AMERICAN HOMEPATIENT INC, 10-Q, 1996-11-14

AMERICAN HOMEPATIENT INC
10-Q, 1996-11-14
HOME HEALTH CARE SERVICES

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<PAGE> 1

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

CHECK ONE FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 30, 1996
------------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to .
--------- ---------

American HomePatient, Inc.
--------------------------
(exact name of registrant as specified in its charter)

Delaware 0-19532 62-1474680
- ------------------------------- ------------ -------------------
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification No.)

5200 Maryland Way, Suite 400, Brentwood, Tennessee 37027
----------------------------------------------------------
(Address of Principal executive offices) (Zip Code)

(615) 221-8884
--------------
(Registrant's telephone number, including area code)

None
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)

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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----

14,675,062
- -------------------------------------------------------------------------------
(Outstanding shares of the issuer's common stock as of October 31, 1996)

1
<PAGE> 2

PART I. FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1995 1996
-------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,224,000 $ 2,318,000
Restricted cash 375,000 425,000
Accounts receivable, less allowance for doubtful accounts of
$12,383,000 and $19,003,000, respectively 47,251,000 71,932,000
Inventories 12,974,000 19,602,000
Prepaid expenses and other assets 2,089,000 2,634,000
Deferred tax asset 5,000,000 5,255,000
-------------- --------------
Total current assets 71,913,000 102,166,000
-------------- --------------

PROPERTY AND EQUIPMENT, at cost 62,258,000 90,667,000
Less accumulated depreciation and amortization (21,597,000) (36,986,000)
-------------- --------------
Net property and equipment 40,661,000 53,681,000
-------------- --------------

OTHER ASSETS
Excess of cost over fair value of net assets acquired, net 107,234,000 183,352,000
Investment in unconsolidated joint ventures 7,245,000 11,280,000
Deferred costs, net 2,074,000 2,951,000
Other assets 3,389,000 3,667,000
-------------- --------------
Total other assets 119,942,000 201,250,000
-------------- --------------
$ 232,516,000 $ 357,097,000
============== ==============
</TABLE>

(Continued)

2
<PAGE> 3

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1995 1996
-------------- ---------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and capital leases $ 8,999,000 $ 9,908,000
Trade accounts payable 4,815,000 6,973,000
Income taxes payable 1,459,000 645,000
Other payables 767,000 780,000
Accrued expenses:
Payroll and related benefits 4,722,000 4,535,000
Other 4,879,000 5,589,000
-------------- ---------------
Total current liabilities 25,641,000 28,430,000
-------------- ---------------

NONCURRENT LIABILITIES
Long-term debt and capital leases, less current portion 84,607,000 114,425,000
Deferred income taxes 2,049,000 2,213,000
Other noncurrent liabilities 788,000 1,079,000
------------- ---------------
Total noncurrent liabilities 87,444,000 117,717,000
------------- ---------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000
shares; none issued and outstanding --- ---
Common stock, $.01 par value; authorized 35,000,000
shares; issued and outstanding, 11,487,000 and 14,668,000
shares, respectively 115,000 147,000
Paid-in capital 85,802,000 166,514,000
Retained earnings 33,514,000 44,289,000
------------- ---------------
Total stockholders' equity 119,431,000 210,950,000
------------- ---------------
$ 232,516,000 $ 357,097,000
============= ===============
</TABLE>

The accompanying notes to interim condensed consolidated financial statements
are an integral part of these balance sheets.

3
<PAGE> 4

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

<TABLE>
<CAPTION>
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
--------------------------- --------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales and related service revenues $ 19,729,000 $ 32,101,000 $ 49,096,000 $ 82,916,000
Rentals and other revenues 25,017,000 38,213,000 61,602,000 102,132,000
Earnings from joint ventures 1,049,000 1,666,000 2,836,000 4,403,000
------------- ------------ ------------ -------------
Total revenues 45,795,000 71,980,000 113,534,000 189,451,000
------------- ------------ ------------ -------------

EXPENSES

Cost of sales and related services, excluding
depreciation and amortization 10,003,000 15,449,000 24,001,000 40,463,000
Operating 22,901,000 36,570,000 57,032,000 96,376,000
General and administrative 3,009,000 4,475,000 8,442,000 12,044,000
Depreciation and amortization 4,110,000 6,543,000 9,673,000 17,093,000
Interest 1,374,000 1,932,000 3,160,000 5,926,000
------------- ------------ ------------ -------------
Total expenses 41,397,000 64,969,000 102,308,000 171,902,000
------------- ------------ ------------ -------------

INCOME FROM OPERATIONS BEFORE INCOME TAXES 4,398,000 7,011,000 11,226,000 17,549,000

PROVISION FOR INCOME TAXES 1,758,000 2,706,000 4,487,000 6,774,000
------------- ------------ ------------ -------------

NET INCOME $ 2,640,000 $ 4,304,000 $ 6,739,000 $ 10,775,000
============= ============= ============ =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES 11,723,000 15,010,000 10,551,000 13,414,000
============= ============ ============ =============

INCOME PER SHARE $ 0.23 $ 0.29 $ 0.64 $ 0.80
============= ============= ============ =============
</TABLE>

The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.

4
<PAGE> 5

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

<TABLE>
<CAPTION>
For the Nine Months Ended September 30
--------------------------------------
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from operations $ 6,739,000 $ 10,775,000
Adjustments to reconcile net income from operations
to net cash provided from (used in) operating activities:
Depreciation and amortization 9,673,000 17,093,000
Equity in earnings of unconsolidated joint ventures (1,469,000) (2,340,000)
Minority interest 113,000 111,000

Change in assets and liabilities, net of effects
from acquisitions:
Restricted cash --- (50,000)
Receivables, net (4,213,000) (10,595,000)
Inventories (868,000) (1,465,000)
Prepaid expenses and other (1,122,000) 14,000
Income taxes payable (4,514,000) (547,000)
Trade accounts payable, accrued expenses
and other current liabilities (5,359,000) (7,377,000)
Other assets (186,000) (420,000)
-------------- -------------
Net cash provided from (used in) operating activities (1,206,000) 5,199,000
-------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (82,214,000) (74,302,000)
Additions to property and equipment, net (10,512,000) (14,831,000)
Distributions to unconsolidated joint ventures,
net of advances (208,000) (1,103,000)
Distributions to minority interest owners (114,000) (9,000)
-------------- -------------
Net cash used in investing activities (93,048,000) (90,245,000)
-------------- -------------
</TABLE>

(Continued)

5
<PAGE> 6

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)

<TABLE>
<CAPTION>
For the Nine Months Ended September 30
--------------------------------------
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases (2,288,000) (9,248,000)
Proceeds from issuance of debt 44,715,000 25,300,000
Proceeds from exercise of stock options 3,442,000 2,365,000
Deferred financing costs (613,000) (1,309,000)
Proceeds from equity offering, net 47,345,000 66,032,000
-------------- --------------
Net cash provided from financing activities 92,601,000 83,140,000
-------------- --------------
DECREASE IN CASH AND CASH
EQUIVALENTS (1,653,000) (1,906,000)

CASH AND CASH EQUIVALENTS, beginning of period 3,704,000 4,224,000
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 2,051,000 $ 2,318,000
============== ==============

SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 2,964,000 $ 6,058,000
============== ==============

Cash payments of income taxes $ 9,248,000 $ 7,588,000
============== ==============
</TABLE>

The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.

6
<PAGE> 7

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1996 AND 1995

1. ORGANIZATION AND BACKGROUND:

The registrant is a health care services company engaged in the provision of
home health care services. The Company's home health care services consist
primarily of the provision of respiratory and infusion therapies and the rental
and sale of home medical equipment and home health care supplies. For the nine
months ended September 30, 1996, such services represented 50%, 18% and 32%,
respectively, of net revenues. As of September 30, 1996, the Company provided
these services to patients primarily in the home through 292 centers in
Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia,
Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota,
Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas,
Virginia, West Virginia, and Wisconsin.

2. INCOME PER SHARE:

Net income per share is based on the weighted average number of the Company's
common and common equivalent shares outstanding or subscribed which pertain to
the respective operations included in each period. Common stock equivalents
result from stock options issued to management, employees, and directors as
well as from warrants to acquire common shares issued by the Company.

3. BASIS OF FINANCIAL STATEMENTS:

The interim condensed consolidated financial statements of the Company for the
three and nine months ended September 30, 1996 and 1995 included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management
of the Company, the accompanying unaudited interim consolidated financial
statements reflect all adjustments (consisting of only normally recurring
accruals) necessary to present fairly the financial position at September 30,
1996 and the results of operations and cash flows for the three and nine months
ended September 30, 1996 and 1995.

The results of operations for the three and nine months ended September 30,
1996 and 1995 are not necessarily indicative of the operating results for the
entire respective years. These interim consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.

7
<PAGE> 8

4. ACQUISITIONS:

During 1996 and effective through September 30, 1996, the Company acquired 88
home health care centers for total consideration of approximately $106 million,
including cash, satisfaction of certain liabilities, and notes payable issued
to sellers with combined annualized revenue of approximately $91 million.

Since January 1, 1995 and effective through the filing date of this Form 10-Q,
American HomePatient has acquired 167 home health care centers.

The terms of the 1995 and 1996 acquisitions, including the consideration paid,
were the result of arm's-length negotiations. The acquisitions were funded via
a combination of cash from Company reserves, seller-financed notes, and draws
on the Company's line of credit.

On May 1, 1996, the Company entered into a second amended and restated Bank
Credit Facility to increase commitments thereunder to $225.0 million. This
Facility includes a $100.0 million five-year term loan and a $125.0 million
five-year revolving line of credit. The various financial and operating
covenants are substantially similar to those under the first amended and
restated Bank Credit Facility. Borrowings under the Bank Credit Facility may be
used for acquisitions and other general corporate purposes, subject to the
terms and conditions of the respective credit and security agreements. Most of
the Company's operating assets have been pledged as security for borrowings
under the Bank Credit Facility. The Bank Credit Facility contains various
financial covenants, the most restrictive of which relate to measurements of
stockholders' equity, leverage ratios, and interest coverage ratios.

5. SECONDARY OFFERING OF COMMON STOCK:

In May 1996, the Company issued 1,650,000 shares of its common stock (on a
pre-split basis; see Note 6) to the public (the "Secondary Offering") at a
price of $42.00 per share before underwriting discounts and expenses. Net of
discounts and expenses, the Company realized approximately $66 million from the
Secondary Offering. Of the Secondary Offering proceeds, approximately $59
million was applied to reduce outstanding borrowings under the Secured
Revolving Line of Credit and the remainder was used to fund acquisitions.

6. 3-FOR-2 STOCK SPLIT DIVIDEND:

The Company completed a 3-for-2 common stock split dividend effective with a
record date at the close of trading on June 28, 1996. All amounts shown in the
financial statements in this Form 10-Q related to common shares outstanding,
weighted average common shares outstanding, and income per share have been
adjusted to reflect this stock split.

7. IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS:

8
<PAGE> 9

required for fiscal years beginning after December 15, 1995. The Company has
adopted SFAS 121 in 1996, and the adoption did not have a material effect on
the Company's financial position.

In October 1995, the FASB issued Statement No. 123 ("SFAS 123") "Accounting for
Stock-Based Compensation." This statement requires new disclosures in the notes
to the financial statements about stock-based compensation plans based on the
fair value of equity instruments granted. Companies also may base the
recognition of compensation cost for instruments issued under stock-based
compensation plans on these fair values. The Company will adopt the disclosure
requirements of SFAS 123 in 1996.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

The Company's home health care services consist primarily of the provision of
home respiratory therapy, the provision of home infusion therapy and the rental
and sale of home medical equipment and supplies. These services and products
are paid for primarily by Medicare, Medicaid and other third-party payors. The
following table sets forth the percentage of the Company's net revenues
represented by each line of business for the periods presented:

<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Home respiratory therapy services . . . . . . . . . 53% 50%
Home infusion therapy services . . . . . . . . . . 20 18
Home medical equipment and medical supplies . . . . 27 32
---- ----
Total . . . . . . . . . . . . . . . . . . . . 100% 100%
==== ====
</TABLE>

The Company reports its net revenues as follows: (i) sales and related
services; (ii) rentals and other; and (iii) earnings from hospital joint
ventures. Sales and related services revenues are derived from the provision
of infusion therapies, the sale of home health care equipment and supplies, the
sale of aerosol and respiratory therapy equipment and supplies and services
related to the delivery of these products. Rentals and other revenues are
derived from the rental of home health care equipment, enteral pumps and
equipment related to the provision of respiratory therapies. Because the
Company's hospital joint ventures are not consolidated for financial statement
reporting purposes, earnings from joint ventures represent the Company's equity
in earnings and management and administrative fees for unconsolidated hospital
joint ventures. Cost of sales and related services includes the cost of
equipment, drugs and related supplies sold to patients. Operating expenses
include center labor costs, delivery expenses, occupancy costs, costs related
to rentals other than depreciation, billing center costs, other operating costs
and provision for doubtful accounts. General and administrative expenses
include corporate, area and regional management expenses and costs.

9
<PAGE> 10

Since its inception, the Company has experienced substantial growth. This
growth is primarily attributable to the Company's pursuit of an acquisition
strategy targeting successful, operating home health care businesses, through
both 100% ownership and joint venture partnerships. Since the Company's initial
public offering in November 1991, the Company has expanded operations from 24
home health care centers in four states to 292 home health care centers in 32
states as of September 30, 1996. The Company acquired 79 centers during 1995
and 88 centers during the nine months ended September 30, 1996. The Company
continues its integration of recently acquired home health care centers. The
Company's experience and management expertise is applied wherever possible to
improve the operating efficiency of the new centers. Quality methods and ideas
from the acquired centers become part of the systems and procedures of the
combined Company. Profitable services that were not formerly provided are
being added where such opportunities exist. As the Company grows, economies of
scale can be realized in its purchasing of goods and services used in its
business and, to some extent, its management of overhead expenses.

MEDICARE REIMBURSEMENT FOR OXYGEN THERAPY SERVICES

In the fall of 1995, Congress proposed certain reductions in the Medicare
reimbursement rate for home oxygen therapy service and equipment, which
legislation was vetoed by President Clinton. Despite the presidential veto,
Congress continues to consider legislation affecting reimbursement of these
items, and Medicare reimbursement rates for oxygen services and equipment could
be reduced. The Company cannot be certain of the timing or level of reductions
for Medicare oxygen reimbursement. Any such reductions could have an adverse
effect on the Company's net revenues and net income.

RESULTS OF OPERATIONS

The following table and discussion set forth, for the periods indicated, the
percentage of net revenues represented by the respective financial items:

PERCENTAGE OF NET REVENUES

<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES 100.0% 100.0% 100.0% 100.0%

Costs and expenses:

Cost of sales and related services 21.8 21.5 21.1 21.4
Operating expenses 50.0 50.8 50.3 50.9
General and administrative 6.6 6.2 7.4 6.3
Depreciation and amortization 9.0 9.1 8.5 9.0
Interest 3.0 2.7 2.8 3.1
------ ------ ------ ------
Total costs and expenses 90.4% 90.3% 90.1% 90.7%
------ ------ ------ ------
Income from operations before income taxes 9.6% 9.7% 9.9% 9.3%
====== ====== ====== ======
</TABLE>

The operations of acquired centers are included in the operations of the Company
from the effective date of each acquisition. Because of the substantial
acquisition activity, the

10
<PAGE> 11

comparison of the results of operations between 1996 and 1995 is materially
impacted by the operations of these acquired businesses. For comparative
purposes, the Company separates operations into "same-store" and
"acquisitions." An acquired center becomes "same-store" beginning with its
thirteenth month of operations as part of the Company.

THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995

NET REVENUES. Net revenues increased from $45,795,000 for the quarter ended
September 30, 1995 to $71,980,000 for the same period in 1996, an increase of
$26,185,000, or 57%. Same-store net revenues, including net revenues of
same-store hospital joint ventures managed by the Company and accounted for
under the equity method, increased 10%, excluding the ConPharma acquisition made
in 1995. Including ConPharma, the Company recorded 6% same-store revenue growth
for the quarter. Net revenues of same-store hospital joint ventures contributed
3% of this total same-store growth rate. Following is a discussion of the
components of net revenues:

Sales and Related Services Revenues. Sales and related services
revenues increased from $19,729,000 for the quarter ended September 30,
1995 to $32,101,000 for the same period in 1996, an increase of
$12,372,000, or 63%. This increase is primarily attributable to the
acquired home health care businesses.

Rentals and Other Revenue. Rentals and other revenues increased from
$25,017,000 for the quarter ended September 30, 1995 to $38,213,000 for the
same period in 1996, an increase of $13,196,000, or 53%. This increase is
primarily attributable to the acquired home health care businesses.

Earnings from Joint Ventures. Earnings from joint ventures increased
from $1,049,000 for the quarter ended September 30, 1995 to $1,666,000 for
the same period in 1996, an increase of $617,000, or 59%. Of this
increase, $267,000 is attributable to net growth in the Company's existing
hospital joint ventures. The remainder of the increase is primarily
attributable to acquired and newly-formed joint ventures.

COST OF SALES AND RELATED SERVICES. Cost of sales and related services
increased from $10,003,000 for the quarter ended September 30, 1995 to
$15,449,000 for the same period in 1996, an increase of $5,446,000, or 54%. As a
percentage of sales and related services revenues, cost of sales and related
services decreased from 51% to 48%. This decrease is attributable to favorable
pricing the Company has been able to negotiate with certain of its product
vendors offset in part by a change in the mix of sales and related services
revenue attributable primarily to the acquired home health care businesses.

OPERATING EXPENSES. Operating expenses increased from $22,901,000 for the
quarter ended September 30, 1995 to $36,570,000 for the same period in 1996, an
increase of $13,669,000, or 60%. This increase is primarily attributable to
operating expenses associated with the acquired home health care businesses. As
a percentage of net revenues, operating expenses increased from 50% to 51%.
This increase is primarily attributable to slightly higher field operating
expenses as a percentage of net revenue in the quarter ended September 30, 1996
compared to the same period in 1995.

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<PAGE> 12

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from
$3,009,000 for the quarter ended September 30, 1995 to $4,475,000 for the same
period in 1996, an increase of $1,466,000, or 49%. This increase is primarily
attributable to increases in expense associated with the acquired home health
care businesses and to increases in corporate office general and administrative
expenses. As a percentage of net revenues, general and administrative expenses
have decreased from 7% to 6%.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
from $4,110,000 for the quarter ended September 30, 1995 to $6,543,000 for the
same period in 1996, an increase of $2,433,000, or 59%. This increase is
primarily attributable to the acquired home health care businesses.

INTEREST. Interest expense increased from $1,374,000 for the quarter ended
September 30, 1995 to $1,932,000 for the same period in 1996, an increase of
$558,000. The increase is due to additional interest expense associated with
increased borrowings used to fund acquisitions of home health care businesses.

NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995

NET REVENUES. Net revenues increased from $113,534,000 for the nine months
ended September 30, 1995 to $189,451,000 for the same period in 1996, an
increase of $75,917,000, or 67%. Same-store net revenues, including net
revenues of same-store hospital joint ventures managed by the Company and
accounted for under the equity method, increased 11%, excluding the ConPharma
acquisition made in 1995. Including ConPharma, the Company reported 9%
same-store revenue growth for the nine months. Same-store hospital joint
ventures contributed 3% of this total same-store growth rate. Following is a
discussion of the components of net revenues:

Sales and Related Services Revenues. Sales and related services
revenues increased from $49,096,000 for the nine months ended September 30,
1995 to $82,916,000 for the same period in 1996, an increase of $33,820,000
or 69%. This increase is primarily attributable to the acquired home health
care businesses.

Rentals and Other Revenue. Rentals and other revenues increased from
$61,602,000 for the nine months ended September 30, 1995 to $102,132,000 for
the same period in 1996, an increase of $40,530,000, or 66%. This increase
is primarily attributable to the acquired home health care businesses.

Earnings from Joint Ventures. Earnings from joint ventures increased
from $2,836,000 for the nine months ended September 30, 1995 to $4,403,000
for the same period in 1996, an increase of $1,567,000, or 55%. Of this
increase, $825,000 is attributable to net growth in the existing hospital
joint ventures. The remainder of the increase is attributable to acquired
and newly-formed joint ventures.

<PAGE> 13

COST OF SALES AND RELATED SERVICES. Cost of sales and related services
increased from $24,001,000 for the nine months ended September 30, 1995 to
$40,463,000 for the same period in 1996, an increase of $16,462,000, or 69%. As
a percentage of sales and related services revenues, cost of sales and related
services remained constant at 49%.

OPERATING EXPENSES. Operating expenses increased from $57,032,000 for the nine
months ended September 30, 1995 to $96,376,000 for the same period in 1996, an
increase of $39,344,000, or 69%. This increase is primarily attributable to
operating expenses associated with the acquired home health care businesses. As
a percentage of net revenues, operating expenses increased from 50% to 51%.
Even though field operating expenses remained constant, higher bad debt
expense as a percentage of net revenue in the nine months ended September 30,
1996 compared to the same period in 1995 was the primary factor contributing to
the overall operating expense increase.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from
$8,442,000 for the nine months ended September 30, 1995 to $12,044,000 for the
same period in 1996, an increase of $3,602,000, or 43%. This increase is
primarily attributable to increases in expense associated with the acquired home
health care businesses and to increases in corporate office general and
administrative expenses. As a percentage of net revenue, general and
administrative expenses have decreased from 7% to 6%.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
from $9,673,000 for the nine months ended September 30, 1995 to $17,093,000 for
the same period in 1996, an increase of $7,420,000 or 77%. This increase is
primarily attributable to the acquired home health care businesses.

INTEREST. Interest expense increased from $3,160,000 for the nine months ended
September 30, 1995 to $5,926,000 for the same period in 1996, an increase of
$2,776,000. The increase is due to additional interest expense associated with
increased borrowings used to fund acquisitions of home health care businesses.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1996, the Company's working capital is $73,736,000 and the
current ratio is 3.6 as compared to working capital of $46,272,000 and a current
ratio of 2.8 at December 31, 1995. The Company has current maturities of
long-term debt of approximately $9,908,000 at September 30, 1996.

The Company's future liquidity will continue to be dependent upon the relative
amounts of current assets (principally cash, accounts receivable and
inventories) and current liabilities (principally accounts payable, and accrued
expenses). In that regard, accounts receivable can have a significant impact on
the Company's liquidity. Accounts receivable are generally outstanding for
longer periods of time in the health care industry than many other industries
because of requirements to provide third party payors with additional
information subsequent to billing and the time required by such payors to
process claims. Certain accounts receivable frequently are outstanding for more
than 90 days, particularly where the account receivable relates to services for
a patient (i) receiving a new medical therapy or (ii) covered

13
<PAGE> 14

by Medicare or Medicaid. Net patient accounts receivable were $44,348,000 and
$67,960,000 at December 31, 1995 and September 30, 1996, respectively. This
increase was primarily attributable to the acquisition of home health care
businesses in 1996. This represented an average of approximately 91 and 89
days' sales in accounts receivable at December 31, 1995 and September 30, 1996,
respectively.

Net cash used in operating activities was $1,206,000 for the nine months ended
September 30, 1995 and net cash provided from operating activities was
$5,199,000 for the nine months ended September 30, 1996. These amounts
primarily represent net income plus depreciation and amortization and provisions
for doubtful accounts and changes in the various components of working capital.
Also included in net cash used in operating activities for the nine months ended
September 30, 1995 was $5,500,000 for payment of taxes on the sale of
discontinued operations. Net cash used in investing activities was $93,048,000
and $90,245,000 for the nine months ended September 30, 1995 and 1996,
respectively. These amounts primarily represent acquisitions of home health
care businesses and property and equipment additions. Net cash provided from
financing activities was $92,601,000 and $83,140,000 for the nine months ended
September 30, 1995 and 1996, respectively. These amounts primarily represent
proceeds from the issuance of long-term debt, the issuance of common stock due
to equity offering and stock option exercises, and principal repayments on debt.

The Company's principal capital requirements are for acquisitions of additional
home health care companies and expansion of the services provided through its
existing home health care centers. The Company has financed and intends to
continue to finance these requirements, its net revenue growth, and working
capital needs with net cash provided by operations, issuance of stock and
borrowings under the Bank Credit Facility. On May 1, 1996, the Company amended
and restated the Bank Credit Facility to increase commitments thereunder to
$225.0 million. The Bank Credit Facility includes a $100.0 million five-year
term loan and a $125.0 million five-year revolving line of credit. Borrowings
under the Bank Credit Facility may be used to finance acquisitions and for
other general corporate purposes, subject to the terms and conditions of the
credit and security agreements. Most of the Company's operating assets have
been pledged as security for borrowings under the Bank Credit Facility.
Interest is payable on borrowings under the Bank Credit Facility, at the
election of the Company, at either a "Base Lending Rate" or an "Adjusted
Eurodollar Rate" (each as defined in the Bank Credit Facility), plus a margin
from 0% to 1.00% and from 0.5% to 2.00%, respectively. The Company's ability
to borrow under the Bank Credit Facility terminates on May 1, 2001, subject to
exceptions set forth therein. As of September 30, 1996 the weighted average
borrowing rate was 6.5%. A commitment fee of up to .375% per annum (.25% as of
September 30, 1996) is payable by the Company on the undrawn balance. The
interest rate and commitment fee vary depending on a financial ratio as defined
in the Bank Credit Facility.

The Bank Credit Facility contains various financial covenants, the most
restrictive of which relate to measurements of stockholders' equity, leverage
ratios and interest coverage ratios. The Company was in compliance with these
covenants at September 30, 1996. The Bank Credit Facility also contains certain
covenants which, among other things, impose certain limitations or prohibitions
on the Company with respect to the incurrence of certain indebtedness, the
creation of security interest on the assets of the Company, the payment of

<PAGE> 15

dividends on and the redemption or repurchase of securities of the Company,
investments, acquisitions, investments in joint ventures, capital expenditures
and sales of Company assets.

The Company's capital expenditures consist of purchases of home health care
rental equipment and routine capital purchases at its regional and corporate
offices. Through September 30, 1996, $14,831,000 of capital expenditures had
been incurred.

IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS

In 1995, the Financial Accounting Standards Board ("FASB") issued Statements of
Financial Accounting Standards Number 121 ("SFAS 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Adoption of SFAS 121 is required for fiscal years beginning after December 15,
1995. The Company has adopted SFAS 121 in 1996, and the adoption did not have a
material effect on the Company's financial position.

SUMMARY

Management believes that available cash, the funding available under the Bank
Credit Facility, and funds generated from operations will be sufficient for the
Company to satisfy its capital expenditures, acquisition activities, working
capital and debt requirements for the next twelve months.

<PAGE> 16

PART II. OTHER INFORMATION

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits. The exhibits filed as part of this Report are listed on the
Index to Exhibits immediately following the signature page.

(B) Reports on Form 8-K. Form 8-K dated July 29, 1996 was filed with respect
to the acquisition of Miller Medical Service, Inc. by merger and a related Form
8-K/A1 dated August 8, 1996 was filed with respect to such transaction to
correct a typographical error appearing in the original Form 8-K.

16
<PAGE> 17

SIGNATURES

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

AMERICAN HOMEPATIENT, INC.

November 14, 1996 By: /s/ Mary Ellen Rodgers
----------------------------------------------
Mary Ellen Rodgers
Chief Financial Officer and An Officer Duly
Authorized to Sign on Behalf of the Registrant

<PAGE> 18
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- ---------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
No. 33-42777 on Form S-1).
3.2 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement
No. 33-42777 on Form S-1).
3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company (incorporated by reference to Registration Statement on
Form S-8 dated February 16, 1993).
3.4 Certificate of Ownership and Merger merging American
HomePatient, Inc. into Diversicare Inc. dated May 11, 1994
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement No. 33-89568 on Form S-2).
3.5 Certificate of Amendment to the Certificate of Incorporation of
the Company dated July 18, 1996 (incorporated by reference to
Exhibit 3.5 to the Company's Form 10-Q filed on August 14, 1996).
10.1 1991 Non-Qualified Stock Option Plan, as amended (incorporated
by reference to Exhibit 10.25 to the Company's Registration
Statement No. 33-89568 on Form S-2).
10.2 Amendment No. 5 to 1991 Non-Qualified Stock Option Plan (incorporated
by reference to Exhibit 10.2 to the Company's Form 10-Q filed on
August 14, 1996).
10.3 Stock Purchase of Miller Medical Service, Inc. and its subsidiary,
Mid-Prairie, Inc. (incorporated by reference to the Company's
Amendment to Form 8-K filed on July 31, 1996).
10.4 Stock Purchase of Happy Harry's Health Care, Inc. dated September
13, 1996, effective as of August 1, 1996.
10.5 Stock Purchase of Penn Oxygen Services, Inc. dated October 4, 1996,
effective as of September 1, 1996.
27 Financial Data Schedule (for SEC use only)
</TABLE>

<PAGE> 1
EXHIBIT 10.4

STOCK PURCHASE AGREEMENT

AMONG

HAPPY HARRY'S HEALTH CARE, INC.

THE COMPANY,

DIANE LEVIN-WIDDER, ALAN B. LEVIN,
DARRELL FOREMAN AND CAROL KORDA

THE SHAREHOLDERS,

AND

AMERICAN HOMEPATIENT, INC.

THE BUYER
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<S> <C>
ARTICLE I. PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Assets at Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Excluded Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Continuing Contracts, Leases and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Delivery of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ARTICLE II. RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Collection of Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ARTICLE III. PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Additional Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.1 Organization, Qualification and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.2 Capitalization and Stock Ownership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Absence of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.4 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 Operations Since December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.6 Absence of Certain Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.7 Employment Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.8 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.9 Medicare, Medicaid and Other Third-Party Payors . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.10 Compliance with Zoning, Land Use and Other Laws; Easements . . . . . . . . . . . . . . . . . . . . . 10
4.11 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.12 Leases and Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.14 Miscellaneous Representations Relating to Real Estate . . . . . . . . . . . . . . . . . . . . . . . 13
4.15 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.16 Company Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.17 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.18 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.19 Broker's or Finder's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.20 Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.21 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.22 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.23 Motor Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.24 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.25 Compliance with Healthcare and Other Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.26 Condition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.27 WARN Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.28 Tax Returns; Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>

i
<PAGE> 3

4.29 Asset Value; Statement of Income and Net Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.30 No Omissions or Misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.1 Organization, Qualification and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.2 Absence of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.3 Broker's or Finder's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE VI. COVENANTS OF PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.1 Preservation of Business and Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.2 Absence of Material Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.3 Access to Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.4 Medicare and Medicaid Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.5 Current Return Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.6 Preserve Accuracy of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . 22
6.7 Maintain Books and Accounting Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.8 Indebtedness; Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.9 Compliance with Laws and Regulatory Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.10 Maintain Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.11 No Sale, Merger or Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.12 Hart-Scott-Rodino Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

ARTICLE VII. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

ARTICLE VIII. COMPANY'S AND SHAREHOLDERS' CONDITIONS TO CLOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.1 Representations and Warranties True at Closing; Compliance with Agreement . . . . . . . . . . . . . 24
8.2 No Action/Proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.3 Order Prohibiting Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

ARTICLE IX. BUYER'S CONDITIONS TO CLOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.1 Representations and Warranties True at Closing; Compliance with Agreement . . . . . . . . . . . . . 24
9.2 Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.3 No Action/Proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.4 Inspection of Assets; U.C.C. Searches, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.5 Order Prohibiting Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.6 Confidentiality and Non-Compete Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.7 Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.8 Operating Targets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.9 Lease Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.10 Third Party Consents; Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.11 Approval of Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.12 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>

ii
<PAGE> 4

<TABLE>
<S> <C>
ARTICLE X. OBLIGATIONS OF COMPANY AND SHAREHOLDERS AT CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.1 Documents Relating to Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.2 Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.4 Corporate Good Standing and Corporate Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.5 Closing Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.6 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.7 Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.8 Additionally Requested Documents; Post-Closing Assistance . . . . . . . . . . . . . . . . . . . . . 27
10.9 Confidentiality, Employment and Lease Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.10 Assumption Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ARTICLE XI. OBLIGATIONS OF BUYER AT CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.1 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.2 Corporate Good Standing and Certified Board Resolutions . . . . . . . . . . . . . . . . . . . . . . 28
11.3 Closing Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.4 Opinion of Buyer's Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ARTICLE XII. OPINION OF BUYER'S COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ARTICLE XIII. SURVIVAL OF PROVISIONS AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
13.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
13.2 Indemnification by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
13.3 Indemnification by Company and Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
13.4 Rules Regarding Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

ARTICLE XIV. PRESERVATION OF BUSINESSAND NONCOMPETE RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 32
14.1 Covenant Not to Compete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
14.2 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

ARTICLE XV. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
15.1 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
15.2 Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
15.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
15.4 Confidentiality; Prohibition on Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
15.5 Controlling Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
15.6 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
15.7 Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
15.8 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
15.9 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
15.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
15.11 Interpretation; Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
15.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
15.13 Further Assurance of Shareholders After Closing . . . . . . . . . . . . . . . . . . . . . . . . . . 35
15.14 Legal Fees and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>

iii
<PAGE> 5

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT is entered into on August ___,
1996, by and among HAPPY HARRY'S HEALTH CARE, INC., a Delaware corporation
("Company"), DIANE LEVIN-WIDDER, ALAN B. LEVIN, DARRELL FOREMAN and CAROL
KORDA, (collectively, the "Shareholders"), and AMERICAN HOMEPATIENT, INC., a
Tennessee corporation ("Buyer").

R E C I T A L S:

WHEREAS, Shareholders own and operate the Company, a corporation that
operates a medical supply business at the locations described on Exhibit A
hereto, which Exhibit sets forth the type of services and products provided by
the Company at each location (collectively, the "Business"); and

WHEREAS, Shareholders own all of the issued and outstanding capital
stock of the Company (the "Stock"); and

WHEREAS, Shareholders desire to sell and transfer the Stock to Buyer,
and Buyer desires to purchase the same from Shareholders, subject to the terms
and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties,
intending to be legally bound hereby, agree as follows:

ARTICLE I. PURCHASE AND SALE

1.1 Purchase and Sale. Shareholders agree to sell, transfer,
assign, convey and deliver to Buyer, and Buyer agrees to purchase from
Shareholders, all right, title and interest in and to the Stock, which consists
of all of the issued and outstanding capital stock of the Company.
Shareholders shall deliver to Buyer at Closing all stock certificates
representing the Stock, duly endorsed for transfer or accompanied by duly
executed stock powers. The Stock shall be delivered free and clear of all
claims, liens, restrictions, suits, proceedings, calls, proxies, charges,
options, security interests and encumbrances of any kind.

1.2 Assets at Closing. At Closing the Company shall own or
lease, as specified, all assets, tangible and intangible, real and personal,
that are necessary or reasonably desirable to operate the Business
(collectively, the "Assets"), free and clear of all encumbrances, mortgages,
pledges, liens, security interests, obligations and liabilities other

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than the Continuing Liabilities (as defined in paragraph 1.4), which Assets
shall include, without limitation, the following:

(1) All right, title and interest in and to all of the
land and real estate owned or leased by the Company and used in connection with
the Business as listed in Exhibit 1.2(1) attached hereto and in and to all
structures, improvements, fixed assets and fixtures including fixed machinery
and fixed equipment situated thereon or forming a part thereof and all
appurtenances, easements and rights-of-way related thereto (collectively, the
"Real Estate");

(2) All tangible personal property, medical and other
equipment, machinery, data processing hardware and software, furniture,
furnishings, appliances, vehicles and other tangible personal property of every
description and kind and all replacement parts therefor used in connection with
the Business including, without limitation, the items listed on Exhibit 1.2(2)
attached hereto but excluding the furniture and personal property in Ms.
Levin-Widder's office (collectively, the "Equipment and Furnishings");

(3) All inventory of goods and supplies used or
maintained in connection with the Business reflected on the Financial
Statements (collectively, the "Inventory");

(4) All accounts and notes receivable (the
"Receivables");

(5) All cash, bank accounts (as listed by name and
address of banking institution, account name and account and routing numbers on
Exhibit 1.2(5) attached hereto), money market accounts, other accounts,
certificates of deposit and other investments of the Company (the "Cash and
Cash Equivalents");

(6) All patient, medical, personnel, corporate and other
records related to the Business (including both hard and microfiche copies),
and all manuals, books and records used in operating the Business, including,
without limitation, personnel policies and files and manuals, accounting
records, and computer software;

(7) To the full extent transferable, all licenses,
permits, registrations, certificates, consents, accreditations, approvals and
franchises necessary to operate and conduct the Business, together with
assignments thereof, if required, and all waivers which the Company currently
has, if any, of any requirements pertaining to such licenses, permits,
registrations, certificates, consents, accreditations, approvals and
franchises;

(8) All goodwill, and, to the extent assignable by the
Company, all warranties (express or implied) and rights and claims related to
the Assets or the operation of the Business;

(9) All prepaid expenses reflected on the Financial
Statements;

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<PAGE> 7

(10) Contract and leasehold rights and interests pursuant
to contracts for purchase or lease of personal property, construction
contracts, contracts for purchase, sale or lease of equipment, goods or
services currently furnished or to be furnished in connection with the Business
and that are approved by Buyer (as such term is defined herein);

(11) All intangible or intellectual property owned,
leased, licensed or possessed by either the Company or the Shareholders and
utilized in connection with the Business, including without limitation, a
six-month non-exclusive license to use the name "Happy Harry's Health Care,
Inc.," and derivatives thereof, to the extent the Company or any Shareholder
has rights in or to each such name (during the first two (2) months following
Closing, Buyer shall endeavor to use its name in connection with each use of
Seller's name; following such two (2) month period Buyer's name shall
immediately precede any use of Seller's name); and

(12) All equity interests in Company and all corporate,
fiscal and other records pertaining to Company or the Business and all of
Company's right, title and interest in any partnerships, joint ventures or
similar arrangements.

1.3 Excluded Items. Immediately prior to conveyance of the
Stock, Company shall transfer to the Shareholders all debts, liabilities and
other obligations of any nature whatsoever, whether known or unknown,
contingent or otherwise, other than the Continuing Liabilities as specifically
set forth in paragraph 1.4(1) (the "Excluded Items"). The parties acknowledge
and agree that Shareholders and Company are not conveying to Buyer any of the
Excluded Items and that, following Closing, neither Company nor Buyer will not
have any right, title, interest or obligation with respect to the Excluded
Items.

1.4 Continuing Contracts, Leases and Liabilities.

(1) At Closing, Company will retain and agree to pay or
perform, as the case may be, only (a) those obligations constituting working
capital liabilities incurred in the ordinary course of business existing on the
Effective Date (as defined), which Company expressly elects to retain as
specifically set forth on Exhibit 1.4 attached hereto other than long-term and
interest bearing debt, (b) those obligations constituting working capital
liabilities incurred in the ordinary course of business on and after the
Effective Date as described on Exhibit 1.4, other than long-term and interest
bearing debt, and (c) those obligations arising on and after the Effective Date
under those Leases and Contracts (as defined in paragraph 4.12) which Company
expressly elects to retain (collectively, the "Continuing Liabilities") as
specifically set forth on Exhibit 1.4.

(2) Buyer is not assuming any debt, liability or
obligation of the Company or of Shareholder and, except for the Continuing
Liabilities, it is expressly agreed and understood by each of the parties to
this Agreement that after the Closing Company shall not retain or be liable
for, any debt, liability or obligation of Company prior to the Closing or of
Shareholders of any type or description whatsoever, whether related or
unrelated to the Stock, the Business or the transactions contemplated under
this Agreement and that

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<PAGE> 8

Shareholders shall be jointly and severally liable and responsible for the
payment or performance, as the case may be, of all debts, liabilities,
obligations, contracts, leases, notes payable, accounts payable, commitments,
agreements, suits, claims, indemnities, mortgages, taxes, contingent
liabilities and other obligations of Company arising prior to Closing and of
Shareholders including, without limitation, any and all investment tax credit
recapture, depreciation recapture, recapture or prior period adjustments under
Medicare, Medicaid and Blue Cross, all impositions of income tax and other
taxes; all employee wages, salaries and benefits including, without limitation,
COBRA and WARN obligations, accrued vacation and sick pay not expressly
retained by Company pursuant to this paragraph, and other accrued employee
benefits including rights of Company's retirees to participate in medical
plans. Notwithstanding any statement contained in this Agreement or otherwise
seemingly to the contrary, Company shall not be obligated to retain liabilities
pursuant to clause (a) of paragraph 1.4(1) in excess of, in the aggregate Six
Hundred Eighty-Three Thousand and No/100 Dollars ($683,000.00) (the "Continuing
Liabilities Cap").

(3) For purposes of calculating the amount of the
Continuing Liabilities, the present value of payments to be made on and after
the Effective Date with respect to any Continuing Liability that is a
capitalized obligation under generally accepted accounting principles shall be
considered part of the amount of such Continuing Liabilities. In the event
that Company elects to retain Continuing Liabilities in excess of the
Continuing Liabilities Cap, then the Purchase Price (as such term is defined
herein) shall be reduced on a dollar-for-dollar basis to the full extent of
such excess.

1.5 Delivery of Stock. Shareholders shall deliver to Buyer at
Closing all stock certificates representing the Stock, duly endorsed for
transfer or accompanied by duly executed stock powers. The Stock will be
conveyed to Buyer fully paid and nonassessable with good and valid title, free
and clear of all liens, charges, claims, liabilities, encumbrances, security
interests, restrictive agreements, options, rights of others and imperfections
of title of any nature whatsoever, including all amounts due and payable for
federal, state and local transfer taxes.

ARTICLE II. RECEIVABLES

2.1 Collection of Receivables. After Closing, Company will
proceed to collect the Receivables in the ordinary course of business
consistent with past collection practices. Shareholders shall provide such
assistance in the collection process as Company or Buyer may reasonably
request. If, within 270 days following Closing, Buyer and Company have
collected less than the amount of the Receivables reflected in the Interim
Financial Statements (as such term is defined in paragraph 4.4(1)) in excess of
the reserves set forth on Exhibit 2.1 attached hereto, (a) Shareholders shall,
jointly and severally, promptly pay Buyer, or the Purchase Price shall be
reduced by, the amount of such shortfall, and (b) Shareholders agree, jointly
and severally, to prepare at their cost revised historical financial statements
reflecting the impact of the less-than-anticipated collections.

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<PAGE> 9

ARTICLE III. PURCHASE PRICE

3.1 Purchase Price. The purchase price payable by Buyer to
Shareholders for the Stock and in consideration for the agreements contained
herein, including the agreements contained in Article XIV hereof, will be Nine
Million Ten Thousand and No/100 Dollars ($9,010,000.00) (the "Purchase Price").
The Purchase Price shall be subject to adjustment as set forth in this
Agreement and shall be payable at Closing in the following manner:

(1) Eight Million Two Hundred Ten Thousand and No/100
Dollars ($8,210,000.00), subject to the foregoing adjustments, in immediately
available funds at Closing by wire transfer;

(2) Eight Hundred Thousand and No/100 Dollars
($800,000.00) by a purchase price note (the "Note"), the form of which is
attached hereto as Exhibit 3.1(2); and

3.2 Additional Purchase Price. In addition to the Purchase
Price described in paragraph 3.1, Buyer shall deliver to Shareholders, in cash
at Closing, interest on that portion of the Purchase Price noted in paragraphs
3.1(1) and 3.1(2) at the rate of seven percent (7%) per annum from the
Effective Date through Closing. In addition, Buyer shall pay to Darrell
Foreman and Craig Rotenberry at Closing, in such proportions as set forth on
Exhibit 3.2A, the aggregate sum of Three Hundred Thousand and No/100 Dollars
($300,000.00) and options to acquire Twenty Thousand (20,000) shares of the
Common Stock of American HomePatient, Inc., the form of which option is
attached hereto as Exhibit 3.2B.

ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF
THE SHAREHOLDERS

As a material inducement to Buyer to enter into this Agreement and to
consummate the transactions contemplated hereunder, Shareholders hereby jointly
and severally represent and warrant to Buyer, which representations and
warranties shall be true and correct on the date of Closing, as follows:

4.1 Organization, Qualification and Authority. Company is a
corporation duly organized and validly existing in the State of Delaware, and
is in good standing and duly qualified to do business as a foreign corporation
in Pennsylvania. Since the date of its organization and incorporation, Company
has consistently observed and operated within the corporate formalities of the
jurisdictions in which it is incorporated and/or conducts its business, and has
consistently observed and complied with the general corporation law of such
jurisdictions. Company has full power and authority to own, lease and operate
its facilities and assets as presently owned, leased and operated; to carry on
its business as it is now being conducted; and is duly qualified to do business
and is in good standing in

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<PAGE> 10

each of the jurisdictions where the Business is conducted. Except for
Shareholders, no other person or entity owns or holds, has any interest in,
whether legal, equitable or beneficial, or has the right to purchase, any
capital stock or other security of Company. Company owns no capital stock,
security, interest or other right, or any option or warrant convertible into
the same, of any corporation, partnership, joint venture or other business
enterprise. Company and Shareholders have the full right, power and authority
to execute, deliver and carry out the terms of this Agreement and all documents
and agreements necessary to give effect to the provisions of this Agreement, to
consummate the transactions contemplated on the part of each such party hereby,
and to take all actions necessary, in their respective capacities, to permit or
approve the actions of Company and Shareholders taken in connection with this
Agreement. The execution, delivery and consummation of this Agreement, and all
other agreements and documents executed in connection herewith by Company and
Shareholders, have been duly authorized by all necessary action on the part of
such parties. This Agreement and all other agreements and documents executed
in connection herewith by Company and/or Shareholders, upon due execution and
delivery thereof, shall constitute the valid and binding obligations of Company
and/or Shareholders, as the case may be, enforceable in accordance with their
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally and by general principles of equity.

4.2 Capitalization and Stock Ownership. Except for
Shareholders, no other person or entity owns or holds, has any interest in,
whether legal, equitable or beneficial, or has the right to purchase, any
capital stock or other security of Company. The Stock, being 600 shares, no
par value, of common stock, constitutes all issued and outstanding securities
of Company, is duly authorized, validly issued, fully paid and nonassessable,
and is owned free and clear of any liens, charges, encumbrances, security
interests, pledges or any other restrictions whatsoever. At Closing, Company
shall have no outstanding subscriptions, options, warrants, calls, contracts,
convertible securities or other instruments, agreements or arrangements of any
nature whatsoever under which Company is or may be obligated or compelled to
issue any capital stock, security or interest of any kind, or to transfer or
modify any right with respect to any capital stock, security or other interest,
and no one has any pre-emptive rights, right of first refusal or similar rights
with respect to the Stock or any equity interest in Company. Except for a
stockholder agreement which will be terminated prior to Closing, neither
Company nor Shareholders are a party to any, and there exist no, voting trusts,
stockholder agreements, pledge agreements or other agreements relating to or
restricting the transferability of any shares of the Stock or equity interests
of Company. The Stock has been issued in accordance with all applicable
federal and state securities laws.

4.3 Absence of Default. The execution, delivery and
consummation of this Agreement, and all other agreements and documents executed
in connection herewith by Company and Shareholders will not constitute a
violation of, or be in conflict with, will not, with or without the giving of
notice or the passage of time, or both, result in a breach of, constitute a
default under, create (or cause the acceleration of the maturity of) any debt,
indenture, obligation or liability affecting Company or its Business or rights
in the Stock,

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<PAGE> 11

result in the creation or imposition of any security interest, lien, charge or
other encumbrance upon any of the Stock, or otherwise adversely affect Buyer,
Company or the Business under: (a) any term or provision of the Charter or
Bylaws of Company; (b) any contract, lease, purchase order, agreement,
document, instrument, indenture, mortgage, pledge, assignment, permit, license,
approval or other commitment to which Company and/or any Shareholders is a
party or by which Company, any Shareholder, Stock or the Assets are bound; (c)
any judgment, decree, order, regulation or rule of any court or regulatory
authority; or (d) any law, statute, rule, regulation, order, writ, injunction,
judgment or decree of any court or governmental authority or arbitration
tribunal to which Company, any Shareholder, Stock and/or the Assets are
subject.

4.4 Financial Statements.

(1) Attached hereto as Exhibit 4.4 are true and correct
copies of Company's audited balance sheets as of December 31, 1995, and its
audited income statements for the year then ending (the "Fiscal Year Financial
Statements"), and the interim unaudited balance sheet and income statement of
Company for the seven (7) month period ended July 31, 1996 (the "Interim
Financial Statements" which with the Fiscal Year Financial Statements shall be
the "Financial Statements"). The Financial Statements are based on the books
and records of Company and present fairly, in compliance with generally
accepted accounting principles, the financial position of Company as of, and
the results of its operations for, the periods specified.

(2) The books and records of Company are in such order
and completeness so that an unqualified audit may be performed for any period
prior to Closing not already audited. Shareholders shall fully and readily
cooperate with Buyer in Buyer's attempt to perform an audit of Company for any
period prior to Closing not already audited.

4.5 Operations Since December 31, 1995. Since December 31,
1995, there has been no:

(1) material change in the condition, financial or
otherwise, which has, or could reasonably be expected to have, an adverse
effect on any of the Assets, the Business or future prospects of the Business,
or in the results of the operations of the Company;

(2) loss, damage or destruction of or to any of the
Assets, whether or not covered by insurance;

(3) sale, lease, transfer or other disposition by Company
of, or mortgages or pledges of or the imposition of any lien, charge or
encumbrance on, any portion of the Assets, other than those made in the
ordinary course of business;

(4) increase in the compensation payable by Company to
any of its Shareholders, employees, directors, independent contractors or
agents, or increase in, or institution of, any bonus, insurance, pension,
profit-sharing or other employee benefit plan

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<PAGE> 12

or arrangements made to, for or with the employees, directors, independent
contractors or agents of Company;

(5) cumulative net operating loss incurred in the
operation of the Business;

(6) adjustment or write-off of Receivables or reduction
in reserves for Receivables outside of the ordinary course of business;

(7) change in the accounting methods or practices
employed by Company or change in adopted depreciation or amortization policies;

(8) issuance or sale by Company, or contract or other
commitment entered into by Company or Shareholders for the issuance or sale, of
any shares of capital stock or securities convertible into or exchangeable for
capital stock of Company;

(9) payment by Company of any dividend, distribution or
extraordinary or unusual disbursement or expenditure or intercompany payable;

(10) sale, transfer, pledge, mortgage or other disposition
of any of the Stock or the Assets (except inventory and equipment held for rent
in the ordinary course of business and consistent with Company's past practice
and the sale of stock to Darrell Foreman); merger, consolidation or similar
transaction; or solicitation therefor;

(11) security interest, guarantee or other encumbrance, or
other than in the ordinary course of business, obligation or liability, in each
case whether absolute, accrued, contingent or otherwise, or whether due or to
become due, incurred or paid by Company to any person or entity; or the making
by Company of any loan or advance to, or an investment in, any person or
entity;

(12) federal, state or local statute, rule, regulation,
order or case adopted, promulgated or decided which, to the best knowledge of
Company and Shareholders, adversely affects Company, Stock, Business or Assets;

(13) strike, work stoppage or other labor dispute
adversely affecting the Business; or

(14) termination, waiver or cancellation of any rights or
claims of Company, under contract or otherwise.

Further, since the Effective Date, neither the Shareholders nor any of
their family members or affiliates has received any compensation, benefits or
distributions from Company, whether as salary, bonus, fees, dividends or any
other form of compensation, which is greater than the amount of compensation
and benefits contemplated for each pursuant to the agreements referenced in
paragraph 9.7 (except for the customary compensation paid to Darrell Foreman).

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<PAGE> 13

4.6 Absence of Certain Liabilities. Except as set forth in the
Interim Financial Statements, Company has, and as of the Closing will have, no
contingent liabilities or obligations.

4.7 Employment Discrimination. Except as disclosed in Exhibit
4.7 attached hereto, no person or party (including, without limitation, any
governmental agency) has asserted, or to the best knowledge of the Company or
Shareholders, has threatened to assert, any claim for any action or proceeding,
against Company (or any officer, director, employee, agent or Shareholder of
Company) arising out of any statute, ordinance or regulation relating to wages,
collective bargaining, discrimination in employment or employment practices or
occupational safety and health standards (including, without limitation, 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, or the Americans With Disabilities Act). The claims
disclosed in Exhibit 4.7 will not result in any liability to or obligation of
Buyer, directly or through the Company, and will not cause or lead to any lien
or encumbrance being placed, created or filed against or upon any of the Stock
or Assets, and Shareholders will jointly and severally hold Buyer and Company
harmless with respect to the same.

4.8 Licenses and Permits.

(1) Company has all local, state and federal licenses,
permits, registrations, certificates, contracts, consents, accreditations and
approvals (collectively, the "Licenses and Permits") necessary for Company to
occupy, operate and conduct the Business, and there does not exist any waivers
or exemptions relating thereto. There is no default on the part of Company or
any other party under any of the Licenses and Permits. There exists no
grounds for revocation, suspension or limitation of any of the Licenses or
Permits. Copies of each of the Licenses and Permits are attached to and listed
on Exhibit 4.8(1) attached hereto. The most recent licensure surveys,
deficiency reports and plans of correction related to each of these items has
also been included in Exhibit 4.8(1). Company is, and at the time of Closing
will be, licensed by the regulatory bodies listed on Exhibit 4.8(1). No
notices have been received by Company or Shareholders with respect to any
threatened, pending, or possible revocation, termination, suspension or
limitation of the Licenses and Permits.

(2) Company is not required to have any certificates of
need or similar authorizations in order to operate the Business.

(3) Each employee of Company has all Licenses and Permits
required for each such employee to perform such employee's designated functions
and duties for Company in connection with conducting the Business, and there
exists no waivers or exemptions relating thereto. There is no default under,
nor does there exist any grounds for revocation, suspension or limitation of,
any such Licenses and Permits.

(4) Company is duly accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") to operate and conduct the
Business. Included in

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<PAGE> 14

Exhibit 4.8(4) attached hereto are the certificates of accreditation issued by
the JCAHO, and copies of the most recent JCAHO accreditation survey report,
including a list of deficiencies, if any.

4.9 Medicare, Medicaid and Other Third-Party Payors.

(1) Company participates in the Medicare and Medicaid
Programs (collectively, the "Programs"). A list of and copies of its existing
Medicare and Medicaid contracts and other documentation evidencing such
participation (collectively, the "Program Agreements") are included in Exhibit
4.12 attached hereto. Company is, and will be at the time of Closing, in full
compliance with all of the terms, conditions and provisions of the Program
Agreements.

(2) No notice of any offsets against future
reimbursements under or pursuant to the Programs has been received by either
Company or Shareholders, nor is there any basis therefor. There are no pending
appeals, adjustments, challenges, audits, litigation, notices of intent to
recoup past or present reimbursements with respect to the Programs. Company
has not been subject to or threatened with loss of waiver of liability for
utilization review denials with respect to the Programs during the past twelve
(12) months, nor has either Company or Shareholders received notice of any
pending, threatened or possible decertification or other loss of participation
in, any of the Programs.

(3) Company currently has contractual arrangements with
Blue Cross and other third party Payors. A list of and copies of its existing
Blue Cross contract(s) and other third party payor contract(s) are included in
Exhibit 4.12 attached hereto. Company is, and will be at the time of Closing,
in full compliance with all of the material terms, conditions and provisions of
such contracts.

(4) All liabilities and contractual adjustments of
Company under any third party payor or reimbursement programs have been
properly reflected and adequately reserved for in the Financial Statements. In
the event that, following Closing, Company suffers any offsets against any
reimbursement under any third-party payor or reimbursement programs due to
Buyer or Company relating to the periods on or prior to the Closing, then
Shareholders shall immediately pay to Company the amounts the amounts so
offset, with interest at a rate equal to seven percent (7%) per annum;
provided, however that Buyer shall bear the risk of offset as to operations
from the Effective Date through Closing so long as such offsets are not caused
by the wilful acts or omissions, or negligence, of Shareholders, Company and/or
their respective employees, representatives or agents. The interest shall
accrue from the date of offset by the third party until the date paid by
Shareholders to Company.

4.10 Compliance with Zoning, Land Use and Other Laws; Easements.
None of the Real Estate is in violation of any zoning, public health, building
code or other similar laws applicable thereto or to the ownership, occupancy
and/or operation thereof, nor does there exist any waivers or exemptions
relating to the Real Estate with respect to any non-conforming use or other
zoning or building codes matters. The Company has all

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<PAGE> 15

easements and rights necessary to continue operation of the Business, copies of
which are set forth in Exhibit 4.10 attached hereto.

4.11 Title to Assets.

(1) Company is the sole legal and beneficial owner of the
personal property included in the Assets, free and clear of all mortgages,
security interests, liens, leases, covenants, assessments, easements, options,
rights of refusal, restrictions, reservations, defects in the title,
encroachments, and other encumbrances, except as set forth in the Leases and
Contracts. The Assets are all the assets set forth on the Interim Financial
Statements or used in the operation of the Business.

(2) The descriptions of the Real Estate contained in
Exhibit 1.2 (1) are accurate and sufficient for their intended purposes, and
such descriptions include all real property leased or owned by Company and used
in connection with the Business or set forth on the Interim Financial
Statements. Company is the sole and exclusive record, legal and equitable
owner of all right, title and interest in and has good, marketable and
insurable title in fee simple to, and is in possession of, all of the Real
Estate including the buildings, structures and improvements situated thereon
and all appurtenances thereto, in each case free and clear of all mortgages,
liens, leases, assessments, easements, covenants, options, rights of refusal,
restrictions, reservations, defects in title, encroachments and other
encumbrances, whether or not the same render the title to such Real Estate
uninsurable or unmarketable. Company is in lawful possession of all of the
Real Estate that is leased rather than owned, including, without limitation,
the buildings, structures and improvements situated thereon and appurtenances
thereto, in each case free and clear of all mortgages, liens and other
encumbrances or restrictions that are related to or impair the Assets or the
Business. Additionally, the transfer and conveyance of the Stock to Buyer as
contemplated by the terms of this Agreement once effected as contemplated
hereunder, will vest in the Buyer, either directly or indirectly through
Company, the lawful right to possess and use the leased Real Estate, superior
in right to all others.

4.12 Leases and Contracts.

(1) Exhibit 4.12 attached hereto sets forth a complete
and accurate list of all contracts, including, the Program Agreements,
agreements, purchase orders, leases, subleases, options and commitments, oral
or written, and all assignments, amendments, schedules, exhibits and appendices
thereof, affecting or relating to the Business, Stock or any Asset or any
interest therein, to which either Company and/or Shareholders are a party or by
which Company, the Assets or the Business is bound or affected, including,
without limitation, service contracts, management agreements, equipment leases
and building leases pertaining to any part of the Real Estate (collectively,
the "Leases and Contracts"). Attached to Exhibit 4.12 are accurate and
complete copies of all written Leases and Contracts and written summaries of
key terms of all oral Leases and Contracts. Except for the Continuing
Liabilities, all obligations under the Leases and Contracts shall be jointly
and severally assumed by the Shareholders.

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<PAGE> 16

(2) None of the Leases and Contracts has been modified,
amended, assigned or transferred and each is in full force and effect and is
valid, binding and enforceable in accordance with its respective terms, except
as enforcement may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally and by general principles of
equity.

(3) No event or condition has happened or presently
exists which constitutes a default or breach or, after notice or lapse of time
or both, would constitute a default or breach by any party under any of the
Leases and Contracts. There are no counterclaims or offsets under any of the
Leases and Contracts.

(4) There does not exist any security interest, lien,
encumbrance or claim of others created or suffered to exist on any interest
created under any of the Leases and Contracts (except for those that result
from or relate to leased Assets).

(5) No purchase commitment by Company is in excess of
Company's ordinary business requirements.

(6) Conveyance to Buyer of the Stock will not default,
alter or terminate any of the Leases and Contracts, and Buyer, directly or
through Company, will be entitled to all rights thereunder.

4.13 Environmental Matters.

(1) Hazardous Substances. As used in this Paragraph, the
term "Hazardous Substances" means any hazardous or toxic substances, materials
or wastes, including but not limited to those substances, materials, and wastes
defined in Paragraph 101 of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), listed in the
United States Department of Transportation Table (49 CFR 172.101) or by the
Environmental Protection Agency as hazardous substances pursuant to 40 CFR Part
302, or which are regulated under any other Environmental Law (as such term is
defined herein), and any of the following: hydrocarbons, petroleum and
petroleum products, asbestos, polychlorinated biphenyls, formaldehyde,
radioactive substances (other than naturally occurring materials in place),
flammables and explosives.

(2) Compliance with Laws and Regulations. All operations
or activities upon, or any use of occupancy of the Real Estate, or any portion
thereof, by Company, any Affiliates of Company (wherein the term "Affiliates"
shall mean any person or entity controlling, controlled by or under common
control at any time with Company, and the term "control" shall mean the power,
directly or indirectly to direct the management or policies of such person or
entity), and any agent, contractor or employee of any agent or contractor of
Company or its Affiliates ("Agents"), or any tenant or subtenant of Company of
any part of the Real Estate is and has been in compliance with any and all
laws, regulations, orders, codes, judicial decisions, decrees, licenses,
permits and other applicable requirements of governmental authorities with
respect to Hazardous Substances, pollution or protection of

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<PAGE> 17

human health and safety (collectively, "Environmental Laws"), including but not
limited to the release, emission, discharge, storage and removal of Hazardous
Substances. To the best knowledge of Company and Shareholders, all prior
owners, operators and occupants of the Real Estate complied with Environmental
Law. Except for uses and storage or presence of Hazardous Substances
reasonably necessary or incidental to the customary operation of a business
similar to the Business, as appropriate which, if required, was duly licensed
or authorized by appropriate governmental authorities or otherwise permitted by
Environmental Law, and which complies with Environmental Law:

(a) Neither Company nor its Affiliates or Agents
have allowed the use, generation, treatment, handling, manufacture, voluntary
transmission or storage of any Hazardous Substances over, in or upon the Real
Estate, nor, to the best knowledge of Company or Shareholders, has the Real
Estate ever been used for any of the foregoing.

(b) Neither Company nor its Affiliates or Agents
have installed or permitted to be installed, in or on the Real Estate friable
asbestos or any substance containing asbestos in condition or amount deemed
hazardous by Environmental Law.

(c) Company has not at any time engaged in or
permitted any dumping, discharge, disposal, spillage, or leakage (whether legal
or illegal, accidental or intentional) of such Hazardous Substances, at, on, in
or about the Real Estate, or any portion thereof that would subject the Real
Estate or Buyer to clean-up obligations imposed by governmental authorities.

(d) None of the Real Estate, nor any part
thereof, nor Company, nor any present owner or operator of the Real Estate is
subject to any existing, pending, or, to the best knowledge of Company or
Shareholder, threatened investigation or inquiry by any governmental authority
for noncompliance with, or any remedial obligations under Environmental Law.

(3) Other Environmental Matters. To the best knowledge
of Seller and Shareholders, there are no underground storage tanks on any
portion of the Real Estate, and the Real Estate is free of dangerous levels of
naturally-emitted radon. To the best knowledge of Company and Shareholders, no
portion of the Real Estate has ever been used as a landfill.

4.14 Miscellaneous Representations Relating to Real Estate.

(1) To the best knowledge of Company and Shareholders, no
part of the Real Estate is currently subject to condemnation proceedings.
There are no facts known to either Company or Shareholders that would adversely
affect the possession, use or occupancy of the Real Estate.

(2) All utilities serving the Real Estate are adequate to
operate the Real Estate in the manner it is currently operated and to the best
knowledge of Company and Shareholders all utility lines, pipes, hook-ups and
wires serving the Real Estate are located

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<PAGE> 18

within recorded easements for the benefit of the Real Estate. To the best
knowledge of Company and Shareholders, there are no encroachments upon the Real
Estate and no encroachment of any improvements to the Real Estate onto adjacent
property. To the best knowledge of Company and Shareholders, none of the
improvements to the Real Estate violate set-back, building or side lines, nor
do they encroach on any easements located on the Real Estate.

(3) All potable and industrial water and all gas,
electrical, steam, compressed air, telecommunication, sanitary and storm sewage
lines and systems and other similar systems serving the Real Estate and the
facilities of the Business are installed and operating and are sufficient to
enable the Real Estate and the facilities of the Business to continue to be
used and operated in the manner currently being used and operated, and any
so-called hook-up fees or other associated charges accrued to date have been
fully paid. Company has received no written recommendation from any insurer to
repair or replace any of the Assets with which Seller has not complied.

4.15 Litigation. Neither Company nor Shareholders have received
notice of any violation of any law, rule, regulation, ordinance or order of any
court or federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality (including, without
limitation, legislation and regulations applicable to the Medicare and Medicaid
programs, environmental protection, civil rights, public health and safety and
occupational health). Except as set forth in Exhibit 4.15 attached hereto (for
which Shareholders shall jointly and severally indemnify and hold harmless
Buyer and Company), there are no lawsuits, proceedings, actions, arbitrations,
governmental investigations, claims, inquiries or proceedings pending or
threatened involving Company, Shareholders, Stock, any of the Assets or the
Business.

4.16 Company Employees. Exhibit 4.16 attached hereto sets forth:
(a) a complete list of all of the Company's employees, and rates of pay, (b)
true and correct copies of any and all fringe benefits and personnel policies,
(c) the employment dates and job titles of each such person, (d) categorization
of each such person as a full-time or part-time employee of Company and (e) a
list of all ex-employees of Company utilizing or eligible to utilize COBRA
(health insurance). For purposes of this paragraph, "part-time employee" means
an employee who is employed for an average of fewer than twenty hours per week
or who has been employed for fewer than six (6) of the twelve (12) months
preceding the date on which notice is required pursuant to the "Worker
Adjustment and Retraining Notification Act" ("WARN"), 29 U.S.C. Section 2102 et
seq. Except as provided in Exhibit 4.12, Company has no employment agreements
with its employees and all such employees are employed on an "at will" basis.
Shareholders agree, jointly and severally, to indemnify and hold Buyer and
Company harmless from and against any and all claims of employees, whenever
made, relating to their employment by Company through Closing. Company has
adequately accrued all salaries and wages, related payroll taxes and all sick
leave, holiday, vacation benefits, retirement and other fringe benefits that
have accrued to Company employees through the Closing Date, including related
payroll taxes.

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<PAGE> 19

4.17 Labor Relations. Company is not a party to any labor
contract, collective bargaining agreement, contract, letter of understanding,
or any other arrangement, formal or informal, with any labor union or
organization which obligates Company to compensate Company's employees at
prevailing rates or union scale, nor are any of its employees represented by
any labor union or organization. There is no pending or, to the best knowledge
of Company and Shareholders, threatened labor dispute, work stoppage, unfair
labor practice complaint, strike, administrative or court proceeding or order
between Company and any present or former employee(s) of Company. There is no
pending or, to the best knowledge of Company and Shareholders, threatened suit,
action, investigation or claim between Company and any present or former
employee(s) of Company. There has not been any labor union organizing activity
at any location of Company, or elsewhere, with respect to Company's employees
within the last three years.

4.18 Insurance. Company has in effect and has continuously
maintained insurance coverage for all of its operations, personnel and assets,
and for the Assets and the Business. A complete and accurate list of all such
insurance policies is included in Exhibit 4.18. Exhibit 4.18 attached hereto
sets forth a summary of Company's current insurance coverage (listing type,
carrier and limits), and includes a list of any pending insurance claims
relating to Company. Shareholders agree, jointly and severally, to indemnify
and hold Buyer and Company harmless from and against such pending insurance
claims to the extent such claims are not satisfied by Company's insurance
policies. Company is not in default or breach with respect to any provision
contained in any such insurance policies, nor has Company failed to give any
notice or to present any claim thereunder in due and timely fashion.

4.19 Broker's or Finder's Fee. Neither Company nor Shareholders
have employed, or are liable for the payment of any fee to, any find, broker,
consultant or similar person in connection with the transactions contemplated
under this Agreement.

4.20 Conflicts of Interest. Except for the lease described in
Section 9.9, none of the following is either a supplier of goods or services to
Company, or directly or indirectly controls or is a director, officer, employee
or agent of any corporation, firm, association, partnership or other business
entity that is a supplier of goods or services to Company: (a) any Shareholder,
(b) any director or officer of Company, or (c) any entity under common control
with Company or controlled by or related to Shareholders.

4.21 Intellectual Property. All trademarks, service marks, trade
names, patents, inventions, processes, copyrights and applications therefor,
whether registered or at common law (collectively, the "Intellectual
Property"), owned by Company are listed and described in Exhibit 4.21 attached
hereto. No proceedings have been instituted or are pending or, to the best
knowledge of Company and Shareholders, threatened which challenge the validity
of the ownership by Company of any such Intellectual Property. Company has not
licensed anyone to use any such Intellectual Property, and neither Company nor
Shareholders have any knowledge of the use or the infringement of any of such
Intellectual Property by any other person. Company owns or possesses adequate

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<PAGE> 20

and enforceable licenses or other rights to use all Intellectual Property now
used in the conduct of its Business.

4.22 Inventories. The Inventory is of a quality and quantity
previously used by Company in the ordinary course of business determined and
valued consistent with Company's past practice. The Inventory is properly
valued at the lower of cost or market value on a first-in/first-out basis in
accordance with generally accepted accounting principles consistently applied.
Since the date of the Interim Financial Statements, Company has not decreased
or substituted its items of Inventory other than in the ordinary course of
business. Company has fairly represented the nature and extent of the
Inventory to its outside accountants on a consistent basis and in the exercise
of good faith.

4.23 Motor Vehicles. All motor vehicles used in the Business,
whether owned or leased, are listed in Exhibit 1.2(2) attached hereto. All
such vehicles are properly licensed and registered in accordance with
applicable law.

4.24 Employee Benefit Plans.

(1) Welfare Benefit Plans. Exhibit 4.24(1) attached
hereto contains a true, accurate and complete list of each "employee welfare
benefit plan" (as defined in Paragraph 3(1) of the Employee Retirement Income
Security Act of 1974 as amended ("ERISA")) maintained by Company or to which
Company contributes or is required to contribute (such employee welfare benefit
plans being hereinafter collectively referred to as the "Welfare Benefit
Plans"). Copies of all Welfare Benefit Plans have previously been provided to
Buyer.

(2) Pension Benefit Plans. Exhibit 4.24(2) attached
hereto contains a true and complete list of each "employee pension benefit
plan" (as defined in Paragraph 3(2) of ERISA) maintained by Company, to which
Company contributes or is required to contribute, or which covered employees of
Company during the period of their employment with any predecessor of Company,
including any multi-employer pension plan as defined under Internal Revenue
Code of 1986, Paragraph 414(f) (such employee pension benefit plans being
hereinafter collectively referred to as the "Pension Benefit Plans"). Copies
of all Pension Benefit Plans have previously been provided to Buyer.

(3) Liabilities. There are no unfunded liabilities under
any Welfare Benefit Plan or Pension Benefit Plan. Neither Buyer nor Company
shall be liable or responsible for any debt, obligation, responsibility or
liability under any such plans. Shareholders hereby assume joint and several
liability under such plans for all claims due and unpaid at Closing and for all
claims incurred before Closing, whether or not paid or presented before
Closing.

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<PAGE> 21

Leases and Contracts and no activity of Company or Shareholders violates
provisions of applicable state law relating to the corporate practice of
medicine in any material respect. Company is in compliance (without obtaining
waivers, variances or extensions) with all federal, state and local laws, rules
and regulations which relate to the operations of the Business, except where
the failure to be in compliance would not have a material adverse effect on the
Business. No bulk sales or similar statute applies to the transactions
contemplated under this Agreement. The transactions contemplated under this
Agreement comply with applicable state antitrust or similar laws. All
healthcare, tax and other returns, reports, plans and filings of any nature
required to be filed by Company or Shareholders with any federal, state or
local governmental authorities and any third party payors have been properly
completed, except where the failure to be so completed or filed could not have
a material adverse effect on the Business, and timely filed in compliance with
all applicable requirements. Each return, report, plan and filing contains no
materially untrue or misleading statements and does not omit anything which
could cause it to be misleading or inaccurate in any material respect.

4.26 Condition of Assets. The Equipment and Furnishings are all
of the "Equipment" reflected on the Interim Financial Statements, other than
those items sold and replaced in the ordinary course of business. The Assets
comprise all of the following: all assets owned by the Company and all assets
used in connection with the Business and any related businesses. All
components of all of the Equipment and Furnishings (a) operate in accordance
with their respective specifications, (b) perform the functions they are
supposed to perform, (c) are free of structural, installation, engineering, or
mechanical defects or problems, and (d) are otherwise in good working order.
The Company has received no written recommendation from any insurer to repair
or replace any of the Assets with which the Company has not complied. Since
December 31,1995, the Business has been operated in conformity with the methods
and procedures observed and utilized during the two year period immediately
preceding December 31, 1995, and, since December 31, 1995 and except as
required in the ordinary and usual course of the Business, no assets have been
removed, distributed, assigned or paid by or from Company or Shareholders.

4.27 WARN Act. Since ninety (90) days prior to Effective Date,
Company has not temporarily or permanently closed or shut down any single site
of employment or any facility or any operating unit, department or service
within a single site of employment, as such terms are used in WARN.

4.28 Tax Returns; Taxes. Company and Shareholders have filed all
federal, state and local tax returns and tax reports required by such
authorities to be filed as of the time of Closing. Company and Shareholders
have paid all taxes, assessments, governmental charges, penalties, interest and
fines due or claimed to be due as of the time of Closing (including, without
limitation, taxes on properties, income, franchises, licenses, sales and
payrolls) by any federal, state or local authority. Additionally, the reserves
for taxes reflected in the Financial Statements are adequate to cover all tax
liabilities accrued as of the respective dates thereof. There is no pending
tax examination or audit of, nor any

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<PAGE> 22

action, suit, investigation or claim asserted or, to the best knowledge of
Company and Shareholders, threatened against Company or Shareholders by any
federal, state or local authority; and Company and/or Shareholders have not
been granted any extension of the limitation period applicable to any tax
claims.

4.29 Asset Value; Statement of Income and Net Revenues. The
aggregate net book value of the Assets (being the book value of the Assets less
the Continuing Liabilities) owned by Company at Closing shall be no less than
Three Million Five Hundred Fifty Thousand and No/100 Dollars ($3,500,000.00).
For the seven (7) month period ended July 31, 1996, Company achieved annualized
earnings before interest and taxes (adjusted for owner related and
non-recurring expenses) of no less than One Million Three Hundred Thousand and
No/100 Dollars ($1,300,000.00)(including an appropriate credit for earnings
related to unrecorded nutrition revenues, estimated to be $200,000 on an annual
basis) and annualized net revenues of no less than Ten Million five Hundred
Thousand and No/100 Dollars ($10,500,000.00)

4.30 No Omissions or Misstatements. There is no fact material to
the Stock, Assets, liabilities, Business or prospects of Company which has not
been set forth or described in this Agreement or in the Exhibits hereto and
which is material to the conduct, prospects, operations or financial condition
of Company, Business or the Assets. None of the information included in this
Agreement and Exhibits hereto, or other documents furnished or to be furnished
by Shareholders or Company, or any of its representatives, contains any untrue
statement of a material fact or is misleading in any material respect or omits
to state any material fact necessary in order to make any of the statements
herein or therein not misleading in light of the circumstances in which they
were made. Copies of all documents referred to in any Exhibit hereto have been
delivered or made available to Buyer and constitute true, correct and complete
copies thereof and include all amendments, exhibits, schedules, appendices,
supplements or modifications thereto or waivers thereunder.

ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BUYER

As an inducement to Shareholders and Company to enter into this
Agreement and to consummate the transactions contemplated herein, Buyer hereby
represents and warrants to Shareholders and Company, which representations and
warranties shall be true and correct on the date of Closing, as follows:

5.1 Organization, Qualification and Authority. Buyer is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Tennessee. Buyer has the full corporate power and
authority to own, lease and operate its properties and assets as presently
owned, leased and operated and to carry on its business as it is now being
conducted. Buyer has the full right, power and authority to execute, deliver
and carry out the terms of this Agreement and all documents and agreements
necessary to give effect to the provisions of this Agreement and to consummate
the transactions contemplated on the part of Buyer hereby. The execution,
delivery and consummation of

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<PAGE> 23

this Agreement and all other agreements and documents executed in connection
herewith by Buyer has been duly authorized by all necessary corporate action on
the part of Buyer. No other action on the part of Buyer or any other person or
entity is necessary to authorize the execution, delivery and consummation of
this Agreement and all other agreements and documents executed in connection
herewith. This Agreement, and all other agreements and documents executed in
connection herewith by Buyer, upon due execution and delivery thereof, shall
constitute the valid binding obligations of Buyer, enforceable in accordance
with their respective terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and by general principles of equity.

5.2 Absence of Default. The execution, delivery and
consummation of this Agreement and all other agreements and documents executed
in connection herewith by Buyer will not constitute a violation of, be in
conflict with, or, with or without the giving of notice or the passage of time,
or both, result in a breach of, constitute a default under, or create (or cause
the acceleration of the maturity of) any debt, indenture, obligation or
liability or result in the creation or imposition of any security interest,
lien, charge or other encumbrance upon any of the Assets (except in the
ordinary course pursuant to Buyer's existing credit agreement) under: (a) any
term or provision of the Certificate of Incorporation or Bylaws of Buyer; (b)
any contract, lease, agreement, indenture, mortgage, pledge, assignment,
permit, license, approval or other commitment to which Buyer is a party or by
which Buyer is bound; (c) any judgment, decree, order, regulation or rule of
any court or regulatory authority, or (d) any law, statute, rule, regulation,
order, writ, injunction, judgment or decree of any court or governmental
authority or arbitration tribunal to which Buyer is subject.

5.3 Broker's or Finder's Fee. Buyer has not employed and is not
liable for the payment of any fee to any finder, broker, government official,
consultant or similar person in connection with the transactions contemplated
by this Agreement.

ARTICLE VI. COVENANTS OF PARTIES

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<PAGE> 24

Company shall pay no dividend, and shall make no distribution or extraordinary
payment to Shareholders or any third party or pay any intercompany payable and,
other than in the ordinary course of business, Company will not sell, discard
or dispose of any of the Assets. None of the Leases and Contracts shall be
amended in any material respect between the date hereof and Closing without the
prior written consent of Buyer. From the Effective Date until Closing, Company
and any party in possession of all or any part of the Real Estate will not
perform any material grading or excavation, construction or removal of any
improvement, or make any material other change or improvement upon or about the
Real Estate. From the Effective Date until Closing, Company and any party in
possession of all or any part of the Assets will maintain and keep the Assets
in a sanitary, well-maintained condition and in good order and repair.

6.2 Absence of Material Change. From the Effective Date until
the Closing, neither Company nor Shareholders shall make any change in the
Business or and in the utilization of the Assets and shall not enter jointly or
separately into any other material contract or commitment or any other
transaction with respect to the Business or the Assets without the prior
written consent of Buyer.

6.3 Access to Books and Records.

(1) From the date hereof until the Closing, Company and
Shareholders shall give to Buyer and to Buyer's counsel, accountants and other
representatives, full access to all of Company's offices, properties, books,
contracts, commitments, records and affairs relating to the Stock, Assets or
the Business so that Buyer may inspect and audit them and shall furnish to
Buyer a copy of all documents and information concerning the properties and
affairs of Company, the Business, Stock or the Assets as Buyer may request. If
any such books, records and materials are in the custody of third parties,
Company and Shareholders shall direct such third parties to promptly provide
them to Buyer. Copies of documents furnished to Buyer by Company and
Shareholders will be returned by Buyer upon request if the transaction is not
consummated. Company and Shareholders shall provide Buyer promptly with
interim financial statements of Company and any other management reports, as
and when they are available.

(2) Following the Closing, Buyer shall permit
Shareholders' representatives (including, without limitation, its counsel and
auditors), during normal business hours, to have reasonable access to, and
examine and make copies of, all books and records of the Business which relate
to transactions or events occurring prior to the Closing. All out-of-pocket
costs associated with the delivery of the requested documents shall be paid by
Shareholders.

(3) Following the Closing, Shareholders shall permit
Buyer and its representatives (including, without limitation, its counsel and
auditors), to have access to, and examine and make copies of, any books and
records relating to the Business, Stock or Assets which Shareholders are
required by law to retain, if any, and which relate to transactions or events
occurring prior to the Closing. For a period of five years after the Closing,
Shareholders agree that, prior to the destruction or disposition of any such
books

20
<PAGE> 25

or records, Shareholders shall provide not less than forty-five (45) days', nor
more than ninety (90) days', prior written notice to Buyer of such proposed
destruction or disposal. If Buyer desires to obtain any such documents or
records, it may do so by notifying Shareholders in writing at any time prior
to the date scheduled for such destruction or disposal. In such event,
Shareholders shall not destroy such documents or records and the parties shall
then promptly arrange for the delivery of such documents or records to Buyer,
its successors or assigns. All out-of-pocket costs associated with the
delivery of the requested documents or records shall be paid by Buyer.

(4) Shareholders shall cause Company's accounting firm to
consent to the inclusion of the Financial Statements in any registration
statements, private placement memoranda, and periodic reports, if any,
necessary or appropriate in order to enable Buyer or its affiliates to comply
with any applicable registration or reporting requirements of federal or state
securities laws.

(5) After Closing, Shareholders shall make the books and
records of Company available to Buyer (and, without limitation, to Buyer's
auditors and other agents) and shall otherwise cooperate with Buyer in order to
permit Buyer to conduct an audit of Company's financial statements for any
period prior to Closing not already audited. Shareholders agree to cooperate
with Buyer in Buyer's preparation of financial statements relating to such
periods and Buyer's filing in a timely manner of registration statements,
private placement memoranda and periodic reports, if any, pursuant to any
applicable federal or state securities law.

6.4 Medicare and Medicaid Reporting. Shareholders shall jointly
and severally assume and be responsible for any liability incurred as a result
of the improper filing of all reports and claims of every kind, nature or
description required by law or by written or oral contract to be filed with
respect to the purchase of services by third party payors, including, without
limitation, Medicare, Medicaid and Blue Cross. Company has adequately accrued
or reserved for all liabilities for contracted adjustments, discounts, refunds
and other offsets in connection with the filing of such reports and claims up
to the Effective Date; provided, however, that if any adverse adjustments or
offsets regarding operations on or after the Effective Date are the result of
the wilful acts or omissions, or negligence, of Company, Shareholders and/or
either's employees, representatives and agents, Shareholders shall also be
jointly and severally responsible for such adjustments and offsets.
Shareholders shall be entitled to receive any refund or other benefit which may
result for the filing of said reports and claims for operations up to the
Effective Date, and Buyer shall likewise be so entitled beginning on the
Effective Date.

6.5 Current Return Filing. Shareholders shall be responsible
for the preparation and filing of the federal, state and local income tax and
gross receipts and use tax returns which were due on or before the Closing.
Buyer shall, with Shareholders' assistance with respect to Business operations
occurring prior to Closing, be responsible for the preparation and filing of
all such returns which were due subsequent to Closing. Company shall pay all
taxes, including any penalties or assessments thereon, for any period prior to
Closing when due. Buyer shall reimburse Shareholders for all income taxes (but
no

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<PAGE> 26

penalties or assessments) properly paid by Shareholders (and not the Company)
which relate to operations of the Business from the Effective Date through the
Closing.

6.6 Preserve Accuracy of Representations and Warranties.
Shareholders and Company shall refrain from taking any action which would
render any representation and warranty contained in Article IV hereof untrue,
inaccurate or misleading as of Closing. Each Shareholder and Company will
promptly notify Buyer of any lawsuit, claim, audit, investigation,
administrative action or other proceeding asserted or commenced against Company
or its directors, officers, or Shareholders, that may involve or relate in any
way to Company, the Assets, Stock, Shareholders or the operation of the
Business. Each Shareholder and Company shall promptly notify Buyer of any facts
or circumstances that come to its attention and that cause, or through the
passage of time may cause, any of Shareholders' or Company's representations,
warranties or covenants to be untrue or misleading at any time from the date
hereof to Closing.

6.7 Maintain Books and Accounting Practices. From the date
hereof until the Closing, Company shall maintain its books of account in the
usual, regular and ordinary manner on a basis consistent with prior years and
shall make no change in its accounting methods or practices.

6.8 Indebtedness; Liens. Other than in the ordinary course of
business as reflected in the Financial Statements, from the Effective Date
until the Closing, with respect to the Stock and Assets, including the Business
and operations conducted with the Assets, Company shall not create, incur,
assume, guarantee or otherwise become liable or obligated with respect to any
indebtedness for borrowed money, nor make any loan or advance to, or any
investment in, any person or entity, nor create any lien, security interest,
mortgage, right or other encumbrance in any of the Assets, without Buyer's
prior written approval. At Closing, the Assets will be free and clear of all
mortgages, security interests, liens, leases, covenants, assessments,
easements, options, rights of first refusal, restrictions, reservations,
defects in title, encroachments or other encumbrances, except as set forth in
those Leases and Contracts which are to be retained by Company, and Company
shall deliver to Buyer such releases, U.C.C. termination statements and other
documents as Buyer may reasonably request to evidence the same.

6.9 Compliance with Laws and Regulatory Consents. From the date
hereof until the Closing, (a) Company shall comply with all applicable
statutes, laws, ordinances and regulations, (b) Company shall keep, hold and
maintain all certificates, certificates of need, certificates of exemption,
accreditations, participation, licenses, and other permits necessary for the
business and operation of the Assets, (c) Shareholders and Company shall use
their reasonable efforts and shall cooperate fully with Buyer to obtain all
consents, approvals, exemptions and authorizations of third parties, whether
governmental or private, necessary to consummate the transactions contemplated
by this Agreement, and (d) Shareholders and Company shall make and cause to be
made all filings and give and cause to be given all notices which may be
necessary or desirable on their part under all applicable laws and under their
respective contracts, agreements and commitments in order to consummate the
transactions contemplated by this Agreement.

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<PAGE> 27

6.10 Maintain Insurance Coverage. From the date hereof until the
Closing, Company shall maintain and cause to be maintained in full force and
effect the existing insurance on the Assets and the operations of the Business
and shall provide at Closing written evidence satisfactory to Buyer that such
insurance continues to be in effect, that all premiums due have been paid, and
that Buyer has been named additional insured since the Effective Date.

6.11 No Sale, Merger or Consolidation. From the date hereof until
the Closing, Shareholders shall not sell, pledge or transfer any of the Stock,
and Company shall not sell all or substantially all of the Assets, or merge or
consolidate with any other entity; neither shall solicit any inquiries,
proposals or offers relating to any such transactions; and each such party
shall promptly notify the Buyer orally, and confirm in writing, of all relevant
details relating to inquiries, proposals or offers which either may receive
relating to any of the matters referred to in this paragraph.

6.12 Hart-Scott-Rodino Filing. If required, Shareholders and
Company will (with the assistance of the Buyer if and when required) timely and
promptly make, and Buyer will or if Buyer is not the "ultimate parent" it will
cause its "ultimate parent" (with the assistance of Shareholders and Company if
and when required) to timely and promptly make, all filings which are required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1987 (the "Antitrust
Improvements Act"). The parties will use their best efforts to obtain the
approval of the United States Federal Trade Commission or the Antitrust
Division of the United States Department of Justice, as the case may be, to the
purchase of the Stock by Buyer or the lapse prior to the Closing Date of the
waiting period under the Antitrust Improvements Act without the commencement of
litigation, or threat thereof, by the appropriate governmental enforcement
agency to restrain the transactions contemplated by this Agreement.

ARTICLE VII. CLOSING

7.1 Closing. If all of the conditions to Closing set forth in
Articles VIII and IX hereof are satisfied, then the Closing shall occur on or
by September 13,1996 at the offices of Harwell Howard Hyne Gabbert & Manner,
P.C., Nashville, Tennessee, or at such other time or place as the parties may
mutually agree (the "Closing"). Upon consummation, the Closing shall be deemed
to be effective and the transfer of the Assets shall be deemed to have
occurred, as of 12:01 a.m. local time on August 1, 1996 (the "Effective Date").
In the event that Closing has not occurred by October 31, 1996, then any party
not in default hereunder may terminate this Agreement without further
obligation.

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ARTICLE VIII. COMPANY'S AND SHAREHOLDERS' CONDITIONS TO CLOSE

The obligations of Company and Shareholders under this Agreement are
subject to the satisfaction on or prior to Closing, of the following conditions
(which may be waived in writing by Company or Shareholders, in whole or in
part):

8.1 Representations and Warranties True at Closing; Compliance
with Agreement. The representations and warranties of Buyer contained in this
Agreement and in any certificate or document delivered pursuant hereto shall be
deemed to have been made again at the Closing and shall then be true in all
respects. Buyer shall have performed and complied with all covenants,
agreements and conditions required by this Agreement to be performed or
complied with by it prior to or at Closing.

8.2 No Action/Proceeding. No action or proceeding before a court
or any other governmental agency or body shall have been instituted or
threatened to restrain or prohibit the transaction herein contemplated, and no
governmental agency or body or other entity shall have taken any other action
or made any request of Company, Shareholders or Buyer as a result of which
Company or Shareholders reasonably and in good faith deem that to proceed with
the transactions hereunder may constitute a violation of law. The waiting
periods specified under the Antitrust Improvements Act with respect to the
transactions contemplated by this Agreement will have lapsed or been
terminated.

8.3 Order Prohibiting Transaction. No order shall have been
entered in any action or proceeding before any court or governmental agency,
and no preliminary or permanent injunction by any court shall have been issued
which would have the effect of (a) making the transactions contemplated by this
Agreement illegal, or (b) otherwise preventing consummation of such
transactions. There shall have been no United States federal or state statute,
rule or regulations enacted or promulgated after the date of this Agreement
that would reasonably, directly or indirectly, result in any of the
consequences referred to in this paragraph.

8.4 Exhibits. The exhibits hereto will be completed to the
satisfaction of the parties.

ARTICLE IX. BUYER'S CONDITIONS TO CLOSE

The obligations of Buyer under this Agreement are subject to the
satisfaction, on or prior to Closing, of the following conditions (which may be
waived in writing by Buyer, in whole or in part):

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shall then be true in all respects. Company and Shareholders shall have
performed and complied with all covenants, agreements and conditions required
by this Agreement to be performed or complied with by them prior to or at
Closing.

9.2 Regulatory Approvals. Buyer shall have obtained (a)
certification for participation in the Medicaid Programs of the states where
the Business is conducted, (b) certification from the appropriate agency of the
federal government for participation in the federal Medicare Program, and (c)
all other consents, licenses, permits, approvals, provider contracts,
determinations or certificates of need necessary in the judgment of Buyer to
acquire the Stock and operate the Assets and Business as contemplated
hereunder.

9.3 No Action/Proceeding. No action or proceeding before a court
or any other governmental agency or body shall have been instituted or
threatened to restrain or prohibit the transaction herein contemplated, and no
governmental agency or body or other entity shall have taken any other action
or made any request of Company, Shareholders or Buyer as a result of which
Buyer reasonably and in good faith deems that to proceed with the transactions
hereunder may constitute a violation of law. The waiting periods specified
under the Antitrust Improvements Act with respect to the transactions
contemplated by this Agreement shall have lapsed or been terminated.

9.4 Inspection of Assets; U.C.C. Searches, etc. Buyer and its
representatives shall have had and continue to have reasonable rights of
inspection of the Business in connection with Buyer's due diligence review, and
the results of Buyer's inspection and due diligence review shall be acceptable
to it. Company and Shareholders shall have delivered to Buyer, at
Shareholders' expense, all U.C.C. financing statement and title searches, local
and central, including fixtures, and federal and state pending litigation, tax
lien and judgment searches, with respect to Company, including all "DBA's,"
tradenames and fictitious names of Company, dated no more than ten (10) days
prior to Closing.

9.5 Order Prohibiting Transaction. No order shall have been
entered in any action or proceeding before any court or governmental agency,
and no preliminary or permanent injunction by any court shall have been issued
which would have the effect of (a) making the transactions contemplated by this
Agreement illegal, (b) otherwise preventing consummation of such transactions,
or (c) imposing material limitations on the ability of Buyer effectively to
acquire and hold the Stock or Assets, to operate the Business, or, in any case,
to exercise rights of ownership pursuant thereto. There shall have been no
federal or state statute, rule or regulations enacted or promulgated after the
date of this Agreement that would reasonably result, directly or indirectly, in
any of the consequences referred to in this paragraph.

9.6 Confidentiality and Non-Compete Agreements. Shareholders and
key employees of Company, as reasonably determined by Buyer, shall execute and
deliver to Buyer a Confidentiality and Non-Compete Agreement in the forms
attached hereto as Exhibit 9.6.

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9.7 Employment Agreements. Buyer and Darrell Foreman shall have
entered into an employment agreement in the form attached hereto as Exhibit
9.7(a). Buyer and Craig Rotenberry shall have entered into an employment
agreement in the form attached hereto as Exhibit 9.7(b).

9.8 Operating Targets. As of the date of Closing, Company and
the Business shall meet the following minimum operating thresholds: (i) for the
seven (7) month period ended July 31, 1996, Company shall have achieved
annualized earnings before interest and taxes (adjusted for owner related and
non-recurring expenses) of no less than One Million Three Hundred Thousand and
No/100 Dollars ($1,300,000.00) (including an appropriate credit for earnings
related to unrecorded nutrition revenues, estimated to be $200,000 on an annual
basis); (ii) for the seven (7) month period ended July 31, 1996, Company shall
have achieved annualized net revenues of no less than Ten Million Five Hundred
Thousand and No/100 Dollars ($10,500,000.00); and (iii) that since December 31,
1995 and except as required in the ordinary and usual course of the Business,
no assets have been removed, distributed, assigned or paid by or from Company
or Shareholders. As of the date of Closing, the Assets shall have an aggregate
net book value of no less than Three Million Five Hundred Thousand and No/100
Dollars ($3,500,000.00). The Asset shall be free and clear of all liabilities
and encumbrances whatsoever other than the Assumed Liabilities.

9.9 Lease Agreement. Buyer and Shareholders shall have entered
into a lease in the form attached hereto as Exhibit 9.9.

9.10 Third Party Consents; Releases. Shareholders and Company
shall provide to the Buyer all third party consents, releases and
authorizations believed by Buyer to be necessary or advisable for the legal and
proper consummation of all agreements and transactions contemplated within this
Agreement, each in form and substance acceptable to Buyer.

9.11 Approval of Board of Directors. This Agreement and
consummation of the transactions contemplated hereunder shall have been
approved by the Board of Directors of Buyer.

9.12 Exhibits. The exhibits hereto will be completed to the
satisfaction of the parties.

ARTICLE X. OBLIGATIONS OF COMPANY AND SHAREHOLDERS AT CLOSING

At Closing, Company and Shareholders shall deliver or cause to be
delivered to Buyer the following in form and substance reasonably satisfactory
to Buyer:

10.1 Documents Relating to Title. Shareholders shall execute,
acknowledge, deliver and cause to be executed, acknowledged and delivered to
Buyer:

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(1) Stock certificates, registered in the name of the
Shareholders, duly endorsed by Shareholders or with stock powers attached,
representing all of the Stock.

(2) The resignation of each member of the Board of
Directors and each officer of Company effective as of the Closing.

10.2 Possession. Company shall deliver to Buyer full possession
and control of the Stock, Business and Assets.

10.3 Opinion of Counsel. Shareholders shall deliver to Buyer the
favorable opinion of counsel for Shareholders and Company which may be subject
to the Legal Opinion Accord of the ABA Section of Business Law (1991), dated as
of Closing, in the form attached hereto as Exhibit 10.3.

10.4 Corporate Good Standing and Corporate Resolution.
Shareholders shall deliver to Buyer certificates of good standing from the
Secretary of State of Company's state of organization, and from each
jurisdiction in which Company is qualified to do business, certified copies of
the Bylaws and charter of Company, and a certified copy of the resolutions of
the Board of Directors and Shareholders of Company authorizing the execution,
delivery and consummation of this Agreement and the execution, delivery and
consummation of all other agreements and documents executed in connection
herewith by them, including all assumption agreements and other instruments
required hereunder, sufficient in form and content to meet the requirements of
the law of the State of Company's incorporation relevant to such transactions
and certified by officers of Company to be validly adopted and in full force
and effect and unamended as of Closing.

10.5 Closing Certificate. Company shall deliver to Buyer a
certificate of an officer of Company and of Shareholders, dated as of Closing,
certifying that (a) each covenant and obligation of Company and Shareholders
have been complied with, and (b) each representation, warranty and covenant of
Company and Shareholders is true and correct at the Closing as if made on and
as of the Closing.

10.6 Third Party Consents. Shareholders shall deliver to Buyer
all consents, estoppels, approvals, releases, filings and authorizations of
third parties that Buyer believes are necessary or advisable for the legal and
proper execution, delivery and consummation of this Agreement, and the
transactions contemplated hereunder.

10.7 Releases. Shareholders shall deliver to Buyer executed
releases of all mortgages, security interests, liens, pledges, restrictions or
other encumbrances on or applicable to the Stock or Assets.

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request in order to effectively sell, convey, transfer and assign the same to
Buyer, to execute and deliver such further instruments and to take such other
actions as Buyer may reasonably request to release Buyer and Company from all
obligation and liability with regard to any obligation or liability retained or
assumed by Shareholders, and to execute and deliver such further instruments
and to cooperate with Buyer as Buyer may reasonably request or to enable Buyer
and Company to obtain all necessary health care or regulatory certifications,
approvals, consents and licenses, accreditation or permits.

10.9 Confidentiality, Employment and Lease Agreements.
Shareholders shall deliver to Buyer each of the agreements described in
paragraphs 9.6, 9.7 and 9.9.

10.10 Assumption Agreement. Shareholders shall deliver to Buyer
and the Company an Assumption Agreement evidencing that Shareholders shall be
jointly and severally responsible for all obligations pertaining to past
operations of the Business other than the Continuing Liabilities.

ARTICLE XI. OBLIGATIONS OF BUYER AT CLOSING

At Closing, Buyer shall deliver or cause to be delivered to
Shareholders the following in a form and substance reasonably satisfactory to
Shareholders:

11.1 Purchase Price. Buyer shall pay to Shareholders the Purchase
Price upon the terms specified in this Agreement.

11.2 Corporate Good Standing and Certified Board Resolutions.
Buyer shall deliver to Shareholders a certificate of good standing from the
Secretary of State of Delaware, dated the most recent practical date prior to
Closing, together with a certified copy of the resolutions of the Board of
Directors of Buyer authorizing the execution, delivery and consummation of this
Agreement and all other documents executed in connection herewith.

11.3 Closing Certificate. Buyer shall deliver to Shareholder a
certificate of an officer of Buyer, dated as of Closing, certifying that (a)
each covenant and obligation of Buyer has been complied with, and (b) each
representation, warranty and covenant of Buyer is true and correct at the
Closing as if made on and as of the Closing.

11.4 Opinion of Buyer's Counsel. Buyer shall deliver to
Shareholders a favorable opinion of counsel for Buyer, dated as of Closing, in
the form specified in Article XII hereof.

ARTICLE XII. OPINION OF BUYER'S COUNSEL

At the Closing, Buyer shall deliver to Shareholders an opinion of
Harwell Howard Hyne Gabbert & Manner, P.C. dated the date of the Closing and
pursuant to the Legal Opinion Accord of the ABA Paragraph of Business Law
(1991), in form and substance reasonably satisfactory to Shareholders and their
counsel to the effect that:

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(1) Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Tennessee and has
all requisite corporate power and corporate authority to own, operate and lease
its properties and assets and to carry on its business as now conducted.

(2) Buyer has the corporate power and corporate authority
to execute, deliver and carry out the terms of this Agreement and all documents
and agreements delivered by Buyer at Closing and to consummate the transactions
contemplated on the part of Buyer hereby and thereby; Buyer has taken all
action required by law, and its Certificate of Incorporation and Bylaws, to
authorize such execution, delivery and consummation of this Agreement, and this
Agreement, and all other agreements delivered by Buyer at Closing constitute
the valid and binding obligations of Buyer enforceable in accordance with their
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally and by general principles of equity.

ARTICLE XIII. SURVIVAL OF PROVISIONS AND INDEMNIFICATION

13.2 Indemnification by Shareholders. Subject to the provisions
of paragraph 13.4, Shareholders shall, jointly and severally, promptly
indemnify, defend, and hold harmless Buyer, Company and the directors,
officers, stockholders, employees and agents of each against any and all
losses, costs, and expenses (including reasonable cost of investigation, court
costs and legal fees actually incurred) and other damages resulting from (i)
any breach by either Company or Shareholders of any of the covenants,
obligations, representations or warranties or breach or untruth of any
representation, warranty, fact or conclusion contained in this Agreement or any
certificate or document of Company and/or Shareholders delivered pursuant to
this Agreement, (ii) any liability of Company not expressly retained by Company
or pursuant to Paragraph 1.4 hereof, and (iii) any claim (whether or not
disclosed herein) that is brought or asserted by any third party(s) against
Buyer or Company arising out of the ownership, licensing, operation or conduct
of the Business or Assets or the conduct of any of Company's employees, agents
or independent contractors, relating to all periods of time prior to the
Effective Date. Any indemnification payment made pursuant to this Article shall
include interest at a floating rate equal to two points over the prime rate of
Bankers Trust Company established from time to time (the "Rate") payable for
the period measured from the date that the loss, cost, expense or damage was
incurred until the date of payment.

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13.3 Indemnification by Company and Buyer. Subject to the
provisions of paragraph 13.4, Company and Buyer shall promptly indemnify,
defend, and hold Shareholders harmless against any and all losses, costs, and
expenses (including reasonable cost of investigation, court costs and legal
fees) and other damages resulting from (i) any breach by Buyer of any of its
covenants, obligations, representations or warranties or breach or untruth of
any representation, warranty, fact or conclusion contained in this Agreement or
any certificate or document of Buyer delivered pursuant to this Agreement, (ii)
any claim which is brought or asserted by any third party(s) against
Shareholders for failure to pay or perform any of the Continuing Liabilities,
and (iii) subject to the other provisions of this Agreement, any claim that is
brought or asserted by any third party(s) against Shareholders arising out of
the ownership, licensing, operation or conduct of the Business or the conduct
of any of Company's employees, agents or independent contractors, relating to
periods of time subsequent to the Closing Date. Any indemnification payment
pursuant to the foregoing shall include interest at the Rate from the date that
the loss, cost, expense or damage was incurred until the date of payment.

13.4 Rules Regarding Indemnification. The obligations and
liabilities of each party which may be subject to indemnification liability
hereunder (the "indemnifying party") to the other party (the "indemnified
party") shall be subject to the following terms and conditions:

(1) Claims by Non-parties. The indemnified party shall
give written notice within a reasonably prompt period of time to the
indemnifying party of any written claim by a third party which is likely to
give rise to a claim by the indemnified party against the indemnifying party
based on the indemnity agreements contained in this Article, stating the nature
of said claim and the amount thereof, to the extent known. The indemnified
party shall give notice to the indemnifying party that pursuant to the
indemnity, the indemnified party is asserting against the indemnifying party a
claim with respect to a potential loss from the third party claim, and such
notice shall constitute the assertion of a claim for indemnity by the
indemnified party. If, within thirty (30) days after receiving such notice, the
indemnifying party advises the indemnified party that it will provide
indemnification and assume the defense at its expense, then so long as such
defense is being conducted, the indemnified party shall not settle or admit
liability with respect to the claim and shall afford to the indemnifying party
and defending counsel reasonable assistance in defending against the claim. If
the indemnifying party assumes the defense, counsel shall be selected by such
party and if the indemnified party then retains its own counsel, it shall do so
at its own expense. If the indemnified party does not receive a written
objection to the notice from the indemnifying party within thirty (30) days
after the indemnifying party's receipt of such notice, the claim for indemnity
shall be conclusively presumed to have been assented to and approved, and in
such case the indemnified party may control the defense of the matter or case
and, at its sole discretion, settle or admit liability. If within the aforesaid
thirty (30) day period the indemnified party shall have received written
objection to a claim (which written objection shall briefly describe the basis
of the objection to the claim or the amount thereof, all in good faith), then
for a period of ten (10) days after receipt of such objection the parties shall
attempt to settle the dispute as between the indemnified and indemnifying
parties. If they are unable to settle the dispute, the unresolved issue or
issues shall be

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settled by arbitration in Nashville, Tennessee in accordance with the rules and
procedures of the American Arbitration Association.

(2) Claims by a Party. The determination of a claim
asserted by a party hereunder (other than as set forth in subparagraph (1)
above) pursuant to this Article shall be made as follows: The indemnified party
shall give written notice within a reasonably prompt period of time to the
indemnifying party of any claim by the indemnified party which has not been
made pursuant to subparagraph (1) above, stating the nature and basis of such
claim and the amount thereof, to the extent known. The claim shall be deemed to
have resulted in a determination in favor of the indemnified party and to have
resulted in a liability of the indemnifying party in an amount equal to the
amount of such claim estimated pursuant to this paragraph if within forty-five
(45) days after the indemnifying party's receipt of the claim the indemnified
party shall not have received written objection to the claim. In such event,
the claim shall be conclusively presumed to have been assented to and approved.
If within the aforesaid forty-five (45) day period the indemnified party shall
have received written objection to a claim (which written objection shall
briefly describe the basis of the objection to the claim or the amount thereof,
all in good faith), then for a period of sixty (60) days after receipt of such
objection the parties shall attempt to settle the disputed claim as between the
indemnified and indemnifying parties. If they are unable to settle the disputed
claim, the unresolved issue or issues shall be settled by arbitration in
Nashville, Tennessee in accordance with the rules and procedures of the
American Arbitration Association.

(3) Claims by a Straddle Patient. Any claim by a patient
relating to professional negligence or similar matters involving a patient
served both prior to the Effective Date and subsequent to the Effective Date
will be the responsibility of either Company or Shareholders in accordance with
the following guidelines: (i) if it is a claim in which the incident giving
rise to liability clearly arose on or prior to the Effective Date, Shareholders
shall jointly and severally respond to the loss and defense expenses; (ii)
subject to the other provisions of this Agreement, if it is a claim in which
the incident giving rise to liability clearly arose after the Effective Date,
Company shall respond to the loss and defense expenses; and (iii) in the event
that the incident giving rise to liability as to time is not clear,
Shareholders and Company will jointly defend the case and each will fully
cooperate with the other in such defense. Once the case is closed, if Company
and Shareholders cannot agree to the allocation of both indemnity and expenses,
then the matter shall be submitted to binding arbitration in Nashville,
Tennessee in accordance with the rules and procedures of the American
Arbitration Association.

ARTICLE XIV. PRESERVATION OF BUSINESS
AND NONCOMPETE RESTRICTIONS

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Shareholder shall directly or indirectly, (a) acquire, lease, manage, consult
for, serve as agent or subcontractor for, finance, invest in, own any part of
or exercise management control over any health care operation or business which
provides any goods or services competitive with the goods and services provided
by the Business as of the Closing, or (b) solicit for employment or employ any
person who at Closing or thereafter became an employee of Buyer, Company or an
affiliate unless such person is not so employed for at least six (6) months, or
(c) with respect to any customer, patient, physician, physician group, or
healthcare provider with whom Buyer, Company and/or an Affiliate contracts with
in connection with the Business, either solicit the same in a manner which
could adversely affect Buyer, Company or an Affiliate, or make statements to
the same which disparage Buyer, Company, an Affiliate or their respective
operations in any way. The "Non-Compete Period" shall commence at the Closing
and terminate on the fifth anniversary thereof. The "Non-Compete Area" shall
mean the area within a fifty (50) mile radius of each location from which the
Business is operated or conducted as of the Closing. Ownership of less than
five percent (5%) of the stock of a publicly held company shall not be deemed a
breach of this covenant nor shall the continued operations by an affiliate of
Shareholders of the existing infusion business of Happy Harry's, Inc. or the
sale or rental by Happy Harry's Inc. drug stores of their existing product line
as currently conducted. Buyer shall be granted an option to purchase such
infusion business by an option agreement in the form attached hereto as Exhibit
14.1.

14.2 Enforceability. In the event of a breach of paragraph 14.1,
Shareholders recognize that monetary damages shall be inadequate to compensate
Buyer and Company, and Buyer and Company shall be entitled, without the posting
of a bond or similar security, to an injunction restraining such breach, with
the costs (including attorney's fees) of securing such injunction to be borne
by Shareholders. Nothing contained herein shall be construed as prohibiting
Buyer or Company from pursuing any other remedy available to either for such
breach or threatened breach. All parties hereby acknowledge the necessity of
protection against the competition of Shareholders and that the nature and
scope of such protection has been carefully considered by the parties. The
period provided and the area covered are expressly represented and agreed to be
fair, reasonable and necessary. The consideration provided for herein is deemed
to be sufficient and adequate to compensate Shareholders for agreeing to the
restrictions contained in paragraph 14.1. If, however, any court determines
that the forgoing restrictions are not reasonable, such restrictions shall be
modified, rewritten or interpreted to include as much of their nature and scope
as will render them enforceable.

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ARTICLE XV. MISCELLANEOUS

15.1 Assignment. Following Closing, Buyer and Company may freely
assign any or all of their respective rights or delegate any or all of their
respective obligations under this Agreement without the express written consent
of Shareholders. No Shareholder may assign any rights or delegate any
obligations under this Agreement without the prior written consent of Buyer,
and any prohibited assignment or delegation will be null and void.

15.2 Other Expenses. Except as otherwise provided in this
Agreement, Shareholders shall jointly and severally pay all of their and
Company's expenses in connection with the negotiation, execution, and
implementation of the transactions contemplated under this Agreement and Buyer
shall pay all of its expenses in connection with the negotiation, execution,
and implementation of the transactions contemplated under this Agreement. All
sales and use taxes, recording fees and transfer taxes incurred in connection
under the transactions contemplated within this Agreement shall be jointly and
severally borne by Shareholders and paid at Closing. All ad valorem taxes
incurred and related to the Real Estate shall be shared by Shareholders
(jointly and severally) and Company and shall be prorated at Closing as of the
Effective Date, unless retained by Company as part of the Continuing
Liabilities.

15.3 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given: (a) if delivered
personally or sent by facsimile, on the date received, (b) if delivered by
overnight courier, on the day after mailing, and (c) if mailed, five days after
mailing with postage prepaid. Any such notice shall be sent as follows:

To Shareholders and, prior to Closing, Company:

Happy Harry's Health Care, Inc.
315 Ruthar Drive
Newark, Delaware 19711
ATTN: Alan Levin

with a copy to:

Robert Meyer
Bayard Handelman & Murdoch, P.A.
902 Market Street, 13th Floor
P.O. Box 25130
Wilmington, Delaware 19899

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To the Buyer and, after Closing to the Company:

American HomePatient, Inc.
5200 Maryland Way
Suite 400
Brentwood, Tennessee 37027
Attn: Edward K. Wissing

with a copy to:

Lauren W. Anderson
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238-1800

15.4 Confidentiality; Prohibition on Trading. Except for press
releases issued by Buyer in the ordinary course, all parties agree to maintain
the confidentiality of the existence of this Agreement and the transactions
contemplated hereunder, unless disclosure is required by law. Shareholders,
Company and their affiliates agree not to trade in the securities of Buyer or
its affiliates based upon any nonpublic information.

15.5 Controlling Law. This Agreement shall be construed,
interpreted and enforced in accordance with the laws of the State of Tennessee.

15.6 Headings. Any table of contents and paragraph headings in
this Agreement are for convenience of reference only and shall not be
considered or referred to in resolving questions of interpretation.

15.7 Benefit. Subject to paragraph 15.1, this Agreement shall be
binding upon and shall inure to the exclusive benefit of the parties hereto and
their respective heirs, legal representatives, successors and assigns. This
Agreement is not intended to, nor shall it, create any rights in any other
party.

15.8 Partial Invalidity. The invalidity or unenforceability of
any particular provision of this Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provisions were omitted. Further, there shall be
automatically substituted for such invalid or unenforceable provision a
provision as similar as possible which is valid and enforceable.

15.9 Waiver. Neither the failure nor any delay on the part of any
party hereto in exercising any rights, power or remedy hereunder shall operate
as a waiver thereof, or of any other right, power or remedy; nor shall any
single or partial exercise of any right, power or remedy preclude any further
or other exercise thereof, or the exercise of any other right, power or remedy.
No waiver of any of the provisions of this Agreement shall be void unless it is
in writing and signed by the party against which it is sought to be enforced.

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15.10 Counterparts. This Agreement may be executed simultaneously
in two or more counterparts each of which shall be deemed an original and all
of which together shall constitute but one and the same instrument.

15.11 Interpretation; Knowledge. All pronouns and any variation
thereof shall be deemed to refer to the masculine, feminine, neuter, singular
or plural as the identity of the person or entity, or the context, may require.
Further, it is acknowledged by the parties that this Agreement has undergone
several drafts with the negotiated suggestions of both; and, therefore, no
presumptions shall arise favoring either party by virtue of the authorship of
any of its provisions or the changes made through revisions. Whenever in this
Agreement the term "to the best knowledge of Company or Shareholders" or the
like is used, Company and Shareholders shall each be deemed to have the
knowledge of Company's officers, directors, Shareholders and employees, and of
its Affiliates; and Company and Shareholders shall each be under a duty of due
inquiry.

15.12 Entire Agreement. This Agreement, including the Exhibits and
Attachments hereto, constitutes the entire agreement between the parties hereto
with regard to the matters contained herein and it is understood and agreed
that all previous undertakings, negotiations, letter of intent and agreements
between the parties are merged herein. This Agreement may not be modified
orally, but only by an agreement in writing signed by Buyer, Company and
Shareholders.

15.13 Further Assurance of Shareholders After Closing. Subsequent
to the Closing, Shareholders shall from time to time, at Buyer's request,
execute and deliver such other instruments of conveyance and transfer, and take
such other action as Buyer may request, in order to more effectively sell,
transfer, assign and deliver and vest in Buyer and Company, as the case may be,
the benefits of, title to and possession of the Stock and Assets.

15.14 Legal Fees and Costs. In the event any party hereto incurs
legal expenses to enforce or interpret any provision of this Agreement, the
prevailing party will be entitled to recover such legal expenses, including,
without limitation, attorney's fees, costs and disbursements, in addition to
any other relief to which such party shall be entitled.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

"COMPANY":

HAPPY HARRY'S HEALTH CARE, INC.
By: /s/ Darrell Foreman
----------------------------------------------

Title: President
----------------------------------------------

"SHAREHOLDERS":

/s/ Diane Levin-Widder, by Alan Levin authorized signer
-------------------------------------------------------
DIANE LEVIN-WIDDER

/s/ Alan Levin
-------------------------------------------------------
ALAN LEVIN

/s/ Darrell Foreman
-------------------------------------------------------
DARRELL FOREMAN

/s/ Carol Korda, by Alan Levin authorized signer
-------------------------------------------------------
CAROL KORDA

"BUYER":

AMERICAN HOMEPATIENT, INC.

By: /s/ Edward K. Wissing
----------------------------------------------

Title: President
----------------------------------------------
<PAGE> 41
PROXY

I, the undersigned, as Trustee and individually, hereby constitute and
appoint ALAN B. LEVIN as proxy and in substitution for the undersigned to vote
for me as a stockholder all of my stock of Happy Harry's Health Care, Inc. on
all matters which may be necessary or appropriate during the period from this
date through September 6, 1996, with respect to the approval of the
stockholders of an agreement to sell the stock or assets of the corporation to
American HomePatient Inc. This Proxy is irrevocable and is coupled with an
interest.

In witness whereof, the undersigned has hereunto set her hand and seal
this 25th day of August, 1996.

/s/ Diane Levin Widder
-------------------------------
DIANE LEVIN WIDDER as the sole
Trustee of the Revocable Trust
of Diane S. Levin U/A dated
5/29/87, as amended, and in
her individual capacity

<PAGE> 42
PROXY

I, the undersigned, hereby constitute and appoint ALAN B. LEVIN as
proxy and in substitution for the undersigned to vote for me as a stockholder
all of my stock of Happy Harry's Health Care, Inc. on all matters which may be
necessary or appropriate during the period from this date through September 6,
1996, with respect to the approval of the stockholders of an agreement to sell
the stock or assets of the corporation to American HomePatient Inc. This
Proxy is irrevocable and is coupled with an interest.

In witness whereof, the undersigned has hereunto set her hand and seal
this 22th day of August, 1996.

/s/ Carol Korda
-------------------------------
CAROL KORDA
(formerly Carol Levin Kay)

<PAGE> 1

EXHIBIT 10.5

STOCK PURCHASE AGREEMENT

AMONG

PENN OXYGEN SERVICES, INC.

THE COMPANY,

WILLIAM C. CLOONAN, JR.
AND MICHAEL E. HICKEY

THE SHAREHOLDERS,

AND

AMERICAN HOMEPATIENT, INC.

THE BUYER

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<S> <C>
ARTICLE I. PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Assets at Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Excluded Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Continuing Contracts, Leases and Liabilities . . . . . . . . . . . . . . . . . . . 3
1.5 Delivery of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ARTICLE II. RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Collection of Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ARTICLE III. PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Interest Constituting Additional Purchase Price . . . . . . . . . . . . . . . . . 5
3.3 Earn-Out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF
THE SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1 Organization, Qualification and Authority . . . . . . . . . . . . . . . . . . . . 6
4.2 Capitalization and Stock Ownership. . . . . . . . . . . . . . . . . . . . . . . . 7
4.3 Absence of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.4 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.5 Operations Since December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 8
4.6 Absence of Certain Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.7 Employment Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.8 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.9 Medicare, Medicaid and Other Third-Party Payors . . . . . . . . . . . . . . . . . 11
4.10 [OMITTED] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.11 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.12 Leases and Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.14 Miscellaneous Representations Relating to Real Estate . . . . . . . . . . . . . . 15
4.15 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.16 Company Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.17 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.18 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.19 Broker's or Finder's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.20 Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.21 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.22 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.23 Motor Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.24 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>

i
<PAGE> 3

<TABLE>
<S> <C>
4.25 Compliance with Healthcare and Other Laws . . . . . . . . . . . . . . . . . . . . 18
4.26 Condition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.27 WARN Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.28 Tax Returns; Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.29 No Omissions or Misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . 19
5.1 Organization, Qualification and Authority . . . . . . . . . . . . . . . . . . . . 19
5.2 Absence of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.3 Broker's or Finder's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.4 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.5 No Omissions or Mistatements . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

ARTICLE VI. COVENANTS OF PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.1 Preservation of Business and Assets . . . . . . . . . . . . . . . . . . . . . . . 21
6.2 Absence of Material Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.3 Access to Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.4 Medicare and Medicaid Reporting . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.5 Current Return Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.6 Preserve Accuracy of Representations and Warranties . . . . . . . . . . . . . . . 24
6.7 Maintain Books and Accounting Practices . . . . . . . . . . . . . . . . . . . . . 24
6.8 Indebtedness; Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.9 Compliance with Laws and Regulatory Consents . . . . . . . . . . . . . . . . . . . 24
6.10 Maintain Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.11 No Sale, Merger or Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.12 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

ARTICLE VII. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

ARTICLE VIII. COMPANY'S AND SHAREHOLDERS' CONDITIONS TO CLOSE . . . . . . . . . . . . . . . . . . . 25
8.1 Representations and Warranties True at Closing;
Compliance with Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.2 No Action/Proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.3 Order Prohibiting Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . 26

ARTICLE IX. BUYER'S CONDITIONS TO CLOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.1 Representations and Warranties True at Closing;
Compliance with Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.2 Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.3 No Action/Proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.4 Inspection of Assets; U.C.C. Searches, etc. . . . . . . . . . . . . . . . . . . . 27
9.5 Order Prohibiting Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>

ii
<PAGE> 4

<TABLE>
<S> <C>
9.6 [OMIT] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.7 Cloonan Employment Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.8 Operating Targets and Value of Assets. . . . . . . . . . . . . . . . . . . . . . . 27
9.9 Lease Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.10 Third Party Consents; Releases . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.11 Approval of Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.12 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ARTICLE X. OBLIGATIONS OF COMPANY AND SHAREHOLDERS AT CLOSING . . . . . . . . . . . . . . . . . . . 28
10.1 Documents Relating to Title . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.2 Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.4 Corporate Good Standing and Corporate Resolution . . . . . . . . . . . . . . . . . 29
10.5 Closing Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.6 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.7 Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.8 Additionally Requested Documents; Post-Closing Assistance . . . . . . . . . . . . 29
10.9 Employment, Consulting and Lease Agreements . . . . . . . . . . . . . . . . . . . 30
10.10 Assumption Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

ARTICLE XI. OBLIGATIONS OF BUYER AT CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.1 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.2 Corporate Good Standing and Certified Board Resolutions . . . . . . . . . . . . . 30
11.3 Closing Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.4 Opinion of Buyer's Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

ARTICLE XII. OPINION OF BUYER'S COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

ARTICLE XIII. SURVIVAL OF PROVISIONS AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . 31
13.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
13.2 Indemnification by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 31
13.3 Indemnification by Company and Buyer . . . . . . . . . . . . . . . . . . . . . . . 32
13.4 Rules Regarding Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 32

ARTICLE XIV. PRESERVATION OF BUSINESS AND NONCOMPETE RESTRICTIONS . . . . . . . . . . . . . . . . . 34
14.1 Covenant Not to Compete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
14.2 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

ARTICLE XV. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
15.1 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
15.2 Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
15.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>

iii
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<TABLE>
<S> <C> <C>
15.4 Confidentiality; Prohibition on Trading . . . . . . . . . . . . . . . . . . . . . 36
15.5 Controlling Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
15.6 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
15.7 Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
15.8 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
15.9 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
15.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
15.11 Interpretation; Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
15.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
15.13 Further Assurance of Shareholders After Closing . . . . . . . . . . . . . . . . . 37
15.14 Legal Fees and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>

iv
<PAGE> 6

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT is entered into on September 30,
1996, by and among PENN OXYGEN SERVICES, INC., a Pennsylvania corporation
("Company"), WILLIAM C. CLOONAN, JR. and MICHAEL E. HICKEY (collectively, the
"Shareholders"), and AMERICAN HOMEPATIENT, INC., a Tennessee corporation
("Buyer").

R E C I T A L S:

WHEREAS, Shareholders own all of the issued and outstanding capital
stock of the Company (the "Stock"); and

WHEREAS, Shareholders desire to sell and transfer the Stock to Buyer,
and Buyer desires to purchase the same from Shareholders, subject to the terms
and conditions set forth in this Agreement.

ARTICLE I. PURCHASE AND SALE

1.2 Assets at Closing. Subject to paragraph 1.3, at Closing the
Company shall own or lease, as specified, all its assets, tangible and
intangible, real and personal (collectively, the "Assets"), free and clear of
all encumbrances, mortgages, pledges, liens,

1
<PAGE> 7

security interests, obligations and liabilities other than the Continuing
Liabilities (as defined in paragraph 1.4), which Assets shall include, without
limitation, the following:

(1) All tangible personal property, medical and other
equipment, machinery, data processing hardware and software, furniture,
furnishings, appliances, vehicles and other tangible personal property of every
description and kind and all replacement parts therefor used in connection with
the Business including, without limitation, the items listed on Exhibit 1.2(1)
attached hereto (collectively, the "Equipment and Furnishings");

(2) All inventory of goods and supplies used or
maintained in connection with the Business reflected on the Financial
Statements (collectively, the "Inventory");

(3) All accounts and notes receivables (the
"Receivables");

(4) All cash, bank accounts (as listed by name and
address of banking institution, account name and account and routing numbers on
Exhibit 1.2(4) attached hereto), money market accounts, other accounts,
certificates of deposit and other investments of the Company (the "Cash and
Cash Equivalents");

(5) All patient, medical, personnel, corporate and other
records related to the Business (including both hard and microfiche copies),
and all manuals, books and records used in operating the Business, including,
without limitation, personnel policies and files and manuals, accounting
records, and computer software;

(6) To the full extent transferable, all licenses,
permits, registrations, certificates, consents, accreditations, approvals and
franchises necessary to operate and conduct the Business, together with
assignments thereof, if required, and all waivers which the Company currently
has, if any, of any requirements pertaining to such licenses, permits,
registrations, certificates, consents, accreditations, approvals and
franchises;

(7) All goodwill, and, to the extent assignable by the
Company, all warranties (express or implied) and rights and claims related to
the Assets or the operation of the Business;

(8) All prepaid expenses reflected on the Financial
Statements;

(9) Contract and leasehold rights and interests pursuant
to contracts for purchase or lease of personal property, construction
contracts, contracts for purchase, sale or lease of equipment, goods or
services currently furnished or to be furnished in connection with the Business
and that are approved by Buyer (as such term is defined herein);

2
<PAGE> 8

(10) All intangible or intellectual property owned,
leased, licensed or possessed by either the Company or the Shareholders and
utilized in connection with the Business, including without limitation, the
name "Penn Oxygen Services, Inc.," and derivatives thereof, to the extent the
Company or any Shareholder has rights in or to each such name; and

(11) All right, title and interest in and to all of the
land and real estate owned or leased by the Company, except as noted in
paragraph 1.3, as listed in Exhibit 1.2(11) attached hereto and in and to all
structures, improvements, fixed assets and fixtures including fixed machinery
and fixed equipment situated thereon or forming a part thereof (collectively
with the real estate noted in paragraph 1.3, the "Real Estate").

1.3 Excluded Items. Immediately prior to conveyance of the Stock,
Company shall convey to the Shareholders its fee simple interest in the Real
Estate used in connection with the Business located at One McCormack Road,
Pittsburgh, Pennsylvania and shall transfer to the Shareholders all debts,
liabilities and other obligations of any nature whatsoever, whether known or
unknown, contingent or otherwise, other than the Continuing Liabilities as
specifically set forth in paragraph 1.4(1)(the "Excluded Items"). The parties
acknowledge and agree that Shareholders and Company are not conveying to Buyer
any of the Excluded Items and that, following Closing, neither Company nor
Buyer will have any right, title, interest or obligation with respect to the
Excluded Items other than a lease as tenant for the Real Estate at One
McCormack Road, Pittsburgh, Pennsylvania.

1.4 Continuing Contracts, Leases and Liabilities.

(1) At Closing, Company will retain and agree to pay or
perform, as the case may be, only (a) those obligations constituting working
capital liabilities incurred in the ordinary course of business existing on the
Effective Date (as defined) other than long term interest bearing debt, which
Company expressly elects to retain as specifically set forth on Exhibit 1.4
attached hereto, (b) those obligations constituting working capital liabilities
incurred in the ordinary course of business on and after the Effective Date as
described on Exhibit 1.4, other than long-term and interest bearing debt, and
(c) those obligations arising on and after the Effective Date under those
Leases and Contracts (as defined in paragraph 4.12) except as expressly noted
in Exhibit 4.12 (collectively, the "Continuing Liabilities").

(2) Buyer is not assuming any debt, liability or
obligation of the Company or of Shareholders and, except for the Continuing
Liabilities, it is expressly agreed and understood by each of the parties to
this Agreement that after the Closing, Company shall not retain or be liable
for, any debt, liability or obligation related to the operation of the Business
prior to the Closing or of Shareholders of any type or description whatsoever,
whether related or unrelated to the Stock, the Business or the transactions
contemplated under this Agreement and that Shareholders shall be jointly and
severally liable and

3
<PAGE> 9

responsible for the payment or performance, as the case may be, of the same.
Notwithstanding any statement contained in this Agreement or otherwise
seemingly to the contrary, Company shall not be obligated to retain (nor shall
Buyer be directly or indirectly liable for) Continuing Liabilities pursuant to
clause (a) of paragraph 1.4(1) in excess of, in the aggregate, Five Hundred
Twenty-Five Thousand and No/100 Dollars ($525,000.00) (the "Continuing
Liabilities Cap").

(3) In the event that Company elects to retain Continuing
Liabilities in excess of the Continuing Liabilities Cap, then that portion of
the Purchase Price (as such term is defined herein) payable by wire transfer at
Closing shall be reduced on a dollar-for-dollar basis to the full extent of
such excess. In the event the Continuing Liabilities are less than the
Continuing Liabilities Cap, Buyer shall pay such difference to the Shareholders
in immediately available funds at Closing, without interest.

ARTICLE II. RECEIVABLES

2.1 Collection of Receivables. After Closing, Company will
proceed to collect the Receivables. Shareholders shall provide such assistance
in the collection process as Company or Buyer may reasonably request. If,
within 180 days following Closing, Buyer and Company have collected less than
the amount of the Receivables reflected in the Interim Financial Statements (as
such term is defined in paragraph 4.4(1)) in excess of the reserves set forth
therein, (a) Shareholders shall, jointly and severally, promptly pay Buyer, or
the Purchase Price shall be reduced by, the amount of such shortfall, and (b)
Shareholders agree, jointly and severally, to prepare at their cost revised
historical financial statements pertaining to the applicable pre-Closing period
and reflecting the impact of the less-than-anticipated collections.

ARTICLE III. PURCHASE PRICE

3.1 Purchase Price. The purchase price payable by Buyer to
Shareholders for the Stock and in consideration for the agreements contained
herein, including the agreements contained in Article XIV hereof, shall be Six
Million Seven Hundred Seventy-Four Thousand and No/100 Dollars ($6,774,000.00)
(the "Purchase Price"). The Purchase Price shall be subject to adjustment as
set forth in this Agreement and shall be payable at

4
<PAGE> 10

Closing to the Shareholders in the respective amounts set forth in the Closing
Statement delivered at Closing and in the following manner:

(1) Three Hundred Thousand and No/100 Dollars
($300,000.00) by a non-negotiable, unsecured promissory note (the "Note"), the
form of which is attached hereto as Exhibit 3.1(1); and

(2) Four Hundred Fifty-Six Thousand Three Hundred Twenty
and No/100 Dollars ($456,320.00) (the "Escrowed Funds) by deposit of good funds
by wire transfer into an interest earning escrow account pursuant to the terms
of an escrow agreement (the "Escrow Agreement"), the form of which is attached
hereto as Exhibit 3.1(2); and

(3) The remainder, currently estimated to be Six Million
Seventeen Thousand Six Hundred Eighty and No/100 Dollars ($6,017,680.00), in
immediately available funds at Closing by wire transfer. If the Company
retains Continuing Liabilities pursuant to clause (a) of paragraph 1.4(1) in
excess of the Continuing Liabilities Cap, this portion of the Purchase Price
will be reduced by the amount of such excess, and if the Company retains
Continuing Liabilities pursuant to clause (a) of paragraph 1.4(1) of less than
the Continuing Liabilities Cap, this portion of the Purchase Price will be
increased by the amount of the shortfall.

3.2 Interest Constituting Additional Purchase Price. In addition
to the Purchase Price described in paragraph 3.1, Buyer shall deliver to
Shareholders, in cash at Closing, interest on that portion of the Purchase
Price noted in paragraphs 3.1(1) ($300,000.00) and 3.1(3) (up to but not in
excess of $6,017,680.00) at the rate of seven percent (7%) per annum from the
Effective Date through Closing. In addition, Buyer shall also deposit into
escrow pursuant to the Escrow Agreement interest on that portion of the
Purchase Price noted in Paragraph 3.1 (2) at the foregoing rate and for the
foregoing period.

3.3 Earn-Out. (1) Buyer shall pay to Shareholders up to One
Million Three Hundred Seventy-Six Thousand and No/100 Dollars ($1,376,000.00)
as additional Purchase Price for the Stock if the Company achieves, for the six
(6) month period beginning October 1, 1996 and ending March 31, 1997, a gross
margin in excess of One Million Eight Hundred Four Thousand One Hundred and
No/100 Dollars ($1,804,100.00). The amount of the earn-out shall be the
product of the excess of the Company's gross margin for such six (6) month
period (the "Gross Margin") over One Million Eight Hundred Four Thousand One
Hundred and No/100 Dollars ($1,804,100.00) multiplied by 8.03; provided,
however, that in no event will the earn-out payment exceed One Million Three
Hundred Seventy-Six Thousand and No/100 Dollars ($1,376,000.00).

(2) For purposes of this paragraph 3.3, "Gross Margin" is
defined as net revenues of the Company less bad debt expense and less cost of
sales for the six-month

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<PAGE> 11

period; and "cost of sales" will be determined according to the classifications
reflected in the Company's Interim Financial Statements dated August 31, 1996.

(3) Buyer will prepare the financial statements of the
Company for the six (6) month period ended March 31, 1997 in accordance with
generally accepted accounting principals and the policies set forth in Exhibit
3.3 attached hereto. Buyer will deliver such financial statements to the
Shareholders on or before April 30, 1997. Buyer will also provide to
Shareholders access to all documentation created in the preparation of the
financial statements. If Shareholders dispute the Gross Margin of the Company
as reflected in the financial statements prepared by Buyer, they must provide
Buyer written notice setting forth in reasonable detail the nature of the
dispute and deliver the same within fifteen (15) days of delivery of the
financial statements by Buyer. If no such notice is timely delivered, the
Shareholders will be deemed to have accepted the financial statements as
accurate. If such a notice is delivered, then for a period of thirty (30) days
after receipt of such notice the parties will attempt in good faith to settle
the dispute. If they are unable to settle the dispute, the unresolved issue or
issues will be settled by a "Big 6" independent certified public accounting
firm jointly selected by Shareholders, on the one hand, and Buyer, on the other
hand, who shall share equally the expenses of such engagement. In such event,
determination by the accounting firm will be deemed final and conclusive. Once
final determination of the Gross Margin amount is made, either by agreement of
the parties or by determination of a duly selected accounting firm, Buyer shall
pay Shareholders whatever earn-out is due under this paragraph 3.3, if any,
within five (5) business days.

ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF
THE SHAREHOLDERS

4.1 Organization, Qualification and Authority. Company is a
corporation duly organized, validly existing and in good standing in the State
of Pennsylvania. Since the date of its organization and incorporation, Company
has observed and operated within the corporate formalities of the jurisdiction
in which it is incorporated and has observed and complied with the general
corporation law of such jurisdiction, except where the failure to do so would
not have a material adverse effect on the Company or Business. Company has
full power and authority to own, lease and operate its facilities and assets as
presently owned, leased and operated and to carry on its business as it is now
being conducted; provided, however, that Company is not qualified to do
business in the State of West Virginia, and any fines or penalties arising from
such failure prior to Closing shall be the

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<PAGE> 12

responsibility of Shareholders. Company owns no capital stock, security,
interest or other right, or any option or warrant convertible into the same, of
any corporation, partnership, joint venture or other business enterprise.
Company and Shareholders have the full right, power and authority to execute,
deliver and carry out the terms of this Agreement and all documents and
agreements necessary to give effect to the provisions of this Agreement, to
consummate the transactions contemplated on the part of each such party
hereunder, and to take all actions necessary, in their respective capacities,
to permit or approve the actions of Company and Shareholders taken in
connection with this Agreement. The execution, delivery and consummation of
this Agreement, and all other agreements and documents executed in connection
herewith by Company and Shareholders, have been duly authorized by all
necessary action on the part of such parties. This Agreement and all other
agreements and documents executed in connection herewith by Company and/or
Shareholders, upon due execution and delivery thereof, shall constitute the
valid and binding obligations of Company and/or Shareholders, as the case may
be, enforceable in accordance with their respective terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally and by general principles of equity.

4.2 Capitalization and Stock Ownership. Except for Shareholders
and, indirectly, their spouses, no other person or entity owns or holds, has
any interest in, whether legal, equitable or beneficial, or has the right to
purchase, any capital stock or other security of Company. Notwithstanding
anything to the contrary contained in paragraph 4.1 or this paragraph 4.2, the
representations and warranties of an individual Shareholder as to the right,
power and capacity of the other Shareholder are made to the best knowledge of
such Shareholder. The Stock, being 10,000 shares, $1.00 par value, of common
stock constitutes all issued and outstanding securities of Company, is duly
authorized, validly issued, fully paid and nonassessable, and is owned free and
clear of any liens, charges, encumbrances, security interests, pledges or any
other restrictions whatsoever. At Closing, Company shall have no outstanding
subscriptions, options, warrants, calls, contracts, convertible securities or
other instruments, agreements or arrangements of any nature whatsoever under
which Company is obligated or compelled to issue any capital stock, security or
interest of any kind, or to transfer or modify any right with respect to any
capital stock, security or other interest, and no one has any preemptive
rights, right of first refusal or similar rights with respect to the Stock or
any equity interest in Company. Neither Company nor Shareholders are a party
to any, and there exist no, voting trusts, stockholder agreements, pledge
agreements or other agreements relating to or restricting the transferability
of any shares of the Stock or equity interests of Company. The Stock has been
issued in accordance with all applicable federal and state securities laws.

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<PAGE> 13

result in a material breach of, constitute a material default under, create (or
cause the acceleration of the maturity of) any debt, indenture, obligation or
liability affecting Company or its Business or rights in the Stock, result in
the creation or imposition of any security interest, lien, charge or other
encumbrance upon any of the Stock, or otherwise materially adversely affect
Buyer, Company or the Business under: (a) any term or provision of the Charter
or Bylaws of Company; (b) any contract, lease, purchase order, agreement,
document, instrument, indenture, mortgage, pledge, assignment, permit, license,
approval or other commitment to which Company and/or any Shareholders is a
party or by which Company, any Shareholder, Stock or the Assets are bound; (c)
any judgment, decree, order, regulation or rule of any court or regulatory
authority; or (d) any law, statute, rule, regulation, order, writ, injunction,
judgment or decree of any court or governmental authority or arbitration
tribunal to which Company, any Shareholder, Stock and/or the Assets are
subject.

4.4 Financial Statements.

(1) Attached hereto as Exhibit 4.4 are true and correct
copies of Company's audited balance sheet as of December 31, 1995, and its
audited income statements for the year then ending (the "Fiscal Year Financial
Statements"), and the interim unaudited balance sheet and income statement of
Company for the eight (8) month period ended August 31, 1996 (the "Interim
Financial Statements" which with the Fiscal Year Financial Statements shall be
the "Financial Statements"). Except as set forth in Exhibit 4.4 attached
hereto, the Financial Statements are based on the books and records of Company
and present fairly, in compliance with generally accepted accounting
principles, the financial position of Company as of, and the results of its
operations for, the periods specified.

(2) Shareholders shall fully and readily cooperate with
Buyer in Buyer's attempt to perform an audit of Company for any period prior to
Closing not already audited.

4.5 Operations Since December 31, 1995 . Except as set forth in
Exhibit 4.5 attached hereto, since December 31, 1995 there has been no:

(2) loss, damage or destruction of or to any material
portion of the Assets, whether or not covered by insurance;

(3) sale, lease, transfer or other disposition by Company
of, or mortgages or pledges of or the imposition of any lien, charge or
encumbrance on, any portion of the

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<PAGE> 14

Assets, other than the Excluded Real Estate and those transfers made in the
ordinary course of business;

(4) increase in the compensation payable by Company,
other than in the ordinary course of business, to any of its Shareholders,
employees, directors, independent contractors or agents, or increase in, or
institution of, any bonus, insurance, pension, profit-sharing or other employee
benefit plan or arrangements made to, for or with the employees, directors,
independent contractors or agents of Company;

(5) cumulative net operating loss incurred in the
operation of the Business;

(6) adjustment or write-off of Receivables or reduction
in reserves for Receivables outside of the ordinary course of business;

(7) material change in the accounting methods or
practices employed by Company or change in adopted depreciation or amortization
policies;

(9) payment by Company of any dividend, distribution or
extraordinary or unusual disbursement or expenditure or intercompany payable;

(10) sale, transfer, pledge, mortgage or other disposition
of any of the Stock or the Assets (except inventory and equipment held for rent
in the ordinary course of business and consistent with Company's past
practice); or merger, consolidation or similar transaction;

(11) other than as set forth in the Interim Financial
Statements, security interest, guarantee or other encumbrance, or other than in
the ordinary course of business, obligation or liability, in each case whether
absolute, accrued, contingent or otherwise, or whether due or to become due,
incurred or paid by Company to any person or entity; or the making by Company
of any loan or advance to, or an investment in, any person or entity;

(12) strike, work stoppage or other labor dispute
adversely affecting the Business; or

(13) termination, waiver or cancellation of any material
rights or material claims of Company, under contract or otherwise.

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<PAGE> 15

4.6 Absence of Certain Liabilities. Except as set forth in the
Interim Financial Statements, Company has, and as of the Closing will have, no
contingent liabilities or obligations.

4.7 Employment Discrimination. There is not pending or, to the
best knowledge of the Company or Shareholders, threatened, any claim, action or
proceeding against Company (or any officer, director, employee, agent or
Shareholder of Company) arising out of any statute, ordinance or regulation
relating to wages, collective bargaining, discrimination in employment or
employment practices or occupational safety and health standards (including,
without limitation, 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, or the Americans With Disabilities
Act).

4.8 Licenses and Permits.

(1) Company has all local, state and federal licenses,
permits, registrations, certificates, contracts, consents, accreditations and
approvals (collectively, the "Licenses and Permits") necessary for Company to
occupy, operate and conduct the Business. There is no default on the part of
Company under any of the Licenses and Permits. There exists no grounds for
revocation, suspension or limitation of any of the Licenses or Permits. Copies
of each of the Licenses and Permits are attached to and listed on Exhibit
4.8(1) attached hereto. The most recent licensure surveys, deficiency reports
and plans of correction related to each of these items has also been included
in Exhibit 4.8(1). Company is, and at the time of Closing will be, licensed by
the regulatory bodies listed on Exhibit 4.8(1). No written notices have been
received by Company or Shareholders with respect to any threatened, pending, or
possible revocation, termination, suspension or limitation of the Licenses and
Permits.

(2) Company is not required to have any certificates of
need or similar authorizations in order to operate the Business.

(3) Each employee of Company has all Licenses and Permits
required for each such employee to perform such employee's designated functions
and duties for Company in connection with conducting the Business, and there
exists no waivers or exemptions relating thereto. To the best knowledge of the
Company and Shareholders, there is no default under, nor, to the best knowledge
of the Company and Shareholders,

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<PAGE> 16

does there exist any grounds for revocation, suspension or limitation of, any
such Licenses and Permits.

(4) Company is duly accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") to operate and conduct the
Business. Included in Exhibit 4.8(4) attached hereto are the certificates of
accreditation issued by the JCAHO, and copies of the most recent JCAHO
accreditation survey report, including a list of deficiencies, if any.

4.9 Medicare, Medicaid and Other Third-Party Payors.

(1) Company participates in the Medicare and Medicaid
Programs (collectively, the "Programs"). A list of and copies of its existing
Medicare and Medicaid contracts and other documentation evidencing such
participation (collectively, the "Program Agreements") are included in Exhibit
4.12 attached hereto. Company is, and will be at the time of Closing, in
material compliance with all of the terms, conditions and provisions of the
Program Agreements.

(2) No notice of any offsets against future
reimbursements under or pursuant to the Programs has been received by either
Company or Shareholders, nor, to the best knowledge of the Company and
Shareholders, is there any basis therefor. There are no pending appeals,
adjustments, challenges, audits, litigation, notices of intent to recoup past
or present reimbursements with respect to the Programs. Company has not been
subject to or, to the best knowledge of the Company and Shareholders,
threatened with loss of waiver of liability for utilization review denials with
respect to the Programs during the past twelve (12) months, nor has either
Company or Shareholders received notice of any pending, threatened or possible
decertification or other loss of participation in, any of the Programs.

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<PAGE> 17

Effective Date through Closing so long as such offsets are not caused by the
willful acts or omissions, or gross negligence, of Shareholders, Company and/or
their respective employees, representatives or agents. Buyer acknowledges that
Shareholders have the right to review documentation regarding any offsets for
which they are responsible and to contest the same in good faith. In the event
Shareholders successfully contest any such offsets, Buyer shall promptly pay
Shareholders an amount equal to any funds or credits received as a direct
result of such contest, less the amount of any reimbursements, including
interest, due Buyer from Shareholders and not properly paid.

4.10 [OMITTED]

4.11 Title to Assets.

(1) Company is the sole legal and beneficial owner of the
personal property included in the Assets, free and clear of all security
interests, liens, leases, covenants, assessments, options, rights of refusal,
restrictions, reservations, defects in the title, and other encumbrances,
except as set forth in the Leases and Contracts. The Assets are all the assets
set forth on the Interim Financial Statements or used in the operation of the
Business.

(2) The descriptions of the Real Estate contained in
Exhibit 1.2(11) are accurate and, along with the Excluded Items, include all
real property and used in connection with the Business or set forth on the
Interim Financial Statements. Company owns no Real Estate other than the
parcel described in paragraph 1.3. Company is in lawful possession of all of
the Real Estate, including, without limitation, the buildings, structures and
improvements situated thereon and appurtenances thereto, in each case free and
clear of all mortgages, liens and other encumbrances or restrictions that are
related to or impair the Assets or the Business. Additionally, the execution
of the Lease referenced in paragraph 9.9, when coupled with the conveyance of
the Stock to Buyer as contemplated by the terms of this Agreement, will vest in
Buyer, either directly or indirectly through Company, the lawful right to
possess and use the Real Estate, superior in right to all others.

4.12 Leases and Contracts.

(1) Exhibit 4.12 attached hereto sets forth a complete
and accurate list of all contracts, including, without limitation, the Program
Agreements, agreements, purchase orders, leases, subleases, options and
commitments, oral or written, and all assignments, amendments, schedules,
exhibits and appendices thereof, affecting or relating to the Business, Stock
or any Asset or any interest therein, to which either Company and/or
Shareholders are a party or by which Company, the Assets or the Business is
bound or affected, including, without limitation, service contracts, management
agreements, equipment leases and building leases pertaining to any part of the
Real Estate, but

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<PAGE> 18

excluding contracts terminable by the Company without liability or expense on
sixty (60) days' notice or less which involve payment by or to the Company of
either (i) less than $5,000.00 as to any one contract, or (ii) less than
$10,000.00 as to any related group of contracts (collectively, the "Leases and
Contracts"). Attached to Exhibit 4.12 are accurate and complete copies of all
written Leases and Contracts and written summaries of key terms of all oral
Leases and Contracts. Except for the Continuing Liabilities, all obligations
under the Leases and Contracts shall be jointly and severally assumed by the
Shareholders.

(5) No purchase commitment by Company is in excess of
Company's ordinary business requirements.

(6) Conveyance to Buyer of the Stock will not default,
alter or terminate any of the Leases and Contracts, and Buyer, directly or
through Company, will be entitled to all rights thereunder.

4.13 Environmental Matters.

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<PAGE> 19

formaldehyde, radioactive substances (other than naturally occurring materials
in place), flammables and explosives.

(2) Compliance with Laws and Regulations. All operations
or activities upon, or any use of occupancy of the Real Estate by Company and
any Affiliates of Company (wherein the term "Affiliates" shall mean any person
or entity controlling, controlled by or under common control at any time with
Company, and the term "control" shall mean the power, directly or indirectly to
direct the management or policies of such person or entity), or, to the
knowledge of Company and Shareholders without the benefit of inquiry, any
tenant of Company, of the Real Estate is and has been in material compliance
with any and all laws, regulations, orders, codes, judicial decisions, decrees,
licenses, permits and other applicable requirements of governmental authorities
with respect to Hazardous Substances, pollution or protection of human health
and safety (collectively, "Environmental Laws"), including but not limited to
the release, emission, discharge, storage and removal of Hazardous Substances.
The Company and Affiliates have kept the Real Estate free of any lien imposed
pursuant to Environmental Laws. To the knowledge of Company and Shareholders
without the benefit of inquiry, all prior owners, operators and occupants of
the Real Estate complied with Environmental Law. Except for uses and storage
or presence of Hazardous Substances reasonably necessary or incidental to the
customary operation of a business similar to the Business, as appropriate
which, if required, was duly licensed or authorized by appropriate governmental
authorities or otherwise permitted by Environmental Law, and which complies
with Environmental Law:

(a) Neither Company nor its Affiliates have
allowed the use, generation, treatment, handling, manufacture, voluntary
transmission or storage of any Hazardous Substances on the Real Estate.

(b) Neither Company nor its Affiliates have
installed or permitted to be installed, in or on the Real Estate friable
asbestos or any substance containing asbestos in condition or amount deemed
hazardous by Environmental Law.

(c) Company has not at any time engaged in or
permitted any dumping, discharge, disposal, spillage, or leakage (whether legal
or illegal, accidental or intentional) of such Hazardous Substances, on the
Real Estate that would subject the Real Estate or Buyer to clean-up obligations
imposed by governmental authorities.

(d) None of the Real Estate, nor Company, nor, to
the knowledge of Company and Shareholders without the benefit of inquiry, any
present owner or operator of the Real Estate (i) has either received or been
issued a notice, demand, request for information, citations, summons or
complaint regarding an alleged failure to comply with Environmental Law, or
(ii) is subject to any existing, pending, or, to the best knowledge of Company
or Shareholder, threatened investigation or inquiry by any governmental
authority

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<PAGE> 20

for noncompliance with, or any remedial obligations under Environmental Law.
Company has not assumed any liability of a third party for clean-up under or
noncompliance with Environmental Law.

(e) Neither the Company nor its Affiliates have
transported or arranged for the transportation of any Hazardous Substances to
any location which is listed or, to the knowledge of Company and Shareholders
without the benefit of inquiry, proposed for listing under Environmental Law or
is the subject of any enforcement action, investigation or other inquiry under
Environmental Law.

(f) To the best knowledge of Seller and
Shareholders, there are currently no underground storage tanks on the Real
Estate. Company has furnished (or prior to Closing will furnish) to Buyer a
copy of any environmental audit, study, report, certificate or other analysis
on the Real Estate, which Company or its Affiliates obtained or was furnished.

4.14 Miscellaneous Representations Relating to Real Estate. To the
best knowledge of Company and Shareholders, none of the Real Estate is in
violation of any zoning, public health, building code or other similar laws
applicable thereto or to the ownership, occupancy and/or operation thereof, nor
does there exist any waivers or exemptions relating to the Real Estate with
respect to any non-conforming use or other zoning or building codes matters.
To the best knowledge of Company and Shareholders, no part of the Real Estate
is currently subject to condemnation proceedings and no condemnation or taking
is threatened or contemplated. There are no facts known to either Company or
Shareholders that would adversely affect the possession, use or occupancy of
the Real Estate. All utilities serving the Real Estate are adequate to operate
the Real Estate in the manner it is currently operated.

4.15 Litigation. There are no lawsuits, proceedings, actions,
arbitrations, governmental investigations, claims, inquiries, proceedings or
written notices of violation of any law, rule, regulation, ordinance or order
of any court or governmental agency (including, without limitation, legislation
and regulations applicable to the Medicare and Medicaid programs, environmental
protection, civil rights, public health and safety and occupational health)
pending or, to the best knowledge of Company or Shareholders, threatened
involving Company, Shareholders, Stock, any of the Assets or the Business.

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<PAGE> 21

or who has been employed for fewer than six (6) of the twelve (12) months
preceding the date on which notice is required pursuant to the "Worker
Adjustment and Retraining Notification Act" ("WARN"), 29 U.S.C. Section 2102 et
seq. Except as provided in Exhibit 4.12, Company has no employment agreements
with its employees and all such employees are employed on an "at will" basis.
Company has adequately accrued all salaries and wages, related payroll taxes
and all sick leave, holiday, vacation benefits, retirement and other fringe
benefits that have accrued to Company employees through the Closing Date,
including related payroll taxes.

4.17 Labor Relations. Company is not a party to any labor
contract, collective bargaining agreement, contract, letter of understanding,
or any other arrangement, formal or informal, with any labor union or
organization which obligates Company to compensate Company's employees at
prevailing rates or union scale, nor are any of its employees represented by
any labor union or organization. There is no pending or, to the best knowledge
of Company and Shareholders, threatened labor dispute, work stoppage, unfair
labor practice complaint, strike, administrative or court proceeding or order
between Company and any present or former employee(s) of Company. Except as
set forth in Exhibit 4.17 attached hereto, there is no pending or, to the best
knowledge of Company and Shareholders, threatened suit, action, investigation
or claim between Company and any present or former employee(s) of Company. To
the best knowledge of Company or Shareholders, there has not been any labor
union organizing activity at any location of Company, or elsewhere, with
respect to Company's employees within the last three years.

4.18 Insurance. Company has in effect and has continuously
maintained for the past four (4) years insurance coverage for all of its
operations, personnel and assets, and for the Assets and the Business. A
complete and accurate list of all such insurance policies is included in
Exhibit 4.12. Exhibit 4.18 attached hereto sets forth a summary of Company's
current insurance coverage (listing type, carrier and limits), and includes a
list of any pending insurance claims relating to Company. Shareholders agree,
jointly and severally, to indemnify and hold Buyer and Company harmless from
and against such pending insurance claims to the extent such claims are not
satisfied by Company's insurance policies. Company is not in default or breach
with respect to any provision contained in any such insurance policies, nor has
Company failed to give any notice or to present any claim thereunder in due and
timely fashion, which default, breach or failure would have a material adverse
effect on the ability to collect under, or enforce the terms of, such policies.

4.19 Broker's or Finder's Fee. Shareholders acknowledge and agree
that they are being represented by Paragon Ventures, Inc. and Shareholders
shall be solely liable for the payment of any fees and expenses to Paragon
Ventures, Inc. in connection with the transaction contemplated under this
Agreement.

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<PAGE> 22

4.23 Motor Vehicles. All motor vehicles used in the Business,
whether owned or leased, are listed in Exhibit 1.2(1) attached hereto. All
such vehicles are properly licensed and registered in accordance with
applicable law.

4.24 Employee Benefit Plans.

(2) Pension Benefit Plans. There is no "employee pension
benefit plan" (as defined in Paragraph 3(2) of ERISA) maintained by Company, to
which Company

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<PAGE> 23

contributes or is required to contribute, or which covered employees of Company
during the period of their employment with any predecessor of Company,
including any multi-employer pension plan as defined under Internal Revenue
Code of 1986, Paragraph 414(f).

(3) Liabilities; Termination of Participation. There are
no unfunded liabilities under any Welfare Benefit Plan. Neither Buyer nor
Company shall be liable or responsible for any claim, debt, obligation,
responsibility or liability under any such plans, whether arising before or
after Closing. Upon Closing, Company shall cease to be a participating
employer under all Welfare Benefit Plans maintained by Company, and any such
action by Company shall in no way diminish Shareholders' obligations to
indemnify Buyer with respect to all such plans.

4.25 Compliance with Healthcare and Other Laws. Neither Company
nor Shareholders have made any kickback, bribe or payment to any person or
entity, directly or indirectly, for referring, recommending or arranging
business or patients with, to or for Company which action could have a material
adverse effect on the Business. None of the Leases and Contracts and no
activity of Company or Shareholders violates Paragraph 1877 of the Social
Security Act or any similar provision of applicable state law in any material
respect. None of the Leases and Contracts and no activity of Company or
Shareholders violates provisions of applicable state law relating to the
corporate practice of medicine in any material respect. Company is in
compliance (without obtaining waivers, variances or extensions) with all
federal, state and local laws, rules and regulations which relate to the
operations of the Business, except where the failure to be in compliance would
not have a material adverse effect on the Business. No Pennsylvania bulk sales
or similar statute applies to the transactions contemplated under this
Agreement. All healthcare, tax and other returns, reports, plans and filings of
any nature required to be filed by Company or Shareholders with any federal,
state or local governmental authorities and any third party payors have been
properly completed, except where the failure to be so completed or filed could
not have a material adverse effect on the Business, and timely filed in
compliance with all applicable requirements. Each return, report, plan and
filing contains no materially untrue or misleading statements and does not omit
anything which could cause it to be misleading or inaccurate in any material
respect.

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<PAGE> 24

in conformity with the methods and procedures observed and utilized during the
two year period immediately preceding December 31, 1995.

4.28 Tax Returns; Taxes. Neither Pennsylvania, West Virginia nor
any municipalities or other subdivisions thereof impose any ad valorem taxes,
transfer taxes or similar assessments in connection with any of the
transactions contemplated hereunder. Company and Shareholders have filed all
federal, state and local tax returns and tax reports required by such
authorities to be filed as of the time of Closing. Company and Shareholders
have paid all taxes, assessments, governmental charges, penalties, interest and
fines due or claimed to be due as of the time of Closing (including, without
limitation, taxes on properties, income, franchises, licenses, sales and
payrolls) by any federal, state or local authority. Additionally, the reserves
for taxes reflected in the Financial Statements are adequate to cover all tax
liabilities accrued as of the respective dates thereof. There is no pending
tax examination or audit of, nor any action, suit, investigation or claim
asserted or, to the best knowledge of Company and Shareholders, threatened
against Company or Shareholders by any federal, state or local authority; and
Company and/or Shareholders have not been granted any extension of the
limitation period applicable to any tax claims.

4.29 No Omissions or Misstatements. None of the information
included in this Agreement and Exhibits hereto, or other documents furnished or
to be furnished by Shareholders or Company, or any of its representatives,
contains any untrue statement of a material fact or is misleading in any
material respect or omits to state any material fact necessary in order to make
any of the statements herein or therein not misleading in light of the
circumstances in which they were made. Copies of all documents referred to in
any Exhibit hereto have been delivered or made available to Buyer and
constitute true, correct and complete copies thereof and include all
amendments, exhibits, schedules, appendices, supplements or modifications
thereto or waivers thereunder.

ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BUYER

As an inducement to Shareholders and Company to enter into this
Agreement and to consummate the transactions contemplated hereunder, Buyer
hereby represents and warrants to Shareholders and Company, which
representations and warranties shall be true and correct on the date of
Closing, as follows:

5.1 Organization, Qualification and Authority. Buyer is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Tennessee.

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Buyer has the full corporate power and authority to own, lease and operate its
properties and assets as presently owned, leased and operated and to carry on
its business as it is now being conducted. Buyer has the full right, power and
authority to execute, deliver and carry out the terms of this Agreement and all
documents and agreements necessary to give effect to the provisions of this
Agreement and to consummate the transactions contemplated on the part of Buyer
hereunder. The execution, delivery and consummation of this Agreement and all
other agreements and documents executed in connection herewith by Buyer has
been duly authorized by all necessary corporate action on the part of Buyer.
No other action on the part of Buyer or any other person or entity is necessary
to authorize the execution, delivery and consummation of this Agreement and all
other agreements and documents executed in connection herewith. This
Agreement, and all other agreements and documents executed in connection
herewith by Buyer, upon due execution and delivery thereof, shall constitute
the valid binding obligations of Buyer, enforceable in accordance with their
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally and by general principles of equity.

5.2 Absence of Default. The execution, delivery and consummation
of this Agreement and all other agreements and documents executed in connection
herewith by Buyer will not constitute a violation of, be in conflict with, or,
with or without the giving of notice or the passage of time, or both, result in
a breach of, constitute a default under, or create (or cause the acceleration
of the maturity of) any debt, indenture, obligation or liability or result in
the creation or imposition of any security interest, lien, charge or other
encumbrance upon any of the Assets (except in the ordinary course pursuant to
Buyer's existing credit agreement) under: (a) any term or provision of the
Certificate of Incorporation or Bylaws of Buyer; (b) any contract, lease,
agreement, indenture, mortgage, pledge, assignment, permit, license, approval
or other commitment to which Buyer is a party or by which Buyer is bound; (c)
any judgment, decree, order, regulation or rule of any court or regulatory
authority, or (d) any law, statute, rule, regulation, order, writ, injunction,
judgment or decree of any court or governmental authority or arbitration
tribunal to which Buyer is subject.

5.4 Taxes. Neither Tennessee nor any of its municipalities or
other subdivisions impose any ad valorem taxes, transfer taxes or similar
assessments in connection with any of the transactions contemplated hereunder.

5.5 No Omissions or Mistatements. None of the information
included in this Agreement or other documents furnished or to be furnished by
Buyer or any of its representatives contains an untrue statement of a material
fact or is misleading in any

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material respect or omits to state any material fact necessary in order to make
any of the statements herein or therein not misleading in light of the
circumstances in which they were made. Buyer has furnished to Shareholders
true and complete copies of its Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and its Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996 (collectively, the "SEC Reports") as such reports
were filed with the Securities and Exchange Commission ("SEC"). Each of the
SEC Reports, at the time it was filed with the SEC, did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. Since June
30, 1996 there has been no material adverse change in the operation of the
business of the Buyer, taken as a whole, which would necessitate any filings
with the SEC.

ARTICLE VI. COVENANTS OF PARTIES

6.1 Preservation of Business and Assets. From the Effective Date
until the Closing, Company and Shareholders shall use their best efforts and
shall do or cause to be done all such acts and things as may be necessary to
preserve, protect and maintain intact the operation of the Business and Assets
as a going concern consistent with prior practice and not other than in the
ordinary course of business, to preserve, protect and maintain for Buyer the
goodwill of the suppliers, employees, clientele, patients and others having
business relations with Company or the Business. Company shall use its best
efforts to retain its employees in their current positions up to Closing.
Buyer, Company and Shareholders shall use their best efforts to facilitate the
consummation of the transactions contemplated under this Agreement. Until
termination of this Agreement, Company and Shareholders will not sell or
transfer, or negotiate the sale or transfer of, either the Assets or Stock of
Company, provided however, Company may transfer Excluded Items Shareholders.
From the Effective Date until the Closing, Company shall pay no dividend, and
shall make no distribution or extraordinary payment to Shareholders or any
third party or pay any intercompany payable and, other than in the ordinary
course of business, Company will not sell, discard or dispose of any of the
Assets. None of the Leases and Contracts shall be amended in any material
respect between the date hereof and Closing without the prior written consent
of Buyer. From the Effective Date until Closing, Company and any party in
possession of all or any part of the Assets will maintain and keep the Assets
in a sanitary, well-maintained condition and in good order and repair, ordinary
wear and tear excepted.

6.2 Absence of Material Change. From the Effective Date until the
Closing, neither Company nor Shareholders shall make any change in the Business
or and in the utilization of the Assets and shall not enter jointly or
separately into any other material contract or commitment or any other
transaction with respect to the Business or the Assets without the prior
written consent of Buyer.

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6.3 Access to Books and Records.

(2) Following the Closing, Buyer shall permit
Shareholders and their representatives, during normal business hours, to have
reasonable access to, and examine and make copies of, all books and records of
the Business which relate to transactions or events occurring prior to the
Closing. All out-of-pocket costs associated with the delivery of the requested
documents shall be paid by Shareholders.

(3) Following the Closing, Shareholders shall permit
Buyer and its representatives, to have access to, and examine and make copies
of, any books and records relating to the Business, Stock or Assets which
Shareholders are required by law to retain, if any, and which relate to
transactions or events occurring prior to the Closing. For a period of five
years after the Closing, Shareholders agree that, prior to the destruction or
disposition of any such books or records, Shareholders shall provide not less
than forty-five (45) days, nor more than ninety (90) days, prior written notice
to Buyer of such proposed destruction or disposal. If Buyer desires to obtain
any such documents or records, it may do so by notifying Shareholders in
writing at any time prior to the date scheduled for such destruction or
disposal. In such event, Shareholders shall not destroy such documents or
records and the parties shall then promptly arrange for the delivery of such
documents or records to Buyer, its successors or assigns. All out-of-pocket
costs associated with the delivery of the requested documents or records shall
be paid by Buyer.

(5) After Closing, Shareholders shall cooperate with
Buyer to permit it to conduct an audit of Company's financial statements for
any period prior to Closing not already audited. Shareholders agree to
cooperate with Buyer in Buyer's preparation of financial statements relating to
such periods and Buyer's filing in a timely manner of registration statements,
private placement memoranda and periodic reports, if any, pursuant to any
applicable federal or state securities law.

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<PAGE> 28

6.4 Medicare and Medicaid Reporting. Shareholders shall jointly
and severally assume and be responsible for any liability incurred as a result
of the improper filing of all reports and claims of every kind, nature or
description required by law or by written or oral contract to be filed with
respect to the purchase of services by third party payors, including, without
limitation, Medicare, Medicaid and Blue Cross. Company has adequately accrued
or reserved for all liabilities for contracted adjustments, discounts, refunds
and other offsets in connection with the filing of such reports and claims up
to the Effective Date; provided, however, that if any adverse adjustments or
offsets regarding operations on or after the Effective Date are the result of
the wilful acts or omissions, or gross negligence, of Company, Shareholders
and/or either's employees, representatives and agents, Shareholders shall also
be jointly and severally responsible for such adjustments and offsets as
stipulated in paragraph 4.9(4). Shareholders shall be entitled to receive any
refund or other benefit which may result for the filing of said reports and
claims for operations up to the Effective Date, and Buyer shall likewise be so
entitled beginning on the Effective Date.

6.5 Current Return Filing. (1) Shareholders shall be responsible
for the preparation and filing of the federal, state and local income tax and
gross receipts and use tax returns which were due on or before the Closing.
Buyer shall be responsible for the preparation and filing of all such returns
which relate to periods subsequent to Closing. Buyers' and Shareholders'
accountants will cooperate in the preparation of such returns for the stub
period ending on the date of Closing (the "Stub Returns"). Shareholders'
accountants will complete the Stub Returns and deliver them to Buyers'
accountants for review at least fifteen (15) days prior to the applicable
required filing dates. During such fifteen (15) day period, Buyers'
accountants may review and comment on the Stub Returns. The Stub Returns will
not be filed until approved by both accounting firms. The Stub Returns as filed
will establish an effective tax rate for the stub period. This effective tax
rate will be applied to the taxable income of the Company for the period from
January 1, 1996 through August 31, 1996 to establish the aggregate 1996 tax
liability which is the responsibility of the Shareholders (the "Shareholders'
Tax Liability").

(2) If Company writes off accounts deemed to be uncollectible in
connection with fiscal year-end adjustments for the year ended December 31,
1996 and such write-offs exceed the average monthly write-offs periodically
made by the Company throughout such fiscal year, the Shareholders' Tax
Liability shall be reduced by an amount equal to eight-twelfths (8/12) of the
tax benefit obtained by the Company as a result of the amount of the year-end
write-offs which exceed such average monthly write-off. If the Shareholders'
Tax Liability, as so adjusted, exceeds the tax liability of Company recorded on
the Company's Interim Financial Statements and included in the Continuing
Liabilities, the Shareholders shall, jointly and severally, pay the shortfall
to Buyer within fifteen (15) days of the date of filing of the Stub Returns.
If the adjusted Shareholders' Tax Liability is less than the tax liability
recorded on the Company's Interim Financial Statements and included in the

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Continuing Liabilities, Buyer shall pay the difference jointly to the
Shareholders within fifteen (15) days of the date of filing of the Stub
Returns.

6.7 Maintain Books and Accounting Practices. From the date hereof
until the Closing, Company shall maintain its books of account in the usual,
regular and ordinary manner on a basis consistent with prior years and shall
make no change in its accounting methods or practices.

6.9 Compliance with Laws and Regulatory Consents. From the date
hereof until the Closing, (a) Company shall comply with all applicable
statutes, laws, ordinances and regulations, (b) Shareholders and Company shall
use their reasonable efforts and shall cooperate fully with Buyer to obtain all
consents, approvals, exemptions and authorizations of third parties, whether
governmental or private, necessary to consummate the transactions contemplated
by this Agreement, and (c) Shareholders and Company shall make and cause to be
made all filings and give and cause to be given all notices which may be
necessary or desirable on their part under all applicable laws and under their
respective contracts, agreements and commitments in order to consummate the
transactions contemplated under this Agreement.

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all premiums due have been paid, and that Buyer has been named additional
insured since the Effective Date.

6.12 Employment Agreements. Buyer will negotiate with each of
Scott Fisher, David McCabe and Lisa Ann Palmisano regarding one year employment
agreement between the respective parties; however, execution and delivery of
such agreements will not be a condition to close the transactions contemplated
hereunder.

ARTICLE VII. CLOSING

7.1 Closing. If all of the conditions to Closing set forth in
Articles VIII and IX hereof are satisfied, then the Closing shall occur on or
by October 18,1996 at the offices of Harwell Howard Hyne Gabbert & Manner,
P.C., Nashville, Tennessee, or at such other time or place as the parties may
mutually agree (the "Closing"). Upon consummation, the Closing shall be deemed
to be effective and the transfer of the Assets shall be deemed to have
occurred, as of 12:01 a.m. local time on September 1, 1996 (the "Effective
Date"). In the event that Closing has not occurred by November 15, 1996, then
any party not in default hereunder may terminate this Agreement without further
obligation.

ARTICLE VIII. COMPANY'S AND SHAREHOLDERS' CONDITIONS TO CLOSE

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8.4 Exhibits. The exhibits hereto will be completed to the mutual
satisfaction of the parties.

ARTICLE IX. BUYER'S CONDITIONS TO CLOSE

The obligations of Buyer under this Agreement are subject to the
satisfaction, on or prior to Closing, of the following conditions (which may be
waived in writing by Buyer, in whole or in part):

9.1 Representations and Warranties True at Closing; Compliance
with Agreement. The representations and warranties of Shareholders and Company
contained in this Agreement (including the Exhibits hereto) and in any
certificate or document delivered pursuant hereto shall be deemed to have been
made again at the Closing and shall then be true in all respects. Company and
Shareholders shall have performed and complied with all covenants, agreements
and conditions required by this Agreement to be performed or complied with by
them prior to or at Closing.

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9.6 [OMIT]

9.7 Cloonan Employment Agreement. Buyer and Susan Cloonan shall
have entered into an employment agreement in the form attached hereto as
Exhibit 9.7.

9.8 Operating Targets and Value of Assets. As of the date of
Closing, Company and the Business shall meet the following minimum operating
thresholds: (i) for the eight (8) month period ended August 31, 1996, Company
shall have achieved annualized earnings before interest and taxes ("EBIT") of
no less than One Million Four Hundred Eighty Thousand and No/100 Dollars
($1,480,000.00); (ii) for the eight (8) month period ended August 31, 1996,
Company shall have achieved annualized net revenues, before bad debt expense,
of no less than Five Million Three Hundred Eleven Thousand and No/100 Dollars
($5,311,000.00); and (iii) that since December 31, 1995 and except as required
in the ordinary and usual course of the Business, no assets, except the
Excluded

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Real Estate, have been removed, distributed, assigned or paid by or from
Company or Shareholders. As of the date of Closing, the Assets shall have an
aggregate book value of no less than One Million Eight Hundred Fifty Thousand
and No/100 Dollars ($1,850,000.00). The Asset shall be free and clear of all
liabilities and encumbrances whatsoever other than the Assumed Liabilities.

9.9 Lease Agreement. Buyer and Shareholders shall have entered
into a lease pertaining to the Real Estate in the form attached hereto as
Exhibit 9.9.

9.10 Third Party Consents; Releases. Shareholders and Company shall
provide to the Buyer all third party consents, releases and authorizations
believed by Buyer to be necessary or advisable for the legal and proper
consummation of all agreements and transactions contemplated under this
Agreement, each in form and substance acceptable to Buyer.

9.11 Approval of Board of Directors. This Agreement and
consummation of the transactions contemplated hereunder shall have been
approved by the Board of Directors of Buyer.

9.12 Exhibits. The exhibits hereto will be completed to the mutual
satisfaction of the parties.

9.13 Consulting Agreements. Buyer and each of the Shareholders
shall have entered into consulting agreements in the form attached hereto as
Exhibit 9.13.

ARTICLE X. OBLIGATIONS OF COMPANY AND SHAREHOLDERS AT CLOSING

At Closing, Company and Shareholders shall deliver or cause to be
delivered to Buyer the following in form and substance reasonably satisfactory
to Buyer:

10.1 Documents Relating to Title. Shareholders shall execute,
acknowledge, deliver and cause to be executed, acknowledged and delivered to
Buyer:

(1) Stock certificates, registered in the name of the
Shareholders, duly endorsed by Shareholders or with stock powers attached,
representing all of the Stock.

(2) Releases executed by the Shareholders' spouses,
relinquishing all right, title and interest in and to the Stock.

(3) The resignation of each member of the Board of
Directors and each officer of Company effective as of the Closing.

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10.2 Possession. Company shall deliver to Buyer full possession and
control of the Stock, Business and Assets.

10.3 Opinion of Counsel. Shareholders shall deliver to Buyer the
favorable opinion of counsel for Shareholders and Company, which opinion may be
subject to the Legal Opinion Accord of the ABA Section of Business Law (1991),
dated as of Closing, in the form attached hereto as Exhibit 10.3.

10.4 Corporate Good Standing and Corporate Resolution. Shareholders
shall deliver to Buyer certificates of good standing from the Secretary of
State of Company's state of organization, and from each jurisdiction in which
Company is qualified to do business, certified copies of the Bylaws and charter
of Company, and a certified copy of the resolutions of the Board of Directors
and Shareholders of Company authorizing the execution, delivery and
consummation of this Agreement and the execution, delivery and consummation of
all other agreements and documents executed in connection herewith by them,
including all assumption agreements and other instruments required hereunder,
sufficient in form and content to meet the requirements of the law of the State
of Company's incorporation relevant to such transactions and certified by
officers of Company to be validly adopted and in full force and effect and
unamended as of Closing.

10.6 Third Party Consents. Shareholders shall deliver to Buyer all
consents, estoppels, approvals, releases, filings and authorizations of third
parties that Buyer believes are necessary or advisable for the legal and proper
execution, delivery and consummation of this Agreement, and the transactions
contemplated hereunder.

10.7 Releases. Shareholders shall deliver to Buyer executed
releases of all mortgages, security interests, liens, pledges, restrictions or
other encumbrances on or applicable to the Stock or Assets.

10.8 Additionally Requested Documents; Post-Closing Assistance. At
the reasonable request of Buyer at Closing and at any time or from time to time
thereafter, Shareholders shall cooperate with Buyer to put Buyer in actual
possession and operating control of the Stock, Company, Business and Assets,
execute and deliver such further instruments of sale, conveyance, transfer and
assignment, as Buyer may reasonably request in order to effectively sell,
convey, transfer and assign the same to Buyer, to execute and deliver such
further instruments and to take such other actions as Buyer may reasonably
request to release Buyer and Company from all obligation and liability with

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regard to any obligation or liability retained or assumed by Shareholders, and
to execute and deliver such further instruments and to cooperate with Buyer as
Buyer may reasonably request or to enable Buyer and Company to obtain all
necessary health care or regulatory certifications, approvals, consents and
licenses, accreditation or permits.

10.9 Employment, Consulting and Lease Agreements. Shareholders
shall deliver to Buyer each of the agreements described in paragraphs 9.7, 9.9
and 9.13.

10.10 Assumption Agreement. Shareholders shall deliver to Buyer and
the Company an Assumption Agreement evidencing that Shareholders shall be
jointly and severally responsible for all obligations pertaining to past
operations of the Business other than the Continuing Liabilities.

ARTICLE XI. OBLIGATIONS OF BUYER AT CLOSING

At Closing, Buyer shall deliver or cause to be delivered to
Shareholders the following in a form and substance reasonably satisfactory to
Shareholders:

11.1 Purchase Price. Buyer shall pay to Shareholders the Purchase
Price upon the terms specified in this Agreement.

11.2 Corporate Good Standing and Certified Board Resolutions. Buyer
shall deliver to Shareholders a certificate of good standing from the Secretary
of State of Delaware, dated the most recent practical date prior to Closing,
together with a certified copy of the resolutions of the Board of Directors of
Buyer authorizing the execution, delivery and consummation of this Agreement
and all other documents executed in connection herewith.

11.4 Opinion of Buyer's Counsel. Buyer shall deliver to
Shareholders a favorable opinion of counsel for Buyer, dated as of Closing, in
the form specified in Article XII hereof.

ARTICLE XII. OPINION OF BUYER'S COUNSEL

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(2) Buyer has the corporate power and corporate authority
to execute, deliver and carry out the terms of this Agreement and all documents
and agreements delivered by Buyer at Closing and to consummate the transactions
contemplated on the part of Buyer hereby and thereby; Buyer has taken all
action required by law, and its Charter and Bylaws, to authorize such
execution, delivery and consummation of this Agreement, and this Agreement, and
all other agreements delivered by Buyer at Closing constitute the valid and
binding obligations of Buyer enforceable in accordance with their respective
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and by
general principles of equity.

ARTICLE XIII. SURVIVAL OF PROVISIONS AND INDEMNIFICATION

13.1 Survival. The covenants, obligations, representations and
warranties of Buyer, Company and Shareholders contained in this Agreement, or
in any certificate or document delivered pursuant to this Agreement, shall be
deemed to be material and to have been relied upon by the parties hereto
notwithstanding any investigation prior to the Closing, shall survive the date
of Closing for a period of three (3) years, and shall not be merged into any
documents delivered in connection with the Closing. Notwithstanding the three
(3) year limitation set forth above, those representations, warranties,
covenants and obligations set forth in paragraphs 4.9, 4.13, the first, second,
fifth and sixth sentences of paragraph 4.25, 4.28, 6.4 and 6.5 (collectively,
the "Exempt Items") shall each survive for a period equal to the applicable
statute of limitations.

13.2 Indemnification by Shareholders. Subject to the provisions of
paragraph 13.4, Shareholders shall, jointly and severally, promptly indemnify,
defend, and hold harmless Buyer, Company and the directors, officers,
stockholders, employees and agents of each against any and all losses, costs,
and expenses (including reasonable cost of investigation, court costs and legal
fees actually incurred) and other damages resulting from (i) any breach by
either Company or Shareholders of any of the covenants, obligations,
representations or warranties or breach or untruth of any representation,
warranty, fact or conclusion contained in this Agreement or any certificate or
document of Company and/or Shareholders delivered pursuant to this Agreement,
(ii) any liability of Company not expressly retained by Company or pursuant to
Paragraph 1.4 hereof, and (iii) any claim (whether or not disclosed herein)
that is brought or asserted by any third party(ies) against Buyer or Company
arising out of the ownership, licensing, operation or conduct of the Business
or Assets or the conduct of any of Company's employees, agents or independent

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contractors, relating to all periods of time prior to the Effective Date. Any
indemnification payment made pursuant to this Article shall include interest at
a floating rate equal to two points over the prime rate of Bankers Trust
Company established from time to time (the "Rate") payable for the period
measured from the date that the loss, cost, expense or damage was incurred
until the date of payment.

13.3 Indemnification by Company and Buyer. Subject to the
provisions of paragraph 13.4, Company and Buyer shall promptly indemnify,
defend, and hold Shareholders harmless against any and all losses, costs, and
expenses (including reasonable cost of investigation, court costs and legal
fees) and other damages resulting from (i) any breach by Buyer of any of its
covenants, obligations, representations or warranties or breach or untruth of
any representation, warranty, fact or conclusion contained in this Agreement or
any certificate or document of Buyer delivered pursuant to this Agreement, (ii)
any claim which is brought or asserted by any third party(ies) against
Shareholders for failure to pay or perform any of the Continuing Liabilities,
and (iii) subject to the other provisions of this Agreement, any claim that is
brought or asserted by any third party(ies) against Shareholders arising out of
the ownership, licensing, operation or conduct of the Business or the conduct
of any of Company's employees, agents or independent contractors, relating to
periods of time subsequent to the Effective Date. Any indemnification payment
pursuant to the foregoing shall include interest at the Rate from the date that
the loss, cost, expense or damage was incurred until the date of payment.

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such notice, the claim for indemnity shall be conclusively presumed to have
been assented to and approved, and in such case the indemnified party may
control the defense of the matter or case and, at its sole discretion, settle
or admit liability. If within the aforesaid thirty (30) day period the
indemnified party shall have received written objection to a claim (which
written objection shall briefly describe the basis of the objection to the
claim or the amount thereof, all in good faith), then for a period of ten (10)
days after receipt of such objection the parties shall attempt to settle the
dispute as between the indemnified and indemnifying parties. If they are unable
to settle the dispute, the unresolved issue or issues shall be settled by
arbitration in Nashville, Tennessee in accordance with the rules and procedures
of the American Arbitration Association.

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matter shall be submitted to binding arbitration in Nashville, Tennessee in
accordance with the rules and procedures of the American Arbitration
Association.

(4) Limitation on Claims. The obligations of an
indemnified party under this Agreement, exclusive of obligations either related
to Exempt Items, stipulated under paragraph 2.1 or related to working capital
liabilities of the Company, shall not begin until the indemnified party incurs
one or more claims which equal, in the aggregate, Sixty-Five Thousand and
No/100 Dollars ($65,000.00) (the "Basket"). Once the Basket is reached, the
obligations of an indemnifying party under this Agreement shall apply to all
claims of the indemnified party, whether such claims are part of the Basket or
in excess thereof. The parties acknowledge and agree that the materiality
and/or knowledge caveats set forth elsewhere in this Agreement will provide no
limitation on obligations of an indemnifying party in excess of or in addition
to the Basket. Further, other than with respect to all of the Exempt Items
except those referenced in paragraph 4.13, for which such Exempt Items no
limitation shall apply, the obligations of an indemnifying party under this
Agreement shall not exceed, in the aggregate, Seven Million Two Hundred
Ninety-Nine Thousand and No/100 Dollars ($7,299,000.00).

ARTICLE XIV. PRESERVATION OF BUSINESS
AND NONCOMPETE RESTRICTIONS

14.1 Covenant Not to Compete. Shareholders hereby, jointly and
severally, covenant and agree with Buyer that, during the NON-COMPETE PERIOD
(as such term is defined herein) and within the NON-COMPETE AREA (as such term
is defined herein), no Shareholder shall directly or indirectly, (a) acquire,
lease, manage, consult for, serve as agent or subcontractor for, finance,
invest in, own any part of or exercise management control over any home health
care operation or business which provides any goods or services competitive
with the goods and services provided by the Business as of the Closing, or (b)
solicit for employment or employ any person who at Closing or thereafter became
an employee of Buyer, Company or an affiliate unless such person is not so
employed for at least six (6) months, or (c) with respect to any customer,
patient, physician, physician group, or healthcare provider with whom Buyer,
Company and/or an Affiliate contracts with in connection with the Business,
either solicit the same in a manner which could adversely affect Buyer, Company
or an Affiliate, or make statements to the same which disparage Buyer, Company,
an Affiliate or their respective operations in any way. The "Non-Compete
Period" shall commence at the Closing and terminate on the fifth anniversary
thereof. The "Non-Compete Area" shall mean the area within a fifty (50) mile
radius of each location from which the Business is operated or conducted as of
the Closing. Ownership of less than five percent (5%) of the stock of a
publicly held company shall not be deemed a breach of this covenant.

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ARTICLE XV. MISCELLANEOUS

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To Shareholders and, prior to Closing, Company:

Penn Oxygen Services, Inc.
One McCormack Road
Pittsburgh, Pennsylvania 15136-1404
Attn:___________________________

with a copy to:
Mark I. Baseman
Cohen & Grigsby, P.C.
2900 CNG Tower
25 Liberty Avenue
Pittsburgh, Pennsylvania 15222

To the Buyer and, after Closing to the Company:

American HomePatient, Inc.
5200 Maryland Way
Suite 400
Brentwood, Tennessee 37027
Attn: Edward K. Wissing

with a copy to:

Lauren W. Anderson
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238-1800

15.5 Controlling Law. This Agreement shall be construed,
interpreted and enforced in accordance with the laws of the State of Tennessee.

15.6 Headings. Any table of contents and paragraph headings in this
Agreement are for convenience of reference only and shall not be considered or
referred to in resolving questions of interpretation.

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15.8 Partial Invalidity. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provisions were omitted. Further, there shall be
automatically substituted for such invalid or unenforceable provision a
provision as similar as possible which is valid and enforceable.

15.10 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.

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in order to more effectively sell, transfer, assign and deliver and vest in
Buyer and Company, as the case may be, the benefits of, title to and possession
of the Stock and Assets.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

"COMPANY":

PENN OXYGEN SERVICES, INC.

By: /s/ Michael E. Hickey
----------------------------------

Title: President
----------------------------------

"SHAREHOLDERS":

/s/ William C. Cloonan, Jr.
-------------------------------------------
WILLIAM C. CLOONAN, JR.

/s/ Michael E. Hickey
-------------------------------------------
MICHAEL E. HICKEY

"BUYER":

AMERICAN HOMEPATIENT, INC.

By:
/s/ Rita N. Hill
----------------------------------

Title: Vice President
----------------------------------

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