  and (ii)
furnish to the officers,  employees and authorized agents and representatives of
Parent  such  additional  financial  and  operating  data and other  information
regarding the assets,  properties,  goodwill and business of the Company and the
Company Subsidiaries as Parent may from time to time reasonably request in order
to assist  Parent in  fulfilling  its  obligations  under this  Agreement and to
facilitate the consummation of the transactions  contemplated hereby,  including
such  information  as may be reasonably  requested by Parent in connection  with
obtaining the financing under the Commitment Letter; provided, however, that (x)
Parent shall not unreasonably interfere with any of the businesses or operations
of the  Company,  or any  Company  Subsidiaries,  and (y) the  Company  and each
Company  Subsidiary shall not be obligated to provide  information  which, based
upon the written advice of Company  counsel,  would reasonably be likely violate
applicable Law.

SECTION 5.04.  Confidentiality.  The terms of the Confidentiality  Agreement are
hereby  incorporated  herein by reference  and shall  continue in full force and
effect until the Closing, at which time such  Confidentiality  Agreement and the
obligations of the Parties hereto under this Section 5.04 shall terminate.

SECTION 5.05. Efforts; Regulatory and Other Authorizations; Consents.

                  (a) Each party  hereto shall use its best efforts to (i) take,
or cause to be taken, all appropriate  action,  and do, or cause to be done, all
things  necessary,  proper or  advisable  under  applicable  Law or otherwise to
promptly  consummate and make effective the  transactions  contemplated  by this
Agreement (including,  in the case of Parent,  obtaining the financing necessary
to  consummate  the   transactions   contemplated   hereby),   (ii)  obtain  all
authorizations,  consents,  orders and approvals of, and give all notices to and
make all filings with, all Governmental Authorities and other third parties that
may  be or  become  necessary  for  its  execution  and  delivery  of,  and  the
performance of its obligations  pursuant to, this Agreement  including,  without
limitation,  those consents set forth in the Disclosure Schedule,  (iii) lift or
rescind any injunction or restraining  order or other order adversely  affecting
the ability of the parties  hereto to consummate the  transactions  contemplated
hereby,  and (iv)  fulfill all  conditions  to this  Agreement.  Each party will
cooperate  fully  with the other  party in  promptly  seeking to obtain all such
authorizations,  consents, orders and approvals, giving such notices, and making
such filings.  In connection  with  obtaining  such consents from third parties,
neither party shall be required to make payments,  commence  litigation or agree
to  modifications  of the terms of any agreements with such third parties (other
than payments and modifications which individually,  and in the aggregate, would
not have a  Material  Adverse  Effect),  and  (except  for  modifications  which
individually, and in the aggregate, would not have a Material Adverse Effect) no
such  modification  shall be made to any  contract of the Company or any Company
Subsidiary   without  the  consent  of  Parent,   which  consent  shall  not  be
unreasonably withheld. The parties hereto agree not to take any action that will
have the effect of unreasonably  delaying,  impairing or impeding the receipt of
any required  authorizations,  consents,  orders or approvals. The Company shall
cooperate with Parent in connection with effecting a tender offer for the Senior
Subordinated Notes.

                  (b) In  furtherance  and not in limitation  of the  foregoing,
each party hereto agrees to make an  appropriate  filing of a  Notification  and
Report  Form  pursuant  to  the  HSR  Act  with  respect  to  the   transactions
contemplated  hereby  within ten Business  Days of the date hereof and to supply
promptly  any  additional  information  and  documentary  material  that  may be
requested  pursuant to the HSR Act and cooperate in  connection  with any filing
under   applicable   Antitrust  Laws  and  in  connection   with  resolving  any
investigation or other inquiry concerning the transactions  contemplated by this
Agreement  commenced  by any of the  Federal  Trade  Commission,  the  Antitrust
Division of the Department of Justice or state attorneys  general.  In addition,
Parent shall use its best efforts to resolve such objections,  if any, as may be
asserted  with  respect  to  the  transactions  contemplated  hereby  under  any
antitrust or trade  regulatory laws of any  Governmental  Authority  ("Antitrust
Laws").  It is further agreed that in connection with resolving such objections,
Parent,  the Company and their respective  Affiliates,  as determined by Parent,
will, not withstanding any provision of this Agreement, if necessary,  divest or
hold  separate  (i)  customer  contracts  ("Disposed  Contracts")  which  in the
aggregate  represent  annual  gross  revenues  in an amount (the  "Annual  Gross
Revenue Amount") not to exceed  $45,000,000,  as determined  below, and (ii) any
interest of Parent,  the Company or their respective  Affiliates in the TennCare
Partners  Program  implemented  by the  State of  Tennessee,  including  without
limitation any interest in the behavioral health organizations  participating in
the  TennCare  Partners  Program  or in  the  customer  contract  held  by  such
behavioral health organization.  Annual Gross Revenue Amounts shall, (x) exclude
gross  revenues  with respect to contracts  referred to in clause (ii) above and
with respect to Disposed Contracts for which Parent, the Company or the relevant
Affiliate  shall have received a notice of nonrenewal  or  termination  from the
customer  prior to the date of  receipt  of  objections,  (y)  with  respect  to
Disposed  Contracts that have been in force for at least twelve  months,  be the
product  of the  gross  revenues  generated  during  the  immediately  preceding
twelve-month  period  multiplied  by  Parent's,  the  Company's  or the relevant
Affiliate's  direct or indirect  percentage  interest in such contract,  and (z)
with respect to Disposed  Contracts that have been in force for less than twelve
months,  be the  product  of the gross  revenues  generated  during the time the
contract has been in force annualized,  multiplied by Parent's, the Company's or
the  relevant  Affiliate's  direct  or  indirect  percentage  interest  in  such
contract.  To the extent the Annual Gross Revenue Amount for Disposed  Contracts
does not exceed $25,000,000 (the "Threshold Amount"), no adjustment will be made
to the  Aggregate  Cash  Consideration.  To the extent the Annual Gross  Revenue
Amount for Disposed  Contracts  exceeds the Threshold  Amount (such excess,  the
"Excess  Amount",  which  shall in no event be greater  than  $20,000,000),  the
Aggregate  Cash  Consideration  shall be  reduced  by an amount  equal to (A) .8
multiplied  by the Excess  Amount,  less (B) an amount equal to (a) the fraction
equal  to the  Excess  Amount,  divided  by the  Annual  Gross  Revenue  Amount,
multiplied by (b) an amount equal to the proceeds  received in  connection  with
the divestiture or other transfer of the Disposed  Contracts.  In no event shall
Parent or the Company be required to breach any customer  contract in connection
with  this  provision.  If  any  suit  is  instituted  challenging  any  of  the
transactions  contemplated  hereby as violative of any Antitrust Law, Parent and
the  Company  shall  each  cooperate  to contest  and resist any such  action or
proceeding,  and to have vacated,  lifted,  reversed or  overturned  any decree,
judgment,   injunction  or  other  order  (whether  temporary,   preliminary  or
permanent)  that  is  in  effect  and  that  restricts,  prevents  or  prohibits
consummation of the  transactions  contemplated  by this  Agreement,  including,
without  limitation,  by pursuing all reasonable  avenues of administrative  and
judicial appeal.

                  (c) Either party hereto shall promptly inform the other of any
material  communication  from the Federal Trade  Commission,  the  Department of
Justice or any other  Governmental  Authority  regarding any of the transactions
contemplated hereby. If either party or any Affiliate thereof receives a request
for additional  information or documentary  material from any such  Governmental
Authority with respect to the transactions  contemplated hereby, then such party
will  endeavor in good faith to make, or cause to be made, as soon as reasonably
practicable and after consultation with the other party, an appropriate response
in substantial compliance with such request. The Company and Parent will consult
and cooperate with one another, and will consider in good faith the views of one
another in connection with any analyses, appearances,  presentations, memoranda,
briefs,  and other similar items and proposals made or submitted by or on behalf
of any party  hereto in  connection  with  proceedings  under or relating to any
proceedings  with any  Governmental  Authority.  Parent  will  consult  with the
Company in advance and provide the Company with the  opportunity  to participate
in any  discussion in respect of any  understanding,  undertaking,  or agreement
which Parent  proposes to make or enter into with the Federal Trade  Commission,
the Department of Justice or any other Governmental Authority in connection with
the transactions contemplated hereby.

                  SECTION 5.06.     Further Action.

Subject to the terms and conditions herein provided,  each of the parties hereto
covenants and agrees to use its best efforts to deliver or cause to be delivered
such  documents  and other  papers and to take or cause to be taken such further
actions  as may be  necessary,  proper or  advisable  under  applicable  Laws to
consummate and make effective the transactions contemplated hereby.

                  SECTION 5.07.     No Solicitation.

From the date hereof  through the  Closing or the  earlier  termination  of this
Agreement in accordance with its terms,  each of the Company,  its  Subsidiaries
and Affiliates and their respective officers,  directors,  employees, agents and
representatives shall not, directly or indirectly, enter into, solicit, initiate
or continue any discussions or negotiations with, or encourage or respond to any
inquiries or proposals by, or participate in any  negotiations  with, or provide
any  information  to,  or  otherwise  cooperate  in  any  other  way  with,  any
corporation, partnership, person or other entity or group, other than Parent and
its officers,  directors,  employee, agents and representatives,  concerning any
sale of the Company or all or a substantial  portion of its assets, the Business
or any merger,  consolidation,  liquidation,  dissolution or similar transaction
involving  the Company or any of its  Subsidiaries.  The Company  will  promptly
notify Parent if after the date hereof, it (or any Company Subsidiary)  receives
any such  inquiry  or  proposal  or  offer  to  discuss  or  negotiate  any such
transaction

                  SECTION 5.08.     Notification of Certain Matters.

Each of the Company and Parent  shall give  prompt  written  notice to the other
party of the occurrence,  or  non-occurrence,  of any events the occurrence,  or
non-occurrence  of which would  cause  either (i) a  representation  or warranty
contained in this  Agreement to be untrue or inaccurate in any material  respect
at any time  from the date  hereof  to the  Effective  Time,  or (ii) any of the
conditions set forth in Article VII to be unsatisfied in any material respect at
any time from the date hereof to the Effective  Time;  provided that the parties
hereto  need not give notice  with  respect to events  that are  reported in the
financial or general interest  newspapers that do not specifically relate to the
Company or Parent and their respective businesses.  Nothing in this Section 5.08
shall affect any representation or warranty made by the parties herein.

                  SECTION 5.09.     Indemnification of Officers and Directors.

                  (a) From and after the Effective  Time,  Parent agrees that it
will,  and will cause the Company to,  indemnify  and hold harmless each present
and former director and officer (the "Indemnified  Parties"),  against any costs
or expenses  (including  attorneys' fees),  judgments,  fines,  losses,  claims,
damages,  liabilities or amounts paid in settlement  incurred in connection with
any claim, action, suit, proceeding or investigation,  whether civil,  criminal,
administrative  or  investigative,  arising  out  of or  pertaining  to  matters
existing or occurring at or prior to the  Effective  Time,  whether  asserted or
claimed prior to, at or after the Effective Time, to the fullest extent that the
Company would have been  permitted  under  Delaware law and its  Certificate  of
Incorporation  or  bylaws  in  effect  on the  date  hereof  to  indemnify  such
Indemnified  Party (and Parent and the Company  shall also  advance  expenses as
incurred to the fullest extent  permitted  under  applicable  Law,  provided the
Indemnified Party to whom expenses are advanced provides an undertaking to repay
such advances if it is ultimately  determined that such Indemnified Party is not
entitled to indemnification).

                  (b) For a period of six years after the Effective Time, Parent
shall  maintain or shall cause the Company to maintain (to the extent  available
in the market) in effect a directors' and officers'  liability  insurance policy
covering those persons who are currently covered by the Company's directors' and
officers'  liability  insurance  policy  (copies of which  have been  heretofore
delivered by the Company to Parent)  with  coverage in amount and scope at least
as favorable as the Company's existing coverage; provided that in no event shall
Parent or the Company be required to expend in the  aggregate  in excess of 200%
of the annual premium  currently  paid by the Company for such coverage;  and if
such premium  would at any time exceed 200% of the such  amount,  then Parent or
the Company shall maintain insurance policies which provide the maximum and best
coverage available at an annual premium equal to 200% of such amount.

                  (c) The  provisions of this Section 5.09 are intended to be in
addition to the rights otherwise available to the current officers and directors
of the Company by Law,  charter,  bylaw or agreement,  and shall operate for the
benefit of, and shall be enforceable by, each of the Indemnified Parties,  their
heirs and their representatives.

SECTION 5.10.Repayment of Bank Debt and Senior Subordinated Notes.

                  Parent agrees to cause the Company to, and provide the Company
with  sufficient  funds  to,  (i)  at  the  Effective  Time  repay  all  amounts
outstanding under that certain Credit Agreement,  as amended, among the Company,
various  lending  institutions  and The Chase  Manhattan  Bank, N.A. dated as of
October 6, 1995 (the "Bank Debt") in the manner required by such agreement,  and
(ii)  perform the  Company's  obligations  set forth in Section  4.15 (Change of
Control) of that  certain  Indenture  dated as of November  22, 1995 between the
Company  and Marine  Midland  Bank,  as Trustee  with  respect to the  Company's
$100,000,000   11-1/2%  Senior  Subordinated  Notes  (the  "Senior  Subordinated
Notes").

                                   ARTICLE VI.

                                EMPLOYEE MATTERS

                  Section 6.01.     Employee Benefits.

                  (a) Parent  shall or shall  cause the  Company to  maintain in
effect employee benefit plans and arrangements which provide benefits which have
a value which is  substantially  comparable,  in the aggregate,  to the benefits
provided  by the  benefit  plans and  arrangements  of the  Company  and Company
Subsidiaries  immediately  prior to the Effective  Time (not taking into account
the value of any benefits under any such plans or arrangements  which are equity
based) for a period of one year after the Effective Time.

                  (b) For purposes of determining  eligibility  to  participate,
vesting,  entitlement  to benefits  and in all other  respects  where  length of
service is relevant under any employee  benefit plan or arrangement of Parent or
the Company (including for severance but not for pension benefit accruals to the
extent  not  permitted  by  Law),  employees  of  the  Company  or  any  Company
Subsidiaries  employed as of the Effective Time shall receive service credit for
service  with the  Company or any Company  Subsidiaries  to the same extent such
service was credited under the benefit plans and arrangements of the Company and
Company Subsidiaries immediately prior to the Effective Time.

                  SECTION 6.02.     Severance Arrangements.

                    Parent  shall  require the Company to (i) honor the terms of
the severance agreement included in the Non-Competition  Agreements entered into
between the Company and each of Messrs.  Waxman,  Halper, Lenahan and Budnick as
of the date hereof;  (ii) honor the terms of the  severance  agreements  entered
into prior to the date hereof with the  employees of the Company and the Company
Subsidiaries identified in Section 3.14(i) of the Disclosure Schedule; and (iii)
subject  to the  approval  by the  Company's  stockholders  under  Code  Section
280G(b)(5)(A)(ii),  maintain the Company  severance  policy, to be adopted as of
the Effective  Time, the terms of which are set forth in Section  3.14(a) of the
Disclosure Schedule.


                                  ARTICLE VII.

                              CONDITIONS TO CLOSING

                  SECTION 7.01.     Conditions to Obligations of the Company

                  .  The   obligations   of  the  Company  to   consummate   the
transactions  contemplated by this Agreement shall be subject to the fulfillment
or waiver, at or prior to the Closing, of each of the following conditions:

                  (a)  Representations  and  Warranties;   Covenants.   (i)  The
representations  and  warranties  of Parent  and Merger  Sub  contained  in this
Agreement  shall be true and correct as of the Closing,  with the same force and
effect as if made as of the  Closing  (or,  in the case of  representations  and
warranties  of  Parent  and  Merger  Sub  which  address  matters  only  as of a
particular  date,  as of such date),  except where the failure to be so true and
correct  would not have a material  adverse  effect on the ability of Parent and
Merger  Sub to  perform  its  obligations  hereunder;  (ii)  the  covenants  and
agreements  contained in this Agreement to be complied with by Parent and Merger
Sub at or prior to the Closing,  shall have been  complied  with in all material
respects;  and (iii) the Company shall have received a certificate  of Parent as
to the  matters  set  forth in  clauses  (i) and  (ii)  above  signed  by a duly
authorized officer of Parent;

                  (b) No Order.  No  Governmental  Authority shall have enacted,
issued,  promulgated,  enforced  or entered any  Governmental  Order which is in
effect  and has the  effect  of making  the  transactions  contemplated  by this
Agreement illegal or otherwise  prohibiting  consummation of such  transactions:
provided,  however,  that the provisions of this Section 7.01(b) shall not apply
if the Company has  directly or  indirectly  solicited  or  encouraged  any such
action;

                  (c)      HSR Act.  The applicable waiting period under the
HSR Act shall have expired or been terminated; and

                  (d)      Approvals.  All consents and approvals of
Governmental Authorities necessary for consummation of the transactions
contemplated hereby shall have been obtained.

                  SECTION 7.02.     Conditions to Obligations of Parent and
Merger Sub.

               The  obligations  of Parent  and  Merger  Sub to  consummate  the
transactions  contemplated by this Agreement shall be subject to the fulfillment
or waiver, at or prior to the Closing, of each of the following conditions:

                  (a)  Representations  and  Warranties;   Covenants.   (i)  The
representations  and warranties of the Company contained in this Agreement shall
be true and correct as of the Closing, with the same force and effect as if made
as of the Closing  (or, in the case of  representations  and  warranties  of the
Company  which address  matters only as of a particular  date, as of such date),
except  where the  failure to be so true and  correct  would not have a Material
Adverse Effect; (ii) the covenants and agreements contained in this Agreement to
be  complied  with by the  Company  at or prior to the  Closing  shall have been
complied with in all material  respects;  and (iii) Parent shall have received a
certificate  of the  Company as to the matters set forth in clauses (i) and (ii)
above signed by a duly authorized officer of the Company;

                  (b) No Order.  No  Governmental  Authority shall have enacted,
issued,  promulgated,   enforced  or  entered  any  statute,  rule,  regulation,
injunction or other  Governmental Order which is in effect and has the effect of
making the  transactions  contemplated  by this  Agreement  illegal or otherwise
prohibiting  consummation  of such  transactions;  provided,  however,  that the
provisions  of this Section  7.02(b) shall not apply if Parent or Merger Sub has
directly or indirectly solicited or encouraged any such action;

                  (c)      HSR Act.  The applicable waiting period under the
HSR Act shall have expired or been terminated;

                  (d)      Material Adverse Effect.  Since the date of this
Agreement there has not been any Material Adverse Effect;

                  (e)      Approvals.  All consents and approvals of
Governmental Authorities necessary for consummation of the transactions
contemplated hereby shall have been obtained;

                  (f)  Commitment  Letter.  Parent  and/or Merger Sub shall have
obtained the financing set forth in the Commitment Letter on the terms set forth
in such Commitment  Letter or other terms reasonably  acceptable to Parent,  and
such financing  shall have been funded on such terms;  provided,  however,  that
this condition  shall be deemed  satisfied if the financing  shall not have been
obtained  or funded  directly or  primarily  due to the  nonconsummation  of the
"Green Springs Transactions" (as defined in the Commitment Letter);

                  (g)      Termination of Certain Agreements.  Each of the
agreements listed in Exhibit 7.02(g) shall have been terminated without cost or
liability to the Company, Parent or Merger Sub, and shall be of  no further
force or legal effect;

                  (h)      Stockholder Support Agreements.  Each of the Company
Stockholders shall be in compliance with the Stockholder Support Agreement as
of the Closing;

                  (i) Loan Repayments.  The loans made by the Company to certain
of its  officers in  connection  with their  purchase  of Common  Stock shall be
repaid  in full at the  Effective  Time  either by  delivery  of funds or offset
against  the  total  Cash  Consideration  due  such  officers  pursuant  to this
Agreement;

                  (j)  Governmental  Actions.  There  shall  not be any  pending
litigation or  administrative  proceeding  brought by a  Governmental  Authority
against  Parent or the  Company  relative  to the Merger  that would  reasonably
likely  result  in a  material  adverse  effect  on  the  operations,  business,
financial  conditions  or results of  operations  of Parent and the  Company and
their respective Subsidiaries, taken as a whole; and

                  (k) Resignations.  Prior to the Effective Time, each member of
the Board of Directors of the Company  immediately  prior to the Effective  Time
shall have executed  letters of resignation  which shall become  effective as of
the Effective Time.

                                  ARTICLE VIII.

                        TERMINATION, AMENDMENT AND WAIVER

SECTION 8.01.  Termination.  This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Closing:

                  (a)      by the mutual written consent of the Company
                           and Parent;

                  (b) by either  the  Company  or  Parent,  if any  Governmental
Authority with  jurisdiction  over such matters shall have issued a Governmental
Order restraining, enjoining or otherwise prohibiting the Merger and such order,
decree,  ruling or other  action  shall  have  become  final  and  unappealable;
provided,  however,  that the  provisions  of this Section  8.01(b) shall not be
available  to  any  party  unless  such  party  shall  have  used  best  efforts
(consistent with the terms hereof) to oppose any such  Governmental  Order or to
have such  Governmental  Order vacated or made  inapplicable to the transactions
contemplated by this Agreement;

                  (c) by Parent, if the Closing shall not have occurred prior to
the date five months after the date of this Agreement;  provided,  however, that
Parent shall not have the right to terminate this  Agreement  under this Section
8.01(c) if Parent's failure to fulfill any obligation under this Agreement shall
have been the cause of, or shall have resulted in, the failure of the Closing to
occur prior to the applicable date; or

                  (d) by the  Company,  if the Closing  shall not have  occurred
prior to the date  five  months  after  the  date of this  Agreement;  provided,
however,  that the Company shall not have the right to terminate  this Agreement
under this Section  8.01(d) if the Company's  failure to fulfill any  obligation
under this  Agreement  shall have been the cause of, or shall have  resulted in,
the failure of the Closing to occur prior to the applicable date.

SECTION  8.02.  Effect  of  Termination.  In the  event of  termination  of this
Agreement  and  abandonment  of the Merger as  provided  in Section  8.01,  this
Agreement  shall  forthwith  become void and there shall be no  liability on the
part of any party  hereto  except (a) as set forth in Section  5.04 and  Section
9.02 and (b) that nothing  herein shall relieve  either party from liability for
any willful breach hereof.

SECTION 8.03. Waiver. At any time prior to the Closing,  either party hereto may
(a) extend the time for the  performance of any of the obligations or other acts
of the other party hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto, or (c)
waive compliance with any of the agreements or conditions  contained herein. Any
such  extension or waiver shall be valid only if set forth in an  instrument  in
writing signed by the party to be bound thereby.

                                   ARTICLE IX.

                               GENERAL PROVISIONS

SECTION 9.01. Nonsurvival of Representations, Warranties and Agreements. None of
the  representations,  warranties  and  agreements  in this  Agreement or in any
instrument  delivered  pursuant to this  Agreement  shall  survive the Effective
Time, except for the agreements  contained in Article II, Section 5.09,  Section
5.10,  Article VI and  Article  IX and any other  agreement  which  contemplates
performance after the Effective Time.

SECTION 9.02. Expenses. All costs and expenses,  including,  without limitation,
fees and disbursements of counsel, financial advisors and accountants,  incurred
in connection with this Agreement and the transactions contemplated hereby shall
be paid by the party  incurring  such  costs and  expenses,  whether  or not the
Closing shall have occurred.

SECTION  9.03.  Notices.  All  notices,  requests,  claims,  demands  and  other
communications  hereunder  shall be in  writing  and shall be given or made (and
shall be deemed to have been duly given or made upon  receipt)  by  delivery  in
person, by courier service, by cable, by telecopy,  by telegram,  by telex or by
registered or certified mail (postage prepaid,  return receipt requested) to the
respective  parties at the  following  addresses (or at such other address for a
party as shall be specified in a notice  given in  accordance  with this Section
9.03):

                  (a)      if to the Company:

                           Merit Behavioral Care Corporation
                           One Maynard Drive
                           Park Ridge, New Jersey  07656
                           Telecopier:  (201) 391-2411
                           Attention: Chairman and Chief Executive Officer

                           with copies to:

                           Latham & Watkins
                           75 Willow Road
                           Menlo Park, California  94002
                           Telecopier:  (650) 463-2600
                           Attention: Peter F. Kerman

                  (b)      if to Parent or Merger Sub:

                           Magellan Health Services, Inc.
                           3414 Peachtree Road, N.E.
                           Suite 1400
                           Atlanta, Georgia  30326
                           Telecopier:  (404) 814-2720
                           Attention: Chief Executive Officer and President

                           with a copy to:

                           Dow, Lohnes & Albertson, PLLC
                           One Ravinia Drive
                           Suite 1600
                           Atlanta, Georgia  30346
                           Telecopier:  (770) 901-8800
                           Attention:  J. Eric Dahlgren

SECTION 9.04. Public Announcements.  Unless otherwise required by applicable Law
or stock exchange requirements, no party to this Agreement shall make any public
announcements  in respect of this  Agreement  or the  transactions  contemplated
hereby or otherwise  communicate  with any news media  without the prior written
consent of the other party (which consent shall not be  unreasonably  withheld).
If a public statement is required to be made pursuant to the foregoing sentence,
the parties shall consult with each other, to the extent reasonably practicable,
in advance as to the contents and timing thereof.

SECTION  9.05.  Headings.  The  headings  contained  in this  Agreement  are for
reference  purposes  only  and  shall  not  affect  in any  way the  meaning  or
interpretation of this Agreement.

SECTION 9.06. Severability.  If any term or other provision of this Agreement is
invalid,  illegal or  incapable  of being  enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the  economic or legal  substance  of
the  transactions  contemplated  hereby is not affected in any manner adverse to
any party. Upon such  determination that any term or other provision is invalid,
illegal or incapable of being  enforced,  the parties hereto shall  negotiate in
good faith to modify this  Agreement so as to effect the original  intent of the
parties as closely as possible in a mutually acceptable manner in order that the
transactions  contemplated  hereby be consummated as originally  contemplated to
the greatest extent possible.

SECTION  9.07.  Entire  Agreement.  This  Agreement  (including  the  Disclosure
Schedule  hereto)  and  the  Confidentiality  Agreement  constitute  the  entire
agreement of the parties  hereto with respect to the subject  matter  hereof and
supersedes all prior agreements and  undertakings,  both written and oral, among
the Company, Parent and Merger Sub with respect to the subject matter hereof and
except as otherwise expressly provided herein.

SECTION  9.08.  Assignment.  Neither  this  Agreement  nor  any of  the  rights,
interests  or  obligations  hereunder  shall be  assigned  by any of the parties
hereto  (whether by operation  of law or  otherwise)  without the prior  written
consent of the other parties.  Subject to the preceding sentence, this Agreement
will be binding upon,  inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.

SECTION 9.09. No Third Party Beneficiaries.  Except as specifically  provided in
Section 5.09 (and solely with respect to parties indemnified  thereunder),  this
Agreement  is for the sole  benefit of the  parties  hereto and their  permitted
assigns and nothing herein,  express or implied,  is intended to or shall confer
upon any other person or entity any legal or equitable right,  benefit or remedy
of any nature whatsoever under or by reason of this Agreement.

SECTION 9.10. Waivers and Amendments. This Agreement may be amended or modified,
and the terms and conditions hereof may be waived,  only by a written instrument
signed by the parties  hereto or, in the case of a waiver,  by the party waiving
compliance.  No delay on the part of any party in exercising any right, power or
privilege  hereunder shall operate as a waiver thereof,  nor shall any waiver on
the part of any party of any right, power or privilege hereunder, nor any single
or partial exercise of any other right, power or privilege  hereunder,  preclude
any other or further exercise thereof or the exercise of any other right,  power
or privilege  hereunder.  The rights and remedies herein provided are cumulative
and are not  exclusive of any rights or remedies  which any party may  otherwise
have at Law or in equity.

SECTION 9.11.  Specific  Performance.  The parties hereto agree that irreparable
damage would occur in the event any provision of this  Agreement  required to be
performed  prior to the Closing was not performed in  accordance  with the terms
hereof and that, prior to the Closing, the parties shall be entitled to specific
performance  of the terms  hereof,  in addition to any other remedy at Law or in
equity.

SECTION 9.12.  Governing Law. This Agreement shall be governed by, and construed
in accordance  with,  the laws of the State of New York  applicable to contracts
executed  in and to be  performed  in that State.  All  actions and  proceedings
arising out of or relating to this Agreement  shall be heard and determined in a
New York state or federal court sitting in the City of New York, and the parties
hereto hereby irrevocable submit to the exclusive jurisdiction of such courts in
any  such  action  or  proceeding  and  irrevocably  waive  the  defense  of  an
inconvenient forum to the maintenance of any such action or proceeding.

SECTION  9.13.  Counterparts.  This  Agreement  may be  executed  in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original, but all of which taken
together shall constitute one and the same agreement.



<PAGE>



                  IN WITNESS  WHEREOF,  the Company,  Parent and Merger Sub have
caused this Agreement to be executed as of the date first written above by their
respective officers thereunto duly authorized.


                        MERIT BEHAVIORAL CARE CORPORATION



                                        By: /s/ Albert S. Waxman
                                          ----------------------------
                                         Name: Albert S. Waxman
                                         Title: Chairman & CEO


                                      MAGELLAN HEALTH SERVICES, INC.



                                       By: /s/ Craig McKnight
                                          -----------------------------
                                          Name: Craig McKnight
                                          Title: Executive VP/CFO


                                       MBC MERGER CORPORATION



                                        By: /s/ Craig McKnight
                                          -----------------------------
                                          Name: Craig McKnight
                                          Title: President



<PAGE>






- ------------------------------------------------------------------------

- ------------------------------------------------------------------------









                          AGREEMENT AND PLAN OF MERGER



                          dated as of October 24, 1997



                                      among



                        MERIT BEHAVIORAL CARE CORPORATION



                         MAGELLAN HEALTH SERVICES, INC.



                                       and



                             MBC MERGER CORPORATION













<PAGE>

- ------------------------------------------------------------------------
- ------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          TABLE OF CONTENTS

                                                                                                               Page

<S>     <C>    <C>    <C>    <C>    <C>    <C>

ARTICLE I.  DEFINITIONS...........................................................................................2

   SECTION 1.01. Certain Defined Terms............................................................................2
   SECTION 1.02. Other Defined Terms..............................................................................6

ARTICLE II.   MERGER..............................................................................................8

   SECTION 2.01. The Merger.......................................................................................8
   SECTION 2.02. Effective Time of the Merger.....................................................................8
   SECTION 2.03. Closing..........................................................................................8
   SECTION 2.04. Effect of the Merger.............................................................................8
   SECTION 2.05. Certificate of Incorporation and Bylaws of the Surviving Corporation.............................8
   SECTION 2.06. Directors and Officers of the Surviving Corporation..............................................8
   SECTION 2.07. Conversion of Securities.........................................................................9
   SECTION 2.08. Exchange of Certificates........................................................................10
   SECTION 2.09. Stock Transfer Books............................................................................12
   SECTION 2.10. Company Options.................................................................................12
   SECTION 2.11. Dissenting Shares...............................................................................13

ARTICLE III.   REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................................................14

   SECTION 3.01. Incorporation and Authority of the Company......................................................14
   SECTION 3.02. Incorporation and Qualification of the Company and the Company Subsidiaries.....................14
   SECTION 3.03. Capital Stock of the Company....................................................................14
   SECTION 3.04. Subsidiaries....................................................................................15
   SECTION 3.05. No Conflict.....................................................................................16
   SECTION 3.06. Financial Statements............................................................................17
   SECTION 3.07. Labor Matters...................................................................................17
   SECTION 3.08. Absence of Certain Changes or Events............................................................17
   SECTION 3.09. Absence of Litigation...........................................................................19
   SECTION 3.10. Compliance with Laws............................................................................19
   SECTION 3.11. Consents, Approvals, Licenses...................................................................19
   SECTION 3.12. Personal Property; Information Systems..........................................................20
   SECTION 3.13. Real Property...................................................................................20
   SECTION 3.14. Employee Benefit Matters........................................................................21
   SECTION 3.15. Taxes...........................................................................................23
   SECTION 3.16. Certain Contracts...............................................................................24
   SECTION 3.17. Customers.......................................................................................26
   SECTION 3.18. Undisclosed Liabilities.........................................................................26
   SECTION 3.19. Transactions with Affiliates....................................................................26
   SECTION 3.20. Undisclosed Liabilities.........................................................................27
   SECTION 3.21. Brokers.........................................................................................27
   SECTION 3.22. Restricted Cash.................................................................................27
   SECTION 3.23. SEC Documents...................................................................................27
   SECTION 3.24. Accounts Receivable.............................................................................28

ARTICLE IV.  REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER    SUB..........................................28

   SECTION 4.01. Incorporation and Authority of Parent and Merger Sub............................................28
   SECTION 4.02. No Conflict.....................................................................................28
   SECTION 4.03. Consents and Approvals..........................................................................29
   SECTION 4.04. Absence of Litigation...........................................................................29
   SECTION 4.05. Financing.......................................................................................29
   SECTION 4.06. Other Transactions..............................................................................29
   SECTION 4.07. Brokers.........................................................................................29

ARTICLE V.  ADDITIONAL AGREEMENTS................................................................................30

   SECTION 5.01. Conduct of Business Prior to the Closing........................................................30
   SECTION 5.02. Parent Action Prior to the Closing..............................................................33
   SECTION 5.03. Access to Information...........................................................................33
   SECTION 5.04. Confidentiality.................................................................................34
   SECTION 5.05. Efforts; Regulatory and Other Authorizations; Consents..........................................34
   SECTION 5.06. Further Action..................................................................................36
   SECTION 5.07. No Solicitation.................................................................................36
   SECTION 5.08. Notification of Certain Matters.................................................................36
   SECTION 5.09. Indemnification of Officers and Directors.......................................................37
   SECTION 5.10. Repayment of Bank Debt and Senior Subordinated Notes............................................37

ARTICLE VI.  EMPLOYEE MATTERS....................................................................................38

   Section 6.01  . Employee Benefits.............................................................................38
   Section 6.02.  Severance Arrangements.........................................................................38

ARTICLE VII.  CONDITIONS TO CLOSING..............................................................................38

   SECTION 7.01. Conditions to Obligations of the Company........................................................38
   SECTION 7.02. Conditions to Obligations of Parent and Merger Sub..............................................39

ARTICLE VIII.  TERMINATION, AMENDMENT AND WAIVER.................................................................40

   SECTION 8.01. Termination.....................................................................................40
   SECTION 8.02. Effect of Termination...........................................................................41
   SECTION 8.03. Waiver..........................................................................................41

ARTICLE IX.  GENERAL PROVISIONS..................................................................................41

   SECTION 9.01. Nonsurvival of Representations, Warranties and Agreements.......................................41
   SECTION 9.02. Expenses........................................................................................41
   SECTION 9.03. Notices.........................................................................................42
   SECTION 9.04. Public Announcements............................................................................42
   SECTION 9.05. Headings........................................................................................43
   SECTION 9.06. Severability....................................................................................43
   SECTION 9.07. Entire Agreement................................................................................43
   SECTION 9.08. Assignment......................................................................................43
   SECTION 9.09. No Third Party Beneficiaries....................................................................43
   SECTION 9.10. Waivers and Amendments..........................................................................43
   SECTION 9.11. Specific Performance............................................................................44
   SECTION 9.12. Governing Law...................................................................................44
   SECTION 9.13. Counterparts....................................................................................44
</TABLE>




FOR IMMEDIATE RELEASE



Magellan Investor Contact:          Kevin Helmintoller
                                    (404) 814-5742
Magellan Media Contacts:            Robert Mead
                                    (212) 445-8208
                                    Joel Weiden
                                    (212) 445-8244

Merit Media Contact:                Michael Lenahan
                                    (201) 782-5910

                                   MAGELLAN HEALTH SERVICES AND
                 MERIT BEHAVIORAL CARE CORPORATION ANNOUNCE MERGER
                                                AGREEMENT

 Magellan to Acquire All of Merit's Outstanding Stock for $460 Million,
                          Refinance Debt


ATLANTA,  GA, AND PARK RIDGE,  NJ, OCTOBER 27, 1997 - Magellan  Health  Services
(NYSE: MGL) and Merit Behavioral Care Corporation announced today that they have
signed a definitive  merger  agreement  under which Magellan will acquire Merit.
The company will be the nation's leading  specialty  managed care company,  with
$1.5 billion in revenues and 60 million covered lives across the United States.

Under  the  terms  of the  agreement,  Magellan  will  purchase  all of  Merit's
outstanding  stock for  approximately  $460 million in cash.  Magellan will also
refinance Merit's existing debt,  including $100 million in 11.50 percent senior
subordinated  notes,  and  Magellan's  $375  million  in  11.25  percent  senior
subordinated  notes. Chase Securities Inc. and Smith Barney,  Inc. are acting as
Magellan's  financial  advisors.  Chase  Securities Inc. will provide a fairness
opinion,  and Chase has committed to provide  Magellan with $1.3 billion in debt
financing.   The  transaction  is  subject  to  customary  regulatory  approvals
including  Hart-  Scott-Rodino  clearance,  and is expected to close  during the
fourth  quarter of 1997.  Magellan  said that it believes the  transaction  will
accelerate  earnings per share growth.  While the  transaction is expected to be
modestly  dilutive in year one, it is expected to be significantly  accretive in
years two and three.  Magellan will account for the transaction through purchase
accounting.

"The  combination  of Magellan  and Merit  creates  the  premier  company in the
behavioral  healthcare  segment of specialty care  management - an  organization
capable of  substantial  growth and  long-term  industry  leadership,"  said Mac
Crawford, Chairman, President and


<PAGE>


Chief  Executive  Officer  of  Magellan.   "With  this   transaction,   we  have
substantially  completed  Magellan's  transformation  into a  manager  of  care,
providing  our  shareholders  with the  ability to benefit  from a company  that
possesses substantial growth opportunities."

"While this  transaction in clearly based on creating a platform for growth,  we
also expect that there will be significant  efficiencies  realized over the next
three  years  through  the  integration  of Merit  and our  other  managed  care
operations,  Green  Spring  Health  Services and Human  Affairs  International,"
continued  Crawford.  "During this integration,  we are committed to making sure
every customer we serve and every  individual  whose care we manage receives the
uninterrupted,   high  quality  service  they  have  come  to  expect  from  our
companies."

Magellan's previously announced acquisition of Human Affairs International (HAI)
from Aetna/U.S. Healthcare is expected to close shortly.

"Merit will be a strong  addition to the  Magellan  network,  which has received
recognition of its excellent  clinical systems,  treatment  protocols,  advanced
information  technology systems,  outcomes monitoring and a high quality of care
delivered through an extensive  provider network.  By identifying and drawing on
the best practices from all our organizations,  we will be capable of setting an
even higher standard of service and care in our industry," said Crawford.

"There  is a  growing  recognition  in our  society  of  the  need  for  quality
behavioral  healthcare  for the  millions  of  Americans  who suffer from mental
illness.  Magellan's  approach as a care  manager is not to  restrict  access or
reduce care costs regardless of patients' needs, but to offer a system of proven
treatment  protocols  and  outcomes  measurement  that help restore and maintain
their good health.  We believe  this focus  ensures that care is provided in the
most appropriate  setting using the most effective  treatment - which ultimately
results in the most efficient  utilization of the benefits our customers provide
their employees or beneficiaries," continued Crawford.

"In a time of  consolidation  in our industry,  the joining together of Magellan
and Merit  represents  a unique  opportunity  for our  business,  customers  and
employees,"  said  Albert S.  Waxman,  Ph.D.,  one of Merit's  founders  and its
Chairman and Chief  Executive  Officer.  "Since our founding in 1986,  Merit has
built both an impressive reputation for high quality behavioral healthcare and a
very  strong  record of  growth.  This  transaction  allows us to build upon our
achievements and be part of an organization  capable of providing an even higher
quality of care."

"I am deeply proud of the  accomplishments  of our extremely  talented  employee
base and the growth they have helped  achieve,"  continued  Waxman.  "We believe
that this  union will  result in  greater  opportunities  for our  employees  to
continue  to progress  in their  careers  and succeed in the managed  healthcare
arena."

Certain of the statements in this press release including,  without  limitation,
statements  by Magellan  regarding  the  dilutive and  accretive  effects of the
transaction, savings to be achieved after the transaction close, acquisition and
growth  opportunities,  consolidation,  revenue,  income and  expectations as to
Magellan's   future   performance,    constitute    forward-looking   statements
contemplated  under the Private  Securities  Litigation Reform Act of 1995. Risk
factors such as the ability to successfully complete and integrate  acquisitions
could  prevent  Magellan  from  achieving  the  growth,  performance  (including
anticipated  cost  savings)   mentioned  or  consummating   future   acquisition
opportunities.  For a more complete  discussion of these and other risk factors,
please see Exhibit 99 contained in  Magellan's  Annual  Report on Form 10-K,  as
amended,  for the fiscal year ended September 30, 1996 filed with the Securities
and  Exchange  Commission  on April 23,  1997 and  Magellan's  Form 10-Q for the
quarter ended June 30, 1997 filed on August 14, 1997.

Magellan  Health  Services,  Inc.  is one of the  country's  largest  integrated
specialty managed  healthcare  companies.  Its business units include:  majority
owned  Green  Spring  Health  Services,  a leader  in  behavioral  managed  care
services;  Magellan  Public  Solutions,  serving  public  sector  agencies  with
privatized  behavioral  health  services;  Charter  Advantage,  an international
franchisor of behavioral health care systems; and 50 percent interest in Charter
Behavioral  Health Systems,  the largest  operator of  free-standing  behavioral
health facilities in the U.S.

Merit  Behavioral  Care  Corporation  provides mental health and substance abuse
services and employee  assistance programs to more than 21 million enrollees and
800 clients across all 50 states through a national  network of 36,000 staff and
network providers and facilities.  Merit clients include  corporations and other
private  employers,  union trusts,  insurance  carriers,  HMOs,  Blue Cross Blue
Shield organizations and government entities.  Merit expects to report pro forma
1997 revenues,  including the contributions of its recent acquisition CMG Health
Inc., of  approximately  $680 million.  Kohlberg Kravis Roberts,  the investment
firm, is Merit's majority shareholder. 



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