<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED MAY 31, 1994. [FEE REQUIRED]
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO . [NO FEE REQUIRED]
COMMISSION FILE NUMBER: I-7293
----------------
NATIONAL MEDICAL ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
NEVADA 95-2557091
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2700 COLORADO AVENUE 90404
SANTA MONICA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
AREA CODE (310) 998-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ---------------------
<S> <C>
Common Stock New York Stock Exchange
Pacific Stock Exchange
12 1/8% Notes Due April 1, 1995 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
</TABLE>
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [_]
As of July 29, 1994 (the last business day of July) there were 166,194,728
shares of Common Stock outstanding. The aggregate market value of the shares of
Common Stock held by non-affiliates of the Registrant, based on the closing
price of these shares on the New York Stock Exchange, was approximately
$2,802,198,043. For the purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended May 31, 1994, have been incorporated by reference into Parts I, II
and IV of this Report. Portions of the definitive Proxy Statement for the
Registrant's 1994 Annual Meeting of the Shareholders have been incorporated by
reference into Part III of this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT--1994
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Part I
Item 1. Business................................................... 1
Item 2. Properties................................................. 14
Item 3. Legal Proceedings.......................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........ 18
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 19
Item 6. Selected Financial Data.................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 19
Item 8. Financial Statements and Supplementary Data................ 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 19
Part III
Item 10. Directors and Executive Officers of the Registrant......... 19
Item 11. Executive Compensation..................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 19
Item 13. Certain Relationships and Related Transactions............. 19
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K................................................... 20
</TABLE>
- --------
Note: The responses to Items 5 through 8, Items 11 through 13 and portions of
Items 1, 3, 10 and 14 are included in the Registrant's Annual Report to
Shareholders for the year ended May 31, 1994, or the definitive Proxy
Statement for the Registrant's 1994 Annual Meeting of Shareholders. The
required information is incorporated into this Report by reference to
those documents and is not repeated herein.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
National Medical Enterprises, Inc. ("NME" or the "Company") is a leading
investor-owned health care company, engaged primarily in the operation of
domestic and international general hospitals. For all or a portion of fiscal
year 1994, NME's operations were conducted through its Hospital Division (which
includes the Company's general and rehabilitation hospitals), Psychiatric
Division, Management Services Division, International Hospital Division and
Other Businesses. NME's continuing operations are conducted through its
Hospital Division, International Hospital Division, Management Services
Division and Other Businesses.
Fiscal year 1994 was a period of tremendous change for NME. For the first
time in NME's history, it had a new management team. The year started with
Jeffrey C. Barbakow becoming Chairman and Chief Executive Officer and Michael
H. Focht becoming President and Chief Operating Officer. During the year the
Company also appointed a new General Counsel and a new Chief Financial Officer.
The Company determined that its top priority would be to resolve the unusual
legal proceedings then facing NME.
As fiscal year 1994 began, NME faced significant litigation with various
insurers concerning NME's Psychiatric Division Facilities (as defined below),
class-action lawsuits by certain shareholders, psychiatric patient litigation
alleging fraud and conspiracy and investigations by various state and federal
agencies aimed principally at NME's freestanding psychiatric hospitals,
residential treatment centers and substance abuse recovery facilities
(collectively, the "Psychiatric Division Facilities"). The legal challenges
facing NME reached their peak in August 1993, when federal agents served NME's
Psychiatric Division headquarters in Santa Monica, California as well as
various regional offices and facilities with search warrants and subpoenas in
connection with the government investigations. By the end of the year, NME had
resolved the litigation between NME and the insurers, had resolved 90 of the
cases brought by psychiatric patients alleging fraud and conspiracy
(approximately two-thirds of such cases that had been filed to date) and had
reached an agreement in principle to resolve claims by federal and state
agencies. In the first quarter of fiscal year 1995, NME entered into definitive
agreements that brought a close to all federal investigations and substantially
all state claims pending against NME and its subsidiaries. These matters and
other legal proceedings are discussed in more detail under Legal Proceedings on
page 14.
During the year NME's management also concluded that it would be in the best
interest of the shareholders for NME to focus on its core business, operating
domestic and international general hospitals. During fiscal year 1994, NME sold
29 of its 35 rehabilitation hospitals, retaining six rehabilitation hospitals
located on the same campus as or nearby certain of its general hospitals (the
"Campus Rehabilitation Hospitals").
1
<PAGE>
On November 30, 1993, the Company decided to discontinue its Psychiatric
Division Facilities business and adopted a plan to dispose of those Facilities.
Beginning as of November 30, 1993, the financial results of the Psychiatric
Division Facilities have been treated as discontinued operations for accounting
purposes. During fiscal year 1994, NME sold 15 Psychiatric Division Facilities.
In addition, on March 29, 1994, NME entered into agreements to sell 47 of the
remaining Psychiatric Division Facilities to Charter Medical Corporation
("Charter"). On June 30, 1994, NME sold 27 of those 47 facilities. The sale of
17 of the remaining 20 facilities to be sold to Charter is subject to approval
by the Federal Trade Commission ("FTC"), which has requested additional
information concerning such sales. The Company and Charter are responding to
the FTC's request. No specific date has been set to close these sales, except
that if such closings do not occur prior to September 30, 1994, and the parties
do not extend that date, the agreement will terminate on September 30. Based on
discussions to date with the FTC, the Company believes it may not be able to
sell at least five facilities to Charter. However, it believes it will receive
similar proceeds upon their sale to other parties. The other three facilities
being sold to Charter have FTC approval and are expected to be sold at a later
date. NME plans to sell or close all but four of the 15 Psychiatric Division
Facilities remaining at May 31, 1994, and not being sold to Charter. During the
first quarter of fiscal year 1995, NME sold four of those Psychiatric Division
Facilities to other parties. The four Psychiatric Division Facilities being
retained are located on the same campus as or nearby certain of its general
hospitals (the "Campus Psychiatric Facilities").
At May 31, 1994, NME operated, domestically, 35 general hospitals (two of
which were sold during the first quarter of fiscal year 1995) and six
rehabilitation hospitals. In addition, NME continued to operate as a
discontinued business 54 Psychiatric Division Facilities. The financial results
of the general hospitals and the rehabilitation hospitals are included in the
financial results of the Hospital Division. NME's Management Services Division
manages 20 psychiatric units and 10 rehabilitation units within general
hospitals owned by others and manages one freestanding psychiatric hospital for
a third party. In addition, NME's Management Services Division manages eight
psychiatric units, three substance abuse recovery facilities and seven
rehabilitation units within NME's general hospitals. Beginning as of November
30, 1993, the financial results of the management of the psychiatric units and
psychiatric hospital were reported in the financial results of the Hospital
Division and prior to that were reported in the financial results of the
Psychiatric Division. The financial results of the management of the
rehabilitation units were reported in the financial results of the Hospital
Division for all of fiscal year 1994.
The financial results of NME's International Hospital Division, which
operates and manages general hospitals and other health care businesses located
outside the United States, are included in the financial results of the
Hospital Division. NME's international operations continued to grow during
fiscal year 1994. During the year NME entered into an agreement with Bumrungrad
Hospital Corporation, a Thai company listed on the Stock Exchange of Thailand,
to develop the 554-bed tertiary care Bumrungrad Medical Center in Bangkok,
Thailand. That hospital is expected to open during the first quarter of fiscal
year 1997. NME's 184-bed tertiary care hospital, Centro Medico Teknon, opened
in Barcelona, Spain, in February 1994. In the first quarter of fiscal 1994, NME
purchased the 50% interest of its joint venture partner in that hospital and
now is the sole owner of the hospital. NME continues to operate and manage two
general hospitals in Singapore and owns a minority interest in a 17-story
medical office building adjacent to one of those hospitals. NME also provides
management services for the Subang Jaya Medical Centre (in which it owns a 30%
interest) in Kuala Lumpur, Malaysia. The Subang Jaya Medical Centre is expected
to open a new 150-bed tower during the second quarter of fiscal 1995. NME also
owns a 52% interest in Australian Medical Enterprises Limited ("AME"), an
Australian hospital management company that operates four hospitals in the
Perth area, five hospitals in the Sydney area and a large pathology laboratory
in Western Australia. In fiscal year 1994, AME began building the new 202-bed
St. George Hospital outside of Sydney.
NME continues to own a 42% equity interest in Westminster Health Care
Holdings PLC ("Westminster"). Westminster, formerly NME's 90% owned United
Kingdom nursing home subsidiary, completed its initial public offering of
common stock in fiscal year 1993. NME's share of Westminster's earnings are
included in the financial results of NME's Other Businesses.
2
<PAGE>
NME restructured its relationship with its former subsidiary, The Hillhaven
Corporation ("Hillhaven"), in fiscal year 1994. Following Hillhaven's spinoff
in fiscal year 1990, NME continued to lease facilities to, lend money (in
connection with the sale of facilities) to and guaranty substantial obligations
of, Hillhaven. As described in more detail on page 5, in fiscal year 1994 NME
sold to Hillhaven all of the facilities previously leased by NME to Hillhaven,
Hillhaven repaid to NME all amounts previously loaned by NME to Hillhaven and
Hillhaven caused NME to be released from approximately $370,000,000 of the
$706,000,000 of Hillhaven debt and lease obligations for which NME had been
contingently liable. NME also exercised all of its Warrants to purchase
6,000,000 shares of Hillhaven Common Stock, following which NME owned at May
31, 1994, 8,878,147 shares (approximately 32.9%) of Hillhaven Common Stock,
35,000 shares of Hillhaven's cumulative non-voting 8 1/4% Series C Preferred
Stock and 60,546 shares of Hillhaven's cumulative non-voting 6 1/2% payable-in-
kind Series D Preferred Stock. NME did not transfer as part of the spinoff, and
continued to operate through fiscal year 1994, freestanding and mobile kidney
dialysis units (which were operated by NME's Medical Ambulatory Care ("MAC")
subsidiary), and seven domestic long term care facilities (which are managed by
Hillhaven) adjacent to NME hospitals. NME's share of Hillhaven's earnings,
NME's lease income from Hillhaven prior to restructuring its relationship with
Hillhaven, NME's guaranty fee income from Hillhaven, the financial results of
MAC's operations and the financial results of NME's long term care facilities
are included in the financial results of NME's Other Businesses. In September
1993, Hillhaven effected a one-for-five reverse stock split of its common
stock. All of the numbers above have been adjusted to reflect that reverse
stock split.
In the first quarter of fiscal year 1995, MAC sold units (consisting
primarily of debt but including some non-voting common stock) to the public and
then sold shares constituting a majority interest in MAC to an affiliate of an
investment banking firm and MAC's management, reducing NME's equity interest in
MAC to approximately 25%. MAC paid NME a $75,500,000 dividend with the proceeds
of MAC's public sale of the units and the proceeds of a loan to MAC from a
group of banks.
The health care industry in the United States is going through a period of
great uncertainty. The federal government and various states have set the
reform of the health care system as one of their primary goals. It is not clear
at this time what form any such reforms may take or what impact such reforms
will have on NME's financial performance, but NME believes that some of the
pressures leading to the call for reform and the uncertainty concerning the
scope and substance of any changes to the health care system have affected its
operations. Furthermore, restrictions imposed by government and third party
payors, including what commonly is referred to as "utilization review" and
"managed care," have resulted in a reduction of payments for, or limited the
availability of, certain treatments and procedures. These matters are discussed
in more detail under Health Care Reform, Regulation, Licensing and Insurance on
page 11.
NME's fiscal year 1994 net operating revenues from continuing operations were
derived 94.6% from its Hospital Division and 5.4% from its Other Businesses.
Under segment reporting criteria, NME believes its only material business
segment is "health care," which contributed substantially all of the Company's
net operating revenues and operating profits in fiscal year 1994. See the
discussion of NME's revenues and operations in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in NME's
1994 Annual Report to Shareholders.
3
<PAGE>
HOSPITAL DIVISION
NME's general hospitals offer acute care services with fully equipped
operating and recovery rooms, radiology services, intensive care and coronary
care nursing units, pharmacies, clinical laboratories, respiratory therapy
services, physical therapy services and outpatient facilities. At May 31, 1994,
NME's Hospital Division operated domestically 35 general hospitals (two of
which were sold in the first quarter of fiscal year 1995), 27 of which are
owned by NME's wholly-owned subsidiary, NME Hospitals, Inc., one of which is on
leased land and eight of which are owned by and leased from others (including
two leased from general partnerships in which NME owns interests). The Hospital
Division also operates the Campus Psychiatric Facilities and Campus
Rehabilitation Hospitals.
At May 31, 1994, the Company's International Hospital Division (the
operations of which are included in the financial results of the Hospital
Division) operated two hospitals in Singapore (650 beds), operated 10 hospitals
(689 beds) (the operations of one of which have been suspended pending their
merger into the operations of a new hospital for which a license was granted in
fiscal year 1994) and a laboratory business in Australia, a hospital (184 beds)
in Barcelona, Spain (which now is wholly-owned by NME following its purchase in
the first quarter of fiscal 1994 of its joint venture partner's 50% interest),
and managed one hospital (225 beds) (in which it owns a 30% interest) in Kuala
Lumpur, Malaysia. During the year NME also entered into a joint venture to
develop a new 554-bed tertiary care hospital in Bangkok, Thailand. That
hospital is expected to be completed during the first quarter of fiscal year
1997.
During fiscal year 1994, the Company entered into a long-term lease of one
general hospital (138 beds). In addition, the Company added a total of 67 beds
to three existing general hospitals and eliminated 30 beds from four other
existing general hospitals, all in the United States. The Company sold one
domestic general hospital (120 beds) during fiscal year 1994 and two general
hospitals (202 beds) during the first quarter of fiscal year 1995.
The following table lists, by state, the number of general hospitals owned or
leased by NME and operated domestically as of May 31, 1994 (including the two
general hospitals sold in the first quarter of fiscal year 1995):
OWNED OR LEASED GENERAL HOSPITALS
<TABLE>
<CAPTION>
LICENSED
STATE NO. BEDS
----- --- --------
<S> <C> <C>
California.......................... 17 2,943
Florida............................. 5 1,168
Louisiana........................... 5 849
Missouri............................ 2 527
Tennessee........................... 2 421
Texas............................... 4 965
--- -----
Totals.......................... 35 6,873
=== =====
</TABLE>
The above table does not include the Campus Rehabilitation Hospitals or the
Campus Psychiatric Facilities.
The following table shows certain information about the general hospitals
owned or leased domestically by NME, for the fiscal years ended May 31:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total number of facilities................ 35 35 35 35 37
Total number of licensed beds............. 6,873 6,818 6,559 6,591 6,731
Average occupancy during the period....... 47% 48% 51% 52% 51%
</TABLE>
4
<PAGE>
NME sold 28 of its 35 rehabilitation hospitals to HEALTHSOUTH Rehabilitation
Corporation for approximately $350,000,000 and one rehabilitation hospital to a
third party for approximately $14,000,000 in fiscal year 1994, retaining the
six Campus Rehabilitation Hospitals. The financial results of the
rehabilitation hospitals were included in the financial results of the Hospital
Division in fiscal year 1994.
OTHER BUSINESSES
NME continues to own a 42% equity interest in Westminster. Westminster,
formerly NME's 90% owned United Kingdom nursing home subsidiary, completed its
initial public offering of common stock on April 15, 1993 (the "Offering"). At
May 31, 1994, Westminster owned and operated 56 nursing homes in the United
Kingdom. NME recognizes its share of Westminster's earnings using the equity
method of accounting. Those earnings are included in the financial results of
NME's Other Businesses. In connection with the Offering, NME and Westminster
entered into an agreement governing their future relationship. That agreement
provides that: (1) NME will be entitled to nominate three, two or one
representative(s) to Westminster's nine-member board of directors so long as
NME owns 30%, 20% or 10% or more, respectively, of Westminster's shares; (2)
NME may not purchase or sell shares in Westminster prior to April 15, 1995,
without the consent of Westminster's directors not nominated by NME; (3) NME
may purchase or sell Westminster's shares during the third year following the
Offering so long as it notifies Westminster before doing so and may purchase or
sell shares without restriction after the third year following the Offering so
long as it does not acquire 50% or more of Westminster's stock prior to the
sixth anniversary of the Offering; and (4) as long as NME holds 30% or more of
Westminster's stock (a) both companies have agreed not to operate facilities
within 30 miles of each other and to seek to avoid conflicts of interest and
minimize the extent of competition between their operations and (b) NME has
agreed not to compete with Westminster in the business of nursing home care in
the United Kingdom and Westminster has agreed not to compete with NME in the
business of nursing home care in the United States or Australia.
NME restructured its relationship with Hillhaven in fiscal year 1994.
Following Hillhaven's spinoff in fiscal year 1990, NME continued to lease
facilities to, lend money (in connection with the sale of facilities) to and
guaranty substantial obligations of, Hillhaven. During fiscal year 1994 (1) NME
sold to Hillhaven, for $111,800,000, the 23 remaining long term care facilities
previously leased by NME to Hillhaven, (2) Hillhaven repaid to NME $149,000,000
previously loaned to Hillhaven, (3) Hillhaven caused NME to be released from
approximately $370,000,000 of the $706,000,000 of Hillhaven debt and lease
obligations for which NME had been contingently liable and (4) NME purchased
120,000 shares of Hillhaven non-voting Series D Preferred Stock for
$120,000,000. Hillhaven continues to pay a guaranty fee to NME, calculated as a
percentage of the debt and lease obligations on which NME remains contingently
liable. On February 28, 1994, NME exercised all of its Warrants to purchase
6,000,000 shares of Hillhaven Common Stock. NME paid the $63,300,000 exercise
price by tendering 63,300 shares of Hillhaven cumulative non-voting Series D
Preferred Stock previously acquired by NME. The terms of the Series D Preferred
Stock expressly provided that it could be tendered to pay the exercise price of
the Warrants. Following NME's exercise of the Warrants, it owned at May 31,
1994, 8,878,147 shares of Hillhaven Common Stock, which constitutes
approximately 32.9% of Hillhaven's outstanding Common Stock, 35,000 shares of
Hillhaven's cumulative non-voting 8 1/4% Series C Preferred Stock and 60,546
shares of Hillhaven's cumulative non-voting 6 1/2% payable-in-kind Series D
Preferred Stock. NME did not transfer as part of the spinoff, and continued to
operate through fiscal year 1994, freestanding and mobile kidney dialysis units
(which are operated by NME's MAC subsidiary), and seven domestic long term care
facilities (all of which are managed by Hillhaven and are adjacent to NME
hospitals and one of which, The John Douglas French Center, is a special care
facility for victims of Alzheimer's disease). During fiscal year 1994, NME paid
Hillhaven approximately $2,334,000 for managing those seven long term care
facilities. NME's share of Hillhaven's earnings, NME's lease and guaranty fee
income from Hillhaven, the financial results of MAC's operations and the
financial results of NME's long term care facilities are included in the
financial results of NME's Other Businesses. In September 1993, Hillhaven
effected a one-for-five reverse stock split of its common stock. All of the
numbers above have been adjusted to reflect that reverse stock split.
5
<PAGE>
In the first quarter of fiscal year 1995, MAC sold units (consisting
primarily of debt but including some non-voting common stock) to the public and
then sold shares constituting a majority interest in MAC to an affiliate of an
investment banking firm and MAC's management, reducing NME's equity interest in
MAC to approximately 25%. MAC paid NME a $75,500,000 dividend with the proceeds
of MAC's public sale of the units and the proceeds of a loan to MAC from a
group of banks.
PSYCHIATRIC DIVISION
On November 30, 1993, the Company decided to discontinue its Psychiatric
Division Facilities business and adopted a plan to dispose of those Facilities.
Beginning as of November 30, 1993, the financial results of the Psychiatric
Division Facilities have been treated as discontinued operations for accounting
purposes.
During fiscal year 1994, NME sold 15 Psychiatric Division Facilities. In
addition, on March 29, 1994, NME entered into agreements to sell 47 of the
remaining Psychiatric Division Facilities to Charter for a total purchase price
of approximately $200,000,000. On June 30, 1994, NME sold 27 of those 47
facilities to Charter for a total purchase price of approximately $129,000,000.
The sale to Charter of 17 other facilities is subject to approval by the FTC,
which has requested additional information concerning such sales. The Company
and Charter are responding to the FTC's request. No specific date has been set
to close these sales, except that if such closings do not occur prior to
September 30, 1994, and the parties do not extend that date, the agreement will
terminate on September 30. Based on discussions to date with the FTC, the
Company believes it may not be able to sell at least five facilities to
Charter. However, it believes it will receive similar proceeds upon their sale
to other parties. The other three facilities being sold to Charter have FTC
approval and are expected to be sold at a later date. Except for the four
Campus Psychiatric Facilities that are being retained, NME plans to sell or
close all of the 62 Psychiatric Division Facilities that were remaining at May
31, 1994 (including the 47 facilities being sold to Charter). During the first
quarter of fiscal year 1995, in addition to the 27 facilities sold to Charter,
NME sold four of those Psychiatric Division Facilities to other parties.
PROPERTIES
The corporate headquarters of NME and of its operating divisions are located
in an approximately 310,000 square foot office building owned by NME and
located in Santa Monica, California. At May 31, 1994, NME and its operating
subsidiaries also were leasing other office space in Fairfax, Virginia; Tampa,
Florida; Irving, Texas; and Los Angeles, Modesto, Santa Ana and Santa Monica,
California.
As of May 31, 1994, NME operated domestically 28 medical office buildings,
including 24 that are leased from others, most of which are adjacent to general
hospitals. These buildings are occupied by approximately 700 physicians.
The number of licensed beds and locations of the Company's general hospitals
are described onpage 4. As of May 31, 1994, NME had approximately $171,000,000
of outstanding loans secured by real property and approximately $49,000,000 of
capitalized lease obligations. The Company believes that all of these
properties, as well as the administrative and medical office buildings
described above, are suitable for their intended purposes.
The Company has announced that it intends to sell its corporate headquarters
building in Santa Monica, California, and established a reserve at May 31,
1994, to cover the loss that the Company expects to incur. The Company intends
to announce whether it will be leasing back a portion of the building or moving
to new space in southern California once a decision has been made.
6
<PAGE>
MEDICAL STAFF AND EMPLOYEES
NME's hospitals are staffed by licensed physicians who have been admitted to
the medical staff of individual hospitals. Members of the medical staffs of
NME's hospitals often serve on the medical staffs of hospitals not owned by the
Company and may terminate their affiliation with the NME hospital or shift
their admissions to competing hospitals at any time. With minor exceptions,
physicians are not employees of the Company. Nurses, therapists, lab
technicians, facility maintenance staff and the administrative staff of
hospitals, however, normally are employees of the Company.
The number of NME employees (of which approximately 31% were part-time
employees) at May 31, 1994, was approximately as follows:
<TABLE>
<S> <C>
Hospital Division (1).............................................. 28,500
International Hospital Division.................................... 4,800
Psychiatric Division (2)........................................... 4,400
Management Services Division....................................... 400
Other Businesses................................................... 200
Corporate Office................................................... 500
------
Total.......................................................... 38,800
======
</TABLE>
- --------
(1) Includes employees whose employment relates to the operations of the Campus
Psychiatric Facilities and the Campus Rehabilitation Hospitals.
(2) Does not include employees whose employment relates to the operations of
the Campus Psychiatric Facilities. The operations of the Psychiatric
Division are treated as discontinued operations. This data is included for
informational purposes only.
NME is subject to the federal minimum wage and hour laws and maintains
various employee benefit plans. Labor relations at NME's facilities have been
satisfactory. A small percentage of NME's employees are represented by labor
unions. Although the Company currently is not experiencing a shortage of
nursing personnel, the availability of nursing personnel fluctuates from year
to year, and the Company cannot predict the degree to which it will be affected
by the future availability and cost of nursing personnel.
During the fourth quarter of fiscal year 1994, NME hired a management
consulting firm to conduct a study analyzing the functions being performed at
NME's corporate and regional offices. The goal was to reduce overhead costs. As
a result of that study, which is expected to result in projected annual savings
for NME of approximately $32,000,000, 240 positions from NME's corporate office
and the Hospital Division's district and regional offices have been or will be
eliminated prior to the end of fiscal year 1995. NME established a reserve at
May 31, 1994, to cover the cost of severance packages and other costs related
to the reduction in force.
7
<PAGE>
COMPETITION
NME's general hospitals, Campus Psychiatric Facilities and Campus
Rehabilitation Hospitals (collectively, "Health Care Facilities") operate in
competitive environments. A Health Care Facility's competitive position within
its "Primary Service Area" (the geographic area in which a facility is located
and from which it receives the majority of its patients) is affected by such
competitive factors as the quality of care provided, including the number,
quality and specialties of the physicians, nurses and other health care
professionals on staff, its reputation, the number of competitive facilities,
the state of its physical plant, the quality and the state of the art of its
medical equipment, its location and, in the case of private patients, its
charges for services. Non-profit or government-owned competitors may have
certain financial advantages such as endowments, charitable contributions and
tax-exempt financing not available to NME facilities. The length of time a
facility has been a part of the community and the availability of other health
care alternatives are also competitive factors.
An emerging factor in the competitive position of NME's facilities is the
ability of NME to obtain managed care contracts with purchasers of group health
care services such as health maintenance organizations ("HMO's"), preferred
provider organizations ("PPO's"), employers and traditional health insurers
(collectively, "Group Purchasers"). Group Purchasers contract with health care
providers for discounted or per capita rates in exchange for sending some or
all of their members/employees to those providers. The importance of obtaining
managed care contracts has increased over the years as employers and others
attempt to control rising health care costs. NME, as a national healthcare
provider with 33 general hospitals, four Campus Psychiatric Facilities and six
Campus Rehabilitation Facilities in six states, is well positioned to compete
in the managed care market, and its Health Care Facilities have been actively
pursuing and entering into such contracts both on a local and national level.
To facilitate its managed care contracting, NME's facilities are exploring and
entering into various physician-hospital alliances, which are expected to
enable NME's facilities to offer an integrated delivery system of healthcare
that will appeal to payors.
The Company, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payors. As both private and government payors
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, national and state efforts to reform the United States health
care system may further impact reimbursement rates. Changes in medical
technology, existing and future legislation, regulations and interpretations
and competitive contracting for provider services by private and government
payors may require changes in the Company's facilities, equipment, personnel,
rates and/or services in the future.
The general hospital industry and the Company's general hospitals continue to
have significant unused capacity, and thus there is substantial competition for
patients. Inpatient utilization, average lengths of stay and average occupancy
continue to be negatively affected by payor-required pre-admission
authorization, utilization review and by payor pressure to maximize outpatient
and alternative health care delivery services for less acutely ill patients.
Increased competition, admissions constraints and payor pressures are expected
to continue. There continue to be increases in inpatient acuity and intensity
of services as less intensive services shift from an inpatient to an outpatient
basis or to alternative health care delivery services because of technology
improvements and as cost controls by payors become greater. Allowances and
discounts are expected to continue to rise, and to cause decreases in revenues,
because of increasing cost controls by government and Group Purchasers and
because of the increasing percentage of business (and related discounts) from
Group Purchasers. To meet these challenges, the Company has expanded many of
its general hospitals' facilities to include outpatient centers, offers
discounts to private payor groups, enters into capitation contracts in some
service areas, upgrades facilities and equipment and offers new programs and
services.
In most cases, hospital revenues depend on the physicians on staff who admit
or refer patients to the hospital. Physicians refer patients to hospitals on
the basis of the quality of services provided by the hospital to patients and
their physicians, the hospital's location, the quality of the medical staff
affiliated with the hospital and the quality of the hospital's facilities,
equipment and employees. While a physician may
8
<PAGE>
terminate his or her association with a hospital at any time, NME believes that
by striving to maintain and improve the excellence of care of its hospitals and
by maintaining high ethical and professional standards, it will retain
qualified physicians with a variety of specialties and attract other qualified
physicians to its hospitals' medical staffs. A hospital's revenues also may be
affected by the ability of its management to negotiate favorable group health
service contracts with Group Purchasers. The number of persons and the patient
mix represented by such group contracts affect the impact such contracts have
on hospital operating results.
NME's Campus Rehabilitation Hospitals, whose patients primarily are referred
from general hospitals by neurologists, neurosurgeons, orthopedists, internists
and physiatrists, typically benefit from a broader geographic and other
referral base than general hospitals. Because they must compete in both the
Primary Service Area and a broader regional service area, they engage in
comprehensive outreach programs.
NME's Campus Rehabilitation Hospitals compete for patients and to attract
qualified physicians and other health care professionals primarily with
freestanding rehabilitation hospitals, rehabilitation units within general
hospitals, freestanding sub-acute centers, sub-acute units within general
hospitals and skilled nursing facilities.
Each of NME's Campus Rehabilitation Hospitals and managed units offers highly
specialized programs, such as treatment for closed head injuries, spinal cord
injuries and neurological diseases and return to work programs. Some of those
hospitals and managed units also provide less intensive services such as a
transitional living program to help patients prepare for a return to their
lives outside of the facility, skilled nursing care and outpatient care.
OTHER BUSINESSES
The value of NME's investments in Hillhaven, Westminster and MAC is affected
by many factors. One important factor is the competitive position of Hillhaven,
Westminster and MAC. NME believes that these companies are well positioned to
take advantage of their relative competitive strengths within the long term
care business in the United States and the United Kingdom, respectively, and
the dialysis business in the United States.
MEDICARE, MEDICAID AND OTHER REVENUES
NME-operated facilities receive payments for patient care from private
insurance carriers, federal Medicare programs for elderly and disabled
patients, health maintenance organizations, preferred provider organizations,
state Medicaid programs for indigent and cash grant patients, Civilian Health
and Medical Program of Uniformed Services ("CHAMPUS"), employers and patients
directly. In general, Medicare payments for general hospital outpatient
services, psychiatric care and physical rehabilitation are based on allowable
costs subject to certain limits. General hospital inpatient services are
reimbursed under Medicare based on a prospective payment system ("PPS"),
discussed below. Payments from state Medicaid programs are based on reasonable
costs or are at fixed rates. Substantially all Medicare and Medicaid payments
are below retail rates for NME-operated facilities. Payments from other sources
usually are based on the hospital's established charges, a percentage discount
or all-inclusive per diem rates.
Medicare payments for general hospital inpatient care are based on a PPS that
generally has been applicable to NME facilities since June, 1984. Under the
PPS, a general hospital receives for each Medicare patient a fixed amount for
operating costs based on each Medicare patient's assigned diagnostic related
group ("DRG"). The DRG payments do not consider a specific hospital's costs,
but are adjusted for area wage differentials. DRG payments exclude the
reimbursement of (a) capital costs, including depreciation, interest relating
to capital expenditures, property tax and lease expenses ("Capital Costs"), and
(b) outpatient services. These exclusions are discussed below.
9
<PAGE>
Medicare reimburses general hospitals' Capital Costs separately from DRG
payments. Beginning June 1, 1992, a prospective payment system for Medicare
reimbursement of general hospitals' inpatient Capital Costs ("PPS-CC"),
described in the following paragraph, generally became effective with respect
to the Company's general hospitals. The Omnibus Budget Reconciliation Act of
1990 ("OBRA '90") provides that through September 30, 1995, the total annual
estimated aggregate payment to all PPS hospitals for Capital Costs under the
PPS-CC is to be 10% less than the estimated aggregate amount that would be paid
if all such hospitals were to be reimbursed for 100% of their actual Capital
Costs.
The PPS-CC applies an estimated national average of Medicare Capital Costs
per patient discharge (the "Federal Rate") in making payments to each
individual hospital based on its actual number of patient discharges. The
Federal Rate is based on national 1989 Capital Costs and patient discharges and
has been and will be updated annually to reflect estimated increases in Capital
Costs per patient discharge. In addition, the Federal Rate actually applied to
each hospital is adjusted based on various factors such as that hospital's case
mix and geographic location. The Company expects PPS-CC payments for the 12
months beginning October 1, 1994, to be lower than the payments for the prior
12-month period.
Rules adopted by the Health Care Financing Administration ("HCFA") provide
that the PPS-CC will be phased in over a 10-year transition period, during
which many hospitals' actual Capital Costs will be given less consideration,
and the Federal Rate will be given more consideration, each year. The Company's
general hospitals will receive a major portion of their reimbursement in the
early years of the transition period based on their own Capital Costs. The
impact in later years will depend on the Company's need for new capital as
compared to the updated Federal Rate.
Outpatient services provided at general hospitals, physical rehabilitation
facilities and psychiatric facilities generally are reimbursed by Medicare at
the lower of customary charges or 94.2% of actual cost. Notwithstanding the
foregoing, Congress has established additional limits on the reimbursement of
the following outpatient services: (i) clinical laboratory services, which are
reimbursed based on a fee schedule, and (ii) ambulatory surgery procedures and
certain imaging and other diagnostic procedures, which are reimbursed based on
a blend of the hospital's specific cost and the rate paid by Medicare to non-
hospital providers for such services.
For several years the percentage increases to the DRG rates have been lower
than the percentage increases in the cost of goods and services purchased by
general hospitals. The index used by HCFA to adjust the DRG rates gives
consideration to the cost of goods and services purchased by hospitals as well
as non-hospitals (the "Market Basket"). The increase in the Market Basket for
the year beginning October 1, 1994, has been estimated by HCFA to be 3.6%, but
is subject to change. Based on the Omnibus Budget Reconciliation Act of 1993
("OBRA '93"), the DRG rates for urban hospitals will be adjusted by the annual
Market Basket percentage change: (1) minus 2.5%, effective October 1, 1994, (2)
minus 2.0%, effective October 1, 1995, (3) minus .5%, effective October 1,
1996, and (4) without reduction, effective October 1, 1997 and each year
thereafter, unless altered by subsequent legislation. Substantially all NME
hospitals are urban hospitals.
Hospitals exempt from the PPS, such as qualified psychiatric and physical
rehabilitation facilities, are reimbursed by Medicare on a cost-based system
wherein target rates for each facility are used in applying various limitations
and incentives. Based on the provisions of OBRA '90, such NME facilities
received a Market Basket increase of 3.3% in target rates effective June 1,
1994. Based on OBRA '93, the target rates for NME's hospitals exempt from the
PPS are scheduled to be adjusted on June 1, 1995, 1996 and 1997 by the
applicable annual Market Basket percentage change minus 1%. Proposals have been
made that would change the method of payment for services provided at these
facilities to a prospective payment system. OBRA '90 requires the Department of
Health and Human Services to develop a proposal to modify the current target
rate system or to replace it with a prospective payment system. It is not known
if any such proposals will be implemented.
10
<PAGE>
OBRA '93 provides for certain budget targets for the next four years which,
if not met, may result in adjustments in payment rates. The Company is unable
to predict whether there will be any future reductions in hospital payments due
to existing or future legislation.
The Medicare, Medicaid and CHAMPUS programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and governmental funding restrictions, all
of which may materially increase or decrease program payments as well as affect
the cost of providing services and the timing of payments to facilities. The
final determination of amounts earned under the programs often requires many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical reimbursement provisions.
Management believes that adequate provision has been made for such adjustments.
Until final adjustment, however, significant issues remain unresolved and
previously determined allowances could become either inadequate or more than
ultimately required.
The approximate percentages of NME's net patient revenue by payment sources
for NME's general hospitals are as follows for the fiscal years ended May 31:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Medicare....................................... 35.9% 33.9% 32.1% 31.8% 33.4%
Medicaid....................................... 8.5% 7.5 6.4 6.0 5.9
Private and Other.............................. 55.6% 58.6 61.5 62.2 60.7
---- ---- ---- ---- ----
Totals..................................... 100% 100% 100% 100% 100%
---- ---- ---- ---- ----
</TABLE>
HEALTH CARE REFORM, REGULATION, LICENSING AND INSURANCE
CERTAIN BACKGROUND INFORMATION
Health care, as one of the largest industries in the United States, continues
to attract much legislative interest and public attention. Medicare, Medicaid,
mandatory and other public and private hospital cost-containment programs,
proposals to limit health care spending, proposals to limit prices and industry
competitive factors are highly significant to the health care industry.
There continue to be federal and state proposals that would, and actions that
do, impose more limitations on government and private payments to providers
such as NME and proposals to increase co-payments and deductibles from program
and private patients. NME's facilities also are affected by controls imposed by
government and private payors designed to reduce admissions and lengths of
stay. Such controls, including what is commonly referred to as "utilization
review," have resulted in a reduction of patient access to certain treatments
and procedures. Utilization review by third party peer review organizations
("PRO's") is required in connection with the provision of care paid for by
Medicare and Medicaid. Utilization review by third parties also is a
requirement of many managed care arrangements. Utilization review entails the
review of the admission and course of treatment of a patient by a third party.
Florida and Tennessee have adopted, and other states are considering
adopting, legislation imposing a tax on revenues of hospitals to help finance
or expand those States' Medicaid systems. The Company currently operates as
part of its ongoing operations five general hospitals, two domestic long term
care facilities (which are managed by Hillhaven), one Campus Psychiatric
Facility and one Campus Rehabilitation Hospital in Florida and two general
hospitals in Tennessee.
Some states require state approval for construction and expansion of health
care facilities, including findings of need for additional or expanded health
care facilities or services. Certificates of Need, which are issued by
governmental agencies with jurisdiction over health care facilities, are at
times required for capital expenditures exceeding a prescribed amount, changes
in bed capacity or services and certain other matters. Following a number of
years of decline, the number of states requiring Certificates of Need is once
again on the rise. State legislators once again are looking at the certificate-
of-need process as a way to contain rising health care costs.
11
<PAGE>
Participation in the Medicare program is regulated by federal statute. The
fraud and abuse anti-kickback provisions contained in Section 1128B(b) of the
Social Security Act (the "Act") essentially prohibit the payment or receipt of
remuneration for the referral of patients whose care will be paid for by
Medicare. As written, the statute technically prohibits many common
arrangements between health care providers and their physicians. As guidance,
however, the Office of the Inspector General of the Department of Health and
Human Services has issued regulations which detail certain conduct and business
arrangements permissible under Section 1128B(b) of the Act (the "Safe
Harbors"). The fact that a given business arrangement does not fall within a
Safe Harbor does not render the arrangement per se illegal, but the Company
believes that the government intends to increase its scrutiny of arrangements
that do not fall within the safe harbor. In addition, many states have adopted
statutes similar to the federal antifraud statute. The state statutes, however,
are broader because they prohibit the payment or receipt of remuneration for
the referral of patients regardless of the source of the payment for the care.
The Company systematically reviews all of its operations to ensure that it
complies with the Act and similar state statutes.
The Company's health care operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations also are subject to compliance
with various other environmental laws, rules and regulations. Such compliance
does not, and the Company anticipates that such compliance will not, materially
affect the Company's capital expenditures, earnings or competitive position.
See Note 7A of the Notes to Consolidated Financial Statements in the
Company's Annual Report to Shareholders for the year ended May 31, 1994, for a
description of NME's professional and general liability insurance.
NME'S HEALTH CARE FACILITIES
NME's Health Care Facilities are subject to extensive federal, state and
local legislation and regulation. In order to maintain their operating
licenses, Health Care Facilities must comply with strict standards concerning
medical care, equipment and hygiene. Various licenses and permits also are
required in order to dispense narcotics, operate pharmacies, handle radioactive
materials and operate certain equipment. NME's Health Care Facilities hold all
required governmental approvals, licenses and permits. Each operated Health
Care Facility eligible for accreditation is fully accredited by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"), the
Commission on Accreditation of Rehabilitation Facilities (in the case of the
Campus Rehabilitation Hospitals) or another appropriate accreditation agency,
which accreditation generally is required for participation in government-
sponsored provider programs.
NME's Health Care Facilities are subject to and comply with various forms of
utilization review. In addition, under the Medicare PPS, each state must have a
PRO to carry out a federally mandated system of review of Medicare patient
admissions, treatments and discharges in general hospitals. Medical and
surgical services and practices are extensively supervised by committees of
staff doctors at each Health Care Facility, are reviewed by each Health Care
Facility's local governing board, comprised of health care professionals,
community members and hospital representatives, and are reviewed by NME's
quality assurance personnel. The local governing boards also help maintain
standards for quality care, develop long range plans, establish, review and
enforce practices and procedures and approve the credentials of medical staff.
COMPLIANCE PROGRAM
One component of the Company's settlement with federal agencies executed in
June 1994 is the adoption of a corporate compliance program under which the
Company has agreed, among other things, to: complete the disposition of its
Psychiatric Division Facilities (with the exception of the Campus Psychiatric
Facilities)
12
<PAGE>
no later than November 30, 1995; not own or operate other psychiatric
facilities (defined for the purposes of the agreement to include residential
treatment centers and substance abuse facilities) for five years from the date
of completion of the disposition of its Psychiatric Division Facilities; and
divest any psychiatric facilities acquired incidental to a corporate
transaction within 180 days of such acquisition. In addition, the Company has
agreed to implement certain oversight procedures pertaining to the matters that
were the subject of the government investigations and to continue its ethics
training program and ethics telephone hotline. Should the oversight procedures
or hotline reveal, after investigation by the Company, violations of criminal,
or potential material violations of civil laws, rules or regulations governing
federally-funded programs, the Company will report any such violation to the
Departments of Justice and Health and Human Services.
HEALTH CARE REFORM
In the past several years, there have been proposals at both the federal and
state levels calling for significant reforms in the United States health care
system. President Clinton has introduced to Congress a comprehensive reform
plan, the primary goals of which are universal access to medical care and
containment of escalating health care costs. President Clinton has proposed
achieving these goals by requiring businesses to provide health insurance to
all full-time and part-time employees and imposing government cost controls
designed to reduce insurance premiums and the fees charged by health care
providers. In addition, President Clinton has proposed significant reductions
in the Medicare/Medicaid payments made by the government. At this time the
focus on health care reform has shifted from the President's proposals to
various bills being proposed in the United States House of Representatives and
Senate. Prominent features of the leading health care reform proposals at this
time would require employers to pay either 50% or 80% of their employees'
health insurance premiums, subsidize the purchase of health care coverage for
low income people and create a new category of Medicare to cover certain
uninsured people. The Company anticipates that essential portions of these
proposals will be revised before any final bill is voted on. Other bills
include limits on malpractice liability, further restrictions on self-referrals
by physicians, the establishment of price controls in conjunction with a global
budget for United States health care in order to cap health care costs and a
single-payor government health plan. The Company cannot predict whether any
such proposals will be adopted or, if adopted, what effect, if any, such
proposals would have on the Company's business.
In addition to federal health reform efforts, several states have adopted or
are considering health care reform legislation. Tennessee has enacted a
revision to their Medicaid program intended to cover their Medicaid and
uninsured population through a managed care program. California has created a
voluntary health insurance purchasing cooperative that seeks to make health
care coverage more affordable for businesses with five to 50 employees. In
November, 1994, California voters will vote on a ballot initiative intended to
create a single-payor government health plan. Florida has enacted a program
creating a system of local purchasing cooperatives and has proposed other
changes that have not yet been enacted. Louisiana and Texas are planning to
consider wider use of managed care for their Medicaid populations. These
proposals also may attempt to include coverage for some people who presently
are uninsured. A number of other states are considering the enactment of
managed care initiatives designed to provide universal low-cost coverage.
13
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of August 22, 1994, who also are not
Directors are:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Barry P. Schochet Executive Vice President of NME
and President--Hospital Division 43
Maris Andersons Executive Vice President and Treasurer 57
William S. Banowsky Executive Vice President 58
Vincent J. Lico Executive Vice President 60
Raymond L. Mathiasen Senior Vice President and Chief Financial Officer 51
Scott M. Brown Senior Vice President, General Counsel and Secretary 49
</TABLE>
Mr. Schochet has been the President and Chief Operating Officer of NME's
Hospital Division since March 1992. Prior to that he served as Assistant Vice
President of hospital operations, Senior Vice President and then Executive Vice
President of NME's Eastern region and most recently as Executive Vice President
and Chief Operating Officer of the Hospital Division. Mr. Schochet began his
service to NME as an Assistant Vice President of NME's Eastern region in 1979,
prior to which he served as the Executive Director of a hospital in Florida.
Mr. Andersons joined NME in 1976, as Senior Vice President, from Bank of
America, where he was a Vice President. Mr. Andersons was elected Treasurer in
1981 and Executive Vice President in 1992.
Mr. Banowsky has been an Executive Vice President of NME since October, 1988.
Mr. Banowsky, also served as a director from 1977 to 1993. Mr. Banowsky's
duties will be consolidated into the duties of other positions and Mr. Banowsky
will no longer be an employee of NME after August 31, 1994.
Mr. Lico, who is a certified public accountant, joined NME in 1979 with NME's
acquisition of Medfield Corporation. Prior to becoming Executive Vice President
in September, 1993, Mr. Lico served as Senior Executive Vice President and
Chief Financial Officer of the Hospital Division from June, 1990 through
August, 1993, and Executive Vice President and Chief Financial Officer of NME's
Hospital Division from June, 1986 through May, 1990. Mr. Lico's duties will be
consolidated into the duties of other positions and Mr. Lico will no longer be
an employee of NME after October 31, 1994.
Mr. Mathiasen is Senior Vice President and, since February 1994, Chief
Financial Officer of the Company. From September 1993 to February 1994, Mr.
Mathiasen was Senior Vice President and acting Chief Financial Officer. Prior
to joining NME as a Vice President in 1985, he was a partner with Arthur Young
& Company (now known as Ernst & Young). Mr. Mathiasen was elected to the
position of Senior Vice President in 1990 and Chief Operating Financial Officer
in 1991.
Mr. Brown is Senior Vice President, Secretary and, since February, 1994,
General Counsel of the Company. He joined NME in 1981. Mr. Brown was elected
Secretary in 1984 and Senior Vice President in 1990. Mr. Brown was appointed
acting General Counsel in July 1993 and General Counsel in February 1994.
ITEM 2. PROPERTIES.
The response to this item is included in Item 1.
ITEM 3. LEGAL PROCEEDINGS.
As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1993, various government agencies have conducted
investigations concerning whether NME and certain of its subsidiaries engaged
in improper practices. As a result of negotiations between the Company and the
Civil and Criminal Divisions of the Department of Justice, and the Department
of Health and Human
14
<PAGE>
Services, the Company entered into various agreements on June 29, 1994, which
brought to a close all open investigations of the Company, its subsidiaries and
its facilities by the federal government and its agencies. As a result of those
agreements, on July 12, 1994, the United States District Court for the District
of Columbia accepted a plea by a subsidiary operating the Company's psychiatric
hospitals, to an information charging a six-count violation of 42 U.S.C.
(S)1320-7(b)(2)(A) (paying remuneration to induce referrals) and a one-count
violation of 18 U.S.C. (S)371 (conspiracy to make such payments). In addition,
the Company agreed to pay $362,700,000 to the federal government. The court
also accepted a plea agreement pursuant to which another subsidiary pled guilty
to an information charging a one-count violation of 18 U.S.C. (S)666 (making
illegal payments concerning programs receiving federal funds), which related to
a single general hospital. The count relates to activities that occurred while
an individual convicted of defrauding the hospital was its chief executive. On
July 12, 1994, the Company, without admitting or denying liability, consented
to the entry, by the United States District Court for the District of Columbia,
of a civil injunctive order in response to a complaint by the Securities and
Exchange Commission. The complaint alleged that the Company failed to comply
with anti-fraud and recordkeeping requirements of the federal securities laws
concerning the manner in which the Company recorded the revenues from the
activities that were the subject of the federal government settlement referred
to above. In the order, the Company is directed to comply with such
requirements of the federal securities laws. In May, 1994, the Company also
reached agreements in principle with 27 states and the District of Columbia to
pay an additional $16.3 million to settle potential claims arising from matters
involved in the federal investigations. The Company has signed agreements with
26 of those states and the District of Columbia, five of which contain errors
or changes that the Company is attempting to resolve. The 27 states and the
District of Columbia are all of the areas in which the Company's subsidiaries
operated psychiatric facilities.
The shareholder derivative actions filed in the Los Angeles Superior Court in
October and November of 1991 were consolidated into one shareholder derivative
action entitled Harry Polikoff, Harry Ackerman, and Bette Rita Grayson,
Derivatively on Behalf of Nominal Defendant National Medical Enterprises, Inc.
v. Richard K. Eamer, Leonard Cohen, John C. Bedrosian, William S. Banowsky,
Ph.D., Jeffrey C. Barbakow, Bernice B. Bratter, Maurice J. DeWald, Peter de
Wetter, Edward Egbert, M.D., Michael H. Focht, Sr., Raymond A. Hay, Nita P.
Heckendorn, Taylor R. Jenson, Lloyd R. Johnson, James P. Livingston, A.J.
Martinson, M.D., Howard F. Nachtman, M.D., Richard S. Schweiker, Richard L.
Stever, Norman A. Zober, Maris Andersons, Scott M. Brown, Raymond L. Mathiasen
and Marcus E. Powers, Defendants. Plaintiffs' suit was based primarily on
alleged breaches of fiduciary duties and constructive fraud on the part of the
individual defendants. The plaintiffs alleged that, among other things, the
individual defendants knew or should have known of allegedly improper
marketing, billing and other practices within what formerly was known as the
Company's Specialty Hospital Group and failed to take appropriate action as
required by their fiduciary responsibilities. Based on these claims, plaintiffs
sought compensatory damages on behalf of the Company, punitive damages,
injunctive relief, attorneys' fees, interest and costs. Defendants filed three
separate demurrers that were sustained and resulted in dismissal of the action
with prejudice on May 21, 1993. The derivative action was dismissed by the
Court in May, 1993, but the dismissal is being appealed by the plaintiffs. The
parties have been participating in a voluntary mediation process, which
commenced in February 1994 and has included directors and officers liability
insurance carriers. As a result of the voluntary mediation process, the
Company, the other parties to this action and the Company's directors' and
officers' liability insurance carriers have reached an agreement in principle
to settle this matter, subject to agreement to contractual terms and court
approval.
The federal class action lawsuits filed in October and November of 1991 were
consolidated into one action now pending in the U.S. District Court in the
Central District of California entitled In Re National Medical Enterprises,
Inc. Securities Litigation I. The defendants in this action are National
Medical Enterprises, Inc., Richard K. Eamer, Leonard Cohen, John C. Bedrosian,
William S. Banowsky, Michael H. Focht, Norman A. Zober, Marcus E. Powers and
Maris Andersons. The action is a consolidated class action against each of the
named defendants for alleged violations of Section 10(b) of the Securities
Exchange Act of 1934. Specifically, plaintiffs allege that each defendant knew
or recklessly disregarded that the public statements made by the Company and
several of its officers and directors in reports to the Securities and
15
<PAGE>
Exchange Commission, in press releases, communications with shareholders, and
communications with the financial community were false and misleading because
the financial data and projections were based upon a number of alleged illegal
practices at many of NME's psychiatric facilities. Plaintiffs claim that each
of the defendants was a direct participant in this wrongdoing and conspired
with and aided and abetted each of the other defendants in perpetrating the
alleged fraudulent scheme. Plaintiffs also challenge various transactions in
which each of the defendants sold shares of NME stock. Based on these claims,
plaintiffs seek compensatory damages, injunctive relief, attorneys' fees,
interest and costs. Currently, this action is in the discovery stage and no
trial date has been set. As a result of a voluntary mediation process commenced
in February 1994, the Company, the other parties to this action and the
Company's directors' and officers' liability insurance carriers have reached an
agreement in principle to settle this matter, subject to agreement to
contractual terms and court approval.
On August 27, 1993, a federal lawsuit entitled Jerrold Schaffer and Jayne M.
Furman v. National Medical Enterprises, Inc., Richard K. Eamer, Leonard Cohen,
Jeffrey Barbakow and Michael H. Focht, Sr. was filed in the U.S District Court
in the Central District of California. On August 31, 1993, a federal lawsuit
entitled Bernard Weisfeld v. National Medical Enterprises, Inc., Richard K.
Eamer, Leonard Cohen, Jeffrey Barbakow and Michael H. Focht, Sr. was filed in
the U.S District Court in the Central District of California. On December 20,
1993, the United States District Court for the Central District of California
ordered that these cases be consolidated into one action, captioned In re:
National Medical Enterprises Securities Litigation II. These consolidated
actions are on behalf of a purported class of shareholders who purchased or
sold stock of the Company between January 14, 1993 and August 26, 1993, and
allege that each of the defendants violated Section 10(b) of the Securities
Exchange Act of 1934. Specifically, plaintiffs allege that each defendant knew
or recklessly disregarded that the public statements made by the Company and
several of its officers and directors in reports to the Securities and Exchange
Commission, in press releases, communications with shareholders, and
communications with the financial community were false and misleading because
the financial data and projections were based upon a number of alleged illegal
practices at many of NME's psychiatric facilities. Plaintiffs claim that each
of the defendants was a direct participant in this wrongdoing and conspired
with and aided and abetted each of the other defendants in perpetrating the
alleged fraudulent scheme. Based on these claims, plaintiffs seek compensatory
damages, injunctive relief, attorneys' fees, interest and costs. The parties
commenced a voluntary mediation in July, 1994. If the mediation is not
successful, plaintiffs will be required to file an amended and consolidated
complaint in the action. The Company believes it has meritorious defenses to
this action and, if the mediation is not successful, will defend this
litigation vigorously.
During the last fiscal year, the Company settled three lawsuits brought
against it by the following insurance carriers: (1) The Travelers Insurance
Company, Prudential Insurance Company, United of Omaha Life Insurance Company,
Massachusetts Mutual Life Insurance Company, Northwestern National Life
Insurance Company, Mutual of Omaha Insurance Companies, Time Insurance Company,
Phoenix Home Life Mutual Insurance Company, Benefit Trust Life Insurance
Company, Golden Rule Insurance Company, Hartford Life and Accident Insurance
Company, Great Western Life and Annuity Insurance Company, and The New England
Mutual Life Insurance Company filed in the United States District Court for the
District of Columbia (referred herein as "Travelers lawsuits"); (2) Aetna Life
Insurance Company and Metropolitan Life Insurance Company (referred herein as
"Aetna lawsuit") filed in the U.S. District Court for the Northern District of
Texas, Dallas Division; and (3) Connecticut General Life Insurance Company,
Equitable Life Assurance Society of the United States, First Equicor Life
Insurance Company and Equicor Inc. (referred herein collectively as "CIGNA
lawsuit"), filed in the United States District Court for the Northern District
of Texas, Dallas Division. Each of these cases alleged that psychiatric
hospitals owned by NME subsidiaries engaged in fraudulent practices. On
November 4, 1993 the Company signed a definitive settlement agreement with the
insurers that are parties to the Aetna and CIGNA lawsuits. Under the terms of
the settlement the Company paid $125,000,000. In return, the insurers agreed on
an individual basis to resume standard business relations with the Company,
including the opportunity to participate in managed care contracts and to
16
<PAGE>
participate in other provider networks. The parties also have dismissed their
respective lawsuits against each other. On February 18, 1994, the Company
signed a definitive settlement agreement to settle the Travelers lawsuits.
Under the settlement the Company paid $89,900,000. All claims between the
parties, including the Company's claims in NME Psychiatric Properties, Inc. vs.
Travelers Insurance Co., et al., have been dismissed with prejudice. In
addition, under the terms of the settlement agreements, the insurers agreed to
expeditiously process all outstanding claims for payment and agreed to meet
with the Company, on an individual basis, with the express goal of
strengthening the respective business relations with the Company, including,
for example, allowing the Company to compete for managed care contracts and
participate in provider networks. The Company has received inquiries from
various other insurance companies and health benefit providers regarding the
possible filing of claims with similar allegations. To date, the amounts
involved are not significant.
The Company and certain of its officers and directors also are subject to
various lawsuits related to alleged malpractice occurring at individual
psychiatric hospitals. Included are numerous cases that allege the existence of
a corporate-wide conspiracy to commit wrongful acts. The underlying allegations
in those cases are substantially similar to the allegations in the insurance
litigation discussed above. NME has settled 90 of these lawsuits (more than
two-thirds of the lawsuits of this type that have been filed to date). The
Company expects that additional similar lawsuits will be filed from time to
time.
On August 16, 1993, the Company was served with a lawsuit in the matter of
Nita P. Heckendorn vs. National Medical Enterprises, Inc., Jeffrey C. Barbakow,
Raymond A. Hay, Maurice J. DeWald and Peter de Wetter. Ms. Heckendorn is a
director and former officer of the Company. Ms. Heckendorn, who joined the
Company in 1982, alleges sex discrimination in employment and retaliation;
sexual harassment; breach of implied employment contract; constructive
discharge in violation of public policy and the California Fair Employment and
Housing Act; tortious interference with prospective economic advantage;
defamation; and intentional infliction of emotional distress. The suit seeks
damages in excess of $15,000,000 for wages, earnings and other benefits,
punitive damages, attorneys fees and costs of suit and other equitable relief.
The plaintiff filed an amended complaint on November 4, 1993. Defendants filed
a demurrer to plaintiff's amended complaint. On January 6, 1994, the Court
sustained defendants' demurrer in part, dismissing certain claims, and denied
defendants' demurrer in part. The remaining claims are pending and the parties
have engaged in discovery. In March, 1994, plaintiff filed a motion for summary
judgment seeking judgment on her claim for retaliatory discharge. After taking
plaintiff's deposition in the Spring of 1994, Defendants filed a cross-motion
for Summary Judgment seeking dismissal of several of plaintiff's claims. In
August, 1994, defendants filed an additional motion for summary judgment on
plaintiff's remaining claims. All three of those motions are set for hearing on
September 19, 1994, and the case is set for trial in mid-December, 1994. The
Company believes that Ms. Heckendorn's claims are without merit.
On October 5, 1993, John Bedrosian filed the lawsuit John C. Bedrosian vs.
National Medical Enterprises, Inc., Jeffrey C. Barbakow, Michael H. Focht, Sr.,
Bernice B. Bratter, Maurice J. DeWald, Peter de Wetter and Lester B. Korn in
the Los Angeles Superior Court. Mr. Bedrosian, who is a director of the Company
and served as its Senior Executive Vice President until September 24, 1993,
when his employment with the Company was terminated without cause pursuant to
the terms of his employment agreement, alleged: breach of oral agreement;
breach of implied in fact contract; breach of the covenant of good faith and
fair dealing; negligent misrepresentation of material fact; bad faith denial of
existence of a contract; breach of written agreement; age discrimination in
employment; libel; tortious interference with contractual relations; conspiracy
to interfere with contractual relations; and intentional infliction of
emotional distress. The suit seeks damages in excess of $20,000,000, exemplary
and punitive damages, declaratory relief, including relief from six loans he
obtained from the Company totaling $3,730,251.27, attorneys fees and costs of
suit and other equitable relief. The Company has filed a cross-complaint
against him for his refusal to make repayment on his six loans. The Company
also filed a motion to have the portion of Mr. Bedrosian's lawsuit that
pertains to his employment agreement with the Company referred to a Superior
Court Referee as provided in the employment agreement. The Company's motion was
granted and Mr. Bedrosian's employment claims against the Company were referred
to a Superior Court Referee for trial. Before that trial began, the Company
filed
17
<PAGE>
motions for summary judgment on several of Mr. Bedrosian's claims and on its
cross-complaint against Mr. Bedrosian for his failure to repay his loans. The
Company's motions for summary judgment were granted as to several of Mr.
Bedrosian's claims against the Company, and also as to its claims against Mr.
Bedrosian on three of his six loans totalling approximately $1,997,500. The
Court declined to grant the Company's motion regarding Mr. Bedrosian's three
remaining loans but allowed the Company to supplement its cross-complaint to
reflect that those loans had since become due and payable. The Company has
supplemented its cross-complaint and intends to renew its motion for summary
judgment on Mr. Bedrosian's three remaining loans. The trial of Mr. Bedrosian's
employment-related claims took place in June and July, 1994 before a retired
California Superior Court Judge. During that trial, the Court granted
defendants' motion to have certain other of Mr. Bedrosian's employment claims
dismissed. The trial on Mr. Bedrosian's two remaining claims was concluded on
July 29, 1994. A decision on those claims is expected in August 1994.
In its normal course of business the Company also is subject to claims and
lawsuits relating to injuries arising from patient treatment. The Company
believes that its liability for damages resulting from such claims and lawsuits
is adequately covered by insurance or is adequately provided for in its
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The response to this item is included on page 33 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1994. The required
information hereby is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The response to this item is included on page 8 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1994. The required
information hereby is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The response to this item is included on pages 9 through 13 of the
Registrant's Annual Report to Shareholders for the year ended May 31, 1994. The
required information hereby is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included on pages 14 through 30 of the
Registrant's Annual Report to Shareholders for the year ended May 31, 1994. The
required information hereby is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE
COMPENSATION.
Information concerning the Directors of the Registrant, including executive
officers of the Registrant who also are Directors, and other information
required by Items 10 and 11, is included on pages 2 through 5 of the definitive
Proxy Statement for Registrant's 1994 Annual Meeting of Shareholders and hereby
is incorporated by reference. Similar information regarding executive officers
of the Registrant who, except as noted therein, are not Directors is set forth
on page 14 above. Information regarding compensation of executive officers and
Directors of the Registrant is included on pages 9 through 18 and pages 26
through 29 of the definitive Proxy Statement for the Registrant's 1994 Annual
Meeting of Shareholders and hereby is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this item is included on pages 6, 7 and 33 of the definitive
Proxy Statement for the Registrant's 1994 Annual Meeting of Shareholders. The
required information hereby is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this item is included on pages 29 through 31 of the
definitive Proxy Statement for the Registrant's 1994 Annual Meeting of
Shareholders. The required information hereby is incorporated by reference.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The consolidated financial statements to be included in Part II, Item
8, are incorporated by reference to the Registrant's 1994 Annual Report
to Shareholders. (See exhibit (13)).
2. FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
Schedule I Marketable Securities-Other Investments (included on page F-
1).
Schedule II Amounts Receivable From Directors, Officers and Employees
(included on pages F-2 and F-3)
Schedule V Property, Plant and Equipment (included on page F-4)
Schedule VI Accumulated Depreciation and Amortization of Property, Plant
and Equipment (included on page F-5)
Schedule VIII Valuation and Qualifying Accounts and Reserves (included on
page F-6)
Schedule IX Short-Term Borrowings (included on page F-7)
Schedule X Supplementary Income Statement Information (included on page
F-8)
</TABLE>
All other schedules and Condensed Financial Statements of Registrant
are omitted because they are not applicable or not required or because
the required information is included in the financial statements or
notes thereto.
3. EXHIBITS.
(3) Articles of Incorporation and Bylaws
(a) Restated Articles of Incorporation of Registrant, as amended
October 13, 1987 (Incorporated by reference to Exhibit 3(a)
to Registrant's Annual Report on Form 10-K dated August 30,
1993)
(b) Restated Bylaws of Registrant, as amended July 27, 1994
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Form of Indenture for the Registrant's Convertible Floating
Rate Debentures, dated as of February 1, 1992, among NME PIP
Funding I, Inc., the Registrant and Bankers Trust Company,
as Trustee (Incorporated by reference to Exhibit 4(a) to
Registration Statement on Form S-3, Registration No. 33-
45689, dated February 14, 1992)
(b) Form of Convertible Floating Rate Debenture due April 3,
1996 (Incorporated by reference to Exhibit (e) to
Registrant's Registration Statement on Form S-3,
Registration No. 33-45689, dated February 14, 1992)
(c) Agreement Providing for First Amendment to Convertible
Floating Rate Debentures due April 3, 1996, dated as of
December 11, 1991, between the Registrant and NME PIP
Funding I, Inc. (Incorporated by reference to Exhibit (f) to
Registrant's Registration Statement on Form S-3,
Registration No. 33-45689, dated February 14, 1992)
20
<PAGE>
(d) Certificate of Designation, Preferences and Rights of Series
B Convertible Preferred Stock (Incorporated by reference to
Exhibit 4(d) to Registrant's Annual Report on Form 10-K
dated August 23, 1991)
(e) Form of Investment Option Agreement (Incorporated by
reference to Exhibit 10(e) to Registrant's Annual Report on
Form 10-K dated August 28, 1989)
(f) Indenture, dated as of March 1, 1991, between the Registrant
and The Bank of New York, as Trustee (Incorporated by
reference to Exhibit 4(a) to Registrant's Annual Report on
Form 10-K dated August 23, 1991)
(g) Indenture, dated as of April 1, 1985, between the Registrant
and The Bank of New York, as Trustee (Incorporated by
reference to Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-3, File No. 2-
96780, filed with the Securities and Exchange Commission on
April 3, 1985)
(h) Certificate of Designation, Preference and Rights of Series
A Junior Participating Preferred Stock (Incorporated by
reference to Exhibit 4(h) to Registrant's Annual Report on
Form 10-K dated August 30, 1993)
(10) Material Contracts
(a) Guaranty Reimbursement Agreement, dated as of January 31,
1990, by and between the Registrant and The Hillhaven
Corporation (Incorporated by reference to Exhibit 10(e) to
Registrant's Annual Report on Form 10-K dated August 21,
1992)
(b) First Amendment to Guarantee Reimbursement Agreement, dated
as of May 30, 1991, by and between the Registrant and The
Hillhaven Corporation (Incorporated by reference to Exhibit
10(g) to Registrant's Annual Report on Form 10-K dated
August 23, 1991)
(c) Second Amendment to Guarantee Reimbursement Agreement, dated
as of October 2, 1991, between the Registrant and The
Hillhaven Corporation (Incorporated by reference to Exhibit
10(w) to Registrant's Annual Report on Form 10-K dated
August 21, 1992)
(d) Third Amendment to Guarantee Reimbursement Agreement, dated
as of April 1, 1992, between the Registrant and The
Hillhaven Corporation (Incorporated by reference to Exhibit
10(dd) to Registrant's Annual Report on Form 10-K dated
August 21, 1992)
(e) Fourth Amendment to Guarantee Reimbursement Agreement, dated
as of November 12, 1992, between the Registrant and
Hillhaven (Incorporated by reference to Exhibit 10(pp) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(f) Fifth Amendment to Guarantee Reimbursement Agreement, dated
as ofFebruary 19, 1993, between the Registrant and Hillhaven
(Incorporated by reference to Exhibit 10(qq) to Registrant's
Annual Report on Form 10-K dated August 30, 1993)
(g) Sixth Amendment to Guarantee Reimbursement Agreement, dated
as of May 28, 1993, between the Registrant and Hillhaven
(Incorporated by reference to Exhibit 10(rr) to Registrant's
Annual Report on Form 10-K dated August 30, 1993)
(h) Seventh Amendment to Guarantee Reimbursement Agreement,
dated as ofMay 28, 1993, between the Registrant and The
Hillhaven Corporation
21
<PAGE>
(i) Eighth Amendment to Guarantee Reimbursement Agreement,
dated September 2, 1993, between the Registrant and The
Hillhaven Corporation
(j) Letter dated October 14, 1992 addressed to Robert F. Pacquer
of Hillhaven from the Registrant and certain of its
subsidiaries (Incorporated by reference to Exhibit 10(ll) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(k) Second Omnibus Amendment to Leases dated as of November 12,
1992 among NME Properties Corp., and certain subsidiaries of
NME Properties Corp. and First Healthcare Corporation
(Incorporated by reference to Exhibit 10(mm) to Registrant's
Annual Report on Form 10-K dated August 30, 1993)
(l) Letter dated June 22, 1993 between the Registrant and
Hillhaven (Incorporated by reference to Exhibit 10(ss) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(m) Agreement Concerning Purchase by NME Properties Corp. and
Certain Sub-sidiaries of Series D Preferred Stock of The
Hillhaven Corporation, dated September 1, 1993, among the
Registrant, NME Properties Corp., NME Properties, Inc., NME
Properties West, Inc., The Hillhaven Corporation and First
Healthcare Corporation
(n) Agreement and Waiver, dated September 2, 1993, among the
Registrant, the subsidiaries of NME signatories thereto,
The Hillhaven Corporation and First Healthcare Corporation
(o) Shareholding Agreement, dated 30 March 1993, among the
Registrant, Westminster Health Care Holdings PLC and P.R.
Carter and Others (Incorporated by reference to Exhibit
10(tt) to Registrant's Annual Report on Form 10-K dated
August 30, 1993)
(p) Agreement for Warranties and Indemnities, dated 31 March
1993, among the Registrant, the Executive Directors of
Westminster Health Care Holdings PLC, the Non-Executive
Directors of Westminster Health Care Holdings PLC, Ernst &
Young Trustees Limited and Others and Westminster Health
Care Holdings PLC (Incorporated by reference to Exhibit
10(uu) to Registrant's Annual Report on Form 10-K dated
August 30, 1993)
(q) Agreement relating to the Placing and Offer of Ordinary
Shares in Westminster Health Care Holdings PLC, dated 31
March 1993, among Westminster Health Care Holdings PLC, the
Executive Directors, the Non-Executive Directors, the
Registrant, Ernst & Young Trustees Limited and Others and
Barclays de Zoete Wedd Limited (Incorporated by reference to
Exhibit 10(vv) to Registrant's Annual Report on Form 10-K
dated August 30, 1993)
(r) Subordinated Loan Note, dated 30 March 1993, in the amount
of 10,000,000 Pounds Sterling payable by Westminster Health
Care Limited, Westminster Health Care (Properties) Limited
and Westminster Health Care Holdings to the Registrant
(Incorporated by reference to Exhibit 10(ww) to Registrant's
Annual Report on Form 10-K dated August 30, 1993)
(s) First Amended and Restated Letter of Credit and
Reimbursement Agreement, dated as of October 1, 1993,
between the Registrant and The Sanwa Bank Limited, Dallas
Agency (Incorporated by reference to Exhibit 10(5) to
Registrant's Quarterly Report on Form 10-Q dated October 15,
1993)
22
<PAGE>
(t) Limited Waiver and Consent to First Amended and Restated
Letter of Credit and Reimbursement Agreement, dated as of
April 13, 1994, between the Registrant and The Sanwa Bank
Limited, Dallas Agency (Incorporated by reference to Exhibit
10(f) to Registrant's Quarterly Report on Form 10-Q dated
April 14, 1994)
(u) First Amended and Restated Master Loan Agreement, dated as
of November 30, 1988, as further Amended and Restated as of
January 25, 1990 among MP Funding Corporation, the
Registrant, various NME subsidiaries and various Hillhaven
subsidiaries (Incorporated by reference to Exhibit 10(a) to
Registrant's Annual Report on Form 10-K dated August 23,
1990)
(v) Consent and Waiver Agreement, dated October 13, 1993, with
respect to that certain First Amended and Restated Credit
Agreement, dated as of January 25, 1990, among Credit
Suisse, as letter of credit bank, the banks parties thereto,
Credit Suisse as agent for the banks and MP Funding
Corporation, and that certain First Amended and Restated
Master Loan Agreement, dated as of January 25, 1990, among
the Registrant, certain subsidiaries and affiliates of the
Registrant and MP Funding Corporation (Incorporated by
reference to Exhibit 10(3) to Registrant's Quarterly Report
on Form 10-Q dated October 15, 1993)
(w) Amendment No. 1 to Master Loan Agreement, dated as of
November 2, 1993, between MP Funding Corporation and the
Borrowers thereto (Incorporated by reference to Exhibit
10(c) to Registrant's Quarterly Report on Form 10-Q dated
January 13, 1994)
(x) Waiver and Amendment No. 2, dated as of April 13, 1994,
between MP Funding Corporation and the Borrowers parties
thereto (Incorporated by reference to Exhibit 10(c) to
Registrant's Quarterly Report on Form 10-Q dated April 14,
1994)
(y) Waiver Letter, dated October 14, 1993, from Bank of America
to the Registrant, concerning Overdraft Financing Facility
Agreement, dated December 16, 1992, between the Registrant
and Bank of America, and Advance Account Agreement, dated
December 17, 1992, between the Registrant and Bank of
America (Incorporated by reference to Exhibit 10(4) to
Registrant's Quarterly Report on Form 10-Q dated October 15,
1993)
(z) Second Amendment to Overdraft Financing Facility Agreement,
dated as ofApril 13, 1994, by and among Bank of America
National Trust and Savings Association, the Registrant, and
the corporations listed on Exhibit A to the Agreement
(Incorporated by reference to Exhibit 10(g) to Registrant's
Quarterly Report on Form 10-Q dated April 14, 1994)
(aa) First Amendment to Advance Account Agreement, dated as of
April 13, 1994, by and between the Registrant and Bank of
America National Trust and Savings Association
(Incorporated by reference to Exhibit 10(h) to Registrant's
Quarterly Report on Form 10-Q dated April 14, 1994)
(bb) Credit Agreement, dated as of April 13, 1994, among the
Registrant, the Banks parties thereto, the Issuing Bank and
Morgan Guaranty Trust Company of New York, as Administrative
Agent (Incorporated by reference to Exhibit 10(b) to
Registrant's Quarterly Report on Form 10-Q dated April 14,
1994)
(cc) Asset Sale Agreement, dated December 3, 1993, by and between
the Registrant, as Seller, and HEALTHSOUTH Rehabilitation
Corporation, as Buyer (Incorporated by reference to Exhibit
10(a) to Registrant's Quarterly Report on Form 10-Q dated
January 13, 1994)
23
<PAGE>
(dd) Amendment No. 1 to Asset Sale Agreement, dated as of January
3, 1994, by and between the Registrant, as Seller, and
HEALTHSOUTH Rehabilitation Corporation (Incorporated by
reference to Exhibit 10(b) to Registrant's Quarterly Report
on Form 10-Q dated January 13, 1994)
(ee) Asset Sale Agreement (First Facilities), dated March 29,
1994, by and between the Registrant, as Seller, and Charter
Medical Corporation, as Buyer
(ff) Asset Sale Agreement (Subsequent Facilities), dated March
29, 1994, by and between the Registrant, as Seller, and
Charter Medical Corporation, as Buyer
(gg) Employment Agreement, dated as of December 5, 1990, between
the Registrant and John C. Bedrosian (Incorporated by
reference to Exhibit 10(m) to Registrant's Annual Report on
Form 10-K dated August 23, 1991)
(hh) Consulting, Severance, Noncompetition and Confidentiality
Agreement made by and between Richard K. Eamer and the
Registrant, effective July 20, 1993 (Incorporated by
reference to Exhibit 10(h) to Registrant's Annual Report on
Form 10-K dated August 30, 1993)
(ii) Consulting, Severance, Noncompetition and Confidentiality
Agreement made by and between Leonard Cohen and the
Registrant, effective July 20, 1993 (Incorporated by
reference to Exhibit 10(j) to Registrant's Annual Report
on Form 10-K dated August 30, 1993)
(jj) Letter from the Registrant to Jeffrey C. Barbakow, dated
May 26, 1993 (Incorporated by reference to Exhibit 10(l) to
Registrant's Annual Report onForm 10-K dated August 30,
1993)
(kk) Letter from the Registrant to Jeffrey C. Barbakow, dated
June 1, 1993 (Incorporated by reference to Exhibit 10(m) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(ll) Memorandum from the Registrant to Jeffrey C. Barbakow, dated
June 14, 1993 (Incorporated by reference to Exhibit 10(n) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(mm) Board of Directors Retirement Plan, effective January 1,
1985 (Incorporated by reference to Exhibit 10(n) to
Registrant's Annual Report on Form 10-K dated August 23,
1991)
(nn) First Amendment to Board of Directors Retirement Plan,
effective as of August 18, 1993 (Incorporated by reference
to Exhibit 10(xx) to Registrant's Annual Report on Form 10-K
dated August 30, 1993)
(oo) Amendment to Directors Retirement Plan, dated as of April
25, 1994
(pp) Supplemental SHERT Plan and Trust, dated June 30, 1991
(Incorporated by reference to Exhibit 10(q) to Registrant's
Annual Report on Form 10-K dated August 23, 1991)
(qq) First Amendment to Supplemental SHERT, dated as of August
15, 1994
(rr) Supplemental Executive Retirement Plan, as amended May 31,
1986 (Incorporated by reference to Exhibit 10(o) to
Registrant's Annual Report on Form 10-K datedAugust 21,
1992)
(ss) Amendment to Supplemental Executive Retirement Plan, dated
as of April 25, 1994
24
<PAGE>
(tt) Amendment to Supplemental Executive Retirement Plan, dated
as of July 25, 1994
(uu) 1994 NME Supplemental Executive Retirement Plan Trust
Agreement, dated as of May 25, 1994, as amended July 25,
1994, between the Registrant, and United States Trust
Company of New York
(vv) Long Term Incentive Plan (Incorporated by reference to
Exhibit 10(p) to Registrant's Annual Report on Form 10-K
dated August 21, 1992)
(ww) Annual Incentive Plan (Incorporated by reference to Exhibit
10(q) to Registrant's Annual Report on Form 10-K dated
August 21, 1992)
(xx) 1994 Annual Incentive Plan (Incorporated by reference to
Exhibit B to the Definitive Proxy Statement for the
Registrant's 1994 Annual Meeting of Shareholders)
(yy) Deferred Compensation Plan, effective March 23, 1983
(Incorporated by reference to Exhibit 10(v) to Registrant's
Annual Report on Form 10-K dated August 23, 1991)
(zz) First Amendment to Deferred Compensation Plan, dated as of
August 15, 1994
(aaa) 1994 NME Deferred Compensation Plan Trust Agreement, dated
as of May 25, 1994, as amended July 25, 1994, between the
Registrant and United States Trust Company of New York
(bbb) Performance Investment Plan (Incorporated by reference to
Exhibit 10(d) to Registrant's Annual Report on Form 10-K
dated August 23, 1991)
(ccc) Revolving Credit and Term Loan Agreement, dated as of
December 11, 1991, between the Registrant and NME PIP
Funding I, Inc. (Incorporated by reference to Exhibit 10(g)
to Registrant's Registration Statement on Form S-3,
Registration No. 33-45689, dated February 14, 1992)
(ddd) Director Restricted Share Plan (Incorporated by reference to
Exhibit A to the definitive Proxy Statement for the
Registrant's 1991 Annual Meeting of Shareholders)
(eee) 1994 Directors Stock Option Plan (Incorporated by reference
to Exhibit A to the Definitive Proxy Statement for the
Registrant's 1994 Annual Meeting of Shareholders)
(fff) 1991 Stock Incentive Plan (Incorporated by reference to
Exhibit B to the definitive Proxy Statement for the
Registrant's 1991 Annual Meeting of Shareholders)
(ggg) Severance Protection Agreement, dated June 28, 1994,
between the Registrant and Barry P. Schochet
(11) Statement Re: Computation of Per Share Earnings, page 26
(13) 1994 Annual Report to Shareholders of Registrant
(21) Subsidiaries of the Registrant
(23) Consent of Experts
(a) Accountants' Consent and Report on Consolidated Schedules (KPMG
Peat Marwick LLP)
(b) REPORTS ON FORM 8-K
NME filed no reports on Form 8-K during the last quarter of the 1994 fiscal
year
25
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
(1) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(EXHIBIT 11)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at
beginning of period.......... 165,898 166,963 174,765 157,782 148,736
Shares issued upon conversion
of notes and debentures...... -- -- 529 348 9,276
Shares issued upon exercise of
stock options................ 60 27 299 722 936
Dilutive effect of outstanding
stock options................ 1,114 172 495 1,156 1,462
Shares issued as grants of
restricted stock, net of
cancellations................ (48) (52) 75 2 (92)
Shares repurchased as treasury
stock........................ -- (999) (4,295) -- (1,502)
Dilutive effect of 9%
Convertible Subordinated
Debentures(2)................ -- -- -- -- 1,402
Other......................... -- -- (15) -- --
-------- -------- -------- -------- --------
Weighted average number of
shares and share equivalents
outstanding.................. 167,024 166,111 171,853 160,010 160,218
======== ======== ======== ======== ========
Income from continuing
operations................... $215,901 $263,644 $218,199 $145,142 $123,486
Adjustments related to 9%
Convertible Subordinated
Debentures(2)................ -- -- -- -- 1,151
-------- -------- -------- -------- --------
Adjusted income from
continuing operations........ $215,901 $263,644 $218,199 $145,142 $124,637
Earnings per share from
continuing operations........ $ 1.29 $ 1.59 $ 1.27 $ 0.91 $ 0.78
======== ======== ======== ======== ========
FOR FULLY DILUTED EARNINGS PER
SHARE
Weighted average number of
shares used in primary
calculation.................. 167,024 166,111 171,853 160,010 160,218
Additional dilutive effect of
stock options................ 97 23 1 64 76
Assumed conversion of dilutive
convertible notes and
debentures................... 13,966 14,356 20,990 37,118 44,154
-------- -------- -------- -------- --------
Fully diluted weighted average
number of shares............. 181,087 180,490 192,844 197,192 204,448
======== ======== ======== ======== ========
Adjusted income from
continuing operations used in
primary calculation.......... $215,901 $263,644 $218,199 $145,142 $124,637
Adjustments for interest
expense, contractual
allowances and income taxes.. 5,981 4,628 12,207 25,991 30,070
-------- -------- -------- -------- --------
Adjusted income from
continuing operations........ $221,882 $268,272 $230,406 $171,133 $154,707
Earnings per share from
continuing operations........ $ 1.23 $ 1.49 $ 1.19 $ 0.87 $ 0.76
======== ======== ======== ======== ========
</TABLE>
- --------
(1) All numbers of shares in these tables are weighted on the basis of the
number of days the shares were outstanding or assumed to be outstanding
during each period.
(2) During the quarter ended August 31, 1989 the 9% debentures were reflected
as a common stock equivalent until they were all redeemed or converted on
or before August 31, 1989. The income adjustments are for calculation
purposes only and do not affect income from continuing operations as
reported.
26
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON AUGUST 25,
1994.
National Medical Enterprises, Inc.
/s/ RAYMOND L. MATHIASEN /s/ SCOTT M. BROWN
By: _____________________________ By: _________________________________
Raymond L. Mathiasen Scott M. Brown
Senior Vice President Senior Vice President
Chief Financial Officer and
Chief Accounting Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON AUGUST 25, 1994, BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <S>
/s/ JEFFREY C. BARBAKOW
- -------------------------------------------
Jeffrey C. Barbakow Chairman, Chief Executive Officer and
Director (Principal Executive Officer)
/s/ MICHAEL H. FOCHT, SR.
- -------------------------------------------
Michael H. Focht, Sr. President, Chief Operating Officer and
Director
- -------------------------------------------
John C. Bedrosian Director
/s/ BERNICE BRATTER
- -------------------------------------------
Bernice Bratter Director
/s/ MAURICE J. DEWALD
- -------------------------------------------
Maurice J. DeWald Director
/s/ PETER DE WETTER
- -------------------------------------------
Peter de Wetter Director
/s/ EDWARD EGBERT, M.D.
- -------------------------------------------
Edward Egbert, M.D. Director
/s/ RAYMOND A. HAY
- -------------------------------------------
Raymond A. Hay Director
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
Director
- -----------------------------------------
Nita P. Heckendorn
/s/ LESTER B. KORN Director
- -----------------------------------------
Lester B. Korn
/s/ JAMES P. LIVINGSTON Director
- -----------------------------------------
James P. Livingston
/s/ RICHARD S. SCHWEIKER Director
- -----------------------------------------
Richard S. Schweiker
</TABLE>
28
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC., AND SUBSIDIARIES
SCHEDULE I--MARKETABLE SECURITIES--OTHER INVESTMENTS
AT MAY 31, 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NUMBER OF MARKET AMOUNT
SHARES OR VALUE AT AT WHICH
PRINCIPAL BALANCE CARRIED IN
AMOUNT OF COST OF SHEET BALANCE
NAME OF ISSUER AND TITLE OF EACH ISSUE BONDS AND NOTES EACH ISSUE DATE SHEET
- -------------------------------------- --------------- ---------- -------- ----------
<S> <C> <C> <C> <C>
The United States Government and
its agencies................... $8 $ 8 $ 8 $ 8
Any state of the United States
and its agencies............... 3 3 3 3
Corporations:
American Express Credit
Corporation................... 2 2 2 2
General Electric Capital
Corporation................... 3 3 3 3
Morgan Guaranty Trust Company
New York...................... 2 2 2 2
Various other issuers of short-
term commercial paper (each
less than $2 million)......... 41 41 42
----
BALANCE SHEET CAPTION: SHORT-
TERM INVESTMENTS............... $ 60
====
Westminster Health Care
Holdings, PLC common stock..... 21,500,000 $ 49 $105 $ 50
The Hillhaven Corporation common
stock.......................... 8,878,147 89 170 69*
The Hillhaven Corporation Series
C preferred stock.............. 35,000 35 35 35
The Hillhaven Corporation Series
D preferred stock.............. 60,546 120 n.a. 28**
Health Care Property Partners... 23.0% 18 31 17
Other investments in common
stock or corporate joint
ventures, substantially all of
which are accounted for by the
equity method.................. 57 n.a. 77**
Land held for expansion......... 33 n.a. 33**
----
BALANCE SHEET CAPTION:
INVESTMENTS AND OTHER ASSETS... $309
====
</TABLE>
- --------
* Because of the Company's minority interest in Hillhaven, portions of the
gains from sales of certain NME facilities to Hillhaven have been deferred
and are offset against the cost of the Company's investment above.
** Market values are not available for the Company's Hillhaven Series D
preferred stock, other investments and land held for expansion shown above.
F-1
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II--AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS AND EMPLOYEES
YEARS ENDED MAY 31, 1992, 1993, 1994
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT BALANCE AT
MAY 31, AMOUNTS MAY 31, AMOUNTS AMOUNTS MAY 31,
NAME OF DEBTOR 1991 ADDITIONS COLLECTED 1992 ADDITIONS COLLECTED WRITTEN OFF 1993
-------------- ----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maris Andersons..... $ 96,479 $100,903 $ -- $ 197,382 $ 957,773 $ (111,467) $ -- $ 1,043,688
William Banowsky.... -- 80,205 -- 80,205 53,641 (133,846) -- --
John C. Bedrosian... 1,928,349 683,918 (115,085) 2,497,182 2,089,043 (747,334) -- 3,838,891
Leonard Cohen....... -- -- -- -- 1,063,140 (1,063,140) -- --
Kenneth Courage..... 100,000 -- (39,196) 60,804 -- (60,804) -- --
Steven Dominguez.... -- 84,053 -- 84,053 158,991 -- -- 243,044
Richard K. Eamer.... 3,919,092 285,658 (4,204,750) -- 3,473,375 (350,958) -- 3,122,417
Alan Ewalt.......... 227,945 154,647 (114,480) 268,112 115,858 (42,854) -- 341,116
Michael H. Focht,
Sr................. -- 346,850 -- 346,850 381,045 -- -- 727,895
Nita Heckendorn..... 21,048 93,246 (21,048) 93,246 133,817 (980) -- 226,083
Walter C. Kraujalis. 109,981 21,391 -- 131,372 21,683 -- (30,334)(3) 122,721
Vincent J. Lico..... -- 136,440 -- 136,440 95,641 (142,521) -- 89,560
Raymond L.
Mathiason.......... -- 84,053 -- 84,053 104,875 (88,446) -- 100,482
Marcus E. Powers.... -- 163,323 -- 163,323 586,592 (1,873) -- 748,042
Joseph Roche........ 152,000 -- (36,000) 116,000 -- -- (116,000)(5) --
Michael Safran...... 370,000 74,000 (444,000) -- 196,150 -- -- 196,150
Sherwin Small....... 16,876 86,367 (16,234) 87,009 141,710 (228,719) -- --
Neil Sorrentino..... -- 90,338 -- 90,338 89,872 (180,210) -- --
David Spahr......... -- -- -- -- 170,000 (170,000) -- --
Richard L. Stever... 657,310 54,034 (53,976) 657,368 53,976 (53,976) -- 657,368
Barry G. Weinbaum... -- 125,000 (125,000) -- -- -- -- --
----------- ---------- ----------- ---------- ---------- ----------- --------- -----------
$7,599,080 $2,664,426 $(5,169,769) $5,093,737 $9,887,182 $(3,377,128) $(146,334) $11,457,457
=========== ========== =========== ========== ========== =========== ========= ===========
<CAPTION>
BALANCE AT MAY 31,
1994
-------------------------
BALANCE AT
MAY 31, AMOUNTS CURRENT NOT CURRENT
NAME OF DEBTOR 1993 ADDITIONS COLLECTED (1) (1)
-------------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Maris Andersons..... $ 1,043,688 $ 132,990 $ (101,889) $1,074,789(2) $ --
William Banowsky.... -- 62,183 (62,183) 0.00 --
John C. Bedrosian... 3,838,891 262,793 -- 4,101,684(2) --
Steven Dominguez.... 243,044 93,336 (253,894) 82,486 --
Richard K. Eamer.... 3,122,417 120,707 (1,611,135) 231,989(2) 1,400,000(2)
Alan Ewalt.......... 341,116 74,231 (350,070) 65,277 --
Michael H. Focht,
Sr................. 727,895 226,474 (759,786) 194,583 --
Nita Heckendorn..... 226,083 6,649 (232,732) 0.00 --
Walter C. Kraujalis. 122,721 8,398 -- 131,119(4) --
Vincent J. Lico..... 89,560 87,632 (177,192) 0.00 --
Raymond L.
Mathiason.......... 100,482 70,397 (105,602) 65,277 --
Marcus E. Powers.... 748,042 134,617 (381,884) 462,934(2) 37,841(2)
Michael Safran...... 196,150 -- (196,150) 0.00 --
Neil Sorrentino..... -- 72,160 -- 72,160 --
Richard L. Stever... 657,368 53,976 (53,976) 657,368 --
----------- ---------- ----------- ---------- ----------
$11,457,457 $1,406,543 $(4,286,493) $7,139,666 $1,437,841
=========== ========== =========== ========== ==========
</TABLE>
F-2
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II--AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS AND EMPLOYEES--
(CONTINUED)
YEARS ENDED MAY 31, 1992, 1993 AND 1994
- --------
(1) Except for Items (2) through (5) below, these loans consist of principal
and interest on (a) full recourse five-year promissory notes bearing
interest at rates of 6.5%, 8% and 9% given to purchase NME common stock
under the Company's stock option plans, and (b) promissory notes given to
NME upon its deposit of federal and state income taxes under withholding
requirements. Shares purchased or vested are pledged as security for these
notes. The tax notes bear interest at rates ranging from 6.5% to 8% and
normally are payable on or before April 15 of the succeeding calendar year,
unless such date otherwise is extended by the Company. Certain tax notes
that were due on April 15, 1993, were extended to October 15, 1993. The tax
benefit to the Company resulting from the exercise of nonstatutory stock
options is reflected in the Company's financial statements as an increase
in stockholder's equity. The current column represents demand loans and
balances due on or before May 31, 1995.
(2) On September 23, 1992, the Executive Committee of the Board authorized
special loans in the aggregate principal amount of $3,000,000 from the
Company to Mr. Richard K. Eamer, who was then the Chief Executive Officer
of the Company. Pursuant to that authorization, an aggregate principal
amount of $3,000,000 was loaned to Mr. Eamer. The loans initially were made
on a demand basis with interest at the rate of 7% per annum. The Company
did not obtain from Mr. Eamer either a promissory note or a pledge
agreement with respect to such loans until the termination of Mr. Eamer's
full-time employment with the Company. In connection with the termination
of Mr. Eamer's full-time employment with the Company, the Company caused
Mr. Eamer to execute a promissory note and a pledge agreement, accepted by
the full Board of Directors, pursuant to which Mr. Eamer paid down the
then-existing balance of his loans from $3,000,000 to $2,200,000 and such
loans were converted into a term loan bearing interest at 7% per annum,
payable through May 31, 1998. Among other rights that the Company has upon
any default, the term loan is secured by (a) Mr. Eamer's investment options
and other rights under the Company's Performance Investment Plan ("PIP"),
including the Company's obligation to repurchase Mr. Eamer's investment
options in April, 1996, for the approximately $2,200,000 he paid for them
in April, 1989, if such investment options have not been exercised, and (b)
all the proceeds thereof. During fiscal year 1993, the Company also made
special loans to three other executive officers: $850,000 to Mr. Andersons,
Executive Vice President and Treasurer, $450,000 to Mr. Powers, former
General Counsel, and $1,300,000 to Mr. Bedrosian, former Senior Executive
Vice President. These loans were made on a demand basis with interest at a
fluctuating rate equal to at least the prime rate (which was 6% at that
time). Although no notes or security agreements were signed at the time the
loans were made, each of Messrs. Andersons, Powers and Bedrosian provided
memoranda to the Company confirming that they understood that their loans
would bear interest and were made on a demand basis. Since such time,
Messrs. Andersons and Powers executed demand promissory notes, bearing
interest at a fluctuating interest rate equal to at least the prime rate
(which was 6% at that time), secured by their investment options and other
rights under the PIP and, in the case of Mr. Andersons, certain additional
collateral, including various other securities of the Company. Mr.
Andersons' note was repaid in July 1994. On May 31, 1994, in a lawsuit
brought by Mr. Bedrosian against the Company, the California Superior Court
for the County of Los Angeles granted the Company's motions with respect to
Mr. Bedrosian's repayment to NME of all of the principal and interest due
with respect to the $1,300,000 and another $504,406 loan. The Company
intends to ask the court to also order Mr. Bedrosian to repay all principal
and interest owing on three other loans to Mr. Bedrosian that are
outstanding.
The Company does not intend to make any similar loans in the future. No
similar loans may be made in the future without the prior approval of the
Compensation Committee.
(3) This loan was forgiven in consideration of services rendered.
(4) Loan made to assist in job transfer at NME's request. The note is secured
by real property and bears interest at 8%.
(5) This amount was written off in lieu of severance compensation upon the
termination of Mr. Roche's employment with the Company.
F-3
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
YEARS ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS RETIREMENTS OTHER BALANCE AT
BEGINNING OF AT COST OR SALES CHANGES END OF
PERIOD (1) (2) (3) PERIOD
------------ --------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
1992:
Land.................... $ 261 $ 20 $ (12) $ 2 $ 271
Buildings and
improvements........... 1,896 119 (195) 133 1,953
Construction in
progress............... 156 205 (6) (178) 177
Equipment............... 870 160 (75) 45 1,000
------ ---- ----- ----- ------
3,183 504 (288) 2 3,401
Land held for expansion. 28 5 -- (2) 31
------ ---- ----- ----- ------
$3,211 $509 $(288) $ 0 $3,432
====== ==== ===== ===== ======
1993:
Land.................... $ 271 $ 5 $ (20) $ (7) $ 249
Buildings and
improvements........... 1,953 77 (148) 75 1,957
Construction in
progress............... 177 82 -- (212) 47
Equipment............... 1,000 128 (88) 21 1,061
------ ---- ----- ----- ------
3,401 292 (256) (123) 3,314
Land held for expansion. 31 14 (2) (10) 33
------ ---- ----- ----- ------
$3,432 $306 $(258) $(133) $3,347
====== ==== ===== ===== ======
1994:
Land.................... $ 249 $ 2 $ (81) $ 3 $ 173
Buildings and
improvements........... 1,957 22 (610) 19 1,388
Construction in
progress............... 47 61 (3) (46) 59
Equipment............... 1,061 94 (262) 23 916
------ ---- ----- ----- ------
3,314 179 (956) (1) 2,536
Land held for expansion. 33 6 (8) 1 32
------ ---- ----- ----- ------
$3,347 $185 $(964) $ 0 $2,568
====== ==== ===== ===== ======
</TABLE>
- --------
(1) Includes amounts from purchased businesses of $13 in 1992 and $2 in 1993.
(2) The retirement or sales column also includes the reclassification of
property, plant and equipment accounts of facilities held for sale.
(3) Other changes reflect transfers upon construction completion and in 1993,
also include the property, plant and equipment accounts of the Company's
United Kingdom nursing home subsidiary, which, as a result of an initial
public offering of common stock in April, 1993, are no longer consolidated
with the Company's financial statements.
The annual provision for depreciation is computed principally using the
straight-line method over the following estimated useful lives: generally 25 to
50 years for buildings and improvements, 3 to 15 years for equipment.
F-4
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
YEARS ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS CHARGED TO:
BALANCE AT ----------------------- RETIREMENTS OTHER BALANCE AT
BEGINNING OF CONTINUING DISCONTINUED OR SALES CHANGES END OF
PERIOD OPERATIONS OPERATIONS (1) (2) PERIOD
------------ ---------- ------------ ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
1992:
Buildings and
improvements.......... $312 $ 48 $24 $ (48) $ 0 $336
Equipment.............. 356 74 10 (20) 0 420
---- ---- --- ----- --- ----
$668 $122 $34 $ (68) $ 0 $756
==== ==== === ===== === ====
1993:
Buildings and
improvements.......... $336 $ 49 $14 $ (66) $(3) $330
Equipment.............. 420 92 13 (29) (4) 492
---- ---- --- ----- --- ----
$756 $141 $27 $ (95) $(7) $822
==== ==== === ===== === ====
1994:
Buildings and
improvements.......... $330 $ 48 $10 $(127) $50 $311
Equipment.............. 492 95 14 (144) 4 461
---- ---- --- ----- --- ----
$822 $143 $24 $(271) $54 $772
==== ==== === ===== === ====
</TABLE>
- --------
(1) The retirement or sales column also includes the reclassification of
property, plant and equipment accounts of facilities held for sale.
(2) Other changes reflect transfers upon construction completion, translation
adjustments and in 1993, also include the property, plant and equipment
accounts of the Company's United Kingdom nursing home subsidiary, which as
a result of an initial public offering of common stock in April, 1993, are
no longer consolidated with the Company's financial statements. 1994 also
includes a write-down of the Corporate headquarters building.
F-5
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS CHARGED TO:
---------------------------
BALANCE AT BALANCE AT
BEGINNING OF CONTINUING DISCONTINUED END OF
PERIOD OPERATIONS(1) OPERATIONS(1) DEDUCTIONS(2) PERIOD
------------ ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts
1992................... $153 $132 $88 $221 $152
1993................... $152 $122 $40 $199 $115
1994................... $115 $111 $35 $184 $77
</TABLE>
- --------
(1) Before considering recoveries on doubtful accounts or notes previously
written off.
(2) Accounts written off, net of beginning balances from purchased businesses.
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF ADDITIONS (CHARGED TO END OF
PERIOD DISCONTINUED OPERATIONS) DEDUCTIONS(1) PERIOD
------------ ------------------------ ------------- ----------
<S> <C> <C> <C> <C>
Reserve for discontinued
operations
1992................... -- $129 $16 $113
1993................... $113 $160 $172 $101
1994................... $101 $1,113 $749 $465
</TABLE>
- --------
(1) Primarily cash disbursements and, in 1994, write-down of assets to net
realizable value and reclassifications to other long-term liabilities.
F-6
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE IX--SHORT-TERM BORROWINGS
YEARS ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE AT END OF INTEREST DURING THE DURING THE DURING THE
SHORT-TERM BORROWINGS PERIOD RATE PERIOD PERIOD PERIOD
--------------------- --------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Amounts payable to banks
for borrowings:
1992................... $148 4.7% $233 $109 5.3%
1993................... $133 3.7% $179 $119 4.0%
1994................... $ 66 4.2% $132 $ 87 4.1%
Amounts payable to other
financial institutions:
1992................... $ 20 4.1% $34 $ 7 4.2%
1993................... $ 30 3.1% $54 $ 21 3.0%
1994................... $ 1 3.1% $25 $ 4 3.1%
</TABLE>
F-7
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEAR ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
<S> <C>
1992:
Maintenance and repairs................................................. $ 39
Depreciation............................................................ $122
Advertising............................................................. $ 20
1993:
Maintenance and repairs................................................. $ 45
Depreciation............................................................ $142
Taxes other than payroll and income taxes............................... $ 35
1994:
Maintenance and repairs................................................. $ 46
Depreciation............................................................ $143
Taxes other than payroll and income taxes............................... $ 31
</TABLE>
- --------
Amortization of intangible assets for all years, taxes other than payroll and
income taxes for 1992, advertising for 1993 and 1994, and royalties for all
years are not presented because such amounts are less than one percent of
operating revenues.
F-8
<PAGE>
BYLAWS
EXHIBIT 3(B)
RESTATED BY-LAWS OF
NATIONAL MEDICAL ENTERPRISES, INC.
A NEVADA CORPORATION
AS AMENDED JULY 27, 1994
(AMENDMENT OF JULY 27, 1994 IS
EFFECTIVE SEPTEMBER 28, 1994)
ARTICLE I
SHAREHOLDERS' MEETINGS
SECTION 1.1 PLACE OF MEETINGS.
All meetings of the shareholders shall be held at the principal office of
the Corporation in the State of California, or at any other place within or
without the State of Nevada as may be designated for that purpose from time to
time by the Board of Directors.
SECTION 1.2 ANNUAL MEETINGS.
The Annual meeting of the shareholders shall be held not later than 210
days after the close of the fiscal year, on the date and at the time set by the
Board of Directors, at which time the shareholders shall elect by plurality vote
an annual Class of the Board of Directors, consider reports of the affairs of
the Corporation, and transact such other business as may properly be brought
before the meeting.
SECTION 1.3 SPECIAL MEETINGS.
Special meetings of the shareholders, for any purpose or purposes
whatsoever, may be called at any time by the Chief Executive Officer or by the
Board of Directors.
SECTION 1.4 NOTICE OF MEETINGS.
1.4.1. Notice of each meeting of shareholders, whether annual or
special, shall be given at least 10 and not more than 60 days prior to the day
thereof by the Secretary or any Assistant Secretary causing to be delivered to
each shareholder of record entitled to vote at such meeting a written notice
stating the time and place of the meeting and the purpose or purposes for which
the meeting is called. Such notice shall be signed by the Chief Executive
Officer, the President, the Secretary or any Assistant Secretary and shall be
mailed postage prepaid to each shareholder at his address as it appears on the
stock books of the Corporation. If any shareholder has failed to supply an
address, notice shall be deemed to have been given if mailed to the address of
the principal office of the Corporation, or published at least once in a
newspaper having general circulation in the county in which the principal office
is located.
1.4.2. It shall not be necessary to give any notice of the
adjournment of or the business to be transacted at an adjourned meeting other
<PAGE>
-2-
than by announcement at the meeting at which such adjournment is taken; provided
that when a meeting is adjourned for 30 days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting.
SECTION 1.5 CONSENT BY SHAREHOLDERS.
Any action which may be taken at a regular meeting of the shareholders,
except election of directors, may be taken without a meeting, if authorized by a
writing signed by holders of the number of shares required under the law to give
their approval for such purpose.
SECTION 1.6 QUORUM.
1.6.1. The presence in person or by proxy of the persons entitled
to vote a majority of the voting shares at any meeting constitutes a quorum for
the transaction of business. Shares shall not be counted in determining the
number of shares represented or required for a quorum or in any vote at a
meeting, if voting of them at the meeting has been enjoined or for any reason
they cannot be lawfully voted at the meeting.
1.6.2. The shareholders present at a duly called or held meeting at
which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
1.6.3. In the absence of a quorum, a majority of the shares present
in person or by proxy and entitled to vote may adjourn any meeting from time to
time, but not for a period of more than 30 days at any one time, until a quorum
shall attend.
SECTION 1.7 VOTING RIGHTS.
1.7.1. Every shareholder of record of the Corporation shall be
entitled at each meeting of the shareholders to one vote for each share of stock
standing in his name on the books of the Corporation. Except as otherwise
provided by law, or by the Articles of Incorporation or any amendment thereto,
or by the By-Laws, if a quorum is present, the majority of votes cast in person
or by proxy shall be binding upon all shareholders of the Corporation.
1.7.2. The Board of Directors shall designate a day not more than
60 days prior to any meeting of the shareholders as the day as of which
shareholders entitled to notice of and to vote at such meetings shall be
determined.
SECTION 1.8 PROXIES.
Every shareholder entitled to vote or to execute consents may do so either
in person or by written proxy executed in accordance with the provisions of
Section 78.355 of the Nevada Revised Statutes and filed with the Secretary of
the Corporation.
<PAGE>
-3-
SECTION 1.9 MANNER OF CONDUCTING MEETINGS.
To the extent not in conflict with the provisions of the law relating
thereto, the Articles of Incorporation, or express provisions of these By-Laws,
meetings shall be conducted pursuant to such rules as may be adopted by the
chairman presiding at, or a majority of the shares represented at, the meeting.
ARTICLE II
DIRECTORS - MANAGEMENT
SECTION 2.1 POWERS.
Subject to the limitation of the Articles of Incorporation, of the By-
Laws, and of the laws of the State of Nevada as to action to be authorized or
approved by the shareholders, all corporate powers shall be exercised by or
under authority of, and the business and affairs of this Corporation shall be
controlled by, a Board of Directors.
SECTION 2.2 NUMBER AND QUALIFICATION.
The authorized number of directors of this Corporation shall be 10, all of
whom shall be of full age and at least a majority of whom shall be citizens of
the United States.
SECTION 2.3 CLASSIFICATION AND ELECTION.
The Board of Directors shall be classified into three annual Classes, with
three directors in Class 1, three directors in Class 2, and four directors in
Class 3. Each Class of directors shall be elected for terms of three years.
Each term shall continue for the number of years stated and until their
successors are elected and have qualified. Their term of office shall begin
immediately after election. These By-Laws are being adopted subsequent to the
initial classification of directors in 1975. The directors in office as of the
date of adoption hereof shall continue to serve the terms for which they have
been previously elected.
SECTION 2.4 INCREASE IN THE NUMBER OF DIRECTORS.
The Board of Directors may change the number of directors from time to
time; provided, however, neither the Board of Directors nor the shareholders may
ever increase the number of directorships by more than one during any twelve-
month period, except upon the affirmative vote of two-thirds of the directors of
each Class, or the affirmative vote of the holders of two-thirds of all
outstanding shares voting together and not by class. This provision may not be
amended except by a like vote.
<PAGE>
-4-
SECTION 2.5 VACANCIES.
2.5.1. Any vacancies in the Board of Directors, except vacancies
first filled by the shareholders, may be filled by the affirmative vote of two-
thirds of the remaining directors of each Class, though less than a quorum, or
by a sole remaining director. Each director so elected shall hold office for
the balance of the term of the resigning director and until his successor is
elected. The power to fill vacancies shall in no event be delegated to any
committee appointed in accordance with these By-Laws.
2.5.2. The shareholders may at any time elect a director to fill
any vacancy not filled by the directors, and may elect the additional directors
at the meeting at which an amendment of the By-Laws is voted authorizing an
increase in the number of directors.
2.5.3. A vacancy or vacancies shall be deemed to exist in case of
the death, resignation, or removal of any director, or if the directors or
shareholders shall increase the authorized number of directors but shall fail at
a meeting at which such increase is authorized or at an adjournment thereof to
elect the additional director so provided for, or in case the shareholders fail
at any time to elect the full number of authorized directors.
2.5.4. If the Board of Directors accepts the resignation of a
director tendered to take effect at a future time, the Board or the shareholders
shall have power to immediately elect a successor who shall take office when the
resignation shall become effective.
2.5.5. No reduction of the number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
SECTION 2.6 REMOVAL OF DIRECTORS.
The entire Board of Directors or any individual director may be removed
from office, with or without cause, by the vote or written consent of
shareholders representing two-thirds of the issued and outstanding capital stock
entitled to vote.
SECTION 2.7 RESIGNATIONS.
Any director of the Corporation may resign at any time either by oral
tender of resignation at any meeting of the Board or by giving written notice
thereof to the Secretary, the Chief Executive Officer or the President. Such
resignation shall take effect at the time it specifies, and the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 2.8 PLACE OF MEETINGS.
Meetings of the Board of Directors shall be held at the principal office
of the Corporation in the State of California, or at such other place within or
without the State of Nevada as may be designated for that purpose by the Board
of Directors. Any meeting shall be valid, wherever held, if held by the written
<PAGE>
-5-
consent of all members of the Board of Directors, given before or after the
meeting and filed with the Secretary of the Corporation.
SECTION 2.9 MEETINGS AFTER ANNUAL SHAREHOLDERS' MEETING.
The first meeting of the Board of Directors held after the annual
shareholders' meeting shall be held at such time and place within or without the
State of Nevada as shall be fixed by announcement of the Chief Executive Officer
or the President given at the annual shareholders' meeting, and no other notice
of such meeting shall be necessary, provided a majority of the whole Board shall
be present. Alternatively, such meeting may be held at such time and place as
shall be fixed pursuant to notice given under other provisions of these By-Laws.
SECTION 2.10 OTHER REGULAR MEETINGS.
2.10.1. Regular meetings of the Board of Directors shall be held at
such time and place within or without the State of Nevada as may be agreed upon
from time to time by the Board.
2.10.2. No notice need be given of regular meetings, except that a
written notice shall be given to each director of the resolution establishing
specific meeting dates or a regular meeting date, which notice shall set forth
the date of the month, the time, and the place of the meetings.
SECTION 2.11 SPECIAL MEETINGS.
Special meetings of the Board of Directors shall be held whenever called
by the Chief Executive Officer or the President or by two-thirds of the
directors of each Class. Notice of any such meeting shall be mailed to each
director not later than three days before the day on which the meeting is to be
held, or shall be sent to him by telegraph, or delivered personally or by
telephone, not later than midnight of the day before the day of the meeting.
Any meeting of the Board of Directors shall be a legal meeting without any
notice thereof having been given, if each director consents to the holding
thereof or waives notice by a writing filed with the Secretary, or is present
thereat and their oral consents are entered on the minutes, or they take part in
the deliberations thereat without objection. Except as otherwise provided in
the By-Laws or as may be indicated in the notice thereof, any and all business
may be transacted at any special meeting.
SECTION 2.12 WAIVER OF NOTICE.
Anything herein to the contrary notwithstanding, notice of any meeting of
directors shall not be required as to any director who shall waive notice in
writing (including telex, facsimile telephonic transmission, telegram, cablegram
or radiogram) before or after such meeting.
<PAGE>
-6-
SECTION 2.13 NOTICE OF ADJOURNMENT.
Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place is fixed at the meeting
adjourned.
SECTION 2.14 QUORUM.
A majority of the number of directors as fixed by the Articles of
Incorporation or By-Laws shall be necessary to constitute a quorum for the
transaction of business, and the action of a majority of the directors present
at any meeting at which there is a quorum, when duly assembled, is valid as a
corporate act; provided, that a minority of the directors, in the absence of a
quorum, may adjourn from time to time or fill vacant directorships in accordance
with Section 2.5 but may not transact any business.
SECTION 2.15 ACTION BY UNANIMOUS WRITTEN CONSENT.
Any action required or permitted to be taken at any meeting of the Board
of Directors may be taken without a meeting, if all members of the Board shall
individually or collectively consent in writing thereto. Such written consent
shall be filed with the minutes of the proceedings of the Board and shall have
the same force and effect as a unanimous vote of such directors.
SECTION 2.16 COMPENSATION.
The directors may be paid their expenses of attendance at each meeting of
the Board of Directors. Additionally, the Board of Directors may from time to
time, in its discretion, pay to directors either or both a fixed sum for
attendance at each meeting of the Board of Directors or a stated salary for
services as a director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
reimbursement and compensation for attending committee meetings.
SECTION 2.17 TRANSACTIONS INVOLVING INTERESTS OF DIRECTORS.
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
directors of the Corporation are in any way interested in, or connected with,
any other party to, such contract or transaction or are themselves parties to
such contract or transaction, provided that such transaction satisfies Section
78.140 of the Nevada Revised Statutes; and each and every person who may become
a director of the Corporation is hereby relieved, to the extent permitted by
law, from any liability that might otherwise exist from contracting in good
faith with the Corporation for the benefit of himself or any person in which he
may be in any way interested or with which he may be in any way connected. Any
director of the Corporation may vote and act upon any matter, contract or
transaction between the Corporation and any other person without regard to the
fact that he is also a stockholder, director or officer of, or has any interest
in, such other person.
<PAGE>
-7-
SECTION 2.18 EMERITUS POSITIONS.
The Board of Directors may authorize parties to serve in an emeritus
position with respect to the Board of Directors, included by way of example but
not by way of limitation, as an Emeritus Director, as a Chairman Emeritus of the
Board of Directors or as a Vice-Chairman Emeritus of the Board of Directors.
These positions shall be honorary positions and parties elected to those
positions may be asked to attend meetings of the board of directors and meeting
of the shareholders from time to time. A party holding an emeritus position
shall not be an officer or director of the Company, shall have no vote at a
director's meeting, shall receive no fees for service in that position and shall
not be given access to material, non-published information pertaining, to the
Company. A party filling an emeritus position shall be requested to do so
because of his or her experience with and contributions to the Company.
ARTICLE III
OFFICERS
SECTION 3.1 EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a Chairman, a Vice
Chairman, a Chief Executive Officer, a President, one or more Senior Executive
Vice Presidents, one or more Executive Vice Presidents, one or more Group
Presidents and Chief Executive Officers, one or more Senior Vice Presidents, one
or more Vice Presidents, a Secretary, and a Treasurer. Any person may hold two
or more offices. The executive officers of the Corporation shall be elected
annually by the Board of Directors and shall hold office for one year or until
their respective successors shall be elected and shall qualify.
SECTION 3.2 APPOINTED OFFICERS: TITLES.
3.2.1. The Chief Executive Officer or the Secretary in the case of
Assistant Secretaries or the Treasurer in the case of Assistant Treasurers may
appoint one or more Assistant Secretaries or one or more Assistant Treasurers,
each of whom shall hold such title at the pleasure of the appointing officer,
have such authority and perform such duties as are provided in the By-Laws, or
as the Chief Executive Officer or the appointing officer may determine from time
to time. Any person appointed under this Section 3.2.1 to serve in any of the
foregoing positions shall be deemed by reason of such appointment or service in
such capacity to be an "officer" of the corporation.
3.2.2. The Chief Executive Officer or a person designated by the
Chief Executive Officer may also appoint a president, one or more executive vice
presidents, one or more senior vice presidents, one or more vice presidents and
one or more assistant vice presidents for each operating group and division of
the Corporation and one or more senior vice presidents, one or more vice
presidents and one or more assistant vice presidents for each corporate staff
function and a corporate controller and one or more assistant controllers. Each
of such persons will hold such title at the pleasure of the Chief Executive
<PAGE>
-8-
Officer and have authority to act for and shall perform duties with respect to
only the group, division or corporate staff function for which the person is
appointed. Any person appointed under this Section 3.2.2 to serve in any of the
foregoing positions shall not be deemed by reason of such appointment or service
in such capacity to be an "officer" of the Corporation.
SECTION 3.3 REMOVAL AND RESIGNATION.
3.3.1. Any officer may be removed, either with or without cause, by
a majority of the directors at the time in office, at any regular or special
meeting of the Board. Any appointed person may be removed from such position at
any time by the person making such appointment or his successor.
3.3.2. Any officer may resign at any time, by giving written notice
to the Board of Directors, the Chief Executive Officer, the President or the
Secretary of the Corporation. Any such resignation shall take effect at the
date of the receipt of such notice, or at any later time specified therein; and
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 3.4 VACANCIES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
the By-Laws for regular appointments to such office.
SECTION 3.5 CHAIRMAN AND VICE CHAIRMAN.
The Chairman shall preside at all meetings of the Board of Directors and
shall exercise and perform such other powers and duties as may be from time to
time assigned to him by the Board of Directors. The Vice Chairman shall, in the
absence of the Chairman, preside at all meetings of the Board of Directors and
shall exercise and perform such other powers and duties as may be from time to
time assigned to him by the Board of Directors.
SECTION 3.6 CHIEF EXECUTIVE OFFICER.
The Chief Executive Officer shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
affairs of the Corporation. He shall preside at all meetings of the
shareholders and, in the absence of the Chairman of the Board and the Vice
Chairman of the Board, at all meetings of the Board of Directors. He shall be
ex officio a member of the Executive Committee and shall have the general powers
and duties of management usually vested in the office of chief executive officer
of a corporation and such other powers and duties as may be prescribed by the
Board of Directors.
SECTION 3.7 PRESIDENT.
In the absence or disability of the Chief Executive Officer, the President
shall perform all of the duties of the Chief Executive Officer and when
<PAGE>
-9-
so acting shall have all the powers and be subject to all the restrictions upon
the Chief Executive Officer, including the power to sign all instruments and to
take all actions which the Chief Executive Officer is authorized to perform by
the Board of Directors or the By-Laws. The President shall have the general
powers and duties usually vested in the office of president of a corporation and
such other powers and duties as may be prescribed by the Chief Executive Officer
or the Board of Directors.
SECTION 3.8 SENIOR EXECUTIVE VICE PRESIDENT, EXECUTIVE VICE PRESIDENT, SENIOR
VICE PRESIDENT AND VICE PRESIDENT.
In the absence or disability of the Chief Executive Officer and the
President, a Senior Executive Vice President, an Executive Vice President or a
Group President and Chief Executive Officer, in the order of his rank and
seniority shall perform all of the duties of the Chief Executive Officer, and
when so acting shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer, including the power to sign all
instruments and to take all actions which the Chief Executive Officer is
authorized to perform by the Board of Directors or the By-Laws. The Senior
Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents and
Vice Presidents shall have the general powers and duties usually vested in the
office of a vice president of a corporation; the Group Presidents and Chief
Executive Officers shall have the general powers and duties of a principal
executive officer of an operating group of a corporation; and each of them shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors, the Executive
Committee of the Board of Directors, the Chief Executive Officer or the By-Laws.
SECTION 3.9 SECRETARY AND ASSISTANT SECRETARIES.
3.9.1. The Secretary shall (1) attend all sessions of the Board and
all meetings of the shareholders; and (2) record and keep, or cause to be kept,
all votes and the minutes of all proceedings in a book to be kept for that
purpose at the principal office of the Corporation, or at such other place as
the Board of Directors may from time to time determine, specifying therein (i)
the time and place of holding, (ii) whether regular or special, and if special,
how authorized, (iii) the notice thereof given, (iv) the names of those present
at directors' meetings, (v) the number of shares present or represented at
shareholders' meetings, and (vi) the proceedings thereof; and (3) perform like
duties for the Executive and other standing committees, when required. In
addition, he shall keep or cause to be kept, at the principal office of the
Corporation in the State of Nevada, those documents required to be kept thereat
by Section 5.2 of the By-Laws and Section 78.105 of the Nevada Revised Statutes.
3.9.2. The Secretary shall give, or cause to be given, notice of
meetings of the shareholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or the Chief Executive Officer, under whose supervision he shall be. He shall
keep in safe custody the seal of the Corporation, and, when authorized by the
Board, affix the same to any instrument requiring it, and when so affixed, it
shall be attested by his signature or by the signature of the Treasurer or an
<PAGE>
-10-
Assistant Secretary. The Secretary is hereby authorized to issue certificates,
to which the corporate seal may be affixed, attesting to the incumbency of
officers of this Corporation or to actions duly taken by the Board of Directors
or the shareholders.
3.9.3. The Assistant Secretaries, in the order of their seniority,
shall in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary, and shall perform such other duties as the
Chief Executive Officer or the Secretary shall prescribe.
SECTION 3.10 TREASURER AND ASSISTANT TREASURERS.
3.10.1. The Treasurer shall deposit all moneys and other valuables
in the name, and to the credit, of the Corporation, with such depositories as
may be ordered by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
Chief Executive Officer and directors, whenever they request it, an account of
all his transactions as Treasurer, and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or the By-Laws.
3.10.2. The Assistant Treasurers, in the order of their seniority,
shall in the absence or disability of the Treasurer, perform the duties and
exercise the powers of the Treasurer, and shall perform such other duties as the
Chief Executive Officer or the Treasurer shall prescribe.
SECTION 3.11 ADDITIONAL POWERS, SENIORITY AND SUBSTITUTION OF OFFICERS.
In addition to the foregoing powers and duties specifically prescribed for
the respective officers, the Board of Directors may from time to time by
resolution (i) impose or confer upon any of the officers such additional duties
and powers as the Board of Directors may see fit, (ii) determine the order of
seniority among the officers, and/or (iii) except as otherwise provided above,
provide that in the absence of any officer or officers, any other officer or
officers shall substitute for and assume the duties, powers and authority of the
absent officer or officers. Any such resolution may be final, subject only to
further action by the Board of Directors, or the resolution may grant such
discretion, as the Board of Directors deems appropriate, to the Chairman, the
Vice Chairman, the Chief Executive Officer, the President (or in his absence the
Senior Executive Vice President or the Executive Vice President serving in his
place) to impose or confer additional duties and powers, to determine the order
of seniority among officers, and/or to provide for substitution of officers as
above described.
SECTION 3.12 COMPENSATION.
The officers of the Corporation shall receive such compensation as shall
be fixed from time to time by the Board of Directors. No officer shall be
prohibited from receiving such salary by reason of the fact that he is also a
director of the Corporation.
<PAGE>
-11-
SECTION 3.13 TRANSACTION INVOLVING INTEREST OF OFFICER.
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
officers of the Corporation are in any way interested in, or connected with, any
other party to such contract or transaction, or are themselves parties to such
contract or transaction, provided that such transaction complies with Section
78.140 of the Nevada Revised Statutes; and each and every person who is or may
become an officer of the Corporation is hereby relieved, to the extent permitted
by law, when acting in good faith, from any liability that might otherwise exist
from contracting with the Corporation for the benefit of himself or any person
in which he may be in any way interested or with which he may be in any way
connected.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 4.1 STANDING COMMITTEES.
The Board of Directors shall appoint an Executive Committee, an Audit
Committee and a Compensation and Stock Option Committee, consisting of such
number of its members as it may designate, consistent with the Articles of
Incorporation, the By-Laws and the laws of the State of Nevada.
4.1.1. The Executive Committee shall have and may exercise, when
the Board is not in session, all of the powers of the Board of Directors in the
management of the business and affairs of the Corporation, but the Executive
Committee shall not have the power to fill vacancies on the Board, or to change
the membership of or to fill vacancies in the Executive Committee or any other
Committee of the Board, or to adopt, amend or repeal the By-Laws, or to declare
dividends.
4.1.2. The Audit Committee shall select and engage on behalf of the
Corporation, subject to the consent of the shareholders, and fix the
compensation of, a firm of certified public accountants whose duty it shall be
to audit the books and accounts of the Corporation and its subsidiaries for the
fiscal year in which they are appointed, and who shall report to such Committee.
The Audit Committee shall confer with the auditors and shall determine, and from
time to time shall report to the Board of Directors upon, the scope of the
auditing of the books and accounts of the Corporation and its subsidiaries. The
Audit Committee shall also be responsible for determining that the business
practices and conduct of employees and other representatives of the Corporation
and its subsidiaries comply with the policies and procedures of the Corporation.
None of the members of the Audit Committee shall be officers or employees of the
Corporation.
4.1.3. The Compensation and Stock Option Committee shall establish
a general compensation policy for the Corporation and shall have responsibility
for the approval of increases in directors' fees and in salaries
<PAGE>
-12-
paid to officers and senior employees earning in excess of an annual salary to
be determined by the Committee. The Compensation and Stock Option Committee
shall have all of the powers of administration under all of the Corporation's
employee benefit plans, including any stock option plans, long-term incentive
plans, bonus plans, retirement plans, stock purchase plans and medical, dental
and insurance plans. In connection therewith, the Compensation and Stock Option
Committee shall determine, subject to the provisions of the Corporation's plans,
the directors, officers and employees of the Corporation eligible to participate
in any of the plans, the extent of such participation and the terms and
conditions under which benefits may be vested, received or exercised. None of
the members of the Compensation and Stock Option Committee shall be officers or
employees of the Corporation.
SECTION 4.2 OTHER COMMITTEES.
Subject to the limitations of the Articles of Incorporation, the By-Laws
and the laws of the State of Nevada as to action to be authorized or approved by
the shareholders, or duties not delegable by the Board of Directors, any or all
of the corporate powers may be exercised by or under authority of, and the
business and affairs of this Corporation may be controlled by, such other
committee or committees as may be appointed by the Board of Directors. The
powers to be exercised by any such committee shall be designated by the Board of
Directors.
SECTION 4.3 PROCEDURES.
Subject to the limitations of the Articles of Incorporation, the By-Laws
and the laws of the State of Nevada regarding the conduct of business by the
Board of Directors and its appointed committees, any committee created under
this Article may use any procedures for conducting its business and exercising
its powers, including but not limited to actions by the unanimous written
consent of its members in the manner set forth in Section 2.15. A majority (but
not less than two members) shall constitute a quorum. Notices of meetings may
be in any reasonable manner and may be waived as for meetings of directors.
ARTICLE V
CORPORATE RECORDS AND REPORTS - INSPECTION
SECTION 5.1 RECORDS.
The Corporation shall maintain adequate and correct accounts, books and
records of its business and properties. All of such books, records and accounts
shall be kept at its principal place of business in the State of California, as
fixed by the Board of Directors from time to time.
SECTION 5.2 ARTICLES, BY-LAWS AND STOCK LEDGER.
The Corporation shall maintain and keep the following documents at its
principal place of business in the State of Nevada: (i) a certified copy of the
<PAGE>
-13-
Articles of Incorporation and all amendments thereto; (ii) a certified copy of
the By-Laws and all amendments thereto; and (iii) a statement setting forth the
following: "The Secretary of the Corporation, whose address is 2700 Colorado
Avenue, Santa Monica, California 90404, is the custodian of the duplicate stock
ledger of the Corporation."
SECTION 5.3 INSPECTION.
Any person who has been a shareholder of record for at least six months
immediately preceding his demand, or any person holding, or thereunto authorized
in writing by the holders of, at least five percent of all of the Corporation's
outstanding shares, upon at least five days' written demand, or any judgment
creditor without prior demand, shall have the right to inspect in person or by
agent or attorney, during usual business hours, the duplicate stock ledger of
the Corporation and to make extracts therefrom; provided, however, that such
inspection may be denied to any shareholder or other person upon his refusal to
furnish to the Corporation an affidavit that such inspection is not desired for
a purpose which is in the interest of a business or object other than the
business of the Corporation and that he has not at any time sold or offered for
sale any list of shareholders of any corporation or aided or abetted any person
in procuring any such record of shareholders for any such purpose.
SECTION 5.4 CHECKS, DRAFTS, ETC.
All checks, drafts, or other orders for payment of money, notes, or other
evidences of indebtedness, issued in the name of, or payable to, the
Corporation, shall be signed or endorsed by such person or persons, and in such
manner as shall be determined from time to time by resolution of the Board of
Directors.
ARTICLE VI
OTHER AUTHORIZATIONS
SECTION 6.1 EXECUTION OF CONTRACTS.
The Board of Directors, except as the By-Laws otherwise provide, may
authorize any officer or officers or agent or agents to enter into any contract
or execute any instrument in the name of and on behalf of the Corporation. Such
authority may be general, or confined to specific instances. Unless so
authorized by the Board of Directors, no officer, agent or employee shall have
any power or authority, except in the ordinary course of business, to bind the
Corporation by any contract or engagement or to pledge its credit, or to render
it liable for any purpose or in any amount.
SECTION 6.2 REPRESENTATION OF OTHER CORPORATIONS.
All shares of any other corporation, standing in the name of the
Corporation, shall be voted, represented, and all rights incidental thereto
exercised as directed by written consent or resolution of the Board of Directors
expressly referring thereto. In general, such rights shall be delegated by the
<PAGE>
-14-
Board of Directors under express instructions from time to time as to each
exercise thereof to the Chief Executive Officer, the President, any Senior
Executive Vice President, any Executive Vice President, any Senior Vice
President, any Vice President, the Treasurer or the Secretary of this
Corporation, or any other person expressly appointed by the Board of Directors.
Such authority may be exercised by the designated officers in person, or by any
other person authorized so to do by proxy, or power of attorney, duly executed
by such officers.
SECTION 6.3 DIVIDENDS.
The Board of Directors may from time to time declare, and the Corporation
may pay, dividends on its outstanding shares in the manner and on the terms and
conditions provided by the laws of the State of Nevada, and the Articles of
Incorporation, subject to any contractual restrictions to which the Corporation
is then subject.
ARTICLE VII
CERTIFICATES FOR AND TRANSFER OF SHARES
SECTION 7.1 CERTIFICATES FOR SHARES.
7.1.1. Certificates for shares shall be of such form and device as
the Board of Directors may designate and shall be numbered and registered as
they are issued. Each shall state the name of the record holder of the shares
represented thereby; its number and date of issuance; the number of shares for
which it is issued; the par value; a statement of the rights, privileges,
preferences and restrictions, if any; a statement as to rights of redemption or
conversion, if any; and a statement of liens or restrictions upon transfer or
voting, if any, or, alternatively, a statement that certificates specifying such
matters may be obtained from the Secretary of the Corporation.
7.1.2. Every certificate for shares must be signed by the Chief
Executive Officer or the President and the Secretary or an Assistant Secretary,
or must be authenticated by facsimiles of the signatures of the Chief Executive
Officer or the President and the Secretary or an Assistant Secretary. Before it
becomes effective, every certificate for shares authenticated by a facsimile or
a signature must be countersigned by a transfer agent or transfer clerk, and
must be registered by an incorporated bank or trust company, either domestic or
foreign, as registrar of transfers.
7.1.3. Even though an officer who signed, or whose facsimile
signature has been written, printed, or stamped on a certificate for shares
ceases, by death, resignation, or otherwise, to be an officer of the Corporation
before the certificate is delivered by the Corporation, the certificate shall be
as valid as though signed by a duly elected, qualified and authorized officer,
if it is countersigned by the signature or facsimile signature of a transfer
clerk or transfer agent and registered by an incorporated bank or trust company,
as registrar of transfers.
<PAGE>
-15-
7.1.4. Even though a person whose facsimile signature as, or on
behalf of, the transfer agent or transfer clerk has been written, printed or
stamped on a certificate for shares ceases, by death, resignation, or otherwise,
to be a person authorized to so sign such certificate before the certificate is
delivered by the Corporation, the certificate shall be deemed countersigned by
the facsimile signature of a transfer agent or transfer clerk for purposes of
meeting the requirements of this section.
SECTION 7.2 TRANSFER ON THE BOOKS.
Upon surrender to the Secretary or transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 7.3 LOST OR DESTROYED CERTIFICATES.
The Board of Directors may direct, or may authorize the Secretary to
direct, a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate for shares so lost or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors or Secretary may, in its or his discretion, and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed.
SECTION 7.4 TRANSFER AGENTS AND REGISTRARS.
The Board of Directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, who may be the same person, and may be the
Secretary of the Corporation, or an incorporated bank or trust company, either
domestic or foreign, who shall be appointed at such times and places as the
requirements of the Corporation may necessitate and the Board of Directors may
designate.
SECTION 7.5 FIXING RECORD DATE FOR DIVIDENDS, ETC.
The Board of Directors may fix a time, not exceeding 50 days preceding the
date fixed for the payment of any dividend or distribution, or for the allotment
of rights, or when any change or conversion or exchange of shares shall go into
effect, as a record date for the determination of the shareholders entitled to
receive any such dividend or distribution, or any such allotment of rights, or
to exercise the rights in respect to any such change, conversion, or exchange of
shares, and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive such dividend, distribution, or allotment
<PAGE>
-16-
of rights, or to exercise such rights, as the case may be, notwithstanding any
transfer of any shares on the books of the Corporation after any record date
fixed as aforesaid.
SECTION 7.6 RECORD OWNERSHIP.
The Corporation shall be entitled to recognize the exclusive right of a
person registered as such on the books of the Corporation as the owner of shares
of the Corporation's stock to receive dividends, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to or interest in
such shares on the part of any other person, whether or not the Corporation
shall have express or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
AMENDMENTS TO BY-LAWS
SECTION 8.1 BY SHAREHOLDERS.
New or restated by-laws may be adopted, or these By-Laws may be repealed
or amended, at the annual shareholders' meeting or at any other meeting of the
shareholders called for that purpose, by a vote of shareholders entitled to
exercise a majority of the voting power of the Corporation.
SECTION 8.2 BY DIRECTORS.
Subject to the right of the shareholders to adopt, amend, or repeal by-
laws, as provided in Section 8.1, the Board of Directors may adopt, amend, or
repeal any of these By-Laws by the affirmative vote of two-thirds of the
directors of each Class except as otherwise provided in Section 2.4. This power
may not be delegated to any committee appointed in accordance with these By-
Laws.
SECTION 8.3 RECORD OF AMENDMENTS.
Whenever an amendment or a new By-Law is adopted, it shall be copied in
the book of minutes with the original By-Laws, in the appropriate place. If any
By-Law is repealed, the fact of repeal, with the date of the meeting at which
the repeal was enacted, or written assent was filed, shall be stated in said
book.
ARTICLE IX
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 9.1 Each person who was or is a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he, or a person of whom he is the legal representative,
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee, fiduciary or agent
of
<PAGE>
-17-
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action or inaction in an official
capacity or in any other capacity while serving as a director, officer,
employee, fiduciary or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the laws of Nevada, as the same
exist or may hereafter be amended, against all costs, charges, expenses,
liabilities and losses (including attorneys' fees, judgments, fines, employee
benefit plan exercise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee, fiduciary or agent and shall inure to the
benefit of his heirs, executors and administrators; provided however, that,
except as provided in Section 9.2, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board. The right to indemnification conferred in this Article
IX shall include the right to be paid by the Corporation the expenses incurred
in defending any such proceeding in advance of its final disposition; provided,
however, that, if the Nevada Private Corporation Law requires, the payment of
such expenses incurred by a director or officer in his capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to any employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it shall ultimately be determined that such director or officer
is not entitled to be indemnified under this Section 9.1 or otherwise. The
Corporation may, by action of the Board, provide indemnification to employees
and agents of the Corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
SECTION 9.2 If a claim under Section 9.1 is not paid in full by the Corporation
within thirty days after a written claim has been received by the Corporation,
the claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought
to enforce a claim for expenses incurred in defending any proceeding in advance
of its final disposition where the required undertaking, if any is required, has
been tendered to the Corporation) that the claimant has failed to meet a
standard of conduct which makes it permissible under Nevada law for the
Corporation to indemnify the claimant for the amount claimed. Neither the
failure of the Corporation (including the Board, independent legal counsel, or
its shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is permissible in the circumstances
because he has met such standard of conduct, nor an actual determination by the
Corporation (including the Board, independent legal counsel, or its
shareholders) that the claimant has not met such standard of conduct, shall be a
defense to the action or create a presumption that the claimant has failed to
meet such standard of conduct.
<PAGE>
-18-
SECTION 9.3 The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Article IX shall not be exclusive of any other right which any person may have
or hereafter acquire under any statute, provision of the Articles of
Incorporation, By-Law, agreement, vote of shareholders or disinterested
directors or otherwise.
SECTION 9.4 The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, fiduciary or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under Nevada law.
SECTION 9.5 To the extent that any director, officer, employee, fiduciary or
agent of the Corporation is by reason of such position, or a position with
another entity at the request of the Corporation, a witness in any action, suit
or proceeding, he shall be indemnified against all costs and expenses actually
and reasonably incurred by him or on his behalf in connection therewith.
SECTION 9.6 The Corporation may enter into agreements with any director,
officer, employee, fiduciary or agent of the Corporation providing for
indemnification to the full extent permitted by Nevada law.
SECTION 9.7 For purposes of this Article IX, the term "Board" shall mean the
Board of Directors of the Corporation or, to the extent permitted by the laws of
Nevada, as the same exist or may hereafter be amended, its Executive Committee.
On vote of the Board, the Corporation may assent to the adoption of this Article
IX by any subsidiary, whether or not wholly owned.
SECTION 9.8 The rights provided by this Article IX shall be available whether or
not the claim asserted against the director, officer, employee, fiduciary or
agent is based on matters which antedate the adoption of this Article IX.
SECTION 9.9 If any provision of this Article IX shall for any reason be
determined to be invalid, the remaining provisions hereof shall not be affected
thereby but shall remain in full force and effect.
SECTION 9.10 The rights provided by this Article IX shall be applicable to the
officers (including without limitation the Chairman, Vice Chairman, treasurer
and assistant treasurer) appointed from time to time by the Chief Executive
Officer of the Corporation or his designee to serve in the administration and
management of any separate, segregated fund established for purposes of
collecting and distributing voluntary employee political contributions to
federal election campaigns pursuant to the Federal Election Campaign Act of
1971, as amended.
<PAGE>
-19-
ARTICLE X
CORPORATE SEAL
The corporate seal shall be circular in form and shall have inscribed
thereon the name of the Corporation, and the date of its incorporation, and the
word "Nevada".
ARTICLE XI
INTERPRETATION
Reference in these By-Laws to any provision of the Nevada Revised Statutes
shall be deemed to include all amendments thereto and the effect of the
construction and determination of validity thereof by the Nevada Supreme Court.
<PAGE>
SERP.TRS
EXHIBIT 10(uu)
1994 NME SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TRUST
AS AMENDED JULY 25, 1994
This Trust Agreement (the "Agreement") is made and entered into this 25th
day of May, 1994, by and between National Medical Enterprises, Inc., a Nevada
corporation (the "Company") and United States Trust Company of New York (the
"Trustee") with reference to the following facts:
A. Company has adopted the NME Supplemental Executive Retirement Plan (the
"Plan"), a copy of the Plan is attached hereto as Exhibit A.
---------
B. Company has incurred or expects to incur liability under the terms of
such Plan with respect to the individuals participating in such Plan.
C. Company wishes to establish a trust (hereinafter called "Trust") and to
contribute to the Trust assets that shall be held therein, subject to the claims
of Company's creditors in the event of Company's Insolvency, as herein defined,
until paid to Plan participants and for their beneficiaries in such manner and
at such times as specified in the Plan.
D. It is the intention of the parties that this Trust shall constitute an
unfunded arrangement and shall not affect the status of the Plan as an unfunded
plan maintained for the purpose of providing deferred compensation for a select
group of management or highly compensated employees for purposes of Title I of
the Employee Retirement Income Security Act of 1974 ("ERISA").
1
<PAGE>
E. It is the intention of Company to make contributions to the Trust to
provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan.
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
Section 1. ESTABLISHMENT OF TRUST.
----------------------
(a) Company hereby deposits with Trustee in trust One Million shares of the
$.075 par value per share common stock of Company, which shall become the
principal of the Trust to be held, administered and disposed of by Trustee as
provided in this Agreement.
(b) The Trust shall become irrevocable upon approval by the Board of
Directors. Company shall provide a certified copy of the resolution of the
Board of Directors stipulating that the Trust has been approved by them.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used exclusively for
the uses and purposes of participants in the Plan and general creditors as
herein set forth. Plan participants and their beneficiaries shall have no
preferred
2
<PAGE>
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plan and this Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against Company.
Any assets held by the Trust will be subject to the claims of Company's general
creditors under federal and state law in the event of Insolvency, as defined in
Section 3(a) herein.
(e) Upon a Change of Control, as defined in Section 13(d) herein, and on
the last day of every calendar quarter commencing with the first calendar
quarter beginning after the month in which a Change in Control occurs (a
"Quarter"). Company shall, as soon as possible, but in no event longer than
thirty (30) days following the Change of Control and no longer than ten (10)
days after the end of each Quarter, make an irrevocable contribution to the
Trust in an amount that is sufficient together with all assets held by the Trust
as of such date to pay to each Plan participant or beneficiary, on a pre-tax
basis, the benefits to which Plan participants or their beneficiaries would be
entitled pursuant to the terms of the Plan as of the date on which the Change of
Control occurred, and as of the last day of each Quarter. Company shall notify
the Trustee immediately following verification that a Change of Control has
occurred.
Section 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.
-----------------------------------------------------
(a) Company shall deliver to Trustee a schedule (the "Payment Schedule")
that indicates the amounts payable in respect of each Plan participant (and his
or her beneficiaries), that provides a formula or other instructions acceptable
to Trustee for determining the amounts so payable, the form in which such amount
is to be paid (as provided for or available under the Plan), and the time of
3
<PAGE>
commencement for payment of such amounts. Except as otherwise provided herein,
Trustee shall make payments to the Plan participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall not be responsible for
determining the accuracy of the amounts to be paid according to the Payment
Schedule. The Trustee shall make provision for the reporting and withholding of
any federal, state or local taxes pursuant to the terms of the Plan and shall
pay amounts withheld to the appropriate taxing authorities or determine that
such amounts have been reported, withheld and paid by Company.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by Company or such party as it shall
designate under the Plan, and any claim for such benefits shall be considered
and reviewed under the procedures set out in the Plan.
(c) Company may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan. Company
shall notify Trustee of its decision to make payment of benefits directly prior
to the time amounts are payable to participants or their beneficiaries. In
addition, if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the terms of the
Plan, Company shall make the balance of each such payment as it falls due.
Trustee shall notify Company where principal and earnings are not sufficient.
4
<PAGE>
Section 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST
--------------------------------------------------
BENEFICIARY WHEN COMPANY IS INSOLVENT.
-------------------------------------
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is Insolvent. Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay
its debts as they become due, or (ii) Company is subject to a pending proceeding
as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of Company under federal and state law as set forth
below.
(1) The Board of Directors and the Chief Executive Officer of Company
shall have the duty to inform Trustee in writing of Company's Insolvency. If a
person claiming to be a creditor of Company alleges in writing to Trustee that
Company has become Insolvent, Trustee shall determine whether Company is
Insolvent and, pending such determination, Trustee shall discontinue payment of
benefits to Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or
has received notice from Company or a person claiming to be a creditor alleging
that Company is Insolvent, Trustee shall have no duty to inquire whether Company
is Insolvent. Trustee may in all events rely on such evidence concerning
Company's solvency as may be furnished to Trustee and that provides Trustee with
a reasonable basis for making a determination concerning Company's solvency.
5
<PAGE>
(3) If at any time Trustee has determined that Company is Insolvent,
Trustee shall discontinue payments to Plan participants or their beneficiaries
and shall hold the assets of the Trust for the benefit of Company's general
creditors. Nothing in this Agreement shall in any way diminish any rights of
Plan participants or their beneficiaries to pursue their rights as general
creditors of Company with respect to benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants
or their beneficiaries in accordance with Section 2 of this Agreement only after
Trustee has determined that Company is not Insolvent (or is no longer
Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by Company in lieu of the payments provided
for hereunder during any such period of discontinuance.
Section 4. PAYMENTS TO COMPANY.
-------------------
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, Company shall have no right or power to direct Trustee to return to
6
<PAGE>
Company or to divert to others any of the Trust assets before all payment of
benefits have been made to Plan participants and their beneficiaries pursuant to
the terms of the Plan.
Section 5. INVESTMENT AUTHORITY.
--------------------
It is the intent of Company that the Trustee shall invest the contributions
to the Trust in shares of common stock of Company. Trustee may invest in
securities (including stock or right to acquire stock) or obligations issued by
Company. All rights associated with assets of the Trust shall be exercised by
Trustee, or the person designated by Trustee, and shall in no event be
exercisable by or rest with Plan participants. Company shall have the right at
any time, and from time to time in its sole discretion, to substitute assets of
equal fair market value for any asset held by the Trust. This right is
exercisable by Company in a nonfiduciary capacity without the approval or
consent of any person in a fiduciary capacity. The Trustee shall hold the stock
until such time as the stock must be liquidated to pay Plan participants or
their beneficiaries or until such time as the Trustee determines it to be
clearly imprudent to retain the stock to preserve the principal balance required
to maintain adequate funding for future payments due to Plan participants or
their beneficiaries.
Company represents and warrants that it has filed and will file with the
Securities and Exchange Commission and with all applicable state agencies or
authorities all required registration statements relating to shares of Company
stock and other interests which may be issued under the Plan. The Employer
acknowledges that it is and shall be responsible for, and that the Trustee shall
7
<PAGE>
not be responsible for, preparing or filing such registration statements or for
the accuracy of statements contained therein, or for preparing or filing any
other reports, statements or filings required under federal or state securities
laws with respect to the Trust's investment in Company stock.
Section 6. DISPOSITION OF INCOME.
---------------------
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
Section 7. ACCOUNTING BY TRUSTEE.
---------------------
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within sixty (60) days following the close of each calendar
year and within sixty (60) days after the removal or resignation of Trustee,
Trustee shall deliver to Company a written account of its administration of the
Trust during such year or during the period from the close of the last preceding
year to the date of such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.
8
<PAGE>
Section 8. RESPONSIBILITY OF TRUSTEE.
-------------------------
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims provided, however, that Trustee shall incur no
liability to any person for any action taken pursuant to a direction, request or
approval given by Company which is contemplated by, and in conformity with, the
terms of the Plan or this Trust and is given in writing by Company. In the
event of a dispute between Company and a party, Trustee may apply to a court of
competent jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection
with this Trust, Company agrees to indemnify Trustee against Trustee's costs,
expenses and liabilities (including, without limitation, attorneys' fees and
expenses) relating thereto and to be primarily liable for such payments. If
Company does not pay such costs, expenses and liabilities in a reasonably timely
manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisors,
financial consultants or other professionals to assist it in performing any of
its duties or obligations hereunder.
9
<PAGE>
(e) Trustee shall have, without exclusion, all powers conferred on trustees
by applicable law, unless expressly provided otherwise herein, provided,
however, that if an insurance policy is held as an asset of the Trust, Trustee
shall have no power to name a beneficiary of the policy other than the Trust, to
assign the policy (as distinct from conversion of the policy to a different
form) other than to a successor Trustee, or to loan to any person the proceeds
of any borrowing against such policy.
(f) Notwithstanding any powers granted to Trustee pursuant to this
Agreement or to applicable law, Trustee shall not have any power that could give
this Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
(g) Notwithstanding any provision in this Agreement to the contrary, in the
event of a Change of Control, the Trustee is hereby directed to sell any and all
shares of Company stock, or other stock that is received by the Trustee in
exchange for such Company stock as a result of the Change of Control, which the
Trustee holds as a Trust asset, within thirty (30) days of such Change of
Control. The Trustee shall invest any and all proceeds that it receives as a
result of such sales that are not immediately needed in order to make
distributions to Plan participants and their beneficiaries in United States
government securities and/or securities of United States government agencies
with average portfolio maturity of two (2) years. Additionally, if the Trustee
sells any Company stock prior to a Change in Control the proceeds from any such
sale that are not immediately needed in order to make distributions to Plan
participants and their beneficiaries shall also be invested by the Trustee in
10
<PAGE>
United States government securities and/or securities of United States
government agencies with average portfolio maturity of two (2) years.
Section 9. COMPENSATION AND EXPENSES OF TRUSTEE.
------------------------------------
Company shall pay all administrative and Trustee's fees and expenses. If
not so paid, the fees and expenses shall be paid from the Trust. In the event of
a Change of Control or any other matter, which in the Trustee's reasonable
discretion requires the Trustee to perform services in addition to the Trustee's
custodial and investment responsibilities under this Agreement, the Trustee
shall be entitled to an addition fee as provided in this Section 9. The Trustee
shall be compensated at its normal hourly rates for all reasonable additional
services and for the reasonable fees and expenses of its counsel or other
experts required to be engaged by the Trustee. Such amounts shall be paid by
Company to the Trustee within thirty (30) days of billing, provided that if
timely payment is not made by the Company, the Trustee may discharge any such
obligation out of the Trust assets, regardless of whether the Trust is fully
funded. In the event of the termination of the Trust or the removal or
resignation of the Trustee, the Trustee shall be entitled to withhold out of the
Trust assets all amounts due to the Trustee pursuant to this Section 9. This
Section 9 shall supersede any conflicting provision of this Agreement or the
Plan.
Section 10. RESIGNATION AND REMOVAL OF TRUSTEE.
----------------------------------
(a) Trustee may resign at any time by written notice to Company, which
shall be effective ninety (90) days after receipt of such notice unless Company
and Trustee agree otherwise.
11
<PAGE>
(b) Subject to Section 10(c), Trustee may be removed by Company on ninety
(90) days notice or upon shorter notice accepted by Trustee.
(c) Upon a Change of Control, as defined herein, Trustee may not be removed
by Company for ten (10) years.
(d) If Trustee resigns or is removed within ten (10) years of a Change of
Control, as defined herein, Trustee shall select a successor Trustee in
accordance with the provisions of Section 11(b) hereof prior to the effective
date of Trustee's resignation or removal.
(e) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor Trustee.
The transfer shall be completed within ninety (90) days after receipt of notice
of resignation, removal or transfer, unless Company extends the time limit.
(f) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 11 hereof, by the effective date of resignation or
removal under paragraphs (a) or (b) of this section. If no such appointment has
been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
Section 11. APPOINTMENT OF SUCCESSOR.
------------------------
(a) If Trustee resigns or is removed in accordance with Section 10(a) or
(b) hereof, Company may appoint any third party, such as a bank trust department
12
<PAGE>
or other party that may be granted corporate trustee powers under state law, as
a successor to replace Trustee upon resignation or removal. The appointment
shall be effective when accepted in writing by the new Trustee, who shall have
all of the rights and powers of the former Trustee, including ownership rights
in the Trust assets. The former Trustee shall execute any instrument necessary
or reasonably requested by Company or the successor Trustee to evidence the
transfer.
(b) If Trustee resigns or is removed pursuant to the provisions of Section
10(e) hereof and selects a successor Trustee, Trustee may appoint any third
party such as a bank trust department or other party that may be granted
corporate trustee powers under state law. The appointment of a successor
Trustee shall be effective when accepted in writing by the new Trustee. The new
Trustee shall have all the rights and powers of the former Trustee, including
ownership rights in Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by the successor Trustee to
evidence the transfer.
(c) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and
Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
13
<PAGE>
Section 12. AMENDMENT OR TERMINATION.
------------------------
(a) This Agreement may be amended by a written instrument executed by
Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan or shall make the Trust revocable after it
has become irrevocable in accordance with Section l(b) hereof.
(b) The Trust shall not terminate until the date on which Plan participants
and their beneficiaries are no longer entitled to benefits pursuant to the terms
of the Plan unless sooner revoked in accordance with Section 1(b) hereof. Upon
termination of the Trust any assets remaining in the Trust shall be returned to
Company.
(c) Upon written approval of all participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan, Company may terminate
this Trust prior to the time all benefit payments under the Plan have been made.
Company shall provide verification to the Trustee that all Plan participants or
beneficiaries entitled to benefits under the Plan have in fact approved the
termination of the Trust. All assets in the Trust at termination shall be
returned to Company.
(d) Sections 1(e), 4, 5, 8(g), 10(c), 10(d), 12(d) and 13(d) of this
Agreement may not be amended by Company for ten (10) years following a Change in
Control, as defined herein.
14
<PAGE>
Section 13. MISCELLANEOUS.
-------------
(a) Any provision of this Agreement prohibited by law shall be ineffective
to the extent of any such prohibition, without invalidating the remaining
provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of the State of New York, except to the extent pre-empted by
ERISA.
(d) For purposes of this Trust, a Change of Control shall be deemed to have
occurred if after April 1, 1994 (a) any person (as defined in Section 13(c) or
14(d)(2) of the Securities Exchange Act of 1934, as amended) becomes the
beneficial owner directly or indirectly of twenty percent (20%) or more of the
combined voting power of Company's then outstanding securities or (b)
individuals who, as of April 1, 1994, constitute the Board of Directors of the
Company (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board of Directors; provided, however, that (i) any individual
who becomes a director of the Company subsequent to April 1, 1994, whose
election, or nomination for election by the Company's stockholders, was approved
by a vote of at least a majority of the directors then comprising the Incumbent
Board shall be deemed to have been a member of the Incumbent Board and (ii) no
individual who was elected initially (after April 1, 1994) as a director as a
result of an
15
<PAGE>
actual or threatened election contest, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended, or any other actual or threatened solicitations of proxies or consents
by or on behalf of any person other than the Incumbent Board shall be deemed to
have been a member of the Incumbent Board.
(e) If a Plan participant or beneficiary of a Plan participant is required
to institute a legal proceeding in order to enforce his or her rights under this
Agreement and such Plan participant or beneficiary prevails in such legal
proceeding then the Company shall reimburse such Plan participant or beneficiary
for the reasonable legal fees and expenses incurred in bringing and prosecuting
such legal proceeding.
Section 14. EFFECTIVE DATE.
--------------
The effective date of this Agreement shall be the date first written above.
16
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
"COMPANY"
NATIONAL MEDICAL ENTERPRISES, INC.
By: _______________________________________
Its:_______________________________________
"TRUSTEE"
UNITED STATES TRUST COMPANY OF NEW YORK
By: _______________________________________
Its:_______________________________________
17
<PAGE>
EXHIBIT 10(aaa)
1994 NME DEFERRED COMPENSATION PLAN TRUST
AS AMENDED JULY 25, 1994
This Trust Agreement (the "Agreement") is made and entered into this 25th
day of May, 1994, by and between National Medical Enterprises, Inc., a Nevada
corporation (the "Company") and United States Trust Company of New York (the
"Trustee") with reference to the following facts:
A. Company has adopted the National Medical Enterprises, Inc. Deferred
Compensation Plan (the "Plan"), a copy of the Plan is attached hereto as Exhibit
-------
A.
- -
B. Company has incurred or expects to incur liability under the terms of
such Plan with respect to the individuals participating in such Plan.
C. Company wishes to establish a trust (hereinafter called "Trust") and to
contribute to the Trust assets that shall be held therein, subject to the claims
of Company's creditors in the event of Company's Insolvency, as herein defined,
until paid to Plan participants and for their beneficiaries in such manner and
at such times as specified in the Plan.
D. It is the intention of the parties that this Trust shall constitute an
unfunded arrangement and shall not affect the status of the Plan as an unfunded
plan maintained for the purpose of providing deferred compensation for a select
group of management or highly compensated employees for purposes of Title I of
the Employee Retirement Income Security Act of 1974 ("ERISA").
1
<PAGE>
E. It is the intention of Company to make contributions to the Trust to
provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan.
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
Section 1. ESTABLISHMENT OF TRUST.
----------------------
(a) Company hereby deposits with Trustee in trust Five Hundred Thousand
shares of the $.075 par value per share common stock of Company, which shall
become the principal of the Trust to be held, administered and disposed of by
Trustee as provided in this Agreement.
(b) The Trust shall become irrevocable upon approval by the Board of
Directors. Company shall provide a certified copy of the resolution of the
Board of Directors stipulating that the Trust has been approved by them.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used exclusively for
the uses and purposes of participants in the Plan and general creditors as
herein set forth. Plan participants and their beneficiaries shall have no
preferred
2
<PAGE>
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plan and this Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against Company.
Any assets held by the Trust will be subject to the claims of Company's general
creditors under federal and state law in the event of Insolvency, as defined in
Section 3(a) herein.
(e) Upon a Change of Control, as defined in Section 13(d) herein, and on
the last day of every calendar quarter commencing with the first calendar
quarter beginning after the month in which a Change in Control occurs (a
"Quarter"). Company shall, as soon as possible, but in no event longer than
thirty (30) days following the Change of Control and no longer than ten (10)
days after the end of each Quarter, make an irrevocable contribution to the
Trust in an amount that is sufficient together with all assets held by the Trust
as of such date to pay to each Plan participant or beneficiary, on a pre-tax
basis, the benefits to which Plan participants or their beneficiaries would be
entitled pursuant to the terms of the Plan as of the date on which the Change of
Control occurred, and as of the last day of each Quarter. Company shall notify
the Trustee immediately following verification that a Change of Control has
occurred.
Section 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.
-----------------------------------------------------
(a) Company shall deliver to Trustee a schedule (the "Payment Schedule")
that indicates the amounts payable in respect of each Plan participant (and his
or her beneficiaries), that provides a formula or other instructions acceptable
to Trustee for determining the amounts so payable, the form in which such amount
is to be paid (as provided for or available under the Plan), and the time of
3
<PAGE>
commencement for payment of such amounts. Except as otherwise provided herein,
Trustee shall make payments to the Plan participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall not be responsible for
determining the accuracy of the amounts to be paid according to the Payment
Schedule. The Trustee shall make provision for the reporting and withholding of
any federal, state or local taxes pursuant to the terms of the Plan and shall
pay amounts withheld to the appropriate taxing authorities or determine that
such amounts have been reported, withheld and paid by Company.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by Company or such party as it shall
designate under the Plan, and any claim for such benefits shall be considered
and reviewed under the procedures set out in the Plan.
(c) Company may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan. Company
shall notify Trustee of its decision to make payment of benefits directly prior
to the time amounts are payable to participants or their beneficiaries. In
addition, if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the terms of the
Plan, Company shall make the balance of each such payment as it falls due.
Trustee shall notify Company where principal and earnings are not sufficient.
4
<PAGE>
Section 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST
--------------------------------------------------
BENEFICIARY WHEN COMPANY IS INSOLVENT.
-------------------------------------
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is Insolvent. Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay
its debts as they become due, or (ii) Company is subject to a pending proceeding
as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of Company under federal and state law as set forth
below.
(1) The Board of Directors and the Chief Executive Officer of Company
shall have the duty to inform Trustee in writing of Company's Insolvency. If a
person claiming to be a creditor of Company alleges in writing to Trustee that
Company has become Insolvent, Trustee shall determine whether Company is
Insolvent and, pending such determination, Trustee shall discontinue payment of
benefits to Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or
has received notice from Company or a person claiming to be a creditor alleging
that Company is Insolvent, Trustee shall have no duty to inquire whether Company
is Insolvent. Trustee may in all events rely on such evidence concerning
Company's solvency as may be furnished to Trustee and that provides Trustee with
a reasonable basis for making a determination concerning Company's solvency.
5
<PAGE>
(3) If at any time Trustee has determined that Company is Insolvent,
Trustee shall discontinue payments to Plan participants or their beneficiaries
and shall hold the assets of the Trust for the benefit of Company's general
creditors. Nothing in this Agreement shall in any way diminish any rights of
Plan participants or their beneficiaries to pursue their rights as general
creditors of Company with respect to benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants
or their beneficiaries in accordance with Section 2 of this Agreement only after
Trustee has determined that Company is not Insolvent (or is no longer
Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by Company in lieu of the payments provided
for hereunder during any such period of discontinuance.
Section 4. PAYMENTS TO COMPANY.
-------------------
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, Company shall have no right or power to direct Trustee to return to
6
<PAGE>
Company or to divert to others any of the Trust assets before all payment of
benefits have been made to Plan participants and their beneficiaries pursuant to
the terms of the Plan.
Section 5. INVESTMENT AUTHORITY.
--------------------
It is the intent of Company that the Trustee shall invest the contributions
to the Trust in shares of common stock of Company. Trustee may invest in
securities (including stock or right to acquire stock) or obligations issued by
Company. All rights associated with assets of the Trust shall be exercised by
Trustee, or the person designated by Trustee, and shall in no event be
exercisable by or rest with Plan participants. Company shall have the right at
any time, and from time to time in its sole discretion, to substitute assets of
equal fair market value for any asset held by the Trust. This right is
exercisable by Company in a nonfiduciary capacity without the approval or
consent of any person in a fiduciary capacity. The Trustee shall hold the stock
until such time as the stock must be liquidated to pay Plan participants or
their beneficiaries or until such time as the Trustee determines it to be
clearly imprudent to retain the stock to preserve the principal balance required
to maintain adequate funding for future payments due to Plan participants or
their beneficiaries.
Company represents and warrants that it has filed and will file with the
Securities and Exchange Commission and with all applicable state agencies or
authorities all required registration statements relating to shares of Company
stock and other interests which may be issued under the Plan. Company
acknowledges that it is and shall be responsible for, and that the Trustee shall
7
<PAGE>
not be responsible for, preparing or filing such registration statements or for
the accuracy of statements contained therein, or for preparing or filing any
other reports, statements or filings required under federal or state securities
laws with respect to the Trust's investment in Company stock.
Section 6. DISPOSITION OF INCOME.
---------------------
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
Section 7. ACCOUNTING BY TRUSTEE.
---------------------
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within sixty (60) days following the close of each calendar
year and within sixty (60) days after the removal or resignation of Trustee,
Trustee shall deliver to Company a written account of its administration of the
Trust during such year or during the period from the close of the last preceding
year to the date of such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.
8
<PAGE>
Section 8. RESPONSIBILITY OF TRUSTEE.
-------------------------
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims provided, however, that Trustee shall incur no
liability to any person for any action taken pursuant to a direction, request or
approval given by Company which is contemplated by, and in conformity with, the
terms of the Plan or this Trust and is given in writing by Company. In the
event of a dispute between Company and a party, Trustee may apply to a court of
competent jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection
with this Trust, Company agrees to indemnify Trustee against Trustee's costs,
expenses and liabilities (including, without limitation, attorneys' fees and
expenses) relating thereto and to be primarily liable for such payments. If
Company does not pay such costs, expenses and liabilities in a reasonably timely
manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisors,
financial consultants or other professionals to assist it in performing any of
its duties or obligations hereunder.
9
<PAGE>
(e) Trustee shall have, without exclusion, all powers conferred on trustees
by applicable law, unless expressly provided otherwise herein, provided,
however, that if an insurance policy is held as an asset of the Trust, Trustee
shall have no power to name a beneficiary of the policy other than the Trust, to
assign the policy (as distinct from conversion of the policy to a different
form) other than to a successor Trustee, or to loan to any person the proceeds
of any borrowing against such policy.
(f) Notwithstanding any powers granted to Trustee pursuant to this
Agreement or to applicable law, Trustee shall not have any power that could give
this Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
(g) Notwithstanding any provision in this Agreement to the contrary, in the
event of a Change of Control, the Trustee is hereby directed to sell any and all
shares of Company stock, or other stock that is received by the Trustee in
exchange for such Company stock as a result of the Change of Control, which the
Trustee holds as a Trust asset, within thirty (30) days of such Change of
Control. The Trustee shall invest any and all proceeds that it receives as a
result of such sales that are not immediately needed in order to make
distributions to Plan participants and their beneficiaries in United States
government securities and/or securities of United States government agencies
with average portfolio maturity of two (2) years. Additionally, if the Trustee
sells any Company stock prior to a Change in Control the proceeds from any such
sale that are not immediately needed in order to make distributions to Plan
participants and their beneficiaries shall also be invested by the Trustee in
10
<PAGE>
United States government securities and/or securities of United States
government agencies with average portfolio maturity of two (2) years.
Section 9. COMPENSATION AND EXPENSES OF TRUSTEE.
------------------------------------
Company shall pay all administrative and Trustee's fees and expenses. If
not so paid, the fees and expenses shall be paid from the Trust. In the event of
a Change of Control or any other matter, which in the Trustee's reasonable
discretion requires the Trustee to perform services in addition to the Trustee's
custodial and investment responsibilities under this Agreement, the Trustee
shall be entitled to an addition fee as provided in this Section 9. The Trustee
shall be compensated at its normal hourly rates for all reasonable additional
services and for the reasonable fees and expenses of its counsel or other
experts required to be engaged by the Trustee. Such amounts shall be paid by
Company to the Trustee within thirty (30) days of billing, provided that if
timely payment is not made by the Company, the Trustee may discharge any such
obligation out of the Trust assets, regardless of whether the Trust is fully
funded. In the event of the termination of the Trust or the removal or
resignation of the Trustee, the Trustee shall be entitled to withhold out of the
Trust assets all amounts due to the Trustee pursuant to this Section 9. This
Section 9 shall supersede any conflicting provision of this Agreement or the
Plan.
Section 10. RESIGNATION AND REMOVAL OF TRUSTEE.
----------------------------------
(a) Trustee may resign at any time by written notice to Company, which
shall be effective ninety (90) days after receipt of such notice unless Company
and Trustee agree otherwise.
11
<PAGE>
(b) Subject to Section 10(c), Trustee may be removed by Company on ninety
(90) days notice or upon shorter notice accepted by Trustee.
(c) Upon a Change of Control, as defined herein, Trustee may not be removed
by Company for ten (10) years.
(d) If Trustee resigns or is removed within ten (10) years of a Change of
Control, as defined herein, Trustee shall select a successor Trustee in
accordance with the provisions of Section 11(b) hereof prior to the effective
date of Trustee's resignation or removal.
(e) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor Trustee.
The transfer shall be completed within ninety (90) days after receipt of notice
of resignation, removal or transfer, unless Company extends the time limit.
(f) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 11 hereof, by the effective date of resignation or
removal under paragraphs (a) or (b) of this section. If no such appointment has
been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
Section 11. APPOINTMENT OF SUCCESSOR.
------------------------
(a) If Trustee resigns or is removed in accordance with Section 10(a) or
(b) hereof, Company may appoint any third party, such as a bank trust department
12
<PAGE>
or other party that may be granted corporate trustee powers under state law, as
a successor to replace Trustee upon resignation or removal. The appointment
shall be effective when accepted in writing by the new Trustee, who shall have
all of the rights and powers of the former Trustee, including ownership rights
in the Trust assets. The former Trustee shall execute any instrument necessary
or reasonably requested by Company or the successor Trustee to evidence the
transfer.
(b) If Trustee resigns or is removed pursuant to the provisions of Section
10(e) hereof and selects a successor Trustee, Trustee may appoint any third
party such as a bank trust department or other party that may be granted
corporate trustee powers under state law. The appointment of a successor
Trustee shall be effective when accepted in writing by the new Trustee. The new
Trustee shall have all the rights and powers of the former Trustee, including
ownership rights in Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by the successor Trustee to
evidence the transfer.
(c) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and
Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
13
<PAGE>
Section 12. AMENDMENT OR TERMINATION.
------------------------
(a) This Agreement may be amended by a written instrument executed by
Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan or shall make the Trust revocable after it
has become irrevocable in accordance with Section l(b) hereof.
(b) The Trust shall not terminate until the date on which Plan participants
and their beneficiaries are no longer entitled to benefits pursuant to the terms
of the Plan unless sooner revoked in accordance with Section 1(b) hereof. Upon
termination of the Trust any assets remaining in the Trust shall be returned to
Company.
(c) Upon written approval of all participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan, Company may terminate
this Trust prior to the time all benefit payments under the Plan have been made.
Company shall provide verification to the Trustee that all Plan participants or
beneficiaries entitled to benefits under the Plan have in fact approved the
termination of the Trust. All assets in the Trust at termination shall be
returned to Company.
(d) Sections 1(e), 4, 5, 8(g), 10(c), 10(d), 12(d) and 13(d) of this
Agreement may not be amended by Company for ten (10) years following a Change in
Control, as defined herein.
14
<PAGE>
Section 13. MISCELLANEOUS.
-------------
(a) Any provision of this Agreement prohibited by law shall be ineffective
to the extent of any such prohibition, without invalidating the remaining
provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of the State of New York, except to the extent pre-empted by
ERISA.
(d) For purposes of this Trust, a Change of Control shall be deemed to have
occurred if after April 1, 1994 (a) any person (as defined in Section 13(c) or
14(d)(2) of the Securities Exchange Act of 1934, as amended), becomes the
beneficial owner directly or indirectly of twenty percent (20%) or more of the
combined voting power of Company's then outstanding securities or (b)
individuals who, as of April 1, 1994, constitute the Board of Directors of the
Company (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board of Directors; provided, however, that (i) any individual
who becomes a director of the Company subsequent to April 1, 1994, whose
election, or nomination for election by the Company's stockholders, was approved
by a vote of at least a majority of the directors then comprising the Incumbent
Board shall be deemed to have been a member of the Incumbent Board and (ii) no
individual who was elected initially (after April 1, 1994) as a director as a
result of an
15
<PAGE>
actual or threatened election contest, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended, or any other actual or threatened solicitations of proxies or consents
by or on behalf of any person other than the Incumbent Board shall be deemed to
have been a member of the Incumbent Board.
(e) If a Plan participant or beneficiary of a Plan participant is required
to institute a legal proceeding in order to enforce his or her rights under this
Agreement and such Plan participant or beneficiary prevails in such legal
proceeding then the Company shall reimburse such Plan participant or beneficiary
for the reasonable legal fees and expenses incurred in bringing and prosecuting
such legal proceeding.
Section 14. EFFECTIVE DATE.
--------------
The effective date of this Agreement shall be the date first written above.
16
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
"COMPANY"
NATIONAL MEDICAL ENTERPRISES, INC.
By: _______________________________________
Its:_______________________________________
"TRUSTEE"
UNITED STATES TRUST COMPANY OF NEW YORK
By: _______________________________________
Its:_______________________________________
17
<PAGE>
EXHIBIT 10(ee)
ASSET SALE AGREEMENT
(FIRST FACILITIES)
******
NATIONAL MEDICAL ENTERPRISES, INC.
As Seller
AND
CHARTER MEDICAL CORPORATION
As Buyer
Dated: March 29, 1994
<PAGE>
ASSET SALE AGREEMENT
(FIRST FACILITIES)
Table of Contents
PREAMBLE................................................ 1
ARTICLE 1....................... 2
DEFINITIONS
Section 1.1 Certain Defined Terms...................... 2
Section 1.2 Index of Other Defined Terms............... 4
ARTICLE 2....................... 8
BASIC TRANSACTIONS
Section 2.1 Purchased Assets........................... 8
Section 2.2 Excluded Assets............................ 13
Section 2.3 Assumed Liabilities........................ 15
Section 2.4 Excluded Liabilities....................... 17
Section 2.5 Purchase Price............................. 20
Section 2.6 Payment of Purchase Price.................. 20
(a) Payment of Tentative Purchase Price........... 20
(b) Determination of Interim Net Book Values...... 21
(c) Determination of Final Net Book Values........ 22
(d) Seller as Agent of Subsidiaries............... 24
Section 2.7 Allocation of Purchase Price............... 24
Section 2.8 Contingent Lease Obligations............... 25
Section 2.9 Remittances and Receivables................ 25
(a) In General.................................... 25
(b) Receivables................................... 27
(c) Straddle Patient Receivables.................. 28
(i) Cut-Off Billings........................ 28
(ii) Cut-Off Billings Not Accepted........... 29
(d) Cooperation in Collecting Receivables
and Excluded Assets........................... 30
(e) Non-Assignable Receivables.................... 30
(f) Collection Fee................................ 31
(i)
<PAGE>
Section 2.10 Employee Matters.......................... 32
(a) Pension Plans................................. 32
(b) Retained Employees............................ 33
(c) Hiring of Retained Employees.................. 34
(d) Health Benefits............................... 35
(e) Acknowledgement of Responsibility............. 35
Section 2.11 Use of Names.............................. 36
Section 2.12 No Assignment If Breach; Seller's Discharge
of Assumed Liabilities.................... 38
Section 2.13 Closings.................................. 40
(a) The First Closing............................. 40
(b) The Second Closing............................ 42
(c) The Final Closing............................. 42
(d) Deliveries by Seller.......................... 43
(e) Deliveries by Buyer........................... 44
(f) Escrow........................................ 44
Section 2.14 Purchase Price Adjustment................. 45
Section 2.15 Transfer of Assets in Corporate Form...... 47
Section 2.16 Assignment of Rights and Obligations to
Buyer Subsidiaries........................ 47
Section 2.17 Data Processing Services.................. 49
Section 2.18 Rejection of Certain Contracts............ 50
Section 2.19 Remaining Schedules....................... 52
ARTICLE 3...................... 52
REPRESENTATIONS AND WARRANTIES OF SELLER
Section 3.1 Organization and Corporate Power............ 52
Section 3.2 Subsidiaries 52
Section 3.3 Authority Relative to this Agreement........ 54
Section 3.4 Absence of Breach........................... 54
Section 3.5 Private Party Consents...................... 55
Section 3.6 Governmental Consents....................... 55
Section 3.7 Brokers..................................... 56
Section 3.8 Title to Property........................... 56
Section 3.9 Assumed Contracts........................... 57
Section 3.10 Licenses.................................... 58
Section 3.11 U.S. Person; Resident of Georgia............ 58
Section 3.12 Employee Relations.......................... 59
Section 3.13 Employee Plans.............................. 59
(ii)
<PAGE>
Section 3.14 Litigation.................................. 60
Section 3.15 Inventory................................... 60
Section 3.16 Hazardous Substances........................ 61
Section 3.17 Financial Information....................... 62
Section 3.18 Changes Since Balance Sheet................. 64
Section 3.19 Transferred Business Names.................. 66
Section 3.20 Compliance with Laws and Accreditation...... 66
Section 3.21 Cost Reports, Third Party Receivables and
Conditions of Participation................. 67
Section 3.22 Medical Staff............................... 67
Section 3.23 Hill-Burton Care............................ 68
Section 3.24 Assets Used in the Operation of the
Facilities.................................. 68
Section 3.25 Taxes....................................... 68
Section 3.26 Lists of Other Data......................... 69
Section 3.27 Certain Transactions........................ 70
ARTICLE 4....................... 70
REPRESENTATIONS AND WARRANTIES OF BUYER
Section 4.1 Organization and Corporate Power............ 70
Section 4.2 Buyer Subsidiaries.......................... 70
Section 4.3 Authority Relative to this Agreement........ 71
Section 4.4 Absence of Breach........................... 72
Section 4.5 Private Party Consents...................... 72
Section 4.6 Governmental Consents....................... 73
Section 4.7 Brokers..................................... 73
Section 4.8 Qualified for Licenses...................... 73
Section 4.9 Financial Ability to Perform................ 73
Section 4.10 No Knowledge of Seller's Breach............. 73
Section 4.11 No Assurance................................ 74
ARTICLE 5....................... 74
COVENANTS OF EACH PARTY
Section 5.1 Efforts to Consummate Transactions.......... 74
Section 5.2 Cooperation; Regulatory Filings............. 75
Section 5.3 Further Assistance.......................... 76
Section 5.4 Cooperation Respecting Proceedings.......... 76
(iii)
<PAGE>
Section 5.5 Expenses.................................... 77
Section 5.6 Announcements; Confidentiality.............. 79
Section 5.7 Preservation of and Access to Certain
Records..................................... 80
ARTICLE 6....................... 82
ADDITIONAL COVENANTS OF SELLER
Section 6.1 Conduct Pending Closing..................... 83
Section 6.2 Access and Information; Environmental Survey;
Remediation or Adjustment................... 85
Section 6.3 Updating.................................... 88
Section 6.4 No Solicitation............................. 88
Section 6.5 Name Changes................................ 89
Section 6.6 Filing of Cost Reports...................... 89
Section 6.7 Purchase of Supplies........................ 89
Section 6.8 Covenant Not to Compete..................... 90
(a) Covenant....................................... 90
(b) Exceptions..................................... 91
(i) Psychiatric Facilities and Contracts Not
Acquired By Buyer........................ 91
(ii) Facilities Outside Geographic Area....... 91
(iii) Acute Hospitals.......................... 91
(iv) Divestiture of Acquired Psychiatric
Facilities............................... 92
(v) Acquiring Entities....................... 92
(c) Acute Hospital Affiliations.................... 92
(d) Covenant Period................................ 94
(e) Severability................................... 94
(f) Injunctive Relief.............................. 94
(g) Value.......................................... 95
Section 6.9 Audited Statements.......................... 95
Section 6.10 Post-Closing Insurance..................... 95
Section 6.11 Use of Controlled Substance Licenses....... 96
Section 6.12 Non-Disturbance Agreements................. 96
(iv)
<PAGE>
ARTICLE 7....................... 97
ADDITIONAL COVENANTS OF BUYER
Section 7.1 Waiver of Bulk Sales Law Compliance......... 97
Section 7.2 Resale Certificate.......................... 97
Section 7.3 Cost Reports and Audit Contests............. 97
Section 7.4 Tax Matters................................. 98
Section 7.5 Letters of Credit........................... 98
Section 7.6 Conduct Pending Closing..................... 99
Section 7.7 Securities Offerings........................ 99
ARTICLE 8....................... 99
BUYER'S CONDITIONS TO CLOSING
Section 8.1 Performance of Agreement.................... 99
Section 8.2 Accuracy of Representations and Warranties.. 100
Section 8.3 Officers' Certificate....................... 100
Section 8.4 Consents.................................... 100
Section 8.5 Absence of Injunctions...................... 101
Section 8.6 Opinion of Counsel.......................... 102
Section 8.7 Title to Real Property...................... 102
Section 8.8 Receipt of Other Documents.................. 104
Section 8.9 Licenses and Permits........................ 105
Section 8.10 Casualty; Condemnation...................... 105
Section 8.11 Reasonable Assurances....................... 106
Section 8.12 Certain Events.............................. 106
ARTICLE 9....................... 106
SELLER'S CONDITIONS TO CLOSING
Section 9.1 Performance of Agreement.................... 107
Section 9.2 Accuracy of Representations and Warranties.. 107
Section 9.3 Officers' Certificate....................... 107
Section 9.4 Consents.................................... 107
Section 9.5 Absence of Injunctions...................... 108
Section 9.6 Opinion of Counsel.......................... 109
Section 9.7 Receipt of Other Documents.................. 109
(v)
<PAGE>
ARTICLE 10....................... 110
TERMINATION
Section 10.1 Termination................................ 110
Section 10.2 Effect of Termination...................... 111
ARTICLE 11....................... 111
SURVIVAL AND REMEDIES; INDEMNIFICATION
Section 11.1 Survival................................... 111
Section 11.2 Exclusive Remedy........................... 112
Section 11.3 Indemnity by Seller........................ 112
Section 11.4 Indemnity by Buyer......................... 116
Section 11.5 Further Qualifications Respecting
Indemnification............................ 117
Section 11.6 Procedures Respecting Third Party Claims... 118
ARTICLE 12....................... 119
GENERAL PROVISIONS
Section 12.1 Notices.................................... 119
Section 12.2 Attorneys' Fees............................ 120
Section 12.3 Successors and Assigns..................... 120
Section 12.4 Counterparts............................... 121
Section 12.5 Captions and Paragraph Headings............ 121
Section 12.6 Entirety of Agreement; Amendments.......... 121
Section 12.7 Construction............................... 122
Section 12.8 Waiver..................................... 122
Section 12.9 Governing Law.............................. 122
Section 12.10 Severability.............................. 123
Section 12.11 Consents Not Unreasonably Withheld........ 123
Section 12.12 Time Is of the Essence.................... 123
(vi)
<PAGE>
EXHIBITS
A. Forms of Bill of Sale and Assignment
B. Form of Assignments with Respect to
Real Property Leases
C. Forms of Assumption Agreement
D. Form of Purchasing Contract
E. Remaining Schedules
F. Form of Data Processing Services Contract
LIST OF SCHEDULES
A-1 Subsidiaries and Their
Respective States of Incorporation;
Ownership of Subsidiary Stock
A-2 Facilities
2.1(a) Real property owned in fee by Subsidiaries
2.1(b) Real Property Leases
2.1(c) Venture Agreements
2.1(f) Other Assigned Contracts
2.1(h) Transferred Business Names
2.1(k) Prepayments
2.2(j) Other Excluded Assets
2.3(a) Capitalized Leases and Capitalized Lease
Liabilities
(vii)
<PAGE>
2.3(f) Other Assumed Liabilities
2.4(i) Indebtedness
2.4(j) Other Excluded Liabilities
2.7 Allocation Schedule
2.10(a) Pension Plans
2.12(c) Schedule of Required Consents
2.13B Assigned EBITDA
3.5 Private Party Consents
3.7 Seller's Brokers
3.8(a) Liens
3.8(b)(i) Other Real Property
and
3.8(b)(ii)
3.9 Assumed Contracts
3.10 Licenses
3.12 Certain Employee Relations Matters
3.14 Litigation
3.16 Environmental Matters
3.17(a) EBITDA Statements
3.17(b) Balance Sheet
3.18 Changes Since Balance Sheet
(viii)
<PAGE>
3.19 Conflicts With Transferred Business Names
3.20 Compliance With Laws and Accreditations
3.21 Cost Reports, Third Party Receivables and Conditions of
Participation
3.22 Medical Staff
3.23 Hill-Burton Care
3.24 Assets Used in the Operation of the Facilities
3.26(a) Depreciation Schedules
3.26(b) Insurance
3.26(c) Employee Benefit Arrangements
3.26(d) Paid Time Off
3.26(e) Certain Contracts
3.26(f) Certain Indebtedness
3.26(g) Certain Financing Arrangements
3.26(h) Certain Contracts Related to Liens
3.27 Certain Transactions
4.5 Private Party Consents
4.7 Buyer's Brokers
4.11 Certain Scheduled Meetings
6.1 Exceptions to Conduct
6.7 National Purchasing Contracts
(ix)
<PAGE>
7.5 Letters of Credit
6.8(c) Specified Acute Hospitals
8.7(b) Disapproved Title Exceptions
(x)
<PAGE>
ASSET SALE AGREEMENT
--------------------
(FIRST FACILITIES)
This ASSET SALE AGREEMENT (the "Agreement") is made and entered into
---------
as of the 29th day of March 1994 by and among NATIONAL MEDICAL
ENTERPRISES, INC., a Nevada corporation ("Seller"), the Subsidiaries (as
------
defined) and CHARTER MEDICAL CORPORATION, a Delaware corporation ("Buyer"),
-----
with reference to the following facts:
A. Through wholly-owned subsidiary corporations listed on the
Schedule (as defined in Section 1.1) hereto identified as Schedule A-1 (the
----------- -------- ---
"Subsidiaries"), Seller engages in the business of delivering psychiatric
------------
health care services to the public through the inpatient, outpatient and
substance abuse recovery facilities, residential treatment centers and
medical office buildings identified in Schedule A-2 under the following
------------
facility numbers (such facilities, centers and buildings being herein
sometimes referred to as the "First Facilities" or simply the
----------------
"Facilities"):
----------
<TABLE>
<CAPTION>
NME No./Name City State
------------ ---- -----
<C> <S> <C> <C>
1. Pinewood Hospital Texarkana AR
2. Tucson Psychiatric Institute Tucson AZ
5. Mill Creek Hospital Visalia CA
7. Canyon Springs Hospital Cathedral City CA
8. Oak Creek Hospital San Jose CA
12. Manatee Palms RTC Bradenton FL
20. Kingwood Hospital Michigan City IN
21. Arbor Hospital of Evansville Evansville IN
22. Acadian Oaks Hospital Lafayette LA
23. New Beginnings at Hidden Brook Bel Air MD
24. New Beginnings at Meadows Gambrills MD
26. New Beginnings at Waverly Waverly MN
28. Highland Hall Asheville NC
29. Nashua Brookside Hospital Nashua NH
30. New Beginnings at Lakehurst Lakehurst NJ
33. Baywood Hospital Webster TX
35. Tidewater Psychiatric Institute - Norfolk Norfolk VA
36. New Beginnings at Serenity Lodge Chesapeake VA
40. Centennial Peaks Hospital Louisville CO
44. New Beginnings at Warwick Manor E. New Market MD
45. Potomac Ridge Treatment Center Rockville MD
46. New Beginnings at White Oak Woolford MD
47. Fairbridge RTC Rockville MD
48. Fair Oaks Hospital Summit NJ
49. New Beginnings at Cove Forge Williamsburg PA
52. Springwood Psychiatric Institute Leesburg VA
53. Tidwater Psychiatric Institute - Virginia Beach Virginia Beach VA
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
55. Linden Oaks Hospital Naperville IL
69. NEPA Nashua NH
70. Alvarado Parkway Institute La Mesa CA
</TABLE>
B. Buyer desires to purchase from the Subsidiaries, through wholly-
owned subsidiaries of the Buyer (each, a "Buyer Subsidiary" and
----------------
collectively, the "Buyer Subsidiaries"), and Seller desires to cause the
------------------
Subsidiaries to sell to the applicable Buyer Subsidiaries, such Facilities
together with related assets (the "Transactions").
------------
C. Buyer and Seller are simultaneously with the execution of this
Agreement entering into a separate asset sale agreement (the "Subsequent
----------
Facilities Agreement") in respect of the other inpatient, outpatient and
--------------------
substance abuse recovery facilities, residential treatment centers and
medical office buildings also identified in Schedule A-2 (the "Subsequent
------------ ----------
Facilities").
----------
NOW, THEREFORE, in consideration of the foregoing recitals and the
agreements contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto, intending to be legally bound, do hereby agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 Certain Defined Terms. For purposes of this Agreement,
---------------------
the following terms shall have the following meanings:
"Affiliate" of a specified person shall mean any corporation,
partnership, sole proprietorship or other person or entity which directly
or indirectly through one or more intermediaries controls, is controlled by
or is under common control with the person specified. The term "control"
means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person or entity. The
term "Affiliate" shall include, without limitation, (i) with respect to
Seller, each Subsidiary, and (ii) with respect to Buyer, each Buyer
Subsidiary.
"Cost Report" means the cost report required to be filed, as of
the end of a provider cost year or for any other required period, with
cost-based Payors with respect to cost reimbursement.
- 2 -
<PAGE>
"Environmental Law" shall mean any Law regulating or otherwise
relating to Hazardous Materials, the environment, natural resources,
pollution, environmental protection, waste management, industrial hygiene,
health, or safety.
"Hazardous Materials" means any chemicals, materials, substances,
or items in any form, whether solid, liquid, gaseous, semisolid, or any
combination thereof, whether waste materials, raw materials, chemicals,
finished products, by-products, or any other materials or articles, which
are regulated by or form the basis of liability under any Environmental
Laws, including, without limitation, any hazardous waste, medical waste,
biohazardous waste, industrial waste, special waste, solid waste, hazardous
substance, pollutant, hazardous air pollutant, contaminant, asbestos,
polychlorinated biphenyls ("PCBs"), petroleum (including, but not limited
to, petroleum-derived substances, waste or breakdown or decomposition
products thereof, or any fraction thereof), coal (including, but not
limited to, coal-derived substances, waste or breakdown or decomposition
products thereof, or any fraction thereof), natural gas (including, but not
limited to, natural gas-derived substances, waste or breakdown or
decomposition products thereof, or any fraction thereof), formaldehyde,
industrial solvents, flammables, explosives, and radioactive substances.
"knowledge" of a party shall mean the best of the knowledge of
any person who serves as of the date of this Agreement as a duly elected
officer of such party.
"Laws" shall mean all statutes, rules, regulations, ordinances,
orders, codes, permits, licenses and agreements with or of federal, state,
local and foreign governmental and regulatory authorities and any order,
writ, injunction, settlement agreement or decree issued or approved by any
court, arbitrator or governmental agency or in connection with any
judicial, administrative or other non-judicial proceeding (including,
without limitation, arbitration or reference).
"Licenses" shall mean certificates of need, accreditations,
registrations, licenses, permits and other consents or approvals of
governmental agencies or accreditation organizations.
"Payor" shall mean Medicare, Medicaid, CHAMPUS and Medically
Indigent Assistance programs, Blue Cross, Blue Shield or any
- 3 -
<PAGE>
other third party payor (including an insurance company and self-insured
employer), or any health care provider (such as a health maintenance
organization, preferred provider organization, peer review organization, or
any other managed care program).
"Release" means any release, spill, emission, leaking, pumping,
emptying, dumping, injection, abandonment, deposit, disposal, discharge,
dispersal, leaching, or migration of Hazardous Materials (including, but
not limited to, the abandonment or discarding of Hazardous Materials in
barrels, drums, or other containers) into or within the environment,
including, without limitation, the migration of Hazardous Materials into,
under, on, through, or in the air, soil, subsurface strata, surface water,
groundwater, drinking water supply, any sediments associated with any water
bodies, or any other environmental medium, regardless of where such
migration originates.
"Schedule" shall mean a schedule from the master set of schedules
and attachments developed for this Agreement and the Subsequent Facilities
Agreement and which is listed in the Table of Contents for this Agreement.
The parties agree that to the extent information in a schedule from the
master set of schedules and attachments is listed by a facility name and/or
by a facility number, such schedule shall, for purposes of this Agreement,
be deemed to include only the information contained therein that is related
to the First Facilities, unless this Agreement expressly refers to
information contained therein that is related to the Subsequent Facilities.
"Taxes" shall mean (i) all federal, state, county and local
sales, use, property, recordation and transfer taxes, (ii) all state,
county and local taxes, levies, fees, assessments or surcharges (however
designated, including privilege taxes, room or bed taxes and user fees)
which are based on the gross receipts, net operating revenues or patient
days of a Facility for a period ending on, before or including the relevant
Closing Date (as defined in Section 2.13) or a formula taking any one of
------------
the foregoing into account, and (iii) any interest, penalties and additions
to tax attributable to any of the foregoing, but shall not include income
and other taxes described in Sections 2.4(a) and (b).
--------------- ---
Section 1.2 Index of Other Defined Terms. In addition to those terms
----------------------------
defined above, the following terms shall have the respective meanings given
thereto in the sections indicated below:
- 4 -
<PAGE>
Defined Term Section
------------ -------
Account Parties 2.9(b)
Accrued Operating Assets 2.5(b)
Accrued Operating Expenses 2.3(g)
Acquired Acute Hospitals 6.8(c)
Acquisition Date 6.8(c)
Acute Hospitals 6.8(b)(iii)
Adjustment Sections 2.14
Agreement Preamble
Allocation Schedule 2.7
Assumed Contracts 2.3(a)
Assumed Guaranties 2.3(a)
Assumed Liabilities 2.3
Balance Sheet 3.17(b)
Buyer Preamble
Buyer Subsidiary Preamble
Charter Documents 3.4
Claim Notice 11.6
Closing Date 2.13
COBRA 2.10(d)
Code 3.11
Collection Fee Base 2.9(f)
Combined Receivables 3.17(d)
Combined Subsidiaries 3.17(a)
Competing Business 6.8(a)
Consents 8.5
Consultant 6.2(b)
Contingent Contract 2.18
Cost Report Settlements 2.2(i)
Covenant Period 6.8(d)
Covered Facilities 6.8(b)(ii)
Covered Parties 6.8(a)
Deductible Amount 11.3(b)(i)(B)
Document Retention Period 5.7(b)
EBITDA 3.17(a)
EBITDA Statements 3.17(a)
Eligible Receivables 2.9(b)(ii)
Employee Benefit Arrangements 3.26(c)
Environmental Survey 6.2(b)
Equipment 2.1(d)
- 5 -
<PAGE>
ERISA 2.10(a)
Escrow Agent 2.13(f)
Estimated Net Book Values 2.6(a)
Excess Interim Payments 2.1(l)
Excluded Assets 2.2
Excluded Liabilities 2.4
Exempted Competing Business 6.8(c)
Facilities Recitals
Final Closing 2.13
Final Closing Date 2.13
Final Net Book Values 2.6(c)
Financial Schedule 3.17(b)
First Closing 2.13
First Facilities Recitals
Hired Employees 2.10(c)
Hospital Records 5.7(a)
HSR Act 3.4
Indemnitee 11.5
Indemnitor 11.5(a)
Insurance Program 6.10
Intercompany Transactions 2.1(f)(y)
Interim Net Book Values 2.6(b)
Inventory 2.1(e)
JCAHO 3.20
Leased Real Property 2.1(b)
Loan Commitment Agreements 2.1(f)
Loan Commitment Notes 2.1(f)
Losses 11.3(a)
Manuals 2.11(b)
Material Adverse Effect 3.4
Multiemployer Plans 2.10(a)
Net Book Values 2.5(b)
1993 EBITDA 2.13(b)
Other Assigned Contracts 2.1(f)
Original Closing Date 2.14
Owned Real Property 2.1(a)
Paid Time Off 2.3(c)
Panel 2.14
Patient Records 5.7(a)
Pension Plans 2.10(a)
Permitted Encumbrances 3.8(a)
- 6 -
<PAGE>
Permitted Expansions 6.8(b)(iv)
PHIS Employees 2.10(b)(i)
PHIS System 2.17
Prepayments 2.1(k)
Purchase Price 2.5
Real Property Leases 2.1(b)
Receivables 2.1(l)
Related Agreements 3.4
Reorganization 6.8(b)(v)
Required First Facilities 2.13
Retained Employees 2.10(b)(iii)
Schedule of Required Consents 2.12(c)
Scheduled Closing 2.13
Second Closing 2.13
Seller Preamble
Specified Acute Hospital 6.8(c)
Specified Capacity 6.8(a)
Straddle Patients 2.9(c)
Straddle Patient Payments 2.9(c)(ii)
Subject Transferred Assets 2.13
Subsequent Facilities Recitals
Subsequent Facilities Agreement Recitals
Subsidiaries Recitals
TEFRA 2.9(c)(ii)
Tentative Purchase Price 2.6(a)
Termination Date 10.1(b)
Third Party Claims 11.5(a)
Title Insurer 8.7
Title Policies 8.7
Transactions Recitals
Transferred Business Names 2.1(h)
Transition Period 2.17
Trigger Amount 11.3(b)(i)(B)
Unusual Proceedings 3.14
Venture Agreements 2.1(c)
Ventures 2.1(c)
WARN Act 2.10(e)
Working Capital Adjustment Date 2.6(c)
- 7 -
<PAGE>
ARTICLE 2
BASIC TRANSACTIONS
Section 2.1 Purchased Assets. On the terms and subject to the
----------------
conditions contained in this Agreement, Buyer shall, or shall cause the
applicable Buyer Subsidiary to, purchase from each Subsidiary, and Seller
shall cause each Subsidiary to sell, convey, assign, transfer and deliver
to Buyer or the applicable Buyer Subsidiary, the following assets of each
such Subsidiary that are used in and necessary for the conduct of the
operations of the Facilities (the "Transferred Assets"), but excluding all
------------------
Excluded Assets as defined in Section 2.2:
-----------
(a) All of the Subsidiary's right, title and interest in and to
the real property owned in fee (the "Owned Real Property") that is
-------------------
identified in Schedule 2.1(a) on which Facilities are located and all other
---------------
real property owned in fee by the Subsidiary and used in and necessary for
the conduct of the operations of the Facilities, together with the
Facilities, construction work-in-progress, and all other buildings,
fixtures and improvements thereon, and all rights, privileges, permits and
easements appurtenant thereto.
(b) All of the Subsidiary's right, title and interest, as lessee
or sublessee, in and to the leasehold estates and the related lease or
sublease agreements (the "Real Property Leases") respecting land,
--------------------
Facilities, buildings, fixtures and real property improvements (whether
owned or leased) (the "Leased Real Property") identified in Schedule
-------------------- --------
2.1(b), together with all construction work-in-progress in respect of same
------
and all rights, privileges and easements appurtenant thereto.
(c) All of the Subsidiary's right, title and interest in and to
the joint ventures or partnerships identified in Schedule 2.1(c) hereto
---------------
(the "Ventures") that relate to partnerships or joint ventures that own or
--------
lease Facilities or other Transferred Assets, together with all of the
Subsidiary's right, title and interest in and to the joint venture or
partnership agreements, also identified in such Schedule (the "Venture
-------
Agreements"), that govern such partnerships or joint ventures, and, subject
----------
to the provisions of Section 7.6, in and to all distributions and
-----------
allocations which the Subsidiary is entitled to receive as of the relevant
Scheduled Closing (as defined in Section 2.13).
------------
- 8 -
<PAGE>
(d) All of the Subsidiary's right, title and interest in and to
fixed machinery and equipment, other fixtures and fittings, moveable plant,
machinery, equipment and furniture, trucks, tractors, trailers and other
vehicles, tools and other similar items of tangible personal property
(collectively "Equipment") (i) that are not consumed, disposed of or held
---------
for sale or as inventory in the ordinary course of business, (ii) that are
used, owned, held or leased by the Subsidiary as of the relevant Scheduled
Closing, and (iii) that are used in and necessary for the conduct of the
operations of the Facilities.
(e) All of the Subsidiary's right, title and interest in and to
inventories of supplies, drugs, food, janitorial and office supplies,
maintenance and shop supplies, and other similar items of tangible personal
property intended to be consumed, disposed of or sold in the ordinary
course of business (collectively, the "Inventory") that are used, owned or
---------
held by the Subsidiary as of the relevant Scheduled Closing and that are
used by the Subsidiary in and necessary for the conduct of the operations
of the Facilities.
(f) All of the Subsidiary's right, title and interest in and to
all written contracts and agreements (the "Other Assigned Contracts") to
------------------------
which the Subsidiary is a party at the relevant Scheduled Closing, other
than the Real Property Leases and the Venture Agreements, (i) that are
listed on Schedule 2.1(f), (ii) pursuant to which the Subsidiary paid or
---------------
received less than $25,000 during its last fiscal year or pursuant to which
it expects to pay or receive less than $25,000 during its current fiscal
year, or (iii) with respect to Other Assigned Contracts not described in
clauses (i) or (ii) above, for which Buyer has not provided Seller with
--- ----
written notice of its rejection of such contract or agreement within sixty
(60) days following the relevant Scheduled Closing, provided that the Other
-------------
Assigned Contracts shall not include any contract or agreement that relates
to or covers healthcare facilities or operations of Seller other than the
Facilities that are being sold, assigned, transferred or conveyed at such
relevant Scheduled Closing except to the extent the portion of such
contract or agreement related to such Facilities may be assigned together
with the sale, assignment, transfer or conveyance of such Facilities.
Schedule 2.1(f) contains a list by Facility of the following categories of
---------------
Other Assigned Contracts pursuant to which a Subsidiary paid or received
$25,000 or more during its last fiscal year or expects to pay or receive
$25,000 or more during its current fiscal year: construction contracts
relating to construction work-in-progress at the Facilities; Equipment
leases (whether operating or
- 9 -
<PAGE>
capitalized leases) and installment purchase contracts where the annualized
lease or installment payments exceed $25,000; contracts or arrangements
binding on a Facility which contain any covenant not to compete or
otherwise significantly restrict the nature of the business activities in
which the Facility may engage; provider agreements with Payors other than
Medicare and Medicaid (as defined in Section 1.1); bridge and other loan
-----------
commitment agreements (the "Loan Commitment Agreements") pursuant to
--------------------------
which a Subsidiary has agreed to provide advances or income guarantees from
time to time to lessors or sublessors under the Real Property Leases or to
healthcare professionals, groups or entities providing services to the
Facilities, together with promissory notes (the "Loan Commitment Notes")
---------------------
evidencing amounts owed to the Subsidiary as a result of any such advances
or guarantees; agreements with healthcare professionals; leases as lessor
or sublessor; and any other contracts in force pursuant to which the
Subsidiary paid or received over $25,000 during its last fiscal year or
expects to pay or receive $25,000 or more during its current fiscal year.
Notwithstanding the foregoing, the Other Assigned Contracts shall not
include and Schedule 2.1(f) need not contain:
---------------
(w) Any contract which evidences indebtedness for money
borrowed or the deferred portion of the purchase price for Owned Real
Property and is therefore an Excluded Liability under the provisions
of Section 2.4(i), unless the parties mutually agree, in accordance
--------------
with the provisions of such Section 2.4(i), that such indebtedness
--------------
will be assumed by Buyer, in which case the contract or contracts
evidencing such indebtedness will be Transferred Assets, provided that
-------------
if the indebtedness evidenced by any such contract is secured by a
lien on any Transferred Asset, Seller shall cause such lien to be
released at or prior to the relevant Scheduled Closing unless Buyer
agrees to assume such indebtedness pursuant to Section 2.4(i);
--------------
(x) Any contract respecting an intercompany transaction
between the Subsidiary, on the one hand, and Seller or an Affiliate
(as defined in Section 1.1) of Seller, on the other, whether or not
-----------
such transaction relates to the provision of goods and services, tax
sharing arrangements, payment arrangements, intercompany charges or
balances, or the like ("Intercompany Transactions"), except that
-------------------------
transactions arising in connection with open purchase orders where the
Seller has acted as an intermediary for a Subsidiary and transactions
between Seller or an Affiliate of Seller, on the one
- 10 -
<PAGE>
hand, and the ventures and partnerships described in Section 2.1(c)
--------------
that are not wholly owned by Seller and its Affiliates, on the other
hand, shall not be regarded as Intercompany Transactions;
(y) Employment contracts, if any, between the Subsidiary or
a Facility and the chief executive or chief financial officer of such
Facility, whether or not such officer is a Hired Employee (as defined
in Section 2.10(c)); and
---------------
(z) Collective bargaining agreements in respect of the
employees of a Facility, unless Buyer elects to assume such agreements
(it being understood, however, that nothing herein is intended to
affect Buyer's obligations with respect thereto, if any, under the
National Labor Relations Act).
(g) All of the Subsidiary's right, title and interest in and to
the right to receive mail and other communications addressed to Seller or
the Subsidiary insofar as such mail or other communication relates to the
operation of the Facilities after the relevant Scheduled Closing, or to
Receivables, Inventory, Prepayments or Accrued Operating Expenses (as
herein defined).
(h) All of the Subsidiary's right, title and interest in and to
the business names set forth in Schedule 2.1(h) (the "Transferred Business
--------------- --------------------
Names").
-----
(i) All of the Subsidiary's right, title and interest in and to
Licenses (as defined in Section 1.1) in favor of the Subsidiary as of the
-----------
relevant Scheduled Closing that are related to, necessary for, or used in
connection with the operation of the Facilities transferred in such
Scheduled Closing as presently operated by the Subsidiary, provided that
-------------
Licenses in favor of the Subsidiary shall be included in the Transferred
Assets only to the extent they are lawfully transferable.
(j) All of the Subsidiary's right, title and interest in and to
unexpired warranties as of the relevant Scheduled Closing that are
transferable to Buyer which the Subsidiary has received from third parties
with respect to the Transferred Assets, including, but not limited to, such
warranties as are set forth in any construction agreement, lease agreement,
equipment purchase agreement, consulting agreement or agreement for
architectural and engineering services.
- 11 -
<PAGE>
(k) All of the Subsidiary's right, title and interest in and to
advance payments, prepayments, prepaid expenses, deposits and the like (i)
made by the Subsidiary or Seller on its behalf in the ordinary course of
business with respect to Subject Transferred Assets (as defined in Section
-------
2.13) prior to the relevant Scheduled Closing, (ii) which exist as of such
----
Scheduled Closing, (iii) with respect to which Buyer will receive the
benefit after the relevant Scheduled Closing, and (iv) which Buyer agrees
---
to acquire (Buyer hereby agreeing not to withhold such agreement
unreasonably) (collectively, "Prepayments"), which Prepayments are listed
-----------
by Facility, category and approximate amount as of November 30, 1993 (or a
later date if mutually agreed upon), in Schedule 2.1(k).
---------------
(l) Subject to the further provisions of Section 2.9, all of the
-----------
Subsidiary's right, title and interest as of the Closing in and to accounts
receivable recorded by the Subsidiary as an account receivable from Payors,
patients and other third parties (whether or not billed) arising from or in
connection with the operation of the Facilities, together with rights to
payment for services rendered through the relevant Closing Date to Straddle
Patients referred to in Section 2.9(c) (collectively, "Receivables"),
-------------- -----------
provided that any account receivable that would, under Sections
-------- --------
2.9(b)(ii)(B) or (C), qualify as an "Eligible Receivable" as of the end of
--------------------
the month ending prior to the relevant Scheduled Closing shall, at the
option of Buyer, not be a receivable included in the Scheduled Closing and
shall be an Excluded Asset. The parties hereby acknowledge that interim
payments made by a Payor that are in excess of the net carrying value of
the Receivables with respect to which such interim payments are a credit
against amounts that would otherwise be due from the Payor ("Excess Interim
--------------
Payments") shall not be regarded as Receivables for any purpose of this
--------
Agreement, because such Excess Interim Payments do not reflect amounts
which the recipient is entitled to retain for services rendered and such
Excess Interim Payments are Excluded Assets and Excluded Liabilities under
this Agreement.
(m) All of the Subsidiary's right, title and interest in and to
the goodwill of the businesses evidenced by the Transferred Assets, and,
except for Excluded Assets, any and all other assets of the Subsidiary used
in and necessary for the conduct of the operations of the Facilities as
conducted prior to the relevant Scheduled Closing, whether or not such
assets have any value for accounting purposes, provided that with respect
-------------
to NME Hospitals, Inc., NME Properties Corp., NME Psychiatric Properties,
Inc., NME Specialty Hospitals, Inc. and any subsidiary of NME Specialty
Hospitals, Inc. (including, without limitation, NME Psychiatric
- 12 -
<PAGE>
Hospitals, Inc.), only those assets described in Section 2.1(a)-(l) above
------------------
(other than Excluded Assets) shall be included in the Transferred Assets.
Section 2.2 Excluded Assets. The following properties and assets
---------------
(the "Excluded Assets") are not included in Transferred Assets:
---------------
(a) Except for the Inventory, Receivables, Prepayments and
current amounts represented by the Loan Commitment Notes, all assets
constituting working capital, whether cash, cash equivalents, securities,
or other current assets, and all claims, choses in action, rights of
recovery, rights of set-off, rights to refunds, and similar rights.
(b) Except for the Transferred Business Names, Licenses and
Other Assigned Contracts included in the Transferred Assets and except for
manuals relating to equipment and other tangible property included in the
Transferred Assets, all privileged or proprietary (to Seller or a
Subsidiary) materials, documents, information, media, methods and processes
owned by Seller or a Subsidiary, and any and all rights to use same,
including, but not limited to, all intangible assets of an intellectual
property nature such as trademarks, service marks and trade names (whether
or not registered), computer software that is proprietary to Seller or a
Subsidiary, all procedures and manuals that are proprietary to Seller or a
Subsidiary, all promotional or marketing materials (including all marketing
computer software), and any and all names under which the Subsidiaries or
the Facilities have done business or offered programs, other than the
Transferred Business Names, and all abbreviations and variations thereof,
provided, however, that Buyer shall have the rights set forth in Section
-------- ------- -------
2.11.
----
(c) The rights of Seller or any Subsidiary under any insurance
policy, if any, included in the Transferred Assets which relate to any
Excluded Asset or Excluded Liability (as defined in Section 2.4) (it being
-----------
understood, however, that Buyer shall have no obligation to take any action
under any such policy to seek any recovery except at the reasonable
request, and at the sole expense, of Seller or a Subsidiary or to continue
any such policies in force).
(d) The rights of Seller or of any Subsidiary to receive mail
and other communications addressed to any of them with respect to Excluded
Assets or Excluded Liabilities.
- 13 -
<PAGE>
(e) Subject to the provisions of Section 5.7, any and all
-----------
business and patient records of or related to the operation of the
Facilities, whether or not maintained at or by the Facilities.
(f) All property, plant, equipment and other assets pertaining
to the psychiatric healthcare business of Seller or any subsidiary of
Seller that relate primarily to any general hospital, acute hospital or so-
called "campus facility" of Seller or any subsidiary of Seller and all
outpatient facilities and other assets primarily related thereto.
(g) Any and all contracts and agreements pursuant to which a
Subsidiary provides management services to third parties other than a
Facility, except for such contracts and agreements as are specifically
listed on Schedule 2.1(f).
---------------
(h) Subject to Sections 2.17 and 6.7, any and all rights
------------- ---
respecting computer and data processing hardware or firmware that is
proprietary to Seller or any Affiliate of Seller, and any computer and data
processing hardware or firmware, whether or not located at a Facility, that
is part of a computer system the central processing unit for which is not
located at a Facility.
(i) All of the right, title and interest of Seller and the
Subsidiaries in assets resulting from any resolution with Payors of amounts
due with respect to Cost Reports ("Cost Report Settlements") to the extent
-----------------------
such Cost Reports cover any period through the relevant Scheduled Closing
with respect to a Facility and other rights of Seller respecting Cost
Reports described in Section 6.6, including any assets or liabilities
-----------
resulting from any gain or loss on the sale of the Facilities in connection
with the Transactions.
(j) (i) All amounts due to the Subsidiaries arising from
Intercompany Transactions, (ii) assets that are the subject of the
Subsequent Facilities Agreement, and (iii) such other assets, if any,
specifically described in Schedule 2.2(j) and assets which would be
---------------
Transferred Assets except for the operation of Sections 2.12, 6.2(c), 8.5,
------------- ------ ---
8.7 or 9.5 or other provisions of this Agreement.
--- ---
(k) All "800" telephone lines and related Equipment and contract
rights and all advertising containing any name other than a Transferred
Business Name.
- 14 -
<PAGE>
Seller shall remove at any time prior to or within thirty (30) days
following the relevant Closing Date or, with respect to the Hospital
Records (as defined in Section 5.7(a)), Seller may remove from time to time
--------------
within the relevant Document Retention Period (as defined in Section
-------
5.7(b)) (in each case, at Seller's expense, but without charge by Buyer for
-------
storage), any and all of the Excluded Assets from the Facilities, provided
--------
that Seller shall do so in a manner that does not unduly or unnecessarily
disrupt Buyer's normal business activities at the Facilities.
Section 2.3 Assumed Liabilities. Subject to the terms and conditions
-------------------
set forth in this Agreement, Buyer shall assume and pay, discharge and
perform as and when due only the following obligations and liabilities of
----
Seller and the Subsidiaries and no others (the "Assumed Liabilities"), as
-------------------
such obligations and liabilities may exist at the time they are assumed by
Buyer in accordance with the terms hereof:
(a) All liabilities and obligations of the Subsidiaries which
pertain to or are to be performed during the period following the relevant
Closing Date, and which arise under any contract, license, permit,
agreement, arrangement, understanding or undertaking included in the
Transferred Assets, including the Real Property Leases, the Venture
Agreements, the Other Assigned Contracts and the Licenses, and any
obligation or liability (the "Assumed Guarantees") of Seller or any
------------------
Affiliate of Seller (including letters of credit and performance bonds)
which is in the nature of a guaranty of the foregoing (together, the
"Assumed Contracts"), including without limitation, the capitalized lease
------------------
liabilities and obligations of the Facilities listed on Schedule 2.3(a).
---------------
(b) Without affecting the provisions of Sections 2.1(k), 2.6(a),
--------------- ------
2.6(b) or 2.6(c), all liabilities and obligations under open purchase
------ ------
orders at a Facility included in the Subject Transferred Assets that were
entered into by Seller or a Subsidiary in the ordinary course of business
with respect to operation of such Facility on or prior to the relevant
Closing Date and which provide for the delivery of goods or services
subsequent to the relevant Closing Date.
(c) All obligations and liabilities to any Hired Employee for
paid time off that is vested and with respect to which the Hired Employee
would be entitled to payment upon termination of his or her employment with
Seller or an Affiliate of Seller (including, for all purposes of this
Agreement, "old paid days leave," "paid time off," sick leave and vacation
- 15 -
<PAGE>
pay to the extent that they are vested rights that are subject to payment
upon termination of employment; collectively, "Paid Time Off") through the
-------------
relevant Closing Date in accordance with the employment policies of Seller
and its Affiliates as they exist on the date of this Agreement; provided
--------
that if Seller satisfies any portion of such obligations and liabilities
existing at the relevant Scheduled Closing by payment to a Hired Employee,
then such payment shall be treated as a reduction of Accrued Operating
Expenses (as defined in Section 2.3(g)).
--------------
(d) Without limiting Seller's representations and warranties
contained in Article 3 or Buyer's rights under Article 11 for a breach
--------- ----------
thereof, all liabilities and obligations respecting any changes or
improvements needed to the Facilities for them to be in material compliance
following the relevant Scheduled Closing with respect to such Facilities
with safety, building, fire, land use, access (including without limitation
the Americans With Disabilities Act) or similar Laws (as defined in Section
-------
1.1) respecting the physical condition of the Facilities.
---
(e) All liabilities and obligations respecting employee matters
assumed by Buyer pursuant to the provisions of Section 2.10.
------------
(f) Any liability or obligation which becomes an Assumed
Liability by operation of Section 2.4(i) and such other liabilities and
--------------
obligations pertaining to the Facilities, if any, specifically described in
Schedule 2.3(f).
---------------
(g) Any accrued and unpaid liabilities (whether or not due) of
the Subsidiaries in existence on the relevant Scheduled Closing Date which
relate to the Facilities, which were incurred in the ordinary course of the
operation of the Facilities and which represent (i) trade payables incurred
to suppliers of goods or services; (ii) water, gas, electricity and other
utility charges; (iii) license fees; (iv) rent, common area maintenance
charges, operating expenses and other charges arising under the Real
Property Leases; (v) insurance premiums (but only with respect to policies
that will be continued in force by Buyer after the relevant Scheduled
Closing); (vi) salaries and other payroll costs respecting Hired Employees
accrued in accordance with the normal accounting practices of Seller and
the Subsidiaries (but not including bonuses or other incentive compensation
or accrued benefits with respect to benefit plans that are not assumed by
Buyer); (vii) Taxes, except for Taxes referred to in Section 5.5 relating
-----------
to expenses of the Transactions and payroll taxes respecting employees who
- 16 -
<PAGE>
are not Hired Employees; and (viii) similar liabilities incurred in the
ordinary course of the operation of the Facilities and customarily recorded
as a current liability, other than the current portion of long-term
liabilities and obligations (the liabilities referred to in this Section
-------
2.3(g), together with the liabilities and obligations for Paid Time Off
------
assumed under Section 2.3(c), being herein referred to as "Accrued
-------------- -------
Operating Expenses").
------------------
Section 2.4 Excluded Liabilities. The parties agree that liabilities
--------------------
and obligations of Seller and the Subsidiaries not expressly described in
Section 2.3 as Assumed Liabilities are not part of the Assumed Liabilities,
-----------
and Buyer shall not assume or become obligated with respect to any other
obligation or liability of Seller or any Subsidiary or any Affiliate of
either of any nature whatsoever (whether express or implied, fixed or
contingent, liquidated or unliquidated, known or unknown, accrued, due or
to become due) (collectively, "Excluded Liabilities"), including, but not
--------------------
limited to, the liabilities and obligations described in this Section, all
of which shall remain the sole responsibility of Seller or the pertinent
Subsidiary or Affiliate, as the case may be. Without limiting the
generality of the foregoing, Buyer shall not assume and shall have no
liability or obligation of any kind for or with respect to any of the
following liabilities or obligations:
(a) Subject to Section 5.5 respecting certain expenses incurred
-----------
in connection with the Transactions, any of Seller's or any of the
Subsidiaries' (or their respective Affiliates') liabilities or obligations
(including, but not limited to, any liabilities or obligations under any
tax sharing agreements) with respect to franchise taxes and with respect to
foreign, federal, state or local taxes imposed upon or measured, in whole
or in part, by the income for any period of Seller and/or such Subsidiaries
or any member of a combined or consolidated group of companies of which
Seller and/or such Subsidiaries are, or were at any time, a part, or with
respect to interest, penalties or additions to any of such taxes, and any
income, franchise, tax recapture, transfer tax, sales tax or use tax that
may arise upon consummation of the transactions contemplated by this
Agreement and be due or payable by Seller or any Subsidiary, it being
understood that Buyer shall not be deemed to be Seller's or any
Subsidiary's transferee with respect to any such tax liability.
(b) Any of Seller's or any of its Subsidiaries' or Affiliates'
liabilities or obligations with respect to the recapture of foreign,
federal, state or local tax deductions or credits taken by Seller or such
Subsidiary
- 17 -
<PAGE>
imposed upon, or any taxable gain recognized by, Seller or such
Subsidiary on account of the Transactions contemplated hereby.
(c) Liabilities or obligations of Seller, its Affiliates or a
Subsidiary arising from the breach by Seller or such Subsidiary on or prior
to the relevant Closing Date of any term, covenant, or provision of any of
the Assumed Contracts.
(d) Liabilities or obligations of Seller, a Subsidiary or
Seller's Affiliates now existing or which may hereafter exist by reason of
any violation or alleged violation of Law or Laws by Seller or any of its
Affiliates or by a Subsidiary, or by an employee or independent contractor
of any of the foregoing where any of the foregoing is or is alleged to be
responsible for the acts or omissions of any such person, occurring on or
prior to the relevant Scheduled Closing Date.
(e) Liabilities or obligations of Seller or a Subsidiary now
existing or which may hereafter exist by reason of any liability to refund
any payment or reimbursement received by Seller or a Subsidiary from any
Payor which is attributable to any period of time ending on or prior to the
relevant Closing Date respecting such Facilities for which such payment or
reimbursement was received.
(f) Liabilities or obligations of Seller or a Subsidiary under
any Assumed Contract which would be included in the Transferred Assets but
for the provisions of Section 2.12, unless Buyer is provided with the
------------
benefits thereunder as contemplated in Section 2.12.
------------
(g) Liabilities of Seller and the Subsidiaries arising from or
in connection with litigation described in Section 3.14, including, but not
------------
limited to, the Unusual Proceedings described therein, and any and all
liabilities or obligations of Seller and the Subsidiaries for claims for
personal injury (including sickness, trauma, disease, pain and suffering,
loss of future earnings, punitive damages and the like), property damage,
and other damage and injury in existence (i.e., all elements of the claim
----
are complete) at or prior to the relevant Scheduled Closing, whether or not
any claim has been made or litigation has been instituted with respect
thereto and whether or not any claim is covered partially or fully by
insurance.
(h) Subject to Section 2.12, liabilities of Seller and the
------------
Subsidiaries incurred in connection with their obtaining any consent,
- 18 -
<PAGE>
authorization or approval necessary for them to sell, convey, assign,
transfer or deliver any Transferred Asset to Buyer hereunder.
(i) Any liability of Seller or a Subsidiary representing
indebtedness for money borrowed or the deferred portion of the purchase
price for any Owned Real Property or Equipment (and any refinancing
thereof), including without limitation the indebtedness identified on
Schedule 2.4(i); provided that if, prior to the relevant Scheduled Closing,
--------------- --------
the parties mutually agree that any such indebtedness or obligation will be
assumed by Buyer and further agree upon an equitable reduction in the cash
portion of the Purchase Price (as defined in Section 2.5) to reflect
-----------
Buyer's assumption of such indebtedness or obligation, then any such
indebtedness or obligation will be deemed to constitute an Assumed
Liability for all purposes of this Agreement; and provided further that
-------- -------
with respect to any such indebtedness or obligation not so assumed by Buyer
that constitutes a lien or encumbrance upon any Transferred Asset, Seller
agrees that on or prior to the relevant Scheduled Closing it will either
pay or discharge such indebtedness or liability in full or otherwise cause
such lien or encumbrance to be removed from such Transferred Asset, so that
such Transferred Asset is sold, conveyed, assigned, transferred and
delivered to Buyer at such Scheduled Closing free and clear of such lien or
encumbrance.
(j) Such other liabilities and obligations, if any, specifically
described in Schedule 2.4(j) and liabilities which would be Assumed
---------------
Liabilities but for the provisions of Sections 2.12, 8.5, 8.7 or 9.5.
------------- --- --- ---
(k) Amounts due from the Subsidiaries arising from Intercompany
Transactions.
(l) Liabilities and obligations respecting Cost Report
Settlements to the extent such Cost Reports cover any period through the
relevant Closing Date and other obligations of Seller respecting Cost
Reports described in Section 6.6.
-----------
(m) Subject to Section 2.10(f), liabilities and obligations for
---------------
bonuses, other incentive compensation and benefits under benefit plans to
the extent not specifically included in Accrued Operating Expenses.
Section 2.5 Purchase Price. The purchase price (the "Purchase
-------------- --------
Price") in the aggregate for all of the Transferred Assets shall be equal
to the sum of (a) Ninety-One Million Four Hundred Sixty-Eight Thousand
- 19 -
<PAGE>
Dollars ($91,468,000), subject to such adjustments, if any, as may occur
pursuant to Sections 2.12, 2.14, 6.2(c), 8.5, 8.7, or 9.5 or other
---- ---- ------ --- --- ---
provisions of this Agreement, including the book value as of the relevant
Scheduled Closing of capitalized lease liabilities assumed and the value of
any assumption of debt pursuant to Section 2.4(i), plus (b) an amount equal
-------------- ----
to the net book values as of the relevant Scheduled Closing of the Loan
Commitment Notes, Inventory, Receivables and Prepayments (collectively,
"Accrued Operating Assets") included in the Transferred Assets less Accrued
------------------------- ----
Operating Expenses, plus (c) an amount (determined on the basis of the
Venture's balance sheet) equal to the net book value as of the relevant
Scheduled Closing of (i) the sum of each Venture's current assets and
distributions payable to partners or venturers, less (ii) the sum of each
----
such Venture's current liabilities, indebtedness for money borrowed and
capitalized lease liabilities, pro-rated in each case to the equity
percentage in such Venture held by Seller and the Subsidiaries (the amounts
in clauses (b) and (c) being referred to as the ("Net Book Values"). In
--- --- ---------------
addition, at the First Closing, Buyer shall pay to Seller the sum of Two
Million Dollars ($2,000,000) for the covenant not to compete described in
Section 6.8. Notwithstanding anything in this Agreement or in a Schedule
-----------
hereto that might be construed to the contrary, Net Book Values will not be
reduced by Seller's retained liability for Excess Interim Payments made by
a Payor prior to the relevant Scheduled Closing that are in excess of the
net carrying value of the Receivables transferred at such Scheduled Closing
with respect to which such interim payments are a credit against amounts
that would otherwise be due from the Payor.
Section 2.6 Payment of Purchase Price. That portion of the Purchase
-------------------------
Price due and payable for the Transferred Assets actually sold, assigned,
transferred and conveyed to Buyer and the applicable Buyer Subsidiaries
hereunder shall be paid as follows:
(a) Payment of Tentative Purchase Price. No less than five (5)
-----------------------------------
business days prior to each Scheduled Closing, Seller shall deliver to
Buyer a certificate executed on the Seller's behalf by a responsible
officer setting forth the Seller's estimate of what the Net Book Values
will be as of such Scheduled Closing for the Subject Transferred Assets (as
defined in Section 2.13) (the "Estimated Net Book Values"), and
------------ -------------------------
additionally setting forth (i) the Net Book Values for the Subject
Transferred Assets recorded by Seller as of the most recent month-end prior
to the delivery of such certificate for which data is available, and (ii)
the methodology used by Seller for updating changes in Net Book Values
since such month-end data
- 20 -
<PAGE>
to arrive at such estimate. All determinations made with respect to the Net
Book Values shall be based upon the internal records of, and the valuation
methods customarily used by, Seller and the Subsidiaries, absent error, and
consistent with generally accepted accounting principles with respect to
the recording and accruing of the types of assets and liabilities included
in Net Book Values. On the terms and subject to the conditions contained in
this Agreement, at each Scheduled Closing Buyer shall pay to Seller, in the
manner set forth herein, an amount equal to (iii) the portion of the
Purchase Price arising under Section 2.5(a) (including any debt assumptions
--------------
pursuant to Section 2.4(i)) due at such Scheduled Closing as calculated on
--------------
the basis of the values assigned to the pertinent Subject Transferred
Assets in the Allocation Schedule (as defined in Section 2.7) plus (iv) an
----------- ----
amount equal to one hundred percent (100%) of the Estimated Net Book Values
related to the Subject Transferred Assets,(the sum of clauses (iii) and
-----
(iv) being referred to as the "Tentative Purchase Price"), less (v) the
---- ------------------------ ----
book value of any capitalized leases assumed at such Scheduled Closing,
less (vi) the value of any debt assumed pursuant to Section 2.4(i) at such
---- --------------
Scheduled Closing.
(b) Determination of Interim Net Book Values. As soon as
----------------------------------------
practicable, but in no event later than sixty (60) days after each
Scheduled Closing, Seller shall cause a schedule to be prepared and
delivered to Buyer showing an interim calculation of the Net Book Values
with respect to the Subject Transferred Assets (the "Interim Net Book
----------------
Values") as of the relevant Closing Date derived by Seller from the
------
internal books and records of Seller and the Subsidiaries and otherwise in
accordance with the second sentence of Section 2.6(a) with respect to the
--------------
Facilities included in such Subject Transferred Assets, as well as from a
physical inventory, taken after the date hereof and prior to or as of such
relevant Closing Date, of property which would constitute Inventory if the
relevant Scheduled Closing had occurred on the date of such physical
inventory. If such schedule as submitted by Seller is not challenged in
writing by Buyer within thirty (30) days of its receipt of same, then it
shall be deemed accepted by Buyer. If it is so challenged, then, unless
otherwise resolved by agreement of the parties within thirty (30) days from
the date of Buyer's challenge or such later date as the parties may
mutually agree upon, such disagreement shall be mutually submitted by the
parties to their respective independent certified public accountants for
resolution. If such accountants cannot resolve the disagreement within
thirty (30) days of such submission, then they shall submit the matter to a
third accounting firm of national standing selected by them, whose
determination shall be final and binding, and shall be rendered
- 21 -
<PAGE>
within thirty (30) days of the date on which the matter is submitted to
such firm. Any such third accounting firm shall determine the issues in
dispute following such procedures, consistent with the language of this
Agreement, as it deems appropriate to the circumstances and with reference
to the amounts in issue. No particular procedures are intended to be
imposed upon such third accounting firm, it being the desire of the parties
that any such dispute shall be resolved as expeditiously and inexpensively
as reasonably practicable. In the event that the Interim Net Book Values
differ from the Estimated Net Book Values, whether determined on the basis
of the schedule prepared by Seller, or agreement of the parties, or
decision by independent public accountants, as the case may be, then and in
such event, within five (5) business days following such determination of
the Interim Net Book Values, either Buyer shall pay to Seller, or Seller
shall pay to Buyer, as the case may be, in immediately available funds, the
amount by which the Interim Net Book Values differs from the Estimated Net
Book Values. The pendency of a dispute shall not affect the payment
obligation hereunder of either Buyer or Seller to the extent such payment
is not disputed.
(c) Determination of Final Net Book Values. Within ten (10)
--------------------------------------
business days following expiration of six (6) months from each Scheduled
Closing, Buyer shall provide a certificate to Seller, executed on Buyer's
behalf by a responsible officer, setting forth a proposed calculation of
final Net Book Values with respect to the Subject Transferred Assets (the
"Final Net Book Values") as of the end of such six (6) month period (a
----------------------
"Working Capital Adjustment Date") which shall contain a reconciliation as
--------------------------------
of the relevant Closing Date of the Interim Net Book Values, adjusted only
for (i) errors claimed by Buyer to exist in Seller's accruals for Accrued
Operating Assets and Accrued Operating Expenses and the Ventures'
calculations of partners' equity, partners' distributions payable and the
net book value of Venture fixed assets, (ii) Buyer's ability to collect
Receivables and the Ventures' ability to collect their accounts receivable
in existence as of the relevant Closing Date, on or before the Working
Capital Adjustment Date, in excess of the carrying value therefor as of the
relevant Closing Date net of reserves, and by Buyer's or a Venture's
receipt of Excess Interim Payments, (iii) Buyer's inability to collect
Receivables and the Ventures' inability to collect their accounts
receivable in existence as of the relevant Closing Date, on or before the
Working Capital Adjustment Date, in accordance with their net carrying
values as of the relevant Closing Date, and (iv) Buyer's ability to pay
Accrued Operating Expenses and the Ventures' ability to pay similar
expenses of the Venture at less than their
- 22 -
<PAGE>
book value as of the relevant Closing Date or Buyer's or the Ventures'
payment of the same at more than their book value as of the relevant
Closing Date to the extent legally required to do so. For purposes of any
such calculation, (v) the accuracy of Seller's or the Ventures' accrual for
real and personal property taxes shall be based upon the last notice of tax
assessment respecting such property prior to the relevant Scheduled Closing
that does not reflect the Transactions contemplated to occur at the
relevant Scheduled Closing, (vi) variable or undetermined charges arising
under Real Property Leases shall be accrued as of the relevant Scheduled
Closing on an historical basis, (vii) payments received on account of
Receivables shall be applied in accordance with Sections 2.9(b) and (c),
--------------- ---
and (viii) expenses for such items as real and personal property taxes,
utility charges, charges arising under leases, insurance premiums and the
like shall be pro-rated as of the relevant Scheduled Closing. In the event
that Buyer elects to reassign to Seller any Loan Commitment Notes on or
prior to the relevant Working Capital Adjustment Date, then the Final Net
Book Values shall be deemed to be further reduced by an amount equal to the
uncollected portion thereof, in which case Buyer shall execute such
documents of re-assignment as are reasonably satisfactory to Seller and
such Loan Commitment Notes as are reassigned shall thereafter to be deemed
to be Excluded Assets. Any dispute concerning Buyer's calculation of the
Final Net Book Values that is unresolved for thirty (30) days shall be
submitted for resolution by the parties' independent certified public
accountants in accordance with the procedures contained in Section 2.6(b).
--------------
Within five (5) business days following determination of the Final Net Book
Values for a Scheduled Closing, either Buyer shall pay to Seller, or Seller
shall pay to Buyer, as the case may be, in immediately available funds, the
amount by which the Final Net Book Values differ from the Estimated Net
Book Values, as adjusted for payments, if any, on account of the Interim
Net Book Values. The pendency of a dispute shall not affect the payment
obligation hereunder of either Buyer or Seller to the extent such payment
is not disputed.
(d) Seller as Agent of Subsidiaries. Seller shall, at or prior
-------------------------------
to the relevant Scheduled Closing, cause each Subsidiary transferring
Subject Transferred Assets thereat to irrevocably designate (with an
original copy being provided to Buyer) Seller as its agent to receive on
its behalf delivery of that portion of all payments made by Buyer hereunder
to which such Subsidiary may be entitled as a result of its participation
in such Scheduled Closing, including without limitation that portion of the
Purchase Price attributable to the Subject Transferred Assets sold to Buyer
by it, and to acknowledge that delivery of such payments, including the
Purchase
- 23 -
<PAGE>
Price, to Seller in accordance with the terms of this Agreement shall be
conclusive and binding evidence against such Subsidiary that any payments
or consideration due to such Subsidiary in respect of the Subject
Transferred Assets sold to Buyer by it, or in respect of other payments due
to it from Buyer under the terms of this Agreement, have been delivered.
Section 2.7 Allocation of Purchase Price. The Purchase Price shall
----------------------------
be allocated to the Transferred Assets on a Facility by Facility basis in
accordance with Schedule 2.7 (the "Allocation Schedule"), except that the
------------ -------------------
portion of the Purchase Price attributable to the Net Book Values shall be
allocated in accordance with the amounts actually paid therefor in
accordance with the provisions of Sections 2.5(b) and (c). Notwithstanding
--------------- ---
the foregoing, at least five (5) days prior to the First Closing (as
defined in Section 2.13), Buyer and Seller shall in good faith agree upon
------------
reasonable modifications to the Allocation Schedule set forth in Schedule
--------
2.7 to reduce the aggregate amounts allocated therein to the First
---
Facilities by the sum of Five Million Dollars ($5,000,000), and such
modified Allocation Schedule shall thereafter be the Allocation Schedule
for all purposes of this Agreement. Seller and Buyer shall, and Seller
shall cause the Subsidiaries to, allocate the Purchase Price in accordance
with the Allocation Schedule and allocate the Net Book Values portion
thereof in accordance with the amounts paid therefor, to be bound by such
allocations for all purposes, to account for and report the purchases and
sales contemplated hereby for all purposes (including, without limitation,
financial, accounting, Medicare reimbursement and federal and state tax
purposes) in accordance with such allocations, and not to take any position
(whether in financial statements, Cost Reports, tax returns, Cost Report or
tax audits, or otherwise), including without limitation any claim to an
adjustment in the basis of such assets by Buyer or its successors and
assigns for Medicare purposes which is inconsistent with such allocations
without the prior written consent of the other party, except to the extent,
if any, required by applicable Law or generally accepted accounting
principles.
Section 2.8 Contingent Lease Obligations. With respect to each Real
----------------------------
Property Lease for which Seller or a Subsidiary remains or will remain
contingently liable after the relevant Scheduled Closing as lessee,
sublessee, guarantor or assignor, Buyer hereby agrees to exercise its best
efforts:
(a) To cause the contingent liability of Seller or such
Subsidiary, as the case may be, to be removed on or prior to any extension,
- 24 -
<PAGE>
renewal or modification of such Real Property Lease by Buyer or a Buyer
Subsidiary;
(b) To procure for Seller and the applicable Subsidiaries a
security interest, in form reasonably satisfactory to Seller, in all of the
right, title and interest of Buyer and the applicable Buyer Subsidiaries in
such Real Property Lease, junior only to the security interest of Buyer's
most senior secured lenders, in order to secure the due and punctual
performance by Buyer and the applicable Buyer Subsidiaries of the Assumed
Liabilities represented by such Real Property Lease; and
(c) To procure for Seller and the applicable Subsidiaries the
right to acquire such right, title and interest in such Real Property
Lease, at fair market value, in the event that Buyer and the applicable
Buyer Subsidiaries fail to pay, perform and discharge when due the Assumed
Liabilities represented by such Real Property Lease and such failure
results in Seller or any Subsidiary being required to pay, perform or
discharge any of such Assumed Liabilities.
Section 2.9 Remittances and Receivables.
---------------------------
(a) In General.
----------
(i) All remittances, mail and other communications relating to
the Excluded Assets or Excluded Liabilities received by Buyer or a Buyer
Subsidiary at any time after a relevant Scheduled Closing shall be promptly
turned over by Buyer to the addressee thereof, or if the addressee is no
longer affiliated with Seller, to Seller, and pending such delivery, Buyer
shall have no interest in the same and shall hold such remittances, mail
and other communications in trust for the benefit of Seller and the
Subsidiaries. All remittances, mail and other communications relating to
the Transferred Assets or the Assumed Liabilities received by Seller or any
Subsidiary at any time after the relevant Scheduled Closing at which such
Transferred Assets are transferred and such Assumed Liabilities are assumed
by Buyer shall be promptly turned over by Seller or such Subsidiary to the
addressee thereof, or if the addressee is no longer affiliated with Buyer,
to Buyer, and pending such delivery, Seller or such Subsidiary shall have
no interest in the same and shall hold such remittances, mail and other
communications in trust for the benefit of Buyer.
- 25 -
<PAGE>
(ii) With regard to the Medicare, Medicaid and CHAMPUS programs,
and any Blue Cross program that requires a Cost Report or retains the right
of offset, Buyer and Seller mutually covenant and agree as follows. Seller
acknowledges that, from time to time, Buyer or Buyer Subsidiaries, after a
relevant Scheduled Closing, may receive a demand for payment in connection
with overpayments or alleged overpayments from one or more of such
programs, or both, which demand relates to the operation of a Facility
prior to the relevant Scheduled Closing at which such Facility was included
in the Subject Transferred Assets. Buyer shall provide notice to Seller of
such demand within ten (10) days of Buyer's receipt of same. Seller
covenants and agrees with Buyer that Seller shall, within thirty (30) days
of its receipt of written notice from Buyer of such request for any such
payment, which notice shall state the basis thereof in reasonable detail,
pay in cash to Buyer an amount equal to any and all such overpayments
claimed or (by an election made in writing, within twenty (20) days after
receiving notice of any such demand) diligently pursue a contest of such
claim of overpayment and indemnify and hold Buyer harmless from any
liability resulting therefrom, but the right to contest without first
paying shall not be available to Seller if the programs collect the alleged
overpayment by means of a setoff against Buyer, unless Seller first
reimburses Buyer in an amount equal to the amount so setoff, provided that
--------
in all events Buyer shall provide notice to Seller of such demand within
ten (10) days of Buyer's receipt of same. Subject to the foregoing, if any
such program, with or without notice, collects an alleged overpayment or
other amount allegedly owed by Seller or a Subsidiary by offset against
Buyer or Buyer Subsidiary, Seller shall promptly pay to Buyer an amount
equal to such offset amount provided that Buyer shall have provided Seller
--------
with any notice related to such offset within ten (10) days of Buyer's
receipt of same, or, if no such notice was received by Buyer, Buyer shall
have provided notice to Seller of such offset within ten (10) days of
Buyer's obtaining notice of such offset being taken. Nothing in this
Section 2.9(a)(ii) shall limit Buyer's obligations under Section 7.3.
------------------ -----------
(b) Receivables.
-----------
(i) Buyer shall exercise commercially reasonable efforts to
collect Receivables. Any payments received by Buyer or its successors
and assigns after a Scheduled Closing Date, from patients, Payors,
clients, customers or others who are the obligors on Receivables
transferred as of such Scheduled Closing Date (collectively, "Account
-------
Parties"), shall be applied to the oldest remaining
-------
- 26 -
<PAGE>
Receivables transferred as of such Scheduled Closing Date from such
Account Party in the order in which they arose unless, in the case of
an Account Party who is a patient, otherwise indicated by the
patient's Payor.
(ii) On the tenth day of the first month that begins at
least thirty (30) days after a Scheduled Closing, on the tenth day of
each month thereafter until the Working Capital Adjustment Date with
respect to such Scheduled Closing, and on the tenth day following such
Working Capital Adjustment Date, Buyer shall execute appropriate
instruments of assignment to re-assign back to Seller, and shall turn
over to Seller all evidences of and documents pertaining to, any
Receivable which, as of the end of the immediately preceding month
and/or such Working Capital Adjustment Date, as the case may be, was
uncollected and which either (A) is a Receivable in respect of a non-
Medicare patient as to which Buyer has decided to cease collection
activity, or (B) is a Receivable in respect of a non-Medicare patient
which, as of such month end or such Working Capital Adjustment Date,
has remained unpaid for a period of at least one hundred eighty (180)
days following the date of such patient's discharge from a Facility,
(C) is a Receivable in respect of a Medicare patient which relates to
amounts that represent such patient's deductible or co-insurance
obligations, and which, as of such month end or Working Capital
Adjustment Date, has remained unpaid for a period of at least one
hundred eighty (180) days following the date after which the patient
is first billed, or (D) is a Receivable from Medicare in respect of
a Medicare patient for which payment has been denied by Medicare
provided that Buyer has filed a request for reconsideration within the
--------
period required. Such Receivables which are eligible to be turned
over to Seller are herein referred to as "Eligible Receivables." Any
--------------------
Eligible Receivable that is assigned back to Seller within thirty (30)
days following the first opportunity to do so under the provisions of
this clause (ii) shall, for purposes of the adjustments contemplated
-----------
by Section 2.6(c), be deemed to have not been collected by Buyer, and
--------------
any Eligible Receivable that is not so assigned back to Seller within
thirty (30) days following the first opportunity to do so under the
provisions of this clause (ii) shall, for purposes of the adjustments
-----------
contemplated by Section 2.6(c), be deemed to have been collected by
--------------
Buyer. With respect to any such Eligible Receivable re-assigned back
to Seller, Seller and the Subsidiaries shall be free to institute such
collection
- 27 -
<PAGE>
efforts, including, without limitation, initiating such legal
proceedings, with respect thereto as they shall, in their sole
discretion determine.
(iii) In the event of any adjustment in the Net Book Values
arising under Section 2.6(c)(iii), then upon such determination, Buyer
-------------------
shall execute instruments of assignment, effective as of the relevant
Working Capital Adjustment Date, respecting any unpaid Receivables
which are not collected or deemed collected as of such date (it being
agreed that any unpaid Receivables not so assigned shall be deemed
collected as of or prior to such Working Capital Adjustment Date).
(c) Straddle Patient Receivables. To compensate Seller and the
----------------------------
Subsidiaries for services rendered and medicine, drugs and supplies
provided through a Scheduled Closing Date with respect to patients
("Straddle Patients") who were admitted to a Facility on or before the date
-----------------
of the Scheduled Closing in which such Facility was transferred and were
discharged by the Facility after such Scheduled Closing Date, the following
shall apply:
(i) Cut-Off Billings. Seller shall, or shall cause the
----------------
Subsidiaries to, prepare cut-off billings for all Straddle Patients as
of the close of business on the relevant Closing Date. All payments
(other than Excess Interim Payments) which are received by Buyer (or
its successors in interest or assigns) after the relevant Closing Date
with respect to Straddle Patients and which relate to such cut-off
billings shall constitute Receivables for purposes of calculating the
Tentative Purchase Price and the Interim Net Book Values for such
Scheduled Closing.
(ii) Cut-Off Billings Not Accepted. If the Payor of any
-----------------------------
Straddle Patient cannot or does not for any reason accept cut-off
billings, then Buyer shall notify Seller of same, and Seller shall, or
shall cause the Subsidiaries to, deliver to Buyer a statement
calculating the total charges made by Seller and the Subsidiaries for
services rendered and medicine, drugs and supplies provided through
the relevant Closing Date with respect to such Straddle Patient.
Within ten (10) days following the discharge of each such Straddle
Patient, Buyer shall deliver to Seller a statement reflecting the
total charges for the services rendered and medicine, drugs and
supplies
- 28 -
<PAGE>
billed to such Straddle Patient after the relevant Closing Date and
the patient receivable (the "Straddle Patient Payments") of Buyer with
-------------------------
respect to such Straddle Patient (including any cost per discharge
limit imposed by the Tax Equity and Fiscal Responsibility Act of 1982,
as amended ("TEFRA") and all deductibles and co-insurance payments).
-----
For purposes of calculating the Final Net Book Values for any
Scheduled Closing, the pro rata share of the Straddle Patient Payments
which shall be treated as a Receivable shall be equal to the amount
obtained by multiplying the Straddle Patient Payments by a fraction,
the numerator of which is the total charges of Seller and the
Subsidiaries with respect to such Straddle Patient through the
relevant Closing Date and the denominator of which is the total
charges of Buyer, Seller and the Subsidiaries with respect to such
Straddle Patient. Seller or Buyer, as may be applicable, may have such
statements as submitted by Buyer or Seller verified by their
respective independent public accountants within thirty (30) days from
delivery. If such statements, as submitted by Buyer or Seller, are
acceptable, then such statements shall fix the value of the services,
medicine, drugs and supplies provided by Seller and the Subsidiaries,
on the one hand, and by Buyer, on the other, to each such Straddle
Patient. If any such statement is challenged by Seller or Buyer, then
unless otherwise resolved by agreement of the parties within thirty
(30) days of any such challenge, such statement shall be deemed in
dispute, which dispute shall be resolved by the parties' independent
certified public accountants. If such accountants cannot resolve the
matter within thirty (30) days, then it shall be submitted by them to
a third accounting firm in accordance with the procedures contained in
Section 2.6(b). If Seller or Buyer does not give written notice to the
--------------
party preparing the statement of its challenge of such statement
within the first said thirty (30) day period, the receiving party
shall be deemed to have accepted the same.
(d) Cooperation in Collecting Receivables and Excluded Assets.
---------------------------------------------------------
Buyer agrees to cooperate with Seller and the Subsidiaries and to provide
access to records (both medical and financial) to assist in the collection,
rebilling and auditing (by Seller or its representatives, including its
independent public accountants) of the Receivables and the Excluded Assets
(including, but not limited to, any and all Receivables from Account
Parties or amounts due to or from any Payor). Without limiting the
generality of the foregoing agreements of Buyer to cooperate with Seller,
until six (6) months after the relevant Closing Date, (i) Seller may locate
- 29 -
<PAGE>
one or more of its or its subsidiaries' employees at any or all of the
Facilities transferred at such Closing Date, without charge, in order to
facilitate such collection, rebilling and auditing, (ii) Buyer shall
provide such employees, without charge, adequate and proper space to
facilitate the performance of such duties, and (iii) Buyer shall provide
reasonable assistance of the employees of Buyer, without charge.
(e) Non-Assignable Receivables. Notwithstanding anything in
--------------------------
this Agreement that might be construed to the contrary, this Agreement
shall not constitute an agreement to assign any Receivable (including any
Receivable respecting a Straddle Patient) the assignment of which is either
prohibited by Law or by the terms of any contract with a Payor. However,
without limiting the generality of the foregoing, the Net Book Value of
such non-assignable Receivables shall be included in the Net Book Values
for all purposes of this Agreement, including, but not limited to, Sections
--------
2.5 through 2.7 and this Section 2.9, as modified by the provisions of this
--- --- -----------
Section 2.9(e). That portion of the Purchase Price which, but for the
--------------
provisions of this Section 2.9(e), would otherwise be attributable to the
--------------
Net Book Value of such non-assignable Receivables shall be deemed to be a
loan from Buyer to Seller and to the pertinent Subsidiary that will be
repaid from the proceeds of such Receivables collected and held by Buyer
and from the adjustments to Estimated Net Book Values contemplated by
Sections 2.6, 2.9(b), and 2.9(c). All procedures and requirements
------------ ------ ------
specified herein (including, without limitation, Buyer's obligations under
Section 2.9(b)) for the collection of Receivables (including any
--------------
Receivables in respect of a Straddle Patient) shall be fully applicable to
such non-assignable Receivables, except that (i) Buyer shall be deemed to
collect and hold the proceeds of such non-assignable Receivables as agent
for the Seller and the Subsidiaries and shall apply such proceeds to the
repayment of such loan, and (ii) any provision herein that would otherwise
require or provide for Buyer's "reassignment" of a Receivable (including an
Eligible Receivable) that is non-assignable to Buyer in the first instance
shall be construed to require or provide that Buyer, as agent for Seller
and the Subsidiaries, return pertinent documentation respecting such
Receivable to Seller and the Subsidiaries to permit collection of such
Receivable by them (in accordance with such collection efforts and
procedures as they, in their sole discretion, shall determine).
(f) Collection Fee.
--------------
- 30 -
<PAGE>
(i) Buyer shall be entitled to a collection fee equal to
fifteen percent (15%) of the sum of the following amounts (the
"Collection Fee Base"):
--------------------
(A) Cash collected, or deemed, under the provisions of
this Agreement, to be collected by Buyer after a relevant
Scheduled Closing in respect of (1) Receivables included in the
Net Book Values that are acquired by Buyer at such Scheduled
Closing, excluding Receivables that Buyer or a Buyer Subsidiary
assigns or entrusts at or after such Scheduled Closing to an
Affiliate of Seller for purposes of collection and (2) Excess
Interim Payments; and
(B) Cash remitted to a Facility after the relevant
Scheduled Closing by any collection agency (excluding an
Affiliate of Seller) with respect to accounts receivable that
were assigned to such agency prior to such Scheduled Closing and
that would be Receivables but for the provisions of paragraph 6
of Schedule 2.2(j), provided that for purposes of calculating the
--------------- -------------
collection fee, such cash remitted shall be deemed to be net of
any collection agency discounts, fees and charges.
Five (5) days prior to each Scheduled Closing, Buyer and Seller shall
in good faith agree to an estimate of Excess Interim Payments for each
Facility included in such Scheduled Closing. Absent manifest error,
such estimates shall be binding on Buyer and Seller. Fifteen percent
(15%) of the total of such estimates for all Facilities included in
each Scheduled Closing (the "Credit Amount") shall be credited against
amounts due from Seller to Buyer as provided in Section 2.9(f)(ii).
(ii) On the tenth day of the first month that begins at
least sixty (60) days after a Scheduled Closing, on the tenth day of
every other month thereafter until the Working Capital Adjustment
Date, and on the tenth day following the Working Capital Adjustment
Date, Buyer shall submit a report to Seller as of the nearest month-
end specifying in reasonable detail its calculation of the Collection
Fee Base for the period covered by such report. Within five (5)
business days following receipt of each such report, Seller shall pay
to Buyer, by wire transfer of immediately available funds,
-31-
<PAGE>
the collection fee due with respect to the Collection Fee Base covered
by such report less the amount of any Credit Amount not previously
used to offset amounts due under this provision. Any Receivable for
which a collection fee is so paid shall, to the extent of such
Receivable on which such a fee is paid, no longer qualify as an
Eligible Receivable.
Section 2.10 Employee Matters.
----------------
(a) Pension Plans. Schedule 2.10(a) lists all "employee pension
------------- ----------------
benefit plans" ("Pension Plans") within the meaning of Section 3(2) of the
-------------
Employee Retirement Income Security Act of 1974, as amended ("ERISA") in
-----
which Retained Employees (as defined in Subsection (b) below) directly
--------------
employed to work at the Facilities participate. Seller shall, or shall
cause the Subsidiaries to, (i) terminate as of the relevant Closing Date
the active participation of all such employees in the Pension Plans who
constitute Hired Employees, (ii) cause the Pension Plans to make timely
appropriate distributions following the relevant Closing Date, to the
extent required, to such employees in accordance with, and to the extent
permitted by, the terms and conditions of such Pension Plans, and (iii) in
connection with the termination of the active participation of all such
employees in such Pension Plans, comply, and cause each Pension Plan to
comply, with all applicable Laws. Prior to the relevant Closing Date,
Seller shall have delivered to Buyer, for information purposes only, forms
of any letters or other written communications which Seller or the
Subsidiaries shall distribute generally to such employees notifying them of
their rights in respect of their cessation of active participation in the
Pension Plans. There are no "multiemployer plans" within the meaning of
Section 3(37) of ERISA ("Multiemployer Plans") in which Retained Employees
-------------------
directly employed to work at the Facilities participate.
(b) Retained Employees.
------------------
(i) Buyer shall have the right to offer to hire at each
Scheduled Closing each of the direct employees of Seller or an
Affiliate of Seller, who is not a Facility's chief executive or chief
financial officer and who, as of such Scheduled Closing, works at the
Facilities (including any such direct employees who are on medical
disability or leaves of absence and who worked at the Facilities
immediately prior to such disability or leave) included in the Subject
Transferred Assets, and shall additionally have the right to
-32-
<PAGE>
offer to hire at the First Closing up to five (5) employees of Seller
selected by Buyer who are primarily employed at Seller's Fairfax,
Virginia regional office in connection with Seller's PHIS System
described in Section 2.17 (whether direct or indirect employees with
------------
respect to the PHIS System, the "PHIS Employees"), provided that Buyer
-------------- --------
may not offer to hire those employees covered by this clause (i), if
---
any, who are designated by Seller at least five (5) days prior to the
relevant Scheduled Closing and provided further that Buyer shall
----------------
extend offers of employment to a sufficient number of employees at
each Facility so as to avoid any liability on the part of Seller and
the Subsidiaries under the WARN Act (as defined in Section 2.10(e))
---------------
with respect to the Transactions contemplated hereby. Seller will
advise Buyer of the number of employees terminated at each Facility
during the ninety (90) day period preceding the relevant Scheduled
Closing.
(ii) Buyer shall additionally have the right to offer to
hire at each Scheduled Closing such other employees of Seller and its
Affiliates who are mutually agreed upon by Buyer and Seller and who
are either (A) indirect employees with respect to the operation of the
Facilities included in the Subject Transferred Assets, or (B) a chief
executive or chief financial officer of a Facility included in the
Subject Transferred Assets, provided that in the event that Buyer
--------
wishes to hire a chief executive or chief financial officer and Seller
does not agree to such hiring, Seller shall not employ such chief
executive or chief financial officer in such capacity at a healthcare
facility operated or managed by Seller or its subsidiaries for a
period of at least one (1) year following such Scheduled Closing.
(iii) All such direct and indirect employees to whom Buyer
has the right to make offers of employment pursuant to clauses (i) or
---
(ii) above are herein referred to as the "Retained Employees."
---- ------------------
(iv) Any such offer of employment to a Retained Employee by
Buyer shall be to perform comparable services, in such position and
for such compensation as is comparable to the position such Retained
Employee held with, and the compensation paid to such Retained
Employee by, Seller or any of its subsidiaries as of the Scheduled
Closing. Seller or its Affiliates shall have the right (but not the
obligation) to employ or offer to employ any Retained
-33-
<PAGE>
Employee (including, but not limited to, the chief executive officer
and the chief financial officer of each Facility without regard to the
provisions of Section 2.10(b)(ii)(B)) who declines Buyer's offer of
----------------------
employment.
(c) Hiring of Retained Employees. Buyer shall hire at each
----------------------------
Scheduled Closing each Retained Employee who elects to accept employment
with Buyer (the "Hired Employees") and shall continue to employ each such
---------------
Hired Employee for a period of no less than ninety (90) days following the
relevant Closing Date, unless the employment of such Hired Employee is
terminated for cause or as a result of the Hired Employee's resignation.
Subject to the proviso to Section 2.3(c), Buyer agrees to give the Hired
--------------
Employees full credit for the Paid Time Off earned or accrued by them
during, and to which they are entitled as a result of, their employment by
Seller and/or its subsidiaries, by allowing such Hired Employees such Paid
Time Off as to which such Hired Employees would have been entitled as of
the relevant Closing Date under the policies of Seller and/or its
subsidiaries if such Hired Employees had remained employees of Seller
and/or its subsidiaries and, upon termination of employment, by making full
payment to such Hired Employees of the Paid Time Off that such employees
would have received had they taken such Paid Time Off.
(d) Health Benefits. Buyer shall provide the Hired Employees a
---------------
program of health care benefits which is comparable in the aggregate to the
program of health care benefits currently provided by Seller or its
pertinent Subsidiaries, as the case may be, provided, however, that such
-------- -------
health care benefits shall be immediately available to the Hired Employees
as of the relevant Closing Date, and the Hired Employees shall become as of
the relevant Closing Date participants thereunder, without regard to any
applicable waiting period or any limitation with respect to preexisting
conditions except insofar as such waiting period or limitation gives full
credit to such Hired Employees for the period of time during which he or
she was employed by Seller and its Affiliates and, provided further, that
----------------
Buyer may make modifications or changes in such health care benefits at any
time following a Scheduled Closing. Buyer acknowledges and agrees that,
with respect to the Hired Employees, Buyer is a successor employer for
purposes of the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), that the Hired Employees will not, as a result, be
-----
deemed to have had a termination of employment for purposes of COBRA and
that any COBRA notices or coverages required to
-34-
<PAGE>
be given or made available to any Hired Employee shall be given or made by
Buyer and not Seller or the Subsidiaries, provided that Buyer does not
--------
assume, and shall not be deemed to have assumed, any COBRA obligations
which Seller or any Subsidiary may have to former employees of Seller or
such Subsidiary whose employment was terminated on or prior to the relevant
Closing Date, or to any Retained Employees who do not accept employment
with Buyer, and provided further that Seller shall be responsible for any
--------
COBRA coverages required to be made available to any Hired Employee who is
entitled to COBRA coverage under existing plans of Seller or any Subsidiary
as a result of the Transactions.
(e) Acknowledgement of Responsibility. Buyer acknowledges and
---------------------------------
agrees that as of the date and time a Scheduled Closing is effective, Buyer
shall be considered for purposes of the Worker Adjustment and Retraining
Notification Act (the "WARN Act") the employer of the Retained Employees
--------
related to the Transferred Assets transferred at such Scheduled Closing and
that Buyer (and not Seller or the Subsidiaries) shall thereupon be
responsible for complying with the WARN Act with respect to such Retained
Employees and that prior to such time none of such Retained Employees shall
be, nor shall they be deemed to be, terminated. Buyer shall indemnify and
hold Seller and its Affiliates harmless, in accordance with Sections 11.4,
-------------
11.5 and 11.6, from and against all Losses (i) resulting from any
---- ----
compliance obligation (including, without limitation, the obligation to
give notice or pay money) that Seller and its Affiliates or Buyer has under
the WARN Act arising from the termination of any Retained Employee or (ii)
resulting from any claims of the Hired Employees (including, without
limitation, claims for health care coverage or benefits); provided,
--------
however, Buyer shall neither be responsible for, nor indemnify Seller and
-------
its Affiliates for the consequences of any WARN event which may be caused
by the actions of Seller or its Affiliates with respect to employees whom
Seller and its Affiliates retain pursuant to rights set forth in Section
-------
2.10(b) above.
-------
Notwithstanding the foregoing, nothing in this Section 2.10 shall, or shall
------------
be deemed to, create any rights in favor of any person not a party hereto
or to constitute an employment agreement or condition of employment for any
employee of Seller or any Affiliate of Seller or any Retained Employee.
Section 2.11 Use of Names.
------------
-35-
<PAGE>
(a) Although trade names of Seller and the Subsidiaries, other
than the Transferred Business Names, are Excluded Assets, such names appear
on certain of the fixed Transferred Assets, such as certain fixtures and
Equipment, and on supplies, materials, stationery and similar consumable
items which will be on hand at the Facilities at a Scheduled Closing with
respect to such Facilities. Notwithstanding that such names are Excluded
Assets, Buyer shall be entitled to use such consumable items for a period
of three (3) months following the Scheduled Closing in which such items are
transferred and shall have up to six (6) months following such Scheduled
Closing to remove such names from fixed Transferred Assets, provided that
--------
Buyer shall not send correspondence or other materials to third parties on
any stationery that contains a trade name (other than a Transferred
Business Name) of Seller or any Affiliate of Seller.
(b) Seller hereby grants to Buyer, for the period from the
relevant Closing Date through the expiration of the ninetieth day
thereafter, the non-exclusive right and license to use, solely in
connection with the operation of the Facilities transferred on such Closing
Date, the clinical policy and procedures manuals of Seller and/or the
Subsidiaries (the "Manuals") presently used at such Facilities. Such
-------
license shall be on the following terms and conditions:
(i) Buyer shall accept the Manuals in their present
condition, "AS IS" and "WITH ALL FAULTS" and without any
representation or warranty of any kind whatsoever, either express or
implied, by Seller, including, but not limited to, any representation
or warranty that the Manuals are adequate for Buyer's operation of the
relevant Facilities after the relevant Scheduled Closing or are in
compliance with any Laws;
(ii) Buyer agrees that Seller shall have no obligation
whatsoever to update or otherwise revise the Manuals, even if Seller
or its Affiliates are revising similar manuals at other healthcare
facilities, and that Buyer shall have sole responsibility for updating
and revising such manuals;
(iii) Buyer acknowledges and agrees that the Manuals are
confidential and proprietary information of Seller and its Affiliates
and Buyer agrees that it will not, directly or indirectly, reproduce,
distribute or disclose the contents of the Manuals except as may be
required in the operation of such Facilities (including, but
-36-
<PAGE>
not limited to, as may be required by any Laws) and shall exercise due
care to otherwise preserve and protect the proprietary nature thereof,
provided that Seller and the Subsidiaries acknowledge that the Manuals
--------
used by Buyer and the Buyer Subsidiaries more likely than not contain
information that is substantially similar to information contained in
the Manuals;
(iv) Upon the termination of Buyer's use of the Manuals
pursuant to this Section, Buyer shall return to Seller all originals
and copies of the Manuals; and
(v) Buyer shall implement its own policy and procedure
manuals promptly following the relevant Closing Date, and in any event
by the date on which the license hereby granted to Buyer terminates.
(c) Notwithstanding the assignment to Buyer of the Transferred
Business Names, Seller and its Affiliates and their assignees shall have
the nonexclusive right to use such Transferred Business Names, consistent
with past practices, in connection with the operation of previously and
currently operated healthcare facilities of Seller and its Affiliates not
included in the Transferred Assets, and Buyer, on behalf of itself and each
Buyer Subsidiary, hereby grants Seller and its Affiliates and their
assignees a fully paid-up, perpetual right and license to use such
Transferred Business Names in such manner in connection with the operation
of such facilities, such license to be effective as of the relevant
Scheduled Closing in which such Transferred Business Names are assigned to
Buyer and the Buyer Subsidiaries.
Section 2.12 No Assignment If Breach; Seller's Discharge of Assumed
------------------------------------------------------
Liabilities.
-----------
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement shall not constitute an agreement to assign any
Transferred Asset, or assume any Assumed Liability, if the attempted
assignment or assumption of the same, as a result of the absence of the
consent or authorization of a third party or failure of a right of first
refusal notice period to expire, would constitute a breach or default under
any lease, agreement, encumbrance or commitment, would violate any Law or
would in any way adversely affect the rights, or increase the obligations,
-37-
<PAGE>
of Buyer, Seller or any Subsidiary with respect thereto; provided that the
--------
assignment of any contract, including without limitation Medicare, Medicaid
and similar provider agreements, which may lawfully be made subject to
customary conditions subsequent (such as needs surveys, evaluations of
Buyer or other determinations by the counterparties to such agreements)
shall be deemed not to constitute a default under, or to in any way
adversely affect the rights or increase the obligations of Buyer with
respect to, such lease, agreement, encumbrance or commitment, whether or
not such condition or conditions subsequent are met on or prior to the
relevant Scheduled Closing. Except as provided in Section 2.12(c), if any
---------------
such consent or authorization is not obtained, or if an attempted
assignment or assumption would be ineffective or would adversely affect the
rights or increase the obligations of Seller, a Subsidiary or Buyer, with
respect to any such lease, agreement, encumbrance or commitment, so that
Buyer would not, in fact, receive all such rights, or assume the
obligations, of Seller or Subsidiary with respect thereto as they exist
prior to such attempted assignment or assumption, then Seller and Buyer
shall, and Seller shall cause each Subsidiary to, enter into such
reasonable cooperative arrangements as may be reasonably acceptable to both
Buyer and Seller (including without limitation, sublease, agency,
management, indemnity or payment arrangements and enforcement at the cost
and for the benefit of Buyer of any and all rights of Seller and the
Subsidiaries against an involved third party) to provide for or impose upon
Buyer the benefits of such Transferred Asset or the obligations of such
Assumed Liability, as the case may be, and any transfer or assignment to
Buyer by Seller or a Subsidiary of any such Transferred Asset, or any
assumption by Buyer of any such Assumed Liability, which shall require such
consent or authorization of a third party that is not obtained shall be
made subject to such consent or authorization being obtained. Except as
provided in Section 2.12(c), if the parties cannot agree on any such
---------------
arrangement, or any such arrangement would not be reasonably practicable,
to provide Buyer with materially all the benefits of such Transferred Asset
or materially all the obligations of such Assumed Liability, then such
Transferred Asset or Assumed Liability, as the case may be, shall be
excluded from the Transactions and shall be deemed to be an Excluded Asset
or an Excluded Liability, as the case may be, and Buyer and Seller shall
negotiate in good faith an equitable adjustment in the Purchase Price, or
resolve any disagreement respecting such adjustment, in accordance with the
procedures of Section 2.14.
------------
(b) Notwithstanding any other provision of this Agreement,
during the period between the date hereof and the relevant Scheduled
-38-
<PAGE>
Closing, Seller may, for the purpose of facilitating consummation of the
Transactions and with the consent of Buyer (which will not be unreasonably
withheld), cause any Subsidiary to acquire a fixed asset, or any direct or
indirect interest therein, that results in the simultaneous discharge of
all or any part of a liability that exists as of the date hereof which, but
for such acquisition, would be an Assumed Liability; provided that in each
--------
such case it gives prompt notice of such acquisition to Buyer. In the
event of any such acquisition, Buyer and Seller shall negotiate in good
faith an equitable adjustment to the Purchase Price, or resolve any
disagreement respecting such adjustment, in accordance with the procedures
of Section 2.14.
------------
(c) The provisions of Section 2.12(a) notwithstanding, neither
---------------
Buyer nor Seller shall be obligated to close with respect to a given
Facility if any private third party consent or authorization in respect of
Transferred Assets and Assumed Liabilities related to such Facility that is
enumerated in Schedule 2.12(c) (the "Schedule of Required Consents") is not
---------------- -----------------------------
obtained, unless both Buyer and Seller waive in writing their respective
conditions precedent that such consent or authorization be obtained prior
to the transfer of such Facility. With respect to all other private third
party consents or authorizations with respect to such Facility that have
not been obtained by the relevant Scheduled Closing, if the parties have
not entered into a cooperative arrangement in respect of the Transferred
Asset or Assumed Liability to which such consent or authorization relates,
then, subject to the provisions of Section 2.18 regarding Buyer's right to
------------
reject certain contracts within sixty (60) days following the Scheduled
Closing at which such contracts are assigned or purported to be assigned,
(i) Buyer hereby agrees to accept the assignment of any such pertinent
Transferred Asset, and to assume any such pertinent Assumed Liability, as
the case may be, whether or not such assignment or assumption is made
subject to such consent or authorization being obtained after the relevant
Scheduled Closing, and (ii) the parties agree to continue to cooperate with
one another, pursuant to the provisions of Sections 5.2 and 5.3, to obtain
------------ ---
any such requisite consent
Section 2.13 Closings. All of Seller's and the Subsidiaries' right,
--------
title and interest in a Facility and all other Transferred Assets and
Assumed Liabilities which relate to, or constitute a part of, a Facility
shall be transferred to Buyer or the applicable Buyer Subsidiaries at a
"Scheduled Closing" (as defined below). Subject to the terms and conditions
-----------------
hereof, the Transferred Assets shall be transferred to Buyer at one of
three Scheduled Closings: The "First Closing" (as defined below), the
-------------
"Second Closing" (as defined below) or the "Final Closing" (as defined
-------------- -------------
below). The
-39-
<PAGE>
First Closing, Second Closing and Final Closing, collectively, are the
"Scheduled Closings" and each is a "Scheduled Closing." A date on which a
Scheduled Closing actually occurs is a "Closing Date," and the Closing Date
------------
of the Final Closing is the "Final Closing Date." A Scheduled Closing shall
------------------
be effective for all purposes as to each Facility which is the subject of
such Scheduled Closing (and the Transferred Assets and Assumed Liabilities
related thereto or constituting a part thereof) (collectively, the "Subject
-------
Transferred Assets") at 11:59 p.m. on the relevant Closing Date, as
------------------
determined by reference to the local time zone in which the Facility is
located. Notwithstanding the foregoing, either the First or Second Closing
may also be a Final Closing and if the First Closing is the Final Closing,
there shall be no Second Closing. Scheduled Closings shall occur in
accordance with the following provisions:
(a) The First Closing. Provided that no Scheduled Closing shall
-----------------
occur after the Termination Date set forth in Section 10.1(b), the "First
--------------- -----
Closing" shall occur at a mutually agreeable time and place or places
-------
within five (5) business days (unless another date is mutually agreed upon
by Buyer and Seller) after the first date on which all of the conditions
set forth in Article 8 and Article 9 hereof are capable of being satisfied
--------- ---------
or are waived (i) as to Facility Nos. 29, 48 and 55 (the "Required First
--------------
Facilities"), and (ii) as to the Transferred Assets and Assumed Liabilities
----------
in respect of First Facilities that account in the aggregate for at least
Twenty-Seven Million Dollars ($27,000,000) of the EBITDA (as defined in
Section 3.17(a)) assigned to Facilities for this purpose as shown on
---------------
Schedule 2.13B hereto, and all Facilities, Transferred Assets and Assumed
--------------
Liabilities sold, assigned, conveyed, transferred, delivered and assumed at
the First Closing shall be the Subject Transferred Assets with respect to
the First Closing; provided that:
-------------
(A) If the conditions set forth in Articles 8 and 9 with
---------- -
respect to any of the Required First Facilities have not been met by
the First Closing, then at the option of Buyer, the condition set
forth in clause (a)(i) above may be waived to permit the First Closing
------
to occur, in which case any of the Required First Facilities not
included in the First Closing will, to the extent the conditions set
forth in Articles 8 and 9 with respect thereto are otherwise
---------- -
satisfied, be Subject Transferred Assets at the Second Closing or the
Final Closing;
-40-
<PAGE>
(B) At the option of Buyer, exercisable by written notice
to Seller at least five (5) business days prior to the First Closing,
Buyer may elect to defer until the Second Closing or the Final Closing
(but in no event later than the Termination Date) consummation of the
Transactions respecting one or more of the Facilities denominated on
Schedule A-2 as Facility Nos. 35, 36 and 53; and
------------
(C) In the event that Buyer elects to exercise either or
both of the options set forth in paragraphs (A) or (B) above, then the
--- ---
amounts set forth in clause (a)(ii) above shall be reduced by the
-------
EBITDA set forth on Schedule 2.13(B) for the Facilities that the Buyer
----------------
excludes from the Subject Transferred Assets pursuant to such options.
Upon consummation at the First Closing of Transactions in compliance with
the foregoing provisions, any remaining Transactions in respect of
Facilities that were not consummated at such Closing may be consummated at
a subsequent Closing subject to the provisions of Article 8 and Article 9
--------- ---------
and to the provisions of this Section 2.13 with respect to such Closings.
------------
(b) The Second Closing. Provided that the First Closing has
------------------
occurred and that no Scheduled Closing shall occur after the Termination
Date, the "Second Closing" shall occur at a mutually agreeable time and
--------------
place or places, on the date which is within five (5) business days (unless
another date is mutually agreed upon by Buyer and Seller) after the first
date on which all of the conditions set forth in Article 8 and Article 9
--------- ---------
hereof are capable of being satisfied or are waived as to any additional
First Facilities and the Transferred Assets and Assumed Liabilities related
thereto or constituting a part thereof that are not the subject of the
First Closing, and the First Facilities and the Transferred Assets and
Assumed Liabilities shall be the Subject Transferred Assets with respect to
the Second Closing, provided that the Second Closing shall be held, in any
--------
event, within thirty (30) days of the First Closing with respect to any
First Facilities for which the conditions to Closing, including those set
forth in this Section 2.13, have been met or waived as of such date.
(c) The Final Closing. Provided that a First Closing has
-----------------
occurred, the "Final Closing" shall occur with respect to First Facilities
-------------
that are not the subject of the First or Second Closings at a mutually
agreeable place or places and at a mutually agreeable time as follows:
-41-
<PAGE>
(i) If all of the conditions set forth in Articles 8 and 9
---------- -
hereof and in this Section 2.13 are capable of being satisfied or are
------------
waived on or prior to the Termination Date as to all First Facilities
that are not included in the First Closing or the Second Closing, then
the Final Closing shall occur (A) within five (5) business days
(unless another date is mutually agreed upon by Buyer and Seller)
after the first date upon which such conditions may be satisfied or
are waived, but in no event later than the Termination Date or (B) if
the only Facilities subject to the Final Closing are one or more of
Facilities Nos. 35, 36 and 53, on such date as the parties shall
mutually agree, but no later than the Termination Date.
(ii) If all of the conditions set forth in Articles 8 and 9
---------- -
hereof and in this Section 2.13 are capable of being satisfied or are
------------
waived on or prior to the Termination Date as to some, but not all, of
the Facilities that are not included in the First Closing or the
Second Closing, then the Final Closing shall occur within five (5)
business days after the identity of the Facilities as to which such
conditions will not be satisfied has become reasonably manifest or has
been mutually agreed upon by the parties, but in no event shall such
Final Closing occur later than the Termination Date.
(d) Deliveries by Seller. At each Scheduled Closing Seller
--------------------
shall deliver, or cause the Subsidiaries to deliver, to Buyer:
(i) A Bill or Bills of Sale and Assignment in substantially
the form of Exhibit A executed by each Subsidiary with respect to the
---------
Subject Transferred Assets of the Subsidiary covered thereby;
(ii) Grant deeds (or equivalent special or limited warranty
deeds for Owned Real Properties outside California), properly executed
and acknowledged by each Subsidiary with respect to the Owned Real
Properties of the Subsidiary included in the Subject Transferred
Assets;
(iii) Separate assignments and assumptions in substantially
the form of Exhibit B executed by each Subsidiary with respect to each
---------
Real Property Lease of the Subsidiary included in the Subject
Transferred Assets that is designated by either Buyer or Seller;
-42-
<PAGE>
(iv) Instruments of transfer, sufficient to transfer
personal property interests of each Subsidiary that are included in
the Subject Transferred Assets but not otherwise transferred by the
Bills of Sale and Assignment referred to in clause (i) above, executed
----------
by each Subsidiary in the form customarily used in commercial
transactions in the areas in which such other personal property of
such Subsidiary is located;
(v) Such other instruments of transfer, executed by each
of the pertinent Subsidiaries necessary to transfer to and vest in
Buyer all of Seller's and the Subsidiaries' rights, title and interest
in and to the Subject Transferred Assets or which may be required by
the Title Insurer (as defined in Section 8.7), including owner's and
-----------
lessee's affidavits, if any; and
(vi) Possession of the Subject Transferred Assets.
All such documents of transfer shall be in a form and substance reasonably
satisfactory to Buyer.
(e) Deliveries by Buyer. At each Scheduled Closing, Buyer shall
-------------------
deliver to Seller:
(i) Immediately available funds, by way of wire transfer to
an account or accounts designated by Seller, in an amount equal to the
amounts then due pursuant to Sections 2.5 and 2.6(a) (including, with
------------ ------
respect to the First Closing, the amount due for the covenant not to
compete as specified by the last sentence of Section 2.5), as adjusted
-----------
by the expenses due at such Scheduled Closing pursuant to Section 5.5;
-----------
(ii) Separate assignments and assumptions in substantially
the form of Exhibit C executed by Buyer and the applicable Buyer
---------
Subsidiaries with respect to each Real Property Lease included in the
Subject Transferred Assets that is designated by either Buyer or
Seller; and
(iii) An Assumption Agreement or Assumption Agreements with
respect to the Assumed Liabilities assumed at such Scheduled Closing,
in substantially the form of Exhibit C, executed
---------
-43-
<PAGE>
by Buyer and the applicable Buyer Subsidiaries in favor of Seller and
each of the applicable Subsidiaries.
All such documents of transfer shall be in a form and substance reasonably
satisfactory to Seller.
(f) Escrow. If either of the parties desires to consummate a
------
Scheduled Closing through an escrow, an escrow shall be opened with, and
the escrow agent shall be, Chicago Title Company (the "Escrow Agent"), by
------------
depositing a fully executed copy of this Agreement with Escrow Agent to
serve as escrow instructions. This Agreement shall be considered the
primary escrow instructions between the parties, but the parties shall
execute such additional escrow instructions as Escrow Agent shall require
and the parties may agree upon in order to clarify the duties and
responsibilities of Escrow Agent. In the event of any conflict between
this Agreement and such additional escrow instructions, this Agreement
shall prevail. If a Scheduled Closing is to be consummated through the
Escrow Agent, then on or prior to the Closing Date, Buyer shall cause the
funds required by Subsection (e)(i) above to be wired to Escrow Agent, and
---------- ------
the parties shall deliver the instruments of sale, assignment, conveyance
and assumption called for by Subsections (d) and (e) above to be delivered
--------------- ---
to the Escrow Agent, and on the Closing Date, the Escrow Agent shall close
the escrow with respect to such Scheduled Closing by:
(i) Causing the deeds for the Owned Real Properties, the
assignments of the Real Property Leases, and any other documents which
the parties may mutually designate to be recorded in the official
records of the appropriate counties in which the pertinent Subject
Transferred Assets are located;
(ii) Delivering to Seller by wire transfer of immediately
available funds, to an account or accounts designated by Seller, the
amounts called for by Subsection (e)(i) above; and
-----------------
(iii) Delivering to Buyer or Seller, as the case may be,
the other instruments referred to in Subsections (d) and (e) above.
--------------- ---
(g) Ability To Close Without Regard To Subsequent Facilities.
--------------------------------------------------------
Without limiting the generality of the foregoing, the parties hereby
expressly acknowledge that the Transactions related to the First Facilities
may be consummated if the conditions thereto are satisfied or
-44-
<PAGE>
waived, irrespective of whether transactions in respect of the Subsequent
Facilities that are contemplated by the Subsequent Facilities Agreement are
previously, concurrently or subsequently consummated.
Section 2.14 Purchase Price Adjustment. If circumstances exist that
-------------------------
require the parties to negotiate in good faith equitable adjustments in the
Purchase Price pursuant to the provisions of Section 2.12 (respecting
------------
absence of consents), Sections 8.5 and 9.5 (dealing with certain
------------ ---
prohibitions and restraints), Section 6.2(c) (respecting Seller's
--------------
obligations with respect to environmental conditions), Section 8.7
-----------
(respecting the condition of title to interests in real property) or
Section 8.10 (respecting casualty losses or condemnation) (Sections 2.12,
------------ -------------
6.2(c), 8.5, 8.7, 8.10, 9.5 and this Section 2.14 being collectively
------ --- --- ---- --- -------------
referred to as the "Adjustment Sections"), then and in any of such events,
-------------------
such negotiations, and the resolution of disagreements arising therefrom,
shall be conducted in accordance with the provisions of this Section 2.14.
------------
The parties shall negotiate such equitable adjustments in the Purchase
Price in good faith prior to any relevant Closing Date (as may be extended
by mutual agreement of the parties), provided, that any adjustment in the
--------
Purchase Price shall be consistent with the Allocation Schedule. If the
parties are unable to agree by the day prior to such relevant Closing Date,
then such relevant Closing Date (the "Original Closing Date") (and the
---------------------
Termination Date, if necessary) shall be extended for up to fifteen (15)
business days to provide for the opportunity to resolve such disagreement
pursuant to the provisions of this Section 2.14. On the day a Scheduled
------------
Closing would have occurred but for the absence of agreement between the
parties, each party shall designate an individual (who may not be a present
or former officer, director, partner or employee of the party or of any
present or former investment banker, accounting firm, law firm or attorney
of or for the party) to mediate such disagreement, and advise the other
party in writing of the identity of such individual, which advice shall be
accompanied by a list of up to ten (10) suggested neutral individuals to
serve as a third mediator. The mediators originally designated by each
party shall promptly confer about the selection of a third mediator from
such lists, and within five (5) business days following the Original
Closing Date (or Termination Date, as the case may be), the originally
designated mediators shall agree upon and (subject to availability) select
the third mediator from the lists submitted by the parties or otherwise,
provided that if the originally designated mediators cannot agree upon a
--------
third mediator by such date, the third mediator shall be a retired judge
designated by Judicial and Arbitration Mediation Services, Inc., located in
Los Angeles, California. The three mediators so selected
-45-
<PAGE>
are herein referred to as the "Panel". Within two (2) business days
-----
following the designation of the third mediator, each party shall submit to
the Panel in writing, its proposed equitable adjustments in the Purchase
Price. Such proposals shall be materially in accordance with the last
proposals made by such party to the other party during the course of the
aforementioned good faith negotiations between the parties. The parties
shall additionally submit such memoranda, arguments, briefs and evidence in
support of their respective positions, and in accordance with such
procedures, as a majority of the Panel may determine. Within seven (7)
business days following the designation of the third mediator, as to each
adjustment of the Purchase Price about which there is disagreement, the
Panel shall, by majority vote, select the proposed adjustment of the
Purchase Price proposed by one of the parties, it being agreed that the
Panel shall have no authority to alter any such proposal in any way.
Thereafter, the parties shall, subject to the terms and conditions of this
Agreement, consummate the Transactions on the basis of such adjustments at
a mutually agreeable time and place or places, in accordance with and
subject to the provisions of Section 2.13, which shall be no later than the
------------
fifteenth (15th) business day following the Original Closing Date or such
later date as the parties may agree upon. Subject to the foregoing, the
Panel may determine the issues in dispute following such procedures,
consistent with the language of this Agreement, as it deems appropriate to
the circumstances and with reference to the amounts in issue, but in any
event consistent with the Allocation Schedule to the extent applicable. No
particular procedures are intended to be imposed upon the Panel, it being
the desire of the parties that any such disagreement shall be resolved as
expeditiously and inexpensively as reasonably practicable. No member of the
Panel shall have any liability to the parties in connection with service on
the Panel, and the parties shall provide such indemnities to the members of
the Panel as they shall request.
Section 2.15 Transfer of Assets in Corporate Form. If Buyer consents
------------------------------------
in writing in its sole and absolute discretion, Seller may, prior to any
Scheduled Closing, cause any Transferred Asset or Assumed Liability to be
assigned and transferred by way of an assignment to Buyer of the stock of a
subsidiary of Seller (including the stock of any Subsidiary), in which case
all right, title and interest of Seller and any of its Affiliates in such
subsidiary (which shall constitute all of the outstanding capital stock and
rights to acquire capital stock in such subsidiary) shall be transferred to
Buyer at the Scheduled Closing as a Subject Transferred Asset. Any
-46-
<PAGE>
such agreement of the parties shall become an amendment to this Agreement.
Section 2.16 Assignment of Rights and Obligations to Buyer
---------------------------------------------
Subsidiaries. Notwithstanding any contrary provisions contained herein,
------------
the parties hereto agree that, prior to a Scheduled Closing, Buyer, in its
sole discretion, may assign any or all of its rights and obligations with
respect to the Subject Transferred Assets and the Assumed Liabilities to be
transferred at such Scheduled Closing to one or more Buyer Subsidiaries,
provided that no such assignment shall relieve Buyer of any obligation or
--------
liability to Seller hereunder, and provided further that the following
--------
shall apply:
(a) Buyer will provide Seller with prompt written notice of any
such assignment.
(b) No such assignment shall be effected if the making of the
assignment will result in Seller's inability to obtain any consent or
authorization reasonably required to consummate the Transactions or to
avoid economic detriment to the Seller arising from the consummation of the
Transactions.
(c) Each such Buyer Subsidiary that is an assignee of Buyer
shall irrevocably appoint Buyer as its sole and exclusive representative
and agent authorized to act for and to receive notices and payments on
behalf of the Buyer Subsidiaries in all matters arising from or related to
this Agreement and the Transactions.
(d) As a condition to Seller's agreement to such assignments,
Buyer hereby agrees that Buyer will at all times be the ultimate parent
entity of the consolidated group of companies of which Buyer is a group
member or that, in the event of any reorganization involving Buyer and its
subsidiaries, the ultimate parent entity of the consolidated group of
companies emerging from such reorganization that includes Buyer and its
successors and assigns shall, prior to any such reorganization, execute
such documents as are reasonably necessary to confirm the assumption by
such ultimate parent entity of Buyer's obligations to Seller hereunder.
(e) Buyer shall remain jointly and severally liable to Seller
and the Subsidiaries and to third parties with respect to any Assumed
Liabilities transferred to a Buyer Subsidiary, and, without limiting the
-47-
<PAGE>
generality of the foregoing, hereby absolutely and unconditionally
guarantees the full, prompt and faithful performance by each Buyer
Subsidiary of all covenants and obligations to be performed by such Buyer
Subsidiary under this Agreement and any Related Agreement (as defined in
Section 3.4) which are assigned to such Buyer Subsidiary, including but not
-----------
limited to, the payment of all sums stipulated to be paid by such Buyer
Subsidiary pursuant to such assignment, it being understood that each such
covenant and obligation constitutes the direct and primary obligation of
Buyer and that a separate action or actions may be brought and prosecuted
against Buyer whether action is brought against the pertinent Buyer
Subsidiary or whether such Buyer Subsidiary is joined in any such action or
actions (Buyer hereby waiving any right to require Seller or a Subsidiary
to proceed against a Buyer Subsidiary). Buyer hereby authorizes Seller,
without notice and without affecting Buyer's liability hereunder, from time
to time to (x) renew, compromise, extend, accelerate, or otherwise change
the terms of any obligation of a Buyer Subsidiary hereunder with the
agreement of such Buyer Subsidiary, (y) take and hold security for the
obligations guaranteed, and exchange, enforce, waive and release any such
security, and (z) apply such security and direct the order or manner of
sale thereof as Seller in its discretion may determine. Buyer hereby
further waives:
(i) Any defense that may arise by reason of the incapacity
or lack of authority of any Buyer Subsidiary;
(ii) Any defense based upon a statute or rule of law which
provides that the obligations of a surety must be neither larger in
amount nor in other respects more burdensome than those of the
principal; and
(iii) Any duty on the part of Seller or a Subsidiary to
disclose to Buyer any facts that Seller or a Subsidiary may now or
hereafter know about a Buyer Subsidiary.
Section 2.17 Data Processing Services. In order to facilitate the
------------------------
transition of the Facilities from Seller's to Buyer's ownership, from and
after the First Closing until the expiration of eight (8) months after the
later of the Final Closing or the last closing to occur under the
Subsequent Facilities Agreement (the "Transition Period"):
-----------------
-48-
<PAGE>
(a) Seller will provide Buyer, at no charge, with data
processing services from Seller's Psychiatric Hospital Information System
(the "PHIS System") that support the collection of Receivables acquired by
-----------
Buyer hereunder and of "Receivables," as defined in the Subsequent
Facilities Agreement, acquired by Buyer, if any, pursuant to the Subsequent
Facilities Agreement.
(b) Seller shall, at no charge to Buyer, provide the PHIS
Employees with reasonable access to the PHIS System on-site at Seller's
Fairfax, Virginia offices from which the PHIS System is operated, and Buyer
hereby agrees that such PHIS Employees will be made reasonably available to
Seller, at no charge to Seller, to provide assistance to Seller in
connection with Seller's operation of the PHIS System. Seller may require,
as a condition of such access, that such PHIS Employees comply with such
security and safety measures as Seller may reasonably impose.
(c) Seller will provide Buyer, at no charge, with reasonable
access to Seller's data processing training center in Fairfax, Virginia for
the purpose of training employees with respect to data services utilized by
the First Facilities and the Subsequent Facilities (to the extent any are
acquired pursuant to the Subsequent Facilities Agreement).
(d) Seller agrees to cause to be made available to the First
Facilities and the Subsequent Facilities (to the extent any are acquired
pursuant to the Subsequent Facilities Agreement) the customary support
services that have been provided to the Facilities by up to three (3)
employees at the so-called "Help Desk" of Seller located in Fairfax,
Virginia, which provides telephone assistance to First and Subsequent
Facilities in connection with management information services and facility
accounting.
At the First Closing, Buyer will be entitled to purchase from Seller
certain excess computer equipment associated with the PHIS System (together
with certain agreements related to such equipment) for One Dollar ($1.00).
In addition, within thirty (30) days following Seller's closure of its
operations at its Fairfax, Virginia offices, Seller shall notify Buyer of
such event, and Buyer shall have the right to purchase certain additional
equipment associated with the PHIS System (to the extent owned by Seller)
(together with certain agreements related to such equipment), for the sum
of One Dollar ($l.00). Such purchases, as well as Seller's provision of
services pursuant to paragraphs (a) and (d) above, shall be subject to the
further
-49-
<PAGE>
terms and conditions of a Data Processing Services Contract to be executed
by the parties at the First Closing substantially in the form of Exhibit F
---------
hereto.
Section 2.18 Rejection of Certain Contracts. The provisions of this
------------------------------
Section 2.18 shall apply to the following categories of Assumed Contracts:
------------
(i) those subject to the provisions of Section 2.1(f)(iii); (ii) those
-------------------
subject to the provisions of the second sentence of Section 2.12(c); and
---------------
(iii) those subject to Section 6.1(f) that are entered into by Seller or a
--------------
Subsidiary after the date hereof in violation of Section 6.1(f). With
--------------
respect to each such contract (a "Contingent Contract"):
-------------------
(a) Buyer or the pertinent Buyer Subsidiary shall have the right
to reject such Contingent Contract by giving a written notice of such
rejection to Seller within sixty (60) days following the relevant Scheduled
Closing, such written notice to be accompanied by originals of the contract
then in Buyer's or the Buyer Subsidiary's possession, copies of any written
communications between Buyer or the Buyer Subsidiary and the counterparty
to such contract relating to the subject matter thereof, and instruments
evidencing the reassignment of such contract to Seller or the pertinent
Subsidiary in form reasonably satisfactory to Buyer and Seller, in which
case such contract shall be treated as an Excluded Asset, and the
liabilities related thereto shall be treated as an Excluded Liability, for
all purposes of this Agreement, subject to the further provisions of this
Section 2.18.
------------
(b) In the event that Seller or the pertinent Subsidiary incurs
any costs in connection with the termination of any such Contingent
Contract so rejected by Buyer (including payments during any applicable
notice period required to terminate such contract) and Buyer or the
pertinent Buyer Subsidiary continues to do business with the counterparty
to such contract related to the subject matter thereof during any period
for which Seller or the applicable Subsidiary is obligated to make payments
to such counterparty, then Buyer will reimburse Seller for one-half of the
payments that Seller or the applicable Subsidiary is obligated to make to
such counterparty in connection with such termination, but not in excess of
one-half of the payments that Seller or the applicable Subsidiary is
obligated to make to such counterparty under such contract for a period of
ninety (90) days.
-50-
<PAGE>
(c) With respect to any Contingent Contract subject to clause
(ii) of this Section 2.18 that is not also subject to either clause (i) or
---- ------------ ---
clause (iii) of this Section 2.18 and that is not rejected by Buyer
----- ------------
pursuant to Subsection (a) above, Buyer agrees to indemnify and hold
--------------
harmless Seller and the Subsidiaries, in accordance with the provisions of
Sections 11.3 through 11.6, from and against any and all Losses arising
------------- ----
from or related to the lack of any consent or authorization in connection
with the assignment of such Contingent Contract to Buyer (or the pertinent
Buyer Subsidiary) hereunder.
(d) In the event Buyer rejects a Contingent Contract pursuant to
Subsection (a), then, notwithstanding any other provision of this
--------------
Agreement, Seller shall have no liability to Buyer and the Buyer
Subsidiaries for Losses under the provisions of Sections 11.3 through 11.6
------------- ----
related to such Contingent Contract for the period prior to such rejection
or for the amounts due Seller under Subsection (b) above.
--------------
(e) With respect to any Contingent Contract subject to clause
(iii) of this Section 2.18 that appears on an updated Schedule 2.1(f)
----- ------------ ---------------
delivered pursuant to Section 6.3 and that is not rejected by Buyer
----------- ---
pursuant to Subsection (a) above, then, notwithstanding any other provision
--------------
of this Agreement, Seller shall have no liability to Buyer and the Buyer
Subsidiaries for Losses under the provisions of Sections 11.3 through 11.6
------------- ----
for violation of Section 6.1(f) with respect to such Contingent Contract.
--------------
Section 2.19 Remaining Schedules. Notwithstanding anything to the
-------------------
contrary herein, this Agreement shall be deemed cancelled and of no further
force and effect if the parties shall have failed to agree upon the
Schedules enumerated in Exhibit E, if any, within five (5) business days
---------
following the date hereof, the parties hereby agreeing to cooperate with
one another in good faith and to work expeditiously to agree upon such
Schedules within such period. Such agreement shall be evidenced by a duly
executed amendment of this Agreement that deletes this Section 2.19.
------------
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer, as of the date hereof,
as follows, except as set forth in Schedules numbered in relation to the
Sections set forth below:
-51-
<PAGE>
Section 3.1 Organization and Corporate Power. Seller is a
--------------------------------
corporation duly incorporated and validly existing under the laws of, and
is authorized to exercise its corporate powers, rights and privileges and
is in good standing in, the State of Nevada and has full corporate power to
carry on its business as presently conducted and to own or lease and
operate its properties and assets now owned or leased and operated by it
and to perform the transactions on its part contemplated by this Agreement
and all other agreements contemplated hereby.
Section 3.2 Subsidiaries.
------------
(a) Each Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation
(which, in the case of Subsidiaries existing on the date of this Agreement,
is indicated on Schedule A-1). Each Subsidiary has all requisite power and
------------
authority (corporate and otherwise) to carry on its business as presently
conducted and to own or lease and operate its properties and assets now
owned or leased and operated by it and to perform the transactions on its
part contemplated by this Agreement and all other agreements contemplated
hereby.
(b) All of the outstanding capital stock of each Subsidiary has
been duly authorized and is validly issued, fully paid and nonassessable
and, except as indicated on Schedule A-1, is owned beneficially and of
------------
record by Seller or another subsidiary of Seller as indicated on Schedule
--------
A-1. Except as provided in Schedule A-1, there are no (i) rights,
--- ------------
subscriptions, warrants, options, conversion rights or agreements of any
kind outstanding to purchase or otherwise acquire any shares of capital
stock of any Subsidiary, or (ii) securities or obligations of any kind
convertible into or exchangeable for any shares of capital stock of any
Subsidiary, or (iii) obligations of any kind obligating Seller to sell or
dispose of all or any part of Seller's ownership interest therein. The
Subsidiaries listed on Schedule A-1 are, on the date hereof, the only
------------
subsidiaries of Seller that have any right or interest in, or title to the
Facilities.
(c) The board of directors of each Subsidiary and, if required,
its shareholders, have duly and effectively authorized (i) the sale of the
Transferred Assets to be sold by such Subsidiary and (ii) the execution,
delivery and performance of the Related Agreements (as defined in Section
-------
3.4) and all other agreements contemplated hereby and thereby to which such
----
Subsidiary is a party. No other corporate act or proceeding on the
-52-
<PAGE>
part of any Subsidiary, its board of directors or its shareholders is
necessary to authorize any Related Agreement or other agreement
contemplated hereby and thereby or the transactions contemplated hereby and
thereby.
(d) The Related Agreements and all other agreements contemplated
hereby and thereby to which any Subsidiary is a party will, as of each
Scheduled Closing, have been duly executed and delivered by each such
Subsidiary, and each such agreement, when executed and delivered, will
constitute a valid and binding obligation of such Subsidiary, enforceable
against such Subsidiary in accordance with its terms, except as it may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar Laws now or hereafter in effect relating to creditors' rights
generally and that the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding may be brought.
Section 3.3 Authority Relative to this Agreement. The execution,
------------------------------------
delivery and performance of this Agreement and all other agreements
contemplated hereby and the consummation of the transactions contemplated
hereby and thereby have been duly and effectively authorized by the board
of directors of Seller; no other corporate act or proceeding on the part of
Seller, its board of directors or its shareholders is necessary to
authorize this Agreement, any such other agreement or the transactions
contemplated hereby and thereby. This Agreement has been, and each of the
other agreements contemplated hereby will, as of each Scheduled Closing,
have been, duly executed and delivered by Seller, and this Agreement
constitutes, and each such other agreement when executed and delivered will
constitute, a valid and binding obligation of Seller, enforceable against
Seller in accordance with its terms, except as it may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar Laws
now or hereafter in effect relating to creditors' rights generally and that
the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding may be brought.
Section 3.4 Absence of Breach. Subject to the provisions of Sections
----------------- --------
3.5 and 3.6 below regarding private party and governmental consents, and
--- ---
except for compliance with the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and any
-------
regulatory or licensing Laws applicable to the businesses
-53-
<PAGE>
and assets represented by the Transferred Assets, the execution, delivery
and performance by Seller of this Agreement and all other agreements
contemplated hereby or executed in connection herewith (not including the
Subsequent Facilities Agreement, the "Related Agreements"), and the
------------------
execution and delivery by any Subsidiary of the Related Agreements to which
it is a party, and the performance by the Subsidiaries of the transactions
contemplated by this Agreement and the Related Agreements entered into by
the Subsidiaries, do not, (a) conflict with or result in a breach of any of
the provisions of the Articles or Certificates of Incorporation or Bylaws
or similar charter documents (the "Charter Documents") of Seller or of any
-----------------
of the Subsidiaries, (b) contravene any Law or cause the suspension or
revocation of any License presently in effect, which affects or binds
Seller or any of the Subsidiaries, or any of their properties, except where
such contravention, suspension or revocation will not have a Material
Adverse Effect (as defined below) on the Transferred Assets and will not
affect the validity or enforceability of this Agreement and the Related
Agreements or the validity of the Transactions contemplated hereby and
thereby, or (c) conflict with or result in a breach of or default (with or
without notice or lapse of time or both) under any indenture or loan or
credit agreement or any other agreement or instrument to which Seller or
any of the Subsidiaries is a party or by which it or they or any of their
properties may be affected or bound, the effect of which conflict, breach,
or default, either individually or in the aggregate, would be a Material
Adverse Effect on the Transferred Assets. As used herein, a "Material
--------
Adverse Effect": (x) when used with respect to the Transferred Assets,
--------------
means a material adverse effect on the Transferred Assets and on the
businesses operated therefrom, including their condition (financial or
otherwise) and results of operations, taken as a whole; (y) when used with
respect to any portion of the Transferred Assets (including, without
limitation, a Facility), means a material adverse effect on such portion of
the Transferred Assets and on the businesses operated therefrom, including
their condition (financial or otherwise) and results of operations, taken
as a whole; and (z) when used with respect to an entity, such as Seller, a
Subsidiary or Buyer, means a material adverse effect on the business,
condition (financial or otherwise) and results of operations of such entity
taken as a whole (including any subsidiaries of such entity).
Section 3.5 Private Party Consents. Except as set forth in Schedule
---------------------- --------
3.5, the execution, delivery and performance by Seller of this Agreement
---
and the Related Agreements, and the execution and delivery by any
Subsidiary of the Related Agreements to which it is a party, and the
-54-
<PAGE>
performance by the Subsidiaries of the transactions contemplated by this
Agreement and the Related Agreements to be performed by the Subsidiaries,
do not require the authorization, consent or approval of any non-
governmental third party of such a nature that the failure to obtain the
same would have a Material Adverse Effect on the Transferred Assets or a
Facility.
Section 3.6 Governmental Consents. The execution, delivery and
---------------------
performance by Seller of this Agreement and the Related Agreements, and the
execution and delivery by any Subsidiary of the Related Agreements to which
it is a party, and the performance by the Subsidiaries of the transactions
contemplated by this Agreement and the Related Agreements to be performed
by the Subsidiaries, do not require the authorization, consent, approval,
certification, license or order of, or any filing with, any court or
governmental agency of such a nature that the failure to obtain the same
would have a Material Adverse Effect on the Transferred Assets or a
Facility, except for compliance with the HSR Act and except for such
governmental authorizations, consents, approvals, certifications, licenses
and orders that customarily accompany the transfer of health care
facilities such as the Facilities.
Section 3.7 Brokers. Except as shown on Schedule 3.7, no broker,
------- ------------
finder, or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with this Agreement or the
Transactions contemplated hereby based upon any agreements or arrangements
or commitments, written or oral, made by or on behalf of Seller or any of
its Affiliates. Seller shall be solely responsible for the payment of any
such fee or commission to any person or entity listed on Schedule 3.7 as an
------------
exception to the foregoing.
Section 3.8 Title to Property.
-----------------
(a) Each Subsidiary has good and defensible title, or valid and
effective leasehold rights in the case of leased property, to all tangible
personal property included in the Transferred Assets to be sold, conveyed,
assigned, transferred and delivered to Buyer by such Subsidiary, free and
clear of all liens, charges, claims, pledges, security interests, equities
and encumbrances of any nature whatsoever, except for those created or
allowed to be suffered by Buyer and except for the following (individually
and collectively, the "Permitted Encumbrances"): (i) the lien of current
----------------------
taxes not delinquent, (ii) liens listed on Schedules 3.8(a) and 3.8(b),
---------------------------
(iii) the
-55-
<PAGE>
Assumed Liabilities, (iv) such consents, authorizations, approvals and
licenses referred to in Sections 3.5 and 3.6, and (v) liens, charges,
------------ ---
claims, pledges, security interests, equities and encumbrances which will
be discharged or released either prior to, or substantially simultaneously
with, the Scheduled Closing at which such property is sold, conveyed,
assigned and transferred to Buyer and other possible minor matters that in
the aggregate are not substantial in amount and do not materially detract
from or interfere with the present or intended use of such property. All
such tangible personal property is in good operating condition and repair,
subject to ordinary wear and tear and ordinary and routine maintenance, and
is reasonably adequate for the operation of the Facilities as they are
presently operated.
(b) Except as set forth on Schedule 3.8(b), and except for the
---------------
Owned Real Property and the Leased Real Property, no Subsidiary owns any
fee or leasehold or other interests in any real property used in and
necessary for the conduct of the operations of any Facility as presently
conducted. Each Subsidiary has good and marketable title to all Owned Real
Property, or valid and effective leasehold rights in the case of the Leased
Real Property, included in the Transferred Assets to be sold, conveyed,
transferred and delivered to Buyer by such Subsidiary, free and clear of
all liens except for those created or allowed to be suffered by Buyer and
except for the following: (i) Permitted Encumbrances, (ii) liens (not
including liens for borrowed money or the deferred purchase price of
property) that do not materially impair the use of the Owned Real Property
subject thereto, as such Owned Real Property is being used on the date
hereof, (iii) easements and similar encumbrances disclosed by current
standard ALTA Preliminary Title Reports, delivered to and approved by Buyer
prior to the date hereof (except for such easements or similar encumbrances
shown on Schedule 8.7(b)), and (iv) zoning, set back, building and other
---------------
similar restrictions including, without limitation, restrictions and
requirements affecting the Owned Real Property and the Leased Real Property
imposed by deeds, leases, development agreements, declarations, and
redevelopment authorities, which are not being violated in any manner that
would cause a Material Adverse Effect on any Facility as currently used and
operated. The condition of the Owned and Leased Real Property is such that
it will not materially adversely affect the operations of the Transferred
Assets on or from such Owned and Leased Real Property. All of the
improvements on land included in the Transferred Assets are in good
condition and repair, subject to those matters disclosed in Section 3.16 or
------------
Schedule 3.16, ordinary wear and tear and
-------------
-56-
<PAGE>
ordinary and routine maintenance, and in view of the purpose for which such
improvements are being used, free of any material structural or engineering
defects.
Section 3.9 Assumed Contracts. Except for such matters that, when
-----------------
viewed in the aggregate, do not have a Material Adverse Effect on a
Facility, (a) there is no liability to any person by reason of the default
by Seller or a Subsidiary under any Assumed Contract, (b) neither Seller
nor any Subsidiary has received written or other notice that any person
intends to cancel or terminate any Assumed Contract, (c) all of the Assumed
Contracts are in full force and effect and without any material default by
any party or to the knowledge of Seller and the Subsidiaries, any event
which, with the passage of time or the giving of notice or both would be
such a material default, (d) subject to the provisions of Sections 3.5 and
------------
3.6, the consummation of the transactions contemplated by this Agreement
---
will not constitute and, to the best of Seller's current actual knowledge,
no event has occurred which, with or without the passage of time or the
giving of notice or both, would constitute a material breach or default by
Seller or a Subsidiary of such Assumed Contract, or would cause the
acceleration of any obligation of Seller or any Subsidiary or the creation
of any lien (except for Permitted Encumbrances) upon any Transferred Asset,
and (e) neither Seller nor any Subsidiary has waived any right under any
Assumed Contract; provided that Seller makes no separate representation or
--------
warranty under this Section 3.9 respecting compliance with the provisions
-----------
of any Assumed Contract related to title to or condition of property,
licenses, environmental conditions, hazardous substances or environmental
laws, taxes, or compliance with laws generally, it being the intent of the
parties that warranties respecting such matters shall be made exclusively
under the provisions of Sections 3.8, 3.10, 3.16, 3.20, and 3.25. Seller
------------ ---- ---- ---- ----
has previously delivered to Buyer true and complete copies of all written
Assumed Contracts except where the failure to so deliver a copy thereof
will not have a Material Adverse Effect on a Facility.
Section 3.10 Licenses. Except as set forth on Schedule 3.10, (a) the
-------- -------------
Subsidiaries possess all Licenses necessary for their operation of the
Facilities at the locations and in the manner presently operated (other
than such Licenses the absence of which would not have a Material Adverse
Effect on a Facility), (b) if required, such Facilities are accredited by
applicable accrediting agencies as necessary for their operations in the
manner presently operated, and (c) such Facilities are certified for
participation in the Medicare program and have current and valid provider
-57-
<PAGE>
contracts with such program. Schedule 3.10 lists each License held by a
-------------
Subsidiary and related to the ownership or operation of a Facility and a
true and correct copy of each has previously been delivered to Buyer by
Seller (other than such Licenses the absence of which would not have a
Material Adverse Effect on a Facility). All such Licenses are in full
force and effect.
Section 3.11 U.S. Person; Resident of Georgia. Neither Seller nor
--------------------------------
any Subsidiary is a "foreign person" for purposes of Section 1445 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any other Laws
----
requiring withholding of amounts paid to foreign persons. For purposes of
the withholding tax imposed by Section 48-7-128 of the Official Code of
Georgia Annotated, each Subsidiary that owns Transferred Assets
constituting Owned Real Property located in Georgia and related tangible
personal property is a corporation the principal place of business of which
is located in the State of Georgia. The Seller shall, or shall cause the
relevant Subsidiaries to, provide an appropriate affidavit of each such
Subsidiary's residence. Seller acknowledges that jurisdictions other than
Georgia may impose withholding obligations similar to those imposed by
Georgia and that it is Seller's obligation to provide evidence of
exemptions from such withholding taxes.
Section 3.12 Employee Relations. With respect to the Retained
------------------
Employees, except as set forth on Schedule 3.12:
-------------
(a) Neither Seller, nor any Subsidiary nor any Facility is a
party to any agreement with any union, trade association or other similar
employee organization, no written demand has been made for recognition by a
labor organization, and to Seller's knowledge it has received no notice of
any union organizing activities by or with respect to any such employees;
(b) There are no controversies (including, without limitation,
any unfair labor practice complaints, labor strikes, arbitrations,
disputes, work slowdowns or work stoppages) pending, or to the best of
Seller's current actual knowledge, threatened, which could have a Material
Adverse Effect on any Facility; and
(c) Each Subsidiary has been and is in material compliance with
all federal and state laws respecting employment and employment practices,
terms and conditions of employment, and wages and hours
-58-
<PAGE>
(including, but not limited to, the Fair Labor Standards Act, Title VII of
the Civil Rights Act of 1964, as amended, the Occupational Safety and
Health Act, the Age Discrimination in Employment Act of 1967, the Americans
with Disabilities Act of 1990 and the Family and Medical Leave Act).
Section 3.13 Employee Plans.
--------------
(a) With respect to each Multiemployer Plan, there has occurred
no "complete withdrawal" or "partial withdrawal," as each is defined in
Sections 4203 and 4205, respectively, of ERISA, and all payments required
to be made to such Multiemployer Plans by a Subsidiary under any collective
bargaining agreement have been made.
(b) Neither Buyer nor any Buyer Subsidiary shall have any
obligation or liability to Seller, any Subsidiary or any present or former
employee of any of them for or with respect to any benefit plan, employee
benefit plan or employee health or welfare program or other Employee
Benefit Arrangements (as defined in Section 3.26(c)), except for
---------------
specifically listed Assumed Liabilities and other express obligations of
Buyer and the Buyer Subsidiaries under this Agreement.
Section 3.14 Litigation. Except for (a) matters associated with or
----------
within the scope of the significant legal proceedings and investigations of
an unusual nature referred to in Seller's filings with the Securities and
Exchange Commission (the "Unusual Proceedings"), (b) ordinary routine
-------------------
claims and litigation incidental to the businesses represented by the
Facilities (including, but not limited to, actions for negligence,
professional malpractice, workers' compensation claims, so-called "slip-
and-fall" claims and the like), (c) governmental inspections and reviews
customarily made of businesses such as those operated from the Facilities,
and (d) as set forth on Schedule 3.14, there are no actions, suits, claims
-------------
or proceedings pending, or to the knowledge of Seller or any Subsidiary,
threatened against or affecting the Transferred Assets or relating to the
operations of the Facilities, at law or in equity, or before or by any
federal, state, municipal or other governmental department, commission,
agency or instrumentality. The claims and litigation referred to in clause
------
(b) above are covered by insurance currently maintained by Seller except
---
where the failure to be so covered (i) would not have a Material Adverse
Effect on any Facility or (ii) is of a nature that is not ordinarily
subject to insurance coverage (e.g., demands for punitive damages).
----
Neither Seller nor any Subsidiary is in default under any judgment, order
or decree of any governmental agency
-59-
<PAGE>
or authority applicable to the conduct of the business conducted at the
Facilities. Except as disclosed on Schedule 3.14, there is no condemnation
-------------
proceeding pending or, to the knowledge of Seller or any Subsidiary,
threatened against any of the Owned or Leased Real Property. Schedule 3.14
-------------
includes an accurate and complete list of each malpractice claim or lawsuit
pending or to Seller's or any Subsidiary's knowledge, threatened against
any Facility or Subsidiary.
Section 3.15 Inventory. All Inventory included in the Transferred
---------
Assets and included in the Net Book Values will consist of a quality and
quantity usable and salable in the ordinary course of business, except for
items of obsolete materials and materials of below-standard quality at any
given Facility, all of which in the aggregate are immaterial to the
financial condition or results of operations of the businesses operated
from such Facility taken as a whole, or have been, or prior to the relevant
Scheduled Closing will be, written down to realizable market value.
Section 3.16 Hazardous Substances. To Seller's and the Subsidiaries'
--------------------
knowledge, except as disclosed by the Environmental Survey (as defined in
Section 6.2(b)) or otherwise on Schedule 3.16:
-------------- -------------
(a) There has not been a Release of Hazardous Material on or
otherwise affecting the Owned Real Properties or the Leased Real
Properties, (other than Releases involving de minimis quantities of
Hazardous Materials) that would: (i) constitute a violation of any
Environmental Law by Seller or the Subsidiaries, or by any third party if
the effect of such violation by such third party imposes a remediation
obligation on the part of Seller or any Subsidiary; (ii) trigger any
release-reporting obligations of Seller or the Subsidiaries under any
Environmental Law; or (iii) trigger any clean-up or remediation obligations
or Seller or the Subsidiaries under any Environmental Law;
(b) Seller and the Subsidiaries have complied with and currently
are in compliance in all material respects with all Environmental Laws that
govern the Owned Real Properties, the Leased Real Properties, and the
businesses operated from any such properties;
(c) Seller and the Subsidiaries have obtained all material
Licenses required under the Environmental Laws for operation of their
businesses related to the Owned Real Properties and the Leased Real
Properties, have complied with and currently are in compliance in all
-60-
<PAGE>
material respects with all such Licenses, and have not received any notice
that: (i) any such existing License will be revoked; or (ii) any pending
application for any new such License will be denied;
(d) Seller and the Subsidiaries have not received any currently
outstanding notice of any proceedings, action, or other claim or liability
arising under any Environmental Laws (including, without limitation, notice
of potentially responsible party status under the Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C.
(S)(S)9601 et seq. or any state counterpart) from any person or
governmental agency regarding the Owned Real Properties, the Leased Real
Properties, or the businesses operated from such properties;
(e) Neither Seller nor any Subsidiary has received any currently
outstanding notice, which notice is specifically directed to an Owned or
Leased Real Property (rather than to all property owners or operators in a
given geographic area), that any of the Owned Real Properties or any of the
Leased Real Properties is the subject of a material deed restriction,
material title-transfer restriction, other material land-use restriction,
or material lien arising in each case under any Environmental Law;
(f) Neither the Owned Real Properties, the Leased Real
Properties, nor any of the businesses conducted on any such properties is
the subject of any outstanding order, decree, or agreement with or
involving any governmental agency, court, or other party respecting any
material aspect of the operation of such properties and businesses that
relates to or arises under any Environmental Law (other than orders,
decrees or agreements affecting or directed to the healthcare industry
generally, or in the case of Leased Real Properties, lease agreements
requiring compliance with applicable Environmental Law);
(g) No portion of the Owned Real Properties or Leased Real
Properties contains or has ever contained any underground storage tank,
surface impoundment or similar device used for the management of
wastewater, or other waste management unit dedicated to the disposal,
treatment, or long-term (greater than 90 days) storage of waste materials;
and
(h) Neither Seller, any Subsidiary nor any other person has
improperly disturbed or encroached upon any floodplain areas, waters, or
-61-
<PAGE>
wetlands associated with any of the Owned Real Properties or Leased Real
Properties in violation of any Environmental Law.
Section 3.17 Financial Information.
---------------------
(a) Attached hereto as Schedule 3.17(a) is an unaudited
----------------
statement of combined earnings from the operations of the Transferred
Assets and Assumed Liabilities of the First Facilities and Subsequent
Facilities (as they were comprised on the as of date of such Schedule)
before interest, income taxes, depreciation and amortization ("EBITDA")
------
for the fiscal year ended May 31, 1993 and for the fiscal period ended
November 30, 1993 (collectively, the "EBITDA Statements"). The EBITDA
-----------------
Statements present fairly the combined EBITDA of such operations, taken as
a whole, as of the dates and for the periods shown, and were derived from
and are in accordance with the internal books and records of the
Subsidiaries as well as the "Subsidiaries" defined in the Subsequent
Facilities Agreement (the "Combined Subsidiaries") and the regularly
---------------------
prepared unaudited internal financial statements of the First Facilities
and the Subsequent Facilities, which are prepared in accordance with the
generally accepted accounting principles utilized in the preparation of the
published financial statements of Seller.
(b) Attached hereto as Schedule 3.17(b) is an internally
----------------
prepared unaudited combined statement of certain assets and liabilities of
the First Facilities and the Subsequent Facilities as of November 30, 1993
(the "Balance Sheet"; collectively, the Balance Sheet and the EBITDA
-------------
Statements are the "Financial Schedule"). The Balance Sheet has been
------------------
prepared from, and is in accordance with, the internal books and records of
the Combined Subsidiaries and presents fairly the financial condition of
the First Facilities and the Subsequent Facilities with respect to the
Transferred Assets and Assumed Liabilities that are the subject of this
Agreement and the Subsequent Facilities Agreement, taken as a whole, as of
the date shown. The Balance Sheet was prepared in accordance with Seller's
practices for the preparation of internal financial statements,
consistently applied, and is in accordance with the generally accepted
accounting principles utilized in the preparation of the published
financial statements of Seller.
(c) Notwithstanding the foregoing, (i) the Financial Schedule
does not (A) reflect all intercompany eliminations, adjustments and
accruals that are reflected in financial statements of Seller, (B) reflect
any reserves
-62-
<PAGE>
for the Unusual Proceedings, (C) reflect any anticipation of the
divestiture of the Transferred Assets that are the subject of this
Agreement and the Subsequent Facilities Agreement and any adjustments to
the carrying values of such assets occasioned thereby, (D) contain
footnotes or other explanatory material associated with financial
statements prepared in accordance with generally accepted accounting
principles, or (E) contain normal year-end adjustments with respect to
interim periods, (ii) the EBITDA Statements do not reflect allocations of
indirect costs and non-hospital overhead or the corresponding cost
reimbursement impact of claiming such costs in a Cost Report relating to
First Facilities or Subsequent Facilities, and (iii) certain earnings,
assets and liabilities have been excluded from the EBITDA Statements or the
Balance Sheets, as applicable, as noted in the footnotes or other
explanatory material associated with the Financial Statements. In addition,
the Financial Schedule is to be read in conjunction with, and is subject
to, all notes and other explanatory material set forth therein.
(d) The Balance Sheet reflects the amount of Receivables, as
well as "Receivables" as defined in the Subsequent Facilities Agreement
(together, the "Combined Receivables"), which for this purpose may include
--------------------
Eligible Receivables (including "Eligible Receivables" as defined in the
Subsequent Facilities Agreement) as of the date thereof, net of allowances
customarily recorded by the Combined Subsidiaries for uncollectible and
doubtful accounts, and contractual allowances pursuant to agreements with
Payors, all in conformity with Seller's practices for the preparation of
internal financial statements and in accordance with the generally accepted
accounting principles utilized in the preparation of the published
financial statements of the Seller. To the knowledge of Seller and each
such Subsidiary, all such Combined Receivables included in the Balance
Sheet represent amounts validly owed to the applicable Combined Subsidiary
by reason of the provision of goods, services and other consideration by
such Combined Subsidiary, and, to the knowledge of Seller and each such
Combined Subsidiary, are not valued in excess of the amounts expected to be
collected with respect thereto. Each such Combined Subsidiary maintains
its accounting records in sufficient detail to substantiate the Combined
Receivables reflected on the Balance Sheet. Since the date of Seller's
most recent audited financial statements, neither Seller nor any such
Combined Subsidiary has changed any principle or practice with respect to
the recordation of accounts receivable or the calculation of reserves
therefor, or any material collection, discount or write-off policy or
procedure.
-63-
<PAGE>
Section 3.18 Changes Since Balance Sheet. Since the date of the
---------------------------
Balance Sheet and up to and including the date of this Agreement, other
than as contemplated or permitted by this Agreement, the Subsidiaries have
conducted the businesses represented by the Transferred Assets only in the
ordinary and normal course, except for (i) matters associated with the
Unusual Proceedings, (ii) as shown on Schedule 3.18, (iii) the institution
-------------
or completion of compliance programs, or (iv) events in anticipation of the
divestiture of the Transferred Assets, and there has not been:
(a) Any entry into or termination by Seller or a Subsidiary of
any material commitment, contract, agreement or transaction (including,
without limitation, any borrowing or lending transaction or capital
expenditure) related to the Transferred Assets except for transactions in
the ordinary course of business and renegotiation of credit agreements to
which Seller and certain of its subsidiaries are parties which
renegotiations will not have a Material Adverse Effect on the Transferred
Assets or on any Facility;
(b) Any casualty, physical damage, destruction or physical loss
respecting, or change in the physical condition of, any Facility or
Equipment that has had a Material Adverse Effect on a Facility;
(c) Any transfer of or rights granted under any contract which
would have been an Assumed Contract on the date of the Balance Sheet except
for transactions in the ordinary course of business;
(d) Other than in the ordinary course of business, (i) any sale
or other disposition of any fixed asset included in the Balance Sheet
having a net book value in excess of $100,000, or (ii) any material
mortgage, pledge or imposition of any lien or other encumbrances on any
such asset, or (iii) sales or dispositions of, or the imposition of
material encumbrances on, fixed assets included in such Balance Sheet
having a net book value that exceeds $1,000,000 in the aggregate, or (iv)
any sale or other disposition of Inventories included in the Balance Sheet;
(e) Any material amendment (other than general amendments which
the carrier makes for a category of policy) or termination of any material
insurance policy or failure to renew any material insurance policy covering
the Transferred Assets;
-64-
<PAGE>
(f) Any default or breach by Seller or a Subsidiary under any
contract that would have been an Assumed Contract on the date of the
Balance Sheet which, when viewed individually or in the aggregate of all
such breaches or defaults, has had a Material Adverse Effect on any
Facility;
(g) Any material adverse change in the trend of the business,
financial condition or results of operations of any Facility as compared to
the trend of the business, financial condition or results of operations, as
applicable, of such Facility for the two year period ended November 30,
1993; or
(h) Any increase made in the compensation levels of any chief
executive officer or chief financial officer of any Facility, or any
general increase made in the compensation levels of the other Retained
Employees, except in the ordinary course of business.
Section 3.19 Transferred Business Names. Seller or one of the
--------------------------
Subsidiaries owns or has the right to use the Transferred Business Names,
free of any liens. Schedule 2.1(h) sets forth for each Transferred
---------------
Business Name, if any, that is the subject of a trademark registration the
date of registration, the registration number and the expiration date. To
the knowledge of Seller and the Subsidiaries, no aspect of registered
trademarks included in the Transferred Business Names, if any, has been
adjudged invalid or unenforceable or has been cancelled or revoked. Except
as set forth on Schedule 3.19, to the knowledge of Seller and the
-------------
Subsidiaries, the use by the Subsidiaries of the Transferred Business Names
in connection with the Facilities does not conflict with or violate any
valid rights of third parties, including any patents, trademarks, trade
names or copyrights of others, in any way which would have a Material
Adverse Effect on the Transferred Assets or a Facility; neither Seller nor
any Subsidiary has received any notice of a conflict with the asserted
rights of others in connection therewith which, if determined adversely,
would have a Material Adverse Effect on any Facility. Neither Seller nor
any of the Subsidiaries is obligated to pay any amount, whether as a
royalty, license fee or other payment, to any person in order to use any of
the Transferred Business Names.
Section 3.20 Compliance with Laws and Accreditation. To Seller's and
--------------------------------------
each Subsidiary's knowledge, Seller and each Subsidiary has complied in all
material respects with all laws, regulations and orders, and as
-65-
<PAGE>
materially required for participation in the Medicare, CHAMPUS and Medicaid
reimbursement programs and is in material compliance with the indigent care
conditions, if any, contained in or related to certificates of need
obtained by it except (a) as set forth in Schedule 3.20, (b) as described
-------------
in Sections 3.10, 3.12, 3.16, and 3.21 and the Schedules, if any related
------------- ---- ---- ---- ---------
thereto, and (c) for matters related to the Unusual Proceedings. With
respect to each Facility, Seller has previously delivered to Buyer true and
complete copies of the most recent Joint Commission on Accreditation of
Health Care Organizations ("JCAHO") accreditation survey report and
deficiency list, if any; the most recent Statement of Deficiencies and Plan
of Correction on Form HCFA-2567; the most recent state licensing report and
list of deficiencies, if any; the most recent fire marshall's survey and
deficiency list, if any; and the corresponding plans of correction or other
responses except, in each case, such surveys, reports or deficiency lists
which do not reflect any deficiency which would have a Material Adverse
Effect on any Facility. Seller or the relevant Subsidiary has taken or is
in the process of taking all reasonable steps to correct all material
deficiencies noted therein and a description of any material uncorrected
deficiency is listed in Schedule 3.20. There are no provisions in, or other
-------------
agreements to which Seller or a Subsidiary is a party relating to any
Licenses, which would preclude or limit Buyer from operating the
Transferred Assets substantially as they are now operated and using the
beds of any Facility substantially as they are currently classified.
Section 3.21 Cost Reports, Third Party Receivables and Conditions of
-------------------------------------------------------
Participation. The Cost Reports of the Facilities for Medicare, Medicaid
-------------
(if required) and Blue Cross (if required) reimbursement have been audited
through the periods set forth in Schedule 3.21, and Blue Cross and Medicare
-------------
Cost Reports of the Facilities were filed when due. Except for matters
related to the Unusual Proceedings, and as set forth in Schedule 3.21: to
-------------
the knowledge of Seller, (a) neither Seller nor any Subsidiary has received
notice of any material dispute between a Facility and Blue Cross,
governmental authorities or the Medicare fiscal intermediary regarding such
Cost Reports for periods subsequent to the period specified in Schedule
--------
3.21 other than with respect to adjustments thereto made in the ordinary
----
course of business which do not involve individual amounts in excess of ten
thousand dollars ($10,000) per Cost Report; (b) there are no pending or
threatened material claims by any of such programs against any Facility;
(c) each Facility currently meets, without material exception, the
conditions for participation in the Medicare program; and (d) no Facility
has been subject
-66-
<PAGE>
to loss of waiver of liability for utilization review denials with respect
to any such program during the past two years.
Section 3.22 Medical Staff. Seller has previously delivered to
-------------
Buyer, with respect to each Facility, a true and correct copy of the blank
forms generally used with respect to medical staff privilege and membership
application or delineation of privilege; all current medical staff bylaws,
rules and regulations and amendments thereto respecting Facilities; and all
written contracts with physicians, physician groups, or other members of
the medical staffs of the Facilities. With regard to the active medical
staffs of the Facilities, there are no material pending or threatened
disciplinary or corrective actions or appeals therefrom involving physician
applicants or active medical staff members except as set forth in Schedule
--------
3.22. Schedule 3.22 also sets forth a materially complete and accurate list
---- -------------
and description of (a) the name of each member of the medical staff of each
Facility as of the date shown on such Schedule, (b) the approximate age of
each active medical staff member as of such date, (c) the specialty, if
any, of each medical staff member, (d) readily available reports regarding
the number of patient admissions of each medical staff member for the
period shown on such Schedule 3.22, and (e) readily available reports
-------------
regarding the aggregate patient days of patients admitted by each medical
staff member for the period shown on such Schedule 3.22.
-------------
Section 3.23 Hill-Burton Care. Except as set forth in Schedule 3.23,
---------------- -------------
no Subsidiary or Facility has an outstanding loan, grant or loan guarantee
pursuant to the Hill-Burton Act (42 U.S.C. (S)291a, et seq.) and the
transactions contemplated hereby will not result in any obligation on the
part of the Buyer or a Buyer Subsidiary to repay any such loans, grants or
loan guarantees or provide uncompensated care in consideration thereof.
Section 3.24 Assets Used in the Operation of the Facilities. There
----------------------------------------------
are no assets or properties that are used in and necessary for the conduct
of the operations of the Facilities that are owned by Seller and the
Subsidiaries, and which individually or in the aggregate, are necessary for
the operation of the Facilities that are not included in the Transferred
Assets except for such Assumed Contracts which Buyer has elected or will
elect to reject pursuant to Section 2.18. Except as set forth in Schedule
------------ --------
3.24 and subject to Section 2.18, the Transferred Assets include all assets
---- ------------
and properties that are properly recordable on the Balance Sheet, other
than assets and properties disposed of by the Seller or a Subsidiary in
the
-67-
<PAGE>
ordinary course of business since the date of the Balance Sheet and without
violation of this Agreement.
Section 3.25 Taxes. All tax returns of every kind (including,
-----
without limitation, returns of all income taxes, franchise taxes, real and
personal property taxes, intangibles taxes, patient revenue or other
healthcare taxes, withholding taxes, employee compensation taxes and all
other taxes of any kind applicable to Seller or any Subsidiary) that are
due to have been filed in accordance with applicable laws have been duly
filed, and all taxes shown to be due and payable on such returns have been
paid in full.
Section 3.26 Lists of Other Data. Schedule 2.1(f) contains a list,
------------------- ---------------
materially complete and correct as of the dates shown thereon, of the Other
Assigned Contracts, and Schedules 3.26(a) through (h) contain lists or
----------------- ---
other information, materially complete and correct as of the dates shown
thereon, of the following:
(a) The most recent regularly generated depreciation schedules
related to tangible personal property constituting Equipment, together with
copies of such schedules;
(b) A brief description of all insurance in force covering (i)
fixed assets that would constitute Transferred Assets, or (ii) the
operations of any Facility as of such date;
(c) All compensation, bonus, incentive, deferred payments,
retirement, pension, severance, profit-sharing, stock purchase and stock
option plans, group life, automobile, medical, dental, disability, welfare
or other employee benefit plans or insurance policies, and other similar
arrangements (collectively, "Employee Benefit Arrangements") generally
-----------------------------
applicable to the Retained Employees or a substantial part thereof or
generally applicable to the chief executive or chief financial officers, or
a substantial part thereof, of the Facilities as of such date;
(d) The aggregate accrued Paid Time Off for all employees at
each Facility, as of the date shown;
(e) Any contract relating to clean-up, abatement or other
actions in connection with the remediation of any existing environmental
liabilities or relating to the performance of any environmental audit or
study
-68-
<PAGE>
with respect to the Facilities other than with respect to the Environmental
Survey and entered into in the three years preceding the date hereof;
(f) Any indenture, mortgage, loan, credit or other written
contract under which any of the Subsidiaries, directly or indirectly, is
indebted for money borrowed or is the issuer of any note, bond, indenture
or other evidence of indebtedness for money borrowed or guarantor of
similar financial obligations of others, whether or not reflected on the
Balance Sheet;
(g) Any contract with any bank, finance company or similar
organization pursuant to which such organization acquires receivables from
the Subsidiaries; and
(h) Any contract granting any person a lien, security interest
or mortgage on any Transferred Asset (other than Permitted Encumbrances),
including, without limitation, any factoring agreement or agreement for the
assignment of accounts receivable or inventory.
Section 3.27 Certain Transactions. Except as set forth in Schedule
-------------------- --------
3.27, and except for remuneration as employees, since November 30, 1992 (i)
----
no Facility has been a party to any transaction or series of similar
transactions in which the amount involved exceeds $60,000 and in which the
chief executive officer, chief financial officer or medical director of
such Facility has a direct or indirect material interest, and (ii) no chief
executive officer, chief financial officer or medical director of any
Facility has been indebted to Seller or any Subsidiary in an amount in
excess of $60,000.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller, as of the date hereof,
as follows, except as set forth in Schedules numbered in relation to the
Sections set forth below:
Section 4.1 Organization and Corporate Power. Buyer is a corporation
--------------------------------
duly incorporated and validly existing under the laws of, and is authorized
to exercise its corporate powers, rights and privileges and is in good
standing in, the State of Delaware and has full corporate power to carry on
its business as presently conducted and to own or lease and operate
-69-
<PAGE>
its properties and assets now owned or leased and operated by it and to
perform the transactions on its part contemplated by this Agreement and all
other agreements contemplated hereby.
Section 4.2 Buyer Subsidiaries.
------------------
(a) As of each Scheduled Closing, each Buyer Subsidiary will be
a corporation duly organized, validly existing and in good standing under
the laws of its state of incorporation. Each Buyer Subsidiary will have,
at the First Closing and at each Scheduled Closing thereafter, all
requisite power and authority (corporate and otherwise) to carry on its
business as then conducted and to own or lease and operate its properties
and assets then owned or leased and operated by it and to perform the
transactions on its part contemplated by this Agreement and all other
agreements contemplated hereby.
(b) The board of directors of each Buyer Subsidiary and, if
required, its shareholders, will have, by the date of the First Closing,
duly and effectively authorized (i) the purchase of the Transferred Assets
to be purchased by such Buyer Subsidiary; and (ii) the execution, delivery
and performance of the Related Agreements and all other agreements
contemplated hereby and thereby to which such Buyer Subsidiary is a party.
No other corporate act or proceeding on the part of any Buyer Subsidiary,
its board of directors or its shareholders will be necessary to authorize
any Related Agreement or other agreement contemplated hereby and thereby or
the transactions contemplated hereby and thereby.
(c) The Related Agreements and all other agreements contemplated
hereby and thereby to which any Buyer Subsidiary is a party will, as of
each Scheduled Closing, have been duly executed and delivered by each such
Buyer Subsidiary, and each such agreement, when executed and delivered will
constitute, a valid and binding obligation of such Buyer Subsidiary,
enforceable against such Buyer Subsidiary in accordance with its terms,
except as it may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar Laws now or hereafter in effect relating to
creditors' rights generally and that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding may
be brought.
-70-
<PAGE>
Section 4.3 Authority Relative to this Agreement. The execution,
------------------------------------
delivery and performance of this Agreement and the Related Agreements and
the consummation of the transactions contemplated hereby and thereby have
been duly and effectively authorized by the board of directors of Buyer; no
other corporate act or proceeding on the part of Buyer, its board of
directors or shareholders is necessary to authorize this Agreement, any
such Related Agreement or the transactions contemplated hereby and thereby.
This Agreement has been, and each of the Related Agreements contemplated
hereby will, as of each Scheduled Closing, have been, duly executed and
delivered by Buyer and by each applicable Buyer Subsidiary, and this
Agreement constitutes, and each such Related Agreement when executed and
delivered will constitute, a valid and binding obligation of Buyer and each
Buyer Subsidiary party thereto, enforceable against Buyer and each Buyer
Subsidiary party thereto, in accordance with its terms, except as it may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar Laws now or hereafter in effect relating to creditors' rights
generally and that the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding may be brought.
Section 4.4 Absence of Breach. Subject to the provisions of Sections
----------------- --------
4.5 and 4.6 below regarding private party and governmental consents, and
--- ---
except for compliance with the requirements of the HSR Act and any
regulatory or licensing Laws applicable to the businesses and assets
represented by the Transferred Assets, the execution, delivery and
performance by Buyer of this Agreement and the Related Agreements, and the
execution and delivery by any Buyer Subsidiary of the Related Agreements to
which it is a party, and the performance by the Buyer Subsidiaries of the
transactions to be performed by them and contemplated by this Agreement and
the Related Agreements entered into by the Buyer Subsidiaries, do not, (a)
conflict with or result in a breach of any of the provisions of Charter
Documents of Buyer or of any of the Buyer Subsidiaries, (b) contravene any
Law or cause the suspension or revocation of any License presently in
effect, which affects or binds Buyer or any of the Buyer Subsidiaries or
any of their material properties, or (c) conflict with or result in a
breach of or default under any indenture or loan or credit agreement or any
other agreement or instrument to which Buyer or any of the Buyer
Subsidiaries is a party or by which it or they or any of their properties
may be affected or bound.
-71-
<PAGE>
Section 4.5 Private Party Consents. Except as set forth on Schedule
---------------------- --------
4.5, the execution, delivery and performance by Buyer of this Agreement and
---
the Related Agreements and the execution and delivery by any Buyer
Subsidiary of the Related Agreements to which it is a party, and the
performance by the Buyer Subsidiaries of the transactions contemplated by
this Agreement and the Related Agreements to be performed by the Buyer
Subsidiaries, do not require the authorization, consent or approval of any
non-governmental third party.
Section 4.6 Governmental Consents. The execution, delivery and
---------------------
performance by Buyer of this Agreement and the Related Agreements, and the
execution and delivery by any Buyer Subsidiary of the Related Agreements to
which it is a party, and the performance by the Buyer Subsidiaries of the
transactions contemplated by this Agreement and the Related Agreements to
be executed, delivered or performed by the Buyer Subsidiaries, do not
require the authorization, consent, approval, certification, license or
order of, or any filing with, any court or governmental agency, except for
compliance with the HSR Act and except for such governmental
authorizations, consents, approvals, certifications, licenses and orders
that customarily accompany the transfer of health care facilities such as
the Facilities.
Section 4.7 Brokers. Except as set forth on Schedule 4.7, no broker,
------- ------------
finder, or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with this Agreement or the
transactions contemplated hereby based upon any agreements or arrangements
or commitments, written or oral, made by or on behalf of Buyer or any of
its Affiliates. Buyer shall be solely responsible for the payment of any
such fee or commission to any person or entity listed on Schedule 4.7 as an
------------
exception to the foregoing.
Section 4.8 Qualified for Licenses. Buyer or a Buyer Subsidiary is
----------------------
qualified to obtain any Licenses and program participations necessary for
the operation by Buyer or a Buyer Subsidiary of the Transferred Assets as
of the relevant Scheduled Closing in the same manner as the Transferred
Assets are presently operated by Seller and the Subsidiaries.
Section 4.9 Financial Ability to Perform. Buyer has liquid capital
----------------------------
or committed sources therefor sufficient to permit it to perform timely its
obligations hereunder, including, but not limited to, the payment of the
Tentative Purchase Price to Seller at the Scheduled Closings and the other
-72-
<PAGE>
payments to Seller required hereunder. Promptly after its receipt of
letters of commitment or other documents related to the financing of its
obligations hereunder, Buyer will provide copies of the same to Seller.
Section 4.10 No Knowledge of Seller's Breach. Neither Buyer nor, to
-------------------------------
the knowledge of Buyer, any of its Affiliates has knowledge of any breach
of any representation or warranty by Seller or of any other condition or
circumstance that would excuse Buyer from its timely performance of its
obligations hereunder. Buyer shall notify Seller as promptly as practicable
if any such information comes to its attention before any relevant Closing
Date.
Section 4.11 No Assurance. Buyer acknowledges and agrees that the
------------
rates or bases used in calculating payments or reimbursements to it or a
Buyer Subsidiary by any Payor (including but not limited to Medicare) may
differ from the rates and bases used in calculating such payments or
reimbursements to Seller and the Subsidiaries. In entering into the
transactions contemplated by this Agreement and the Related Agreements,
Buyer is relying solely on the express representations, warranties and
covenants of Seller and the Subsidiaries contained in this Agreement and
the Related Agreements and upon no other representations or statements of
Seller, the Subsidiaries or any of their representatives, and acknowledges
and agrees that nothing in this Agreement or the Related Agreements shall
be deemed to create any implied duty, disclosure obligation or
responsibility on the part of Seller or the Subsidiaries. Buyer further
acknowledges that during the course of the due diligence investigation,
material information related to the matters that are the subject of the
Unusual Proceedings may not have been discovered by or disclosed to it.
Seller represents and warrants that, at those scheduled confidential
meetings held among counsel for Buyer and Seller on the dates referenced in
Schedule 4.11, which meetings were held for the purpose of conducting
-------------
Buyer's due diligence regarding the Unusual Proceedings, statements of fact
concerning the Unusual Proceedings made by Seller's counsel present at such
meetings were not materially inaccurate.
ARTICLE 5
COVENANTS OF EACH PARTY
Section 5.1 Efforts to Consummate Transactions. Subject to the terms
----------------------------------
and conditions herein provided including, without limitation, Articles 8
----------
and 9 hereof, each of the parties hereto agrees to use its reasonable
-
-73-
<PAGE>
commercial efforts to take, or to cause to be taken, all reasonable actions
and to do, or to cause to be done, all reasonable things necessary, proper
or advisable under applicable Laws to consummate and make effective, as
soon as reasonably practicable, the Transactions contemplated hereby,
including the satisfaction of all conditions thereto set forth herein. Such
actions shall include, without limitation, exerting their reasonable
efforts to obtain the consents, authorizations and approvals of all private
parties and governmental authorities whose consent is reasonably necessary
to effectuate the Transactions contemplated hereby, and effecting all other
necessary registrations and filings, including but not limited to filings
under Laws relating to the transfer or obtaining of necessary Licenses,
under the HSR Act and all other necessary filings with governmental
authorities. Inasmuch as the Transactions in respect of the First
Facilities may be consummated without regard to consummation of the
transactions contemplated by the Subsequent Facilities Agreement, the
parties hereby agree that, in order potentially to expedite the timing of
the First Closing, the parties will make separate filings under the HSR Act
with respect to the First Facilities. The foregoing notwithstanding, it
shall be the responsibility of Buyer to use its reasonable commercial
efforts and to act diligently and at its expense to obtain any
authorizations, approvals and consents in connection with acquiring
Licenses and program participations that will permit it to operate the
Facilities after the Scheduled Closings, provided that Buyer will seek to
--------
obtain Licenses and program participations subject to the existing
conditions under which the Subsidiaries operate the Facilities and will not
seek to change the same until the Transferred Assets and Assumed
Liabilities respecting the Facilities in question have been transferred to
and assumed by Buyer. Seller and its Subsidiaries shall cooperate with
Buyer's efforts to obtain the requisite regulatory consents, provided
neither Seller nor any of its Subsidiaries shall be obligated to incur any
liabilities or assume any obligations in connection therewith. Other than
Buyer's and Seller's obligations under Section 5.5, neither party shall
-----------
have any liability to the other if, after using its reasonable commercial
efforts (and, in the case of Buyer's efforts to obtain requisite Licenses,
acting diligently), it is unable to obtain any consents, authorizations or
approvals necessary for such party to consummate the Transactions. As used
herein, the terms "reasonable commercial efforts" or "reasonable efforts"
----------------------------- ------------------
do not include the provision of any consideration to any third party or the
suffering of any economic detriment to a party's ongoing operations for the
procurement of any such consent, authorization or approval except for the
costs of gathering and supplying data or other information or making any
filings, fees and
-74-
<PAGE>
expenses of counsel and consultants and for customary fees and charges of
governmental authorities and accreditation organizations.
Section 5.2 Cooperation; Regulatory Filings. Prior to and after the
-------------------------------
Final Closing, upon prior reasonable written request, each party agrees to
cooperate with the other in every reasonable commercial way to consummate
the Transactions. Notwithstanding the foregoing, all analyses, appearances,
presentations, memoranda, briefs, arguments, opinions and proposals made or
submitted by or on behalf of either party hereto in connection with
proceedings under or relating to the HSR Act or any other federal or state
antitrust or fair trade law, or made or submitted by or on behalf of Buyer
in connection with proceedings to obtain the Licenses and program
participations referred to in Section 5.1 hereof, shall be subject to the
-----------
joint approval or disapproval and the joint control of Buyer and Seller,
acting with the advice of their respective counsel, it being the intent of
the foregoing that the parties hereto will consult and cooperate with one
another, and consider in good faith the views of one another, in connection
with any such analysis, presentation, memorandum, brief, argument,
appearance, opinion or proposal; provided that nothing herein shall prevent
--------
either party hereto or any of their Affiliates or their authorized
representatives from (a) making or submitting any such analysis,
appearance, presentation, memorandum, brief, argument, opinion or proposal
in response to a subpoena or other legal process or as otherwise required
by Law, or (b) submitting factual information to the United States
Department of Justice, the Federal Trade Commission, any other governmental
agency or any court or administrative law judge in response to a request
therefor or as otherwise required by Law.
Section 5.3 Further Assistance. From time to time, at the reasonable
------------------
request of either party, whether on or after a Scheduled Closing, without
further consideration, either party, at its expense and within a reasonable
amount of time after request hereunder is made, shall execute and deliver
such further instruments of assignment, transfer and assumption and take
such other action as may be reasonably required to more effectively assign
and transfer the Transferred Assets to, and vest the Assumed Liabilities
in, Buyer, deliver or make the payment of the Purchase Price to Seller or
any amounts due from one party to the other pursuant to the terms of this
Agreement or confirm Seller's ownership of the Excluded Assets and
obligations with respect to the Excluded Liabilities.
-75-
<PAGE>
Section 5.4 Cooperation Respecting Proceedings. After the Scheduled
----------------------------------
Closings, upon prior reasonable written request, each party shall cooperate
with the other, at the requesting party's expense (but including only out-
of-pocket expenses to third parties and not the costs incurred by any party
for the wages or other benefits paid to its officers, directors or
employees), in furnishing information, testimony and other assistance in
connection with any inquiries, actions, tax or Cost Report audits,
proceedings, arrangements or disputes involving either of the parties
hereto (other than in connection with disputes between the parties hereto)
and based upon contracts, arrangements or acts of Seller or any of the
Subsidiaries which were in effect or occurred on or prior to any Scheduled
Closing and which relate to the Transferred Assets, including, without
limitation, arranging discussions with (and the calling as witness of)
officers, directors, employees, agents, and representatives of Buyer.
Section 5.5 Expenses. Whether or not the Transactions contemplated
--------
hereby are consummated, except as otherwise provided in this Agreement, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses. Notwithstanding the foregoing:
(a) Costs associated with preliminary title reports and title
policies shall be borne by Seller up to the costs that would have been
incurred had the title policies been standard coverage policies of title
insurance, and the remaining costs, if any, including costs for Extended
Coverage and any surveys in connection therewith, shall be borne by Buyer;
(b) All costs of the Environmental Survey referred to in Section
-------
6.2(b) shall be borne one-half by Buyer and one-half by Seller, other than
------
any cost incurred in connection with any "Phase II" investigation conducted
by Buyer's environmental consultant (which shall be borne by Buyer);
(c) All escrow charges, appraisal fees, and charges of any
neutral independent public accountant or mediator, and related costs, shall
be borne one-half by Buyer and one-half by Seller (it being agreed that
each party shall bear the costs of its own independent public accountant or
designated mediator);
-76-
<PAGE>
(d) All recording costs and charges respecting real property
will be borne one-half by Seller and one-half by Buyer;
(e) All transfer taxes respecting real property will be borne
one-half by Buyer and one-half by Seller;
(f) All fees and expenses relating to the filings under the HSR
Act shall be borne by the party incurring such fees and expenses;
(g) All fees and charges of governmental authorities and
accreditation agencies in connection with the transfer, issuance or
authorization of any License, accreditation or program participation shall
be borne by Buyer;
(h) All fees or costs associated with the issuance of any bond
or the establishment of any escrow required by Section 2.10(a) shall be
---------------
borne by Buyer;
(i) All fees, charges or costs (other than internal costs of
Seller or any Subsidiary), including auditing fees and expenses, incurred
as a result of Buyer's compliance with the Securities Exchange Act of 1934,
as amended, or the Securities Act of 1933, as amended, and the rules and
regulations thereunder, shall be borne by Buyer;
(j) Out-of-pocket costs incurred by Seller and the Subsidiaries
in connection with providing transitional assistance to Buyer shall be
borne by Buyer, whether such assistance is provided before or after a
Scheduled Closing, including costs associated with attendance at meetings
requested by Buyer;
(k) All liabilities or obligations of Seller or a Subsidiary for
Taxes in the nature of sales taxes incurred as a result of the sale of the
Transferred Assets hereunder to Buyer shall be borne one-half by Seller and
one-half by Buyer; and
(l) All fees, charges and costs of economists and other experts,
if any, jointly retained by Buyer and Seller in connection with submissions
made to any government agency and advice in connection therewith respecting
approval of the Transactions, including proceedings under the HSR Act, will
be borne one-half by Buyer and one-half by Seller.
-77-
<PAGE>
All such charges and expenses shall be promptly settled between the parties
at the relevant Scheduled Closing or upon termination or expiration of
further proceedings under this Agreement, or with respect to such charges
and expenses not determined as of such time, as soon thereafter as is
reasonably practicable.
Section 5.6 Announcements; Confidentiality. Prior to the Final
------------------------------
Closing Date, no press or other public announcement, or public statement or
comment in response to any inquiry, relating to the transactions
contemplated by this Agreement shall be issued or made by Buyer or Seller
or any Subsidiary without the joint approval of Buyer and Seller; provided
--------
that a press release or other public announcement, regulatory filing,
statement or comment made without such joint approval shall not be in
violation of this Section if it is made in order to comply with applicable
securities Laws or stock exchange policies and in the reasonable judgment
of the party making such release or announcement, based upon advice of
counsel, prior review and joint approval, despite reasonable efforts to
obtain the same, would prevent dissemination of such release or
announcement in a timely enough fashion to comply with such Laws or
policies, provided that in all instances prompt notice from one party to
--------
the other shall be given with respect to any such release, announcement,
statement or comment. Subject to the foregoing, the parties hereto
recognize and agree that all information, instruments, documents and
details concerning the businesses of Buyer, Seller and the Subsidiaries are
strictly confidential, and Seller and Buyer expressly covenant and agree
with each other that, prior to and after the Scheduled Closings, they will
not, nor will they allow any of their respective officers, directors,
employees, representatives or agents (including professional advisors) to
disclose or publicly comment upon any matters relating to the business of
the other or relating to this Agreement, including, without limitation, the
terms, timing or progress of the transactions contemplated hereby, or its
negotiation, terms, provisions or conditions, including Purchase Price,
except for disclosure to their respective professional advisors and lenders
or prospective financing sources (each of whom shall agree not to disclose
the same) which is reasonably necessary to effectuate the Transactions
contemplated hereby and in a manner consistent with the provisions of this
Agreement. Each party shall keep all information (i) obtained from the
other either before or after the date of this Agreement, or (ii) related to
Buyer's proposed purchase of the Transferred Assets, Seller's proposed sale
of the Transferred Assets, the contents of this Agreement or the
negotiation of this Agreement confidential, and neither party shall reveal
such information to, nor produce
-78-
<PAGE>
copies of any written information for, any person outside its management
group or its professional advisors (including lenders and prospective
financing sources) without the prior written consent of the other party,
unless such party is compelled to disclose such information by judicial or
administrative process or by any other requirements of Law or disclosure is
reasonably necessary to obtain a License or a consent listed on the
Schedule of Required Consents. If the Transactions contemplated by this
Agreement should fail to close for any reason, each party shall return to
the other as soon as practicable all originals and copies of written
information provided to such party by or on behalf of the other party and
none of such information shall be used by either party, or their employees,
agents or representatives in the business operations of any person.
Notwithstanding the foregoing, (i) each party's obligations under this
Section shall not apply to any information or document which is or becomes
available to the public other than as a result of a disclosure by the other
party in violation of this Agreement or other obligation of confidentiality
under which such information may be held or becomes available to the party
on a non-confidential basis from a source other than the other party or its
officers, directors, employees, representatives or agents and (ii) without
the prior written consent of Seller, or except as may be required by Law
(as determined by the written opinion of independent counsel in form and
substance satisfactory to Seller) the schedules to this Agreement shall not
be disclosed to or filed with any person (including any governmental entity
or regulatory board) if such filing or disclosure could result in such
schedules becoming available to the public. The parties' obligations under
this Section shall survive the termination of this Agreement. Nothing in
this Section shall, or is intended to, impair or modify any of the rights
or obligations of Buyer or its Affiliates under that certain letter
agreement dated as of September 15, 1993, all of which remain in effect
until termination of such letter agreement in accordance with its terms.
Section 5.7 Preservation of and Access to Certain Records.
---------------------------------------------
(a) As set forth in Section 2.2(e), all or any portion of the
------
medical, clinical and other records directly or indirectly associated with
the admission, care and treatment of patients on or prior to the relevant
Closing Date on which the relevant Facility is transferred (collectively,
for all Facilities, the "Patient Records") and all financial and other
---------------
records of, or located at, a Facility for the period ending on or prior to
the relevant Closing Date, whether or not maintained at or by a Facility
(the Patient Records and such other records for all Facilities are
collectively referred to
-79-
<PAGE>
as the "Hospital Records") shall be Excluded Assets. Notwithstanding the
----------------
foregoing, the parties will cooperate in providing copies and access to
such records as set forth below.
(b) Notwithstanding that the Hospital Records are Excluded
Assets, to the extent required by applicable Law or at Seller's election,
Seller may choose not to remove the Hospital Records from a transferred
Facility or otherwise acquire possession of them after a Scheduled Closing.
Unless and until removed by Seller, the Buyer shall, in accordance with
applicable Laws, maintain the Hospital Records at the Facilities (or at
such other mutually approved locations) at Buyer's cost, and as agent of
and bailee for Seller, until the expiration of seven (7) years from the
relevant Scheduled Closing (and, if at the expiration thereof any tax or
Payor audit or judicial proceeding is in progress or the applicable statute
of limitations has been extended, for such longer period as such audit or
proceeding is in progress or such statutory period is extended)(the
"Document Retention Period"). After a Scheduled Closing and subject to
--------------------------
applicable Laws, Buyer shall grant Seller full access to the Hospital
Records (including any Patient Records) as needed for any lawful purpose
(including Seller's inspection and copying of same), and Seller shall have
the same rights of access to inspect and copy (at Seller's cost) any or all
of the Hospital Records that Seller had prior to the Scheduled Closing.
Buyer shall instruct the appropriate employees of the Facilities to
cooperate in providing access to such records to Seller and its authorized
representatives as contemplated herein. Access to such records shall be,
wherever reasonably possible, during normal business hours, with reasonable
prior written notice to Buyer of the time when such access shall be needed.
Seller's employees, representatives and agents shall conduct themselves in
such a manner so that Buyer's normal business activities shall not be
unduly or unnecessarily disrupted. After the expiration of the
aforementioned Document Retention Period, Buyer shall not, without ninety-
one (91) days' prior written notification to Seller, destroy any Hospital
Records in its possession. Within ninety (90) days after its receipt of
such notice of intent to destroy, Seller shall have the right, at its own
expense, to require Buyer to deliver any such records to Seller in
accordance with Seller's reasonable instructions. Buyer shall adopt a
record retention policy with respect to the Hospital Records which requires
that all Hospital Records be maintained for the Document Retention Period
and destroyed only after compliance with the notice provisions of this
Subsection (b) (including the passage of time), and shall take all
--------------
reasonable steps necessary to inform its employees of such policy.
-80-
<PAGE>
(c) Buyer acknowledges and agrees that Seller shall have the
right to remove, and may remove, from time to time on or prior to the
relevant Closing Date and during the Document Retention Period any or
all of the Hospital Records. In the event of Seller's removal of any
Hospital Records from a Facility, it shall, at Seller's cost and subject to
applicable Laws, provide Buyer with copies (or originals, if required by
applicable law or accreditation standards) of the following Hospital
Records if Buyer elects to retain such copies: (i) the Patient Records for
patients who are patients of the Facilities at the relevant Scheduled
Closing or who are the subject of Receivables transferred to Buyer
hereunder, (ii) the personnel records of the Hired Employees, and (iii) any
records Buyer would be required to have to comply with accreditation
standards. If the Hospital Records are removed by Seller, then it shall
maintain such Hospital Records at its expense during such period of time
and at such location as is deemed appropriate by Seller in its sole and
absolute discretion. For so long as the Hospital Records are maintained by
Seller, Seller shall make Hospital Records (other than those protected by
or subject to the attorney-client privilege) available to Buyer, subject to
applicable Laws, as needed by Buyer for any lawful purpose and if
reasonably necessary to permit Buyer to operate the Facilities or other
Transferred Assets. Seller shall instruct its appropriate employees to
cooperate in providing access to such records to Buyer and its authorized
representatives as contemplated herein. Buyer's access to such Hospital
Records shall be during normal business hours, with reasonable prior
written notice to Seller of the time when such access shall be needed.
Buyer may make copies of or extracts from any such Hospital Records to
which Buyer has access hereunder at Buyer's sole cost and expense.
Notwithstanding the foregoing, Buyer's access to, or right to copies of,
any Patient Records shall be subject to any applicable Law, accreditation
standard or rule of confidentiality or privilege.
(d) After Closing, Buyer or the applicable Buyer Subsidiary
shall have the right to assign to an entity which purchases from Buyer or a
Buyer Subsidiary a Facility or substantially all the assets of a Facility,
all of the rights of Buyer under this Section 5.7, provided that such
-----------
entity expressly assumes all obligations of Buyer under this Section 5.7
-----------
with respect to the purchased Facility.
ARTICLE 6
ADDITIONAL COVENANTS OF SELLER
Seller hereby additionally covenants, promises and agrees as follows:
-81-
<PAGE>
Section 6.1 Conduct Pending Closing. Prior to consummation of the
-----------------------
Transactions contemplated hereby or the termination or expiration of this
Agreement pursuant to its terms, unless Buyer shall otherwise consent in
writing, which consent shall not be unreasonably withheld or delayed, and
except for actions taken pursuant to Assumed Contracts, or which arise from
or are related to the anticipated transfer of the Transferred Assets, the
conduct or resolution of the Unusual Proceedings or effectuation of ongoing
compliance programs, or as otherwise contemplated by this Agreement or
disclosed in Schedule 6.1 or another Schedule to this Agreement, Seller
------------
shall, and shall cause the Subsidiaries to:
(a) Conduct the business represented by, and otherwise deal
with, the Transferred Assets only in the usual and ordinary course,
materially consistent with practices followed prior to the execution of
this Agreement;
(b) Use reasonable efforts to keep intact the Transferred Assets
and the business they represent and to preserve relationships beneficial to
such business that doctors, patients, Payors, suppliers, employees and
others have with the Facilities;
(c) Except as required by their terms, not amend, terminate,
renew, fail to renew or renegotiate any material contract, except in the
ordinary course of business and consistent with practices of the recent
past, or default (or take or omit to take any action that, with or without
the giving of notice or passage of time, would constitute a default) in any
of its obligations under any such contracts, that would be an Assumed
Contract as of the date hereof;
(d) Not (i) sell, lease, transfer or dispose of, or make any
contract for the sale, lease, transfer or disposition of, any assets or
properties which would be included in the Transferred Assets in an amount
in excess of $1,000,000 in the aggregate (other than sales in the ordinary
course of business); (ii) incur, assume, guaranty, or otherwise become
liable in respect of any indebtedness for money borrowed which would result
in Buyer assuming such liability hereunder after the Closing; (iii)
purchase or make any contract for the purchase of a material amount of
assets or properties which would be included in the Transferred Assets
(other than purchases in the ordinary course of business and other than
capital expenditures within the aggregate thresholds set forth in clause
(v) below); (iv) accelerate or delay the purchase of Inventory, or the
-82-
<PAGE>
payment of amounts due to or from the Subsidiaries in a manner inconsistent
with past practice; (v) make any new commitments which would require an
expenditure of more than $50,000 in the aggregate other than in the
ordinary course of business; (vi) encumber or voluntarily subject to any
lien any Transferred Asset (except for Permitted Encumbrances); or (vii)
assign or transfer accounts receivable to collection agencies in a manner
inconsistent with past practice.
(e) Maintain in force and effect the insurance policies
identified in Section 3.26(b);
---------------
(f) Not enter into any contract or amendment of a contract that,
had such contract or amendment been entered into prior to the date hereof,
would have been included on Schedule 2.1(f), unless Buyer has failed to
---------------
disapprove of such contract or amendment in a written notice to Seller
given within two (2) business days of Seller's written notice to Buyer of
such contract or amendment accompanied by a copy thereof, provided that
--------
Buyer's disapproval of such contract or amendment shall not be
unreasonable, and provided further that any contract entered into in
--------
violation of this Section 6.1(f) shall be subject to the provisions of
--------------
Section 2.18;
------------
(g) Not grant any general or uniform increase in the rates of
pay or benefits to Retained Employees (or a class thereof) or any increase
in salary or benefits of any chief executive or financial officer of any
Facility, except for compensation previously agreed to prior to the date
hereof; or
(h) Subject to Section 6.3, not take any action which would
-----------
cause any of Seller's representations and warranties set forth in Article 3
---------
to be false as of the relevant Scheduled Closing;
provided that nothing in this Section shall (i) obligate Seller or any
--------
Subsidiary to make expenditures other than in the ordinary course of
business and consistent with practices of the recent past or to otherwise
suffer any economic detriment, (ii) preclude Seller from paying, prepaying
or otherwise satisfying any liability which, if outstanding as of a Closing
Date, would be an Assumed Liability or an Excluded Liability, (iii)
preclude Seller from incurring any liabilities or obligations to any third
party in connection with obtaining such party's consent to any transaction
contemplated by this Agreement or the Related Agreements provided such
--------
-83-
<PAGE>
liabilities and obligations under this clause (iii) shall be Excluded
------------
Liabilities pursuant to Section 2.4(h) hereof if not approved in advance by
--------------
Buyer (which approval shall not be unreasonably withheld), or (iv) preclude
Seller from instituting or completing any program designed to promote
compliance or comply with Laws or other good business practices respecting
the Facilities.
Section 6.2 Access and Information; Environmental Survey; Remediation
---------------------------------------------------------
or Adjustment.
-------------
(a) Subject to the restrictions set forth in Section 5.6
-----------
respecting confidentiality and provided that Buyer has complied with each
and every provision thereof, Seller shall, and shall cause the Subsidiaries
to, afford Buyer, and the counsel, accountants and other representatives of
Buyer, reasonable access, throughout the period from the date hereof to the
relevant Closing Date, to the Transferred Assets and the employees,
personnel and medical staff associated therewith and all the properties,
books, contracts, commitments, Cost Reports and records respecting the
Transferred Assets (regardless of where such information, may be located)
which Seller has or to which it has access. Such access shall be afforded
to Buyer after no less than 24 hours prior written notice, during normal
business hours and only in such manner so as not to disturb patient care or
to interfere with the normal operations of the Facilities; provided,
--------
however, that, notwithstanding the foregoing and subject to the provisions
concerning nondisclosure set forth in Section 5.6, without first obtaining
-----------
the written consent of Mr. Donald Thayer which consent shall not be
unreasonably withheld, neither Buyer nor its counsel, accountants and other
representatives shall tour or visit the Facilities or contact any of the
employees, personnel or medical staff thereof; and provided further that
--------
until the first to occur of the Termination Date or the Final Closing,
under no circumstances shall Buyer directly or indirectly solicit the
employment of any employees of Seller or its Subsidiaries, except as Hired
Employees pursuant to the terms hereof or except as may be permitted with
the prior written consent of a responsible officer of Seller. Seller's
covenants under this Section are made with the understanding that Buyer
shall use all such information in compliance with all Laws. The foregoing
notwithstanding, Buyer acknowledges and agrees that Buyer's access to the
books and records of the Transferred Assets shall not include access to,
and Seller shall not have any obligation to deliver to Buyer, any
information concerning any alleged dispute or any pending litigation,
investigation or proceeding involving Seller or its Affiliates that is
protected by or subject
-84-
<PAGE>
to the attorney-client privilege, or the disclosure of which is restricted
by an agreement entered into in connection with such dispute, litigation,
investigation or proceeding or an order entered by any court, or (in the
case of the Unusual Proceedings) certain non-public information; moreover,
Buyer shall not have access to patient or employee records or any other
records the disclosure of which would be prohibited by any Law,
accreditation standards, or rule or agreement (express or implied) of
confidentiality, except that Buyer may be granted access to such records to
the extent they are appropriately redacted and in conformity with such
other reasonable procedures as may be required to conform to any such
requirements of Law, accreditation standards or rule or agreement of
confidentiality.
(b) Seller has provided (or, with respect to Facility No. 30,
will reasonably soon provide) to Buyer copies of an environmental survey
conducted with respect to each of the Facilities (the "Environmental
-------------
Survey"). The Environmental Survey was conducted by an environmental
------
consulting firm or firms (the "Consultant") in accordance with applicable
----------
professional standards in effect at the time the Environmental Survey was
conducted and such reasonable procedures as were determined by Seller. In
the event of a disagreement between Buyer and Seller concerning the
procedures employed by the Consultant, Buyer may at Buyer's expense employ
a separate environmental consultant to conduct such procedures requested by
Buyer (subject to Seller's prior approval of such procedures, which shall
not unreasonably be withheld), and the findings of the Buyer's
Environmental consultant shall be included as an addendum to the
Environmental Survey. The results of any such Environmental Survey shall
be delivered to and owned by Seller, and all proceedings in connection with
the Environmental Survey and the results thereof shall be subject to the
confidentiality provisions of Section 5.6. Buyer acknowledges and agrees
-----------
that the Environmental Survey is and shall be only an initial "Phase I"
environmental site assessment. If subsequently determined by Seller, the
Consultant and the Buyer, to be necessary or prudent to conduct sampling,
laboratory analyses, or additional investigation work at any of the
Facilities, Seller shall direct the Consultant to undertake a further
"Phase II" investigation involving additional investigation and appropriate
sampling and laboratory analyses respecting such Facilities the results of
which are to be included in the Environmental Survey. In any "Phase II"
investigation, Seller shall give Buyer no less than 24 hours' notice before
the Consultant enters onto any Facility, and the "Phase II" Environmental
Survey shall be conducted so as not to interfere with the
normal operation of the Facilities.
-85-
<PAGE>
Buyer shall be permitted to have one of its employees or agents present
during all inspections of, and sample gatherings (including borings) from
the soil or any floor tile, insulation or other internal component of, a
Facility and shall be entitled to split samples upon Buyer's request. In
the event that Buyer considers it necessary to conduct any "Phase II"
investigation work that Seller refuses to order, Buyer may at Buyer's
expense employ a separate environmental consultant to conduct such "Phase
II" investigation work at least thirty (30) days before the First Closing.
Buyer shall give Seller no less than 24 hours' notice before Buyer's
environmental consultant enters onto any Facility, and any such "Phase II"
work performed by Buyer's environmental consultant shall be conducted so as
not to interfere with the normal operations of the Facilities. Seller shall
be permitted to have one of its employees or agents present during all
inspections of and sample gatherings (including borings) from the soil or
any floor tile, insulation, or other internal component of a Facility
performed by Buyer's environmental consultant and shall be entitled to
split samples upon Seller's request. Buyer shall be liable for any repairs
or other costs required to correct damage to the Facilities resulting from
such "Phase II" investigation. The findings of any Phase II investigation
prepared by Buyer's environmental consultant shall be included as an
addendum to the Environmental Survey. Notwithstanding the foregoing, Seller
may elect not to permit Buyer to conduct a "Phase II" investigation through
its own environmental consultant, in which case Buyer can exclude the
affected Facility, and the Transferred Assets and Assumed Liabilities
respecting such Facility from the Transactions, in which case the parties
shall negotiate in good faith an equitable adjustment to the Purchase
Price, or if they cannot agree upon the same, such adjustment shall be
determined in accordance with Section 2.14.
------------
(c) With respect to any matters disclosed by such Environmental
Survey or listed on Schedule 3.16 that would constitute a breach of
-------------
Seller's warranties in Section 3.16, but for the qualifications to such
------------
warranties based on Seller's knowledge or disclosures in the Environmental
Survey or on such Schedule 3.16, Seller will at its election, either (i)
-------------
clean up or otherwise remediate such matters in a reasonable manner prior
to the Closing Date related to such Facility, at its expense; or (ii) agree
in writing prior to the Closing Date to reimburse Buyer for the costs
specified in such written agreement of such reasonable clean-up or
remediation incurred by Buyer after the Closing Date related to such
Facility, and to promptly reimburse Buyer after Buyer incurs such expenses
subsequent to the Closing Date related to such Facility; or (iii) elect to
exclude the affected Facility,
-86-
<PAGE>
and Transferred Assets and Assumed Liabilities respecting such Facility,
from the Transactions, in which case the parties shall negotiate in good
faith an equitable adjustment to the Purchase Price, or if they cannot
agree upon the same, such adjustment shall be determined in accordance with
Section 2.14; provided, however, that in no case will Seller be required to
------------ --------
remove or otherwise remediate (or bear the costs of same) any Hazardous
Materials used as construction materials in structures or improvements
constituting the Facilities, or in equipment contained therein, unless the
current condition of such Hazardous Materials has resulted in either: (i)
noncompliance with any Environmental Law or License issued pursuant to an
Environmental Law; or (ii) an unreasonable hazard to human health, human
safety or the environment.
Section 6.3 Updating. Seller shall notify Buyer of any changes or
--------
additions to any of Seller's Schedules to this Agreement with respect to a
particular Facility or the Transferred Assets or Assumed Liabilities
related thereto by the delivery of updates thereof, if any, as of a
reasonably current date prior to the relevant Scheduled Closing not later
than three (3) business days prior to the Scheduled Closing with respect to
such Subject Transferred Assets, provided, however, that the Financial
--------
Schedule shall not be updated to cover any period or periods subsequent to
the respective dates thereof. No such updates made pursuant to this
Section shall be deemed to cure any breach of any representation or
warranty made in this Agreement, unless Buyer specifically agrees thereto
in writing, nor shall any such notification be considered to constitute or
give rise to a waiver by Buyer of any condition set forth in this
Agreement.
Section 6.4 No Solicitation. Seller will not, and shall cause the
---------------
Subsidiaries not to, and will use its best efforts to cause its and their
officers, employees, agents and representatives (including any investment
banker) not to, directly or indirectly, solicit, encourage or initiate any
discussions with, or, subject to fiduciary duties to shareholders,
negotiate or otherwise deal with, or provide any information to, any
corporation, partnership, person or other entity or group, other than Buyer
and its officers, employees and agents, concerning any sale of or similar
transactions involving the Transferred Assets or the stock of the
Subsidiaries. None of the foregoing shall prohibit providing information
to others in a manner in keeping with the ordinary conduct of Seller's or
the Subsidiaries' businesses. Seller shall notify Buyer promptly of any
inquiry, proposal or offer received by Seller concerning the sale of or
similar transactions involving the Transferred Assets or the stock of the
-87-
<PAGE>
Subsidiaries. Subject to the foregoing, in the exercise of its
aforementioned fiduciary duties to shareholders, Seller may terminate this
Agreement on written notice to Buyer, which termination shall have the
effect set forth in Section 10.2, provided that upon consummation prior to
------------ --------
the first anniversary of this Agreement of any transaction or transactions
with one or more third parties covering substantially all of the
Transferred Assets, Seller shall be obligated to pay Buyer the sum of
Fifteen Million Dollars ($15,000,000), and provided further that the
--------
payment of such sum shall be deemed to constitute liquidated damages in
lieu of any and all other liability of Seller and the Subsidiaries to Buyer
and the Buyer Subsidiaries in connection with or related to or arising from
this Agreement or the transactions contemplated hereby, or in connection
with or related to or arising from the termination hereof.
Section 6.5 Name Changes. To the extent that the corporate names of
------------
any of the Subsidiaries incorporate or are substantially similar to the
Transferred Business Names, Seller agrees to cause the Subsidiaries
promptly after the relevant Scheduled Closing to take all action necessary
to change such names so as not to incorporate or be substantially similar
to the Transferred Business Names.
Section 6.6 Filing of Cost Reports. Seller shall cause to be
----------------------
prepared and timely filed all Cost Reports and all other filings which are
required to be filed with Medicare and any other cost-based Payors with
respect to the operations of the Facilities for any and all periods ending
on or prior to a relevant Closing Date. Seller and the Subsidiaries shall
retain all rights to any amounts receivable from Medicare or other Payors
with respect to such reports or filings or with respect to such periods
and, as between Buyer, on the one hand, and Seller and Subsidiaries, on the
other, shall remain obligated for all amounts due Medicare or such other
Payors with respect to such reports or filings or with respect to such
periods, and the parties hereby acknowledge and agree that Buyer is not
being assigned or otherwise receiving and is not hereby assuming any of the
same. Seller's rights shall include, without limitation, the right to
dispute or to appeal any determinations relating to such reports.
Section 6.7 Purchase of Supplies. Buyer may request Seller or its
--------------------
Affiliates to permit Facilities transferred at such Scheduled Closing to
participate in specified national purchasing contracts of Seller or its
Affiliates for a fee to be agreed upon. If Buyer wishes to enter into such
an agreement with Seller, it shall notify Seller no later than five (5)
days
-88-
<PAGE>
prior to such Scheduled Closing, and at the Scheduled Closing the
parties shall execute a Purchasing Contract substantially in the form of
Exhibit D hereto. Schedule 6.7 lists all of the national purchasing
--------- ------------
contracts of Seller and its Affiliates in effect as of the date thereof
which do not preclude participation by persons which are not Affiliates of
Seller.
Section 6.8 Covenant Not to Compete.
-----------------------
(a) Covenant. Subject to the further provisions of this Section
-------- -------
6.8, during the "Covenant Period" (as defined in Section 6.8(d)), none of
--- --------------
the Subsidiaries, Seller or any other subsidiaries of Seller in which
Seller owns a majority of the voting interests (collectively, "Covered
-------
Parties") shall, directly or indirectly (whether through a majority-owned
-------
subsidiary or otherwise), in any Specified Capacity (as defined in this
Section 6.8), engage in the business of delivering mental health or alcohol
-----------
or substance abuse services through the operation of a hospital or
otherwise, including without limitation through the delivery of inpatient,
partial hospitalization, residential or outpatient services (as limited by
the provisions of Section 6.8(b), a "Competing Business"). For purposes
-------------- ------------------
hereof, the term "Specified Capacity" shall mean, subject to Section
------------------ -------
6.8(b), each of the following capacities:
------
(i) As an operator, manager or sole owner of the Competing
Business, whether directly or indirectly;
(ii) As a constituent partner, joint venturer or equity
shareholder of an entity engaged in the Competing Business if the
voting equity interest held is greater than 10% of all voting equity
interests in such entity;
(iii) As a lender of money to, or a guarantor of
indebtedness for money borrowed by, any other entity engaged in a
Competing Business in a principal amount in excess of $1,000,000,
except for (A) loans or guarantees made in the ordinary course of
business and not as an investment in such entity; (B) loans or
guarantees made or entered into in connection with the sale of a
Competing Business by a Covered Party; or (C) loans represented by
publicly traded instruments.
(b) Exceptions. The provisions of this Section 6.8 shall not
---------- -----------
apply to and shall not prohibit the following:
-89-
<PAGE>
(i) Psychiatric Facilities and Contracts Not Acquired By
----------------------------------------------------
Buyer. The conduct of a Competing Business from any facility
-----
(including renovations and expansions thereof) at which a Covered
Party, in any Specified Capacity, primarily engages in a Competing
Business as of the Final Closing, or pursuant to any contract
(including modifications, extensions and renewals thereof) under which
a Covered Party, in any Specified Capacity, engages in a Competing
Business as of the Final Closing, if (A) such facility, contract or
Specified Capacity is not acquired or assumed by Buyer or a Buyer
---
Subsidiary pursuant to this Agreement, or (B) such facility, contract
or Specified Capacity, is, after the Final Closing, reacquired by a
Covered Party from Buyer or a Buyer Subsidiary pursuant to this
Agreement;
(ii) Facilities Outside Geographic Area. The conduct of a
----------------------------------
Competing Business from any location that is not within twenty-five
(25) miles of a Facility (not including satellite locations) that (A)
was acquired by Buyer or a Buyer Subsidiary pursuant to this
Agreement, and (B) at the time in question, is still owned, operated
or managed by Buyer or by a person or entity which, directly or
indirectly, controls, is controlled by or is under common control with
Buyer (Facilities meeting the requirements of both clauses (A) and (B)
--- ---
being herein referred to as "Covered Facilities");
------------------
(iii) Acute Hospitals. The conduct of a Competing Business
---------------
from or through any hospital, commonly referred to as an acute care
hospital, that is licensed to provide general medical and surgical
services, including related facilities that operate on the same campus
as, or under the auspices of, such acute care hospital (such hospitals
and related facilities being herein referred to as "Acute Hospitals"),
---------------
including the provision of management services to an Acute Hospital,
provided that the conduct of any Competing Business from or through
-------------
a Specified Acute Hospital or an Acquired Acute Hospital (as each
such term is defined in Section 6.8(c)) shall be subject to the
--------------
further provisions of Section 6.8(c);
--------------
(iv) Divestiture of Acquired Psychiatric Facilities. Other
----------------------------------------------
than an Acquired Acute Hospital, the conduct of a Competing Business
in a Specified Capacity first acquired by any Covered Party after the
date hereof as part of the acquisition of interests in healthcare
assets other than the Competing Business, provided that
-------------
- 90 -
<PAGE>
no Covered Party engages in such Competing Business after the
expiration of twelve (12) months from such acquisition and no such
Competing Business is expanded during such twelve (12) month period,
except for expansions for which regulatory approval exists, or for
which capital expenditures have been undertaken or are in process, or
which are required by existing contracts (together, "Permitted
---------
Expansions"); or
----------
(v) Acquiring Entities. The conduct of a Competing
------------------
Business for, on behalf of, or by (A) any entity that is not a Covered
Party that acquires majority ownership or substantially all the assets
of a Covered Party after the date hereof, (B) any entity that is not a
Covered Party that acquires a Competing Business from a Covered Party
after the date hereof, (C) any surviving entity (other than a Covered
Party) of a consolidation, merger, reorganization or spinoff (each, a
"Reorganization") involving a Covered Party as a result of which
--------------
shareholders directly or indirectly owning a majority of such Covered
Party immediately before such Reorganization do not own a majority of
such surviving entity immediately after such Reorganization, or (D)
any majority-owned subsidiary of any such acquiring or surviving
entity that is not a Covered Party.
(c) Acute Hospital Affiliations. With respect to an Acute
---------------------------
Hospital listed on Schedule 6.8(c) (a "Specified Acute Hospital"), and
--------------- ------------------------
except as set forth below, the exception provided by Section 6.8(b)(iii)
-------------------
above shall apply but only to the extent such Specified Acute Hospital
conducts a Competing Business (including Permitted Expansions, the
"Exempted Competing Business") on the Scheduled Closing Date with respect
-----------------------------
to the Facility shown on Schedule 6.8(c) as the Specified Acute Hospital's
---------------
"Affiliation Facility." On and after such Scheduled Closing Date, a
Specified Acute Hospital shall not expand its services or its Competing
Business beyond the Exempted Competing Business except in accordance with,
and subject to, clauses (i) through (iii) below. With respect to any Acute
----------- -----
Hospital acquired by a Covered Party after the date of this Agreement and
which is within twenty (20) miles of a Covered Facility (an "Acquired Acute
--------------
Hospital"), the exception provided by Section 6.8(b)(iii) shall apply but
---------- -------------------
only to the extent of such Acquired Acute Hospital's Exempted Competing
Business on the date the acquisition of such Acquired Acute Hospital is
consummated (the "Acquisition Date"). On and after such Acquisition Date,
----------------
an Acquired Acute Hospital shall not expand its services or its Competing
Business beyond the Exempted Competing
- 91 -
<PAGE>
Business except in accordance with, and subject to, clauses (i) through
-----------
(iii) below.
-----
(i) Seller or its relevant Affiliate must first provide
Buyer notice that it proposes to expand its services or Competing
Business beyond the Exempted Competing Business, and shall briefly
describe the nature and scope of the expanded Competing Business in
which it proposes to engage. Within thirty (30) days following its
receipt of such notice, Buyer shall cause (A) the Affiliation Facility
with respect to a Specified Acute Hospital (as noted in Schedule
--------
6.8(c)) to offer the Specified Acute Hospital the opportunity to enter
------
into an affiliation agreement with its Affiliation Facility, or (B)
the closest Covered Facility with respect to an Acquired Acute
Hospital to offer the Acquired Acute Hospital the opportunity to enter
into an affiliation agreement. All affiliation agreements must be on
customary industry terms, pursuant to which the relevant Covered
Facility will agree to provide all services comprising the expanded
Competing Business to Payors and patients of, and to subscribers or
other participants in services or programs provided by, the Acute
Hospital at the Covered Facility's usual and customary prices, terms
and conditions which the parties shall negotiate expeditiously and in
good faith. The term of the affiliation agreement shall be for the
Covenant Period for such Specified or Acquired Acute Hospital and
shall give the Specified Acute Hospital or Acquired Acute Hospital, as
the case may be, the right to extend the agreement for two successive
one-year periods.
(ii) The Covered Facility must have the capacity to provide
the desired services in a quantity and manner comparable to the
quantity and manner in which such services are proposed to be provided
by the Specified or Acquired Acute Hospital.
(iii) The entry into such affiliation agreement by the
Specified Acute Hospital or Acquired Acute Hospital, and the
performance thereof by the Specified Acute Hospital or Acquired Acute
Hospital (including, without limitation, the failure to provide
such Competing Business by the Specified Acute Hospital or Acquired
Acute Hospital) will not violate or conflict with, or cause a default
under, the terms of any License, accreditation standard or Payor
contract to which the Specified Acute Hospital or Acquired Acute
Hospital is then subject.
- 92 -
<PAGE>
If the terms and conditions set forth in clause (i) through (iii) (other
---------- -----
than the first sentence of clause (i)) are not met as to the expanded
----------
Competing Business of a Specified or Acquired Acute Hospital, the exception
provided by Section 6.8(b)(iii) above shall apply to such expanded
-------------------
Competing Business of such Specified or Acquired Acute Hospital.
(d) Covenant Period. The term of the covenant (the "Covenant
--------------- --------
Period") set forth in Section 6.8(a) shall expire on the third anniversary
------ --------------
of the Final Closing, except (i) as to a Specified Acute Hospital, the
covenant shall expire on the earlier of the third anniversary of the Final
Closing or the date on which such Specified Acute Hospital's Affiliation
Facility is no longer a Covered Facility, and (ii) as to an Acquired Acute
Hospital, the covenant shall expire on the earlier of the third anniversary
of the Final Closing or the second anniversary of the Acquisition Date for
such Acquired Acute Hospital.
(e) Severability. To the extent that this covenant or any
------------
provision of this Section 6.8 shall be deemed illegal or unenforceable by a
-----------
court or other tribunal of competent jurisdiction with respect to (i) any
geographic area, (ii) any part of the time period covered by this covenant,
(iii) any activity or Specified Capacity covered by this covenant, or (iv)
any other aspect of this covenant, such determination shall not affect this
covenant with respect to any other geographic area, time period, activity
or other aspect covered by this covenant.
(f) Injunctive Relief. Each of the parties to this Agreement
-----------------
acknowledges that (i) the covenant and restrictions contained in this
Section 6.8 are necessary, fundamental and required for the protection of
-----------
the business of Buyer and its operation (through the Buyer Subsidiaries) of
the Facilities; (ii) this covenant relates to matters which are of a
special character and which give this covenant a special value; and (iii) a
breach of the covenant contained in this Section 6.8 will result in
-----------
irreparable harm and damages to Buyer and Buyer Subsidiaries which cannot
be adequately compensated for by a monetary award. Accordingly, it is
expressly agreed that in addition to all other remedies available in law or
in equity, Buyer and Buyer Subsidiaries shall be entitled to the remedy of
a temporary restraining order, preliminary injunction or such other form of
injunctive or equitable relief as may be issued by any court of competent
jurisdiction to restrain or enjoin a Covered Party from breaching this
covenant or any provision of this Section 6.8 or otherwise to specifically
-----------
enforce the provisions of this covenant.
- 93 -
<PAGE>
(g) Value: The parties agree that the value of the covenant
-----
contained in this Section 6.8 is the value assigned to it in Section 2.5
----------- -----------
and that each will account for and report the value of such covenant in
accordance with such valuation and all of the terms and provisions of
Section 2.7.
-----------
Section 6.9 Audited Statements. Prior to and after any relevant
------------------
Scheduled Closing, Seller shall make the books and records (other than
those protected by or subject to the attorney-client privilege) and
unaudited financial statements of the Subsidiaries which are related to the
Facilities and are for periods prior to such Scheduled Closing available to
Buyer and Buyer's and Seller's independent accountants at reasonable times
and in a manner so as to not unduly interfere with Seller's operations, and
otherwise cooperate with Buyer in order to permit an audit of the
Subsidiaries' financial statements for periods prior to such Scheduled
Closing. Seller shall reasonably cooperate in assisting Buyer in obtaining
and preparing all necessary information for the timely filing of any
documents required to be filed by Buyer under the Securities Exchange Act
of 1934 related to the transactions contemplated hereby. Without limiting
the effect of Section 5.5 of this Agreement, the audit and the out-of-
-----------
pocket costs of Seller's cooperation in obtaining and preparing any
information (including, without limitation, all services of Seller's
independent accountants rendered in connection therewith) will be paid for
by Buyer.
Section 6.10 Post-Closing Insurance. Seller for five years after the
----------------------
Final Closing, shall maintain its existing comprehensive general liability
and hospital professional liability insurance coverages with respect to the
Facilities for all periods prior to the Closing in substantially their
present form as described on Schedule 3.26(b) (the "Insurance Program"),
---------------- -----------------
provided that (a) Seller shall have the right to reduce (but not increase
beyond $2,000,000 per occurrence) the existing deductible under the
Insurance Program and (b) shall have the right to cancel or terminate, or
have cancelled or terminated, the coverages under the Insurance Program
so long as Seller acquires (from (i) its present insurance company or (ii)
another reasonably acceptable insurance company under a reasonably
acceptable policy) an extended discovery period of not less than five years
after any such cancellation or termination for periods prior to the Final
Closing. Such Insurance Program, if maintained, shall be maintained at
Seller's expense, and if such Insurance Program is maintained Seller shall
cause Buyer and each Buyer Subsidiary to be named as an additional insured
with respect to the applicable Facility and Seller shall provide Buyer with
copies
- 94 -
<PAGE>
thereof and copies of renewals prior to the expiration of the prior policy
or policies. Seller shall use commercially reasonable efforts to avoid
invalidating the insurance policies referred to in this Section 6.10.
------------
Section 6.11 Use of Controlled Substance Licenses. To the extent
------------------------------------
permitted by Law, Buyer shall have the right, for a period not to exceed
sixty (60) days following a relevant Scheduled Closing, to operate under
the Licenses of the Subsidiaries relating to controlled substances and the
operation of pharmacies, until Buyer is able to obtain such Licenses for
itself. Seller shall cause the pertinent Subsidiaries to execute and
deliver to Buyer any powers of attorney and other instruments which Buyer
or the appropriate governmental agency may reasonably require in connection
with Buyer's use of such Licenses. Buyer acknowledges that it shall apply
for all such Licenses as soon as reasonably possible before or after the
relevant Scheduled Closing and diligently pursue such applications in
accordance with Section 5.1.
-----------
Section 6.12 Non-Disturbance Agreements. Seller hereby agrees to
--------------------------
exercise its reasonable commercial efforts, prior to the relevant Scheduled
Closing, to obtain from each existing mortgagee of each Facility identified
below a non-disturbance agreement providing in substance that in the event
the lessor or sublessor of such Facility defaults in its obligations to the
mortgagee respecting indebtedness existing at the relevant Scheduled
Closing and as a result thereof the mortgagee forecloses upon, exercises a
power of sale or otherwise succeeds to the ownership of such property, then
and in such event, such foreclosure or other change in ownership shall not
terminate or affect the validity of the Real Property Lease respecting such
Facility assigned to Buyer hereunder, provided that Buyer hereby agrees
-------------
that, in connection with Seller's obtaining any such non-disturbance
agreement, Buyer will execute such reasonable agreements in favor of such
mortgagee confirming the attornment of Buyer to such mortgagee or its
assigns, and subordinating the Real Property Lease to the interest of such
mortgagee, under such circumstances. In the event that Seller shall be
unable to obtain any such non-disturbance agreement and the lessor's or
sublessor's default under indebtedness existing at the relevant Scheduled
Closing results in the termination of any such Real Property Lease prior to
the expiration of the current term and any renewal terms available in the
Real Property Lease as of the relevant Scheduled Closing, then Seller shall
indemnify Buyer, in accordance with the provisions of Section 11.3(a)(ii),
-------------------
for Losses arising therefrom but not in excess of the portion of the
Purchase Price allocated to such Facility in the Allocation Schedule,
provided that
-------------
- 95 -
<PAGE>
Buyer shall provide Seller with notice of any such default or claimed
default by the lessor or sublessor reasonably promptly following Buyer's
receipt of any notice or knowledge respecting same. The Facilities and Real
Property Leases to which this Section shall apply are the Real Property
Leases respecting the hospitals numbered as Facility Nos. 40, 44, 46, and
49.
ARTICLE 7
ADDITIONAL COVENANTS OF BUYER
Section 7.1 Waiver of Bulk Sales Law Compliance. Subject to the
-----------------------------------
indemnification provisions of Section 11.3(a)(iii) hereof, Buyer hereby
--------------------
waives compliance by Seller and the Subsidiaries with the requirements, if
any, of Article 6 of the Uniform Commercial Code as in force in any state
in which Transferred Assets are located and all other similar laws
applicable to bulk sales and transfers.
Section 7.2 Resale Certificate. Buyer agrees to furnish to Seller
------------------
and the Subsidiaries any resale certificate or certificates or other
similar documents reasonably requested by Seller to comply with pertinent
sales and use tax laws.
Section 7.3 Cost Reports and Audit Contests. After each Scheduled
-------------------------------
Closing and for the period of time necessary to conclude any pending or
potential audit or contest of any Cost Reports with respect to the
Facilities transferred at such Scheduled Closing that include periods
ending on or before the relevant Closing Date, Buyer shall (a) properly
keep and preserve all financial books and records delivered to Buyer by
Seller and the Subsidiaries (if any) and utilized in preparing such Cost
Reports, including, without limitation, accounts payable invoices, Medicare
logs and billing information in accordance with Section 5.7, and
-----------
(b) within five (5) days of Buyer's receipt of the same, forward to Seller
all information received from Payors relating to periods prior to and as of
the relevant Closing Date including, without limitation, Cost Report
Settlements, notices of program reimbursements, demand letters for payment
and proposed audit adjustments. Upon reasonable written notice by Seller,
Seller (or its agents) shall be entitled, at Seller's expense, during
regular business hours, to have access to, inspect and make copies of all
such books and records. Upon the reasonable request of Seller, Buyer shall
assist Seller and the Subsidiaries in obtaining information deemed by
Seller to be necessary or desirable in connection with any audit or contest
of such reports. To the extent required
- 96 -
<PAGE>
to meet its obligations under this Section, Buyer shall provide the
reasonable support of its employees at no cost to Seller.
Section 7.4 Tax Matters. After each Scheduled Closing, Buyer shall
-----------
be responsible for causing its employees, at no cost to Seller, to assist
Seller and the Subsidiaries, in the same manner and to the extent that
personnel of the Facilities currently provide such assistance, in the
preparation and filing of all returns relating to taxes imposed upon the
businesses operated through the Transferred Assets that relate to periods
ending on or prior to the relevant Scheduled Closing but are due after the
relevant Closing Date and that are not related to Taxes included in the
Assumed Liabilities, including without limitation, income tax and
information returns. It is further acknowledged by Buyer that Taxes
(including, without limitation, the Florida indigent care tax) imposed upon
the right or privilege to do business from the Facilities after the Closing
shall be Buyer's responsibility even if measured by gross receipts, net
operating revenues or patient days for a period ending on, before or
including a Closing Date and that Taxes included in Accrued Operating
Expenses shall be only those properly accruable, in accordance with
generally accepted accounting principles, for the right or privilege of
doing business through the relevant Closing Date. Buyer further agrees to
exercise its reasonable commercial efforts to have the income tax year of
any venture or partnership referred to in Section 2.1(c) terminated as of
--------------
the relevant Scheduled Closing with respect to the pertinent Subsidiary or
Subsidiaries transferring its interests therein.
Section 7.5 Letters of Credit. Subject to the terms and conditions
-----------------
hereof, at the relevant Scheduled Closing, Buyer shall cause letters of
credit and indemnity or performance bonds to be provided to substitute for
those letters of credit and bonds listed in Schedule 7.5, so that at and as
------------
of such Scheduled Closing Seller and its Affiliates shall have no further
obligation to provide such designated letters of credit or bonds.
Section 7.6 Conduct Pending Closing. Prior to consummation of the
-----------------------
Transactions contemplated hereby or the termination or expiration of this
Agreement pursuant to its terms, unless Seller shall otherwise consent in
writing, Buyer shall not, and shall not permit any Buyer Subsidiary to,
take any action which would cause any of Buyer's representations and
warranties set forth in Article 4 to be false as of the relevant Scheduled
---------
Closing.
- 97 -
<PAGE>
Section 7.7 Securities Offerings. Buyer hereby agrees to indemnify
--------------------
and hold harmless Seller and each of its Affiliates, in accordance with the
provisions of Section 11.4(a)(ii), against any and all Losses, as incurred,
-------------------
arising out of the offer or sale by Buyer of securities, except to the
extent that such Loss arises from any untrue statement or alleged untrue
statement of a material fact contained in any such securities offering
materials or prospectus used by Buyer or its representatives, or from the
omission or alleged omission therefrom of a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, which untrue or alleged untrue statement or omission
or alleged omission is made in reliance upon and in conformity with written
information furnished to Buyer by Seller under a cover letter from Seller's
counsel stating that such information is expressly for use in such offering
materials or prospectus.
ARTICLE 8
BUYER'S CONDITIONS TO CLOSING
The obligations of Buyer to consummate the Transactions with respect
to a Facility and the Transferred Assets and Assumed Liabilities related
thereto shall be subject to the requirements of Section 2.13 and to the
------------
fulfillment at or prior to the relevant Scheduled Closing of the following
conditions, unless Buyer waives in writing such fulfillment:
Section 8.1 Performance of Agreement. Seller shall have performed in
------------------------
all material respects its agreements and obligations contained in this
Agreement required to be performed on or prior to the Scheduled Closing.
Section 8.2 Accuracy of Representations and Warranties. The
------------------------------------------
representations and warranties of Seller set forth in Article 3 of this
---------
Agreement shall be true in all respects as of the date of this Agreement
(unless the inaccuracy or inaccuracies which would otherwise result in a
failure of this condition have been cured by the Scheduled Closing) and as
of the Scheduled Closing (as updated by the revising of Schedules
contemplated by Section 6.3) as if made as of such time, except where such
-----------
inaccuracy or inaccuracies would not individually or in the aggregate
result in a Material Adverse Effect on the Facility in question.
Section 8.3 Officers' Certificate. Buyer shall have received from
---------------------
Seller an officers' certificate, executed on Seller's behalf by its chief
executive officer, president, chief financial officer or treasurer (in his
or her
- 98 -
<PAGE>
capacity as such) dated the Closing Date and stating that to the
knowledge of such individual, the conditions in Sections 8.1 and 8.2 above
------------ ---
have been met.
Section 8.4 Consents. The waiting period under the HSR Act shall
--------
have expired or been terminated, and, subject to the provisions of Section
-------
2.12, all approvals, consents, authorizations and waivers from
----
governmental and accreditation agencies the absence of which would render
Buyer unable to operate the facility in the manner operated prior to such
Scheduled Closing, and all approvals, consents, authorizations and waivers
from other third parties to the extent shown on the Schedule of Required
Consents (collectively "Consents") required for Buyer to consummate the
--------
Transactions with respect to such Facility, shall have been obtained,
except that a Consent from a third party to the sale and assignment of a
Transferred Asset, such as a Medicare or Medicaid provider agreement, or
the assumption of an Assumed Liability with respect thereto, shall not
constitute a condition to Buyer's consummation of the Transactions with
respect to a Facility if such sale, assignment or assumption may lawfully
be made subject to a customary condition subsequent that the Consent be
obtained from the third party based upon determinations of such third
party, including without limitation needs surveys or evaluations of Buyer,
to be completed after the Scheduled Closing. As to each of the Real
Property Leases listed on the Schedule of Required Consents, Buyer shall
have received an estoppel certificate, identifying the lease and stating
that such lease is in full force and effect, that the lessee under such
lease is current in all of its obligations under such lease and that the
lessor is not aware of any default by lessee under such lease.
Section 8.5 Absence of Injunctions. There shall be no:
----------------------
(a) Injunction, restraining order or order of any nature issued
by any court of competent jurisdiction or governmental agency which directs
that the Transactions related to such Facility contemplated hereby shall
not be consummated as herein provided or compels or would compel Buyer to
dispose of or discontinue, or materially restrict the operations of, such
Facility or any significant portion of the Transferred Assets with respect
thereto as a result of the consummation of the Transactions contemplated
hereby;
(b) Suit, action or other proceeding by any governmental agency
pending before any court, governmental agency or non-governmen
- 99 -
<PAGE>
tal, self-regulatory organization, or threatened (pursuant to a written
notification), wherein such complainant seeks the restraint or prohibition
of the consummation of the Transactions related to such Facility or asserts
the illegality of the Transactions related to such Facility; or
(c) Action taken, or law enacted, promulgated or deemed
applicable to the Transactions related to such Facility, by any
governmental agency which would render consummation of such Transactions
illegal or which would threaten the imposition of any penalty or material
economic detriment upon Buyer if such Transactions were consummated;
provided that:
-------- ----
(i) The parties will use their reasonable efforts to litigate
against, or to obtain the lifting of, any such injunction, restraining or
other order, restraint, prohibition, action, suit, law or penalty;
(ii) In the event that (A) the First Closing has occurred, (B)
there is such a pending or threatened suit, action, proceeding, injunction,
restraining order or other order, made, sought, issued, initiated or
obtained by a governmental agency in respect of Transactions contemplated
to occur at the Final Closing, and (C) on or prior to the original
Termination Date for the Final Closing, the parties and such agency have
entered into a written agreement which would resolve such controversy but
such agreement is subject to final agency approval that has not been
obtained on or prior to the fifth business day before the original
Termination Date for the Final Closing, then and in such events the
original Termination Date for the Final Closing shall be extended to the
fifth business day following such final agency approval if the date of such
approval is within five (5) business days of the end of a month or the
original Termination Date for the Final Closing shall be extended to the
end of the month in which such approval is obtained if the date of such
approval is not within five (5) business days of the end of a month, but in
no event shall the original Termination Date for the Final Closing be
extended for more than three (3) calendar months from the original
Termination Date; and
(iii) Clauses (a) through (c) above notwithstanding, the effect
--- ---
of any such event, action or suit shall be to exclude the affected Facility
from the Scheduled Closing and, if such Facility is not transferred in a
subsequent Closing, to adjust the Purchase Price pursuant to the Allocation
Schedule.
- 100 -
<PAGE>
Section 8.6 Opinion of Counsel. Buyer shall have received, on and as
------------------
of the Closing Date, an opinion of Mr. Scott Brown, general counsel to
Seller, substantially as to the matters set forth in Sections 3.1, 3.2,
------------ ---
3.3, 3.4, 3.5, 3.6 and 3.14, subject to customary conditions and
--- --- --- --- ----
limitations.
Section 8.7 Title to Real Property. Title to Transferred Assets
----------------------
related to the Facility comprised of interests in real property shall have
been evidenced by the willingness of Chicago Title Insurance Company (or an
Affiliate thereof) (the "Title Insurer") to issue at regular rates ALTA (or
-------------
the local equivalents thereof) owner's, or lessee's, as the case may be,
extended coverage policies of title insurance (1990 Form B) (the "Title
-----
Policies"), with the survey exception removed, in amounts equal to the
--------
respective portions of the Purchase Price allocated to such interests,
showing title to such interests in such real property vested in Buyer
subject to transfer of such interest to Buyer. Each such Title Policy
shall be free of exceptions relating to (i), except for Title Policies
respecting Facilities located in Texas, any claim which arises out of the
transaction vesting in Buyer the estate or interest insured by the Title
Policy, by reason of the operation of federal bankruptcy, state insolvency
or similar creditors's rights laws, and (ii) rights of the United States of
America, and the state in which the real property covered by the Title
Policy is located, or either or them, to recover any federal funds advanced
as provided in the Hill-Burton Act, 42 U.S.C (S)(S) 291 et. seq. Such
Title Policies shall additionally be free of all other exceptions,
including other standard exceptions, other than the following:
(a) A lien or liens to secure payment of real estate taxes, not
delinquent;
(b) Exceptions, other than those listed on Schedule 8.7(b),
---------------
disclosed by current standard ALTA Preliminary Title Reports, delivered to
and approved (except as shown on Schedule 8.7(b)) by Buyer prior to the
---------------
date hereof (as indicated by Buyer's signature of approval appended
thereto) together with copies of all documents underlying the exceptions
contained therein; and
(c) Other possible minor matters that in the aggregate are not
substantial in amount and do not materially detract from or interfere with
the present or intended use of such real property, including such minor
matters as may be disclosed by surveys taken after the date hereof.
- 101 -
<PAGE>
The willingness of the Title Insurer to issue the Title Policies shall be
evidenced either by the issuance thereof at the relevant Scheduled Closing
or the written commitments or binders, dated as of the relevant Scheduled
Closing, of the Title Insurer to issue such Title Policies within a
reasonable time after the relevant Closing Date, subject to actual transfer
of the real property in question. If the Title Insurer is unwilling to
issue any such Title Policy, it shall be required to provide Buyer and
Seller, in writing, notice setting forth the reason(s) for such
unwillingness on or before the relevant Closing Date. Seller shall have
the right to seek to cure any defect which is the reason for such
unwillingness, and, if such notice by the Title Insurer is given less than
ten (10) business days prior to the then Scheduled Closing, then the
relevant Closing Date (and, to the extent necessary, the Termination Date)
shall be extended for a period of up to ten (10) business days to provide
to Seller such opportunity to cure. In the event that, despite Seller's
efforts to cure, the Title Insurer remains unwilling to issue any such
Title Policy on the Final Closing Date (as may be extended as provided
herein), then, at the election of Buyer, and without affecting the other
conditions of the parties to consummation of the Transactions, such real
property interests not covered by such a Title Policy shall not be included
in the Transferred Assets and shall be deemed to be Excluded Assets, and
liabilities associated therewith that would otherwise be Assumed
Liabilities shall be deemed to be Excluded Liabilities; and Buyer and
Seller shall negotiate in good faith prior to the Final Closing Date an
adjustment in the Purchase Price based on the Allocation Schedule. If the
parties cannot agree upon such adjustment, then the disagreement shall be
resolved in accordance with Section 2.14. Notwithstanding the foregoing,
------------
Buyer may accept such title to any such interests as the pertinent
Subsidiary may be able to convey, and such title insurance with respect to
the same as the Title Insurer is willing to issue, in which case such
interests shall be conveyed as part of the Transferred Assets without
reduction of the Purchase Price or any credit or allowance against the same
and without any other liability on the part of Seller or the Subsidiaries.
Section 8.8 Receipt of Other Documents. Buyer shall have received
--------------------------
the following:
(a) Certified copies of the resolutions of Seller's and each
relevant Subsidiary's board of directors respecting this Agreement, the
Related Agreements and the Transactions, together with certified copies of
any shareholder resolutions which are necessary to approve the execution
and delivery of this Agreement and any Agreements and/or the
- 102 -
<PAGE>
performance of the obligations of Seller and the Subsidiaries hereunder and
thereunder;
(b) Certified copies of Seller's and each relevant Subsidiary's
Charter Documents, together with a certificate of the corporate secretary
of each that none of such documents have been amended;
(c) One or more certificates as to the incumbency of each
officer of Seller or of any Subsidiary who has signed the Agreement, any
Related Agreement or any certificate, document or instrument delivered
pursuant to the Agreement or any Related Agreement;
(d) Good standing certificates for Seller and each of the
relevant Subsidiaries from the Secretaries of State of their respective
states of incorporation, dated as of a date not earlier than fifteen (15)
business days prior to the relevant Closing Date;
(e) Copies of all third party and governmental consents, permits
and authorizations that Seller or any Subsidiary has received in connection
with the Agreement, the Related Agreements and the Transactions to occur at
the relevant Scheduled Closing; and
(f) Certificates of non-foreign status in the form required by
Section 1445 of the Code duly executed by Seller and the relevant
Subsidiaries.
Section 8.9 Licenses and Permits. The Buyer shall have obtained any
--------------------
and all authorizations, approvals and consents in connection with acquiring
Licenses that will permit it to operate the Facility after the relevant
Scheduled Closing substantially as operated by the relevant Subsidiary
immediately prior to the relevant Scheduled Closing.
Section 8.10 Casualty; Condemnation.
----------------------
(a) Casualty. If any part of the Transferred Assets related to
--------
the Facility are damaged, lost or destroyed (whether by fire, theft,
vandalism or other casualty) in whole or in part prior to the relevant
Scheduled Closing, and the fair market value of such damage or destruction
is less than thirty percent (30%) of the allocated portion of the Purchase
Price for such Facility set forth in the Allocation Schedule, Seller shall,
at its option, either (i) reduce the Purchase Price by the fair market
value of
- 103 -
<PAGE>
the assets destroyed, such value to be determined as of the date
immediately prior to such destruction or, as the case may be, by the
estimated cost to restore damaged assets, (ii) provided that the proceeds
are obtainable without delay and are sufficient to fully restore the
damaged assets, upon the relevant Scheduled Closing transfer the proceeds
or the rights to the proceeds of applicable insurance to Buyer, and Buyer
may restore the improvements, or (iii) repair or restore such damages or
destroyed improvements. If any part of the Transferred Assets related to
the Facility are damaged, lost or destroyed (whether by fire, theft,
vandalism or other cause or casualty) in whole or in part prior to the
relevant Scheduled Closing and the fair market value of such damages is
greater than thirty percent (30%) of such allocated portion of the Purchase
Price, Buyer may elect either to (i) require Seller upon the relevant
Scheduled Closing to transfer the proceeds (or the right to the proceeds)
of applicable insurance to Buyer and Buyer may restore the improvements, or
(ii) terminate this Agreement with respect to the damaged assets or
Facility only, with a reduction in the Purchase Price determined as
follows. The reduction in Purchase Price shall be mutually determined by
Buyer and Seller on the basis of the Allocation Schedule, or if the Buyer
and Seller fail to agree, then such reduction shall be determined in
accordance with Section 2.14.
------------
(b) Condemnation. From the date hereof until the relevant
------------
Scheduled Closing, in the event that any portion of the Transferred Assets
related to the Facility becomes subject to or is threatened with any
condemnation or eminent domain proceedings (except for an immaterial
portion), then Buyer, at its sole option, may elect to terminate this
Agreement with respect only to that part which is condemned or threatened
to be condemned with a reduction in the Purchase Price determined as
provided in Section 8.10(a).
---------------
Section 8.11 Reasonable Assurances. There shall not have been any
---------------------
actions taken by the United States government to indicate that it is
reasonably likely that either the Unusual Proceedings or any proceeding,
investigation, claim or lawsuit relating thereto, in each case relating to
periods prior to the relevant Scheduled Closing, (a) shall be applied to or
be expanded to include an assertion against Buyer or the applicable Buyer
Subsidiaries with respect to their operation of the Facility after the
relevant Scheduled Closing, or (b) would be the basis of any investigation
or proceeding to exclude Buyer or the applicable Buyer Subsidiaries from
participation in any government healthcare program with respect to the
operations of the Facility after the relevant Scheduled Closing, or (c)
would
- 104 -
<PAGE>
result in the Transferred Assets being subjected to forfeiture under
18 U.S.C. (S)1961-1966 or otherwise.
Section 8.12 Certain Events. During the thirty (30) days preceding
--------------
the date of the relevant Scheduled Closing, there shall not have occurred
or be continuing (a) any suspension of trading on the New York Stock
Exchange or material governmental restrictions (not in force on the date
hereof) on trading in securities generally, or (b) any banking moratorium
declared by Federal, California or New York authorities, or (c) any
material disruption of or any material adverse change in the financial,
banking or capital markets, or (d) any outbreak or material escalation of
hostilities affecting the United States of America or other calamity, panic
or crisis, the effect of which on the financial markets of the United
States in each case described in clauses (a), (b), (c) or (d) above, is
that lending institutions have generally ceased providing funding for
transactions of the size contemplated hereby, provided that the occurrence
--------
of such event shall operate only to delay the Scheduled Closing (and extend
the Termination Date, if necessary) until the tenth day following the date
upon which lending institutions generally have resumed providing funding
for transactions of the size contemplated hereby and that such delay may
not extend the original Termination Date for more than sixty (60) days,
after which time there shall be deemed to be a failure of this condition.
ARTICLE 9
SELLER'S CONDITIONS TO CLOSING
The obligations of Seller to consummate the Transactions with respect
to a Facility and the Transferred Assets and Assumed Liabilities related
thereto shall be subject to the fulfillment at or prior to the relevant
Scheduled Closing of the following conditions, unless Seller waives in
writing such fulfillment:
Section 9.1 Performance of Agreement. Buyer shall have performed in
------------------------
all material respects its agreements and obligations contained in this
Agreement required to be performed on or prior to the Scheduled Closing.
Section 9.2 Accuracy of Representations and Warranties. The
------------------------------------------
representations and warranties of Buyer set forth in Article 4 of this
---------
Agreement shall be true in all material respects as of the date of this
Agreement (unless the inaccuracy or inaccuracies which would otherwise
- 105 -
<PAGE>
result in a failure of this condition have been cured by the Scheduled
Closing) and as of the Scheduled Closing as if made as of such time.
Section 9.3 Officers' Certificate. Seller shall have received from
---------------------
Buyer an officers' certificate, executed on Buyer's behalf by its chief
executive officer, president, chief financial officer or treasurer (in his
or her capacity as such) dated the Closing Date and stating that to the
actual knowledge of such individual, the conditions in Sections 9.1 and 9.2
------------ ---
above have been met.
Section 9.4 Consents. The waiting period under the HSR Act shall
--------
have expired or been terminated, and, subject to the provisions of Section
-------
2.12, all Consents required for Seller to consummate the Transactions with
----
respect to such Facility shall have been obtained, except that a Consent
from a third party to the sale and assignment of a Transferred Asset, such
as a Medicare or Medicaid provider agreement, or the assumption of an
Assumed Liability with respect thereto, shall not constitute a condition to
Seller's consummation of the Transactions with respect to such Facility if
such sale, assignment or assumption may lawfully be made subject to a
customary condition subsequent that the Consent be obtained from the third
party based upon determinations of such third party, including without
limitation needs surveys or evaluations of Buyer, to be completed after the
Scheduled Closing, whether or not such third party indicates prior to the
Scheduled Closing that any such Consent is likely or not likely to be
given.
Section 9.5 Absence of Injunctions. There shall be no:
----------------------
(a) Injunction, restraining order or order of any nature issued
by any court of competent jurisdiction or governmental agency which directs
that the Transactions related to such Facility contemplated hereby shall
not be consummated as herein provided;
(b) Suit, action or other proceeding by any governmental agency
pending before any court, governmental agency or non-governmental, self-
regulatory organization, or threatened (pursuant to a written
notification), wherein such complainant seeks the restraint or prohibition
of the consummation of the Transactions related to such Facility or asserts
the illegality of the Transactions related to such Facility; or
(c) Action taken, or law enacted, promulgated or deemed
applicable to the Transactions related to such Facility, by any
governmental
- 106 -
<PAGE>
agency which would render consummation of such Transactions illegal or
which would threaten the imposition of any penalty or material economic
detriment upon Seller or the Subsidiaries if such Transactions were
consummated;
provided that:
-------- ----
(i) The parties will use their reasonable efforts to litigate
against, or to obtain the lifting of, any such injunction, restraining or
other order, restraint, prohibition, action, suit, law or penalty;
(ii) In the event that (A) the First Closing has occurred, (B)
there is such a pending or threatened suit, action, proceeding, injunction,
restraining order or other order, made, sought, issued, initiated or
obtained by a governmental agency in respect of Transactions contemplated
to occur at the Final Closing, and (C) on or prior to the original
Termination Date for the Final Closing, the parties and such agency have
entered into a written agreement which would resolve such controversy but
such agreement is subject to final agency approval that has not been
obtained on or prior to the fifth business day before the original
Termination Date for the Final Closing, then and in such events the
original Termination Date for the Final Closing shall be extended to the
fifth business day following such final agency approval if the date of such
approval is within five (5) business days of the end of the month or the
original Termination Date for the Final Closing shall be extended to the
end of the month in which such approval is obtained if the date of such
approval is not within five (5) business days of the end of a month, but in
no event shall the original Termination Date for the Final Closing be
extended for more than three (3) calendar months from the original
Termination Date; and
(iii) Clauses (a) through (c) above notwithstanding, the effect
--- ---
of any such event, action or suit shall be to exclude the affected Facility
from the Scheduled Closing and, if such Facility is not transferred in a
subsequent Closing, to adjust the Purchase Price pursuant to the Allocation
Schedule.
Section 9.6 Opinion of Counsel. Seller shall have received, on and
------------------
as of the Closing Date, an opinion of King & Spalding, counsel to Buyer,
substantially as to the matters set forth in Sections 4.1, 4.2, 4.3, 4.4,
------------ --- --- ---
and 4.5, subject to customary conditions and limitations.
---
- 107 -
<PAGE>
Section 9.7 Receipt of Other Documents. Seller shall have received
--------------------------
the following:
(a) Certified copies of the resolutions of Buyer's and each
relevant Buyer Subsidiary's board of directors respecting this Agreement,
the Related Agreements and the Transactions;
(b) Certified copies of Buyer's and each relevant Buyer
Subsidiary's Charter Documents, together with a certificate of Buyer's and
each Buyer Subsidiary's corporate secretary that none of such documents
have been amended;
(c) One or more certificates as to the incumbency of each
officer of Buyer who has signed the Agreement, any Related Agreement, or
any certificate, document or instrument delivered pursuant to the Agreement
or any Related Agreement;
(d) Good standing certificates for Buyer and for each relevant
Buyer Subsidiary from the Secretaries of State of their respective states
of incorporation, dated as of a date not earlier than fifteen (15) business
days prior to the relevant Closing Date;
(e) Copies of all third party and governmental consents, permits
and authorizations that Buyer has received in connection with the
Agreement, the Related Agreements and the Transactions; and
(f) A certificate of Buyer executed on its behalf by the Chief
Executive Officer and the Chief Financial Officer of Buyer stating that to
the best of their knowledge and belief, specifying in reasonable detail
their basis for same, after giving effect to the Transactions, neither
Buyer nor any relevant Buyer Subsidiary is insolvent or will be rendered
insolvent by obligations incurred in connection therewith, or will be left
with unreasonably small capital with which to engage in their businesses,
or will have incurred obligations beyond their respective abilities to
perform the same as and when due.
ARTICLE 10
TERMINATION
Section 10.1 Termination. Any Transactions contemplated hereby that
-----------
have not been consummated may be terminated:
- 108 -
<PAGE>
(a) At any time, by mutual written consent of Seller and Buyer;
or
(b) By either Buyer or Seller upon written notice to the other
party, if (i) the relevant Scheduled Closing shall not have occurred by its
Termination Date; or (ii)(A) in the case of termination by Seller, the
conditions set forth in Section 2.13 and Article 9 for the relevant
------------ ---------
Scheduled Closing cannot reasonably be met by its Termination Date or
Seller has terminated this Agreement pursuant to Section 6.4, and (B) in
-----------
the case of termination by Buyer, the conditions set forth in Section 2.13
------------
and Article 8 for the relevant Scheduled Closing cannot reasonably be met
---------
by its Termination Date, unless in either of the cases described in clauses
-------
(A) or (B), the failure of the condition is the result of the material
--- ---
breach of this Agreement by the party seeking to terminate. The
Termination Date for the First Closing shall be September 1, 1994, and
provided the First Closing has occurred, the Termination Date for any
subsequent Scheduled Closing and the Final Closing shall be September 30,
1994; provided that if the "Termination Date" for the "Final Closing" under
-------------
the Subsequent Facilities Agreement has been extended beyond September 30,
1994, then the Termination Date for the Final Closing under this Agreement
shall likewise be extended, and provided further that, notwithstanding any
---------------------
provisions in this Agreement which may be construed to the contrary, under
no circumstances shall the Termination Date for the Final Closing under
this Agreement occur after the first to occur of the "Final Closing" or the
"Termination Date" therefor under the Subsequent Facilities Agreement. Each
such date, or such later date as may be specifically provided for in this
Agreement (including any date arising under operation of Sections
--------
8.5(c)(ii) and 9.5(c)(ii) hereof) or agreed upon by the parties, is herein
--------- ---------
referred to as the "Termination Date."
----------------
Each party's right of termination hereunder is in addition to any other
rights it may have hereunder or otherwise.
Section 10.2 Effect of Termination. If there has been a termination
---------------------
pursuant to Section 10.1 prior to the First Closing, then this Agreement
------------
shall be deemed terminated, and all further obligations of the parties
hereunder shall terminate, except that the obligations set forth in
Sections 5.5 and 5.6 and in Articles 11 and 12 shall survive. In the event
------------ --- ----------- --
of termination of this Agreement as provided above, there shall be no
liability on the part of a party to another under and by reason of this
Agreement or the transactions contemplated hereby except as set forth in
Article 11 and
----------
- 109 -
<PAGE>
except for intentionally fraudulent acts by a party, the remedies for which
shall not be limited by the provisions of this Agreement. In the event of a
termination after the First Closing, then all further obligations of the
parties respecting Transactions that have not been consummated shall
terminate, except that the obligations set forth in
Sections 5.5 and 5.6 and in Articles 11 and 12 shall survive, and there
------------ --- ----------- --
shall be no liability on the part of a party to another in respect of such
unconsummated Transactions except as set forth in Article 11 and except for
----------
intentionally fraudulent acts by a party, the remedies for which shall not
be limited by this Agreement. The foregoing provisions shall not, however,
limit or restrict the availability of specific performance or other
injunctive or equitable relief to the extent that specific performance or
such other relief would otherwise be available to a party hereunder.
ARTICLE 11
SURVIVAL AND REMEDIES; INDEMNIFICATION
Section 11.1 Survival. Except as may be otherwise expressly set
--------
forth in this Agreement, the representations, warranties, covenants and
agreements of Buyer and Seller set forth in this Agreement, or in any
writing required to be delivered in connection with this Agreement, shall
survive the Scheduled Closings and the consummations of the Transactions.
Section 11.2 Exclusive Remedy. Absent intentional fraud or unless
----------------
otherwise specifically provided herein, the sole exclusive remedy for
damages of a party hereto for any breach of the representations,
warranties, covenants and agreements of the other party contained in this
Agreement and the Related Agreements shall be the remedies contained in
this Article 11. Notwithstanding the foregoing, with respect to any
----------
matters associated with any of the Owned Real Properties or Leased Real
Properties involving environmental contamination or noncompliance with any
applicable Environmental Law, if the First Closing occurs, nothing in this
Article 11 shall limit or restrict a party's rights or remedies against, or
----------
obligations to, another party or any third party arising under any
Environmental Law, if such matter (a) was in existence on or prior to the
relevant Scheduled Closing, (b) was not identified in the Environmental
Survey or Schedule 3.16 (or an update thereto pursuant to Section 6.3), (c)
------------- -----------
was unknown to Seller or any Subsidiary as of the relevant Scheduled
Closing, and (d) would not constitute a breach of Seller's warranties in
Section 3.16.
------------
Section 11.3 Indemnity by Seller.
-------------------
- 110 -
<PAGE>
(a) Seller shall indemnify Buyer and the Buyer Subsidiaries and
hold them harmless from and against any and all claims, demands, suits,
loss, liability, damage and expense, including reasonable attorneys' fees
and costs of investigation, litigation, settlement and judgment
(collectively "Losses"), which they may sustain or suffer or to which they
------
may become subject as a result of:
(i) The inaccuracy of any representation or the breach of
any warranty made by Seller herein or by Seller or a Subsidiary in a
Related Agreement, provided, that any such inaccuracy or breach shall
--------
be determined without regard to any qualification of such
representation or warranty relating to materiality or any Material
Adverse Effect;
(ii) The nonperformance or breach of any covenant or
agreement made or undertaken by Seller in this Agreement or by Seller
or a Subsidiary in a Related Agreement; and
(iii) If a Scheduled Closing occurs, the failure of Seller
or any Subsidiary to pay, discharge or perform as and when due, any of
the Excluded Liabilities (including, without limitation, the Excluded
Liabilities enumerated in Sections 2.4(c), (d), (e) and (g), and any
--------------- --- --- ---
Losses as a result of or in connection with the failure of Seller and
the Subsidiaries to comply with any Bulk Sales Laws referred to in
Section 7.1).
-----------
(b) The indemnification obligations of Seller provided above
shall, in addition to the qualifications and conditions set forth in
Sections 11.5 and 11.6, be subject to the following qualifications:
------------- ----
(i) Buyer and the Buyer Subsidiaries shall not be entitled
to indemnity under Subsection (a)(i) above (except for claims arising
-----------------
under Sections 3.1, 3.2, 3.3 and 3.7) unless:
------------ --- --- ---
(A) Written notice to Seller of such claim specifying
the basis thereof is made, or an action at law or in equity with
respect to such claim is served, before the second anniversary of
the earlier to occur of the relevant Closing Date or the date on
which this Agreement is terminated, as the case may be;
- 111 -
<PAGE>
(B) If a Scheduled Closing occurs, the Losses
sustained or suffered by Buyer and the Buyer Subsidiaries or to
which they may be subject as a result of circumstances described
in such Subsection (a)(i) and in Section 11.3(a)(i) of the
----------------- ------------------
Subsequent Facilities Agreement exceed, in the aggregate, the sum
of Three Million Dollars ($3,000,000) (the "Trigger Amount"), in
--------------
which case Buyer and the Buyer Subsidiaries shall be entitled
only to recover the amount by which such aggregate Losses exceed
Two Million Dollars ($2,000,000) (the "Deductible Amount"),
-----------------
provided, however, that individual claims of Two Thousand Dollars
--------
($2,000) or less shall not be aggregated for purposes of
calculating either the Trigger Amount, the Deductible Amount or
the excess of Losses over the Deductible Amount;
(C) If a Scheduled Closing occurs, in no event shall
Seller be liable to Buyer and the Buyer Subsidiaries under
Subsection (a)(i) for Losses in the nature of consequential
-----------------
damages, lost profits, damage to reputation or the like, but such
damages shall be limited to out-of-pocket Losses and diminution
in value; and
(D) If a Scheduled Closing occurs, in no event shall
Seller be liable to Buyer and the Buyer Subsidiaries under
Subsection (a)(i) of this Agreement and under Section 11(a)(i) of
----------------- ---------------
the Subsequent Facilities Agreement for amounts which, in the
aggregate, exceed the sum of (x) that portion of the Purchase
Price paid pursuant to Section 2.5(a) of this Agreement and
--------------
pursuant to Section 2.5(a) of the Subsequent Facilities Agreement
-------------
for assets actually acquired and (y) the amount paid pursuant to
the penultimate sentence of Section 2.5 of this Agreement and
-----------
pursuant to the penultimate sentence of Section 2.5(a) of the
-------------
Subsequent Facilties Agreement; provided that in the event Buyer
--------
and the Buyer Subsidiaries make claims in the aggregate for
Losses with respect to a Facility that exceed seventy-five
percent (75%) of the portion of the Purchase Price allocated to
such Facility in the Allocation Schedule, then substantially
concurrently with the making of such claim or claims, Buyer shall
cause such Facility to be offered in writing for resale to Seller
at a cash price equal to such allocated portion of the Purchase
Price
- 112 -
<PAGE>
less amounts, if any, previously paid by Seller to Buyer
with respect to Buyer's claims for Losses with respect to such
Facility and on an "as is, where is" basis, in which case:
(1) Seller shall have thirty (30) days to accept such
offer in writing;
(2) If Seller accepts such offer, it shall have one
hundred fifty (150) days to close such transaction;
(3) At the closing of such transaction, Buyer shall
cause all of the right, title and interest of its Affiliates
in such Facility and related assets to be conveyed to Seller
(or a designee of Seller) in the same condition of title as
the Facility and related assets were originally sold,
assigned, transferred and conveyed by Seller and the
Subsidiaries hereunder, and Seller (or such designee) shall
assume disclosed operating liabilities of the Facility of
the same types as the Assumed Liabilities provided that if
--------
the dollar amount of such liabilities exceeds the dollar
amount of the Assumed Liabilities respecting such Facility
originally assumed by Buyer hereunder, then there shall be a
dollar-for-dollar reduction in the purchase price payable by
Seller (or its designee) to the extent of such excess; and
(4) Simultaneous with such closing, Buyer and the
Buyer Subsidiaries shall release Seller from further
liability under Subsection (a)(i) for Losses with respect to
-----------------
such Facility.
(ii) If a Scheduled Closing occurs, Buyer and the Buyer
Subsidiaries shall not be entitled to indemnity under Subsections
-----------
(a)(ii)-(iii) above except for out-of-pocket Losses actually suffered
-------------
or sustained by them or to which they may become subject as a result
of circumstances described in such Subsections (a)(ii)-(iii), and such
-------------------------
indemnity shall not include Losses in the nature of consequential
damages, lost profits, diminution in value, damage to reputation or
the like; except that the provisions of this clause (b)(ii) shall not
-------
apply to breaches of Sections 5.6 and 6.8, provided that the
------------ --- --------
- 113 -
<PAGE>
liability of Seller and the Subsidiaries for breaches of such Sections
shall be subject to the provisions of Subsection (b)(i)(D) above and
--------------------
that the liability of Seller and the Subsidiaries for breaches of such
Sections shall be aggregated with the liability of Seller under
Subsection (a)(i) for purposes of Subsection (b)(i)(D).
----------------- --------------------
(iii) Seller shall have no liability for Losses arising
from the breach of any warranty related to Net Book Values, including
without limitation the warranties contained in Sections 3.17 and 3.18,
------------- ----
and no such Losses shall be applied against the Trigger Amount or the
Deductible Amount or the excess of Losses over the Deductible Amount,
it being agreed that the liability of the Seller with respect to Net
Book Values, if any, shall be resolved in accordance with the
provisions of Sections 2.6(a), (b) and (c).
--------------- --- ---
Section 11.4 Indemnity by Buyer.
------------------
(a) Buyer shall indemnify Seller and the Subsidiaries and hold
Seller and the Subsidiaries harmless from and against any and all Losses
which they may sustain or suffer or to which they may become subject as a
result of:
(i) The inaccuracy of any representation or the breach of
any warranty made by Buyer herein or by Buyer or a Buyer Subsidiary in
a Related Agreement, provided that any such inaccuracy or breach shall
--------
be determined without regard to any qualification of such
representation or warranty relating to materia-lity or any Material
Adverse Effect;
(ii) The nonperformance or breach of any covenant or
agreement made or undertaken by Buyer in this Agreement or by Buyer or
a Buyer Subsidiary in a Related Agreement;
(iii) If a Scheduled Closing occurs, the failure of Buyer
to pay, discharge or perform as and when due, any of the Assumed
Liabilities; and
(iv) If a Scheduled Closing occurs, the ongoing operations
of Buyer and the Transferred Assets after the relevant Closing Date,
including but not limited to the continuation or
- 114 -
<PAGE>
performance by Buyer after the relevant Closing Date of any agreement
or practice of the Seller or the Subsidiaries.
(b) The indemnification obligations of Buyer provided above
shall, in addition to the qualifications and conditions set forth in
Sections 11.5 and 11.6, be subject to the following qualifications:
------------- ----
(i) Seller and the Subsidiaries shall not be entitled to
indemnity under Subsection (a)(i) above (except for claims under
-----------------
Sections 4.1, 4.2, 4.3 and 4.7) unless:
------------ --- --- ---
(A) Written notice to Buyer of such claim specifying
the basis thereof is made, or an action at law or in equity with
respect to such claim is served, before the second anniversary of
the earlier to occur of the relevant Closing Date or the date on
which this Agreement is terminated, as the case may be;
(B) If a Scheduled Closing occurs, the Losses
sustained or suffered by Seller and the Subsidiaries or to which
they may be subject as a result of circumstances described in
such Subsection (a)(i) and in Section 11.4(a)(i) of the
----------------- ------------------
Subsequent Facilities Agreement exceed, in the aggregate, the
Trigger Amount, in which case Seller and the Subsidiaries shall
be entitled only to recover the amount by which such Losses
exceed, in the aggregate, the Deductible Amount, provided,
--------
however, that individual claims of Two Thousand Dollars ($2,000)
or less shall not be aggregated for purposes of calculating
either the Trigger Amount, the Deductible Amount or the excess of
Losses over the Deductible Amount; and
(C) If a Scheduled Closing occurs, in no event shall
Buyer be liable to Seller and the Subsidiaries under Subsection
----------
(a)(i) for Losses in the nature of consequential damages, lost
------
profits, damage to reputation or the like, but such damages shall
be limited to out-of-pocket Losses and diminution in value.
(ii) If a Scheduled Closing occurs, Seller and the
Subsidiaries shall not be entitled to indemnity under Subsections
-----------
(a)(ii)-
-------
- 115 -
<PAGE>
(iv) above except for out-of-pocket Losses actually suffered or
----
sustained by them or to which they may become subject as a result of
circumstances described in such Subsections (a)(ii)-(iv), and such
------------------------
indemnity shall not include Losses in the nature of consequential
damages, lost profits, diminution in value, damage to reputation or
the like, except that the provisions of this clause (b)(ii) shall not
-------
apply to breaches of Sections 5.6 or 5.7.
------------ ---
Section 11.5 Further Qualifications Respecting Indemnification. The
-------------------------------------------------
right of a party (an "Indemnitee") to indemnity hereunder shall be subject
----------
to the following additional qualifications:
(a) The Indemnitee shall promptly upon its discovery of facts or
circumstances giving rise to a claim for indemnification, including receipt
by it of notice of any demand, assertion, claim, action or proceed-
ing, judicial, governmental or otherwise, by any third party (such third
party actions being collectively referred to herein as "Third Party
-----------
Claims"), give notice thereof to the indemnifying party (the "Indemnitor"),
------ ----------
such notice in any event to be given within sixty (60) days from the date
the Indemnitee obtains actual knowledge of the basis or alleged basis for
the right of indemnity or such shorter period as may be necessary to avoid
material prejudice to the Indemnitor; and
(b) In computing Losses, such amounts shall be computed net of
any related recoveries to which the Indemnitee is entitled under insurance
policies or other related payments received or receivable from third
parties and net of any tax benefits actually received by the Indemnitee or
for which it is eligible, taking into account the income tax treatment of
the receipt of indemnification.
Section 11.6 Procedures Respecting Third Party Claims. In providing
----------------------------------------
notice to the Indemnitor of any Third Party Claim (the "Claim Notice"), the
------------
Indemnitee shall provide the Indemnitor with a copy of such Third Party
Claim or other documents received and shall otherwise make available to the
Indemnitor all relevant information material to the defense of such claim
and within the Indemnitee's possession. The Indemnitor shall have the
right, by notice given to the Indemnitee within fifteen (15) days after the
date of the Claim Notice, to assume and control the defense of the Third
Party Claim that is the subject of such Claim Notice, including the
employment of counsel selected by the Indemnitor after consultation with
the Indemnitee, and the Indemnitor shall pay all expenses of, and the
- 116 -
<PAGE>
Indemnitee shall cooperate fully with the Indemnitor in connection with,
the conduct of such defense. The Indemnitee shall have the right to employ
separate counsel in any such proceeding and to participate in (but not
control) the defense of such Third Party Claim, but the fees and expenses
of such counsel shall be borne by the Indemnitee unless the Indemnitor
shall agree otherwise; provided, however, if the named parties to any such
-------- -------
proceeding (including any impleaded parties) include both the Indemnitee
and the Indemnitor, the Indemnitor requires that the same counsel represent
both the Indemnitee and the Indemnitor, and representation of both parties
by the same counsel would be inappropriate due to actual or potential
differing interests between them, then the Indemnitee shall have the right
to retain its own counsel at the cost and expense of the Indemnitor. If
the Indemnitor shall have failed to assume the defense of any Third Party
Claim in accordance with the provisions of this Section, then the
Indemnitee shall have the absolute right to control the defense of such
Third Party Claim, and, if and when it is finally determined that the
Indemnitee is entitled to indemnification from the Indemnitor hereunder,
the fees and expenses of Indemnitee's counsel shall be borne by the
Indemnitor, provided that the Indemnitor shall be entitled, at its
--------
expense, to participate in (but not control) such defense. The Indemnitor
shall have the right to settle or compromise any such Third Party Claim for
which it is providing indemnity so long as such settlement does not impose
any obligations on the Indemnitee (except with respect to providing
releases of the third party). The Indemnitor shall not be liable for any
settlement effected by the Indemnitee without the Indemnitor's consent
except where the Indemnitee has assumed the defense because Indemnitor has
failed or refused to do so. The Indemnitor may assume and control, or bear
the costs, of any such defense subject to its reservation of a right to
contest the Indemnitee's right to indemnification hereunder, provided that
--------
it gives the Indemnitee notice of such reservation within fifteen (15) days
of the date of the Claim Notice.
ARTICLE 12
GENERAL PROVISIONS
Section 12.1 Notices. All notices, requests, demands, waivers,
-------
consents and other communications hereunder shall be in writing, shall be
delivered either in person, by telegraphic, facsimile or other electronic
means, by overnight air courier or by mail, and shall be deemed to have
been duly given and to have become effective (a) upon receipt if delivered
in person or by telegraphic, facsimile or other electronic means, (b) one
business day after having been delivered to an air courier for overnight
- 117 -
<PAGE>
delivery or (c) three business days after having been deposited in the
mails as certified or registered mail, return receipt requested, all fees
prepaid, directed to the parties or their permitted assignees at the
following addresses (or at such other address as shall be given in writing
by a party hereto):
If to Seller, addressed to:
National Medical Enterprises
2700 Colorado Avenue
Santa Monica, CA 90404
Attn: Treasurer
Facsimile: (310) 998-6507
with a copy to counsel for Seller:
National Medical Enterprises
2700 Colorado Avenue
Santa Monica, CA 90404
Attn: General Counsel
Facsimile: (310) 998-6956
and
Munger, Tolles & Olson
355 South Grand Avenue
35th Floor
Los Angeles, CA 90071
Attn: Robert L. Adler
Facsimile: (213) 687-3702
If to Buyer, addressed to:
Charter Medical Corporation
577 Mulberry St.
Macon, GA 31298
Attn: Executive Vice President - Finance
Facsimile: (912) 751-2832
- 118 -
<PAGE>
with a copy to counsel for Buyer:
King & Spalding
191 Peachtree Street
Atlanta, GA 30303-1763
Attn: Robert W. Miller
Facsimile: (404) 572-5144
Section 12.2 Attorneys' Fees. In any litigation or other proceeding
---------------
relating to this Agreement, including litigation with respect to any
Related Agreement (but excluding any proceedings under Sections 2.6(b),
---------------
2.6(c) or 2.14), the prevailing party shall be entitled to recover its
------ -----
costs and reasonable attorneys' fees.
Section 12.3 Successors and Assigns. The rights under this Agreement
----------------------
shall not be assignable or transferable nor the duties delegable by either
party without the prior written consent of the other; and nothing contained
in this Agreement, express or implied, is intended to confer upon any
person or entity, other than the parties hereto and their permitted
successors-in-interest and permitted assignees, any rights or remedies
under or by reason of this Agreement unless so stated to the contrary.
Notwithstanding the foregoing, (a) Buyer may grant to its lenders a
security interest in its rights under this Agreement, and (b) subject to
the terms and provisions of Section 5.7, Buyer may assign its rights under
-----------
Section 5.7 to the entities and in the circumstances described in Section
----------- -------
5.7(d).
------
Section 12.4 Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 12.5 Captions and Paragraph Headings. Captions and paragraph
-------------------------------
headings used herein are for convenience only and are not a part of this
Agreement and shall not be used in construing it.
Section 12.6 Entirety of Agreement; Amendments. This Agreement
---------------------------------
(including the Schedules and Exhibits hereto), the other documents and
instruments specifically provided for in this Agreement, and the Subsequent
Facilities Agreement contain the entire understanding between the parties
concerning the subject matter of this Agreement and such other documents
and instruments and, except as expressly provided for herein, supersede all
prior understandings and agreements, whether oral or written, between
- 119 -
<PAGE>
them with respect to the subject matter hereof and thereof. There are no
representations, warranties, agreements, arrangements or understandings,
oral or written, between the parties hereto relating to the subject matter
of this Agreement and such other documents and instruments which are not
fully expressed herein or therein. This Agreement may be amended or
modified only by an agreement in writing signed by each of the parties
hereto. All Exhibits and Schedules attached to or delivered in connection
with this Agreement are integral parts of this Agreement as if fully set
forth herein. Without limiting the generality of the foregoing, this
Agreement and the Subsequent Facilities Agreement shall, upon their
execution, replace and substitute for that certain Asset Sale Agreement
between the parties dated as of March 29, 1994 related to both the First
Facilities and the Subsequent Facilities which shall be of no further force
and effect, it being agreed that the effectiveness of this Agreement and of
the Subsequent Facilities Agreement shall relate back from their actual
date of execution to and including March 29, 1994. The representations and
warranties of the parties made herein shall likewise be deemed to have been
made as of March 29, 1994.
Section 12.7 Construction. This Agreement and any documents or
------------
instruments delivered pursuant hereto shall be construed without regard to
the identity of the person who drafted the various provisions of the same.
Each and every provision of this Agreement and such other documents and
instruments shall be construed as though the parties participated equally
in the drafting of the same. Consequently, the parties acknowledge and
agree that any rule of construction that a document is to be construed
against the drafting party shall not be applicable either to this Agreement
or such other documents and instruments.
Section 12.8 Waiver. The failure of a party to insist, in any one or
------
more instances, on performance of any of the terms, covenants and
conditions of this Agreement shall not be construed as a waiver or
relinquishment of any rights granted hereunder or of the future performance
of any such term, covenant or condition, but the obligations of the parties
with respect thereto shall continue in full force and effect. No waiver of
any provision or condition of this Agreement by a party shall be valid
unless in writing signed by such party or operational by the terms of this
Agreement. A waiver by one party of the performance of any covenant,
condition, representation or warranty of the other party shall not
invalidate this Agreement, nor shall such waiver be construed as a waiver
of any other covenant, condition, representation or warranty. A waiver by
any party of
- 120 -
<PAGE>
the time for performing any act shall not constitute a waiver of the time
for performing any other act or the time for performing an identical act
required to be performed at a later time.
Section 12.9 Governing Law. This Agreement shall be governed in all
-------------
respects, including validity, interpretation and effect, by the laws of the
State of California, without regard to the principles of conflicts of law
thereof, provided that the validity, interpretation and effect of any
--------
instruments by which real property is conveyed at a Scheduled Closing shall
be governed by the laws of the state in which such real property is
located. Any action arising under this Agreement shall be adjudicated (a)
in Los Angeles, California, if brought by Buyer or its Affiliates against
Seller, any Subsidiary or their respective Affiliates, and (b) in
[Atlanta], Georgia, if brought by Seller or its Affiliates against Buyer,
any Buyer Subsidiary or their respective Affiliates, provided that any
cross-claim or counterclaim shall also be adjudicated in the court in which
the underlying action has been brought in accordance with this Section
-------
12.9.
----
Section 12.10 Severability. Whenever possible, each provision of
------------
this Agreement shall be interpreted in such manner as to be valid, binding
and enforceable under applicable law, but if any provision of this
Agreement is held to be invalid, void (or voidable) or unenforceable under
applicable law, such provision shall be ineffective only to the extent held
to be invalid, void (or voidable) or unenforceable, without affecting the
remainder of such provision or the remaining provisions of this Agreement.
Section 12.11 Consents Not Unreasonably Withheld. Wherever the
----------------------------------
consent or approval of any party is required under this Agreement, such
consent or approval shall not be unreasonably withheld, unless such consent
or approval is to be given by such party at the sole or absolute discretion
of such party or is otherwise similarly qualified.
Section 12.12 Time Is of the Essence. Time is hereby expressly made
----------------------
of the essence with respect to each and every term and provision of this
Agreement. The parties acknowledge that each will be relying upon the
timely performance by the other of its obligations hereunder as a material
inducement to each party's execution of this Agreement.
- 121 -
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement
on the date first above written.
Buyer:
CHARTER MEDICAL CORPORATION
By __________________________
Name _______________________
Title ______________________
Seller:
NATIONAL MEDICAL ENTERPRISES,
INC.
By __________________________
Name ____________________
Title ___________________
- 122 -
<PAGE>
EXHIBIT A
---------
BULK BILL OF SALE AND ASSIGNMENT
(General Closing)
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, NATIONAL MEDICAL ENTERPRISES, INC., a
Nevada corporation (the "Seller"), and each subsidiary of Seller set forth
in Rider A hereto (individually a "Subsidiary" and collectively, the
"Subsidiaries"), pursuant to, and subject to the terms, provisions and
conditions of, that certain Asset Sale Agreement (First Facilities) dated
________________, 1994 (the "Agreement"), by and between Seller and CHARTER
MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), do hereby sell,
convey, assign, transfer and deliver to Buyer, its successors and assigns,
the Transferred Assets of Seller and the Subsidiaries described in the
Agreement, except for those Transferred Assets sold, conveyed, assigned,
transferred or delivered by Seller or a Subsidiary to Buyer or to a
subsidiary of Buyer pursuant to separate instruments of sale, conveyance,
assignment, transfer or delivery, including, without limitation, any
Facility Specific Bill of Sale and Assignment, any deed, or any Assignment
and Assumption of Real Property Lease.
The sale, conveyance, assignment, transfer and delivery made
hereunder is made without warranty of any kind, except as may be provided
in the Agreement, including the warranty of merchantability or fitness for
any purpose.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement. This instrument is governed by
and subject to all of the representations, warranties, covenants,
indemnities and other terms and conditions of the Agreement.
A-1
<PAGE>
IN WITNESS WHEREOF, the Seller and each Subsidiary have executed
this Bulk Bill of Sale and Assignment this ___ day of _________, 1994,
effective as of the date and time specified in the Agreement.
NATIONAL MEDICAL ENTERPRISES,
INC.
For Itself And As Attorney-In-Fact
For The Subsidiaries Listed In Rider A
By: ___________________________
Title: ________________________
A-2
<PAGE>
RIDER A
-------
TO
--
BULK BILL OF SALE AND ASSIGNMENT
--------------------------------
(List of Subsidiaries)
A-3
<PAGE>
FACILITY SPECIFIC
BILL OF SALE AND ASSIGNMENT
(Facility No. ___)
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, NATIONAL MEDICAL ENTERPRISES, INC., a
Nevada corporation (the "Seller"), and each subsidiary of Seller set forth
in Rider A hereto (individually a "Subsidiary" and collectively, the
"Subsidiaries"), pursuant to, and subject to the terms, provisions and
conditions of, that certain Asset Sale Agreement (First Facilities) dated
__________________, 1994 (the "Agreement"), by and between Seller and
CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), do
hereby sell, convey, assign, transfer and deliver to the subsidiary of
Buyer identified in Rider A hereto (the "Buyer's Subsidiary"), its
successors and assigns, the Transferred Assets of Seller and the
Subsidiaries described in the Agreement that are related to the healthcare
facilities identified in Rider A hereto (together with related outpatient
or satellite clinics, if any, the "Facilities"), except for those
Transferred Assets sold, conveyed, assigned, transferred or delivered by
Seller or a Subsidiary to Buyer or to Buyer's Subsidiary pursuant to
separate instruments of sale, conveyance, assignment, transfer or delivery,
of even date herewith, including, without limitation, any deed, or any
Assignment and Assumption of Real Property Lease.
The sale, conveyance, assignment, transfer and delivery made
hereunder is made without warranty of any kind, except as may be provided
in the Agreement, including the warranty of merchantability or fitness for
any purpose.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement. This instrument is governed by
and subject to all of the representations, warranties, covenants,
indemnities and other terms and conditions of the Agreement.
A-4
<PAGE>
IN WITNESS WHEREOF, the Seller and each Subsidiary have executed
this Facility Specific Bill of Sale and Assignment this ___ day of
_________, 1994, effective as of the date and time specified in the
Agreement.
NATIONAL MEDICAL ENTERPRISES,
INC.
For Itself And As Attorney-In-Fact
For The Subsidiaries Listed In Rider A
By: ___________________________
Title: ________________________
A-5
<PAGE>
RIDER A
-------
TO
--
FACILITY SPECIFIC BILL OF SALE AND ASSIGNMENT
---------------------------------------------
1. Subsidiaries of Seller:
----------------------
______________________________
______________________________
NME Psychiatric Properties, Inc.
NME Psychiatric Hospitals, Inc.
NME Hospitals, Inc.
2. Facilities:
----------
______________________________
______________________________
______________________________
Related outpatient facilities:
______________________________
______________________________
______________________________
3. Buyer's Subsidiary:
------------------
______________________________
A-6
<PAGE>
EXHIBIT B
---------
ASSIGNMENT AND ASSUMPTION OF REAL
PROPERTY LEASE
(Facility No. ___)
WHEN RECORDED, MAIL TO:
THIS ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE (this
"Assignment") is entered into as of _____________, 1994, by and between the
undersigned assignor (the "Assignor") and the undersigned assignee (the
"Assignee"), pursuant to that certain Asset Sale Agreement (First
Facilities) dated __________, 1994 (the "Asset Sale Agreement"), by and
between the parent corporation of the Assignor, National Medical
Enterprises, Inc., a Nevada corporation (the "Assignor's Parent"), and the
parent corporation of the Assignee, Charter Medical Corporation, a Delaware
corporation (the "Assignee's Parent").
WITNESSETH:
-----------
WHEREAS, Assignor is the tenant under that certain real property
lease described in Rider A attached hereto wherein Assignor leases that
certain real property described in Rider B attached hereto (the "Real
Property Lease"); and
WHEREAS, Assignor desires to assign all of its right, title and
interest under the Real Property Lease and Assignee desires to assume all
of Assignor's obligations thereunder;
NOW, THEREFORE, the parties agree as follows:
1. Assignment of Lease. Assignor hereby assigns unto Assignee
-------------------
all of the Assignor's right, title and interest in the Real Property
B-1
<PAGE>
Lease, including, without limitation, any rights to renew, terminate or
extend the term of the Real Property Lease, and any rights of first refusal
respecting and options to purchase the leased premises that are the subject
of the Real Property Lease.
2. Assumption of Real Property Lease Obligations. Assignee and
---------------------------------------------
Assignee's Parent, jointly and severally, do hereby assume all of the
obligations of the Assignor under the Real Property Lease and all of the
obligations of any guarantor of the Assignor's obligations under the Real
Property Lease.
3. General Provisions. Assignee and Assignee's Parent hereby
------------------
confirm that Assignee has irrevocably appointed Assignee's Parent as its
sole and exclusive representative, agent and attorney-in-fact with respect
to all matters arising from or related to this Assignment. Notices
hereunder to the Assignor or the Assignor's Parent, or to the Assignee or
the Assignee's Parent, as the case may be, shall be given to the Assignor's
Parent or the Assignee's Parent, as the case may be, in accordance with the
provisions of the Asset Sale Agreement. The provisions of this Assignment
shall be binding upon and inure to the benefit of each party hereto, the
Assignor's Parent, any guarantor of the Assignor's obligations under the
Real Property Lease, the lessor under the Real Property Lease, and the
respective predecessors, successors and permitted assigns of each of the
foregoing. Unless otherwise expressly provided by the Real Property Lease,
nothing in this Assignment and Assumption shall relieve the Assignor of its
obligations to the lessor under the Real Property Lease or any such
guarantor of its obligations under any such guaranty. This instrument is
governed by and subject to all of the representations, warranties,
covenants, indemnities and other terms and conditions of the Asset Sale
Agreement.
B-2
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Assignment
as of the day and year first above written.
ASSIGNOR:
______________________________,
a _______________ corporation
By: __________________________
Title: _________________________
And By: ______________________
Title: _________________________
ASSIGNEE:
______________________________,
a ________________ corporation
By: _____________________________
Title: ___________________________
And By: _________________________
Title: ___________________________
CHARTER MEDICAL CORPORATION
By: _____________________________
Title: ___________________________
And By: ________________________
Title: ___________________________
B-3
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On ___________________, 1994, before me, the undersigned, a
Notary Public in and for said County and State, personally appeared,
____________________ and _____________________, proved to me on the basis
of satisfactory evidence to be the persons whose names are subscribed to
the within instrument and acknowledged to me that they executed the same in
their authorized capacities as ____________________ and _______________,
respectively, of ___________________________________, a _____________
corporation, and that by their signatures on the instrument, the entity
upon behalf of which the persons acted, executed the instrument.
WITNESS my hand and official seal.
_____________________________
Notary Public
(Notary Seal)
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On ___________________, 1994, before me, the undersigned, a
Notary Public in and for said County and State, personally appeared,
____________________ and _____________________, proved to me on the basis
of satisfactory evidence to be the persons whose names are subscribed to
the within instrument and acknowledged to me that they executed the same in
their authorized capacities as ____________________ and _______________,
respectively, of ___________________________________, a _______________
corporation, and that by their signatures on the instrument, the entity
upon behalf of which the persons acted, executed the instrument.
WITNESS my hand and official seal.
_____________________________
Notary Public
B-4
<PAGE>
(Notary Seal)
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On ___________________, 1994, before me, the undersigned, a
Notary Public in and for said County and State, personally appeared,
____________________ and _____________________, proved to me on the basis
of satisfactory evidence to be the persons whose names are subscribed to
the within instrument and acknowledged to me that they executed the same in
their authorized capacities as ____________________ and _______________,
respectively, of Charter Medical Corporation, a Delaware corporation, and
that by their signatures on the instrument, the entity upon behalf of which
the persons acted, executed the instrument.
WITNESS my hand and official seal.
_____________________________
Notary Public
(Notary Seal)
B-5
<PAGE>
RIDER A
-------
TO
--
ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE
------------------------------------------------
(Description of Lease and Any Separate
First Refusal Rights and/or Purchase Options)
__________________________________.
B-6
<PAGE>
RIDER B
-------
TO
--
ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE
------------------------------------------------
(Description of Leased Premises)
______________________________
______________________________
______________________________
B-7
<PAGE>
EXHIBIT C
---------
GENERAL ASSUMPTION AGREEMENT
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, and pursuant to, and subject to the
terms, provisions and conditions of, that certain Asset Sale Agreement
(First Facilities) dated ___________, 1994 (the "Agreement"), by and
between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the
"Seller") and CHARTER MEDICAL CORPORATION, a Delaware corporation (the
"Buyer"), Buyer does hereby assume, and does hereby agree to pay, discharge
and perform as and when due, the Assumed Liabilities described in the
Agreement of Seller and of each subsidiary of Seller set forth in Rider A
hereto (individually a "Subsidiary" and collectively, the "Subsidiaries"),
except for those Assumed Liabilities assumed, jointly and severally, by
Buyer and a subsidiary of Buyer pursuant to separate instruments of
assumption, including, without limitation, any Facility Specific Assumption
Agreement or any Assignment and Assumption of Real Property Lease executed
by Buyer and/or any subsidiary of Buyer in favor of Seller and/or any of
the Subsidiaries.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement. This instrument is governed by
and subject to all of the representations, warranties, covenants,
indemnities and other terms and conditions of the Agreement.
This Assumption Agreement is being delivered in favor of Seller
and each of the Subsidiaries.
C-1
<PAGE>
IN WITNESS WHEREOF, Buyer has executed this Assumption Agreement
this ___ day of ________, 1994, effective as of the date and time specified
in the Agreement.
CHARTER MEDICAL CORPORATION
By: _____________________________
Title: __________________________
C-2
<PAGE>
RIDER A
-------
TO
--
GENERAL ASSUMPTION AGREEMENT
----------------------------
(List of Subsidiaries)
C-3
<PAGE>
FACILITY SPECIFIC ASSUMPTION AGREEMENT
(Facility No. ___)
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, and pursuant to, and subject to the
terms, provisions and conditions of, that certain Asset Sale Agreement
(First Facilities) dated _____________, 1994 (the "Agreement"), by and
between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the
"Seller") and CHARTER MEDICAL CORPORATION, a Delaware corporation (the
"Buyer"), Buyer and the subsidiary of Buyer identified in Rider A hereto
(the "Buyer's Subsidiary"), jointly and severally, do hereby assume, and do
hereby agree to pay, discharge and perform as and when due, the Assumed
Liabilities described in the Agreement of Seller and of each subsidiary of
Seller set forth in Rider A hereto (individually a "Subsidiary" and
collectively, the "Subsidiaries") that are related to the healthcare
facilities identified in Rider A hereto (together with related outpatient
or satellite clinics, if any, the "Facilities"), except for those Assumed
Liabilities assumed, jointly and severally, by Buyer and the Buyer's
Subsidiary pursuant to separate instruments of assumption, of even date
herewith, including, without limitation, Assignment and Assumption of Real
Property Lease executed by Buyer and/or the Buyer's Subsidiary in favor of
Seller and/or any of the Subsidiaries.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement. This instrument is governed by
and subject to all of the representations, warranties, covenants,
indemnities and other terms and conditions of the Agreement.
This Facility Specific Assumption Agreement is being delivered in
favor of Seller and each of the Subsidiaries.
C-4
<PAGE>
IN WITNESS WHEREOF, Buyer and the Buyer's Subsidiary have
executed this Facility Specific Assumption Agreement this ___ day of
_________, 1994, effective as of the date and time specified in the
Agreement.
BUYER'S SUBSIDIARY:
______________________________,
a _______________ corporation
By: __________________________
Title: ________________________
CHARTER MEDICAL CORPORATION
By: ______________________________
Title: _____________________________
C-5
<PAGE>
RIDER A
-------
TO
--
FACILITY SPECIFIC ASSUMPTION AGREEMENT
--------------------------------------
1. Subsidiaries of Seller:
----------------------
______________________________
______________________________
NME Psychiatric Properties, Inc.
NME Psychiatric Hospitals, Inc.
NME Hospitals, Inc.
2. Facilities:
----------
______________________________
______________________________
______________________________
Related outpatient facilities:
______________________________
______________________________
______________________________
3. Buyer's Subsidiary:
------------------
______________________________
C-6
<PAGE>
EXHIBIT D
---------
NATIONAL PURCHASING PARTICIPATION AGREEMENT
-------------------------------------------
THIS NATIONAL PURCHASING PARTICIPATION AGREEMENT (the "Agreement") is
---------
made and entered into as of the ___ day of _____________, 1994, by and
between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation
("Seller"), and CHARTER MEDICAL CORPORATION, a Delaware corporation
------
("Buyer"), with reference to the following facts.
-----
A. Buyer and Seller are parties to a Asset Sale Agreement (First
Facilities) dated ___________, 1994 (the "Asset Sale Agreement"), pursuant
--------------------
to which Seller is causing certain of its wholly-owned subsidiaries (the
"Subsidiaries") to sell, and Buyer and certain of its wholly-owned
-------------
subsidiaries (the "Buyer Subsidiaries") are buying, certain mental health
------------------
facilities (the "Facilities") and related assets (such Facilities and
----------
related assets being referred to as the "Transferred Assets") through which
------------------
the Subsidiaries have provided mental health services to the public.
B. To assist in the orderly transition in the ownership of the
Facilities following the purchases and sales contemplated by the Asset Sale
Agreement (the "Transactions"), Seller has agreed to, or will cause its
------------
pertinent Affiliates (as such term is defined in the Asset Sale Agreement)
to, permit the Facilities to participate in certain national purchasing
contracts of Seller and its Affiliates (together, the "Seller Group") to
------------
the extent such Facilities have previously participated therein, all in
accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
agreements contained herein and in the Asset Sale Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
Section 1 Participation In National Purchasing Contracts. On the
----------------------------------------------
terms and subject to the conditions hereof, Seller hereby agrees to
exercise its reasonable commercial efforts for the term set forth in
Section 6.1 to permit Buyer and the Buyer Subsidiaries to participate to
the extent they
D-1
<PAGE>
choose in the national purchasing contracts or programs of Seller and its
Affiliates set forth in Rider A hereto (as modified from time to time, the
"National Contracts") on substantially the same basis as members of the
------------------
Seller Group participate in such National Contracts, provided that such
--------
participation shall be solely for the purpose of supporting and shall be
limited to the operations of the Facilities.
Section 2 Primary Negotiating Party. Buyer agrees that Seller or
-------------------------
pertinent members of the Seller Group shall remain the primary negotiating
party (the "Primary Negotiating Party") with respect to dealing with third
-------------------------
parties under all such National Contracts, and Buyer agrees that without
the prior written consent of Seller or the pertinent member of the Seller
Group (which consent shall be in the absolute discretion of Seller or such
pertinent member of the Seller Group), neither Buyer nor any Affiliate of
Buyer (the "Buyer Group") shall initiate any discussions or engage in any
-----------
dealings with third parties with respect to matters arising under or
related to such National Contracts. Seller agrees to cause the Primary
Negotiating Party to consider the unique needs of the Facilities when
negotiating terms, provisions and purchasing arrangements under such
National Contracts, but the Primary Negotiating Party shall be under no
obligation to expend any efforts, reasonable or otherwise, to address such
needs if to do so would cause any economic detriment to any member of the
Seller Group.
Section 3 Fees and Charges. In consideration for participation in
----------------
the National Contracts, Buyer agrees as follows:
3.1 Buyer shall pay Seller a monthly participation fee (the
"Participation Fee") as set forth in Rider B hereto. Such Participation
------------------
Fee shall be payable on the first day of each month during the term of this
Agreement, pro-rated for partial periods.
3.2 In the event that, pursuant to arrangements applicable to a
particular purchase or purchases under a National Contract, a member of the
Buyer Group becomes directly obligated to third parties for the Cost of
goods and services provided to such member of the Buyer Group, then such
member of the Buyer Group shall promptly pay to such third parties the
Costs billed to such member of the Buyer Group upon presentation to it of
reasonably detailed invoices therefor, such payments to be made in
accordance with the terms and tenor of such invoices.
D-2
<PAGE>
3.3 Buyer hereby agrees to indemnify and hold harmless Seller
and each member of the Seller Group from and against any and all loss,
liability, damage and expense, including reasonable attorneys' fees and
costs of investigation, litigation, settlement and judgment, which Seller
and each member of the Seller Group may sustain or suffer or to which they
may become subject as a result of any failure of any member of the Buyer
Group to comply with the foregoing provisions of this Section 3.
---------
Section 4 Disclaimer of Warranties. Seller agrees to use reasonable
------------------------
efforts to permit members of the Buyer Group to participate in the National
Contracts to the extent set forth in Section 1, but no member of the Seller
---------
Group shall be liable to any member of the Buyer Group for any loss, damage
or expense which may result from such participation, for negligent
performance by any member of the Seller Group in connection with such
participation, or for any changes in the terms, manner, method or mode by
which goods and services are procured under the National Contracts.
Neither Seller nor any member of the Seller Group makes any warranty,
express or implied, to Buyer or any member of the Buyer Group respecting
goods and services supplied under a National Contract or this Agreement,
including without limitation warranties of merchantability or fitness for a
particular purpose, and as between members of the Seller Group and members
of the Buyer Group, goods and services shall be provided and accepted "AS
IS" and "WITH ALL FAULTS." Without limiting the generality of the
foregoing, Seller agrees to exercise reasonable efforts, and to cause
members of the Seller Group to exercise reasonable efforts, to pass through
to pertinent members of the Buyer Group the benefit of any warranties
provided by third parties, to the extent permitted by the warranties in
question, with respect to goods and services supplied by such third parties
to such members of the Buyer Group, provided that such reasonable efforts
--------
shall not include the initiation of any legal proceedings and provided
--------
further that Buyer shall, or shall cause the pertinent member or members of
-------
the Buyer Group to, reimburse Seller and each member of the Seller Group
for any expenses incurred by them in connection with passing through the
benefit of any such warranty or warranties.
Section 5 Limitation on Obligations of Seller Group. The parties
-----------------------------------------
agree that the sole obligation of Seller and members of the Seller Group
under this Agreement is to exercise reasonable efforts to permit, subject
to the terms hereof and the terms of the National Contracts, members of the
Buyer Group to participate in the National Contracts. Nothing herein shall
obligate any member of the Seller Group to enforce any rights of any
D-3
<PAGE>
member of the Buyer Group arising under any National Contract or with
respect to any third party. Absent fraud or conversion, and
notwithstanding the form in which any claim or action may be brought or
asserted, the liability of members of the Seller Group for acts or
omissions arising from or relating to the performance of this Agreement
shall be limited to repayment, as general damages, of the Participation Fee
paid by Buyer for the month or months in which such acts or omissions
occurred, and no member of the Seller Group shall, under any circumstances,
have any other financial liability hereunder to members of the Buyer Group
whatsoever. Buyer agrees, and shall cause each participating member of the
Buyer Group to agree, that the provisions of this Section 5 limiting their
---------
remedies and liquidating their damages are reasonable in the circumstances
existing on the date of this Agreement.
Section 6 Term and Termination.
--------------------
6.1 This Agreement is effective on the date first written above,
and shall remain in effect for the term set forth herein unless sooner
terminated in accordance with the provisions hereof. The initial term of
this Agreement shall be for a period of ___________ ( ) days from the
date first written above. The term of this Agreement may be extended by
mutual agreement of the parties, provided that such mutual agreement shall
-------------
be evidenced by a duly executed amendment to this Agreement.
6.2 Buyer may terminate this Agreement upon written notice if
Seller or any member of the Seller Group commits any material breach of
this Agreement, and fails to cure the breach within thirty (30) days after
written notice or, if the breach cannot be cured within thirty (30) days,
fails to commence diligent efforts to cure the breach within that period.
6.3 Seller may terminate the participation of Buyer or any
member of the Buyer Group with respect to any National Contract in
accordance with Section 7.2. In addition, Seller may terminate this
Agreement upon written notice to Buyer if Buyer or any member of the Buyer
Group (i) fails to pay any amount when due hereunder, or (ii) commits any
material breach of this Agreement and, if such breach is other than a
failure to pay any amount when due hereunder, fails to cure the breach
within thirty (30) days after written notice or, if the breach cannot be
cured within thirty (30) days, fails to commence diligent efforts to cure
the breach within that period.
D-4
<PAGE>
6.4 Buyer may terminate this Agreement, with or without cause,
upon forty-five (45) days' written notice.
6.5 Seller may terminate this Agreement if Buyer or any Buyer
Subsidiary becomes insolvent or admits in writing its insolvency or
inability to pay its debts as they become due; is unable or does not pay
its debts as they become due; makes or proposes an assignment for the
benefit of creditors; convenes or proposes to convene a meeting of its
creditors or any class thereof, for purposes of effecting a moratorium upon
or extension or composition of its debts; proposes any such moratorium,
extension or composition; or commences or has filed against it any
bankruptcy, reorganization, liquidation or insolvency proceeding under any
law in any jurisdiction for the relief of debtors; or if any receiver,
trustee, liquidator or custodian is appointed to take possession of any
substantial portion of its assets.
6.6 Termination of this Agreement in whole or in part, for
cause, shall be without prejudice to any other remedy otherwise available
to the innocent party.
Section 7 General Provisions.
------------------
7.1 Force Majeure. If any party's performance is prevented,
-------------
hindered or delayed by reason of any cause(s) beyond such party's
reasonable control ("Force Majeure") which cannot be overcome by reasonable
-------------
diligence, including without limitation, war, labor disputes, civil
disorders, governmental acts, epidemics, quarantines, embargoes, fires,
earthquakes, storms, power failures, equipment failures, transmission
failures, or acts of God, such party shall be excused from performance to
the extent that it is prevented, hindered or delayed thereby, during the
continuance of such cause(s); and such party's obligations hereunder shall
be excused so long as and to the extent that such cause(s) prevent or delay
performance.
7.2 Requirements of Third Parties. Notwithstanding any other
-----------------------------
provision hereof, Buyer acknowledges and agrees that members of the Buyer
Group shall not be entitled to participate in one or more National
Contracts to the extent that to do so would violate the contractual
arrangements that may exist from time to time between members of the Seller
Group and third party suppliers and vendors or to the extent that such
participation is unacceptable to any such third party supplier or vendor,
and
D-5
<PAGE>
that the continued participation of any member of the Buyer Group in one or
more National Contracts may be terminated immediately upon written notice
to Buyer in such event.
7.3 Entirety of Agreement; Amendments. This Agreement
---------------------------------
(including the Riders hereto), the Asset Sale Agreement (including the
Schedules and Exhibits thereto), and the other documents and instruments
specifically provided for herein and therein contain the entire
understanding between the parties concerning the subject matter of this
Agreement and such other documents and instruments and, except as expressly
provided for herein or therein, supersede all prior understandings and
agreements, whether oral or written, between them with respect to the
subject matter hereof and thereof. The are no representations, warranties,
agreements, arrangements or understandings, oral or written, between the
parties hereto relating to the subject matters of this Agreement and such
other documents and instruments which are not fully expressed herein or
therein. This Agreement may be amended or modified only by an agreement in
writing signed by each of the parties hereto.
7.4 Incorporation of Provisions of Asset Sale Agreement. The
---------------------------------------------------
following provisions of the Asset Sale Agreement are incorporated herein by
reference mutatis mutandis: Sections 2.16, 12.1 through 12.5, and 12.7
------------- ---- ---- ----
through 12.12.
-----
D-6
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement
on the date first above written.
Buyer:
CHARTER MEDICAL CORPORATION
For Itself and as Duly
Authorized Agent and
Attorney-In-Fact for each
Buyer Subsidiary
By __________________________
Name _______________________
Title ______________________
Seller:
NATIONAL MEDICAL ENTERPRISES,
INC.
By __________________________
Name ____________________
Title ___________________
D-7
<PAGE>
RIDER A
-------
TO
--
NATIONAL PURCHASING PARTICIPATION AGREEMENT
-------------------------------------------
[List of National Purchasing Contracts Attached Hereto]
D-8
<PAGE>
RIDER B
-------
TO
--
NATIONAL PURCHASING PARTICIPATION AGREEMENT
-------------------------------------------
(Participation Fee To Come)
D-9
<PAGE>
EXHIBIT E
REMAINING SCHEDULES
None
E-1
<PAGE>
EXHIBIT F
FORM OF DATA PROCESSING SERVICES CONTRACT
F-1
<PAGE>
EXHIBIT 10(ff)
CHARTER.SF
ASSET SALE AGREEMENT
(SUBSEQUENT FACILITIES)
******
NATIONAL MEDICAL ENTERPRISES, INC.
As Seller
AND
CHARTER MEDICAL CORPORATION
As Buyer
Dated: March 29, 1994
<PAGE>
ASSET SALE AGREEMENT
(SUBSEQUENT FACILITIES)
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
PREAMBLE..................................................... 1
ARTICLE 1............................ 2
DEFINITIONS
Section 1.1 Certain Defined Terms........................... 2
Section 1.2 Index of Other Defined Terms.................... 4
ARTICLE 2............................ 8
BASIC TRANSACTIONS
Section 2.1 Purchased Assets................................ 8
Section 2.2 Excluded Assets................................. 13
Section 2.3 Assumed Liabilities............................. 15
Section 2.4 Excluded Liabilities............................ 17
Section 2.5 Purchase Price.................................. 20
Section 2.6 Payment of Purchase Price....................... 20
(a) Payment of Tentative Purchase Price................ 21
(b) Determination of Interim Net Book Values........... 21
(c) Determination of Final Net Book Values............. 22
(d) Seller as Agent of Subsidiaries.................... 24
Section 2.7 Allocation of Purchase Price.................... 24
Section 2.8 Contingent Lease Obligations.................... 25
Section 2.9 Remittances and Receivables..................... 25
(a) In General......................................... 25
(b) Receivables........................................ 27
(c) Straddle Patient Receivables....................... 28
(i) Cut-Off Billings.............................. 28
(ii) Cut-Off Billings Not Accepted................ 29
(d) Cooperation in Collecting Receivables and
Excluded Assets.................................... 30
(e) Non-Assignable Receivables......................... 30
(f) Collection Fee..................................... 31
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
Section 2.10 Employee Matters............................... 32
(a) Pension Plans...................................... 32
(b) Retained Employees................................. 32
(c) Hiring of Retained Employees....................... 34
(d) Health Benefits.................................... 34
(e) Acknowledgement of Responsibility.................. 35
Section 2.11 Use of Names................................... 36
Section 2.12 No Assignment If Breach; Seller's Discharge
of Assumed Liabilities......................... 37
Section 2.13 Closings....................................... 40
(a) The First Closing.................................. 40
(b) The Second Closing................................. 41
(c) The Final Closing.................................. 41
(d) Deliveries by Seller............................... 42
(e) Deliveries by Buyer................................ 43
(f) Escrow............................................. 43
Section 2.14 Purchase Price Adjustment...................... 44
Section 2.15 Transfer of Assets in Corporate Form........... 46
Section 2.16 Assignment of Rights and Obligations to
Buyer Subsidiaries............................. 46
Section 2.17 Data Processing Services....................... 48
ARTICLE 3............................ 50
REPRESENTATIONS AND WARRANTIES OF SELLER
Section 3.1 Organization and Corporate Power................ 50
Section 3.2 Subsidiaries.................................... 50
Section 3.3 Authority Relative to this Agreement............ 51
Section 3.4 Absence of Breach............................... 52
Section 3.5 Private Party Consents.......................... 53
Section 3.6 Governmental Consents........................... 53
Section 3.7 Brokers......................................... 53
Section 3.8 Title to Property............................... 54
Section 3.9 Assumed Contracts............................... 55
Section 3.10 Licenses....................................... 56
Section 3.11 U.S. Person; Resident of Georgia............... 56
Section 3.12 Employee Relations............................. 57
Section 3.13 Employee Plans................................. 57
Section 3.14 Litigation..................................... 58
Section 3.15 Inventory...................................... 58
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
Section 3.16 Hazardous Substances........................... 58
Section 3.17 Financial Information.......................... 60
Section 3.18 Changes Since Balance Sheet.................... 62
Section 3.19 Transferred Business Names..................... 63
Section 3.20 Compliance with Laws and Accreditation......... 64
Section 3.21 Cost Reports, Third Party Receivables and
Conditions of Participation.................... 65
Section 3.22 Medical Staff.................................. 65
Section 3.23 Hill-Burton Care............................... 66
Section 3.24 Assets Used in the Operation of the
Facilities..................................... 66
Section 3.25 Taxes.......................................... 66
Section 3.26 Lists of Other Data............................ 66
Section 3.27 Certain Transactions........................... 68
ARTICLE 4............................ 68
REPRESENTATIONS AND WARRANTIES OF BUYER
Section 4.1 Organization and Corporate Power................ 68
Section 4.2 Buyer Subsidiaries.............................. 68
Section 4.3 Authority Relative to this Agreement............ 69
Section 4.4 Absence of Breach............................... 70
Section 4.5 Private Party Consents.......................... 70
Section 4.6 Governmental Consents........................... 70
Section 4.7 Brokers......................................... 71
Section 4.8 Qualified for Licenses.......................... 71
Section 4.9 Financial Ability to Perform.................... 71
Section 4.10 No Knowledge of Seller's Breach................ 71
Section 4.11 No Assurance................................... 71
ARTICLE 5............................ 72
COVENANTS OF EACH PARTY
Section 5.1 Efforts to Consummate Transactions.............. 72
Section 5.2 Cooperation; Regulatory Filings................. 73
Section 5.3 Further Assistance.............................. 74
Section 5.4 Cooperation Respecting Proceedings.............. 74
Section 5.5 Expenses........................................ 75
Section 5.6 Announcements; Confidentiality.................. 76
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
Section 5.7 Preservation of and Access to Certain
Records......................................... 78
ARTICLE 6............................ 80
ADDITIONAL COVENANTS OF SELLER
Section 6.1 Conduct Pending Closing......................... 80
Section 6.2 Access and Information; Environmental Survey;
Remediation or Adjustment....................... 83
Section 6.3 Updating........................................ 86
Section 6.4 No Solicitation................................. 86
Section 6.5 Name Changes.................................... 87
Section 6.6 Filing of Cost Reports.......................... 87
Section 6.7 Purchase of Supplies............................ 87
Section 6.8 Covenant Not to Compete......................... 88
(a) Covenant........................................... 88
(b) Exceptions......................................... 88
(i) Psychiatric Facilities and Contracts Not
Acquired By Buyer............................. 88
(ii) Facilities Outside Geographic Area........... 89
(iii) Acute Hospitals............................. 89
(iv) Divestiture of Acquired Psychiatric
Facilities................................... 89
(v) Acquiring Entities............................ 90
(c) Acute Hospital Affiliations........................ 90
(d) Covenant Period.................................... 92
(e) Severability....................................... 92
(f) Injunctive Relief.................................. 92
(g) Value.............................................. 93
Section 6.9 Audited Statements.............................. 93
Section 6.10 Post-Closing Insurance......................... 93
Section 6.11 Use of Controlled Substance Licenses........... 94
Section 6.12 Non-Disturbance Agreements..................... 94
ARTICLE 7............................ 95
ADDITIONAL COVENANTS OF BUYER
Section 7.1 Waiver of Bulk Sales Law Compliance............. 95
Section 7.2 Resale Certificate.............................. 95
</TABLE>
(iv)
<PAGE>
<TABLE>
<S> <C>
Section 7.3 Cost Reports and Audit Contests................ 95
Section 7.4 Tax Matters.................................... 96
Section 7.5 Letters of Credit.............................. 96
Section 7.6 Conduct Pending Closing........................ 96
ARTICLE 8........................... 97
BUYER'S CONDITIONS TO CLOSING
Section 8.1 Performance of Agreement....................... 97
Section 8.2 Accuracy of Representations and Warranties..... 97
Section 8.3 Officers' Certificate.......................... 98
Section 8.4 Consents....................................... 98
Section 8.5 Absence of Injunctions......................... 98
Section 8.6 Opinion of Counsel............................. 100
Section 8.7 Title to Real Property......................... 100
Section 8.8 Receipt of Other Documents..................... 102
Section 8.9 Licenses and Permits........................... 102
Section 8.10 Casualty; Condemnation........................ 102
Section 8.11 Reasonable Assurances......................... 103
ARTICLE 9........................... 104
SELLER'S CONDITIONS TO CLOSING
Section 9.1 Performance of Agreement....................... 105
Section 9.2 Accuracy of Representations and Warranties..... 105
Section 9.3 Officers' Certificate.......................... 105
Section 9.4 Consents....................................... 105
Section 9.5 Absence of Injunctions......................... 105
Section 9.6 Opinion of Counsel............................. 107
Section 9.7 Receipt of Other Documents..................... 107
ARTICLE 10.......................... 108
TERMINATION
Section 10.1 Termination................................... 108
Section 10.2 Effect of Termination......................... 108
</TABLE>
(v)
<PAGE>
<TABLE>
<S> <C>
ARTICLE 11........................... 109
SURVIVAL AND REMEDIES; INDEMNIFICATION
Section 11.1 Survival....................................... 109
Section 11.2 Exclusive Remedy............................... 109
Section 11.3 Indemnity by Seller............................ 110
Section 11.4 Indemnity by Buyer............................. 113
Section 11.5 Further Qualifications Respecting
Indemnification................................ 115
Section 11.6 Procedures Respecting Third Party Claims....... 116
ARTICLE 12........................... 117
GENERAL PROVISIONS
Section 12.1 Notices........................................ 117
Section 12.2 Attorneys' Fees................................ 118
Section 12.3 Successors and Assigns......................... 118
Section 12.4 Counterparts................................... 119
Section 12.5 Captions and Paragraph Headings................ 119
Section 12.6 Entirety of Agreement; Amendments.............. 119
Section 12.7 Construction................................... 119
Section 12.8 Waiver......................................... 120
Section 12.9 Governing Law.................................. 120
Section 12.10 Severability.................................. 120
Section 12.11 Consents Not Unreasonably Withheld............ 121
Section 12.12 Time Is of the Essence........................ 121
</TABLE>
(vi)
<PAGE>
EXHIBITS
A. Forms of Bill of Sale and Assignment
B. Form of Assignments with Respect to
Real Property Leases
C. Forms of Assumption Agreement
D. Form of Purchasing Contract
E. Remaining Schedules
LIST OF SCHEDULES
A-1 Subsidiaries and Their
Respective States of Incorporation;
Ownership of Subsidiary Stock
A-2 Facilities
2.1(a) Real property owned in fee by Subsidiaries
2.1(b) Real Property Leases
2.1(c) Venture Agreements
2.1(f) Other Assigned Contracts
2.1(h) Transferred Business Names
2.1(k) Prepayments
2.2(j) Other Excluded Assets
2.3(a) Capitalized Leases and Capitalized Lease
Liabilities
2.3(f) Other Assumed Liabilities
(vii)
<PAGE>
2.4(i) Indebtedness
2.4(j) Other Excluded Liabilities
2.7 Allocation Schedule
2.10(a) Pension Plans
2.12(c) Schedule of Required Consents
2.13B Assigned EBITDA
3.5 Private Party Consents
3.7 Seller's Brokers
3.8(a) Liens
3.8(b)(i) Other Real Property
and
3.8(b)(ii)
3.9 Assumed Contracts
3.10 Licenses
3.12 Certain Employee Relations Matters
3.14 Litigation
3.16 Environmental Matters
3.17(a) EBITDA Statements
3.17(b) Balance Sheet
3.18 Changes Since Balance Sheet
3.19 Conflicts With Transferred Business Names
3.20 Compliance With Laws and Accreditations
(viii)
<PAGE>
3.21 Cost Reports, Third Party Receivables and
Conditions of Participation
3.22 Medical Staff
3.23 Hill-Burton Care
3.24 Assets Used in the Operation of the Facilities
3.26(a) Depreciation Schedules
3.26(b) Insurance
3.26(c) Employee Benefit Arrangements
3.26(d) Paid Time Off
3.26(e) Certain Contracts
3.26(f) Certain Indebtedness
3.26(g) Certain Financing Arrangements
3.26(h) Certain Contracts Related to Liens
3.27 Certain Transactions
4.5 Private Party Consents
4.7 Buyer's Brokers
4.11 Certain Scheduled Meetings
6.1 Exceptions to Conduct
6.7 National Purchasing Contracts
7.5 Letters of Credit
6.8(c) Specified Acute Hospitals
(ix)
<PAGE>
8.7(b) Disapproved Title Exceptions
(x)
<PAGE>
ASSET SALE AGREEMENT
--------------------
(SUBSEQUENT FACILITIES)
This ASSET SALE AGREEMENT (the "Agreement") is made and entered into
---------
as of the 29th day of March 1994 by and among NATIONAL MEDICAL
ENTERPRISES, INC., a Nevada corporation ("Seller"), the Subsidiaries (as
------
defined) and CHARTER MEDICAL CORPORATION, a Delaware corporation ("Buyer"),
-----
with reference to the following facts:
A. Through wholly-owned subsidiary corporations listed on the
Schedule (as defined in Section 1.1) hereto identified as Schedule A-1 (the
----------- ------------
"Subsidiaries"), Seller engages in the business of delivering psychiatric
------------
health care services to the public through the inpatient, outpatient and
substance abuse recovery facilities, residential treatment centers and
medical office buildings identified in Schedule A-2 under the following
------------
facility numbers (such facilities, centers and buildings being herein
sometimes referred to as the "Subsequent Facilities" or simply the
---------------------
"Facilities"):
----------
<TABLE>
<CAPTION>
NME No. Name City State
- ------- ---- ---- -----
<C> <S> <C> <C>
4. Los Altos Hospital & Medical Center Long Beach CA
6. Yorba Hills Hospital and Mental Health Center Yorba Linda CA
11. Bay Harbor Residential Treatment Center Largo FL
13. Laurel Oaks Hospital Orlando FL
14. Medfield Hospital Largo FL
15. Laurel Heights Hospital Atlanta GA
16. Brawner South Mental Health System Stockbridge GA
17. Brawner Midtown Mental Health System Atlanta GA
18. Arbor Hospital of Greater Indianapolis Indianapolis IN
19. Jefferson Hospital Jeffersonville IN
32. MidSouth Hospital Memphis TN
34. Psychiatric Institute of Richmond Richmond VA
37. Northbrooke Hospital Brown Deer WI
38. New Beginnings at Lakewood Lakewood CA
42. Brawner North Mental Health System Smyrna GA
50. Fenwick Hall Johns Island SC
59. Laurel Oaks Residential Treatment Center Orlando FL
</TABLE>
B. Buyer desires to purchase from the Subsidiaries, through wholly-
owned subsidiaries of the Buyer (each, a "Buyer Subsidiary" and
----------------
collectively, the "Buyer Subsidiaries"), and Seller desires to cause the
------------------
Subsidiaries to sell to the applicable Buyer Subsidiaries, such Facilities
together with related assets (the "Transactions").
------------
<PAGE>
C. Buyer and Seller are simultaneously with the execution of this
Agreement entering into a separate asset sale agreement (the "First
-----
Facilities Agreement") in respect of the other inpatient, outpatient and
--------------------
substance abuse recovery facilities, residential treatment centers and
medical office buildings also identified in Schedule A-2 (the "First
------------ -----
Facilities").
----------
NOW, THEREFORE, in consideration of the foregoing recitals and the
agreements contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto, intending to be legally bound, do hereby agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1 Certain Defined Terms. For purposes of this Agreement,
---------------------
the following terms shall have the following meanings:
"Affiliate" of a specified person shall mean any corporation,
partnership, sole proprietorship or other person or entity which directly
or indirectly through one or more intermediaries controls, is controlled by
or is under common control with the person specified. The term "control"
means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person or entity. The
term "Affiliate" shall include, without limitation, (i) with respect to
Seller, each Subsidiary, and (ii) with respect to Buyer, each Buyer
Subsidiary.
"Cost Report" means the cost report required to be filed, as of
the end of a provider cost year or for any other required period, with
cost-based Payors with respect to cost reimbursement.
"Environmental Law" shall mean any Law regulating or otherwise
relating to Hazardous Materials, the environment, natural resources,
pollution, environmental protection, waste management, industrial hygiene,
health, or safety.
"Hazardous Materials" means any chemicals, materials, substances,
or items in any form, whether solid, liquid, gaseous, semisolid, or any
combination thereof, whether waste materials, raw materials, chemicals,
finished products, by-products, or any other materials or articles, which
are regulated by or form the basis of liability under any Environmental
Laws, including, without limitation, any hazardous waste,
-2-
<PAGE>
medical waste, biohazardous waste, industrial waste, special waste, solid
waste, hazardous substance, pollutant, hazardous air pollutant,
contaminant, asbestos, polychlorinated biphenyls ("PCBs"), petroleum
(including, but not limited to, petroleum-derived substances, waste or
breakdown or decomposition products thereof, or any fraction thereof), coal
(including, but not limited to, coal-derived substances, waste or breakdown
or decomposition products thereof, or any fraction thereof), natural gas
(including, but not limited to, natural gas-derived substances, waste or
breakdown or decomposition products thereof, or any fraction thereof),
formaldehyde, industrial solvents, flammables, explosives, and radioactive
substances.
"knowledge" of a party shall mean the best of the knowledge of
any person who serves as of the date of this Agreement as a duly elected
officer of such party.
"Laws" shall mean all statutes, rules, regulations, ordinances,
orders, codes, permits, licenses and agreements with or of federal, state,
local and foreign governmental and regulatory authorities and any order,
writ, injunction, settlement agreement or decree issued or approved by any
court, arbitrator or governmental agency or in connection with any
judicial, administrative or other non-judicial proceeding (including,
without limitation, arbitration or reference).
"Licenses" shall mean certificates of need, accreditations,
registrations, licenses, permits and other consents or approvals of
governmental agencies or accreditation organizations.
"Payor" shall mean Medicare, Medicaid, CHAMPUS and Medically
Indigent Assistance programs, Blue Cross, Blue Shield or any other third
party payor (including an insurance company and self-insured employer), or
any health care provider (such as a health maintenance organization,
preferred provider organization, peer review organization, or any other
managed care program).
"Release" means any release, spill, emission, leaking, pumping,
emptying, dumping, injection, abandonment, deposit, disposal, discharge,
dispersal, leaching, or migration of Hazardous Materials (including, but
not limited to, the abandonment or discarding of Hazardous Materials in
barrels, drums, or other containers) into or within the environment,
including, without limitation, the migration of Hazardous
-3-
<PAGE>
Materials into, under, on, through, or in the air, soil, subsurface strata,
surface water, groundwater, drinking water supply, any sediments associated
with any water bodies, or any other environmental medium, regardless of
where such migration originates.
"Schedule" shall mean a schedule from the master set of schedules
and attachments developed for this Agreement and the First Facilities
Agreement and which is listed in the Table of Contents for this Agreement.
The parties agree that to the extent information in a schedule from the
master set of schedules and attachments is listed by a facility name and/or
by a facility number, such schedule shall, for purposes of this Agreement,
be deemed to include only the information contained therein that is related
to the Subsequent Facilities, unless this Agreement expressly refers to
information contained therein that is related to the First Facilities.
"Taxes" shall mean (i) all federal, state, county and local
sales, use, property, recordation and transfer taxes, (ii) all state,
county and local taxes, levies, fees, assessments or surcharges (however
designated, including privilege taxes, room or bed taxes and user fees)
which are based on the gross receipts, net operating revenues or patient
days of a Facility for a period ending on, before or including the relevant
Closing Date (as defined in Section 2.13) or a formula taking any one of
------------
the foregoing into account, and (iii) any interest, penalties and additions
to tax attributable to any of the foregoing, but shall not include income
and other taxes described in Sections 2.4(a) and (b).
--------------- ---
Section 1.2 Index of Other Defined Terms. In addition to those terms
----------------------------
defined above, the following terms shall have the respective meanings given
thereto in the sections indicated below:
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
Account Parties 2.9(b)
Accrued Operating Assets 2.5(b)
Accrued Operating Expenses 2.3(g)
Acquired Acute Hospitals 6.8(c)
Acquisition Date 6.8(c)
Acute Hospitals 6.8(b)(iii)
Adjustment Sections 2.14
Agreement Preamble
Allocation Schedule 2.7
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
Assumed Contracts 2.3(a)
Assumed Guaranties 2.3(a)
Assumed Liabilities 2.3
Balance Sheet 3.17(b)
Buyer Preamble
Buyer Subsidiary Preamble
Charter Documents 3.4
Claim Notice 11.6
Closing Date 2.13
COBRA 2.10(d)
Code 3.11
Collection Fee Base 2.9(f)
Combined Receivables 3.17(d)
Combined Subsidiaries 3.17(a)
Competing Business 6.8(a)
Consents 8.5
Consultant 6.2(b)
Contingent Contract 2.18
Cost Report Settlements 2.2(i)
Covenant Period 6.8(d)
Covered Facilities 6.8(b)(ii)
Covered Parties 6.8(a)
Deductible Amount 11.3(b)(i)(B)
Document Retention Period 5.7(b)
EBITDA 3.17(a)
EBITDA Statements 3.17(a)
Eligible Receivables 2.9(b)(ii)
Employee Benefit Arrangements 3.26(c)
Environmental Survey 6.2(b)
Equipment 2.1(d)
ERISA 2.10(a)
Escrow Agent 2.13(f)
Estimated Net Book Values 2.6(a)
Excess Interim Payments 2.1(l)
Excluded Assets 2.2
Excluded Liabilities 2.4
Exempted Competing Business 6.8(c)
Facilities Recitals
Final Closing 2.13
Final Closing Date 2.13
Final Net Book Values 2.6(c)
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
Financial Schedule 3.17(b)
First Closing 2.13
First Facilities Recitals
First Facilities Agreement Recitals
Hired Employees 2.10(c)
Hospital Records 5.7(a)
HSR Act 3.4
Indemnitee 11.5
Indemnitor 11.5(a)
Insurance Program 6.10
Intercompany Transactions 2.1(f)(y)
Interim Net Book Values 2.6(b)
Inventory 2.1(e)
JCAHO 3.20
Leased Real Property 2.1(b)
Loan Commitment Agreements 2.1(f)
Loan Commitment Notes 2.1(f)
Losses 11.3(a)
Manuals 2.11(b)
Material Adverse Effect 3.4
Multiemployer Plans 2.10(a)
Net Book Values 2.5(b)
1993 EBITDA 2.13(b)
Other Assigned Contracts 2.1(f)
Original Closing Date 2.14
Owned Real Property 2.1(a)
Paid Time Off 2.3(c)
Panel 2.14
Patient Records 5.7(a)
Pension Plans 2.10(a)
Permitted Encumbrances 3.8(a)
Permitted Expansions 6.8(b)(iv)
Prepayments 2.1(k)
Purchase Price 2.5
Real Property Leases 2.1(b)
Receivables 2.1(l)
Related Agreements 3.4
Reorganization 6.8(b)(v)
Retained Employees 2.10(b)(iii)
Schedule of Required Consents 2.12(c)
Scheduled Closing 2.13
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C>
Second Closing 2.13
Seller Preamble
Specified Acute Hospital 6.8(c)
Specified Capacity 6.8(a)
Straddle Patients 2.9(c)
Straddle Patient Payments 2.9(c)(ii)
Subject Transferred Assets 2.13
Subsequent Facilities Recitals
Subsidiaries Recitals
TEFRA 2.9(c)(ii)
Tentative Purchase Price 2.6(a)
Termination Date 10.1(b)
Third Party Claims 11.5(a)
Title Insurer 8.7
Title Policies 8.7
Transactions Recitals
Transferred Business Names 2.1(h)
Trigger Amount 11.3(b)(i)(B)
Unusual Proceedings 3.14
Venture Agreements 2.1(c)
Ventures 2.1(c)
WARN Act 2.10(e)
Working Capital Adjustment Date 2.6(c)
</TABLE>
-7-
<PAGE>
ARTICLE 2
BASIC TRANSACTIONS
Section 2.1 Purchased Assets. On the terms and subject to the
----------------
conditions contained in this Agreement, Buyer shall, or shall cause the
applicable Buyer Subsidiary to, purchase from each Subsidiary, and Seller
shall cause each Subsidiary to sell, convey, assign, transfer and deliver
to Buyer or the applicable Buyer Subsidiary, the following assets of each
such Subsidiary that are used in and necessary for the conduct of the
operations of the Facilities (the "Transferred Assets"), but excluding all
------------------
Excluded Assets as defined in Section 2.2:
-----------
(a) All of the Subsidiary's right, title and interest in and to
the real property owned in fee (the "Owned Real Property") that is
-------------------
identified in Schedule 2.1(a) on which Facilities are located and all other
---------------
real property owned in fee by the Subsidiary and used in and necessary for
the conduct of the operations of the Facilities, together with the
Facilities, construction work-in-progress, and all other buildings,
fixtures and improvements thereon, and all rights, privileges, permits and
easements appurtenant thereto.
(b) All of the Subsidiary's right, title and interest, as lessee
or sublessee, in and to the leasehold estates and the related lease or
sublease agreements (the "Real Property Leases") respecting land,
--------------------
Facilities, buildings, fixtures and real property improvements (whether
owned or leased) (the "Leased Real Property") identified in Schedule
-------------------- --------
2.1(b), together with all construction work-in-progress in respect of same
------
and all rights, privileges and easements appurtenant thereto.
(c) All of the Subsidiary's right, title and interest in and to
the joint ventures or partnerships identified in Schedule 2.1(c) hereto
---------------
(the "Ventures") that relate to partnerships or joint ventures that own or
--------
lease Facilities or other Transferred Assets, together with all of the
Subsidiary's right, title and interest in and to the joint venture or
partnership agreements, also identified in such Schedule (the "Venture
-------
Agreements"), that govern such partnerships or joint ventures, and, subject
----------
to the provisions of Section 7.6, in and to all distributions and
-----------
allocations which the Subsidiary is entitled to receive as of the relevant
Scheduled Closing (as defined in Section 2.13).
------------
-8-
<PAGE>
(d) All of the Subsidiary's right, title and interest in and to
fixed machinery and equipment, other fixtures and fittings, moveable plant,
machinery, equipment and furniture, trucks, tractors, trailers and other
vehicles, tools and other similar items of tangible personal property
(collectively "Equipment") (i) that are not consumed, disposed of or held
---------
for sale or as inventory in the ordinary course of business, (ii) that are
used, owned, held or leased by the Subsidiary as of the relevant Scheduled
Closing, and (iii) that are used in and necessary for the conduct of the
operations of the Facilities.
(e) All of the Subsidiary's right, title and interest in and to
inventories of supplies, drugs, food, janitorial and office supplies,
maintenance and shop supplies, and other similar items of tangible personal
property intended to be consumed, disposed of or sold in the ordinary
course of business (collectively, the "Inventory") that are used, owned or
---------
held by the Subsidiary as of the relevant Scheduled Closing and that are
used by the Subsidiary in and necessary for the conduct of the operations
of the Facilities.
(f) All of the Subsidiary's right, title and interest in and to
all written contracts and agreements (the "Other Assigned Contracts") to
------------------------
which the Subsidiary is a party at the relevant Scheduled Closing, other
than the Real Property Leases and the Venture Agreements, (i) that are
listed on Schedule 2.1(f), (ii) pursuant to which the Subsidiary paid or
---------------
received less than $25,000 during its last fiscal year or pursuant to which
it expects to pay or receive less than $25,000 during its current fiscal
year, or (iii) with respect to Other Assigned Contracts not described in
clauses (i) or (ii) above, for which Buyer has not provided Seller with
--- ----
written notice of its rejection of such contract or agreement within sixty
(60) days following the relevant Scheduled Closing, provided that the Other
-------------
Assigned Contracts shall not include any contract or agreement that relates
to or covers healthcare facilities or operations of Seller other than the
Facilities that are being sold, assigned, transferred or conveyed at such
relevant Scheduled Closing except to the extent the portion of such
contract or agreement related to such Facilities may be assigned together
with the sale, assignment, transfer or conveyance of such Facilities.
Schedule 2.1(f) contains a list by Facility of the following categories of
---------------
Other Assigned Contracts pursuant to which a Subsidiary paid or received
$25,000 or more during its last fiscal year or expects to pay or receive
$25,000 or more during its current fiscal year: construction contracts
relating to construction work-in-progress at the Facilities; Equipment
leases (whether operating or
-9-
<PAGE>
capitalized leases) and installment purchase contracts where the annualized
lease or installment payments exceed $25,000; contracts or arrangements
binding on a Facility which contain any covenant not to compete or
otherwise significantly restrict the nature of the business activities in
which the Facility may engage; provider agreements with Payors other than
Medicare and Medicaid (as defined in Section 1.1); bridge and other loan
-----------
commitment agreements (the "Loan Commitment Agreements") pursuant to which
--------------------------
a Subsidiary has agreed to provide advances or income guarantees from time
to time to lessors or sublessors under the Real Property Leases or to
healthcare professionals, groups or entities providing services to the
Facilities, together with promissory notes (the "Loan Commitment Notes")
---------------------
evidencing amounts owed to the Subsidiary as a result of any such advances
or guarantees; agreements with healthcare professionals; leases as lessor
or sublessor; and any other contracts in force pursuant to which the
Subsidiary paid or received over $25,000 during its last fiscal year or
expects to pay or receive $25,000 or more during its current fiscal year.
Notwithstanding the foregoing, the Other Assigned Contracts shall not
include and Schedule 2.1(f) need not contain:
---------------
(w) Any contract which evidences indebtedness for money
borrowed or the deferred portion of the purchase price for Owned Real
Property and is therefore an Excluded Liability under the provisions
of Section 2.4(i), unless the parties mutually agree, in accordance
--------------
with the provisions of such Section 2.4(i), that such indebtedness
--------------
will be assumed by Buyer, in which case the contract or contracts
evidencing such indebtedness will be Transferred Assets, provided that
-------------
if the indebtedness evidenced by any such contract is secured by a
lien on any Transferred Asset, Seller shall cause such lien to be
released at or prior to the relevant Scheduled Closing unless Buyer
agrees to assume such indebtedness pursuant to Section 2.4(i);
--------------
(x) Any contract respecting an intercompany transaction
between the Subsidiary, on the one hand, and Seller or an Affiliate
(as defined in Section 1.1) of Seller, on the other, whether or not
-----------
such transaction relates to the provision of goods and services, tax
sharing arrangements, payment arrangements, intercompany charges or
balances, or the like ("Intercompany Transactions"), except that
-------------------------
transactions arising in connection with open purchase orders where the
Seller has acted as an intermediary for a Subsidiary and transactions
between Seller or an Affiliate of Seller, on the one
-10-
<PAGE>
hand, and the ventures and partnerships described in Section 2.1(c)
--------------
that are not wholly owned by Seller and its Affiliates, on the other
hand, shall not be regarded as Intercompany Transactions;
(y) Employment contracts, if any, between the Subsidiary or
a Facility and the chief executive or chief financial officer of such
Facility, whether or not such officer is a Hired Employee (as defined
in Section 2.10(c)); and
---------------
(z) Collective bargaining agreements in respect of the
employees of a Facility, unless Buyer elects to assume such agreements
(it being understood, however, that nothing herein is intended to
affect Buyer's obligations with respect thereto, if any, under the
National Labor Relations Act).
(g) All of the Subsidiary's right, title and interest in and to
the right to receive mail and other communications addressed to Seller or
the Subsidiary insofar as such mail or other communication relates to the
operation of the Facilities after the relevant Scheduled Closing, or to
Receivables, Inventory, Prepayments or Accrued Operating Expenses (as
herein defined).
(h) All of the Subsidiary's right, title and interest in and to
the business names set forth in Schedule 2.1(h) (the "Transferred Business
--------------- --------------------
Names").
-----
(i) All of the Subsidiary's right, title and interest in and to
Licenses (as defined in Section 1.1) in favor of the Subsidiary as of the
-----------
relevant Scheduled Closing that are related to, necessary for, or used in
connection with the operation of the Facilities transferred in such
Scheduled Closing as presently operated by the Subsidiary, provided that
-------------
Licenses in favor of the Subsidiary shall be included in the Transferred
Assets only to the extent they are lawfully transferable.
(j) All of the Subsidiary's right, title and interest in and to
unexpired warranties as of the relevant Scheduled Closing that are
transferable to Buyer which the Subsidiary has received from third parties
with respect to the Transferred Assets, including, but not limited to, such
warranties as are set forth in any construction agreement, lease agreement,
equipment purchase agreement, consulting agreement or agreement for
architectural and engineering services.
-11-
<PAGE>
(k) All of the Subsidiary's right, title and interest in and to
advance payments, prepayments, prepaid expenses, deposits and the like (i)
made by the Subsidiary or Seller on its behalf in the ordinary course of
business with respect to Subject Transferred Assets (as defined in Section
-------
2.13) prior to the relevant Scheduled Closing, (ii) which exist as of such
----
Scheduled Closing, (iii) with respect to which Buyer will receive the
benefit after the relevant Scheduled Closing, and (iv) which Buyer agrees
---
to acquire (Buyer hereby agreeing not to withhold such agreement
unreasonably) (collectively, "Prepayments"), which Prepayments are listed
-----------
by Facility, category and approximate amount as of November 30, 1993 (or a
later date if mutually agreed upon), in Schedule 2.1(k).
---------------
(l) Subject to the further provisions of Section 2.9, all of the
-----------
Subsidiary's right, title and interest as of the Closing in and to accounts
receivable recorded by the Subsidiary as an account receivable from Payors,
patients and other third parties (whether or not billed) arising from or in
connection with the operation of the Facilities, together with rights to
payment for services rendered through the relevant Closing Date to Straddle
Patients referred to in Section 2.9(c) (collectively, "Receivables"),
-------------- -----------
provided that any account receivable that would, under Sections
-------- --------
2.9(b)(ii)(B) or (C), qualify as an "Eligible Receivable" as of the end of
--------------------
the month ending prior to the relevant Scheduled Closing shall, at the
option of Buyer, not be a receivable included in the Scheduled Closing and
shall be an Excluded Asset. The parties hereby acknowledge that interim
payments made by a Payor that are in excess of the net carrying value of
the Receivables with respect to which such interim payments are a credit
against amounts that would otherwise be due from the Payor ("Excess Interim
--------------
Payments") shall not be regarded as Receivables for any purpose of this
--------
Agreement, because such Excess Interim Payments do not reflect amounts
which the recipient is entitled to retain for services rendered and such
Excess Interim Payments are Excluded Assets and Excluded Liabilities under
this Agreement.
(m) All of the Subsidiary's right, title and interest in and to
the goodwill of the businesses evidenced by the Transferred Assets, and,
except for Excluded Assets, any and all other assets of the Subsidiary used
in and necessary for the conduct of the operations of the Facilities as
conducted prior to the relevant Scheduled Closing, whether or not such
assets have any value for accounting purposes, provided that with respect
-------------
to NME Hospitals, Inc., NME Properties Corp., NME Psychiatric Properties,
Inc., NME Specialty Hospitals, Inc. and any subsidiary of NME Specialty
Hospitals, Inc. (including, without limitation, NME Psychiatric
-12-
<PAGE>
Hospitals, Inc.), only those assets described in Section 2.1(a)-(l) above
------------------
(other than Excluded Assets) shall be included in the Transferred Assets.
Section 2.2 Excluded Assets. The following properties and assets
---------------
(the "Excluded Assets") are not included in Transferred Assets:
---------------
(a) Except for the Inventory, Receivables, Prepayments and
current amounts represented by the Loan Commitment Notes, all assets
constituting working capital, whether cash, cash equivalents, securities,
or other current assets, and all claims, choses in action, rights of
recovery, rights of set-off, rights to refunds, and similar rights.
(b) Except for the Transferred Business Names, Licenses and
Other Assigned Contracts included in the Transferred Assets and except for
manuals relating to equipment and other tangible property included in the
Transferred Assets, all privileged or proprietary (to Seller or a
Subsidiary) materials, documents, information, media, methods and processes
owned by Seller or a Subsidiary, and any and all rights to use same,
including, but not limited to, all intangible assets of an intellectual
property nature such as trademarks, service marks and trade names (whether
or not registered), computer software that is proprietary to Seller or a
Subsidiary, all procedures and manuals that are proprietary to Seller or a
Subsidiary, all promotional or marketing materials (including all marketing
computer software), and any and all names under which the Subsidiaries or
the Facilities have done business or offered programs, other than the
Transferred Business Names, and all abbreviations and variations thereof,
provided, however, that Buyer shall have the rights set forth in Section
-------- ------- -------
2.11.
----
(c) The rights of Seller or any Subsidiary under any insurance
policy, if any, included in the Transferred Assets which relate to any
Excluded Asset or Excluded Liability (as defined in Section 2.4) (it being
-----------
understood, however, that Buyer shall have no obligation to take any action
under any such policy to seek any recovery except at the reasonable
request, and at the sole expense, of Seller or a Subsidiary or to continue
any such policies in force).
(d) The rights of Seller or of any Subsidiary to receive mail
and other communications addressed to any of them with respect to Excluded
Assets or Excluded Liabilities.
-13-
<PAGE>
(e) Subject to the provisions of Section 5.7, any and all
-----------
business and patient records of or related to the operation of the
Facilities, whether or not maintained at or by the Facilities.
(f) All property, plant, equipment and other assets pertaining
to the psychiatric healthcare business of Seller or any subsidiary of
Seller that relate primarily to any general hospital, acute hospital or so-
called "campus facility" of Seller or any subsidiary of Seller and all
outpatient facilities and other assets primarily related thereto.
(g) Any and all contracts and agreements pursuant to which a
Subsidiary provides management services to third parties other than a
Facility, except for such contracts and agreements as are specifically
listed on Schedule 2.1(f).
---------------
(h) Subject to Sections 2.17 and 6.7, any and all rights
------------- ---
respecting computer and data processing hardware or firmware that is
proprietary to Seller or any Affiliate of Seller, and any computer and data
processing hardware or firmware, whether or not located at a Facility, that
is part of a computer system the central processing unit for which is not
located at a Facility.
(i) All of the right, title and interest of Seller and the
Subsidiaries in assets resulting from any resolution with Payors of amounts
due with respect to Cost Reports ("Cost Report Settlements") to the extent
-----------------------
such Cost Reports cover any period through the relevant Scheduled Closing
with respect to a Facility and other rights of Seller respecting Cost
Reports described in Section 6.6, including any assets or liabilities
-----------
resulting from any gain or loss on the sale of the Facilities in connection
with the Transactions.
(j) (i) All amounts due to the Subsidiaries arising from
Intercompany Transactions, (ii) assets that are the subject of the First
Facilities Agreement, and (iii) such other assets, if any, specifically
described in Schedule 2.2(j) and assets which would be Transferred Assets
---------------
except for the operation of Sections 2.12, 6.2(c), 8.5, 8.7 or 9.5 or other
------------- ------ --- --- ---
provisions of this Agreement.
(k) All "800" telephone lines and related Equipment and contract
rights and all advertising containing any name other than a Transferred
Business Name.
-14-
<PAGE>
Seller shall remove at any time prior to or within thirty (30) days
following the relevant Closing Date or, with respect to the Hospital
Records (as defined in Section 5.7(a)), Seller may remove from time to time
--------------
within the relevant Document Retention Period (as defined in Section
-------
5.7(b)) (in each case, at Seller's expense, but without charge by Buyer for
------
storage), any and all of the Excluded Assets from the Facilities, provided
--------
that Seller shall do so in a manner that does not unduly or unnecessarily
disrupt Buyer's normal business activities at the Facilities.
Section 2.3 Assumed Liabilities. Subject to the terms and conditions
-------------------
set forth in this Agreement, Buyer shall assume and pay, discharge and
perform as and when due only the following obligations and liabilities of
----
Seller and the Subsidiaries and no others (the "Assumed Liabilities"), as
-------------------
such obligations and liabilities may exist at the time they are assumed by
Buyer in accordance with the terms hereof:
(a) All liabilities and obligations of the Subsidiaries which
pertain to or are to be performed during the period following the relevant
Closing Date, and which arise under any contract, license, permit,
agreement, arrangement, understanding or undertaking included in the
Transferred Assets, including the Real Property Leases, the Venture
Agreements, the Other Assigned Contracts and the Licenses, and any
obligation or liability (the "Assumed Guarantees") of Seller or any
------------------
Affiliate of Seller (including letters of credit and performance bonds)
which is in the nature of a guaranty of the foregoing (together, the
"Assumed Contracts"), including without limitation, the capitalized lease
-----------------
liabilities and obligations of the Facilities listed on Schedule 2.3(a).
---------------
(b) Without affecting the provisions of Sections 2.1(k), 2.6(a),
--------------- ------
2.6(b) or 2.6(c), all liabilities and obligations under open purchase
------ ------
orders at a Facility included in the Subject Transferred Assets that were
entered into by Seller or a Subsidiary in the ordinary course of business
with respect to operation of such Facility on or prior to the relevant
Closing Date and which provide for the delivery of goods or services
subsequent to the relevant Closing Date.
(c) All obligations and liabilities to any Hired Employee for
paid time off that is vested and with respect to which the Hired Employee
would be entitled to payment upon termination of his or her employment with
Seller or an Affiliate of Seller (including, for all purposes of this
Agreement, "old paid days leave," "paid time off," sick leave and vacation
-15-
<PAGE>
pay to the extent that they are vested rights that are subject to payment
upon termination of employment; collectively, "Paid Time Off") through the
-------------
relevant Closing Date in accordance with the employment policies of Seller
and its Affiliates as they exist on the date of this Agreement; provided
--------
that if Seller satisfies any portion of such obligations and liabilities
existing at the relevant Scheduled Closing by payment to a Hired Employee,
then such payment shall be treated as a reduction of Accrued Operating
Expenses (as defined in Section 2.3(g)).
--------------
(d) Without limiting Seller's representations and warranties
contained in Article 3 or Buyer's rights under Article 11 for a breach
--------- ----------
thereof, all liabilities and obligations respecting any changes or
improvements needed to the Facilities for them to be in material compliance
following the relevant Scheduled Closing with respect to such Facilities
with safety, building, fire, land use, access (including without limitation
the Americans With Disabilities Act) or similar Laws (as defined in Section
-------
1.1) respecting the physical condition of the Facilities.
---
(e) All liabilities and obligations respecting employee matters
assumed by Buyer pursuant to the provisions of Section 2.10.
------------
(f) Any liability or obligation which becomes an Assumed
Liability by operation of Section 2.4(i) and such other liabilities and
--------------
obligations pertaining to the Facilities, if any, specifically described in
Schedule 2.3(f).
---------------
(g) Any accrued and unpaid liabilities (whether or not due) of
the Subsidiaries in existence on the relevant Scheduled Closing Date which
relate to the Facilities, which were incurred in the ordinary course of the
operation of the Facilities and which represent (i) trade payables incurred
to suppliers of goods or services; (ii) water, gas, electricity and other
utility charges; (iii) license fees; (iv) rent, common area maintenance
charges, operating expenses and other charges arising under the Real
Property Leases; (v) insurance premiums (but only with respect to policies
that will be continued in force by Buyer after the relevant Scheduled
Closing); (vi) salaries and other payroll costs respecting Hired Employees
accrued in accordance with the normal accounting practices of Seller and
the Subsidiaries (but not including bonuses or other incentive compensation
or accrued benefits with respect to benefit plans that are not assumed by
Buyer); (vii) Taxes, except for Taxes referred to in Section 5.5 relating
-----------
to expenses of the Transactions and payroll taxes respecting employees who
-16-
<PAGE>
are not Hired Employees; and (viii) similar liabilities incurred in the
ordinary course of the operation of the Facilities and customarily recorded
as a current liability, other than the current portion of long-term
liabilities and obligations (the liabilities referred to in this Section
-------
2.3(g), together with the liabilities and obligations for Paid Time Off
------
assumed under Section 2.3(c), being herein referred to as "Accrued
-------------- -------
Operating Expenses").
------------------
Section 2.4 Excluded Liabilities. The parties agree that liabilities
--------------------
and obligations of Seller and the Subsidiaries not expressly described in
Section 2.3 as Assumed Liabilities are not part of the Assumed Liabilities,
-----------
and Buyer shall not assume or become obligated with respect to any other
obligation or liability of Seller or any Subsidiary or any Affiliate of
either of any nature whatsoever (whether express or implied, fixed or
contingent, liquidated or unliquidated, known or unknown, accrued, due or
to become due) (collectively, "Excluded Liabilities"), including, but not
--------------------
limited to, the liabilities and obligations described in this Section, all
of which shall remain the sole responsibility of Seller or the pertinent
Subsidiary or Affiliate, as the case may be. Without limiting the
generality of the foregoing, Buyer shall not assume and shall have no
liability or obligation of any kind for or with respect to any of the
following liabilities or obligations:
(a) Subject to Section 5.5 respecting certain expenses incurred
-----------
in connection with the Transactions, any of Seller's or any of the
Subsidiaries' (or their respective Affiliates') liabilities or obligations
(including, but not limited to, any liabilities or obligations under any
tax sharing agreements) with respect to franchise taxes and with respect to
foreign, federal, state or local taxes imposed upon or measured, in whole
or in part, by the income for any period of Seller and/or such Subsidiaries
or any member of a combined or consolidated group of companies of which
Seller and/or such Subsidiaries are, or were at any time, a part, or with
respect to interest, penalties or additions to any of such taxes, and any
income, franchise, tax recapture, transfer tax, sales tax or use tax that
may arise upon consummation of the transactions contemplated by this
Agreement and be due or payable by Seller or any Subsidiary, it being
understood that Buyer shall not be deemed to be Seller's or any
Subsidiary's transferee with respect to any such tax liability.
(b) Any of Seller's or any of its Subsidiaries' or Affiliates'
liabilities or obligations with respect to the recapture of foreign,
federal, state or local tax deductions or credits taken by Seller or such
Subsidiary
-17-
<PAGE>
imposed upon, or any taxable gain recognized by, Seller or such Subsidiary
on account of the Transactions contemplated hereby.
(c) Liabilities or obligations of Seller, its Affiliates or a
Subsidiary arising from the breach by Seller or such Subsidiary on or prior
to the relevant Closing Date of any term, covenant, or provision of any of
the Assumed Contracts.
(d) Liabilities or obligations of Seller, a Subsidiary or
Seller's Affiliates now existing or which may hereafter exist by reason of
any violation or alleged violation of Law or Laws by Seller or any of its
Affiliates or by a Subsidiary, or by an employee or independent contractor
of any of the foregoing where any of the foregoing is or is alleged to be
responsible for the acts or omissions of any such person, occurring on or
prior to the relevant Scheduled Closing Date.
(e) Liabilities or obligations of Seller or a Subsidiary now
existing or which may hereafter exist by reason of any liability to refund
any payment or reimbursement received by Seller or a Subsidiary from any
Payor which is attributable to any period of time ending on or prior to the
relevant Closing Date respecting such Facilities for which such payment or
reimbursement was received.
(f) Liabilities or obligations of Seller or a Subsidiary under
any Assumed Contract which would be included in the Transferred Assets but
for the provisions of Section 2.12, unless Buyer is provided with the
------------
benefits thereunder as contemplated in Section 2.12.
------------
(g) Liabilities of Seller and the Subsidiaries arising from or
in connection with litigation described in Section 3.14, including, but not
------------
limited to, the Unusual Proceedings described therein, and any and all
liabilities or obligations of Seller and the Subsidiaries for claims for
personal injury (including sickness, trauma, disease, pain and suffering,
loss of future earnings, punitive damages and the like), property damage,
and other damage and injury in existence (i.e., all elements of the claim
----
are complete) at or prior to the relevant Scheduled Closing, whether or not
any claim has been made or litigation has been instituted with respect
thereto and whether or not any claim is covered partially or fully by
insurance.
(h) Subject to Section 2.12, liabilities of Seller and the
------------
Subsidiaries incurred in connection with their obtaining any consent,
-18-
<PAGE>
authorization or approval necessary for them to sell, convey, assign,
transfer or deliver any Transferred Asset to Buyer hereunder.
(i) Any liability of Seller or a Subsidiary representing
indebtedness for money borrowed or the deferred portion of the purchase
price for any Owned Real Property or Equipment (and any refinancing
thereof), including without limitation the indebtedness identified on
Schedule 2.4(i); provided that if, prior to the relevant Scheduled Closing,
--------------- --------
the parties mutually agree that any such indebtedness or obligation will be
assumed by Buyer and further agree upon an equitable reduction in the cash
portion of the Purchase Price (as defined in Section 2.5) to reflect
-----------
Buyer's assumption of such indebtedness or obligation, then any such
indebtedness or obligation will be deemed to constitute an Assumed
Liability for all purposes of this Agreement; and provided further that
-------- -------
with respect to any such indebtedness or obligation not so assumed by Buyer
that constitutes a lien or encumbrance upon any Transferred Asset, Seller
agrees that on or prior to the relevant Scheduled Closing it will either
pay or discharge such indebtedness or liability in full or otherwise cause
such lien or encumbrance to be removed from such Transferred Asset, so that
such Transferred Asset is sold, conveyed, assigned, transferred and
delivered to Buyer at such Scheduled Closing free and clear of such lien or
encumbrance.
(j) Such other liabilities and obligations, if any, specifically
described in Schedule 2.4(j) and liabilities which would be Assumed
---------------
Liabilities but for the provisions of Sections 2.12, 8.5, 8.7 or 9.5.
------------- --- --- ---
(k) Amounts due from the Subsidiaries arising from Intercompany
Transactions.
(l) Liabilities and obligations respecting Cost Report
Settlements to the extent such Cost Reports cover any period through the
relevant Closing Date and other obligations of Seller respecting Cost
Reports described in Section 6.6.
-----------
(m) Subject to Section 2.10(f), liabilities and obligations for
---------------
bonuses, other incentive compensation and benefits under benefit plans to
the extent not specifically included in Accrued Operating Expenses.
Section 2.5 Purchase Price. The purchase price (the "Purchase
-------------- --------
Price") in the aggregate for all of the Transferred Assets shall be equal
to the sum of (a) Fifty-Two Million Four Hundred Two Thousand Dollars
-19-
<PAGE>
($52,402,000), subject to such adjustments, if any, as may occur pursuant
to Sections 2.12, 2.14, 6.2(c), 8.5, 8.7, or 9.5 or other provisions of
---- ---- ------ --- --- ---
this Agreement, including the book value as of the relevant Scheduled
Closing of capitalized lease liabilities assumed and the value of any
assumption of debt pursuant to Section 2.4(i), plus (b) an amount equal to
-------------- ----
the net book values as of the relevant Scheduled Closing of the Loan
Commitment Notes, Inventory, Receivables and Prepayments (collectively,
"Accrued Operating Assets") included in the Transferred Assets less Accrued
------------------------- ----
Operating Expenses, plus (c) an amount (determined on the basis of the
Venture's balance sheet) equal to the net book value as of the relevant
Scheduled Closing of (i) the sum of each Venture's current assets and
distributions payable to partners or venturers, less (ii) the sum of each
----
such Venture's current liabilities, indebtedness for money borrowed and
capitalized lease liabilities, pro-rated in each case to the equity
percentage in such Venture held by Seller and the Subsidiaries (the amounts
in clauses (b) and (c) being referred to as the ("Net Book Values"). In
--- --- ---------------
addition, at the "First Closing" under this Agreement, Buyer shall pay to
Seller the sum of One Million Dollars ($1,000,000) for the covenant not to
compete described in Section 6.8. Notwithstanding anything in this
-----------
Agreement or in a Schedule hereto that might be construed to the contrary,
Net Book Values will not be reduced by Seller's retained liability for
Excess Interim Payments made by a Payor prior to the relevant Scheduled
Closing that are in excess of the net carrying value of the Receivables
transferred at such Scheduled Closing with respect to which such interim
payments are a credit against amounts that would otherwise be due from the
Payor.
Section 2.6 Payment of Purchase Price. That portion of the Purchase
-------------------------
Price due and payable for the Transferred Assets actually sold, assigned,
transferred and conveyed to Buyer and the applicable Buyer Subsidiaries
hereunder shall be paid as follows:
(a) Payment of Tentative Purchase Price. No less than five (5)
-----------------------------------
business days prior to each Scheduled Closing, Seller shall deliver to
Buyer a certificate executed on the Seller's behalf by a responsible
officer setting forth the Seller's estimate of what the Net Book Values
will be as of such Scheduled Closing for the Subject Transferred Assets (as
defined in Section 2.13) (the "Estimated Net Book Values"), and
------------- -------------------------
additionally setting forth (i) the Net Book Values for the Subject
Transferred Assets recorded by Seller as of the most recent month-end prior
to the delivery of such certificate for which data is available, and (ii)
the methodology used by Seller for updating changes in Net Book Values
since such month-end data
-20-
<PAGE>
to arrive at such estimate. All determinations made with respect to the Net
Book Values shall be based upon the internal records of, and the valuation
methods customarily used by, Seller and the Subsidiaries, absent error, and
consistent with generally accepted accounting principles with respect to
the recording and accruing of the types of assets and liabilities included
in Net Book Values. On the terms and subject to the conditions contained in
this Agreement, at each Scheduled Closing Buyer shall pay to Seller, in the
manner set forth herein, an amount equal to (iii) the portion of the
Purchase Price arising under Section 2.5(a) (including any debt assumptions
--------------
pursuant to Section 2.4(i)) due at such Scheduled Closing as calculated on
---------------
the basis of the values assigned to the pertinent Subject Transferred
Assets in the Allocation Schedule (as defined in Section 2.7) plus (iv) an
----------- ----
amount equal to one hundred percent (100%) of the Estimated Net Book Values
related to the Subject Transferred Assets,(the sum of clauses (iii) and
-----
(iv) being referred to as the "Tentative Purchase Price"), less (v) the
---- ------------------------ ----
book value of any capitalized leases assumed at such Scheduled Closing,
less (vi) the value of any debt assumed pursuant to Section 2.4(i) at such
---- --------------
Scheduled Closing.
(b) Determination of Interim Net Book Values. As soon as
----------------------------------------
practicable, but in no event later than sixty (60) days after each
Scheduled Closing, Seller shall cause a schedule to be prepared and
delivered to Buyer showing an interim calculation of the Net Book Values
with respect to the Subject Transferred Assets (the "Interim Net Book
----------------
Values") as of the relevant Closing Date derived by Seller from the
------
internal books and records of Seller and the Subsidiaries and otherwise in
accordance with the second sentence of Section 2.6(a) with respect to the
--------------
Facilities included in such Subject Transferred Assets, as well as from a
physical inventory, taken after the date hereof and prior to or as of such
relevant Closing Date, of property which would constitute Inventory if the
relevant Scheduled Closing had occurred on the date of such physical
inventory. If such schedule as submitted by Seller is not challenged in
writing by Buyer within thirty (30) days of its receipt of same, then it
shall be deemed accepted by Buyer. If it is so challenged, then, unless
otherwise resolved by agreement of the parties within thirty (30) days from
the date of Buyer's challenge or such later date as the parties may
mutually agree upon, such disagreement shall be mutually submitted by the
parties to their respective independent certified public accountants for
resolution. If such accountants cannot resolve the disagreement within
thirty (30) days of such submission, then they shall submit the matter to a
third accounting firm of national standing selected by them, whose
determination shall be final and binding, and shall be rendered
-21-
<PAGE>
within thirty (30) days of the date on which the matter is submitted to
such firm. Any such third accounting firm shall determine the issues in
dispute following such procedures, consistent with the language of this
Agreement, as it deems appropriate to the circumstances and with reference
to the amounts in issue. No particular procedures are intended to be
imposed upon such third accounting firm, it being the desire of the parties
that any such dispute shall be resolved as expeditiously and inexpensively
as reasonably practicable. In the event that the Interim Net Book Values
differ from the Estimated Net Book Values, whether determined on the basis
of the schedule prepared by Seller, or agreement of the parties, or
decision by independent public accountants, as the case may be, then and in
such event, within five (5) business days following such determination of
the Interim Net Book Values, either Buyer shall pay to Seller, or Seller
shall pay to Buyer, as the case may be, in immediately available funds, the
amount by which the Interim Net Book Values differs from the Estimated Net
Book Values. The pendency of a dispute shall not affect the payment
obligation hereunder of either Buyer or Seller to the extent such payment
is not disputed.
(c) Determination of Final Net Book Values. Within ten (10)
--------------------------------------
business days following expiration of six (6) months from each Scheduled
Closing, Buyer shall provide a certificate to Seller, executed on Buyer's
behalf by a responsible officer, setting forth a proposed calculation of
final Net Book Values with respect to the Subject Transferred Assets (the
"Final Net Book Values") as of the end of such six (6) month period (a
----------------------
"Working Capital Adjustment Date") which shall contain a reconciliation as
--------------------------------
of the relevant Closing Date of the Interim Net Book Values, adjusted only
for (i) errors claimed by Buyer to exist in Seller's accruals for Accrued
Operating Assets and Accrued Operating Expenses and the Ventures'
calculations of partners' equity, partners' distributions payable and the
net book value of Venture fixed assets, (ii) Buyer's ability
to collect Receivables and the Ventures' ability to collect their accounts
receivable in existence as of the relevant Closing Date, on or before the
Working Capital Adjustment Date, in excess of the carrying value therefor
as of the relevant Closing Date net of reserves, and by Buyer's or a
Venture's receipt of Excess Interim Payments, (iii) Buyer's inability to
collect Receivables and the Ventures' inability to collect their accounts
receivable in existence as of the relevant Closing Date, on or before the
Working Capital Adjustment Date, in accordance with their net carrying
values as of the relevant Closing Date, and (iv) Buyer's ability to pay
Accrued Operating Expenses and the Ventures' ability to pay similar
expenses of the Venture at less than their
-22-
<PAGE>
book value as of the relevant Closing Date or Buyer's or the Ventures'
payment of the same at more than their book value as of the relevant
Closing Date to the extent legally required to do so. For purposes of any
such calculation, (v) the accuracy of Seller's or the Ventures' accrual for
real and personal property taxes shall be based upon the last notice of tax
assessment respecting such property prior to the relevant Scheduled Closing
that does not reflect the Transactions contemplated to occur at the
relevant Scheduled Closing, (vi) variable or undetermined charges arising
under Real Property Leases shall be accrued as of the relevant Scheduled
Closing on an historical basis, (vii) payments received on account of
Receivables shall be applied in accordance with Sections 2.9(b) and (c),
--------------- ---
and (viii) expenses for such items as real and personal property taxes,
utility charges, charges arising under leases, insurance premiums and the
like shall be pro-rated as of the relevant Scheduled Closing. In the event
that Buyer elects to reassign to Seller any Loan Commitment Notes on or
prior to the relevant Working Capital Adjustment Date, then the Final Net
Book Values shall be deemed to be further reduced by an amount equal to the
uncollected portion thereof, in which case Buyer shall execute such
documents of re-assignment as are reasonably satisfactory to Seller and
such Loan Commitment Notes as are reassigned shall thereafter to be deemed
to be Excluded Assets. Any dispute concerning Buyer's calculation of the
Final Net Book Values that is unresolved for thirty (30) days shall be
submitted for resolution by the parties' independent certified public
accountants in accordance with the procedures contained in Section 2.6(b).
--------------
Within five (5) business days following determination of the Final Net Book
Values for a Scheduled Closing, either Buyer shall pay to Seller, or Seller
shall pay to Buyer, as the case may be, in immediately available funds, the
amount by which the Final Net Book Values differ from the Estimated Net
Book Values, as adjusted for payments, if any, on account of the Interim
Net Book Values. The pendency of a dispute shall not affect the payment
obligation hereunder of either Buyer or Seller to the extent such payment
is not disputed.
(d) Seller as Agent of Subsidiaries. Seller shall, at or prior
-------------------------------
to the relevant Scheduled Closing, cause each Subsidiary transferring
Subject Transferred Assets thereat to irrevocably designate (with an
original copy being provided to Buyer) Seller as its agent to receive on
its behalf delivery of that portion of all payments made by Buyer hereunder
to which such Subsidiary may be entitled as a result of its participation
in such Scheduled Closing, including without limitation that portion of the
Purchase Price attributable to the Subject Transferred Assets sold to Buyer
by it, and to acknowledge that delivery of such payments, including the
Purchase
-23-
<PAGE>
Price, to Seller in accordance with the terms of this Agreement shall be
conclusive and binding evidence against such Subsidiary that any payments
or consideration due to such Subsidiary in respect of the Subject
Transferred Assets sold to Buyer by it, or in respect of other payments due
to it from Buyer under the terms of this Agreement, have been delivered.
Section 2.7 Allocation of Purchase Price. The Purchase Price shall
----------------------------
be allocated to the Transferred Assets on a Facility by Facility basis in
accordance with Schedule 2.7 (as the same will, pursuant to the First
------------
Facilities Agreement, be amended with respect to the First Facilities, the
"Allocation Schedule"), except that the portion of the Purchase Price
-------------------
attributable to the Net Book Values shall be allocated in accordance with
the amounts actually paid therefor in accordance with the provisions of
Sections 2.5(b) and (c). Seller and Buyer shall, and Seller shall cause
--------------- ---
the Subsidiaries to, allocate the Purchase Price in accordance with the
Allocation Schedule and allocate the Net Book Values portion thereof in
accordance with the amounts paid therefor, to be bound by such allocations
for all purposes, to account for and report the purchases and sales
contemplated hereby for all purposes (including, without limitation,
financial, accounting, Medicare reimbursement and federal and state tax
purposes) in accordance with such allocations, and not to take any position
(whether in financial statements, Cost Reports, tax returns, Cost Report or
tax audits, or otherwise), including without limitation any claim to an
adjustment in the basis of such assets by Buyer or its successors and
assigns for Medicare purposes which is inconsistent with such allocations
without the prior written consent of the other party, except to the extent,
if any, required by applicable Law or generally accepted accounting
principles.
Section 2.8 Contingent Lease Obligations. With respect to each Real
----------------------------
Property Lease for which Seller or a Subsidiary remains or will remain
contingently liable after the relevant Scheduled Closing as lessee,
sublessee, guarantor or assignor, Buyer hereby agrees to exercise its best
efforts:
(a) To cause the contingent liability of Seller or such
Subsidiary, as the case may be, to be removed on or prior to any extension,
renewal or modification of such Real Property Lease by Buyer or a Buyer
Subsidiary;
(b) To procure for Seller and the applicable Subsidiaries a
security interest, in form reasonably satisfactory to Seller, in all of the
-24-
<PAGE>
right, title and interest of Buyer and the applicable Buyer Subsidiaries in
such Real Property Lease, junior only to the security interest of Buyer's
most senior secured lenders, in order to secure the due and punctual
performance by Buyer and the applicable Buyer Subsidiaries of the Assumed
Liabilities represented by such Real Property Lease; and
(c) To procure for Seller and the applicable Subsidiaries the
right to acquire such right, title and interest in such Real Property
Lease, at fair market value, in the event that Buyer and the applicable
Buyer Subsidiaries fail to pay, perform and discharge when due the Assumed
Liabilities represented by such Real Property Lease and such failure
results in Seller or any Subsidiary being required to pay, perform or
discharge any of such Assumed Liabilities.
Section 2.9 Remittances and Receivables.
---------------------------
(a) In General.
----------
(i) All remittances, mail and other communications relating
to the Excluded Assets or Excluded Liabilities received by Buyer or a Buyer
Subsidiary at any time after a relevant Scheduled Closing shall be promptly
turned over by Buyer to the addressee thereof, or if the addressee is no
longer affiliated with Seller, to Seller, and pending such delivery, Buyer
shall have no interest in the same and shall hold such remittances, mail
and other communications in trust for the benefit of Seller and the
Subsidiaries. All remittances, mail and other communications relating to
the Transferred Assets or the Assumed Liabilities received by Seller or any
Subsidiary at any time after the relevant Scheduled Closing at which such
Transferred Assets are transferred and such Assumed Liabilities are assumed
by Buyer shall be promptly turned over by Seller or such Subsidiary to the
addressee thereof, or if the addressee is no longer affiliated with Buyer,
to Buyer, and pending such delivery, Seller or such Subsidiary shall have
no interest in the same and shall hold such remittances, mail and other
communications in trust for the benefit of Buyer.
(ii) With regard to the Medicare, Medicaid and CHAMPUS
programs, and any Blue Cross program that requires a Cost Report or retains
the right of offset, Buyer and Seller mutually covenant and agree as
follows. Seller acknowledges that, from time to time, Buyer or Buyer
Subsidiaries, after a relevant Scheduled Closing, may receive a
-25-
<PAGE>
demand for payment in connection with overpayments or alleged overpayments
from one or more of such programs, or both, which demand relates to the
operation of a Facility prior to the relevant Scheduled Closing at which
such Facility was included in the Subject Transferred Assets. Buyer shall
provide notice to Seller of such demand within ten (10) days of Buyer's
receipt of same. Seller covenants and agrees with Buyer that Seller shall,
within thirty (30) days of its receipt of written notice from Buyer of such
request for any such payment, which notice shall state the basis thereof in
reasonable detail, pay in cash to Buyer an amount equal to any and all such
overpayments claimed or (by an election made in writing, within twenty (20)
days after receiving notice of any such demand) diligently pursue a contest
of such claim of overpayment and indemnify and hold Buyer harmless from any
liability resulting therefrom, but the right to contest without first
paying shall not be available to Seller if the programs collect the alleged
overpayment by means of a setoff against Buyer, unless Seller first
reimburses Buyer in an amount equal to the amount so setoff, provided that
--------
in all events Buyer shall provide notice to Seller of such demand within
ten (10) days of Buyer's receipt of same. Subject to the foregoing, if any
such program, with or without notice, collects an alleged overpayment or
other amount allegedly owed by Seller or a Subsidiary by offset against
Buyer or Buyer Subsidiary, Seller shall promptly pay to Buyer an amount
equal to such offset amount provided that Buyer shall have provided Seller
--------
with any notice related to such offset within ten (10) days of Buyer's
receipt of same, or, if no such notice was received by Buyer, Buyer shall
have provided notice to Seller of such offset within ten (10) days of
Buyer's obtaining notice of such offset being taken. Nothing in this
Section 2.9(a)(ii) shall limit Buyer's obligations under Section 7.3.
------------------ -----------
(b) Receivables.
-----------
(i) Buyer shall exercise commercially reasonable efforts to
collect Receivables. Any payments received by Buyer or its successors
and assigns after a Scheduled Closing Date, from patients, Payors,
clients, customers or others who are the obligors on Receivables
transferred as of such Scheduled Closing Date (collectively, "Account
-------
Parties"), shall be applied to the oldest remaining Receivables
-------
transferred as of such Scheduled Closing Date from such Account Party
in the order in which they arose unless, in the case of an Account
Party who is a patient, otherwise indicated by the patient's Payor.
-26-
<PAGE>
(ii) On the tenth day of the first month that begins at
least thirty (30) days after a Scheduled Closing, on the tenth day of
each month thereafter until the Working Capital Adjustment Date with
respect to such Scheduled Closing, and on the tenth day following such
Working Capital Adjustment Date, Buyer shall execute appropriate
instruments of assignment to re-assign back to Seller, and shall turn
over to Seller all evidences of and documents pertaining to, any
Receivable which, as of the end of the immediately preceding month
and/or such Working Capital Adjustment Date, as the case may be, was
uncollected and which either (A) is a Receivable in respect of a non-
Medicare patient as to which Buyer has decided to cease collection
activity, or (B) is a Receivable in respect of a non-Medicare patient
which, as of such month end or such Working Capital Adjustment Date,
has remained unpaid for a period of at least one hundred eighty (180)
days following the date of such patient's discharge from a Facility,
(C) is a Receivable in respect of a Medicare patient which relates to
amounts that represent such patient's deductible or co-insurance
obligations, and which, as of such month end or Working Capital
Adjustment Date, has remained unpaid for a period of at least one
hundred eighty (180) days following the date after which the patient
is first billed, or (D) is a Receivable from Medicare in respect of a
Medicare patient for which payment has been denied by Medicare
provided that Buyer has filed a request for reconsideration within the
--------
period required. Such Receivables which are eligible to be turned
over to Seller are herein referred to as "Eligible Receivables." Any
--------------------
Eligible Receivable that is assigned back to Seller within thirty (30)
days following the first opportunity to do so under the
provisions of this clause (ii) shall, for purposes of the adjustments
-----------
contemplated by Section 2.6(c), be deemed to have not been
--------------
collected by Buyer, and any Eligible Receivable that is not so
assigned back to Seller within thirty (30) days following the first
opportunity to do so under the provisions of this clause (ii) shall,
-----------
for purposes of the adjustments contemplated by Section 2.6(c), be
--------------
deemed to have been collected by Buyer. With respect to any such
Eligible Receivable re-assigned back to Seller, Seller and the
Subsidiaries shall be free to institute such collection efforts,
including, without limitation, initiating such legal proceedings, with
respect thereto as they shall, in their sole discretion determine.
-27-
<PAGE>
(iii) In the event of any adjustment in the Net Book Values
arising under Section 2.6(c)(iii), then upon such determination, Buyer
-------------------
shall execute instruments of assignment, effective as of the relevant
Working Capital Adjustment Date, respecting any unpaid Receivables
which are not collected or deemed collected as of such date (it being
agreed that any unpaid Receivables not so assigned shall be deemed
collected as of or prior to such Working Capital Adjustment Date).
(c) Straddle Patient Receivables. To compensate Seller and the
----------------------------
Subsidiaries for services rendered and medicine, drugs and supplies
provided through a Scheduled Closing Date with respect to patients
("Straddle Patients") who were admitted to a Facility on or before the date
-----------------
of the Scheduled Closing in which such Facility was transferred and were
discharged by the Facility after such Scheduled Closing Date, the following
shall apply:
(i) Cut-Off Billings. Seller shall, or shall cause the
----------------
Subsidiaries to, prepare cut-off billings for all Straddle Patients as
of the close of business on the relevant Closing Date. All payments
(other than Excess Interim Payments) which are received by Buyer (or
its successors in interest or assigns) after the relevant Closing Date
with respect to Straddle Patients and which relate to such cut-off
billings shall constitute Receivables for purposes of calculating the
Tentative Purchase Price and the Interim Net Book Values for such
Scheduled Closing.
(ii) Cut-Off Billings Not Accepted. If the Payor of any
-----------------------------
Straddle Patient cannot or does not for any reason accept cut-
off billings, then Buyer shall notify Seller of same, and Seller
shall, or shall cause the Subsidiaries to, deliver to Buyer a
statement calculating the total charges made by Seller and the
Subsidiaries for services rendered and medicine, drugs and supplies
provided through the relevant Closing Date with respect to such
Straddle Patient. Within ten (10) days following the discharge of
each such Straddle Patient, Buyer shall deliver to Seller a statement
reflecting the total charges for the services rendered and medicine,
drugs and supplies billed to such Straddle Patient after the relevant
Closing Date and the patient receivable (the "Straddle Patient
----------------
Payments") of Buyer with respect to such Straddle Patient (including
--------
any cost per discharge limit imposed by the Tax Equity and Fiscal
Responsibility Act of
-28-
<PAGE>
1982, as amended ("TEFRA") and all deductibles and co-insurance
-----
payments). For purposes of calculating the Final Net Book Values for
any Scheduled Closing, the pro rata share of the Straddle Patient
Payments which shall be treated as a Receivable shall be equal to the
amount obtained by multiplying the Straddle Patient Payments by a
fraction, the numerator of which is the total charges of Seller and
the Subsidiaries with respect to such Straddle Patient through the
relevant Closing Date and the denominator of which is the total
charges of Buyer, Seller and the Subsidiaries with respect to such
Straddle Patient. Seller or Buyer, as may be applicable, may have such
statements as submitted by Buyer or Seller verified by their
respective independent public accountants within thirty (30) days from
delivery. If such statements, as submitted by Buyer or Seller, are
acceptable, then such statements shall fix the value of the services,
medicine, drugs and supplies provided by Seller and the Subsidiaries,
on the one hand, and by Buyer, on the other, to each such Straddle
Patient. If any such statement is challenged by Seller or Buyer, then
unless otherwise resolved by agreement of the parties within thirty
(30) days of any such challenge, such statement shall be deemed in
dispute, which dispute shall be resolved by the parties' independent
certified public accountants. If such accountants cannot resolve the
matter within thirty (30) days, then it shall be submitted by them to
a third accounting firm in accordance with the procedures contained in
Section 2.6(b). If Seller or Buyer does not give written notice to
--------------
the party preparing the statement of its challenge of such statement
within the first said thirty (30) day period, the receiving party
shall be deemed to have accepted the same.
(d) Cooperation in Collecting Receivables and Excluded Assets.
---------------------------------------------------------
Buyer agrees to cooperate with Seller and the Subsidiaries and to provide
access to records (both medical and financial) to assist in the collection,
rebilling and auditing (by Seller or its representatives, including its
independent public accountants) of the Receivables and the Excluded Assets
(including, but not limited to, any and all Receivables from Account
Parties or amounts due to or from any Payor). Without limiting the
generality of the foregoing agreements of Buyer to cooperate with Seller,
until six (6) months after the relevant Closing Date, (i) Seller may locate
one or more of its or its subsidiaries' employees at any or all of the
Facilities transferred at such Closing Date, without charge, in order to
facilitate such collection, rebilling and auditing, (ii) Buyer shall
provide such employees, without charge, adequate and proper space to
facilitate the
-29-
<PAGE>
performance of such duties, and (iii) Buyer shall provide reasonable
assistance of the employees of Buyer, without charge.
(e) Non-Assignable Receivables. Notwithstanding anything in
--------------------------
this Agreement that might be construed to the contrary, this Agreement
shall not constitute an agreement to assign any Receivable (including any
Receivable respecting a Straddle Patient) the assignment of which is either
prohibited by Law or by the terms of any contract with a Payor. However,
without limiting the generality of the foregoing, the Net Book Value of
such non-assignable Receivables shall be included in the Net Book Values
for all purposes of this Agreement, including, but not limited to, Sections
--------
2.5 through 2.7 and this Section 2.9, as modified by the provisions of this
--- --- -----------
Section 2.9(e). That portion of the Purchase Price which, but for the
--------------
provisions of this Section 2.9(e), would otherwise be attributable to the
--------------
Net Book Value of such non-assignable Receivables shall be deemed to be a
loan from Buyer to Seller and to the pertinent Subsidiary that will be
repaid from the proceeds of such Receivables collected and held by Buyer
and from the adjustments to Estimated Net Book Values contemplated by
Sections 2.6, 2.9(b), and 2.9(c). All procedures and requirements
------------ ------ ------
specified herein (including, without limitation, Buyer's obligations under
Section 2.9(b)) for the collection of Receivables (including any
--------------
Receivables in respect of a Straddle Patient) shall be fully applicable to
such non-assignable Receivables, except that (i) Buyer shall be deemed to
collect and hold the proceeds of such non-assignable Receivables as agent
for the Seller and the Subsidiaries and shall apply such proceeds to the
repayment of such loan, and (ii) any provision herein that would otherwise
require or provide for Buyer's "reassignment" of a Receivable (including an
Eligible Receivable) that is non-assignable to Buyer in the first instance
shall be construed to require or provide that Buyer, as agent for Seller
and the Subsidiaries, return pertinent documentation respecting such
Receivable to Seller and the Subsidiaries to permit collection of such
Receivable by them (in accordance with such collection efforts and
procedures as they, in their sole discretion, shall determine).
(f) Collection Fee.
--------------
(i) Buyer shall be entitled to a collection fee equal to
fifteen percent (15%) of the sum of the following amounts (the
"Collection Fee Base"):
--------------------
-30-
<PAGE>
(A) Cash collected, or deemed, under the provisions of
this Agreement, to be collected by Buyer after a relevant
Scheduled Closing in respect of (1) Receivables included in the
Net Book Values that are acquired by Buyer at such Scheduled
Closing, excluding Receivables that Buyer or a Buyer Subsidiary
assigns or entrusts at or after such Scheduled Closing to an
Affiliate of Seller for purposes of collection and (2) Excess
Interim Payments; and
(B) Cash remitted to a Facility after the relevant
Scheduled Closing by any collection agency (excluding an
Affiliate of Seller) with respect to accounts receivable that
were assigned to such agency prior to such Scheduled Closing and
that would be Receivables but for the provisions of paragraph 6
of Schedule 2.2(j), provided that for purposes of calculating the
--------------- -------------
collection fee, such cash remitted shall be deemed to be net of
any collection agency discounts, fees and charges.
Five (5) days prior to each Scheduled Closing, Buyer and Seller shall
in good faith agree upon an estimate of Excess Interim Payments for
each Facility included in such Scheduled Closing. Absent manifest
error, such estimates shall be binding on Buyer and Seller. Fifteen
percent (15%) of the total of such estimates for all Facilities
included in each Scheduled Closing (the "Credit Amount") shall be
credited against amounts due from Seller to Buyer as provided in
Section 2.9(f)(ii).
(ii) On the tenth day of the first month that begins at
least sixty (60) days after a Scheduled Closing, on the tenth day of
every other month thereafter until the Working Capital Adjustment
Date, and on the tenth day following the Working Capital Adjustment
Date, Buyer shall submit a report to Seller as of the nearest month-
end specifying in reasonable detail its calculation of the Collection
Fee Base for the period covered by such report. Within five (5)
business days following receipt of each such report, Seller shall pay
to Buyer, by wire transfer of immediately available funds, the
collection fee due with respect to the Collection Fee Base covered by
such report less the amount of any Credit Amount not previously used
to offset amounts due under this provision. Any Receivable for which
a collection fee is so paid shall, to the extent
-31-
<PAGE>
of such Receivable on which such a fee is paid, no longer qualify as
an Eligible Receivable.
Section 2.10 Employee Matters.
----------------
(a) Pension Plans. Schedule 2.10(a) lists all "employee pension
------------- ----------------
benefit plans" ("Pension Plans") within the meaning of Section 3(2) of the
-------------
Employee Retirement Income Security Act of 1974, as amended ("ERISA") in
-----
which Retained Employees (as defined in Subsection (b) below) directly
--------------
employed to work at the Facilities participate. Seller shall, or shall
cause the Subsidiaries to, (i) terminate as of the relevant Closing Date
the active participation of all such employees in the Pension Plans who
constitute Hired Employees, (ii) cause the Pension Plans to make timely
appropriate distributions following the relevant Closing Date, to the
extent required, to such employees in accordance with, and to the extent
permitted by, the terms and conditions of such Pension Plans, and (iii) in
connection with the termination of the active participation of all such
employees in such Pension Plans, comply, and cause each Pension Plan to
comply, with all applicable Laws. Prior to the relevant Closing Date,
Seller shall have delivered to Buyer, for information purposes only, forms
of any letters or other written communications which Seller or the
Subsidiaries shall distribute generally to such employees notifying them of
their rights in respect of their cessation of active participation in the
Pension Plans. There are no "multiemployer plans" within the meaning of
Section 3(37) of ERISA ("Multiemployer Plans") in which Retained Employees
-------------------
directly employed to work at the Facilities participate.
(b) Retained Employees.
------------------
(i) Buyer shall have the right to offer to hire at each
Scheduled Closing each of the direct employees of Seller or an
Affiliate of Seller, who is not a Facility's chief executive or chief
financial officer and who, as of such Scheduled Closing, works at the
Facilities (including any such direct employees who are on medical
disability or leaves of absence and who worked at the Facilities
immediately prior to such disability or leave) included in the Subject
Transferred Assets, provided that Buyer may not offer to hire those
--------
employees covered by this clause (i), if any, who are designated by
---
Seller at least five (5) days prior to the relevant Scheduled Closing
and provided further that Buyer shall extend offers of employment to a
----------------
sufficient number of employees at each
-32-
<PAGE>
Facility so as to avoid any liability on the part of Seller and the
Subsidiaries under the WARN Act (as defined in Section 2.10(e)) with
---------------
respect to the Transactions contemplated hereby. Seller will advise
Buyer of the number of employees terminated at each Facility during
the ninety (90) day period preceding the relevant Scheduled Closing.
(ii) Buyer shall additionally have the right to offer to
hire at each Scheduled Closing such other employees of Seller and its
Affiliates who are mutually agreed upon by Buyer and Seller and who
are either (A) indirect employees with respect to the operation of the
Facilities included in the Subject Transferred Assets, or (B) a chief
executive or chief financial officer of a Facility included in the
Subject Transferred Assets, provided that in the event that Buyer
--------
wishes to hire a chief executive or chief financial officer and Seller
does not agree to such hiring, Seller shall not employ such chief
executive or chief financial officer in such capacity at a healthcare
facility operated or managed by Seller or its subsidiaries for a
period of at least one (1) year following such Scheduled Closing.
(iii) All such direct and indirect employees to whom Buyer
has the right to make offers of employment pursuant to clauses (i) or
---
(ii) above are herein referred to as the "Retained Employees."
---- ------------------
(iv) Any such offer of employment to a Retained Employee by
Buyer shall be to perform comparable services, in such position and
for such compensation as is comparable to the position such Retained
Employee held with, and the compensation paid to such Retained
Employee by, Seller or any of its subsidiaries as of the Scheduled
Closing. Seller or its Affiliates shall have the right (but not the
obligation) to employ or offer to employ any Retained Employee
(including, but not limited to, the chief executive officer and the
chief financial officer of each Facility without regard to the
provisions of Section 2.10(b)(ii)(B)) who declines Buyer's offer of
----------------------
employment.
(c) Hiring of Retained Employees. Buyer shall hire at each
----------------------------
Scheduled Closing each Retained Employee who elects to accept employment
with Buyer (the "Hired Employees") and shall continue to employ each such
---------------
Hired Employee for a period of no less than ninety (90)
-33-
<PAGE>
days following the relevant Closing Date, unless the employment of such
Hired Employee is terminated for cause or as a result of the Hired
Employee's resignation. Subject to the proviso to Section 2.3(c), Buyer
--------------
agrees to give the Hired Employees full credit for the Paid Time Off earned
or accrued by them during, and to which they are entitled as a result of,
their employment by Seller and/or its subsidiaries, by allowing such Hired
Employees such Paid Time Off as to which such Hired Employees would have
been entitled as of the relevant Closing Date under the policies of Seller
and/or its subsidiaries if such Hired Employees had remained employees of
Seller and/or its subsidiaries and, upon termination of employment, by
making full payment to such Hired Employees of the Paid Time Off that such
employees would have received had they taken such Paid Time Off.
(d) Health Benefits. Buyer shall provide the Hired Employees a
---------------
program of health care benefits which is comparable in the aggregate to the
program of health care benefits currently provided by Seller or its
pertinent Subsidiaries, as the case may be, provided, however, that such
-------- -------
health care benefits shall be immediately available to the Hired Employees
as of the relevant Closing Date, and the Hired Employees shall become as of
the relevant Closing Date participants thereunder, without regard to any
applicable waiting period or any limitation with respect to preexisting
conditions except insofar as such waiting period or limitation gives full
credit to such Hired Employees for the period of time during which he or
she was employed by Seller and its Affiliates and, provided further, that
----------------
Buyer may make modifications or changes in such health care benefits at any
time following a Scheduled Closing. Buyer acknowledges and agrees that,
with respect to the Hired Employees, Buyer is a successor employer for
purposes of the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), that the Hired Employees will not, as a result, be
-----
deemed to have had a termination of employment for purposes of COBRA and
that any COBRA notices or coverages required to be given or made available
to any Hired Employee shall be given or made by Buyer and not Seller or the
Subsidiaries, provided that Buyer does not assume, and shall not be deemed
--------
to have assumed, any COBRA obligations which Seller or any Subsidiary may
have to former employees of Seller or such Subsidiary whose employment was
terminated on or prior to the relevant Closing Date, or to any Retained
Employees who do not accept employment with Buyer, and provided further
--------
that Seller shall be responsible for any COBRA coverages required to be
made available to any
-34-
<PAGE>
Hired Employee who is entitled to COBRA coverage under existing plans of
Seller or any Subsidiary as a result of the Transactions.
(e) Acknowledgement of Responsibility. Buyer acknowledges and
---------------------------------
agrees that as of the date and time a Scheduled Closing is effective, Buyer
shall be considered for purposes of the Worker Adjustment and Retraining
Notification Act (the "WARN Act") the employer of the Retained Employees
--------
related to the Transferred Assets transferred at such Scheduled Closing and
that Buyer (and not Seller or the Subsidiaries) shall thereupon be
responsible for complying with the WARN Act with respect to such Retained
Employees and that prior to such time none of such Retained Employees shall
be, nor shall they be deemed to be, terminated. Buyer shall indemnify and
hold Seller and its Affiliates harmless, in accordance with Sections 11.4,
-------------
11.5 and 11.6, from and against all Losses (i) resulting from any
---- ----
compliance obligation (including, without limitation, the obligation to
give notice or pay money) that Seller and its Affiliates or Buyer has under
the WARN Act arising from the termination of any Retained Employee or (ii)
resulting from any claims of the Hired Employees (including, without
limitation, claims for health care coverage or benefits); provided,
--------
however, Buyer shall neither be responsible for, nor indemnify Seller and
-------
its Affiliates for the consequences of any WARN event which may be caused
by the actions of Seller or its Affiliates with respect to employees whom
Seller and its Affiliates retain pursuant to rights set forth in Section
-------
2.10(b) above.
-------
Notwithstanding the foregoing, nothing in this Section 2.10 shall, or shall
------------
be deemed to, create any rights in favor of any person not a party hereto
or to constitute an employment agreement or condition of employment for any
employee of Seller or any Affiliate of Seller or any Retained Employee.
Section 2.11 Use of Names.
------------
(a) Although trade names of Seller and the Subsidiaries, other
than the Transferred Business Names, are Excluded Assets, such names appear
on certain of the fixed Transferred Assets, such as certain fixtures and
Equipment, and on supplies, materials, stationery and similar consumable
items which will be on hand at the Facilities at a Scheduled Closing with
respect to such Facilities. Notwithstanding that such names are Excluded
Assets, Buyer shall be entitled to use such consumable items for a period
of three (3) months following the Scheduled Closing in which such items are
transferred and shall have up to six (6) months following
-35-
<PAGE>
such Scheduled Closing to remove such names from fixed Transferred Assets,
provided that Buyer shall not send correspondence or other materials to
--------
third parties on any stationery that contains a trade name (other than a
Transferred Business Name) of Seller or any Affiliate of Seller.
(b) Seller hereby grants to Buyer, for the period from the
relevant Closing Date through the expiration of the ninetieth day
thereafter, the non-exclusive right and license to use, solely in
connection with the operation of the Facilities transferred on such Closing
Date, the clinical policy and procedures manuals of Seller and/or the
Subsidiaries (the "Manuals") presently used at such Facilities. Such
-------
license shall be on the following terms and conditions:
(i) Buyer shall accept the Manuals in their present
condition, "AS IS" and "WITH ALL FAULTS" and without any
representation or warranty of any kind whatsoever, either express or
implied, by Seller, including, but not limited to, any representation
or warranty that the Manuals are adequate for Buyer's operation of the
relevant Facilities after the relevant Scheduled Closing or are in
compliance with any Laws;
(ii) Buyer agrees that Seller shall have no obligation
whatsoever to update or otherwise revise the Manuals, even if
Seller or its Affiliates are revising similar manuals at other
healthcare facilities, and that Buyer shall have sole responsibility
for updating and revising such manuals;
(iii) Buyer acknowledges and agrees that the Manuals are
confidential and proprietary information of Seller and its Affiliates
and Buyer agrees that it will not, directly or indirectly, reproduce,
distribute or disclose the contents of the Manuals except as may be
required in the operation of such Facilities (including, but not
limited to, as may be required by any Laws) and shall exercise due
care to otherwise preserve and protect the proprietary nature thereof,
provided that Seller and the Subsidiaries acknowledge that the Manuals
--------
used by Buyer and the Buyer Subsidiaries more likely than not contain
information that is substantially similar to information contained in
the Manuals;
-36-
<PAGE>
(iv) Upon the termination of Buyer's use of the Manuals
pursuant to this Section, Buyer shall return to Seller all originals
and copies of the Manuals; and
(v) Buyer shall implement its own policy and procedure
manuals promptly following the relevant Closing Date, and in any event
by the date on which the license hereby granted to Buyer terminates.
(c) Notwithstanding the assignment to Buyer of the Transferred
Business Names, Seller and its Affiliates and their assignees shall have
the nonexclusive right to use such Transferred Business Names, consistent
with past practices, in connection with the operation of previously and
currently operated healthcare facilities of Seller and its Affiliates not
included in the Transferred Assets, and Buyer, on behalf of itself and each
Buyer Subsidiary, hereby grants Seller and its Affiliates and their
assignees a fully paid-up, perpetual right and license to use such
Transferred Business Names in such manner in connection with the operation
of such facilities, such license to be effective as of the relevant
Scheduled Closing in which such Transferred Business Names are assigned to
Buyer and the Buyer Subsidiaries.
Section 2.12 No Assignment If Breach; Seller's Discharge of Assumed
------------------------------------------------------
Liabilities.
-----------
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement shall not constitute an agreement to assign any
Transferred Asset, or assume any Assumed Liability, if the attempted
assignment or assumption of the same, as a result of the absence of the
consent or authorization of a third party or failure of a right of first
refusal notice period to expire, would constitute a breach or default under
any lease, agreement, encumbrance or commitment, would violate any Law or
would in any way adversely affect the rights, or increase the obligations,
of Buyer, Seller or any Subsidiary with respect thereto; provided that the
--------
assignment of any contract, including without limitation Medicare, Medicaid
and similar provider agreements, which may lawfully be made subject to
customary conditions subsequent (such as needs surveys, evaluations of
Buyer or other determinations by the counterparties to such agreements)
shall be deemed not to constitute a default under, or to in any way
adversely affect the rights or increase the obligations of Buyer with
respect
-37-
<PAGE>
to, such lease, agreement, encumbrance or commitment, whether or
not such condition or conditions subsequent are met on or prior to the
relevant Scheduled Closing. Except as provided in Section 2.12(c), if any
---------------
such consent or authorization is not obtained, or if an attempted
assignment or assumption would be ineffective or would adversely affect the
rights or increase the obligations of Seller, a Subsidiary or Buyer, with
respect to any such lease, agreement, encumbrance or commitment, so that
Buyer would not, in fact, receive all such rights, or assume the
obligations, of Seller or Subsidiary with respect thereto as they exist
prior to such attempted assignment or assumption, then Seller and Buyer
shall, and Seller shall cause each Subsidiary to, enter into such
reasonable cooperative arrangements as may be reasonably acceptable to both
Buyer and Seller (including without limitation, sublease, agency,
management, indemnity or payment arrangements and enforcement at the cost
and for the benefit of Buyer of any and all rights of Seller and the
Subsidiaries against an involved third party) to provide for or impose upon
Buyer the benefits of such Transferred Asset or the obligations of such
Assumed Liability, as the case may be, and any transfer or assignment to
Buyer by Seller or a Subsidiary of any such Transferred Asset, or any
assumption by Buyer of any such Assumed Liability, which shall require such
consent or authorization of a third party that is not obtained shall be
made subject to such consent or authorization being obtained. Except as
provided in Section 2.12(c), if the parties cannot agree on any such
---------------
arrangement, or any such arrangement would not be reasonably practicable,
to provide Buyer with materially all the benefits of such Transferred Asset
or materially all the obligations of such Assumed Liability, then such
Transferred Asset or Assumed Liability, as the case may be, shall be
excluded from the Transactions and shall be deemed to be an Excluded Asset
or an Excluded Liability, as the case may be, and Buyer and Seller shall
negotiate in good faith an equitable adjustment in the Purchase Price, or
resolve any disagreement respecting such adjustment, in accordance with the
procedures of Section 2.14.
------------
(b) Notwithstanding any other provision of this Agreement,
during the period between the date hereof and the relevant Scheduled
Closing, Seller may, for the purpose of facilitating consummation of the
Transactions and with the consent of Buyer (which will not be unreasonably
withheld), cause any Subsidiary to acquire a fixed asset, or any direct or
indirect interest therein, that results in the simultaneous discharge of
all or any part of a liability that exists as of the date hereof which, but
for such acquisition, would be an Assumed Liability; provided that in each
--------
such case it gives prompt notice of such acquisition to Buyer. In the
event of any
-38-
<PAGE>
such acquisition, Buyer and Seller shall negotiate in good faith an
equitable adjustment to the Purchase Price, or resolve any disagreement
respecting such adjustment, in accordance with the procedures of Section
-------
2.14.
----
(c) The provisions of Section 2.12(a) notwithstanding, neither
---------------
Buyer nor Seller shall be obligated to close with respect to a given
Facility if any private third party consent or authorization in respect of
Transferred Assets and Assumed Liabilities related to such Facility that is
enumerated in Schedule 2.12(c) (the "Schedule of Required Consents") is not
---------------- -----------------------------
obtained, unless both Buyer and Seller waive in writing their respective
conditions precedent that such consent or authorization be obtained prior
to the transfer of such Facility. With respect to all other private third
party consents or authorizations with respect to such Facility that have
not been obtained by the relevant Scheduled Closing, if the parties have
not entered into a cooperative arrangement in respect of the Transferred
Asset or Assumed Liability to which such consent or authorization relates,
then, subject to the provisions of Section 2.18 regarding Buyer's right to
------------
reject certain contracts within sixty (60) days following the Scheduled
Closing at which such contracts are assigned or purported to be assigned,
(i) Buyer hereby agrees to accept the assignment of any such pertinent
Transferred Asset, and to assume any such pertinent Assumed Liability, as
the case may be, whether or not such assignment or assumption is made
subject to such consent or authorization being obtained after the relevant
Scheduled Closing, and (ii) the parties agree to continue to cooperate with
one another, pursuant to the provisions of Sections 5.2 and 5.3, to obtain
------------ ---
any such requisite consent
Section 2.13 Closings. All of Seller's and the Subsidiaries' right,
--------
title and interest in a Facility and all other Transferred Assets and
Assumed Liabilities which relate to, or constitute a part of, a Facility
shall be transferred to Buyer or the applicable Buyer Subsidiaries at a
"Scheduled Closing" (as defined below). Subject to the terms and
------------------
conditions hereof, the Transferred Assets shall be transferred to Buyer at
one of three Scheduled Closings: The "First Closing" (as defined below),
-------------
the "Second Closing" (as defined below) or the "Final Closing" (as defined
-------------- -------------
below). The First Closing, Second Closing and Final Closing, collectively,
are the "Scheduled Closings" and each is a "Scheduled Closing." A date on
which a Scheduled Closing actually occurs is a "Closing Date," and the
------------
Closing Date of the Final Closing is the "Final Closing Date." A Scheduled
------------------
Closing shall be effective for all purposes as to each Facility which is
the subject of such Scheduled Closing (and the Transferred Assets and
Assumed Liabilities related thereto or constituting a part thereof)
(collectively, the
-39-
<PAGE>
"Subject Transferred Assets") at 11:59 p.m. on the relevant Closing Date,
--------------------------
as determined by reference to the local time zone in which the Facility is
located. Notwithstanding the foregoing, either the First or Second Closing
may also be a Final Closing and if the First Closing is the Final Closing,
there shall be no Second Closing. Scheduled Closings shall occur in
accordance with the following provisions:
(a) The First Closing. Provided that no Scheduled Closing shall
-----------------
occur (i) before there is a "First Closing" under the First Facilities
Agreement with respect to First Facilities, or (ii) after the Termination
Date set forth in Section 10.1(b), the "First Closing" with respect to
--------------- -------------
Subsequent Facilities shall occur at a mutually agreeable time and place or
places within five (5) business days (unless another date is mutually
agreed upon by Buyer and Seller) after the first date on which all of the
conditions set forth in Article 8 and Article 9 hereof are capable of being
--------- ---------
satisfied or are waived as to the Transferred Assets and Assumed
Liabilities in respect of Subsequent Facilities that account in the
aggregate for at least Eight Million Dollars ($8,000,000) of the EBITDA (as
defined in Section 3.17(a)) assigned to Facilities for this purpose as
---------------
shown on Schedule 2.13B hereto, and all Facilities, Transferred Assets and
--------------
Assumed Liabilities sold, assigned, conveyed, transferred, delivered and
assumed at the First Closing shall be the Subject Transferred Assets with
respect to the First Closing. Upon consummation at the First Closing of
Transactions in compliance with the foregoing provisions, any remaining
Transactions in respect of Facilities that were not consummated at such
Closing may be consummated at a subsequent Closing subject to the
provisions of Article 8 and Article 9 and to the provisions of this Section
--------- --------- -------
2.13 with respect to such Closings.
----
(b) The Second Closing. Provided that the First Closing has
------------------
occurred and that no Scheduled Closing shall occur after the Termination
Date, the "Second Closing" shall occur at a mutually agreeable time and
--------------
place or places, on the date which is within five (5) business days (unless
another date is mutually agreed upon by Buyer and Seller) after the first
date on which all of the conditions set forth in Article 8 and Article 9
--------- ---------
hereof are capable of being satisfied or are waived as to any additional
Subsequent Facilities and the Transferred Assets and Assumed Liabilities
related thereto or constituting a part thereof that are not the subject of
the First Closing, and the Subsequent Facilities and the Transferred Assets
and Assumed Liabilities related thereto that are included in the
Transactions occurring at the Second Closing shall, for purposes of this
Agreement, be the Subject Transferred Assets with respect to the Second
Closing, provided
--------
-40-
<PAGE>
that the Second Closing shall be held, in any event, within thirty (30)
days of the First Closing with respect to any Subsequent Facilities for
which the conditions to Closing, including those set forth in this Section
-------
2.13, have been met or waived as of such date.
----
(c) The Final Closing. Provided that a First Closing has
-----------------
occurred, the "Final Closing" shall occur with respect to Subsequent
-------------
Facilities that are not the subject of the First or Second Closings at a
mutually agreeable place or places and at a mutually agreeable time as
follows:
(i) If all of the conditions set forth in Articles 8 and 9
---------- -
hereof and in this Section 2.13 are capable of being satisfied or are
------------
waived on or prior to the Termination Date as to all Subsequent
Facilities that are not included in the First Closing or the Second
Closing, then the Final Closing shall occur within five (5) business
days (unless another date is mutually agreed upon by Buyer and Seller)
after the first date upon which such conditions may be satisfied or
are waived, but in no event later than the Termination Date.
(ii) If all of the conditions set forth in Articles 8 and 9
---------- -
hereof and in this Section 2.13 are capable of being satisfied or are
------------
waived on or prior to the Termination Date as to some, but not all, of
the Facilities that are not included in the First Closing or the
Second Closing, then the Final Closing shall occur within five (5)
business days after the identity of the Facilities as to which such
conditions will not be satisfied has become reasonably manifest or has
been mutually agreed upon by the parties, but in no event shall such
Final Closing occur later than the Termination Date.
(d) Deliveries by Seller. At each Scheduled Closing Seller
--------------------
shall deliver, or cause the Subsidiaries to deliver, to Buyer:
(i) A Bill or Bills of Sale and Assignment in substantially
the form of Exhibit A executed by each Subsidiary with respect to the
---------
Subject Transferred Assets of the Subsidiary covered thereby;
(ii) Grant deeds (or equivalent special or limited warranty
deeds for Owned Real Properties outside California), properly executed
and acknowledged by each Subsidiary with respect
-41-
<PAGE>
to the Owned Real Properties of the Subsidiary included in the Subject
Transferred Assets;
(iii) Separate assignments and assumptions in substantially
the form of Exhibit B executed by each Subsidiary with respect to each
---------
Real Property Lease of the Subsidiary included in the Subject
Transferred Assets that is designated by either Buyer or Seller;
(iv) Instruments of transfer, sufficient to transfer
personal property interests of each Subsidiary that are included in
the Subject Transferred Assets but not otherwise transferred by the
Bills of Sale and Assignment referred to in clause (i) above, executed
----------
by each Subsidiary in the form customarily used in commercial
transactions in the areas in which such other personal property of
such Subsidiary is located;
(v) Such other instruments of transfer, executed by each
of the pertinent Subsidiaries necessary to transfer to and vest in
Buyer all of Seller's and the Subsidiaries' rights, title and
interest in and to the Subject Transferred Assets or which may be
required by the Title Insurer (as defined in Section 8.7), including
-----------
owner's and lessee's affidavits, if any; and
(vi) Possession of the Subject Transferred Assets.
All such documents of transfer shall be in a form and substance reasonably
satisfactory to Buyer.
(e) Deliveries by Buyer. At each Scheduled Closing, Buyer shall
-------------------
deliver to Seller:
(i) Immediately available funds, by way of wire transfer to
an account or accounts designated by Seller, in an amount equal to the
amounts then due pursuant to Sections 2.5 and 2.6(a), as adjusted by
------------ ------
the expenses due at such Scheduled Closing pursuant to Section 5.5;
-----------
(ii) Separate assignments and assumptions in substantially
the form of Exhibit C executed by Buyer and the applicable Buyer
---------
Subsidiaries with respect to each Real Property Lease included
-42-
<PAGE>
in the Subject Transferred Assets that is designated by either Buyer
or Seller; and
(iii) An Assumption Agreement or Assumption Agreements with
respect to the Assumed Liabilities assumed at such Scheduled Closing,
in substantially the form of Exhibit C, executed by Buyer and the
---------
applicable Buyer Subsidiaries in favor of Seller and each of the
applicable Subsidiaries.
All such documents of transfer shall be in a form and substance reasonably
satisfactory to Seller.
(f) Escrow. If either of the parties desires to consummate a
------
Scheduled Closing through an escrow, an escrow shall be opened with, and
the escrow agent shall be, Chicago Title Company (the "Escrow Agent"), by
------------
depositing a fully executed copy of this Agreement with Escrow Agent to
serve as escrow instructions. This Agreement shall be considered the
primary escrow instructions between the parties, but the parties shall
execute such additional escrow instructions as Escrow Agent shall require
and the parties may agree upon in order to clarify the duties and
responsibilities of Escrow Agent. In the event of any conflict between this
Agreement and such additional escrow instructions, this Agreement shall
prevail. If a Scheduled Closing is to be consummated through the Escrow
Agent, then on or prior to the Closing Date, Buyer shall cause the funds
required by Subsection (e)(i) above to be wired to Escrow Agent, and the
---------- ------
parties shall deliver the instruments of sale, assignment, conveyance and
assumption called for by Subsections (d) and (e) above to be delivered to
--------------- ---
the Escrow Agent, and on the Closing Date, the Escrow Agent shall close
the escrow with respect to such Scheduled Closing by:
(i) Causing the deeds for the Owned Real Properties, the
assignments of the Real Property Leases, and any other documents which
the parties may mutually designate to be recorded in the official
records of the appropriate counties in which the pertinent Subject
Transferred Assets are located;
(ii) Delivering to Seller by wire transfer of immediately
available funds, to an account or accounts designated by Seller, the
amounts called for by Subsection (e)(i) above; and
-----------------
-43-
<PAGE>
(iii) Delivering to Buyer or Seller, as the case may be,
the other instruments referred to in Subsections (d) and (e) above.
--------------- ---
Section 2.14 Purchase Price Adjustment. If circumstances exist that
-------------------------
require the parties to negotiate in good faith equitable adjustments in the
Purchase Price pursuant to the provisions of Section 2.12 (respecting
------------
absence of consents), Sections 8.5 and 9.5 (dealing with certain
------------ ---
prohibitions and restraints), Section 6.2(c) (respecting Seller's
--------------
obligations with respect to environmental conditions), Section 8.7
-----------
(respecting the condition of title to interests in real property) or
Section 8.10 (respecting casualty losses or condemnation) (Sections 2.12,
------------ -------------
6.2(c), 8.5, 8.7, 8.10, 9.5 and this Section 2.14 being collectively
------ --- --- ---- --- -------------
referred to as the "Adjustment Sections"), then and in any of such events,
-------------------
such negotiations, and the resolution of disagreements arising therefrom,
shall be conducted in accordance with the provisions of this Section 2.14.
------------
The parties shall negotiate such equitable adjustments in the Purchase
Price in good faith prior to any relevant Closing Date (as may be extended
by mutual agreement of the parties), provided, that any adjustment in the
--------
Purchase Price shall be consistent with the Allocation Schedule. If the
parties are unable to agree by the day prior to such relevant Closing Date,
then such relevant Closing Date (the "Original Closing Date") (and the
---------------------
Termination Date, if necessary) shall be extended for up to fifteen (15)
business days to provide for the opportunity to resolve such disagreement
pursuant to the provisions of this Section 2.14. On the day a Scheduled
------------
Closing would have occurred but for the absence of agreement between the
parties, each party shall designate an individual (who may not be a present
or former officer, director, partner or employee of the party or of any
present or former investment banker, accounting firm, law firm or attorney
of or for the party) to mediate such disagreement, and advise the other
party in writing of the identity of such individual, which advice shall be
accompanied by a list of up to ten (10) suggested neutral individuals to
serve as a third mediator. The mediators originally designated by each
party shall promptly confer about the selection of a third mediator from
such lists, and within five (5) business days following the Original
Closing Date (or Termination Date, as the case may be), the originally
designated mediators shall agree upon and (subject to availability) select
the third mediator from the lists submitted by the parties or otherwise,
provided that if the originally designated mediators cannot agree upon a
--------
third mediator by such date, the third mediator shall be a retired judge
designated by Judicial and Arbitration Mediation Services, Inc., located in
Los Angeles, California. The three mediators so selected are herein
referred to as the "Panel". Within two (2) business days
-----
-44-
<PAGE>
following the designation of the third mediator, each party shall submit
to the Panel in writing, its proposed equitable adjustments in the
Purchase Price. Such proposals shall be materially in accordance with the
last proposals made by such party to the other party during the course of
the aforementioned good faith negotiations between the parties. The
parties shall additionally submit such memoranda, arguments, briefs and
evidence in support of their respective positions, and in accordance with
such procedures, as a majority of the Panel may determine. Within seven
(7) business days following the designation of the third mediator, as to
each adjustment of the Purchase Price about which there is disagreement,
the Panel shall, by majority vote, select the proposed adjustment of the
Purchase Price proposed by one of the parties, it being agreed that the
Panel shall have no authority to alter any such proposal in any way.
Thereafter, the parties shall, subject to the terms and conditions of this
Agreement, consummate the Transactions on the basis of such adjustments at
a mutually agreeable time and place or places, in accordance with and
subject to the provisions of Section 2.13, which shall be no later than the
------------
fifteenth (15th) business day following the Original Closing Date or such
later date as the parties may agree upon. Subject to the foregoing, the
Panel may determine the issues in dispute following such procedures,
consistent with the language of this Agreement, as it deems appropriate to
the circumstances and with reference to the amounts in issue, but in any
event consistent with the Allocation Schedule to the extent applicable. No
particular procedures are intended to be imposed upon the Panel, it being
the desire of the parties that any such disagreement shall be resolved as
expeditiously and inexpensively as reasonably practicable. No member of
the Panel shall have any liability to the parties in connection with
service on the Panel, and the parties shall provide such indemnities to the
members of the Panel as they shall request.
Section 2.15 Transfer of Assets in Corporate Form. If Buyer consents
------------------------------------
in writing in its sole and absolute discretion, Seller may, prior to any
Scheduled Closing, cause any Transferred Asset or Assumed Liability to be
assigned and transferred by way of an assignment to Buyer of the stock of a
subsidiary of Seller (including the stock of any Subsidiary), in which case
all right, title and interest of Seller and any of its Affiliates in such
subsidiary (which shall constitute all of the outstanding capital stock and
rights to acquire capital stock in such subsidiary) shall be transferred to
Buyer at the Scheduled Closing as a Subject Transferred Asset. Any such
agreement of the parties shall become an amendment to this Agreement.
-45-
<PAGE>
Section 2.16 Assignment of Rights and Obligations to Buyer
---------------------------------------------
Subsidiaries. Notwithstanding any contrary provisions contained herein,
------------
the parties hereto agree that, prior to a Scheduled Closing, Buyer, in its
sole discretion, may assign any or all of its rights and obligations with
respect to the Subject Transferred Assets and the Assumed Liabilities to be
transferred at such Scheduled Closing to one or more Buyer Subsidiaries,
provided that no such assignment shall relieve Buyer of any obligation or
--------
liability to Seller hereunder, and provided further that the following
--------
shall apply:
(a) Buyer will provide Seller with prompt written notice of any
such assignment.
(b) No such assignment shall be effected if the making of the
assignment will result in Seller's inability to obtain any consent or
authorization reasonably required to consummate the Transactions or to
avoid economic detriment to the Seller arising from the consummation of the
Transactions.
(c) Each such Buyer Subsidiary that is an assignee of Buyer
shall irrevocably appoint Buyer as its sole and exclusive representative
and agent authorized to act for and to receive notices and payments on
behalf of the Buyer Subsidiaries in all matters arising from or related to
this Agreement and the Transactions.
(d) As a condition to Seller's agreement to such assignments,
Buyer hereby agrees that Buyer will at all times be the ultimate parent
entity of the consolidated group of companies of which Buyer is a group
member or that, in the event of any reorganization involving Buyer and its
subsidiaries, the ultimate parent entity of the consolidated group of
companies emerging from such reorganization that includes Buyer and its
successors and assigns shall, prior to any such reorganization, execute
such documents as are reasonably necessary to confirm the assumption by
such ultimate parent entity of Buyer's obligations to Seller hereunder.
(e) Buyer shall remain jointly and severally liable to Seller
and the Subsidiaries and to third parties with respect to any Assumed
Liabilities transferred to a Buyer Subsidiary, and, without limiting the
generality of the foregoing, hereby absolutely and unconditionally
guarantees the full, prompt and faithful performance by each Buyer
Subsidiary of all covenants and obligations to be performed by such Buyer
-46-
<PAGE>
Subsidiary under this Agreement and any Related Agreement (as defined in
Section 3.4) which are assigned to such Buyer Subsidiary, including but not
-----------
limited to, the payment of all sums stipulated to be paid by such Buyer
Subsidiary pursuant to such assignment, it being understood that each such
covenant and obligation constitutes the direct and primary obligation of
Buyer and that a separate action or actions may be brought and prosecuted
against Buyer whether action is brought against the pertinent Buyer
Subsidiary or whether such Buyer Subsidiary is joined in any such action or
actions (Buyer hereby waiving any right to require Seller or a Subsidiary
to proceed against a Buyer Subsidiary). Buyer hereby authorizes Seller,
without notice and without affecting Buyer's liability hereunder, from time
to time to (x) renew, compromise, extend, accelerate, or otherwise change
the terms of any obligation of a Buyer Subsidiary hereunder with the
agreement of such Buyer Subsidiary, (y) take and hold security for the
obligations guaranteed, and exchange, enforce, waive and release any such
security, and (z) apply such security and direct the order or manner of
sale thereof as Seller in its discretion may determine. Buyer hereby
further waives:
(i) Any defense that may arise by reason of the incapacity
or lack of authority of any Buyer Subsidiary;
(ii) Any defense based upon a statute or rule of law which
provides that the obligations of a surety must be neither larger in
amount nor in other respects more burdensome than those of the
principal; and
(iii) Any duty on the part of Seller or a Subsidiary to
disclose to Buyer any facts that Seller or a Subsidiary may now or
hereafter know about a Buyer Subsidiary.
Section 2.17 Data Processing Services. In order to facilitate the
------------------------
transition of the Facilities from Seller's to Buyer's ownership, the
parties acknowledge that in the event Buyer acquires Subsequent Facilities
hereunder from Seller, then Seller shall provide certain telephone
assistance in connection with management information services and Facility
accounting and shall also provide certain data processing services support
for the collection of Receivables all in accordance with the terms of and
for the period stated in the First Facilities Agreement.
-47-
<PAGE>
Section 2.18 Rejection of Certain Contracts. The provisions of this
------------------------------
Section 2.18 shall apply to the following categories of Assumed Contracts:
------------
(i) those subject to the provisions of Section 2.1(f)(iii); (ii) those
-------------------
subject to the provisions of the second sentence of Section 2.12(c); and
---------------
(iii) those subject to Section 6.1(f) that are entered into by Seller or a
--------------
Subsidiary after the date hereof in violation of Section 6.1(f). With
--------------
respect to each such contract (a "Contingent Contract"):
-------------------
(a) Buyer or the pertinent Buyer Subsidiary shall have the right
to reject such Contingent Contract by giving a written notice of such
rejection to Seller within sixty (60) days following the relevant Scheduled
Closing, such written notice to be accompanied by originals of the contract
then in Buyer's or the Buyer Subsidiary's possession, copies of any written
communications between Buyer or the Buyer Subsidiary and the counterparty
to such contract relating to the subject matter thereof, and instruments
evidencing the reassignment of such contract to Seller or the pertinent
Subsidiary in form reasonably satisfactory to Buyer and Seller, in which
case such contract shall be treated as an Excluded Asset, and the
liabilities related thereto shall be treated as an Excluded Liability, for
all purposes of this Agreement, subject to the further provisions of this
Section 2.18.
------------
(b) In the event that Seller or the pertinent Subsidiary incurs
any costs in connection with the termination of any such Contingent
Contract so rejected by Buyer (including payments during any applicable
notice period required to terminate such contract) and Buyer or the
pertinent Buyer Subsidiary continues to do business with the counterparty
to such contract related to the subject matter thereof during any period
for which Seller or the applicable Subsidiary is obligated to make payments
to such counterparty, then Buyer will reimburse Seller for one-half of the
payments that Seller or the applicable Subsidiary is obligated to make to
such counterparty in connection with such termination, but not in excess of
one-half of the payments that Seller or the applicable Subsidiary is
obligated to make to such counterparty under such contract for a period of
ninety (90) days.
(c) With respect to any Contingent Contract subject to clause
(ii) of this Section 2.18 that is not also subject to either clause (i) or
---- ------------ ---
clause (iii) of this Section 2.18 and that is not rejected by Buyer
----- ------------
pursuant to Subsection (a) above, Buyer agrees to indemnify and hold
--------------
harmless Seller and the Subsidiaries, in accordance with the provisions of
Sections
--------
-48-
<PAGE>
11.3 through 11.6, from and against any and all Losses arising from or
---- ----
related to the lack of any consent or authorization in connection with the
assignment of such Contingent Contract to Buyer (or the pertinent Buyer
Subsidiary) hereunder.
(d) In the event Buyer rejects a Contingent Contract pursuant to
Subsection (a), then, notwithstanding any other provision of this
--------------
Agreement, Seller shall have no liability to Buyer and the Buyer
Subsidiaries for Losses under the provisions of Sections 11.3 through 11.6
------------- ----
related to such Contingent Contract for the period prior to such rejection
or for the amounts due Seller under Subsection (b) above.
--------------
(e) With respect to any Contingent Contract subject to clause
(iii) of this Section 2.18 that appears on an updated Schedule 2.1(f)
----- ------------ ---------------
delivered pursuant to Section 6.3 and that is not rejected by Buyer
----------- ---
pursuant to Subsection (a) above, then, notwithstanding any other provision
--------------
of this Agreement, Seller shall have no liability to Buyer and the Buyer
Subsidiaries for Losses under the provisions of Sections 11.3 through 11.6
------------- ----
for violation of Section 6.1(f) with respect to such Contingent Contract.
--------------
Section 2.19 Remaining Schedules. Notwithstanding anything to the
-------------------
contrary herein, this Agreement shall be deemed cancelled and of no further
force and effect if the parties shall have failed to agree upon the
Schedules enumerated in Exhibit E, if any, within five (5) business days
---------
following the date hereof, the parties hereby agreeing to cooperate with
one another in good faith and to work expeditiously to agree upon such
Schedules within such period. Such agreement shall be evidenced by a duly
executed amendment of this Agreement that deletes this Section 2.19.
------------
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer, as of the date hereof,
as follows, except as set forth in Schedules numbered in relation to the
Sections set forth below:
Section 3.1 Organization and Corporate Power. Seller is a
--------------------------------
corporation duly incorporated and validly existing under the laws of, and
is authorized to exercise its corporate powers, rights and privileges and
is in good standing in, the State of Nevada and has full corporate power to
-49-
<PAGE>
carry on its business as presently conducted and to own or lease and
operate its properties and assets now owned or leased and operated by it
and to perform the transactions on its part contemplated by this Agreement
and all other agreements contemplated hereby.
Section 3.2 Subsidiaries.
------------
(a) Each Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation
(which, in the case of Subsidiaries existing on the date of this Agreement,
is indicated on Schedule A-1). Each Subsidiary has all requisite power and
------------
authority (corporate and otherwise) to carry on its business as presently
conducted and to own or lease and operate its properties and assets now
owned or leased and operated by it and to perform the transactions on its
part contemplated by this Agreement and all other agreements contemplated
hereby.
(b) All of the outstanding capital stock of each Subsidiary has
been duly authorized and is validly issued, fully paid and nonassessable
and, except as indicated on Schedule A-1, is owned beneficially and of
------------
record by Seller or another subsidiary of Seller as indicated on Schedule
--------
A-1. Except as provided in Schedule A-1, there are no (i) rights,
--- ------------
subscriptions, warrants, options, conversion rights or agreements of any
kind outstanding to purchase or otherwise acquire any shares of capital
stock of any Subsidiary, or (ii) securities or obligations of any kind
convertible into or exchangeable for any shares of capital stock of any
Subsidiary, or (iii) obligations of any kind obligating Seller to sell or
dispose of all or any part of Seller's ownership interest therein. The
Subsidiaries listed on Schedule A-1 are, on the date hereof, the only
------------
subsidiaries of Seller that have any right or interest in, or title to the
Facilities.
(c) The board of directors of each Subsidiary and, if required,
its shareholders, have duly and effectively authorized (i) the sale of the
Transferred Assets to be sold by such Subsidiary and (ii) the execution,
delivery and performance of the Related Agreements (as defined in Section
-------
3.4) and all other agreements contemplated hereby and thereby to which such
----
Subsidiary is a party. No other corporate act or proceeding on the part of
any Subsidiary, its board of directors or its shareholders is necessary to
authorize any Related Agreement or other agreement contemplated hereby and
thereby or the transactions contemplated hereby and thereby.
-50-
<PAGE>
(d) The Related Agreements and all other agreements contemplated
hereby and thereby to which any Subsidiary is a party will, as of each
Scheduled Closing, have been duly executed and delivered by each such
Subsidiary, and each such agreement, when executed and delivered, will
constitute a valid and binding obligation of such Subsidiary, enforceable
against such Subsidiary in accordance with its terms, except as it may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar Laws now or hereafter in effect relating to creditors' rights
generally and that the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding may be brought.
Section 3.3 Authority Relative to this Agreement. The execution,
------------------------------------
delivery and performance of this Agreement and all other agreements
contemplated hereby and the consummation of the transactions contemplated
hereby and thereby have been duly and effectively authorized by the board
of directors of Seller; no other corporate act or proceeding on the part of
Seller, its board of directors or its shareholders is necessary to
authorize this Agreement, any such other agreement or the transactions
contemplated hereby and thereby. This Agreement has been, and each of the
other agreements contemplated hereby will, as of each Scheduled Closing,
have been, duly executed and delivered by Seller, and this Agreement
constitutes, and each such other agreement when executed and delivered will
constitute, a valid and binding obligation of Seller, enforceable against
Seller in accordance with its terms, except as it may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar Laws
now or hereafter in effect relating to creditors' rights generally and that
the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding may be brought.
Section 3.4 Absence of Breach. Subject to the provisions of Sections
----------------- --------
3.5 and 3.6 below regarding private party and governmental consents, and
--- ---
except for compliance with the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and any
-------
regulatory or licensing Laws applicable to the businesses and assets
represented by the Transferred Assets, the execution, delivery and
performance by Seller of this Agreement and all other agreements
contemplated hereby or executed in connection herewith (not including the
First Facilities Agreement, the "Related Agreements"), and the execution
------------------
and delivery by any Subsidiary of the Related Agreements to which it is a
-51-
<PAGE>
party, and the performance by the Subsidiaries of the transactions
contemplated by this Agreement and the Related Agreements entered into by
the Subsidiaries, do not, (a) conflict with or result in a breach of any of
the provisions of the Articles or Certificates of Incorporation or Bylaws
or similar charter documents (the "Charter Documents") of Seller or of any
-----------------
of the Subsidiaries, (b) contravene any Law or cause the suspension or
revocation of any License presently in effect, which affects or binds
Seller or any of the Subsidiaries, or any of their properties, except where
such contravention, suspension or revocation will not have a Material
Adverse Effect (as defined below) on the Transferred Assets and will not
affect the validity or enforceability of this Agreement and the Related
Agreements or the validity of the Transactions contemplated hereby and
thereby, or (c) conflict with or result in a breach of or default (with or
without notice or lapse of time or both) under any indenture or loan or
credit agreement or any other agreement or instrument to which Seller or
any of the Subsidiaries is a party or by which it or they or any of their
properties may be affected or bound, the effect of which conflict, breach,
or default, either individually or in the aggregate, would be a Material
Adverse Effect on the Transferred Assets. As used herein, a "Material
--------
Adverse Effect": (x) when used with respect to the Transferred Assets,
--------------
means a material adverse effect on the Transferred Assets and on the
businesses operated therefrom, including their condition (financial or
otherwise) and results of operations, taken as a whole; (y) when used with
respect to any portion of the Transferred Assets (including, without
limitation, a Facility), means a material adverse effect on such portion of
the Transferred Assets and on the businesses operated therefrom, including
their condition (financial or otherwise) and results of operations, taken
as a whole; and (z) when used with respect to an entity, such as Seller, a
Subsidiary or Buyer, means a material adverse effect on the business,
condition (financial or otherwise) and results of operations of such entity
taken as a whole (including any subsidiaries of such entity).
Section 3.5 Private Party Consents. Except as set forth in Schedule
---------------------- --------
3.5, the execution, delivery and performance by Seller of this Agreement
---
and the Related Agreements, and the execution and delivery by any
Subsidiary of the Related Agreements to which it is a party, and the
performance by the Subsidiaries of the transactions contemplated by this
Agreement and the Related Agreements to be performed by the Subsidiaries,
do not require the authorization, consent or approval of any non-
governmental third party of such a nature that the failure to obtain the
same
-52-
<PAGE>
would have a Material Adverse Effect on the Transferred Assets or a
Facility.
Section 3.6 Governmental Consents. The execution, delivery and
---------------------
performance by Seller of this Agreement and the Related Agreements, and the
execution and delivery by any Subsidiary of the Related Agreements to which
it is a party, and the performance by the Subsidiaries of the transactions
contemplated by this Agreement and the Related Agreements to be performed
by the Subsidiaries, do not require the authorization, consent, approval,
certification, license or order of, or any filing with, any court or
governmental agency of such a nature that the failure to obtain the same
would have a Material Adverse Effect on the Transferred Assets or a
Facility, except for compliance with the HSR Act and except for such
governmental authorizations, consents, approvals, certifications, licenses
and orders that customarily accompany the transfer of health care
facilities such as the Facilities.
Section 3.7 Brokers. Except as shown on Schedule 3.7, no broker,
------- ------------
finder, or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with this Agreement or the
Transactions contemplated hereby based upon any agreements or arrangements
or commitments, written or oral, made by or on behalf of Seller or any of
its Affiliates. Seller shall be solely responsible for the payment of any
such fee or commission to any person or entity listed on Schedule 3.7 as an
------------
exception to the foregoing.
Section 3.8 Title to Property.
-----------------
(a) Each Subsidiary has good and defensible title, or valid and
effective leasehold rights in the case of leased property, to all tangible
personal property included in the Transferred Assets to be sold, conveyed,
assigned, transferred and delivered to Buyer by such Subsidiary, free and
clear of all liens, charges, claims, pledges, security interests, equities
and encumbrances of any nature whatsoever, except for those created or
allowed to be suffered by Buyer and except for the following (individually
and collectively, the "Permitted Encumbrances"): (i) the lien of current
----------------------
taxes not delinquent, (ii) liens listed on Schedules 3.8(a) and 3.8(b),
---------------------------
(iii) the Assumed Liabilities, (iv) such consents, authorizations,
approvals and licenses referred to in Sections 3.5 and 3.6, and (v) liens,
------------ ---
charges, claims, pledges, security interests, equities and encumbrances
which will be discharged or released either prior to, or substantially
simultaneously with,
-53-
<PAGE>
the Scheduled Closing at which such property is sold, conveyed, assigned
and transferred to Buyer and other possible minor matters that in the
aggregate are not substantial in amount and do not materially detract from
or interfere with the present or intended use of such property. All such
tangible personal property is in good operating condition and repair,
subject to ordinary wear and tear and ordinary and routine maintenance, and
is reasonably adequate for the operation of the Facilities as they are
presently operated.
(b) Except as set forth on Schedule 3.8(b), and except for the
---------------
Owned Real Property and the Leased Real Property, no Subsidiary owns any
fee or leasehold or other interests in any real property used in and
necessary for the conduct of the operations of any Facility as presently
conducted. Each Subsidiary has good and marketable title to all
Owned Real Property, or valid and effective leasehold rights in the case of
the Leased Real Property, included in the Transferred Assets to be sold,
conveyed, transferred and delivered to Buyer by such Subsidiary, free and
clear of all liens except for those created or allowed to be suffered by
Buyer and except for the following: (i) Permitted Encumbrances, (ii) liens
(not including liens for borrowed money or the deferred purchase price of
property) that do not materially impair the use of the Owned Real Property
subject thereto, as such Owned Real Property is being used on the date
hereof, (iii) easements and similar encumbrances disclosed by current
standard ALTA Preliminary Title Reports, delivered to and approved by Buyer
prior to the date hereof (except for such easements or similar encumbrances
shown on Schedule 8.7(b)), and (iv) zoning, set back, building and other
---------------
similar restrictions including, without limitation, restrictions and
requirements affecting the Owned Real Property and the Leased Real Property
imposed by deeds, leases, development agreements, declarations, and
redevelopment authorities, which are not being violated in any manner that
would cause a Material Adverse Effect on any Facility as currently used and
operated. The condition of the Owned and Leased Real Property is such that
it will not materially adversely affect the operations of the Transferred
Assets on or from such Owned and Leased Real Property. All of the
improvements on land included in the Transferred Assets are in good
condition and repair, subject to those matters disclosed in Section 3.16 or
------------
Schedule 3.16, ordinary wear and tear and ordinary and routine maintenance,
-------------
and in view of the purpose for which such improvements are being used, free
of any material structural or engineering defects.
-54-
<PAGE>
Section 3.9 Assumed Contracts. Except for such matters that, when
-----------------
viewed in the aggregate, do not have a Material Adverse Effect on a
Facility, (a) there is no liability to any person by reason of the default
by Seller or a Subsidiary under any Assumed Contract, (b) neither Seller
nor any Subsidiary has received written or other notice that any person
intends to cancel or terminate any Assumed Contract, (c) all of the Assumed
Contracts are in full force and effect and without any material default by
any party or to the knowledge of Seller and the Subsidiaries, any event
which, with the passage of time or the giving of notice or both would be
such a material default, (d) subject to the provisions of Sections 3.5 and
------------
3.6, the consummation of the transactions contemplated by this Agreement
---
will not constitute and, to the best of Seller's current actual knowledge,
no event has occurred which, with or without the passage of time or the
giving of notice or both, would constitute a material breach or
default by Seller or a Subsidiary of such Assumed Contract, or would cause
the acceleration of any obligation of Seller or any Subsidiary or the
creation of any lien (except for Permitted Encumbrances) upon any
Transferred Asset, and (e) neither Seller nor any Subsidiary has waived any
right under any Assumed Contract; provided that Seller makes no separate
--------
representation or warranty under this Section 3.9 respecting compliance
-----------
with the provisions of any Assumed Contract related to title to or
condition of property, licenses, environmental conditions, hazardous
substances or environmental laws, taxes, or compliance with laws generally,
it being the intent of the parties that warranties respecting such matters
shall be made exclusively under the provisions of Sections 3.8, 3.10, 3.16,
------------ ---- ----
3.20, and 3.25. Seller has previously delivered to Buyer true and complete
---- ----
copies of all written Assumed Contracts except where the failure to so
deliver a copy thereof will not have a Material Adverse Effect on a
Facility.
Section 3.10 Licenses. Except as set forth on Schedule 3.10, (a) the
-------- -------------
Subsidiaries possess all Licenses necessary for their operation of the
Facilities at the locations and in the manner presently operated (other
than such Licenses the absence of which would not have a Material Adverse
Effect on a Facility), (b) if required, such Facilities are accredited by
applicable accrediting agencies as necessary for their operations in the
manner presently operated, and (c) such Facilities are certified for
participation in the Medicare program and have current and valid provider
contracts with such program. Schedule 3.10 lists each License held by a
-------------
Subsidiary and related to the ownership or operation of a Facility and a
true and correct copy of each has previously been delivered to Buyer by
Seller (other than such Licenses the absence of which would not have a
Material
-55-
<PAGE>
Adverse Effect on a Facility). All such Licenses are in full force and
effect.
Section 3.11 U.S. Person; Resident of Georgia. Neither Seller nor
--------------------------------
any Subsidiary is a "foreign person" for purposes of Section 1445 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any other Laws
----
requiring withholding of amounts paid to foreign persons. For purposes of
the withholding tax imposed by Section 48-7-128 of the Official Code of
Georgia Annotated, each Subsidiary that owns Transferred Assets
constituting Owned Real Property located in Georgia and related tangible
personal property is a corporation the principal place of business of which
is located in the State of Georgia. The Seller shall, or shall cause the
relevant Subsidiaries to, provide an appropriate affidavit of each such
Subsidiary's residence. Seller acknowledges that jurisdictions other than
Georgia may impose withholding obligations similar to those imposed by
Georgia and that it is Seller's obligation to provide evidence of
exemptions from such withholding taxes.
Section 3.12 Employee Relations. With respect to the Retained
------------------
Employees, except as set forth on Schedule 3.12:
-------------
(a) Neither Seller, nor any Subsidiary nor any Facility is a
party to any agreement with any union, trade association or other similar
employee organization, no written demand has been made for recognition by a
labor organization, and to Seller's knowledge it has received no notice of
any union organizing activities by or with respect to any such employees;
(b) There are no controversies (including, without limitation,
any unfair labor practice complaints, labor strikes, arbitrations,
disputes, work slowdowns or work stoppages) pending, or to the best of
Seller's current actual knowledge, threatened, which could have a Material
Adverse Effect on any Facility; and
(c) Each Subsidiary has been and is in material compliance with
all federal and state laws respecting employment and employment practices,
terms and conditions of employment, and wages and hours (including, but not
limited to, the Fair Labor Standards Act, Title VII of the Civil Rights Act
of 1964, as amended, the Occupational Safety and Health Act, the Age
Discrimination in Employment Act of 1967, the Americans with Disabilities
Act of 1990 and the Family and Medical Leave Act).
-56-
<PAGE>
Section 3.13 Employee Plans.
--------------
(a) With respect to each Multiemployer Plan, there has occurred
no "complete withdrawal" or "partial withdrawal," as each is defined in
Sections 4203 and 4205, respectively, of ERISA, and all payments required
to be made to such Multiemployer Plans by a Subsidiary under any collective
bargaining agreement have been made.
(b) Neither Buyer nor any Buyer Subsidiary shall have any
obligation or liability to Seller, any Subsidiary or any present or former
employee of any of them for or with respect to any benefit plan,
employee benefit plan or employee health or welfare program or other
Employee Benefit Arrangements (as defined in Section 3.26(c)), except for
---------------
specifically listed Assumed Liabilities and other express obligations of
Buyer and the Buyer Subsidiaries under this Agreement.
Section 3.14 Litigation. Except for (a) matters associated with or
----------
within the scope of the significant legal proceedings and investigations of
an unusual nature referred to in Seller's filings with the Securities and
Exchange Commission (the "Unusual Proceedings"), (b) ordinary routine
-------------------
claims and litigation incidental to the businesses represented by the
Facilities (including, but not limited to, actions for negligence,
professional malpractice, workers' compensation claims, so-called "slip-
and-fall" claims and the like), (c) governmental inspections and reviews
customarily made of businesses such as those operated from the Facilities,
and (d) as set forth on Schedule 3.14, there are no actions, suits, claims
-------------
or proceedings pending, or to the knowledge of Seller or any Subsidiary,
threatened against or affecting the Transferred Assets or relating to the
operations of the Facilities, at law or in equity, or before or by any
federal, state, municipal or other governmental department, commission,
agency or instrumentality. The claims and litigation referred to in clause
------
(b) above are covered by insurance currently maintained by Seller except
---
where the failure to be so covered (i) would not have a Material Adverse
Effect on any Facility or (ii) is of a nature that is not ordinarily
subject to insurance coverage (e.g., demands for punitive damages).
----
Neither Seller nor any Subsidiary is in default under any judgment, order
or decree of any governmental agency or authority applicable to the conduct
of the business conducted at the Facilities. Except as disclosed on
Schedule 3.14, there is no condemnation proceeding pending or, to the
-------------
knowledge of Seller or any Subsidiary, threatened against any of the Owned
or Leased Real Property. Schedule 3.14 includes an accurate and complete
-------------
list of each malpractice claim or
-57-
<PAGE>
lawsuit pending or to Seller's or any Subsidiary's knowledge, threatened
against any Facility or Subsidiary.
Section 3.15 Inventory. All Inventory included in the Transferred
---------
Assets and included in the Net Book Values will consist of a quality and
quantity usable and salable in the ordinary course of business, except for
items of obsolete materials and materials of below-standard quality at any
given Facility, all of which in the aggregate are immaterial to the
financial condition or results of operations of the businesses operated
from such Facility taken as a whole, or have been, or prior to the relevant
Scheduled Closing will be, written down to realizable market value.
Section 3.16 Hazardous Substances. To Seller's and the Subsidiaries'
--------------------
knowledge, except as disclosed by the Environmental Survey (as defined in
Section 6.2(b)) or otherwise on Schedule 3.16:
-------------- -------------
(a) There has not been a Release of Hazardous Material on or
otherwise affecting the Owned Real Properties or the Leased Real
Properties, (other than Releases involving de minimis quantities of
Hazardous Materials) that would: (i) constitute a violation of any
Environmental Law by Seller or the Subsidiaries, or by any third party if
the effect of such violation by such third party imposes a remediation
obligation on the part of Seller or any Subsidiary; (ii) trigger any
release-reporting obligations of Seller or the Subsidiaries under any
Environmental Law; or (iii) trigger any clean-up or remediation obligations
or Seller or the Subsidiaries under any Environmental Law;
(b) Seller and the Subsidiaries have complied with and currently
are in compliance in all material respects with all Environmental Laws that
govern the Owned Real Properties, the Leased Real Properties, and the
businesses operated from any such properties;
(c) Seller and the Subsidiaries have obtained all material
Licenses required under the Environmental Laws for operation of their
businesses related to the Owned Real Properties and the Leased Real
Properties, have complied with and currently are in compliance in all
material respects with all such Licenses, and have not received any notice
that: (i) any such existing License will be revoked; or (ii) any pending
application for any new such License will be denied;
-58-
<PAGE>
(d) Seller and the Subsidiaries have not received any currently
outstanding notice of any proceedings, action, or other claim or liability
arising under any Environmental Laws (including, without limitation, notice
of potentially responsible party status under the Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C.
(S)(S)9601 et seq. or any state counterpart) from any person or
governmental agency regarding the Owned Real Properties, the Leased Real
Properties, or the businesses operated from such properties;
(e) Neither Seller nor any Subsidiary has received any currently
outstanding notice, which notice is specifically directed to an Owned or
Leased Real Property (rather than to all property owners or operators in a
given geographic area), that any of the Owned Real Properties or any of the
Leased Real Properties is the subject of a material deed restriction,
material title-transfer restriction, other material land-use restriction,
or material lien arising in each case under any Environmental Law;
(f) Neither the Owned Real Properties, the Leased Real
Properties, nor any of the businesses conducted on any such properties is
the subject of any outstanding order, decree, or agreement with or
involving any governmental agency, court, or other party respecting any
material aspect of the operation of such properties and businesses that
relates to or arises under any Environmental Law (other than orders,
decrees or agreements affecting or directed to the healthcare industry
generally, or in the case of Leased Real Properties, lease agreements
requiring compliance with applicable Environmental Law);
(g) No portion of the Owned Real Properties or Leased Real
Properties contains or has ever contained any underground storage tank,
surface impoundment or similar device used for the management of
wastewater, or other waste management unit dedicated to the disposal,
treatment, or long-term (greater than 90 days) storage of waste materials;
and
(h) Neither Seller, any Subsidiary nor any other person has
improperly disturbed or encroached upon any floodplain areas, waters, or
wetlands associated with any of the Owned Real Properties or Leased Real
Properties in violation of any Environmental Law.
Section 3.17 Financial Information.
---------------------
-59-
<PAGE>
(a) Attached hereto as Schedule 3.17(a) is an unaudited
----------------
statement of combined earnings from the operations of the Transferred
Assets and Assumed Liabilities of the First Facilities and Subsequent
Facilities (as they were comprised on the as of date of such Schedule)
before interest, income taxes, depreciation and amortization ("EBITDA") for
------
the fiscal year ended May 31, 1993 and for the fiscal period ended November
30, 1993 (collectively, the "EBITDA Statements"). The EBITDA Statements
-----------------
present fairly the combined EBITDA of such operations, taken as a whole, as
of the dates and for the periods shown, and were derived from and are in
accordance with the internal books and records of the Subsidiaries as well
as the "Subsidiaries" defined in the First Facilities Agreement (the
"Combined Subsidiaries") and the regularly prepared unaudited internal
----------------------
financial statements of the First Facilities and the Subsequent Facilities,
which are prepared in accordance with the generally accepted accounting
principles utilized in the preparation of the published financial
statements of Seller.
(b) Attached hereto as Schedule 3.17(b) is an internally
----------------
prepared unaudited combined statement of certain assets and liabilities of
the First Facilities and the Subsequent Facilities as of November 30, 1993
(the "Balance Sheet"; collectively, the Balance Sheet and the EBITDA
-------------
Statements are the "Financial Schedule"). The Balance Sheet has been
------------------
prepared from, and is in accordance with, the internal books and records of
the Combined Subsidiaries and presents fairly the financial condition of
the First Facilities and the Subsequent Facilities with respect to the
Transferred Assets and Assumed Liabilities that are the subject of this
Agreement and the First Facilities Agreement, taken as a whole, as of the
date shown. The Balance Sheet was prepared in accordance with Seller's
practices for the preparation of internal financial statements,
consistently applied, and is in accordance with the generally accepted
accounting principles utilized in the preparation of the published
financial statements of Seller.
(c) Notwithstanding the foregoing, (i) the Financial Schedule
does not (A) reflect all intercompany eliminations, adjustments and
accruals that are reflected in financial statements of Seller, (B) reflect
any reserves for the Unusual Proceedings, (C) reflect any anticipation of
the divestiture of the Transferred Assets that are the subject of this
Agreement and the First Facilities Agreement and any adjustments to the
carrying values of such assets occasioned thereby, (D) contain footnotes or
other explanatory material associated with financial statements prepared in
accordance with generally accepted accounting principles, or (E) contain
normal year-end
-60-
<PAGE>
adjustments with respect to interim periods, (ii) the EBITDA Statements do
not reflect allocations of indirect costs and non-hospital overhead or the
corresponding cost reimbursement impact of claiming such costs in a Cost
Report relating to First Facilities or Subsequent Facilities, and (iii)
certain earnings, assets and liabilities have been excluded from the EBITDA
Statements or the Balance Sheets, as applicable, as noted in the footnotes
or other explanatory material associated with the Financial Statements. In
addition, the Financial Schedule is to be read in conjunction with, and is
subject to, all notes and other explanatory material set forth therein.
(d) The Balance Sheet reflects the amount of Receivables, as
well as "Receivables" as defined in the First Facilities Agreement
(together, the "Combined Receivables"), which for this purpose may include
--------------------
Eligible Receivables (including "Eligible Receivables" as defined in the
First Facilities Agreement) as of the date thereof, net of allowances
customarily recorded by the Combined Subsidiaries for uncollectible and
doubtful accounts, and contractual allowances pursuant to agreements with
Payors, all in conformity with Seller's practices for the preparation of
internal financial statements and in accordance with the generally accepted
accounting principles utilized in the preparation of the published
financial statements of the Seller. To the knowledge of Seller and each
such Subsidiary, all such Combined Receivables included in the Balance
Sheet represent amounts validly owed to the applicable Combined Subsidiary
by reason of the provision of goods, services and other consideration by
such Combined Subsidiary, and, to the knowledge of Seller and each such
Combined Subsidiary, are not valued in excess of the amounts expected to be
collected with respect thereto. Each such Combined Subsidiary maintains
its accounting records in sufficient detail to substantiate the Combined
Receivables reflected on the Balance Sheet. Since the date of Seller's
most recent audited financial statements, neither Seller nor any such
Combined Subsidiary has changed any principle or practice with respect to
the recordation of accounts receivable or the calculation of reserves
therefor, or any material collection, discount or write-off policy or
procedure.
Section 3.18 Changes Since Balance Sheet. Since the date of the
---------------------------
Balance Sheet and up to and including the date of this Agreement, other
than as contemplated or permitted by this Agreement, the Subsidiaries have
conducted the businesses represented by the Transferred Assets only in the
ordinary and normal course, except for (i) matters associated with the
Unusual Proceedings, (ii) as shown on Schedule 3.18, (iii) the institution
-------------
or
-61-
<PAGE>
completion of compliance programs, or (iv) events in anticipation of the
divestiture of the Transferred Assets, and there has not been:
(a) Any entry into or termination by Seller or a Subsidiary of
any material commitment, contract, agreement or transaction (including,
without limitation, any borrowing or lending transaction or capital
expenditure) related to the Transferred Assets except for transactions in
the ordinary course of business and renegotiation of credit agreements to
which Seller and certain of its subsidiaries are parties which
renegotiations will not have a Material Adverse Effect on the Transferred
Assets or on any Facility;
(b) Any casualty, physical damage, destruction or physical loss
respecting, or change in the physical condition of, any Facility or
Equipment that has had a Material Adverse Effect on a Facility;
(c) Any transfer of or rights granted under any contract which
would have been an Assumed Contract on the date of the Balance Sheet except
for transactions in the ordinary course of business;
(d) Other than in the ordinary course of business, (i) any sale
or other disposition of any fixed asset included in the Balance Sheet
having a net book value in excess of $100,000, or (ii) any material
mortgage, pledge or imposition of any lien or other encumbrances on any
such asset, or (iii) sales or dispositions of, or the imposition of
material encumbrances on, fixed assets included in such Balance Sheet
having a net book value that exceeds $1,000,000 in the aggregate, or (iv)
any sale or other disposition of Inventories included in the Balance Sheet;
(e) Any material amendment (other than general amendments which
the carrier makes for a category of policy) or termination of any material
insurance policy or failure to renew any material insurance policy covering
the Transferred Assets;
(f) Any default or breach by Seller or a Subsidiary under any
contract that would have been an Assumed Contract on the date of the
Balance Sheet which, when viewed individually or in the aggregate of all
such breaches or defaults, has had a Material Adverse Effect on any
Facility;
-62-
<PAGE>
(g) Any material adverse change in the trend of the business,
financial condition or results of operations of any Facility as compared to
the trend of the business, financial condition or results of operations, as
applicable, of such Facility for the two year period ended November 30,
1993; or
(h) Any increase made in the compensation levels of any chief
executive officer or chief financial officer of any Facility, or any
general increase made in the compensation levels of the other Retained
Employees, except in the ordinary course of business.
Section 3.19 Transferred Business Names. Seller or one of the
--------------------------
Subsidiaries owns or has the right to use the Transferred Business Names,
free of any liens. Schedule 2.1(h) sets forth for each Transferred
---------------
Business Name, if any, that is the subject of a trademark registration the
date of registration, the registration number and the expiration date. To
the knowledge of Seller and the Subsidiaries, no aspect of registered
trademarks included in the Transferred Business Names, if any, has been
adjudged invalid or unenforceable or has been cancelled or revoked. Except
as set forth on Schedule 3.19, to the knowledge of Seller and the
-------------
Subsidiaries, the use by the Subsidiaries of the Transferred Business Names
in connection with the Facilities does not conflict with or violate any
valid rights of third parties, including any patents, trademarks, trade
names or copyrights of others, in any way which would have a Material
Adverse Effect on the Transferred Assets or a Facility; neither Seller nor
any Subsidiary has received any notice of a conflict with the asserted
rights of others in connection therewith which, if determined adversely,
would have a Material Adverse Effect on any Facility. Neither Seller nor
any of the Subsidiaries is obligated to pay any amount, whether as a
royalty, license fee or other payment, to any person in order to use any of
the Transferred Business Names.
Section 3.20 Compliance with Laws and Accreditation. To Seller's and
--------------------------------------
each Subsidiary's knowledge, Seller and each Subsidiary has complied in all
material respects with all laws, regulations and orders, and as materially
required for participation in the Medicare, CHAMPUS and Medicaid
reimbursement programs and is in material compliance with the indigent care
conditions, if any, contained in or related to certificates of need
obtained by it except (a) as set forth in Schedule 3.20, (b) as described
-------------
in Sections 3.10, 3.12, 3.16, and 3.21 and the Schedules, if any related
------------- ---- ---- ---- ---------
thereto, and (c) for matters related to the Unusual Proceedings. With
-63-
<PAGE>
respect to each Facility, Seller has previously delivered to Buyer true and
complete copies of the most recent Joint Commission on Accreditation of
Health Care Organizations ("JCAHO") accreditation survey report and
deficiency list, if any; the most recent Statement of Deficiencies and Plan
of Correction on Form HCFA-2567; the most recent state licensing report and
list of deficiencies, if any; the most recent fire marshall's survey and
deficiency list, if any; and the corresponding plans of correction or other
responses except, in each case, such surveys, reports or deficiency lists
which do not reflect any deficiency which would have a Material Adverse
Effect on any Facility. Seller or the relevant Subsidiary has taken or is
in the process of taking all reasonable steps to correct all material
deficiencies noted therein and a description of any material uncorrected
deficiency is listed in Schedule 3.20. There are no provisions in, or other
-------------
agreements to which Seller or a Subsidiary is a party relating to any
Licenses, which would preclude or limit Buyer from operating the
Transferred Assets substantially as they are now operated and using the
beds of any Facility substantially as they are currently classified.
Section 3.21 Cost Reports, Third Party Receivables and Conditions of
-------------------------------------------------------
Participation. The Cost Reports of the Facilities for Medicare, Medicaid
-------------
(if required) and Blue Cross (if required) reimbursement have been audited
through the periods set forth in Schedule 3.21, and Blue Cross and Medicare
-------------
Cost Reports of the Facilities were filed when due. Except for matters
related to the Unusual Proceedings, and as set forth in Schedule 3.21: to
-------------
the knowledge of Seller, (a) neither Seller nor any Subsidiary has received
notice of any material dispute between a Facility and Blue Cross,
governmental authorities or the Medicare fiscal intermediary regarding such
Cost Reports for periods subsequent to the period specified in Schedule
--------
3.21 other than with respect to adjustments thereto made in the ordinary
----
course of business which do not involve individual amounts in excess of ten
thousand dollars ($10,000) per Cost Report; (b) there are no pending or
threatened material claims by any of such programs against any Facility;
(c) each Facility currently meets, without material exception, the
conditions for participation in the Medicare program; and (d) no Facility
has been subject to loss of waiver of liability for utilization review
denials with respect to any such program during the past two years.
Section 3.22 Medical Staff. Seller has previously delivered to
-------------
Buyer, with respect to each Facility, a true and correct copy of the blank
forms generally used with respect to medical staff privilege and membership
application or delineation of privilege; all current medical staff bylaws,
-64-
<PAGE>
rules and regulations and amendments thereto respecting Facilities; and all
written contracts with physicians, physician groups, or other members of
the medical staffs of the Facilities. With regard to the active medical
staffs of the Facilities, there are no material pending or threatened
disciplinary or corrective actions or appeals therefrom involving physician
applicants or active medical staff members except as set forth in Schedule
--------
3.22. Schedule 3.22 also sets forth a materially complete and accurate
---- -------------
list and description of (a) the name of each member of the medical staff of
each Facility as of the date shown on such Schedule, (b) the approximate
age of each active medical staff member as of such date, (c) the specialty,
if any, of each medical staff member, (d) readily available reports
regarding the number of patient admissions of each medical staff member
for the period shown on such Schedule 3.22, and (e) readily available
-------------
reports regarding the aggregate patient days of patients admitted by each
medical staff member for the period shown on such Schedule 3.22.
-------------
Section 3.23 Hill-Burton Care. Except as set forth in Schedule 3.23,
---------------- -------------
no Subsidiary or Facility has an outstanding loan, grant or loan guarantee
pursuant to the Hill-Burton Act (42 U.S.C. (S)291a, et seq.) and the
transactions contemplated hereby will not result in any obligation on the
part of the Buyer or a Buyer Subsidiary to repay any such loans, grants or
loan guarantees or provide uncompensated care in consideration thereof.
Section 3.24 Assets Used in the Operation of the Facilities. There
----------------------------------------------
are no assets or properties that are used in and necessary for the conduct
of the operations of the Facilities that are owned by Seller and the
Subsidiaries, and which individually or in the aggregate, are necessary for
the operation of the Facilities that are not included in the Transferred
Assets except for such Assumed Contracts which Buyer has elected or will
elect to reject pursuant to Section 2.18. Except as set forth in Schedule
------------ --------
3.24 and subject to Section 2.18, the Transferred Assets include all assets
---- ------------
and properties that are properly recordable on the Balance Sheet, other
than assets and properties disposed of by the Seller or a Subsidiary in
the ordinary course of business since the date of the Balance Sheet and
without violation of this Agreement.
Section 3.25 Taxes. All tax returns of every kind (including,
-----
without limitation, returns of all income taxes, franchise taxes, real and
personal property taxes, intangibles taxes, patient revenue or other
healthcare taxes, withholding taxes, employee compensation taxes and all
other taxes of any kind applicable to Seller or any Subsidiary) that are
due
-65-
<PAGE>
to have been filed in accordance with applicable laws have been duly filed,
and all taxes shown to be due and payable on such returns have been paid in
full.
Section 3.26 Lists of Other Data. Schedule 2.1(f) contains a list,
------------------- ---------------
materially complete and correct as of the dates shown thereon, of the Other
Assigned Contracts, and Schedules 3.26(a) through (h) contain lists
----------------- ---
or other information, materially complete and correct as of the dates shown
thereon, of the following:
(a) The most recent regularly generated depreciation schedules
related to tangible personal property constituting Equipment, together with
copies of such schedules;
(b) A brief description of all insurance in force covering (i)
fixed assets that would constitute Transferred Assets, or (ii) the
operations of any Facility as of such date;
(c) All compensation, bonus, incentive, deferred payments,
retirement, pension, severance, profit-sharing, stock purchase and stock
option plans, group life, automobile, medical, dental, disability, welfare
or other employee benefit plans or insurance policies, and other similar
arrangements (collectively, "Employee Benefit Arrangements") generally
-----------------------------
applicable to the Retained Employees or a substantial part thereof or
generally applicable to the chief executive or chief financial officers, or
a substantial part thereof, of the Facilities as of such date;
(d) The aggregate accrued Paid Time Off for all employees at
each Facility, as of the date shown;
(e) Any contract relating to clean-up, abatement or other
actions in connection with the remediation of any existing environmental
liabilities or relating to the performance of any environmental audit or
study with respect to the Facilities other than with respect to the
Environmental Survey and entered into in the three years preceding the date
hereof;
(f) Any indenture, mortgage, loan, credit or other written
contract under which any of the Subsidiaries, directly or indirectly, is
indebted for money borrowed or is the issuer of any note, bond, indenture
or other evidence of indebtedness for money borrowed or guarantor of
-66-
<PAGE>
similar financial obligations of others, whether or not reflected on the
Balance Sheet;
(g) Any contract with any bank, finance company or similar
organization pursuant to which such organization acquires receivables from
the Subsidiaries; and
(h) Any contract granting any person a lien, security interest
or mortgage on any Transferred Asset (other than Permitted Encumbrances),
including, without limitation, any factoring agreement or agreement for the
assignment of accounts receivable or inventory.
Section 3.27 Certain Transactions. Except as set forth in Schedule
-------------------- --------
3.27, and except for remuneration as employees, since November 30, 1992 (i)
----
no Facility has been a party to any transaction or series of similar
transactions in which the amount involved exceeds $60,000 and in which the
chief executive officer, chief financial officer or medical director of
such Facility has a direct or indirect material interest, and (ii) no chief
executive officer, chief financial officer or medical director of any
Facility has been indebted to Seller or any Subsidiary in an amount in
excess of $60,000.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller, as of the date hereof,
as follows, except as set forth in Schedules numbered in relation to the
Sections set forth below:
Section 4.1 Organization and Corporate Power. Buyer is a corporation
--------------------------------
duly incorporated and validly existing under the laws of, and is authorized
to exercise its corporate powers, rights and privileges and is in good
standing in, the State of Delaware and has full corporate power to carry on
its business as presently conducted and to own or lease and operate its
properties and assets now owned or leased and operated by it and to perform
the transactions on its part contemplated by this Agreement and all other
agreements contemplated hereby.
Section 4.2 Buyer Subsidiaries.
------------------
-67-
<PAGE>
(a) As of each Scheduled Closing, each Buyer Subsidiary will be
a corporation duly organized, validly existing and in good standing under
the laws of its state of incorporation. Each Buyer Subsidiary will have,
at the First Closing and at each Scheduled Closing thereafter, all
requisite power and authority (corporate and otherwise) to carry on its
business as then conducted and to own or lease and operate its properties
and assets then owned or leased and operated by it and to perform the
transactions on its part contemplated by this Agreement and all other
agreements contemplated hereby.
(b) The board of directors of each Buyer Subsidiary and, if
required, its shareholders, will have, by the date of the First Closing,
duly and effectively authorized (i) the purchase of the Transferred Assets
to be purchased by such Buyer Subsidiary; and (ii) the execution, delivery
and performance of the Related Agreements and all other agreements
contemplated hereby and thereby to which such Buyer Subsidiary is a party.
No other corporate act or proceeding on the part of any Buyer Subsidiary,
its board of directors or its shareholders will be necessary to authorize
any Related Agreement or other agreement contemplated hereby and thereby or
the transactions contemplated hereby and thereby.
(c) The Related Agreements and all other agreements contemplated
hereby and thereby to which any Buyer Subsidiary is a party will, as of
each Scheduled Closing, have been duly executed and delivered by each such
Buyer Subsidiary, and each such agreement, when executed and delivered will
constitute, a valid and binding obligation of such Buyer Subsidiary,
enforceable against such Buyer Subsidiary in accordance with its terms,
except as it may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar Laws now or hereafter in effect relating to
creditors' rights generally and that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding may
be brought.
Section 4.3 Authority Relative to this Agreement. The execution,
------------------------------------
delivery and performance of this Agreement and the Related Agreements and
the consummation of the transactions contemplated hereby and thereby have
been duly and effectively authorized by the board of directors of Buyer; no
other corporate act or proceeding on the part of Buyer, its board of
directors or shareholders is necessary to authorize this Agreement, any
such Related Agreement or the transactions contemplated hereby and
-68-
<PAGE>
thereby. This Agreement has been, and each of the Related Agreements
contemplated hereby will, as of each Scheduled Closing, have been, duly
executed and delivered by Buyer and by each applicable Buyer Subsidiary,
and this Agreement constitutes, and each such Related Agreement when
executed and delivered will constitute, a valid and binding obligation of
Buyer and each Buyer Subsidiary party thereto, enforceable against Buyer
and each Buyer Subsidiary party thereto, in accordance with its terms,
except as it may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar Laws now or hereafter in effect relating to
creditors' rights generally and that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding may
be brought.
Section 4.4 Absence of Breach. Subject to the provisions of Sections
----------------- --------
4.5 and 4.6 below regarding private party and governmental consents, and
--- ---
except for compliance with the requirements of the HSR Act and any
regulatory or licensing Laws applicable to the businesses and assets
represented by the Transferred Assets, the execution, delivery and
performance by Buyer of this Agreement and the Related Agreements, and the
execution and delivery by any Buyer Subsidiary of the Related Agreements to
which it is a party, and the performance by the Buyer Subsidiaries of the
transactions to be performed by them and contemplated by this Agreement and
the Related Agreements entered into by the Buyer Subsidiaries, do not, (a)
conflict with or result in a breach of any of the provisions of Charter
Documents of Buyer or of any of the Buyer Subsidiaries, (b) contravene any
Law or cause the suspension or revocation of any License presently in
effect, which affects or binds Buyer or any of the Buyer Subsidiaries or
any of their material properties, or (c) conflict with or result in a
breach of or default under any indenture or loan or credit agreement or any
other agreement or instrument to which Buyer or any of the Buyer
Subsidiaries is a party or by which it or they or any of their properties
may be affected or bound.
Section 4.5 Private Party Consents. Except as set forth on Schedule
---------------------- --------
4.5, the execution, delivery and performance by Buyer of this Agreement and
---
the Related Agreements and the execution and delivery by any Buyer
Subsidiary of the Related Agreements to which it is a party, and the
performance by the Buyer Subsidiaries of the transactions contemplated by
this Agreement and the Related Agreements to be performed by the Buyer
-69-
<PAGE>
Subsidiaries, do not require the authorization, consent or approval of any
non-governmental third party.
Section 4.6 Governmental Consents. The execution, delivery and
---------------------
performance by Buyer of this Agreement and the Related Agreements, and the
execution and delivery by any Buyer Subsidiary of the Related Agreements to
which it is a party, and the performance by the Buyer Subsidiaries of the
transactions contemplated by this Agreement and the Related Agreements to
be executed, delivered or performed by the Buyer Subsidiaries, do not
require the authorization, consent, approval, certification, license or
order of, or any filing with, any court or governmental agency, except for
compliance with the HSR Act and except for such governmental
authorizations, consents, approvals, certifications, licenses and orders
that customarily accompany the transfer of health care facilities such as
the Facilities.
Section 4.7 Brokers. Except as set forth on Schedule 4.7, no broker,
------- ------------
finder, or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with this Agreement or the
transactions contemplated hereby based upon any agreements or arrangements
or commitments, written or oral, made by or on behalf of Buyer or any of
its Affiliates. Buyer shall be solely responsible for the payment of any
such fee or commission to any person or entity listed on Schedule 4.7 as an
------------
exception to the foregoing.
Section 4.8 Qualified for Licenses. Buyer or a Buyer Subsidiary is
----------------------
qualified to obtain any Licenses and program participations necessary for
the operation by Buyer or a Buyer Subsidiary of the Transferred Assets as
of the relevant Scheduled Closing in the same manner as the Transferred
Assets are presently operated by Seller and the Subsidiaries.
Section 4.9 Financial Ability to Perform. Buyer has liquid capital
----------------------------
or committed sources therefor sufficient to permit it to perform timely its
obligations hereunder, including, but not limited to, the payment of the
Tentative Purchase Price to Seller at the Scheduled Closings and the other
payments to Seller required hereunder. Promptly after its receipt of
letters of commitment or other documents related to the financing of its
obligations hereunder, Buyer will provide copies of the same to Seller.
Section 4.10 No Knowledge of Seller's Breach. Neither Buyer nor, to
-------------------------------
the knowledge of Buyer, any of its Affiliates has knowledge of any
-70-
<PAGE>
breach of any representation or warranty by Seller or of any other
condition or circumstance that would excuse Buyer from its timely
performance of its obligations hereunder. Buyer shall notify Seller as
promptly as practicable if any such information comes to its attention
before any relevant Closing Date.
Section 4.11 No Assurance. Buyer acknowledges and agrees that the
------------
rates or bases used in calculating payments or reimbursements to it or
a Buyer Subsidiary by any Payor (including but not limited to Medicare) may
differ from the rates and bases used in calculating such payments or
reimbursements to Seller and the Subsidiaries. In entering into the
transactions contemplated by this Agreement and the Related Agreements,
Buyer is relying solely on the express representations, warranties and
covenants of Seller and the Subsidiaries contained in this Agreement and
the Related Agreements and upon no other representations or statements of
Seller, the Subsidiaries or any of their representatives, and acknowledges
and agrees that nothing in this Agreement or the Related Agreements shall
be deemed to create any implied duty, disclosure obligation or
responsibility on the part of Seller or the Subsidiaries. Buyer further
acknowledges that during the course of the due diligence investigation,
material information related to the matters that are the subject of the
Unusual Proceedings may not have been discovered by or disclosed to it.
Seller represents and warrants that, at those scheduled confidential
meetings held among counsel for Buyer and Seller on the dates referenced in
Schedule 4.11, which meetings were held for the purpose of conducting
-------------
Buyer's due diligence regarding the Unusual Proceedings, statements of fact
concerning the Unusual Proceedings made by Seller's counsel present at such
meetings were not materially inaccurate.
ARTICLE 5
COVENANTS OF EACH PARTY
Section 5.1 Efforts to Consummate Transactions. Subject to the terms
----------------------------------
and conditions herein provided including, without limitation, Articles 8
----------
and 9 hereof, each of the parties hereto agrees to use its reasonable
-
commercial efforts to take, or to cause to be taken, all reasonable actions
and to do, or to cause to be done, all reasonable things necessary, proper
or advisable under applicable Laws to consummate and make effective, as
soon as reasonably practicable, the Transactions contemplated hereby,
including the satisfaction of all conditions thereto set forth herein.
Such actions shall include, without limitation, exerting their reasonable
efforts to
-71-
<PAGE>
obtain the consents, authorizations and approvals of all private parties
and governmental authorities whose consent is reasonably necessary to
effectuate the Transactions contemplated hereby, and effecting all other
necessary registrations and filings, including but not limited to filings
under Laws relating to the transfer or obtaining of necessary Licenses,
under the HSR Act and all other necessary filings with governmental
authorities. Inasmuch as the Transactions in respect of the First
Facilities may be consummated without regard to consummation of the
transactions contemplated by the Subsequent Facilities Agreement, the
parties hereby agree that, in order potentially to expedite the timing of
the First Closing, the parties will make separate filings under the HSR Act
with respect to the First Facilities and the Second Facilities. The
foregoing notwithstanding, it shall be the responsibility of Buyer to use
its reasonable commercial efforts and to act diligently and at its expense
to obtain any authorizations, approvals and consents in connection with
acquiring Licenses and program participations that will permit it to
operate the Facilities after the Scheduled Closings, provided that Buyer
--------
will seek to obtain Licenses and program participations subject to the
existing conditions under which the Subsidiaries operate the Facilities and
will not seek to change the same until the Transferred Assets and Assumed
Liabilities respecting the Facilities in question have been transferred to
and assumed by Buyer. Seller and its Subsidiaries shall cooperate with
Buyer's efforts to obtain the requisite regulatory consents, provided
neither Seller nor any of its Subsidiaries shall be obligated to incur any
liabilities or assume any obligations in connection therewith. Other than
Buyer's and Seller's obligations under Section 5.5, neither party shall
-----------
have any liability to the other if, after using its reasonable commercial
efforts (and, in the case of Buyer's efforts to obtain requisite Licenses,
acting diligently), it is unable to obtain any consents, authorizations or
approvals necessary for such party to consummate the Transactions. As used
herein, the terms "reasonable commercial efforts" or "reasonable efforts"
----------------------------- ------------------
do not include the provision of any consideration to any third party or the
suffering of any economic detriment to a party's ongoing operations for the
procurement of any such consent, authorization or approval except for the
costs of gathering and supplying data or other information or making any
filings, fees and expenses of counsel and consultants and for customary
fees and charges of governmental authorities and accreditation
organizations.
Section 5.2 Cooperation; Regulatory Filings. Prior to and after the
-------------------------------
Final Closing, upon prior reasonable written request, each party agrees to
cooperate with the other in every reasonable commercial way to consum-
-72-
<PAGE>
mate the Transactions. Notwithstanding the foregoing, all analyses,
appearances, presentations, memoranda, briefs, arguments, opinions and
proposals made or submitted by or on behalf of either party hereto in
connection with proceedings under or relating to the HSR Act or any other
federal or state antitrust or fair trade law, or made or submitted by or on
behalf of Buyer in connection with proceedings to obtain the Licenses and
program participations referred to in Section 5.1 hereof, shall be subject
-----------
to the joint approval or disapproval and the joint control of Buyer and
Seller, acting with the advice of their respective counsel, it being the
intent of the foregoing that the parties hereto will consult and cooperate
with one another, and consider in good faith the views of one another, in
connection with any such analysis, presentation, memorandum, brief,
argument, appearance, opinion or proposal; provided that nothing herein
--------
shall prevent either party hereto or any of their Affiliates or their
authorized representatives from (a) making or submitting any such analysis,
appearance, presentation, memorandum, brief, argument, opinion or proposal
in response to a subpoena or other legal process or as otherwise required
by Law, or (b) submitting factual information to the United States
Department of Justice, the Federal Trade Commission, any other governmental
agency or any court or administrative law judge in response to a request
therefor or as otherwise required by Law.
Section 5.3 Further Assistance. From time to time, at the reasonable
------------------
request of either party, whether on or after a Scheduled Closing, without
further consideration, either party, at its expense and within a reasonable
amount of time after request hereunder is made, shall execute and deliver
such further instruments of assignment, transfer and assumption and take
such other action as may be reasonably required to more effectively assign
and transfer the Transferred Assets to, and vest the Assumed Liabilities
in, Buyer, deliver or make the payment of the Purchase Price to Seller or
any amounts due from one party to the other pursuant to the terms of this
Agreement or confirm Seller's ownership of the Excluded Assets and
obligations with respect to the Excluded Liabilities.
Section 5.4 Cooperation Respecting Proceedings. After the Scheduled
----------------------------------
Closings, upon prior reasonable written request, each party shall cooperate
with the other, at the requesting party's expense (but including only out-
of-pocket expenses to third parties and not the costs incurred by any party
for the wages or other benefits paid to its officers, directors or
employees), in furnishing information, testimony and other assistance in
connection with any inquiries, actions, tax or Cost Report audits, proceed-
-73-
<PAGE>
ings, arrangements or disputes involving either of the parties hereto
(other than in connection with disputes between the parties hereto) and
based upon contracts, arrangements or acts of Seller or any of the
Subsidiaries which were in effect or occurred on or prior to any Scheduled
Closing and which relate to the Transferred Assets, including, without
limitation, arranging discussions with (and the calling as witness of)
officers, directors, employees, agents, and representatives of Buyer.
Section 5.5 Expenses. Whether or not the Transactions contemplated
--------
hereby are consummated, except as otherwise provided in this Agreement, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses. Notwithstanding the foregoing:
(a) Costs associated with preliminary title reports and title
policies shall be borne by Seller up to the costs that would have been
incurred had the title policies been standard coverage policies of title
insurance, and the remaining costs, if any, including costs for Extended
Coverage and any surveys in connection therewith, shall be borne by Buyer;
(b) All costs of the Environmental Survey referred to in Section
-------
6.2(b) shall be borne one-half by Buyer and one-half by Seller, other than
------
any cost incurred in connection with any "Phase II" investigation conducted
by Buyer's environmental consultant (which shall be borne by Buyer);
(c) All escrow charges, appraisal fees, and charges of any
neutral independent public accountant or mediator, and related costs, shall
be borne one-half by Buyer and one-half by Seller (it being agreed that
each party shall bear the costs of its own independent public accountant or
designated mediator);
(d) All recording costs and charges respecting real property
will be borne one-half by Seller and one-half by Buyer;
(e) All transfer taxes respecting real property will be borne
one-half by Buyer and one-half by Seller;
(f) All fees and expenses relating to the filings under the HSR
Act shall be borne by the party incurring such fees and expenses;
-74-
<PAGE>
(g) All fees and charges of governmental authorities and
accreditation agencies in connection with the transfer, issuance or
authorization of any License, accreditation or program participation shall
be borne by Buyer;
(h) All fees or costs associated with the issuance of any bond
or the establishment of any escrow required by Section 2.10(a) shall be
---------------
borne by Buyer;
(i) All fees, charges or costs (other than internal costs of
Seller or any Subsidiary), including auditing fees and expenses, incurred
as a result of Buyer's compliance with the Securities Exchange Act of 1934,
as amended, or the Securities Act of 1933, as amended, and the rules and
regulations thereunder, shall be borne by Buyer;
(j) Out-of-pocket costs incurred by Seller and the Subsidiaries
in connection with providing transitional assistance to Buyer shall be
borne by Buyer, whether such assistance is provided before or after a
Scheduled Closing, including costs associated with attendance at meetings
requested by Buyer;
(k) All liabilities or obligations of Seller or a Subsidiary for
Taxes in the nature of sales taxes incurred as a result of the sale of the
Transferred Assets hereunder to Buyer shall be borne one-half by Seller and
one-half by Buyer; and
(l) All fees, charges and costs of economists and other experts,
if any, jointly retained by Buyer and Seller in connection with submissions
made to any government agency and advice in connection therewith respecting
approval of the Transactions, including proceedings under the HSR Act, will
be borne one-half by Buyer and one-half by Seller.
All such charges and expenses shall be promptly settled between the parties
at the relevant Scheduled Closing or upon termination or expiration of
further proceedings under this Agreement, or with respect to such charges
and expenses not determined as of such time, as soon thereafter as is
reasonably practicable.
Section 5.6 Announcements; Confidentiality. Prior to the Final
------------------------------
Closing Date, no press or other public announcement, or public statement or
comment in response to any inquiry, relating to the transactions contem-
-75-
<PAGE>
plated by this Agreement shall be issued or made by Buyer or Seller
or any Subsidiary without the joint approval of Buyer and Seller; provided
--------
that a press release or other public announcement, regulatory filing,
statement or comment made without such joint approval shall not
be in violation of this Section if it is made in order to comply with
applicable securities Laws or stock exchange policies and in the reasonable
judgment of the party making such release or announcement, based upon
advice of counsel, prior review and joint approval, despite reasonable
efforts to obtain the same, would prevent dissemination of such release or
announcement in a timely enough fashion to comply with such Laws or
policies, provided that in all instances prompt notice from one party to
--------
the other shall be given with respect to any such release, announcement,
statement or comment. Subject to the foregoing, the parties hereto
recognize and agree that all information, instruments, documents and
details concerning the businesses of Buyer, Seller and the Subsidiaries are
strictly confidential, and Seller and Buyer expressly covenant and agree
with each other that, prior to and after the Scheduled Closings, they will
not, nor will they allow any of their respective officers, directors,
employees, representatives or agents (including professional advisors) to
disclose or publicly comment upon any matters relating to the business of
the other or relating to this Agreement, including, without limitation, the
terms, timing or progress of the transactions contemplated hereby, or its
negotiation, terms, provisions or conditions, including Purchase Price,
except for disclosure to their respective professional advisors and lenders
or prospective financing sources (each of whom shall agree not to disclose
the same) which is reasonably necessary to effectuate the Transactions
contemplated hereby and in a manner consistent with the provisions of this
Agreement. Each party shall keep all information (i) obtained from the
other either before or after the date of this Agreement, or (ii) related to
Buyer's proposed purchase of the Transferred Assets, Seller's proposed sale
of the Transferred Assets, the contents of this Agreement or the
negotiation of this Agreement confidential, and neither party shall reveal
such information to, nor produce copies of any written information for, any
person outside its management group or its professional advisors (including
lenders and prospective financing sources) without the prior written
consent of the other party, unless such party is compelled to disclose such
information by judicial or administrative process or by any other
requirements of Law or disclosure is reasonably necessary to obtain a
License or a consent listed on the Schedule of Required Consents. If the
Transactions contemplated by this Agreement should fail to close for any
reason, each party shall return to the other as soon as practicable all
originals and copies of written information
-76-
<PAGE>
provided to such party by or on behalf of the other party and none of such
information shall be used by either party, or their employees, agents or
representatives in the business operations of any person. Notwithstanding
the foregoing, (i) each party's obligations under this Section shall not
apply to any information or document which is or becomes available to the
public other than as a result of a disclosure by the other party in
violation of this Agreement or other obligation of confidentiality under
which such information may be held or becomes available to the party on a
non-confidential basis from a source other than the other party or its
officers, directors, employees, representatives or agents and (ii) without
the prior written consent of Seller, or except as may be required by Law
(as determined by the written opinion of independent counsel in form and
substance satisfactory to Seller) the schedules to this Agreement shall not
be disclosed to or filed with any person (including any governmental entity
or regulatory board) if such filing or disclosure could result in such
schedules becoming available to the public. The parties' obligations under
this Section shall survive the termination of this Agreement. Nothing in
this Section shall, or is intended to, impair or modify any of the rights
or obligations of Buyer or its Affiliates under that certain letter
agreement dated as of September 15, 1993, all of which remain in effect
until termination of such letter agreement in accordance with its terms.
Section 5.7 Preservation of and Access to Certain Records.
---------------------------------------------
(a) As set forth in Section 2.2(e), all or any portion of the
------
medical, clinical and other records directly or indirectly associated with
the admission, care and treatment of patients on or prior to the relevant
Closing Date on which the relevant Facility is transferred (collectively,
for all Facilities, the "Patient Records") and all financial and other
---------------
records of, or located at, a Facility for the period ending on or prior to
the relevant Closing Date, whether or not maintained at or by a Facility
(the Patient Records and such other records for all Facilities are
collectively referred to as the "Hospital Records") shall be Excluded
----------------
Assets. Notwithstanding the foregoing, the parties will cooperate in
providing copies and access to such records as set forth below.
(b) Notwithstanding that the Hospital Records are Excluded
Assets, to the extent required by applicable Law or at Seller's election,
Seller may choose not to remove the Hospital Records from a transferred
Facility or otherwise acquire possession of them after a Scheduled Closing.
Unless and until removed by Seller, the Buyer shall, in accordance with
-77-
<PAGE>
applicable Laws, maintain the Hospital Records at the Facilities (or at
such other mutually approved locations) at Buyer's cost, and as agent of
and bailee for Seller, until the expiration of seven (7) years from the
relevant Scheduled Closing (and, if at the expiration thereof any tax or
Payor audit or judicial proceeding is in progress or the applicable statute
of limitations has been extended, for such longer period as such audit or
proceeding is in progress or such statutory period is extended)(the
"Document Retention Period"). After a Scheduled Closing and subject to
-------------------------
applicable Laws, Buyer shall grant Seller full access to the Hospital
Records (including any Patient Records) as needed for any lawful purpose
(including Seller's inspection and copying of same), and Seller shall have
the same rights of access to inspect and copy (at Seller's cost) any or all
of the Hospital Records that Seller had prior to the Scheduled Closing.
Buyer shall instruct the appropriate employees of the Facilities to
cooperate in providing access to such records to Seller and its authorized
representatives as contemplated herein. Access to such records shall be,
wherever reasonably possible, during normal business hours, with reasonable
prior written notice to Buyer of the time when such access shall be needed.
Seller's employees, representatives and agents shall conduct themselves in
such a manner so that Buyer's normal business activities shall not be
unduly or unnecessarily disrupted. After the expiration of the
aforementioned Document Retention Period, Buyer shall not, without ninety-
one (91) days' prior written notification to Seller, destroy any Hospital
Records in its possession. Within ninety (90) days after its receipt of
such notice of intent to destroy, Seller shall have the right, at its own
expense, to require Buyer to deliver any such records to Seller in
accordance with Seller's reasonable instructions. Buyer shall adopt a
record retention policy with respect to the Hospital Records which requires
that all Hospital Records be maintained for the Document Retention Period
and destroyed only after compliance with the notice provisions of this
Subsection (b) (including the passage of time), and shall take all
--------------
reasonable steps necessary to inform its employees of such policy.
(c) Buyer acknowledges and agrees that Seller shall have the
right to remove, and may remove, from time to time on or prior to the
relevant Closing Date and during the Document Retention Period any or all
of the Hospital Records. In the event of Seller's removal of any Hospital
Records from a Facility, it shall, at Seller's cost and subject to
applicable Laws, provide Buyer with copies (or originals, if required by
applicable law or accreditation standards) of the following Hospital
Records if Buyer elects to retain such copies: (i) the Patient Records for
patients who are patients
-78-
<PAGE>
of the Facilities at the relevant Scheduled Closing or who are the subject
of Receivables transferred to Buyer hereunder, (ii) the personnel records
of the Hired Employees, and (iii) any records Buyer would be required to
have to comply with accreditation standards. If the Hospital Records are
removed by Seller, then it shall maintain such Hospital Records at its
expense during such period of time and at such location as is deemed
appropriate by Seller in its sole and absolute discretion. For so long as
the Hospital Records are maintained by Seller, Seller shall make Hospital
Records (other than those protected by or subject to the attorney-client
privilege) available to Buyer, subject to applicable Laws, as needed by
Buyer for any lawful purpose and if reasonably necessary to permit Buyer to
operate the Facilities or other Transferred Assets. Seller shall instruct
its appropriate employees to cooperate in providing access to such records
to Buyer and its authorized representatives as contemplated herein. Buyer's
access to such Hospital Records shall be during normal business hours, with
reasonable prior written notice to Seller of the time when such access
shall be needed. Buyer may make copies of or extracts from any such
Hospital Records to which Buyer has access hereunder at Buyer's sole cost
and expense. Notwithstanding the foregoing, Buyer's access to, or right to
copies of, any Patient Records shall be subject to any applicable Law,
accreditation standard or rule of confidentiality or privilege.
(d) After Closing, Buyer or the applicable Buyer Subsidiary
shall have the right to assign to an entity which purchases from Buyer or a
Buyer Subsidiary a Facility or substantially all the assets of a Facility,
all of the rights of Buyer under this Section 5.7, provided that such
-----------
entity expressly assumes all obligations of Buyer under this Section 5.7
-----------
with respect to the purchased Facility.
ARTICLE 6
ADDITIONAL COVENANTS OF SELLER
Seller hereby additionally covenants, promises and agrees as follows:
Section 6.1 Conduct Pending Closing. Prior to consummation of the
-----------------------
Transactions contemplated hereby or the termination or expiration of this
Agreement pursuant to its terms, unless Buyer shall otherwise consent in
writing, which consent shall not be unreasonably withheld or delayed, and
except for actions taken pursuant to Assumed Contracts, or which arise from
or are related to the anticipated transfer of the Transferred Assets, the
conduct or resolution of the Unusual Proceedings or effectuation of ongoing
-79-
<PAGE>
compliance programs, or as otherwise contemplated by this Agreement or
disclosed in Schedule 6.1 or another Schedule to this Agreement, Seller
------------
shall, and shall cause the Subsidiaries to:
(a) Conduct the business represented by, and otherwise deal
with, the Transferred Assets only in the usual and ordinary course,
materially consistent with practices followed prior to the execution of
this Agreement;
(b) Use reasonable efforts to keep intact the Transferred Assets
and the business they represent and to preserve relationships beneficial to
such business that doctors, patients, Payors, suppliers, employees and
others have with the Facilities;
(c) Except as required by their terms, not amend, terminate,
renew, fail to renew or renegotiate any material contract, except in the
ordinary course of business and consistent with practices of the recent
past, or default (or take or omit to take any action that, with or without
the giving of notice or passage of time, would constitute a default) in any
of its obligations under any such contracts, that would be an Assumed
Contract as of the date hereof;
(d) Not (i) sell, lease, transfer or dispose of, or make any
contract for the sale, lease, transfer or disposition of, any assets or
properties which would be included in the Transferred Assets in an amount
in excess of $1,000,000 in the aggregate (other than sales in the ordinary
course of business); (ii) incur, assume, guaranty, or otherwise become
liable in respect of any indebtedness for money borrowed which would result
in Buyer assuming such liability hereunder after the Closing; (iii)
purchase or make any contract for the purchase of a material amount of
assets or properties which would be included in the Transferred Assets
(other than purchases in the ordinary course of business and other than
capital expenditures within the aggregate thresholds set forth in clause
(v) below); (iv) accelerate or delay the purchase of Inventory, or the
payment of amounts due to or from the Subsidiaries in a manner inconsistent
with past practice; (v) make any new commitments which would require an
expenditure of more than $50,000 in the aggregate other than in the
ordinary course of business; (vi) encumber or voluntarily subject to any
lien any Transferred Asset (except for Permitted Encumbrances); or (vii)
assign or transfer accounts receivable to collection agencies in a manner
inconsistent with past practice.
-80-
<PAGE>
(e) Maintain in force and effect the insurance policies
identified in Section 3.26(b);
---------------
(f) Not enter into any contract or amendment of a contract that,
had such contract or amendment been entered into prior to the date hereof,
would have been included on Schedule 2.1(f), unless Buyer has failed to
---------------
disapprove of such contract or amendment in a written notice to Seller
given within two (2) business days of Seller's written notice to Buyer of
such contract or amendment accompanied by a copy thereof, provided that
--------
Buyer's disapproval of such contract or amendment shall not be
unreasonable, and provided further that any contract entered into in
--------
violation of this Section 6.1(f) shall be subject to the provisions of
--------------
Section 2.18;
------------
(g) Not grant any general or uniform increase in the rates of
pay or benefits to Retained Employees (or a class thereof) or any increase
in salary or benefits of any chief executive or financial officer of any
Facility, except for compensation previously agreed to prior to the date
hereof; or
(h) Subject to Section 6.3, not take any action which would
-----------
cause any of Seller's representations and warranties set forth in Article 3
---------
to be false as of the relevant Scheduled Closing;
provided that nothing in this Section shall (i) obligate Seller or any
--------
Subsidiary to make expenditures other than in the ordinary course of
business and consistent with practices of the recent past or to otherwise
suffer any economic detriment, (ii) preclude Seller from paying, prepaying
or otherwise satisfying any liability which, if outstanding as of a Closing
Date, would be an Assumed Liability or an Excluded Liability, (iii)
preclude Seller from incurring any liabilities or obligations to any third
party in connection with obtaining such party's consent to any transaction
contemplated by this Agreement or the Related Agreements provided such
--------
liabilities and obligations under this clause (iii) shall be Excluded
------------
Liabilities pursuant to Section 2.4(h) hereof if not approved in advance by
--------------
Buyer (which approval shall not be unreasonably withheld), or (iv) preclude
Seller from instituting or completing any program designed to promote
compliance or comply with Laws or other good business practices respecting
the Facilities.
-81-
<PAGE>
Section 6.2 Access and Information; Environmental Survey; Remediation
---------------------------------------------------------
or Adjustment.
-------------
(a) Subject to the restrictions set forth in Section 5.6
-----------
respecting confidentiality and provided that Buyer has complied with each
and every provision thereof, Seller shall, and shall cause the Subsidiaries
to, afford Buyer, and the counsel, accountants and other representatives of
Buyer, reasonable access, throughout the period from the date hereof to the
relevant Closing Date, to the Transferred Assets and the employees,
personnel and medical staff associated therewith and all the properties,
books, contracts, commitments, Cost Reports and records respecting the
Transferred Assets (regardless of where such information, may be located)
which Seller has or to which it has access. Such access shall be afforded
to Buyer after no less than 24 hours prior written notice, during normal
business hours and only in such manner so as not to disturb patient care or
to interfere with the normal operations of the Facilities; provided,
--------
however, that, notwithstanding the foregoing and subject to the provisions
concerning nondisclosure set forth in Section 5.6, without first obtaining
-----------
the written consent of Mr. Donald Thayer which consent shall not be
unreasonably withheld, neither Buyer nor its counsel, accountants and other
representatives shall tour or visit the Facilities or contact any of the
employees, personnel or medical staff thereof; and provided further that
--------
until the first to occur of the Termination Date or the Final Closing,
under no circumstances shall Buyer directly or indirectly solicit the
employment of any employees of Seller or its Subsidiaries, except as Hired
Employees pursuant to the terms hereof or except as may be permitted with
the prior written consent of a responsible officer of Seller. Seller's
covenants under this Section are made with the understanding that Buyer
shall use all such information in compliance with all Laws. The foregoing
notwithstanding, Buyer acknowledges and agrees that Buyer's access to the
books and records of the Transferred Assets shall not include access to,
and Seller shall not have any obligation to deliver to Buyer, any
information concerning any alleged dispute or any pending litigation,
investigation or proceeding involving Seller or its Affiliates that is
protected by or subject to the attorney-client privilege, or the disclosure
of which is restricted by an agreement entered into in connection with such
dispute, litigation, investigation or proceeding or an order entered by any
court, or (in the case of the Unusual Proceedings) certain non-public
information; moreover, Buyer shall not have access to patient or employee
records or any other records the disclosure of which would be prohibited by
any Law, accreditation standards, or rule or agreement (express or implied)
of
-82-
<PAGE>
confidentiality, except that Buyer may be granted access to such records to
the extent they are appropriately redacted and in conformity with such
other reasonable procedures as may be required to conform to any such
requirements of Law, accreditation standards or rule or agreement of
confidentiality.
(b) Seller has provided to Buyer copies of an environmental
survey conducted with respect to each of the Facilities (the "Environmental
-------------
Survey"). The Environmental Survey was conducted by an environmental
------
consulting firm or firms (the "Consultant") in accordance with applicable
----------
professional standards in effect at the time the Environmental Survey was
conducted and such reasonable procedures as were determined by Seller. In
the event of a disagreement between Buyer and Seller concerning the
procedures employed by the Consultant, Buyer may at Buyer's expense employ
a separate environmental consultant to conduct such procedures requested by
Buyer (subject to Seller's prior approval of such procedures, which shall
not unreasonably be withheld), and the findings of the Buyer's
Environmental consultant shall be included as an addendum to the
Environmental Survey. The results of any such Environmental Survey shall
be delivered to and owned by Seller, and all proceedings in connection with
the Environmental Survey and the results thereof shall be subject to the
confidentiality provisions of Section 5.6. Buyer acknowledges and agrees
-----------
that the Environmental Survey is and shall be only an initial "Phase I"
environmental site assessment. If subsequently determined by Seller, the
Consultant and the Buyer, to be necessary or prudent to conduct sampling,
laboratory analyses, or additional investigation work at any of the
Facilities, Seller shall direct the Consultant to undertake a further
"Phase II" investigation involving additional investigation and appropriate
sampling and laboratory analyses respecting such Facilities the results of
which are to be included in the Environmental Survey. In any "Phase II"
investigation, Seller shall give Buyer no less than 24 hours' notice before
the Consultant enters onto any Facility, and the "Phase II" Environmental
Survey shall be conducted so as not to interfere with the normal operation
of the Facilities. Buyer shall be permitted to have one of its employees
or agents present during all inspections of, and sample gatherings
(including borings) from the soil or any floor tile, insulation or other
internal component of, a Facility and shall be entitled to split samples
upon Buyer's request. In the event that Buyer considers it necessary to
conduct any "Phase II" investigation work that Seller refuses to order,
Buyer may at Buyer's expense employ a separate environmental consultant to
conduct such "Phase II" investigation work at least thirty (30) days before
the First Closing.
-83-
<PAGE>
Buyer shall give Seller no less than 24 hours' notice before Buyer's
environmental consultant enters onto any Facility, and any such "Phase II"
work performed by Buyer's environmental consultant shall be conducted so as
not to interfere with the normal operations of the Facilities. Seller shall
be permitted to have one of its employees or agents present during all
inspections of and sample gatherings (including borings) from the soil or
any floor tile, insulation, or other internal component of a Facility
performed by Buyer's environmental consultant and shall be entitled to
split samples upon Seller's request. Buyer shall be liable for any repairs
or other costs required to correct damage to the Facilities resulting from
such "Phase II" investigation. The findings of any Phase II investigation
prepared by Buyer's environmental consultant shall be included as an
addendum to the Environmental Survey. Notwithstanding the foregoing, Seller
may elect not to permit Buyer to conduct a "Phase II" investigation through
its own environmental consultant, in which case Buyer can exclude the
affected Facility, and the Transferred Assets and Assumed Liabilities
respecting such Facility from the Transactions, in which case the parties
shall negotiate in good faith an equitable adjustment to the Purchase
Price, or if they cannot agree upon the same, such adjustment shall be
determined in accordance with Section 2.14.
------------
(c) With respect to any matters disclosed by such Environmental
Survey or listed on Schedule 3.16 that would constitute a breach of
-------------
Seller's warranties in Section 3.16, but for the qualifications to such
------------
warranties based on Seller's knowledge or disclosures in the Environmental
Survey or on such Schedule 3.16, Seller will at its election, either (i)
-------------
clean up or otherwise remediate such matters in a reasonable manner prior
to the Closing Date related to such Facility, at its expense; or (ii) agree
in writing prior to the Closing Date to reimburse Buyer for the costs
specified in such written agreement of such reasonable clean-up or
remediation incurred by Buyer after the Closing Date related to such
Facility, and to promptly reimburse Buyer after Buyer incurs such expenses
subsequent to the Closing Date related to such Facility; or (iii) elect to
exclude the affected Facility, and Transferred Assets and Assumed
Liabilities respecting such Facility, from the Transactions, in which case
the parties shall negotiate in good faith an equitable adjustment to the
Purchase Price, or if they cannot agree upon the same, such adjustment
shall be determined in accordance with Section 2.14; provided, however,
------------ --------
that in no case will Seller be required to remove or otherwise remediate
(or bear the costs of same) any Hazardous Materials used as construction
materials in structures or improvements constituting the Facilities, or in
equipment contained therein, unless the current condition
-84-
<PAGE>
of such Hazardous Materials has resulted in either: (i) noncompliance with
any Environmental Law or License issued pursuant to an Environmental Law;
or (ii) an unreasonable hazard to human health, human safety or the
environment.
Section 6.3 Updating. Seller shall notify Buyer of any changes or
--------
additions to any of Seller's Schedules to this Agreement with respect to a
particular Facility or the Transferred Assets or Assumed Liabilities
related thereto by the delivery of updates thereof, if any, as of a
reasonably current date prior to the relevant Scheduled Closing not later
than three (3) business days prior to the Scheduled Closing with respect to
such Subject Transferred Assets, provided, however, that the Financial
--------
Schedule shall not be updated to cover any period or periods subsequent to
the respective dates thereof. No such updates made pursuant to this
Section shall be deemed to cure any breach of any representation or
warranty made in this Agreement, unless Buyer specifically agrees thereto
in writing, nor shall any such notification be considered to constitute or
give rise to a waiver by Buyer of any condition set forth in this
Agreement.
Section 6.4 No Solicitation. Seller will not, and shall cause the
---------------
Subsidiaries not to, and will use its best efforts to cause its and their
officers, employees, agents and representatives (including any investment
banker) not to, directly or indirectly, solicit, encourage or initiate any
discussions with, or, subject to fiduciary duties to shareholders,
negotiate or otherwise deal with, or provide any information to, any
corporation, partnership, person or other entity or group, other than Buyer
and its officers, employees and agents, concerning any sale of or similar
transactions involving the Transferred Assets or the stock of the
Subsidiaries. None of the foregoing shall prohibit providing information
to others in a manner in keeping with the ordinary conduct of Seller's or
the Subsidiaries' businesses. Seller shall notify Buyer promptly of any
inquiry, proposal or offer received by Seller concerning the sale of or
similar transactions involving the Transferred Assets or the stock of the
Subsidiaries. Subject to the foregoing, in the exercise of its
aforementioned fiduciary duties to shareholders, Seller may terminate this
Agreement on written notice to Buyer, which termination shall have the
effect set forth in Section 10.2, provided that upon consummation prior to
------------ --------
the first anniversary of this Agreement of any transaction or transactions
with one or more third parties covering substantially all of the
Transferred Assets, Seller shall be obligated to pay Buyer the sum of
Fifteen Million Dollars ($15,000,000), and provided further that the
--------
payment of such sum shall be
-85-
<PAGE>
deemed to constitute liquidated damages in lieu of any and all other
liability of Seller and the Subsidiaries to Buyer and the Buyer
Subsidiaries in connection with or related to or arising from this
Agreement or the transactions contemplated hereby, or in connection with or
related to or arising from the termination hereof.
Section 6.5 Name Changes. To the extent that the corporate names of
------------
any of the Subsidiaries incorporate or are substantially similar to the
Transferred Business Names, Seller agrees to cause the Subsidiaries
promptly after the relevant Scheduled Closing to take all action necessary
to change such names so as not to incorporate or be substantially similar
to the Transferred Business Names.
Section 6.6 Filing of Cost Reports. Seller shall cause to be
----------------------
prepared and timely filed all Cost Reports and all other filings which are
required to be filed with Medicare and any other cost-based Payors with
respect to the operations of the Facilities for any and all periods ending
on or prior to a relevant Closing Date. Seller and the Subsidiaries shall
retain all rights to any amounts receivable from Medicare or other Payors
with respect to such reports or filings or with respect to such periods
and, as between Buyer, on the one hand, and Seller and Subsidiaries, on the
other, shall remain obligated for all amounts due Medicare or such other
Payors with respect to such reports or filings or with respect to such
periods, and the parties hereby acknowledge and agree that Buyer is not
being assigned or otherwise receiving and is not hereby assuming any of the
same. Seller's rights shall include, without limitation, the right to
dispute or to appeal any determinations relating to such reports.
Section 6.7 Purchase of Supplies. Buyer may request Seller or its
--------------------
Affiliates to permit Facilities transferred at such Scheduled Closing to
participate in specified national purchasing contracts of Seller or its
Affiliates for a fee to be agreed upon. If Buyer wishes to enter into such
an agreement with Seller, it shall notify Seller no later than five (5)
days prior to such Scheduled Closing, and at the Scheduled Closing the
parties shall execute a Purchasing Contract substantially in the form of
Exhibit D hereto. Schedule 6.7 lists all of the national purchasing
--------- ------------
contracts of Seller and its Affiliates in effect as of the date thereof
which do not preclude participation by persons which are not Affiliates of
Seller.
Section 6.8 Covenant Not to Compete.
-----------------------
-86-
<PAGE>
(a) Covenant. Subject to the further provisions of this Section
-------- -------
6.8, during the "Covenant Period" (as defined in Section 6.8(d)), none of
--- --------------
the Subsidiaries, Seller or any other subsidiaries of Seller in which
Seller owns a majority of the voting interests (collectively, "Covered
-------
Parties") shall, directly or indirectly (whether through a majority-owned
-------
subsidiary or otherwise), in any Specified Capacity (as defined in this
Section 6.8), engage in the business of delivering mental health or alcohol
-----------
or substance abuse services through the operation of a hospital or
otherwise, including without limitation through the delivery of inpatient,
partial hospitalization, residential or outpatient services (as limited by
the provisions of Section 6.8(b), a "Competing Business"). For purposes
-------------- ------------------
hereof, the term "Specified Capacity" shall mean, subject to Section
------------------ -------
6.8(b), each of the following capacities:
(i) As an operator, manager or sole owner of the Competing
Business, whether directly or indirectly;
(ii) As a constituent partner, joint venturer or equity
shareholder of an entity engaged in the Competing Business if the
voting equity interest held is greater than 10% of all voting equity
interests in such entity;
(iii) As a lender of money to, or a guarantor of
indebtedness for money borrowed by, any other entity engaged in a
Competing Business in a principal amount in excess of $1,000,000,
except for (A) loans or guarantees made in the ordinary course of
business and not as an investment in such entity; (B) loans or
guarantees made or entered into in connection with the sale of a
Competing Business by a Covered Party; or (C) loans represented by
publicly traded instruments.
(b) Exceptions. The provisions of this Section 6.8 shall not
---------- -----------
apply to and shall not prohibit the following:
(i) Psychiatric Facilities and Contracts Not Acquired By
----------------------------------------------------
Buyer. The conduct of a Competing Business from any facility
-----
(including renovations and expansions thereof) at which a Covered
Party, in any Specified Capacity, primarily engages in a Competing
Business as of the Final Closing, or pursuant to any contract
(including modifications, extensions and renewals thereof) under which
a Covered Party, in any Specified Capacity, engages in a
-87-
<PAGE>
Competing Business as of the Final Closing, if (A) such facility,
contract or Specified Capacity is not acquired or assumed by Buyer or
---
a Buyer Subsidiary pursuant to this Agreement, or (B) such facility,
contract or Specified Capacity, is, after the Final Closing,
reacquired by a Covered Party from Buyer or a Buyer Subsidiary
pursuant to this Agreement;
(ii) Facilities Outside Geographic Area. The conduct of a
----------------------------------
Competing Business from any location that is not within twenty-five
(25) miles of a Facility (not including satellite locations) that (A)
was acquired by Buyer or a Buyer Subsidiary pursuant to this
Agreement, and (B) at the time in question, is still owned, operated
or managed by Buyer or by a person or entity which, directly or
indirectly, controls, is controlled by or is under common control with
Buyer (Facilities meeting the requirements of both clauses (A) and (B)
--- ---
being herein referred to as "Covered Facilities");
------------------
(iii) Acute Hospitals. The conduct of a Competing Business
---------------
from or through any hospital, commonly referred to as an acute care
hospital, that is licensed to provide general medical and surgical
services, including related facilities that operate on the same campus
as, or under the auspices of, such acute care hospital (such hospitals
and related facilities being herein referred to as "Acute Hospitals"),
---------------
including the provision of management services to an Acute Hospital,
provided that the conduct of any Competing Business from or through a
-------------
Specified Acute Hospital or an Acquired Acute Hospital (as each such
term is defined in Section 6.8(c)) shall be subject to the further
--------------
provisions of Section 6.8(c);
--------------
(iv) Divestiture of Acquired Psychiatric Facilities. Other
----------------------------------------------
than an Acquired Acute Hospital, the conduct of a Competing Business
in a Specified Capacity first acquired by any Covered Party after the
date hereof as part of the acquisition of interests in healthcare
assets other than the Competing Business, provided that no Covered
-------------
Party engages in such Competing Business after the expiration of
twelve (12) months from such acquisition and no such Competing
Business is expanded during such twelve (12) month period, except for
expansions for which regulatory approval exists, or for which capital
expenditures have been undertaken or are in process, or which are
required by existing contracts (together, "Permitted Expansions"); or
---------------------
-88-
<PAGE>
(v) Acquiring Entities. The conduct of a Competing
------------------
Business for, on behalf of, or by (A) any entity that is not a Covered
Party that acquires majority ownership or substantially all the assets
of a Covered Party after the date hereof, (B) any entity that is not a
Covered Party that acquires a Competing Business from a Covered Party
after the date hereof, (C) any surviving entity (other than a Covered
Party) of a consolidation, merger, reorganization or spinoff (each, a
"Reorganization") involving a Covered Party as a result of which
--------------
shareholders directly or indirectly owning a majority of such Covered
Party immediately before such Reorganization do not own a majority of
such surviving entity immediately after such Reorganization, or (D)
any majority-owned subsidiary of any such acquiring or surviving
entity that is not a Covered Party.
(c) Acute Hospital Affiliations. With respect to an Acute
---------------------------
Hospital listed on Schedule 6.8(c) (a "Specified Acute Hospital"), and
--------------- ------------------------
except as set forth below, the exception provided by Section 6.8(b)(iii)
-------------------
above shall apply but only to the extent such Specified Acute Hospital
conducts a Competing Business (including Permitted Expansions, the
"Exempted Competing Business") on the Scheduled Closing Date with respect
-----------------------------
to the Facility shown on Schedule 6.8(c) as the Specified Acute Hospital's
---------------
"Affiliation Facility." On and after such Scheduled Closing Date, a
Specified Acute Hospital shall not expand its services or its Competing
Business beyond the Exempted Competing Business except in accordance with,
and subject to, clauses (i) through (iii) below. With respect to any Acute
----------- -----
Hospital acquired by a Covered Party after the date of this Agreement and
which is within twenty (20) miles of a Covered Facility (an "Acquired Acute
--------------
Hospital"), the exception provided by Section 6.8(b)(iii) shall apply but
-------- -------------------
only to the extent of such Acquired Acute Hospital's Exempted Competing
Business on the date the acquisition of such Acquired Acute Hospital is
consummated (the "Acquisition Date"). On and after such Acquisition Date,
----------------
an Acquired Acute Hospital shall not expand its services or its Competing
Business beyond the Exempted Competing Business except in accordance with,
and subject to, clauses (i) through (iii) below.
----------- -----
(i) Seller or its relevant Affiliate must first provide
Buyer notice that it proposes to expand its services or Competing
Business beyond the Exempted Competing Business, and shall briefly
describe the nature and scope of the expanded Competing Business in
which it proposes to engage. Within thirty (30) days following its
-89-
<PAGE>
receipt of such notice, Buyer shall cause (A) the Affiliation Facility
with respect to a Specified Acute Hospital (as noted in Schedule
--------
6.8(c)) to offer the Specified Acute Hospital the opportunity to enter
------
into an affiliation agreement with its Affiliation Facility, or (B)
the closest Covered Facility with respect to an Acquired Acute
Hospital to offer the Acquired Acute Hospital the opportunity to enter
into an affiliation agreement. All affiliation agreements must be on
customary industry terms, pursuant to which the relevant Covered
Facility will agree to provide all services comprising the expanded
Competing Business to Payors and patients of, and to subscribers or
other participants in services or programs provided by, the Acute
Hospital at the Covered Facility's usual and customary prices, terms
and conditions which the parties shall negotiate expeditiously and in
good faith. The term of the affiliation agreement shall be for the
Covenant Period for such Specified or Acquired Acute Hospital and
shall give the Specified Acute Hospital or Acquired Acute Hospital, as
the case may be, the right to extend the agreement for two successive
one-year periods.
(ii) The Covered Facility must have the capacity to provide
the desired services in a quantity and manner comparable to the
quantity and manner in which such services are proposed to be provided
by the Specified or Acquired Acute Hospital.
(iii) The entry into such affiliation agreement by the
Specified Acute Hospital or Acquired Acute Hospital, and the
performance thereof by the Specified Acute Hospital or Acquired Acute
Hospital (including, without limitation, the failure to provide such
Competing Business by the Specified Acute Hospital or Acquired Acute
Hospital) will not violate or conflict with, or cause a default under,
the terms of any License, accreditation standard or Payor contract to
which the Specified Acute Hospital or Acquired Acute Hospital is then
subject.
If the terms and conditions set forth in clause (i) through (iii) (other
---------- -----
than the first sentence of clause (i)) are not met as to the expanded
----------
Competing Business of a Specified or Acquired Acute Hospital, the exception
provided by Section 6.8(b)(iii) above shall apply to such expanded
-------------------
Competing Business of such Specified or Acquired Acute Hospital.
-90-
<PAGE>
(d) Covenant Period. The term of the covenant (the "Covenant
--------------- --------
Period") set forth in Section 6.8(a) shall expire on the third anniversary
------ --------------
of the Final Closing, except (i) as to a Specified Acute Hospital, the
covenant shall expire on the earlier of the third anniversary of the Final
Closing or the date on which such Specified Acute Hospital's Affiliation
Facility is no longer a Covered Facility, and (ii) as to an Acquired Acute
Hospital, the covenant shall expire on the earlier of the third anniversary
of the Final Closing or the second anniversary of the Acquisition Date for
such Acquired Acute Hospital.
(e) Severability. To the extent that this covenant or any
------------
provision of this Section 6.8 shall be deemed illegal or unenforceable by a
-----------
court or other tribunal of competent jurisdiction with respect to (i) any
geographic area, (ii) any part of the time period covered by this covenant,
(iii) any activity or Specified Capacity covered by this covenant, or (iv)
any other aspect of this covenant, such determination shall not affect this
covenant with respect to any other geographic area, time period, activity
or other aspect covered by this covenant.
(f) Injunctive Relief. Each of the parties to this Agreement
-----------------
acknowledges that (i) the covenant and restrictions contained in this
Section 6.8 are necessary, fundamental and required for the protection of
-----------
the business of Buyer and its operation (through the Buyer Subsidiaries) of
the Facilities; (ii) this covenant relates to matters which are of a
special character and which give this covenant a special value; and (iii) a
breach of the covenant contained in this Section 6.8 will result in
-----------
irreparable harm and damages to Buyer and Buyer Subsidiaries which cannot
be adequately compensated for by a monetary award. Accordingly, it is
expressly agreed that in addition to all other remedies available in law or
in equity, Buyer and Buyer Subsidiaries shall be entitled to the remedy of
a temporary restraining order, preliminary injunction or such other form of
injunctive or equitable relief as may be issued by any court of competent
jurisdiction to restrain or enjoin a Covered Party from breaching this
covenant or any provision of this Section 6.8 or otherwise to specifically
-----------
enforce the provisions of this covenant.
(g) Value: The parties agree that the value of the covenant
-----
contained in this Section 6.8 is the value assigned to it in Section 2.5
----------- -----------
and that each will account for and report the value of such covenant in
accordance with such valuation and all of the terms and provisions of
Section 2.7.
-----------
-91-
<PAGE>
Section 6.9 Audited Statements. Prior to and after any relevant
------------------
Scheduled Closing, Seller shall make the books and records (other than
those protected by or subject to the attorney-client privilege) and
unaudited financial statements of the Subsidiaries which are related to the
Facilities and are for periods prior to such Scheduled Closing available to
Buyer and Buyer's and Seller's independent accountants at reasonable times
and in a manner so as to not unduly interfere with Seller's operations, and
otherwise cooperate with Buyer in order to permit an audit of the
Subsidiaries' financial statements for periods prior to such Scheduled
Closing. Seller shall reasonably cooperate in assisting Buyer in obtaining
and preparing all necessary information for the timely filing of any
documents required to be filed by Buyer under the Securities Exchange Act
of 1934 related to the transactions contemplated hereby. Without limiting
the effect of Section 5.5 of this Agreement, the audit and the out-of-
pocket costs of Seller's cooperation in obtaining and preparing any
information (including, without limitation, all services of Seller's
independent accountants rendered in connection therewith) will be paid for
by Buyer.
Section 6.10 Post-Closing Insurance. Seller for five years after the
----------------------
Final Closing, shall maintain its existing comprehensive general liability
and hospital professional liability insurance coverages with respect to the
Facilities for all periods prior to the Closing in substantially their
present form as described on Schedule 3.26(b) (the "Insurance Program"),
---------------- -----------------
provided that (a) Seller shall have the right to reduce (but not increase
beyond $2,000,000 per occurrence) the existing deductible under the
Insurance Program and (b) shall have the right to cancel or terminate, or
have cancelled or terminated, the coverages under the Insurance Program so
long as Seller acquires (from (i) its present insurance company or (ii)
another reasonably acceptable insurance company under a reasonably
acceptable policy) an extended discovery period of not less than five years
after any such cancellation or termination for periods prior to the Final
Closing. Such Insurance Program, if maintained, shall be maintained at
Seller's expense, and if such Insurance Program is maintained Seller shall
cause Buyer and each Buyer Subsidiary to be named as an additional
insured with respect to the applicable Facility and Seller shall provide
Buyer with copies thereof and copies of renewals prior to the expiration of
the prior policy or policies. Seller shall use commercially reasonable
efforts to avoid invalidating the insurance policies referred to in this
Section 6.10.
------------
Section 6.11 Use of Controlled Substance Licenses. To the extent
------------------------------------
permitted by Law, Buyer shall have the right, for a period not to exceed
-92-
<PAGE>
sixty (60) days following a relevant Scheduled Closing, to operate under
the Licenses of the Subsidiaries relating to controlled substances and the
operation of pharmacies, until Buyer is able to obtain such Licenses for
itself. Seller shall cause the pertinent Subsidiaries to execute and
deliver to Buyer any powers of attorney and other instruments which Buyer
or the appropriate governmental agency may reasonably require in connection
with Buyer's use of such Licenses. Buyer acknowledges that it shall apply
for all such Licenses as soon as reasonably possible before or after the
relevant Scheduled Closing and diligently pursue such applications in
accordance with Section 5.1.
-----------
Section 6.12 Non-Disturbance Agreements. Seller hereby agrees to
--------------------------
exercise its reasonable commercial efforts, prior to the relevant Scheduled
Closing, to obtain from each existing mortgagee of each Facility identified
below a non-disturbance agreement providing in substance that in the event
the lessor or sublessor of such Facility defaults in its obligations to the
mortgagee respecting indebtedness existing at the relevant Scheduled
Closing and as a result thereof the mortgagee forecloses upon, exercises a
power of sale or otherwise succeeds to the ownership of such property, then
and in such event, such foreclosure or other change in ownership shall not
terminate or affect the validity of the Real Property Lease respecting such
Facility assigned to Buyer hereunder, provided that Buyer hereby agrees
-------------
that, in connection with Seller's obtaining any such non-disturbance
agreement, Buyer will execute such reasonable agreements in favor of such
mortgagee confirming the attornment of Buyer to such mortgagee or its
assigns, and subordinating the Real Property Lease to the interest of such
mortgagee, under such circumstances. In the event that Seller shall be
unable to obtain any such non-disturbance agreement and the lessor's or
sublessor's default under indebtedness existing at the relevant Scheduled
Closing results in the termination of any such Real Property Lease prior to
the expiration of the current term and any renewal terms available in the
Real Property Lease as of the relevant Scheduled Closing, then Seller shall
indemnify Buyer, in accordance with the provisions of Section 11.3(a)(ii),
-------------------
for Losses arising therefrom but not in excess of the portion of the
Purchase Price allocated to such Facility in the Allocation Schedule,
provided that Buyer shall provide Seller with notice of any such default or
-------------
claimed default by the lessor or sublessor reasonably promptly following
Buyer's receipt of any notice or knowledge respecting same. The Facility
and Real Property Lease to which this Section shall apply is the Real
Property Lease respecting the hospital numbered as Facility No. 50.
-93-
<PAGE>
ARTICLE 7
ADDITIONAL COVENANTS OF BUYER
Section 7.1 Waiver of Bulk Sales Law Compliance. Subject to the
-----------------------------------
indemnification provisions of Section 11.3(a)(iii) hereof, Buyer hereby
--------------------
waives compliance by Seller and the Subsidiaries with the requirements, if
any, of Article 6 of the Uniform Commercial Code as in force in any state
in which Transferred Assets are located and all other similar laws
applicable to bulk sales and transfers.
Section 7.2 Resale Certificate. Buyer agrees to furnish to Seller
------------------
and the Subsidiaries any resale certificate or certificates or other
similar documents reasonably requested by Seller to comply with pertinent
sales and use tax laws.
Section 7.3 Cost Reports and Audit Contests. After each Scheduled
-------------------------------
Closing and for the period of time necessary to conclude any pending or
potential audit or contest of any Cost Reports with respect to the
Facilities transferred at such Scheduled Closing that include periods
ending on or before the relevant Closing Date, Buyer shall (a) properly
keep and preserve all financial books and records delivered to Buyer by
Seller and the Subsidiaries (if any) and utilized in preparing such Cost
Reports, including, without limitation, accounts payable invoices, Medicare
logs and billing information in accordance with Section 5.7, and (b) within
-----------
five (5) days of Buyer's receipt of the same, forward to Seller all
information received from Payors relating to periods prior to and as of the
relevant Closing Date including, without limitation, Cost Report
Settlements, notices of program reimbursements, demand letters for payment
and proposed audit adjustments. Upon reasonable written notice by Seller,
Seller (or its agents) shall be entitled, at Seller's expense, during
regular business hours, to have access to, inspect and make copies of all
such books and records. Upon the reasonable request of Seller, Buyer shall
assist Seller and the Subsidiaries in obtaining information deemed by
Seller to be necessary or desirable in connection with any audit or contest
of such reports. To the extent required to meet its obligations under this
Section, Buyer shall provide the reasonable support of its employees at no
cost to Seller.
Section 7.4 Tax Matters. After each Scheduled Closing, Buyer shall
-----------
be responsible for causing its employees, at no cost to Seller, to assist
Seller and the Subsidiaries, in the same manner and to the extent that
personnel of the Facilities currently provide such assistance, in the
-94-
<PAGE>
preparation and filing of all returns relating to taxes imposed upon the
businesses operated through the Transferred Assets that relate to periods
ending on or prior to the relevant Scheduled Closing but are due after the
relevant Closing Date and that are not related to Taxes included in the
Assumed Liabilities, including without limitation, income tax and
information returns. It is further acknowledged by Buyer that Taxes
(including, without limitation, the Florida indigent care tax) imposed upon
the right or privilege to do business from the Facilities after the Closing
shall be Buyer's responsibility even if measured by gross receipts, net
operating revenues or patient days for a period ending on, before or
including a Closing Date and that Taxes included in Accrued Operating
Expenses shall be only those properly accruable, in accordance with
generally accepted accounting principles, for the right or privilege of
doing business through the relevant Closing Date. Buyer further agrees to
exercise its reasonable commercial efforts to have the income tax year of
any venture or partnership referred to in Section 2.1(c) terminated as of
--------------
the relevant Scheduled Closing with respect to the pertinent Subsidiary or
Subsidiaries transferring its interests therein.
Section 7.5 Letters of Credit. Subject to the terms and conditions
-----------------
hereof, at the relevant Scheduled Closing, Buyer shall cause letters of
credit and indemnity or performance bonds to be provided to substitute for
those letters of credit and bonds listed in Schedule 7.5, so that at and as
------------
of such Scheduled Closing Seller and its Affiliates shall have no further
obligation to provide such designated letters of credit or bonds.
Section 7.6 Conduct Pending Closing. Prior to consummation of the
-----------------------
Transactions contemplated hereby or the termination or expiration of this
Agreement pursuant to its terms, unless Seller shall otherwise consent in
writing, Buyer shall not, and shall not permit any Buyer Subsidiary to,
take any action which would cause any of Buyer's representations and
warranties set forth in Article 4 to be false as of the relevant Scheduled
---------
Closing.
Section 7.7 Securities Offerings. Buyer hereby agrees to indemnify
--------------------
and hold harmless Seller and each of its Affiliates, in accordance with the
provisions of Section 11.4(a)(ii), against any and all Losses, as incurred,
-------------------
arising out of the offer or sale by Buyer of securities, except to the
extent that such Loss arises from any untrue statement or alleged untrue
statement of a material fact contained in any such securities offering
materials or prospectus used by Buyer or its representatives, or from the
omission or alleged omission therefrom of a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, which untrue or alleged untrue statement or omission
or
-95-
<PAGE>
alleged omission is made in reliance upon and in conformity with written
information furnished to Buyer by Seller under a cover letter from Seller's
counsel stating that such information is expressly for use in such offering
materials or prospectus.
ARTICLE 8
BUYER'S CONDITIONS TO CLOSING
The obligations of Buyer to consummate the Transactions with respect
to a Facility and the Transferred Assets and Assumed Liabilities related
thereto shall be subject to the requirements of Section 2.13 and to the
------------
fulfillment at or prior to the relevant Scheduled Closing of the following
conditions, unless Buyer waives in writing such fulfillment:
Section 8.1 Performance of Agreement. Seller shall have performed in
------------------------
all material respects its agreements and obligations contained in this
Agreement required to be performed on or prior to the Scheduled Closing.
Section 8.2 Accuracy of Representations and Warranties. The
------------------------------------------
representations and warranties of Seller set forth in Article 3 of this
---------
Agreement shall be true in all respects as of the date of this Agreement
(unless the inaccuracy or inaccuracies which would otherwise result in a
failure of this condition have been cured by the Scheduled Closing) and as
of the Scheduled Closing (as updated by the revising of Schedules
contemplated by Section 6.3) as if made as of such time, except where
-----------
such inaccuracy or inaccuracies would not individually or in the aggregate
result in a Material Adverse Effect on the Facility in question.
Section 8.3 Officers' Certificate. Buyer shall have received from
---------------------
Seller an officers' certificate, executed on Seller's behalf by its chief
executive officer, president, chief financial officer or treasurer (in his
or her capacity as such) dated the Closing Date and stating that to the
knowledge of such individual, the conditions in Sections 8.1 and 8.2 above
------------ ---
have been met.
Section 8.4 Consents. The waiting period under the HSR Act shall
--------
have expired or been terminated, and, subject to the provisions of Section
-------
2.12, all approvals, consents, authorizations and waivers from
----
governmen-
-96-
<PAGE>
tal and accreditation agencies the absence of which would render
Buyer unable to operate the facility in the manner operated prior to such
Scheduled Closing, and all approvals, consents, authorizations and waivers
from other third parties to the extent shown on the Schedule of Required
Consents (collectively "Consents") required for Buyer to consummate the
--------
Transactions with respect to such Facility, shall have been obtained,
except that a Consent from a third party to the sale and assignment of a
Transferred Asset, such as a Medicare or Medicaid provider agreement, or
the assumption of an Assumed Liability with respect thereto, shall not
constitute a condition to Buyer's consummation of the Transactions with
respect to a Facility if such sale, assignment or assumption may lawfully
be made subject to a customary condition subsequent that the Consent be
obtained from the third party based upon determinations of such third
party, including without limitation needs surveys or evaluations of Buyer,
to be completed after the Scheduled Closing. As to each of the Real
Property Leases listed on the Schedule of Required Consents, Buyer shall
have received an estoppel certificate, identifying the lease and stating
that such lease is in full force and effect, that the lessee under such
lease is current in all of its obligations under such lease and that the
lessor is not aware of any default by lessee under such lease.
Section 8.5 Absence of Injunctions. There shall be no:
----------------------
(a) Injunction, restraining order or order of any nature issued
by any court of competent jurisdiction or governmental agency which directs
that the Transactions related to such Facility contemplated hereby shall
not be consummated as herein provided or compels or would compel Buyer to
dispose of or discontinue, or materially restrict the operations of,
such Facility or any significant portion of the Transferred Assets with
respect thereto as a result of the consummation of the Transactions
contemplated hereby;
(b) Suit, action or other proceeding by any governmental agency
pending before any court, governmental agency or non-governmental, self-
regulatory organization, or threatened (pursuant to a written
notification), wherein such complainant seeks the restraint or prohibition
of the consummation of the Transactions related to such Facility or asserts
the illegality of the Transactions related to such Facility; or
(c) Action taken, or law enacted, promulgated or deemed
applicable to the Transactions related to such Facility, by any
governmental
-97-
<PAGE>
agency which would render consummation of such Transactions
illegal or which would threaten the imposition of any penalty or material
economic detriment upon Buyer if such Transactions were consummated;
provided that:
-------- ----
(i) The parties will use their reasonable efforts to litigate
against, or to obtain the lifting of, any such injunction, restraining or
other order, restraint, prohibition, action, suit, law or penalty;
(ii) In the event that (A) the "First Closing" has occurred
under the First Facilities Agreement, (B) there is such a pending or
threatened suit, action, proceeding, injunction, restraining order or other
order, made, sought, issued, initiated or obtained by a governmental agency
in respect of Transactions contemplated to occur at the Final Closing under
this Agreement, and (C) on or prior to the original Termination Date for
such Final Closing, the parties and such agency have entered into a written
agreement which would resolve such controversy but such agreement is
subject to final agency approval that has not been obtained on or prior to
the fifth business day before the original Termination Date for the Final
Closing, then and in such events the original Termination Date for the
Final Closing shall be extended to the fifth business day following such
final agency approval if the date of such approval is within five (5)
business days of the end of a month or the original Termination Date for
the Final Closing shall be extended to the end of the month in which such
approval is obtained if the date of such approval is not within five (5)
business days of the end of a month, but in no event shall the original
Termination Date for the Final Closing be extended for more than three (3)
calendar months from the original Termination Date; and
(iii) Clauses (a) through (c) above notwithstanding, the effect
--- ---
of any such event, action or suit shall be to exclude the affected Facility
from the Scheduled Closing and, if such Facility is not transferred in a
subsequent Closing, to adjust the Purchase Price pursuant to the Allocation
Schedule.
Section 8.6 Opinion of Counsel. Buyer shall have received, on and as
------------------
of the Closing Date, an opinion of Mr. Scott Brown, general counsel to
Seller, substantially as to the matters set forth in Sections 3.1, 3.2,
------------ ---
3.3, 3.4, 3.5, 3.6 and 3.14, subject to customary conditions and
--- --- --- --- ----
limitations.
-98-
<PAGE>
Section 8.7 Title to Real Property. Title to Transferred Assets
----------------------
related to the Facility comprised of interests in real property shall have
been evidenced by the willingness of Chicago Title Insurance Company (or an
Affiliate thereof) (the "Title Insurer") to issue at regular rates ALTA (or
-------------
the local equivalents thereof) owner's, or lessee's, as the case may be,
extended coverage policies of title insurance (1990 Form B) (the "Title
-----
Policies"), with the survey exception removed, in amounts equal to the
--------
respective portions of the Purchase Price allocated to such interests,
showing title to such interests in such real property vested in Buyer
subject to transfer of such interest to Buyer. Each such Title Policy
shall be free of exceptions relating to (i), except for Title Policies
respecting Facilities located in Texas, any claim which arises out of the
transaction vesting in Buyer the estate or interest insured by the Title
Policy, by reason of the operation of federal bankruptcy, state insolvency
or similar creditors's rights laws, and (ii) rights of the United States of
America, and the state in which the real property covered by the Title
Policy is located, or either or them, to recover any federal funds advanced
as provided in the Hill-Burton Act, 42 U.S.C (S)(S) 291 et. seq. Such
Title Policies shall additionally be free of all other exceptions,
including other standard exceptions, other than the following:
(a) A lien or liens to secure payment of real estate taxes, not
delinquent;
(b) Exceptions, other than those listed on Schedule 8.7(b),
---------------
disclosed by current standard ALTA Preliminary Title Reports, delivered
to and approved (except as shown on Schedule 8.7(b)) by Buyer prior to the
---------------
date hereof (as indicated by Buyer's signature of approval appended
thereto) together with copies of all documents underlying the exceptions
contained therein; and
(c) Other possible minor matters that in the aggregate are not
substantial in amount and do not materially detract from or interfere with
the present or intended use of such real property, including such minor
matters as may be disclosed by surveys taken after the date hereof.
The willingness of the Title Insurer to issue the Title Policies shall be
evidenced either by the issuance thereof at the relevant Scheduled Closing
or the written commitments or binders, dated as of the relevant Scheduled
Closing, of the Title Insurer to issue such Title Policies within a
reasonable time after the relevant Closing Date, subject to actual transfer
of the real
-99-
<PAGE>
property in question. If the Title Insurer is unwilling to
issue any such Title Policy, it shall be required to provide Buyer and
Seller, in writing, notice setting forth the reason(s) for such
unwillingness on or before the relevant Closing Date. Seller shall have
the right to seek to cure any defect which is the reason for such
unwillingness, and, if such notice by the Title Insurer is given less than
ten (10) business days prior to the then Scheduled Closing, then the
relevant Closing Date (and, to the extent necessary, the Termination Date)
shall be extended for a period of up to ten (10) business days to provide
to Seller such opportunity to cure. In the event that, despite Seller's
efforts to cure, the Title Insurer remains unwilling to issue any such
Title Policy on the Final Closing Date (as may be extended as provided
herein), then, at the election of Buyer, and without affecting the other
conditions of the parties to consummation of the Transactions, such real
property interests not covered by such a Title Policy shall not be included
in the Transferred Assets and shall be deemed to be Excluded Assets, and
liabilities associated therewith that would otherwise be Assumed
Liabilities shall be deemed to be Excluded Liabilities; and Buyer and
Seller shall negotiate in good faith prior to the Final Closing Date an
adjustment in the Purchase Price based on the Allocation Schedule. If the
parties cannot agree upon such adjustment, then the disagreement shall be
resolved in accordance with Section 2.14. Notwithstanding the foregoing,
------------
Buyer may accept such title to any such interests as the pertinent
Subsidiary may be able to convey, and such title insurance with respect to
the same as the Title Insurer is willing to issue, in which case such
interests shall be conveyed as part of the Transferred Assets without
reduction of the Purchase Price or any credit or allowance against the same
and without any other liability on the part of Seller or the Subsidiaries.
Section 8.8 Receipt of Other Documents. Buyer shall have received
--------------------------
the following:
(a) Certified copies of the resolutions of Seller's and each
relevant Subsidiary's board of directors respecting this Agreement, the
Related Agreements and the Transactions, together with certified copies of
any shareholder resolutions which are necessary to approve the execution
and delivery of this Agreement and any Agreements and/or the performance
of the obligations of Seller and the Subsidiaries hereunder and thereunder;
-100-
<PAGE>
(b) Certified copies of Seller's and each relevant Subsidi-ary's
Charter Documents, together with a certificate of the corporate secretary
of each that none of such documents have been amended;
(c) One or more certificates as to the incumbency of each
officer of Seller or of any Subsidiary who has signed the Agreement, any
Related Agreement or any certificate, document or instrument delivered
pursuant to the Agreement or any Related Agreement;
(d) Good standing certificates for Seller and each of the
relevant Subsidiaries from the Secretaries of State of their respective
states of incorporation, dated as of a date not earlier than fifteen (15)
business days prior to the relevant Closing Date;
(e) Copies of all third party and governmental consents, permits
and authorizations that Seller or any Subsidiary has received in connection
with the Agreement, the Related Agreements and the Transactions to occur at
the relevant Scheduled Closing; and
(f) Certificates of non-foreign status in the form required by
Section 1445 of the Code duly executed by Seller and the relevant
Subsidiaries.
Section 8.9 Licenses and Permits. The Buyer shall have obtained any
--------------------
and all authorizations, approvals and consents in connection with acquiring
Licenses that will permit it to operate the Facility after the
relevant Scheduled Closing substantially as operated by the relevant
Subsidiary immediately prior to the relevant Scheduled Closing.
Section 8.10 Casualty; Condemnation.
----------------------
(a) Casualty. If any part of the Transferred Assets related to
--------
the Facility are damaged, lost or destroyed (whether by fire, theft,
vandalism or other casualty) in whole or in part prior to the relevant
Scheduled Closing, and the fair market value of such damage or destruction
is less than thirty percent (30%) of the allocated portion of the Purchase
Price for such Facility set forth in the Allocation Schedule, Seller shall,
at its option, either (i) reduce the Purchase Price by the fair market
value of the assets destroyed, such value to be determined as of the date
immediately prior to such destruction or, as the case may be, by the
estimated cost to restore damaged assets, (ii) provided that the proceeds
are obtainable
-101-
<PAGE>
without delay and are sufficient to fully restore the damaged assets, upon
the relevant Scheduled Closing transfer the proceeds or the rights to the
proceeds of applicable insurance to Buyer, and Buyer may restore the
improvements, or (iii) repair or restore such damages or destroyed
improvements. If any part of the Transferred Assets related to the Facility
are damaged, lost or destroyed (whether by fire, theft, vandalism or other
cause or casualty) in whole or in part prior to the relevant Scheduled
Closing and the fair market value of such damages is greater than thirty
percent (30%) of such allocated portion of the Purchase Price, Buyer may
elect either to (i) require Seller upon the relevant Scheduled Closing to
transfer the proceeds (or the right to the proceeds) of applicable
insurance to Buyer and Buyer may restore the improvements, or (ii)
terminate this Agreement with respect to the damaged assets or Facility
only, with a reduction in the Purchase Price determined as follows. The
reduction in Purchase Price shall be mutually determined by Buyer and
Seller on the basis of the Allocation Schedule, or if the Buyer and Seller
fail to agree, then such reduction shall be determined in accordance with
Section 2.14.
------------
(b) Condemnation. From the date hereof until the relevant
------------
Scheduled Closing, in the event that any portion of the Transferred Assets
related to the Facility becomes subject to or is threatened with any
condemnation or eminent domain proceedings (except for an immaterial
portion), then Buyer, at its sole option, may elect to terminate this
Agreement with respect only to that part which is condemned or
threatened to be condemned with a reduction in the Purchase Price
determined as provided in Section 8.10(a).
---------------
Section 8.11 Reasonable Assurances. There shall not have been any
---------------------
actions taken by the United States government to indicate that it is
reasonably likely that either the Unusual Proceedings or any proceeding,
investigation, claim or lawsuit relating thereto, in each case relating to
periods prior to the relevant Scheduled Closing, (a) shall be applied to or
be expanded to include an assertion against Buyer or the applicable Buyer
Subsidiaries with respect to their operation of the Facility after the
relevant Scheduled Closing, or (b) would be the basis of any investigation
or proceeding to exclude Buyer or the applicable Buyer Subsidiaries from
participation in any government healthcare program with respect to the
operations of the Facility after the relevant Scheduled Closing, or (c)
would result in the Transferred Assets being subjected to forfeiture under
18 U.S.C. (S)1961-1966 or otherwise.
-102-
<PAGE>
Section 8.12 Certain Events. During the thirty (30) days preceding
--------------
the date of the relevant Scheduled Closing, there shall not have occurred
or be continuing (a) any suspension of trading on the New York Stock
Exchange or material governmental restrictions (not in force on the date
hereof) on trading in securities generally, or (b) any banking moratorium
declared by Federal, California or New York authorities, or (c) any
material disruption of or any material adverse change in the financial,
banking or capital markets, or (d) any outbreak or material escalation of
hostilities affecting the United States of America or other calamity, panic
or crisis, the effect of which on the financial markets of the United
States in each case described in clauses (a), (b), (c) or (d) above, is
that lending institutions have generally ceased providing funding for
transactions of the size contemplated hereby, provided that the occurrence
--------
of such event shall operate only to delay the Scheduled Closing (and extend
the Termination Date, if necessary) until the tenth day following the date
upon which lending institutions generally have resumed providing funding
for transactions of the size contemplated hereby and that such delay may
not extend the original Termination Date for more than sixty (60) days,
after which time there shall be deemed to be a failure of this condition.
ARTICLE 9
SELLER'S CONDITIONS TO CLOSING
The obligations of Seller to consummate the Transactions with respect
to a Facility and the Transferred Assets and Assumed Liabilities related
thereto shall be subject to the fulfillment at or prior to the relevant
Scheduled Closing of the following conditions, unless Seller waives in
writing such fulfillment:
Section 9.1 Performance of Agreement. Buyer shall have performed in
------------------------
all material respects its agreements and obligations contained in this
Agreement required to be performed on or prior to the Scheduled Closing.
Section 9.2 Accuracy of Representations and Warranties. The
------------------------------------------
representations and warranties of Buyer set forth in Article 4 of this
---------
Agreement shall be true in all material respects as of the date of this
Agreement (unless the inaccuracy or inaccuracies which would otherwise
result in a failure of this condition have been cured by the Scheduled
Closing) and as of the Scheduled Closing as if made as of such time.
-103-
<PAGE>
Section 9.3 Officers' Certificate. Seller shall have received from
---------------------
Buyer an officers' certificate, executed on Buyer's behalf by its chief
executive officer, president, chief financial officer or treasurer (in his
or her capacity as such) dated the Closing Date and stating that to the
actual knowledge of such individual, the conditions in Sections 9.1 and 9.2
------------ ---
above have been met.
Section 9.4 Consents. The waiting period under the HSR Act shall
--------
have expired or been terminated, and, subject to the provisions of Section
-------
2.12, all Consents required for Seller to consummate the Transactions with
----
respect to such Facility shall have been obtained, except that a Consent
from a third party to the sale and assignment of a Transferred Asset, such
as a Medicare or Medicaid provider agreement, or the assumption of an
Assumed Liability with respect thereto, shall not constitute a condition to
Seller's consummation of the Transactions with respect to such Facility if
such sale, assignment or assumption may lawfully be made subject to a
customary condition subsequent that the Consent be obtained from the third
party based upon determinations of such third party, including without
limitation needs surveys or evaluations of Buyer, to be completed after the
Scheduled Closing, whether or not such third party indicates prior to the
Scheduled Closing that any such Consent is likely or not likely to be
given.
Section 9.5 Absence of Injunctions. There shall be no:
----------------------
(a) Injunction, restraining order or order of any nature issued
by any court of competent jurisdiction or governmental agency which directs
that the Transactions related to such Facility contemplated hereby shall
not be consummated as herein provided;
(b) Suit, action or other proceeding by any governmental agency
pending before any court, governmental agency or non-governmental, self-
regulatory organization, or threatened (pursuant to a written
notification), wherein such complainant seeks the restraint or prohibition
of the consummation of the Transactions related to such Facility or asserts
the illegality of the Transactions related to such Facility; or
(c) Action taken, or law enacted, promulgated or deemed
applicable to the Transactions related to such Facility, by any
governmental agency which would render consummation of such Transactions
illegal or which would threaten the imposition of any penalty or material
economic
-104-
<PAGE>
detriment upon Seller or the Subsidiaries if such Transactions were
consummated;
provided that:
-------- ----
(i) The parties will use their reasonable efforts to litigate
against, or to obtain the lifting of, any such injunction, restraining or
other order, restraint, prohibition, action, suit, law or penalty;
(ii) In the event that (A) the "First Closing" has occurred
under the First Facilities Agreement, (B) there is such a pending or
threatened suit, action, proceeding, injunction, restraining order or other
order, made, sought, issued, initiated or obtained by a governmental agency
in respect of Transactions contemplated to occur at the Final Closing under
this Agreement, and (C) on or prior to the original Termination Date for
such Final Closing, the parties and such agency have entered into a written
agreement which would resolve such controversy but such agreement is
subject to final agency approval that has not been obtained on or prior to
the fifth business day before the original Termination Date for the Final
Closing, then and in such events the original Termination Date for the
Final Closing shall be extended to the fifth business day following such
final agency approval if the date of such approval is within five (5)
business days of the end of a month or the original Termination Date for
the Final Closing shall be extended to the end of the month in which such
approval is obtained if the date of such approval is not within five (5)
business days of the end of a month, but in no event shall the original
Termination Date for the Final Closing be extended for more than three (3)
calendar months from the original Termination Date; and
(iii) Clauses (a) through (c) above notwithstanding, the effect
--- ---
of any such event, action or suit shall be to exclude the affected Facility
from the Scheduled Closing and, if such Facility is not transferred in a
subsequent Closing, to adjust the Purchase Price pursuant to the Allocation
Schedule.
Section 9.6 Opinion of Counsel. Seller shall have received, on and
------------------
as of the Closing Date, an opinion of King & Spalding, counsel to Buyer,
substantially as to the matters set forth in Sections 4.1, 4.2, 4.3, 4.4,
------------ --- --- ---
and 4.5, subject to customary conditions and limitations.
---
-105-
<PAGE>
Section 9.7 Receipt of Other Documents. Seller shall have received
--------------------------
the following:
(a) Certified copies of the resolutions of Buyer's and each
relevant Buyer Subsidiary's board of directors respecting this Agreement,
the Related Agreements and the Transactions;
(b) Certified copies of Buyer's and each relevant Buyer
Subsidiary's Charter Documents, together with a certificate of Buyer's and
each Buyer Subsidiary's corporate secretary that none of such documents
have been amended;
(c) One or more certificates as to the incumbency of each
officer of Buyer who has signed the Agreement, any Related Agreement, or
any certificate, document or instrument delivered pursuant to the Agreement
or any Related Agreement;
(d) Good standing certificates for Buyer and for each relevant
Buyer Subsidiary from the Secretaries of State of their respective states
of incorporation, dated as of a date not earlier than fifteen (15) business
days prior to the relevant Closing Date;
(e) Copies of all third party and governmental consents, permits
and authorizations that Buyer has received in connection with the
Agreement, the Related Agreements and the Transactions; and
(f) A certificate of Buyer executed on its behalf by the Chief
Executive Officer and the Chief Financial Officer of Buyer stating that to
the best of their knowledge and belief, specifying in reasonable detail
their basis for same, after giving effect to the Transactions, neither
Buyer nor any relevant Buyer Subsidiary is insolvent or will be rendered
insolvent by obligations incurred in connection therewith, or will be left
with unreasonably small capital with which to engage in their businesses,
or will have incurred obligations beyond their respective abilities to
perform the same as and when due.
ARTICLE 10
TERMINATION
Section 10.1 Termination. Any Transactions contemplated hereby that
-----------
have not been consummated may be terminated:
-106-
<PAGE>
(a) At any time, by mutual written consent of Seller and Buyer;
or
(b) By either Buyer or Seller upon written notice to the other
party, if (i) the relevant Scheduled Closing shall not have occurred by its
Termination Date; or (ii)(A) in the case of termination by Seller, the
conditions set forth in Section 2.13 and Article 9 for the relevant
------------ ---------
Scheduled Closing cannot reasonably be met by its Termination Date or
Seller has terminated this Agreement pursuant to Section 6.4, and (B) in
-----------
the case of termination by Buyer, the conditions set forth in Section 2.13
------------
and Article 8 for the relevant Scheduled Closing cannot reasonably be met
---------
by its Termination Date, unless in either of the cases described in clauses
-------
(A) or (B), the failure of the condition is the result of the material
--- ---
breach of this Agreement by the party seeking to terminate. The
Termination Date for the First Closing shall be September 1, 1994, unless
on or prior to such date there has been a "First Closing" under the First
Facilities Agreement, in which case, the Termination Date for all Closings
under this Agreement shall be September 30, 1994. Each such date, or such
later date as may be specifically provided for in this Agreement (including
any date arising under the operation of Sections 8.5(c)(ii) and 9.5(c)(ii)
------------------- ----------
hereof) or agreed upon by the parties, is herein referred to as the
"Termination Date."
----------------
Each party's right of termination hereunder is in addition to any other
rights it may have hereunder or otherwise.
Section 10.2 Effect of Termination. If there has been a termination
---------------------
pursuant to Section 10.1 prior to the First Closing, then this Agreement
------------
shall be deemed terminated, and all further obligations of the parties
hereunder shall terminate, except that the obligations set forth in
Sections 5.5 and 5.6 and in Articles 11 and 12 shall survive. In the event
------------ --- ----------- --
of termination of this Agreement as provided above, there shall be no
liability on the part of a party to another under and by reason of this
Agreement or the transactions contemplated hereby except as set forth in
Article 11 and except for intentionally fraudulent acts by a party, the
----------
remedies for which shall not be limited by the provisions of this
Agreement. In the event of a termination after the First Closing, then all
further obligations of the parties respecting Transactions that have not
been consummated shall terminate, except that the obligations set forth in
Sections 5.5 and 5.6 and in Articles 11 and 12 shall survive, and there
------------ --- ----------- --
shall be no liability on the part of a party to another in respect of such
unconsummated Transactions except as set forth in Article 11 and except for
----------
intentionally fraudulent acts by a party,
-107-
<PAGE>
the remedies for which shall not be limited by this Agreement. The
foregoing provisions shall not, however, limit or restrict the availability
of specific performance or other injunctive or equitable relief to the
extent that specific performance or such other relief would otherwise be
available to a party hereunder.
ARTICLE 11
SURVIVAL AND REMEDIES; INDEMNIFICATION
Section 11.1 Survival. Except as may be otherwise expressly set
--------
forth in this Agreement, the representations, warranties, covenants and
agreements of Buyer and Seller set forth in this Agreement, or in any
writing required to be delivered in connection with this Agreement, shall
survive the Scheduled Closings and the consummations of the Transactions.
Section 11.2 Exclusive Remedy. Absent intentional fraud or unless
----------------
otherwise specifically provided herein, the sole exclusive remedy for
damages of a party hereto for any breach of the representations, warran-
ties, covenants and agreements of the other party contained in this
Agreement and the Related Agreements shall be the remedies contained in
this Article 11. Notwithstanding the foregoing, with respect to any
----------
matters associated with any of the Owned Real Properties or Leased Real
Properties involving environmental contamination or noncompliance with any
applicable Environmental Law, if the First Closing occurs, nothing in this
Article 11 shall limit or restrict a party's rights or remedies against, or
----------
obligations to, another party or any third party arising under any
Environmental Law, if such matter (a) was in existence on or prior to the
relevant Scheduled Closing, (b) was not identified in the Environmental
Survey or Schedule 3.16 (or an update thereto pursuant to Section 6.3), (c)
------------- -----------
was unknown to Seller or any Subsidiary as of the relevant Scheduled
Closing, and (d) would not constitute a breach of Seller's warranties in
Section 3.16.
------------
Section 11.3 Indemnity by Seller.
-------------------
(a) Seller shall indemnify Buyer and the Buyer Subsidiaries and
hold them harmless from and against any and all claims, demands, suits,
loss, liability, damage and expense, including reasonable attorneys' fees
and costs of investigation, litigation, settlement and judgment
(collectively "Losses"), which they may sustain or suffer or to which they
------
may become subject as a result of:
-108-
<PAGE>
(i) The inaccuracy of any representation or the breach of
any warranty made by Seller herein or by Seller or a Subsidiary in a
Related Agreement, provided, that any such inaccuracy or breach shall
--------
be determined without regard to any qualification of such
representation or warranty relating to materiality or any Material
Adverse Effect;
(ii) The nonperformance or breach of any covenant or
agreement made or undertaken by Seller in this Agreement or by Seller
or a Subsidiary in a Related Agreement; and
(iii) If a Scheduled Closing occurs, the failure of Seller
or any Subsidiary to pay, discharge or perform as and when due, any of
the Excluded Liabilities (including, without limitation, the Excluded
Liabilities enumerated in Sections 2.4(c), (d), (e) and (g), and any
--------------- --- --- ---
Losses as a result of or in connection with the failure
of Seller and the Subsidiaries to comply with any Bulk Sales Laws
referred to in Section 7.1).
-----------
(b) The indemnification obligations of Seller provided above
shall, in addition to the qualifications and conditions set forth in
Sections 11.5 and 11.6, be subject to the following qualifications:
------------- ----
(i) Buyer and the Buyer Subsidiaries shall not be entitled
to indemnity under Subsection (a)(i) above (except for claims arising
-----------------
under Sections 3.1, 3.2, 3.3 and 3.7) unless:
------------ --- --- ---
(A) Written notice to Seller of such claim specifying
the basis thereof is made, or an action at law or in equity with
respect to such claim is served, before the second anniversary of
the earlier to occur of the relevant Closing Date or the date on
which this Agreement is terminated, as the case may be;
(B) If a Scheduled Closing occurs, the Losses
sustained or suffered by Buyer and the Buyer Subsidiaries or to
which they may be subject as a result of circumstances described
in such Subsection (a)(i) and in Section 11.3(a)(i) of the First
----------------- ------------------
Facilities Agreement exceed, in the aggregate, the sum of Three
Million Dollars ($3,000,000) (the "Trigger Amount"), in which
--------------
case Buyer and the Buyer Subsidiaries
-109-
<PAGE>
shall be entitled only to recover the amount by which such
aggregate Losses exceed Two Million Dollars ($2,000,000) (the
"Deductible Amount"), provided, however, that individual claims
------------------ --------
of Two Thousand Dollars ($2,000) or less shall not be aggregated
for purposes of calculating either the Trigger Amount, the
Deductible Amount or the excess of Losses over the Deductible
Amount;
(C) If a Scheduled Closing occurs, in no event shall
Seller be liable to Buyer and the Buyer Subsidiaries under
Subsection (a)(i) for Losses in the nature of consequential
-----------------
damages, lost profits, damage to reputation or the like, but such
damages shall be limited to out-of-pocket Losses and diminution
in value; and
(D) If a Scheduled Closing occurs, in no event shall
Seller be liable to Buyer and the Buyer Subsidiaries under
Subsection (a)(i) of this Agreement and under Section 11(a)(i) of
---------------- ---------------
the First Facilities Agreement for amounts which, in the
aggregate, exceed the sum of (x) that portion of the Purchase
Price paid pursuant to Section 2.5(a) of this Agreement and
--------------
pursuant to Section 2.5(a) of the First Facilities Agreement for
-------------
assets actually acquired and (y) the amount paid pursuant to the
penultimate sentence of Section 2.5 of this Agreement and
-----------
pursuant to the penultimate sentence of Section 2.5(a) of the
--------------
First Facilities Agreement; provided that in the event Buyer and
--------
the Buyer Subsidiaries make claims in the aggregate for Losses
with respect to a Facility that exceed seventy-five percent (75%)
of the portion of the Purchase Price allocated to such Facility
in the Allocation Schedule, then substantially concurrently with
the making of such claim or claims, Buyer shall cause such
Facility to be offered in writing for resale to Seller at a cash
price equal to such allocated portion of the Purchase Price less
amounts, if any, previously paid by Seller to Buyer with respect
to Buyer's claims for Losses with respect to such Facility and on
an "as is, where is" basis, in which case:
(1) Seller shall have thirty (30) days to accept such
offer in writing;
-110-
<PAGE>
(2) If Seller accepts such offer, it shall have one
hundred fifty (150) days to close such transaction;
(3) At the closing of such transaction, Buyer shall
cause all of the right, title and interest of its Affiliates
in such Facility and related assets to be conveyed to Seller
(or a designee of Seller) in the same condition of title as
the Facility and related assets were originally sold,
assigned, transferred and conveyed by Seller and the
Subsidiaries hereunder, and Seller (or such designee) shall
assume disclosed operating liabilities of the Facility of
the same types as the Assumed Liabilities provided that if
--------
the dollar amount of such liabilities exceeds the dollar
amount of the Assumed Liabilities respecting such Facility
originally assumed by Buyer hereunder, then there shall be a
dollar-for-dollar reduction in the purchase price payable by
Seller (or its designee) to the extent of such excess; and
(4) Simultaneous with such closing, Buyer and the
Buyer Subsidiaries shall release Seller from further
liability under Subsection (a)(i) for Losses with respect to
-----------------
such Facility.
(ii) If a Scheduled Closing occurs, Buyer and the Buyer
Subsidiaries shall not be entitled to indemnity under Subsections
-----------
(a)(ii)-(iii) above except for out-of-pocket Losses actually suffered
-------------
or sustained by them or to which they may become subject as a result
of circumstances described in such Subsections (a)(ii)-(iii), and such
-------------------------
indemnity shall not include Losses in the nature of consequential
damages, lost profits, diminution in value, damage to reputation or
the like; except that the provisions of this clause (b)(ii) shall not
-------
apply to breaches of Sections 5.6 and 6.8, provided that the liability
------------ --- --------
of Seller and the Subsidiaries for breaches of such Sections shall be
subject to the provisions of Subsection (b)(i)(D) above and that the
--------------------
liability of Seller and the Subsidiaries for breaches of such Sections
shall be aggregated with the liability of Seller under Subsection
----------
(a)(i) for purposes of Subsection (b)(i)(D).
------ --------------------
-111-
<PAGE>
(iii) Seller shall have no liability for Losses arising
from the breach of any warranty related to Net Book Values, including
without limitation the warranties contained in Sections 3.17 and 3.18,
------------- ----
and no such Losses shall be applied against the Trigger Amount or the
Deductible Amount or the excess of Losses over the Deductible Amount,
it being agreed that the liability of the Seller with respect to Net
Book Values, if any, shall be resolved in accordance with the
provisions of Sections 2.6(a), (b) and (c).
--------------- --- ---
Section 11.4 Indemnity by Buyer.
------------------
(a) Buyer shall indemnify Seller and the Subsidiaries and hold
Seller and the Subsidiaries harmless from and against any and all Losses
which they may sustain or suffer or to which they may become subject as a
result of:
(i) The inaccuracy of any representation or the breach of any
warranty made by Buyer herein or by Buyer or a Buyer Subsidiary in a
Related Agreement, provided that any such inaccuracy or breach shall
--------
be determined without regard to any qualification of such
representation or warranty relating to materiality or any Material
Adverse Effect;
(ii) The nonperformance or breach of any covenant or
agreement made or undertaken by Buyer in this Agreement or by Buyer or
a Buyer Subsidiary in a Related Agreement;
(iii) If a Scheduled Closing occurs, the failure of Buyer
to pay, discharge or perform as and when due, any of the Assumed
Liabilities; and
(iv) If a Scheduled Closing occurs, the ongoing operations
of Buyer and the Transferred Assets after the relevant Closing Date,
including but not limited to the continuation or performance by Buyer
after the relevant Closing Date of any agreement or practice of the
Seller or the Subsidiaries.
(b) The indemnification obligations of Buyer provided above
shall, in addition to the qualifications and conditions set forth in
Sections 11.5 and 11.6, be subject to the following qualifications:
------------- ----
-112-
<PAGE>
(i) Seller and the Subsidiaries shall not be entitled to
indemnity under Subsection (a)(i) above (except for claims under
-----------------
Sections 4.1, 4.2, 4.3 and 4.7) unless:
------------ --- --- ---
(A) Written notice to Buyer of such claim specifying
the basis thereof is made, or an action at law or in equity with
respect to such claim is served, before the second anniversary of
the earlier to occur of the relevant Closing Date or the date on
which this Agreement is terminated, as the case may be;
(B) If a Scheduled Closing occurs, the Losses
sustained or suffered by Seller and the Subsidiaries or to which
they may be subject as a result of circumstances described in
such Subsection (a)(i) and in Section 11.4(a)(i) of the First
----------------- ------------------
Facilities Agreement exceed, in the aggregate, the Trigger
Amount, in which case Seller and the Subsidiaries shall be
entitled only to recover the amount by which such Losses exceed,
in the aggregate, the Deductible Amount, provided, however,
--------
that individual claims of Two Thousand Dollars ($2,000) or less
shall not be aggregated for purposes of calculating either the
Trigger Amount, the Deductible Amount or the excess of Losses
over the Deductible Amount; and
(C) If a Scheduled Closing occurs, in no event shall
Buyer be liable to Seller and the Subsidiaries under Subsection
----------
(a)(i) for Losses in the nature of consequential damages, lost
------
profits, damage to reputation or the like, but such damages shall
be limited to out-of-pocket Losses and diminution in value.
(ii) If a Scheduled Closing occurs, Seller and the
Subsidiaries shall not be entitled to indemnity under Subsections
-----------
(a)(ii)-(iv) above except for out-of-pocket Losses actually suffered
------------
or sustained by them or to which they may become subject as a result
of circumstances described in such Subsections (a)(ii)-(iv), and such
------------------------
indemnity shall not include Losses in the nature of consequential
damages, lost profits, diminution in value, damage to reputation or
the like, except that the provisions of this clause (b)(ii) shall not
-------
apply to breaches of Sections 5.6 or 5.7.
------------ ---
-113-
<PAGE>
Section 11.5 Further Qualifications Respecting Indemnification. The
-------------------------------------------------
right of a party (an "Indemnitee") to indemnity hereunder shall be subject
----------
to the following additional qualifications:
(a) The Indemnitee shall promptly upon its discovery of facts or
circumstances giving rise to a claim for indemnification, including receipt
by it of notice of any demand, assertion, claim, action or proceeding,
judicial, governmental or otherwise, by any third party (such third party
actions being collectively referred to herein as "Third Party Claims"),
------------------
give notice thereof to the indemnifying party (the "Indemnitor"), such
----------
notice in any event to be given within sixty (60) days from the date the
Indemnitee obtains actual knowledge of the basis or alleged basis for the
right of indemnity or such shorter period as may be necessary to avoid
material prejudice to the Indemnitor; and
(b) In computing Losses, such amounts shall be computed net of
any related recoveries to which the Indemnitee is entitled under insurance
policies or other related payments received or receivable from third
parties and net of any tax benefits actually received by the Indemnitee or
for which it is eligible, taking into account the income tax treatment of
the receipt of indemnification.
Section 11.6 Procedures Respecting Third Party Claims. In providing
----------------------------------------
notice to the Indemnitor of any Third Party Claim (the "Claim Notice"), the
------------
Indemnitee shall provide the Indemnitor with a copy of such Third Party
Claim or other documents received and shall otherwise make available to the
Indemnitor all relevant information material to the defense of such claim
and within the Indemnitee's possession. The Indemnitor shall have the
right, by notice given to the Indemnitee within fifteen (15) days after the
date of the Claim Notice, to assume and control the defense of the Third
Party Claim that is the subject of such Claim Notice, including the
employment of counsel selected by the Indemnitor after consultation with
the Indemnitee, and the Indemnitor shall pay all expenses of, and the
Indemnitee shall cooperate fully with the Indemnitor in connection with,
the conduct of such defense. The Indemnitee shall have the right to employ
separate counsel in any such proceeding and to participate in (but not
control) the defense of such Third Party Claim, but the fees and expenses
of such counsel shall be borne by the Indemnitee unless the Indemnitor
shall agree otherwise; provided, however, if the named parties to any such
-------- -------
proceeding (including any impleaded parties) include both the Indemnitee
and the Indemnitor, the Indemnitor requires that the same counsel represent
-114-
<PAGE>
both the Indemnitee and the Indemnitor, and representation of both parties
by the same counsel would be inappropriate due to actual or potential
differing interests between them, then the Indemnitee shall have the right
to retain its own counsel at the cost and expense of the Indemnitor. If
the Indemnitor shall have failed to assume the defense of any Third Party
Claim in accordance with the provisions of this Section, then the
Indemnitee shall have the absolute right to control the defense of such
Third Party Claim, and, if and when it is finally determined that the
Indemnitee is entitled to indemnification from the Indemnitor hereunder,
the fees and expenses of Indemnitee's counsel shall be borne by the
Indemnitor, provided that the Indemnitor shall be entitled, at its expense,
--------
to participate in (but not control) such defense. The Indemnitor shall
have the right to settle or compromise any such Third Party Claim for which
it is providing indemnity so long as such settlement does not impose any
obligations on the Indemnitee (except with respect to providing releases of
the third party). The Indemnitor shall not be liable for any settlement
effected by the Indemnitee without the Indemnitor's consent except where
the Indemnitee has assumed the defense because Indemnitor has failed or
refused to do so. The Indemnitor may assume and control, or bear the costs,
of any such defense subject to its reservation of a right to contest the
Indemnitee's right to indemnification hereunder, provided that it gives the
--------
Indemnitee notice of such reservation within fifteen (15) days of the date
of the Claim Notice.
ARTICLE 12
GENERAL PROVISIONS
Section 12.1 Notices. All notices, requests, demands, waivers,
-------
consents and other communications hereunder shall be in writing, shall be
delivered either in person, by telegraphic, facsimile or other electronic
means, by overnight air courier or by mail, and shall be deemed to have
been duly given and to have become effective (a) upon receipt if delivered
in person or by telegraphic, facsimile or other electronic means, (b) one
business day after having been delivered to an air courier for overnight
delivery or (c) three business days after having been deposited in the
mails as certified or registered mail, return receipt requested, all fees
prepaid, directed to the parties or their permitted assignees at the
following addresses (or at such other address as shall be given in writing
by a party hereto):
If to Seller, addressed to:
-115-
<PAGE>
National Medical Enterprises
2700 Colorado Avenue
Santa Monica, CA 90404
Attn: Treasurer
Facsimile: (310) 998-6507
with a copy to counsel for Seller:
National Medical Enterprises
2700 Colorado Avenue
Santa Monica, CA 90404
Attn: General Counsel
Facsimile: (310) 998-6956
and
Munger, Tolles & Olson
355 South Grand Avenue
35th Floor
Los Angeles, CA 90071
Attn: Robert L. Adler
Facsimile: (213) 687-3702
If to Buyer, addressed to:
Charter Medical Corporation
577 Mulberry St.
Macon, GA 31298
Attn: Executive Vice President - Finance
Facsimile: (912) 751-2832
with a copy to counsel for Buyer:
King & Spalding
191 Peachtree Street
Atlanta, GA 30303-1763
Attn: Robert W. Miller
Facsimile: (404) 572-5144
Section 12.2 Attorneys' Fees. In any litigation or other proceeding
---------------
relating to this Agreement, including litigation with respect to any
Related
-116-
<PAGE>
Agreement (but excluding any proceedings under Sections 2.6(b),
---------------
2.6(c) or 2.14), the prevailing party shall be entitled to recover its
------ -----
costs and reasonable attorneys' fees.
Section 12.3 Successors and Assigns. The rights under this Agreement
----------------------
shall not be assignable or transferable nor the duties delegable by either
party without the prior written consent of the other; and nothing contained
in this Agreement, express or implied, is intended to confer upon any
person or entity, other than the parties hereto and their permitted
successors-in-interest and permitted assignees, any rights or remedies
under or by reason of this Agreement unless so stated to the contrary.
Notwithstanding the foregoing, (a) Buyer may grant to its lenders a
security interest in its rights under this Agreement, and (b) subject to
the terms and provisions of Section 5.7, Buyer may assign its rights under
-----------
Section 5.7 to the entities and in the circumstances described in Section
----------- -------
5.7(d).
------
Section 12.4 Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 12.5 Captions and Paragraph Headings. Captions and paragraph
-------------------------------
headings used herein are for convenience only and are not a part of this
Agreement and shall not be used in construing it.
Section 12.6 Entirety of Agreement; Amendments. This Agreement
---------------------------------
(including the Schedules and Exhibits hereto), the other documents and
instruments specifically provided for in this Agreement, and the First
Facilities Agreement contain the entire understanding between the parties
concerning the subject matter of this Agreement and such other documents
and instruments and, except as expressly provided for herein, supersede all
prior understandings and agreements, whether oral or written, between them
with respect to the subject matter hereof and thereof. There are no
representations, warranties, agreements, arrangements or understandings,
oral or written, between the parties hereto relating to the subject matter
of this Agreement and such other documents and instruments which are not
fully expressed herein or therein. This Agreement may be amended or
modified only by an agreement in writing signed by each of the parties
hereto. All Exhibits and Schedules attached to or delivered in connection
with this Agreement are integral parts of this Agreement as if fully set
forth herein. Without limiting the generality of the foregoing, this
Agreement and the First Facilities Agreement shall, upon their execution,
replace and
-117-
<PAGE>
substitute for that certain Asset Sale Agreement between the parties dated
as of March 29, 1994 related to both the First Facilities and the
Subsequent Facilities which shall be of no further force and effect, it
being agreed that the effectiveness of this Agreement and of the First
Facilities Agreement shall relate back from their actual date of execution
to and including March 29, 1994. The representations and warranties of the
parties made herein shall likewise be deemed to have been made as of March
29, 1994.
Section 12.7 Construction. This Agreement and any documents or
------------
instruments delivered pursuant hereto shall be construed without regard to
the identity of the person who drafted the various provisions of the same.
Each and every provision of this Agreement and such other documents
and instruments shall be construed as though the parties participated
equally in the drafting of the same. Consequently, the parties acknowledge
and agree that any rule of construction that a document is to be construed
against the drafting party shall not be applicable either to this Agreement
or such other documents and instruments.
Section 12.8 Waiver. The failure of a party to insist, in any one or
------
more instances, on performance of any of the terms, covenants and
conditions of this Agreement shall not be construed as a waiver or
relinquishment of any rights granted hereunder or of the future performance
of any such term, covenant or condition, but the obligations of the parties
with respect thereto shall continue in full force and effect. No waiver of
any provision or condition of this Agreement by a party shall be valid
unless in writing signed by such party or operational by the terms of this
Agreement. A waiver by one party of the performance of any covenant,
condition, representation or warranty of the other party shall not
invalidate this Agreement, nor shall such waiver be construed as a waiver
of any other covenant, condition, representation or warranty. A waiver by
any party of the time for performing any act shall not constitute a waiver
of the time for performing any other act or the time for performing an
identical act required to be performed at a later time.
Section 12.9 Governing Law. This Agreement shall be governed in all
-------------
respects, including validity, interpretation and effect, by the laws of the
State of California, without regard to the principles of conflicts of law
thereof, provided that the validity, interpretation and effect of any
--------
instruments by which real property is conveyed at a Scheduled Closing shall
be governed by the laws of the state in which such real property is
located. Any action arising under this Agreement shall be adjudicated (a)
in Los
-118-
<PAGE>
Angeles, California, if brought by Buyer or its Affiliates against
Seller, any Subsidiary or their respective Affiliates, and (b) in
[Atlanta], Georgia, if brought by Seller or its Affiliates against Buyer,
any Buyer Subsidiary or their respective Affiliates, provided that any
cross-claim or counterclaim shall also be adjudicated in the court in which
the underlying action has been brought in accordance with this Section
-------
12.9.
----
Section 12.10 Severability. Whenever possible, each provision of
------------
this Agreement shall be interpreted in such manner as to be valid, binding
and enforceable under applicable law, but if any provision of this
Agreement is held to be invalid, void (or voidable) or unenforceable under
applicable law, such provision shall be ineffective only to the extent held
to be invalid, void (or voidable) or unenforceable, without affecting the
remainder of such provision or the remaining provisions of this Agreement.
Section 12.11 Consents Not Unreasonably Withheld. Wherever the
----------------------------------
consent or approval of any party is required under this Agreement, such
consent or approval shall not be unreasonably withheld, unless such consent
or approval is to be given by such party at the sole or absolute discretion
of such party or is otherwise similarly qualified.
Section 12.12 Time Is of the Essence. Time is hereby expressly made
----------------------
of the essence with respect to each and every term and provision of this
Agreement. The parties acknowledge that each will be relying upon the
timely performance by the other of its obligations hereunder as a material
inducement to each party's execution of this Agreement.
-119-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement
on the date first above written.
Buyer:
CHARTER MEDICAL CORPORATION
By __________________________
Name _______________________
Title ______________________
Seller:
NATIONAL MEDICAL ENTERPRISES,
INC.
By __________________________
Name ____________________
Title ___________________
-120-
<PAGE>
EXHIBIT A
---------
BULK BILL OF SALE AND ASSIGNMENT
(General Closing)
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, NATIONAL MEDICAL ENTERPRISES, INC., a
Nevada corporation (the "Seller"), and each subsidiary of Seller set forth
in Rider A hereto (individually a "Subsidiary" and collectively, the
"Subsidiaries"), pursuant to, and subject to the terms, provisions and
conditions of, that certain Asset Sale Agreement (Subsequent Facilities)
dated ________________, 1994 (the "Agreement"), by and between Seller and
CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), do
hereby sell, convey, assign, transfer and deliver to Buyer, its successors
and assigns, the Transferred Assets of Seller and the Subsidiaries
described in the Agreement, except for those Transferred Assets sold,
conveyed, assigned, transferred or delivered by Seller or a Subsidiary to
Buyer or to a subsidiary of Buyer pursuant to separate instruments of sale,
conveyance, assignment, transfer or delivery, including, without
limitation, any Facility Specific Bill of Sale and Assignment, any deed, or
any Assignment and Assumption of Real Property Lease.
The sale, conveyance, assignment, transfer and delivery made
hereunder is made without warranty of any kind, except as may be provided
in the Agreement, including the warranty of merchantability or fitness for
any purpose.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement. This instrument is governed by
and subject to all of the representations, warranties, covenants,
indemnities and other terms and conditions of the Agreement.
A-1
<PAGE>
IN WITNESS WHEREOF, the Seller and each Subsidiary have executed
this Bulk Bill of Sale and Assignment this ___ day of _________, 1994,
effective as of the date and time specified in the Agreement.
NATIONAL MEDICAL ENTERPRISES,
INC.
For Itself And As Attorney-In-Fact
For The Subsidiaries Listed In Rider A
By: ___________________________
Title: ________________________
A-2
<PAGE>
RIDER A
-------
TO
--
BULK BILL OF SALE AND ASSIGNMENT
--------------------------------
(List of Subsidiaries)
A-3
<PAGE>
FACILITY SPECIFIC
BILL OF SALE AND ASSIGNMENT
(Facility No. ___)
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, NATIONAL MEDICAL ENTERPRISES, INC., a
Nevada corporation (the "Seller"), and each subsidiary of Seller set forth
in Rider A hereto (individually a "Subsidiary" and collectively, the
"Subsidiaries"), pursuant to, and subject to the terms, provisions and
conditions of, that certain Asset Sale Agreement (Subsequent Facilities)
dated __________________, 1994 (the "Agreement"), by and between Seller and
CHARTER MEDICAL CORPORATION, a Delaware corporation (the "Buyer"), do
hereby sell, convey, assign, transfer and deliver to the subsidiary of
Buyer identified in Rider A hereto (the "Buyer's Subsidiary"), its
successors and assigns, the Transferred Assets of Seller and the
Subsidiaries described in the Agreement that are related to the healthcare
facilities identified in Rider A hereto (together with related outpatient
or satellite clinics, if any, the "Facilities"), except for those
Transferred Assets sold, conveyed, assigned, transferred or delivered by
Seller or a Subsidiary to Buyer or to Buyer's Subsidiary pursuant to
separate instruments of sale, conveyance, assignment, transfer or delivery,
of even date herewith, including, without limitation, any deed, or any
Assignment and Assumption of Real Property Lease.
The sale, conveyance, assignment, transfer and delivery made
hereunder is made without warranty of any kind, except as may be provided
in the Agreement, including the warranty of merchantability or fitness for
any purpose.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement. This instrument is governed by
and subject to all of the representations, warranties, covenants,
indemnities and other terms and conditions of the Agreement.
A-4
<PAGE>
IN WITNESS WHEREOF, the Seller and each Subsidiary have executed
this Facility Specific Bill of Sale and Assignment this ___ day of
_________, 1994, effective as of the date and time specified in the
Agreement.
NATIONAL MEDICAL ENTERPRISES,
INC.
For Itself And As Attorney-In-Fact
For The Subsidiaries Listed In Rider A
By: ___________________________
Title: ________________________
A-5
<PAGE>
RIDER A
-------
TO
--
FACILITY SPECIFIC BILL OF SALE AND ASSIGNMENT
---------------------------------------------
1. Subsidiaries of Seller:
----------------------
______________________________
______________________________
NME Psychiatric Properties, Inc.
NME Psychiatric Hospitals, Inc.
NME Hospitals, Inc.
2. Facilities:
----------
______________________________
______________________________
______________________________
Related outpatient facilities:
______________________________
______________________________
______________________________
3. Buyer's Subsidiary:
------------------
______________________________
A-6
<PAGE>
EXHIBIT B
---------
ASSIGNMENT AND ASSUMPTION OF REAL
PROPERTY LEASE
(Facility No. ___)
WHEN RECORDED, MAIL TO:
THIS ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE (this
"Assignment") is entered into as of _____________, 1994, by and between the
undersigned assignor (the "Assignor") and the undersigned assignee (the
"Assignee"), pursuant to that certain Asset Sale Agreement (Subsequent
Facilities) dated __________, 1994 (the "Asset Sale Agreement"), by and
between the parent corporation of the Assignor, National Medical
Enterprises, Inc., a Nevada corporation (the "Assignor's Parent"), and the
parent corporation of the Assignee, Charter Medical Corporation, a Delaware
corporation (the "Assignee's Parent").
WITNESSETH:
-----------
WHEREAS, Assignor is the tenant under that certain real property
lease described in Rider A attached hereto wherein Assignor leases that
certain real property described in Rider B attached hereto (the "Real
Property Lease"); and
WHEREAS, Assignor desires to assign all of its right, title and
interest under the Real Property Lease and Assignee desires to assume all
of Assignor's obligations thereunder;
NOW, THEREFORE, the parties agree as follows:
B-1
<PAGE>
1. Assignment of Lease. Assignor hereby assigns unto Assignee
-------------------
all of the Assignor's right, title and interest in the Real Property Lease,
including, without limitation, any rights to renew, terminate or extend the
term of the Real Property Lease, and any rights of first refusal respecting
and options to purchase the leased premises that are the subject of the
Real Property Lease.
2. Assumption of Real Property Lease Obligations. Assignee and
---------------------------------------------
Assignee's Parent, jointly and severally, do hereby assume all of the
obligations of the Assignor under the Real Property Lease and all of the
obligations of any guarantor of the Assignor's obligations under the Real
Property Lease.
3. General Provisions. Assignee and Assignee's Parent hereby
------------------
confirm that Assignee has irrevocably appointed Assignee's Parent as its
sole and exclusive representative, agent and attorney-in-fact with respect
to all matters arising from or related to this Assignment. Notices
hereunder to the Assignor or the Assignor's Parent, or to the Assignee or
the Assignee's Parent, as the case may be, shall be given to the Assignor's
Parent or the Assignee's Parent, as the case may be, in accordance with the
provisions of the Asset Sale Agreement. The provisions of this Assignment
shall be binding upon and inure to the benefit of each party hereto, the
Assignor's Parent, any guarantor of the Assignor's obligations under the
Real Property Lease, the lessor under the Real Property Lease, and the
respective predecessors, successors and permitted assigns of each of the
foregoing. Unless otherwise expressly provided by the Real Property Lease,
nothing in this Assignment and Assumption shall relieve the Assignor of its
obligations to the lessor under the Real Property Lease or any such
guarantor of its obligations under any such guaranty. This instrument is
governed by and subject to all of the representations, warranties,
covenants, indemnities and other terms and conditions of the Asset Sale
Agreement.
B-2
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Assignment
as of the day and year first above written.
ASSIGNOR:
______________________________,
a _______________ corporation
By: __________________________
Title: _________________________
And By: ______________________
Title: _________________________
ASSIGNEE:
______________________________,
a ________________ corporation
By: _____________________________
Title: ___________________________
And By: _________________________
Title: ___________________________
CHARTER MEDICAL CORPORATION
By: _____________________________
Title: ___________________________
And By: ________________________
Title: ___________________________
B-3
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On ___________________, 1994, before me, the undersigned, a
Notary Public in and for said County and State, personally appeared,
____________________ and _____________________, proved to me on the basis
of satisfactory evidence to be the persons whose names are subscribed to
the within instrument and acknowledged to me that they executed the same in
their authorized capacities as ____________________ and _______________,
respectively, of ___________________________________, a _____________
corporation, and that by their signatures on the instrument, the entity
upon behalf of which the persons acted, executed the instrument.
WITNESS my hand and official seal.
_____________________________
Notary Public
(Notary Seal)
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On ___________________, 1994, before me, the undersigned, a
Notary Public in and for said County and State, personally appeared,
____________________ and _____________________, proved to me on the basis
of satisfactory evidence to be the persons whose names are subscribed to
the within instrument and acknowledged to me that they executed the same in
their authorized capacities as ____________________ and _______________,
respectively, of ___________________________________, a _______________
corporation, and that by their signatures on the instrument, the entity
upon behalf of which the persons acted, executed the instrument.
WITNESS my hand and official seal.
_____________________________
Notary Public
B-4
<PAGE>
(Notary Seal)
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On ___________________, 1994, before me, the undersigned, a
Notary Public in and for said County and State, personally appeared,
____________________ and _____________________, proved to me on the basis
of satisfactory evidence to be the persons whose names are subscribed to
the within instrument and acknowledged to me that they executed the same in
their authorized capacities as ____________________ and _______________,
respectively, of Charter Medical Corporation, a Delaware corporation, and
that by their signatures on the instrument, the entity upon behalf of which
the persons acted, executed the instrument.
WITNESS my hand and official seal.
_____________________________
Notary Public
(Notary Seal)
B-5
<PAGE>
RIDER A
-------
TO
--
ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE
------------------------------------------------
(Description of Lease and Any Separate
First Refusal Rights and/or Purchase Options)
__________________________________.
B-6
<PAGE>
RIDER B
-------
TO
--
ASSIGNMENT AND ASSUMPTION OF REAL PROPERTY LEASE
------------------------------------------------
(Description of Leased Premises)
______________________________
______________________________
______________________________
B-7
<PAGE>
EXHIBIT C
---------
GENERAL ASSUMPTION AGREEMENT
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, and pursuant to, and subject to the
terms, provisions and conditions of, that certain Asset Sale Agreement
(Subsequent Facilities) dated ___________, 1994 (the "Agreement"), by and
between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the
"Seller") and CHARTER MEDICAL CORPORATION, a Delaware corporation (the
"Buyer"), Buyer does hereby assume, and does hereby agree to pay, discharge
and perform as and when due, the Assumed Liabilities described in the
Agreement of Seller and of each subsidiary of Seller set forth in Rider A
hereto (individually a "Subsidiary" and collectively, the "Subsidiaries"),
except for those Assumed Liabilities assumed, jointly and severally, by
Buyer and a subsidiary of Buyer pursuant to separate instruments of
assumption, including, without limitation, any Facility Specific Assumption
Agreement or any Assignment and Assumption of Real Property Lease executed
by Buyer and/or any subsidiary of Buyer in favor of Seller and/or any of
the Subsidiaries.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement. This instrument is governed by
and subject to all of the representations, warranties, covenants,
indemnities and other terms and conditions of the Agreement.
This Assumption Agreement is being delivered in favor of Seller
and each of the Subsidiaries.
C-1
<PAGE>
IN WITNESS WHEREOF, Buyer has executed this Assumption Agreement
this ___ day of ________, 1994, effective as of the date and time specified
in the Agreement.
CHARTER MEDICAL CORPORATION
By: _____________________________
Title: ___________________________
C-2
<PAGE>
RIDER A
-------
TO
--
GENERAL ASSUMPTION AGREEMENT
----------------------------
(List of Subsidiaries)
C-3
<PAGE>
FACILITY SPECIFIC ASSUMPTION AGREEMENT
(Facility No. ___)
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, and pursuant to, and subject to the
terms, provisions and conditions of, that certain Asset Sale Agreement
(Subsequent Facilities) dated _____________, 1994 (the "Agreement"), by and
between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation (the
"Seller") and CHARTER MEDICAL CORPORATION, a Delaware corporation (the
"Buyer"), Buyer and the subsidiary of Buyer identified in Rider A hereto
(the "Buyer's Subsidiary"), jointly and severally, do hereby assume, and do
hereby agree to pay, discharge and perform as and when due, the Assumed
Liabilities described in the Agreement of Seller and of each subsidiary of
Seller set forth in Rider A hereto (individually a "Subsidiary" and
collectively, the "Subsidiaries") that are related to the healthcare
facilities identified in Rider A hereto (together with related outpatient
or satellite clinics, if any, the "Facilities"), except for those Assumed
Liabilities assumed, jointly and severally, by Buyer and the Buyer's
Subsidiary pursuant to separate instruments of assumption, of even date
herewith, including, without limitation, Assignment and Assumption of Real
Property Lease executed by Buyer and/or the Buyer's Subsidiary in favor of
Seller and/or any of the Subsidiaries.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement. This instrument is governed by
and subject to all of the representations, warranties, covenants,
indemnities and other terms and conditions of the Agreement.
This Facility Specific Assumption Agreement is being delivered in
favor of Seller and each of the Subsidiaries.
C-4
<PAGE>
IN WITNESS WHEREOF, Buyer and the Buyer's Subsidiary have
executed this Facility Specific Assumption Agreement this ___ day of
_________, 1994, effective as of the date and time specified in the
Agreement.
BUYER'S SUBSIDIARY:
______________________________,
a _______________ corporation
By: __________________________
Title: ________________________
CHARTER MEDICAL CORPORATION
By: ______________________________
Title: _____________________________
C-5
<PAGE>
RIDER A
-------
TO
--
FACILITY SPECIFIC ASSUMPTION AGREEMENT
--------------------------------------
1. Subsidiaries of Seller:
----------------------
______________________________
______________________________
NME Psychiatric Properties, Inc.
NME Psychiatric Hospitals, Inc.
NME Hospitals, Inc.
2. Facilities:
----------
______________________________
______________________________
______________________________
Related outpatient facilities:
______________________________
______________________________
______________________________
3. Buyer's Subsidiary:
------------------
______________________________
C-6
<PAGE>
EXHIBIT D
---------
NATIONAL PURCHASING PARTICIPATION AGREEMENT
-------------------------------------------
THIS NATIONAL PURCHASING PARTICIPATION AGREEMENT (the "Agreement") is
---------
made and entered into as of the ___ day of _____________, 1994, by and
between NATIONAL MEDICAL ENTERPRISES, INC., a Nevada corporation
("Seller"), and CHARTER MEDICAL CORPORATION, a Delaware corporation
------
("Buyer"), with reference to the following facts.
-----
A. Buyer and Seller are parties to a Asset Sale Agreement (Subsequent
Facilities) dated ___________, 1994 (the "Asset Sale Agreement"), pursuant
--------------------
to which Seller is causing certain of its wholly-owned subsidiaries (the
"Subsidiaries") to sell, and Buyer and certain of its wholly-owned
-------------
subsidiaries (the "Buyer Subsidiaries") are buying, certain mental health
------------------
facilities (the "Facilities") and related assets (such Facilities and
----------
related assets being referred to as the "Transferred Assets") through which
------------------
the Subsidiaries have provided mental health services to the public.
B. To assist in the orderly transition in the ownership of the
Facilities following the purchases and sales contemplated by the Asset Sale
Agreement (the "Transactions"), Seller has agreed to, or will cause its
------------
pertinent Affiliates (as such term is defined in the Asset Sale Agreement)
to, permit the Facilities to participate in certain national purchasing
contracts of Seller and its Affiliates (together, the "Seller Group") to
------------
the extent such Facilities have previously participated therein, all in
accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
agreements contained herein and in the Asset Sale Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
Section 1 Participation In National Purchasing Contracts. On the
----------------------------------------------
terms and subject to the conditions hereof, Seller hereby agrees to
exercise its reasonable commercial efforts for the term set forth in
Section 6.1 to permit Buyer and the Buyer Subsidiaries to participate to
the extent they
D-1
<PAGE>
choose in the national purchasing contracts or programs of Seller and its
Affiliates set forth in Rider A hereto (as modified from time to time, the
"National Contracts") on substantially the same basis as members of the
------------------
Seller Group participate in such National Contracts, provided that such
--------
participation shall be solely for the purpose of supporting and shall be
limited to the operations of the Facilities.
Section 2 Primary Negotiating Party. Buyer agrees that Seller or
-------------------------
pertinent members of the Seller Group shall remain the primary negotiating
party (the "Primary Negotiating Party") with respect to dealing with third
-------------------------
parties under all such National Contracts, and Buyer agrees that without
the prior written consent of Seller or the pertinent member of the Seller
Group (which consent shall be in the absolute discretion of Seller or such
pertinent member of the Seller Group), neither Buyer nor any Affiliate of
Buyer (the "Buyer Group") shall initiate any discussions or engage in any
-----------
dealings with third parties with respect to matters arising under or
related to such National Contracts. Seller agrees to cause the Primary
Negotiating Party to consider the unique needs of the Facilities when
negotiating terms, provisions and purchasing arrangements under such
National Contracts, but the Primary Negotiating Party shall be under no
obligation to expend any efforts, reasonable or otherwise, to address such
needs if to do so would cause any economic detriment to any member of the
Seller Group.
Section 3 Fees and Charges. In consideration for participation in
----------------
the National Contracts, Buyer agrees as follows:
3.1 Buyer shall pay Seller a monthly participation fee (the
"Participation Fee") as set forth in Rider B hereto. Such Participation
------------------
Fee shall be payable on the first day of each month during the term of this
Agreement, pro-rated for partial periods.
3.2 In the event that, pursuant to arrangements applicable to a
particular purchase or purchases under a National Contract, a member of the
Buyer Group becomes directly obligated to third parties for the Cost of
goods and services provided to such member of the Buyer Group, then such
member of the Buyer Group shall promptly pay to such third parties the
Costs billed to such member of the Buyer Group upon presentation to it of
reasonably detailed invoices therefor, such payments to be made in
accordance with the terms and tenor of such invoices.
D-2
<PAGE>
3.3 Buyer hereby agrees to indemnify and hold harmless Seller
and each member of the Seller Group from and against any and all loss,
liability, damage and expense, including reasonable attorneys' fees and
costs of investigation, litigation, settlement and judgment, which Seller
and each member of the Seller Group may sustain or suffer or to which they
may become subject as a result of any failure of any member of the Buyer
Group to comply with the foregoing provisions of this Section 3.
---------
Section 4 Disclaimer of Warranties. Seller agrees to use reasonable
------------------------
efforts to permit members of the Buyer Group to participate in the National
Contracts to the extent set forth in Section 1, but no member of the Seller
---------
Group shall be liable to any member of the Buyer Group for any loss, damage
or expense which may result from such participation, for negligent
performance by any member of the Seller Group in connection with such
participation, or for any changes in the terms, manner, method or mode by
which goods and services are procured under the National Contracts.
Neither Seller nor any member of the Seller Group makes any warranty,
express or implied, to Buyer or any member of the Buyer Group respecting
goods and services supplied under a National Contract or this Agreement,
including without limitation warranties of merchantability or fitness for a
particular purpose, and as between members of the Seller Group and members
of the Buyer Group, goods and services shall be provided and accepted "AS
IS" and "WITH ALL FAULTS." Without limiting the generality of the
foregoing, Seller agrees to exercise reasonable efforts, and to cause
members of the Seller Group to exercise reasonable efforts, to pass through
to pertinent members of the Buyer Group the benefit of any warranties
provided by third parties, to the extent permitted by the warranties in
question, with respect to goods and services supplied by such third parties
to such members of the Buyer Group, provided that such reasonable efforts
--------
shall not include the initiation of any legal proceedings and provided
--------
further that Buyer shall, or shall cause the pertinent member or members of
-------
the Buyer Group to, reimburse Seller and each member of the Seller Group
for any expenses incurred by them in connection with passing through the
benefit of any such warranty or warranties.
Section 5 Limitation on Obligations of Seller Group. The parties
-----------------------------------------
agree that the sole obligation of Seller and members of the Seller Group
under this Agreement is to exercise reasonable efforts to permit, subject
to the terms hereof and the terms of the National Contracts, members of the
Buyer Group to participate in the National Contracts. Nothing herein shall
obligate any member of the Seller Group to enforce any rights of any
D-3
<PAGE>
member of the Buyer Group arising under any National Contract or with
respect to any third party. Absent fraud or conversion, and
notwithstanding the form in which any claim or action may be brought or
asserted, the liability of members of the Seller Group for acts or
omissions arising from or relating to the performance of this Agreement
shall be limited to repayment, as general damages, of the Participation Fee
paid by Buyer for the month or months in which such acts or omissions
occurred, and no member of the Seller Group shall, under any circumstances,
have any other financial liability hereunder to members of the Buyer Group
whatsoever. Buyer agrees, and shall cause each participating member of the
Buyer Group to agree, that the provisions of this Section 5 limiting their
---------
remedies and liquidating their damages are reasonable in the circumstances
existing on the date of this Agreement.
Section 6 Term and Termination.
--------------------
6.1 This Agreement is effective on the date first written above,
and shall remain in effect for the term set forth herein unless sooner
terminated in accordance with the provisions hereof. The initial term of
this Agreement shall be for a period of ___________ ( ) days from the
date first written above. The term of this Agreement may be extended by
mutual agreement of the parties, provided that such mutual agreement shall
-------------
be evidenced by a duly executed amendment to this Agreement.
6.2 Buyer may terminate this Agreement upon written notice if
Seller or any member of the Seller Group commits any material breach of
this Agreement, and fails to cure the breach within thirty (30) days after
written notice or, if the breach cannot be cured within thirty (30) days,
fails to commence diligent efforts to cure the breach within that period.
6.3 Seller may terminate the participation of Buyer or any
member of the Buyer Group with respect to any National Contract in
accordance with Section 7.2. In addition, Seller may terminate this
Agreement upon written notice to Buyer if Buyer or any member of the Buyer
Group (i) fails to pay any amount when due hereunder, or (ii) commits any
material breach of this Agreement and, if such breach is other than a
failure to pay any amount when due hereunder, fails to cure the breach
within thirty (30) days after written notice or, if the breach cannot be
cured within thirty (30) days, fails to commence diligent efforts to cure
the breach within that period.
D-4
<PAGE>
6.4 Buyer may terminate this Agreement, with or without cause,
upon forty-five (45) days' written notice.
6.5 Seller may terminate this Agreement if Buyer or any Buyer
Subsidiary becomes insolvent or admits in writing its insolvency or
inability to pay its debts as they become due; is unable or does not pay
its debts as they become due; makes or proposes an assignment for the
benefit of creditors; convenes or proposes to convene a meeting of its
creditors or any class thereof, for purposes of effecting a moratorium upon
or extension or composition of its debts; proposes any such moratorium,
extension or composition; or commences or has filed against it any
bankruptcy, reorganization, liquidation or insolvency proceeding under any
law in any jurisdiction for the relief of debtors; or if any receiver,
trustee, liquidator or custodian is appointed to take possession of any
substantial portion of its assets.
6.6 Termination of this Agreement in whole or in part, for
cause, shall be without prejudice to any other remedy otherwise available
to the innocent party.
Section 7 General Provisions.
------------------
7.1 Force Majeure. If any party's performance is prevented,
-------------
hindered or delayed by reason of any cause(s) beyond such party's
reasonable control ("Force Majeure") which cannot be overcome by reasonable
-------------
diligence, including without limitation, war, labor disputes, civil
disorders, governmental acts, epidemics, quarantines, embargoes, fires,
earthquakes, storms, power failures, equipment failures, transmission
failures, or acts of God, such party shall be excused from performance to
the extent that it is prevented, hindered or delayed thereby, during the
continuance of such cause(s); and such party's obligations hereunder shall
be excused so long as and to the extent that such cause(s) prevent or delay
performance.
7.2 Requirements of Third Parties. Notwithstanding any other
-----------------------------
provision hereof, Buyer acknowledges and agrees that members of the Buyer
Group shall not be entitled to participate in one or more National
Contracts to the extent that to do so would violate the contractual
arrangements that may exist from time to time between members of the Seller
Group and third party suppliers and vendors or to the extent that such
participation is unacceptable to any such third party supplier or vendor,
and
D-5
<PAGE>
that the continued participation of any member of the Buyer Group in one or
more National Contracts may be terminated immediately upon written notice
to Buyer in such event.
7.3 Entirety of Agreement; Amendments. This Agreement
---------------------------------
(including the Riders hereto), the Asset Sale Agreement (including the
Schedules and Exhibits thereto), and the other documents and instruments
specifically provided for herein and therein contain the entire
understanding between the parties concerning the subject matter of this
Agreement and such other documents and instruments and, except as expressly
provided for herein or therein, supersede all prior understandings and
agreements, whether oral or written, between them with respect to the
subject matter hereof and thereof. The are no representations, warranties,
agreements, arrangements or understandings, oral or written, between the
parties hereto relating to the subject matters of this Agreement and such
other documents and instruments which are not fully expressed herein or
therein. This Agreement may be amended or modified only by an agreement in
writing signed by each of the parties hereto.
7.4 Incorporation of Provisions of Asset Sale Agreement. The
---------------------------------------------------
following provisions of the Asset Sale Agreement are incorporated herein by
reference mutatis mutandis: Sections 2.16, 12.1 through 12.5, and 12.7
------------- ---- ---- ----
through 12.12.
-----
D-6
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement
on the date first above written.
Buyer:
CHARTER MEDICAL CORPORATION
For Itself and as Duly
Authorized Agent and
Attorney-In-Fact for each
Buyer Subsidiary
By __________________________
Name _______________________
Title ______________________
Seller:
NATIONAL MEDICAL ENTERPRISES,
INC.
By __________________________
Name ____________________
Title ___________________
D-7
<PAGE>
RIDER A
-------
TO
--
NATIONAL PURCHASING PARTICIPATION AGREEMENT
-------------------------------------------
[List of National Purchasing Contracts Attached Hereto]
D-8
<PAGE>
RIDER B
-------
TO
--
NATIONAL PURCHASING PARTICIPATION AGREEMENT
-------------------------------------------
(Participation Fee To Come)
D-9
<PAGE>
EXHIBIT E
REMAINING SCHEDULES
None
E-1
<PAGE>
EXHIBIT 10(iii)
SEVERANCE PROTECTION AGREEMENT
This Agreement dated as of June 28, 1994 (this "Agreement"), between
National Medical Enterprises, Inc., a Nevada corporation (the "Company"), and
Barry Schochet (the "Executive").
WITNESSETH:
WHEREAS, the Executive is currently employed by the Company as its
President and Chief Operating Officer, Hospital Division; and
WHEREAS, the Executive has extensive management experience in acute
hospital management and the operation of the Company, and such experience is
very important to the continued success of the Company, as well as to the
orderly transition of the Company should a change in corporate control and
ownership occur; and
WHEREAS, the Company believes that it is in the best interests of the
Company and its shareholders to enter into agreements with certain key officers,
including the Executive, in order to ensure their retention.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the terms set forth
-----------
in this Section shall have the following meanings:
a. A "Change of Control" of the Company shall be deemed to have
occurred if: (i) any Person is or becomes the beneficial
owner directly or indirectly of securities of the Company
representing 30% or more of the combined Voting Stock of the
Company or; (ii) individuals who, as of April 1, 1994,
constitute the Board of Directors of the Company (the
"Incumbent Board") cease for any reason to constitute at
least a majority of the Board of Directors; provided,
however, that (a) any individual who becomes a director of
the Company subsequent to April 1, 1994, whose election, or
nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be deemed to have
been a member of the Incumbent Board and (b) no individual
who was elected initially (after April 1, 1994) as a director
as a result of an actual or threatened election contest, as
such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as
amended, or any other actual or threatened solicitations of
proxies or consents by or on behalf of any person other than
the Incumbent Board shall be deemed to have been a member of
the Incumbent Board.
b. "Person" shall mean an individual, firm, corporation or other
entity or any successor to such entity, together with all
Affiliates and Associates of such Person, but "Person" shall
not include the Company, any subsidiary of the Company, any
<PAGE>
employee benefit plan or employee stock plan of the Company or
any subsidiary of the Company, or any Person organized,
appointed, established or holding Voting Stock by, for or
pursuant to the terms of such a plan.
c. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as
amended.
d. "Voting Stock" with respect to a corporation shall mean shares
of that corporation's capital stock having general voting
power, with "voting power" meaning the power under ordinary
circumstances (and not merely upon the happening of a
contingency) to vote in the election of directors.
e. "Cause" shall mean: the willful, substantial, continued and
unjustified refusal of the Executive to perform the duties of
his office to the extent of his ability to do so; any conduct
on the part of the Executive which constitutes a breach of any
statutory or common law duty of loyalty to the Company; any
illegal or publicly immoral act by the Executive which
materially and adversely affects the business of the Company;
the physical or mental disability of the Executive as
determined by the Board of Directors of the Company resulting
in his inability to perform his duties hereunder; or the death
of the Executive.
2. PAYMENTS UPON CHANGE OF CONTROL. If a Change of Control of the
-------------------------------
Company occurs within two years from the date of this Agreement and at any time
during the two-year period thereafter, the Executive's employment is Terminated
without cause or the Executive voluntarily Terminates Employment from his
position as President and Chief Operating Officer of the Hospital Division
following (a) a material downward change in the functions, duties, or
responsibilities which reduce the rank or position of the Executive; (b) (i) a
reduction in the Executive's annual base salary, or (ii) a material reduction in
the Executive's annual incentive plan bonus payment other than for financial
performance as it broadly applies to all similarly situated Executives in the
same plan, or (iii) a material reduction in the Executive's retirement or
supplemental retirement benefits that does not broadly apply to all Executives
in the same plan or; (c) transfer of the Executive's office to a location that
is more than fifty (50) miles from the Executive's current principal office
location, then in any such event, the Company shall pay the Executive a
severance benefit in cash within 30 days after such termination in an amount
equal to two times the Executive's annual base salary then in effect.
3. GOLDEN PARACHUTE CAP. Notwithstanding any provision in this Agreement
--------------------
to the contrary, in no event shall the total payments under this Agreement that
are deemed to be contingent upon a Change of Control in accordance with the
rules set forth in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), when added to the present value of all other payments that are
payable to the Executive and are contingent upon a Change of Control, exceed an
amount equal to two hundred and ninety-nine percent (299%) of the
-2-
<PAGE>
Executive's "base amount" as that term is defined in Section 280G of the Code
and regulations thereunder.
4. WAIVER OF CONDITION PRECEDENT. In the event of termination of
-----------------------------
employment per Paragraph 2 of this Agreement, then Paragraph 5.7(ii) of the
Supplemental Executive Retirement Plan is waived.
5. ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any rights or
--------------------------
obligations hereunder may be assigned or pledged by the Executive. This
Agreement and the rights and obligations of the parties hereunder shall be
binding upon, and inure to the benefit of, the parties hereto, the heirs and
legal representatives of the Executives and the successors and assigns of the
Company.
6. NO RIGHT TO EMPLOYMENT. Nothing herein shall confer upon the
----------------------
Executive any right to continue in the employ of the Company or a subsidiary
thereof or shall interfere in any way with the right of the Company or any
subsidiary to terminate such employment at any time.
7. SEVERABILITY. Should any provision of this Agreement be declared
------------
illegal or unenforceable by any court of competent jurisdiction in any action or
proceeding, and such provision cannot be modified to be enforceable, such
provision shall immediately become null and void and the parties shall
renegotiate such provision in good faith, leaving the remainder of this
Agreement in full force and effect.
8. NOTICES. Any notice to be given hereunder shall be effective upon
-------
receipt, shall be in writing and shall be personally delivered or sent by
registered or certified mail, postage prepaid to the following address or such
other places as either party shall designate in writing:
If to the Company: National Medical Enterprises, Inc.
2700 Colorado Avenue
Santa Monica, California
Attention: Chief Executive Officer
with a copy to: National Medical Enterprises, Inc.
2700 Colorado Avenue
Santa Monica, California
Attention: General Counsel
If to the Executive: _________________________________________
_________________________________________
_________________________________________
_________________________________________
9. NO ORAL MODIFICATIONS. This Agreement shall not be amended or
---------------------
modified except by a written instrument executed by both parties to this
Agreement.
10. ENTIRE AGREEMENT. This Severance Protection Agreement contains the
----------------
entire agreement between the parties hereto regarding the subject matter hereof,
and fully supersedes any and all prior agreements or understandings between the
-3-
<PAGE>
parties hereto regarding the subject matter hereof. Each party hereto
acknowledges that no representations, inducements, promises or agreements, oral
or otherwise, have been made by any party, or anyone acting on behalf of any
party, which are not embodied herein, and that no other agreement regarding the
subject matter hereof will be binding. Each party hereto further acknowledges
and agrees that any modifications of this Agreement will be effective only if it
is in writing and signed by the party to be charged.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, other than its rules for
choice of laws.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first above written.
NATIONAL MEDICAL ENTERPRISES, INC.
By: /s/ MICHAEL H. FOCHT, SR.
-----------------------------------
Its: President & Chief Operating Officer
-----------------------------------
___________________________________
Barry Schochet
-4-
<PAGE>
EXHIBIT 10(h)
SEVENTH AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT
THIS SEVENTH AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT (the
"Amendment") is made and dated as of May 28, 1993, between National Medical
Enterprises, Inc., a Nevada corporation ("NME") and The Hillhaven Corporation, a
Nevada corporation ("Hillhaven").
RECITALS
--------
A. NME and Hillhaven are parties to that certain Guarantee Reimbursement
Agreement, dated as of January 31, 1990 (as the same has been or may from time
to time be amended, restated, renewed, replaced, modified or supplemented from
time to time, the "Reimbursement Agreement").
B. Hillhaven has requested that NME enter into that certain Pledge and
Security Agreement and Master Assignment of Mortgages, dated as of May 28, 1993
(the "Pledge Agreement"), pursuant to which NME is assigning certain promissory
notes from Hillhaven to NME, and the mortgages securing such promissory notes,
to Swiss Bank Corporation, as Collateral Agent, to secure NME's obligations
under a guaranty of certain of Hillhaven's "Obligations" (as defined in the
Reimbursement Agreement).
C. In order to induce NME to enter into the Pledge Agreement, Hillhaven
has agreed to amend the Reimbursement Agreement as set forth in this Agreement.
NOW THEREFORE, in consideration of the foregoing Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
AGREEMENT
---------
1. Section 1(a) of the Reimbursement Agreement hereby is amended and
restated to read in its entirety as follows:
(a) Reimbursement. New Hillhaven shall reimburse NME, promptly on
-------------
demand, for all Obligations (including those Obligations set forth in
Appendix B to the Reimbursement Agreement) paid by NME or its subsidiaries
after the Distribution Date not theretofore reimbursed by New Hillhaven.
Without limiting the generality of the foregoing, in the event that NME
pledges or assigns collateral directly or indirectly to secure any
Obligations or NME's obligations with respect thereto, under a guaranty or
otherwise, the amount to be reimbursed by New Hillhaven to NME hereunder
with respect to such Obligations shall be the greater of (x) the face value
of any collateral applied to the satisfaction of the Obligations, and any
other sums then outstanding with respect to such collateral, including
accrued and unpaid interest thereon, and (y) the fair market value of any
collateral, and any proceeds thereon, applied to the satisfacton of the
Obligations (provided, however, that if the collateral is a note secured by
a mortgage or deed of trust, the fair market value of such note shall not
include the fair market value of the real property securing such note).
Payments and notices shall be made or given, as the case may be, in
accordance with the provisions of Sections 1(c), 3 and 9(b).
<PAGE>
2. Reimbursement Agreement Remains in Effect. Except as expressly
-----------------------------------------
amended hereby, the Reimbursement Agreement shall remain in full force and
effect.
3. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California.
4. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed an original, but such counterparts shall together
constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the day and year first above written.
NATIONAL MEDICAL ENTERPRISES, INC.,
a Nevada corporation
By: /s/ Maris Andersons
--------------------------------
Title: Exec. Vice President
-----------------------------
THE HILLHAVEN CORPORATION
a Nevada corporation
By: /s/ Robert Schneider
--------------------------------
Title: VP Treasurer
-----------------------------
-2-
<PAGE>
EXHIBIT 10(i)
EIGHTH AMENDMENT TO GUARANTEE REIMBURSEMENT AGREEMENT
This Eighth Amendment to Guarantee Reimbursement Agreement ("Amendment")
dated as of September 2, 1993, is entered into by and between National Medical
Enterprises, Inc., a Nevada corporation ("NME") and The Hillhaven Corporation, a
Nevada corporation ("New Hillhaven").
RECITALS
A. New Hillhaven and NME are parties to that certain Guarantee Reimbursement
Agreement, dated as of January 31, 1990 (as the same has been or may be amended,
restated, modified, supplemented, renewed or replaced from time to time, the
"Reimbursement Agreement"), which provides, among other things, for the
reimbursement by New Hillhaven of all Obligations (as defined in the
Reimbursement Agreement) paid by NME. Unless otherwise defined herein, all
capitalized terms used herein shall have the same meaning ascribed to such terms
in the Reimbursement Agreement.
B. New Hillhaven, NME, and certain subsidiaries of New Hillhaven and NME, have
entered into that certain letter agreement dated June 22, 1993 (the "June 22
Letter"), which among other things, restructures certain relationships of the
companies. Among the provisions contained in the June 22 Letter that are
pertinent to this Reimbursement Agreement, are the following:
(1) New Hillhaven will obtain financing consisting of (a) third party bank
financing in the approximate amount of $400 million, and (b) public or
private debt financing in the approximate amount of $175 million
(collectively, the "Financing"), a portion of the proceeds of which
Financing will be used to (i) repay certain Obligations currently
guaranteed by NME, and (ii) cause NME and/or certain of its subsidiaries to
be released from certain other Obligations currently guaranteed by NME
and/or certain of its subsidiaries;
(2) The annual guarantee fee payable by New Hillhaven under this
Reimbursement Agreement in connection with the Obligations shall be limited
to a maximum of 2% of the Obligations outstanding and the manner of
calculating the fee charged on the Obligations outstanding shall be
revised; and
(3) NME and/or certain subsidiaries of NME shall assign to New Hillhaven's
subsidiary, First Healthcare Corporation ("FHC"), and FHC shall assume the
renewal and/or purchase options contained in the Assumed Leases (as that
term is defined in the Reimbursement Agreement) that were not assigned to
FHC on or before the Distribution Date for those facilities described in
Exhibit 1 attached hereto and incorporated herein by this reference (the
"Assumed Lease Options"), and those Assumed Lease Options shall be added to
the Obligations covered by this Reimbursement Agreement, as more
specifically provided herein.
<PAGE>
C. New Hillhaven and NME desire to amend the Reimbursement Agreement as set
forth in this Agreement.
NOW THEREFORE, in consideration of the foregoing Recitals and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree to
amend, modify and supplement the Reimbursement Agreement as follows:
AGREEMENT
1. Calculation of the Guarantee Fee After Completion of Financing. The
---------------------------------------------------------------
provisions of Section 2(c) of the Reimbursement Agreement are hereby amended to
provide that, commencing with the quarterly payment due for the fiscal quarter
ending February 28, 1993, the guarantee fee for each quarter shall be the
product of (i) the amount of the Obligations outstanding at the close of
business on the last day of the preceding fiscal quarter multiplied by (ii) a
fraction which is equal to the applicable fraction for the previous fiscal year
multiplied by 1.2; provided, however, that at no time shall the fraction to be
used in calculating the guarantee fee exceed 2%. Furthermore, notwithstanding
the foregoing guaranty fee provisions, the principal amounts of the Obligations
described in Exhibit 2 and Exhibit 3 attached hereto shall not be included as
part of the Obligations for the purposes of calculating the guarantee fee in the
foregoing sentence. Instead, in accordance with prior agreements, (x) New
Hillhaven shall pay to NME a guarantee fee of 1% per annum on those Obligations
described in Exhibit 2, and (y) no guarantee fee shall be charged on those
Obligations described in Exhibit 3.
2. Proration of Guarantee Fee on Obligations Paid With Proceeds of Financing.
--------------------------------------------------------------------------
Notwithstanding any provisions to the contrary, the guarantee fee paid with
respect to those Obligations that are paid in full, or as to which NME's
guaranty has been released, with proceeds of the Financing during the fiscal
year ending May 31, 1994 shall be prorated to the date of payoff, based on the
actual number of days elapsed until such Obligation is paid in full or such
guaranty has been released.
3. Inclusion of the Assumed Lease Options as Obligations. The Assumed Lease
------------------------------------------------------
Options are hereby added as, and shall be deemed to be, "Obligations" under (and
as defined in) the Reimbursement Agreement, and all terms, covenants and
conditions of the Reimbursement Agreement shall apply; provided, however, that
the guarantee fee set forth in Paragraph 1 above shall be charged on the
aggregate amount of the rents that will become due for the renewal period for
any such Assumed Lease, commencing on the earlier of the date that FHC exercises
or is required to exercise such Assumed Lease Option, as provided by the terms
of the assignment of such Assumed Lease Option.
-2-
<PAGE>
4. Inclusion of Certain Assumed Obligations. To the extent NME or any
-----------------------------------------
subsidiary or affiliate of NME remains primarily or contingently liable
therefor, each of the Assumed Existing Debt and the Assumed Lease described in
Exhibit 4 attached hereto is hereby added as, and shall be deemed to be, an
"Obligation" under (and as defined in) the Reimbursement Agreement, and all
terms, covenants and conditions of the Reimbursement Agreement, including
payment of a guarantee fee as provided in Paragraph 1 above, shall apply to such
Assumed Existing Debt and Assumed Lease.
5. Reaffirmation of Reimbursement Agreement. New Hillhaven reaffirms that
-----------------------------------------
the Reimbursement Agreement, as amended hereby, shall remain in full force and
effect, and shall continue to be binding upon New Hillhaven.
6. Captions. The captions and headings used herein are for the convenience
---------
of reference and shall not be construed in any manner to limit or modify any of
the terms hereof.
7. Governing Law. This Amendment shall be governed by and construed in
--------------
accordance with the laws of the State of California.
8. Counterparts. This Amendment may be executed in counterparts, each of
-------------
which shall be an original, but all of which together shall constitute but one
and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
be duly executed on its behalf as of the date first set forth above.
NATIONAL MEDICAL ENTERPRISES, INC.
By: /s/ Maris Andersons
------------------------------
Title: Executive Vice President
----------------------------
THE HILLHAVEN CORPORATION
By: /s/ Robert Schneider
------------------------------
Title: VP Treasurer
----------------------------
-3-
<PAGE>
EXHIBIT 1
No. Facility Name
- --- -------------
272 Hughes Springs Nursing Home
Hughes Springs, Texas
273 Pinecrest Convalescent Home
Daingerfield, Texas
274 Coastal Care Center
Texas City, Texas
275 Great Southwest Convalescent Center
Grand Prairie, Texas
292 Twin City Nursing Home
Gas City, Indiana
298 Driftwood Convalescent Hospital
Yuba City, California
299 Marysville Convalescent Hospital
Marysville, California
305 University Nursing Center
Upland, Indiana
880 Four States Nursing Home
Texarkana, Texas
881 Southwest Senior Care Center
Las Vegas, New Mexico
760 Ridgeview Nursing and Convalescent Center
Wichita Falls, Texas 76392
860 Blue Hills Centre
Kansas City, Missouri
849 Iliff Care Center
Denver, Colorado
295 Whitehouse Country Manor
Whitehouse, Ohio
184 Greystone Healthcare Center
Blountville, Tennessee
183 Hillhaven Convalescent Center - Ripley
Ripley, Tennessee
<PAGE>
Exhibit 1 (Continued)
189 Fairpark Healthcare Center
Maryville, Tennessee
179 Hillhaven Convalescent Center of Huntington
Huntington, Tennessee
175 Hillhaven of Jefferson City
Jefferson City, Tennessee
171 Hillhaven Convalescent Center
Bolivar, Tennessee
<PAGE>
EXHIBIT 2
A ONE PERCENT GUARANTEE FEE IS PAYABLE ON OBLIGATIONS COVERING THE FOLLOWING
FACILITIES:
FACILITY 462: Queen Anne Care Center, WA
FACILITY 158: Bellingham Care Center, Bellingham, WA
FACILITY 461: Edmonds Care Center, Edmonds, WA
FACILITY 825: Nansemond Convalescent Center, Suffolk, VA
FACILITY 829: Holmes Convalescent Center, Virginia Beach, VA
<PAGE>
EXHIBIT 3
NO GUARANTEE FEE IS PAYABLE ON OBLIGATIONS COVERING THE FOLLOWING FACILITIES:
FACILITY 525: Hillhaven Convalescent Hospital, Orange, CA
FACILITY 781: Bashford East Health Care Center, Bashford, KY
FACILITY 804: Hillhaven Convalescent Center and Nursing Home, Birmingham, AL
FACILITY 824: Hillhaven Convalescent Center & Nursing Home, Mobile, AL
FACILITY 160: First Hill Care Center, WA
FACILITY 560: Franklin Woods Healthcare Center, OH
FACILITY 570: Pickerington Health Care Center, OH
FACILITY 822: Hillhaven Convalescent Center, Memphis, TN
FACILITY 416: Park Place Hillhaven Convalescent Center, Great Falls, MT
FACILITY 572: Canal Winchester, OH -- No guarantee fee shall be payable on the
Assumed Lease. A guarantee shall be payable on the Assumed
Existing Debt as provided in Paragraph 1 of the Amendment.
<PAGE>
EXHIBIT 4
ASSUMED OBLIGATIONS
ASSUMED EXISTING DEBT
- ---------------------
Facility 572: Canal Winchester Loan Agreement, dated April 1, 1983,
between County of Franklin and Aeon, Inc.,
with an outstanding principal balance as of
September 2, 1993 of $1,955,000, secured by
an Open-End Mortgage and Security Agreement
dated April 1, 1983.
Facility 416: Park Place All-Inclusive Promissory Note Secured by
Mortgage, dated September 1, 1983, in favor
of B.G.M. Enterprises, with an outstanding
principal balance as of September 2, 1993 of
$257,998.44.
All-Inclusive Promissory Note Secured by
Mortgage, dated September 1, 1983, in favor
of B.G.M. Enterprises, with an outstanding
principal balance as of September 2, 1993 of
$1,357,016.39.
ASSUMED LEASE
Facility 572: Canal Winchester Lease and Sublease Agreement, dated October
10, 1985, between Aeon, Inc. and First
Healthcare Corporation, and any amendments
thereto.
<PAGE>
EXHIBIT 10(m)
AGREEMENT CONCERNING PURCHASE BY NME PROPERTIES CORP.
AND CERTAIN SUBSIDIARIES OF SERIES D PREFERRED STOCK OF
THE HILLHAVEN CORPORATION
This Agreement is made and dated as of September 1, 1993, among National
Medical Enterprises, Inc., a Nevada corporation ("NME"), NME Properties Corp., a
Tennessee corporation ("NMEP Corp."), NME Properties, Inc., a Delaware
corporation ("NMEP Inc."), NME Properties West, Inc., a Delaware corporation
("NMEP West"), The Hillhaven Corporation, a Nevada corporation ("Hillhaven") and
First Healthcare Corporation, a Delaware corporation ("First Healthcare"). NMEP
Corp., NMEP Inc. and NMEP West are sometimes herein referred to collectively as
the "NMEP Entities."
RECITALS
A. As part of the January, 1990 spinoff by NME to its shareholders of
shares of Hillhaven, First Healthcare, a wholly-owned subsidiary of Hillhaven,
delivered to NMEP Corp., a wholly-owned subsidiary of NME, a promissory note
dated as of January 31, 1990, in the original principal amount of
$127,300,000.00, which amount subsequently was adjusted (as reflected in the
addendum thereto) to reflect the actual adjusted principal amount of
$135,859,396.00. Such promissory note, as adjusted, and as amended by that
certain First Amendment to Promissory Note, dated as of May 1, 1991, is referred
to herein as the "FHC Promissory Note." As of the Closing Date (as defined in
Section 3 herein), the outstanding balance of the FHC Promissory Note, including
unpaid accrued interest thereon is $49,072,836.93.
B. Pursuant to that certain Note Guarantee Agreement, dated as of
January 31, 1990 (the "Note Guarantee Agreement"), Hillhaven has guarantied
First Healthcare's obligations under the FHC Promissory Note.
C. Pursuant to that certain letter agreement dated May 31, 1990, as
amended by that certain Amendment No. One to Commitment Letter dated as of May
1, 1991, First Healthcare has borrowed from NMEP West the sum of $6,000,000.00,
which loan is evidenced by a promissory note dated July 20, 1992, in favor of
NMEP West, and is secured by a mortgage on the facility known as Clayton House
(Facility No. 445) (the "Clayton House Note"). As of the Closing Date, the
outstanding balance of the Clayton House Note, including unpaid accrued interest
thereon, is $5,911,097.51.
D. In connection with First Healthcare's purchase of Greenbriar
Terrace (Facility No. 592), NMEP Corp. provided a loan to First Healthcare in
the original sum of $1,452,626.42, evidenced by promissory note and secured by a
mortgage against the real property (the "Greenbriar Note"). As of the Closing
Date, the outstanding balance of the Greenbriar Note, including unpaid accrued
interest thereon, is $969,110.79.
<PAGE>
-2-
E. In connection with First Healthcare's purchase of Birchwood Terrace
(Facility No. 559), NMEP, Inc. provided a loan to First Healthcare in the
original sum of $893,194.45, evidenced by a promissory note and secured by a
mortgage against the real property (the "Birchwood Note"). As of the Closing
Date, the outstanding balance of the Birchwood Note, including unpaid accrued
interest thereon, is $647,522.06.
F. On the terms and subject to the conditions set forth in this
Agreement, NME Properties desires to purchase from Hillhaven, and Hillhaven
desires to sell to the NMEP Entities, 120,000 shares of Hillhaven's Series D
Preferred Stock (the "Series D Preferred"), which Series D Preferred shall have
the rights and preferences specified in that certain Certificate of Designation,
Preferences and Rights of Series D Preferred Stock of Hillhaven (the
"Certificate of Designation"), a copy of which is attached hereto as Exhibit A,
---------
for consideration of $120,000,000.00.
NOW, THEREFORE, in consideration of the foregoing Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
AGREEMENT
1. Purchase of Series D Preferred. The NMEP Entities hereby agrees to
------------------------------
purchase from Hillhaven, and Hillhaven hereby agrees to sell to the NMEP
Entities, on the Closing Date, 120,000 shares of Series D Preferred for a
purchase price of $120,000,000.00 (the "Purchase Price"), payable as provided in
Section 3 below.
2. Representations and Warranties.
------------------------------
(a) In order to induce the NMEP Entities and NME to enter into this
Agreement and to consummate the transactions contemplated hereby, Hillhaven
hereby covenants, represents and warrants to the NMEP Entities and NME that:
(i) Hillhaven is duly organized, validly existing and in good standing
under the laws of the State of Nevada.
(ii) Hillhaven has the corporate power, authority and legal right to
make, deliver and perform its obligations under this Agreement and the Series D
Preferred and has taken all corporate action to authorize the execution,
delivery and performance of this Agreement and the Series D Preferred. No
consent of any other person (including, without limitation, stockholders and
creditors of Hillhaven), and no authorization of, notice to or other act by or
in respect of Hillhaven by, any governmental authority, agency or
instrumentality is required in connection with the execution, delivery,
performance, validity or enforceability of this Agreement or the Series D
Preferred. This Agreement has been duly executed and delivered by Hillhaven,
each certificate evidencing shares
<PAGE>
-3-
of Series D Preferred has been duly executed and delivered by Hillhaven and each
of this Agreement and each share of Series D Preferred constitutes a legal,
valid and binding obligation of Hillhaven enforceable against Hillhaven in
accordance with its terms.
(iii) The execution, delivery and performance by Hillhaven of this
Agreement and the Series D Preferred will not violate any provision of any
existing law or regulation applicable to Hillhaven or any of its significant
subsidiaries or of any award, order or decree applicable to Hillhaven or any of
its significant subsidiaries of any court, arbitrator or governmental authority,
or of the Articles of Incorporation or Bylaws of Hillhaven, or of any security
issued by Hillhaven or any material mortgage, indenture, lease, contract or
other agreement or undertaking to which Hillhaven is a party or by which
Hillhaven or any of its properties or assets may be bound, and will not result
in, or require, the creation or imposition of any lien on any of its or their
respective properties or revenues pursuant to the provisions of any such
mortgage, indenture, contract, lease or other agreement. Without limiting the
generality of the foregoing, no material mortgage, indenture, lease, contract or
other agreement or undertaking to which Hillhaven is a party or by which
Hillhaven or any of its properties or assets may be bound prohibits or restricts
Hillhaven from executing, delivering or performing its obligations hereunder or
under the Series D Preferred or from declaring or paying the dividends
contemplated by the Certificate of Designation, except for the Guarantee
Reimbursement Agreement dated as of January 30, 1990 between NME and Hillhaven
(as amended, the "Guarantee Reimbursement Agreement"), the provisions of which
that so prohibit or restrict the payment or declaration of the dividends
contemplated by the Certificate of Designation are being waived by NME pursuant
to this Agreement.
(iv) No litigation, investigation or proceeding of or before any
arbitrator or governmental authority is pending or, to the knowledge of
Hillhaven, threatened by or against Hillhaven or any of its subsidiaries or any
of its or their respective properties or revenues (a) with respect to this
Agreement or the Series D Preferred or any of the transactions contemplated
hereby or thereby, or (b) which, if adversely determined, would have a material
adverse effect on Hillhaven's ability to perform its obligations under this
Agreement or the Series D Preferred.
(v) Neither Hillhaven nor any of its significant subsidiaries is in
default in any material respect under or with respect to any material contract,
agreement or other instrument to which it is a party or by which it or its
assets is bound. Except as would not have a material adverse effect on the
business, operations, properties or financial condition of Hillhaven and its
subsidiaries taken as a whole or on the ability of Hillhaven to perform its
obligations under this Agreement and the Series D Preferred, Hillhaven is not in
default under any order, award or decree of any court, arbitrator, or other
governmental authority binding upon or affecting it or by which any of its
assets is bound or affected. Hillhaven is not subject to any order, award or
decree which would materially adversely affect the ability of Hillhaven to
perform its obligations under any other order, award or decree or under this
Agreement or the Series D Preferred.
<PAGE>
-4-
(vi) Hillhaven's guaranty referred to in Recital B above remains in full
force and effect and continues to be a legal, valid and binding obligation of
Hillhaven enforceable against Hillhaven in accordance with its terms.
(vii) The Series D Preferred has been duly authorized and issued by
Hillhaven. The holders of the Series D Preferred shall be entitled to all of the
benefits of the Series D Preferred as described in the Certificate of
Designation. Upon Hillhaven's receipt of the Purchase Price and its issuance of
the 120,000 shares of Series D Preferred, such 120,000 shares of Series D
Preferred will be fully paid and non-assessable and will not have been issued or
delivered in violation of, or subject to, any preemptive rights or other rights
of any person to subscribe for or purchase the Series D Preferred.
(b) In order to induce the NMEP Entities and NME to enter into this
Agreement and to consummate the transactions contemplated hereby, First
Healthcare hereby covenants, represents and warrants to each of the NMEP
Entities and NME that:
(i) First Healthcare is duly organized, validly existing and in good
standing under the laws of the State of Delaware.
(ii) First Healthcare has the corporate power, authority and legal right
to make, deliver and perform its obligations under this Agreement and has taken
all corporate action to authorize the execution, delivery and performance of
this Agreement. No consent of any other person (including, without limitation,
stockholders and creditors of First Healthcare), and no authorization of, notice
to or other act by or in respect of First Healthcare by, any governmental
authority, agency or instrumentality is required in connection with the
execution, delivery, performance, validity or enforceability of this Agreement.
This Agreement has been duly executed and delivered by First Healthcare and this
Agreement constitutes a legal, valid and binding obligation of First Healthcare
enforceable against First Healthcare in accordance with its terms.
(iii) The execution, delivery and performance by First Healthcare of this
Agreement will not violate any provision of any existing law or regulation
applicable to First Healthcare or any of its significant subsidiaries or of any
award, order or decree applicable to First Healthcare or any of its significant
subsidiaries of any court, arbitrator or governmental authority, or of the
Articles of Incorporation or Bylaws of First Healthcare, or of any security
issued by First Healthcare or any material mortgage, indenture, lease, contract
or other agreement or undertaking to which First Healthcare is a party or by
which First Healthcare or any of its properties or assets may be bound, and will
not result in, or require, the creation or imposition of any lien on any of its
or their respective properties or revenues pursuant to the provisions of any
such mortgage, indenture, contract, lease or other agreement.
<PAGE>
-5-
(iv) No litigation, investigation or proceeding of or before any
arbitrator or governmental authority is pending or, to the knowledge of First
Healthcare, threatened by or against First Healthcare or any of its subsidiaries
or any of its or their respective properties or revenues (a) with respect to
this Agreement or any of the transactions contemplated hereby, or (b) which, if
adversely determined, would have a material adverse effect on First Healthcare's
ability to perform its obligations under this Agreement.
(v) Neither First Healthcare nor any of its significant subsidiaries is
in default in any material respect under or with respect to any material
contract, agreement or other instrument to which it is a party or by which it or
its assets is bound. Except as would not have a material adverse effect on the
business, operations, properties or financial condition of First Healthcare and
its subsidiaries taken as a whole or on the ability of First
Healthcare to perform its obligations under this Agreement, First Healthcare is
not in default under any order, award or decree of any court, arbitrator, or
other governmental authority binding upon or affecting it or by which any of its
assets is bound or affected. First Healthcare is not subject to any order,
award or decree which would materially adversely affect the ability of First
Healthcare to perform its obligations under this Agreement.
(vi) Each of the FHC Promissory Note, the Clayton House Note, the
Greenbriar Note, and the Birchwood Note remains in full force and effect and
continues to be a legal, valid and binding obligation of First Healthcare,
enforceable against First Healthcare in accordance with its terms. First
Healthcare is current in the payment and performance of its obligations under,
and has not assigned its interests in any of, the FHC Promissory Note, the
Clayton House Note, the Greenbriar Note, and the Birchwood Note.
(c) In order to induce Hillhaven and First Healthcare to enter into this
Agreement and to consummate the transactions contemplated hereby, NME hereby
covenants, represents and warrants to Hillhaven and First Healthcare that:
(i) NME is duly organized, validly existing and in good standing under
the laws of the State of Nevada.
(ii) NME has the corporate power, authority and legal right to make,
deliver and perform its obligations under this Agreement and has taken all
corporate action to authorize the execution, delivery and performance of this
Agreement. No consent of any other person (including, without limitation,
stockholders and creditors of NME), and no authorization of, notice to or other
act by or in respect of NME by, any governmental authority, agency or
instrumentality is required in connection with the execution, delivery,
performance, validity or enforceability of this Agreement. This Agreement has
been duly executed and delivered by NME and this Agreement constitutes a legal,
valid and binding obligation of NME enforceable against NME in accordance with
its terms.
<PAGE>
-6-
(iii) The execution, delivery and performance by NME of this Agreement
will not violate any provision of any existing law or regulation applicable to
NME or any of its significant subsidiaries or of any award, order or decree
applicable to NME or any of its significant subsidiaries of any court,
arbitrator or governmental authority, or of the Articles of Incorporation or
Bylaws of NME, or of any security issued by NME or any material mortgage,
indenture, lease, contract or other agreement or undertaking to which NME is a
party or by which NME or any of its properties or assets may be bound, and will
not result in, or require, the creation or imposition of any lien on any of its
or their respective properties or revenues pursuant to the provisions of any
such mortgage, indenture, contract, lease or other agreement.
(iv) No litigation, investigation or proceeding of or before any
arbitrator or governmental authority is pending or, to the knowledge of NME,
threatened by or against NME or any of its subsidiaries or any of its or their
respective properties or revenues (a) with respect to this Agreement or any of
the transactions contemplated hereby, or (b) which, if adversely determined,
would have a material adverse effect on NME's ability to perform its obligations
under this Agreement.
(v) Neither NME nor any of its significant subsidiaries is in default in
any material respect under or with respect to any material contract, agreement
or other instrument to which it is a party or by which it or its assets is
bound. Except as would not have a material adverse effect on the business,
operations, properties or financial condition of NME and its subsidiaries taken
as a whole or on the ability of NME to perform its obligations under this
Agreement, NME is not in default under any order, award or decree of any court,
arbitrator, or other governmental authority binding upon or affecting it or by
which any of its assets is bound or affected. NME is not subject to any order,
award or decree which would materially adversely affect the ability of NME to
perform its obligations under this Agreement.
(d) In order to induce Hillhaven and First Healthcare to enter into this
Agreement and to consummate the transactions contemplated hereby, each of NMEP
Corp., NMEP Inc., and NMEP West hereby covenants, represents and warrants to
Hillhaven and First Healthcare that:
(i) It is duly organized, validly existing and in good standing under
the laws of the state of incorporation of the corporation.
(ii) It has the corporate power, authority and legal right to make,
deliver and perform its obligations under this Agreement and has taken all
corporate action to authorize the execution, delivery and performance of this
Agreement. No consent of any other person (including, without limitation,
stockholders and creditors of the corporation), and no authorization of, notice
to or other act by or in respect of the corporation by, any governmental
authority, agency or instrumentality is required in connection with the
execution, delivery, performance, validity or enforceability of this Agreement.
This Agreement has been duly executed and delivered by the corporation and this
Agreement constitutes a legal, valid and binding obligation of the corporation
enforceable against the corporation in accordance with its terms.
<PAGE>
-7-
(iii) The execution, delivery and performance by the corporation of this
Agreement will not violate any provision of any existing law or regulation
applicable to the corporation or any of its significant subsidiaries or of any
award, order or decree applicable to the corporation or any of its significant
subsidiaries of any court, arbitrator or governmental authority, or of the
Articles of Incorporation or Bylaws of the corporation, or of any security
issued by the corporation or any material mortgage, indenture, lease, contract
or other agreement or undertaking to which the corporation is a party or by
which the corporation or any of its properties or assets may be bound, and will
not result in, or require, the creation or imposition of any lien on any of its
or their respective properties or revenues pursuant to the provisions of any
such mortgage, indenture, contract, lease or other agreement.
(iv) No litigation, investigation or proceeding of or before any
arbitrator or governmental authority is pending or, to the knowledge of the
corporation, threatened by or against the corporation or any of its subsidiaries
or any of its or their respective properties or revenues (a) with respect to
this Agreement or any of the transactions contemplated hereby, or (b) which, if
adversely determined, would have a material adverse effect on its ability to
perform its obligations under this Agreement.
(v) Neither the corporation nor any of its significant subsidiaries is
in default in any material respect under or with respect to any material
contract, agreement or other instrument to which it is a party or by which it or
its assets is bound. Except as would not have a material adverse effect on the
business, operations, properties or financial condition of the corporation and
its subsidiaries taken as a whole or on the ability of the corporation to
perform its obligations under this Agreement, the corporation is not in default
under any order, award or decree of any court, arbitrator, or other governmental
authority binding upon or affecting it or by which any of its assets is bound or
affected. The corporation is not subject to any order, award or decree which
would materially adversely affect the ability of the corporation to perform its
obligations under this Agreement.
(vi) Except to the extent that the promissory notes have been pledged
and assigned to Swiss Bank Corporation pursuant to that certain unrecorded
Pledge and Security Agreement and Master Assignment of Mortgages dated as of May
28, 1993 (the "Pledge Agreement"), the NME Entities have not assigned their
interests in the promissory notes described in the above Recitals. Upon release
of the Pledge Agreement which shall occur upon Hillhaven's repayment of the THC
Facilities Corp. loan evidenced by the Credit Agreement (as defined in the
Pledge Agreement) on September 2, 1993, NMEP Corp. will be the holder of the FHC
Promissory Note and the Greenbriar Note, NMEP West will be the holder of the
Clayton House Note, and NMEP Inc. will be the holder of the Birchwood Note, free
and clear of any liens or encumbrances.
(vii) It is purchasing the Series D Preferred for investment purposes
and not in connection with or with a view towards the distribution thereof.
<PAGE>
-8-
3. The Closing. On September 2, 1993 (the "Closing Date"), the parties
-----------
hereto shall take the following actions:
(a) NMEP Corp. shall deposit with Escrow cash or immediately available
funds in the amount of $63,399,432.71, and shall give written instructions to
Escrow to transfer said funds to First Healthcare's account at PNC Bank.
(b) NMEP Corp. shall assign to Hillhaven its interest in the FHC Promissory
Note, with an outstanding balance in the sum of $49,072,836.93;
(c) NMEP Corp. shall assign to Hillhaven its interest in the Greenbriar
Note, with an outstanding balance in the sum of $969,110.79;
(d) NMEP West shall assign to Hillhaven its interest in the Clayton House
Note, with an outstanding balance in the sum of $5,911,097.51;
(e) NMEP Inc. shall assign to Hillhaven its interest in the Birchwood Note,
with an outstanding balance in the sum of $647,522.06;
(f) In consideration of (i) payment of the cash sum described in
subparagraph (a) above, and (ii) the assignment to Hillhaven of the promissory
notes described in subparagraphs (b), (c), (d) and (e) above, Hillhaven shall
deliver to the NME Entities the following certificates representing a total of
120,000 shares of Series D Preferred:
(i) Certificate representing 63,399 shares of Series D Preferred in
the name of NME Properties Corp.;
(ii) Certificate representing 50,042 shares of Series D Preferred in
the name of NME Properties Corp.;
(iii) Certificate representing 5911 shares of Series D Preferred in
the name of NME Properties West, Inc.; and
(iv) Certificate representing 648 shares of Series D Preferred in the
name of NME Properties, Inc.
4. NME Waivers. NME hereby waives the provisions of Section 5(h) of that
-----------
certain Guarantee Reimbursement Agreement to the extent that such provisions
would prohibit Hillhaven from paying dividends on the Series D Preferred;
provided, however, that such waiver shall be limited to Hillhaven being
permitted to pay dividends only on the Series D Preferred (and on Series C
Preferred for which a waiver was previously obtained) and not on any other
series or class of stock of Hillhaven or any of its subsidiaries.
5. Survival of Certain Representations and Warranties and Covenants.
----------------------------------------------------------------
Hillhaven's representations and warranties set forth in Section 2(a)(vii) shall
survive the execution, delivery and performance of this Agreement.
<PAGE>
-9-
6. Miscellaneous.
-------------
(a) This Agreement may be executed in as many counterparts as may be deemed
necessary or convenient, and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute one and the same agreement.
(b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW.
(c) No waiver or modification of any provision of this Agreement shall be
(i) valid or enforceable unless it is in writing and has been executed by the
party against whom such enforcement is sought, or (ii) construed as a waiver or
modification of any other provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the day and year first above written.
National Medical Enterprises, Inc.,
a Nevada corporation
By: /s/ Maris Andersons
--------------------------------
Title: Executive Vice President
NME Properties Corp.,
a Tennessee corporation
By: /s/ Maris Andersons
--------------------------------
Title: Senior Vice President
NME Properties, Inc.,
a Delaware corporation
By: /s/ Maris Andersons
--------------------------------
Title: Senior Vice President
NME Properties West, Inc.,
a Delaware corporation
By: /s/ Maris Andersons
--------------------------------
Title: Senior Vice President
<PAGE>
-10-
The Hillhaven Corporation,
a Nevada corporation
By: /s/ Robert Schneider
--------------------------------
Title: Vice President and Treasurer
First Healthcare Corporation,
a Delaware corporation
By: /s/ Robert Schneider
--------------------------------
Title: Vice President and Treasurer
<PAGE>
EXHIBIT 10(n)
AGREEMENT AND WAIVER
This AGREEMENT AND WAIVER (this "Agreement") dated as of September 2,
1993, by and among National Medical Enterprises, Inc., a Nevada corporation
("NME"), the subsidiaries of NME which are signatories hereto, The Hillhaven
Corporation, a Nevada corporation ("Hillhaven"), and First Healthcare
Corporation, a Delaware corporation ("FHC").
WITNESSETH:
----------
WHEREAS, pursuant to that certain Revolving Credit and Term Loan
Agreement dated as of January 31, 1990 between NME and Hillhaven, as amended by
that certain First Amendment thereto dated as of November 12, 1992 (as amended,
the "Revolving Credit Agreement"), NME agreed to make certain loans to Hillhaven
through May 31, 1994 subject to the conditions set forth therein; and
WHEREAS, pursuant to that certain Commitment Letter dated May 31,
1990, between NME and FHC, as amended by that certain Amendment No. One thereto
dated as of May 1, 1991 (as amended, the "Commitment Letter"), NME agreed to
make certain loans to FHC subject to the conditions set forth therein; and
WHEREAS, pursuant to that certain Master Loan Agreement dated as of
April 1, 1992 among the lenders parties thereto, NME, FHC and Hillhaven, as
amended by that certain First Amendment thereto dated as of November 12, 1992
(as amended, the "Master Loan Agreement"), the lenders which were parties
thereto agreed to finance up to 100% of the purchase price of the facilities
referred to therein; and
WHEREAS, pursuant to that certain Guaranty dated as of April 1, 1992
from Hillhaven in favor of the lenders listed thereon (the "Master Loan
Agreement Guaranty"), Hillhaven guaranteed the obligations of FHC under the
Master Loan Agreement; and
WHEREAS, pursuant to that certain Master Loan Agreement for Purchase
of Nine Facilities dated as of June 1, 1992 among the lenders parties thereto
and FHC (the "Second Master Loan Agreement"), the lenders which were parties
thereto agreed to finance up to 100% of the purchase price of the facilities
referred to therein; and
WHEREAS, pursuant to that certain Guaranty dated as of June 1, 1992
from Hillhaven in favor of the lenders listed thereon (the "Second Master Loan
Agreement Guaranty"), Hillhaven guaranteed FHC's obligations under the Second
Master Loan Agreement; and
WHEREAS, pursuant to that certain Promissory Note dated January 31,
1990 (the "Promissory Note") by FHC in favor of NME Properties Corp., a
Tennessee corporation (formerly known as The Hillhaven Corporation), FHC owes
certain monies to NME Properties Corp.; and
<PAGE>
WHEREAS, pursuant to that certain Note Guarantee Agreement dated as of
January 31, 1990 among Hillhaven, NME and the payees identified therein (the
"Note Guarantee Agreement"), Hillhaven guaranteed FHC's obligations under the
Promissory Note; and
WHEREAS, Hillhaven is restructuring its relationship with NME to,
inter alia, repay amounts owing to NME pursuant to the Master Loan Agreement,
- ----- ----
the Second Master Loan Agreement and the Promissory Note, and terminate NME's
commitment to loan funds pursuant to the Revolving Credit Agreement and the
Master Loan Agreement; and
WHEREAS, in connection therewith the parties desire to eliminate NME's
commitments under the Revolving Credit Agreement, and the Master Loan Agreement,
and to terminate Hillhaven's obligations under the Master Loan Agreement
Guaranty, Second Master Loan Agreement Guaranty and Note Guarantee Agreement;
and
WHEREAS, the aforesaid restructuring will be financed through (1) the
issuance by Hillhaven to NME or its subsidiaries of $120 million of a newly
created series of payable-in-kind preferred stock, (2) the incurrence by FHC of
up to $360 million of indebtedness in the form of term loans, letters of credit
and working capital loans under a secured credit facility with Morgan Guaranty
Trust Company of New York and a syndicate of other lenders (the "Bank
Financing"), (3) the sale by Hillhaven of senior subordinated notes in the
approximate amount of $175 million (the "Notes"), (4) the extension of FHC's
commercial paper program backed by certain of its (and certain of its
subsidiaries') Medicaid accounts receivable and increase in permitted borrowings
under such program from $30.0 million to $40.0 million and (5) the use of
available cash; and
WHEREAS, in connection with the Bank Financing, Hillhaven has
transferred its bank accounts to FHC; and
WHEREAS, pursuant to Sections 5(a), 5(b) and 5(i) of that certain
Guarantee Reimbursement Agreement, as amended (as so amended, the "Guarantee
Reimbursement Agreement"), Hillhaven agreed, inter, alia, to certain covenants
----- ----
which may be violated as a result of the Bank Financing, the Notes and the
transfer of bank accounts to FHC;
NOW, THEREFORE, in consideration of the foregoing recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto intending to be legally bound, hereby
agree as follows:
1. TERMINATION OF OBLIGATIONS TO LEND. NME's obligations to loan
----------------------------------
funds to Hillhaven under the Revolving Credit Agreement, the Master Loan
Agreement, the Second Master Loan Agreement, the Promissory Note and the
Commitment Letter shall terminate as of the date hereof.
2. TERMINATION OF GUARANTEES. Hillhaven's obligations under the
-------------------------
Master Loan Agreement Guaranty, Second Master Loan Agreement Guaranty and Note
Guarantee Agreement shall terminate as of the date hereof.
-2-
<PAGE>
3. WAIVER. NME hereby waives compliance with the following provisions of
------
the Guarantee Reimbursement Agreement;
(a) Sections 5(a) and 5(b) of the Guarantee Reimbursement Agreement
are hereby waived to the extent necessary to permit (i) the
transactions contemplated by the Bank Financing, including the
placement of mortgages on facilities owned by FHC or its
subsidiaries, the substitution of facilities as collateral and any
subsequent addition of collateral, and (ii) the issuance of the
Notes.
(b) Section 5(i) of the Guarantee Reimbursement Agreement is hereby
waived to the extent necessary to permit Hillhaven to transfer
any or all of its bank accounts to FHC.
4. COSTS. Each party shall bear its own cost and expenses in connection
-----
with the transactions contemplated in this Agreement.
5. COOPERATION. The parties agree to execute and deliver such other
-----------
documents and instruments and do all such other acts and things as may be
reasonably required to give effect to the agreements contained in this
Agreement.
6. AMENDMENT. No amendment or modifications of this Agreement shall be
---------
effective unless in writing signed by the parties.
7. GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with California law.
8. COUNTERPARTS. This Agreement may be executed in counterparts, each of
------------
which shall be an original, but all of which together shall constitute but one
and the same instrument.
9. NO FURTHER WAIVER. The waivers set forth herein shall be effective
-----------------
only for the specific purposes for which given.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed on its behalf as of the date first set forth above.
NATIONAL MEDICAL ENTERPRISES, INC.,
a Nevada corporation
By: /s/ MARIS ANDERSONS
-------------------------------
Its: Executive Vice President
-------------------------------
NME PROPERTIES CORP.,
a Tennessee corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
-3-
<PAGE>
NME PROPERTIES, INC.,
a Delaware corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
NME PROPERTY HOLDING CO., INC.,
a Delaware corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
NME PROPERTIES WEST, INC.,
a Delaware corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
HAMMOND HOLIDAY HOME, INC.,
a Kansas corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
SEDGWICK CONVALESCENT CENTER, INC.,
a Kansas corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
NORTHWEST CONTINUUM CARE CENTER, INC.,
a Washington corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
-4-
<PAGE>
FLAGG INDUSTRIES, INC.,
a California corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
GUARDIAN MEDICAL SERVICES, INC.,
a North Carolina corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
NME ARIZONA, INC.,
an Arizona corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
LAKE HEALTH CARE FACILITIES, INC.,
a Delaware corporation
By: /s/ TIMOTHY L. PULLEN
-------------------------------
Its: Vice President
-------------------------------
THE HILLHAVEN CORPORATION,
a Nevada corporation
By: /s/ ROBERT SCHNEIDER
-------------------------------
Its: Vice President & Treasurer
-------------------------------
FIRST HEALTHCARE CORPORATION,
a Delaware corporation
By: /s/ ROBERT SCHNEIDER
-------------------------------
Its: Vice President & Treasurer
-------------------------------
-5-
<PAGE>
EXHIBIT 10(ss)
Amendment to National Medical Enterprises, Inc.
Supplemental Executive Retirement Plan
Dated November 1, 1984
As Amended May 21, 1986
THIS AMENDMENT TO NATIONAL MEDICAL ENTERPRISES, INC. SUPPLEMENTAL
RETIREMENT PLAN (the "Amendment") is made, entered into and effective as of the
25th day of April, 1994.
R E C I T A L S :
- - - - - - - -
WHEREAS, National Medical Enterprises, Inc., a Nevada corporation
("NME") adopted the Supplemental Executive Retirement Plan (the "Plan"),
pursuant to a document dated November 1, 1984 and amended May 21, 1986;
WHEREAS, Section 5.4 provides that NME reserves the right, in its sole
discretion, to amend the Plan; and
WHEREAS, NME now desires to amend the Plan.
NOW, THEREFORE, intending to be legally bound, NME hereby agrees to
amend the Plan as follows:
A M E N D M E N T :
- - - - - - - - -
1. Section 2.5 of the Plan is hereby amended by deleting such Section
in its entirety and replacing it with the following:
"2.5 Change of Control. "Change of Control" shall be deemed to have
-----------------
occurred if (a) any person as such term is used in Sections 13(c) and
14(d)(2) of the Securities Exchange Act of 1934, as amended, is or
becomes the beneficial owner directly or indirectly of securities of
NME representing 30% or more of the combined voting power of NME's
then outstanding securities or (b) during any two year period
commencing after April 1, 1994, individuals who at the beginning of
such period constitute the Board of Directors of NME cease for any
reason other than death or disability to constitute a majority of the
Board."
2. Section 2.14 of the Plan is hereby amended by deleting such Section
in its entirety and replacing it with the following:
"2.14 Existing Retirement Benefit Plans Adjustment Factor. "Existing
---------------------------------------------------
Retirement Benefit Plans Adjustment Factor or Factors" means the
assumed benefit the Participant would be eligible for under Social
Security and all retirement plans of NME and its Subsidiaries whether
or not he participates in such plans. This Factor will be used for
calculating all benefits under the Plan and is a projection of the
benefits payable under the Social Security regulations in effect June
1, 1984, and retirement plans of NME in effect on June 1, 1984, or the
participant's Date of Enrollment in the Plan, if later. Once
established for a Participant this Factor will not thereafter be
altered to reflect any reduction in benefits under Social Security.
This Factor will be adjusted to reflect changes in
-1-
<PAGE>
benefits under NME retirement plans if a Participant is transferred to
different retirement plans or the Company contribution to a retirement
plan is increased or decreased from the percentage used for original
calculation of the Participant's Factor or the Participant becomes
eligible for other retirement plans adopted by the Company which would
provide benefits greater or less than the Plan considered in
calculating the Participant's original Factor, except that such Factor
for Participant's who are regular full time employees actively at work
with the Company on April 1, 1994, with the corporate office or a
division or subsidiary that is not announced as a discontinued
operation shall be revised based upon the Participant's actual base
salary as of April 1, 1994, but no Factor will be increased as a
result of revision of the Factor to use the base salary as of April 1,
1994."
3. Section 2.19 of the Plan is hereby amended by deleting such Section
in its entirety and replacing it with the following:
"2.19 Projected Earnings. "Projected Earnings means the (a) actual
------------------
Earnings of the Participant on the Date of Enrollment plus an assumed
increase of eight percent per annum, or (b) for Participants who are
regular full time employees actively at work on April 1, 1994, with
the corporate office or a division or a subsidiary that has not been
declared to be a discontinued operation, the actual Earnings of the
Participant on April 1, 1994 plus an assumed increase of eight percent
per annum."
4. Section 3.8 of the Plan is hereby amended by designating the first
paragraph of Section 3.8 as subparagraph (a) and by adding the
following as a new subparagraph 3.8(b):
"3.8(b) For a Participant who is a regular full time employee actively
at work on April 1, 1994, with the corporate office or a division or a
subsidiary which has not been declared to be a discontinued operation,
who has not yet begun to receive benefit payments under the Plan and
whose employment is Terminated without cause or who voluntarily
Terminates Employment following (a) a material downward change in the
functions, duties, or responsibilities which reduce the rank or
position of the Participant, (b) (i) a reduction in the Participant's
annual base salary, or (ii) a material reduction in the Participant's
annual incentive plan bonus payment other than for financial
performance as it broadly applies to all similarly situated active
Participants in the same plan, or (iii) a material reduction in the
Participant's retirement or supplemental retirement benefits that does
not broadly apply to all active Participant's in the same plan or; (c)
transfer of a Participant's office to a location that is more than
fifty (50) miles from the Participant's current principal office
location, if such Termination of Employment occurs within two years
following a Change of Control of NME while this Plan remains in
effect, the provisions of Section 3.8a above shall not apply and (i) a
Participant's Early or Normal Retirement Benefits under this Plan (a)
will be determined on the basis of (I) receiving full Prior Service
Credit under Sections 3.1 and 3.2 for all Years of Service prior to
his or her Date of Enrollment and (II) being credited with three
additional years to his or her Years of Service (with total Years of
-2-
<PAGE>
Service not to exceed twenty years) and (b) will be fully vested in
the Participant without regard to his or her Years of Service with NME
and its Subsidiaries, (ii) will be determined by replacing the
definition of "Earnings" under Section 2.10 hereof with the following
"the base salary and the annual cash bonus paid to a Participant by
NME or a Subsidiary, excluding (A) any cash bonus paid under the LTIP,
(B) any car and other allowances and (C) other cash and non-cash
compensation" and (iii) notwithstanding any other provision of this
Plan to the contrary, a Participant will be entitled to receive the
Normal Retirement Benefit on or after the age of sixty, without
reduction, and after the age of fifty-five with a reduction of 0.42%
per month for each month for which the benefit commences to be paid
prior to the Participant's attaining the age of sixty and after the
age of fifty with the foregoing reduction from age sixty to age fifty-
five and with a reduction to 0.56% per month for each month for which
the benefit commences to be paid prior to the Participant's attaining
the age of fifty-five. No other reductions set forth in Sections
3.2a(iii) and 3.2b will apply."
5. The following language shall be added as a new Paragraph 3.9:
"3.9 Golden Parachute Cap. Notwithstanding any provision in this Plan
to the contrary, in no event shall the total present value of all
payments under this Plan that are payable to a Participant and are
contingent upon a Change of Control in accordance with the rules set
forth in Section 280G of the Internal Revenue Service Code of 1986, as
amended (the "Code") and the Treasury Regulations thereunder, when
added to the present value of all other payments, other than payments
that are made pursuant to this Plan, that are payable to a Participant
and are contingent upon a Change of Control, exceed an amount equal to
two hundred and ninety-nine percent (299%) of the Participant's "base
amount" as that term is defined in Section 280G of the Code."
6. The following language shall be added as new Section 4.5 to the
Plan:
"4.5 Lump Sum Distributions. At any time following a Termination of
----------------------
Employment which occurs within two (2) years after a Change of Control
or following an Early Retirement or a Normal Retirement, a
Participant, or the Surviving Spouse of a Participant, who has a
vested interest in the Plan may elect to receive a lump sum payment,
in an amount determined below, sixty (60) days after giving notice to
the Committee of the Participant's, or the Participant's Surviving
Spouse's, desire to receive such lump sum benefit. The date of the
notice shall be the "Commencement Date." The lump sum payment shall be
determined in accordance with the following provisions of this Section
4.5, and then shall be reduced by a penalty equal to ten percent (10%)
of such payment which shall be forfeited to NME. However, the penalty
shall not apply if the Committee determines, based on the advice of
counsel or a final determination by the Internal Revenue Service or
any court of competent jurisdiction, that by reason of the foregoing
elective provisions of this Section 4.5 any Participant, Surviving
Spouse or Eligible Children has recognized or will recognize gross
income for federal income tax purposes under this Plan in advance of
payment to him or her of Plan benefits. NME shall notify all
-3-
<PAGE>
Participants (and Surviving Spouses or Eligible Children of deceased
Participants) of any such determination. Wherever any such
determination is made, NME shall refund all penalties which were
imposed hereunder on account of making lump sum payments at any time
during or after the first year to which such determination applies
(i.e., the first year when gross income is recognized for federal
income tax purposes). Interest shall be paid on any such refunds based
on an interest factor determined under Section 4.5(b) hereof. The
Committee may also reduce or eliminate the penalty if it determines
that this action will not cause any Participant to recognize gross
income for federal income tax purposes under this Plan in advance of
payment to him or her of Plan benefits.
Notwithstanding any other provision of this Plan, a penalty shall not
apply if a retired Participant or the Surviving Spouse or Eligible
Children of a deceased Participant receives a lump sum distribution
due to a financial hardship. The Committee shall determine whether a
financial hardship exists in its sole discretion, but in good faith
and on a uniform, nondiscriminatory and reasonable basis. A hardship
distribution shall be a cash payment not to exceed the amount
necessary to relieve the hardship.
(a) When monthly benefit payments have not yet commenced and the
Participant is living on the Commencement Date, the lump sum
payment (prior to the ten percent (10%) reduction) shall equal the
lump sum value of the Participant's Early Retirement Benefit or
Normal Retirement Benefit accrued through the Commencement Date.
The amount described in this Section 4.5(a) shall include, in
addition, in the case of a Participant who has a spouse or Eligible
Children on the Commencement Date, the lump sum value, determined
as of such date, of any benefit payable to a Surviving Spouse or
Eligible Children by reason of the Participant's death on or after
such date assuming such spouse would qualify as a Surviving Spouse
on and after such date. The lump sum amount representing the value
of the benefits described in the preceding two sentences shall be
computed (i) first by reducing the amount of the Participant's
monthly benefit payable under Section 3.2 hereof, if the
Participant's Commencement Date occurs before the Participant's
Normal Retirement date, (ii) then determining the survivor benefit
which would be payable to a Surviving Spouse or Eligible Children
in respect of such monthly benefit under Section 3.1(c) or Section
3.2(c) whichever is applicable, and (iii) next commuting such
benefits to their lump sum equivalent at the Commencement Date by
reference to the factor described in Section 4.5(b). In computing
the Participant's monthly benefit under clause (i) of the preceding
sentence, if the Commencement Date occurs before the earliest date
when the Participant may commence to receive his or her Early
Retirement Benefit, the Participant's Early Retirement Benefit
shall be computed as the annual actuarial equivalent of the Early
Retirement Benefit which would be payable to him or her at the
earliest date when benefits could commence under the Early
Retirement provisions of Section 3.2, in the form of a single life
annuity.
-4-
<PAGE>
When annual benefits have previously commenced, the lump sum
payment (prior to the ten percent (10%) reduction) shall be equal
to the difference between (A) minus (B) below, determined as of the
Participant's Commencement Date, accumulated to the date of the
lump sum payment using the same interest rate which is used in
calculating the amounts (A) and (B):
(A) The lump sum value of the monthly benefits payable to the
Participant (including any benefit payable to the Surviving
Spouse or Eligible Children) determined as of the Participant's
Commencement Date in the same manner as described in the
previous paragraph.
(B) The lump sum value of the monthly benefits previously paid
to the Participant discounted to the Participant's Commencement
Date.
When a Surviving Spouse of a deceased Participant elects to receive
a lump sum payment, the amount of the lump sum payment shall be
determined by the Committee in a manner similar to that used for a
Participant, except that the lump sum payment shall only reflect
the benefit which would be payable to a Surviving Spouse and
Eligible Children. All lump sum equivalents hereunder shall be
determined by reference to the factor described in Section 4.5(b).
(b) The factor described in this Section 4.5(b) is the actuarial
equivalence factor of the Pension Benefit Guaranty Corporation
applicable to plans terminating on the Commencement Date."
7. The Plan, as amended by this Amendment, remains in full force and
effect.
IN WITNESS WHEREOF, NME has signed this Amendment on the date set
forth above.
NATIONAL MEDICAL ENTERPRISES, INC.
By: /s/ SCOTT M. BROWN
--------------------------------
Its: Senior Vice President
-------------------------------
-5-
<PAGE>
EXHIBIT 10(tt)
Amendment to National Medical Enterprises, Inc.
Supplemental Executive Retirement Plan
Dated November 1, 1984
As Amended May 21, 1986
As Amended April 25, 1994
THIS AMENDMENT TO NATIONAL MEDICAL ENTERPRISES, INC. SUPPLEMENTAL
EXECUTIVE RETIREMENT PLAN (the "Amendment") is made, entered into and effective
as of the 25th day of July, 1994.
R E C I T A L S :
- - - - - - - -
WHEREAS, National Medical Enterprises, Inc., a Nevada corporation
("NME") adopted the Supplemental Executive Retirement Plan (the "Plan"),
pursuant to a document dated November 1, 1984 and amended May 21, 1986 and April
25, 1994;
WHEREAS, Section 5.4 of the Plan provides that NME reserves the right,
in its sole discretion, to amend the Plan; and
WHEREAS, NME desires to amend the Plan to amend the definition of
"Change of Control" contained in the Plan and to waive certain "Conditions
Precedent" under certain circumstances;
NOW, THEREFORE, intending to be legally bound, NME hereby agrees to
amend the Plan as follows:
A M E N D M E N T :
- - - - - - - - -
1. Section 2.5 of the Plan is hereby amended by deleting such Section
in its entirety and replacing it with the following:
"2.5 Change of Control. "Change of Control" of NME shall be deemed
-----------------
to have occurred if either (a) any person as such term is used in Sections
13(c) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, is
or becomes the beneficial owner directly or indirectly of securities of NME
representing 20% or more of the combined voting power of NME's then
outstanding securities or (b) individuals who, as of April 1, 1994,
constitute the Board of Directors of NME (the "Incumbent Board") cease for
any reason to constitute at least a majority of the Board of Directors;
provided, however, that (i) any individual who becomes a director of NME
subsequent to April 1, 1994, whose election, or nomination for election by
the NME's stockholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be deemed to have
been a member of the Incumbent Board, and (ii) no individual who was
elected initially (after April 1, 1994) as a director as a result of an
actual or threatened election contest, as such terms are used in Rule 14a-
11 of Regulation 14A promulgated under the Securities Exchange Act of 1934,
as amended, or any other actual or threatened solicitations of proxies or
consents by or on behalf of any person other than the Incumbent Board shall
be deemed to have been a member of the Incumbent Board."
-1-
<PAGE>
2. Section 3.8 of the Plan is hereby amended by adding the following as
new subparagraph 3.8(c):
"c. For a Participant who (a) is an active, full-time employee, (b)
has not yet begun to receive benefit payments under the Plan and (c)
is involuntarily terminated from employment without cause or
voluntarily terminates employment pursuant to Section 3.8(c) above,
within two years following a Change of Control of NME while this Plan
remains in effect, the provisions of Section 5.7(ii) below shall not
apply."
3. The Plan, as amended by this Amendment, remains in full force and
effect.
IN WITNESS WHEREOF, NME has signed this Amendment on the date set forth
above.
NATIONAL MEDICAL ENTERPRISES, INC.
By: /s/ SCOTT M. BROWN
-------------------------------
Its: Senior Vice President
------------------------------
-2-
<PAGE>
EXHIBIT 10(zz)
FIRST AMENDMENT TO
DEFERRED COMPENSATION PLAN
I, Scott M. Brown, the Secretary of National Medical Enterprises, Inc.
("NME"), hereby certify that on December 1, 1993 and April 13, 1994, the
Compensation and Stock Option Committee of the Board of Directors of NME
approved the following amendments to the Deferred Compensation Plan (the
"Plan"):
1. The second paragraph of Section 5 of the Plan is hereby amended by
deleting such paragraph in its entirety and replacing it with the
following:
"In the event of the death of the Participant, compensation that has
been deferred together with the accumulated interest will be
distributed to the beneficiary named by the Participant or to the
estate of the Participant in 120 approximateley equal monthly payments
unless the Committee, in its sole discretion, determines upon written
request of the beneficiary that payment shall be made voer a shorter
period or in a lump sum. Payment shall commence within 30 days after
the death of the Participant, with interest continuing to accrue
pursuant to Section 3(b) hereof until the full amount of deferred
compensation is paid."
2. The following language shall be added as new Paragraph 8 to the Plan:
"8. Lump Sum Distributions. At any time either (a) prior to an event
----------------------
causing distribution in accordance with Paragraph 4 hereto or (b)
after a Participant or his or her beneficiary is receiving
distributions in installments in accordance with Paragraph 5 hereof
and has not received the entire balance of a Participant's deferred
compensation account, a Participant in the Plan or his or her
beneficiary may elect to receive a lump sum payment, in an amount
determined below, sixty (60) days after giving notice to the Committee
of the Participant's or beneficiary's desire to receive such lump sum
benefit. The date of the notice shall be the "Commencement Date."
The lump sum payment shall be equal to (a) the Participant's remaining
deferred compensation account under the Plan or (b) a beneficiary's
share of the Participant's remaining deferred compensation account
under the Plan, whichever is applicable, reduced by a penalty equal to
ten percent (10%) of such account which shall be forfeited to the
Company. However, the penalty shall not apply if the Committee
determines, based on the advice of counsel or a final determination by
the Internal Revenue Service or any court of competent jurisdiction,
that by reason of the foregoing elective provisions of this Paragraph
8 any Participant or beneficiary has recognized or will recognize
gross income for federal income tax purposes under this Plan in
advance of payment to him or her of Plan benefits. The Company shall
notify all Participants or beneficiaries of any such determination.
Wherever any such determination is made, the Company shall refund all
penalties which were imposed hereunder on account of making lump sum
payments at any time during or after the first year to which such
determination applies (i.e., the first year when gross income is
----
<PAGE>
recognized for federal income tax purposes). Interest shall be paid
on any such refunds based on an interest factor determined under
Paragraph 3(b) hereof. The Committee may also reduce or eliminate the
penalty if it determines that this action will not cause any
Participant or beneficiary to recognize gross income for federal
income tax purposes under this Plan in advance of payment to him or
her of Plan benefits.
Notwithstanding any other provision of this Plan, a penalty shall not
apply if a retired Participant receives a lump sum distribution
pursuant to Paragraph 5 hereof.
Any Participant who receives a lump-sum distribution in accordance
with this Paragraph 8 shall be prohibited from making any deferral of
compensation under this Plan for a period of one-year commencing on
the date on which the lump-sum distribution is made to such
Participant."
IN WITNESS WHEREOF, I have caused this certificate to be executed as of
August 15, 1994.
National Medical Enterprises, Inc.
By: /s/ SCOTT M. BROWN
-------------------------------
Name: Scott M. Brown
Title: Secretary
<PAGE>
EXHIBIT 10(qq)
FIRST AMENDMENT TO
SUPPLEMENTAL SHERT
I, Scott M. Brown, the Secretary of National Medical Enterprises, Inc.
("NME"), hereby certify that on December 1, 1993, the Compensation and Stock
Option Committee of the Board of Directors of NME approved the following
amendment to the Supplemental Specialty Hospital Employee Retirement Trust (the
"Supplemental SHERT"):
The unvested balances in the Supplemental SHERT as of December 31, 1992
shall be vested effective as of December 31, 1992.
IN WITNESS WHEREOF, I have caused this certificate to be executed as of
August 15, 1994.
National Medical Enterprises, Inc.
By: /s/ SCOTT M. BROWN
-------------------------------
Name: Scott M. Brown
Title: Secretary
<PAGE>
EXHIBIT 10(oo)
Amendment to National Medical Enterprises, Inc.
Board of Directors Retirement Plan
Dated January 1, 1985
As Amended August 18, 1993
THIS AMENDMENT TO NATIONAL MEDICAL ENTERPRISES, INC. BOARD OF DIRECTORS
RETIREMENT PLAN (the "Amendment") is made, entered into and effective as of the
25th day of April, 1994.
R E C I T A L S :
- - - - - - - -
WHEREAS, National Medical Enterprises, Inc., a Nevada corporation ("NME")
adopted the Board of Directors Retirement Plan (the "Plan"), pursuant to a
document dated January 1, 1985 and amended August 18, 1993;
WHEREAS, Section 5.4 of the Plan provides that NME reserves the right, in
its sole discretion, to amend the Plan; and
WHEREAS, NME desires to amend the Plan to allow a Director (as defined in
the Plan) who is a participant in the NME Supplemental Executive Retirement Plan
to qualify as a Participant (as defined in the Plan) under the Plan;
NOW, THEREFORE, intending to be legally bound, NME hereby agrees to amend
the Plan as follows:
A M E N D M E N T :
- - - - - - - - -
1. Section 2.10 of the Plan is hereby amended by deleting it in its
entirety and replacing it with the following:
"2.10 Participant. "Participant" shall include any Director who, with the
-----------
permission of the Committee, enters into an Agreement to participate in
this Plan."
2. Section 2.16 of the Plan is hereby amended by deleting it in its
entirety and replacing it with the following:
"2.16 Year of Service. "Year of Service" means each complete year of
---------------
Service as a Director of NME, but shall specifically exclude any year of
Service included in the definition of "Service" under Section 2.13 of the
National Medical Enterprises, Inc. Supplemental Executive Retirement Plan,
dated November 1, 1984, as amended. Years of Service shall be deemed to
have begun as of the first day of the calendar month of Service and to have
ceased on the last day of the calendar month of Service."
3. The Plan, as amended by this Amendment, remains in full force and
effect.
IN WITNESS WHEREOF, NME has signed this Amendment as of the date set forth
above.
NATIONAL MEDICAL ENTERPRISES, INC.
BY: /s/ SCOTT M. BROWN
-------------------------------
ITS: Senior Vice President
------------------------------
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC
[ARTWORK]
1994 ANNUAL REPORT
<PAGE>
National Medical Enterprises, Inc.
National Medical Enterprises, Inc. (NME), headquartered in Santa Monica,
Calif., owns and operates general hospitals and related health care businesses
in the United States and overseas. NME was founded in 1969 as a publicly held
hospital management company. The company employs approximately 35,000 people.
The Year's Highlights
. Implemented companywide ethics program
. Changed top executive management
. Restructured board of directors
. Settled federal government investigations
. Resolved major litigation
. Refocused on core general hospital business
. Divested nearly all psychiatric and physical rehabilitation hospitals
. Increased general hospital operating margins
. Reduced total debt by $341 million; lowered total debt-to-equity from .67 to
.63
. Simplified corporate structure and reduced overhead
. Increased market value 73 percent, from $1.57 billion to $2.72 billion in
fiscal 1994
Cover illustration by Steve Dininno
2
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES'
To Our Shareholders:
Any way you look at it, it was an unforgettable year at National Medical
Enterprises. It was a period of painful adjustments and acknowledgments, hard
work and gratifying successes. Ultimately, we believe it will be remembered as
a year of transition for NME.
We have finally cleared up the most significant of the legal difficulties
that have been casting a shadow over our company for the past two years. As we
said in last year's annual report, resolving these problems was our top
priority. We are pleased to have met our goal.
Most importantly, soon after the fiscal year ended, we signed a final
settlement agreement with the federal government that ended its investigations
of NME and subsidiaries. Now we can fully dedicate our energies and resources
to our profitable general hospital business and on ways to enhance shareholder
value.
NME is in good financial condition to support aggressive growth as our
nation's health care system changes. In fiscal 1994 NME's fully diluted
earnings from continuing operations were $1.23 per share, compared with $1.49
per share in fiscal 1993. However, after excluding the impact of restructuring
charges and gains on the disposals of assets, NME's fully diluted earnings from
continuing operations would have been $1.19 per share in both years. Despite
the heavy costs the company has incurred during the past year, NME's balance
sheet and cash flow remain strong.
Our core business of general hospitals continues to perform well. Even
though our revenue base declined due to the sale of noncore assets, earnings
before interest, taxes, depreciation and amortization (EBITDA) from continuing
operations before restructuring charges were $553 million, only $10 million
below last year.
Let's review major events at NME since we assumed management responsibilities
in June 1993. We have accomplished a lot in that short time.
First, we reduced our board from 18 members to 12, most of whom are outside
directors. We are the only two board members employed by NME. A majority of the
board's executive committee members are also outside directors. Following the
annual meeting of shareholders in September, the number of directors will be
further reduced to 10. We have a new general counsel, a new chief financial
officer and a new executive in charge of public affairs. These appointments
complete changes to NME's top tier of executives, the first major management
transition in our company's 25-year history.
NME's legal problems and resulting public relations woes got worse before
they got better in fiscal 1994. In August 1993 federal investigators searched a
number of our facilities and offices. We cooperated fully with them in their
widely publicized examination of our operations.
We improved our outlook significantly in September when we agreed to settle
litigation over disputed psychiatric claims with six insurers for $125 million.
In December we agreed to settle with another 13 insurers for $90 million. This
resolved all major insurance litigation and allowed us to get back to business
as usual with these companies.
We also have resolved approximately two-thirds of the psychiatric patient
claims that faced us involving fraud and conspiracy allegations. Two
class-action lawsuits filed by shareholders are now in voluntary mediation.
Effective in December, our board of directors suspended the payment of
dividends on NME's common stock. This helped us conserve cash otherwise needed
to solve our legal problems.
Executing a final agreement with the federal
3
<PAGE>
government on June 29 resolved our company's most pressing problem. NME
agreed to pay $363 million to conclude the federal investigations, which had
been focused principally on our psychiatric subsidiaries. Most importantly, the
agreement allows us to continue to participate in Medicare and other federally
funded health care programs essential to our operations.
We also have agreed in principle to pay $16 million to settle potential
claims with all the states in which our former psychiatric subsidiary operated.
Having built up cash reserves during the year, we were prepared to pay these
federal and state settlements.
To ensure our ongoing integrity, NME has implemented what we believe is the
most comprehensive ethics program in the health care industry. Nearly all of
our 35,000 employees, including every one of our executive-level managers, have
participated in our ethics awareness and training workshops. The program makes
employees more alert to potential ethical dilemmas and gives them the tools to
make the right decisions. And, because we know that our written code of conduct
cannot anticipate every ethical issue in our complex business, we have
established a toll-free ethics hotline that employees can call with questions
and concerns. Our compliance program is directed by a management-level
committee, chaired by Michael H. Focht Sr., president and chief operating
officer, and supervised by the ethics and quality assurance committee of the
board. We have made it very clear that NME will not tolerate ethical misconduct.
Much of our fiscal 1994 efforts have gone into refocusing on the company's
core general hospital business. We now operate 33 domestic and 13 international
general hospitals. We have divested or are in the process of divesting almost
all of our rehabilitation and psychiatric hospitals and have reduced our
involvement in other lines of business.
In fiscal 1994 we completed a series of transactions that simplified NME's
relationship with a former subsidiary, The Hillhaven Corporation, a Tacoma,
Wash.-based owner and operator of nursing centers. NME received $135 million in
cash before taxes from these transactions and reduced contingent liabilities
during fiscal 1994 by approximately $420 million. Although NME is no longer a
lender or lessor to Hillhaven, we now own approximately 33 percent of
Hillhaven's common shares.
In January we sold 28 inpatient physical rehabilitation hospitals and 45
outpatient clinics to HEALTHSOUTH Rehabilitation Corporation for approximately
$350 million. We have kept six physical rehabilitation hospitals located on or
near NME general hospital campuses.
In May NME signed an agreement with DLJ Merchant Banking Partners, L.P. and
affiliated investment partnerships through which they will acquire a
controlling interest in Total Renal Care, Inc. (formerly Medical Ambulatory
Care). Total Renal Care provides dialysis services at 37 outpatient facilities
and on an inpatient basis at 28 hospitals. NME received a $76 million dividend
from the company in August 1994 and retains a 25 percent interest in it.
We have also sold, closed or are in the process of selling or closing nearly
all of our psychiatric hospitals. As of August 12, 1994, we had sold 27
psychiatric facilities to Charter Medical Corporation and 25 facilities to
other buyers. Charter has agreed to buy 20 additional facilities; those sales
are pending. We also intend to sell 11 more facilities to other buyers. We are
retaining four
4
<PAGE>
psychiatric hospitals located near NME general hospitals.
As we moved to concentrate our business on our general hospitals and
hospital campuses, we also moved quickly to bring our corporate staffing levels
in line with the new NME. In July with the help of McKinsey & Co., a leading
management consulting firm, we completed a comprehensive analysis of our
corporate, regional and divisional operations, which eliminated about 240
positions. This reorganization will result in a leaner, more efficient central
operation and will reduce annual overhead by approximately $32 million.
Clearly, we've had an extraordinary number of problems to confront and
adjustments to make this year. We even contended with a major earthquake. The
quake didn't affect service at or damage our Southern California hospitals, but
it did result in extensive cosmetic damage at our headquarters.
All this has been played out against a backdrop of enormous, accelerating change
in the health care business. A wave of mergers and takeovers has transformed our
industry, while legislators continue to debate how to provide health care to
more people and how to pay for it.
The changes we're making today at NME will serve us well in the new age of
health care. Already, we are
(Stock price in dollars per share)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Date Description Stock Price
<S> <C> <C>
2/28/92 Earnings outlook revised downward. $14.625
4/23/92 $250 million charge to divest certain $14.500
psych hospitals announced.
6/3/92 Psych settlement reached with Texas $14.500
attorney general.
7/30/92 Eight insurers sue NME. $16.250
9/14/92 Two insurers sue NME. $13.500
11/11/92 Ethics program implemented. $13.000
1/8/93 Negative Wall Street Journal article on $ 9.875
NME published.
4/27/93 Stock at 6 1/2 , the lowest level in more $ 6.500
than 10 years, on 4/27/93.
4/28/93 Barbakow named CEO; Focht COO on 4/28/93. $ 7.500
6/23/93 Restructuring of Hillhaven relationship announced. $ 9.500
8/27/93 Trading resumed after Department of $ 7.750
Justice searches.
9/29/93 Settlement reached with three insurers. $10.000
10/28/93 Dividend suspended. $11.250
11/16/93 59 psych patient cases settled. $11.500
12/3/93 Rehab hospitals' sale announced. $12.500
12/13/93 Settlement reached with 13 insurers. $13.625
1/11/94 Discontinuance of psych business announced. $14.625
3/8/94 23 psych patient cases settled. $16.500
3/30/94 Psych hospitals' sale announced. $16.500
4/5/94 Corporate downsizing announced. $16.125
4/14/94 Agreement in principle with federal government $16.875
announced.
4/19/94 Dialysis sale announced. $15.375
6/28/94 Government settlement finalized. $15.875
6/30/94 27 psych hospitals sold. $15.625
7/11/94 Corporate downsizing implemented. $16.625
8/5/94 Stock closed at 18 1/4 on 8/5/94. $18.250
</TABLE>
- --------------------------------------------------------------------------------
NATIONAL MEDICAL ENTERPRISES' STOCK PRICE: In recent years the company's
stock price has reflected its problemsbut has recovered during the past 15
months as those problems were resolved. NME's stock price increased from 9-1/2
to 16-3/8 in fiscal 1994.
5
<PAGE>
pursuing innovative ways to work with the increasingly demanding, powerful
and large groups that buy medical care; we are strengthening our base in the
medical community; and we are actively looking for strategic acquisitions. As
always, we are continually improving our facilities and our patient service, as
well as finding new ways to reduce costs.
We see opportunities to expand internationally. Our existing successful
operations overseas, our resources and our hospital management expertise put us
in a good position to meet growing foreign demand for quality health care.
The investment community has reacted positively to our efforts to refocus
our company. Although we've made substantial progress, we still have much to
do. We must satisfy rapidly changing markets. We must be prepared to adjust to
health care reform at the national and state levels. We must look for ways to
enlarge our company -- through mergers or acquisitions, through the purchase or
lease of single facilities, or through strengthening the provider networks
within our key geographic markets.
Even as we return to our general hospital roots, we realize that running
hospitals is a much different business than it used to be. The economics of
health care has changed the way we operate, while new technology has
transformed the way we care for patients. Although no one yet knows how the
rules will change under health care reform, we can be sure that providing the
best possible care to patients and vigilantly controlling expenses will always
serve us well. We will build our business on these tenets and on a strengthened
ethical foundation.
We thank you, our shareholders, for your support during this critical
period. We also thank NME's employees, their families and our board for their
extra efforts, which have made our company's many accomplishments possible this
year.
Sincerely,
Jeffrey C. Barbakow
Chairman and Chief Executive Officer
Michael H. Focht Sr.
President and Chief Operating Officer
August 12, 1994
6
<PAGE>
Operations Review
In fiscal 1994 we refocused on the profitable core business of National
Medical Enterprises -- general hospitals -- and on our hospital campuses. Today
NME operates 33 general hospitals in six U.S. states and 13 hospitals in four
foreign countries. We spun off most of our long-term-care operations in 1990,
sold most of our physical rehabilitation hospitals in fiscal 1994, and are in
the process of divesting our psychiatric facilities. To maintain strategic
service networks in some key metropolitan areas, we have retained seven
long-term-care facilities, six rehabilitation hospitals and four psychiatric
hospitals on or near our general hospital campuses.
GENERAL HOSPITALS
Amid major changes in the health care industry, our general hospitals
continue to perform well both in the fee-for-service arena and in the managed
care environment.
Admission and utilization rates at our hospitals declined slightly as more
patients utilize managed care. In fiscal 1994 we reduced the impact of these
declines through outstanding expense control. For example, NME works closely
with hospital medical staffs to more effectively manage the use of ancillary
services and supplies. Another important cost-control component is
restructuring the staffing and functions of hospital personnel. A new
multidisciplinary approach to patient care, in place at five NME hospitals,
allows staff to provide more services on the patient floors instead of in
ancillary departments.
Through national purchasing, NME negotiates money-saving contracts for
hospital supplies. For example, we save an average of 30 percent to 40 percent
off the list price on pharmaceuticals and IV therapy products.
Cost control is not the only way to improve our performance. At NME, we've
known for years that the market for traditional fee-for-service medicine will
continue to shrink; managed care is the future of health care. In many areas,
the future is already here. Managed care -- in different forms in different
marketplaces -- is the basis of the development plans of every one of our
hospitals. Our goal is to be a key player in an integrated health care delivery
system.
Toward that end, we are ensuring that NME hospitals can provide effective
capitated services. Under capitation, providers contract with a health plan to
offer comprehensive services to plan members in return for a flat monthly
per-member fee. Consequently, doctors and hospitals share the financial risks
as well as the rewards of capitation. This gives physicians more incentive than
ever to treat patients cost-efficiently and to form physician/hospital
alliances to better manage financial risks.
Providing physicians with access to excellent hospital facilities and staff
always has been central to NME's business philosophy. Today we also provide
specialized management services to help them navigate the increasing
complexities of the health care business under capitation and other forms of
managed care.
Of course, cost-efficiency and physician support are only means to an end:
Outstanding patient care and patient satisfaction is the mission of our
business. To measure satisfaction and further improve our service, this fiscal
year we began a centralized, standardized survey of every patient who stays
overnight or has outpatient surgery at NME hospitals. Results have been
positive and indicate that most patients are very happy with the care at our
hospitals.
7
<PAGE>
Additionally, we continue efforts to measure our patients' clinical outcomes
from medical records. Ultimately, we believe patient satisfaction and outcome
study data will provide the kind of information patients and payors look for
when they select hospitals and physicians for their provider networks.
Our acquisition goals, too, focus on expanding NME's role in the integrated
health care system. In May 1994 NME signed an operating lease for the 138-bed
Doctors Hospital of Jefferson near New Orleans that was well-suited to these
goals. NME owns four other general hospitals in the area, along with two
psychiatric hospitals, two long-term-care facilities and one physical
rehabilitation hospital. This move gives our company improved ability to serve
a greater portion of the New Orleans metropolitan area and to develop a
stronger provider network to contract with health plans.
In early fiscal 1995 NME sold Doctors Hospital of Montclair and Ontario
Community Hospital, two smaller Southern California community hospitals that do
not fit in our future of integrated health care.
National Health Plans, an NME subsidiary in Modesto, Calif., the location of
NME's largest domestic hospital, does complement our strategic plans. This
subsidiary has grown dramatically in its decade of involvement in managed care.
Its preferred provider organization (PPO) includes more than 1,500 providers
and serves more than 20,000 members; its health maintenance organization (HMO)
has more than 40,000 members; and its insurance products and services firm
serves approximately 23,000 policyholders. We are expanding National Health
Plans' service area in California and elsewhere and are offering new programs
and products.
Systemwide, we are careful to maintain, upgrade and remodel our hospitals.
Most of our capital expenditures go toward these ends, rather than toward
increasing the number of licensed beds. An important element of modernization,
which also reflects the influence of managed care, is the expansion of
outpatient services at many of our hospitals.
In addition, NME has six medical office buildings under construction to meet
physicians' demands for space near NME hospitals and to serve patients more
conveniently. We currently operate 28 medical office buildings domestically,
most adjacent to our hospitals.
Where there is a need and where market conditions warrant, we continue to
introduce new medical equipment and procedures that promise to improve patient
care and assist our physicians.
For example, two of our more-sophisticated hospitals recently acquired gamma
knives to treat some patients with certain brain tumors and vascular
malformations. With this tool, which is not a knife but a device that focuses
multiple beams of gamma radiation on a precise spot, surgeons can perform brain
surgery in a single short session without opening a patient's skull. Gamma
knives can reduce the attendant risks of neurosurgery and minimize
hospitalization and recovery time. Only 16 other U.S. hospitals have this
equipment.
INTERNATIONAL HOSPITALS
NME is well-positioned to take full advantage of a world of health care
opportunities. In Asia, we are helping to meet the rapidly growing middle
class's demand for quality care. In Australia, NME is modernizing hospitals and
foresees solid growth in the private health care industry. In Europe, where some
8
<PAGE>
countries are beginning to shift toward the private sector as an alternative
to overburdened public health systems, we are pursuing selective expansion.
Our Singapore operations, which include two hospitals plus lab and radiology
services, are thriving. They provide a sturdy base for continued development in
Southeast Asia. One of the region's largest private tertiary hospitals, 505-bed
Mount Elizabeth Hospital in Singapore draws 30 percent of its patients from
outside the country and has a reputation as a regional center of medical
excellence. Mount Elizabeth has established medical affiliations with China,
Indonesia, Myanmar and neighboring countries.
Subang Jaya Medical Centre, our successful joint venture in Malaysia, will
expand to 375 beds when it opens a 150-bed inpatient tower in November.
In June 1996 NME will open and manage another Asian venture -- the 554-bed
Bumrungrad Hospital in Bangkok. We own 40 percent of the project, which will be
Thailand's largest private hospital. We plan further expansion in Malaysia and
Thailand. Other countries we're examining include Indonesia, India and China.
NME owns 52 percent of Australian Medical Enterprises Limited (AME), which
has been expanding and upgrading its nine hospitals and improving its
successful pathology business. The company issued new shares in June 1994 to
raise funds for expansion. Additionally, AME is building the 202-bed St. George
Medical Complex adjacent to one of metropolitan Sydney's leading public
teaching hospitals. Scheduled to open in late 1995, it will be one of
Australia's largest private hospitals.
NME has just begun to operate private hospitals in Europe. In June 1994 we
assumed full ownership of Centro Medico Teknon, a 184-bed, full-service
hospital in Barcelona, Spain. We previously owned 50 percent of the hospital,
which opened in February 1994.
Internationally and domestically, NME's 35,000 employees continue to work
closely with physicians to find new ways to better serve our patients and to
adapt successfully to the world's changing health care delivery systems. The
result should be high-quality health care and satisfied patients.
9
<PAGE>
Selected Financial Data and Ratios
Continuing Operations
<TABLE>
<CAPTION>
Years Ended May 31,
(dollar amounts, except per-share -------------------------------------------------------------
amounts, are expressed in millions) 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results
Net operating revenues $2,967 $3,191 $2,941 $2,610 $2,917
Total costs and expenses(1) (2,723) (2,915) (2,642) (2,394) (2,746)
Investment earnings 28 21 29 29 29
Gain on sale of subsidiary's
common stock 0 29 0 0 0
Net gain on disposals of facilities
and long-term investments 88 93 31 0 0
------------------------------------------------------------
Income from continuing operations 360 419 359 245 200
Taxes on income (144) (155) (141) (100) (77)
------------------------------------------------------------
Income from continuing operations 216 264 218 145 123
------------------------------------------------------------
Earnings per share from continuing
operations:
Primary 1.29 1.59 1.27 0.91 0.78
Fully diluted 1.23 1.49 1.19 0.87 0.76
Cash dividends per common share 0.12 0.48 0.46 0.40 0.36
- -----------------------------------------------------------------------------------------------------
Balance Sheet Data
Total assets 3,697 4,173 4,236 4,060 3,807
Long-term debt 223 892 1,066 1,140 1,361
Total debt 834 1,177 1,305 1,243 1,638
Stockholders' equity 1,320 1,752 1,674 1,762 1,257
Book value per common share 7.95 10.56 10.03 10.08 7.97
- -----------------------------------------------------------------------------------------------------
Ratios
Pretax margin 12.1% 13.1% 12.2% 9.4% 6.9%
------------------------------------------------------------
Current ratio 0.88/1 1.17/1 1.26/1 1.58/1 1.36/1
------------------------------------------------------------
Total debt/equity ratio 0.63/1 0.67/1 0.78/1 0.71/1 1.30/1
------------------------------------------------------------
Return on assets, after tax 5.5% 6.2% 5.3% 3.7% 3.2%
------------------------------------------------------------
Return on equity, after tax 13.8% 15.2% 12.2% 10.4% 9.9%
------------------------------------------------------------
Interest expense coverage 6.1 6.6 5.0 3.0 2.5
------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Total costs and expenses for 1994, 1993 and 1992 include unusual
restructuring charges of $77 million, $52 million and $18 million
respectively, which are explained elsewhere in this report.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(All references to years are to fiscal years, and all note references are to
the accompanying Notes to Consolidated Financial Statements.)
Liquidity and Capital Resources
A number of events occurred in 1994 that had a significant impact on the
Company's financial statements, liquidity and results of operations. These
events included the settlement of insurance company litigation, settlement of
the government investigations, adoption of a formal plan to discontinue the
psychiatric hospital business, the sale of most of the Company's rehabilitation
hospitals, and a corporate restructuring to significantly reduce overhead.
In November 1993 and in February 1994 the Company executed settlement
agreements covering the three lawsuits previously filed by several insurance
companies. Under the settlements, the Company paid an aggregate of $214.9
million as complete and final resolution of these disputed claims alleging that
certain psychiatric hospitals engaged in fraudulent practices.
In June 1994 the Company agreed to settle for $362.7 million all
investigations by federal government agencies and in May 1994 reached
agreements in principle with 27 states and the District of Columbia to settle
all investigations by them for $16.3 million. (See Note 7B).
In April 1994 the Company announced and initiated a formal plan to reduce
corporate and division staffing levels, to review the resulting office space
needs of all corporate operations, and to otherwise lower the Company's
corporate overhead. As a result, the Company announced in July 1994 that 240
staff positions were being eliminated and that it had decided to sell its
corporate headquarters building and to lease less office space in that building
or at an alternative site. A reserve of $77 million was recorded in the quarter
ended May 31, 1994, to cover the costs of a write-down of the building,
employee severance benefits and other expenses directly related to the overhead
reduction plan. The Company expects its annual overhead savings from
implementation of this plan to approximate $32 million and that the sale of its
corporate headquarters building, which may take two years to consummate, should
generate after-tax proceeds in excess of $40 million.
The Company's cash and cash equivalents at May 31, 1994, were $313 million,
an increase of $172 million over May 31, 1993. The ratio of total debt to
equity was 0.63:1, compared with 0.67:1 at May 31, 1993, and 0.78:1 at May 31,
1992. Working capital (deficit) at May 31, 1994, was ($196) million, compared
with $155 million at May 31, 1993, and $223 million at May 31, 1992. The
principal reasons for the decline in working capital in 1994 were 1) a $424
million increase in current portion of long-term debt, most of which matures in
April 1995, and 2) a $393 million increase in current reserves related to
discontinued operations and restructuring charges.
During 1994 net cash provided by operating activities was $466 million
before pretax expenditures of $319 million related to the discontinued
psychiatric hospital business and for restructuring charges. (See Notes 2 and
16.) Corresponding figures for 1993 were $494 million and $96 million,
respectively. In 1992 they were $583 million and $24 million, respectively.
Proceeds from the sales of facilities, investments and other assets were
$569 million during 1994, compared with $70 million in 1993 and $109 million in
1992. Sales in 1994 included 23 long-term-care facilities previously leased to
The Hillhaven Corporation, 29 inpatient rehabilitation hospitals and 45 related
satellite outpatient clinics, 15 psychiatric facilities and one general
hospital. In June 1994 the Company sold 31 more psychiatric facilities for $137
million in cash. The Company has agreed to sell 20 more psychiatric facilities
for $71 million in cash. (See Note 2.) In August 1994 the Company received a
$75.5 million dividend from a wholly owned subsidiary in connection with a
debt/equity offering in which the Company's interest in the subsidiary will be
reduced to approximately 25%. (See Notes 13 and 15.)
Cash payments for property, plant and equipment were $185 million in 1994,
compared with $319 million in 1993 and $421 million in 1992. The estimated cost
to complete major approved construction projects at wholly owned subsidiaries
is approximately $120 million, all of which is related to expansion,
improvement and equipping of existing domestic hospital facilities, and the
significant portion of which will be spent over the next three years. The
Company expects to finance all such expenditures with either internally
generated or borrowed funds. The Company intends to continue to invest
domestically and internationally in existing and new facilities within its
existing health care business.
During 1994 the Company had a net reduction in current and long-term debt of
approximately $337 million. In September 1993 the Company repaid $50 million of
its then-outstanding bank borrowings under its unsecured revolving credit and
term loan agreement and refinanced the $246.2 million balance of such loans
with new term loans maturing in April 1995 and requiring quarterly installments
aggregating $56.4 million through February 1995. These loans were repaid in
April 1994 with $222 million in loans under a new $464.7 million revolving
credit and letter of credit agreement with four banks. Indebtedness under the
new agreement is secured by a pledge of all the outstanding capital stock of a
wholly owned subsidiary of the Company, which also guarantees the loans. The
new agreement also provides for $242.7 million in letters of credit to support
certain of the
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Company's obligations relating to commercial paper and remarketable bond
programs. All of the outstanding revolving loans under the new agreement mature
on April 12, 1995, and there are no earlier installments of principal due or
reductions of availability. The Company has no unused revolving credit
availability under the new agreement and has no other unused committed credit
facilities.
The Company is having discussions with several banks regarding the
establishment of new lines of credit that could be utilized to repay the
current portion of long-term debt, most of which matures in April 1995, and
believes that, based on the progress to date of these discussions, such new
lines of credit will be available if needed.
In June 1993 Moody's Investors Service, Inc. lowered its rating on the
Company's senior debt from Baa1 to Baa3 and in August 1993 placed the Baa3
rating under review for possible further downgrading. In September 1993
Standard and Poor's Corporation lowered its rating on the Company's senior debt
from BBB- to BB. In April 1994 the BB rating was upgraded to BB+.
The Company suspended the payment of quarterly dividends in October 1993.
Management believes that patient volumes, cash flows and operating results
at the Company's principal health care businesses have been adversely affected
by the legal proceedings and investigations described elsewhere in this annual
report. The most significant of these legal proceedings and investigations have
now been resolved. The Company has recorded reserves for the remaining legal
proceedings not yet settled as of May 31, 1994, and an estimate of the legal
fees related to these matters to be incurred subsequent to May 31, 1994,
totaling approximately $81 million, of which $69 million is expected to be paid
within one year. These reserves represent management's estimate of the net
costs of the ultimate disposition of these matters. However, there can be no
assurance that the ultimate liability will not exceed such estimates.
The Company's liquidity, including cash proceeds from operating activities,
anticipated disposals of assets and the realization of current deferred tax
assets ($372 million), is believed to be adequate to finance planned capital
expenditures and known operating needs, including the settlements of the
federal and state investigations and other unusual legal proceedings referred
to herein.
Results of Operations
The most significant transactions affecting the results of continuing
operations were the sale of most of the Company's rehabilitation hospitals and
related outpatient clinics in 1994 (see Note 13) and other unusual pretax items
as shown below.
Table I Unusual Items -- Continuing Operations:
<TABLE>
<CAPTION>
(in millions) 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C>
Gains on sales of facilities and long-term
investments (see Note 13) 88 93 31
Gain on sale of subsidiary's stock (see Note 15) -- 29 --
Restructuring charges (see Note 16) $(77) $(52) $(18)
------------------
Net unusual pretax items (after-tax $0.04
fully diluted per share in 1994, $0.30 in
1993and $0.04 in 1992) $11 $70 $ 13
==================
</TABLE>
In November 1993 the Company decided to discontinue its psychiatric hospital
business and adopted a plan to dispose of its psychiatric hospitals and
substance abuse recovery facilities within one year. In 1994 the Company had a
loss from the psychiatric operations of $701 million net of income tax benefits
of $412 million. The loss includes the costs of settling federal and state
investigations of the psychiatric business, provisions for losses during the
phase-out period, including the costs of settling unusual psychiatric
litigation, and the write-down of assets to net realizable value. Losses from
discontinued operations in 1993 and 1992 were $104 million and $85 million, net
of income tax benefits, respectively. Results for 1993 and 1992 have been
restated to reflect the operating results for the discontinued business
separately from continuing operations.
12
<PAGE>
Income from continuing operations before income taxes and cumulative effect
of a change in accounting was $360 million in 1994, compared with $419 million
and $359 million in 1993 and 1992, respectively. Excluding the unusual items as
shown in Table I, income from continuing operations before income taxes and
cumulative effect of a change in accounting would have been $349 million in
both 1994 and 1993 and $346 million in 1992.
Net operating revenues and operating profits from continuing operations
before interest are shown in Table II. The revenues and expenses of the sold
rehabilitation hospitals and related outpatient clinics are included in the
Company's results of operations through December 1993. Net operating revenues
of the sold facilities were $266 million in 1994 and $470 million in 1993.
Pretax income of the sold facilities, before general corporate overhead costs,
was $22 million in 1994 and $55 million in 1993.
Table II Operating Revenues and Profits:
<TABLE>
<CAPTION>
Increase (Decrease)
1993 to 1994
-------------------
(in millions) 1994 1993 1992 Amount Percent
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Operating Revenues:
Hospitals $2,807 $2,979 $2,757 $(172) (6)%
Other Businesses 160 212 184 (52) (25)%
----------------------------------------------
Total $2,967 $3,191 $2,941 $(224) (7)%
==============================================
</TABLE>
Operating Profits Before
Interest and Net
Unusual Items (Table I):
<TABLE>
<S> <C> <C> <C> <C>
Hospitals $358 $359 $369 $(1) --
Other Businesses 42 54 44 (12) (22)%
----------------------------------------------
Total $400 $413 $413 $(13) (3)%
==============================================
</TABLE>
The hospital line of business includes primarily the operations of the
Company's domestic and international general hospitals, its rehabilitation
hospitals and the management services business. Net operating revenues
decreased in 1994 due to the sale of the rehabilitation facilities. Operating
profits were virtually unchanged from the prior year. The hospitals' operating
profit margin was 12.8% in 1994, compared with 12.1% in 1993 and 13.4% in 1992.
The operating profit margin increase from 1993 to 1994 was primarily due to
more effective cost-control programs and the sale of the rehabilitation
hospitals, which, as a whole, had lower margins than the general hospitals.
Selected statistics for domestic general hospital operations are shown below:
Table III
<TABLE>
<CAPTION>
Increase
(Decrease)
1993 to
1994 1993 1992 1994
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Hospitals:
Facilities owned or operated 35 35 35 --
Year-end licensed beds 6,873 6,818 6,559 0.8%
Average licensed beds in period 6,760 6,811 6,563 (0.7)%
Average occupancy 46.8% 47.8% 50.5% (1.0)%*
Patient days 1,154,030 1,187,181 1,211,187 (2.8)%
Net inpatient revenues
(in millions) $1,568 $1,529 $1,445 2.6%
Net inpatient revenue per
patient day $1,359 $1,288 $1,193 5.5%
Admissions 207,868 210,669 208,307 (1.3)%
Average length of stay (days) 5.6 5.6 5.8 --
Net outpatient revenues
(in millions) $557 $535 $465 4.1%
% of net patient revenues
from Medicare and Medicaid 44.4% 41.4% 38.5% 3.0%*
</TABLE>
*This % change is the difference between the 1994 and 1993 percentages shown.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Domestic General Hospitals
Domestic general hospital net patient revenues were $2.1 billion in 1994 and
1993 and $1.9 billion in 1992. There continue to be increases in inpatient
acuity and intensity of services and higher inpatient revenue per patient day
as less intensive services shift from an inpatient to an outpatient basis or to
alternative health care delivery services because of technology improvements
and as cost controls by payors become greater. Allowances and discounts are
expected to continue to rise because of increasing cost controls by government
and group health payors and because the percentage of business from managed
care programs (and related discounts) continues to grow.
The Medicare program accounted for approximately 36% of the net patient
revenues of the domestic general hospitals in 1994 and 34% and 32% in 1993 and
1992, respectively. Historically, rates paid under the Medicare's prospective
payment system have increased, but such increases have been less than cost
increases.
The general hospital industry in the United States and the Company's general
hospitals continue to have significant unused capacity, and thus there is
substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. Increased competition, admissions constraints
and payor pressures are expected to continue. The Company offers discounts to
private payor groups, enters into capitation contracts in some service areas,
upgrades facilities and equipment and offers new programs and services. The
Company has been implementing various cost-control programs focused on reducing
operating costs. The Company's general hospitals have been successful in
increasing operating profits in a very competitive environment, due in large
part to enhanced cost control and efficiencies being achieved throughout the
Company. The Company, however, does not expect to be able to sustain the growth
rates from its existing domestic general hospitals that were achieved in recent
years.
Psychiatric Hospitals
Psychiatric hospitals' statistics and commentary have not been included
herein because of the Company's decision on November 30, 1993, to discontinue
its psychiatric hospital business by disposing of its psychiatric hospitals and
substance abuse recovery facilities. The Company entered into two separate
asset sale agreements, each dated as of March 1994, to sell 47 psychiatric
facilities, and the Company currently has reached an agreement to sell or is
negotiating with various other parties for the sale of 10 psychiatric hospitals
and is seeking a buyer for one other facility. (See Note 2.) Even though the
Company will continue to operate its psychiatric hospital business until the
completion of the divestiture program, the expected results of operations
already have been reported as discontinued operations in the Company's
financial statements.
The action to discontinue its psychiatric hospital business and the sale of
the psychiatric and off-campus rehabilitation hospitals described above
comprise significant elements of the Company's previously announced decision to
focus on its core general hospital business.
Other Businesses
During 1994 other businesses included the operating results of the Company's
dialysis centers, seven domestic long-term-care facilities, the Company's
equity interest in the net income of The Hillhaven Corporation, loan and lease
guarantee fees from Hillhaven, leasing of long-term-care facilities and
retirement centers to Hillhaven, the Company's equity interest in the net
income of Westminster Health Care Holdings PLC, and other smaller businesses.
Most of the declines in net operating revenues of other businesses for the
1994 year compared with the 1993 year are due to a reduction in the Company's
ownership of Westminster from approximately 90% to approximately 42% and the
restructuring of its relationship with Hillhaven described below. Operating
profits have been affected for the same reasons.
14
<PAGE>
In September 1993 the Company and Hillhaven substantially completed a series
of transactions that resulted in: 1) the Company selling to Hillhaven all
remaining leased long-term-care nursing facilities, and no longer being a
lessor to Hillhaven, but remaining a significant holder of Hillhaven common and
preferred stock; 2) all indebtedness owed to the Company from Hillhaven being
paid in full; and 3) reducing Hillhaven obligations guaranteed by the Company.
After reflecting these transactions, including the sale of long-term-care
facilities to Hillhaven, the Company's lease income for 1994 was $3 million,
compared with $20 million in 1993. The Company's equity in Hillhaven's net
income was $15 million in 1994, compared with $8 million in 1993. The
significant increase in equity earnings is due to Hillhaven's improved overall
earnings and the Company's increasing its investment in Hillhaven in 1994. (See
Note 14.)
In May 1994 the Company entered into an agreement pursuant to which DLJ
Merchant Banking Funding, Inc. and certain of its affiliates will acquire a
controlling interest in the Company's wholly owned subsidiary that operates its
dialysis centers. After completion of the transaction in August 1994, the
Company will own approximately 25% of the outstanding common stock of the
subsidiary. Thereafter, the Company's share of the operating results of the
subsidiary will be recognized using the equity method of accounting and is
expected to be minimal in 1995. Net operating revenues of the subsidiary were
$80.5 million in 1994, and net income was $5.7 million. (See Note 15.)
Other Operating Results
Depreciation and amortization expense as a percentage of net operating
revenues was 5.4% in 1994, 5.0% in 1993 and 4.8% in 1992. Interest expense was
2.4% in 1994 and 1993 and 3.0% in 1992.
Investment earnings were $28 million in 1994, $21 million in 1993 and $29
million in 1992, and were derived primarily from notes receivable and
investments in short-term marketable securities. Effective tax rates on income
from continuing operations before extraordinary charges were 40.0% in 1994,
37.0% in 1993 and 39.3% in 1992. The 1993 effective rate on pretax income from
continuing operations excluding the gain on the sale of Westminster's common
stock would have been 39.7%. (See Note 15.)
The financial statements reflect operating and depreciation expenses based
on historical cost. Except for depreciation expense, the expenses are recorded
in the amounts approximating current purchasing power. Depreciation expense
would be greater if based on current costs of the Company's property, plant and
equipment rather than historical costs. The Company mitigates the impact of
inflation on its operating costs and provision for depreciation by price
increases and by continuing renovation and replacement of the physical plant
and equipment. As a result, the Company believes that inflation does not have a
significant impact on its earnings, except when Medicare and Medicaid rate
increases are inadequate in relation to rising costs and when other payors also
implement programs to control their health costs as discussed above.
Business Outlook
Because of intense national, state and private industry efforts to reform
the health care delivery and payment systems in this country, the health care
industry as a whole faces increased uncertainty. While the Company is unable to
predict which, if any, proposals for health care reform will be adopted, it
continues to monitor their progress and analyze their potential impacts in
order to formulate its future business strategies.
Another factor impacting operating results is the slow recovery of the
California economy from the recent recession. At May 31, 1994, 43% of the
Company's domestic general hospital beds were in California.
The challenge facing the Company and the health care industry is to continue
to provide quality patient care in an environment of rising costs, strong
competition for patients, and a general reduction of reimbursement by both
private and government payors.
15
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended May 31,
(dollar amounts, except per-share amounts, ------------------------------------------
are expressed in millions) 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating revenues $2,967 $3,191 $2,941
------------------------------------------
Operating and administrative expenses (2,492) (2,680) (2,412)
Depreciation and amortization (161) (160) (141)
Interest, net of capitalized portion
($4 in 1994, $9 in 1993, $11 in 1992) (70) (75) (89)
------------------------------------------
Total costs and expenses (2,723) (2,915) (2,642)
------------------------------------------
Investment earnings 28 21 29
Net gain on disposals of facilities
and long-term investments 88 93 31
Gain on sale of subsidiary's
common stock 0 29 0
------------------------------------------
Income from continuing operations
before income taxes 360 419 359
Taxes on income (144) (155) (141)
------------------------------------------
Income from continuing operations 216 264 218
------------------------------------------
Discontinued operations (701) (104) (85)
Extraordinary charges -- net of tax 0 0 (29)
Cumulative effect of a change
in accounting for income taxes 60 0 0
------------------------------------------
Net income (loss) $(425) $160 $104
==========================================
Earnings (loss) per share:
Primary:
Continuing operations $1.29 $1.59 $1.27
Discontinued operations (4.19) (0.63) (0.50)
Extraordinary charges 0.00 0.00 (0.17)
Cumulative effect of a change
in accounting principle 0.36 0.00 0.00
------------------------------------------
$(2.54) $0.96 $0.60
==========================================
Fully diluted:
Continuing operations $1.23 $1.49 $1.19
Discontinued operations (4.10) (0.58) (0.44)
Extraordinary charges 0.00 0.00 (0.15)
Cumulative effect of a change
in accounting principle 0.33 0.00 0.00
------------------------------------------
$(2.54) $0.91 $0.60
==========================================
Weighted average shares and share
equivalents outstanding--primary
(in thousands) 167,024 166,111 171,853
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 31,
-----------------------
(dollar amounts are expressed in millions) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 313 $ 141
Short-term investments, at
cost which approximates market 60 98
Accounts and notes receivable,
less allowance for doubtful accounts
($77 in 1994and $115 in 1993) 385 502
Inventories of supplies, at cost 55 62
Deferred income taxes 372 120
Assets held for sale 204 56
Prepaid expenses and other current assets 55 89
-----------------------
Total current assets 1,444 1,068
-----------------------
Long-term receivables 73 190
Investments and other assets 309 205
Property, plant and equipment, net 1,764 2,492
Intangible assets, at cost, less accumulated
amortization ($54 in 1994 and $176 in 1993) 107 218
-----------------------
$3,697 $4,173
=======================
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings and notes $ 67 $ 163
Accounts payable 176 140
Employee compensation and benefits 93 104
Reserves related to discontinued operations 465 101
Other current liabilities 236 254
Income taxes 58 30
Current portion of long-term debt 545 121
-----------------------
Total current liabilities 1,640 913
-----------------------
Long-term debt, net of current portion 223 892
Other long-term liabilities 389 299
Deferred income taxes 125 317
Commitments and contingencies
(see accompanying notes)
Stockholders' equity:
Common stock, $0.075 par value; authorized
450,000,000 shares; 185,587,666 shares
issued at May 31, 1994, and 185,698,524
shares at May 31, 1993 14 14
Additional paid-in-capital 1,015 1,007
Notes receivable on exercise of stock
options (2) (2)
Retained earnings 575 1,019
Less common stock in treasury, at cost,
19,507,161 shares at May 31, 1994,
and 19,800,103 at May 31, 1993 (282) (286)
-----------------------
Total stockholders' equity 1,320 1,752
-----------------------
$3,697 $4,173
=======================
- -------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------
(dollar amounts are expressed in millions) 1994 1993 1992
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(425) $ 160 $ 104
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 198 199 196
Deferred income taxes (253) (32) (96)
Gains on sales of facilities and long-term
investments (88) (93) (31)
Gain on sale of subsidiary's common stock 0 (29) 0
Extraordinary charges 0 0 34
Additions to reserves related to discontinued
operations andrestructuring charges 1,175 189 218
Cumulative change in accounting principle (60) 0 0
Other items 38 33 35
Increases (decreases) in cash from changes in
operating assets and liabilities, net of
effects from purchases of new businesses:
Accounts and notes receivable, net (65) 65 46
Inventories, prepaid expenses and other
current assets (21) (43) (13)
Accounts payable, accrued expenses and
income taxes payable (31) 21 55
Noncurrent accrued expenses and other
liabilities (2) 24 35
------------------------------
Net cash provided by operating activities,
before expenditures for discontinued
operations and restructuring charges 466 494 583
Net expenditures for discontinued
operations and restructuring charges (319) (96) (24)
------------------------------
Net cash provided by operating activities 147 398 559
------------------------------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment (185) (319) (421)
Purchases of new businesses, net of cash acquired (5) (3) (14)
Proceeds from sales of facilities, investments
and other assets 569 70 109
Investments in Hillhaven (63) 0 0
Collections on notes 100 27 74
Increase in intangible and other assets (24) (29) (53)
Increase in notes receivable (4) (21) (24)
Equity investments in partnerships (11) (8) 0
Other items 9 (16) (8)
------------------------------
Net cash provided by (used in) investing
activities 386 (299) (337)
------------------------------
</TABLE>
18
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended May 31,
---------------------------
(dollar amounts are expressed in millions) 1994 1993 1992
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Net proceeds from (payments of) unsecured
lines of credit and reverse purchase agreements (151) (10) 220
Payments of other borrowings (217) (93) (103)
Proceeds from other borrowings 31 131 271
Redemptions of notes and debentures 0 0 (383)
Cash dividends paid to shareholders (40) (78) (76)
Purchases of treasury stock 0 (19) (150)
Other items 16 (3) (3)
---------------------------
Net cash used in financing activities (361) (72) (224)
---------------------------
Net increase (decrease) in cash and cash
equivalents 172 27 (2)
Cash and cash equivalents at beginning
of year 141 114 116
---------------------------
Cash and cash equivalents at end of year $ 313 $ 141 $ 114
===========================
- ---------------------------------------------------------------------------------
Supplemental Disclosures:
Interest paid, net of amounts capitalized $ 62 $ 87 $ 78
Income taxes paid 30 125 186
Notes received in connection with sales
of facilities 0 92 4
Conversions of notes and debentures into
common stock 0 0 15
- ---------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE>
Consolidated Statements of Changes
in Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended May 31, 1992, 1993, 1994
-----------------------------------------------------------------------
Common Stock Stock
---------------------- Additional Option
(dollar amounts are expressed in millions, Outstanding Issued Paid-in Notes Retained Treasury
share amounts in thousands) Shares Amount Capital Receivable Earnings Stock
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, May 31, 1991 174,765 $14 $ 969 $(2) $ 914 $(133)
Net income 104
Cash dividends ($0.46 per share) (79)
Purchases of treasury stock (9,288) (150)
Stock options exercised 457 6 (2) 2
Notes receivable collections 2
Restricted share awards, net of
cancellations 129 13 1
Conversions of notes and
debentures 915 8 7
Other (15)
- -----------------------------------------------------------------------------------------------------------------------
Balances, May 31, 1992 166,963 14 996 (2) 939 (273)
Net income 160
Cash dividends ($0.48 per share) (80)
Purchases of treasury stock (1,034) (15)
Stock options exercised 36 1
Restricted share cancellations (67) 11 1
- -----------------------------------------------------------------------------------------------------------------------
Balances, May 31, 1993 165,898 14 1,007 (2) 1,019 (286)
Net loss (425)
Cash dividends ($0.12 per share) (19)
Stock options exercised 293 (1) 4
Restricted share cancellations (110) 9
- -----------------------------------------------------------------------------------------------------------------------
Balances, May 31, 1994 166,081 $14 $1,015 $(2) $ 575 $(282)
===================================================================
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE>
Notes to Consolidated Financial Statements
Note 1 Significant Accounting Policies
A. Principles of Consolidation
The consolidated financial statements include the accounts of National
Medical Enterprises, Inc. and its wholly owned and majority-owned subsidiaries.
Investments in other affiliated companies are accounted for by the equity
method. Significant intercompany accounts and transactions are eliminated in
consolidation.
The Company is primarily engaged in the operation of domestic and
international general hospitals. During 1994 the Company sold most of its
physical rehabilitation hospitals and decided to discontinue its psychiatric
hospital business, adopting a plan to dispose of its psychiatric hospitals and
substance abuse recovery facilities within one year. (See Note 2.)
B. Net Operating Revenues
These revenues consist primarily of net patient service revenues, which are
based on the hospitals' established billing rates less allowances and discounts
principally for patients covered by Medicare, Medicaid and other contractual
programs. These allowances and discounts were $2.7 billion, $2.6 billion and
$2.3 billion for the years ended May 31, 1994, 1993 and 1992, respectively.
Payments under these programs are based on either predetermined rates or the
costs of services. Settlements for retrospectively determined rates are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined. Management believes that
adequate provision has been made for adjustments that may result from final
determination of amounts earned under these programs. Approximately 40% of
fiscal 1994 consolidated net operating revenues is from participation of
domestic general and physical rehabilitation hospitals in Medicare and Medicaid
programs. In 1993 it was approximately 37%, and in 1992 it was approximately
35%.
The Company provides care to patients who meet certain financial or economic
criteria without charge or at amounts substantially less than its established
rates. Because the Company does not pursue collection of amounts determined to
qualify as charity care, they are not reported as gross revenue and are not
included in deductions from revenue or in operating and administrative expenses.
C. Provision for Doubtful Accounts
A provision for estimated uncollectible accounts and notes receivable, net
of recoveries, is included in operating and administrative expenses and was
$107 million, $115 million and $123 million for 1994, 1993 and 1992,
respectively.
D. Property, Plant and Equipment
The Company uses the straight-line method of depreciation for buildings,
improvements and equipment over their estimated useful lives as follows:
buildings and improvements -- generally 25 to 50 years; equipment -- three to
15 years.
E. Intangible Assets
Preopening costs generally are amortized over four years. Costs in excess of
the fair value of identifiable net assets of purchased businesses generally are
amortized over 40 years. Deferred financing costs and the costs of acquiring
certain management contracts are amortized over the lives of the related loans
or contracts. The straight-line method is used to amortize most intangible
assets.
F. Stock Benefit Plans
The fair market value of restricted shares on the date of award and the fair
market value of the Company's common shares on the date of grant of discounted
stock options in excess of the exercise price are expensed, with appropriate
credits to additional paid-in capital, over the periods that the restrictions
as to forfeiture or exercise lapse. For restricted units, an amount equivalent
to the fair market value of shares of the Company's common stock on the date of
vesting, subject to a maximum amount, is expensed over the vesting period. (See
Note 10.)
G. Leases
Capital leases are recorded at the beginning of the lease term as assets and
liabilities at the lower of the present value of the minimum lease payments or
the fair value of the assets.
H. Cash Equivalents
The Company treats highly liquid investments with an original maturity of
three months or less as cash equivalents.
I. Interest Rate Swap Agreements
The differential to be paid or received under interest rate swap agreements
is accrued as the interest rates change and is recognized over the life of the
agreements as an adjustment to interest expense. (See Note 8B.)
21
<PAGE>
Notes to Consolidated Financial Statements
J. Sales of Common Stock of Subsidiaries
At the time a subsidiary sells existing or newly issued common stock to
unrelated parties at a price in excess of its book value, the Company's policy
is to record a gain reflecting its share of the increase in the subsidiary's
stockholders' equity resulting from the sale. (See Note 15.)
K. Translation of Foreign Currencies
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. All balance sheet accounts have been translated at
fiscal year-end exchange rates. Income statement amounts have been translated
at the average exchange rate for the year. The resulting currency translation
adjustments and the effect of transaction gains and losses are insignificant
for all years presented.
Note 2 Discontinued Operations -- Psychiatric Hospital Business
At November 30, 1993, the Company decided to discontinue its psychiatric
hospital business and adopted a plan to dispose of its psychiatric hospitals
and substance abuse recovery facilities within one year. Also, in connection
with the settlement of federal investigations of the Company described in Note
7B, the Company agreed to dispose of its psychiatric hospital business and not
to re-enter such business for five years. The Consolidated Statements of
Operations reflect the net operating results of the discontinued business
separately from continuing operations, and previously issued financial
statements have been restated to report these operations as discontinued.
Operating results for periods subsequent to November 30, 1993, are charged to
the reserve for estimated operating losses during the phase-out period. The
discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
Twelve Months Ended May 31,
(in millions) 1994 1993 1992
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating revenues $ 476 $ 571 $1,010
Loss from operations:
Loss before income taxes (266) (160) (129)
Income tax benefit 111 56 44
-----------------------
(155) (104) (85)
-----------------------
Loss on disposal:
Estimated losses upon disposal (414) -- --
Estimated operating losses during the phase-out period (433) -- --
Income tax benefit 301 -- --
-----------------------
(546) -- --
-----------------------
Total loss from discontinued operations $(701) $(104) $(85)
=======================
</TABLE>
The estimated losses upon disposal consist primarily of provisions for the
write-down of assets to estimated net realizable value and other costs
associated with the disposal of assets. The estimated net realizable value is
included in assets held for sale in the accompanying consolidated balance
sheet. The estimated operating losses during the phase-out period include the
costs of settling federal and state investigations and other unusual legal
costs related to the psychiatric hospital business. The loss from operations
also includes provisions for unusual legal costs and certain asset write-downs
related to the psychiatric business that were recorded prior to November 30,
1993. (See Note 7B.)
The Company entered into two separate sale agreements, each dated as of
March 29, 1994, to sell 47 psychiatric facilities to Charter Medical
Corporation for approximately $200 million, including the net book values of
certain inventory, receivables and other items of working capital, subject to
certain adjustments. One agreement provides for the sale of 30 hospitals for an
approximate sales price of $134 million. In June 1994 the Company sold 27 of
the 30 hospitals for a sales price of approximately $129 million. The sales of
the remaining three hospitals are anticipated to close in the near future. The
second agreement provides for the sale of 17 psychiatric hospitals. The Federal
Trade Commission (FTC) issued a request for additional information regarding
22
<PAGE>
these remaining hospitals. The Company and Charter are responding to the
FTC's request. No specific date has been set to close these sales, except that
if such closings do not occur prior to September 30, 1994, and the parties do
not extend that date, the agreement will terminate on September 30. Based on
discussions to date with the FTC, the Company believes it may not be able to
sell at least five facilities to Charter. However, it believes it will receive
similar proceeds upon their sale to other parties.
During fiscal year 1994 and through July 27, 1994, the Company sold an
additional 16 psychiatric hospitals, two substance abuse recovery facilities
and one residential treatment center to other parties. The aggregate sales
price for the 19 facilities approximated $44 million. The Company currently has
reached an agreement to sell or is negotiating with various other parties for
the sale of 10 psychiatric hospitals and is seeking a buyer for one other
facility.
Note 3 Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
interest payable approximate fair value because of the short maturity of these
instruments. The carrying values of investments, both short-term and long-term
(excluding investments accounted for by the equity method), long-term
receivables and long-term debt are not materially different than the estimated
fair values of these instruments. The estimated fair values of interest rate
swap agreements and foreign currency contracts also are not material to the
Company's financial position.
Note 4 Property, Plant and Equipment
Property, plant and equipment is stated at cost and consists of the
following:
<TABLE>
<CAPTION>
(in millions) 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 173 $ 249
Buildings and improvements 1,388 1,957
Construction in progress 59 47
Equipment 916 1,061
------ ------
2,536 3,314
Less accumulated depreciation and amortization 772 822
------ ------
Net property, plant and equipment $1,764 $2,492
====== ======
</TABLE>
Note 5 Long-Term Debt and Lease Obligations
A. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(in millions) 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Unsecured loans payable to banks $ -- $ 86
Secured loans payable to banks 13 --
Secured loans payable 143 158
Convertible floating rate debentures due 1996 219 220
Unsecured medium-term notes due through 1997 111 175
12-1/8% unsecured notes due April 1995 (not redeemable) 93 93
Notes secured by property, plant and equipment, weighted average
interest rate of approximately 9.5% in 1994 and 10.4% in 1993,
payable in installments to 2012 28 88
7-3/8% unsecured notes due 1997 (not redeemable) 58 58
Obligations under capital leases 49 80
Other, primarily unsecured 54 55
------------
768 1,013
Less current portion 545 121
------------
$223 $ 892
============
</TABLE>
23
<PAGE>
Notes to Consolidated Financial Statements
Unsecured Loans Payable to Banks
In September 1993 the Company repaid $50 million of its then-outstanding
revolving bank borrowings under its $300 million unsecured bank revolving
credit and term loan agreement and refinanced the $246.2 million balance of
such loans with new term loans maturing in April 1995 and requiring quarterly
installments of $11.4 million through May 1994 and $15 million through February
1995. These loans were repaid in April 1994 with new secured bank loans, as
described below. The weighted average interest rate on these and other
unsecured loans payable to banks was 4.7% during 1994, 3.9% during 1993 and
5.3% during 1992.
Also in September 1993 the Company canceled its $120 million short-term
revolving credit agreement entered into in December 1992. No loans were ever
outstanding under this agreement.
Secured Loans Payable
In April 1994 the Company entered into a new $464.7 million revolving credit
and letter of credit agreement with several banks. Indebtedness of the Company
under the new agreement is secured by a pledge of all the outstanding capital
stock of NME Hospitals, Inc., a wholly owned subsidiary of the Company, and is
also guaranteed by NME Hospitals, Inc. The new agreement provides for revolving
loans of up to $222 million and for letters of credit in an aggregate amount of
$242.7 million to support certain of the Company's obligations relating to
commercial paper and remarketable bond programs. Loans of $222 million under
the new agreement were used to repay all of the Company's obligations under,
and to effect termination of, its then-existing unsecured bank term loan
agreement described above. All of this amount, including $209 million related
to the convertible floating rate debentures discussed below, was outstanding at
May 31, 1994.
All outstanding revolving loans under the new agreement mature on April 12,
1995, and there are no earlier installments of principal due or reductions of
availability thereunder. Revolving loans under the new agreement bear interest
at a base rate that is equal to the prime rate announced by Morgan Guaranty
Trust of New York or, if higher, the federal funds rate plus 0.5% or, at the
option of the Company, a London Interbank Offered Rate (LIBOR) plus 1.0% per
annum, for interest periods of one, two, three or six months.
The Company also has $143 million of secured loans payable outstanding at
May 31, 1994, that were used for project financings and are secured by liens on
real property or leasehold interests. These loans expire on April 12, 1995, and
provide for interest at the lender's fluctuating cost of funds plus 1/8%. The
weighted average interest rate during 1994 was 5.1%. It was 4.6% in 1993 and
6.4% in 1992.
Floating Rate Debentures -- Convertible
The floating rate debentures consist of two components: $209 million of
secured loans payable to banks and $10 million (5% of the debenture face
amount) of generally nontransferable performance investment options to key
employees of the Company. Because the proceeds from the exercise of the
investment options must be used by the Company to retire the debt underlying
the debentures, these loans, together with the outstanding balance of the
investment options, are classified as convertible floating rate debentures. The
weighted average interest rate for the debentures was 4.8% during 1994, 3.6% in
1993 and 6.3% in 1992. The debentures are subject to mandatory redemption in
April 1996 and after the occurrence of certain events.
The performance investment options permit the holder to purchase debentures
at 95% of their $105,264 face value. The debentures are convertible into
preferred stock, which in turn is convertible into common stock. The investment
options ultimately are convertible into 13,977,549 shares of common stock at an
exercise price equivalent to $15.83 per share. The 13,977,549 shares include
1,828,652 shares that are the subject of litigation between the Company and two
of its former executive officers. The Company believes that the investment
options held by those executive officers no longer are exercisable but has
included these shares pending final resolution of the dispute. The investment
options became fully vested in March 1994. The Company may repurchase the
investment options without a premium with the consent of the holder or by
paying a redemption premium sufficient to provide the holder a 6% annual
return. Under certain conditions, the investment options are subject to
mandatory redemption at a redemption price including a 6% annual return.
When investment options are exercised, the Company reduces taxable income by
any excess of the fair market value of the stock at the date of conversion over
the principal amount of the debentures redeemed. The resulting tax benefit
increases additional paid-in capital.
Unsecured Medium-Term Notes
These notes have had both fixed and floating rates of interest. The floating
rate notes were repaid during fiscal 1994. The weighted average interest rate
on these notes was 8.1% during 1994, 7.3% during 1993 and 8.6% during 1992. The
notes are not redeemable.
24
<PAGE>
Loan Covenants
Certain loan agreements have, among other requirements, limitations on
dividends, investments, borrowings, and acquisitions and dispositions of assets
and require maintenance of specified operating ratios, as well as specified
levels of working capital and net worth. The Company is in compliance with the
loan covenants. There are no compensating balance requirements for any credit
line or borrowing.
B. Long-Term Debt Maturities and Lease Obligations
Future long-term debt maturities and minimum operating lease payments are as
follows:
<TABLE>
<CAPTION>
Later
(in millions) 1995 1996 1997 1998 1999 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt $545 $60 $61 $66 $ 3 $ 33
Long-term leases $ 69 $64 $60 $55 $52 $250
</TABLE>
Rental expense under operating leases, including short-term leases, was
approximately $98 million in 1994, $114 million in 1993 and $113 million in
1992.
Note 6 Income Taxes
Taxes on income from continuing operations consist of the following amounts:
<TABLE>
<CAPTION>
(in millions) 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $159 $148 $148
State 31 30 26
Foreign 6 7 7
--------------------
196 185 181
Deferred:
Federal (46) (29) (39)
State (6) (3) (6)
--------------------
(52) (32) (45)
Charges equivalent to federal and state income taxes,
primarily the benefit associated with stock benefit plans -- 2 5
--------------------
$144 $155 $141
====================
</TABLE>
The difference between the Company's effective income tax rate and the
statutory federal income tax rate is shown below:
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------------------------------
(in millions of dollars and as a percent of pretax income) Amount Percent Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at statutory federal rate $126 35.0% $142 34.0% $122 34.0%
State income taxes, net of federal income tax benefit 17 4.6% 18 4.3% 14 3.9%
Gain on sale of subsidiary's common stock -- -- (10) (2.4)% -- --
Other 1 .4% 5 1.1% 5 1.4%
----------------------------------------------------
Taxes on income from continuing operations and effective tax rates $144 40.0% $155 37.0% $141 39.3%
====================================================
</TABLE>
No tax provision has been made for U.S. or additional foreign taxes on $68
million of undistributed earnings of foreign subsidiaries or on a $29 million
gain on the sale of a foreign subsidiary's common stock as the Company's
overseas investments are intended to be permanent. Such earnings would become
taxable upon the remittance of dividends or upon the sale or liquidation of the
investments.
25
<PAGE>
Notes to Consolidated Financial Statements
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Among other
provisions, this standard requires deferred tax balances to be determined using
enacted income tax rates for the years in which the taxes actually are paid or
refunds actually are received instead of when the deferrals were initiated. The
Company has recognized $60 million as income in the fiscal year ended May 31,
1994, for the cumulative effect on prior years of adopting this standard based
on tax rates in effect at June 1, 1993.
Deferred tax assets and liabilities as of May 31, 1994, relate to the
following:
<TABLE>
<CAPTION>
Deferred Tax
-------------------
(in millions) Assets Liabilities
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation and fixed asset basis differences $ -- $182
Reserves related to discontinued operations and restructuring charges 306 --
Receivables -- doubtful accounts and adjustments 69 --
Cash-basis accounting change -- 23
Accruals for insurance risks 35 --
Intangible assets -- 7
Other long-term liabilities 20 --
Benefit plans 18 --
Other accrued liabilities 10 --
Investments 9 --
Valuation allowance (7) --
Other items -- 1
---- ----
$460 $213
==== ====
</TABLE>
Management believes that the deferred tax assets at May 31, 1994, will be
realized by offsetting current tax provisions against future income or through
tax loss carrybacks.
Prior-year financial statements are not restated to reflect the new
accounting standard. The following reflect the principal sources of deferred
income tax credits for those years:
<TABLE>
<CAPTION>
(in millions) 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Depreciation and asset disposition differences $ 4 $ 9
Cash-basis accounting (8) (9)
Doubtful accounts and adjustments (5) (15)
Costs included in intangible assets, net of amortization -- (2)
Equity method accounting 2 (5)
Accruals for insurance risks (7) (7)
Restructuring charges (14) (14)
Other items (4) (2)
---- ----
$(32) $(45)
==== ====
</TABLE>
Note 7 Claims and Lawsuits
A. Professional and General Liability Insurance
The Company currently insures all of its professional and comprehensive
general liability risks through an insurance company owned by several health
care companies and in which the Company has a significant minority interest.
Risks in excess of $3 million per occurrence are reinsured with major
independent insurance companies. Through May 31, 1994, the Company insured its
professional and comprehensive general liability risks related to its
psychiatric and physical rehabilitation hospitals through a wholly owned
insurance subsidiary that reinsured risks in excess of $500,000 with major
independent insurance companies. The Company has reached the policy limits
provided by its insurance subsidiary related to the psychiatric hospitals in
certain years, and, in addition, damages, if any, arising from fraud and
conspiracy claims in psychiatric malpractice cases may not be insured.
(See Note 7B.)
26
<PAGE>
The Company's estimated liability for the self-insured portion of
professional and comprehensive general liability claims is $93 million at May
31, 1994, after discounting the liability to its present value based on
expected loss reporting patterns and a weighted average discount rate of 8.8%.
The Company believes that claims and lawsuits arising in the ordinary course
of business are adequately covered by insurance or are adequately provided for
in the Company's consolidated financial statements. However, the final
liability may vary from the estimated liability.
B. Significant Legal Proceedings
The Company has been involved in significant legal proceedings and
investigations of an unusual nature related principally to its psychiatric
business. During the years ended May 31, 1994, and 1993, the Company recorded
provisions to estimate the cost of the ultimate disposition of all these
proceedings and investigations and to estimate the legal fees that it expects
to incur. As discussed further below, the Company has settled the most
significant of these matters. The remaining reserves for unusual litigation
costs that relate to the matters that have not been settled as of May 31, 1994,
and an estimate of the legal fees to be incurred subsequent to May 31, 1994,
total approximately $81 million and represent management's estimate of the net
costs of the ultimate disposition of these matters. There can be no assurance,
however, that the ultimate liability will not exceed such estimates.
All of the costs associated with these legal proceedings and investigations
are classified in discontinued operations. (See Note 2.)
1) Insurance Litigation -- In November 1993 the Company signed agreements to
settle two of its lawsuits with certain insurance companies, and in February
1994 the Company signed an agreement to settle the remaining lawsuit. Under the
settlements, the Company agreed to pay up to $125 million and $89.9 million,
respectively, as complete and final resolution of the disputed claims alleging
that the psychiatric hospitals engaged in certain fraudulent practices. The
final installment of these settlements was paid in March 1994. In return, the
insurers agreed on an individual basis to strengthen standard business
relations with the Company, including, for example, allowing the Company to
compete for managed care contracts and participate in provider networks. The
settlements also addressed the processing by the insurance companies of pending
claims from psychiatric facilities owned by the Company's subsidiaries. The
Company has received inquiries from various other insurance companies and
health benefit providers regarding the possible filing of claims with similar
allegations. To date, the amounts involved are not significant.
2) Investigations -- On June 29, 1994, the Company executed plea agreements
that were approved by a federal judge and other settlement agreements under
which it agreed to pay a total of $362.7 million to conclude the federal
investigations of the Company and its subsidiaries: $324.2 million in civil
restitution and penalties, $34 million in criminal fines, $2 million to the
Department of Health and Human Services to support a children's mental health
program, and $2.5 million to the National Institute of Mental Health to fund
research relating to federally funded health care in substance abuse recovery
or mental health treatment facilities. Under the agreements, the Company's
remaining hospitals will continue to be eligible to participate in all
federally funded health care programs.
As part of the settlement, a subsidiary operating the Company's psychiatric
hospitals pled guilty to six counts of paying illegal remuneration for referral
of Medicare patients and one count of conspiracy to make such payments and paid
a $33 million fine. Another subsidiary operating a single general hospital pled
guilty to one count of illegal payments and paid a $1 million fine. The count
relates to activities that occurred while an individual convicted of defrauding
the hospital was its chief executive.
The federal settlement agreements pertain only to the Company and its
subsidiaries and will not extend to individuals. The Company is obligated to
cooperate with the government in its investigation of individuals. The Company
has numerous other obligations under the agreements, including disposing of its
psychiatric hospital business and not re-entering it for five years,
implementation and maintenance of compliance programs, and reporting
requirements to the federal government, designed to assure that the Company
complies with federal laws relating to the provision of health care.
In May 1994 the Company also reached agreements in principle with 27 states
and the District of Columbia to pay an additional $16.3 million to settle
investigations. The Company has signed agreements with 26 of those states and
the District of Columbia, five of which contain errors or changes that the
Company is attempting to resolve. The 27 states and the District of Columbia
are all of the areas in which the Company's subsidiaries operated psychiatric
facilities.
On July 12, 1994, the Company, without admitting or denying liability,
consented to the entry of a civil injunctive order in response to a complaint
filed that day by the Securities and Exchange Commission. The complaint alleged
that the Company failed to comply with anti-fraud and recordkeeping
requirements of the federal securities laws concerning the manner in which the
Company recorded the revenues from the activities that were the subject of the
federal government settlement referred to above. In the order, the Company
consented to comply with such requirements of the federal securities laws.
27
<PAGE>
Notes to Consolidated Financial Statements
3) Shareholders' Lawsuits -- In October and November 1991 shareholder
derivative actions and federal shareholder class-action suits were filed
against the Company and certain of its officers and directors. Those derivative
and federal class-action suits have been consolidated into one derivative and
one federal class action, respectively. The consolidated derivative action,
purportedly brought on behalf of the Company, alleged breach of fiduciary duty
and other causes of action against the directors and various officers of the
Company. The derivative action was dismissed by the court in May 1993; the
dismissal is being appealed by the plaintiffs. The consolidated federal class
action alleges violations of federal securities laws against the Company and
certain of its executive officers. All parties in the federal class action and
the derivative action have been participating in a voluntary mediation process,
which has included directors and officers liability insurance carriers. Through
this mediation process, the parties have reached an agreement in principle for
the settlement of both lawsuits, including contributions to the settlement by
certain insurance companies. Any agreement in principle is conditioned upon the
execution of formal settlement documentation and court approval.
Two additional federal class actions filed in August 1993 now have been
consolidated into one action. The consolidated action alleges violations of
federal securities laws against the Company and certain of its executive
officers. The parties commenced a voluntary mediation in July 1994.
4) Psychiatric Malpractice Cases Involving Fraud and Conspiracy Claims --
The Company and certain of its officers and directors are defendants in
numerous lawsuits filed on behalf of psychiatric patients making various
claims, including conspiracy, false imprisonment, fraud and gross negligence.
The Company has settled 90 of these patient care lawsuits for approximately
$20.5 million. These cases represent approximately two-thirds of the
psychiatric patient care cases filed to date that contain allegations of
conspiracy or fraud. The Company expects that additional similar lawsuits will
be filed.
Note 8 Other Contingencies and Financial Instruments With Off-Balance-Sheet
Risks
A. Guarantees and Letters of Credit
The Company is contingently liable for $503 million under various guarantees,
standby letters of credit and lease obligations not included in Note 5. Included
in this amount are The Hillhaven Corporation's obligations to third parties
totaling $286 million, including $216 million of lease obligations and $70
million of long-term debt and other obligations. During the year, Hillhaven
reduced by approximately $420 million its obligations that were guaranteed by
the Company. Also included in the $503 million is approximately $208 million in
obligations, substantially all of which are lease obligations, relating to
rehabilitation hospitals sold to HEALTHSOUTH Rehabilitation Corporation in
January 1994.
B. Interest Rate Swaps
At May 31, 1994, and 1993, the Company had outstanding interest rate swap
agreements, generally with commercial banks, having a total notional principal
of $120 million, expiring through 2000. These agreements call for the payment
of fixed rate interest by the Company in return for the assumption by other
contracting parties of the variable rate cost, which effectively changes the
Company's interest rate on a portion of its dollar-denominated floating rate
debt to a fixed rate of 8.5%. Additionally, on May 31, 1994, and 1993, the
Company had outstanding swap agreements with a notional amount of $29 million
expiring through 1997, in which it receives interest from other contracting
parties at a weighted average fixed interest rate of 7.0% and pays interest at
variable rates to those parties. The Company's exposure to credit loss under
these agreements is limited to the interest rate spread in the event of
nonperformance by the other parties. Nonperformance is not anticipated due to
the credit rating of the other parties. The weighted average interest rates in
Note 5A do not include the effects of these agreements.
C. Currency Swap and Forward Exchange Contracts
The Company has entered into currency swap agreements and forward exchange
contracts to hedge the foreign currency exposure attributable to its net
investment in foreign operations. At May 31, 1994, the Company had outstanding
agreements with commercial banks having a total notional principal amount of
75,800,000 Australian dollars, 1,650,000,000 Spanish pesetas and 10,000,000
British pounds at average exchange rates to the U.S. dollar of 1.38, 123.48 and
0.67, expiring through 1999, 1998 and fiscal 1995, respectively.
Note 9 Preferred Stock Purchase Rights and Preferred Stock
A. Preferred Stock Purchase Rights
In 1988 the Company distributed Preferred Stock Purchase Rights to holders
of the Company's common stock and authorized the issuance of additional rights
for common stock issued after that date. The Company may redeem the rights at
$.025 per right at
28
<PAGE>
any time until they become exercisable. The rights become exercisable 10
days after a public announcement that an investor has acquired 20% or more of
the Company's common stock or has commenced a tender or exchange offer for 30%
or more of the common stock. The rights may be exchanged for one two-thousandth
(.0005) of a share of Series A Junior Participating Preferred Stock at an
exercise price of $40.61.
In the event the Company is acquired or merged into another company and the
rights have not been redeemed, rights holders will be entitled to purchase, for
the then-current exercise price of the rights, common stock of the surviving
company having a market value equal to two times the exercise price of the
rights. The rights expire in December 1998 unless exercised or redeemed and do
not entitle the holders thereof to vote as shareholders or receive dividends.
B. Preferred Stock
The Series A Junior Participating Preferred Stock for which the Preferred
Stock Purchase Rights may be exchanged is non-redeemable and has a par value of
$0.15 per share. None of the 225,000 authorized shares are outstanding.
The Company has also authorized a Series B Convertible Preferred Stock,
issuable solely upon conversion of the Company's convertible floating rate
debentures. (See Note 5A.) The par value of the stock is $0.15 per share; its
liquidation and redemption value is $105,264 per share; 2,087 shares are
reserved for future issuance; and no shares are outstanding. Since it is likely
that this preferred stock would be converted immediately to common stock, all
references in Note 5A are to common stock rather than preferred stock.
Note 10 Stock Benefit Plans
Under the Company's 1983 and 1991 stock incentive plans, stock options and
incentive stock awards (restricted shares and restricted units) have been made
to certain officers and other key employees. Stock options generally are
granted at an exercise price equal to the fair market value of the shares on
the date of grant (except for discounted stock options granted at an exercise
price equal to 50% of the fair market value of the shares and options for
600,000 shares granted during fiscal 1993 at an exercise price equal to 110% of
the fair market value of the shares) and are exercisable at the rate of
one-third per year beginning one year from the date of grant. In addition,
during fiscal 1994 526,000 options were granted to certain senior officers that
are exercisable on May 31, 1996. Stock options generally expire 10 years from
the date of grant. Certain 1991 plan stock options may be canceled in
connection with the vesting of restricted units under circumstances described
below.
Restricted shares generally are issued at no cost to the recipient and are
held in trust by the Company for release in generally equal amounts over five
to seven years from the date of the award (as long as the recipient continues
to be employed by the Company).
Restricted units were granted in fiscal 1992, 1993 and 1994. A restricted
unit is a grant that entitles the recipient to a payment of cash at the end of
each vesting period equivalent to the fair market value of a share of the
Company's common stock on the date of vesting subject to a maximum value per
unit, which is equivalent to the fair market value of a share of the Company's
common stock on the date of grant. These restricted units were granted along
with stock options. Restricted units vest normally one-third each year over
three years and also earn dividend equivalents during the vesting period.
Subject to approval by the shareholders in September 1994, a new Directors
Stock Option Plan will replace the 1991 Director Restricted Share Plan and will
make available options to purchase 500,000 shares of common stock for issuance
to nonemployee directors. Under the plan each nonemployee director will be
entitled to receive a stock option for 5,000 common shares upon initially being
elected to the Board of Directors and each January, beginning retroactively in
January 1994 when the plan was approved by the Board of Directors. Awards will
vest one year after the date of grant, will have an exercise price equal to the
fair market value of the Company's common stock on the date of grant, and will
expire 10 years after the date of grant.
All awards granted under the 1983 and 1991 plans will vest under
circumstances defined in the plans or under certain employment arrangements,
including, with the consent of the Compensation and Stock Option Committee of
the Board of Directors, a change in control of the Company.
Charges to continuing operations associated with discounted stock options,
restricted shares (including the Director Restricted Share Plan) and restricted
units were $12 million in fiscal 1994, $11 million in fiscal 1993 and $11
million in fiscal 1992. The remaining amount to be charged to future
operations, principally over the next two years, is approximately $7 million.
29
<PAGE>
Notes to Consolidated Financial Statements
Differences in accrued income tax benefits associated with restricted shares
and discounted stock options and the amounts realized in income tax returns are
reflected as adjustments to additional paid-in capital. Income tax benefits
associated with stock options having exercise prices equal to fair market value
at date of grant are credited to additional paid-in capital as realized.
Stock awards may be made only under the 1991 Plan. At May 31, 1994, there
were 8,331,456 shares of common stock available under the 1991 Plan for future
awards. The table below summarizes the transactions in all stock option plans
in which employees participate, including discounted stock options but
excluding restricted shares and units:
<TABLE>
<CAPTION>
(shares of common stock) 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year (1983 and 1991 Plans) 11,682,204 9,597,490
Granted 5,719,175 2,977,745
Exercised ($4.60 to $16.813 per share in 1994 and 1993) (282,482) (36,650)
Canceled and other adjustments (1,692,304) (856,381)
------------------------
Outstanding at end of year ($4.41 to $22.44 per share
at May 31, 1994) 15,426,593 11,682,204
========================
Exercisable at end of year 6,472,708 4,131,859
========================
</TABLE>
The Company has received full recourse interest-bearing notes in connection
with the exercise of certain stock options. The notes, secured by the common
stock purchased, reduce stockholders' equity. See Note 5A for information
regarding Performance Investment Options (debenture purchase rights) sold to
certain key employees of the Company.
Note 11 Earnings Per Share
Primary earnings per share of common stock are based on after-tax income
applicable to common stock and the weighted average number of shares of common
stock and common stock equivalents outstanding during each period as
appropriate.
Fully diluted earnings-per-share calculations are based on the assumption
that all dilutive convertible debentures were converted into shares of common
stock as of the beginning of the year, or as of the issue date if later, and 1)
that those shares are added to the weighted average number of common shares and
share equivalents outstanding used in the calculation of primary earnings per
share, and 2) that after-tax income is adjusted accordingly.
Note 12 Employee Retirement Plans
Substantially all domestic employees upon qualification are eligible to
participate in a defined contribution 401(k) plan, the NME Retirement Savings
Plan. Employees who elect to participate make mandatory contributions equal to
3% of their eligible compensation, and such contributions are matched by the
Company. Company contributions from continuing operations to all plans for the
fiscal years 1994, 1993 and 1992 were approximately $17 million, $18 million
and $16 million, respectively. The Company does not have a plan that provides
postretirement benefits other than pensions to retired employees.
Note 13 Disposals and Acquisition of Facilities
In January 1994 the Company sold 28 inpatient rehabilitation hospitals and
45 related satellite outpatient clinics for approximately $350 million in cash,
including the net book values of certain inventory, receivables and other items
of working capital, subject to certain adjustments. The sale resulted in a gain
of $66.2 million. The Company retained six rehabilitation hospitals on or near
general hospital campuses and in March 1994 sold its other remaining
rehabilitation hospital for approximately $14 million. For the fiscal year
ended May 31, 1994, net operating revenues of the sold rehabilitation hospitals
were $266 million, while pretax income, before general corporate overhead
costs, was $22 million.
During fiscal year 1994 The Hillhaven Corporation purchased the remaining 23
nursing centers it previously leased from the Company for $112 million. (See
Note 14.) The sales resulted in a gain of $17 million.
In May 1994 the Company entered into a long-term operating lease of a
138-bed general hospital in the New Orleans area. In July 1993 the Company sold
a 120-bed general hospital in Tennessee. In June 1994 the Company announced the
sale of two general hospitals in Southern California. Also in June 1994 the
Company acquired, through a wholly owned subsidiary, an additional 50% interest
in Centro Medico Teknon, its general hospital project in Barcelona, Spain, to
bring the Company's ownership of the hospital to 100%. None of these
transactions were significant.
30
<PAGE>
Note 14 The Hillhaven Corporation
In September 1993 the Company substantially completed a series of
transactions with The Hillhaven Corporation that resulted in: 1) the Company
selling to Hillhaven all remaining leased long-term-care nursing facilities,
and no longer being a lessor to Hillhaven; 2) all indebtedness owed to the
Company from Hillhaven being paid in full; 3) reducing Hillhaven obligations
guaranteed by the Company; and 4) the Company purchasing 120,000 shares of
Hillhaven nonvoting Series D Preferred Stock for $120 million. In February 1994
the Company exercised its warrants to purchase 6 million shares of Hillhaven
common stock at the exercise price of $10.55 per share (after giving effect to
Hillhaven's 5-to-1 reverse stock split). The total exercise price of $63.3
million was paid by liquidating 63,300 shares of Hillhaven Series D Preferred
Stock acquired in September 1993. The Company, as of May 31, 1994, owned: 1)
approximately 33% (8,878,147 shares) of the outstanding common stock of
Hillhaven; 2) 35,000 shares of Hillhaven 8-1/4% accumulative nonvoting Series C
Preferred Stock; and 3) 60,546 shares of Hillhaven nonvoting 6-1/2% payable in
kind Series D Preferred Stock.
Note 15 Sales of Subsidiaries' Common Stock
In May 1994 the Company entered into an agreement pursuant to which DLJ
Merchant Banking Funding, Inc. and certain of its affiliates (DLJMB) will
acquire a controlling interest in the Company's wholly owned subsidiary that
operates its 37 outpatient renal dialysis facilities. Under the terms of the
agreement, and as subsequently agreed among the parties, the subsidiary is
expected to consummate a public debt/equity offering in August 1994, the
proceeds of which will be used to partially fund the payment of a $75.5 million
dividend to the Company. Immediately after payment of the dividend, DLJMB will
purchase common stock of the subsidiary for $10.5 million, and certain members
of the subsidiary's management are expected to purchase common stock for
approximately $1.9 million. After consummation of these transactions, the
Company will own approximately 25% of the outstanding common stock of the
subsidiary. Net operating revenues of the subsidiary were $80.5 million in the
fiscal year ended May 31, 1994, and net income was $5.7 million. This
transaction is expected to result in a gain to the Company of approximately $35
million in the first quarter of fiscal 1995.
In March 1993 the Company's long-term-care subsidiary in the United Kingdom,
Westminster Health Care Holdings PLC, issued 3,500,000 shares of its common
stock to third parties in a private placement and in April 1993 sold 26,001,923
shares in an initial public offering; those transactions resulted in a gain to
the Company of $29 million. As a result of the sale and issuance of shares, the
Company's percentage ownership of Westminster changed from 90% to approximately
42%.
Note 16 Restructuring Charges
In April 1994 the Company initiated a plan to significantly decrease
overhead costs through a reduction in corporate and division staffing levels
and to review the resulting office space needs of all corporate operations.
Accordingly, in July 1994 the Company announced that approximately 240
positions were being eliminated and other cost-saving efficiencies were
implemented. The Company also decided to sell its corporate headquarters
building and to lease substantially less office space in that building or at an
alternative site. Costs of the write-down of the building, employee severance
benefits and other expenses directly related to the overhead reduction plan are
estimated to be approximately $77 million and have been expensed in the quarter
ended May 31, 1994. In the quarter ended May 31, 1993, the Company recorded a
charge of $52 million for restructuring costs related to continuing operations
that were associated with the combination of the Rehabilitation Hospital
Division into the General Hospital Division, a corporate overhead reduction
program that began in April 1993, and severance costs incurred in connection
with a change in senior executive management.
These restructuring charges, as well as $18 million in the year ended May
31, 1992, have been charged to operating and administrative expenses.
Note 17 Information About Lines of Business
On June 1, 1993, the Company combined its former Rehabilitation Hospital
Division and its General Hospital Division into a new division called the
Hospital Division. In January 1994 the Company sold substantially all of its
rehabilitation hospitals. (See Note 13.) Also during fiscal 1994 the Company
announced that it had discontinued its psychiatric hospital business. (See Note
2.) At May 31, 1994, the Company operated 35 general hospitals and six
rehabilitation hospitals in the United States and 12 general hospitals
overseas, which accounted for approximately 95% of the Company's consolidated
net revenues. The net revenues and operating profits of the overseas general
hospitals accounted for approximately 5.9% and 7.6% of the Company's
consolidated net revenues and operating profits in 1994 and approximately 5.1%
and 7.3%, respectively, in 1993.
31
<PAGE>
Report of Independent Auditors
The Board of Directors
National Medical Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of National
Medical Enterprises, Inc. and subsidiaries as of May 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended May 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Notes 2, 7B and 13 to the consolidated financial statements,
during 1994 the Company has discontinued its psychiatric hospital operations,
settled a number of lawsuits and governmental investigations, and sold a
significant number of its rehabilitation hospitals. These events have had a
significant impact on the Company's consolidated financial position and
results of operations.
In our opinion, the consolidated financial statements referred to above
present fairly the financial position of National Medical Enterprises, Inc. and
subsidiaries as of May 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
July 27, 1994
Supplementary Financial Information
Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Fiscal 1994 Quarters Fiscal 1993 Quarters
------------------------------- ------------------------------
(in millions, except per-share data) First Second Third Fourth First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $775 $ 770 $ 720 $ 702 $ 791 $ 785 $ 795 $ 820
============================== ==============================
Income from continuing operations $ 53 $ 61 $ 91 $ 11 $ 50 $ 78 $ 65 $ 70
Net income (loss) $(41) $(226) $(164) $ 6 $ 51 $ 52 $ 54 $ 3
============================== ==============================
Income per share from continuing
operations:
Primary $0.32 $0.37 $0.55 $0.07 $0.30 $0.47 $0.39 $0.42
Fully diluted $0.30 $0.35 $0.51 $0.07 $0.29 $0.44 $0.37 $0.40
============================== ==============================
</TABLE>
Quarterly operating results are not necessarily representative of operations
for a full year for various reasons, including levels of occupancy, interest
rates, acquisitions, disposals, revenue allowance and discount fluctuations,
the timing of price changes, unusual litigation costs, restructuring charges
and fluctuations in quarterly tax rates.
32
<PAGE>
Board of Directors
- ------------------
Jeffrey C. Barbakow(1,4) Chairman and Chief Executive Officer, NME
Michael H. Focht Sr.(1,5) President and Chief Operating Officer, NME
Bernice B. Bratter(1,3,4) Executive Director, Senior Health and Peer
Counseling
Maurice J. DeWald(1,3,6) Chairman, Verity Financial Group, Inc.
Peter de Wetter(1) Executive Vice President, NME, Retired
Edward Egbert, M.D.(2,4,6) Physician, Retired
Raymond A. Hay(2,4,5) Chairman, Aberdeen Associates
Lester B. Korn(1,3) Chairman, Korn Tuttle Capital Group
James P. Livingston(2,4,5) Executive Vice President, NME, Retired
Richard S. Schweiker(2,5) President, American Council of Life Insurance
John C. Bedrosian+ Former Senior Executive Vice President, NME
Nita Puig-Heckendorn+ Former Executive Vice President, NME
Board Committees
1. Executive Committee
2. Audit Committee
3. Compensation and Stock Option Committee
4. Nominating Committee
5. Ethics and Quality Assurance Committee
6. Performance Investment Plan Committee
+ Term expires at the 1994 annual meeting. Not renominated for a new term.
Executive Officers
- ------------------
Jeffrey C. Barbakow Chairman and Chief Executive Officer
Michael H. Focht Sr. President and Chief Operating Officer
Maris Andersons Executive Vice President and Treasurer
William S. Banowsky, Ph.D. Executive Vice President (Retiring 8/31/94)
Scott M. Brown Senior Vice President, General Counsel and
Secretary
Vincent J. Lico Executive Vice President (Retiring 10/31/94)
Raymond L. Mathiasen Senior Vice President and Chief Financial
Officer
Barry P. Schochet Executive Vice President, President and Chief
Operating Officer, Hospital Division
Corporate Staff
Senior Vice Presidents
- ----------------------
Peter J. Andriet Materiel Management
Bruce G. Carpenter Associate General Counsel
Thomas J. Dey Government Relations
Steven Dominguez Government Programs
Edward A. Elliott Taxation
Wajeeh Ersheid Internal Audit
Alan R. Ewalt Human Resources
Lawrence G. Hixon Corporate Controller
33
<PAGE>
Corporate Staff (continued)
Senior Vice Presidents
- ---------------------------
T. Dennis Jorgensen Administration
William Loorz Construction and Design
David R. Mayeux Strategic Planning and Development
Terence P. McMullen Financial Services
Kim Mendenhall Facilities Administration
John A. Meyers Assistant General Counsel
Paul J. Russell Investor Relations
Christi R. Sulzbach Public Affairs and Associate General Counsel
Operating Divisions and
Subsidiary Staff
- -----------------------
Hospital Division
Barry P. Schochet President and Chief Operating Officer
Neil M. Sorrentino Senior Executive Vice President, Western
District
Michael W. Gallo Executive Vice President and Chief Financial
Officer
Alan E. London, M.D. Executive Vice President, Medical Affairs
Thomas B. Mackey Executive Vice President
Frank Tidikis Executive Vice President, Eastern District
Senior Vice Presidents
- ----------------------
Barry S. Ganley Information Systems
Ben F. King Finance
William W. Leyhe Integrated Delivery Systems
Nancee E. Mendenhall Managed Care Business Development
Martin J. Paris, M.D., M.P.H. Technology Assessment Medical Director,
General Hospitals
Clive E. Riddle National Health Plans
Arnold M. Robin President, Syndicated Office Systems
Robert L. Smith Operations
Leann L. Strasen, R.N. Patient Care Services
Davis L. Watts Revenue and Receivable Management
William R. Wilson Finance
International
Hospital Division
Michael H. Ford President and Chief Operating Officer
Carl V. Stanifer Executive Vice President, Operations
34
<PAGE>
Corporate Finance
Common Stock Transfer Agent and Registrar
The Bank of New York
101 Barclay St.
New York, NY 10286
Stock Exchanges for Common Stock
New York Stock Exchange
Pacific Stock Exchange
London Exchange
12 1/8% Notes Trustee/Registrar
The Bank of New York
101 Barclay St.
New York, NY 10286
Listing New York Stock Exchange
Annual Meeting
The annual meeting of the shareholders of National Medical Enterprises, Inc.
will be held at 10 a.m., Wednesday, Sept 28, 1994, at Loews Santa Monica Beach
Hotel, 1700 Ocean Ave., Santa Monica, Calif.
Availability of Form 10-K
The company reports annually to the Securities and Exchange Commission on Form
10-K. You may obtain a copy at no charge by writing to NME Investor Relations or
by telephoning (310) 998-8200.
Corporate Office
National Medical Enterprises, Inc.
2700 Colorado Ave.
P.O. Box 4070
Santa Monica, CA 90411-4070
(310) 998-8000
This annual report is printed on recycled paper.
Supplementary Financial Information
Common Stock Information (unaudited)
<TABLE>
<CAPTION>
Fiscal 1994 Quarters Fiscal 1993 Quarters
---------------------------------------- ---------------------------------------------
First Second Third Fourth First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price range:
High 12 1/4 12 16 1/4 18 1/8 16 3/4 14 1/4 13 1/4 9 7/8
Low 7 7 3/8 11 1/2 14 3/8 13 3/4 9 5/8 9 1/4 6 1/2
</TABLE>
At May 31, 1994, there were approximately 16,000 holders of record of the
Company's common stock. The Company's common stock is listed and traded on the
New York, Pacific and London stock exchanges. The stock prices above are the
high and low sales prices as reported in the NYSE Composite Tape for the last
two fiscal years. On October 27, 1993, the Board of Directors suspended payments
of dividends on the Company's common stock in order to give the Company maximum
flexibility to respond to rapidly developing opportunities, to refocus on its
general hospital core business and to resolve its legal issue.
The Company's cash dividends per share were $0.12 in 1994 and $0.48 in
1993. The Company suspended the payment of quarterly cash dividends following
the first quarter of fiscal 1994.
35
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE
- ---------- ------------------------------------------
Page 1 of Cover of NME's 1994 Annual Report to Shareholders
Exhibit 13 (Exhibit 13).
The cover of the 1994 Annual Report to Shareholders contains
an illustration of people putting blocks into a sun. The
illustration symbolizes NME building a brighter future.
Page 5 of Stock Price Graph
Exhibit 13
A graph showing the price of NME's common stock on various
dates between February 28, 1992 and August 5, 1994 is
included on page 5 of the 1994 Annual Report to Shareholders
of NME (Exhibit 13). The dates shown are the dates of
significant events for the Company which occurred during such
period. Figures indicating the stock price on each
significant date are shown on page 5 of Exhibit 13.
<PAGE>
EXHIBIT 21
NATIONAL MEDICAL ENTERPRISES, INC.
Subsidiary Corporations
Revised August 17, 1994
Note: All subsidiaries are 100% owned by "NME" unless otherwise indicated.
Assured Investors Life Company
(a) Stanislaus Life Insurance Company
Cornerstone - West, Inc.
H.F.I.C. Management Company, Inc.
(a) Health Facilities Insurance Corp., Ltd. - Bermuda
International-NME, Inc.
(a) LEIR Canada, Inc.
(a) N.M.E. International (Cayman) Limited - Cayman Islands, B.W.I.- (99%)
(b) B.V. Hospital Management - Netherlands
(b) Pacific Medical Enterprises Sdn. Bhd. - Malaysia
(c) Hyacinth Sdn. Bhd. - Joint Venture - (49%)
(a) Subang Jaya Medical Center Sdn. Bhd. (30%)
(a) NME Asia Pte Limited
(b) Bumrungrad Medical Center Limited (40%)
(b) Mount Elizabeth Healthcare Holdings Ltd. (80.54%)
(Formerly: NME (Singapore) Holdings Limited)
(19.46% owned by International - NME, Inc.)
(c) Mount Elizabeth Hospital Ltd.
(d) East Shore Hospital Pte Ltd
(e) Renalcare (Katong) Pte Ltd
(d) Medi-Rad Associates Pte Ltd - (71.2%)
(e) Khim Medicare Pte Ltd - (67.3%)
(d) MENA Services Pte Ltd
(d) Mount Elizabeth Healthcare Services Pte Ltd
(d) Mount Elizabeth Health Care Sdn Bhd - Malaysia
(d) Mount Elizabeth Managed Care Services Pte Ltd
(d) Mount Elizabeth Ophthalmic Investments Pte Ltd -
(66.5%)
(d) Radiology Consultants Pte Ltd
(d) Renalcare Mount Elizabeth Pte Ltd - (20%)
(a) Medicalia International, B.V. - Netherlands
National Medical Enterprises Corp.
(a) Westminster Health Care Holdings Plc (UK) (42%)
(Formerly: NME (UK) Limited)
(b) Westminster Health Care Limited -(UK) (90%)
(c) Westminster Health Care (Properties) Limited - (UK)
(c) Burleigh House Properties Limited
(a) Newbridge Hospitals Limited -(UK)
(b) NME Management Services (UK) Ltd.
(a) NME UK Properties, Limited
NME (Australia) Pty., Limited
(a) Australian Medical Enterprises Ltd. (51.94%)
(b) AME Trust (Formerly: Markalinga Trust)
(b) AME Hospitals Pty Limited (Formerly: Markalinga Nom Pty Ltd.)
(b) Victoria House Holdings Pty Ltd.
NME Headquarters, Inc.
NME Hospitals, Inc.
(a) Brookhaven Hospital, Inc.
1
<PAGE>
(b) Brookhaven Pavilion, Inc.
(a) Germantown Community Hospital-Methodist East, Inc.
(a) Instant Care Centers of America, Inc. (80%) (Inactive)
(a) National Managed Med, Inc.
(a) National Med, Inc.
(a) National Medical Hospital of Tullahoma, Inc.
(a) National Medical Hospital of Wilson County, Inc.
(a) National Medical Services, Inc.
(a) National Medical Ventures, Inc.
(b) Litho I - LP
(b) McHenry Surgery Center Partners, Ltd - LP
(b) Redding Surgi Center - LP
(a) NM Ventures - California, Inc.
(a) NM Ventures of North County, Inc.
(a) NME Hospitals Dallas, Inc.
(a) NME Medical de Mexico, S.A. de C.V.
(a) NMV Alvarado, Inc. (DISSOLVED 6/9/93)
(a) NMV Dallas, Inc. (DISSOLVED 11/1/93)
(a) NMV Hollywood, Inc.
(b) Hollywood Medical Center - LP
(a) NMV Tennessee
(a) NMV-I, Inc. (DISSOLVED 6/1/93)
(a) NMV-II, Inc.
(b) West Boca OB Unit - LP
(a) NMV Texas, Inc.
(a) Preferred Medical Systems of California, Inc.
(a) Rehabilitative Driving Resources, Inc. (non-profit)
(a) West Coast PT Clinic, Inc.
(a) Who Advertising, Inc. (DISSOLVED 11/22/93)
NME Medical, Inc.
NME PIP Funding I, Inc.
NME Properties Corp.
(a) AK, Inc.
(a) Cascade Insurance Company, Ltd.
(a) Guardian Medical Services, Inc.
(a) Hammond Holiday Home, Inc.
(a) Total Renal Care. Inc. (25%)
(b) Medical Ambulatory Care, Inc.
(c) Arizona-New Mexico Community Hemodialysis Services, Inc.
(c) Continental at Home, Inc. (DISSOLVED 8/9/94)
(c) Continental Dialysis Center, Inc. (90%)
(c) Continental Dialysis Center of Springfield-Fairfax, Inc.
(90%)
(c) Continental Dialysis Center of Sterling-Dulless, Inc.
(90%)
(c) Garey Dialysis Center - GP (60%)
(c) Kidney Dialysis Care Units, Inc.
(c) Los Angeles Dialysis Center - GP (65%)
(c) New Mexico Dialysis Services, Inc.
(c) Nova Therapeutic Supply, Inc.
(c) Pacific Coast Dialysis Center - GP (63%)
(c) University Park Dialysis Center - GP (50%)
(c) Valley Dialysis Associates, Inc.
(c) Wilshire Dialysis Center - GP (50%)
(a) NME Properties, Inc.
2
<PAGE>
(b) Lake Health Care Facilities, Inc.
(b) NME Properties of Western Michigan, Inc.
(b) NME Properties West, Inc.
(c) Morgan Manors, Inc.
(b) Northwest Continuum Care Center, Inc.
(a) NME Property Corp of Texas
(a) NME Property Holding Co., Inc.
(a) Sedgwick Convalescent Center, Inc.
NME Property Partners, Limited Partnership (90%)
NME Rehabilitation Properties, Inc.
NME Specialty Hospitals, Inc.
(a) National Medical Specialty Hospital of Redding
(a) NME Management Services, Inc.
(a) NME New Beginnings, Inc.
(b) Addiction Treatment Centers of Maryland, Inc.
(b) Alcoholism Treatment Centers of New Jersey, Inc.
(b) Health Institutes, Inc.
(c) Fenwick Hall, Inc.
(c) Health Institutes Investments, Inc.
(b) NME New Beginnings-Western, Inc.
(c) Norquest/RCA-W Bitter Lake Partnership
(a) NME Partial Hospital Services Corporation
(a) NME Psychiatric Hospitals, Inc.
(b) The Huron Corporation
(a) NME Rehabilitation Hospitals, Inc.
(a) Psychiatric Management Services Company
NME Psychiatric Properties, Inc.
(a) Alvarado Parkway Institute, Inc.
(a) Baywood Hospital, Inc.
(a) Brawner Hospital, Inc.
(b) Evaluation and Assistance Programs of Atlanta, Inc. (50%)
(DISSOLVED 9/2/92)
(a) Contemporary Psychiatric Hospitals, Inc.
(a) Elmcrest Manor Psychiatric Institute, Inc.
(b) Elmcrest Manor Joint Venture (50%)
(a) Gwinnett Psychiatric Institute, Inc.
(a) Jefferson Hospital, Inc.
(a) Lake Hospital and Clinic, Inc. (97.875%)
(a) Lakewood Psychiatric Hospitals, Inc.
(a) Laurel Oaks Residential Treatment Center, Inc.
(a) Leesburg Institute, Inc.
(a) Manatee Palms Residential Treatment Center, Inc.
(a) Manatee Palms Therapeutic Group Home, Inc.
(a) Medfield Residential Treatment Center, Inc.
(a) Modesto Psychiatric Hospitals, Inc.
(a) Modesto Psychiatric Realty, Inc.
(b) Modesto Associates Limited Partnership (CANCELED 8/31/93)
(a) Naperville Psychiatric Ventures
(a) Nashua Brookside Hospital, Inc.
(a) North Houston Healthcare Campus, Inc.
(a) Northeast Behavioral Health, Inc.
(a) Northeast Psychiatric Associates - 2, Inc.
(a) Outpatient Recovery Centers, Inc.
3
<PAGE>
(a) P.D. at New Baltimore, Inc.
(a) P.I.A. Alexandria, Inc.
(a) P.I.A. Canoga Park, Inc.
(a) P.I.A. Cape Girardeau, Inc.
(a) P.I.A. Capital City, Inc.
(a) P.I.A. Central Jersey, Inc.
(a) P.I.A. Colorado, Inc.
(a) P.I.A. Connecticut Development Company, Inc.
(b) P.I.A. Connecticut Development/Ameen-Fierman (50%)
(a) P.I.A. Cook County, Inc.
(a) P.I.A. Denton, Inc.
(a) P.I.A. Detroit, Inc.
(b) Harbor Oaks Hospital Limited Partnership
(a) P.I.A. Educational Institute, Inc.
(a) P.I.A. of Fort Worth, Inc.
(a) P.I.A. Green Bay, Inc.
(a) P.I.A. Highland, Inc.
(b) Highland Psychiatric Associates (50%)
(a) P.I.A. Highland Realty, Inc.
(b) Highland Realty Associates (49%) (partnership)
(a) P.I.A. Indianapolis, Inc.
(a) P.I.A. Kansas City, Inc.
(a) P.I.A. Lincoln, Inc.
(a) P.I.A. Long Beach, Inc.
(a) P.I.A. Maryland, Inc.
(a) P.I.A. Michigan City, Inc.
(a) P.I.A. Milwaukee, Inc.
(a) P.I.A. Modesto, Inc.
(a) P.I.A. Modesto Realty, Inc. (DISSOLVED 8/27/93)
(b) Modesto Realty Limited Partnership (CANCELED 8/27/93)
(a) P.I.A. Naperville, Inc.
(a) P.I.A. New Jersey, Inc.
(a) P.I.A. North Jersey, Inc.
(a) P.I.A. Northern New Mexico, Inc.
(a) P.I.A. Panama City, Inc.
(a) P.I.A. Randolph, Inc.
(a) P.I.A. Rockford, Inc.
(a) P.I.A. of Rocky Mount, Inc.
(a) P.I.A. Salt Lake City, Inc.
(a) P.I.A. San Antonio, Inc.
(a) P.I.A. San Ramon, Inc.
(a) P.I.A. Sarasota Palms, Inc.
(a) P.I.A. Seattle, Inc.
(a) P.I.A. Slidell, Inc.
(a) P.I.A. Solano, Inc.
(a) P.I.A. Specialty Press, Inc.
(a) P.I.A. Stafford, Inc.
(a) P.I.A. Stockton, Inc.
(a) P.I.A. Tacoma, Inc.
(a) P.I.A. Tidewater Realty, Inc.
(b) I.P.T. Associates (50%) (partnership)
(a) P.I.A. Topeka, Inc.
(a) P.I.A. Visalia, Inc.
4
<PAGE>
(a) P.I.A. Waxahachie, Inc.
(a) P.I.A. Westbank, Inc.
(a) P.I.A.C. Realty Company, Inc.
(a) PIAFCO, Inc.
(a) Pinewood Hospital, Inc.
(a) Potomac Ridge Treatment Center, Inc.
(a) Psychiatric Division Consolidation, Inc.
(a) Psychiatric Facility at Amarillo, Inc.
(a) Psychiatric Facility at Asheville, Inc.
(a) Psychiatric Facility at Azusa, Inc.
(a) Psychiatric Facility at Evansville, Inc.
(a) Psychiatric Facility at Lafayette, Inc.
(a) Psychiatric Facility at Lawton, Inc.
(a) Psychiatric Facility at Medfield, Inc.
(a) Psychiatric Facility at Memphis, Inc.
(a) Psychiatric Facility at Palm Springs, Inc.
(a) Psychiatric Facility at Yorba Linda, Inc.
(a) Psychiatric Institute of Alabama, Inc.
(a) Psychiatric Institute of Atlanta, Inc.
(a) Psychiatric Institute of Bedford, Inc.
(a) Psychiatric Institute of Bucks County, Inc.
(a) Psychiatric Institute of Chester County, Inc.
(a) Psychiatric Institute of Columbus, Inc.
(a) Psychiatric Institute of Delray, Inc.
(a) Psychiatric Institute of Northern Kentucky, Inc.
(a) Psychiatric Institute of Northern New Jersey, Inc.
(a) Psychiatric Institute of Orlando, Inc.
(a) Psychiatric Institute of Richmond, Inc.
(a) Psychiatric Institute of San Jose, Inc.
(a) Psychiatric Institute of Sherman, Inc.
(a) Psychiatric Institute of Washington, D.C., Inc.
(a) Residential Treatment Center of Memphis, Inc.
(a) Residential Treatment Center of Montgomery County, Inc.
(a) The Residential Treatment Center of the Palm Beaches, Inc.
(a) RiverWood Center, Inc.
(a) Sandpiper Company, Inc.
(a) Southern Crescent Psychiatric Institute, Inc.
(a) Southwood Psychiatric Centers, Inc.
(a) Springwood Residential Treatment Centers, Inc.
(a) Tidewater Psychiatric Institute, Inc.
(a) The Treatment Center at Bedford, Inc.
(a) Tucson Psychiatric Institute, Inc.
(a) Tulsa County Health Services, Inc.
Northshore Hospital Management Corporation
RHSC Hospitals, Inc.
(a) Allegheny Health Corporation
(a) Blair County Health Corporation
(a) Broward County Health Corporation
(a) C.C. Health Corporation
(a) Capital Hospital Corporation
(a) Corpus Christi Rehab Realty, Inc.
(b) Corpus Christi Realty Limited Partnership
(a) Edison Rehab Corporation
5
<PAGE>
(a) El Paso Health Corporation
(a) Extended Care Centers, Inc.
(a) FC Health Corporation
(a) Healthcare Development, Inc.
(a) Intervalley Health Corporation
(a) Lakeside Health Corporation
(a) LEIR Institute, Inc.
(a) Montgomery Rehabilitation Hospital, Inc.
(a) Neuro-Rehab Associates, Inc. (51%)
(a) Outpatient Rehab of Montgomery County, Inc.
(a) Pennsylvania Health Corp.
(b) MRS Orthotics, Inc.
(b) Mechanicsburg Sub-Acute Rehab Associates
(a) Pinecrest Rehabilitation Hospital, Inc.
(a) Rehab Health Corporation of New Jersey
(a) Rehab Hospital of Florida, Inc.
(a) Rehab of Melbourne, Inc.
(a) Rehab-Salt Lake, Inc.
(b) RHSC/Salt Lake Limited Partnership
(a) Rehabilitation Hospital Division Consolidation, Inc.
(a) Rehabilitation Facility at Austin, Inc.
(a) Rehabilitation Facility at Salt Lake City, Inc.
(a) Rehabilitation Facility at San Diego, Inc.
(a) Rehabilitation Facility at San Ramon, Inc.
(a) Rehabilitation Facility at Texarkana, Inc.
(a) Rehabilitation Hospital of Gaston County, Inc.
(a) Rehabilitation Hospital of Wilmington, Inc.
(a) RHD Alternative Services, Inc.
(a) R.H.S.C. Columbus, Inc.
(a) RHSC Corpus Christi, Inc.
(b) Corpus Christi Rehab Associates Limited Partnership
(a) R.H.S.C. El Paso, Inc.
(a) R.H.S.C. Hartford, Inc.
(a) R.H.S.C. Midland, Inc.
(a) R.H.S.C. Modesto, Inc.
(a) R.H.S.C. New London, Inc.
(a) R.H.S.C. Orlando, Inc.
(a) R.H.S.C. Prosthetics, Inc.
(a) R.H.S.C. Rockford, Inc.
(a) R.H.S.C. San Antonio, Inc.
(b) San Antonio Associates Limited Partnership
(b) HCPI/San Antonio Limited Partnership
(a) R.H.S.C. Stamford, Inc.
(a) R.H.S.C. Wichita, Inc.
(a) Sahara Development Company, Inc.
(a) Salt Lake Rehab Realty, Inc.
(b) Realty Salt Lake Limited Partnership
(a) San Antonio Rehab Corporation
(a) Sebastian County Health Services, Inc.
(a) South Texas Rehab Corporation
(a) Transitional Living Center of Broward County, Inc.
(a) Transitional Living Center of Dallas County, Inc.
(a) Treasure Coast Health Corporation
6
<PAGE>
(a) University Rehabilitation Services, Inc.
(a) York County Health Corporation
Syndicated Office Systems
T.A.D. Avanti, Inc.
Wilshire Rental Corp.
Women's Medical Center of America, Inc.
INACTIVE CORPORATIONS
Ambulatory Health Systems, Inc. (Inactive)
Medfield Corporation (Inactive)
Medical Investors Management Corporation (Inactive)
MICA of New York, Inc. (Inactive)
National Medical Specialties, Inc. (Inactive)
NME Acquisition, Inc. (Inactive)
NME Partners, Inc. (Inactive)
Westbank Medical Center. Ltd. (Inactive)
7
<PAGE>
EXHIBIT 23
ACCOUNTANTS' CONSENT AND
REPORT ON CONSOLIDATED SCHEDULES
The Board of Directors and Stockholders
National Medical Enterprises, Inc.:
Under date of July 27, 1994, we reported on the consolidated balance sheets
of National Medical Enterprises, Inc. and subsidiaries as of May 31, 1994 and
1993, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended May 31,
1994, as contained in the 1994 annual report to stockholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year 1994. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedules as listed in the
accompanying index. These financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statement schedules based on our audits. In our opinion, based
on our audits, such schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We also consent to the incorporation by reference of our report dated July
27, 1994, in the Company's Registration Statements on Form S-3 (Nos. 2-96780,
33-39130, 33-39563, 33-40212 and 33-45689) and Registration Statements on Form
S-8 (Nos. 33-11478, 2-95774, 2-87611, 2-69472, 2-79401, 33-35688, 33-50180 and
33-50182).
KPMG Peat Marwick LLP
Los Angeles, California
August 25, 1994
