-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NJDZQe+O1+ZQJ38wKqbrOmpUPxdOUKhnOu6YZEgVHfekmmyItK4+8wzCBovMCfHz bnu+U9BrbdkolbBNw9nGpw== 0000898430-96-003090.txt : 19960710 0000898430-96-003090.hdr.sgml : 19960710 ACCESSION NUMBER: 0000898430-96-003090 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960703 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960708 DATE AS OF CHANGE: 19960708 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY PSYCHIATRIC CENTERS /NV/ CENTRAL INDEX KEY: 0000022764 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 941599386 STATE OF INCORPORATION: NV FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07008 FILM NUMBER: 96591977 BUSINESS ADDRESS: STREET 1: 6600 W CHARLESTON BLVD STREET 2: STE 118 CITY: LAS VEGAS STATE: NV ZIP: 89102 BUSINESS PHONE: 7022593600 FORMER COMPANY: FORMER CONFORMED NAME: SUCCESSOR TO COMMUNITY PSYCHIATRIC CENTERS/CA/ DATE OF NAME CHANGE: 19600201 8-K 1 FORM 8-K DATED JULY 3, 1996 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------ Form 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of report: July 5, 1996 ------ Date of earliest event reported: June 21, 1996 Community Psychiatric Centers ------------------------------------------------------ (Exact name of registrant as specified in its charter) Nevada 1-7008 94-1599386 - ------------- ----------------------- ------------------ (State of (Commission File Number) (IRS Employer Incorporation Identification No.) 5110 West Sahara Avenue, Las Vegas, NV 89102 - ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (702) 257-3600 - ---------------------------------------------------- (Registrant's telephone number, including area code) 6600 W. Charleston Boulevard, Suite 118, Las Vegas, NV 89102 - ------------------------------------------------------------- (former name or former address, if changed since last report) Item 2: Disposition of Assets: On June 21, 1996, Community Psychiatric Centers ("CPC") completed the sale of Priory Hospitals Group ("PHG"), the company's United Kingdom operations, to Foray 911 Limited ("Foray"), a new corporation formed by Mercury Development Capital, a division of Mercury Asset Management plc ("Mercury"), and other investors for the purpose of acquiring PHG. After payment of taxes, severance costs, employee performance bonuses, transaction fees and PHG's debt, net proceeds are expected to be approximately $97 million, which includes a $4.6 million 15% subordinated note due 2009 issued by Foray. Interest is payable quarterly, with none, 1/3, 2/3, and all of the annual interest being payable in cash through November 30, 1997, 1998, 2001, and thereafter, respectively, and the amount of accrued interest being payable upon each of the principal payment dates. The principal amount of the note is to be re-paid in equal annual installments beginning on June 30, 2004 with the final payment due on June 30, 2009. The total purchase price was approximately $135 million. Net proceeds from Mercury's original non-binding offer, as reported on April 16, were estimated at approximately $99 million. In addition, excluded from the sale was PHG's startup secured training centers business, being developed under the name Youth Services Ltd. ("YSL"), which CPC and a 20% joint venture partner intend to develop in the U.K. Upon receipt of the proceeds from the sale, the Company repaid $50 million of outstanding bank debt which bore interest at an effective rate of approximately 8%. PHG operates 15 freestanding acute psychiatric hospitals and chemical dependency facilities comprising 698 beds, including one 42-bed hospital that was 50% owned by CPC. In addition, PHG manages a 13-bed psychiatric unit, a 10- bed secured residential clinic and two 13-station kidney dialysis units for the British government's National Health Service. Uses of the proceeds from the sale of PHG being contemplated by CPC include the expansion of THC operations, repayment of additional bank borrowings, general corporate purposes and other measures which management believes would facilitate CPC's growth, strengthen its balance sheet and enhance stockholder value. Item 5. Other Events. ------------ On June 21, 1996 the Board of Directors of Community Psychiatric Centers (the "Company") declared a dividend of one preferred stock purchase right (the "Rights") on each outstanding share of Company common stock, $1.00 par value per share (the "Common Stock"), payable to stockholders of record on July 16, 1996. Each Right will entitle the holder thereof after the Rights become exercisable and until June 20, 2006 (or the earlier redemption, exchange or termination of the Rights), to buy one one-hundredth of a share of Series B Junior Participating Preferred Stock (the "Preferred Stock") at an exercise price of $45.00, subject to certain antidilution adjustments (the "Purchase Price"). The Rights will be represented by the Common Stock certificates and will not be exercisable or transferable apart from the Common Stock until the earlier of (i) the tenth day after the public announcement that a Person or group has become an Acquiring Person (a Person who has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the Common Stock), or (ii) the tenth day after a Person or group commences, or announces an intention to commence, a tender or exchange offer, the consummation of which would result in the beneficial ownership by a Person or group of 15% or more of the Common Stock (the earlier of (i) and (ii) being called herein the "Distribution Date"). Prior to the Distribution Date, the Board of Directors has the power, under certain circumstances, to postpone the Distribution Date. Separate certificates representing the Rights will be mailed to holders of the Common Stock as of the Distribution Date. The Rights will first become exercisable on the Distribution Date, unless earlier redeemed or exchanged, and may then begin trading separately from the Common Stock. The Rights will at no time have any voting rights. In the event that a Person were to become an Acquiring Person (except pursuant to certain cash offers for all outstanding Common Stock approved by the Board of Directors of the Company) or if the Company were the surviving corporation in a merger and its Common Stock were not changed or exchanged, each holder of a Right, other than Rights that are or were acquired or beneficially owned by the Acquiring Person (which Rights will thereafter be void), will thereafter have the right to receive upon exercise that number of shares of Common Stock having a market value of two times the then-current exercise price of one Right. With certain exceptions, in the event that (i) the Company were acquired in a merger or other business combination transaction in which the Company is not the surviving corporation or its Common Stock is changed or exchanged (other than a merger which follows certain cash offers for all outstanding Common Stock approved by the Board) or (ii) more than 50% of the Company's assets or earning power were sold, proper provision shall be made so that each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise thereof, that number of shares of common 2 stock of the acquiring company which at the time of such transaction would have a market value of two times the then-current exercise price of one Right. At any time after a Person has become an Acquiring Person and prior to the acquisition of 50% or more of the then-outstanding Common Stock by such Acquiring Person, the Board of Directors may cause the Company to acquire the Rights (other than Rights owned by an Acquiring Person which have become void), in whole or in part, in exchange for that number of shares of Common Stock having an aggregate value equal to the excess of the value of the Common Stock issuable upon exercise of a Right after a Person becomes an Acquiring Person over the Purchase Price. The Rights are redeemable at $0.01 per Right prior to the first date of public announcement that a Person or group has become an Acquiring Person. Prior to the expiration of the period during which the Rights may be redeemed, the Board of Directors has the power, under certain circumstances, to extend the redemption period. The Rights will expire on June 20, 2006 (unless earlier redeemed or exchanged). Chase Mellon Shareholder Services is the Rights Agent. Under certain circumstances set forth in the Rights Agreement, the decision to redeem or to lengthen or shorten the redemption period shall require the concurrence of a majority of the Continuing Directors (as defined in the Rights Agreement). The Purchase Price payable, and the number of shares of Preferred Stock or other securities or property issuable upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights or warrants to subscribe for or purchase the Preferred Stock or convertible securities at less than the current market price of the Preferred Stock, or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness, cash, securities or assets (excluding regular periodic cash dividends at a rate not in excess of 125% of the last regular periodic cash dividend theretofore paid or, in case regular periodic dividends have not theretofore been paid, at a rate not in excess of 50% of the average net income per share of the Company for the four quarters ended immediately prior to the payment of such dividend, or dividends payable in the Preferred Stock) or of subscription rights or warrants (other than those referred to above). No adjustments in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. As of May 31, 1996, there were 44,395,753 shares of Common Stock outstanding and 1,128,000 shares were reserved for distribution under the Company's 1989 Stock Incentive Plan and the Company's Combined Stock Option Plan for Key Employees. One Right will be distributed to stockholders of the Company for each share of Common Stock owned of record by them on July 16, 1996. As long as the Rights are attached to the Common Stock, the Company will issue one Right with each new share of Common Stock so that all 3 such shares will have attached Rights. Approximately 1,000,000 shares of Preferred Stock have been reserved for issuance upon exercise of the Rights. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors prior to the time that a Person or group has become an Acquiring Person, as the Rights may be redeemed by the Company at $0.01 per Right prior to such time. The Rights Agreement, dated as of June 21, 1996, between the Company and the Rights Agent specifying the terms of the Rights, and the form of a letter to be sent to the holders of the Company's Common Stock explaining the Rights, are attached hereto as exhibits and are incorporated herein by reference. The foregoing description of the Rights is qualified by reference to such exhibits. Item 7. Exhibits. -------- 1. Agreement between Community Psychiatric Centers and Foray 911 Limited, dated as of June 21, 1996, related to the sale of the entire issued share capital of CPC (Londinium) Limited. The Agreement contains certain attachments designated as "Approved Form Documents" which are not included in this filing. The Company will furnish supplementally a copy of any omitted attachment to the Commission upon request. 2. The Series A Loan Note dated June 21, 1996, made by Foray 911 Limited and payable to Community Psychiatric Centers in the amount of 3 million British Pounds. 3. Inter-Creditor Agreement between the Royal Bank of Scotland, Mercury Asset Management PLC, Foray 911 Limited and Community Psychiatric Centers. 4. Rights Agreement, dated as of June 21, 1996, between Community Psychiatric Centers and Chase Mellon Shareholder Services. 5. Form of Letter to the holders of Community Psychiatric Centers Common Stock. 4 Item 7. Financial Statements: The following unaudited pro forma financial data gives effect to the sale of PHG as described in Item 2, as if the sale occurred as of November 30, 1994 for purposes of the unaudited Pro Forma Condensed Combined Statements of Operations and as of February 29, 1996 for purposes of the Unaudited Pro Forma Condensed Combined Balance Sheet. The unaudited pro forma condensed combined financial statements are based on historical audited financial statements for the year ended November 30, 1995 and the unaudited financial statements as of and for the three months ended February 29, 1996. Pro forma adjustments are based upon preliminary estimates, available information and certain assumptions and adjustments described in the notes to the Unaudited Pro Forma Condensed Combined Financial Statements. The unaudited pro forma financial information presented herein is not necessarily indicative of the results of operations or financial position that CPC would have obtained had such events occurred at the beginning of the period, as assumed, or of the future results of CPC. The unaudited pro forma financial statements should be read in conjunction with the audited financial statements for the year ended November 30, 1995 included in CPC's Form 10-K and the unaudited financial statements for the three months ended February 29, 1996 included in CPC's Form 10-Q.
CPC Pro Forma Condensed Combined Statements of Operations (in thousands, except per share amounts) (unaudited) Three months ended February 29, 1996 Year Ended November 30, 1995 ------------------------------------- ------------------------------------- UK UK Operations Pro Forma Operations Pro Forma Divested Pro Forma as Divested Pro Forma as Historical (A) Adjustments Adjusted Historical (A) Adjustments Adjusted ------------------------------------------------ ------------------------------------------------ Revenues: Net operating revenues $123,409 $(15,254) $ $108,155 $506,663 $(63,319) $ $443,344 Investment and other income 486 173(B) 659 2,513 693(B) 3,206 ------------------------------------------------ ----------------------------------------------- 123,895 (15,254) 173 108,814 509,176 (63,319) 693 446,550 Costs and expenses: Operating expense 97,393 (10,837) 86,556 384,818 (41,597) 343,221 General & administrative expense 7,935 (1,016) 6,919 39,444 (3,338) 36,106 Bad debt expense 4,703 (150) 4,553 28,732 (504) 28,228 Depreciation & amortization 5,643 (857) 4,786 23,344 (3,215) 20,129 Interest expense 1,373 (295) 1,078 5,256 (632) 4,624 Settlement costs 0 45,985 45,985 Impairment loss 0 46,021 46,021 Restructuring charge 843 843 2,110 2,110 ------------------------------------------------ ----------------------------------------------- 117,890 (13,155) 104,735 575,710 (49,286) 526,424 ------------------------------------------------ ----------------------------------------------- Income (loss) before taxes 6,005 (2,099) 173 4,079 (66,534) (14,033) 693 (79,874) Income taxes (credit) 2,282 (735) 66(C) 1,613 (24,902) (4,912) 265(C) (29,549) ------------------------------------------------ ----------------------------------------------- Net income (loss) $ 3,723 $ (1,364) $107 $ 2,466 $(41,632) $ (9,121) $428 $(50,325) Net income (loss) per share $ 0.09 $ 0.06 $ (0.95) $ (1.15) Weighted average shares 43,702 43,702 43,642 43,642 outstanding
See notes to unaudited proforma condensed combined financial statements. CPC Pro Forma Condensed Combined Balance Sheet (Unaudited)
As of February 29, 1996 ------------------------------------------------ UK Operations Historical Divested(A) Pro Forma ------------------------------------------------ (In thousands, except par value data) Assets: Current assets: Cash and cash equivalents $ 7,209 $ 89,626 $ 96,835 Accounts receivable less allowance for doubtful accounts 119,136 (11,340) 107,796 Receivable from third parties under reimbursement contracts 5,196 5,196 Prepaid expenses and other current assets 19,038 (2,324) 16,714 Property held for sale 19,169 19,169 Refundable and deferred income taxes 18,754 18,754 ------------------------------------------------ Total current assets 188,502 75,962 264,464 Property, buildings and equipment, at cost less accumulated depreciation 354,223 (57,899) 296,324 Deferred income taxes 21,218 21,218 Other assets 27,573 1,569 29,142 Goodwill 8,799 (4,557) 4,242 ------------------------------------------------ $600,315 $ 15,075 $615,390 Liabilities and Stockholders' Equity: Current liabilities: Accounts payable & accrued expenses $ 46,781 $ (6,824) $ 39,957 Income taxes payable 8,814 (5,131) 3,683 Current maturities on long-term debt 68,758 (5,102) 63,656 Accrued restructuring charges 1,875 1,875 ------------------------------------------------ Total current liabilities 126,228 (17,057) 109,171 Long-term debt 31,328 (8,929) 22,399 Deferred compensation 2,013 2,013 Deferred income taxes 17,007 (2,322) 14,685 Obligation to be settled in common stock 21,250 21,250 Common Stock, par value $1 a share; authorized 100,000 shares; issued 46,856 shares 46,856 46,856 Other Stockholders' equity 355,633 43,383 399,016 ------------------------------------------------ $600,315 $ 15,075 $615,390
See notes to unaudited pro forma condensed combined financial statements. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The Unaudited Pro Forma Condensed Combined Financial Statements reflect all adjustments which, in the opinion of management, are necessary to present a fair statement of the results for the periods presented. These statements do not include certain disclosures required under generally accepted accounting principles and, therefore, should be read in conjunction with the financial statements and notes thereto included in the Form 10-K of CPC for the year ended November 30, 1995. The accounting principles used in preparing these financial statements are the same as the principles described in those statements. The results for interim periods are not necessarily indicative of trends or of results to be expected for a full year. The adjustments to arrive at the Unaudited Pro Forma Combined Financial Statements are as follows: (A) To reflect the divestiture of Priory Hospitals Group ("PHG"), the Company's United Kingdom operations. After payment of taxes, severance costs, employee performance bonuses, transaction fees and PHG's debt, net proceeds are expected to be approximately $97 million, which includes a $4.6 million 15% subordinated note due 2009 issued by the buyer. CPC expects to record a net gain of approximately $42 million after income taxes and other divestiture costs. The net gain of $43.4 million reflected in the unaudited balance sheet represents the gain that would have been recorded if the sale had occurred on February 29, 1996. For the quarter ended February 29, 1996 and fiscal year 1995, the divested international operations generated net operating revenues of $15.3 million and $63.3 million and net income of $1.4 million and $9.1 million, respectively. Capital expenditures and acquisitions related to these operations totalled $3.0 million for the quarter ended February 29, 1996 and $11.3 million for fiscal year 1995. (B) To reflect interest income on the $4.6 million note due from Foray at an annual interest rate of 15%. (C) To reflect income taxes at CPC's effective tax rate of 38.2%. EXHIBIT INDEX 1. Agreement between Community Psychiatric Centers and Foray 911 Limited, dated as of June 21, 1996, related to the sale of the entire issued share capital of CPC (Londinium) Limited. 2. The Series A Loan Note, dated June 21, 1996, made by Foray 911 Limited and payable to Community Psychiatric Centers in the amount of 3,000 British Pounds. 3. Inter-Creditor Agreement between the Royal Bank of Scotland, Mercury Asset Management PLC, Foray 911 Limited and Community Psychiatric Centers. 4. Rights Agreement dated as of June 21, 1996 between Community Psychiatric Centers and Chase Mellon Shareholder Services, which includes the form of Certificate of Resolution Establishing Designations, Preferences and Rights of Series B Junior Participating Preferred Stock of Community Psychiatric Centers as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C. 5. Form of Letter to the holders of Community Psychiatric Centers Common Stock. 6 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. COMMUNITY PSYCHIATRIC CENTERS Dated: July 5, 1996 By Wendy Simpson --------------------------- Chief Financial Officer EX-99.1 2 ACQUISITION AGREEMENT DATED 6-21-96 EXHIBIT 1 DATED 21st JUNE 1996 ------------------------------------------ (1) COMMUNITY PSYCHIATRIC CENTERS and (2) FORAY 911 LIMITED ------------------------------------------ ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF CPC (LONDINIUM) LIMITED ------------------------------------------ Biddle & Co. 1 Gresham Street LONDON EC2V 7BU Tel: 071 606 9301 Fax: 071 606 3305 Ref: 30/4972X CONTENTS -------- Clause ------ 1. Definitions and interpretations 2. Sale and Purchase 3. Waivers of Pre-emption Rights 4. Consideration 5. Completion 6. Representations, Warranties and Undertakings 7. Taxation Payments 8. Limitations on Relevant Claims 9. Restrictions 10. Vendor's Accounts 11. Announcements 12. Costs and Expenses 13. Entire Agreement 14. Successors 15. Effect of Completion 16. Further Assurance 17. Time of the Essence 18. Notices and Service of Process 19. Counterparts 20. Change of Name 21. Governing Law Schedule -------- First Shareholder Second Directors and Secretary Third Subsidiaries and Associated Companies Fourth Property Fifth Representations, Warranties and Undertakings Sixth Taxation Claims Seventh Cash and Working Capital Adjustment Approved Form Documents ----------------------- - Officers Resignation Letter - Post Completion Powers of Attorney - Evidence of the appointment and retirement of Pension Trustees - Vendors letter of procurement of R Conte's services - Anti-embarrassment letter - Loan Notes - Side Letter re: taxation provisions - US Legal Opinion - Certificates of Title - Share transfer forms THIS AGREEMENT is made on 21st June 1996 BETWEEN:- (1) COMMUNITY PSYCHIATRIC CENTERS whose principal place of business is at 5110 West Sahara Avenue, Las Vegas NV 89102, USA (Facsimile No. 001 702 257 3625) ("the Vendor") (2) FORAY 911 LIMITED whose registered office is at 14 Fletcher Gate, Nottingham NG1 2FX (Facsimile No. 0115 936 6001) ("the Purchaser") WHEREAS:- (A) The Company is a private limited company incorporated in England on 3 November 1987 under the Companies Act 1985, is registered with number 2188451 and has its registered office at The Priory, Priory Lane, Roehampton, London SW15 5JJ. (B) The Company has an authorised share capital of (Pounds)3,500,000 and US 161,063.13 divided into 3,500,000 ordinary shares of (Pounds)1.00 each of which 3,407,203 are issued fully paid or credited as fully paid and 16,106,313 ordinary US shares of $0.01 each all of which are issued fully paid or credited as fully paid. (C) CPC Investment Corporation Inc ("the Shareholder"), a wholly-owned subsidiary of the Vendor, is the beneficial owner of the whole of the issued share capital of the Company. (D) The persons named in the Second Schedule are the only directors and secretary of the Company. (E) The Company has the subsidiaries and associated companies details of which are set out in the Third Schedule. (F) The Vendor wishes to procure the sale of, and the Purchaser wishes to purchase, the whole of the issued share capital of the Company upon the terms and conditions set out in this Agreement. -2- IT IS HEREBY AGREED as follows:- - ------------------------------ 1. DEFINITIONS AND INTERPRETATION ------------------------------ (a) In this Agreement the following words and expressions (unless the context otherwise requires) have the following meanings:- "Accounts" the audited financial statements of the Company and of each Subsidiary, and the audited consolidated financial statements of the Company and the Subsidiaries, for the accounting reference period ended on the Accounts Date, each of which financial statements comprise a balance sheet at the Accounts Date, profit and loss account, notes, directors' and auditors' reports and other documents annexed thereto a copy of which is attached to the Disclosure Letter. "Accounts Date" 30 November 1995. "approved form" in the form approved by the Vendor and the Purchaser and for the purposes of identification initialled by or on behalf of the same or in the form executed at the same time as this Agreement. "Associated Companies" the companies details of which are set out in Part 2 of the Third Schedule. "business day" a day which in England is neither a -3- Saturday nor Sunday nor a bank or other public holiday. "Bearer Shares" all the issued ordinary US shares of US $0.01 each in the capital of the Company. "Company" CPC (Londinium) Limited. "Completion" performance of the obligations assumed by the parties respectively under Clause 5. "Completion Date" the date of Completion. "Disclosure Letter" the letter including its attachments of the same date as this Agreement from the Vendor to the Purchaser disclosing facts for the purpose of Clause 6(a) and delivered to the Purchaser's Solicitors on or before the execution of this Agreement. "the Executive Pension the Priory Executive Pension and Scheme" Assurance Scheme "Group Company" the Company and the Subsidiaries (and, in respect of the period immediately following Completion, any holding company of the Company and any other subsidiary of such holding company from time to time). "the Individual Pension the following:- Arrangements" (a) the plans established in 1978 through Provident Mutual for Miss Baudonne and Mrs. G F Murphy; and -4- (b) the individual pension policies through Equitable Life Assurance Society established by Priory Hospitals Group for John D Lambert, Janis Lambert, David R. Matthews, Stuart P Vere and David A Wakefield "IHTA" Inheritance Tax Act 1984. "Industrial Property" patents, trade marks, service marks, rights (whether registered or unregistered) in any designs, applications for any of the foregoing, trade or business names, copyright and other similar industrial or commercial rights. "Industrial Property agreements or arrangements relating Agreements" wholly or partly to Industrial Property or to the disclosure, use, assignment or patenting of any inventions, discoveries, improvements, processes, formulae or other knowhow. "Loan Notes" the secured loan notes 2004 to be issued by the Purchaser pursuant to Clause 4(a) in the approved form. "the Management the management accounts of the Company and Accounts" the Subsidiaries for the period from the Accounts Date to 30th April 1996 a copy of which is attached to the Disclosure Letter. -5- "the Management 30th April 1996. Accounts Date" "the Paid-Up Schemes" the Priory Staff Pension and Assurance Scheme, Pension 2000 Savingsplan for Community Psychiatric Centers (London) Unlimited, and the Regency Park Pension Scheme "the Pension Schemes" the Paid-Up Schemes, the Executive Pension Scheme, the Staff Scheme, and the Teachers' Scheme "Property" the property described in the Fourth Schedule. "Purchaser's Accountants" Deloitte & Touche of Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR. "Purchaser's Solicitors" Eversheds of 14 Fletcher Gate, Nottingham NG1 2FX "Registered Shares" all the issued ordinary shares of (Pounds)1 each in the capital of the Company. "relevant claim" a claim in respect of any of the Warranties and/or in respect of a Taxation Claim and/or under any other provision of this Agreement, but excluding a claim in respect of any of Clauses 2, 3, 4, 5, 6(b), 9 and 16. "Shares" the Bearer Shares and the Registered Shares. "the Staff Scheme" the Priory Hospitals Group Retirement and Death Benefits Scheme -6- "Subsidiaries" the companies details of which are set out in Part 1 of the Third Schedule. "taxation" all forms of taxation whether of the United Kingdom or elsewhere including (without limitation) corporation tax (and any amount assessed or assessable, or payable, as if it were corporation tax), advance corporation tax, income tax, capital gains tax, development land tax, value added tax, customs and other import duty, stamp duty, stamp duty reserve tax, capital duty, capital transfer tax, inheritance tax, pay as you earn and national insurance and social security contributions, sums required by law to be deducted in respect of or on account of any such taxation and all penalties, fines, surcharges and interest relating to any such taxation or to any failure or delay in reporting any matter or making any return required to be reported or made (or any failure to do so accurately and completely) to any authority responsible for the administration of any taxation. "Taxation Claim" as defined in the Sixth Schedule. "TCGA" Taxation of Chargeable Gains Act 1992. "Taxes Act" Income and Corporation Taxes Act 1988. -7- "the Teachers' Scheme" the Teachers' Superannuation Scheme "VAT" value added tax. "VATA" Value Added Tax Act 1994. "Vendor's Group" the Vendor and any corporations (other than the Group Companies) which at the relevant time after Completion are subsidiaries or subsidiary undertakings of the Vendor (or which would have been had they been incorporated in England). "Vendors' Solicitors" Biddle & Co of 1 Gresham Street, London EC2V 7BU. "Warranties" the representations, warranties and undertakings set out or referred to in Clause 6 and in the Fifth Schedule. (b) References in this Agreement to Clauses, Recitals or Schedules are to clauses of and recitals or schedules to this Agreement and references to this Agreement include all Recitals and Schedules. (c) Any headings in this Agreement are for convenience only and do not affect the construction or interpretation of this Agreement. (d) Unless the context otherwise requires in this Agreement references to the parties are references to the parties to this Agreement, the singular includes the plural and vice versa, words implying one gender shall be treated as implying any gender, and references to individuals shall be treated as including corporations and vice versa. (e) Whether a person is "connected" with another person shall be determined in accordance with Section 839 of the Taxes Act. (f) Words and expressions defined in the Companies Act 1985 bear the -8- same meanings in this Agreement unless the context otherwise requires. (g) References in this Agreement to any statute or statutory provision include any statute or statutory provision which amends, extends, consolidates or replaces the same or which has been amended, extended, consolidated or replaced by the same and include any orders, regulations, instruments or other subordinate legislation made under the relevant statute Provided always that the obligations of the parties under this Agreement shall not be increased by any such amendment, extension, consolidation or replacement made after the date of this Agreement or by any subordinate legislation made after the date of this Agreement. 2. SALE AND PURCHASE ----------------- (a) Subject to the terms of this Agreement the Vendor shall procure that the Shareholder shall sell with full title guarantee, and the Purchaser shall purchase, the Shares free from all claims, charges, liens, encumbrances and equities and together with all rights attached or accruing thereto and together with all dividends and distributions declared, paid or made after the date hereof. (b) The Purchaser shall not be obliged to complete the purchase of any of the Shares unless the purchase of all of the Shares is completed simultaneously. 3. WAIVERS OF PRE-EMPTION RIGHTS ----------------------------- The Vendor shall procure that the Shareholder irrevocably waives all rights of pre-emption over the Shares conferred on it either by the Articles of Association of the Company or in any other way. -9- 4. CONSIDERATION ------------- (a) Subject to the provisions of the Seventh Schedule, the Purchaser shall pay a total consideration for the Registered Shares and the Bearer Shares of (Pounds)88,418,289, which consideration shall be satisfied as follows:- (i) as to (Pounds)85,198,289 in cash payable at Completion to the Shareholder or as the Shareholder shall direct; (ii) as to (Pounds)3,000,000 by the allotment and delivery of the Loan Notes to the Shareholder or as the Shareholder shall direct; (iii) as to the balance of (Pounds)220,000 in cash on the first anniversary of Completion to the Shareholder or as the Shareholder shall direct. The consideration for the Registered Shares is (Pounds)100 in cash at Completion, and the consideration for the Bearer Shares is the balance of the total consideration specified in this Clause 4(a). (b) If:- (i) the Purchaser is obliged to pay any stamp duty on (or in respect of the consideration attributed to) the Bearer Shares and/or any penalty and/or interest in respect of late payment of such stamp duty and makes such payment within 2 years of Completion; or (ii) during the 2 year period referred to in Clause 4(b)(i), the Purchaser notifies the Vendor that the Inland Revenue claims payment of an amount as referred to in Clause 4(b)(i) and the Purchaser has paid the same to the Inland Revenue within 4 years of Completion and produces appropriate evidence to such effect then the Vendor shall pay to the Purchaser an amount equal to 75% of any such amount paid to the Inland Revenue. -10- 5. COMPLETION ---------- The sale and purchase of the Shares shall be completed immediately after execution of this Agreement at the offices of the Vendor's Solicitors or at such other place as may be agreed between the parties, whereupon:- (a) the Vendor shall cause to be delivered to the Purchaser's Solicitors: (i) the certificate or certificates for the Shares together with a transfer or transfers in the approved form of the Registered Shares duly executed in favour of the Purchaser or as it may direct; (ii) transfers in the approved form of all shares in any Subsidiary or Associated Company not held in the name of the Company duly executed in favour of the Purchaser (or as it will direct) together with the share certificates in respect of all the issued shares of each Subsidiary or Associated Company (but excluding transfers and certificates in respect of such shares as are not beneficially owned by a Group Company, as identified in the Third Schedule); (b) the Vendor shall cause to be delivered to the Purchaser's Solicitors or as the Purchaser may direct:- (i) certificates of title ("Certificates of Title") or in the case of such of the Property as is listed in the Fourth Schedule reports on leases prepared by the Vendor's Solicitors or (in the case of such of the Property known as Langside Priory Hospital, Glasgow) by Archibald Campbell & Harley, WS in favour of the Purchaser, the Purchaser's Solicitors, Mercury Asset Management Plc and -11- The Royal Bank of Scotland PLC and others in the approved form (subject to a limitation of liability of (Pounds)50,000,000 in aggregate) together with all deeds and documents relating to the title of the Company and the Subsidiaries to the Property but excluding the Land Certificate in respect of Woodbourne Clinic and excluding original title deeds and documents to Langside Priory Hospital and to such of the Property as is referred to at items 3 and 7 in the Fourth Schedule under the heading Unregistered Titles; (ii) the written resignation of those directors of the Company and the Subsidiaries in the approved form as the Purchaser shall direct and subject to the Purchaser or the Company assuming any liability in respect of any claim for compensation for loss of office (except as regards R. Conte, W. Simpson and D. Wakefield) and (except as aforesaid) the Purchaser hereby undertakes to indemnify and keep indemnified the Vendor's Group from any liability, loss, cost or expense in relation thereto; (iii) the written resignation of the auditors of the Company and the Subsidiaries confirming that they have no claims against the Company or the Subsidiaries in respect of compensation for loss of office or on any other account whatsoever and containing a statement pursuant to Section 394 of the Companies Act 1985 to the effect that there are no circumstances connected with their ceasing to hold office which they consider should be brought to the attention of the members or creditors of the Company or the Subsidiaries; (iv) the Disclosure Letter; (v) the certificate of incorporation, any certificate or -12- certificates of incorporation on change of name, any common seal (and any former common seal or seals), all minute books, share registers and share certificate books (and any unissued share certificates) and other statutory books (all such books and registers being written up to, but not including, Completion) and complete and up to date copies of the Memorandum and Articles of Association of the Company and of each of the Subsidiaries; (vi) all books of account, cheque books, paying in books and unused cheques of the Company and the Subsidiaries together with statements from each of the banks at which they maintain accounts of the amounts standing to the debit or credit of such accounts at the close of business on the business day preceding by no more than three business days the Completion Date together also with duly signed instructions to such banks in the approved form; (vii) all documents of title relating to the investments and securities of the Company and the Subsidiaries; (viii) a power of attorney in the approved form in relation to the exercise of the rights attached to the Registered Shares during the period commencing on Completion and ending on the registration of the Purchaser or its nominee as holder of the Registered Shares; (ix) all licences, certificates or other documents previously specified by the Purchaser at the respective place of business of each unit; (x) all keys and credit cards (if any) of the Company and each Subsidiary which are in the possession of or under the control of the Vendor or any other person who resigns as -13- an officer of any of such companies in accordance with this clause 5; (xi) evidence in the approved form of the appointment of such new trustees to, and the retirement of such of the trustees of, the Pension Schemes as the Purchaser may reasonably require; (c) the Vendor shall procure that board meetings of the Company and of each of the Subsidiaries are held at which the Vendor shall procure:- (i) the appointment as secretary and as directors of the Company and the Subsidiaries of such persons as the Purchaser may nominate; (ii) the appointment of the Purchaser's Accountants as auditors of the Company and of each of the Subsidiaries; (iii) the cancellation of the existing bank mandates of the Company and the Subsidiaries and the execution of new bank mandates in such form as the Purchaser shall require; (iv) that resolutions are passed to cancel the certificate(s) delivered pursuant to sub-clause (a) of this Clause (other than those relating to the Bearer Shares) and to register the transfer(s) delivered pursuant to that sub-clause, subject to their being re-produced duly stamped, and to seal and issue certificates in favour of the transferees named in those transfers; (d) the Vendor shall further procure that:- (i) any indebtedness owing by R Conte, W Simpson or D Wakefield and persons connected with such persons is repaid in full with all outstanding interest (whether due for payment or not); -14- (ii) any indebtedness owing between the Company or any of the Subsidiaries or the Associated Companies and the Vendor or any other member of the Vendor's Group is or has been repaid (whether by retirement, expiry or otherwise) in full with all outstanding interest (whether due for payment or not); (iii) the Company and each of the Subsidiaries is released from all guarantees, indemnities, charges or other encumbrances granted by any of them in respect of liabilities of the Vendor or any other member of the Vendor's Group or the liabilities of any directors of the Company or the Subsidiaries and persons connected with any of such persons ; (iv) the Company and each of the Subsidiaries is released from any liability owed in favour of the Bank of America National Trust and Savings Association and any other lender (other than Midland Bank Plc) who has advanced cash or cash equivalent to the Company or any of the Subsidiaries and is released from all guarantees, indemnities, charges or other encumbrances in relation thereto; (v) the ISDA agreement disclosed at paragraph (21) of the Disclosure Letter and all transactions thereunder are or have been terminated. and (without prejudice to the foregoing provisions of this Clause 5(d)) the Vendor undertakes that if any indebtedness of the Company or any of the Subsidiaries or any Associated Company to or in respect of the Vendor or any other member of the Vendor's Group or if any such obligation as is referred to in paragraph -15- (iii) of this sub-clause (d) is not fully repaid or released at Completion the Vendor shall procure that the same is not enforced after Completion; (e) the Vendor shall procure the delivery of the letter in the approved form for the provision of R. Conte's services on behalf of the Vendor to the Purchaser; (f) the Vendor and Mercury Asset Management Plc shall execute and deliver the anti-embarrassment letter in the approved form; (g) the Purchaser shall deliver a letter to the Vendor's Solicitors and addressed to R. Conte relating to the collection of his personal effects at Flat 5, Priory Court; (h) the Vendor shall deliver to the Purchaser's Solicitors or its US agents a legal opinion in the approved form; (i) the Vendor and Purchaser shall each execute and deliver the side letter relating to taxation provisions in the approved form; (j) the Purchaser shall:- (i) cause to be delivered to the Vendors' Solicitors cleared funds in the sum of (Pounds)84,534,342 (of which (Pounds)30,000 represents the aggregate amount due as compensation for loss of office for Mr J Ainley and Mr N Petrie, (Pounds)96,711 represents outstanding interest and management charges owed to the Vendor and the balance represents the consideration payable for the Shares); (ii) deliver to the Vendor's Solicitors a certified copy of the resolution of the board of directors authorising the execution of this Agreement, the issue of the Loan Notes to the Vendor and the carrying out of the other matters contemplated by this Agreement; -16- and the delivery of such funds and the allotment of the Loan Notes shall constitute an absolute discharge to the Purchaser of the purchase price for the Shares. (k) The Vendor will procure that, on or immediately following Completion, application is made (on behalf of the Company and the Subsidiaries) to HM Customs & Excise for the removal of the Vendor from the PHG Group with effect from the day following Completion (or such other later date as HM Customs & Excise may require). 6. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS -------------------------------------------- (a) The Vendor represents, warrants and undertakes to the Purchaser in the terms set out in the Fifth Schedule (subject to Clause 8 and provided however that the Purchaser will not be entitled to claim that any fact or combination of facts constitutes a breach of any of the Warranties if and to the extent that such fact or combination of facts has been fairly disclosed by the Disclosure Letter so as to enable a purchaser reasonably to be made aware of the same (including for the avoidance of doubt, facts contained in the Purchaser's reports from its advisers as such reports are listed in the Disclosure Letter)) and the Vendor agrees and acknowledges that the Purchaser is entering into this Agreement in reliance on the Warranties. The rights and remedies of the Purchaser in respect of the Warranties shall not be affected by the sale of the Shares, by any investigation made by or on behalf of the Purchaser into the affairs of the Company or of any of the Subsidiaries (save as specified above) or by any other event or matter whatsoever. -17- (b) The Vendor warrants to the Purchaser that no promise or representation has been made to it in connection with the Warranties, the Disclosure Letter or taxation in respect of which the Company or any of the Subsidiaries might be liable and the Vendor undertakes to the Purchaser that it will waive all rights it may have in respect of any misrepresentation, inaccuracy or omission in or from information supplied to it by the Company, any of its Subsidiaries or their respective directors or employees in connection with the Warranties, the Disclosure Letter or taxation and undertakes that it will not make any claims against any such person in respect of any such mispresentation, inaccuracy or omission; Provided however that the Vendor's warranties and undertakings in this Clause 6(b) do not extend to any promise or representation by, or right it may have against, David Wakefield. (c) Each of the Warranties shall be construed as a separate Warranty and will not be limited or restricted by reference to, or inference from, the terms of any other Warranty or any other term of this Agreement. (d) The Vendor hereby undertakes with the Purchaser for itself and as trustee for the Company and each Subsidiary to indemnify and keep indemnified the Purchaser and each Group Company in respect of any entitlement that the Purchaser or any Group Company may be required to satisfy under the CPC stock incentive scheme or phantom stock option scheme as a result of the participation by any employee or former employee of any Group Company in any such scheme or by reason of any such employee or former employee ceasing to be entitled to benefit thereunder in consequence of -18- the Group Companies ceasing to be subsidiaries of the Vendor, provided that, with the exception of sub-clause (a)(iii) of Clause 8, and subject as provided below in respect of sub-clause 8(e), Clause 8 shall not apply; provided further that the Purchaser shall not be entitled to make a claim under this sub-clause 6(d) unless written notice thereof (specifying reasonably full details of the circumstances giving rise to the claim and an estimate of the total amount claimed or potentially to be claimed in respect thereof) shall have been received by the Vendor prior to the fifth anniversary of the Completion Date, and unless any legal proceedings in connection with it are commenced within 12 months after such written notice of the claim is first served on the Vendor. For the avoidance of doubt, no amount paid under this sub-clause (d) of Clause 6 shall form part of or count towards the (Pounds)2,500,000 threshold referred to in sub- clause (a)(iv) of Clause 8. Where any action is proposed to be taken by the Company or any of the Subsidiaries or the Purchaser which may lead to a claim by the Purchaser under this Clause 6(d) (and in respect of which such party shall be deemed to be under a duty to take reasonable steps to mitigate its loss) the Purchaser shall procure that the Vendor is kept fully informed of the position and that any agreement with any such employee or former employee will be subject to the prior approval of the Vendor (such approval not to be unreasonably withheld) and that any such action as aforesaid shall in good faith take account of all proper observations and representations of the Vendor with a view to minimising any liability of the Vendor under this Clause 6(d) -19- and in the case of a claim by a former employee the provisions of sub- clause 8(e) shall also apply on the basis that the Purchaser acknowledges that any dispute with such former employee will not materially and adversely affect the goodwill of the Purchaser, the Company or the Subsidiaries. If any relevant employee ceases to be employed by any of the Group Companies for any reason, the Purchaser shall notify the Vendor of the same within 30 days of such cessation. (e) The Vendor hereby undertakes with the Purchaser for itself and as trustee for the Company and each Subsidiary to indemnify and keep indemnified the Purchaser and each Group Company against any liability which constitutes a breach of the Warranty under paragraph (71) of the Fifth Schedule, to the extent that such liability when aggregated with any other such liability exceeds (Pounds)25,000; provided that of sub- clauses (a)(iv) and (v) of clause 8, clause 8 shall not apply. For the avoidance of doubt no amount paid under this sub-clause (e) of Clause 6 shall form part of or count towards the (Pounds)2,500,000 threshhold referred to in sub-clause (a)(iv) to Clause 8. 7. TAXATION PAYMENTS ----------------- (a) The Vendor shall, subject to the provisions in Clause 8, pay to the Purchaser an amount equal to the amount claimed by or due under any Taxation Claim or (as the case may be) equal to the taxation which arises in relation to any Taxation Claim together with any reasonable costs, fees and expenses reasonably incurred by the Company, the Purchaser or any of the Subsidiaries in connection with any Taxation Claim in respect of which the Vendor is liable to make a payment to the Purchaser in accordance with the provisions of this Agreement. -20- (b) Where the amount of any claim, credit, relief, repayment or other sum falls to be determined in respect of a Taxation Claim, the Purchaser may request the Company's auditors for the time being (acting as experts and not as arbitrators) to certify such amount and any such certificate shall be binding on the parties save in the case of manifest error. (c) The Purchaser shall procure that the Company and the Subsidiaries shall co-operate with the Vendor in the preparation and submission of tax returns relating to periods up to the Accounts Date and shall give access to and copies of any papers or information which the Vendor may reasonably require in respect of the tax liabilities for such periods. All written communications with the Inland Revenue in respect of corporation tax liabilities for periods up to the Accounts Date shall be shown to the Vendor and subject to the Vendor's approval (not to be unreasonably withheld or delayed) prior to being sent, and the Purchaser agrees that all reasonable representations by the Vendor will be incorporated accordingly. Where any action is proposed to be taken by the Company or any of the Subsidiaries or by the Vendor or the Purchaser, which will or might result in the tax liabilities in question being such as to make the charge of (Pounds)2,723,333 for corporation tax in the consolidated profit and loss account comprised in the Accounts, and/or the provision of (Pounds)462,478 for other taxation and Social Security provisions shown as creditors in the Accounts, an under-provision the Vendor and the Purchaser each agree to procure that the person taking responsibility for agreeing the tax liabilities will keep the other fully informed of the position and that any agreement with any revenue authority will be subject to the prior approval of -21- the other party (such approval not to be unreasonably withheld or delayed) and that any such action as aforesaid shall in good faith take account of all proper observations and representations by the other party with a view to minimising or eliminating the shortfall in the said taxation provision. (d) The Purchaser shall procure that the Company and each of the Subsidiaries join if required in the making of any capital gains tax roll-over relief claim which will result in a reduction or cancellation of any chargeable gain otherwise realised by any such company but so that such claims shall only be required in relation to asset disposals and acquisitions occurring before Completion. (e) (i) If any deduction or withholding in respect of taxation is required by law to be made from any payment by the Vendor or the Shareholder to the Purchaser under this Clause 7 or if the Purchaser is or becomes liable to make a payment of taxation or increased taxation as a result of receiving or becoming entitled to any payment ("the Initial Amount") by the Vendor or the Shareholder under this Clause 7, the Vendor covenants with the Purchaser to pay to the Purchaser or procure that the Shareholder pays to the Purchaser such additional amount as is necessary to ensure that the net amount received and retained by the Purchaser (after taking account of such deduction or withholding or taxation) is equal to the amount which it would have received and retained had the payment in question not been subject to the deduction or withholding or taxation. The date for payment of the additional amount shall, in the case of a deduction or withholding, be the date on which -22- payment of the Initial Amount is made and, in the case of a payment subject to taxation, shall be the date five business days before the taxation or increased taxation referred to above falls due for payment. (ii) In sub-clause (i) above "the Purchaser" means Foray 911 Limited only, and this "grossing up" clause in sub-clause (i) above shall not apply in the case of any payments to or which belong to any person other than Foray 911 Limited. (f) Where the Vendor is required to make any payment to the Purchaser under this Clause 7 (or other provision of this Agreement) the Vendor may procure that the Shareholder shall make payment so as to discharge the Vendor's obligation. 8. LIMITATIONS ON RELEVANT CLAIMS ------------------------------ (a) Notwithstanding any other provision of this Agreement (other than Clauses 6(d) and 8(s):- (i) the Purchaser shall not be entitled to make a relevant claim unless written notice thereof or, in the circumstances referred to in Clause 8(b)(viii), of the contingent liability which may give rise to an actual liability (specifying reasonably full details of the circumstances giving rise to the claim and an estimate of the total amount claimed or potentially to be claimed in respect thereof) shall have been received by the Vendor prior to the sixth anniversary of the Completion Date in respect of any relevant claim relating to taxation and prior to the second anniversary of the Completion Date in respect of any other relevant claim; -23- (ii) a relevant claim will not be enforceable against the Vendor, and shall be treated as of no force and effect whatsoever, unless any legal proceedings in connection with it are commenced within 12 months after written notice of it is first served on the Vendor; this paragraph will not apply where there is a delay of more than 12 months arising solely as a result of the Purchaser's compliance with paragraph (a)(vi) or (b)(viii) below provided that legal proceedings are commenced within a reasonable time after the date on which it becomes clear that recovery from any third party will not be possible or (as the case may be) that the contingent liability has become an actual liability (provided such liability becomes actual prior to the tenth anniversary of the Completion Date in respect of claims relating to taxation and the sixth anniversary of the Completion Date in respect of any other relevant claim), and in any event within 12 months of that date; (iii) the aggregate liability of the Vendor in respect of all relevant claims and other claims under this Agreement and the tax side letter shall be limited to the aggregate consideration received and not repaid under Clause 4 ; (iv) the Vendor shall only be liable in respect of any relevant claim if the amount of that and all other relevant claims shall exceed (Pounds)2,500,000 in aggregate in which event the Purchaser shall be entitled to make claim in full in respect of any relevant claim and not just the excess and -24- provided that any amounts in respect of and to the extent to which the Vendor is liable to make a payment to the Purchaser pursuant to the provisions of the tax side letter, or for which the Vendor is not liable in any event in accordance with Clause 2(c) or (d) or 6(b) of the tax side letter shall be excluded altogether in connection with or in aggregating relevant claims for the purposes of the threshold in this sub-clause (iv) (v) individual relevant claims of (Pounds)25,000 or less shall be ignored for all purposes and the Purchaser shall be entitled to make no claim whatsoever in respect thereof and, for the purposes of this Clause only, where two or more Taxation Claims arise from the same subject matter which gives rise to a particular Taxation Claim, the same shall be treated as one; (vi) where the Purchaser or any Group Company is entitled to recover from some other person (including any taxation authority but excluding any other Group Company) any sum in respect of any matter or event which has given rise to a relevant claim against the Vendor, the Purchaser shall procure that it or any Group Company (as appropriate) shall take all reasonable steps to recover that sum, and any sum recovered (whether by way of repayment, set off, credit or otherwise) together with any interest or other amount recovered thereon in addition ("the recovered amount") will reduce by the same amount the amount of the relevant claim. Except in respect of a Taxation Claim, no claim shall (without prejudice to the Purchaser's right to -25- notify the Vendor of a relevant claim under Clause 8(a)(i)) be made by the Purchaser against the Vendor pending such attempts at recovery but if, for whatever reason, a claim has been satisfied by the Vendor prior to such recovery an amount equal to the recovered amount (or if less, the full amount of the claim previously satisfied) will be paid to the Vendor forthwith upon recovery. In the case of a relevant claim which relates to taxation, the recovered amount shall be calculated less the reasonable costs of recovery, and if, subsequent to any payment by the Vendor in respect of a Taxation Claim, any reduction (including discharge) of a Taxation Claim is made or if the ultimate liability in respect of the Taxation Claim falls short of the amount of the Taxation Claim the Purchaser shall promptly repay to the Vendor an amount equal to such reduction or shortfall as if the same were a recovered amount (together with any supplement received in respect of the same). In the case of the recovery of any sum from any of the professional consultants (being the medical directors, therapists and sessional workers and any other similar categories) who at the relevant time is or remains engaged on an on-going basis to provide services to any Group Company and who has been paid gross (as a self- employed person and not an employee), no Group Company shall be bound to take action to recover any such sum where it is reasonably of the opinion that by doing so it would prejudice and adversely affect its on-going relationship with the consultant -26- concerned to the detriment of the business and goodwill of that Group Company; Group Companies will however be obliged to seek the reasonable assistance and co-operation of all such professional consultants paid on a gross basis in providing information to the Vendor and/or to the Inland Revenue and/or the Department of Social Security with a view to eliminating or minimising any income tax or national insurance contributions liabilities sought to be recovered by the Inland Revenue and/or the Department of Social Security from any Group Company in respect of payments by any Group Company to the professional consultants, and to otherwise assist the Vendor to a reasonable extent in liaising with relevant individuals for the purpose of procuring such information; (vii) the Purchaser shall as soon as reasonably practicable inform the Vendor in writing of any event which comes to the notice of the Purchaser or any Group Company whereby it appears that the Vendor is or may become liable to make any payment under the Warranties and/or in respect of a Taxation Claim and, in the case of a claim relating to taxation, notice shall in any event, but only so far as reasonably practicable, be given in sufficient time to enable the Vendor to instruct the Purchaser to lodge on behalf of any such company a notice of appeal with the relevant taxation authorities, and the Purchaser shall make available to the Vendor all such information as may be available to it and any such company in connection with the potential liability; failure to notify the Vendor as -27- soon as is reasonably practicable pursuant to the above provisions of this sub-clause will not invalidate any claim but will (if relevant) be taken into account in assessing any damages payable. (b) The Vendor will not be liable in respect of a relevant claim:- (i) if or to the extent that the relevant claim would not have arisen but for the creation and issue on or before 6 June 1996 of 3,407,203 Bearer Shares or anything done or omitted to be done on or before Completion at the written request or with the written approval of the Purchaser provided however that the issue of any of the Shares by the Company on the date hereof and the arrangements made and to be made on the date hereof to repay indebtedness shall not be treated as done at the request or with the approval of the Purchaser for the purposes of this sub- clause (i); (ii) if or to the extent that the relevant claim would not have arisen but for anything voluntarily done or omitted to be done outside the ordinary course of business after Completion by the Purchaser or any Group Company or any of their respective agents or successors in title which the Purchaser knew or ought reasonably to have known would give rise to the relevant claim; (iii) to the extent that it arises or is increased as a result of any change in the basis or method of calculation of any assets or liabilities or in the treatment of timing differences adopted by any Group Company after the date of this Agreement except to the extent to which such change -28- is necessary in order to correct an accounting policy of any such company which did not comply with any relevant Statement of Standard Accounting Practice or Financial Reporting Standard in force at the date of preparation of the Accounts or relevant earlier accounts of any such company; (iv) to the extent that it arises from or is increased by a change of law or of published Inland Revenue, Customs & Excise or accountancy practice, in either case announced after the date of this Agreement ; (v) to the extent that it would not have arisen but for a revision of any allowance, relief, credit or repayment previously claimed or taken into account or assumed to be available in the preparation of the Accounts, unless the same is voluntarily effected by any Group Company after the date of this Agreement; (vi) to the extent that it relates to any loss for which the Purchaser or any Group Company is indemnified by insurance or for which it would have been so indemnified if at the relevant time there had been maintained with a no less reputable insurance company valid and adequate insurance cover of the same type as, and for at least the same amount of cover as, and on no less favourable terms and conditions than that which was in force in relation to the relevant Group Company at the date of this Agreement; (vii) to the extent that it is provided for or included as a liability or disclosed in the Accounts including but not limited to items included in calculating creditors or -29- deducted in calculating debtors in the Accounts or is taken into account in determining the Value of Cash or the Value of the Working Capital in the Completion Accounts pursuant to the Seventh Schedule; (viii) to the extent that it relates to any liability which is contingent only unless and until such contingent liability becomes an actual liability and is due and payable; (ix) to the extent that it relates to any liability for taxation arising in the ordinary course of business of the Company or any of the Subsidiaries after the Accounts Date and in the period up to and including Completion or arising out of the execution and completion of this Agreement (including the documents in the approved form other than the Disclosure Letter) (and for the avoidance of doubt the reference to a liability for taxation arising in the ordinary course of business includes, without limitation, any such liability resulting from the disposal of any fixed asset by the Company or any of the Subsidiaries on arms length terms to a third party purchaser not being connected with such company and excludes any liability to income tax or national insurance contributions mentioned in Clause 2(e) of the tax side letter which arises out of a failure to deduct or account for any taxation on payments referred to therein and any VAT liability in respect of management services mentioned in Clause 2(d) of the tax side letter) ; (x) to the extent that it results from any company ceasing at any time after Completion to be a member of the same group of companies as the Company; -30- (xi) to the extent that the subject of such relevant claim has been or is made good or is otherwise compensated for without loss to the Purchaser or the Company. (xii) in respect of a relevant claim under paragraph (55)(g) of the Fifth Schedule only, to the extent that such claim would not have arisen had the Purchaser not:- (aa) conceded that any person was under any liability to any other person such as would cause the Vendor to be in breach of Warranty (55)(g) unless it was so obliged by the terms of a Court Order, or an Industrial Tribunal or Pensions Ombudsman decision; or (bb) advised any person that such person might in any way be entitled to such rights as would be inconsistent with Warranty (55)(g), or assisted or procured assistance for any such person in bringing a claim for such rights; or (cc) procured or advised that any other person took any action which if it had been taken by the Purchaser would have fallen within paragraphs (aa) or (bb) above. (c) The amount of any taxation credits, allowances, reliefs, set-offs or rights of repayment due to (and whether ascertained before or -31- after the date hereof) or already received by the Company or any of the Subsidiaries in respect of any period ending on or prior to the Accounts Date shall, to the extent that the same has not been taken into account in the Accounts, be set off against the Vendor's liability in respect of any relevant claim to the extent which they are available to reduce the amount of any taxation, or give rise to any right to repayment of taxation, of or for the Company or any of the Subsidiaries. For the avoidance of doubt any amount which is a corresponding saving in sub-clause (t) below shall be dealt with under that sub-clause and not be treated as an amount for the purpose of this sub-clause (c). (d) A breach of any warranty or undertaking which is capable of remedy shall not entitle the Purchaser to compensation unless the Vendor is given written notice of such breach and such breach is not remedied within 30 days after the date on which such notice is served on the Vendor. (e) The Purchaser and each of the Group Companies shall take such action and give such information and assistance (subject to the Purchaser and such company (as appropriate) having been indemnified and secured to the Purchaser's reasonable satisfaction as to costs and expenses by the Vendor) as the Vendor may reasonably require to mitigate, avoid, dispute, resist, appeal, compromise or defend any claim or matter which gives rise to a relevant claim. No admission of liability to a claim or compromise thereof shall be made without the prior written agreement of the Vendor. If the Purchaser shall be in breach of the above provisions of this Clause 8(e), the Vendor shall, subject only to the Vendor securing the Purchaser to the -32- reasonable satisfaction of the Purchaser against any losses damages and reasonable costs and expenses in respect thereof, have the right at its expense of investigating, resisting appealing and settling and otherwise conducting in the name of the Purchaser or (as the case may be) the Company or any Group Company any claim, or matter giving rise to a relevant claim and to have any claim conducted by professional advisers nominated and instructed by it for this purpose provided that the Purchaser is given notice of any action prior to it being taken and, in circumstances where the goodwill of the Company or any of the Subsidiaries will not be materially and adversely affected by bringing such an action, the Purchaser shall consent to such an action being taken. The Vendor agrees that it shall not be reasonable for it to require any action which shall materially and adversely affect the goodwill of the Company or any of the Subsidiaries, and it shall not refuse agreement of any admission of liability or compromise reasonably necessary in circumstances where such goodwill shall otherwise be materially and adversely affected. (f) The Vendor will not be liable in respect of a relevant claim by the Purchaser under any provision of this Agreement if and to the extent that the loss is or has been recovered under any other provision of this Agreement. (g) If the Vendor is liable to the Purchaser in respect of a relevant claim by reason of an obligation of the Company or any of the Subsidiaries to pay advance corporation tax or any sum due from such company as if it were advance corporation tax, the liability -33- of the Vendor shall be reduced, and any amount paid to the Purchaser in respect of such liability shall be refunded when and to the extent that the relevant company obtains the benefit of a reduction in liability to or repayment of taxation following such payment by any such company. The Purchaser shall procure that such company makes all such claims and elections as will result in such benefit being obtained as soon as reasonably possible. (h) Where to the extent that a relevant claim relates to a liability for taxation, no payment shall be due from the Vendor until the following dates:- (i) to the extent that the relevant claim includes taxation which has not yet become due, the date five days before the day on which that taxation becomes legally due and payable; (ii) to the extent that the relevant claim relates to the nullification or cancellation of a right to repayment of taxation, the date on which that repayment would otherwise have become due; (iii) to the extent that the relevant claim relates to the denial of any allowance, relief or credit, the date on which taxation becomes due as a result of that denial; but in any event (and notwithstanding the above) no amount shall be payable by the Vendor earlier than 14 days after the date on which notice setting out details of the relevant claim is delivered to the Vendor. (i) Where an amount may be applied or set off by the Vendor to reduce the amount payable under a relevant claim then:- -34- (i) if the amount is ascertained before payment has been made in respect of any relevant claim the like consequences shall follow as if the relevant claim were for the reduced amount; and (ii) if the amount is ascertained after payment has been made in respect of one or more relevant claims such claims shall be reduced accordingly and any resulting overpayment shall be repaid forthwith to the Vendor; and (iii) in either case, the de minimis provisions in sub-clauses (a) (iv) and (v) of this Clause shall operate as if the claims paid or payable were for the reduced amounts. (j) If the Purchaser is entitled to make a claim in respect of any act, event or default both under the Warranties and also in respect of a Taxation Claim the Purchaser shall not be entitled to recover more than once in respect of the same act event or default (k) Nothing in this Agreement shall be deemed to relieve the Purchaser or any Group Company from a duty to the Vendor to mitigate its loss in respect of a relevant claim or otherwise but the duty to mitigate is subject to the proviso absolving Group Companies from seeking to recover sums from the professional consultants as set out in Clause 8(a)(vi) above; (l) The Purchaser shall procure that each of the Group Companies complies with the provisions of this Clause 8. (m) Any amount paid by the Vendor under or in respect of any relevant claim shall be treated as a reduction in the consideration payable by the Purchaser to the Vendor under this Agreement. -35- (n) The provisions of this Clause will not be discharged or cease to have effect or be limited in any way in consequence of any provision of this Agreement or any document referred to in this Agreement. (o) The Purchaser shall not be entitled to rescind this Agreement. (p) The Purchaser hereby undertakes as a separate covenant with the Vendor to indemnify it and at all times keep it indemnified against any taxation, additional taxation or other liability (including all costs, fees and expenses incurred in connection with such taxation or other liability) which may arise or accrue (whether alone or in conjunction with other events, circumstances, acts, omissions or transactions) to the Vendor directly or indirectly in consequence of or in connection with or by reference to:- (i) the payment by the Company or any of the Subsidiaries after Completion of an abnormal amount by way of dividend (as defined in Section 709(4) Income and Corporation Taxes Act 1988); or (ii) the distribution or the appropriation of or any other dealing with the whole or part of the assets of the Company or any of the Subsidiaries after Completion otherwise than in the ordinary course of their existing businesses but for the avoidance of doubt this indemnity shall not apply in respect of circumstances giving rise to a liability of the Vendor to make any payment to the Purchaser under this Agreement or under the side letter relating to taxation provisions referred to in Clause 5(k). -36- (q) The Purchaser shall procure that the Company and each of the Subsidiaries utilise all deductions, reliefs and claims relating to taxation and which have accrued in respect of periods up to the Accounts Date in such a way including, without limitation, by way of surrender of group relief and/or ACT to any other Group Company as to minimise taxation which could give rise or has given rise to a claim against the Vendor under this Agreement provided that:- (i) there shall be no obligation to utilise any such deductions, reliefs or claims to the extent that by doing so either: (aa) the corporation tax charge on consolidation of (Pounds)2,723,333 in the Accounts effectively represents an underprovision, unless by virtue thereof the Purchaser has a separate right of recovery, thereupon enforceable, against the Vendor; or (bb) there is a reduction in the amount of any taxation for which the Vendor is liable to make a payment to the Purchaser under the tax side letter of even date ("the tax letter") at the expense of a corresponding increase in the amount of any taxation for which the Vendor would be liable to make a payment to the Purchaser pursuant to Clause 7 but for the application of the de minimis thresholds contained in Clause 8(a)(iv) and (v) of this Agreement; and (ii) (for the avoidance of doubt) this sub-clause (q) shall not require any election to carry back reliefs or claims which accrue in respect of periods after the Accounts Date. -37- (r) The Purchaser shall not be entitled in respect of a relevant claim to any right of deduction set off or counterclaim under the Loan Notes, the deferred consideration payable under Clause 4(a)(iii) or any payment to be made under the letter in the approved form of the provision of R Conte's services on behalf of the Vendor to the Purchaser and the Purchaser hereby unconditionally and irrevocably waives any such right that it might otherwise have had but for this sub-clause (r). (s) Notwithstanding any other provisions of this Agreement, the limitations on relevant claims contained in this Clause 8 shall not apply to exclude or or limit the liability of the Vendor to the extent that any claim arises by reason of any fraud dishonesty or wilful mistatement by or on behalf of the Vendor. (t) (i) If as a result of any liability to taxation (or the circumstances or matter giving rise to any such liability to taxation) for or in consequence of which the Vendor is liable to make or has made a payment to the Purchaser under Clause 7 the Company or any of the Subsidiaries obtains a reduction in or the elimination of any liability to make a payment of taxation (other than (and then to the extent of) such a liability in respect of which the Vendor is liable to make a payment to the Purchaser under Clause 7 or under the tax letter by the use of a benefit, saving, credit, allowance or relief arising directly as a result of the matter which gives rise to the first liability to taxation (a "Corresponding Saving"), the amount or value of such Corresponding Saving (if not agreed between the parties, then as determined and certified by the auditors for the time being of the Company acting as experts whose -38- costs shall be borne by the Vendor unless the auditors (as experts) determine on the application of the Vendor that the Purchaser's assessment of the amount in question was an unreasonable one) shall be dealt with in accordance with (t)(ii) of this clause 8; (ii) Where pursuant to (t)(i) of this Clause 8 any Corresponding Saving is obtained, it shall be dealt with in accordance with this sub-clause:- (aa) the amount or value of the Corresponding Saving shall first be set off against any payment then due from the Vendor under Clause 7 or the tax letter; (bb) to the extent that there is an excess, refund shall be made to the Vendor of any previous payment or payments made by it under Clause 7 or the tax letter; and (cc) to the extent that the excess referred to in (bb) is not exhausted under that sub-clause an amount equal to the remainder of that excess shall be set against and reduce pro tanto any claim that subsequently may be made against the Vendor under Clause 7 or the tax letter. (iii) If any taxation liabilities included in creditors in the consolidated balance sheet comprised in the Accounts are shown or prove to be or to have included any over-provision in respect of such taxation liabilities the amount of any such over-provision (if not agreed, then as determined by the conditions as set out in (t)(i) above) shall also be dealt with under (t)(ii) above in the same way as a Corresponding Saving. -39- 9. RESTRICTIONS ------------ (a) Subject to Clause 9(c) the Vendor undertakes with the Purchaser that it shall not, and it shall procure that no other member of the Vendor's Group shall, at any time:- (i) unless required to do so by law, disclose to any person any confidential information of a technical, trade or other character which it has acquired in the course of or as a result of its position as a member of the same group as the Group Companies; (ii) use to the detriment of the Company or of any of the Subsidiaries any confidential information of a technical, trade or other character which it has acquired in the course of or as a result of its position as a member of the same group as the Group Companies Provided that none of the restrictions contained in sub-clauses (a)(i) and (ii) of this Clause shall apply in respect of any confidential information which enters the public domain unless it does so by reason of its unauthorised publication by or the unauthorised act of a member of the Vendor's Group; (iii) after the Completion Date in any way hold itself out, or permit itself to be held out, as being interested in, or in any way connected with, the Company or any of the Subsidiaries; (iv) after the Completion Date, use the name "Harvard" in any business competing with Harvard Medical Limited and in particular shall not use the name "Harvard" in the Guam operation of the Vendor. (b) Subject to Clause 9(c) the Vendor further undertakes with the Purchaser that for a period of three years from the Completion Date neither it nor any other member of the Vendor's Group shall: -40- (i) be interested, engaged or concerned in any business which competes within the United Kingdom with any business carried on by the Company or by any of the Subsidiaries now or at any time during the period of twelve months prior to the Completion Date; (ii) without prejudice to the provisions of sub-clause (b)(i) of this Clause, in relation to any services supplied in competition with the business of the Company or of any of the Subsidiaries, deal with or solicit or entice the custom of any person who was a customer of the Company or of any of the Subsidiaries at any time during the period of twelve months prior to the Completion Date; (iii) without prejudice to the provisions of sub-clause (b)(i) of this Clause, in relation to any services supplied in competition with the business of the Company or of any of the Subsidiaries, deal with or solicit or entice the business of any person who was a supplier to the Company or any of the Subsidiaries at any time during the period of twelve months prior to the Completion Date; (iv) other than Richard Conte, David Wakefield or Wendy Simpson in respect of services outside the United Kingdom (and except for the provisions of the letter in the approved form in respect of R Conte's services) employ or offer employment to, or endeavour to employ, or solicit, or endeavour to entice away, or conclude or offer to conclude any contract for services with, any person who was at any time during the period of twelve months prior to the Completion Date a director, manager or senior employee of or consultant to the Company or any of the Subsidiaries. -41- (c) Notwithstanding the foregoing provisions of this Clause: (i) the operation or marketing by any member of the Vendor's Group of or in respect of a substance abuse clinic (having not more than 36 beds) situated in Antigua shall not represent a breach of sub-clauses (a) or (b) of this Clause; (ii) the operation or marketing by any member of the Vendor's Group of the business transferred pursuant to the sale agreement disclosed under paragraph (69) of the Disclosure Letter ("YS Agreement") shall not represent a breach of sub-clauses (b)(i), (b)(ii) or (b)(iii) of this Clause; (iii) sub-clause (b)(i) of this Clause shall not restrict any member of the Vendor's Group from being interested, engaged or concerned in a business (being a residential co-educational psycho-dynamic therapeutic single-centre community for severely emotionally damaged adolescents aged 11 to 18) which competes with the business carried on at Jacques Hall, Harwich Road, Bradfield, Manningtree and which is not conducted at premises within a radius of 150 miles of Jacques Hall, and sub-clause b(ii) and (b)(iii) of this Clause shall not apply in relation to any business permitted by this sub-clause (c)(iii); (iv) sub-clause (b)(i) of this Clause shall not restrict any member of the Vendor's Group from being interested, engaged or concerned in a business (being a residential school for boys aged 8 to 19 with mild or moderate learning difficulties and also social, emotional or behavioural problems) which competes with the business at -42- Eden Grove, Chapel Street, Bolton and which is not conducted at premises within a radius of 150 miles of Eden Grove and sub- clauses (b)(ii) and (b)(iii) of this Clause shall not apply in relation to any business permitted by this sub-clause (c)(iv). (d) Each of the restrictions contained in sub-clauses (a) and (b) of this Clause shall apply to each member of the Vendor's Group if it carries on the relevant activities either directly or indirectly, or alone or jointly with another, or (without prejudice to the generality of the foregoing) as manager, adviser, consultant or agent for any other person, or as a shareholder or director of a company, provided that they shall not apply where the activity consists solely of the holding of securities listed on a stock exchange or dealt in on a public securities market which does not exceed three per cent in nominal value of the securities of that class. (e) The Vendor agrees that in all the circumstances of this Agreement the restrictions and provisions contained in this Clause are reasonable and necessary for the protection of the Company, the Subsidiaries and the Purchaser and the Vendor further agrees that having regard to those circumstances such restrictions and provisions do not work harshly on it or any other member of the Vendor's Group. (f) Without prejudice to the foregoing, the parties agree that if such restrictions and provisions taken together shall be judged to go beyond what is reasonable in all the circumstances for the protection of the Company, the Subsidiaries and the Purchaser, but would be judged reasonable if part or parts of the wording -43- thereof were deleted or the area of operation or the period of application reduced, the said restrictions and provisions shall apply with such modifications as may be necessary to make them valid and effective. (g) The Purchaser undertakes to procure that Priory Hospitals Group Limited and Priory Childcare Services Limited shall honour their obligations under the YS Agreement. (h) Notwithstanding any other provisions of this Agreement, if there is any provision in this Agreement, or in any agreement or arrangement of which this Agreement forms a part, which causes or would cause this Agreement (or such agreement or arrangement) to be registrable under the Restrictive Trade Practices Act 1976 (as amended), then that provision shall not take effect until the day after particulars of this Agreement (or such agreement or arrangement, as the case may be) have been furnished to the Director General of Fair Trading. 10. VENDOR'S ACCOUNTS ----------------- The Purchaser undertakes that it will on request use all reasonable endeavours to provide the Vendor (at the Vendor's cost) with such assistance as the Vendor reasonably requires in connection with the preparation and audit of the Vendor's accounts for its financial year ending on 30th November 1996 including granting the Vendor or its accountants reasonable access during normal office hours upon reasonable notice to any books of account, ledgers, files, correspondence and documents in the possession of the Purchaser or any other Group Company. -44- 11. ANNOUNCEMENTS ------------- No announcement, press release or circular relating to any matter referred to in this Agreement shall be made or issued by or on behalf of any party without the prior written approval of the other parties save that each party reserves the right to make or issue any announcement or circular required by law, the rules of The London Stock Exchange or The City Code on Take-overs and Mergers or any other regulatory authority in any other applicable jurisdiction subject, to the extent it is practicable to do so, to prior consultation with the other party or parties and giving such other party or parties an opportunity to comment thereon. 12. COSTS AND EXPENSES ------------------ Each of the parties hereto shall pay its own costs and expenses in relation to the negotiation, preparation and implementation of this Agreement and the Purchaser shall (subject to Clause 4) pay all stamp duty on the transfer of the Shares. 13. ENTIRE AGREEMENT ---------------- (a) This Agreement (together with any documents referred to herein) sets out the entire agreement and understanding between the Purchaser and the Vendor in connection with the sale and purchase of the Shares and no party has relied, in entering into this Agreement, on any representations of any other party which is not expressly set out or referred to in this Agreement. (b) No variation of this Agreement shall be effective unless in writing signed by or on behalf of each of the parties. -45- 14. SUCCESSORS ---------- This Agreement is not assignable except as part of the Purchaser's bank security arrangements entered into as at the Completion Date, any refinancing of the same and any enforcement thereof but subject thereto it shall be binding upon and enure for the benefit of each party's successors in title. 15. EFFECT OF COMPLETION -------------------- The provisions of this Agreement insofar as they are not performed at Completion or are capable of operating or taking effect after Completion will remain in full force and effect and capable of so operating after and notwithstanding Completion. 16. FURTHER ASSURANCE ----------------- Notwithstanding Completion the Vendor shall from time to time and at the cost of the Purchaser execute all such documents and take all such steps (or to the extent it lies within its power so to do procure other necessary parties so to do) as the Purchaser may reasonably require in order to perfect the right, title and interest of the Purchaser to and in the Shares and to give to the Purchaser the full benefit of this Agreement. 17. TIME OF THE ESSENCE ------------------- Time shall be of the essence as regards any date or period referred to in this Agreement. 18. NOTICES AND SERVICE OF PROCESS ------------------------------ (a) All notices under this Agreement shall be in writing and in the English language and shall be delivered by hand or sent by -46- prepaid first class post or by prepaid first class recorded delivery or air mail prepaid at the appropriate rate or by facsimile transmission. All notices shall (subject to Clause 18(f)) be delivered at or sent to the address, or transmitted to the facsimile number shown in this Agreement of the party to be served (or such other address or number in the United Kingdom as that party shall have notified in writing to the other party for this purpose) and shall be marked for the attention of the Chief Executive or President of that party. Notwithstanding the foregoing provisions of this sub-clause, notices may be served on any party which is a limited company incorporated in a jurisdiction within the United Kingdom by delivering by hand or sending by prepaid first class post or by prepaid first class recorded delivery the notice to the registered office of such company. (b) A notice delivered by hand shall be deemed to have been served at the time of such delivery if delivered between 9.00 am and 5.30 pm on a business day or, if delivered before 9.00 am on a business day, it shall be deemed served at 9.00 am on that business day or, if delivered after 5.30 pm on a business day or on a day which is not a business day, at 9.00 am on the next following business day. (c) A notice sent by prepaid first class recorded delivery shall be deemed to have been served at 9.00 am on the second business day following the date of posting or, in the case of air mail, at 9.00 am on the seventh business day following the date of posting and in proving such service it shall be sufficient to show that the notice was properly addressed and posted in accordance with the provisions of this Clause. -47- (d) A notice sent by facsimile transmission shall be deemed to have been served at the time it is transmitted if transmitted between 9.00 am and 5.30 pm on a business day or, if transmitted before 9.00 am on a business day, at 9.00 am on that business day, or, if transmitted after 5.30 pm on a business day or on a day which is not a business day, at 9.00 am on the next following business day provided that a hard copy of any notice sent by facsimile transmission is also sent by post on the same day in accordance with Clause 18(a). It shall be sufficient proof of the time of service by facsimile transmission to show that the transmission was properly made and that the transmitting device was connected to a device with a telephone number reasonably believed to be that of the party to be served at the address for such service. (e) In this Clause all times are to be taken as being the local times of the place at which the notice is received. (f) The Vendor hereby irrevocably designates, empowers and appoints Biddle & Co of 1 Gresham Street, London EC2V 7BU (Facsimile No.0171 606 3305) as its agent to receive for and on its behalf any notice under this Agreement or service of process in England in any action or proceeding with respect to this Agreement and the Vendor agrees that any failure of the said Biddle & Co to inform the Vendor of any such notice or service shall not impair or affect the validity of such notice or service or of any judgement rendered in any action or proceeding based thereon. The Vendor may replace Biddle & Co or any successor agent by notice in writing to the other party with a new agent provided that the address for service on the new agent is in England. If Biddle & Co or any successor agent should cease to exist, cease -48- to have an address for service in England or otherwise cease to be able to inform the Vendor of any service of notice or proceedings, the Vendor shall replace such agent with a new agent as permitted above. 19. COUNTERPARTS ------------ This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all the counterparts shall together constitute one and the same instrument which shall only be deemed executed when counterparts executed by all the parties hereto are delivered and so that delivery for this purpose shall be deemed effective when any party confirms in writing (which shall include confirmation by facsimile transmission) that it has executed any counterpart of this Agreement. 20. CHANGE OF NAME -------------- The Purchaser shall within one month of the Completion Date cause the name of the Company to be changed so as not to include the word "CPC" or "LONDINIUM" or to suggest any connection with the Vendor and the Purchaser agrees that neither it nor any Group Company will use any name or names identical or similar to "CPC" or "LONDINIUM" or any colourable imitation thereof in connection with any activity whatsoever. 21. GOVERNING LAW ------------- This Agreement shall be governed by and construed in accordance with English law and each of the parties hereby submits to the jurisdiction of the English Courts. EXECUTED on the date appearing at the beginning of this Agreement. -49- FIRST SCHEDULE (the Shareholder) 1 2 Names and addresses Number of of the Shareholder Shares owned CPC Investment Corporation Inc (a) 3,407,203 Ordinary 5110 West Sahara Avenue Shares of (Pounds)1 each 4th Floor Las Vegas (b) 16,106,313 Ordinary NV 89102 USA Shares of US $0.01 each
-50- SECOND SCHEDULE (the directors) R. Conte D.A. Wakefield D.H.W. Kelly (the secretary) Mrs J. Lambert -51- THIRD SCHEDULE Part 1 (the Subsidiaries)
Name Registered Number Percentage of - ---- ----------------- ------------- share capital ------------- owned by Group -------------- Companies --------- Priory Hospitals Group Limited 1505382 100 Sturt House Clinic Limited 2656972 100 The Nottingham Clinic Limited 2220967 100 Regency Park Limited 2779834 100 Priory Childcare Services Limited 2838284 100 Care Continuums Limited 2998874 100 Counselling Services (CI) Limited 37244 80 Part 2 (Associated Companies) Fulford Grange Medical Centre Limited 2804493 50 Pinnacle Counselling Limited 2814776 49.32% (of ordinary shares) 100% (of preference shares) Priory Healthcare Group (Middle East) Limited 63330 50
-52- FOURTH SCHEDULE (the Property) I REGISTERED TITLES ----------------- A. FREEHOLD --------
Short description of property Title number ----------------------------- ------------ 1. The Dene, Goddards Green Hospital, Goddards Green WSX180031 2. The Dukes Priory Hospital and Dukes Cottages, Stump Lane, Springfield Green, Chelmsford EX448034 3. Eden Grove, Chapel St, Bolton CU113771 4. Altrincham Priory Hospital, Rappax Road, Hale, Trafford GM32147 5. Grovelands, The Bourne, Southgate, Enfield EGL224063 EGL159651 6. Hayes Grove, Prestons Road, Hayes, Bromley P84935 7. Heath House, Purdown, Bristol AV204454 8. Jacques Hall, Harwich Rd, Bradfield, Manningtree EX494805 9. Lynbrook Clinic, Chobham Rd, Woking, Surrey SY648215 10. Marchwood Park, Marchwood, Hampshire HP274006 HP274005 11. St Dymphna, Ransom Rd, St Anns, Nottingham NT220908 NT292439 12. Priory Hospital, Roehampton and 9 to 11 Upper Richmond Road West SGL172131 13. Sturts Priory Hospital, Sturts Lane, Walton on the Hill, Surrey SY280588 SY567305
-53- FOURTH SCHEDULE (the Property) B. LEASEHOLD ---------
Short description of property and Title number --------------------------------- ------------ particulars and term of lease ----------------------------- 1. Woodbourne Clinic, 21 & 23 Woodbourne Rd, Edgbaston WM299425 Lease dated 7/10/83 and made between (1) The Right Honourable Lord Luke of Pavenham KCVO and others (2) Community Psychiatric Centers (London) for a term of 99 1/44 years from 24/6/1983 2. 3 Owls Road, Boscombe, Bournemouth DT233811 Lease dated 28/2/96 and made between (1) Nuffield Nursing Homes Trust (2) Priory Hospitals Group Limited for a term of 999 years from 25/12/1995. 3. Langside Priory Hospital, 38 Mansionhouse Road, Glasgow Lease constituted by missives dated 24th and 28th June 1994 and made between (1) Sister Joseph Patrick Donovan and Others as Trustees within mentioned (2) Priory Hospitals Group Limited for a term of 25 years from 1 June 1994.
-54- FOURTH SCHEDULE (the Property) II UNREGISTERED TITLES ------------------- 1. Dialysis Unit, Rotherham District Council Hospital, Margate Road, Rotherham. There is no lease but the Company operates under a Management Agreement. 2. Department of Clinical & Quality Development, Unit 8, Shelley Farm, Ower, Romsey, SO51 6AS. Lease dated 17/10/95 and made between (1) E H Jewell and (2) Priory Hospitals Group Limited for a term of 5 years from 17/10/1995. 3. Priory Suite, Beardwood Hospital, Preston New Road, Blackburn, Lancashire, BB2 7AE. Lease dated 15/2/93 and made between (1) Great Northern Hospitals Ltd and (2) Priory Hospitals Group Ltd for a term of 5 years from 1/2/1993. 4. The Longridge Clinic, Samuel Hill House, Springfield Hospital, Glenburnie Road, London, SW17. Lease dated 11/5/95 and made between (1) The Secretary of State for Health (2) Care Continuums Limited and (3) Priory Hospitals Group Limited for a term commencing on 19/6/95 and terminating on 31/3/1997. 5. 3 Consulting Rooms, Bredon House, 321 Tettenhall Road, Wolverhampton. Lease dated 5/3/1993 and made between (1) Dr Nigel Smith and Dr David O'Connell and (2) Priory Hospitals Group Limited for a term of 5 years from 1/11/1991. 6. Room 12, Watton Place Clinic, Watton Place House, Watton at Store, Hertfordshire. Lease dated 10/6/1991 and made between (1) Dr James Newton and Dr David William Haslam and (2) Priory Hospitals Group Limited from 15th July 1991 to 31st December 1992 but the Company has remained in occupation. 7. Hampden House, Didsbury, Manchester. Lease dated 3rd June 1996 and made between (1) R J Turley and I M Turley and (2) Priory Hospitals Group Limited for a term of 10 years from 3rd June 1996. -55- FOURTH SCHEDULE (the Property) II UNREGISTERED TITLES ------------------- 8. Renal Unit, West Wales General Hospital, Caernarfon. Agreement for the provision of dialysis services dated 3rd April 1992 between (1) East Dyfed Health Authority and (2) Community Dialysis Services. The contract period is for five years from 3rd April 1992. 9. Silkwood House, 18 Duhamel Place, Jersey. Agreement dated 16th February 1996 between (1) Hardcastle and Preston Limited (2) Counselling Services (CI) Limited and (3) Priory Hospitals Group Limited for a term of 9 years from 16th February 1996. 10. Suite 2, Second Floor, 113 Cathedral Road, Pontcanna, Cardiff. Tenancy Agreement dated 12 October 1995 between (1) Cowdery and Morris Limited and (2) Heath House Priory Hospital. Tenancy at Will. -56- FIFTH SCHEDULE (the representations, warranties and undertakings referred to in Clause 6) Information - ----------- (1) The information set out in the Recitals and Schedules is true, complete (as to the matters addressed therein) and accurate in all respects. Disclosure Letter - ----------------- (2) The Disclosure Letter fairly discloses details of:- (a) all matters which are necessary to qualify the statements contained in this Schedule in order for such statements, when so qualified, to be fair, accurate and not misleading; (b) all assets used by the Company in connection with its business which are held under leasing, hire or hire purchase agreements, agreements for payment on deferred terms, conditional sale agreements, rental agreements or any similar agreements or arrangements. Memorandum and Articles - ----------------------- (3) The copy of the Memorandum and Articles of Association of the Company which has been made available to the Purchaser's Solicitors is accurate and complete in all respects as at the date of this Agreement and sets out all rights attaching to each class of the share capital of the Company, and the register of members and other statutory books of the Company have been properly kept and contain a true, accurate and complete record of the matters which should be dealt with therein and no notice or allegation that any of the same is incorrect or should be rectified has been received. -57- Returns to the Registrar and elective resolutions - ------------------------------------------------- (4) (a) All returns, particulars, resolutions and other documents required to be filed with or delivered to the Registrar of Companies by the Company have been correctly and properly prepared and so filed or delivered within the time limits specified by the Companies Act 1985, and all such documents are now recorded on the Company's file at Companies House by the Registrar of Companies. (b) The Company has not passed any elective resolutions. Shares unencumbered - ------------------- (5) The Shares constitute the whole of the authorised and issued share capital of the Company and there is no option, right to acquire, mortgage, charge, pledge, lien or other form of security or encumbrance on, over or affecting the Shares or the issued or unissued share capital of the Company and there is no agreement or commitment to give or create any of the foregoing and no claim has been made by any person to be entitled to any of the foregoing and the Shareholder is the beneficial owner free from encumbrances of all the Shares and is entitled to sell and transfer the full legal and beneficial ownership in the Shares to the Purchaser on the terms set out in this Agreement. No lien or call on Shares - ------------------------- (6) The Company has not exercised or claimed or purported to exercise or claim any lien over any of the Shares and no call on any of the Shares is outstanding. Subsidiaries - ------------ (7) The Company:- (a) has not, and has not since its incorporation had, any subsidiary or subsidiary undertaking other than the Subsidiaries; -58- (b) is, or a Subsidiary is, the beneficial owner free from all charges, liens, encumbrances, equities and claims whatsoever of the whole of the issued share capital of each of the Subsidiaries and such share capital is in each case issued fully paid or credited as fully paid; (c) has not since its incorporation been a subsidiary or subsidiary undertaking of any other company nor been a member of any partnership or unincorporated company or association nor does the Company have any branch, agency or permanent establishment outside the United Kingdom; (d) has not made, and has had no cause to make, any warranty or indemnity claim in respect of the acquisition of shares in, or the business of, any of the Subsidiaries. Application of Warranties to Subsidiaries - ----------------------------------------- (8) Each of the statements set out in the other paragraphs of this Schedule (except paragraphs (7)(a) to (c) inclusive and (10) to (18)) would remain fair, accurate and not misleading if the references in those paragraphs to the Company were replaced by references to each of the Subsidiaries and as if references in paragraphs (5) and (6) to the Shares were references to the issued shares of the Subsidiaries owned by Group Companies as referred to in the Third Schedule. Redemption of Shares and capitalisation of profits - -------------------------------------------------- (9) The Company has not at any time:- (a) repaid or agreed to repay or redeem any shares of any class of its share capital or otherwise reduced or agreed to reduce its issued share capital or any class thereof; or (b) capitalised or agreed to capitalise, in the form of shares or debentures or other securities or in paying up any amounts -59- unpaid on any shares, debentures or other securities, any profits or reserves of any class or description or passed or agreed to pass any resolution to do so. Accounts - -------- (10) (a) The Accounts disclose a true and fair view as at the Accounts Date of the state of affairs and position of the companies to which they relate, both individually and as a group, and of their results for the accounting period ended on the Accounts Date. (b) The Accounts were prepared on a proper and consistent basis in accordance with the books of account of the Company and the Subsidiaries and generally accepted and adopted United Kingdom accounting principles and financial reporting standards for companies carrying on similar businesses and in accordance with the requirements of all relevant statutes. (c) Proper and, so far as the Vendor is aware, adequate reserves and provisions have been made in the Accounts for bad and doubtful debts, old, depreciated and unsaleable stock, non-chargeable work in progress, depreciation on fixed assets, taxation and deferred taxation as at the Accounts Date. (d) The Accounts are not affected by any unusual or non-recurring items. (11) As at the Accounts Date there were no liabilities of the Company or of the Subsidiaries known, actual or contingent (including financial lease commitments, pension liabilities, contingent liabilities to customers and contingent liabilities for taxation) which were not disclosed or provided for in the Accounts. (12) The value attributed to work in progress in the Accounts does not -60- exceed the lower of cost or net realisable value at the Accounts Date and has since been charged to customers. Books of account and records - ---------------------------- (13) The books of account and records of the Company and of each of the Subsidiaries have for the period of six years prior to the Completion Date (during which period there has been no change in any methods or bases of valuation or accountancy treatment applied to or reflected in such books and records) been kept on a proper and consistent basis, are up-to-date, are in the possession of the companies to which they relate and contain true, complete and accurate records of the business and activities of the Company and of the respective Subsidiaries and of all matters required to be entered therein by the Companies Act 1985 and the Companies Acts 1948 to 1983 then and from time to time in force. Book debts - ---------- (14) The provision for book debts owing to the Company and to each of the Subsidiaries shown in the Management Accounts is proper in accordance with UK generally accepted accounting principles. No transfer from deferred taxation - ---------------------------------- (15) No transfer from any provision against deferred taxation to distributable reserves has been made by the Company or by any of the Subsidiaries pursuant to or in accordance with the recommendations of the Accounting Standards Committee or otherwise. Professional expenses - --------------------- (16) The expenses in respect of legal and other professional charges and -61- auditors' remuneration reflected in the Accounts have all been properly incurred in the normal course of business and do not relate to advice given or the preparation of figures or documentation supplied in connection with the sale and purchase of the Company or of the Subsidiaries. Events since Accounts Date - -------------------------- (17) Since the Accounts Date:- (a) there has been no material adverse change in the financial and trading position and prospects and the nature of the business of the Company or any of the Subsidiaries; (b) there has been no material change in the assets and liabilities shown in the Accounts nor has the net asset position of the Company or of each of the Subsidiaries deteriorated by comparison with such position at the Accounts Date; (c) there has not been any acquisition or disposal by the Company or by any of the Subsidiaries of fixed or capital assets or any agreement to effect the same; (d) there has not been any creation of liabilities (other than in the ordinary course of business); (e) no dividend or distribution has been declared, made or paid by the Company or by any of the Subsidiaries and no payment has been made which could be deemed a distribution within the meaning of the Taxes Act; (f) no disposal or deemed disposal which might give rise to a liability for corporation tax on chargeable gains has been made by the Company or by any of the Subsidiaries; (g) there has been no capitalisation of reserves or creation or issue of any share or loan capital by the Company or by any of the Subsidiaries; -62- (h) the business of the Company and of each of the Subsidiaries has been carried on in the ordinary and usual course and in the same manner (including nature and scope) as immediately before the Accounts Date; (i) otherwise than in the ordinary course of business neither the Company nor any of the Subsidiaries has disposed of or parted with possession of any of its property or assets or made any payment; (j) no fixed assets have been written up by the Company or by any of the Subsidiaries; (k) no debts have been written off, deferred or subordinated or have proved to any extent irrecoverable and no debtor has been released by the Company or by any of the Subsidiaries on terms that he pays less than the book value of his debt; (l) no contract has been entered into by the Company or by any of the Subsidiaries involving expenditure by them on capital account; (m) the remuneration (including bonuses) payable to any of the directors or employees of the Company or of any of the Subsidiaries has not been increased nor has any obligation been assumed to increase any such remuneration at any future date with or without retrospective effect; (n) no event has occurred which would entitle any third party to terminate any contract or any benefit enjoyed by the Company or by any of the Subsidiaries or call in any money before the normal due date therefor; (o) no legal or other professional charges relating to advice given or the preparation of figures or documentation supplied in connection with the sale and purchase of the Company and of the -63- Subsidiaries or this Agreement have been charged to or paid by the Company or the Subsidiaries; (p) nothing has occurred which would or might affect the adequacy of the reserves or provisions referred to in paragraph 10(c) of this Schedule; (q) no management fee or other charge has been made against the Company or any Subsidiary by the Vendor or any subsidiary of the Vendor (other than the Company or any Subsidiary). Management Accounts - ------------------- (18) The Management Accounts have been prepared on a prudent basis and on a basis consistent with previous management accounts and the Management Accounts fairly state the assets, liabilities and position of the Company and the Subsidiaries at the Management Accounts Date and their results for the period ended on such date. Ownership of assets - ------------------- (19) (a) All the assets of the Company, excluding the Property and those assets listed in the Disclosure Letter pursuant to paragraph 2(b) of this Schedule, but including all books debts owed to the Company and all other assets used in connection with the business of the Company, are the absolute property of the Company and are in the possession or under the control of the Company and the Company has a good title thereto and all such assets are held by the Company free from any mortgage, charge, lien, bill of sale or other encumbrance, and from any agreement to grant any of the same, and are not the subject of any assignment, royalty, factoring arrangement, leasing, hire or hire purchase agreement, agreement for payment on deferred terms, conditional sale agreement, rental agreement or any similar agreement or arrangement; and the assets listed in the -64- Disclosure Letter pursuant to paragraph 2(b) of this Schedule are in the possession or under the control of the Company in accordance with the agreements or arrangements under which they are held. (b) The plant, machinery, office equipment and vehicles used by the Company are, subject to fair wear and tear, in good repair, serviceable and comply with any applicable legal requirement or restriction, and the vehicles are duly licensed and suitable for the purposes for which they are used. Indebtedness - ------------ (20) There is no indebtedness of the Company to the Vendor or to any of R. Conte, W. Simpson or D. Wakefield or to any person connected with any of them. (21) The Company has no outstanding loan capital nor, except in the normal course of business, has it borrowed any money or incurred any indebtedness which it has not repaid or satisfied nor has it lent any money which has not been repaid to it nor does it own the benefit of any debt (whether present or future). Bank accounts - ------------- (22) A statement of the bank accounts of the Company and the credit or debit balances thereon at close of business on the business day preceding by no more than three business days the date of this Agreement which have been supplied to the Purchaser are true and correct, there are no other bank or deposit accounts of the Company (whether in credit or overdrawn) not included in such statement and since such statement there have been no payments out of any such accounts other than in the ordinary course of business and the present balances on such accounts are not now substantially different from the balances shown on such statement. -65- Insurances - ---------- (23) (a) All the assets of the Company of an insurable nature and all of those assets listed in the Disclosure Letter pursuant to paragraph 2(b) of this Schedule which the Company has undertaken to insure are, and at all material times have been, adequately insured for the full replacement or reinstatement value thereof in the name of the Company against fire and all other risks usually insured against by companies with the same assets or carrying on the same or a similar business. (b) The Company is now, and at all material times has been, adequately insured against accident, damage, injury, third party loss loss of profits and all other risks usually insured against by companies carrying on the same or a similar business. (c) Full details of all insurance policies maintained by the Company have been disclosed to the Purchaser; the Company has not done or omitted to do any act or thing which might render any of such insurances void or voidable; no claims under such insurances are outstanding and so far as the Vendor is aware nothing has occurred to give rise to any such claim. Litigation - ---------- (24) The Disclosure Letter lists those debts which have been referred to solicitors or any debt collection agency as at 18th June 1996 before the Completion Date. Otherwise than in respect of debts referred to solicitors or any debt collection agency and claims arising in the normal course of business covered by insurance (particulars of which claims have been disclosed in the Disclosure Letter) the Company is not engaged nor has it been engaged since the Accounts Date in any proceedings, litigation, arbitration or prosecution (whether as -66- plaintiff or defendant or otherwise) and except as aforesaid:- (a) no legal or other proceedings are threatened or anticipated by or against the Company; and (b) to the best of the knowledge, information and belief of the Vendor, there are no circumstances likely to lead to any such proceedings, or to any payment in anticipation of such proceedings, and there are no circumstances that are likely to give rise to proceedings of any character against any director or employee or ex-director or ex- employee of the Company in respect of any acts or defaults for which the Company might be vicariously liable. (25) There are no unsatisfied judgments against the Company. Taxation - -------- Compliance, filing and payment obligations ------------------------------------------ (26) (a) The Company has made or caused to be made within the permitted time limits all proper returns (including notices, computations and registrations required to be made) and all relevant information has been supplied to the Inland Revenue and Customs and Excise Commissioners in respect of taxation for all periods up to and including the date hereof and all such returns and information are true and accurate and there is no dispute or question nor is the Vendor aware of any contemplated at the date hereof with the said authorities with regard to liability (actual or contingent) assessable on the Company at the date of this Agreement. (b) There are set out in the Disclosure Letter full details of all matters in respect of which the Company has, or at Completion will have, an outstanding entitlement to make any appeal -67- (including a further appeal) against any assessment to taxation or to make any application for the postponement of the payment of any taxation. (27) (a) All taxation due and payable by the Company up to Completion has been paid by the Company within the designated time periods and no such payment remains outstanding at Completion. (b) The Company has not within the six years prior to Completion paid or become liable to pay any fine, penalty surcharge or interest in relation to taxation. (c) The Company is not and has not been the subject of a back duty investigation, PAYE, P11D or VAT audit by the Inland Revenue Special Office, Special Investigations Section, Enquiry Branch, PAYE Audit Team, Customs and Excise Commissioners or otherwise and there are no facts which are likely to cause any such investigation to be instituted or which such an investigation would disclose so as to cause additional taxation liabilities to fall upon the Company. PAYE and National Insurance and Employee Benefits - ------------------------------------------------- (28) (a) The Company has properly operated the PAYE and national insurance systems making such deductions as are required by law from all payments made to or treated as made to employees or ex-employees of the Company and sums payable to the Inland Revenue have been so paid. All forms P11D and P9D due for submission prior to the date hereof have been completed and submitted. (b) The Company has obtained clearances from the Inland Revenue in respect of all freelance workers and consultants to whom payment has been made without deducting PAYE. -68- (c) The Company has complied fully with all reporting requirements and proper records have been maintained, relating to all payments and benefits made or provided, or treated as made or provided to its directors, employees or officers or former directors, employees or officers. (d) The Company has complied fully with its obligations under the provisions of sections 136(6) and 139(5) ICTA and section 85 FA 1988. (e) The Disclosure Letter contains full details of all share option schemes and profit sharing schemes established by the Company whether approved by the Inland Revenue under the provisions of Schedule 9 ICTA or otherwise. (f) The Company has not established a qualifying employee share ownership trust within the meaning of section 74 and Schedule 5 FA 1989 and no chargeable event within the meaning of section 69 FA 1989 has occurred. (g) The Disclosure Letter contains full details of all profit-related pay schemes providing for the payment to any employee of the Company of emoluments calculated by reference to profits, which have ever been registered under Chapter III Part V ICTA. Chargeable gains - ---------------- (29) (a) No assets of the Company have been acquired or disposed of except by way of bargain at arm's length; (b) No chargeable gain would arise on the sale at the value attributed to it in the Accounts of any asset which is a chargeable asset for the purposes of taxation; (c) The Company has not been a party to or involved in or connected with any disposal of assets within the meaning of section 29 of -69- the TCGA, or any scheme or arrangements such as are mentioned in section 30 of the TCGA; (d) The Company has sufficient records to calculate the liability to taxation or relief arising on the disposal of any fixed asset where any gain on such disposal would be a chargeable gain for tax purposes; (e) The Company has not in the last six years carried out or been involved in or connected with any reorganisation of its share capital or scheme of reconstruction or amalgamation involving the issue of securities whether or not (by virtue of section 126 or 136 TCGA) section 127 TCGA applied to such reorganisation or scheme of reconstruction or amalgamation; (f) The Company has not in the last six years carried out or been involved in or connected with any scheme of reconstruction or amalgamation involving a transfer of business assets whether or not section 139 TCGA applied to the transfer; (g) The Company has not made an election under paragraph 4 Schedule 2 of the TCGA and no asset owned by the Company is subject to a deemed disposal and re-acquisition under paragraph 16, 19 or 20 Schedule 2 of the TCGA; (h) The Company has not made an election under section 35(5) TCGA nor has the Company made its first relevant disposal for the purposes of section 35(6) TCGA; (i) The Company has not in the last six years transferred a trade carried on by it outside the United Kingdom through a branch or agency in circumstances such that a chargeable gain could be deemed to arise at a date after such transfer under section 140 TCGA; -70- (30) No claim has been made, nor is the Company entitled to make any claim, under any of the following provisions which would affect or be relevant to the chargeable gain or allowable loss which would arise on a disposal by the Company of any of its assets:- Section 247 of the TCGA (roll-over relief on compulsory acquisition) Section 152 of the TCGA (roll-over relief) Section 165 of the TCGA (relief for gifts of business assets) Section 175 of the TCGA (replacement of business assets by members of a group) Section 35(5) of the TCGA (assets held at 31 March 1982) Schedule 4 to the TCGA (deferred charges on gains before 31 March 1982). (31) No claim has been made under any of the following provisions:- Section 279 of the TCGA (foreign assets: delayed remittances) Section 161 of the TCGA (appropriations to and from stock) Section 162 of the TCGA (roll-over relief on transfer of business). (32) The Company has not received or made any capital distributions to which the provisions of Section 189 of the TCGA (capital distribution of chargeable gains; recovery of tax from shareholder) could apply. Distributions and payments by the Company - ----------------------------------------- (33) (a) No actual or deemed distribution has been declared or made by the Company within the meaning of any of the following Sections of the Taxes Act:- Section 209 (meaning of "distribution") Section 210 (bonus issue following repayment of share capital) Section 211 (matters to be treated or not to be treated as repayment of share capital). (b) The Company has not issued any share capital to which the provisions of Section 249 of the Taxes Act (stock dividends -71- treated as income) could apply nor does it own any such share capital. (34) (a) All sums representing income tax required to be deducted from payments made or deemed to have been made by the Company prior to the date hereof have been deducted from all such payments and have been paid to the Inland Revenue, including (but without limitation to the generality of the foregoing) payments under or subject to any of the following provisions of the Taxes Act:- Section 43 (non-residents) Section 349 (payments not out of profits or gains brought into charge to income tax, etc.) Section 350 (charge to tax where payments made under Section 349) Chapter I of Part XIII (Intellectual Property) Chapter III of Part XIII (Entertainers and Sportsmen) Chapter IV of Part XIII (Sub-contractors in the Construction Industry). (b) The Company has not received any notice under Section 23 of the Taxes Act (collection from lessees and agents). (35) (a) The Company has not elected that any dividend it has paid be treated as a foreign income dividend as described in Chapter VI Part VI ICTA. (b) The Company has not paid any dividend to which section 246T ICTA has applied. Capital allowances - ------------------ (36) In the case of each asset of the Company which qualifies or has qualified for capital allowances, the tax written down value of such asset as at the Accounts Date is not less than the book value of the asset at that date. -72- Available losses - ---------------- (37) The Company has no trading losses and no capital losses available to be carried forward at the date hereof. Groups - ------ (38) (a) In the last six years the Company has at no time surrendered or claimed or agreed to surrender or claim any amount by way of group relief, and has at no time received or agreed to receive the surrender of any amount by way of group relief, under the provisions of Part X of Chapter IV of the Taxes Act (group relief). (b) In the last six years the Company has at no time surrendered or claimed or agreed to surrender or claim any amount of advance corporation tax, and has at no time received or agreed to receive the surrender of any amount of advance corporation tax, under the provisions of Section 240 of the Taxes Act (set off of company's surplus ACT against subsidiary's liability to corporation tax). (c) No tax is or may become payable by the Company pursuant to Section 190 of the TCGA (tax on one member of group recoverable from another member) or Sections 178 or 179 of the TCGA (company ceasing to be a member of a group) in respect of any chargeable gain which accrued or will accrue prior to Completion and the Company has at no time within the six years ending on the date hereof transferred any assets other than trading stock to any company which at the time of disposal was a member of the same group (as defined in Section 170 of the TCGA (groups of companies: definitions)). (d) None of the assets which were acquired by the Company in the six years ending on the date hereof was acquired from any company -73- which at the time of the acquisition was a member of the same group (as defined in the said Section 170 of the TCGA). (e) The Company has not made any elections under Section 247 of the Taxes Act (dividends etc paid by one member of a group to another) and the Company has not paid any dividend without paying advance corporation tax in respect thereof and has not made any payments without deduction of tax in the circumstances specified in sub-section (6) of the said Section 247. (f) In relation to Section 178 and 179 of the TCGA (company ceasing to be member of a group), the Company has not at any time ceased to be a member of a group of companies. Close companies - --------------- (39) The Company is not, nor has it been in respect of any accounting period ended within six years prior to the date of this Agreement, a close company within Section 414 of the Taxes Act (close companies). Stamp duty and stamp duty reserve tax - ------------------------------------- (40) The Company has complied with all its obligations in respect of stamp duty and stamp duty reserve tax and all documents which are in the possession of or under the control of the Company, or in the enforcement of which the Company may be interested, or to which the Company is a party, have been properly stamped to the extent that they attract stamp duty in the United Kingdom or elsewhere. (41) No relief or exemption granted to the Company under Section 55 of the Finance Act 1927 (relief from capital and transfer stamp duty in case of reconstructions and amalgamations of companies) or Section 42 of the Finance Act 1930 (relief from transfer stamp duty in case of transfer of property as between associated companies) or Section 47 (stamp duty on documents relating to chargeable transaction of capital -74- companies) of and part III of Schedule 19 to the Finance Act 1973 has become liable to forfeiture. Value added tax - --------------- (42) (a) The Company has complied with all its VAT obligations and in particular (but without prejudice to the generality of the foregoing) has duly paid or provided for all amounts of VAT for which the Company is liable and has maintained, complete, correct and up-to-date records, invoices and other supporting documents. (b) The Company is not and has not been a member of any group of companies for VAT purposes and no act or transaction has been effected in consequence whereof the Company is or may be held liable for any VAT calculated by reference to the supply of goods or services by any other company. (c) The Company is not a party to (nor does it enjoy the benefit of) any contract which contains any provision excluding the adjustment of the consideration therein on changes in tax under Section 89 of the VATA. (43) (a) In this paragraph references to "Schedule 9" and "Schedule 10" are references to those Schedules to the VATA and reference to "election to waive exemption" is a reference to an election under paragraph 2 of Schedule 10. (b) (i) The Company has not at any time made an election to waive exemption in relation to any land or interest in land. (ii) The Company is not, and never has been, a "relevant associate" (as defined in paragraph 3 of Schedule 10) in relation to a body corporate by which an election to waive exemption has been made in relation to any land or interest in land. -75- (c) No building and no civil engineering work comprised in or forming part of the Property is at the date hereof a building or a civil engineering work "which has not been completed" or "a new building" or "a new civil engineering work" within the meaning of Group 1 of Schedule 9. Anti-avoidance - -------------- (44) (a) The Company has not entered into or been a party to any transactions schemes or arrangements the sole or main purpose of which is or was for the purpose of avoiding taxation. (b) The Company has not been a party to or otherwise involved in any transaction, scheme or arrangement to which any of the following provisions have been or could be applied other than transactions in respect of which all necessary clearances have been obtained on the basis of full and accurate disclosure to the Inland Revenue and/or the Special Commissioners of all material facts and considerations relating thereto:- Section 139 of the TCGA (reconstruction or amalgamation involving transfer of business) Sections 213 to 218 of the Taxes Act (demergers) Sections 219 to 229 of the Taxes Act (purchase of own shares) Sections 703 to 709 of the Taxes Act (cancellation of tax advantages from certain transactions in securities) Section 776 of the Taxes Act (transactions in land; taxation of capital gains) Sections 135 to 138 of the TCGA (company reconstructions and amalgamations). Inheritance tax - --------------- (45) (a) There is no outstanding Inland Revenue charge under Section 237 -76- of the IHTA (imposition of charge) over the assets of or the shares in the Company. (b) No person has by virtue of Section 212 of the IHTA (powers to raise tax) any power of sale, mortgage or charge in respect of any share in or asset of the Company. (c) The Company has not made any transfer within Section 94 of the IHTA (charge on participators) which has given rise or could give rise to a liability on the Company under Section 202 of the IHTA (close companies). Miscellaneous - ------------- (46) (a) No claim has been made or is entitled to be made by the Company under either Section 584 (relief for unremittable overseas income) or Section 585 (relief from tax on delayed remittances) of the Taxes Act. (b) The Company is and has at all times been resident in the United Kingdom for the purposes of all taxation matters. Claims and liabilities - ---------------------- (47) At the date hereof save as provided in the Accounts or the Management Accounts there are outstanding no liabilities (except in the ordinary course of business) or claims against the Company nor, so far as the Vendor is aware, are there any deficiencies or defects which may result in claims being made against the Company in relation to any services (other than insurance claims disclosed in the Disclosure Letter) for which the Company has been or is or may be or become liable or responsible in the course of its business and, without prejudice to the generality of the foregoing, no dispute exists between the Company and any customer or client nor, so far as the Vendor is aware, are there any circumstances which may give rise to any such dispute. -77- Trading contracts - ----------------- (48) There is not outstanding:- (a) any agreement or arrangement between the Company and a supplier or customer of the Company who accounts for more than ten per cent of the turnover or expenditure of the Company and the Subsidiaries in aggregate; (b) any agreement or arrangement between the Company and any holding company of the Company or any other subsidiary of such a holding company; (c) any agreement or arrangement entered into by the Company otherwise than by way of bargain at arm's length; (d) any agreement or arrangement whereby any assets owned or used by the Company are subject to an option or similar arrangement for their sale or purchase; (e) any agreement or arrangement which requires or may require, or which restricts in any way, the issue of shares in the Company or the issue of a debenture by the Company; (f) any joint venture, consortium, partnership or profit sharing agreement or arrangement to which the Company is a party; (g) any guarantee, indemnity or undertaking given by the Company to procure the solvency of any person or otherwise to meet the liabilities of any third party; (h) any agreement restricting the freedom of the Company to provide and take goods and services to and from such persons as it may from time to time think fit. (49) There are no agency or management agreements which have been entered into by the Company. (50) The Vendor has no knowledge, of the invalidity of or grounds for rescission, avoidance or repudiation of any agreement to which the -78- Company is a party and the Company has not received notice of any intention to terminate any such agreement. (51) So far as the Vendor is aware, no party to any contract in which the Company is interested (whether as a contracting party or otherwise) is in material breach thereof. (52) The Company has outstanding no bids or tenders or sales or service proposals made otherwise than in the ordinary course of business or which, if accepted, would be likely to result in a loss on completion or performance. Product Guarantees, retention of title - -------------------------------------- (53) The Company has not given any guarantee or warranty or made any representation in respect of services supplied or contracted to be supplied by it save for any guarantee or warranty implied by law; nor (save as aforesaid) has the Company accepted any liability or obligation in respect of any services that would apply after any such services have been supplied by it; nor does the Company in the course of its business acquire or dispose of any goods or receive or supply services on terms whereby title in such goods or the subject matter of such services (or the proceeds of resale thereof) is reserved to the vendor thereof. Employment and Consultancy - -------------------------- (54) (a) Details of all remuneration and other benefits payable to each officer of the Company and of each employee of the Company whose remuneration exceeds (Pounds)15,000 per annum or whose period of notice exceeds three months and the main terms of employment thereof are set out in the Disclosure Letter and no officer or employee has given notice or is under notice of dismissal and no amounts are due to or in respect of any former officer or employee and there are outstanding no arrears of salary, wages, holiday pay -79- or other remuneration and no current or former director, officer or employee of the Company has any claim or prospective claim against the Company for compensation for loss of office or arising out of the termination of his office or employment or otherwise howsoever. (b) The Company has not entered into any recognition agreement with a trade union nor has it done any act which might be construed as recognition of a trade union. (c) So far as the Vendor is aware, material details of the remuneration and other benefits payable to and the main terms of appointment of each Consultant of the Company are set out in the Disclosure Letter. Pensions - -------- (55) (a) Save under the Pension Schemes and the Individual Pension Arrangements there is not in existence, and no proposal has been announced to establish, any retirement, death or disability benefit scheme for present or former officers or employees nor any obligation to or in respect of present or former officers or employees or the dependants of any such person with regard to retirement, death or disability pursuant to which any of the Group Companies is or may become liable to make payment and no pension or retirement or sickness gratuity is currently being paid or has been promised by any of the Group Companies in respect of any former officer or former employee or a dependant of any such person. (b) Each of the Pension Schemes is Contracted-in to the State Earnings- Related Pension Scheme (apart from the Teachers' Superannuation Scheme which is contracted-out), and is an exempt approved scheme within the meaning of Section 592(1) ICTA, and there is no reason why such exempt approval may be withdrawn. -80- (c) All contributions, premiums and any other financial expenditure for which any of the Group Companies are responsible in relation to the Pension Schemes and the Individual Pension Arrangements have been duly paid. (d) Save for those members listed in the Schedule under item (56) of Volume 84 (Pensions) of the agreed bundle attached to the Disclosure Letter, all benefits for classes of members (including deferred pensioners, pensioners and dependants or other contingent beneficiaries) under the Paid-Up Schemes are fully secured and can be fully met from the assets held by each of the Paid-Up Schemes and none of the Group Companies have any further financial liability whatsoever in relation to any of them. (e) The records of each of the Pension Schemes have been maintained by the insurance company with which each Pension Scheme is invested. All information necessary for the maintenance of the records and the calculation of benefit for each of the Pension Schemes has been provided to the relevant insurance company. (f) All benefits payable under the Pension Schemes on the death of a member are at the date of Completion either fully insured with insurance companies or funded in accordance with the actuarial valuation reports disclosed. (g) No current or former employees or officers (whether living or deceased) of any of the Group Companies have at any time in the two years preceding the date of Completion been excluded or prevented from participating in any of the Pension Schemes on the grounds of part- time employment, marital status or otherwise where such exclusion constitutes discrimination in breach of Article 119 of the Treaty of Rome. -81- (h) The only employees or former employees who are subject to the provision of a guaranteed minimum level of defined benefits in accordance with the full terms of their previous membership of the Priory, Roehampton Limited Cash Benefit Scheme are fully listed in the schedule attached under item 56 of Volume 84 (Pensions) of the agreed bundle attached to the Disclosure Letter and their personal details appearing on such schedule are complete and accurate. Real Property - ------------- (56) (a) The Property comprises all of the property owned, used or occupied by the Company or in which the Company has any interest. (b) The Vendor has to the best of its knowledge information or belief provided to the Vendor's Solicitors all the information relating to the Property that ought properly to be taken into account in the preparation of the Certificates of Title. (c) To the best of the Vendor's knowledge information or belief the Certificates of Title are true and accurate in all respects. Environmental matters - --------------------- (57) (a) In this paragraph the following words have the following meanings: "Environment": air (including, without limitation, that within buildings or natural or man-made structures, whether above or below ground), water (including, without limitation, inland waters and ground water as defined in Section 103(d) of the Water Act 1989) and land (including, without limitation, soil and river beds under any water as described above, surface land and sub-surface land); "Environmental Agency": any regulatory or enforcement body in respect of any Relevant Law including (without limitation) any -82- Waste Regulation Authority, Waste Disposal Authority, Waste Management Authority, Sewerage Undertaker, Land Drainage Authority, Drainage Authority or Local Authority, Her Majesty's Inspectorate of Pollution, the National Rivers Authority and the Health and Safety Executive; "Environmental Audit": any survey, inspection, audit, test or examination, whether carried out by an Environmental Agency or otherwise, carried out for the purpose of assessing or demonstrating compliance with the terms of any Relevant Law or of any Permit or assessing the extent to which any of the Property or any neighbouring property has been contaminated by any Hazardous Substance; "Hazardous Substance": controlled waste and/or any substance which alone or in combination with any other substance is hazardous, toxic, radioactive, explosive or capable of polluting the Environment or causing harm to human health or to the health of any living organism; "Permit": any consent, approval, authorisation, exemption, filing requirement, licence, order, permission, recording or registration required as at today's date (and references to obtaining Permits shall be construed accordingly); "Relevant Law": a requirement of or duty imposed by any of the following as at today's date: the common law; United Kingdom legislation and subordinate or delegated legislation; a judgement, order or award of any court; European Community regulations or directives having the force of law in the United Kingdom; which in any case relates to the protection of the Environment, the control of discharges or emissions, the prevention of harm -83- to human health or to the health of any living organism, or to the storage, disposal, handling or transport of any Hazardous Substance. (b) The Company has complied with all Relevant Laws and obtained all Permits required by all Relevant Laws in relation to the conduct of its business and its use of the Property and has complied with the terms and conditions of all such Permits. (c) No allegation or claim of any violation or failure to comply with the requirements of any Relevant Law, or of any Permit, has been received by the Company and there are no circumstances which might give rise to such a claim. (d) Neither the Company nor the Property has been the subject of any Environmental Audit. (e) As far as the Vendor is aware all underground storage tanks which contain or have contained any Hazardous Substance are, and have at all relevant times been, fit for the purpose of Containing the substances which they are containing or have contained. (f) The Purchaser or its representatives have been supplied with the following information in the Company's possession or control:- (i) notices to or from any Environmental Agency; (ii) all correspondence with any Environmental Agency; (iii) any report whether prepared on behalf of the Company or for a third party (but which is in the Company's possession or under its control), resulting from any Environmental Audit in connection with the Company's business or the Property, and all correspondence and documentation relating to such a report; -84- (iv) all Permits and details of appeals (whether current or pending) and all correspondence and memoranda relating to environmental, planning and health and safety matters; (v) details of all litigation files, including administrative proceedings in connection with any governmental or local authority requirements, affecting the Company's business or the Property; (vi) all information concerned with the position, testing and age of underground storage tanks; (vii) details of any remedial measures taken or being taken to prevent, reduce, mitigate or clean up any pollution of the Environment deriving from any of the Property or from the Company's business; and (viii) details of all spillages of any Hazardous Substances upon any of the Property which might give rise to a breach of any Relevant Law or a failure to comply with the requirements of any Permit. (g) The Company has not deposited, caused or permitted to be deposited or caused pollution, contamination, release, discharge or emission of any Hazardous Substance other than in accordance with a current valid Permit. Documents and information - ------------------------- (58) (a) All documents which are necessary to establish the title of the Company to its assets are in the possession of or under the control of the Company. (b) All documents required to be retained for a minimum period for the purposes of taxation or the Companies Act 1985 have been retained and are in the possession or under the control of the Company. -85- (c) The Company is registered under the Data Protection Act 1984 in respect of its business as a data user who also carries on a computer bureau and both the Company and its officers have complied in all respects with their obligations under that Act. No requests have been received under Part III of that Act for the disclosure of information held by the Company. Powers of attorney etc - ---------------------- (59) The Company has not given any power of attorney or any other authority (express, implied or ostensible) which is still outstanding or effective to any person to enter into any contract or commitment or to do anything on its behalf (other than any authority of employees to enter into routine trading contracts in the normal course of their duties). Licences etc - ------------ (60) All licences, consents and other permissions and approvals necessary for the carrying on of the Company's business and activities have been duly obtained on a permanent and unconditional basis and are in full force and effect and all reports, returns and other information required to be made or given in respect thereof have been duly made or given and so far as the Vendor is aware there are no circumstances which indicate that any of such licences, consents and permissions are likely to be revoked or not renewed (if necessary) in the ordinary course and the Company is not restricted by contract from carrying on any activity in any part of the world. Industrial Property Rights - -------------------------- (61) (a) All the Industrial Property used or required by the Company in connection with its business is in full force and effect and vested in and beneficially owned by it. -86- (b) The Company is the sole beneficial owner of the Industrial Property disclosed in the Disclosure Letter and (where such property is capable of registration) the registered proprietor thereof and (save for copyrights) owns no other Industrial Property and save as may appear from the Industrial Property Agreements disclosed in the Disclosure Letter no person has been authorised to make any use whatsoever of any Industrial Property owned by the Company and the Company has not disclosed or permitted to be disclosed or undertaken or arranged to disclose to any person other than the Purchaser any of its knowhow, trade secrets, confidential information, price lists or lists of customers or suppliers save in the ordinary course of its business. (c) Save for the Industrial Property disclosed in the Disclosure Letter and the Industrial Property Agreements, the Company does not require any Industrial Property or rights under Industrial Property Agreements for any of the operations of any of its businesses as presently carried on and none of such operations infringes any right of any other person relating to Industrial Property or involves the unlicensed use of confidential information disclosed to the Company by any person in circumstances which might entitle that person to a claim against the Company and none of the Industrial Property disclosed in the Disclosure Letter is being used, claimed, opposed or attacked by any person nor has any claim been settled by the giving of undertakings which remain in force. (d) The operations of the businesses of the Company (and of any licensee under a licence granted by the Company) as presently -87- carried on do not and are not likely to give rise to a liability to pay a royalty or any sum in the nature of a royalty or to a liability to pay compensation pursuant to Sections 40 and 41 of the Patents Act 1977. (e) The Vendor is not aware of any infringement by any third party of any of the Industrial Property disclosed in the Disclosure Letter. (f) The Company is not party to any secrecy agreement or agreement which may restrict the use or disclosure of information. (g) Confidential information and knowhow used or required by the Company is kept strictly confidential and the Company has operated and complied with procedures which maintain such confidentiality. The Vendor is not aware of any such confidentiality having been breached. (h) All application and renewal fees, costs and charges relating to the Industrial Property disclosed in the Disclosure Letter have been duly paid on time and no act has been done or omission permitted by the Company whereby such Industrial Property or any of it has ceased or might cease to be valid and enforceable. (i) The Industrial Property Agreements disclosed in the Disclosure Letter are all the Industrial Property Agreements to which the Company is a party and all of them are valid and binding and there has not been any material default (or any event which with notice or lapse of time or both would constitute a material default) under any of them by the Company or by any other party thereto. Insolvency - ---------- (62) No receiver, administrator or administrative receiver has been appointed of the whole or any part of the assets or undertaking of the Company. -88- (63) The Company is not in liquidation, is not the subject of a voluntary arrangement or administration order and is not in receivership and no order, petition, application, proceeding, meeting or resolution has been made, presented, brought, called or passed for any of those purposes. (64) The Company has not stopped payment nor is it insolvent nor is it deemed unable to pay its debts within the meaning of Section 123 of the Insolvency Act 1986 and there is no unfulfilled or unsatisfied judgment or Court order outstanding against the Company and there has been no delay by the Company in the payment of any obligation due for payment. Grants - ------ (65) (a) Save as disclosed in the Disclosure Letter the Company has not applied for or received any grant, subsidy or other financial assistance from any government department or agency, or any local or other authority. (b) The Company has not done nor omitted to do any act or thing which could result in all or any part of any such grant, subsidy or assistance becoming repayable or being forfeited or withheld in whole or in part. Statutory, criminal etc. offences - --------------------------------- (66) There is no subsisting breach by the Company or any director, officer or employee of the Company in his capacity as such of any statutory enactment or regulation relating to the Company which would have a material adverse effect on its business. (67) The Company has not committed nor is it liable for any criminal, illegal, unlawful, ultra vires or unauthorised act or material breach -89- of contract and the Company has at all times carried on its business and affairs in all respects in accordance with its Memorandum and Articles of Association. Fair Trading - ------------ (68) (a) No agreement, practice or arrangement carried on by the Company or to which the Company is a party:- (i) is being or has been or ought to be or ought to have been registered in accordance with the provisions of the Restrictive Trade Practices Acts 1976 and 1977 or contravenes the provisions of the Resale Prices Act 1976 or is or has been the subject of any enquiry, investigation or proceeding under any of those Acts; or (ii) is or has been the subject of an enquiry, investigation, reference or report under the Fair Trading Act 1973 (or any previous legislation relating to monopolies or mergers) or the Competition Act 1980; or (iii) infringes article 85 of the Treaty (as amended) establishing the European Community or constitutes an abuse of dominant position contrary to article 86 of such Treaty or infringes any regulation or other enactment made under article 87 of such Treaty or is or has been the subject of any enquiry, investigation or proceeding in respect thereof; or (iv) has been notified to the Directorate General of Competition of the Commission of the European Community; or (v) is by virtue of its terms or by virtue of any practice for the time being carried on in connection therewith a -90- 'Consumer Trade Practice' within the meaning of Section 13 of the Fair Trading Act 1973 and susceptible to or under reference to the Consumer Protection Advisory Committee or the subject matter of a report to the Secretary of State or the subject matter of an order by the Secretary of State under the provisions of Part II of that Act; or (vi) infringes any other competition, anti-restrictive trade practice, anti-trust or consumer protection law or legislation applicable in the United Kingdom and not specifically mentioned in this sub-paragraph (a). (b) The Company has not given any assurance or undertaking to the Restrictive Practices Court or the Director General of Fair Trading or the Secretary of State for Trade and Industry or the Commission or Court of Justice of the European Community or to any other court, person or body and is not subject to any Act, decision, regulation, order or other instrument made by any of them relating to any matter referred to in this paragraph 68. (c) The Company is not in default or in contravention of any article, act, decision, regulation, order or other instrument or of any undertaking relating to any matter referred to in this paragraph 68. Insider Contracts - ----------------- (69) There is not outstanding and there has not at any time during the last four years been outstanding any contract or arrangement, other than the contracts of employment referred to in the Disclosure Letter, to which the Company is a party and in which the Vendor or any director of the Company or any person connected with any of them is or has been -91- interested, whether directly or indirectly, and neither is the Company a party to, nor have its profits or financial position during such period been affected by, any contract or arrangement which is not of an entirely arm's length nature. BUPA - ---- (70) There has been no further correspondence or discussion between BUPA and the Company relating to the matters referred to in the correspondence specified in paragraph (68)(a)(iii) of the Disclosure Letter. ASSOCIATED COMPANIES - -------------------- (71) The Company has no legally binding liability (whether actual or contingent) which it owes to, or to a third party in respect of, any of the Associated Companies. -92- SIXTH SCHEDULE (Taxation Claims) 1. A "Taxation Claim" means any taxation due from or any claim for taxation against the Company or any of the Subsidiaries including (without limitation) any notice, demand, assessment, letter or other document issued or action taken whereby it appears that the Company or any of the Subsidiaries is or may be:- (a) liable to make any payment of taxation; or (b) denied any allowance, relief, credit or repayment of taxation; and includes a liability or claim for taxation which is the primary liability of another party but which may be recovered from the Company, any of the Subsidiaries or the Purchaser. 2. If a Taxation Claim for a given amount would arise or would have arisen under (a) or (b) of paragraph 1 of this Schedule but for the availability to the Company or any of the Subsidiaries of an allowance, relief or credit which has accrued since the Accounts Date there shall be a Taxation Claim for a like amount which shall be treated in the same way as the denial of an allowance, relief or credit. 3. A claim is not a Taxation Claim:- (a) unless it arises in relation to, any income, profits or gains earned, accrued or received on or before the Completion Date or any act, omission or event occuring on or before the Completion Date; or (b) to the extent that provision or allowance has been made therefor in the Accounts; or (c) to the extent that provision or allowance has been made therefor in the Accounts which is insufficient by reason only of any -93- increase in rates of taxation after the date of this Agreement and having retrospective effect; or (d) to the extent that it is a liability in respect of actual (but not deemed) income, profit, gains or payments which arise in the ordinary course of business of the Company or any of the Subsidiaries since the Accounts Date (and for the avoidance of doubt the reference to a liability in respect of such matters which arise in the ordinary course of business includes, without limitation, any such liability resulting from the disposal of a fixed asset on arms length terms to a third party purchaser not being in any way connected with the Company or any of its Subsidiaries); or (e) if it is a liability which would not have arisen but for a voluntary act of the Purchaser, the Company or any of the Subsidiaries after the Completion Date outside the ordinary course of their respective normal businesses and which the Purchaser knew or ought reasonably to have known would give rise to such a liability; or (f) to the extent that it arises from the loss, reduction or denial of any allowance, relief or credit, or of any right to repayment of tax, or to the extent that any allowance relief or credit or right to repayment of tax is available to reduce the tax liability (or to prevent the same from arising), but only where the relevant allowance relief or credit, or right to repayment of tax: (i) accrued to the Company or any of the Subsidiaries in any accounting period prior to or up to the Accounts Date; and (ii) was not taken into account by way of an increase in the amount of the assets or net assets, or reduction in the -94- amount of the liabilities of the Company and the Subsidiaries in the consolidated balance sheet comprised in the Accounts; (g) if it is any amount in respect of and to the extent to which the Vendor is liable to make a payment to the Purchaser pursuant to the provisions of the tax side letter (or would be so liable but for some set-off or other saving under the tax side letter which prevents the liability from arising), or for which the Vendor is not liable in any event in accordance with Clause 2(c) or (d) or 6(b) of the tax side letter; or (h) if it relates to or arises out of the whole or any of the expenditure referred to in Clause 3 of the tax side letter not being allowable or being disallowed as a deduction or charge against or in computing profits of the Company and/or any of the Subsidiaries; or (i) (for the avoidance of doubt) if it relates to or arises out of the disposal of any asset after Completion which operates to bring into charge to taxation any gain previously rolled over into the asset being disposed of. 4. References to income or profits or gains earned, accrued or received shall (except where the contrary appears) include income or profits or gains deemed to have been, or treated as, earned, accrued or received for the purposes of any legislation. -95- SEVENTH SCHEDULE (Cash and Working Capital Adjustment) 1. The total consideration payable for the Shares shall be adjusted in accordance with the following provisions of this Schedule by reference to the aggregate Value of the Cash (as defined below) and the aggregate Value of the Working Capital (as defined below) of the Company and the Subsidiaries as at opening of business on 21st June 1996 (but assuming all matters due to occur on Completion have so occurred) as shown in the consolidated accounts for such companies to be prepared pursuant to paragraph 6(b) of this Schedule ("the Completion Accounts"). 2. In this Schedule:- (a) "Value of the Working Capital" means the Net Current Assets less the Net Current Liabilities; (b) "Net Current Assets" means the trade debtors and other receivables due within one year (net of the provision for bad debts) pre-paid expenses, pre-opening expenses, accrued income other current assets but excluding cash; (c) "Net Current Liabilities" means the trade and other creditors and deferred income falling due (in each case) within one year but excluding corporation tax, any indebtedness to Midland Bank plc, Bank of America or to the Vendor or any of its subsidiaries (other than the Company or the Subsidiaries) or Borrowings; (d) "Value of the Cash" means the cash in hand and at bank (including any uncashed cheques received, but deducting any uncashed cheques drawn), less the amount of the Borrowings and the Relevant Capital Expenditure; -96- (e) "Borrowings" means, indebtedness incurred in respect of (i) money borrowed or raised, (ii) any bond, note, loan stock, debenture or similar instrument, (iii) acceptance or documentary credit facilities, (iv) deferred payments for assets or services acquired (other than on normal trade credit terms), (v) any cost to any Group Company of terminating the ISDA agreement referred to in paragraph (21) of the Disclosure Letter and all transactions thereunder or in connection with the other arrangements referred to in clause 5(d) of this Agreement, (vi) any amount which would have been borrowings but for an act or omission outside the normal course of business calculated to reduce, or a change in policy or general practice, since the management accounts date having the effect of reducing borrowings but excluding any borrowings arranged by or at the instance of the Purchaser or (for the avoidance of doubt) discharged or released as part of Clause 5 of this Agreement. (f) "Relevant Capital Expenditure" means the aggregate amount remaining to be paid within one year by any Group Company pursuant to any contractual commitment to incur capital expenditure made by it prior to Completion but excluding any such amount which:- (i) is disclosed by the Disclosure Letter; or (ii) is included in the Management Accounts; or (iii) has been incurred since the Management Accounts Date in the ordinary course of business; or (iv) amounts in aggregate to a liability falling due within one year of less than (Pounds)25,000. (g) Notwithstanding anything to the contrary in the foregoing provisions, all calculations made under this Schedule shall be -97- on a consolidated basis for the Company and the Subsidiaries as a whole and without duplication of the same liability or other matter under more than one heading; (h) Assets and/or liabilities in a currency other than sterling shall be translated into sterling at the market rate of exchange prevailing for the relevant currency on the date of Completion (on the basis of the spot rate of The Royal Bank of Scotland Plc for the sale of the relevant currency for sterling at 11.00 hours (London time) on such date). (i) "The Vendor's Accountants" means Price Waterhouse of Thames Court, 1 Victoria Street, Windsor, Berkshire SL4 1HB. (j) Unless otherwise stated, definitions and headings used in this Schedule have the same meanings as in the Management Accounts. 3. Subject to paragraph 5 of this Schedule:- (a) If the Value of the Cash shown in the Completion Accounts is less than (Pounds)2,925,289 the Vendor shall repay to the Purchaser the sum by which the Value of the Cash falls short of (Pounds)2,925,289. (b) If the Value of the Cash shown in the Completion Accounts is more than (Pounds)2,925,289 the Purchaser shall pay to the Vendor the sum by which the Value of the Cash exceeds (Pounds)2,925,289. 4. Subject to paragraph 5 of this Schedule:- (a) If the Value of the Working Capital shown in the Completion Accounts is less than (Pounds)4,800,000 the Vendor shall repay to the Purchaser the sum by which the Value of the Working Capital falls short of (Pounds)4,800,000. -98- (b) If the Value of the Working Capital shown in the Completion Accounts is more than (Pounds)4,800,000 the Purchaser shall pay to the Vendor the sum by which the Value of the Working Capital exceeds (Pounds)4,800,000. 5. The Value of the Cash and the Value of the Working Capital shall be aggregated and the net amount paid or repaid to the Vendor or the Purchaser, as appropriate (but so that no payment shall be made which is less than (Pounds)20,000). 6. (a) Any sum payable under this Schedule shall be paid in cleared funds by the Vendor or, as the case may be, the Purchaser within 21 days of the Value of the Cash and the Value of the Working Capital being finally determined in accordance with this Schedule. Any such sum shall bear interest at the daily rate of 2% per annum over National Westminster Bank PLC's base rate from the date which is 60 days from the Completion Date until the date of such receipt. (b) The Completion Accounts shall be prepared as at Completion by the Company and the Purchaser's Accountants a draft of which shall be delivered to the Vendor or the Vendor's Accountants within 60 days of the Completion Date using the bases and policies of accounting adopted in preparing the Management Accounts and in accordance with UK GAAP (unless stated otherwise in paragraph 2 of this Schedule). (c) The Vendor shall then be entitled to have the Completion Accounts and the determination of the Value of the Cash and the Value of the Working Capital reviewed by the Vendor's Accountants and, if the Vendor's Accountants disagree with the -99- determination of the Purchaser's Accountants, it shall notify that fact to the Purchaser within 45 days of the date on which the Vendor or the Vendor's Accountants received a copy of the Completion Accounts and the statement of the Value of the Cash and the Value of the Working Capital from the Purchaser's Accountants. If the Vendor and the Purchaser cannot resolve such disagreement within a period of 21 days from the date on which the Vendor notifies the Purchaser of its disagreement the Vendor and the Purchaser shall agree upon the appointment of an independent chartered accountant, or if they cannot so agree within a further period of 21 days then either may apply to the President for the time being of the Institute of Chartered Accountants in England and Wales for the appointment of an independent chartered accountant. The Vendor and the Purchaser shall instruct such independent chartered accountant that, after making such enquiries as he shall see fit, he should within 45 days of the matter being referred to him verify the Completion Accounts and determine the Value of the Cash and the Value of the Working Capital and the Vendor and the Purchaser shall each use all reasonable endeavours to ensure that the determination is made within that period. (d) In making his determination the independent chartered accountant shall act as an expert and not as an arbitrator. (e) The determination of the independent chartered accountant or, if there has been no disagreement, the determination of the Purchaser's Accountants, as to the amount of the Value of the Cash and the Value of the Working Capital shall, save in the case of manifest error, be binding on the Vendor and the Purchaser. -100- (f) All fees and expenses incurred in the determination of the Value of the Cash and the Value of the Working Capital by the independent chartered accountant shall be paid equally by the Vendor and the Purchaser. The fees and expenses of the Vendor's Accountants for work carried out by them under this Schedule shall be borne by the Vendor. The fees and expenses of the Purchaser's Accountants for work carried out by them under this Schedule shall be borne by the Purchaser, save for 25% or (Pounds)7,500 plus VAT (whichever is less) of such fees and expenses incurred to the date which is 60 days from the Completion Date (such payment to be made by the Vendor within 21 days of demand provided an appropriate invoice from the Purchaser's Accountants to the Purchaser is attached thereto). (g) The Purchaser shall give the Vendor's accountants and any independent chartered accountant reasonable access to the personnel and books of account and records of the relevant Group Company to enable an accurate and proper determination of the Value of the Cash and the Value of the Working Capital to be made. 7. Subject to paragraph 5 of this Schedule, neither party to this Agreement shall be entitled to any right of set off, deduction, counterclaim or similar right against any amount payable under this Schedule and each party unconditionally and irrevocably waives any such right that it might otherwise have had but for this paragraph 7 of this Schedule. -101- SIGNED by ) ) Richard L. Conte for and on behalf of ) COMMUNITY PSYCHIATRIC ) CENTERS INC in the ) presence of:- ) Ronald L. Ooley /s/ Ronald L. Ooley SIGNED by ) /s/ Jan Peter Reynolds ) J. P. Reynolds for and on behalf of ) FORAY 911 LIMITED ) in the presence of:- ) EX-99.2 3 SERIES "A" LOAN NOTE DATED 6-21-96 EXHIBIT 2 THE SERIES `A' LOAN NOTES SERIAL NO: 1 ________________________________________________________________________________ (Pounds)3,000,000 Principal Amount FORAY 911 LIMITED (Incorporated with limited liability in England under the Companies Act 1985) (Registered No 3189363) (the "Company") (Pounds)3,000,000 Secured Loan Notes This Note is held by: Community Psychiatric Centers of 5110, West Sahara Avenue, Las Vegas, NV 89102, USA. This Note forms one of a series of Notes constituted by an instrument dated 21 June 1996 made by Foray 911 Limited (the "Instrument"). Interest on this Note shall be payable in accordance with and at the rates from time to time specified in Condition 3 and in clause 3 of the Instrument. The Company's obligations under the terms of this Note and under the Conditions are subject to the provisions of the Intercreditor Agreement (as defined in the Instrument). The Company hereby covenants with the Noteholder that it will pay to the Noteholder on the dates set out in Condition 4 the sums set out therein (or such earlier date as may be specified in the Conditions for redemption of the Notes) together with interest at the aforesaid rates and any additional amounts as may be payable in accordance with the terms of the Instrument or the Conditions. IN WITNESS whereof this Note is executed as a Deed this 21st day of June 1996. -2- EXECUTED AS A DEED ) By FORAY 911 LIMITED ) in the presence of: ) Director Director CONDITIONS OF THE SERIES `A' LOAN NOTES AND SERIES `B' LOAN NOTES The (Pounds)35,250,000 Secured Loan Notes (the "Notes") of Foray 911 Limited (the "Company") are in registered form. The Notes are constituted by an instrument (the "Instrument") dated 21 June 1996 made by the Company. Copies of the Instrument are available from the registered office of the Company. The statements set out in these Conditions include summaries of, and are subject to, the detailed provisions of the Instrument. Words and expressions used in these Conditions have, unless otherwise defined or the context otherwise requires, the same meanings as are given to them in the Instrument. The holders of the Notes are entitled to the benefit of, and are deemed to have notice of, all the provisions of the Instrument and the Notes, all of which are binding on them. 1. DENOMINATION AND TITLE Notes may, subject to paragraph 2 of Schedule 2, be transferred by an instrument (in writing in accordance with Schedule 2 to the Instrument) in amounts or integral multiples of (Pounds)10,000 in principal amount (or such other amount representing a whole Note). The Notes shall be issued in such denominations as the Company shall determine and each Note shall bear a denoting serial number. The Company may treat the registered holder of any Note as the absolute owner thereof (whether or not such Note shall be overdue and notwithstanding any notice of ownership or writing thereon or any notice of previous loss or theft or of trust or other interest therein) for the purpose of making payment and for all other purposes. 2. STATUS AND SECURITY 2.1 The Notes constitute secured obligations of the Company ranking pari passu without any preference among themselves, subject to the provisions of the Intercreditor Agreement and Condition 4.5. 2.2 The obligations of the Company under the Instrument and in respect of the Notes are secured by way of the Security, subject to the provisions of the Intercreditor Agreement. -2- 3. INTEREST 3.1 Interest shall accrue on the principal amount of the Notes and the Accrued Interest from time to time outstanding and accruing until repayment in full of the Notes at the following rates (the "Accrued Interest"): (a) 15% per annum during the period from the date of issue up to and including 30 November 1997; (b) 10% per annum during the period from 1 December 1997 up to and including 30 November 1998; (c) 5% per annum during the period from 1 December 1998 up to and including 30 November 2001; and (d) 0% thereafter. The Accrued Interest shall be calculated by reference to a year of 365 days and the number of days elapsed and shall accrue on a daily basis on the principal amount of the Notes and the Accrued Interest (compounded monthly) and shall, subject to Condition 3.4 and to the provisions of the Intercreditor Agreement, become payable by the Company on any repayment of the Notes. 3.2 The Company shall pay interest on the principal amount of the Notes and on the Accrued Interest from time to time outstanding and accruing until repayment in full of the Notes at the following rates (the "Running Interest"): (a) 5% per annum during the period from 1 December 1997 up to and including 30 November 1998; (b) 10% per annum during the period from 1 December 1998 up to and including 30 November 2001; (c) 15% per annum thereafter. The Running Interest shall, subject to the provisions of the Intercreditor Agreement, be paid by the Company semiannually in arrears on 31 July and 31 January in each year (or the first -3- Business Day after such date in any year when such dates fall on a day which is not a Business Day) with the first such payment due on 31 July 1998. The Running Interest payable hereunder shall be calculated by reference to a year of 365 days and the number of days elapsed and shall accrue on a daily basis. In addition, unpaid Running Interest shall itself bear interest in accordance with clause 3 of the Instrument (but for the avoidance of doubt shall not itself become Accrued Interest). 3.3 The Company at its sole discretion may at any time satisfy all or any part of the Accrued Interest accumulated at such time by the creation and issue of further loan notes, in principal amounts equal to the Accrued Interest accumulated at such time. Such further loan notes will be issued by the Company to the Noteholders on the same terms as the Notes held by each Noteholder. 3.4 If a Specified Disposal occurs, then, subject to the provisions of the Intercreditor Agreement, an amount equal to the One-Third Amount (as defined in Condition 4.5(b)) shall be paid to the Noteholders, pro rata to their respective holdings of Notes, as a payment of Accrued Interest, and the amount of Accrued Interest on the Notes shall be reduced accordingly. 4. REDEMPTION AND PURCHASE 4.1 REDEMPTION AT MATURITY Unless previously redeemed or purchased by the Company and cancelled, the Company will, subject to the provisions of the Intercreditor Agreement, redeem the Notes at their principal amount on the dates and in the amounts set out below together with the Accrued Interest and the Running Interest accrued up to and including the date of redemption and any other sum due in accordance with these Conditions, less any Taxes:
Date ---- June 30 2004 (Pounds)5,875,000 June 30 2005 (Pounds)5,875,000 June 30 2006 (Pounds)5,875,000 July 02 2007 (Pounds)5,875,000 June 30 2008 (Pounds)5,875,000 June 30 2009 (Pounds)5,875,000
-4- Except as provided in Conditions 4.2, 4.4 and 4.5 below, and without prejudice to Condition 4.3 below, the Company may not optionally redeem Notes prior to these dates. 4.2 REDEMPTION FOR TAXATION REASONS If the Company at any time determines immediately prior to giving notice referred to below that, as a result of any change in or in the official or judicial interpretation or application of any taxation laws (or in regulations made thereunder) of the United Kingdom by any authority thereof or therein having power to levy any form of tax on or in respect of the Company, the Notes are materially prejudicial to the Company's tax position and the Company cannot by taking reasonable steps avoid such result, then the Company may, if all amounts actually or contingently outstanding under the Banking Facilities have been paid in full and none of the Banking Facilities are available for utilisation (but not otherwise) and having given not less than 30 or more than 60 days' notice in writing to the Noteholders, redeem all but not some only of the Notes then outstanding at their then Redemption Amount. 4.3 OPTIONAL PURCHASE The Company may, if all amounts actually or contingently outstanding under the Banking Facilities have been paid in full and none of the Banking Facilities are available for utilisation (but not otherwise), at any time thereafter purchase beneficially or procure others to purchase beneficially for its account all or any of the Notes in amounts or integral multiples of (Pounds)1,000,000 in principal amount (or such other amount representing a whole Note). 4.4 SPECIFIED DATE On any Specified Date the Notes shall, if all amounts actually or contingently outstanding under the Banking Facilities have been paid in full and none of the Banking Facilities are available for utilisation (but not otherwise), become immediately due and payable at their then Redemption Amount. -5- 4.5 SPECIFIED DISPOSAL If a Specified Disposal occurs and provided that at the time of the redemption contemplated by this Condition 4.5 the Agent has not given an instruction to the Security Trustee under clause 5.1 of the Intercreditor Agreement, a number of the Series `A' Loan Notes shall be redeemed within 30 days of the completion of the Specified Disposal by the payment by the Company of a sum (the "Sum") equal to the lower of: (a) (Pounds)500,000; (b) one-third of the net consideration received by the Group pursuant to the agreement giving effect to the Specified Disposal (being the amount of the consideration actually received by the Group (in cash or which is immediately measurable in cash terms) on completion of that agreement or subsequent to it and the Company hereby agrees to use its reasonable endeavours to ensure that any element of deferred consideration will be (i) payable in cash or immediately (at the time of payment) measurable in cash terms and (ii) not more than 20% of the aggregate consideration receivable by the Group) less all taxes and reasonable costs and expenses payable by the Group in connection with the Specified Disposal or otherwise resulting therefrom (the "One- Third Amount"); and (c) the Redemption Amount on all Series 'A' Loan Notes then outstanding at the date of payment under this Condition. The number of Series `A' Loan Notes to be redeemed pursuant to this Condition 4.5 will be such number of Series `A' Loan Notes as represents the relevant principal amount, where the Redemption Amount for such Series `A' Loan Notes on such redemption equals the Sum. The payment of such amount shall be in full satisfaction of all the Company's obligations to pay the principal amount and the Accrued Interest and any Running Interest accrued to the date of receipt on the Series `A' Loan Notes then being redeemed, and any other sum due in accordance with the Instrument or these Conditions. 4.6 REDEMPTION FOR DEFAULT If there occurs an Event of Default, the Notes shall, if declared due and payable in accordance with Condition 6, become immediately due and payable at their then Redemption Amount. -6- 4.7 NOTICE OF REDEMPTION 28 days (or such lesser period as shall be agreed between the Company and the holder of the majority of the Notes then in issue) prior to repayment of any Notes the Company shall give notice to the relevant Noteholders and (unless the Banking Facilities have been repaid in full and are no longer available for utilisation) to The Royal Bank of Scotland plc (as agent for the Banks under the Facilities Agreement) specifying the total amount of the Notes to be repaid on that occasion, the method by which this was calculated, the number of such holder's Notes to be repaid, the applicable repayment date and place at which the certificate for such Notes are to be produced. On each such redemption date each of the relevant Noteholders shall be bound to deliver to the Company at such place the certificate of such of the Notes concerned as are held by him. Upon such delivery of the certificates the Company shall pay to such holder the amount due to him in respect of such repayment. If any certificate so delivered to the Company includes any Notes not to be repaid on the relevant repayment date, a fresh Note for such Notes shall be issued free of charge to the holder delivering such certificate to the Company. 4.8 SELECTION OF NOTES FOR REDEMPTION The Notes to be repaid on any occasion (except redemption in accordance with paragraph 4.5) shall be selected, as nearly as may be, pro rata from the holding of each relevant Noteholder. On any redemption in accordance with paragraph 4.5, the Notes to be repaid shall be selected, as nearly as may be, pro rata from the Noteholders holding the Series `A' Loan Notes. 4.9 CANCELLATION AND RE-SALE All Notes redeemed or purchased by the Company under this Condition 4 will be cancelled and accordingly will not be available for re-issue or re-sale. 5. PAYMENTS 5.1 If the date for payment of any sum under these Conditions is not a Business Day the date for payment shall be postponed to the next succeeding Business Day and Interest and the Redemption Amount shall be calculated by reference to and payable in respect of such extension of time. -7- 5.2 All payments to be made by the Company hereunder shall be made in the case of redemption against delivery of the relevant Note executed by the Noteholder and in all cases either by telegraphic transfer on the due date for payment, or at the Company's option, by cheque drawn on a bank in the City of London which will be posted no later than the fourth Business Day before the due date for payment thereof to persons who are registered as Noteholders at the close of business on the fifth Business Day before the relevant due date and payable to such Noteholders. 5.3 All payments to be made by the Company hereunder to a Noteholder (i) shall be made without any set-off or counter-claim and (ii) each such payment, including any sum in respect of interest payable under Condition 3 and/or clause 3 of the Instrument shall be made without deduction for, any taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature ("Taxes"), unless the Company is compelled by law to deduct any Taxes. 5.4 The Company shall not be entitled to any set off or counterclaim against the Redemption Amount of any Series "A" Loan Note in respect of any sum due or claimed to be due to the Company from the holder of such Series "A" Loan Note. 6. EVENTS OF DEFAULT AND ENFORCEMENT Any Noteholder if so authorised by a Consent or an Extraordinary Resolution, and subject to the provisions of the Intercreditor Agreement, may declare the Notes to be due and repayable immediately (and the Notes shall thereby become so due and repayable) at their then Redemption Amount (without prejudice to the provisions of Condition 3) if: (a) the Company shall fail on the due date to make any payment of principal to any Noteholder under these Conditions, except where such payment is prohibited under the provisions of the Intercreditor Agreement, and shall not remedy such defect within three Business Days of being required to do so by notice in writing from such Noteholder; (b) the Company shall fail on the due date to make any payment of interest due to any Noteholder under these Conditions, except where such payment is prohibited under the provisions of the Intercreditor Agreement, and shall not remedy such defect within three Business Days of being required to do so by notice in writing from such Noteholder; -8- (c) the Company shall fail to perform or observe any other covenant, condition or provision contained in the Notes or the Instrument and on its part to be performed and observed and such failure is not remedied within 15 Business Days following service by or on behalf of any Noteholder on the Company of notice certifying that such failure is materially prejudicial to the interests of the Noteholders in respect of the Notes and requiring the same to be remedied; (d) any resolution is passed or order made for the winding up or dissolution of the Company save for the purpose of a solvent reorganisation or reconstruction or amalgamation, the terms of which were previously approved by an Extraordinary Resolution or a Consent; (e) an administration order is made or a receiver, manager or administrator is appointed in relation to the Company; (f) any demand for repayment being made under clause 11.2(b) of the Facilities Agreement; (g) the Company has committed a breach of the provisions of the Investment Agreement (other than a failure to pay the Participating Dividend under the Articles where payment of such dividend is prohibited by the provisions of the Intercreditor Agreement) and such breach, if capable of remedy, has not been remedied within a period of 15 Business Days following service by or on behalf of any Noteholder on the Company of notice of such breach certifying that such breach is materially prejudicial to the interests of the Investors (as defined in the Investment Agreement) in respect of their investment in the Company and requiring the same to be remedied. 7. MODIFICATION, WAIVER AND SUBSTITUTION 7.1 The Instrument contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the modification by Extraordinary Resolution of these Conditions or the provisions of the Instrument. Any such modification may only be made in accordance with the provisions of the Intercreditor Agreement. The quorum at any such meeting for passing an Extraordinary Resolution for modifying such provisions is persons holding or representing not less than one-half in principal amount of the Notes for the time being outstanding. Any resolution duly passed at any such meeting shall be binding on all the Noteholders, whether present or not. -9- 7.2 The Company may make, without the consent of the Noteholders, any modification of, or any waiver or authorisation of any breach of any provision of, these Conditions or the Instrument which, in the opinion of the auditors appointed by the Company, is not materially prejudicial to the interests of the Noteholders or any modification which is of a formal or technical nature or which is made to correct a manifest error. Any such modification may only be made in accordance with the provisions of the Intercreditor Agreement. 7.3 Any such modification, waiver, authorisation or substitution shall be binding on the Noteholders and any such modification or substitution shall be notified to the Noteholders as soon as practicable thereafter in accordance with clause 8.2 of the Instrument. 8. GOVERNING LAW The Instrument and the Notes are governed by, and shall be construed in accordance with, English law and the English courts have non-exclusive jurisdiction in connection with the Instrument and the Notes. SCHEDULE 2 PROVISIONS AS TO REGISTRATION, TRANSFER AND REPLACEMENT OF NOTES 1. EXCLUSION OF EQUITIES Every Noteholder will be recognised by the Company as entitled to its Note free from any equity, set-off or counter-claim on the part of the Company against the original or any intermediate holder of the Note. 2. TRANSFERABILITY OF NOTES 2.1 The principal amount of each Note is transferable by instrument in writing in any usual form. There shall not be included in any instrument of transfer any note other than a Note constituted by the Instrument. 2.2 Subject to paragraph 2.3 the Series `A' Loan Notes may only be transferred in whole and not in part, and may only be transferred to members of the original Noteholder's group (being any holding company of the original Noteholder, or any subsidiary undertaking of the original Noteholder or of any of its holding companies from time to time) or to a sophisticated investor. 2.3 A transfer of Series `A' Loan Notes other than to a member of the original Noteholder's group (as defined above) may only be made if 30 days' prior written notice thereof (the "Notice Period") has been given to the Company specifying the price at which the Series `A' Loan Notes are to be transferred and the identity of the proposed transferee (a "Transfer Notice"). Within five Business Days of receipt of a Transfer Notice, the Company shall copy the Transfer Notice to the holders of the Series `B' Loan Notes, who shall be entitled to purchase the Series `A' Loan Notes at the price specified in the Transfer Notice within the Notice Period (such entitlement to be in proportion to their holdings of the Series `B' Loan Notes unless any such Noteholder does not wish to participate, in which case the entitlement of each Noteholder who does wish to participate shall be in proportion to its holding of the Series `B' Loan Notes held by all the Noteholders who wish to participate, and provided at all times that the holders of the Series `B' Loan Notes who wish to participate shall not be entitled to purchase part but not all of the Series `A' Loan Notes), and the holder of the Series `A' Loan Notes shall be bound to transfer such Notes to the holders of the Series `B' Loan Notes in accordance with this paragraph on receipt of the price specified in the Transfer Notice. -2- 2.4 If the holders of the Series `B' Loan Notes do not purchase the Series `A' Loan Notes offered for sale in accordance with the Transfer Notice, the holder of the Series `A' Loan Notes may transfer such notes to the proposed transferee specified in the Transfer Notice at a price no lower than the price specified in the Transfer Notice. 2.5 Each Series `B' Loan Note shall only be transferable in accordance with the provisions contained in the Articles, mutatis mutandis, as though each Series `B' Loan Note was a "B" Ordinary Share of the Company. The provisions of this Schedule 2 shall be subject to the provisions contained in the Articles governing the transferability of Series `B' Loan Notes. 2.6 Any proposed transferee of any Note shall adhere to the terms of the Intercreditor Agreement (if not already a party thereto) as a condition of such transfer. 3. EXECUTION OF TRANSFERS Every instrument of transfer must be signed by or on behalf of the transferor and the transferor shall be deemed to remain the owner of the Note to be transferred until the name of the transferee is entered in the Register. 4. REGISTRATION OF TRANSFERS Every instrument of transfer must be left for registration at the location of the Register accompanied by the Note to be transferred together with such other evidence as the Registrar may reasonably require to prove the title of the transferor or his right to transfer the Note and if the instrument of transfer is executed by some other person on his behalf the authority of that person to do so. All instruments of transfer which shall be registered may be retained by the Company. The Registrar will despatch by registered mail, to such address as the transferee may request, a new Note in respect of the principal amount of the Note transferred. Upon registration of any transfer and delivery of any new Note or Notes in respect thereof as aforesaid, the Note transferred shall be cancelled. No transfer shall be registered of a Note in respect of which a notice of repayment has been given. 5. NO FEES FOR REGISTRATION OF TRANSFERS No fees shall be charged for the registration of any transfer. -3- 6. REPLACEMENT OF NOTES If a Note is mutilated, defaced, destroyed, stolen or lost it may, and shall, in the case of mutilation or defacement, upon the surrender of the mutilated or defaced Note be replaced at the registration office for the time being of the Company on payment of such costs as may be incurred in connection therewith and, in the case of destruction, theft or loss, on such terms as to provision of evidence and indemnity as the Company may reasonably require. An entry on the Register shall be made accordingly. SCHEDULE 3 PROVISIONS FOR MEETINGS AND RESOLUTIONS OF THE NOTEHOLDERS 1. CALLING OF MEETINGS The Company may at any time and shall upon the request in writing signed by Noteholders holding in aggregate not less than one-tenth of the principal amount of the Notes then outstanding convene a meeting of the Noteholders, in default of which such Noteholders shall convene such meeting themselves. Every such meeting shall be held at such reasonably convenient and appropriate place in the United Kingdom and time as the Directors may approve. 2. NOTICE OF MEETINGS At least 14 or, in the case of a meeting convened for the purpose of passing an Extraordinary Resolution, at least 21 clear days' notice specifying the place, day and time of the meeting shall be given to the Noteholders of any meeting of Noteholders. Any such notice shall specify the general nature of the business to be transacted at the meeting thereby convened but except in the case of a resolution to be proposed as an Extraordinary Resolution it shall not be necessary to specify the terms of any resolutions to be proposed. The non-receipt of notice by or the accidental omission to give notice to any Noteholder shall not invalidate any resolution passed at any such meeting. A Noteholder whose address on the Register is not within the United Kingdom shall be entitled to receive notice of any meeting. 3. CHAIRMAN OF MEETINGS A person nominated by Noteholders present holding or representing by proxy in aggregate a majority of the principal amount of the Notes then outstanding shall be entitled to take the chair at any such meeting but if no such nomination is made, or if at any meeting the person nominated is not present within 15 minutes after the time appointed for the holding of such meeting, the Noteholders present shall choose one of their number to be chairman. Any director and the secretary, solicitors, auditors and financial advisers of the Company and any other person authorised in that behalf by the Company may attend and speak at any meeting. -2- 4. QUORUM AT MEETINGS At any meeting of Noteholders convened for any purpose other than the passing of an Extraordinary Resolution a person or persons holding or representing by proxy in aggregate not less than one-tenth of the principal amount of the Notes then outstanding shall form a quorum for the transaction of business. At any meeting convened for the purpose of passing an Extraordinary Resolution a person or persons holding or representing by proxy in aggregate a majority of the principal amount of the Notes then outstanding shall form a quorum. No business (other than the choosing of a Chairman) shall be transacted at any meeting unless the requisite quorum is present at the commencement of business. 5. ABSENCE OF QUORUM If within fifteen minutes from the time appointed for any meeting of the Noteholders a quorum is not present the meeting shall, if convened upon the requisition of the Noteholders, be dissolved. In any other case it shall stand adjourned to such day and time (being not less than 14 days thereafter) and to such place as may be appointed by the Chairman and at such adjourned meeting the Noteholders present in person or by proxy and entitled to vote whatever the principal amount of the Notes then outstanding held by them shall form a quorum and shall have power to pass any Extraordinary or other resolution and to decide upon all matters which could properly have been disposed of at the meeting from which the adjournment took place. 6. ADJOURNMENT OF MEETINGS The Chairman may with the consent of any meeting at which a quorum is present and shall if directed by a person or persons holding or representing by proxy in aggregate not less than one-fifth of the principal amount of the Notes then outstanding adjourn the same from time to time and from place to place but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting from which the adjournment took place. -3- 7. NOTICE OF ADJOURNED MEETINGS Notice of any adjourned meeting at which an Extraordinary Resolution is to be submitted shall be given in the manner provided by this Instrument and such notice shall state that the Noteholders present in person or by proxy at the adjourned meeting will form a quorum. 8. RESOLUTION ON SHOW OF HANDS Every question submitted to a meeting of Noteholders shall be decided in the first instance by a show of hands and in case of an equality of votes the Chairman shall both on a show of hands and on a poll have a casting vote in addition to the vote or votes (if any) to which he may be entitled as a Noteholder or as a duly appointed proxy. 9. DEMAND FOR POLL At any meeting of Noteholders unless (before or on the declaration of the result of the show of hands) a poll is demanded by the Chairman or by a person or persons present holding or representing by proxy in aggregate no less than one-tenth of the principal amount of the Notes then outstanding a declaration by the Chairman that a resolution has been carried or carried by a particular majority or lost or not carried by any particular majority shall be conclusive evidence of the fact. 10. MANNER OF TAKING POLL If at any such meeting a poll is so demanded it shall be taken in such manner as the Chairman may direct and the result of such poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand for a poll may be withdrawn. 11. TIME FOR TAKING POLL Any poll demanded at any such meeting on the election of a Chairman or on any question of adjournment shall be taken at the meeting without adjournment. A poll demanded on any other question shall be taken at such time and place as the Chairman may direct. No notice need be given of a poll not taken immediately if the time and place at which it is to be taken are announced at the meeting at which it is demanded. In any other case at least seven clear days' notice shall be given specifying the time and place at which the poll is to be taken. The -4- demand for a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which the poll has been demanded. 12. PERSONS ENTITLED TO VOTE The registered holders of any of the Notes shall be entitled to vote either in person or by proxy. 13. INSTRUMENT APPOINTING PROXY Every instrument appointing a proxy must be in writing signed by a duly authorised officer of the Noteholder and shall be in any usual form or in such other form as the Directors may approve. Such instrument of proxy shall unless the contrary is stated thereon confer authority to demand or join in demanding a poll and to vote on a resolution or amendment of a resolution put to the meeting for which it is given as the proxy thinks fit, be valid as well for an adjournment of the meeting as for the meeting to which it relates and need not be witnessed. A person appointed to act as a proxy need not be a Noteholder. 14. DEPOSIT OF INSTRUMENT APPOINTING PROXY The instrument appointing a proxy and the power of attorney or other authority (if any) under which it is signed or a notarially certified copy of such power or authority shall be deposited at such place or places as the Company (or the Noteholders in default of the Company convening the meeting) may in the notice of meeting direct or if no such place is specified then at the registered office of the Company not less than 48 hours before the time appointed for holding the meeting or adjourned meeting or the taking of a poll at which the person named in such instrument proposes to vote and in default the instrument of proxy shall not be treated as valid. A vote given in accordance with the terms of an instrument appointing a proxy shall be valid notwithstanding the previous revocation of the instrument of proxy or of the authority under which the instrument of proxy is given or transfer of the Notes in respect of which it is given unless previous intimation in writing of such revocation or transfer shall have been received at the registered office of the Company at least one hour before the time for holding the meeting or adjourned meeting at which the vote is given. No instrument appointing a proxy shall be valid after the expiration of 12 months from the date named in it as the date of its execution. -5- 15. VOTES On a show of hands every Noteholder who is present by a representative or by one of its officers as its proxy shall have one vote and on a poll every Noteholder present in person or by proxy shall have one vote for every (Pounds)1 principal amount of the Notes then outstanding of which he is the holder. A Noteholder entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way. 16. POWERS OF MEETINGS OF NOTEHOLDERS 16.1 Subject to paragraph 16.2, a meeting of the Noteholders shall in addition to any other powers have the following powers exercisable by Extraordinary Resolution namely: (a) power to sanction any compromise or arrangement proposed to be made between the Company and the Noteholders; (b) power to sanction any abrogation, modification or compromise or any arrangement in respect of the rights of the Noteholders against the Company or its property whether such rights shall arise under this Instrument or otherwise; (c) power to sanction any scheme for the reconstruction of the Company or for the amalgamation of the Company with any other company; (d) power to sanction any scheme or proposal for the sale or exchange of the Notes for or the conversion of the Notes into shares, stock, debentures, debenture stock or other obligations or securities of the Company or any other company formed or to be formed or cash or partly for or into such shares, stock, debentures, debenture stock or other obligations or securities as aforesaid and partly for or into cash and for the appointment of some person with power on behalf of the Noteholders to execute an instrument of transfer of the Notes held by them in favour of the person to or with whom the Notes are to be sold or exchanged respectively; (e) power to assent to any modifications of the Conditions and/or of the provisions contained in this Instrument proposed or agreed to by the Company and to authorise the Company to execute an instrument supplemental to the Instrument embodying any such modification; -6- (f) power to sanction the release of the Company from payment of all or any part of the principal amount and interest owing upon the Notes, and any other moneys payable to Noteholders pursuant to this Instrument or from any other obligation arising under this Instrument; (g) power to appoint any persons (whether Noteholders or not) as a committee to represent the interest of the Noteholders and to confer upon such committee any powers or discretions which the Noteholders could themselves exercise; (h) power to give any approval, authority, sanction, direction or request which under any of the provisions of this Instrument is required to be given by Extraordinary Resolution; and (i) power to declare the Notes due and payable pursuant to Condition 6. Provided that such powers shall only be exercisable in accordance with, and to the extent permitted by, the provisions of the Intercreditor Agreement. 16.2 The Series 'B' Noteholders will not: (a) convene a meeting of the Noteholders for the purpose of proposing an Extraordinary Resolution to sanction any modification, abrogation or compromise of or arrangement in respect of the rights attaching to the Series 'A' Loan Notes or of the Conditions attaching to the Series 'A' Loan Notes; or (b) save where requested to do so in writing by the holders of the Series 'A' Loan Notes vote, either in person or by proxy or by corporate representative, in favour of any such Extraordinary Resolution, or sign a Consent to pass such an Extraordinary Resolution, unless such Extraordinary Resolution is proposed for a Specified Purpose. 16.3 The holders of the Series 'B' Loan Notes agree that they shall not exercise their powers to pass an Extraordinary Resolution or sign a Consent in such a way as to obtain a benefit for themselves (either in their capacity as shareholders of the Company or as Noteholders) which would not accrue to all the Noteholders as a group and shall exercise their powers hereunder in good faith. -7- 17. EXTRAORDINARY RESOLUTION BINDING ON ALL NOTEHOLDERS An Extraordinary Resolution shall be binding upon all the Noteholders whether present or not present at such meeting and each of the Noteholders shall be bound to give effect thereto accordingly and the passing of any such resolution shall be conclusive evidence that the circumstances justify the passing thereof the intention being that it shall rest with the meeting to determine without appeal whether or not the circumstances justify the passing of such resolution. 18. DEFINITION OF EXTRAORDINARY RESOLUTION The expression "Extraordinary Resolution" means a resolution passed at a meeting of the Noteholders duly convened and held in accordance with the provisions herein contained by a majority consisting of not less than six- tenths of the persons voting thereat upon a show of hands or if a poll is demanded then by a majority consisting of not less than 64% of the votes given on such poll. 19. RESOLUTIONS IN WRITING A resolution in writing signed by the holders of at least 64% of the principal amount of the Notes then outstanding who are for the time being entitled to receive notice of meetings in accordance with the provisions herein contained shall for all purposes be as valid and effectual as an Extraordinary Resolution passed at a meeting of Noteholders. Such resolution in writing may be contained in one document or in several documents in like form each signed by one or more of the Noteholders. 20. MINUTES OF MEETINGS Minutes of all resolutions and proceedings at every meeting of the Noteholders shall be made and duly entered in books kept for that purpose by the Company and any such minutes if purporting to be signed by the Chairman of the meeting at which such resolutions were passed or proceedings had or by the Chairman of the next succeeding meeting of the Noteholders shall be conclusive evidence of the matters therein contained and until the contrary is proved every such meeting in respect of the proceedings of which minutes have been made shall be deemed to have been duly convened and held and all resolutions passed thereat to have been duly passed. EX-99.3 4 INTER-CREDITOR AGREEMENT EXHIBIT 3 Dated 21 June, 1996 ------------------- THE ROYAL BANK OF SCOTLAND plc as Arranger and Agent THE ROYAL BANK OF SCOTLAND plc and Others as Banks THE ROYAL BANK OF SCOTLAND plc as Swap Counterparty THE ROYAL BANK OF SCOTLAND plc as Working Capital Bank THE ROYAL BANK OF SCOTLAND plc as Security Trustee MERCURY ASSET MANAGEMENT PLC and Others as Investors COMMUNITY PSYCHIATRIC CENTERS as Vendor FORAY 911 LIMITED and Others as Borrower and Charging Subsidiaries ---------------------------- INTER-CREDITOR AGREEMENT ---------------------------- Norton Rose London CONTENTS --------
Clause Heading Page 1 Definitions and Preliminary Matters.................................. 2 1.1 Incorporation by Reference................................... 2 1.2 Definitions.................................................. 2 1.3 Clause headings and Contents page............................ 6 1.4 References................................................... 6 1.5 Further References........................................... 6 2 Priority of Payments................................................. 7 2.1 Priority..................................................... 7 2.2 Restricted payments in respect of dividends and Loan Stock... 7 2.3 Acknowledgment by Loan Stock Holders and Investors........... 10 2.4 Refund of payments........................................... 10 2.5 Remedy of financial covenant defaults........................ 10 2.6 Beneficiaries entitled to grant time etc..................... 11 2.7 Termination of Swap Transactions............................. 11 2.8 Insolvency proceedings....................................... 12 2.9 Proof by Creditors........................................... 12 2.10 Rights of Working Capital Bank under the Facilities Agreement.................................................... 13 3 Changes to the Loan Stock and the New Articles....................... 13 3.1 Changes to the Loan Stock.................................... 13 3.2 Changes to the New Articles.................................. 13 4 Effect of this Agreement............................................. 14 4.1 This Agreement prevails...................................... 14 4.2 Purchasers not concerned with provisions of this Agreement... 14 4.3 Disclosure of information.................................... 14 4.4 Notification of Defaults, etc................................ 15 4.5 Consultation................................................. 15 4.6 Prohibition on Encumbrances.................................. 15 5 Enforcement.......................................................... 16 5.1 Enforcement.................................................. 16 5.2 Cash Collateralised Debt..................................... 16 5.3 Rights to enforce............................................ 16 5.4 Security Trustee not to enforce until instructed............. 17 5.5 Deemed consent............................................... 17 5.6 Claims and actions against Relevant Professionals and the Auditors..................................................... 17 5.7 Rights as Shareholders unaffected............................ 18
6 Appropriation........................................................ 18 6.1 Declaration of Trust......................................... 18 6.2 Order of claims.............................................. 19 6.3 Powers of the Security Trustee............................... 20 6.4 Limitation on liability of the Security Trustee.............. 20 7 The Security Trustee................................................. 20 7.1 Security Trustee to act in accordance with instructions...... 20 7.2 Notification................................................. 21 7.3 Provision of information to the Security Trustee............. 21 7.4 Reimbursement................................................ 21 7.5 Indemnity.................................................... 22 7.6 Enquiry by the Security Trustee.............................. 22 7.7 Exclusion in relation to deposit of deeds, etc. ............. 22 7.8 Exclusion of liability....................................... 22 7.9 Reliance on documents........................................ 23 7.10 Deposit of deeds, etc. ...................................... 23 7.11 Illegal acts................................................. 23 7.12 Other business with the Group................................ 24 7.13 Rights as Beneficiary........................................ 24 7.14 Separation of capacities..................................... 24 8 Acknowledgments...................................................... 24 8.1 Acknowledgment by the Borrower and the Charging Subsidiaries................................................. 24 8.2 Agreement between the Creditors.............................. 25 9 Substitutions and Assignments by Banks............................... 25 9.1 Substitutions by Banks....................................... 25 9.2 Notification by Agent........................................ 26 9.3 Authorisation to Agent....................................... 26 9.4 References to A Bank and/or B Bank........................... 26 10 Changes of Agent and the Security Trustee............................ 26 10.1 Change of Agent.............................................. 26 10.2 Change of Security Trustee................................... 26 10.3 Retirement of Security Trustee............................... 27 10.4 Replacement of Security Trustee following payment of the Senior Debt in full................................... 27 11 Assignments and transfers by Other Parties........................... 27 11.1 No assignment or transfer by the Borrower or any Charging Subsidiary................................................... 27 11.2 Assignment or transfer by the Swap Counterparty and the Working Capital Bank......................................... 27 11.3 Assignment by Loan Stock Holders and Investors............... 27 12 Notices and Other Matters............................................ 28 12.1 Notices...................................................... 28
12.2 Severability................................................. 30 12.3 Not a partnership............................................ 30 12.4 No waiver.................................................... 30 12.5 Counterparts................................................. 30 12.6 Interpretation on payment of Senior Debt in full............. 30 13 Law and Jurisdiction................................................. 30 SCHEDULE 31 Part A - Agent's Adherence................................................ 31 Part B - Trustee's Deed of Appointment and Adherence...................... 32 Part C - Loan Stock Holder's and Investor's Adherence..................... 34
THIS AGREEMENT is made the 21 June, 1996 BETWEEN: (1) THE ROYAL BANK OF SCOTLAND plc of Waterhouse Square, 138-142 Holborn, London EC1N 2TH as Arranger; (2) THE ROYAL BANK OF SCOTLAND plc as Agent; (3) THE BANKS whose names and addresses are set out in schedules 1 and 2 to the Facilities Agreement as A Banks and B Banks; (4) THE ROYAL BANK OF SCOTLAND plc as Swap Counterparty; (5) THE ROYAL BANK OF SCOTLAND plc as Working Capital Bank; (6) THE ROYAL BANK OF SCOTLAND plc as Security Trustee; (7) MERCURY ASSET MANAGEMENT PLC of 33 King William Street, London EC4R 9AS and the other Investors pursuant to the Subscription Agreement as Investors and Loan Stock Holders; (8) COMMUNITY PSYCHIATRIC CENTERS of 5110 W. Sahara Avenue, Las Vegas, Nevada 89102-3702, U.S.A. as Vendor and a Loan Stock Holder; (9) FORAY 911 LIMITED whose registered office is at Fletcher Gate, Nottingham NG1 NFX as Borrower; and (10) THE COMPANIES whose names and addresses are set out in schedule 1 to the Guarantee and Debenture as Charging Subsidiaries. WHEREAS: (A) The Arranger has arranged for the A Banks to make available to the Borrower a senior secured term loan facility of (Pounds)42,000,000 to be used for the purpose of satisfying part of the purchase consideration for the acquisition by the Borrower of the entire issued share capital of CPC (Londinium) Limited. (B) The Arranger has arranged for the B Banks to make available to the Borrower and certain of the Charging subsidiaries a senior secured medium term loan facility of (Pounds)10,000,000 to be used for the same purpose as referred to in Recital (A). (C) The Working Capital Bank has agreed to make available to the Borrower a (Pounds)2,000,000 senior secured working capital facility. (D) The Borrower will enter into certain interest rate and/or other hedging arrangements with the Swap Counterparty relating to all or part of the loans made available under the facilities referred to in Recitals (A) and (B). 1 (E) The Borrower and the other members of the Charging Group have given, or will give, a guarantee and debenture in favour of the Security Trustee as a continuing security for the monies, obligations and liabilities now or hereafter due, owing or incurred under or pursuant to the Facilities Agreement, the Swap Documents, the Working Capital Facility Letter, the Loan Stock and/or the Security Documents (as such terms are defined or referenced below). (F) The Investors and the Vendor have agreed to purchase certain loan stock issued, or to be issued, by the Borrower pursuant to the Loan Stock Instrument. (G) Each of the Arranger, the Agent, the Banks, the Swap Counterparty, the Working Capital Bank, the Security Trustee and the Loan Stock Holders have agreed to regulate the order of payments in respect of the Cash Collateralised Debt, the Bank Debt and the Loan Stock Debt (as such terms are defined or referenced below) in the manner set out herein. NOW it is hereby agreed as follows: 1 Definitions and Preliminary Matters ----------------------------------- 1.1 Incorporation by Reference -------------------------- Unless the context otherwise requires or unless otherwise defined herein, words and expressions defined in the Facilities Agreement or the Guarantee and Debenture (in their respective forms on the date hereof) shall have the same meanings when used in this Agreement (including the Recitals). 1.2 DEFINITIONS ----------- In this Agreement, unless the context otherwise requires: "Agent's Adherence" means an undertaking in the form, or substantially in the form, of Part A of the schedule; "Bank Debt" means the aggregate amount from time to time outstanding of all monies, obligations and liabilities, whether actual or contingent, due, owing or incurred by the Companies or any of them to (i) the Arranger and/or the Agent and/or the Banks or any of them under the terms of the Facilities Agreement and/or (ii) the Swap Counterparty under the terms of the Swap Documents and/or (iii) the Working Capital Bank under the Working Capital Facility Letter (to the extent only that such amount is not Cash Collateralised Debt) together (in each case) with interest thereon to the date of payment at the rates and upon the terms set out in the relevant documents, commission, fees and other charges and all legal and other costs, charges and expenses incurred by the Arranger, the Agent, the Banks, the Swap Counterparty, the Working Capital Bank or any of them in relation to any of the Companies which, under the terms of the relevant documents, they are entitled to recover from any of the Companies together with any refinancing, novation, refunding, deferral or extension of such 2 Indebtedness or increase in the amount thereof which is permitted (or not prohibited) under the terms hereof (any necessary consents having been obtained); "Cash Collateralised Debt" means the aggregate amount from time to time outstanding of all monies, obligations and liabilities, whether actual or contingent, due, owing or incurred by the Borrower or the Charging Subsidiaries or any of them to the Working Capital Bank under the terms of the Working Capital Facility Letter together with interest thereon to the date of payment at the rates and upon the terms set out in the Working Capital Facility Letter, commission, fees and other charges and all legal and other costs, charges and expenses incurred by the Working Capital Bank in relation to the Borrower or the Charging Subsidiaries or any of them which, under the terms of the Working Capital Facility Letter, it is entitled to recover from the Borrower or the Charging Subsidiaries or any of them together with any refinancing, novation, refunding deferral or extension of such Indebtedness which is permitted (or not prohibited) under the terms hereof (any necessary consents having been obtained) but (in all cases) to the extent only of the Cash Collateral; "Cash Collateral" means the aggregate amount of all monies standing to the credit of all accounts of the Borrower or the Charging Subsidiaries or any of them with the Working Capital Bank from time to time other than monies standing to the credit of (a) (while the Working Capital Bank is also the Security Trustee) any accounts with the Security Trustee pursuant to the terms of the Security Documents and (b) (while the Working Capital Bank is also the Agent) any accounts with the Agent pursuant to the terms of the Facilities Agreement; "Creditors" means the Arranger, the Agent, the Banks, the Swap Counterparty, the Working Capital Bank and the Loan Stock Holders; "Facilities" has the meaning ascribed thereto in the Facilities Agreement; "Facilities Agreement" means the agreement of even date between the Borrower (1), the Banks (2), the Arranger (3) and the Agent (4) under the terms of which (a) the A Banks will, subject to and in accordance with the terms thereof, make available to the Borrower a (Pounds)42,000,000 senior secured term loan facility for the purpose referred to in Recital (A) above and (b) the B Banks will, subject to and in accordance with the terms thereof, make available to the Borrower a (Pounds)10,000,000 senior secured medium term loan facility for the purpose referred to in Recital (A) above; "Financial Covenant Event of Default" means an Event of Default arising by reason of a breach of the undertakings in clause 9.3 and schedule 8 to the Facilities Agreement; "Guarantee and Debenture" means the guarantee and debenture entered into, or to be entered into, between the Borrower (1), the companies whose respective 3 names, registered numbers and registered offices are set out in schedule 1 thereto (2) and the Security Trustee (3) and more particularly described in Recital (E); "insolvency proceeding" means (other than in clause 5.6) any of: (a) an administration order is made in relation to the Borrower or any other member of the Charging Group; or (b) any kind of composition, scheme of arrangement, compromise or arrangement, in each case involving the Borrower or any other member of the Charging Group and its creditors generally (or any class of them), is made or entered into by the Borrower or any other member of the Charging Group or the Borrower or any other member of the Charging Group otherwise becomes subject to any of the same; or (c) any administrative or other receiver or any manager is appointed of the Borrower or any other member of the Charging Group or any part of its assets and/or undertaking; or (d) an order is made for the winding-up of the Borrower or any other member of the Charging Group; or (e) the Borrower or any other member of the Charging Group is dissolved; or (f) there occurs, in relation to the Borrower or any other member of the Charging Group, in any country or territory in which any of them carries on business or to the jurisdiction of whose courts any part of their assets is subject, any event which appears in that country or territory to correspond with, or have an effect equivalent or similar to, any of those mentioned in paragraphs (a) to (e) above (inclusive) or the Borrower or any other member of the Charging Group otherwise becomes subject, in any such country or territory, to the operation of any law relating to insolvency, bankruptcy or liquidation; "Loan Stock Debt" means the aggregate amount from time to time outstanding of all monies, obligations and liabilities, whether actual or contingent, due, owing or incurred by the Borrower to the Loan Stock Holders or any of them under the terms of the Loan Stock and/or the Loan Stock Instrument (which obligations and liabilities shall for the avoidance of doubt include all obligations and liabilities of the Borrower under the terms of any loan stock issued by it under the Loan Stock Instrument in respect of interest owing by the Borrower under the terms of the Loan Stock and/or the Loan Stock Instrument) together with interest thereon to the date of payment at the rates and upon the terms set out in the Loan Stock and/or the Loan Stock Instrument, commission, fees and other charges and all legal and other costs, charges and expenses incurred by the Loan Stock Holders or any of them in relation to the Borrower which, under the 4 terms of the Loan Stock and/or the Loan Stock Instrument, they are entitled to recover from the Borrower together with any refinancing, novation, refunding, deferral or extension of such Indebtedness which is permitted (or not prohibited) under the terms hereof (any necessary consents having been obtained); "Loan Stock Holders" means the Investors and the Vendor in their capacity as holders of Loan Stock and any other person who from time to time becomes a holder of Loan Stock and a party to this Agreement pursuant to a Loan Stock Holder's and Investor's Adherence; "Loan Stock Holder's Representative" means Mercury in its capacity as representative of the Loan Stock Holders pursuant to clause 8.3; "Loan Stock Holder's and Investor's Adherence" means an undertaking in the form, or substantially the form, of Part C of the schedule; "Participating Dividend" means the dividend referred to in Article 5.1 of the New Articles in their form as at the date hereof; "Payment Default" means a default or event of default (howsoever called) arising by reason of a default in the payment of any amounts due (ignoring any applicable grace period) under the Facilities Agreement, the Swap Documents, the Working Capital Facility Letter or, as the case may be, the Security Documents; "Relevant Professional" means each of Biddle & Co., Deloitte & Touche, Corporate Risks plc, Kalchas, Grimleys and Archibald, Campbell and Harley; "Relevant Report" means (a) in the case of Biddle & Co., the reports on title to be provided by them referred to in schedule 4 to the Facilities Agreement, (b) in the case of Deloitte & Touche, the Accountants' Report, (c) in the case of Corporate Risk plc, the insurance Report, (d) in the case of Kalchas, the Marketing Report, (e) in the case of Grimleys, the Property Valuation and Survey Report and (f) in the case of Archibald, Campbell and Harley, the report of title to be provided by them referred to in schedule 4 to the Facilities Agreement; "Security Trustee's Adherence" means an undertaking in the form, or substantially in the form, of Part B of the schedule; "Security Trustee Debt" means all those amounts First referred to in clause 6.2; "Senior Debt" means the Security Trustee Debt, the Cash Collateralised Debt and the Bank Debt; 5 "Unpaid Dividends" means any dividend (including, without limitation, the Participating Dividend) due and unpaid or declared and unpaid or any other distribution due but not made; and "Vendor Sale Assets Repayment" means the repayment of part of the Loan Stock Debt owing to the Vendor in an amount not exceeding the amount calculated in accordance with the Loan Stock Instrument in its form as at the date hereof following a disposal of the Sale Assets. 1.3 Clause headings and Contents page --------------------------------- Clause headings and the Contents page are inserted for convenience of reference only and shall be ignored in the interpretation of this Agreement. 1.4 References ---------- In this Agreement, unless the context otherwise requires: (a) references to clauses and the schedule are to be construed as references to the clauses of, and the schedule to, this Agreement and references to this Agreement include its schedule; (b) references to, or to any specified provision of, this Agreement, any Facility Document or any other document shall be construed as references to this Agreement, such Facility Document, that provision or that document as in force for the time being and as amended, extended or restated in accordance with the terms thereof or, as the case may be, with the agreement of the relevant parties and (where any consents are required to be obtained as a condition to such amendment, extension or restatement being permitted) with the requisite consents; (c) words importing the plural shall include the singular and vice versa; (d) references to a person shall be construed as including references to an individual, firm, company, corporation, unincorporated body of persons or any State or any agency thereof; and (e) references to statutory provisions shall be construed as references to those provisions as replaced, amended or re-enacted from time to time. 1.5 Further References ------------------ For the purposes of this Agreement: (a) all amounts owing under the A Loan are "paid in full" and no longer "outstanding" when no moneys are owing to the A Banks under the Facilities Agreement and the Security Documents and the A Banks are not under any obligation to advance any moneys under the Facilities 6 Agreement and do not have any actual or contingent liability under the Facilities Agreement; (b) the Cash Collateralised Debt is "paid in full" and is no longer "outstanding" only when no moneys are owing to the Working Capital Bank under the Working Capital Facility Letter in respect thereof and the Working Capital Bank is not under any obligation to advance any moneys under the Working Capital Facility Letter; (c) the Bank Debt is "paid in full" and is no longer "outstanding" only when no moneys are owing to the Arranger and/or the Agent and/or the A Banks and/or the B Banks and/or the Swap Counterparty and/or the Working Capital Bank under the Facilities Agreement, the Security Documents, the Swap Documents and the Working Capital Facility Letter and neither the A Banks nor the B Banks are under any obligation to advance any moneys under the Facilities Agreement and the Working Capital Bank is not under any obligation to advance any moneys under the Working Capital Facility Letter and the Swap Counterparty does not have any contingent or actual liability under any Swap Document; (d) the Security Trustee Debt is "paid in full" and is no longer "outstanding" only when no moneys are owing to the Security Trustee under the Security Documents; and (e) the Senior Debt is "paid in full" and is no longer "outstanding" only when the Cash Collateralised Debt, the Bank Debt and the Security Trustee Debt have all been paid in full and are no longer outstanding. 2 Priority of Payments -------------------- 2.1 Priority -------- In consideration of each other Creditor entering into this Agreement and the Facility Documents to which it is a party, each Creditor agrees that, subject to and upon the terms and provisions of this Agreement: (a) the Cash Collateralised Debt shall rank in priority to the Security Trustee Debt, the Bank Debt and the Loan Stock Debt; (b) the Security Trustee Debt shall rank in priority to the Bank Debt and the Loan Stock Debt; and (c) the Bank Debt shall rank in priority to the Loan Stock Debt. 7 2.2 Restricted payments in respect of dividends and Loan Stock ---------------------------------------------------------- Notwithstanding any provisions of the New Articles, the Subscription Agreement, the Loan Stock or the Loan Stock Instrument to the contrary, the Borrower shall not without the prior written consent of the Agent: (a) (i) pay any interest on, or repay (save as permitted by clause 2.2(a)(ii)) any principal of, the Loan Stock or make any payment of the Participating Dividend (in each case) except upon 30 days' prior written notice to the Agent (provided that this requirement for 30 days' prior written notice shall not apply in the case of scheduled payments of interest on, and scheduled repayments of, the Loan Stock and any scheduled payment of the Participating Dividend in each case on the first dates on which they become payable (not having been deferred pursuant to this Agreement), payments of the Accrued Interest (as defined in the Loan Stock) resulting from disposals of the Sale Assets not being scheduled payments) and in any event not if (A) upon making such a payment (including payment of any related advance corporation tax (in the case of the Participating Dividend) or Taxes at the basic rate (in the case of interest)) any Financial Covenant Event of Default would occur or (B) any Financial Covenant Event of Default or any Payment Default has occurred and is continuing, or either of such circumstances might reasonably be expected (in the light of facts then known) to occur as a result (wholly or partly) of such declaration or payment either immediately or within 4 months thereafter, and (for the purpose of determining whether any scheduled payment of interest on, or principal of, the Loan Stock may be made in accordance with this clause 2.2(a)(i) when it is first scheduled to be made) the Borrower's management accounts for the period ending in May in any relevant year shall be used in relation to any such scheduled payment first due to be made in June or July of such year and the Borrower's management accounts for the period ending in November shall be used in relation to any such scheduled payment first due to be made in January of the next year, Provided however that if on the scheduled due date for a payment on or in respect of the Loan Stock or any payment of the Participating Dividend, such payment is not permitted under this clause 2.2(a)(i), such payment may be paid and received by the Loan Stock Holders or the Investors (as the case may be) as soon as the requirements of this clause 2.2(a)(i) are met (together with interest accrued on the unpaid amount in accordance with the loan stock instrument and/or the New Articles as the case may be), provided always that payment at that date would itself satisfy the requirements of this clause 2.2(a)(i) and, if payment in full of a scheduled payment on or in respect of the Loan Stock or any payment of the Participating Dividend (as the case may be) is not 8 permitted by this clause 2.2(a)(i), partial payment (which shall, in the case of the Participating Dividend, include any related corporation tax) may instead be made if and to the extent that such partial payment would result in the requirements of this clause 2.2(a)(i) being complied with; or (ii) make the Vendor Sale Assets Repayment, provided that no such consent shall be required if at the time the Vendor Sale Assets Repayment is made or proposed to be made the Agent has not given an instruction to the Security Trustee under clause 5.1(a); or (iii) save as permitted by clause 2.2(a)(i), declare or pay any dividend or make any other distribution (whether in cash or in specie) in respect of any of its share capital whatsoever; (b) (unless required to do so by virtue of the adoption of mandatory accounting policies) reduce, redeem or purchase any of its share capital or reduce any uncalled or unpaid liability in respect thereof or reduce the amount (if any) for the time being standing to the credit of its share premium account or capital redemption or other undistributable reserve in any manner, if in each case such reduction, redemption or purchase is on terms that its shareholders receive any payment or distribution in cash or in specie; (c) save, for the avoidance of doubt, to the extent permitted by clause 2.2(a)(i) or (ii): (i) pay, repay, prepay or redeem any of the Loan Stock; (ii) discharge any of the Loan Stock by any set-off; or (iii) purchase or otherwise acquire any of the Loan Stock; (d) (without prejudice to clause 2.2(a)(i)) pay any interest on the Loan Stock at rates in excess of the rates payable under the Loan Stock and the Loan Stock Instrument in their respective forms at the date hereof or in a manner contrary to the Loan Stock and the Loan Stock Instrument in their respective forms at the date hereof or pay any Participating Dividend at a rate or in an amount in excess of the rates or amounts payable under the New Articles in their form at the date hereof or in a manner contrary to the New Articles in their form at the date hereof; or (e) (save as provided above) pay any amount in respect of or calculated by reference to, or any fee or like amount related to, the Loan Stock (other than fees and expenses payable to Mercury under the Subscription Agreement on or about the date of issue of the Loan Stock); 9 unless and until there has occurred the payment in full of the Senior Debt. 2.3 Acknowledgement by Loan Stock Holders and Investors --------------------------------------------------- Without prejudice to the generality of any other clause of this Agreement, each of the Loan Stock Holders and the Investors acknowledges and accepts the provisions of clause 2.2 and agrees that in no circumstances shall it take or accept (whether by any payment, the transfer of asset, the exercise of a right of set-off or combination of accounts or otherwise) any monies or other property from the Borrower or any other member of the Group in or towards reduction or satisfaction of all or any part of the Loan Stock Debt or any moneys due or owing in respect of any Unpaid Dividend except in accordance with, and to the extent permitted by, that clause, provided that no breach of this clause 2.3 shall occur by reason only of the Loan Stock Holders or (as the case may be) the Investors so taking or accepting such monies or property if the same have been paid or delivered on the basis of the management accounts referred to in clause 2.2(a)(i) in relation to scheduled payments on or in respect of the Loan Stock (when the same first become due to be made) which indicated satisfaction of the requirements of clause 2.2 and the subsequent audited consolidated financial statements of the Group show that such requirements were not in fact met. 2.4 Refund of payments ------------------ In the event that, prior to the Senior Debt being repaid in full and following the making of a declaration by the Agent under clause 11.2(b) of the Facilities Agreement or the Working Capital Bank making a demand for payment under the Working Capital Facility letter, any amount is received or recovered (whether by any payment the exercise of a right of set-off or combination of accounts (whether statutory, equitable, contractual or otherwise) by, or any asset is transferred to, any Loan Stock Holder or Investor in or towards reduction or satisfaction of all or any part of the Loan Stock Debt or (as the case may be) all or any part of any Unpaid Dividends, such Loan Stock Holder or (as the case may be) Investor shall forthwith pay such amount (or, in the case of a set-off or combination of accounts, an amount equal thereto), or, as the case may be, transfer such asset, to the Security Trustee (and, pending such payment or transfer, shall hold the same on trust for the Security Trustee) to be applied in accordance with the terms of clause 6 and if any such amount is received or recovered or any such asset is transferred prior to any such declaration or demand (other than in accordance with clause 2.2 or the proviso to clause 2.3) such Loan Stock Holder or (as the case may be) Investor shall (upon being satisfied that the Arranger, the Agent, the Banks, the Swap Counterparty and/or the Working Capital Bank have no prior claim in respect thereof) promptly pay over or (as the case may be) transfer the same to the Borrower. 2.5 Remedy of financial covenant defaults ------------------------------------- For the purposes only of this Agreement, a Financial Covenant Event of Default which is tested only on specific dates or by reference to specific periods shall 10 be deemed to have been remedied when the undertaking (in its present or an agreed revised form) is next complied with on a subsequent testing date or in respect of a subsequent testing period. 2.6 Beneficiaries entitled to grant time etc. ----------------------------------------- Each of the Beneficiaries shall be entitled to grant time or indulgence to and to release, compound or otherwise deal with, or receive monies from, any person liable or to deal with, exchange, release, modify or abstain from perfecting or enforcing any of the rights which it may now or hereafter have against any member of the Charging Group or otherwise without prejudicing its rights under this Agreement but subject always to the express provisions of this Agreement. 2.7 Termination of Swap Transactions -------------------------------- The Swap Counterparty agrees with the Agent, the Banks and the Working Capital Bank that it will not terminate any of the Swap Transactions to which it is a party except: (a) as a result of non-payment of any Indebtedness under a Swap Transaction, which non-payment continues for 7 days after notice of such non-payment has been given by the Swap Counterparty to the Agent (provided that while the Swap Counterparty and the Agent are the same entity it will not be necessary for there to be any formal notice of such non-payment to be given by the Swap Counterparty to the Agent); or (b) upon an acceleration of the principal amount outstanding under the Facilities following consultation with (but without being required to obtain the consent of) the Agent; or (c) upon the occurrence of an insolvency proceeding; or (d) following the repudiation of any such Swap Transaction by the Borrower; or (e) upon: (i) it becoming contrary to any law or regulation for the Borrower or the Swap Counterparty to perform the payment obligations expressed to be assumed by it in respect of any Swap Transaction or such obligations become invalid or unenforceable against the Borrower; or (ii) any provision of any Swap Document relating to the termination thereof (including, without limitation, the calculation of or obligation to pay amounts upon such termination) becoming invalid or unenforceable against the Borrower; or 11 (f) (i) from the date hereof until the date on which the A Loan is paid in full with the prior written consent of the Agent (acting on the instructions of all the Banks); or (ii) on or after the date on which the A Loan is paid in full, with prior written consent of the Agent (acting on the instructions of all the B Banks). 2.8 Insolvency proceedings ---------------------- (a) Without prejudice to the generality of any other provision of this Agreement, the Loan Stock Holders and the Investors severally covenant with and undertake to the Security Trustee that they will procure that in any insolvency proceeding: (i) the claims of the Loan Stock Holders in respect of the Loan Stock Debt and the claims of the Investors in respect of any Unpaid Dividends shall be postponed to the payment in full of the Senior Debt and no amount received in any insolvency proceeding shall be retained by any of the Loan Stock Holders in respect of the Loan Stock Debt or by any of the Investors in respect of any Unpaid Dividends, nor shall any distribution of assets of any kind be retained by any Loan Stock Holders in respect of the Loan Stock Debt or by any of the Investors in respect of any Unpaid Dividends, until the Senior Debt has first been paid in full; and (ii) all amounts which are received (including, without limitation an amount equal to all amounts which are deemed received by reason of the operation of any set-off or combination of accounts (whether statutory, equitable, contractual or otherwise)) by, and all assets which are distributed to, the Loan Stock Holders in respect of the Loan Stock Debt and the Investors in respect of any Unpaid Dividends after the commencement of such insolvency proceeding but before the Senior Debt has been repaid in full shall, or (in the case of a set-off or combination of accounts) an amount equal thereto shall, forthwith be paid or (as the case may be) transferred to the Security Trustee to be applied in accordance with the terms of clause 6 (and, pending such payment or transfer shall be held on trust for the Security Trustee). 2.9 Proof by Creditors ------------------ The Loan Stock Holders and Investors each agree to demand, sue and prove for, collect and receive every payment or distribution made of all or any part of the assets of any member of the Charging Group or the proceeds thereof and to give acquittance therefor and to file claims and take such other proceedings in 12 relation to sums owing in respect of the Loan Stock Debt and any Unpaid Dividends respectively as the Security Trustee may deem necessary or advisable to give effect to this Agreement, provided that they shall not however be required to take any action which would in their reasonable opinion be unlawful or expose them to any material liability or expense. The liquidator or other insolvency representative of each member of the Charging Group is authorised to apply any assets or monies received by him in accordance with the terms of this Agreement. 2.10 Rights of Working Capital Bank under the Facilities Agreement ------------------------------------------------------------- Each Bank acknowledges that the Working Capital Bank shall have the rights ascribed to it under the Facilities Agreement. 3 Changes to the Loan Stock and the New Articles ---------------------------------------------- 3.1 Changes to the Loan Stock ------------------------- Each of the Loan Stock Holders agrees that no amendment shall be made to the terms of the Loan Stock and/or the Loan Stock Instrument (other than the amendment of typographical inconsistencies or manifest errors unless not less than ten Banking Days prior to despatch of the notice convening the relevant proposed meeting of Loan Stock Holders or distribution of the relevant proposed amending resolution the Security Trustee has been consulted in relation to the making of the relevant amendment and each Loan Stock Holder agrees that the relevant amendment will not be made if, in the opinion of the Security Trustee (acting reasonably), the making of the relevant amendment would have an adverse effect on the interests of the Agent and/or the Banks under the Facilities Agreement or on the interests of the Swap Counterparty under the Swap Documents or on the interests of the Working Capital Bank under the Working Capital Facility letter or the interests of any of them under the Security Documents or would bring forward and/or increase the amount of any payment made or to be made under or in respect of the Loan Stock prior to the date on which the Senior Debt is paid in full. Any such amendment so made shall be promptly notified to the Agent and the Security Trustee. 3.2 Changes to the New Articles --------------------------- The Borrower undertakes with the Security Trustee that it will consult with the Security Trustee (not later than ten Banking Days prior to the despatch of the notice convening the relevant proposed meeting) if it proposes to convene any meeting of its shareholders or any class of its shareholders with a view to the alteration of any provision of its Articles of Association (in the form of the New Articles in their form as at the date hereof) which would create any new class of share or any securities convertible into or carrying rights to subscribe for shares of any class or which would alter the rights of any class of shares (including, without prejudice to the generality of the foregoing, any alteration which would have the effect of converting a class of shares into any other class 13 of shares, increasing the amount of any dividend or other distribution payable on any class of shares or of requiring or enabling payment of any dividend or other distribution on, or of requiring or enabling the redemption or purchase of, any class of shares otherwise than in accordance with the New Articles in their form as at the date hereof) and will not make the relevant change if, in the opinion of the Security Trustee (acting reasonably), the making of the same could have an adverse effect on the interests of the Agent and/or the Banks under the Facilities Agreement or on the interests of the Swap Counterparty under the Swap Documents or on the interests of the Working Capital Bank under the Working Capital Facility Letter or on the interests of any of them under the Security Documents or would alter the rights of the shareholders of the Borrower in respect of any distribution made or that may be made by the Borrower prior to the earlier of the date on which the Senior Debt is scheduled to be paid in full and the date on which the Senior Debt is actually paid in full; for the purposes of this clause 3.2 "alteration" shall for the avoidance of doubt include any addition to, deletion from or revision of any provision of its Articles of Association. 4 Effect of this Agreement ------------------------ 4.1 This Agreement prevails ----------------------- Nothing contained in this Agreement shall: (a) require any Creditor to make any advance to, or to purchase any stock or notes from, or to provide any facility to, the Borrower or any other member of the Group; or (b) (without prejudice to clause 8.2) as between (i) the Borrower and any Charging Subsidiary and (ii) any of the other parties hereto, affect or prejudice any rights or remedies of such other parties under the Facilities Agreement, the Loan Stock, the Loan Stock Instrument, the Swap Documents, the Working Capital Facility Letter and the other Security Documents which shall respectively remain in full force and effect according to their terms. 4.2 Purchasers not concerned with provisions of this Agreement ---------------------------------------------------------- No purchaser or other person shall be concerned in any way with the provisions of this Agreement but shall assume that the party hereto with which it is dealing, or any Receiver (as the case may be), is acting in accordance with the provisions of this Agreement. 4.3 Disclosure of information ------------------------- Any party hereto shall be at liberty from time to time to disclose to any other party hereto any information concerning the affairs of the Borrower and any other member of the Group in such manner and to such extent as such party 14 shall from time to time think fit. The Agent agrees to inform the Swap Counterparty and the Working Capital Bank before increasing the principal amount of the Facilities. Each of the Agent, the Working Capital Bank and the Swap Counterparty agrees to inform the others thereof promptly upon any amendment being made to the Facilities Agreement, the Working Capital Facility Letter or the Swap Documents respectively. 4.4 Notification of Defaults, etc. ------------------------------ (a) The Agent shall notify the Working Capital Bank and the Swap Counterparty of any Event of Default; (b) the Swap Counterparty shall notify the Agent and the Working Capital Bank of any default or any termination event (howsoever described) under any Swap Document; and (c) the Working Capital Bank shall notify the Agent and the Swap Counterparty of the occurrence of any default under the Working Capital Facility Letter; but (in each case) only if, in the case of an event which is the non- payment of an amount, such amount is more than three Banking Days overdue (ignoring for this purpose any applicable grace period) or, in the case of any other event, the Agent, the Swap Counterparty or the Working Capital Bank (as the case may be) otherwise has actual knowledge of the event concerned. For the purposes of this clause 4.4, neither the Agent, the Swap Counterparty nor the Working Capital Bank shall be treated as having actual knowledge of any matter of which the corporate finance or any other division outside the treasury, corporate lending or loan administration departments (if any) of the person for the time being acting as the Agent or, as appropriate, the Swap Counterparty or the Working Capital Bank may become aware in the context of corporate finance or advisory activities from time to time undertaken by the Agent or, as appropriate, the Swap Counterparty or the Working Capital Bank or for the Borrower or any other member of the Group. 4.5 Consultation ------------ The Agent, the Swap Counterparty, the Working Capital Bank and the Security Trustee shall consult generally with regard to any matter materially affecting the rights of the Banks, the Swap Counterparty and the Working Capital Bank as regulated by this Agreement. 4.6 Prohibition on Encumbrances --------------------------- Each Creditor undertakes with each of the other Creditors, and each Investor undertakes with each Creditor, that, from and after the date hereof and so long as any of the Senior Debt remains outstanding, such Creditor will not take, accept or receive the benefit of any Encumbrance from any member of the 15 Group (other than Permitted Encumbrances) to secure any liability (whether actual or contingent or present or future) of any member of the Group without the prior written consent of all of the other Creditors. 5 Enforcement ----------- 5.1 Enforcement ----------- It is agreed that: (a) the Agent may instruct the Security Trustee to enforce the security created by the Security Documents at any time after the happening of any Event of Default and while the same is continuing; and (b) following the making of a declaration by the Agent under clause 11.2(b) of the Facilities Agreement, the Working Capital Bank shall (if it has not already done so) make demand under the Working Capital Facility Letter in respect of all moneys then outstanding thereunder. 5.2 Cash Collateralised Debt ------------------------ Each of the Creditors, the Security Trustee, the Borrower and the Charging Subsidiaries agrees that the Working Capital Bank shall not be obliged to account to the Security Trustee for any part of the Cash Collateral. 5.3 Rights to enforce ----------------- (a) Each of the Creditors acknowledges that only the Agent may instruct the Security Trustee to enforce the security created by the Security Documents and that they are not entitled independently to instruct the Security Trustee to enforce the security created by the Security Documents in any circumstances whatsoever. None of the Loan Stock Holders or the Investors shall themselves challenge or question the validity or enforceability of any of the Security Documents. Nothing in this sub-clause shall prejudice the rights of the Creditors amongst themselves. (b) Except as expressly permitted by this Agreement, none of the Loan Stock Holders shall: (i) enforce or take any steps to enforce (whether by legal action or otherwise) the Loan Stock Debt except (having given 90 days' prior written notice to the Agent) in respect of a payment which is permitted to be, or not prohibited from being, made by this Agreement which has become due and payable but has not been made (provided that, for the avoidance of doubt, prior to payment in full of the Senior Debt, nothing in this clause 5.3(b)(i) shall 16 entitle any Loan Stock Holder to require the Security Trustee to enforce the security created by the Security Documents), or (ii) subject to and save as provided in clause 5.7, petition for or vote in favour of any resolution for any insolvency proceeding until the Senior Debt has been paid in full 5.4 Security Trustee not to enforce until instructed ------------------------------------------------ The Security Trustee shall refrain from enforcing the security created by the Security Documents until instructed to do so, pursuant to the terms of this Agreement, by the Agent. Each Creditor with the right to participate in any decision as to whether the Security Trustee should be instructed to enforce the security created by the Security Documents (which, for the avoidance of doubt, shall not prior to payment in full of the Senior Debt include any Loan Stock Holder) is entitled to have regard solely to its own interests in forming a view and is entitled to act and vote in accordance with that view. 5.5 Deemed consent -------------- Notwithstanding any provision of this Agreement, each Loan Stock Holder agrees that prior to payment of the Senior Debt in full any waiver, consent, instruction or discharge which it is contemplated by this Agreement may be given by the Agent, the Banks, the Swap Counterparty, the Working Capital Bank or any of them to the Security Trustee (including, without limitation any instruction given by the Agent under clauses 5.1(a) or 7.1) shall be deemed to have been given by and on behalf of the Loan Stock Holders as well and each of the Loan Stock Holders shall be bound by, and shall have no right to challenge, each of the same and shall have no right of action against the Security Trustee in respect of its reliance on any of the same. 5.6 Claims and actions against Relevant Professionals and the Auditors ------------------------------------------------------------------ Each Loan Stock Holder and each Investor agrees that, if, in any capacity whatsoever prior to payment in full of the Senior Debt: (a) it has any claim or right of action against Biddle & Co. and Deloitte & Touche in respect of or arising out of a Relevant Report or against the Auditors (in such capacity but only if in respect of such claim the liability of the Auditors is limited), it will not proceed with, or will discontinue, such claim if and to the extent that the Security Trustee shall request, provided that nothing in this clause 5.6(a) shall require any Loan Stock Holder or Investor to waive any such claim and each Loan Stock Holder and Investor may take such action as may be reasonably necessary to preserve its claim against the Relevant Professional or, as the case may be, the Auditors for such period as such Loan Stock Holder 17 or, as the ease may be, Investor is prevented by this clause 5.6(a) from pursuing its claim; and (b) it recovers any sum from a Relevant Professional in respect of any claim or right of action in respect of or arising out of a relevant Report or from the Auditors (in such capacity) or their respective insurers in settlement of any such claim (whether in respect of damages or pursuant to any insolvency proceeding or otherwise), it shall promptly upon receipt of the relevant sum pay the same to the Security Trustee for application in accordance with clauses 6.2 and 6.3 (and pending such payment shall hold the same on trust for the Security Trustee), provided that each Loan Stock Holder and Investor shall only be obliged to pay over to the Security Trustee and share any amount which it receives or recovers in respect of any such claim with any other party which: (i) has a same or similar claim against such Relevant Professional or the Auditors which such party successfully pursues; and (ii) does not ultimately receive or recover from such Relevant Professional or the Auditors (as the case may be) or their respective insurers or relevant insolvency official the full amount in respect of which such Relevant Professional or the Auditors (as the case may be) are found to be liable (and in the event that such party receives or recovers part of such amount it shall only be entitled to recover pursuant to this clause 5.6(b) an amount not exceeding the shortfall). 5.7 Rights as Shareholders unaffected --------------------------------- Save as otherwise provided in this Agreement nothing in this Agreement restricts any party hereto which is, from time to time, a shareholder in the Borrower from exercising its rights in that capacity. 6 Appropriation ------------- 6.1 Declaration of Trust -------------------- The Security Trustee hereby declares itself trustee of all monies and assets received by, or transferred to, it pursuant to or in connection with this Agreement (other than (for the avoidance of doubt) the Security Trustee Debt) with effect from the date hereof to hold the same on trust for the Beneficiaries and to apply the same in accordance with clause 6.2. The trust hereby declared shall remain in full force and effect for so long as the trusts contained in the other Security Documents remain in effect. 18 6.2 Order of claims --------------- All amounts received by the Security Trustee pursuant to this Agreement and/or the other Security Documents shall be applied by it in the following order and to the extent that the said amounts are sufficient to meet the respective claims: First as to a sum equivalent to the amounts payable to the Security Trustee under clauses 5.3, 13.3 and 13.4 of the Guarantee and Debenture and any equivalent or similar provisions in any other Security Document from time to time (including any amounts received by the Security Trustee pursuant to clauses 7.4 and/or 7.5) for the Security Trustee absolutely (or, if any amounts have been received by the Security Trustee pursuant to clauses 7.4 and/or 7.5, for the Security Trustee and the payers of those amounts pro rata to the amounts (in the case of the Security Trustee) so payable to it and not received by it pursuant to clauses 7.4 and/or 7.5 and (in the case of each payer) to the amount paid by it pursuant to clauses 7.4 and/or 7.5); Secondly as to a sum equivalent to the Cash Collateralised Debt from time to time and to the extent that for any reason the Working Capital Bank is unable to apply the Cash Collateral in satisfaction of the Cash Collateralised Debt for the Working Capital Bank absolutely; Thirdly as to a sum equivalent to the Bank Debt from time to time for the Arranger, the Agent, the A Banks, the B Banks, the Swap Counterparty and the Working Capital Bank absolutely (and shall pay each of the same (each a "relevant Beneficiary") a sum equivalent to the proportion that the amount outstanding to each relevant Beneficiary bears to the aggregate of all amounts outstanding to all relevant Beneficiaries at the time of payment); Fourthly as to a sum equivalent to the Loan Stock Debt from time to time for the Loan Stock Holders absolutely (and shall pay each of the same a sum equivalent to the proportion that the amount outstanding to such Loan Stock Holder bears to the aggregate of all amounts outstanding to the Loan Stock Holders at the time of payment); Fifthly to such other persons (if any) as may be entitled thereto in priority to the Borrower and the other members of the Charging Group; and Sixthly as to the balance (if any) for the Borrower and the other members of the Charging Group absolutely pro rata to the respective amounts paid, received or recovered from each of them. 19 6.3 Powers of the Security Trustee ------------------------------ The Security Trustee shall have all the powers and discretions conferred upon trustees by law (to the extent not inconsistent herewith) and upon the Security Trustee by this Agreement and it is expressly declared that the Security Trustee shall be entitled to invest monies which in the opinion of the Security Trustee may not be paid out promptly following receipt in the name or under the control of the Security Trustee in any of the investments for the time being authorised by law for the investment by trustees of trust monies or in any other property or investments whether similar to the aforesaid or not or by placing the same on deposit in the name or under the control of the Security Trustee as the Security Trustee may think fit without being under any duty to diversify its investments and the Security Trustee may at any time vary or transpose any such property or investments for or into any others of a like nature and shall not be responsible for any loss due to depreciation in value or otherwise of such property or investments. 6.4 Limitation on liability of the Security Trustee ----------------------------------------------- The Security Trustee shall have no duties, obligations or liabilities to any of the Beneficiaries or the Borrower or any other member of the Charging Group beyond those expressly stated in this Agreement and the other Security Documents and, without prejudice to the generality of the foregoing, shall not be liable to any of the Beneficiaries or the Borrower or any other member of the Charging Group for any losses, costs, damages or expenses any of the same may incur, or that may result from (a) the exercise of, or (b) the failure to exercise, or (c) the timing of the exercise of, any of the powers, authorities and discretions vested in the Security Trustee by this Agreement, by any of the other Security Documents or by law except any arising out of its own wilful default or negligence. 7 The Security Trustee -------------------- 7.1 Security Trustee to act in accordance with instructions ------------------------------------------------------- Without prejudice to clauses 7.6, 7.7 and 7.8: (a) the Security Trustee shall act in accordance with the instructions of the Agent in agreeing with the Borrower and/or any one or more other members of the Charging Group to amend, modify or otherwise vary, or waive breaches of or defaults under, or otherwise excuse performance of, any provision of any of the Security Documents; and (b) the Security Trustee shall act in accordance with: (i) the instructions of the Borrower in granting releases under any provision of the Security Documents for the disposal of any asset permitted by clause 9.2(i) of the Facilities Agreement; and 20 (ii) the instructions of the Agent in granting releases under any provision of the Security Documents for the disposal of any asset not permitted pursuant to (i) above. The Security Trustee shall be entitled to assume that the Agent has due authority to give any such consent or (as the case may be) has obtained the requisite authorisations from the Banks, and shall not be liable to any of the Beneficiaries for any action taken or omitted under or in connection with any of the Security Documents following receipt of such consent. 7.2 Notification ------------ The Security Trustee agrees to notify the Agent promptly of the contents of each notice, certificate and other document received by the Security Trustee from the Borrower or any other member of the Charging Group. 7.3 Provision of information to the Security Trustee ------------------------------------------------ Each of the other parties hereto (whether directly or through the Agent) shall provide the Security Trustee with such written information as it may reasonably require for the purpose of carrying out its duties and obligations under this Agreement and/or the other Security Documents and, in particular with such directions in writing as may reasonably be required so as to enable the Security Trustee to apply the proceeds of realisation of the Security Documents as contemplated by clause 6.2. 7.4 Reimbursement ------------- Without prejudice to clauses 5.3, 13.3 and 13.4 of the Guarantee and Debenture and any equivalent or similar provisions in any other Security Document: (a) prior to payment of the Senior Debt in full, each Bank; and (b) thereafter, each Loan Stock Holder, shall reimburse the Security Trustee (rateably in accordance with the principal amount actually or contingently owing to it under the Facilities Agreement or, as the case may be, under the Loan Stock Instrument and/or the Loan Stock), to the extent that the Security Trustee is not reimbursed by the Borrower or any other member of the Charging Group, for the charges and expenses incurred by the Security Trustee in contemplation of, or otherwise in connection with, the enforcement or attempted enforcement of, or the preservation or attempted preservation of any rights under, any of the Security Documents or in carrying out its duties under this Agreement and/or any of the other Security Documents including (in each case) the fees and expenses of legal or other professional advisers. 21 7.5 Indemnity --------- Without prejudice to clauses 5.3, 13.3 and 13.4 of the Guarantee and Debenture and any equivalent or similar provisions in any other Security Document; (a) prior to payment of the Senior Debt in full, each Bank; and (b) thereafter, each Loan Stock Holder, shall indemnify the Security Trustee (rateably in accordance with the principal amount actually or contingently owing to it under the Facilities Agreement or, as the case may be, under the Loan Stock Instrument and/or the Loan Stock), to the extent that the Security Trustee is not indemnified by the Borrower or any other member of the Charging Group, against all liabilities, damages, costs and claims whatsoever incurred by the Security Trustee in connection with the performance of its duties under this Agreement and/or any of the other Security Documents or any action taken or omitted by the Security Trustee under this Agreement and/or any of the other Security Documents other than any of the same arising out of its own wilful default or negligence. 7.6 Enquiry by the Security Trustee ------------------------------- The Security Trustee shall not be obliged to make any enquiry as to any default by the Borrower or any other member of the Charging Group in the performance or observance of any provision of any of the Security Documents or as to whether any event or circumstance has occurred as a result of which the security constituted by any of the Security Documents shall have or may become enforceable. 7.7 Exclusion in relation to deposit of deeds, etc. ----------------------------------------------- The Security Trustee shall not have any duty or responsibility, either initially or on a continuing basis, to ascertain whether all deeds and documents which should have been deposited with it under or pursuant to the Security Documents have been so deposited with it. 7.8 Exclusion of liability ---------------------- The Security Trustee shall not have any responsibility to any of the Beneficiaries (i) on account of the failure of the Borrower or any other member of the Charging Group to perform any of its obligations under any of the Security Documents or (ii) for the financial condition of the Borrower or any other member of the Charging Group or (iii) for the completeness or accuracy of any statements, representations or warranties in any of the Security Documents or any document delivered under any of the Security Documents or (iv) for the execution, effectiveness, adequacy, genuineness, validity, enforceability or admissibility in evidence of any of the Security Documents or of any certificate, report or other document executed or delivered under any of the Security 22 Documents or (v) to investigate or make any enquiry into the title of the Borrower or any other member of the Charging Group to the Charged Assets or any part thereof or (vi) for the failure to register any of the Security Documents at the Companies Registration Office, H.M. Land Registry or the Trade Marks Registry or elsewhere or (vii) for the failure to register any of the Security Documents in accordance with the provisions of the documents of title of the Borrower or any other member of the Charging Group to any of the Charged Assets or (viii) for the failure to effect or procure the registration of any floating charge created by any of the Security Documents by registering under the Land Registration Act 1925 any notice, caution or other entry prescribed by or pursuant to the provisions of the said Act against any land for the time being forming part of the Charged Assets or (ix) for the failure to take or require the Borrower or any other member of the Charging Group to take any steps to render any of the Security Documents effective as regards Charged Assets outside England or Wales or to secure the creation of any ancillary charge under the laws of the jurisdiction concerned or (x) otherwise in connection with the Security Documents or their negotiation or for acting (or, as the case may be, refraining from acting) with the consent, or upon the instruction, of the Agent given pursuant to clauses 5.1 or 7.1 or in reliance upon information provided to it pursuant to clause 7.3 or otherwise. 7.9 Reliance on documents --------------------- The Security Trustee shall be entitled to rely on any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person and shall be entitled to rely as to legal or other professional matters on opinions and statements of any legal or other professional advisers selected or approved by it. 7.10 Deposit of deeds, etc. ---------------------- The Security Trustee shall be entitled to place all deeds, certificates and other documents relating to the Charged Assets deposited with it under or pursuant to the Security Documents or any of them in any safe deposit, safe or receptacle selected by the Security Trustee or with any solicitor or firm of solicitors and may make any such arrangements as it thinks fit for allowing the Borrower or any other member of the Charging Group access to, or its solicitors or auditors possession of, such documents when necessary or convenient and the Security Trustee shall not be responsible for any loss incurred in connection with any such deposit, access or possession other than arising out of its own wilful default or negligence. 7.11 Illegal acts ------------ The Security Trustee may refrain from doing anything which would, or might in its opinion, be contrary to any law of any jurisdiction or any directive, regulation or regulatory requirement of any State (or any agency thereof) or which would or might render it liable to any person and may do anything which 23 is, in its opinion, necessary to comply with any such law, directive, regulation or regulatory requirement. 7.12 Other business with the Group ----------------------------- The Security Trustee and its subsidiary and associated companies may, without any liability to account to any other party hereto, accept deposits from, lend money to. and generally engage in any kind of banking or trust business with, the Borrower or any of its Subsidiaries or Affiliates or the members of the Management Team or any of the Beneficiaries or any of the Investors as if it were not the Security Trustee. 7.13 Rights as Beneficiary --------------------- With respect to its own status as a Beneficiary the Security Trustee shall have the same rights and powers as any other Beneficiary and may exercise the same as though it were not performing the duties and functions of Security Trustee. 7.14 Separation of capacities ------------------------ Notwithstanding that the Agent and the Security Trustee may from time to time be the same entity, the Agent and the Security Trustee have entered into this Agreement in their separate capacities as agent for the Banks under and pursuant to the Facilities Agreement and as security trustee for the Beneficiaries to hold the guarantees and other assurances and security created or to be created by the Security Documents on the terms set out in the Security Documents Provided that, where this Agreement provides for the Agent to communicate with or provide instructions to the Security Trustee, while the Agent and the Security Trustee are the same entity it will not be necessary for there to be any such formal communication or instructions notwithstanding that this Agreement provides in certain cases for the same to be in writing. 8 Acknowledgements ---------------- 8.1 Acknowledgement by the Borrower and the Charging Subsidiaries ------------------------------------------------------------- The Borrower and the Charging Subsidiaries enter into this Agreement for the purpose of acknowledging the order of payments herein recorded and undertakes with each of the other parties hereto to observe the provisions of this Agreement at all times and not in any way prejudice or affect the enforcement of such provisions or do or suffer anything which would be a breach of the terms of this Agreement. The Borrower further undertakes to procure that its Subsidiaries will not take any action (including, without limitation, the making of any payment) which action, if taken by the Borrower, would have been a breach by the Borrower of the preceding undertaking given in this clause 8.1. 24 8.2 Agreement between the Creditors ------------------------------- Each Creditor agrees with every other Creditor (but not with the Borrower or any Charging Subsidiary) that the provisions of this Agreement shall regulate the rights of such Creditor under the Facilities Agreement, the Swap Documents, the Working Capital Facility Letter, the Loan Stock and the Loan Stock Instrument, which rights shall in all respects take effect subject to the provisions of this Agreement. 8.3 Each Loan Stock Holder acknowledges that Mercury is the authorised representative of the Loan Stock Holders for the purposes of this Agreement and agrees that it will not challenge any action taken by Mercury in such capacity under this Agreement. The Security Trustee shall be entitled to assume that the Loan Stock Holder's Representative has due authority to give any consent or instruction on behalf of the Loan Stock Holders or (as the case may be) has obtained the requisite authorisations from the Loan Stock Holders, and shall not be liable to any of the Loan Stock Holders for any action taken or omitted under this Agreement following receipt of any such consent or instruction. 9 Substitutions and Assignments by Banks -------------------------------------- 9.1 Substitutions by Banks ---------------------- Any Bank may transfer, by way of novation, all or any part of its rights, benefits and/or obligations under this Agreement by delivery to the Agent of a Substitution Certificate in the manner and otherwise as provided in clause 15.3 of the Facilities Agreement in which event, on and as from the effective date specified in such Substitution Certificate, the following provisions shall apply in relation to the rights and obligations of the parties to this Agreement: (a) to the extent that in such Substitution Certificate the A Bank or (as the case may be) B Bank party thereto seeks to transfer its rights and/or its obligations under the Facilities Agreement, such A Bank or (as the case may be) B Bank and the other parties to this Agreement shall be released from their respective obligations to one another under this Agreement ("discharged obligations") and their respective rights against one another under this Agreement ("discharged rights") shall be cancelled; (b) the Substitute party to the relevant Substitution Certificate and the other parties to this Agreement shall, to the same extent, assume obligations towards each other which differ from the discharged obligations only insofar as they are owed to or assumed by such Substitute instead of to or by such A Bank or (as the case may be) B Bank; and (c) the Substitute party to the relevant Substitution Certificate and the other parties to this Agreement shall, to the same extent, acquire rights against each other which differ from the discharged rights only insofar as they 25 are exercisable by or against such Substitute instead of by or against such A Bank or (as the case may be) B Bank. 9.2 Notification by Agent --------------------- The Agent shall promptly notify the Security Trustee of the receipt by it of any Substitution Certificate. 9.3 Authorisation to Agent ---------------------- Each of the other parties hereto irrevocably authorizes the Agent to countersign each Substitution Certificate on its behalf without any further consent of, or consultation with, any such party provided that the conditions of clause 15.3 of the Facilities Agreement have been complied with. 9.4 References to A Bank and/or B Bank ---------------------------------- If any A Bank and/or (as the case may be) any B Bank novates all or any of its rights, benefits and obligations as provided in clause 9.1 all relevant references in this Agreement to such A Bank or (as the case may be) any B Bank shall thereafter be construed as a reference to such Bank and/or its Substitute to the extent of their respective interests. 10 Changes of Agent and the Security Trustee ------------------------------------------ 10.1 Change of Agent --------------- The appointment of any successor to the Agent pursuant to clause 16.11 of the Loan Agreement shall be (as therein provided) conditional upon such successor having executed and delivered to the Security Trustee an Agent's Adherence. Upon the appointment of any such successor taking effect, the retiring Agent shall be discharged from any further obligation under this Agreement and its successor and each of the other parties to this Agreement shall have the same rights and obligations among themselves as they would have had if such successor had been a party to this Agreement in place of the retiring Agent. 10.2 Change of Security Trustee -------------------------- The appointment of any successor to the Security Trustee pursuant to clause 13.6 of the Guarantee and Debenture or any equivalent or similar provision in any other Security Document shall be conditional upon the Agent, the retiring Security Trustee and such successor having executed and delivered a Security Trustee's Adherence. Each of the other parties hereto irrevocably authorises the Agent to enter into a Security Trustee's Adherence on its behalf without further consent of, or consultation with, any such party, provided that the conditions of clause 13.6 of the Guarantee and Debenture and any equivalent or similar provision in any other Security Document have been complied with. Upon the appointment of any such successor taking effect, the retiring Security Trustee 26 shall be discharged from any further obligation under this Agreement and its successor and each of the other parties to this Agreement shall have the same rights and obligations among themselves as they would have had if such successor had been a party to this Agreement in place of the Retiring Security Trustee. 10.3 Retirement of Security Trustee ------------------------------ The Agent acting on the instructions of the Majority Banks may at any time require the Security Trustee to retire from its appointment as Security Trustee if the Security Trustee is no longer a Bank and a Bank willing to replace the Security Trustee has been found. The Security Trustee agrees to co-operate in giving effect to such retirement in accordance with any such notice duly received by it. 10.4 Replacement of Security Trustee following payment of the Senior Debt in ----------------------------------------------------------------------- full ---- After the Senior Debt has been paid in full the Security Trustee may require Mercury to accept (or to procure that a person nominated by it accepts) the appointment of Security Trustee in its place (and the Borrower, the Charging Subsidiaries and the Creditors agree to give any consents, execute any documents and take any other action which may be necessary or desirable to facilitate such appointment). 11 Assignments and transfers by Other Parties ------------------------------------------ 11.1 No assignment or transfer by the Borrower or any Charging Subsidiary -------------------------------------------------------------------- Neither the Borrower nor any Charging Subsidiary may assign or transfer any of its rights or obligations under this Agreement. 11.2 Assignment or transfer by the Swap Counterparty and the Working Capital ----------------------------------------------------------------------- Bank ---- The Swap Counterparty and the Working Capital Bank may not assign any of their respective rights and/or transfer any of their respective obligations under the Swap Documents and the Working Capital Facility Letter (as the case may be) to any person unless the prospective assignee or transferee has first entered into an undertaking in form and substance reasonably satisfactory to the Security Trustee, to be bound by the provisions of this Agreement in the capacity of Swap Counterparty or Working Capital Bank (as the case may be). 11.3 Assignment by Loan Stock Holders and Investors ---------------------------------------------- No Loan Stock Holder or Investor may assign or transfer any of its rights under, in respect of or to the Loan Stock and/or the Loan Stock Instrument or (as the case may be) transfer any of its rights or title in respect of or to shares in the Borrower to any person unless the prospective assignee or transferee has first entered into a Loan Stock Holder's and Investor's Adherence. 27 12 Notices and Other Matters ------------------------- 12.1 Notices ------- Every notice, request, demand or other communication under this Agreement shall: (a) be in writing delivered personally or by first class prepaid letter or fax; (b) be deemed to have been received, subject as otherwise provided in this Agreement, in the case of a letter, when delivered personally or three days after it has been put into the post and, in the case of a fax, at the time of despatch (provided that if the date of despatch is not a business day or the time of despatch is after normal business hours in the country of the addressee it shall be deemed to have been received at the opening of business on the next such business day); and (c) be sent: 1) to the Agent at: Waterhouse Square, 138-142 Holborn, London EC1N 2TH Fax: 0171 427 9930 Attn: Peter Goody or at its address or fax number in any relevant Agent's Adherence or at any other address or fax number from time to time notified to the other parties by it; 2) to each Bank at its address or fax number in schedule 1 to the Facilities Agreement or in any relevant Substitution Certificate or at any other address or fax number from time to time notified to the other parties by it; 3) to the Swap Counterparty at: Waterhouse Square 138-142 Holborn, London EC1N 2TH Fax: 0171 293 9494 Attn: Peter Goody 28 4) to the Working Capital Bank at: Waterhouse Square, 138-142 Holborn, London EC1N 2TH Fax: 0171 427 9930 Attn: Peter Goody or at any other address or fax number from time to time notified to the other parties by it 5) to the Security Trustee at: Waterhouse Square, 138-142 Holborn, London EC1N 2TH Fax: 0171 427 9930 Attn: Peter Goody or at its address or fax number in any relevant Security Trustee's Adherence or at any other address or fax number from time to time notified to the other parties by it; 6) to each Investor at its address in Schedule 1 or 2 (as the case may be) to the Subscription Agreement or at any other address or fax number from time to time notified to the other parties by it; 7) to the Vendor at: 5110 W. Sahara Avenue, Las Vegas, Nevada 89102-3702, U.S.A. Fax: 702 257 3601 Attn: Wendy Simpson 8) to the Borrower and the Charging Subsidiaries at: The Priory, Priory Lane, Roehampton, London SW15 5JJ Fax: 0181 876 8261 Attn: Ian Reynolds or at any other address or fax number in the United Kingdom from time to time notified to the other parties by it. 29 12.2 Severability ------------ If any provision of this Agreement is illegal or unenforceable in any jurisdiction in relation to any party hereto such illegality or unenforceability shall not invalidate the remaining provisions hereof or affect the validity or enforceability of such provision in any other jurisdiction or in relation to any of the other parties hereto. 12.3 Not a partnership ----------------- This Agreement shall not, and shall not be construed so as to, constitute a partnership between the parties or any of them. 12.4 No waiver --------- No waiver by any party of any breach of this Agreement shall operate as a waiver of any subsequent or continuing breach and no failure by any party to exercise its rights under this Agreement shall preclude that party from exercising its rights in respect of any subsequent event. 12.5 Counterparts ------------ This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when executed and delivered, shall constitute an original, but all the counterparts shall together constitute one and the same instrument. 12.6 Interpretation on payment of Senior Debt in full ------------------------------------------------ Following payment of the Senior Debt in full, all references in this Agreement to the Agent shall be deemed to be a reference to the Loan Stock Holder's Representative and all references in this Agreement to the Banks shall be deemed to be a reference to the Loan Stock Holders. 13 Law and Jurisdiction -------------------- This Agreement shall be governed by and interpreted in accordance with English law. Each of the parties hereby irrevocably submits to the non-exclusive jurisdiction of the High Court of Justice in England but (subject as provided below) this Agreement may be enforced in any court of competent jurisdiction. Each party to this Agreement agrees that only the courts of England shall have jurisdiction to determine any claim which any party may have against the Security Trustee arising out of this Agreement. IN WITNESS whereof this Agreement has been entered into the day and year first above written. 30 SCHEDULE -------- Part A - Agent's Adherence -------------------------- THIS DEED POLL dated ..............., supplemental to an agreement (the "Inter-Creditor Agreement") dated ............., 1996 and made between The Royal Bank of Scotland plc as Arranger (1), The Royal Bank of Scotland plc as Agent (2), certain banks as A Banks and B Banks (3), The Royal Bank of Scotland plc as Swap Counterparty (4), The Royal Bank of Scotland plc as Working Capital Bank (5), The Royal Bank of Scotland plc as Security Trustee (6), Mercury Development Capital Limited and others as Investors and Loan Stock Holders (7), Community Psychiatric Centers as Vendor and a Loan Stock Holder (8), Foray 911 Limited as Borrower (9) and certain companies as Charging Subsidiaries (10). Words and expressions defined or referenced in the Inter-Creditor Agreement shall, uniess the context otherwise requires, or unless otherwise defined in this Deed, have the same meanings when used in this Deed. WHEREAS ....................... (the "New Agent") proposes to accept the appointment of Agent under and in accordance with the provisions of clause 16.11 of the Facilities Agreement and execution of this Deed by the New Agent is a condition precedent to such appointment becoming effective. NOW THIS DEED WITNESSES that the New Agent hereby agrees and covenants with each other person who is a party to the Inter-Creditor Agreement as at the date on which the aforementioned appointment shall become effective that, subject only to such appointment becoming effective, it will at all times thereafter observe, perform and be bound by all the terms, provisions, covenants and undertakings contained in the Inter-Creditor Agreement and expressed to be observed and/or performed by the Agent as if it had been party to the Inter-Creditor Agreement in the capacity of Agent. For the purposes of clause 12.1 of the Inter-Creditor Agreement the New Agent's address for service shall be at: .............................. .............................. .............................. Fax: ................... Attention: ................... IN WITNESS whereof this Deed has been duly executed by the New Agent the day and year first above written. 31 SCHEDULE -------- Part B - Trustee's Deed of Appointment and Adherence ---------------------------------------------------- THIS DEED is made the ............. day of ............. BETWEEN: (1) [Retiring Trustee] of (the "Retiring Trustee"); (2) [New Trustee] of (the "New Trustee); and (3) [Agent] of (the "Agent") WHEREAS: (A) This Deed is supplemental to: (1) an agreement (the "Inter-Creditor Agreement") made between The Royal Bank of Scotland plc as Arranger (1), The Royal Bank of Scotland plc as Agent (2), certain banks as A Banks and B Banks (3), The Royal Bank of Scotland plc as Swap Counterparty (4), The Royal Bank of Scotland plc as Working Capital Bank (5), The Royal Bank of Scotland plc as Security Trustee (6), Mercury Development Capital Limited and others as Investors and Loan Stock Holders (7), Community Psychiatric Centers as Vendor and a Loan Stock Holder (8), Foray 911 Limited as Borrower (9) and certain companies as Charging Subsidiaries (10); (2) the other Security Documents; and (3) [specify previous Trustee's Deeds of Appointment and Adherence (if any)] (B) The Retiring Trustee wishes to appoint the New Trustee and the New Trustee proposes to accept the appointment as Security Trustee under and in accordance with the provisions of the Intercreditor Agreement and the other Security Documents and execution of this Deed by the New Trustee is a condition to such appointment becoming effective. (C) It is intended that all property subject to the trusts contained in the Inter-Creditor Agreement and the other Security Documents shall be henceforth vested in or transferred shortly hereafter into the name, or under the control, of the New Trustee. NOW THIS DEED WITNESSES as follows: 1 Unless the context requires otherwise, or unless otherwise defined herein, words and expressions defined in, or incorporated by reference into, the Security Trust Inter-Creditor Agreement shall have the same meanings when used in this Deed. 32 2 In exercise of the powers conferred upon it by the Trustee Act 1925 and of every other (if any) power enabling it the Retiring Trustee hereby appoints the New Trustee to be Security Trustee in its place. 3 The Retiring Trustee is henceforth discharged from the trusts contained in the Inter-Creditor Agreement and the Security Documents. 4 It is intended that the property subject to the trusts constituted by the Trustee Security Documents shall henceforth be vested in the New Trustee by virtue of the provisions of the Trustee Act 1925 and in the case of property which does not vest in the New Trustee by virtue of such provisions, the Retiring Trustee undertakes to do and execute all acts and deeds required to transfer such property into the name, or under the control, of the New Trustee. 5 The New Trustee hereby agrees and covenants with the Agent (on behalf of each Beneficiary, the Borrower and each Charging Subsidiary) that it will at all times hereafter observe, perform and be bound by all the terms, provisions, covenants and undertakings contained in the Intercreditor Agreement and expressed to be observed and/or performed by the Security Trustee as if it had been party to the Intercreditor Agreement in the capacity of Security Trustee. For the purposes of clause 12.1 of the Inter-Creditor Agreement the New Trustee's address for service shall be at: ............................. ............................. Telex: .............. Fax: .............. Attention: .............. IN WITNESS whereof this Deed has been duly executed by the Retiring Trustee, the New Trustee and the Agent the day and year first before written. IN WITNESS whereof this Deed has been duly executed by the New Trustee the day and year first above written. 33 SCHEDULE -------- Part C - Loan Stock Holder's and Investor's Adherence ----------------------------------------------------- THIS DEED POLL dated ............, supplemental to an agreement (tile "Inter- Creditor Agreement") dated ............., 1996 and made between The Royal Bank of Scotland plc as Arranger (1), The Royal Bank of Scotland plc as Agent (2), certain banks as A Banks and B Banks (3), The Royal Bank of Scotland plc as Swap Counterparty (4), The Royal Bank of Scotland plc as Working Capital Bank (5), The Royal Bank of Scotland plc as Security Trustee (6), Mercury Asset Management Plc and others as Investors and Loan Stock Holders (7), Community Psychiatric Centers as Vendor and a Loan Stock Holder (8), Foray 911 Limited as Borrower (9) and certain companies as Charging Subsidiaries (10). Words and expressions defined or referenced in the Inter-Creditor Agreement shall, unless the context otherwise requires, or unless otherwise defined in this Deed, have the same meanings when used in this Deed. WHEREAS .............................. (the "New *[Loan Stock Holder [and] Investor]") proposes to accept an assignment or transfer of rights under, in respect of or to the Loan Stock and/or the Loan Stock Instrument [and] a transfer of rights or title in respect of or to shares in the Borrower] and execution of this Deed by the New *[Loan Stock Holder [and] Investor] is a condition precedent to such assignment or transfer becoming effective. NOW THIS DEED WITNESSES that the New *[Loan Stock Holder [and] Investor] hereby agrees and covenants with each other person who is a party to the Inter- Creditor Agreement that, subject only to such assignment or transfer becoming effective, it will at all times thereafter observe, perform and be bound by all the terms, provisions, covenants and undertakings contained in the Inter- Creditor Agreement and expressed to be observed and/or performed by *[a Loan Stock Holder [and] [an Investor] as if it had been party to the Inter-Creditor Agreement in the capacity of *[a Loan Stock Holder [and] an Investor]. For the purposes of clause 12.1 of the Inter-Creditor Agreement the New *[Loan Stock Holder's] [and] [1nvestor's] address for service shall be at: ............................. ............................. ............................. Fax: .............. Attention: .............. IN WITNESS whereof this Deed has been duly executed by the New Loan Stock Holder the day and year first above written. * delete as applicable 34 The Arranger - ------------ SIGNED for and on behalf of ) THE ROYAL BANK OF SCOTLAND plc: ) The Agent - --------- SIGNED for and on behalf of ) THE ROYAL BANK OF SCOTLAND plc: ) The A Bank - ---------- SIGNED for and on behalf of ) THE ROYAL BANK OF SCOTLAND plc: ) The B Bank - ---------- SIGNED for and on behalf of ) THE ROYAL BANK OF SCOTLAND plc: ) The Swap Counterparty - --------------------- SIGNED for and on behalf of ) THE ROYAL BANK OF SCOTLAND plc: ) The Working Capital Bank - ------------------------ SIGNED for and on behalf of ) The ROYAL BANK OF SCOTLAND plc: ) 35 The Security Trustee - -------------------- SIGNED for and on behalf of ) THE ROYAL BANK OF SCOTLAND plc: ) The Borrower - ------------ SIGNED for and on behalf of ) FORAY 911 LIMITED: ) The Investors - ------------- SIGNED for and on behalf of ) MERCURY ASSET MANAGEMENT PLC ) SIGNED by IAN PETER REYNOLDS: ) SIGNED by ERIC ALLEN MILLARD: ) The Vendor - ---------- SIGNED for and on behalf of ) /s/ Richard Conte COMMUNITY PSYCHIATRIC ) CENTERS ) The Charging Subsidiaries - ------------------------- SIGNED for and on behalf of ) CPC (LONDINIUM) LIMITED: ) 36 SIGNED for and on behalf of ) PRIORY HOSPITALS GROUP LIMITED: ) SIGNED for and on behalf of ) CARE CONTINUUMS LIMITED: ) SIGNED for and on behalf of ) PRIORY CHILDCARE ) SERVICES LIMITED: ) 37 EX-99.4 5 RIGHTS AGREEMENT DATED AS OF JUNE 21, 1996 EXHIBIT 4 ================================================================================ COMMUNITY PSYCHIATRIC CENTERS and CHASE MELLON SHAREHOLDER SERVICES as Rights Agent Rights Agreement Dated as of June 21, 1996 ================================================================================ TABLE OF CONTENTS -----------------
PAGE ---- Section 1. Certain Definitions..................................................... 1 Section 2. Appointment of Rights Agent............................................. 5 Section 3. Issuance of Right Certificates.......................................... 5 Section 4. Form of Right Certificates.............................................. 6 Section 5. Countersignature and Registration....................................... 6 Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates................. 7 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights........... 8 Section 8. Cancellation and Destruction of Right Certificates...................... 9 Section 9. Reservation and Availability of Capital Stock........................... 9 Section 10. Preferred Shares Record Date............................................ 10 Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights...... 10 Section 12. Certificate of Adjusted Purchase Price or Number of Shares.............. 17 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.... 17 Section 14. Fractional Rights and Fractional Shares................................. 18 Section 15. Rights of Action........................................................ 19 Section 16. Agreement of Right Holders.............................................. 20 Section 17. Right Certificate Holder Not Deemed a Stockholder....................... 20 Section 18. Concerning the Rights Agent............................................. 20 Section 19. Merger or Consolidation or Change of Name of Rights Agent............... 21 Section 20. Duties of Rights Agent.................................................. 21 Section 21. Change of Rights Agent.................................................. 23
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Page ---- Section 22. Issuance of New Right Certificates...................................... 24 Section 23. Redemption.............................................................. 24 Section 24. Notice of Certain Events................................................ 25 Section 25. Notices................................................................. 26 Section 26. Supplements and Amendments.............................................. 26 Section 27. Exchange................................................................ 27 Section 28. Successors.............................................................. 28 Section 29. Benefits of this Rights Agreement....................................... 28 Section 30. Severability............................................................ 28 Section 31. Governing Law........................................................... 28 Section 32. Counterparts............................................................ 28 Section 33. Descriptive Heading..................................................... 29
Exhibit A - Form of Certificate of Resolution Establishing Designation, Preferences and Rights of Series B Junior Participating Preferred Stock Exhibit B - Form of Right Certificate Exhibit C - Summary of Rights to Purchase Preferred Shares ii RIGHTS AGREEMENT ---------------- Agreement, dated as of June 21, 1996, between COMMUNITY PSYCHIATRIC CENTERS, a Nevada corporation (the "Company"), and CHASE MELLON SHAREHOLDER SERVICES, as Rights Agent (the "Rights Agent"). RECITALS -------- The Board of Directors of the Company has authorized and declared a dividend of one right (a "Right") for each Common Share (as defined in Section 1.6) of the Company outstanding at the close of business on July 16, 1996 (the "Record Date") and has authorized the issuance of one Right (subject to adjustment as provided herein) with respect to each Common Share that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are defined in Sections 3.1 and 7.1), each Right initially representing the right to purchase one one-hundredth of a share of Series B Junior Participating Preferred Stock (the "Preferred Shares") of the Company having the rights, powers and preferences set forth in the form of Certificate of Resolution Establishing Designation, Preferences and Rights of Series B Junior Participating Preferred Stock of Community Psychiatric Centers attached hereto as Exhibit A, upon the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Rights ------------------- Agreement, the following terms have the meanings indicated: 1.1 "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the Common Shares of the Company then outstanding but shall not include the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the Common Shares of the Company then outstanding; PROVIDED, HOWEVER, that if a Person shall become the Beneficial Owner of 15% or more of the Common Shares of the Company then outstanding solely by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an "Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person," as defined pursuant to the foregoing provisions of this Section 1.1, has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an Acquiring Person, as defined pursuant to the foregoing provisions of this Section 1.1, then such Person shall not be deemed to be an "Acquiring Person" at any time for any purposes of this Agreement. 1 1.2 "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations, as in effect on the date of this Rights Agreement, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 1.3 A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement); (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately, or only after the passage of time, compliance with regulatory requirements, fulfillment of a condition or otherwise) pursuant to any agreement, arrangement or understanding, whether or not in writing (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (1) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange, or (2) securities issuable upon exercise of Rights at any time prior to the occurrence of a Trigger Event, or (3) securities issuable upon exercise of Rights from and after the occurrence of a Trigger Event which Rights were acquired by such Person or any of such Person's Affiliates or Associates prior to the Distribution Date or pursuant to Section 3.1 or Section 22 hereof (the "Original Rights") or pursuant to Section 11.9 hereof in connection with an adjustment made with respect to any Original Rights, or (4) securities which such Person or any of such Person's Affiliates or Associates may acquire, does or do acquire or may be deemed to have the right to acquire, pursuant to any merger or other acquisition agreement between the Company and such Person (or one or more of his Affiliates or Associates) if such agreement has been approved by the Board of Directors of the Company prior to such Person's becoming an Acquiring Person; or (B) the right to vote pursuant to any agreement, arrangement or understanding (whether or not in writing); PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this clause (B) if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), whether or not in writing, for 2 the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to Section 1.3(ii)(B)) or disposing of any securities of the Company. 1.4 "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to close. 1.5 "close of business" on any given date shall mean 5:00 p.m., California time, on such date; PROVIDED, HOWEVER, that if such date is not a Business Day it shall mean 5:00 p.m., California time, on the next succeeding Business Day. 1.6 "Common Shares" when used with reference to the Company shall mean the shares of common stock, par value $1.00 per share, of the Company. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such other Person or, if such Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person, and which has issued and outstanding such capital stock, equity securities or equity interest. 1.7 "Continuing Director" shall mean (i) any member of the Board of Directors of the Company, while such Person is a member of the Board, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or an employee, director, representative, nominee or designee of any Acquiring Person or of any such Affiliate or Associate, and was a member of the Board prior to the time that any Person becomes an Acquiring Person or (ii) any Person (during such period in which such Person is a member of the Board) who, after the time that any Person becomes an Acquiring Person, becomes a member of the Board and who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or an employee, director, representative, nominee or designee of an Acquiring Person or of any such Affiliate or Associate, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. 1.8 "Person" shall mean any individual, partnership, joint venture, limited liability company, firm, corporation, unassociated association, trust or other entity, and shall include any successor (by merger or otherwise) of such entity. 1.9 "Shares Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, the filing of a report pursuant to Section 13(d) of the Exchange Act or pursuant to a comparable successor statute) by the Company or an Acquiring Person that an Acquiring Person has become such or that discloses information which reveals the existence of an Acquiring Person. 1.10 "Spin-off Distribution" shall mean the distribution, to all holders of the Common Shares, of one share of common stock of Spinco Corporation, an indirect wholly-owned subsidiary of the Company, for each five Common Shares held by such stockholder. After such distribution, the Company intends to change its name to "Apollo Healthcare International" and Spinco Corporation intends to change its name to "Community Psychiatric Centers." 3 1.11 "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interests is owned, of record or beneficially, directly or indirectly, by such Person. 1.12 A "Trigger Event" shall be deemed to have occurred upon any Person becoming an Acquiring Person. Notwithstanding the foregoing, a Trigger Event shall not be deemed to have occurred if the event causing the 15% ownership threshold to be crossed is an acquisition of Common Shares made pursuant to a cash tender offer made pursuant to the rules and regulations under the Exchange Act and filed with the Securities and Exchange Commission on Schedule 14D-1 (or any successor form) for all outstanding Common Shares not beneficially owned by the Person making such offer (or by its Affiliates or Associates) so long as the Board of Directors of the Company determines, after receiving advice from one or more investment banking firms, that such offer is (i) at a price and on terms which are fair to stockholders (taking into account all factors which such members of the Board deem relevant, including without limitation, prices which could reasonably be achieved if the Company or its assets were sold on an orderly basis designed to realize maximum value) and (ii) otherwise in the best interests of the Company and its stockholders; PROVIDED, HOWEVER, that there must be Continuing Directors then in office and any such determination shall require the concurrence of a majority of such Continuing Directors. 1.13 The following terms shall have the meanings defined for such terms in the Sections set forth below:
Term Section ---- ------- Adjustment Shares 11.1.2 common stock equivalent 11.1.3 Company Recitals current per share market price 11.4 Current Value 11.1.3 Distribution Date 3.1 equivalent preferred stock 11.2 Exchange Act 1.2 Exchange Consideration 27 Final Expiration Date 7.1 Nasdaq 9 Original Rights 1.3 Preferred Shares Recitals Purchase Price 4 Record Date Recitals Redemption Date 7.1 Redemption Price 23.1 Right Recitals Right Certificate 3.1 Rights Agent Recitals Security 11.4 Spread 11.1.3 Substitution Period 11.1.3 Summary of Rights 3.2 Trading Day 11.4
4 Section 2. Appointment of Rights Agent. The Company hereby appoints --------------------------- the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3, shall prior to the Distribution Date also be the holders of the Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable. In the event the Company appoints one or more co-Rights Agents, the respective duties of the Rights Agent and any co-Rights Agent shall be as the Company shall determine. Contemporaneously with such appointment, if any, the Company shall notify the Rights Agent thereof. Section 3. Issuance of Right Certificates. ------------------------------ 3.1 Rights Evidenced by Share Certificates. Until the earlier of (i) -------------------------------------- the tenth day after the Shares Acquisition Date or (ii) the tenth day after the date of the commencement of, or first public announcement of the intent of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan) to commence, a tender or exchange offer the consummation of which would result in any Person becoming the Beneficial Owner of Common Shares aggregating 15% or more of the then outstanding Common Shares of the Company (the earlier of (i) and (ii) being herein referred to as the "Distribution Date," whether or not either such date occurs prior to the Record Date), (x) the Rights (unless earlier expired, redeemed or terminated) will be evidenced (subject to the provisions of Section 3.2) by the certificates for Common Shares registered in the names of the holders thereof (which certificates for Common Shares shall also be deemed to be Right Certificates) and not by separate certificates, and (y) the Rights (and the right to receive certificates therefor) will be transferable only in connection with the transfer of the underlying Common Shares. The preceding sentence notwithstanding, prior to the Distribution Date specified therein (or such later Distribution Date as the Board of Directors of the Company may select pursuant to this sentence), the Board of Directors of the Company may postpone, one or more times, the Distribution Date beyond the earlier of the dates set forth in such preceding sentence; PROVIDED, HOWEVER, that there must be Continuing Directors then in office and any such postponement shall require the approval of at least a majority of such Continuing Directors. As soon as practicable after the Distribution Date, the Rights Agent will send, by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, one or more certificates for Rights, in substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing one Right (subject to adjustment as provided herein) for each Common Share so held. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates. 3.2 Summary of Rights. On the Record Date or as soon as practicable ----------------- thereafter, the Company will send or cause to be sent a copy of a Summary of Rights to Purchase Preferred Shares, in substantially the form attached hereto as Exhibit C (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Record Date at the address of such holder shown on the records of the Company. With respect to certificates for Common Shares outstanding as of the close of business on the Record Date, until the Distribution Date (or the earlier Redemption Date or Final Expiration Date), the Rights will be evidenced by such certificates for Common Shares registered in the names of the holders thereof together with a copy of the Summary of Rights and the registered holders of the Common Shares shall also be registered holders of the associated Rights. Until the Distribution Date (or the earlier Redemption Date or Final Expiration Date), the surrender for transfer of any certificate for Common Shares outstanding at the close of business 5 on the Record Date shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. 3.3 New Certificates After Record Date. Certificates for Common Shares ---------------------------------- which become outstanding (whether upon issuance out of authorized but unissued Common Shares, issuance out of treasury or transfer or exchange of outstanding Common Shares) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date, shall be deemed also to be certificates for Rights, and shall have impressed, printed, stamped, written or otherwise affixed onto them the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between Community Psychiatric Centers and Chase Mellon Shareholder Services, dated as of June 21, 1996, as the same may be amended from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Community Psychiatric Centers. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Community Psychiatric Centers will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. AS DESCRIBED IN THE RIGHTS AGREEMENT, RIGHTS WHICH ARE HELD BY OR HAVE BEEN HELD BY ACQUIRING PERSONS OR ASSOCIATES OR AFFILIATES THEREOF (AS DEFINED IN THE RIGHTS AGREEMENT) SHALL BECOME NULL AND VOID. With respect to such certificates containing the foregoing legend, until the Distribution Date (or the earlier Redemption Date or Final Expiration Date), the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates (together with a copy of the Summary of Rights), and the surrender for transfer of any such certificates shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. Section 4. Form of Right Certificates. The Right Certificates (and the -------------------------- forms of election to purchase Preferred Shares, certification and assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Rights Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or trading system on which the Rights may from time to time be listed or quoted, or to conform to usage. Subject to the terms and conditions hereof, the Right Certificates, whenever issued, shall be dated as of the Record Date, and shall show the date of countersignature by the Rights Agent, and on their face shall entitle the holders thereof to purchase such number of one one- hundredths of a Preferred Share as shall be set forth therein at the price per one one-hundredth of a Preferred Share set forth therein (the "Purchase Price"), but the number of such one one-hundredths of a Preferred Share and the Purchase Price shall be subject to adjustment as provided herein. Section 5. Countersignature and Registration. The Right Certificates --------------------------------- shall be executed on behalf of the Company by its Chairman of the Board of Directors, the Chief Executive Officer, 6 President or any Vice President, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or any Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by an authorized signatory of the Rights Agent, but it shall not be necessary for the same signatory to countersign all of the Right Certificates hereunder. No Right Certificate shall be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent, and issued and delivered by the Company with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office in California, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates, the certificate number of each of the Right Certificates and the date of each of the Right Certificates. Section 6. Transfer, Split Up, Combination and Exchange of Right ----------------------------------------------------- Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject - --------------------------------------------------------------------- to the provisions of Section 11.1.2 and Section 14, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the earlier of the Redemption Date or the Final Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Rights that have become void pursuant to Section 11.1.2 or that have been exchanged pursuant to Section 27) may be transferred, split up or combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of one one-hundredths of a Preferred Share (or, following a Trigger Event, Common Shares, other securities, cash or other assets, as the case may be) as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up or combine or exchange any Right Certificate shall make such request in writing delivered to the Rights Agent, and shall surrender, together with any required form of assignment and certificate duly completed, the Right Certificate or Right Certificates to be transferred, split up or combined or exchanged at the office of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Right Certificate or Right Certificates until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Right Certificate or Right Certificates and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall countersign and deliver to the person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment from the holders of Right Certificates of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up or combination or exchange of such Right Certificates. Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, 7 reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; Expiration Date of ------------------------------------------------------ Rights. - ------ 7.1 Exercise of Rights. Subject to Section 11.1.3 and except as ------------------ otherwise provided herein, the registered holder of any Right Certificate may exercise the Rights evidenced thereby in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase and certification on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each one one- hundredth of a Preferred Share as to which the Rights are exercised, at or prior to the earliest of (i) the close of business on June 20, 2006 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 (the "Redemption Date"), (iii) the closing of any merger or other acquisition transaction involving the Company pursuant to an agreement of the type described in Section 1.3(ii)(A)(4), at which time the Rights are deemed terminated, or (iv) the time at which the Rights are exchanged as provided in Section 27. 7.2 Purchase Price. The Purchase Price for each one one- -------------- hundredth of a Preferred Share pursuant to the exercise of a Right shall initially be $45.00, shall be subject to adjustment from time to time as provided in Sections 11, 13 and 26 and shall be payable in lawful money of the United States of America in accordance with Section 7.3. 7.3 Payment Procedures. Upon receipt of a Right Certificate ------------------ representing exercisable Rights, with the form of election to purchase and certification duly executed, accompanied by payment of the Purchase Price for the shares to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Right Certificate in accordance with Section 9, by certified or cashier's check or money order payable to the order of the Company, the Rights Agent shall thereupon promptly (i)(A) requisition from any transfer agent of the Preferred Shares (or make available, if the Rights Agent is the transfer agent) certificates for the number of Preferred Shares to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) if the Company shall have elected to deposit the total number of Preferred Shares issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent depositary receipts representing such number of one one- hundredths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with all such requests, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of the issuance of fractional shares in accordance with Section 14, (iii) promptly after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt, promptly deliver such cash to or upon the order of the registered holder of such Right Certificate. In the event that the Company is obligated to issue other securities of the Company, pay cash and/or distribute other property pursuant to Section 11.1.3, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. 7.4 Partial Exercise. In case the registered holder of any ---------------- Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent 8 to the Rights remaining unexercised shall be issued by the Rights Agent and delivered to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14. 7.5 Full Information Concerning Ownership. Notwithstanding anything in ------------------------------------- this Rights Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder of Rights upon the occurrence of any purported exercise as set forth in this Section 7 unless the certificate contained in the form of election to purchase set forth on the reverse side of the Right Certificate surrendered for such exercise shall have been duly completed and signed by the registered holder thereof and the Company shall have been provided with such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. Cancellation and Destruction of Right Certificates. All -------------------------------------------------- Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Right Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. Reservation and Availability of Capital Stock. The Company --------------------------------------------- covenants and agrees that from and after the Distribution Date it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares (and, following the occurrence of a Trigger Event, out of its authorized and unissued Common Shares or other securities or out of its shares held in its treasury) the number of Preferred Shares (and, following the occurrence of a Trigger Event, Common Shares and/or other securities) that will be sufficient to permit the exercise in full of all outstanding Rights. So long as the Preferred Shares (and, following the occurrence of a Trigger Event, Common Shares and/or other securities) issuable upon the exercise of Rights may be listed on any national securities exchange or traded in the over-the-counter market and quoted on the Nasdaq National Market ("Nasdaq"), the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed on such exchange or so traded in such over-the-counter market, upon official notice of issuance upon such exercise. The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Shares (and, following the occurrence of a Trigger Event, Common Shares and/or other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares. The Company further covenants and agrees that it will pay when due and payable any and all Federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any Preferred Shares (or Common Shares and/or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a person other than, or the issuance or delivery of certificates for the Preferred Shares (or Common Shares 9 and/or other securities, as the case may be) in a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or deliver any certificates for Preferred Shares (or Common Shares and/or other securities, as the case may be) in a name other than that of the registered holder upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. Section 10. Preferred Shares Record Date. Each person in whose name ---------------------------- any certificate for Preferred Shares (or Common Shares and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Shares (or Common Shares and/or other securities, as the case may be) represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and payment is a date upon which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares (fractional or otherwise) on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are open. Section 11. Adjustment of Purchase Price, Number of Shares or Number -------------------------------------------------------- of Rights. The Purchase Price, the number of shares covered by each Right and - --------- the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. 11.1 Post Execution Events. --------------------- 11.1.1 Corporate Dividends, Reclassifications, Etc. In the event the ------------------------------------------- Company shall at any time after the date of this Rights Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11.1, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Company were open, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both Section 11.1.1 and Section 11.1.2, the adjustment provided for in this Section 11.1.1 shall be in addition to, and shall be made prior to, the adjustment required pursuant to, Section 11.1.2. 11.1.2 Acquiring Person Events; Triggering Events. Subject to Sections ------------------------------------------ 23.1 and 27 of this Agreement, in the event that (A) any Acquiring Person or any Associate or Affiliate of any Acquiring Person, at any time after the date of this Rights Agreement, directly or indirectly, shall merge into the Company or otherwise combine with the Company and the Company shall be the continuing or surviving corporation of such merger or combination and the Common Shares of 10 the Company shall remain outstanding and not changed into or exchanged for stock or other securities of any other Person or the Company or cash or any other property, or (B) a Trigger Event occurs, then, from and after the first occurrence of such event, each holder of a Right, except as provided below, shall thereafter have a right to receive, upon exercise thereof at a price per Right equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable (without giving effect to this Section 11.1.2), in accordance with the terms of this Rights Agreement, such number of Common Shares as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of one one-hundredths of a Preferred Share for which a Right is then exercisable (without giving effect to this Section 11.1.2) and (y) dividing that product by 50% of the current per share market price of the Common Shares (determined pursuant to Section 11.4) on the first of the date of the occurrence of, or the date of the first public announcement of, one of the events listed above in this Section 11.1.2 (the "Adjustment Shares"); PROVIDED, HOWEVER, that if the transaction that would otherwise give rise to the foregoing adjustment is also subject to the provisions of Section 13, then only the provisions of Section 13 shall apply and no adjustment shall be made pursuant to this Section 11.1.2; PROVIDED, FURTHER, that nothing contained in this Section 11.1.2 shall limit or otherwise diminish the power of the Board of Directors (or, if applicable, the Continuing Directors) to postpone the Distribution Date pursuant to Section 3.1 or to extend the period during which the Rights may be redeemed pursuant to Section 23.1; PROVIDED, FURTHER, that the Purchase Price and the number of Adjustment Shares shall thereafter be subject to further adjustment pursuant to Section 11.1.1 hereof. Notwithstanding the foregoing, upon the occurrence of either of the events listed above in this Section 11.1.2, any Rights that are or were acquired or beneficially owned by (1) an Acquiring Person or any Associate or Affiliate thereof, (2) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (3) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect avoidance of this Section 11.1.2, shall become void, and any holder (whether or not such holder is an Acquiring Person or an Associate or Affiliate of an Acquiring Person) of such Rights shall thereafter have no right to exercise such Rights under any provision of this Rights Agreement or otherwise. The Company shall not enter into any transaction of the type described in this Section 11.1.2 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. Any Right Certificate issued pursuant to Section 3 or Section 22 that represents Rights beneficially owned by: (1) an Acquiring Person or any Associate or Affiliate thereof, (2) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (3) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect avoidance of this Section 11.1.2, and any Right Certificate issued 11 pursuant to Section 6, 7.4 or 22 or this Section 11 upon transfer, exchange, replacement or adjustment of any other Right Certificate referred to in this sentence, shall contain the following legend (PROVIDED, HOWEVER, that the Rights Agent shall not be responsible for affixing such legend unless it has actual knowledge as to the foregoing circumstances or the Company has notified the Rights Agent in writing thereof): THE RIGHTS REPRESENTED BY THIS RIGHT CERTIFICATE ARE HELD OR HAVE BEEN HELD BY A PERSON WHO IS OR WAS AN ACQUIRING PERSON OR AN AFFILIATE OR AN ASSOCIATE OF AN ACQUIRING PERSON OR A NOMINEE THEREOF. THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY HAVE BECOME NULL AND VOID AS SPECIFIED IN SECTION 11.1.2 OF THE RIGHTS AGREEMENT. The Company shall use all reasonable efforts to insure that the provisions of this Section 11.1.2 are complied with, but shall have no liability to any holder of Right Certificates or other Person as a result of its failure to make any determinations with respect to any Acquiring Person or its Affiliates, Associates or transferees hereunder. 11.1.3 Insufficient Shares. In the event that upon the occurrence of ------------------- one or more of the events listed in Section 11.1.2 above there shall not be sufficient Common Shares authorized but unissued, or held by the Company as treasury shares, to permit the exercise in full of the Rights in accordance with the foregoing Section 11.1.2, the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exercise of the Rights, PROVIDED, HOWEVER, that if the Company determines that it is unable to cause the authorization of a sufficient number of additional Common Shares, then, in the event the Rights become exercisable, the Company, with respect to each Right and to the extent necessary and permitted by applicable law and any agreements or instruments in effect on the date hereof to which it is a party, shall: (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value"), over (2) the Purchase Price (such excess, the "Spread") and (B) with respect to each Right, make adequate provision to substitute for the Adjustment Shares, upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) Common Shares or other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock which the Board of Directors of the Company has deemed to have the same value as Common Shares) (each such share of preferred stock constituting a "common stock equivalent")), (4) debt securities of the Company, (5) other assets or (6) any combination of the foregoing having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; PROVIDED, HOWEVER, that if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the first occurrence of one of the events listed in Section 11.1.2 above, then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, Common Shares (to the extent available) and then, if necessary, cash, which in the aggregate are equal to the Spread. If the Board of Directors of the Company shall determine in good faith that it is unlikely that sufficient additional Common Shares could, within the thirty (30) day period set forth above, be authorized for issuance upon exercise in full of the Rights, such thirty (30) day period may be extended and re-extended to the extent necessary, but not more than ninety (90) days following the first occurrence of one of the events listed in Section 11.1.2 above, in order that the Company may seek stockholder approval for the authorization of such additional shares (such period as may be extended, the "Substitution Period"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 11.1.3, the Company (x) shall provide that such action shall apply uniformly to all outstanding Rights, 12 and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11.1.3, the value of a Common Share shall be the current per share market price (as determined pursuant to Section 11.4) on the date of the first occurrence of one of the events listed in Section 11.1.2 above and the value of any "common stock equivalent" shall be deemed to have the same value as the Common Shares on such date. 11.2 Dilutive Rights Offering. In case the Company shall fix a record ------------------------ date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or securities having the same rights, privileges and preferences as the Preferred Shares ("equivalent preferred stock")) or securities convertible into Preferred Shares or equivalent preferred stock at a price per share of Preferred Shares or per share of equivalent preferred stock (or having a conversion or exercise price per share, if a security convertible into or exercisable for Preferred Shares or equivalent preferred stock) less than the current per share market price of the Preferred Shares (as defined in Section 11.4) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred Shares outstanding on such record date plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred stock to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current per share market price and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred stock to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Preferred Shares owned by or held for the account of the Company or any Subsidiary of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. 11.3 Distributions. In case the Company shall fix a record date for ------------- the making of a distribution to all holders of the Preferred Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness, cash, securities or assets (other than a regular periodic cash dividend at a rate not in excess of 125% of the rate of the last regular periodic cash dividend theretofore paid or, in case regular periodic cash dividends have not theretofore been paid, at a rate not in excess of 50% of the average net income per share of the Company for the four quarters ended immediately prior to the payment of such dividend, or a dividend payable in Preferred Shares (which dividend, for purposes of this Agreement, shall be subject to the provisions of Section 11.1.1(A) hereof)) or convertible securities, or subscription rights or warrants (excluding those referred to in Section 11.2), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current per share market price of the Preferred Shares (as defined in Section 11.4) on such record date, less the fair market value (as 13 determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the cash, assets, securities or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Preferred Share and the denominator of which shall be such current per share market price of the Preferred Shares. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. 11.4 Current Per Share Market Value. ------------------------------ 11.4.1 General. For the purpose of any computation hereunder, the ------- "current per share market price" of any security (a "Security" for the purpose of this Section 11.4.1) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the thirty (30) consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; PROVIDED, HOWEVER, that in the event that the current per share market price of the Security is determined during any period following the announcement by the issuer of such Security of (i) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares or (ii) any subdivision, combination or reclassification of such Security, and prior to the expiration of thirty (30) Trading Days after the ex- dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current per share market price" shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by Nasdaq or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Security, the fair value of the Security on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. If the Security is not publicly held or not so listed or traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company or, if at the time of such determination there is an Acquiring Person, by a majority of the Continuing Directors then in office, or if there are no Continuing Directors, by a nationally recognized investment banking firm selected by the Board of Directors, which shall have the duty to make such determination in a reasonable and objective manner, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. 11.4.2 Preferred Shares. Notwithstanding Section 11.4.1, for the ---------------- purpose of any computation hereunder, the "current per share market price" of the Preferred Shares shall be determined in the same manner as set forth above in Section 11.4.1 (other than the last sentence thereof). If the current per share market price of the Preferred Shares cannot be determined in the manner described in 14 Section 11.4.1, the "current per share market price" of the Preferred Shares shall be conclusively deemed to be an amount equal to 100 (as such number may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to the Common Shares occurring after the date of this Agreement) multiplied by the current per share market price of the Common Shares. If neither the Common Shares nor the Preferred Shares is publicly held or so listed or traded, "current per share market price" of the Preferred Shares shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, or, if at the time of such determination there is an Acquiring Person, by a majority of the Continuing Directors then in office, or if there are no Continuing Directors, by a nationally recognized investment banking firm selected by the Board of Directors of the Company, which shall have the duty to make such determination in a reasonable and objective manner, which determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. For purposes of this Agreement, the "current per share market price" of one one-hundredth of a Preferred Share shall be equal to the "current per share market price" of one Preferred Share divided by 100. 11.5 Insignificant Changes. No adjustment in the Purchase Price shall --------------------- be required unless such adjustment would require an increase or decrease of at least 1% in such price. Any adjustments which by reason of this Section 11.5 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one-millionth of a Preferred Share or the nearest ten-thousandth of a Common Share, as the case may be. 11.6 Shares Other Than Preferred Shares. If as a result of an ---------------------------------- adjustment made pursuant to Section 11.1, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Sections 11.1 through 11.3, inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares shall apply on like terms to any such other shares. 11.7 Rights Issued Prior to Adjustment. All Rights originally issued --------------------------------- by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-hundredths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. 11.8 Effect of Adjustments. Unless the Company shall have exercised --------------------- its election as provided in Section 11.9, upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11.2 and 11.3, each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-hundredths of a Preferred Share (calculated to the nearest one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number of one one- hundredths of a Preferred Share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. 11.9 Adjustment in Number of Rights. The Company may elect on or after ------------------------------ the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of one one-hundredths of a Preferred Share issuable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the 15 number of one one-hundredths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least ten (10) days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11.9, the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. 11.10 Right Certificates Unchanged. Irrespective of any adjustment or ---------------------------- change in the Purchase Price or the number of one one-hundredths of a Preferred Share issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price per share and the number of one one-hundredths of a Preferred Share which were expressed in the initial Right Certificates issued hereunder. 11.11 Par Value Limitations. Before taking any action that would cause --------------------- an adjustment reducing the Purchase Price below one one-hundredth of the then par value, if any, of the Preferred Shares issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Preferred Shares at such adjusted Purchase Price. 11.12 Deferred Issuance. In any case in which this Section 11 shall ----------------- require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date of the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. 11.13 Reduction in Purchase Price. Anything in this Section 11 to the --------------------------- contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Preferred Shares, issuance wholly for cash of any of the Preferred Shares at less than the current market price, issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or 16 exchangeable for Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or issuance of rights, options or warrants referred to hereinabove in this Section 11, hereafter made by the Company to holders of its Preferred Shares shall not be taxable to such stockholders. 11.14 Certain Actions. The Company covenants and agrees that after the --------------- Distribution Date it will not, except as permitted by Section 23 or Section 26, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights. 11.15 Corporate Dividends, Reclassifications, Etc.; Adjustment in ----------------------------------------------------------- Number of Rights. Notwithstanding anything contained in this Agreement to the - ---------------- contrary, in the event that the Company shall at any time after the date hereof and prior to the Distribution Date (i) declare or pay any dividend on the outstanding Common Shares payable in Common Shares, (ii) effect a subdivision or consolidation of the outstanding Common Shares (by reclassification or otherwise than by the payment of dividends payable in Common Shares), or (iii) combine the outstanding Common Shares into a greater or lesser number of Common Shares, then in any such case, the number of Rights associated with each Common Share then outstanding, or issued or delivered thereafter but prior to the Distribution Date, shall be proportionately adjusted so that the number of Rights thereafter associated with each Common Share following any such event shall equal the result obtained by multiplying the number of Rights associated with each Common Share immediately prior to such event by a fraction, the numerator of which shall be the total number of Common Shares outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of Common Shares outstanding immediately following the occurrence of such event. The adjustments provided for in this Section 11.15 shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. Section 12. Certificate of Adjusted Purchase Price or Number of --------------------------------------------------- Shares. Whenever an adjustment is made as provided in Sections 11 and 13, the - ------ Company shall (a) promptly prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent and with each transfer agent for the Common Shares or the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate (or, if prior to the Distribution Date, to each holder of a certificate representing Common Shares) in accordance with Section 25. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained and shall not be deemed to have knowledge of any such adjustment unless and until it shall have received such certificate. Section 13. Consolidation, Merger or Sale or Transfer of Assets or ------------------------------------------------------ Earning Power. - ------------- 13.1 General. In the event that, from and after the first occurrence ------- of a Trigger Event, directly or indirectly, (A) the Company shall consolidate with, or merge with and into, any other Person and the Company shall not be the continuing or surviving corporation, (B) any Person shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of the Company or any other Person or cash or any other property, or (C) the Company shall sell, exchange, mortgage or otherwise transfer (or one or more of its Subsidiaries shall sell, exchange, mortgage or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons, then, and in each such case, proper provision shall be made so that (i) each holder of a Right (except as provided in Section 17 11.1.2 and as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at a price per Right equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right was exercisable immediately prior to the first occurrence of a Trigger Event (as subsequently adjusted pursuant to Sections 11.1.1, 11.2, 11.3, 11.8, 11.9 and 11.12), in accordance with the terms of this Rights Agreement and in lieu of Preferred Shares, such number of Common Shares of such other Person (including the Company as successor thereto or as the surviving corporation) as shall be equal to the result obtained by (x) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right was exercisable immediately prior to the first occurrence of a Trigger Event (as subsequently adjusted pursuant to Sections 11.1.1, 11.2, 11.3, 11.8, 11.9 and 11.12) and (y) dividing that product by 50% of the then current per share market price of the Common Shares of such other Person (determined pursuant to Section 11.4) on the date of consummation of such consolidation, merger, sale or transfer; PROVIDED, that the price per Right so payable and the number of Common Shares of such Person so purchasable shall thereafter be adjusted in accordance with Sections 11.1.1, 11.2, 11.3, 11.8, 11.9 and 11.12 by reason of such subsequent events covered thereby occurring in respect of such Person; (ii) the issuer of such Common Shares shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Company pursuant to this Rights Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its Common Shares thereafter deliverable upon the exercise of the Rights. The Company shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. The Company shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Company and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement so providing. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. 13.2 Approved Acquisitions. Notwithstanding anything contained herein --------------------- to the contrary, in the event of any merger or other acquisition transaction involving the Company pursuant to a merger or other acquisition agreement between the Company and any Person (or one or more of such Person's Affiliates or Associates) which agreement has been approved by the Board of Directors of the Company prior to any Person becoming an Acquiring Person, this Rights Agreement and the rights of holders of Rights hereunder shall be terminated in accordance with Section 7.1. Section 14. Fractional Rights and Fractional Shares. --------------------------------------- 14.1 Cash in Lieu of Fractional Rights. The Company shall not be --------------------------------- required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14.1, the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock 18 Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by Nasdaq or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. 14.2 Cash in Lieu of Fractional Shares. The Company shall not be --------------------------------- required to issue fractions of Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-hundredth of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it; PROVIDED, that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such depositary receipts. In lieu of fractional Preferred Shares that are not integral multiples of one one-hundredth of a Preferred Share, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current per share market price of one Preferred Share. For purposes of this Section 14.2, the current per share market price of a Preferred Share shall be the closing price of a Preferred Share (as determined pursuant to the second sentence of Section 11.4.2) for the Trading Day immediately prior to the date of such exercise. Following the occurrence of a Trigger Event, the Company shall not be required to issue fractions of Common Shares upon exercise of the Rights or to distribute certificates which evidence fractional Common Shares. In lieu of fractional Common Shares, the Company may pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current per share market price of one Common Share. For purposes of this Section 14.2, the current per share market price of a Common Share shall be the closing price of a Common Share (as determined pursuant to Section 11.4.1 hereof) for the Trading Day immediately prior to the date of such exercise. 14.3 Waiver of Right to Receive Fractional Rights or Shares. The ------------------------------------------------------ holder of a Right by the acceptance of the Rights expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right, except as permitted by this Section 14. Section 15. Rights of Action. All rights of action in respect of this ---------------- Rights Agreement, except the rights of action given to the Rights Agent under Section 18, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his own behalf and for his own benefit, enforce this Rights Agreement, and may institute and maintain any suit, action or proceeding against the Company to enforce this Rights Agreement, or otherwise enforce or act in respect 19 of his right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Rights Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Rights Agreement and shall be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person (including, without limitation, the Company) subject to this Rights Agreement. Section 16. Agreement of Right Holders. Every holder of a Right by -------------------------- accepting the same consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) as of and after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer with all required certifications completed; (c) the Company and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Rights Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Rights Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation. Section 17. Right Certificate Holder Not Deemed a Stockholder. No ------------------------------------------------- holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 24), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. Section 18. Concerning the Rights Agent. The Company agrees to pay to --------------------------- the Rights Agent reasonable compensation for all services rendered by it hereunder in accordance with a fee schedule to be mutually agreed upon and, from time to time, on demand of the Rights Agent, its reasonable 20 expenses and counsel fees and other disbursements incurred in the administration and execution of this Rights Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Rights Agreement, including the costs and expenses of defending against any claim of liability in the premises. The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Rights Agreement in reliance upon any Right Certificate or certificate for the Preferred Shares or the Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, instruction, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons. Section 19. Merger or Consolidation or Change of Name of Rights Agent. --------------------------------------------------------- Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust or stock transfer business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Rights Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, PROVIDED that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21. In case at the time such successor Rights Agent shall succeed to the agency created by this Rights Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Rights Agreement. In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Rights Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes the ---------------------- duties and obligations imposed by this Rights Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound: 20.1 Legal Counsel. The Rights Agent may consult with legal counsel ------------- selected by it (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. 20.2 Certificates as to Facts or Matters. Whenever in the ----------------------------------- performance of its duties under this Rights Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be 21 proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer, any Vice President, the Treasurer, the Secretary or any Assistant Treasurer or Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Rights Agreement in reliance upon such certificate. 20.3 Standard of Care. The Rights Agent shall be liable hereunder only ---------------- for its own negligence, bad faith or willful misconduct. 20.4 Reliance on Rights Agreement and Right Certificates. The Rights --------------------------------------------------- Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Rights Agreement or in the Right Certificates (except as to its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. 20.5 No Responsibility as to Certain Matters. The Rights Agent shall --------------------------------------- not be under any responsibility in respect of the validity of this Rights Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Rights Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11.1.2) or any adjustment required under the provisions of Sections 3, 11, 13, 23 or 27 or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice of any such adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares to be issued pursuant to this Rights Agreement or any Right Certificate or as to whether any Preferred Shares will, when so issued, be validly authorized and issued, fully paid and nonassessable. 20.6 Further Assurance by Company. The Company agrees that it will ---------------------------- perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Rights Agreement. 20.7 Authorized Company Officers. The Rights Agent is hereby --------------------------- authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer, any Vice President, the Treasurer, the Secretary or any Assistant Treasurer or Assistant Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties under this Rights Agreement, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for these instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent with respect to its duties or obligations under this Rights Agreement and the date on and/or after which such action shall be taken or omitted. The Rights Agent shall not be liable to the Company for any action taken or omitted in accordance with a proposal included in any such application 22 on or after the date specified therein (which date shall not be less than three business days after the date any such officer actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking of any such action (or the effective date in the case of omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. 20.8 Freedom to Trade in Company Securities. The Rights Agent and any -------------------------------------- stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Rights Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. 20.9 Reliance on Attorneys and Agents. The Rights Agent may execute -------------------------------- and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, omission, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, omission, default, neglect or misconduct, PROVIDED that reasonable care was exercised in the selection and continued employment thereof. 20.10 Rights Holders List. At any time and from time to time after the ------------------- Distribution Date, upon the request of the Company, the Rights Agent shall promptly deliver to the Company a list, as of the most recent practicable date (or as of such earlier date as may be specified by the Company), of the holders of record of Rights. Section 21. Change of Rights Agent. The Rights Agent or any successor ---------------------- Rights Agent may resign and be discharged from its duties under this Rights Agreement upon thirty (30) days' notice in writing mailed to the Company and to each transfer agent of the Common Shares and/or Preferred Shares, as applicable, by registered or certified mail. The Company shall promptly notify the holders of the Right Certificates by first-class mail of any such resignation. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares and/or Preferred Shares, as applicable, by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the resigning, removed, or incapacitated Rights Agent shall remit to the Company, or to any successor Rights Agent designated by the Company, all books, records, funds, certificates or other documents or instruments of any kind then in its possession which were acquired by such resigning, removed or incapacitated Rights Agent in connection with its services as Rights Agent hereunder, and shall thereafter be discharged from all duties and obligations hereunder. Following notice of such removal, resignation or incapacity, the Company shall appoint a successor to such Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the State of California (or any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of California) in good standing, having a principal office in the State of California, 23 which is authorized under such laws to exercise stock transfer or corporate trust powers and is subject to supervision or examination by Federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $10 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares and/or Preferred Shares, as applicable, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Right Certificates. Notwithstanding any of ---------------------------------- the provisions of this Rights Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Rights Agreement. In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the redemption, exchange, termination or expiration of the Rights, the Company (a) shall, with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, granted or awarded as of the Distribution Date, or upon exercise, conversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; PROVIDED, HOWEVER, that (i) no such Right Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Right Certificate would be issued, (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof and (iii) at the time of a determination by the Board of Directors to cause the Company to issue a Right Certificate under clause (b) above, there must be Continuing Directors then in office and any such determination shall require the approval of at least a majority of such Continuing Directors. Section 23. Redemption. ---------- 23.1 Right to Redeem. The Board of Directors of the Company may, at --------------- its option, at any time prior to the Shares Acquisition Date, redeem all but not less than all of the then outstanding Rights at a redemption price of $0.01 per Right, appropriately adjusted to reflect any stock split, stock dividend, recapitalization or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price") and the Company may, at its option, pay the Redemption Price in cash, Common Shares (based on the "current per share market price," as defined in Section 11.4.1 hereof, of the Common Shares at the time of redemption) or any other form of consideration deemed appropriate by the Board of Directors; PROVIDED, HOWEVER, that if the Board of Directors of the Company authorizes redemption of the Rights after the time a Person becomes an Acquiring Person, then there must be Continuing Directors then in office and such authorization shall require the approval of at least a majority of such Continuing Directors. The preceding sentence notwithstanding, prior to the expiration of the period during which the Rights may be redeemed as 24 specified therein (or such longer period as the Board of Directors of the Company may select pursuant to this sentence), the Board of Directors of the Company may extend, one or more times, the period during which the Rights may be redeemed beyond the Shares Acquisition Date; PROVIDED, HOWEVER, that there must be Continuing Directors then in office and any such extension shall require the approval of at least a majority of such Continuing Directors. In the event that, pursuant to the last sentence of Section 1.1 hereof, the Board of Directors determines that a Person has become an Acquiring Person inadvertently, and such Person divests Common Shares in accordance with such sentence, then the Company's right of redemption hereunder shall be deemed to have not expired as a result of such inadvertent acquisition. Anything contained in this Rights Agreement to the contrary notwithstanding, the Rights shall not be exercisable following a transaction or event described in Section 11.1.2 prior to the expiration of the Company's right of redemption hereunder. 23.2 Redemption Procedures. Immediately upon the action of the Board --------------------- of Directors of the Company ordering the redemption of the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held. Within ten (10) days after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give, or cause the Rights Agent to give, notice of such redemption to the holders of the then outstanding Rights by mailing such notice to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 27, and other than in connection with the purchase, acquisition or redemption of Common Shares prior to the Distribution Date. Section 24. Notice of Certain Events. In case the Company shall ------------------------ propose at any time after the Distribution Date (a) to pay any dividend payable in stock of any class to the holders of Preferred Shares or to make any other distribution to the holders of Preferred Shares (other than a regular periodic cash dividend at a rate not in excess of 125% of the rate of the last regular periodic cash dividend theretofore paid or, in case regular periodic cash dividends have not theretofore been paid, at a rate not in excess of 50% of the average net income per share of the Company for the four quarters ended immediately prior to the payment of such dividends, or a stock dividend on, or a subdivision, combination or reclassification of the Common Shares), or (b) to offer to the holders of Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares or shares of stock of any class or any other securities, rights or options, or (c) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), or (d) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person (other than pursuant to a merger or other acquisition agreement of the type described in Section 1.3(ii)(A)(4)), or (e) to effect the liquidation, dissolution or winding up of the Company, or (f) to declare or pay any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares), then, in each such case, the Company shall give to the Rights Agent and to each holder of a Right Certificate, in accordance with Section 25, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, 25 dissolution, or winding up is to take place and the date of participation therein by the holders of the Preferred Shares and/or Common Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (a) or (b) above at least ten (10) days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least ten (10) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Preferred Shares and/or Common Shares, whichever shall be the earlier. In case any event set forth in Section 11.1.2 of this Rights Agreement shall occur, then, in any such case, (i) the Company shall as soon as practicable thereafter give to the Rights Agent and to each holder of a Right Certificate, in accordance with Section 25, a notice of the occurrence of such event, which notice shall describe the event and the consequences of the event to holders of Rights under Section 11.1.2, and (ii) all references in this Section 24 to Preferred Shares shall be deemed thereafter to refer to Common Shares and/or, if appropriate, other securities. Notwithstanding anything in this Rights Agreement to the contrary, prior to the Distribution Date a filing by the Company with the Securities and Exchange Commission shall constitute sufficient notice to the holders of securities of the Company, including the Rights, for purposes of this Rights Agreement and no other notice need be given. Section 25. Notices. Notices or demands authorized by this Rights ------- Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Community Psychiatric Centers 5110 West Sahara Avenue Las Vegas, Nevada 89102 Attention: Corporate Secretary Subject to the provisions of Section 21, any notice or demand authorized by this Rights Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: Chase Mellon Shareholder Services 15821 Ventura Boulevard Suite 670 Encino, California 91436 Attention: Mary Ann McElroy Notices or demands authorized by this Rights Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate (or, prior to the Distribution Date, to the holder of any certificate representing Common Shares) shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 26. Supplements and Amendments. Prior to the Distribution Date -------------------------- and subject to the last sentence of this Section 26, the Company and the Rights Agent may, if the Company so 26 directs, supplement or amend any term or provision of this Rights Agreement without the approval of any holders of certificates representing Common Shares, including, without limitation, the Purchase Price upon the occurrence of the Spin-off Distribution. From and after the Distribution Date and subject to the last sentence of this Section 26, the Company and the Rights Agent may from time to time supplement or amend this Rights Agreement without the approval of any holders of Right Certificates (i) to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (ii) to shorten or lengthen any time period hereunder (which shortening or lengthening, after the time a Person becomes an Acquiring Person, shall be effective only if there are Continuing Directors and shall require the approval of at least a majority of such Continuing Directors) or (iii) so long as the interests of the holders of the Right Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person) are not adversely affected thereby, to make any other changes or provisions in regard to matters or questions arising hereunder which the Company and the Rights Agent may deem necessary or desirable, including but not limited to extending the Final Expiration Date; PROVIDED, HOWEVER, that the right of the Board of Directors to extend the Distribution Date or Redemption Date shall not require any amendment or supplement hereunder. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 26, the Rights Agent shall execute such supplement or amendment. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Shares. Without limiting the foregoing, at any time prior to such time as any Person becomes an Acquiring Person, the Company and the Rights Agent may amend this Agreement to lower the thresholds set forth in Sections 1.1 and 3.1 to not less than the greater of (i) any percentage greater than the largest percentage of the outstanding Common Shares then known by the Company to be beneficially owned by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan) and (ii) 10%. Section 27. Exchange. -------- 27.1 Exchange of Common Shares for Rights. The Board of Directors of ------------------------------------ the Company may, at its option, at any time after the occurrence of a Trigger Event, exchange Common Shares for all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 11.1.2) by exchanging that number of Common Shares having an aggregate value equal to the Spread (with such value being based on the current per share market price (as determined pursuant to Section 11.4) on the date of the occurrence of a Trigger Event) per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such amount per Right being hereinafter referred to as the "Exchange Consideration"). Notwithstanding the foregoing, (i) the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Shares then outstanding and (ii) the Board shall not be empowered to effect an exchange for more than that number of Rights for which there are sufficient Common Shares authorized but unissued, or held by the Company as treasury shares, to permit the exchange for Rights. 27.2 Exchange Procedures. Immediately upon the action of the Board of ------------------- Directors of the Company ordering the exchange for any Rights pursuant to Section 27.1 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right 27 thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Exchange Consideration. The Company shall promptly give public notice of any such exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than the Rights which have become void pursuant to the provisions of Section 11.1.2) held by each holder of Rights. 27.3 No Fractional Shares Upon Exchange. The Company shall not be ---------------------------------- required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Right Certificates, with regard to which such fractional Common Shares would otherwise be issuable, in an amount in cash equal to the same fraction of the current market value of a whole Common Share. For the purposes of this Section 27.3, the current market value of a whole Common Share shall be the current per share market price (as determined pursuant to Section 11.4) for the Trading Day immediately prior to the date of exchange pursuant to this Section 27. Section 28. Successors. All the covenants and provisions of this ---------- Rights Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Benefits of this Rights Agreement. Nothing in this Rights --------------------------------- Agreement shall be construed to give to any Person or corporation other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Rights Agreement; but this Rights Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares). Section 30. Severability. If any term, provision, covenant or ------------ restriction of this Rights Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Rights Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 31. Governing Law. This Rights Agreement and each Right ------------- Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Nevada and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 32. Counterparts. This Rights Agreement may be executed in any ------------ number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 28 Section 33. Descriptive Heading. Descriptive headings of the several ------------------- Sections of this Rights Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. [signature page to follow] 29 IN WITNESS WHEREOF, the parties hereto have caused this Rights Agreement to be duly executed as of the day and year first above written. COMMUNITY PSYCHIATRIC CENTERS By ______________________________ Name: Title: CHASE MELLON SHAREHOLDER SERVICES By ______________________________ Name: Title: S-1 EXHIBIT A --------- FORM of CERTIFICATE OF RESOLUTION ESTABLISHING DESIGNATION, PREFERENCES AND RIGHTS of SERIES B JUNIOR PARTICIPATING PREFERRED STOCK of COMMUNITY PSYCHIATRIC CENTERS (Pursuant to Section 78.195 of the Nevada Revised Statutes) _____________________________ Community Psychiatric Centers, a corporation organized and existing under the laws of the State of Nevada (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 78.195 of the Nevada Revised Statutes at a meeting duly called and held on June 21, 1996. RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Restated Articles of Incorporation, the Board of Directors hereby creates a series of Preferred Stock, par value $1.00 per share (the "Preferred Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as follows: Series B Junior Participating Preferred Stock: Section 1. Designation and Amount. The shares of such series ---------------------- shall be designated as "Series B Junior Participating Preferred Stock" (the "Series B Preferred Stock") and the number of shares constituting the Series B Preferred Stock shall be 1,000,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; PROVIDED, that no decrease shall reduce the number of shares of Series B Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series B Preferred Stock. A-1 Section 2. Dividends and Distributions. --------------------------- (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series B Preferred Stock with respect to dividends, the holders of shares of Series B Preferred Stock, in preference to the holders of Common Stock, par value $1.00 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series B Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non- cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series B Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series B Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series B Preferred Stock as provided in paragraph (A) of this Section 2 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series B Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series B Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series B Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series B Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of A-2 Directors may fix a record date for the determination of holders of shares of Series B Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series B Preferred ------------- Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series B Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series B Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Certificate of Resolution creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series B Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, holders of Series B Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. -------------------- (A) Whenever quarterly dividends or other dividends or distributions payable on the Series B Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series B Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Preferred Stock, except dividends paid ratably on the Series B Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; A-3 (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series B Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series B Preferred Stock, or any shares of stock ranking on a parity with the Series B Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any Subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series B Preferred ----------------- Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Restated Articles of Incorporation, or in any other Certificate of Resolution creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. Upon any -------------------------------------- liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock unless, prior thereto, the holders of shares of Series B Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series B Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Preferred Stock, except distributions made ratably on the Series B Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series B Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common A-4 Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation -------------------------- shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series B Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series B Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series B Preferred Stock ------------- shall not be redeemable. Section 9. Rank. The Series B Preferred Stock shall rank, with ---- respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock, except to the extent that any such other series specifically provides that it shall rank on a parity with or junior to the Series B Preferred Stock. Section 10. Amendment. The Restated Articles of Incorporation of --------- the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series B Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series B Preferred Stock, voting together as a single class. A-5 IN WITNESS WHEREOF, this Certificate of Resolution Establishing Designation, Preferences and Rights of Series B Junior Participating Preferred Stock of Community Psychiatric Centers is executed on behalf of the Corporation by its Chairman of the Board and attested by its Secretary this ___ day of ____________, 1996. ______________________________ Chairman of the Board Attest: ______________________ Secretary A-6 EXHIBIT B --------- [Form of Right Certificate] Certificate No. R- _______ Rights NOT EXERCISABLE AFTER JUNE 20, 2006 OR EARLIER IF NOTICE OF REDEMPTION OR EXCHANGE IS GIVEN OR IF THE COMPANY IS MERGED OR ACQUIRED PURSUANT TO AN AGREEMENT OF THE TYPE DESCRIBED IN SECTION 1.3(ii)(A)(4) OF THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES (SPECIFIED IN SECTION ------------------------------------------------- 11.1.2 OF THE RIGHTS AGREEMENT), RIGHTS BENEFICIALLY OWNED BY AN ---------------------------------------------------------------- ACQUIRING PERSON, OR ITS AFFILIATES OR ASSOCIATES, OR ANY SUBSEQUENT -------------------------------------------------------------------- HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS ---------------------------------------------- REPRESENTED BY THIS CERTIFICATE ARE HELD OR HAVE BEEN HELD BY A PERSON WHO IS OR WAS AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF AN ACQUIRING PERSON OR A NOMINEE THEREOF. THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY HAVE BECOME NULL AND VOID AS SPECIFIED IN SECTION 11.1.2 OF THE RIGHTS AGREEMENT.]/1/ Right Certificate COMMUNITY PSYCHIATRIC CENTERS This certifies that __________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of June 21, 1996, as the same may be amended from time to time (the "Rights Agreement"), between Community Psychiatric Centers, a Nevada corporation (the "Company"), and Chase Mellon Shareholder Services, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date and prior to 5:00 P.M. (California time) on June 20, 2006, at the offices of the Rights Agent, or its successors as Rights Agent, designated for such purpose, one one-hundredth of a fully paid, nonassessable share of Series B Junior Participating Preferred Stock, par value $1.00 per share (the "Preferred Shares") of the Company, at a purchase price of $45.00 per one one- hundredth of a share, subject to adjustment (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase and certification duly executed. The number of Rights evidenced by this Right Certificate (and the number of one one-hundredths of a Preferred Share which may be purchased upon exercise thereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of July 16, 1996 based on the Preferred Shares as constituted at such date. Capitalized terms used in this Right Certificate without definition shall have the meanings ascribed to them in the Rights Agreement. As provided in the Rights Agreement, the Purchase Price and the number of Preferred Shares which may be purchased upon - --------------- /1./ The portion of the legend in brackets shall be inserted only if applicable and shall replace the preceding sentence. B-1 the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal offices of the Company and the Rights Agent. This Right Certificate, with or without other Right Certificates, upon surrender at the offices of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of one one-hundredths of a Preferred Share as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Board of Directors may, at its option, (i) redeem the Rights evidenced by this Right Certificate at a redemption price of $0.01 per Right at any time prior to the Shares Acquisition Date (as such time period may be extended pursuant to the Rights Agreement) or (ii) exchange Common Shares for the Rights evidenced by this Certificate, in whole or in part, after the occurrence of a Trigger Event. The period during which redemption of the Rights is permitted may be extended by the Board of Directors of the Company, but such an extension shall require the concurrence of a majority of the Continuing Directors. In the event that, pursuant to the last sentence of Section 1.1 of the Rights Agreement, the Board of Directors determines that a Person has become an Acquiring Person inadvertently, and such Person divests Common Shares in accordance with such sentence, then the Company's right of redemption shall be deemed to have not expired as a result of such inadvertent acquisition. Under certain circumstances set forth in the Rights Agreement, the decision to redeem shall require the concurrence of a majority of the Continuing Directors. No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Right Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. If any term, provision, covenant or restriction of the Rights Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the B-2 terms, provisions, covenants and restrictions of the Rights Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. This Right Certificate shall not be valid or binding for any purpose until it shall have been countersigned by the Rights Agent. B-3 WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of _______________. Attest: COMMUNITY PSYCHIATRIC CENTERS By ______________________ By _________________________________ Title: Title: Countersigned: CHASE MELLON SHAREHOLDER SERVICES By _____________________________ Authorized Signature B-4 [Form of Reverse Side of Right Certificate] FORM OF ASSIGNMENT ------------------ (To be executed by the registered holder if such holder desires to transfer the Right Certificate.) FOR VALUE RECEIVED _________________________________________ hereby sells, assigns and transfers unto____________________ ____________________________________________________________ ____________________________________________________________ (Please print name and address of transferee) this Right Certificate and the Rights evidenced thereby, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint __________________________ Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution. Dated: __________________ ---------------------------- Signature Signature Guaranteed: ------------------------- Signatures must be guaranteed by an eligible institution (as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934) which may include a commercial bank, trust company, savings association, credit union or a member firm of the American Stock Exchange, New York Stock Exchange, Pacific Stock Exchange or Midwest Stock Exchange. B-5 - -------------------------------------------------------------------------------- The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate [ ] are [ ] are not beneficially owned by an Acquiring Person or an Affiliate or an Associate thereof; and (2) after due inquiry and to the best knowledge of the undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate thereof. Dated: __________________ -------------------------- Signature B-6 FORM OF ELECTION TO PURCHASE ---------------------------- (To be executed if holder desires to exercise Rights represented by the Right Certificate.) To: COMMUNITY PSYCHIATRIC CENTERS The undersigned hereby irrevocably elects to exercise __________________ Rights represented by this Right Certificate to purchase the Preferred Shares issuable upon the exercise of such Rights (or such other securities of the Company or of any other Person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of: Please insert social security or other identifying number ____________________________________________________________ (Please print name and address) ____________________________________________________________ If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number ____________________________________________________________ (Please print name and address) ____________________________________________________________ Dated: __________________ ______________________________ Signature Signature Guaranteed: ---------------------------------- Signatures must be guaranteed by an eligible institution (as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934) which may include a commercial bank, trust company, savings association, credit union or a member firm of the American Stock Exchange, New York Stock Exchange, Pacific Stock Exchange or Midwest Stock Exchange. B-7 The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate [ ] are [ ] are not beneficially owned by an Acquiring Person or an Affiliate or an Associate thereof; and (2) after due inquiry and to the best knowledge of the undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate thereof. Dated:_______________ ________________________ Signature - -------------------------------------------------------------------------------- NOTICE ------ The signature in the foregoing Form of Assignment and Form of Election to Purchase must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment or Form of Election to Purchase is not completed, the Company will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate hereof and, in the case of an Assignment, will affix a legend to that effect on any Right Certificates issued in exchange for this Right Certificate. B-8 EXHIBIT C --------- As described in the Rights Agreement, Rights which are held by -------------------------------------------------------------- or have been held by Acquiring Persons or Associates or Affiliates ------------------------------------------------------------------ thereof (as defined in the Rights Agreement) shall become null and void. ------------------------------------------------------------------------ SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES On June 21, 1996 the Board of Directors of Community Psychiatric Centers (the "Company") declared a dividend of one Right for each share of common stock, $1.00 par value (the "Common Shares"), of the Company outstanding at the close of business on July 16, 1996 (the "Record Date"). As long as the Rights are attached to the Common Shares, the Company will issue one Right (subject to adjustment) with each new Common Share so that all such shares will have attached Rights. When exercisable, each Right will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock (the "Preferred Shares") at a price of $45.00 per one one-hundredth of a Preferred Share, subject to adjustment (the "Purchase Price"). The description and terms of the Rights are set forth in a Rights Agreement, dated as of June 21, 1996, as the same may be amended from time to time (the "Rights Agreement"), between the Company and Chase Mellon Shareholder Services, as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) ten (10) days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the Common Shares or (ii) ten (10) days following the commencement or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the Common Shares (the earlier of (i) and (ii) being called the "Distribution Date," whether or not either such date occurs prior to the Record Date), the Rights will be evidenced, with respect to any of the Common Share certificates outstanding as of the Record Date, by such Common Share certificate together with a copy of this Summary of Rights. The Rights Agreement provides that the Board of Directors, with the concurrence of a majority of the Continuing Directors (as defined below), may postpone the Distribution Date and that, until the Distribution Date, the Rights will be transferred with and only with the Common Shares. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Share certificates issued after the close of business on the Record Date upon transfer or new issuance of the Common Shares will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption, exchange, termination or expiration of the Rights), the surrender for transfer of any certificates for Common Shares will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on June 20, 2006, subject to the Company's right to extend such date (the "Final Expiration Date"), unless earlier redeemed or exchanged by the Company or terminated. Each Preferred Share purchasable upon exercise of the Rights will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend C-1 of 100 times the dividend, if any, declared per Common Share. In the event of liquidation, the holders of the Preferred Shares will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per Common Share. Each Preferred Share will have 100 votes and will vote together with the Common Shares. Finally, in the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Share will be entitled to receive 100 times the amount received per Common Share. These rights are protected by customary antidilution provisions. Because of the nature of the Preferred Share's dividend, liquidation and voting rights, the value of one one-hundredth of a Preferred Share purchasable upon exercise of each Right should approximate the value of one Common Share. The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of the Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares or convertible securities at less than the current market price of the Preferred Shares or (iii) upon the distribution to holders of the Preferred Shares of evidences of indebtedness, cash, securities or assets (excluding regular periodic cash dividends at a rate not in excess of 125% of the rate of the last regular periodic cash dividend theretofore paid or, in case regular periodic cash dividends have not theretofore been paid, at a rate not in excess of 50% of the average net income per share of the Company for the four quarters ended immediately prior to the payment of such dividend, or dividends payable in Preferred Shares (which dividends will be subject to the adjustment described in clause (i) above)) or of subscription rights or warrants (other than those referred to above). In the event that a Person becomes an Acquiring Person (except pursuant to certain cash offers for all outstanding Common Shares approved by the Board) or if the Company were the surviving corporation in a merger with an Acquiring Person or any affiliate or associate of an Acquiring Person and the Common Shares were not changed or exchanged, each holder of a Right, other than Rights that are or were acquired or beneficially owned by the 15% stockholder (which Rights will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the then current Purchase Price of the Right. With certain exceptions, in the event that (i) the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation or its Common Shares are changed or exchanged (other than a merger which follows certain cash offers for all outstanding Common Shares approved by the Board) or (ii) more than 50% of its assets or earning power is sold, proper provision shall be made so that each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the then current Purchase Price of the Right. At any time after a Person becomes an Acquiring Person and prior to the acquisition by such Acquiring Person of 50% or more of the outstanding Common Shares, the Board of Directors may cause the Company to acquire the Rights (other than Rights owned by an Acquiring Person which have become void), in whole or in part, in exchange for that number of Common Shares having an aggregate value equal to the Spread (the excess of the value of the Common Shares issuable upon exercise of a Right after a Person becomes an Acquiring Person over the Purchase Price) per Right (subject to adjustment). No adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares will be issued and in lieu thereof, a payment in cash will be made based on the market price of the Preferred Shares on the last trading date prior to the date of exercise. C-2 The Rights may be redeemed in whole, but not in part, at a price of $0.01 per Right (the "Redemption Price") by the Board of Directors at any time prior to the first date of public announcement that a Person has become an Acquiring Person. Prior to the expiration of the period during which the Rights may be redeemed (or such longer period as the Board of Directors may select pursuant to this sentence), the Board of Directors, with the concurrence of a majority of the Continuing Directors (as defined below), may extend the period during which the Rights are redeemable beyond the first date of public announcement that a Person has become an Acquiring Person. In the event that, pursuant to the last sentence of Section 1.1 of the Rights Agreement, the Board of Directors determines that a Person has become an Acquiring Person inadvertently, and such Person divests Common Shares in accordance with such sentence, then the Company's right of redemption shall be deemed to have not expired as a result of such inadvertent acquisition. Under certain circumstances set forth in the Rights Agreement, the decision to redeem shall require the concurrence of a majority of the Continuing Directors. Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights, the Company shall make an announcement thereof, and upon such election, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The term "Continuing Directors" means any member of the Board of Directors of the Company who was a member of the Board prior to the time that any Person becomes an Acquiring Person, and any person who is subsequently elected to the Board if such person is recommended or approved by a majority of the Continuing Directors. Continuing Directors do not include an Acquiring Person, or an affiliate or associate of an Acquiring Person, or any representative of the foregoing. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company beyond those as an existing stockholder, including, without limitation, the right to vote or to receive dividends. Any of the terms or provisions of the Rights Agreement may be amended by the Board of Directors of the Company prior to the Distribution Date, including, without limitation, the Purchase Price upon the occurrence of the distribution, to all holders of the Common Shares, of one share of common stock of Spinco Corporation, an indirect wholly-owned subsidiary of the Company, for each five Common Shares held by such stockholder. After the Distribution Date, the Company and the Rights Agent may amend or supplement the Rights Agreement without the approval of any holders of Right Certificates to cure any ambiguity, to correct or supplement any provision contained therein which may be defective or inconsistent with any other provisions therein, to shorten or lengthen any time period under the Rights Agreement (so long as, under certain circumstances, a majority of Continuing Directors approve such shortening or lengthening) or so long as the interests of the holders of Right Certificates (other than an Acquiring Person or an affiliate or associate of an Acquiring Person) are not adversely affected thereby, to make any other provisions in regard to matters or questions arising thereunder which the Company and the Rights Agent may deem necessary or desirable, including but not limited to extending the Final Expiration Date. The Company may at any time prior to such time as any Person becomes an Acquiring Person amend the Rights Agreement to lower the thresholds described above to not less than the greater of (i) any percentage greater than the largest percentage of the outstanding Common Shares then known by the Company to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated herein by reference. C-3 EX-99.5 6 FORM OF LETTER TO THE HOLDERS OF CPC COMMON STOCK EXHIBIT 5 Community Psychiatric Centers 5110 West Sahara Avenue Las Vegas, Nevada 89102 July ___, 1996 To Our Stockholders: On June 21, 1996 Community Psychiatric Centers' Board of Directors adopted a Stockholder Rights Plan that is intended to protect your interests in the event you and Community Psychiatric Centers are confronted with coercive takeover tactics. The Plan provides for a dividend distribution of Rights to purchase shares of a newly created series of Community Psychiatric Centers Preferred Stock. Under certain circumstances, the Rights could become exercisable to purchase Community Psychiatric Centers Common Stock, or securities of an acquiring entity, at one-half market value. The Rights may be exercised only if certain events occur. You are now the owner of one Right for each share of Community Psychiatric Centers Common Stock you own. The Plan has been adopted in order to strengthen the ability of the Board to protect your interests. We are attaching a summary description that outlines the principal features of the Plan, and we urge you to read the summary carefully. This letter reviews our reasons for issuing the Rights. NO ACTION BY STOCKHOLDERS IS REQUIRED OR PERMITTED AT THIS TIME, AND NO MONEY SHOULD BE SENT TO COMMUNITY PSYCHIATRIC CENTERS. THE RIGHTS WILL AUTOMATICALLY ATTACH TO THE SHARES OF COMMON STOCK YOU HOLD AND WILL TRADE WITH THEM. SEPARATE RIGHT CERTIFICATES WILL BE SENT TO STOCKHOLDERS ONLY IF A PERSON OR GROUP ACQUIRES 15% OR MORE OF COMMUNITY PSYCHIATRIC CENTERS' OUTSTANDING COMMON STOCK OR MAKES A TENDER OFFER FOR 15% OR MORE OF THE COMMON STOCK. COMMUNITY PSYCHIATRIC CENTERS COMMON STOCK CERTIFICATES ISSUED AFTER JULY 16, 1996 WILL CONTAIN A REFERENCE TO THE RIGHTS PLAN, BUT THERE IS NO NEED TO SEND IN YOUR CERTIFICATES TO HAVE THIS REFERENCE ADDED. The Rights are not being distributed in response to any specific effort to acquire control of the Company. The Rights are designed to protect stockholders in the event of an unsolicited attempt to acquire the Company, including through an accumulation of Common Stock in the open market, a partial, two-tier or inadequate tender offer that does not treat all stockholders equally and other abusive takeover tactics which the Board of Directors believes are not in the best interests of stockholders. These tactics unfairly pressure stockholders, squeeze them out of their investment without giving them any real choice and deprive them of the full value of their Common Stock. We consider these Rights to be a valuable means of protecting both your right to retain your equity investment in the Company and the full value of that investment, while not foreclosing a fair acquisition bid for the Company. The Rights are not intended to prevent a takeover of Community Psychiatric Centers and will not do so. They are designed to deal with the possibility of unilateral actions by hostile acquirors that could deprive the Board of Directors and stockholders of Community Psychiatric Centers of their ability to determine the Company's destiny and obtain the highest price for their Common Stock. Among the factors considered by the Board in adopting the Plan were the substantial amount of cash the Company has on its balance sheet due to the sale of Priory Hospitals Group, the Company's United Kingdom operations, and the proposed spin-off of the Company's U.S. psychiatric operations to its stockholders. Adoption of the Plan should not by itself affect any prospective acquiror who is willing to make an all-cash offer at a full and fair price or who is willing to negotiate with the Company's Board of Directors. The Plan certainly will not interfere with a merger or other business combination transaction approved by the Board of Directors. The issuance of the Rights has no dilutive effect, will not affect reported earnings per share and is not taxable to the Company or to you. Stockholders may, under certain circumstances, recognize taxable income if the Rights become exercisable. Our overriding objective is to continue building value for Community Psychiatric Centers' stockholders, and we feel that the Plan will assist in that effort. Sincerely, [Name and Title of Executive Officer] 2 -----END PRIVACY-ENHANCED MESSAGE-----