-----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, JGZnA6fNYiozgo5AhznxTWeOF/csZighuNdP+F8VbsROodPyp0zvmqOi1r/nLllB /6juAdmXlJOJdXYUg5TRsw== 0000898430-96-004899.txt : 19961024 0000898430-96-004899.hdr.sgml : 19961024 ACCESSION NUMBER: 0000898430-96-004899 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961022 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19961023 SROS: NYSE 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: 96647007 BUSINESS ADDRESS: STREET 1: 5110 WEST SAHARA AVE 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 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K Current Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) ........ October 22, 1996 COMMUNITY PSYCHIATRIC CENTERS ----------------------------- (Exact name of registrant as specified in its charter) Nevada 1-7008 94-1599386 --------------------------- ---------------------- --------------- (State or other jurisdiction (Commission File Number) (I.R.S. Employer of incorporation) Identification Number) 5110 West Sahara Avenue Las Vegas, Nevada 89102 ------------------------- (Address of principal executive offices) Registrant's telephone number, including area code ......... (702) 259-3600 Not Applicable ----------------------------------------------------------- (Former name or former address, if changed since last report) ITEM 5. OTHER EVENTS. Community Psychiatric Centers and certain of its subsidiaries (collectively the "Company") and Behavioral Healthcare Corporation ("BHC") have entered into an Asset Purchase Agreement dated October 22, 1996 (the "Asset Purchase Agreement") and an Agreement and Plan of Merger dated October 22, 1996 (the "Merger Agreement") pursuant to which BHC will acquire substantially all of the psychiatric hospital and residential treatment center operations of the Company in the United States and Puerto Rico, as well as two closed hospitals and certain excess land. The Company will receive approximately $60 million in cash and shares of Common Stock and Preferred Stock of BHC, representing appoximately 61.6% of BHC's equity, on a fully diluted basis. The forms of the Asset Purchase Agreement and Merger Agreement are attached hereto as Exhibit 99.1 and Exhibit 99.2 respectively, and are hereby ------------ ------------ incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
Exhibit No. Description of Exhibit Page ----------- ---------------------- ---- 99.1 Asset Purchase Agreement, between the Company and BHC, dated October 22, 1996. 99.2 Agreement and Plan of Merger, between the Company and BHC, dated October 22, 1996. 99.3 Schedule 3.10 to the Asset Purchase Agreement, consisting of the Audited Consolidated Financial Statements of BHC, for fiscal years ended June 30, 1996, 1995 and 1994.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: October 22, 1996 COMMUNITY PSYCHIATRIC CENTERS, a Nevada corporation by: /s/ Julia L. Kopta ------------------------ Julia L. Kopta Executive Vice President and General Counsel EX-99.1 2 ASSET PURCHASE AGREEMENT DATED 10/22/96 EXHIBIT 99.1 ASSET PURCHASE AGREEMENT, DATED AS OF OCTOBER 22, 1996 BETWEEN BEHAVIORAL HEALTHCARE CORPORATION AND COMMUNITY PSYCHIATRIC CENTERS, COMMUNITY PSYCHIATRIC CENTERS OF CALIFORNIA, INC., COMMUNITY PSYCHIATRIC CENTERS PROPERTIES INCORPORATED, COMMUNITY PSYCHIATRIC CENTERS OF FLORIDA, INC., FLORIDA HOSPITAL PROPERTIES, INC., COMMUNITY PSYCHIATRIC CENTERS OF IDAHO, INC., COMMUNITY PSYCHIATRIC CENTERS OF NORTH CAROLINA, INC., CPC PROPERTIES OF NORTH CAROLINA, INC., COMMUNITY PSYCHIATRIC CENTERS OF KANSAS, INC., CPC PROPERTIES OF KANSAS, INC., CPC OF LOUISIANA, INC., CPC PROPERTIES OF LOUISIANA, INC., COMMUNITY PSYCHIATRIC CENTERS PROPERTIES OF TEXAS, INC., COMMUNITY PSYCHIATRIC CENTERS OF UTAH, INC., CPC PROPERTIES OF UTAH, INC., COMMUNITY PSYCHIATRIC CENTERS OF ARKANSAS, INC., CPC PROPERTIES OF ARKANSAS, COMMUNITY PSYCHIATRIC CENTERS OF MISSISSIPPI, INC., CPC PROPERTIES OF MISSISSIPPI, INC., COMMUNITY PSYCHIATRIC CENTERS OF MISSOURI, INC., CPC PROPERTIES, INC., OLD ORCHARD HOSPITAL, INC., CPC PROPERTIES OF ILLINOIS, INC., COMMUNITY PSYCHIATRIC CENTERS OF INDIANA, INC., CPC PROPERTIES OF INDIANA, INC., CPC MANAGED CARE HEALTH SERVICES, INC., and COMMUNITY BEHAVIORAL HEALTH SYSTEMS ASSET PURCHASE AGREEMENT ------------------------ THIS ASSET PURCHASE AGREEMENT (the "Agreement"), dated October 22, 1996, is by and between COMMUNITY PSYCHIATRIC CENTERS, a Nevada corporation ("CPC"), COMMUNITY PSYCHIATRIC CENTERS OF CALIFORNIA, INC., a California corporation, COMMUNITY PSYCHIATRIC CENTERS PROPERTIES INCORPORATED, a California corporation, COMMUNITY PSYCHIATRIC CENTERS OF FLORIDA, INC., a Florida corporation, FLORIDA HOSPITAL PROPERTIES, INC., a Florida corporation, COMMUNITY PSYCHIATRIC CENTERS OF IDAHO, INC., an Idaho corporation, COMMUNITY PSYCHIATRIC CENTERS OF NORTH CAROLINA, INC., a North Carolina corporation, CPC PROPERTIES OF NORTH CAROLINA, INC., a North Carolina corporation, COMMUNITY PSYCHIATRIC CENTERS OF KANSAS, INC., a Kansas corporation, CPC PROPERTIES OF KANSAS, INC., a Kansas corporation, CPC OF LOUISIANA, INC., a Louisiana corporation, CPC PROPERTIES OF LOUISIANA, INC., a Louisiana corporation, COMMUNITY PSYCHIATRIC CENTERS PROPERTIES OF TEXAS, INC., a Texas corporation, COMMUNITY PSYCHIATRIC CENTERS OF UTAH, INC., a Utah corporation, CPC PROPERTIES OF UTAH, INC., a Utah corporation, COMMUNITY PSYCHIATRIC CENTERS OF ARKANSAS, INC., an Arkansas corporation, CPC PROPERTIES OF ARKANSAS, an Arkansas corporation, COMMUNITY PSYCHIATRIC CENTERS OF MISSISSIPPI, INC., a Mississippi corporation, CPC PROPERTIES OF MISSISSIPPI, INC., a Mississippi corporation, COMMUNITY PSYCHIATRIC CENTERS OF MISSOURI, INC., a Missouri corporation, CPC PROPERTIES, INC., a Missouri corporation, OLD ORCHARD HOSPITAL, INC., an Illinois corporation, CPC PROPERTIES OF ILLINOIS, INC., an Illinois corporation, COMMUNITY PSYCHIATRIC CENTERS OF INDIANA, INC., an Indiana corporation, CPC PROPERTIES OF INDIANA, INC., an Indiana corporation, CPC MANAGED CARE HEALTH SERVICES, INC., a ___________ corporation, and COMMUNITY BEHAVIORAL HEALTH SYSTEMS, a __________ corporation (collectively with CPC, the "Sellers"), and BEHAVIORAL HEALTHCARE CORPORATION, a Delaware corporation (the "Parent"), individually and on behalf of various wholly-owned subsidiaries of the Parent (collectively, the "BHC Subs"), (the BHC Subs and the Parent, collectively and individually when the context so requires, the "Purchaser"). RECITALS -------- WHEREAS, the Sellers own all the outstanding capital stock of Community Psychiatric Centers of Texas, Inc., a Texas corporation ("CPC of Texas"); WHEREAS, CPC of Texas owns a 60% interest in Community Residential Centers of San Antonio, a Texas limited liability company ("CRC San Antonio"); WHEREAS, the Sellers own and operate the facilities listed in Exhibit ------- A hereto (certain of which facilities are no longer operating (the "Closed - - Facilities"), which facilities, together with the facility owned and operated by CRC San Antonio, are sometimes referred to collectively herein as the "Hospitals"; WHEREAS, the healthcare businesses of the Hospitals are sometimes referred to collectively herein as the "Hospital Businesses"; and WHEREAS, the Sellers desire to sell the assets used in the operation of the Hospital Businesses to the Purchaser, and the Purchaser desires to purchase such assets in conformity with the terms and conditions hereof. NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties, covenants and agreements of the parties hereinafter set forth, the parties hereby agree as follows: ARTICLE I SALE AND TRANSFER OF ASSETS; ---------------------------- CONSIDERATION; CLOSING ---------------------- Section 1.1. Sale of Assets. At the Closing, the Sellers shall -------------- sell, transfer, convey, assign and deliver to the Purchaser (or a BHC Sub), and the Purchaser shall purchase from the Sellers, the following assets and properties: (a) all real property or leasehold interests in real property owned or leased by Sellers, as applicable, and used by Sellers in connection with the operation of each of the Hospital Businesses of Sellers, as described and listed by Hospital in Schedule 1.1(a), including all buildings, improvements and --------------- fixtures located thereupon and all construction in progress (the "Real Property"), such Schedule to include a legal description for each such parcel of Real Property owned by the Sellers; (b) all tangible personal property excluding cash owned by the Sellers and used in connection with their Hospital Businesses, including, without limitation, all equipment, furniture, fixtures, machinery, vehicles, office furnishings, instruments, leasehold improvements, spare parts, and, to the extent assignable or transferable by the Sellers, all rights in all warranties of any manufacturer or vendor with respect thereto, but excluding office furniture and equipment and similar non-hospital items located at the executive offices of CPC and office furniture and equipment and non-hospital items located at 24502 Pacific Park Drive, Laguna Hills, California, other than office furniture and equipment used by William Hale and his assistant (the "Personal Property"), which Personal Property as of August 31, 1996 (insofar as such property consists of land, buildings and equipment) is set forth on Schedule -------- 1.1(b); - ------ 2 (c) all rights, to the extent assignable or transferable, to all licenses, certificates of need, certificates of exemption, franchises, accreditations and registrations and other licenses or permits issued in connection with each of the Hospital Businesses of Sellers (the "Licenses"), including, without limitation, the Licenses described and listed by Hospital in Schedule 1.1(c); - --------------- (d) all of the interests of the Sellers, to the extent assignable or transferable by Sellers, in and to those real property leases relating to the Hospital Business of Sellers described and listed by Hospital in Schedule 1.1(d) --------------- (collectively, the "Leases") and to the personal property leases relating to each of the Hospital Businesses operated by Sellers; (e) except for the collective bargaining agreements relating to the Belmont Hills Hospital and the Walnut Creek Hospital (which agreements are not being assumed by Purchaser), all of the interests of the Sellers, to the extent assignable or transferable by Sellers in and to those contracts and agreements (including, without limitation, purchase orders) relating to their respective Hospital Business (the "Contracts"); (f) any deposits, other assets, escrows, prepaid taxes or other advance payments relating to any expenses of the Hospital Businesses reflected in CPC's balance sheet dated as of August 31, 1996 and maintained in the ordinary course of business (the "Prepaid Expenses"); (g) all inventories of supplies, drugs, food, janitorial and office supplies and other disposables and consumables existing on the Closing Date (as hereinafter defined) and located at each of the Hospitals or purchased by any Seller for use in connection with its Hospital Businesses (the "Inventory"); (h) all of the interest of Sellers in the accounts receivable of each of the Hospital Businesses outstanding at the Closing (the "Receivables"); (i) all documents, records, operating manuals and files, and computer software owned by the Sellers or their affiliates, primarily pertaining to or used in connection with the Hospital Businesses, including, without limitation, all patient records, medical records, financial records, equipment records, construction plans and specifications, and medical and administrative libraries, but excluding Sellers' corporate record books, minute books and tax records; (j) all of the Sellers' rights, if any, to the names and symbols used in connection with the Hospital Businesses, including, without limitation, the names listed on Schedule 1.1(j); --------------- 3 (k) all insurance proceeds arising in connection with damage to the Assets (as hereinafter defined) occurring after the date hereof and prior to the Closing to the extent not expended on the repair or restoration of such Assets; (l) all the outstanding capital stock of CPC of Texas; (m) except as expressly excluded below, all other property owned or leased by the Sellers, whether tangible or intangible, located at the Hospitals or used in connection with the Hospital Businesses whether or not reflected on the balance sheet of CPC (other than office furniture and equipment and similar non-hospital items located at the executive offices of CPC and office furniture and equipment and non-hospital items located at 24502 Pacific Park Drive, Laguna Hills, California, other than office furniture and equipment used by William Hale and his assistant) (including, without limitation, any claims, other than those presently being pursued by any Seller, against third parties by any Seller relating to the Assets whether known or unknown, contingent or otherwise); and (n) all documents, records, materials, files and reports, together with similar information, relating to the preparation or filing of cost reports on behalf of or for the Sellers. The foregoing, which (except for the Excluded Assets, as hereinafter defined) are hereafter referred to, collectively, as the "Assets," together with the assets owned by corporations being transferred under the Agreement and Plan of Merger by and between BHC, CPC and certain affiliates of CPC dated of even date herewith (the "Merger Agreement"), comprise all of the property and assets used in the conduct and operation of the psychiatric hospital and residential treatment center business of CPC in the United States and its territories (other than the property and assets used by Southwind Hospital which Hospital is not being sold to Purchaser) (the "Business") as of the date of this Agreement, including without limitation, those assets reflected on the balance sheet of CPC dated as of August 31, 1996 (the "August 1996 Balance Sheet"), and all assets acquired by the Sellers between August 31, 1996 and the Closing in each case relating to the Business. Section 1.2. Excluded Assets. The following items which are related --------------- to the Assets are not intended by the parties to be a part of the sale and purchase contemplated hereunder and are excluded from the Assets (collectively, the "Excluded Assets"): (i) CPC Investment Corporation; (ii) intercompany payables and receivables; (iii) those Assets which are disposed of by Sellers after August 31, 1996 in the ordinary course of business reasonably consistent with past practices; (iv) all cash; (v) certain excess 4 land located at the Spirit of St. Louis Hospital and Streamwood Hospital described in Schedule 1.2 and (vi) all documents and records pertaining to the Hospital Businesses which any Seller is required by law to retain. The parties acknowledge that Purchaser shall not acquire any tax benefit associated with periods prior to November 30, 1995 relating to the Business, including deductions relating to the settlement of certain class actions (the "Prior Period Deductions"). Section 1.3. Assets Free and Clear; Assignment and Undertakings. -------------------------------------------------- (a) Notwithstanding any other provision hereof to the contrary, the Assets shall be sold free and clear of all liabilities, liens and encumbrances, except for Permitted Encumbrances (as hereinafter defined) and the liens, liabilities and encumbrances to be assumed by the Purchaser pursuant to the Assignment and Undertaking with respect to each Hospital and the Hospital Businesses in the form attached hereto as Exhibit 1.3 (the "Assignment and ----------- Undertaking"). The Purchaser will be responsible to the Sellers for the payment, performance and discharge in due course in accordance with their terms of all obligations, indebtedness and liabilities of the Sellers assumed by it pursuant to the Assignments and Undertakings. (b) To effect assumptions and assignments of the Leases and Contracts contemplated hereby, the Purchaser and the Sellers shall execute the Assignments and Undertakings. Section 1.4. Purchase Price. The total purchase price of the Assets -------------- (the "Purchase Price") shall be cash (payable in immediately available funds) in the aggregate amount of $60,000,000, together with 3,701,493 shares of the common stock, par value $.01 per share, of Purchaser (the "BHC Common Stock") and 6,381,086 shares of the Series A Preferred Stock, par value $____ per share, of Purchaser, and 49,666 shares of the Series B Preferred Stock, par value $_____ per share, of Purchaser, having the terms and conditions set forth in Schedule 1.4 (the "Series B Preferred Stock") having the terms and conditions - ------------ set forth in Schedule 1.4 (the "BHC Preferred Stock") which shall be payable to each of the Sellers as set forth on Schedule 1.4. ------------ Section 1.5. Closing. (a) The consummation of the transactions ------- provided for herein (the "Closing") shall take place at the offices of counsel for the Purchaser, Waller Lansden Dortch & Davis, A Professional Limited Liability Company, Nashville City Center, Suite 2100, 511 Union Street, Nashville, Tennessee. The Closing shall take place at 9:00 a.m., Nashville time, as soon as practicable following the receipt of all regulatory approvals and the satisfaction of other required conditions to the Closing. It is contemplated that the Closing will occur on or before November 27, 1996. The date on which the Closing is to take place is herein referred to as the "Closing Date." At the Closing: (i) The Sellers shall deliver or cause to be delivered to the Purchaser documents in form and substance reasonably satisfactory to the Sellers and the Purchaser necessary to 5 transfer title to the Assets (with the Real Property conveyed by means of separate General Warranty Deeds, one in respect of each Hospital); (ii) The Purchaser and the Sellers shall execute and deliver separate Assignment and Undertakings (one in respect of each Hospital and one in respect of the Hospital Businesses) providing for the assumption by Purchaser of all liabilities of Seller relating to the Hospital Business of each Hospital and of the Hospital Businesses, whether or not contingent, known and unknown, including liabilities for taxes for the Hospital Businesses for periods after the Closing, and severance obligations to Sellers' employees; provided, however, that Purchaser shall not be responsible for and shall not assume any liability or obligation relating to (aa) healthcare benefits for those employees who are hospitalized at the time of the Closing; (bb) the settlement of certain consolidated securities class action lawsuits and a related stockholder derivative action filed in late 1991; (cc) any claim of any former Chairman of the Board of Directors of CPC; (dd) (except for real estate taxes) any Closed Facility; (ee) any taxes relating to the Hospital Businesses or owed by any Seller and relating to periods ending on or prior to the Closing Date; and (ff) any liability or obligation of CPC or any Seller not relating to the Hospital Businesses being acquired by Purchaser; (iii) The Purchaser shall deliver to Sellers their respective portion of the Purchase Price; and (iv) The Sellers and the Purchaser shall execute and deliver to each other: (I) separate Bills of Sale, one for each Hospital, in a form reasonably satisfactory to the parties; and (II) any other closing documents set forth in Articles VI or VII of this Agreement. (v) Sellers shall deliver to Purchaser stock certificate(s) representing all the outstanding shares of CPC of Texas, duly endorsed for transfer or accompanied by separate stock transfer powers and such other documents as may be necessary to transfer the shares of CPC of Texas to Purchaser, all in form and substance reasonably satisfactory to Purchaser. The documents described in Subsections 1.05(i), (ii), (iv) and (v) above are hereinafter collectively referred to as the "Closing Documents". (b) Notwithstanding anything to the contrary set forth herein, there shall be no transfer of ownership or control of the "controlled substances" in respect of the Hospital Businesses until such time as the Purchaser has obtained the appropriate Controlled Substance Registration Certificate from the United States Drug Enforcement Agency (the "DEA") in respect of each Hospital's pharmacy. Until such time, the Sellers shall execute a power of attorney or similar document as may be required by the DEA authorizing Purchaser to operate at Purchaser's expense the Hospital pharmacy or pharmacies pursuant to Sellers' Controlled Substance Registration Certificate utilizing such employee or employees of the Purchaser after the Closing as shall be reasonably 6 necessary to continue the operation of such pharmacy or pharmacies after the Closing in the manner as it had been theretofore operated. The Purchaser shall indemnify and hold harmless the Sellers and their affiliates and their stockholders, employees, officers, directors, agents and representatives, upon and after the Closing, from and against any Damages (as defined in Section 9.1(a)) arising out of or relating to the operation of each such Hospital pharmacy after the Closing, including without limitation the dispensing of controlled substances. Section 1.6. Allocation of Purchase Price. The respective Sellers and ---------------------------- Purchasers agree that the Purchase Price shall be allocated in a manner mutually agreed to by the Sellers and the Purchaser to each category of Assets of each Hospital in accordance with and as provided by Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), in the manner set forth on Schedule 1.6. The parties agree that any tax returns or other tax information - ------------ they may file or cause to be filed with any governmental agency shall be prepared and filed consistently with such agreed upon allocation. In this regard, the parties agree that, to the extent required, they will each properly agree and timely file Form 8594 in accordance with Section 1060 of the Code. Section 1.7. Statement of Adhesion. Prior to the Closing Date, the --------------------- Parent shall cause the BHC Subs to be incorporated and shall cause the BHC Subs to adhere to this Agreement by executing and delivering the Statement of Adhesion in a form reasonably satisfactory to the parties. Upon the execution and delivery of the Statement of Adhesion, the BHC Subs shall be bound by and entitled to the benefit of any provisions herein intended to place an obligation on, or grant a right to, the BHC Subs. Section 1.8. Interpretation. In this Agreement, unless the context -------------- otherwise requires: (a) unless otherwise defined, words importing the singular include the plural and vice versa; (b) words importing a gender include every gender and the word "including" shall mean including without limitation; (c) references to any document (including this Agreement) are references to that document as amended, consolidated, supplemented, novated or replaced by the parties from time to time; (d) references to this Agreement are references to this Agreement, together with the Schedules, Exhibits and Appendices hereto; 7 (e) references to Articles, Sections, Schedules and Appendices, are references to articles and sections of, and schedules and appendices to, this Agreement; (f) references to any party to this Agreement shall include references to its respective successors and permitted assigns; (g) references to law shall include references to any constitutional provision, treaty, decree, convention, statute, act, regulation, rule, ordinance, subordinate legislation, rule of common law and of equity and judgment and shall include the requirements of any applicable stock exchange; (h) references to any law are references to that law as amended, consolidated, supplemented or replaced from time to time; (i) references to a judgment shall include references to any order, injunction, decree, determination or award of any court or tribunal; (j) references to person shall include references to any individual, company, body corporate, association, partnership, firm, joint venture, trust and governmental agency; (k) references to time, unless otherwise provided, are references to Nashville, Tennessee local time; (l) references to "Knowledge of the Sellers", the "best Knowledge of the Sellers" or "Known to the Sellers" (or similar references) mean the actual knowledge of any of the persons listed in Schedule 1.8(l) hereto (or any such --------------- person's successor in office if such person prior to the Closing Date ceases to be employed by any Seller); and (m) references to "Knowledge of the Purchaser," the "best Knowledge of the Purchaser" or "Known to the Purchaser" (or similar references) mean the actual knowledge of any of the persons listed in Schedule 1.8(m) hereto (or any person's --------------- successor in office if 8 such person prior to the Closing Date ceases to be employed by the Purchaser). ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER -------------------------------------------- Each of the Sellers hereby jointly and severally represents and warrants the following to the Purchaser: Section 2.1. Authorization. Each of the Sellers has full corporate ------------- power and authority to enter into this Agreement and has full corporate power and authority to carry out the transactions contemplated hereby. Section 2.2. Binding Agreement. Except as set forth in Schedule ----------------- -------- 2.4, all proceedings required by law, its governing instruments or otherwise required to be taken by each of the Sellers to authorize the execution, delivery and performance of this Agreement in accordance with its terms have been properly taken and, assuming due and valid execution and delivery by the Purchaser, this Agreement constitutes a valid, legal and binding obligation of each of the Sellers enforceable in accordance with its terms. Without limiting the generality of the foregoing, no vote of any class of security holders of CPC is required or necessary in order for the Sellers to execute, deliver and perform this Agreement and to consummate the transactions contemplated herein. Section 2.3. Organization and Good Standing. Each of the Sellers ------------------------------ and CPC of Texas is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Each of the Sellers and CPC of Texas has full corporate power and authority under its governing instruments to own, operate and lease its properties and to carry on its businesses as now conducted. Each of the Sellers and CPC of Texas is qualified as a foreign corporation in each jurisdiction in which its assets or operations require such qualification. CPC directly or indirectly owns all of the outstanding capital stock of each of the other Sellers and there are no existing agreements, options, warrants, rights, calls or commitments of any character to which a Seller (other than CPC) is a party providing for the issuance of any additional shares or securities or the sale of treasury shares, and there are no outstanding securities of any Seller (other than CPC) or other instruments convertible into or exchangeable for shares of such capital stock and no commitments to issue such securities or instruments. All outstanding shares of capital stock of Sellers are duly authorized, validly issued, fully paid and non-assessable. CRC San Antonio is a limited liability company duly organized, validly existing and in good standing under the laws of 9 the State of Texas. CRC San Antonio has full power and authority under its governing instruments to own, operate and lease its properties and to carry on its business as now conducted. CRC San Antonio is qualified as a foreign limited liability company in each jurisdiction in which its assets or operations require such qualification. CPC of Texas owns a 60% interest in CRC San Antonio. Section 2.4. No Violation. Except as set forth in Schedule 2.4., ------------ ------------- neither the execution and delivery by any Seller of this Agreement, the consummation of the transactions contemplated hereby nor compliance with any of the material provisions hereof by the Sellers will (i) violate, conflict with or result in a breach of any provision of the articles of incorporation, bylaws, organizational documents or the LLC Documents (as defined in Section 2.24) of any Seller, CPC of Texas or CRC San Antonio, (ii) violate any order, writ, injunction, ruling or law of any court or governmental authority, United States or foreign, applicable to any Seller, CPC of Texas or CRC San Antonio, or (iii) except for applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the "HSR Act"), and except for such regulatory filings set forth on Schedule 2.4, require any material consent, approval or authorization of, or - ------------ notice to, or declaration, filing or registration with, any governmental or regulatory authority. Section 2.5. Required Consents. Except as set forth in Schedule ----------------- -------- 2.5., none of CPC of Texas, CRC San Antonio or any Seller is a party to or bound - ---- by any mortgage, lien, deed of trust, lease, agreement or instrument involving obligations in respect of any Hospital Business or relating to the Business for payment, performance of services or delivery of goods in excess of $25,000, which continue for a period longer than twelve (12) months and are not terminable by such Seller or CPC of Texas or CRC San Antonio upon 90 days or less prior notice, or any order, judgment or decree that would require the consent of another to the execution of this Agreement or prohibit or require the consent of another to, or make unduly burdensome the consummation of, any of the transactions referred to in or contemplated by this Agreement. Except as set forth in Schedule 2.5., the consummation of the transactions referred to in or ------------- otherwise contemplated by this Agreement will not result in a breach of any term or provision of or constitute a default under any agreement or instrument involving obligations in respect of any Hospital Business or relating to the Business for payment, performance of services or delivery of goods in excess of $25,000, which continue for a period longer than twelve (12) months and are not terminable by such Seller or by CPC of Texas or CRC San Antonio upon 90 days or less prior notice, to which any of the Sellers, CPC of Texas or CRC San Antonio is a party, by which any Seller, CPC of Texas or CRC San Antonio is bound, or otherwise 10 gives any other party thereto a right to terminate the same or amend the terms thereof or result in an acceleration in the payment due under any note or any other agreement or instrument involving obligations in respect of any Hospital Business for payment, performance of services or delivery of goods in excess of $25,000, which continue for a period longer than twelve (12) months and are not terminable by such Seller or by CPC of Texas or CRC San Antonio upon 90 days or less prior notice, which is binding on any of the Sellers, CPC of Texas or CRC San Antonio, which breach, default, termination or acceleration would prevent any of the Sellers from consummating the transactions contemplated by this Agreement, or in the creation of any lien, security interest, encumbrance or charge under any of the foregoing on any of the Assets. Section 2.6. Compliance with Laws and Contracts. (a) Neither any ---------------------------------- Seller nor CPC of Texas or CRC San Antonio is in violation of, or, to the best Knowledge of Sellers, under investigation with respect to, and neither any Seller nor CPC of Texas or CRC San Antonio has been charged with or given notice of any violation of, any applicable law, statute, order, rule, regulation, policy or guideline promulgated, or judgment entered, by any federal, state, local or foreign court or governmental authority relating to the Hospital Businesses, including, but not limited to, the anti-fraud and abuse amendments under the Social Security Act, except as set forth in Schedule 2.6. Each of the ------------ Sellers, CPC of Texas and CRC San Antonio has filed with the proper authorities all statements and reports required by the laws, regulations, licensing requirements, and orders to which it or any of their employees (because of their activities on behalf of any of the Sellers, CPC of Texas or CRC San Antonio) is subject, the failure to file which would reasonably be expected to have a material adverse effect on the Hospital Business of any Seller, CPC of Texas or of CRC San Antonio. (b) Each of the Sellers, CPC of Texas and CRC San Antonio has performed all obligations relating to its Hospital Business required to be performed by it, and no Seller, CPC of Texas or CRC San Antonio is in default with respect to any obligation to be performed under any contract, lease, guaranty, indenture, loan agreement, document or other agreement or arrangement relating to its respective Hospital Business to which it is a party or to which any of its assets are subject, nor is there any claim of such default, which default or its consequences would reasonably be expected to have a material adverse effect on the Hospital Business of any Seller, CPC of Texas or of CRC San Antonio. Section 2.7. Title to the Assets. The Sellers, CPC of Texas and CRC ------------------- San Antonio, as applicable, have, and except for assets disposed of or consumed in the regular and ordinary course of business at the Closing will have, good, valid and marketable 11 fee simple or leasehold, as the case may be, title to each and every item of Real Property and real property owned by CPC of Texas or CRC San Antonio, and good, valid and marketable title to each and every item of Personal Property (excluding leased Personal Property) and personal property owned by CPC of Texas or CRC San Antonio, whether tangible or intangible, which any of them purports to own. All such properties are held free and clear of all title defects, liens, pledges, claims, charges, rights of first refusal, security interests or other encumbrances and are not, in the case of Real Property or real property owned by CPC of Texas or CRC San Antonio, subject to any rights-of-way, building or use restrictions, exceptions, easements, covenants, variances, reservations or limitations of any nature whatsoever, except (i) such encumbrances as are set forth in the title commitments set forth in Schedule 2.7 (the "Title ------------ Commitments"), (ii) liens for current real property taxes and assessments not in default, (iii) mechanics', carriers', workmen's, repairmen's and other statutory liens, rights of way, building or use restrictions, exceptions, variances, reservations and other limitations of any kind, if any, which in the case of (x) liens (other than for current taxes) are not substantial in amount and (y) clauses (ii) and (iii) above do not materially impair the ordinary business operations of any Hospital Business, and (iv) liens incurred in the ordinary course of business of any Hospital Business (A) in connection with its workers' compensation or unemployment insurance, or (B) to secure the performance of public or statutory obligations, performance and return of money, bonds and other similar obligations relating to the Business (collectively, the "Permitted Encumbrances"). Neither any Seller nor CPC of Texas nor CRC San Antonio has received notice of any violation of any building, zoning or other law, ordinance or regulation with respect to the Real Property or real property owned by CPC of Texas or CRC San Antonio or its use by any Seller or CRC San Antonio. None of the Real Property nor any of the real property owned by CPC of Texas or CRC San Antonio is subject to a condemnation or similar proceeding. Schedule 1.1(a) --------------- also sets forth a list of rental and lease payments payable to any Seller or to CPC of Texas or CRC San Antonio in respect of any of the Assets or the assets of CPC of Texas or CRC San Antonio, including the Real Property and real property owned by CPC of Texas or CRC San Antonio, containing the amount of rent, the lease expiration dates, and names of the lessor and tenants. Section 2.8. Certain Representations With Respect to the Hospitals. ----------------------------------------------------- Each of the Hospitals is (other than a Closed Facility) duly licensed by the state in which it is located as a hospital, psychiatric hospital or residential treatment center or similar facility, as the case may be, authorized to operate the Hospital Business conducted by it as currently operated and to operate the numbers of beds at the location set forth in Schedule 2.8 (other than the Closed ------------ Facilities). Each of the Hospitals (other than the Closed Facilities) participates in the 12 Medicare, Medicaid and CHAMPUS programs, except as set forth in Schedule 2.8. ------------ Except as set forth on Schedule 2.8, all material licenses, permits, ------------ certifications, certificates of need and contracts which are necessary to operate the Hospital Businesses are valid and in good standing. None of the Hospitals has incurred or committed for expenditures which require certificates of need which have not been duly obtained. Each of the Hospitals (other than the Closed Facilities) is duly accredited by the Joint Commission on Accreditation of Healthcare Organizations for the three-year periods ended as set forth by Hospital in Schedule 2.8. ------------ Section 2.9. Brokers and Finders. Except as set forth in Schedule ------------------- -------- 2.9, no Seller (nor any affiliate thereof nor any officer or director thereof) - --- has engaged any finder or broker in connection with the transactions contemplated hereunder. Section 2.10. Financial Statements. Schedule 2.10 consists of true, -------------------- ------------- correct and complete copies of CPC's audited and consolidated financial statements for the years ended November 30, 1993, 1994 and 1995, and the related unaudited financial statements of CPC for the nine months ended August 31, 1996 (including, with respect to the audited financial statements, the notes thereto, the "Financial Statements"). The Financial Statements have been prepared from and are in accordance with the books and records of CPC. The balance sheets included in the Financial Statements present fairly the financial position of CPC as of the respective dates thereof and the other financial statements included therein present fairly the results of operations for the periods indicated, in each case in conformity with generally accepted accounting principles consistently applied during such periods, except as set forth in Schedule 2.10. Purchaser acknowledges that the Financial Statements reflect - ------------- assets and businesses which are not being acquired by Purchaser under this Agreement or the Merger Agreement. Schedule 2.10 also contains unaudited ------------- financial statements for each of the Hospitals and certain other hospitals being directly or indirectly transferred to Purchaser pursuant to the Merger Agreement for the year ended November 30, 1995 and the nine months ended August 31, 1996 (the "Hospital Financial Statements"). The Hospital Financial Statements present fairly the financial position of the Hospitals and the other hospitals or businesses being directly or indirectly transferred to Purchaser pursuant to the Merger Agreement as of the respective dates thereof and for the periods therein and were prepared by CPC using the same procedures and standards employed by CPC in preparing the financial statements included in its public filings. Section 2.11. Litigation or Proceedings. Schedule 2.11 contains a ------------------------- ------------- list of each pending lawsuit or legal proceeding to which any Seller or CPC of Texas or CRC San Antonio is a party or which arose out of or in connection with the Hospital Business of any Hospital or, to the Sellers' best Knowledge, which has been 13 threatened against any Seller or CPC of Texas or CRC San Antonio in connection with any Hospital Business which, in the case of threatened lawsuits or litigation, would reasonably be expected to have a material adverse effect on any Hospital Business. Except as disclosed on Schedule 2.11, no Seller has, and ------------- CPC of Texas and CRC San Antonio have not, within the last three years been subject to any formal or informal (of which any Seller has received notice) investigations or proceedings relating to the Hospital Businesses of the Department of Health of the state in which it operates, the United States General Accounting Office, the Health Care Financing Administration, the Department of Justice, the Federal Trade Commission or other similar governmental agencies with respect to any Hospital Business (other than the Closed Facilities except to the extent such do not materially adversely affect the Hospital Businesses). There are no such claims, actions, proceedings or investigations of which any Seller or CPC of Texas or CRC San Antonio has received notice pending or, to the best Knowledge of Sellers, threatened challenging the validity or propriety of the transactions contemplated by this Agreement. No Seller is, and CPC of Texas and CRC San Antonio are not, now a party or subject to any injunction, order, or decree restricting the method of the conduct of its Hospital Business (other than the Closed Facilities except to the extent such do not materially adversely affect the Hospital Businesses) or the marketing of any of its services, nor, except as disclosed on Schedule 2.11, ------------- has any governmental agency investigated or requested (other than on a routine basis) within the last three years information with respect to such methods of business or marketing of services; no Seller has, and CPC of Texas and CRC San Antonio have not received any claim that any of them currently violates any federal, state, or local law, ordinance, rule or regulation, which would reasonably be expected to have a material adverse effect on their respective Hospital Businesses and, to the best of the Sellers' Knowledge, no such claim is or has been threatened; and, except as disclosed on Schedule 2.11, there have ------------- been no developments materially adverse to any Seller or CPC of Texas or CRC San Antonio within the last three years with respect to any pending or threatened claim, action or proceeding of an administrative or judicial nature relating to the Hospital Businesses or any Hospital Business, including but not limited to those referred to in Schedule 2.11, and including, without limitation, any such ------------- pending or threatened claim, action or proceeding arising from or relating to (i) the assertion by any governmental authority of any retroactive adjustment of the sums which any of Seller, CPC of Texas or CRC San Antonio was entitled to receive pursuant to government or third party reimbursement programs including, without limitation, Medicare and Medicaid, or (ii) any allegation by any governmental authority of fraud or abuse by any current or former officers or employees of any Seller or CPC of Texas or CRC San Antonio in connection with the making of any application for reimbursement pursuant to the government or third 14 party reimbursement programs referred to in the preceding clause (i). Section 2.12. Employee Benefits. Schedule 2.12 contains a list of ----------------- ------------- (i) each pension, profit-sharing, bonus, deferred compensation, or other retirement plan or arrangement of any Seller or of CPC of Texas or CRC San Antonio, whether oral or written, which constitutes an "employee pension benefit plan" as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) each medical, health, disability, insurance or other plan or arrangement of any Seller or of CPC of Texas or CRC San Antonio, whether oral or written, which constitutes an "employee welfare benefit plan" as defined in Section 3(1) of ERISA, and (iii) each other employee benefit or perquisite provided by any Seller or by CPC of Texas or CRC San Antonio or any Hospital, in which any employee of any of the Sellers or of CPC of Texas or CRC San Antonio participates in his or her capacity as such which are material to the Hospital Business conducted by such Seller or by CPC of Texas or CRC San Antonio. A true and complete copy of each such written plan or agreement described in Schedule 2.12 has heretofore been furnished or made available to ------------- the Purchaser. Section 2.13. Taxes and Tax Returns. Each Seller and CPC of Texas --------------------- and CRC has duly filed all federal, state and local tax and informational returns required to be filed by it relating to the Hospital Businesses or the Business (all of which are true and correct in all material respects) and has duly paid or made provision for the payment of all taxes relating to the Hospital Businesses or the Business (including any interest or penalties) which are due with respect to all periods prior to the Closing to the appropriate tax authorities. Except as set forth on Schedule 2.13, there are no pending examinations by the Internal Revenue Service ("IRS") or any state taxing authority with respect to the Hospital Businesses or the Business and there has been no waiver of any statute of limitations with respect to taxation of the Hospital Businesses or the Business. There are no liens with respect to taxes, including, without limitation, income, franchise, excise, sales, use and payroll taxes (except for liens with respect to real property taxes not yet delinquent) upon any of the Assets. Each Seller and CPC of Texas and CRC San Antonio has withheld proper and accurate amounts from its employees' compensation in full and complete compliance with all withholding and similar provisions of the Code, and any and all other applicable laws. Section 2.14. Employees of the Sellers. Schedule 2.14 contains a list ------------------------ ------------- as of a recent date, by Hospital, of each Seller's Hospital employees and the employees of CPC of Texas and CRC San Antonio, their current salary or wage rates and department of such employees earning greater than $50,000 per annum. Except for annual raises granted consistently with prior practices of 15 Sellers, CPC of Texas or CRC San Antonio, since November 30, 1995, there has not been any increase in the compensation payable or to become payable by any Seller or by CPC of Texas or CRC San Antonio to any of its officers, employees or agents, or any bonus payment or arrangement made to or with any such person, other than bonuses paid in accordance with Sellers' established bonus programs. No Seller has and CPC of Texas and CRC San Antonio have not incurred any liability, or, to the best Knowledge of Sellers, taken or failed to take any action that will result in any liability, in respect of any failure to comply with the Fair Labor Standards Act or any other applicable laws dealing with minimum wages or maximum hours for employees. Except for employees subject to collective bargaining agreements referred to in Schedule 2.15 or as set forth on ------------- Schedule 2.14, all employees of each of the Sellers and CPC of Texas or CRC San - ------------- Antonio are terminable at will. Sellers agree to provide Purchaser with such information as is required in order to comply with the Worker Adjustment and Retraining Notification Act (the "WARN Act"). Section 2.15. Labor Matters. Except as set forth on Schedule 2.15, ------------- ------------- no Seller has, and CPC of Texas and CRC San Antonio do not have, any collective bargaining agreement with any labor union, and there are no current negotiations with a labor union. Each of the Sellers and CPC of Texas and CRC San Antonio is in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice. To the best Knowledge of Sellers, there are no unfair labor practice complaints against any Seller or CPC of Texas or CRC San Antonio pending before the National Labor Relations Board. There is no labor strike, dispute, slowdown or stoppage actually pending or, to the best Knowledge of Sellers, threatened against or affecting any Seller or CPC of Texas or CRC San Antonio. No grievance which would reasonably be expected to have a material adverse effect on any of the Sellers or CPC of Texas or CRC San Antonio or any such arbitration proceeding arising out of or under collective bargaining agreements is pending and no claim therefor exists. No Seller has, and CPC of Texas and CRC San Antonio have not, experienced any employee strike. Each of the Sellers will advise the Purchaser of any such labor dispute that arises before the Closing. Section 2.16. Insurance. Schedule 2.16 contains a list of all --------- ------------- insurance policies of each of the Sellers and of CPC of Texas and CRC San Antonio relating to each Hospital Business, and copies of the insurance policies so listed have been made available to Purchaser. Each of the Sellers will, and will cause CPC of Texas and CRC San Antonio to, maintain such coverage prior to the Closing. To the Knowledge of Sellers, none of the Sellers and CPC 16 of Texas and CRC San Antonio is in default under any policy listed on Schedule -------- 2.16. - ---- Section 2.17. Certain Contracts. Schedule 2.17 lists all contracts ----------------- ------------- to which any of the Sellers or CPC of Texas or CRC San Antonio is a party involving obligations in respect of any Hospital Business for payment, performance of services or delivery of goods in excess of $25,000, which require any Seller or CPC of Texas or CRC San Antonio to continue to perform for a period of longer than twelve (12) months, and are not terminable by such Seller or CRC San Antonio upon 90 days or less prior notice (the "Scheduled Contracts"). Each of the Sellers has delivered or made available to the Purchaser true and correct copies of all Scheduled Contracts. All of such Scheduled Contracts are valid and binding obligations of the parties thereto, are in full force and effect, and, to the best Knowledge of the Sellers, are enforceable against the parties thereto in accordance with their respective terms. No Seller has and CPC of Texas and CRC San Antonio have not received any notice that the other parties to the Scheduled Contracts are (i) in material default under such Scheduled Contracts or (ii) consider any Seller or CPC of Texas or CRC San Antonio to be in default thereunder. Except as expressly noted in Schedule 2.17, to the best Knowledge of the Sellers, no party to any of the ------------- Scheduled Contracts intends to terminate or adversely modify its agreement(s) with respect thereto, or adversely change the volume of business done thereunder. Section 2.18. Certain Leases. Schedule 2.18 lists all leases to -------------- ------------- which any Seller or CPC of Texas or CRC San Antonio is a party in respect of the Hospital Businesses or the Business involving annual obligations on the part of any Seller or CPC of Texas or CRC San Antonio for the payment of rent in excess of $25,000 per year or total rent in excess of $100,000 with respect to any Real Property leased to any Seller, any real property leased to CPC of Texas or CRC San Antonio or involving lease or rental of real property by any Seller or by CPC of Texas or CRC San Antonio as lessor or sublessor, in each case with an unexpired term of twelve (12) months or more and not terminable by such Seller or by CPC of Texas or CRC San Antonio upon 90 days or less prior written notice (the "Scheduled Leases"). Each Seller or CPC of Texas or CRC San Antonio has delivered or made available to the Purchaser true and correct copies of all Scheduled Leases and all related amendments, supplements and modifications and related documents (the "Scheduled Lease Documents"). The Scheduled Lease Documents are unmodified and in full force and effect, and there are no other agreements, written or oral, between any Seller or CPC of Texas or CRC San Antonio and any third parties claiming an interest in the interest of any Seller or of CPC of Texas or CRC San Antonio in the Scheduled Leases or otherwise relating to any Seller's use and occupancy of any leased Real Property or the use by CPC of Texas or CRC San Antonio of any real property owned by it. All such 17 Scheduled Leases are valid and binding obligations of the parties thereto, are in full force and effect, and, to the best Knowledge of the Sellers, are enforceable against the parties thereto in accordance with their terms; and to the best of the Sellers' Knowledge, no event has occurred including, without limitation, the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby which (whether with or without notice, lapse of time or both) would constitute a default thereunder. No Seller has, and CPC of Texas and CRC San Antonio have not, received any notice that the other parties to the Scheduled Leases are (i) in material default under such Leases or (ii) consider any Seller to be in default thereunder. No property leased under any Scheduled Lease is subject to any lien, encumbrance, easement, right of way, building or use restriction, exception, variance, reservation or limitation as would in any respect materially interfere with or impair the present and continued use thereof in the usual and normal conduct of the Hospital Businesses. Section 2.19. Environmental. Except as disclosed in any phase I ------------- environmental report delivered to Purchaser pursuant to this Agreement as set forth on Schedule 2.19 with respect to the Hospital Businesses or any Hospital ------------- Business: (a) Each Seller and CPC of Texas and CRC San Antonio is currently in compliance in all material respects with the Environmental Laws (as hereinafter defined) which compliance includes, but is not limited to, the possession by each Seller and CPC of Texas and CRC San Antonio of all permits and other governmental authorization required under the Environmental Laws, and compliance in all material respects with the terms and conditions thereof; (b) No Seller has, and CPC of Texas or CRC San Antonio have not, stored, disposed of or arranged for disposal of any Materials of Environmental Concern (as hereinafter defined) on any of the Real Property or the real property owned by CPC of Texas or CRC San Antonio, except in material compliance with the Environmental Laws; (c) No Seller has and CPC of Texas and CRC San Antonio have not received any communication (written or, to the best Knowledge of Sellers, oral), whether from a governmental authority, citizens group, employee or otherwise, that alleges that any Seller or CPC of Texas or CRC San Antonio is not in material compliance with the Environmental Laws or the Medical Waste Laws (as hereinafter defined), and, to the best Knowledge of Sellers, there are no circumstances that may prevent or interfere with material compliance in the future. There are no Environmental Claims (as hereinafter defined) pending or, to the best Knowledge 18 of Sellers, threatened against, or which has been made known to, any Seller or CPC of Texas or CRC San Antonio. (d) During the period the Assets have been held by any of the Sellers or during the time any of the assets of CPC of Texas or CRC San Antonio have been held by them, or their affiliates or predecessors in interest, to the best Knowledge of Sellers, there have been no actions, activities, circumstances, conditions, events or incidents, including, without limitation, the generation, handling, transportation, treatment, storage, release, emission, discharge, presence or disposal of any Materials of Environmental Concern (as hereinafter defined), that would form the basis of any Environmental Claim against any Seller or CPC of Texas or CRC San Antonio which would reasonably be expected to have a material adverse effect on any Seller or CPC of Texas or CRC San Antonio. (e) Without in any way limiting the generality of the foregoing, to the best Knowledge of Sellers, (i) no underground storage tanks are located on property owned or leased by any Seller or CPC of Texas or CRC San Antonio, (ii) there is no friable asbestos contained in or forming part of any building, building component, structure or office space owned or leased by any Seller or CPC of Texas or CRC San Antonio, and (iii) no polychlorinated biphenyls (PCBs) are used or stored at any property owned or leased by any Seller or CPC of Texas or CRC San Antonio. (f) With respect to the generation, transportation, treatment, storage, and disposal or other handling of Medical Waste (as hereinafter defined), each of the Sellers and CPC of Texas and CRC San Antonio is presently in compliance with all Medical Waste Laws. The following terms shall have the following meanings: "Environmental Claim" means any claim, action, cause of action, investigation or notice (written or oral) by any person or entity alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (a) the presence, or release into the environment, of Materials of Environmental Concern at any location, whether or not owned or operated by any Seller or CPC of Texas or CRC San Antonio or (b) circumstances forming the basis of the violation, or alleged violation, of the Environmental Laws or Medical Waste Laws. "Environmental Laws" means the federal, state (including specifically, but not by way of limitation, the states in which any of the Sellers or CPC of Texas or CRC San Antonio operates any 19 Hospital Business), regional, county, parish, municipal and local environmental, health or safety laws, regulations, ordinances, rules and policies and common law in effect on the date hereof and the Closing Date relating to the use, refinement, recycling, handling, treatment, removal, storage, production, manufacture, transportation, disposal, emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to protection of the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), as the same may be amended or modified to the date hereof and the Closing Date, including, without limitation, the statutes listed below: Federal Solid Waste Disposal Act as amended by the Resource Conservation and Recovery Act of 1976, 42 U.S.C. (S) 6901, et seq. Federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. (S) 9601, et seq. Federal Clean Air Act, 42 U.S.C. (S) 7401, et seq. Federal Water Pollution Control Act, Federal Clean Water Act of 1977, 33 U.S.C. (S) 1251, et seq. -- --- Federal Insecticide, Fungicide, and Rodenticide Act, Federal Pesticide Act of 1978, 7 U.S.C. (S) 136, et seq. -- --- Federal Hazardous Materials Transportation Act, 48 U.S.C. (S) 1801, et -- seq. - --- Federal Toxic Substances Control Act, 15 U.S.C. (S) 2601, et seq. -- --- Federal Safe Drinking Water Act, 42 U.S.C. (S) 300f, et seq. -- --- "Materials of Environmental Concern" means any toxic or hazardous waste, pollutants or substances, including, without limitations, asbestos, PCBs, petroleum products and byproducts, substances defined or listed as "hazardous substances", "toxic substances," "toxic pollutant," "medical waste" or "air pollutant" or similarly identified substances or mixtures, in or pursuant to the Environmental Laws or the Medical Waste Laws. "Medical Waste" includes any substance, pollutant, materials, or containment listed or regulated under the Medical Waste Tracking Act of 1988, 42 U.S.C. (S)(S)6992, et seq. ("MWTA"), 42 Part 72 and 49 CFR (S)173, 386, the -- ---- Medical Waste Laws or comparable state laws. 20 "Medical Waste Laws" means the following, including regulations promulgated and orders issued thereunder, to the extent such Medical Waste Laws regulate Medical Waste, all as may be amended from time to time: the MWTA, comparable state laws, the Resource Reservation and Recovery Act, 42 USCA (S)6901 et seq., the Air Pollution Prevention and Control Act, 42 USCA (S)7401 -- --- et seq., the Federal Water Pollution Control Act, 33 USCA (S)(S)1251 et seq., - -- --- -- --- the Marine Protection, Research, and Sanctuaries Act of 1972, 33 USCA (S)(S)1401 et seq., Nuclear Regulatory Commission regulations contained in 10 CFR Part 20, - -- --- and 10 CFR Part 61, Occupational Health Act, 29 USCA 651 et seq., Public Health -- --- Service regulations contained in 42 CFR Part 72, Food and Drug Administration regulations contained in 21 CFR Parts 58 and 211, U.S. Department of Transportation regulations contained in 49 CFR Parts 171-179, the Act to Prevent Pollution from Ships, 33 U.S.C.A. (S)1901 et seq., United States Department of -- --- Agriculture regulations contained in 9 CFR Parts 50 through 56, United States Postal Service regulations contained in 39 CFR Part 111, local environmental and safety laws, rules, regulations, and other legally binding requirements, and any other federal, state, regional, county, municipal, or other local laws, regulations, and ordinances insofar as they purport to regulate Medical Waste, or impose requirements relating to Medical Waste. Section 2.20. Absence of Undisclosed Liabilities. Except as and to ---------------------------------- the extent reflected or specifically reserved against (which reserves are believed adequate in amount) in the Financial Statements or the Hospital Financial Statements, as the case may be, no Seller had, and CPC of Texas and CRC San Antonio did not have, at and as of the date of such Financial Statements or the Hospital Financial Statements, as the case may be, any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise and whether due or to become due) required to be reflected thereon or included therein (consistent with the standards set forth in Section 2.10), except for any liabilities which have been incurred since the dates of such Financial Statements or the Hospital Financial Statements, as the case may be, in the ordinary course of business consistent with past practice (and that will not have a material adverse effect on any Hospital Business) or which have been discharged or paid in full prior to the date hereof. Section 2.21. No Misleading Statements. No representation or ------------------------ warranty by any Seller contained in this Agreement, and no statement contained in any Schedule (including any supplement or amendment thereto) and the documents to be delivered at the Closing by or on behalf of any Seller or CPC of Texas or CRC San Antonio to the Purchaser or any of its representatives in connection with the transactions contemplated hereby (the Schedules, including any supplement or amendment thereto, and such other documents are herein referred to, 21 collectively, as the "Additional Documents"), and no written statement made or delivered by any Seller or CPC of Texas or CRC San Antonio in connection with this Agreement or the transactions contemplated hereby, contains or will contain, to the best of the Sellers' Knowledge, any untrue statement of a material fact, or, to the best Knowledge of the Sellers, omits or will omit to state any material fact necessary, in light of the circumstances under which it was or will be made, in order to make the statements herein or therein not misleading. Copies of all documents described on any Schedule hereto shall be correct and complete and all descriptions of such documents shall be true. Section 2.22. Adverse Change. Since August 31, 1996, there has not -------------- been any material adverse change in the Assets or the condition (financial or otherwise) of the Business. Section 2.23. Capitalization of CPC of Texas. The capitalization of ------------------------------ CPC of Texas is as set forth on Schedule 2.23. All of the outstanding shares of ------------- capital stock of CPC of Texas are validly issued, fully paid and non- assessable). There are no existing agreements, options, warrants, rights, calls or commitments of any character to which CPC of Texas is a party providing for the issuance of any additional shares or securities, the sale of treasury shares, or the repurchase or redemption of shares of stock or other securities of CPC of Texas, and there are no outstanding securities or other instruments convertible into or exchangeable for shares of such capital stock and no commitments to issue such securities or instruments. Section 2.24. Operating Agreements of CRC San Antonio. Sellers have --------------------------------------- provided Purchaser with complete copies of the Operating Agreement, Articles of Organization and Bylaws of the Managers of CRC San Antonio (collectively, the "LLC Documents"). The LLC Documents are in full force and effect, and the transactions contemplated in this Agreement will not cause the dissolution or termination of CRC San Antonio. Section 2.25. Solvency. Immediately prior to and immediately -------- following the Closing Date: (a) the present fair salable value of the respective assets of each of the Sellers (on a going concern basis) will exceed the respective liabilities of such Sellers and its debts (including its contingent obligations); (b) None of the Sellers will have incurred debts (including contingent obligations) beyond its ability to pay such debts as such debts mature (taking into account the timing and amounts of cash to be received from any source, and of amounts to be payable on or in respect of debts); and the amount of cash available to each Seller after taking into account all other anticipated uses of funds is anticipated to be sufficient to pay 22 all such amounts on or in respect of its debts, when such amounts are required to be paid; and (c) Each Seller will have sufficient capital with which to conduct their respective businesses, and the respective property of the Sellers does not constitute unreasonably small capital with which to conduct their respective business. For purposes of this Section 2.25 "debt" means any liability or a (i) right to payment whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (ii) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such a right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER ----------------------------------------------- Purchaser hereby represents and warrants to the Sellers as follows (as used in this Article III (except in Sections 3.1 and 3.2 hereof) the term "Purchaser" shall include all subsidiaries of BHC whether or not they are parties to this Agreement, including any subsidiaries acquired or formed after the date of this Agreement), other than with respect to the UPG Hospitals (as defined in Section 5.1 hereof)): Section 3.1. Authorization. Each of the Purchasers has full ------------- corporate power and authority to enter into this Agreement and has full corporate power and authority to carry out the transactions contemplated hereby. Section 3.2. Binding Agreement. Except as set forth in Schedule ----------------- -------- 3.5, all proceedings required by law, its governing instruments or otherwise - --- required to be taken by each of the Purchasers to authorize the execution, delivery and performance of this Agreement in accordance with its terms have been properly taken and, assuming due and valid execution and delivery by the Sellers, this Agreement constitutes a valid, legal and binding obligation of each of the Purchasers enforceable in accordance with its terms. Section 3.3. Capitalization. The authorized capital stock of Parent -------------- is as set forth on Schedule 3.3. All the outstanding shares of capital stock ------------ are validly issued, fully paid and nonassessable. Except as set forth on 23 Schedule 3.3, there are no existing agreements, options, warrants, rights, calls - ------------ or commitments of any character to which Parent is a party providing for the issuance of any additional shares or securities, the sale of treasury shares, or for the repurchase or redemption of shares of stock or other securities of Parent, and there are no outstanding securities or other instruments convertible into or exchangeable for shares of such capital stock and no commitments to issue such securities or instruments. The shares of BHC Common Stock and BHC Preferred Stock to be issued in consideration of this Agreement, once issued pursuant to the terms and conditions of this Agreement, will be validly issued, fully paid and nonassessable, free and clear of preemptive rights. Section 3.4. Organization and Good Standing. Each of the Purchasers ------------------------------ is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Schedule 3.4 contains a list of all ------------ Subsidiaries of Purchaser. Each of the Purchasers has full corporate power and authority under its governing instruments to own, operate and lease its properties and to carry on its businesses as now conducted. Each of the Purchasers is qualified as a foreign corporation in each jurisdiction in which its assets or operations require such qualification. Parent directly or indirectly owns all of the outstanding capital stock of each of the other Purchasers and except as set forth on Schedule 3.3 there are no existing ------------ agreements, options, warrants, rights, calls or commitments of any character to which a Purchaser is a party providing for the issuance of any additional shares or securities or the sale of treasury shares, and there are no outstanding securities of any Purchaser or other instruments convertible into or exchangeable for shares of such capital stock and no commitments to issue such securities or instruments. All outstanding shares of capital stock of each Purchaser are duly authorized, validly issued, fully paid and non-assessable. Section 3.5. No Violation. Except as set forth in Schedule 3.5., ------------ ------------- neither the execution and delivery by any Purchaser of this Agreement, the consummation of the transactions contemplated hereby nor compliance with any of the material provisions hereof by the Purchasers will (i) violate, conflict with or result in a breach of any provision of the articles of incorporation or bylaws of any Purchaser, (ii) violate any order, writ, injunction, ruling or law of any court or governmental authority, United States or foreign, applicable to any Purchaser, or (iii) except for applicable requirements of the HSR Act, and except for such regulatory filings set forth on Schedule 3.5, require any ------------ material consent, approval or authorization of, or notice to, or declaration, filing or registration with, any governmental or regulatory authority. 24 Section 3.6. Required Consents. Except as set forth in Schedule ----------------- -------- 3.6., no Purchaser is a party to or bound by any mortgage, lien, deed of trust, - ---- lease, agreement or instrument involving obligations for payment, performance of services or delivery of goods in excess of $25,000, which continue for a period longer than twelve (12) months and are not terminable by Purchaser upon 90 days or less prior notice or any order, judgment or decree that would require the consent of another to the execution of this Agreement or prohibit or require the consent of another to, or make unduly burdensome the consummation of, any of the transactions referred to in or contemplated by this Agreement. Except as set forth in Schedule 3.6., the consummation of the transactions referred to in or ------------- otherwise contemplated by this Agreement will not result in a breach of any term or provision of or constitute a default under any agreement or instrument involving obligations for payment, performance of services or delivery of goods in excess of $25,000, which continue for a period longer than twelve (12) months and are not terminable by such Purchaser upon 90 days or less prior notice to which any of the Purchasers is a party, by which any Purchaser is bound, or otherwise gives any other party thereto a right to terminate the same or amend the terms thereof or result in an acceleration in the payment due under any note or any other agreement or instrument involving obligations for payment, performance of services or delivery of goods in excess of $25,000, which continue for a period longer than twelve (12) months and are not terminable by such Purchaser upon 90 days or less prior notice which is binding on any of the Purchasers, which breach, default, termination or acceleration would prevent any of the Purchasers from consummating the transactions contemplated by this Agreement, or in the creation of any lien, security interest, encumbrance or charge under any of the foregoing on any of the assets of the Purchasers. Section 3.7. Compliance with Laws and Contracts. (a) No Purchaser ---------------------------------- is in violation of, or, to the best Knowledge of Purchaser, under investigation with respect to, and no Purchaser has been charged with or given notice of any violation of, any applicable law, statute, order, rule, regulation, policy or guideline promulgated, or judgment entered, by any federal, state, local or foreign court or governmental authority relating to its operations, including, but not limited to, the anti-fraud and abuse amendments under the Social Security Act, except as set forth in Schedule 3.7. Each of the Purchasers has ------------ filed with the proper authorities all statements and reports required by the laws, regulations, licensing requirements, and orders to which it or any of their employees (because of their activities on behalf of any of the Purchasers) is subject, the failure to file which would reasonably be expected to have a material adverse effect on Parent or the operations of any hospital owned directly or indirectly by Parent. 25 (b) Each of the Purchasers and Subsidiaries has performed all obligations relating to its operations required to be performed by it, and no Purchaser or Subsidiary is in default with respect to any obligation to be performed under any contract, lease, guaranty, indenture, loan agreement, document or other agreement or arrangement relating to its respective operations to which it is a party or to which any of its assets are subject, nor is there any claim of such default, which default or its consequences would reasonably be expected to have a material adverse effect on the operations of Parent or any hospital owned directly or indirectly by Parent. Section 3.8. Title to the Assets. Purchasers have, and except for ------------------- the assets disposed of or consumed in the regular and ordinary course of business at the Closing will have, good, valid and marketable fee simple or leasehold, as the case may be, title to each and every item of real property owned by any Purchaser, and good, valid and marketable title to each and every item of personal property owned by any Purchaser (excluding leased personal property), whether tangible or intangible, which any Purchaser purports to own. All such properties are held free and clear of all title defects, liens, pledges, claims, charges, rights of first refusal, security interests or other encumbrances and are not, in the case of real property, subject to any rights- of-way, building or use restrictions, exceptions, easements, covenants, variances, reservations or limitations of any nature whatsoever, except (i) such encumbrances of record and such encumbrances as are set forth in the title commitments obtained in connection with any Purchaser acquisition of its respective properties, (ii) liens for current real property taxes and assessments not in default, (iii) mechanics', carriers', workmen's, repairmen's and other statutory liens, rights of way, building or use restrictions, exceptions, variances, reservations and other limitations of any kind, if any, which in the case of (x) liens (other than for current taxes) are not substantial in amount and (y) clauses (ii) and (iii) above do not materially impair the respective ordinary business operations of any Purchaser, and (iv) liens incurred in the ordinary course of business (A) in connection with its workers' compensation or unemployment insurance, or (B) to secure the performance of public or statutory obligations, performance and return of money, bonds and other similar obligations (collectively, the "BHC Permitted Encumbrances"). No Purchaser has received notice of any violation of any building, zoning or other law, ordinance or regulation with respect to its owned real property or its use by any Purchaser. None of such real property is subject to a condemnation or similar proceeding. Schedule 3.8 sets forth a list ------------ of rental and lease payments payable to any Purchaser in respect of any of its property, including its real property, containing the amount of rent, the lease expiration dates, and names of the Purchaser and tenants. 26 Section 3.9. Brokers and Finders. Except as set forth in Schedule ------------------- -------- 3.9., no Purchaser or Subsidiary (nor any affiliate thereof nor any officer or - ---- director thereof) has engaged any finder or broker in connection with the transactions contemplated hereunder. Section 3.10. Financial Statements. Schedule 3.10 consists of true, -------------------- ------------- correct and complete copies of Parent's audited, consolidated financial statements for the years ended June 30, 1994, 1995 and 1996, and the related unaudited financial statements of Parent for the three months ended September 30, 1996 (including the notes with respect to the audited financial statements, the "Financial Statements"). The Financial Statements have been prepared from and are in accordance with the books and records of Parent. The balance sheets included in the Financial Statements present fairly the financial position of Parent as of the respective dates thereof and the other financial statements included therein present fairly the results of operations for the periods indicated, in each case in conformity with generally accepted accounting principles consistently applied during such periods, except as set forth in Schedule 3.10. Since September 30, 1996, Parent has not made any distributions - ------------- with respect to its stock, and Purchasers have not purchased (or agreed to purchase) any of Parent's stock. Purchasers are not subject to any obligations which might require them to repurchase any of Parent's stock. Section 3.11. Certain Representations With Respect to the Facilities. ------------------------------------------------------ Each of the facilities now directly or indirectly owned and operated by Parent is listed on Schedule 3.11 (the "Facilities"), is duly licensed by the state in ------------- which it is located as a hospital, psychiatric hospital or residential treatment center or similar facility, as the case may be, authorized to operate the business conducted by it as currently operated and to operate the numbers of beds at the location set forth in Schedule 3.11. Each of the Facilities ------------- participates in the Medicare, Medicaid and CHAMPUS programs, except as set forth in Schedule 3.11. All material licenses, permits, certifications, certificates ------------- of need and contracts which are necessary to operate the businesses of the Facilities (collectively, the "Facility Businesses") are valid and in good standing. None of the Facilities has incurred or committed for expenditures which require certificates of need which have not been duly obtained. Each of the Facilities is duly accredited by the Joint Commission on Accreditation of Healthcare Organizations for the three-year periods ended as set forth by Facility in Schedule 3.11. ------------- Section 3.12. Litigation or Proceedings. Schedule 3.12 contains a ------------------------- ------------- list of each pending lawsuit or legal proceeding to which any Purchaser is a party or which arose out of or in connection with the operations of any Purchaser or, to the 27 Purchaser's best Knowledge, which has been threatened against any Purchaser in connection with any of their operations which, in the case of threatened lawsuits or litigation, would reasonably be expected to have a material adverse effect on any Facility. Except as disclosed on Schedule 3.12, no Purchaser has ------------- within the last three years been subject to any formal or informal (of which any Purchaser has received notice) investigations or proceedings of the Department of Health of the state in which it operates, the United States General Accounting Office, the Health Care Financing Administration, the Department of Justice, the Federal Trade Commission or other similar governmental agencies with respect to any Facility. There are no such claims, actions, proceedings or investigations, of which any Purchaser has received notice, pending or, to the best Knowledge of Purchaser, threatened challenging the validity or propriety of the transactions contemplated by this Agreement. No Purchaser is now a party or subject to any injunction, order, or decree restricting the method of the conduct of its business or the marketing of any of its services, nor, except as disclosed on Schedule 3.12, has any governmental agency investigated or ------------- requested (other than on a routine basis) within the last three years information with respect to such methods of business or marketing of services; no Purchaser has received any claim that such entity currently violates any federal, state, or local law, ordinance, rule or regulation, which would reasonably be expected to have a material adverse effect on the operations of Purchaser, taken as a whole, and, to the best of the Purchaser's Knowledge, no such claim is or has been threatened; and, except as disclosed on Schedule 3.12, ------------- there have been no developments materially adverse to any Purchaser within the last three years with respect to any pending or threatened claim, action or proceeding of an administrative or judicial nature, including but not limited to those referred to in Schedule 3.12, and including, without limitation, any such ------------- pending or threatened claim, action or proceeding arising from or relating to (i) the assertion by any governmental authority of any retroactive adjustment of the sums which any Purchaser was entitled to receive pursuant to government or third party reimbursement programs including, without limitation, Medicare and Medicaid, or (ii) any allegation by any governmental authority of fraud or abuse by any current or former officers or employees of any Purchaser in connection with the making of any application for reimbursement pursuant to the government or third party reimbursement programs referred to in the preceding clause (i). Section 3.13. Employee Benefits. Schedule 3.13 contains a list of ----------------- ------------- (i) each pension, profit-sharing, bonus, deferred compensation, or other retirement plan or arrangement of any Purchaser, whether oral or written, which constitutes an "employee pension benefit plan" as defined in Section 3(2) of ERISA, (ii) each medical, health, disability, insurance or other plan or arrangement of any Purchaser, whether oral or written, which 28 constitutes an "employee welfare benefit plan" as defined in Section 3(1) of ERISA, and (iii) each other employee benefit or perquisite provided by any Purchaser in which any employee of any of Purchaser participates in his or her capacity as such which are material to Purchaser. A true and complete copy of each such written plan or agreement described in Schedule 3.13 has heretofore ------------- been furnished or made available to CPC. Section 3.14. Taxes and Tax Returns. Each Purchaser and Subsidiary --------------------- has duly filed all federal, state and local tax and informational returns required to be filed by it (all of which are true and correct in all material respects) and has duly paid or made provision for the payment of all taxes including, without limitation, income, franchise, excise, sales, use and payroll taxes (including any interest or penalties) which are due with respect to all periods prior to the closing to the appropriate tax authorities. There are no pending examinations by the IRS or any state taxing authority and there has been no waiver of any statute of limitations with respect to the taxation of any Purchaser. There are no liens with respect to taxes, including without limitation, income, franchise, excise, sales, use and payroll taxes (except for liens with respect to real property taxes not yet delinquent) upon any of the assets of any Purchaser. Each Purchaser has withheld proper and accurate amounts from its employees' compensation in full and complete compliance with all withholding and similar provisions of the Code, and any and all other applicable laws. Section 3.15. Employees. Schedule 3.15 contains a list as of a --------- ------------- recent date, by Facility, of each of the employees of any Purchaser, their current salary or wage rates, of such employees earning greater than $50,000 per annum. Except for annual raises granted consistently with each Purchaser's prior practices, since June 30, 1996, there has not been any increase in the compensation payable or to become payable by any Purchaser to any of its officers, employees or agents, or any bonus payment or arrangement made to or with any such person, other than bonuses paid in accordance with Purchaser's established bonus programs. No Purchaser has incurred any liability, or, to the best Knowledge of Purchasers, taken or failed to take any action that will result in any liability, in respect of any failure to comply with the Fair Labor Standards Act or any other applicable laws dealing with minimum wages or maximum hours for employees. Except as set forth on Schedule 3.15, all employees of each ------------- Purchaser are terminable at will. Section 3.16. Labor Matters. No Purchaser has any collective ------------- bargaining agreement with any labor union, and there are no current negotiations with a labor union. Each of the Purchasers is in material compliance with all applicable laws respecting 29 employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice. To the best Knowledge of Purchaser, there are no unfair labor practice complaints against any Purchaser pending before the National Labor Relations Board. There is no labor strike, dispute, slowdown or stoppage actually pending or threatened against or affecting any Purchaser. No grievance which would reasonably be expected to have a material adverse effect on any of the Purchasers or any such arbitration proceeding arising out of or under collective bargaining agreements is pending and no claim therefor exists. No Purchaser has experienced any employee strike. Each of the Purchasers will advise CPC of any such labor dispute that arises before the Closing. Section 3.17. Certain Contracts. Schedule 3.17 lists all contracts ----------------- ------------- to which any Purchaser is a party involving obligations for payment, performance of services or delivery of goods in excess of $25,000 or total rent in excess of $100,000 and which require any Purchaser to continue to perform for a period of longer than twelve (12) months and are not terminable by such Purchaser upon 90 days or less prior notice (the "BHC Scheduled Contracts"). Each Purchaser has delivered or made available to the Sellers true and correct copies of all BHC Scheduled Contracts. All of such BHC Scheduled Contracts are valid and binding obligations of the parties thereto, are in full force and effect, and, to the best Knowledge of the Purchasers, are enforceable against the parties thereto in accordance with their respective terms. No Purchaser has received any notice that the other parties to the BHC Scheduled Contracts are (i) in material default under such BHC Scheduled Contracts or (ii) consider any Purchaser to be in default thereunder. Except as expressly noted in Schedule 3.17, to the best ------------- Knowledge of the Purchasers, no party to any of the BHC Scheduled Contracts intends to terminate or adversely modify its agreement(s) with respect thereto, or adversely change the volume of business done thereunder. Section 3.18. Certain Leases. Schedule 3.18 lists all leases to -------------- ------------- which any Purchaser is a party involving annual obligations on the part of any Purchaser for the payment of rent in excess of $25,000 per year or total rent in excess of $100,000 with respect to any real property leased to any Purchaser and involving lease or rental of real property by any Purchaser as lessor or sublessor in each case with an unexpired term of twelve (12) months or more and is not terminable by such Purchaser upon 90 days or less prior notice (the "BHC Scheduled Leases"). Each Purchaser has delivered or made available to the Sellers true and correct copies of all BHC Scheduled Leases and all related amendments, supplements and modifications and related documents (the "BHC Scheduled Lease Documents"). The BHC Scheduled Lease Documents are unmodified and in full force and effect, and there are no other agreements, written or oral, between any Purchaser and any third parties 30 claiming an interest in any Purchaser's interest in the BHC Scheduled Leases or otherwise relating to any Purchaser's use and occupancy of any such leased real property. All such BHC Scheduled Leases are valid and binding obligations of the parties thereto, are in full force and effect, and, to the best Knowledge of the Purchasers, are enforceable against the parties thereto in accordance with their terms; and to the best Knowledge of Purchasers, no event has occurred including, without limitation, the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby which (whether with or without notice, lapse of time or both) would constitute a default thereunder. No Purchaser has received any notice that the other parties to the BHC Scheduled Leases are (i) in material default under such BHC Scheduled Leases or (ii) consider any Purchaser to be in default thereunder. Section 3.19. Insurance. Schedule 3.19 contains a list of all --------- ------------- insurance policies of each of the Purchasers relating to their operations. To Purchaser's Knowledge, no Purchaser is in default under any policy listed on Schedule 3.19. - ------------- Section 3.20. Environmental. Except as disclosed in any phase I ------------- environmental report delivered to Purchaser pursuant to this Agreement or as set forth on Schedule 3.20: ------------- (a) Each Purchaser is currently in compliance in all material respects with the Environmental Laws which compliance includes, but is not limited to, the possession by each Purchaser of all permits and other governmental authorization required under the Environmental Laws, and compliance in all material respects with the terms and conditions thereof; (b) No Purchaser has stored, disposed of or arranged for disposal of any Materials of Environmental Concern on any of the real property owned by it, except in material compliance with the Environmental Laws; (c) No Purchaser has received any communication (written or, the best Knowledge of Purchaser, oral), whether from a governmental authority, citizens group, employee or otherwise, that alleges that any Purchaser is not in material compliance with the Environmental Laws or the Medical Waste Laws, and, to the best Knowledge of Purchaser, there are no circumstances that may prevent or interfere with such material compliance in the future. There is no Environmental Claim pending or, to the best Knowledge of Purchaser, threatened against, or which has been made known to, any Purchaser. (d) During the period that the assets used in connection with the Facility Businesses have been held by any of the Purchasers or their affiliates or predecessors in interest, to 31 the best Knowledge of Purchasers, there have been no actions, activities, circumstances, conditions, events or incidents, including, without limitation, the generation, handling, transportation, treatment, storage, release, emission, discharge, presence or disposal of any Materials of Environmental Concern, that would form the basis of any Environmental Claim against any Purchaser which would reasonably be expected to have a material adverse effect on any Facility. (e) Without in any way limiting the generality of the foregoing, to the best Knowledge of Purchaser, (i) no underground storage tanks are located on property owned or leased by any Purchaser, (ii) there is no friable asbestos contained in or forming part of any building, building component, structure or office space owned or leased by any Purchaser, and (iii) no PCBs are used or stored at any property owned or leased by any Purchaser. (f) With respect to the generation, transportation, treatment, storage and disposal or other handling of Medical Waste, each of the Purchasers is presently in compliance with all Medical Waste Laws. Section 3.21. Absence of Undisclosed Liabilities. Except as and to ---------------------------------- the extent reflected or specifically reserved against (which reserves are believed adequate in amount) in the Financial Statements had, at and as of the date of such Financial Statements, any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise and whether due or to become due) required to be reflected thereon or included therein (consistent with the standards set forth in Section 3.10), except for any liabilities which have been incurred since the dates of such Financial Statements in the ordinary course of business consistent with past practice (and that would not have a material adverse effect on any Facility) or which have been discharged or paid in full prior to the date hereof. Section 3.22. No Misleading Statements. No representation or ------------------------ warranty by any Purchaser contained in this Agreement, and no statement contained in any Schedule (including any supplement or amendment thereto) and the documents to be delivered at the Closing by or on behalf of any Purchaser to the Sellers or any of its representatives in connection with the transactions contemplated hereby (the Schedules, including any supplement or amendment thereto, and such other documents are herein referred to, collectively, as the "Purchaser Additional Documents"), and no written statement made or delivered by any Purchaser in connection with this Agreement or the transactions contemplated hereby, contains or will contain, to the best of the Purchaser's Knowledge, any untrue statement of a material fact, or, to the best Knowledge of the Purchaser, omits or will omit to state 32 any material fact necessary, in light of the circumstances under which it was or will be made, in order to make the statements herein or therein not misleading. Copies of all documents described on any Schedule hereto shall be correct and complete and all descriptions of such documents shall be true. Section 3.23. Adverse Change. Since August 31, 1996, there has not -------------- been any material adverse change in the condition (financial or otherwise) of the Purchaser taken as a whole. Section 3.24. Solvency. Immediately prior to and immediately -------- following the Closing Date: (a) the present fair salable value of the respective assets of each Purchaser (on a going concern basis) will exceed the respective liabilities of such Sellers and its debts (including its contingent obligations); (b) None of the Purchasers will have incurred debts (including contingent obligations) beyond its ability to pay such debts as such debts mature (taking into account the timing and amounts of cash to be received from any source, and of amounts to be payable on or in respect of debts); and the amount of cash available to each Seller after taking into account all other anticipated uses of funds is anticipated to be sufficient to pay all such amounts on or in respect of its debts, when such amounts are required to be paid; and (c) Each Purchaser will have sufficient capital with which to conduct their respective businesses, and the respective property of the Purchasers does not constitute unreasonably small capital with which to conduct their respective business. For purposes of this Section 3.24 "debt" means any liability or a (i) right to payment whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (ii) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such a right to any equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. Section 3.25 United Psychiatric Group Representations and -------------------------------------------- Warranties. The representations and warranties of the respective Sellers and Partnerships contained in those certain Asset Purchase Agreements, Stock Purchase Agreements and Purchase Agreement pursuant to which Purchaser acquired or will acquire the UPG Hospitals, including the exceptions thereto, and the disclosure schedules attached thereto are hereby incorporated herein by reference 33 in their entirety as if set forth herein as if such representations and warranties were made by Sellers to Purchaser. ARTICLE IV COVENANTS OF THE SELLERS ------------------------ Each of the Sellers hereby covenants and agrees as follows: Section 4.1. Access and Information. Between the date hereof and ---------------------- the Closing Date, each of the Sellers shall, and shall cause CPC of Texas and CRC San Antonio to, give to the Purchaser and its agents reasonable access during normal business hours and upon reasonable prior request to the premises, employees, books, accounts, records and other relevant documents of each of the Sellers and CPC of Texas and CRC San Antonio in respect of each Hospital Business, provided the Purchaser shall not have access to patient or employee -------- records or other records the disclosure of which would be prohibited by law, governmental rule or regulation. Section 4.2. Fulfillment of Conditions. Each of the Sellers shall ------------------------- execute and deliver prior to or at the Closing each contract that such Sellers are required hereby to execute and deliver prior to or at the Closing and each Seller shall take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each other condition to the obligations of the parties contained in this Agreement to the extent the satisfaction of such condition is within the control of any of the Sellers. Section 4.3. Conduct of the Hospital Businesses Prior to the ----------------------------------------------- Closing. On and after the date hereof and prior to the Closing, and except as otherwise consented to or approved by the Purchaser or required by this Agreement, each Seller shall, and shall cause CPC of Texas and CRC San Antonio to, conduct the businesses, operations and activities of their Hospital Business only in the ordinary course of business and consistent with past practices. Seller shall not dispose of capital assets relating to the Business having an aggregate book value in excess of $25,000; provided, however, that CPC may transfer all or a portion of the stock of CPC of Texas to another wholly-owned subsidiary of CPC. Each of the Sellers shall, and shall cause CPC of Texas and CRC San Antonio to, use all commercially reasonable efforts to keep available to the Purchaser the services of the present employees of its Hospital Business (except those dismissed for cause or those who voluntarily discontinue their employment) and to use all reasonable efforts to preserve for the Purchaser the goodwill of the suppliers, patients and others having business relations with its Hospital Business. The Sellers shall provide access to its employees upon reasonable notice to its employees for purposes relating to the conduct of the Business prior to the Closing. 34 Section 4.4. Title Commitments and Surveys. Sellers will deliver, as ----------------------------- soon as reasonably possible, to the Purchaser the Title Commitments for owner's title insurance from First American Title Insurance Company or their local issuing agents (collectively, the "Title Company"). The Sellers will also deliver, as soon as reasonably possible, to the Purchaser as-built surveys of the Real Property (the "Surveys"), showing the perimeter boundaries of the Real Property and all improvements thereon. The Title Commitments and the Surveys will be set forth on Schedule 2.7. ------------ Section 4.5. Notice and Cure. Sellers shall notify the Purchaser --------------- promptly in writing of, and contemporaneously will provide the Purchaser with true and complete copies of, any and all information or documents relating to, and will use all commercially reasonable efforts to cure before the Closing, any event, transaction or circumstance occurring after the date of this Agreement that causes or will cause any covenant or agreement of any of the Sellers under this Agreement to be breached in any material respect or that renders or will render untrue in any material respect any representation or warranty of Sellers contained in this Agreement as if the same were made on or as of the date of such event, transaction or circumstance. To the extent that a failure to do so would result in the material inaccuracy of any Schedule, each of the Sellers shall update and supplement (pursuant to Section 11.16 of this Agreement) any Schedule rendered inaccurate by any such event, transaction or circumstance. In addition, each Seller shall use all commercially reasonable efforts to cure, before the Closing, any material violation or material breach of any representation, warranty, covenant or agreement made by it in this Agreement, whether occurring or arising before or after the date of this Agreement. Section 4.6. Employee Benefits. After the Closing, each Seller ----------------- shall timely make appropriate distributions to, or for the benefit of, all former employees of each of the Sellers who do not become Hired Employees (as hereinafter defined) in respect of all employee pension benefit plans and employee health or welfare benefit plans (as such terms are defined in Section 3 of ERISA) which are in force and effect with respect to employees at any Hospital Business on the Closing Date in accordance with ERISA, the Code and the terms and conditions of such plans; provided that in no event shall the -------- termination of employment of such employees by any Seller constitute a "partial termination" of any Seller's benefit plans. Employee welfare plan benefits for each Hospitals' employees shall cease as of the Effective Time (as defined in Section 11.4) of the Closing Date; except that each Seller shall remain liable for all workers' compensation and employee health claims for hospitalized employees as of the Effective Time and their covered dependents to whom the Sellers are obligated to pay benefits as of the Closing Date, but such liability shall cease as 35 to each hospitalized employee at such time as such employee is discharged from the hospital and as to each hospitalized dependent as of the date his covered dependent is discharged from the hospital. Notwithstanding the foregoing sentence, in no event shall any Seller be liable after Closing to Hired Employees or dependents who are in a hospital receiving health care services on the Closing Date for continuation of health care benefits beyond the period required pursuant to the health care continuation provisions of Section 4980B of the Code and of Sections 601 through 609 of ERISA. The Purchaser and the Sellers shall cooperate to identify promptly after the Closing the employees and their covered dependents to whom the Sellers remain obligated to provide health benefits after the Closing under the preceding sentence. Section 4.7. HSR Act Filings. Sellers will (a) take promptly all --------------- actions necessary to make the filings required of the Sellers or their affiliates under the HSR Act, such filing to occur on or before October 23, 1996, (b) comply at the earliest practicable date with any request for additional information received by any Seller or their affiliates from the Federal Trade Commission (the "FTC") or the Antitrust Division of the Department of Justice (the "DOJ") pursuant to the HSR Act, and (c) cooperate with the Purchaser in connection with the Purchaser's filings under the HSR Act and in connection with resolving any investigation or other regulatory inquiry concerning the transactions contemplated by this Agreement commenced by either the FTC or the DOJ. Section 4.8. Environmental and Engineering Reports. Each of the ------------------------------------- Sellers shall order environmental phase one surveys of the Real Property and the real property owned by CRC San Antonio and engineering reports of the structural and mechanical systems of the Real Property, to be delivered to the Purchaser as soon as reasonably practicable but in any event on or before November 15, 1996. Section 4.9. Voting Agreement. At the Closing, CPC shall execute ---------------- and deliver the Stockholders' Agreement (the "Stockholders' Agreement") in the form attached hereto as Schedule 4.9. ------------ Section 4.10. Alternative Proposals. From the date of this Agreement --------------------- until the rightful termination of this Agreement pursuant to Article VIII of this Agreement, except for continuing the discussions concerning the possible sale of certain Hospitals of which Sellers shall keep Purchaser informed as to the progress (which discussions shall not result in a binding agreement to sell any such Hospital without the prior written consent of Purchaser), Sellers shall not, and shall not permit any of their subsidiaries or their respective employees, officers, directors, agents or representatives, directly or indirectly, initiate, solicit or 36 encourage any inquiries or proposals or enter into or continue any discussions, negotiations, understandings, arrangements or agreements relating to sale, exchange, transfer or other disposition of any substantial portion (which, for purposes of this Section 4.10, shall include the sale, exchange, transfer or other disposition of one or more Hospitals) of assets comprising the Business or the transactions contemplated within this Agreement and the Merger Agreement or the merger, amalgamation, combination or reorganization of any Seller (as such term is defined herein or in the Merger) with or into any other person, corporation, partnership, or entity (including, without limitation, any proposal or offer to the shareholders of CPC), or provide any assistance, information or data to, or otherwise cooperate or have discussions, with any other person, corporation, partnership, or entity in connection with any such inquiry, proposal or transaction. In the event that any Seller (as such term is defined herein or in the Merger Agreement) receives any inquiry, proposal or offer within this Section, or obtains information that such an inquiry, proposal or offer may be made, then such Seller shall provide Parent with notice thereof immediately following the receipt thereof, including the identity of the prospective purchaser or soliciting party. Section 4.12 Listing of Assets. Sellers shall provide Purchaser ----------------- with such list of the assets of CPC of Texas and/or CRC San Antonio as Purchaser may reasonably request. ARTICLE V COVENANTS OF THE PURCHASER -------------------------- The Purchaser covenants and agrees as follows: Section 5.1. Access and Information. Between the date hereof and ---------------------- the Closing Date, each of the Purchasers shall give to the Sellers and their agents reasonable access during normal business hours and upon reasonable prior request to the premises, employees, books, accounts, records and other relevant documents of each of the Purchasers and Subsidiaries, provided the Sellers shall -------- not have access to patient or employee records or other records the disclosure of which would be prohibited by law, governmental rule or regulation, and further provided that with respect to certain hospitals proposed to be acquired - ---------------- by Purchaser from affiliates United Psychiatric Corporation, a Delaware corporation (the "UPG Hospitals"), Purchaser only agrees to provide access to such information in the possession of Purchaser and to permit access to such UPG Hospitals and their employees (and information at such UPG Hospitals) when Purchaser deems that such access would be appropriate, but in no event later than November 15, 1996. 37 Section 5.2. Fulfillment of Conditions. Each of the Purchasers ------------------------- shall execute and deliver prior to or at the Closing each contract that such Purchasers are required hereby to execute and deliver prior to or at the Closing and each Purchaser shall take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each other condition to the obligations of the parties contained in this Agreement to the extent the satisfaction of such condition is within the control of any of the Purchasers. Section 5.3. Preservation and Access to Records After the Closing. ---------------------------------------------------- After the Closing, the Purchaser shall keep and preserve as long as legally required all medical records, patient records, medical staff records and other books and records of the Business existing as of the Closing relating to the conduct of the Business prior to the Closing. Upon request, Purchaser shall provide Sellers with a control policy addressing the length of time each document will be retained. The Purchaser will afford to the representatives of the Sellers, including its agents, affiliates, counsel and accountants, at the request of the Sellers, reasonable access to, and copies of (at Sellers' cost), the records transferred to the Purchaser at the Closing (including, without limitation, access to records of patients treated by the Sellers at the Hospitals) during normal business hours after the Closing Date. The Purchaser shall maintain the patient and medical staff records at the Hospitals in accordance with applicable law and the requirements of relevant insurance carriers. The Purchaser shall provide access to its employees upon reasonable notice for purposes relating to the conduct of the Business prior to the Closing. Section 5.4. Conduct of Business Prior to the Closing. On and after ---------------------------------------- the date hereof and prior to the Closing, and except as otherwise consented to or approved by the Sellers or required by this Agreement, each Purchaser and Subsidiary (as used in this Article V the term "Subsidiary" includes the UPG Hospitals after the acquisitions thereof by Purchaser) shall conduct its businesses, operations and activities only in the ordinary course of business and consistent with past practices; provided that Seller may dispose of all or a portion of its interest in hospitals in Texas or Cedar Vista Hospital. Purchasers shall not dispose of capital assets having an aggregate book value in excess of $25,000, excluding capital assets relating to facilities located in Texas or Cedar Vista Hospital. Each Purchaser shall and Parent shall cause each Subsidiary to use all commercially reasonable efforts to keep available the services of its present employees (except those dismissed for cause or those who voluntarily discontinue their employment) and to use all reasonable efforts to preserve the goodwill of the suppliers, patients and others having business relations with the Purchaser or any of its subsidiaries. Notwithstanding any statement contained in this Section to the contrary, Purchaser shall have no obligation with respect to the 38 UPG Hospitals until the acquisition of the UPG Hospitals is consummated, but Purchaser does hereby confirm that the UPG Hospitals are subject to contractual limitations substantially similar to those in this Section. Section 5.5. Certain Employee Matters. (a) Prior to the Closing, ------------------------ the Purchaser intends to offer employment in comparable positions, effective simultaneously with the Closing, to all of the employees of the Sellers and of CPC of Texas and CRC San Antonio working at the Hospitals as of the Closing Date. All such employees who accept the Purchaser's offer of employment shall be referred to herein as the "Hired Employees." Also prior to Closing, Purchaser will notify Sellers and CPC of Texas and CRC San Antonio of any employees to whom Purchaser does not intend to offer employment. In any event, Purchaser agrees to make a sufficient number of offers of employment such that Sellers' termination of all employees of the Hospitals prior to Closing under this Agreement and the Merger Agreement will not constitute a violation of the WARN Act. Except as otherwise provided for in this Agreement, Purchaser shall be responsible for all costs and liabilities attendant to such termination. (b) The Purchaser shall give all Hired Employees full credit for all of the accrued vacation, holiday and sick pay of such employees, either by allowing such employees the accrued time off reflected in the employment records of the Seller or by making full payments to such employees of the amounts which such employees would have received had they taken their accrued or accumulated holiday, vacation time. Purchaser shall not be obligated to pay any Hired Employee for accrued sick time upon the termination, whether voluntary or involuntary, of such Hired Employee. (c) The Purchaser shall offer health insurance benefits to all Hired Employees and their dependents (except those persons not having health insurance benefits with the Sellers immediately prior to the Closing), effective simultaneously with the Closing, and shall be responsible for all employee health claims resulting from occurrences before, on or after the Closing Date without regard to whether a Hired Employee is actively at work on said date, except those Hired Employees who are hospitalized on the Closing Date will remain the responsibility of the Sellers until they are discharged from the hospital. Notwithstanding the foregoing sentence, in no event shall the Sellers be liable after Closing to Hired Employees or dependents who are in a hospital receiving healthcare services on the Closing Date for continuation of healthcare benefits beyond the period required pursuant to the healthcare continuation provisions of Section 4980B of the Code and of Sections 601 through 609 of ERISA. Any amounts which have been applied toward satisfaction of the calendar year 1996 deductible on behalf of any Hired Employee under any insured employee welfare 39 benefit plan of the Sellers shall be deemed to be so applied toward satisfaction of the calendar year 1996 deductible under the applicable insured employee welfare benefit plan of the Purchaser. Any amounts which have accumulated towards any Hired Employee's satisfaction of a limitation on benefit payments or coverage under any employee welfare benefit plan of the Sellers shall be applied toward any such limitation under the applicable insured welfare benefit plan of the Purchaser, and the Purchaser shall cause its employee welfare benefit plans to waive any limitations for pre-existing conditions with respect to conditions affecting any Hired Employees as of the date of hire by Purchaser other than conditions affecting such Hired Employees which were excluded with respect to such Hired Employees as pre-existing conditions under the employee welfare benefit plan of the Sellers. The Purchaser shall take into account all service with the Sellers or any affiliate or division of the Sellers for purposes of determining whether an employee has satisfied the service requirements for eligibility, participation and all other purposes (including without limitation vesting of benefits) under all of the employee welfare benefit plans of the Purchaser (whether or not insured). (d) Except as otherwise provided for in this Agreement, Hired Employees will be offered employee benefits to the same extent as employees occupying similar positions with similar experience with Purchaser. Section 5.6. Excluded Assets. As soon as practicable after the --------------- Closing, the Purchaser shall return to CPC any Excluded Assets found after the Closing Date. This is not intended to be part of the purchase price for the Assets or a dividend. Section 5.7. Title Reports. The Purchaser shall deliver, as soon as ------------- reasonable possible, to the Sellers, the most recent title reports obtained by Purchaser in connection with its real property. The Purchaser shall also deliver as soon as reasonably possible, to the Sellers as-built surveys of real property owned by Purchaser showing the perimeter boundaries of such real property and all improvements thereon. The title reports and such surveys will be set forth on Schedule 5.7. ------------ Section 5.8. Notice and Cure. The Purchaser will notify CPC --------------- promptly in writing of, and contemporaneously will provide CPC with true and complete copies of, any and all information or documents relating to, and will use all commercially reasonable efforts to cure before the Closing, any event, transaction or circumstance occurring after the date of this Agreement that causes or will cause any covenant or agreement of the Purchaser under this Agreement to be breached in any material respect or that renders or will render untrue in any material respect any representation or warranty of Purchaser contained in this Agreement as if the same were made on or as of the date of 40 such event, transaction or circumstance. To the extent that a failure to do so would result in the material inaccuracy of any Schedule, Purchaser shall cause each of the Purchasers to update and supplement (pursuant to Section 11.16 of this Agreement) any Schedule rendered inaccurate by any such event, transaction or circumstance. In addition, Purchaser will use all commercially reasonable efforts to cure, before the Closing, any material violation or material breach of any representation, warranty, covenant or agreement made by it in this Agreement, whether occurring or arising before or after the date of this Agreement. Section 5.9. HSR Act Filings. The Purchaser will (a) take promptly --------------- all actions necessary to make the filings required of the Purchaser or its affiliates under the HSR Act, such filing to occur on or before October 23, 1996, (b) comply at the earliest practicable date with any request for additional information received by the Purchaser or its affiliates from the FTC or the DOJ pursuant to the HSR Act, and (c) cooperate with the Seller in connection with the Sellers' or its affiliates' filings under the HSR Act and in connection with resolving any investigation or other regulatory inquiry concerning the transactions contemplated by this Agreement commenced by either the FTC or the DOJ. Section 5.10. Alternative Proposals. From the date of this Agreement --------------------- until the rightful termination of this Agreement pursuant to Article VIII of this Agreement, Purchaser shall not, and shall not permit any of their subsidiaries or their respective employees, officers, directors, agents or representatives, directly or indirectly, initiate, solicit or encourage any inquiries or proposals or enter into or continue any discussions, negotiations, understandings, arrangements or agreements relating to sale, exchange, transfer or other disposition of any substantial portion (which, for purposes of this Section 5.10, shall include the sale, exchange, transfer or other disposition of one or more Facilities, other than the hospitals located in State of Texas and Cedar Vista Hospital) of their assets (except in the ordinary course of business consistent with past practice) or the transactions contemplated within this Agreement, or the merger, amalgamation, combination or reorganization of any Purchaser with or into any other person, corporation, partnership, or entity (including, without limitation, any proposal or offer to the shareholders of Parent), or provide any assistance, information or data to, or otherwise cooperate or have discussions, with any other person, corporation, partnership, or entity in connection with any such inquiry, proposal or transaction. In the event that any Purchaser receives any inquiry, proposal or offer within this Section, or obtains information that such an inquiry, proposal or offer may be made, then such Purchaser shall provide CPC with notice thereof immediately following the receipt thereof, including the identity of the prospective purchaser or soliciting party. 41 Section 5.11. Voting Agreement. Purchaser shall use its best efforts ---------------- to cause all persons having voting rights to execute and deliver the Stockholders' Agreement at the Closing. Section 5.12. Environmental and Engineering Reports. Purchaser shall ------------------------------------- order such environmental phase one surveys of its real property as may reasonably be requested by Sellers and such engineering reports of the structural and mechanical systems of such real property as may reasonably be requested by Sellers, to be delivered to the Sellers as soon as reasonably practicable but in any event (if the date of the request permits) on or before November 16, 1996. (if the date of the request permits). Section 5.13. Employee Options. Purchaser will adopt an employee ---------------- stock option plan (the "Option Plan") prior to the time shares of BHC Common Stock are first registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (an "IPO"). Purchaser agrees that the Option Plan shall provide that 20% of each option grant will vest at the time of grant, with an additional 20% to vest on each anniversary of the date of grant. It is contemplated that the Option Plan will provide for the grant of options to purchase up to approximately 10% of the shares of BHC Common Stock (on a fully diluted basis and assuming that CPC no longer owns any Series A Preferred Stock) and that approximately 80% of the options available under the Option Plan will be granted at the time or before the IPO. Hired Employees will be granted options on the same terms as employees of Purchaser occupying similar positions with Purchaser. Section 5.14. Election to Board. Parent agrees to amend its Bylaws ----------------- prior to the Closing in accordance with Section 1.1 of the Stockholders' Agreement in the form annexed hereto as Schedule 4.9. Contemporaneously with ------------ the Closing, Richard L. Conte, Wendy L. Simpson and Robert L. Thomas (such individuals and any replacements thereof, "Sellers' Designees") shall be elected to Parent's Board of Directors. Section 5.15. Directors and Officers' Insurance. At the Closing, --------------------------------- Parent shall deliver to Sellers a letter from a national insurance brokerage firm reasonably satisfactory to Sellers which states that such company believes that it would be able to place officers' and directors' insurance for Purchaser in an amount of $35,000,000 at a commercially reasonable cost assuming Purchaser were a public company at the date of Closing. Following an IPO, at the request of Sellers' Designees, Purchaser will use its best efforts to obtain officers' and directors' insurance in such amount as is customary among companies of the same size as Purchaser and engaged in the same business, but not to be less than $35,000,000. Section 5.16. Conte Consulting Agreement. Purchaser shall enter into -------------------------- an agreement prior to the Closing with Richard L. 42 Conte on the terms contained in Schedule 5.16 hereto, which agreement shall ------------- contain such other terms and conditions consistent with the terms set forth on Schedule 5.16 as may be agreed upon by Purchaser and Mr. Conte. - ------------- Section 5.17. Formation of Subsidiaries. Prior to the Closing, ------------------------- Purchaser shall form one or more new corporations, which corporations shall purchase the Assets. Section 5.18 Financial Statements Purchaser shall provide Sellers -------------------- with monthly income statements and balance sheets for the Purchaser within 21 days of the end of each month. ARTICLE VI CONDITIONS PRECEDENT TO ----------------------- THE OBLIGATIONS OF THE SELLERS ------------------------------ All obligations of the Sellers which are to be discharged under this Agreement at the Closing are subject to the performance or waiver, at or prior to the Closing Date, in all material respects of all covenants and agreements contained herein which are to be performed by the Purchaser at or prior to the Closing Date and to the fulfillment, at or prior to the Closing Date, of each of the following conditions: Section 6.1. Representations and Warranties True. All of the ----------------------------------- representations and warranties made by Purchaser in Article III of this Agreement shall be true in all material respects on and as of the Closing Date as though such representations and warranties were made on and as of the Closing Date, except to the extent such representations and warranties are expressly made as of an earlier specified date and except to the extent a Schedule is supplemented in accordance with Section 11.16; the Purchaser shall have in all material respects performed and complied with all covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date; and the Sellers shall have been furnished certificates of the President and the Chief Financial Officer, of the Purchaser, dated the Closing Date, in his corporate capacity, certifying to the truth in all material respects of such representations and warranties as of the Closing Date and to the fulfillment in all material respects of such covenants and conditions. Section 6.2. Opinion of the Purchaser's Counsel. The Sellers shall ---------------------------------- have been furnished an opinion, dated the Closing Date, in form and substance reasonably satisfactory to the Seller, of counsel to Purchaser. 43 Section 6.3. Authority. All action required to be taken by or on --------- behalf of the Purchaser to authorize the execution, delivery and performance of this Agreement by the Purchaser and the consummation of the transactions contemplated hereby shall have been duly and validly taken. The Purchaser shall have delivered to the Sellers certified resolutions of its board of directors evidencing such authorization, together with a certified copy of its Certificate of Incorporation and Bylaws. Section 6.4. No Obstructive Proceeding. No suit, action or other ------------------------- proceeding shall have been instituted to restrain, enjoin or otherwise prevent or question the legality of the consummation of the transactions contemplated by this Agreement. Section 6.5. Consents and Approvals. The Sellers shall have ---------------------- obtained all third party consents reasonably necessary for the legal or authorized transfer of all material Assets. Section 6.6. HSR Act; Restraining Order. The waiting period under -------------------------- the HSR Act shall have expired or been terminated, and no order restraining or enjoining the transactions contemplated hereby shall have been obtained by the FTC, the DOJ or any state regulatory agency or any private party and be in effect. Section 6.7. Voting Agreement. The parties to Purchaser's Amended ---------------- and Restated Stockholders' Agreement dated June 30, 1993, as amended and restated as of December 30, 1993 and May 31, 1995, holding at least 80% of the total outstanding votes attributed to the issued and outstanding shares and subordinated notes of the Parent shall have executed and delivered the Stockholders' Agreement. Section 6.8. Prior Transactions. Purchaser shall have consummated ------------------ the acquisition of the UPG Hospitals. Such acquisition shall be on terms approved by Purchaser and Purchaser shall be reasonably satisfied with the assets, liabilities, operations, prospects and condition (financial and otherwise) of such acquired entities. Section 6.9. Financing. Purchaser shall have received, on terms --------- reasonably acceptable to Sellers, permanent financing in an amount not less than $100,000,000. Section 6.10. Employment Offers. Purchaser shall have made ----------------- employment offers to such persons as Purchaser and Seller shall mutually agree and on terms as the parties may agree. 44 Section 6.11. Execution of Lease. Purchaser and THC Indianapolis or ------------------- an affiliate thereof shall have entered into a lease and services agreement having the material terms and conditions set forth in Schedule 6.11 pursuant to ------------- which THC Indianapolis or affiliate thereof will lease space in and be provided services by Valle Vista Hospital from Purchaser. Section 6.12. Title Insurance. If the lender to the Purchaser --------------- referred to Section 6.9 shall require title insurance policies, Purchaser shall cause Seller to be an insured under the policies issued with respect to real property owned by Purchaser or its subsidiaries. Section 6.13. Adverse Change. There shall have been no material -------------- adverse change in condition (financial or otherwise) of the Purchaser and its subsidiaries from the date of this Agreement through the Closing Date. Section 6.14. Additional Agreements. Purchaser, its securities --------------------- holders and affiliates shall have entered into such additional agreements as may reasonably be required to be entered into by such parties on or before the Closing. Section 6.15. Registration Rights Agreement. Purchaser and Sellers ----------------------------- shall have entered into a Registration Rights Agreement substantially in the form of Schedule 6.15 attached hereto. ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS --------------------------------------- OF THE PURCHASER ---------------- All obligations of the Purchaser which are to be discharged under this Agreement at the Closing are subject to the performance or waiver, at or prior to the Closing Date, in all material respects of all covenants and agreements contained herein which are to be performed by the Sellers on or prior to the Closing Date and to the fulfillment, at or prior to the Closing Date, of each of the following conditions: Section 7.1. Representations and Warranties True. All of the ----------------------------------- representations and warranties made by Sellers in Article II of this Agreement shall be true in all material respects on and as of the Closing Date as though such representations and warranties were made on and as of the Closing Date, except to the extent such representations and warranties are expressly made as of an earlier specified date and except to the extent a Schedule is supplemented in accordance with Section 11.16; each of the Sellers shall have in all material respects performed or complied with all covenants and conditions required by this Agreement to be performed or complied 45 with by each of them prior to or at the Closing Date; and the Purchaser shall be furnished with certificates of the President and the Chief Financial Officer of the Sellers, dated the Closing Date, in his or her corporate capacity, certifying to the truth in all material respects of the representations and warranties of Sellers as of the Closing Date and to the fulfillment in all material respects of such covenants and conditions. Section 7.2. No Obstructive Proceeding. No suit, action or other ------------------------- proceeding shall have been instituted to restrain, enjoin or otherwise prevent or question the legality of the consummation of the transactions contemplated by this Agreement. Section 7.3. Opinion of the Seller's Counsel. The Purchaser shall ------------------------------- have been furnished an opinion, dated the Closing Date, in form and substance reasonably satisfactory to the Purchaser, of counsel to the Sellers. Section 7.4. Consents, Approvals and Licenses. The Purchaser shall -------------------------------- have received and been issued all licenses and approvals required under the provisions of state and federal law necessary for the Purchaser to legally conduct all relevant operations of the Hospitals being conducted by the Sellers on the Closing Date (except for the Controlled Substance Registration Certificate relating to the pharmacies in the Hospitals and such licenses and approvals shall be issued in due course and which are expected to be effective as of the Closing), and the Purchaser or the Sellers shall have obtained all third party consents reasonably necessary for the legal and authorized transfer of all material Assets, including, without limitation, the Scheduled Contracts and Scheduled Leases, except where the failure to receive such licenses, approvals and consents would not have a material adverse effect on the operations of Parent and its Subsidiaries, taken as a whole. Section 7.5. Title Insurance Policies. The Purchaser shall have ------------------------ been issued owner's title insurance policies by the Title Company in an amount set forth in Schedule 7.5 pursuant to the Title Commitments insuring as of the ------------ Closing Date the Purchaser's good, indefeasible and, to the extent available in the applicable jurisdiction, marketable title to the Real Property which shall contain no liens except for the Permitted Encumbrances, with the survey and other standard exceptions deleted, and except for liens approved by the Purchaser which arise between the dates of the Title Commitments and the Closing. Section 7.6. HSR Act; Restraining Order. The waiting period under -------------------------- the HSR Act shall have expired or been terminated and no order restraining or enjoining the transactions contemplated hereby shall have been obtained by the FTC, the DOJ or any state regulatory agency or any private party and be in effect. 46 Section 7.7. Financing. The Purchaser shall have received, on terms --------- reasonably acceptable to the Purchaser, permanent financing in an amount not less than $100,000,000. Section 7.8. Adverse Change. There shall have been no material -------------- adverse change in the Assets or condition (financial or otherwise) of the Hospital Businesses from the date of this Agreement through the Closing Date. Section 7.9. Voting Agreement. CPC shall have executed and ---------------- delivered the Stockholders' Agreement. Section 7.10. Execution of Lease. Purchaser and THC Indianapolis or ------------------ an affiliate thereof shall have entered into a lease and services agreement having the material terms and conditions set forth in Schedule 6.12 pursuant to ------------- which THC Indianapolis or an affiliate thereof will lease space in and be provided services by Valle Vista Hospital. Section 7.11 Additional Agreements. Sellers and their affiliates --------------------- shall have entered into such additional agreements as may reasonably be required to be entered into by such parties on or before the Closing. ARTICLE VIII TERMINATION ----------- Section 8.1. Optional Termination. This Agreement may be terminated -------------------- and the sale of the Assets abandoned (i) at any time prior to the Closing by the mutual written consent of CPC and Parent; (ii) by Parent if any Seller adds any supplement to any Schedule to this Agreement or the Merger Agreement after the date hereof which supplement shall reasonably be expected to result in a material adverse change in the consolidated financial condition or results of operations of the Business or, after the Closing Date, Parent, in excess of $500,000 for an individual failure or $2,500,000 for all such failures, except that, in the case of criminal activity or fraud, Parent shall have the right to terminate this Agreement without regard to the preceding dollar limitations; provided that Parent must notify CPC of its election -------- 47 to terminate the Agreement pursuant to this Section 8.1 within ten business days after its receipt of such supplement; (iii) by CPC if any Purchaser adds any supplement to any Schedule to this Agreement or the Merger Agreement after the date hereof which supplement shall reasonably be expected to result in a material adverse change in the consolidated financial condition or results of operations of CPC or, after the Closing Date, Parent, in excess of $500,000 for an individual failure or $2,500,000 for all such failures other than breaches of Section 3.25 hereof and $2,500,000 for breaches of Section 3.25 hereof, except that, in the case of criminal activity or fraud, CPC shall have the right to terminate this Agreement without regard to the preceding dollar limitations; provided that CPC must notify Parent of its election to terminate -------- the Agreement pursuant to this Section 8.1 within ten business days after its receipt of such supplement; (iv) by Parent at any time prior to November 15, 1996, if the environmental phase one surveys and engineering reports with respect to the Real Property ordered by the Sellers pursuant to this Agreement should not be reasonably satisfactory to Parent; and (v) by CPC at any time prior to November 15, 1996, if the environmental phase one surveys and engineering reports with respect to real property owned by Purchaser or its subsidiaries should not be reasonably satisfactory to Sellers. In addition, this Agreement shall immediately terminate in the event of the termination of the Merger Agreement. Section 8.2. Mandatory Termination. If the Closing has not occurred --------------------- by March 31, 1997, this Agreement shall automatically terminate, unless extended by the written agreement of CPC and the Parent. Section 8.3. Termination Consequences. In the event this Agreement ------------------------ is terminated pursuant to Section 8.1 or Section 8.2, then, except as expressly provided to the contrary in this Agreement, the parties shall be discharged from their obligations under this Agreement, and neither of the parties nor any of their respective shareholders, directors or officers shall have any liability to the other party for costs, expenses, loss of anticipated profits, consequential damages or otherwise. Promptly upon the termination of this Agreement, the Purchaser shall deliver to CPC all documents (and copies thereof in its possession) concerning the Hospital Businesses previously delivered to the Purchaser. ARTICLE IX INDEMNIFICATION --------------- Section 9.1. Indemnification by the Sellers. After the Closing and ------------------------------ subject to the limitations set forth in this Article IX the Sellers shall jointly and severally indemnify and hold harmless 48 the Purchaser (and its stockholders, employees, officers, directors, subsidiaries, agents and representatives) from and against all liabilities, damages, costs and expenses (including reasonable attorneys' fees) incurred by such entities and persons (collectively, the "Damages") arising out of any breach, misrepresentation or nonfulfillment by any Seller of any of its representations, warranties or covenants set forth in this Agreement. Section 9.2. Indemnification by the Purchaser. (a) After the -------------------------------- Closing and subject to the limitations set forth in this Article IX, Purchaser and the Subsidiaries shall jointly and severally indemnify and hold harmless the Sellers (and their stockholders, employees, officers, directors, agents and representatives) from and against all Damages arising out of any breach, misrepresentation or nonfulfillment by any Purchaser of any of its representations, warranties or covenants set forth in this Agreement. (b) Furthermore, after the Closing and subject to the limitations set forth in this Article IX, Purchaser shall jointly and severally indemnify and hold harmless the Sellers (and their stockholders, employees, officers, directors, agents and representatives) from and against all damages, if any, arising from any claims arising from Seller's failure to obtain Purchaser's agreement to assume the Seller's rights and obligations under the Seller's Collective Bargaining Agreement with Local 250, of the Service Employees International Union, at its CPC Belmont Hills facility, including any liability of Sellers resulting from the termination of such agreement. This obligation to indemnify should not be construed as an express or implied assumption of such Collective Bargaining Agreement by the Purchaser, as Purchaser is not assuming any of the obligations, terms and/or conditions of any Collective Bargaining Agreement which Seller may have in effect with any labor organization. Section 9.3. Limitations. (a) Neither Sellers nor Purchaser shall ----------- have any liability to the other under this Article IX and no claim under this Article IX shall: (i) accrue unless and only to the extent that the actual liability of (A) the Sellers (as a group) pursuant to the indemnification provisions hereof and the Merger Agreement exceeds $2,500,000 in the aggregate, (B) the Purchaser (as a group) pursuant to the indemnification provisions hereof and in the Merger Agreement (other than liability arising as a result of breaches of Section 3.25 hereof or Section 3.25 of the Merger Agreement) exceeds $2,500,000 in the aggregate, or (C) the Purchaser (as a group) pursuant to the indemnification provisions of this Agreement and the Merger Agreement arising as a result of breaches of Section 3.25 hereof and Section 3.25 of the Merger Agreement exceeds $2,500,000 in the aggregate each a "Relevant Claim"); (ii) be made to the extent that any loss is recovered under a policy of insurance payable to the Indemnified Party which policy is in force on the date of loss; (iii) be made following the three year anniversary of the Closing Date except with respect to Purchaser's obligations under Section 5.14. 49 (b) The liability of Sellers shall cease, and any subsisting claim shall be withdrawn, upon the Hospital Businesses (or the individual Hospital relating to such claim) ceasing for any reason to be directly or indirectly wholly owned by the Purchaser or by a corporation controlled, directly or indirectly, by the Purchaser. (c) In the event that an Indemnified Party is entitled to recover any sum (whether by payment, discount, credit or otherwise) from any third party in respect of any matter for which a claim of indemnity could be made against the party hereto that would be liable for the Damages to an Indemnified Party hereunder (an "Indemnifying Party"), the Indemnified Party shall use commercially reasonable efforts to recover such sum from such third party (but shall not be required to institute legal proceedings) and any sum recovered will reduce the amount of the claim; and if the Indemnifying Party pays to the Indemnified Party an amount in respect of, and the Indemnified Party subsequently recovers from a third party a sum which is referable to, that claim, the Indemnified Party shall forthwith repay to the Indemnifying Party, so much of the amount paid by it as does not exceed the sum recovered from the third party less all reasonable costs, charges and expenses incurred by the Indemnified Party in obtaining payment in respect of that claim and in recovering that sum from the third party. (d) If either party is liable to the other for Damages arising out of any breach, misrepresentation or nonfulfillment of any representations, warranties or covenants set forth in this Agreement, then the liability of the Indemnifying Party shall be reduced and any amount paid shall be refunded when and to the extent that the Indemnified Party obtains the benefit of a reduction in its liability for its tax (whether by way of credit or otherwise) which it would not have obtained had the breach which gave rise to liability of the Indemnifying Party not arisen. Section 9.4. Method of Asserting Claims. All claims for -------------------------- indemnification by any Indemnified Party under this Article IX will be asserted and resolved as follows: (a) In the event any claim or demand is asserted against or sought to be collected from an Indemnified Party by a person other than the Seller, the Purchaser or their affiliates (a "Third Party Claim"), the Indemnified Party shall deliver a notice of its claim (a "Claim Notice") to the Indemnifying Party within fifteen (15) calendar days of receipt of notice of such Third Party Claim by the Indemnified Party. If the Indemnified Party fails to provide the Claim Notice within fifteen (15) calendar days after the Indemnified Party 50 receives notice of such Third Party Claim, the Indemnifying Party will not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim if the Indemnifying Party's ability to defend has been materially prejudiced by such failure of the Indemnified Party. The Indemnifying Party will notify the Indemnified Party within thirty (30) calendar days after receipt of the Claim Notice (the "Notice Period") whether the Indemnifying Party desires, at the sole cost and expense of the Indemnifying Party, to defend the Indemnified Party against such Third Party Claim with counsel reasonably satisfactory to the Indemnified Party. (i) If the Indemnifying Party notifies the Indemnified Party within the Notice Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section, then the Indemnifying Party will have the right to defend, at its sole cost and expense, such Third Party Claim by all appropriate proceedings, which proceedings will be prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party. The Indemnifying Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided that the Indemnified Party may, at its -------- sole cost and expense, file during the Notice Period prior to the time the Indemnifying Party notifies the Indemnified Party that the Indemnifying Party desires to defend the Indemnified Party any motion, answer or other pleadings that the Indemnified Party may deem necessary or appropriate to protect its interests or those of the Indemnifying Party and not prejudicial, in the reasonable judgment of the Indemnifying Party, to the Indemnifying Party (it being understood and agreed that, except as provided in subsection (a)(ii) hereof, if an Indemnified Party takes any such action that is prejudicial and causes a final adjudication that is adverse to the Indemnifying Party, the Indemnifying Party will be relieved of its obligations hereunder with respect to the portion of such Third Party Claim prejudiced by the Indemnified Party's action); and 51 provided further that if requested by the Indemnifying -------- ------- Party, the Indemnified Party agrees, at the sole cost and expense of the Indemnifying Party, to cooperate with the Indemnifying Party and its counsel in contesting any Third Party Claim that the Indemnifying Party elects to contest, or, if appropriate and related to the Third Party Claim in question, in making any counterclaim against the person asserting the Third Party Claim, or any cross-complaint against any person (other than the Indemnified Party or any of its affiliates). The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this Section 9.4(a)(i), and except as provided in the preceding sentence, the Indemnified Party will bear its own costs and expenses with respect to such participation. (ii) If the Indemnifying Party fails to notify the Indemnified Party within the Notice Period that the Indemnifying Party desires to defend the Indemnified Party pursuant to this Section 9.4(a), or if the Indemnifying Party gives such notice but fails to prosecute diligently or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Notice Period, then the Indemnified Party will have the right to defend, at the sole cost and expense of the Indemnifying Party, a Third Party Claim by all appropriate proceedings, which proceedings will be promptly and vigorously prosecuted by the Indemnified Party to a final conclusion or will be settled at the discretion of the Indemnified Party (with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided that if requested by the -------- Indemnified Party, the Indemnifying Party agrees, at the sole cost and expense of the Indemnifying Party, to cooperate with the Indemnified Party and its counsel in contesting any Third Party Claim which the Indemnified Party is contesting, or, if appropriate and related to the Third Party Claim in question, in making any counterclaim 52 against the person asserting the Third Party Claim, or any cross-compliant against any person (other than the Indemnifying Party or any of its affiliates). Notwithstanding the foregoing provisions of this subsection, if the Indemnifying Party has notified the Indemnified Party with reasonable promptness that the Indemnifying Party disputes its liability to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in, favor of the Indemnifying Party in the manner provided in subsection (b) of this Section, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this Section or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party will reimburse the Indemnifying Party in full for all costs and expenses incurred by the Indemnifying Party in connection with such Third Party Claim. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this Section, and the Indemnifying Party will bear its own costs and expenses with respect to such participation. (b) In the event any Indemnified Party should have a claim against any Indemnifying Party hereunder that does not involve a Third Party Claim being asserted against or sought to be collected from the Indemnified Party, the Indemnified Party shall deliver an Indemnity Notice (as hereinafter defined) to the Indemnifying Party. (The term "Indemnity Notice" shall mean written notification of a claim for indemnity under Article IX hereof (which claim does not involve a Third Party Claim or is a Tax Claim) by an Indemnified Party to an Indemnifying Party pursuant to this Section 9.4, specifying the nature of and specific basis for such claim and the amount or the estimated amount of such claim.) The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party's rights hereunder except to the extent that an Indemnifying Party demonstrates that it has been prejudiced thereby. If the Indemnifying Party does not notify the Indemnified Party within thirty (30) calendar days following its receipt of a Claim Notice or an Indemnity Notice that the Indemnifying 53 Party disputes its liability to the Indemnified Party hereunder, such claim specified by the Indemnified Party will be conclusively deemed a liability of the Indemnifying Party hereunder and the Indemnifying Party shall pay the amount of such liability to the Indemnified Party on demand, or on such later date (i) in the case of a Third Party Claim, as the Indemnified Party suffers Damages in respect of such Third Party Claim, (ii) in the case of an Indemnity Notice in which the amount of the claim is estimated, when the amount of such claim becomes finally determined or (iii) in the case of a Tax Claim, within fifteen (15) days following final determination of the item giving rise to the claim for indemnity. If the Indemnifying Party has timely disputed its liability with respect to such claim, as provided above, the Indemnifying Party and the Indemnified Party agree to proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations, such dispute may be resolved by litigation in an appropriate court of competent jurisdiction. (c) In the event the Purchaser should claim indemnity against Sellers hereunder, the Purchaser agrees to give Sellers reasonable access to the books and records and employees of the Purchaser in connection with the matters for which indemnification is sought hereunder, to the extent Sellers reasonably deem necessary in connection with its rights and obligations hereunder and to the extent any privileged information of the Purchaser will not be adversely affected. (d) The Indemnified Party shall assist and cooperate with the Indemnifying Party in the conduct of litigation, the making of settlements and the enforcement of any right of contribution to which the Indemnified Party may be entitled from any person or entity in connection with the subject matter of any litigation subject to indemnification hereunder. In addition, the Indemnified Party shall, upon request by the Indemnifying Party or counsel selected by the Indemnifying Party (without payment of any fees or expenses to the Indemnified Party or an employee thereof), attend depositions, hearings and trials, assist in the securing and giving of evidence, assist in obtaining the presence or cooperation of witnesses, and make available its own personnel; and shall do whatever else is necessary and appropriate in connection 54 with such litigation. Subject to the right of the Indemnifying Party to control the litigation, the Indemnified Party shall not make any demand upon the Indemnifying Party or counsel for the Indemnifying Party in connection with any litigation subject to indemnification hereunder, except a general demand for indemnification as provided hereunder. If the Indemnified Party shall fail to perform such obligations as Indemnified Party hereunder or to cooperate with the Indemnifying Party in Indemnifying Party's defense of any suit or proceeding, such cooperation to include, without limitation, attendance at all depositions and the provision of all documents relevant to the defense of any claim, then, except where such failure does not have an adverse effect on the Indemnifying Party's defense of such claims, the Indemnifying Party shall be released from all of its obligations under this Agreement with respect to that suit or proceeding and any other claims which had been raised in such suit or proceeding. (e) Following indemnification as provided for hereunder, the Indemnifying Party shall be subrogated to all rights of the Indemnified Party with respect to all Persons relating to the matter for which indemnification has been made. Section 9.5. Exclusive. Any dispute arising under this Agreement or --------- in connection with or as a result of the transactions contemplated by this Agreement or any Damages or injury alleged to be suffered by either party as a result of the actions or failure to act by any other party shall, unless otherwise specifically stated, be governed solely and exclusively by the provisions of this Article IX. Section 9.6. METHOD OF PAYMENT. ----------------- (a) Any amounts required to be paid to Purchaser by Sellers pursuant to Section 9.1 hereof shall be paid in cash. (b) Any amounts required to be paid to Sellers by Purchaser pursuant to Section 9.2 and Section 11.22 hereof or by virtue of any breach of any other agreements executed concurrently herewith or in connection with the Closing (the "Additional Amounts") shall be in the form of additional shares of BHC Preferred Stock (and/or, at the election of CPC, BHC Common Stock so long as CPC thereupon owns less than 20% of the outstanding BHC Common Stock) (the "Additional Shares") such that the value of the BHC Common Stock and BHC Preferred Stock theretofore issued pursuant to this Agreement (including pursuant to this Section 9.6), with such value being determined prior to the issuance of the Additional Shares (the "Original Value"), plus the value of the Additional Shares equals the Original Value plus the Additional Amounts after giving effect to the dilutive effects caused by the issuance of the Additional Shares, all as provided below. For example, assume that the value of the BHC Common Stock and BHC Preferred Stock held by Sellers prior to the issuance of Additional Shares is $50 million and that Sellers are entitled to receive $3 million from Purchaser pursuant to Section 9.2 hereof. In such case, BHC shall issue to Sellers a number of shares of BHC Preferred Stock (or BHC Common Stock as provided above) such that following the issuance of such shares (and after giving effect to the reduced value of the Original Shares as a result of the dilution caused by the issuance of the Additional Shares) Sellers shall hold BHC Common Stock and BHC Preferred Stock having a value of $53 million. 55 (c) If at the time Additional Shares are to be issued pursuant to Section 9.2(b) BHC Common Stock is not publicly traded, the number of Additional Shares to be issued to Sellers pursuant to Section 9.6(b) hereof shall be determined as provided in this Section 9.6(c). Promptly upon determination of the Additional Amounts, Parent and CPC shall attempt in good faith to agree upon the number of Additional Shares to be issued to Sellers. If the parties are unable to agree upon the number of Additional Shares to be issued to Sellers within 30 days of the date of the determination of the Additional Amounts, Parent and CPC shall each appoint one investment banker not affiliated with either party who is experienced in valuing businesses similar to Parent's business to determine the number of Additional Shares to be issued to Sellers, taking into account the reduced value of the Original Shares as a result of the dilutive effect of the issuance of Additional Shares. If the two investment bankers are unable to agree upon the number of Additional Shares to be issued to Sellers within 30 days, CPC and Parent shall deliver to the other their determination of the number of Additional Shares to be issued to Sellers and shall jointly select a third investment banker with the same qualifications to determine the number of Additional Shares to be issued to Sellers. If CPC and Parent are unable to agree upon the third investment banker, such investment banker shall be selected by an arbitrator selected pursuant to the commercial rules of the American Arbitration Association. The third investment banker shall select either the number of Additional Shares to be issued to Sellers submitted by CPC or the number of Additional Shares to be issued to Sellers submitted by Parent as the number of Additional Shares to be issued to Sellers. Promptly following the determination of the number of Additional Shares to be issued to Sellers, Parent shall issue to Sellers such Additional Shares. The fees and expenses of such investment bankers shall be borne by Parent. (d) If at the time Additional Shares are to be issued pursuant to Section 9.2(b) BHC Common Stock is publicly traded, the value of Additional Shares to be issued to Sellers pursuant to Section 9.6(b) shall be determined as provided in this Section 9.6(d). Promptly upon determination of the Additional Amounts, the Parent shall issue a press release stating, among other things, the amount owed to Sellers, that Additional Shares will be issued in satisfaction of such obligation and the method by which the value of the Additional Shares will be determined. The average closing price of the BHC Common Stock on the principal exchange on which it is traded or on the NASDAQ National Market System (or, if such stock is not so traded, then the average of the closing bid and asked prices of such stock) for the 20 business day period commencing five business days following the issuance of the press release shall then be determined (the "Average Price"). Promptly following the determination of the Average Price, the Parent shall issue to Sellers Additional Shares with an aggregate value (valuing each Additional Share at the Average Price) such that Sellers then hold BHC Common Stock and BHC Preferred Stock with an aggregate value (valuing each share at the Average Price) equal to the Original Value (for such purposes, the Original Value will be determined using the method of calculation for the Average Price, except that the 20 business day period shall be the 20 business days preceding the date of determination of the Additional Amounts plus the Additional Amounts. 56 (e) For purposes of this Section 9.6, the value of a share of BHC Preferred Stock shall be deemed to be equal to the value of a share of BHC Common Stock. (f) Any payments required pursuant to this Section 9.6 shall be considered as adjustments to Purchase Price and shall not be considered a dividend. ARTICLE X TAX AND MEDICARE MATTERS ------------------------ Section 10.1. Federal, State and Local Taxes. (a) The Sellers shall ------------------------------ be responsible for the preparation and filing of the federal, state and local tax returns of the Sellers with respect to the Hospital Businesses for the periods ending prior to the Closing Date and with respect to periods which do not end prior to the Closing, for the portion of the period through the Closing Date, and Seller shall be responsible for all such taxes. Where applicable, CPC of Texas may be included in any federal consolidated income tax return or state or local consolidated or combined tax return for any affiliated group of which CPC is the common parent and for the consolidated or combined taxable year which includes the Closing Date. The Purchaser shall be responsible for the preparation and filing of federal, state and local tax returns with respect to the Hospital Businesses for periods ending on or after the Closing Date. 57 (b) After the Closing, the parties shall cooperate with each other and shall make available to each other, as reasonably requested, all information, records or documents relating to tax liabilities or potential tax liabilities attributable to the Hospital Businesses for all periods prior to the Closing and shall preserve all such information, records and documents at least until the expiration of any applicable statute of limitations or extensions thereof. The parties shall also, upon reasonable prior notice, make available to each other as reasonably required, and at the reasonable cost of the requesting party (for out-of-pocket costs and expenses only), personnel responsible for preparing or maintaining information, records and documents in connection with tax matters. (c) In the event that the Purchaser receives written notice from an appropriate taxing authority of any pending or threatened examination, claim, settlement, proposed adjustment or related matter with respect to the taxes of the Sellers that could affect the Sellers or any affiliate of the Sellers, or if the Sellers or any affiliate of the Sellers receive written notice from an appropriate taxing authority of any such matters that could affect the Purchaser or any of its subsidiaries or respective affiliates, the party receiving notice shall notify in writing the potentially affected party within thirty (30) days following its receipt thereof. The failure of any party to give the notice required by this Section 10.1 shall not impair that party's rights under this Agreement except to the extent that the other party demonstrates that is has been materially prejudiced thereby. (d) In the case of any audit, examination or other proceeding (a "Proceeding") with respect to taxes for which the Seller is or may be liable pursuant to this Agreement, the Purchaser shall promptly inform the Sellers, and the Purchaser shall execute or cause to be executed powers of attorney or other documents necessary to enable the Sellers to take all actions desired by the Sellers with respect to such Proceeding to the extent such Proceeding may affect the amount of taxes for which the Sellers are liable pursuant to this Agreement. The Sellers shall have the right to control any such Proceeding, and, if there is a reasonable basis therefor, to initiate any claim for refund, file any amended return or take any other action that they deem appropriate with respect to such taxes. All costs and expenses incurred in connection with any such Proceeding shall be borne by the Sellers, and the Purchaser shall be reimbursed by the Sellers for any and all reasonable direct costs and expenses incurred by them in connection with such Proceeding. (e) In order to avoid withholding tax in the sale proceeds allowable to the sale of the Real Property, at the Closing the Seller shall provide the Purchaser with Code Section 1445 Certifications evidencing that each Seller is not a foreign person. 58 SECTION 10.2. MEDICARE AND MEDICAID, ETC. RECEIVABLES AND PAYABLES. ---------------------------------------------------- (a) In respect of Medicare, Medicaid, CHAMPUS, and cost-based Blue Cross cost reports, the Purchaser shall be entitled to, and be responsible for, any Medicare, Medicaid, CHAMPUS and cost-based Blue Cross receivables or payables relating to the Hospitals except for receivables and payables relating to Medicare recapture. (b) The Purchaser and the Sellers agree that the Purchaser shall be responsible for filing Medicare provider, Medicaid provider, CHAMPUS provider and cost-based Blue Cross provider cost reports or forms for the Hospitals for cost reporting Periods ended after the Closing Date. Any terminating cost reports due as a result of the transactions contemplated hereby and the cost reports for periods ended prior to the Closing Date shall be prepared and filed by the Sellers. (c) The Purchaser shall acquire the Sellers' interest in and be responsible for Medicare and Medicaid provider appeals related to the Hospitals, both individual as well as group appeals, as those terms are defined in Part I, section 2920 of the Provider Reimbursement Manual published by the health care financing administration; provided that (i) for group appeals involving home -------- office costs of the Sellers or their affiliates, home office equity of the Sellers or their affiliates and all intercompany transactions, for cost reporting periods ended on or prior to the closing date, the Sellers shall have the sole control of, and discretion to make any and all decisions related to, such group appeals, including without limitation, determination of reimbursement issues to appeal, content of position papers, venue, legal counsel, and whether to continue the appeal, and (ii) for such group appeals, the Sellers shall not charge the Purchaser for Sellers' proportionate costs of the appeal. The Purchaser shall pay all amounts due to, and be entitled to receive all amounts due from, the Medicare or Medicaid programs in respect of all appeals, including the Hospitals' proportionate interests in any group appeals controlled by the Sellers. The Sellers' detailed records related to home office and intercompany transaction group appeals are proprietary and shall not be subject to disclosure to the Purchaser. (d) The Purchaser agrees that it shall not file or cause to be filed any amended cost reports in any Seller's name for periods ending prior to the Closing Date, in respect of any home office and intercompany transaction group appeals, without the prior written consent of such Seller, such Seller having sole discretion as to the filing of such amended cost reports. (e) Following the Closing, the parties shall cooperate with each other and, except as limited by section 10.2(c) above, shall make available to each other, as reasonably requested, and to 59 any Medicare/Medicaid, CHAMPUS or cost-based Blue Cross authority, all information, records or documents relating to the Medicare, Medicaid, CHAMPUS and cost-based Blue Cross receivables and payables of the Hospitals and shall preserve all such information, records and documents until the expiration of any applicable statute of limitations or extensions thereof. The parties shall also make available to each other as is reasonably required, and at the cost of the requesting party, personnel responsible for preparing or maintaining information, records and documents in connection with such matters. (f) Any funds received by the Sellers, on the one hand, or the Purchaser, on the other hand, due to the other under Section 10.2 shall be paid to such party within thirty (30) days after receipt thereof. (g) The Sellers and the Purchaser agree that the values determined as set forth on Schedule 1.6 represent fair market values of the Assets and that ------------ these same values will be used for Medicare, Medicaid, CHAMPUS and cost-based Blue Cross cost reporting purposes. (h) The parties represent to each other that the transactions set forth herein reflect an arm's length transaction between the Sellers and the Purchaser, that neither party to a significant extent is associated or affiliated with, or has control of, or is controlled by, the other party. Section 10.3. Effect of Certain Audit Adjustments. (a) In the event ----------------------------------- that any income tax audit of either (i) the affiliate group of corporations of which CPC is the common parent undergoes tax audit adjustments for any taxable period that includes the Closing Date, then: (i) If such adjustment results in post Closing Date deductions, losses or credits to CPC of Texas, or to any affiliate group of which CPC of Texas is a member, then, Purchaser shall remit to Sellers as a purchase price adjustment an amount equal to the Actual Tax Benefit (defined below) received. (ii) If such adjustment results in post Closing Date income, gains or reduction in credits, then Sellers shall remit to Purchaser an amount equal to the Actual Tax Detriment (defined below) incurred. (b) In the event that, by reason of taxpayer elections or otherwise, Purchaser, CPC of Texas or any affiliate group of which CPC of Texas is a member shall either (i) obtain a refund of taxes paid by Sellers, any affiliated group of which CPC is now or was the common parent, or any tax return or tax reporting group of 60 corporations that included CPC of Texas, or (ii) utilize available tax loss carry forwards or credits of such taxpayer or groups of taxpayer, then Purchaser shall pay CPC as a purchase price adjustment an amount equal to the Actual Tax Benefit received as a result of the foregoing circumstance. (c) For purposes of this Section, the term "Actual Tax Benefit" shall mean the greater of (i) the deduction or loss recognized, multiplied by the tax rate applicable to Parent with respect to ordinary income or capital gain, (ii) the cash received (in the case of a tax refund), or (iii) the tax savings (in the case of a credit). For purposes of this Section, the term "Actual Tax Detriment" means the greater of the income or gain recognized multiplied by the tax rate applicable to Parent with respect to ordinary income or capital gain, (ii) the cash paid (in case of a tax payment), or (iii) the tax loss (in the case a tax credit is offset). (d) Payments hereunder shall be made within ten (10) days of the date of filing of the tax return with respect to which any tax benefit is obtained or on the first business day following receipt of any cash refund or credit. Section 10.4. Nature of Payments. Any payments required to be made ------------------ pursuant to this Article X shall be considered as adjustments to the Purchase Price and not as a dividend. ARTICLE XI MISCELLANEOUS ------------- Section 11.1. Expenses. In the event that the transactions -------- contemplated by this Agreement are not consummated, all expenses of the preparation and consummation of this Agreement and the sale of the Assets, including, without limitation, counsel fees, accounting fees, and investment advisors' fees and disbursements ("Transaction Expenses"), shall be borne by the respective parties incurring such expense. In the event that the transactions contemplated by this Agreement are consummated, all Transaction Expenses, other than the fees of Dean Witter and all costs and expenses incurred by Seller as a result of its obligations as a company registered under the Securities and Exchange Act of 1934, as amended (the "1934 Act"), together with all costs of transfer of the Assets, including sales, use and transfer taxes, and the fees of Cronus Partners, Inc. shall be paid by Purchaser. The fees and expenses of Dean Witter and all costs and expenses incurred by Seller as a result of its obligations as a company registered under the 1934 Act, as amended, shall be paid by Seller. In the event that the transactions contemplated by this Agreement are not consummated, the fees and expenses of Cronus Partners shall be borne equally by Purchaser and Sellers. Section 11.2. Severability. If any provision of this Agreement is ------------ held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of the Seller or the Purchaser under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if 61 such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom, and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. Section 11.3. Notices. All notices, demands and other communications ------- hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or mailed by certified mail, return receipt requested, postage prepaid or sent by Federal Express or other nationally recognized overnight courier or sent by facsimile or telecopy transmission. (i) If to the Purchaser: c/o Behavioral Healthcare Corporation 102 Woodmont Boulevard, Suite 500 Nashville, Tennessee 37205 Facsimile No.: 615/269-5397 Attention: Edward A. Stack, President With a copy to: Waller Lansden Dortch & Davis A Professional Limited Liability Company 511 Union Street, Suite 2100 Nashville, Tennessee 37219 Facsimile No.: 615/244-6804 Attention: William F. Carpenter III (ii) If to any Seller: Community Psychiatric Centers 5110 West Sahara Avenue Las Vegas, Nevada 89102 Facsimile No.: 702/257-3601 Attention: Richard L. Conte, President With copies to: Community Psychiatric Centers 5110 West Sahara Avenue Las Vegas, Nevada 89102 Facsimile No.: 702/257-3601 62 Attention: Julia L. Kopta, General Counsel and Christensen, White, Miller, Fink, Jacobs, Glaser & Shapiro, LLP 2121 Avenue of the Stars Eighteenth Floor Los Angeles, California 90067 Facsimile No.: 310/556-2920 Attention: Stephen D. Silbert or to such other address or facsimile or telecopy number as either the Purchaser or the Sellers may designate by notice to the other party hereto. Notice required or permitted by this Agreement to be given to any Seller may be properly given only to CPC, and Notice required or permitted by this Agreement to be given to any Purchaser may be properly given only to Parent. A notice or other communication shall be deemed to be duly received: (a) if delivered in person or sent by express service, when left at the address of the recipient; (b) if sent by certified mail, when delivered or refused for delivery, as evidenced by the return receipt; and (c) if sent by facsimile or telecopy, upon receipt by the sender of an acknowledgment or transmission report generated by the machine from which the facsimile or telecopy was sent indicating that the facsimile or telecopy was sent in its entirety to the recipient's facsimile or telecopy number; provided that if a notice or other communication is served by hand, or is - -------- received by facsimile or telecopy on a day which is not a business day, or after 5:00 p.m. on any business day at the addressee's location, such notice or communication shall be deemed to be duly received by the recipient at 9:00 a.m. on the first business day thereafter. Section 11.4. Effective Time. The Closing and the other transactions -------------- contemplated hereby shall be effective for accounting and all other purposes as of 12:01 a.m. (local time at the locality of each Hospital) on the date of Closing (the "Effective Time"), unless otherwise agreed in writing by the Seller and the Purchaser. 63 Section 11.5. Tax and Medicare Effect. Neither of the parties (nor ----------------------- such party's counsel or accountants) has made or is making any representations to any other party (nor such party's counsel or accountant) concerning any of the tax or Medicare effects of the transactions provided for in this Agreement and each party hereto represents that it has obtained, or may obtain, independent tax and Medicare advice with respect thereto and upon which it, if so obtained, has solely relied. Section 11.6. Schedules. The Schedules and all Exhibits and --------- documents referred to in or attached to this Agreement are integral parts of this Agreement as if fully set forth herein. Any reference in this Agreement to a specific Section shall also be deemed a reference to that portion of the Schedule and other documents referenced herein relating to such Section. Section 11.7. Governing Law. The validity and construction of this ------------- Agreement shall be governed by the substantive laws of the State of Tennessee without regard to any conflict of laws provisions. Section 11.8. Section Headings. The Section headings are for ---------------- reference only and shall not limit or control the meaning of any provision of this Agreement. Section 11.9. Waiver and Amendments. Any term or provision of this --------------------- Agreement may be waived at any time by the party which is entitled to the benefits thereof and any terms or provisions of this Agreement may be amended or supplemented at any time. No such waiver, amendment or supplement shall be effective unless in writing and signed by the party or parties necessary thereto. No delay or omission on the part of either party hereto in exercising any right hereunder shall operate as a waiver of such right or any other right under this Agreement. Neither party shall be required to give notice in order to restore or revise either (i) time being of the essence hereof, or (ii) any other covenant or condition, after such party has waived a default in one or more instances. Section 11.10. Binding on Successors and Assigns. Subject to Section --------------------------------- 11.14, this Agreement shall inure to the benefit of and bind the respective legal representatives, successors and assigns of the parties hereto. Nothing expressed or referred to in this Agreement is intended or shall be construed to give any person other than the parties to this Agreement or their respective legal representatives, successors or permitted assigns any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein, it being the intention of the parties to this Agreement that this Agreement shall be for the sole and exclusive benefit of such parties or such legal 64 representatives, successors and assigns, and not for the benefit of any other person. Section 11.11. Time of Essence. Time is of the essence in the --------------- performance of this Agreement. Section 11.12. Counterparts. This Agreement may be executed in any ------------ number of counterparts, each of which shall be an original, but all of which together shall comprise one and the same instrument. Section 11.13. Press Releases. At all times at or before the Closing, -------------- the Sellers, on the one hand, and the Purchaser, on the other hand, will consult with the other before issuing or making any reports, statements or releases to the public with respect to this Agreement or the transactions contemplated hereby and will use good faith efforts to obtain the other party's approval of the text of any public report, statement or release to be made on behalf of such party. Section 11.14. Assignment. Neither party hereto shall assign this ---------- Agreement or any rights, obligations or duties hereunder without first obtaining the written consent of the other party, provided, notwithstanding the foregoing, -------- the Parent may direct the Seller to convey the Assets in respect of any particular Hospital or Hospitals to the BHC Subs. Section 11.15. CON Disclaimer. This Agreement shall not be deemed to -------------- be an acquisition or obligation of a capital expenditure or of funds within the meaning of the certificate of need law of any state, until the appropriate governmental agencies shall have granted a certificate of need or other appropriate approval or ruled that no certificate of need or other approval is required. Section 11.16. Supplements to the Schedules. The Sellers and the ---------------------------- Purchaser may, and may be required to, from time to time prior to the Closing supplement the Schedules to this Agreement. Subject to the termination rights of the parties set forth in Section 8.1, such supplements shall be deemed to have been made as of the date of this Agreement for all purposes under this Agreement. Section 11.17. Survival. The representations and warranties of the -------- Purchaser and the Seller shall survive the Closing. Section 11.18. Entire Agreement. This Agreement and the Schedules, ---------------- Exhibits and documents delivered pursuant hereto constitute the entire contract between the parties hereto pertaining to the subject matter hereof and supersede all prior 65 negotiations and discussions, whether written or oral, of the parties, and there are no representations, warranties or other agreements between the parties in connection with the subject matter hereof, except for any agreements or letters dated as of the date hereof and except as specifically set forth herein. Section 11.19. Drafting. No provision of this Agreement shall be -------- interpreted for or against either party hereto on the basis that such party was the draftsman of such provision, both parties having participated equally in the drafting hereof, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Section 11.20. Consented Assignment. Anything contained herein or -------------------- therein to the contrary notwithstanding, as between the Purchaser and third parties, this Agreement and the Assignment and Undertakings shall not constitute an assignment or an agreement to assign any claim, right, contract, license, lease, commitment, sales order or purchase order if an attempted assignment thereof without the consent of another party thereto would constitute a breach thereof or in any material way affect the rights of the Sellers thereunder, unless such consent is obtained; provided that, as between the Purchaser and the -------- Sellers, such assignments or agreements shall be valid and binding. If such consent is not obtained, or if an attempted assignment would be ineffective or would materially affect the Sellers' rights thereunder so that the Purchaser would not in fact receive all such rights, the Seller shall cooperate in any reasonable arrangement designed to provide for the Purchaser the benefits under any such claim, right, contract, license, commitment, sales order or purchase order, including, without limitation, enforcement of any and all rights of the Seller against the other party or parties thereto arising out of the breach or cancellation by such other party or otherwise. Section 11.21. Consents, Approvals and Discretion. Except as herein ---------------------------------- expressly provided to the contrary, whenever this Agreement requires any consent or approval to be given by either party or either party must or may exercise discretion, the parties agree that such consent or approval shall not be unreasonably withheld or delayed and such discretion shall be reasonably exercised. Section 11.22. Legal Fees and Costs. In the event either party elects -------------------- to incur legal expenses to enforce or interpret any provision of this Agreement or any other agreements executed concurrently herewith or in connection with the Closing, the prevailing party will be entitled to recover such legal expenses, including, without limitation, reasonable attorneys' fees, costs and necessary disbursements, in addition to any other relief to which such party shall be entitled. 66 Section 11.23. Interest. Unless otherwise provided to the contrary -------- in this Agreement, any payment required to be made by any party pursuant to this Agreement, if not paid before thirty days after the date such payment is required to be made (such 30th day being the "Interest Commencement Date"), shall include interest from the Interest Commencement Date to the day such payment is made, computed at an interest rate equal to the rate paid by Purchaser from time to time under the financing referred to in Section 7.7. All requests for payment pursuant to this Section shall be accompanied by a certificate of an officer of the party entitled to receive such payment setting forth the amount of the payment due pursuant to this Agreement (without regard to any amounts payable through operation of this Section), the applicable Interest Commencement Date and the applicable interest rate. Section 11.24. Omissions to Schedules and Exhibits. In the case of ----------------------------------- any contract, obligation or other item required to be reflected on an exhibit or schedule to this Agreement which is omitted therefrom (an "Omitted Item"), the Omitted Item will be deemed to be properly included in such exhibit or schedule as of the date hereof provided that (i) the Omitted Item was incurred or entered into or arose in the regular and ordinary course of business, reasonably consistent with prior practice, (ii) it does not require the expenditure of future sums in excess of $50,000 and (iii) it was omitted inadvertently and in good faith. ARTICLE XII NONCOMPETITION -------------- Section 12.1. Noncompetition. (a) The Sellers recognize that (i) the -------------- Purchaser's entering into this Agreement is induced primarily because of the covenants and assurances made by the Sellers hereunder, (ii) the Sellers' covenant not to compete is necessary to insure the continuation of the Hospital Businesses subsequent to the Closing, and (iii) irreparable harm and damage will be done to the Purchaser in the event that the Sellers, or the Sellers' affiliates, compete with the Purchaser within the area or areas specified in this Section. Therefore, in consideration of the premises and as an inducement for the Purchaser to enter into this Agreement and consummate the transactions contemplated herein, the Sellers agree that, for a period of three (3) years from and after the Closing Date, the Sellers, their affiliates (other than affiliates which become affiliates as a result of the acquisition of stock or assets of CPC or one or more Sellers) (the "Regulated Persons") will not own, lease, manage or operate any psychiatric hospitals, beds or units within the 25- mile radiuses of the Hospitals or any facility operated by Purchaser on the Closing Date (the "Proscribed Area"). Notwithstanding the foregoing, the Regulated Persons may own, lease, manage and operate 67 beds and/or units within the Proscribed Area: (a) in any non-psychiatric hospital acquired by the Regulated Person, provided that Purchaser has been offered a right of first refusal to manage the psychiatric services provided at such hospital on then reasonably customary terms (provided that Sellers shall not enter into any agreement to manage such psychiatric services on terms less favorable to Seller than those last offered to Purchaser) and (b) at THC New Orleans. The parties agree that no portion of the Purchase Price shall be allocated to the noncompetition covenant contained in this Article XII. 68 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. ENTITIES CONSTITUTING THE "SELLER" COMMUNITY PSYCHIATRIC CENTERS By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS OF CALIFORNIA, INC. By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS PROPERTIES INCORPORATED By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS OF FLORIDA, INC. By:_______________________________ Title:____________________________ FLORIDA HOSPITAL PROPERTIES, INC. By:_______________________________ Title:____________________________ 69 COMMUNITY PSYCHIATRIC CENTERS OF IDAHO, INC. By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS OF NORTH CAROLINA, INC. By:_______________________________ Title:____________________________ CPC PROPERTIES OF NORTH CAROLINA, INC. By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS OF KANSAS, INC. By:_______________________________ Title:____________________________ CPC PROPERTIES OF KANSAS, INC. By:_______________________________ Title:____________________________ 70 CPC OF LOUISIANA, INC. By:_______________________________ Title:____________________________ CPC PROPERTIES OF LOUISIANA, INC. By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS PROPERTIES OF TEXAS, INC. By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS OF UTAH, INC. By:_______________________________ Title:____________________________ CPC PROPERTIES OF UTAH, INC. By:_______________________________ Title:____________________________ 71 COMMUNITY PSYCHIATRIC CENTERS OF ARKANSAS, INC. By:_______________________________ Title:____________________________ CPC PROPERTIES OF ARKANSAS By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS OF MISSISSIPPI, INC. By:_______________________________ Title:____________________________ CPC PROPERTIES OF MISSISSIPPI, INC. By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS OF MISSOURI, INC. By:_______________________________ Title:____________________________ 72 CPC PROPERTIES, INC. By:_______________________________ Title:____________________________ OLD ORCHARD HOSPITAL, INC. By:_______________________________ Title:____________________________ CPC PROPERTIES OF ILLINOIS, INC. By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS OF INDIANA, INC. By:_______________________________ Title:____________________________ CPC PROPERTIES OF INDIANA, INC. By:_______________________________ Title:____________________________ CPC MANAGED CARE HEALTH SERVICES, INC., By:_______________________________ Title:____________________________ 73 COMMUNITY BEHAVIORAL HEALTH SYSTEMS By:_______________________________ Title:____________________________ PARENT BEHAVIORAL HEALTHCARE CORPORATION By:_______________________________ Title:____________________________ 74 EX-99.2 3 AGREEMENT AND PLAN OF MERGER DATED 10/22/96 EXHIBIT 99.2 AGREEMENT AND PLAN OF MERGER DATED AS OF OCTOBER 22, 1996 BETWEEN COMMUNITY PSYCHIATRIC CENTERS, CPC OF PUERTO RICO, INC., CPC-PHP, INC. AND BEHAVIORAL HEALTHCARE CORPORATION TABLE OF CONTENTS ARTICLE I - THE MERGER............................................ 1 Section 1.1. The Hospital Company Merger........... 2 Section 1.2. The Partially Owned Company Merger.... 4 Section 1.3. Closing............................... 4 Section 1.4. Statement of Adhesion................. 5 Section 1.5. Interpretation........................ 6 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SELLERS............ 7 Section 2.1. Organization and Good Standing........ 7 Section 2.2. Capitalization........................ 8 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER..... 8 ARTICLE IV - COVENANTS OF SELLER.................................. 8 Section 4.1. Access and Information................ 8 Section 4.2. Fulfillment of Conditions............. 9 Section 4.3. Conduct of the Hospital Businesses Prior to Closing...................... 9 Section 4.4. Title Commitments and Surveys......... 9 Section 4.5. Notice and Cure....................... 9 Section 4.6. HSR Act Filings....................... 10 Section 4.7. Environmental and Engineering Reports. 10 Section 4.8. Listing of Assets..................... 10 Section 4.9. Tax Treatment......................... 10 ARTICLE V - COVENANTS OF THE PURCHASER............................ 10 Section 5.1. Certain Employee Matters.............. 10 Section 5.2. Notice and Cure....................... 12 Section 5.3. Fulfillment of Conditions............. 12 Section 5.4. HSR Act Filings....................... 12 Section 5.5. Tax Treatment......................... 13 ARTICLE VI - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS... 13 Section 6.1. Representations and Warranties True... 13 Section 6.2. Authority............................. 13 Section 6.3. No Obstructive Proceeding............. 13 Section 6.4. Consents and Approvals................ 13 Section 6.5 HSR Act; Restraining Order............ 13 Section 6.6. Asset Purchase Agreement Closing...... 14 Section 6.7. Additional Agreements................. 14 Section 6.8. Adverse Change........................ 14 Section 6.9. Confirmation of Tax-Free Status....... 14 ARTICLE VII - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PURCHASER........................................... 14 Section 7.1. Representations and Warranties True... 14 Section 7.2. No Obstructive Proceeding............. 14 Section 7.3. Consents, Approvals and Licenses...... 14 Section 7.4. Consents and Approvals................ 15 Section 7.5. HSR Act; Restraining Order............ 15
i Section 7.6. Title Insurance Policies............... 15 Section 7.7. Adverse Change......................... 15 Section 7.8. Asset Purchase Agreement Closing....... 15 Section 7.9. Transfer of Tax Holiday................ 15 ARTICLE VIII - TERMINATION......................................... 16 Section 8.1. Optional Termination................... 16 Section 8.2. Mandatory Termination.................. 16 Section 8.3. Termination Consequences............... 16 ARTICLE IX - INDEMNIFICATION....................................... 17 Section 9.1. Indemnification by Sellers............. 17 Section 9.2. Indemnification by the Purchaser....... 17 Section 9.3. Limitations............................ 17 Section 9.4. Method of Asserting Claims............. 19 Section 9.5. Exclusive.............................. 19 Section 9.6. Method of Payment...................... 19 ARTICLE X - TAX AND MEDICARE MATTERS............................... 21 Section 10.1. Federal, State and Local Taxes......... 21 Section 10.2. Effect of Certain Audit Adjustments.... 22 Section 10.3. Nature of Payment...................... 23 ARTICLE XI - MISCELLANEOUS......................................... 23 ARTICLE XII - NONCOMPETITION....................................... 23
ii AGREEMENT AND PLAN OF MERGER ---------------------------- This AGREEMENT AND PLAN OF MERGER, dated as of October 22, 1996 is by and among COMMUNITY PSYCHIATRIC CENTERS, a Nevada corporation ("CPC"), COMMUNITY PSYCHIATRIC CENTERS OF PUERTO RICO, INC., a Nevada corporation (the "Hospital Company"), CPC-PHP, INC., a Nevada corporation (the "Partially-Owned Company") and BEHAVIORAL HEALTHCARE CORPORATION, a Delaware corporation (the "Parent") with respect to the following facts: A. CPC owns all the issued and outstanding capital stock of the Hospital Company. The Hospital Company owns and operates San Juan Capestrano Hospital located in San Juan, Puerto Rico. B. CPC indirectly owns all the outstanding capital stock of the Partially- Owned Company. The Partially Owned Company owns 70% of the outstanding capital stock of CPC Clinicas Del Este, Inc., a Puerto Rico corporation ("CPC Clinicas"). C. The Hospital Company and the Partially Owned Company are sometimes collectively referred to herein as the "Companies". The Companies and CPC are sometimes collectively referred to herein as the "Sellers". D. The Hospital Company and CPC-Clinicas own and operate the facilities listed in Exhibit A hereto, which facilities are sometimes referred to --------- collectively herein as the "Hospitals." The healthcare business of the Hospitals is sometimes referred to collectively herein as the "Hospital Businesses." E. CPC desires to cause the Companies to be merged with and into two newly formed Tennessee corporations which are wholly-owned by the Parent ("BHC Sub I" and "BHC Sub II" and collectively with the Parent, the "Purchaser"). F. The parties intend that the transactions contemplated herein shall qualify as a tax-free reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements, the parties hereto hereby agree as follows. ARTICLE I THE MERGER ---------- Section 1.1. The Hospital Company Merger. (a) Upon the terms and subject --------------------------- to the conditions hereof, at the Hospital Company Merger Effective Time (as hereinafter defined), the Hospital Company shall be merged (the "Hospital Company Merger") with and into BHC Sub I and the separate corporate existence of the Hospital Company shall thereupon cease, and BHC Sub I shall be the surviving corporation in the Hospital Company Merger. The Hospital Company Merger shall have the effects set forth in the Tennessee Business Corporation Act and the Nevada Revised Statutes. (b) The Hospital Company Merger shall become effective when a properly executed Certificate of Merger meeting the requirements of the Tennessee Business Corporation Act is duly filed with the Secretary of State of the State of Tennessee or at such later time as the parties hereto shall have designated in such filing as the effective time of the Hospital Company Merger (the "Hospital Company Merger Effective Time"), which filing shall be made as soon as practicable after the closing of the transactions contemplated by this Agreement in accordance with Section 1.3 hereof. (c) The Certificate of Incorporation of the surviving corporation of the Hospital Company Merger shall be the Certificate of Incorporation of BHC Sub I in effect immediately prior to the Hospital Company Merger Effective Time. (d) The By-Laws of BHC Sub I as in effect immediately prior to the Hospital Company Merger Effective Time shall be the By-Laws of the surviving corporation of the Hospital Company Merger. (e) The directors of BHC Sub I immediately prior to the effective time of the Hospital Company Merger shall be the directors of the surviving corporation of the Hospital Company Merger as of the Hospital Company Merger Effective Time. (f) The officers of BHC Sub I immediately prior to the Hospital Company Merger Effective Time shall be the officers of the surviving corporation of the Hospital Company Merger and shall hold office until their respective successors are duly elected or appointed and qualify in the manner provided in the Certificate of Incorporation and By-Laws of the surviving corporation of the Hospital Company Merger, or as otherwise provided by law. (g) At the Hospital Company Merger Effective Time by virtue of the Hospital Company Merger and without any action on the part of the holder thereof: (i) The outstanding shares of common stock of the Hospital Company (the "Hospital Company Shares"), issued and outstanding immediately prior to the Hospital Company Merger Effective Time (other than Hospital Company Shares held in the treasury of the Hospital Company or owned by any subsidiary of the Hospital Company) shall be 2 converted into the right to receive (i) an aggregate of 3,439,935 shares of the common stock, par value $.01 per share of the Parent (the "BHC Common Stock"), and (ii) an aggregate of 1,774 shares of the Series B Preferred Stock, par value $.01 per share, of the Parent (the "BHC Preferred Stock") (BHC Common Stock and BHC Preferred Stock to be issued in the Hospital Company Merger is collectively referred to herein as the "Hospital Company Merger Consideration"). As of the Hospital Company Merger Effective Time, all such Hospital Company Shares shall be no longer outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such Hospital Company Shares shall cease to have any rights with respect thereto, except to receive the Hospital Company Merger Consideration, without interest. (ii) Each Hospital Company Share issued and held in the treasury of the Hospital Company or owned by any subsidiary of the Hospital Company immediately prior to the Hospital Company Merger Effective Time shall be cancelled and retired and cease to exist and no payment shall be made with respect thereto. (iii) Each share of common stock, par value $.01 per share, of BHC Sub I issued and outstanding immediately prior to the effective time of the Hospital Company Merger shall be converted into and become a fully paid and non-assessable share of Common Stock of the surviving corporation of the Hospital Company Merger. (iv) Prior to the Hospital Company Merger Effective Time the Parent shall contribute the Hospital Company Merger Consideration to BHC Sub I. (h) After the Hospital Company Merger Effective Time and upon surrender to BHC Sub I of a certificate for Hospital Company Shares, the holder thereof shall be entitled to receive in exchange therefor that portion of the Hospital Company Merger Consideration which such holder has the right to receive pursuant 3 to the provisions of this Section 1.1, after giving effect to any required withholding tax, and the certificate for Hospital Company Shares so surrendered shall forthwith be cancelled. (i) At the Hospital Company Merger Effective Time, the stock transfer books of the Hospital Company shall be closed and no transfers of Hospital Company Shares shall occur after such time. If any Hospital Company Shares are presented to the surviving corporation of the Hospital Company Merger for transfer, they shall be cancelled and exchanged for the Hospital Company Merger Consideration. Section 1.2. The Partially Owned Company Merger. The Partially- ---------------------------------- Owned Company shall be merged with and into BHC Sub II (the "Partially Owned Company Merger") in accordance with the provisions of Section 1.1 provided that (i) the outstanding shares of common stock of the Partially Owned Company (the "Partially Owned Company Shares") shall be converted into an aggregate of 261,459 shares of BHC Common Stock and (ii) an aggregate pf 1,774 shares of BHC Preferred Stock (the "Partially Owned Merger Consideration"), which shall have been contributed by Parent prior to BHC Sub II, and (ii) other items used in the Section shall be deemed to be appropriately modified. Section 1.3. Closing. (a) The consummation of the transactions ------- provided for herein (the "Closing") shall take place at the offices of counsel for the Purchaser, Waller Lansden Dortch & Davis, A Professional Limited Liability Company, Nashville City Center, Suite 2100, 511 Union Street, Nashville, Tennessee. The Closing shall take place at 9:00 a.m., Nashville time, as soon as practicable following the receipt of all regulatory approvals and the satisfaction of other required conditions to the Closing. It is contemplated that the Closing will occur on or before November 27, 1996. The date on which the Closing is to take place is herein referred to as the "Closing Date." At the Closing: (i) The Hospital Company and BHC Sub I shall each deliver a Certificate of Merger in a form reasonably satisfactory to the Hospital Company and BHC Sub I and meeting the requirements of applicable law; (ii) The Partially-Owned Company and BHC Sub II shall each deliver a Certificate of Merger in a form reasonably satisfactory to the Partially-Owned Company and meeting the requirements of applicable law; (iii) The Hospital Company and the Partially-Owned Company shall cause their 4 stockholders to deliver stock certificates representing all of the outstanding Hospital Company Shares and Partially-Owned Company Shares; (iv) Purchaser shall cause BHC Sub I and BHC Sub II to deliver the Hospital Company Merger Consideration and the Partially-Owned Company Merger Consideration; and (v) The parties shall deliver to each other any other closing documents set forth in Articles VI or VII of this Agreement. The documents described in Subsections 1.04(a)(i), (ii), (iii) and (v) are hereinafter collectively referred to as the "Closing Documents." (b) Notwithstanding anything to the contrary set forth herein, there shall be no transfer of ownership or control of the "controlled substances" in respect of the Hospital Businesses until such time as Purchaser has obtained, to the extent required, the appropriate Controlled Substance Registration Certificate from the United States Drug Enforcement Agency (the "DEA") in respect of each Hospital's pharmacy. Until such time, Sellers shall execute powers of attorney or similar documents as may be required by the DEA authorizing Purchaser at Purchaser's expense to continue to operate the Hospital pharmacy or pharmacies, pursuant to Sellers' Controlled Substance Registration Certificates, utilizing such employee or employees of Purchaser after the Closing as shall be reasonably necessary to continue the operation of such pharmacy or pharmacies after the Closing in the manner as it had been theretofore operated. Purchaser shall indemnify and hold harmless Sellers and their affiliates and their stockholders, employees, officers, directors, agents and representatives, upon and after the Closing, from and against any Damages (as defined in Section 9.1) arising out of or relating to the operation of each such Hospital pharmacy after the Closing, including without limitation the dispensing of controlled substances. Section 1.4. Statement of Adhesion. Prior to the Closing Date, the --------------------- Parent shall form BHC Sub I and BHC Sub II and cause them to adhere to this Agreement by executing and delivering the Statement of Adhesion in a form reasonably satisfactory to Sellers. Upon execution and delivery of the Statement of Adhesion, BHC Sub I and BHC Sub II shall be bound by and entitled to the benefit of any provisions herein intended to place an obligation on, or grant a right to, the BHC Subs. Section 1.5. Interpretation. In this Agreement, unless the context -------------- otherwise requires: 5 (a) unless otherwise defined, words importing the singular include the plural and vice versa; (b) words importing a gender include every gender and the word "including" shall mean including without limitation; (c) references to any document (including this Agreement) are references to that document as amended, consolidated, supplemented, novated or replaced by the parties from time to time; (d) references to this Agreement are references to this Agreement, together with the Schedules, Exhibits and Appendices hereto; (e) references to Articles, Sections, Schedules and Appendices are references to articles and sections of, and schedules and appendices to, this Agreement; (f) references to any party to this Agreement shall include references to its respective successors and permitted assigns; (g) references to law shall include references to any constitutional provision, treaty, decree, convention, statute, act, regulation, rule, ordinance, subordinate legislation, rule of common law and of equity and judgment and shall include the requirements of any applicable stock exchange; (h) references to any law are references to that law as amended, consolidated, supplemented or replaced from time to time; (i) references to a judgment shall include references to any order, injunction, decree, determination or award of any court or tribunal; (j) references to person shall include references to any individual, company, body corporate, association, partnership, firm, joint venture, trust and governmental agency; (k) references to time, unless otherwise provided, are references to Nashville, Tennessee local time; (l) references to "Knowledge of Sellers", the "best Knowledge of Sellers" or "Known to Sellers" (or similar references) mean the actual knowledge of any of the persons listed in Schedule 1.8(l) to the Asset Purchase Agreement --------------- (as defined herein) (or any such person's successor in office if such person prior to the Closing Date ceases to be employed by Seller); and 6 (m) references to "Knowledge of Purchaser," the "best Knowledge of Purchaser" or "Known to Purchaser" (or similar references) mean the actual knowledge of any of the persons listed in Schedule 1.8(m) to the Asset Purchase --------------- Agreement (or any person's successor in office if such person prior to the Closing Date ceases to be employed by the Purchaser). ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS ----------------------------------------- Reference is hereby made to that certain Asset Purchase Agreement, dated of even date herewith, between the Parent, CPC and certain of CPC's affiliates (the "Asset Purchase Agreement"). The representations and warranties contained in Article III (with the exception of Sections 2.3 and 2.23) of the Asset Purchase Agreement are hereby incorporated herein by reference as the corresponding Sections of this Agreement and are hereby deemed representations and warranties made by Sellers to Purchaser under this Agreement as though set forth in full herein, except that any representations or warranties which relate to CPC Clinicas (including the Hospital and Hospital Business operated by CPC Clinicas and the property and assets used in the conduct and operation of the psychiatric hospitals and residential treatment centers of CPC in the United States and its territories (the "Business") insofar as it relates to CPC Clinicas) shall be to the Knowledge of Sellers regardless of whether such qualifier is used in representations or warranties contained in the Asset Purchase Agreement (the term "this Agreement" as used in the incorporated Sections of Article II being deemed to refer to this Agreement, the term "CPC San Antonio" being deemed to refer to CPC Clinicas and other terms used in the Asset Purchase Agreement being deemed to be appropriately modified to be consistent with this Agreement). Each of the Sellers also hereby represents and warrants the following to the Purchaser: Section 2.1. Organization and Good Standing. Each of the Sellers is ------------------------------ a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Each of the Sellers has full corporate power and authority under its governing instruments to own, operate and lease its properties and to carry on its businesses as now conducted. Each of the Sellers is qualified as a foreign corporation in each jurisdiction in which its assets or operations require such qualification. CPC directly or indirectly owns all of the outstanding capital stock of each of each of the Companies. The Partially-Owned Company owns 70% of the outstanding capital stock of CPC Clinicas. Section 2.2. Capitalization. The Companies are set forth by name on -------------- Schedule 2.2 hereof, together with a statement - ------------ 7 describing each class of capital stock, the par value and the number of shares issued and outstanding. All Shares shown as issued and outstanding are validly issued, fully paid and non-assessable. Except as set forth on Schedule 2.2, ------------ there are no existing agreements, options, warrants, rights, calls or commitments of any character to which Sellers or any Company is a party or by which Sellers or any Company is bound providing for the issuance of any additional shares or securities, the sale of treasury shares, or for the repurchase or redemption of shares of stock or other securities of any Company, and there are no outstanding securities or other instruments convertible into or exchangeable for shares of such capital stock and no commitments to issue such securities or instruments. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER ----------------------------------------------- The representations and warranties of the Purchaser contained in Article III of the Asset Purchase Agreement including Section 3.25 are hereby incorporated by reference and are hereby deemed representations and warranties made by Purchaser to Sellers under this Agreement as though set forth in full herein (the term "this Agreement" as used in such Article III being deemed to refer to this Agreement). ARTICLE IV COVENANTS OF SELLER ------------------- Sellers hereby covenant and agree as follows: Section 4.1. Access and Information. Between the date hereof and ---------------------- the Closing Date, Sellers shall give to the Purchaser and its agents reasonable access during normal business hours and upon reasonable prior request to the premises, employees, books, accounts, records and other relevant documents of the Companies and their Hospital Businesses and, to the extent Sellers have the right to do so, to the premises, employees, books, accounts, records and other relevant documents of CPC Clinicas; provided the Purchaser shall not have access -------- to patient or employee records or other records the disclosure of which would be prohibited by law, governmental rule or regulation. Section 4.2. Fulfillment of Conditions. Each of the Sellers shall ------------------------- execute and deliver prior to or at the Closing each contract that such Sellers are required hereby to execute and deliver prior to or at the Closing and each Seller shall take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each other condition to the obligations of the parties contained in this Agreement to the 8 extent the satisfaction of such condition is within the control of any of the Sellers. Section 4.3. Conduct of the Hospital Businesses Prior to Closing. --------------------------------------------------- On and after the date hereof and prior to the Closing, and except as otherwise consented to or approved by the Purchaser or required by this Agreement, the Companies shall conduct their respective businesses, operations and activities only in the ordinary course of business and consistent with past practices. Sellers shall not dispose of any capital assets relating to the Business having an aggregate book value in excess of $25,000. The Companies shall use all commercially reasonable efforts to keep available to the Purchaser the services of the present employees of their respective Hospital Businesses (except those dismissed for cause or those who voluntarily discontinue their employment) and to use all reasonable efforts to preserve for the Purchaser the goodwill of the suppliers, patients and others having business relations with their respective Hospital Businesses. The Seller shall provide access to its employees upon reasonable notice to its employees for purposes relating to the conduct of the Business prior to the Closing. Section 4.4. Title Commitments and Surveys. Sellers will deliver as ----------------------------- applicable, as soon as reasonably possible, to the Purchaser the Title Commitments for owner's title insurance from First American Title Insurance Company or their local issuing agents (collectively, the "Title Company"). Sellers will also deliver, as soon as reasonably possible, to the Purchaser, "as-built" surveys (the "Surveys") of the real property listed on Schedule 4.4 ------------ (the "Real Property"), showing the perimeter boundaries of the Real Property and all improvements thereon. Section 4.5. Notice and Cure. Sellers shall notify the Purchaser --------------- promptly in writing of, and contemporaneously will provide the Purchaser with true and complete copies of, any and all information or documents relating to, and will use all commercially reasonable efforts to cure before the Closing, any event, transaction or circumstance occurring after the date of this Agreement that causes or will cause any covenant or agreement of Sellers under this Agreement to be breached in any material respect or that renders or will render untrue in any material respect any representation or warranty of Sellers contained in this Agreement as if the same were made on or as of the date of such event, transaction or circumstance. To the extent that a failure to do so would result in the material inaccuracy of any Schedule, Sellers shall update and supplement (pursuant to Section 11.16 of this Agreement) any Schedule rendered inaccurate by any such event, transaction or circumstance. In addition, Sellers shall use all commercially reasonable efforts to cure, before the Closing, any material violation or material breach of any representation, warranty, covenant or agreement made by it in this Agreement, 9 whether occurring or arising before or after the date of this Agreement. Section 4.6. HSR Act Filings. Sellers will (a) take promptly all --------------- actions necessary to make the filings required of the Sellers or their affiliates under the HSR Act, such filing to occur on or before October 23, 1996, (b) comply at the earliest practicable date with any request for additional information received by any Seller or their affiliates from the Federal Trade Commission (the "FTC") or the Antitrust Division of the Department of Justice (the "DOJ") pursuant to the HSR Act, and (c) cooperate with the Purchaser in connection with the Purchaser's filings under the HSR Act and in connection with resolving any investigation or other regulatory inquiry concerning the transactions contemplated by this Agreement commenced by either the FTC or the DOJ. Section 4.7. Environmental and Engineering Reports. Seller shall ------------------------------------- order environmental phase one surveys of the Real Property and engineering reports of the structural and mechanical systems of the Real Property, to be delivered to the Purchaser as soon as reasonably practicable but in any event on or before November 15, 1996. Section 4.8. Listing of Assets. Sellers shall provide Purchaser ----------------- with such lists of the assets of the Companies as Purchaser may reasonably request. Section 4.9. Tax Treatment. Sellers shall treat the transactions ------------- contemplated herein as a tax-free reorganization within the meaning of Section 368 of the Code. ARTICLE V COVENANTS OF THE PURCHASER -------------------------- The Purchaser covenants and agrees as follows: Section 5.1. Certain Employee Matters. (a) Purchaser intends to ------------------------ offer employment in comparable positions to all of the employees working at the Hospitals as of the Closing Date. All such employees who accept Purchaser's offer of employment shall be referred to herein as the "Hired Employees." Also prior to Closing, Purchaser will notify Sellers of any employees to whom Purchaser does not intend to offer employment. In any event, Purchaser agrees to make a sufficient number of offers of employment such that Sellers' termination of employees under the Asset Purchase Agreement prior to Closing and any employees not hired under this Agreement will not constitute a violation of the WARN Act. Except as otherwise provided for in this Agreement, Purchaser shall be responsible for all costs and liabilities attendant to the termination of any employees of the Hospitals at or following the Closing. (b) Purchaser shall give all Hired Employees full credit for all of the accrued vacation, holiday and sick pay of 10 such employees, either by allowing such employees the accrued time off reflected in the employment records of the Seller or by making full payments to such employees of the amounts which such employees would have received had they taken their accrued or accumulated holiday or vacation time. Purchaser shall not be obligated to pay any Hired Employee for accrued sick time upon the termination, whether voluntary or involuntary, of such Hired Employee. (c) Purchaser shall offer health insurance benefits to all Hired Employees and their dependents (except those persons not having health insurance benefits with the Seller immediately prior to the Closing), effective simultaneously with the Closing, and shall be responsible for all employee health claims resulting from occurrences beginning before, on or after the Closing Date without regard to whether a Hired Employee is actively at work on said date, except those Hired Employees who are hospitalized on the Closing Date who will remain the responsibility of Seller until they are discharged from the hospital. Notwithstanding the foregoing sentence, in no event shall Seller be liable after Closing to Hired Employees or dependents who are in a hospital receiving healthcare services on the Closing Date for continuation of healthcare benefits beyond the period required pursuant to the healthcare continuation provisions of Section 4980B of the Code and of Sections 601 through 609 of ERISA. Any amounts which have been applied toward satisfaction of the calendar year 1996 deductible on behalf of any Hired Employee under any insured employee welfare benefit plan of Seller shall be deemed to be so applied toward satisfaction of the calendar year 1996 deductible under the applicable insured employee welfare benefit plan of the Purchaser. Any amounts which have accumulated towards any Hired Employee's satisfaction of a limitation on benefit payments or coverage under any employee welfare benefit plan of Seller shall be applied toward any such limitation under the applicable insured welfare benefit plan of Purchaser, and Purchaser shall cause its employee welfare benefit plans to waive any limitations for pre-existing conditions with respect to conditions affecting any Hired Employees as of the date of hire by Purchaser other than conditions affecting such Hired Employees which were excluded with respect to such Hired Employees as pre-existing conditions under the employee welfare benefit plan of Seller. Purchaser shall take into account all service with Seller or any affiliate or division of Seller for purposes of determining whether an employee has satisfied the service requirements for eligibility, participation and all other purposes (including without limitation vesting of benefits) under all of the employee welfare benefit plans of Purchaser (whether or not insured). (d) Except as otherwise provided for in this Agreement, Hired Employees will be offered employee benefits to the same extent as employees occupying similar positions with similar experience with Purchaser. 11 Section 5.2. Notice and Cure. Purchaser will notify Sellers promptly --------------- in writing of, and contemporaneously will provide Sellers with true and complete copies of, any and all information or documents relating to, and will use all commercially reasonable efforts to cure before the Closing, any event, transaction or circumstance occurring after the date of this Agreement that causes or will cause any covenant or agreement of the Purchaser under this Agreement to be breached in any material respect or that renders or will render untrue in any material respect any representation or warranty of Purchaser contained in this Agreement as if the same were made on or as of the date of such event, transaction or circumstance. To the extent that a failure to do so would result in the material inaccuracy of any Schedule, Purchaser shall cause each of the Purchasers to update and supplement (pursuant to Section 11.16 of this Agreement) any Schedule rendered inaccurate by any such event, transaction or circumstance. In addition, the Purchaser will use all commercially reasonable efforts to cure, before the Closing, any material violation or material breach of any representation, warranty, covenant or agreement made by it in this Agreement, whether occurring or arising before or after the date of this Agreement. Section 5.3. Fulfillment of Conditions. Purchaser will execute and ------------------------- deliver prior to or at the Closing each contract that the Purchaser is required hereby to execute and deliver prior to or at the Closing, and Purchaser shall take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of the parties contained in this Agreement to the extent the satisfaction of such condition is under the control of Purchaser. Section 5.4. HSR Act Filings. Purchaser will (a) take promptly all --------------- actions necessary to make the filings required of the Purchaser or its affiliates under the HSR Act, such filing to occur on or before October 23, 1996, (b) comply at the earliest practicable date with any request for additional information received by Purchaser or its affiliates from the FTC or the DOJ pursuant to the HSR Act, and (c) cooperate with the Sellers in connection with the Sellers' or their affiliates' filings under the HSR Act and in connection with resolving any investigation or other regulatory inquiry concerning the transactions contemplated by this Agreement commenced by either the FTC or the DOJ. Section 5.5. Tax Treatment. Purchaser shall treat the transactions ------------- contemplated herein as a tax-free reorganization within the meaning of Section 368 of the Code. ARTICLE VI CONDITIONS PRECEDENT TO ----------------------- THE OBLIGATIONS OF SELLERS -------------------------- All obligations of Sellers which are to be discharged under this Agreement at the Closing are subject to the performance or waiver, at or prior to the Closing Date, in all material 12 respects of all covenants and agreements contained herein which are to be performed by the Purchaser at or prior to the Closing Date and to the fulfillment, at or prior to the Closing Date, of each of the following conditions: Section 6.1. Representations and Warranties True. Section 6.1 of ----------------------------------- the Asset Purchase Agreement is hereby incorporated herein by reference as if set forth herein in its entirety. Section 6.2. Authority. All action required to be taken by or on --------- behalf of the Purchaser to authorize the execution, delivery and performance of this Agreement by the Purchaser and the consummation of the transactions contemplated hereby shall have been duly and validly taken. The Purchaser shall have delivered to the Sellers certified resolutions of its board of directors evidencing such authorization, together with a certified copy of its Certificate of Incorporation and Bylaws. Section 6.3. No Obstructive Proceeding. No suit, action or other ------------------------- proceeding shall have been instituted to restrain, enjoin or otherwise prevent or question the legality of the consummation of the transactions contemplated by this Agreement. Section 6.4. Consents and Approvals. The Sellers shall have ---------------------- obtained all third party consents reasonably necessary for the legal or authorized consummation of the transactions contemplated by this Agreement. Section 6.5. HSR Act; Restraining Order. The waiting period under -------------------------- the HSR Act shall have expired or been terminated, and no order restraining or enjoining the transactions contemplated hereby shall have been obtained by the FTC, the DOJ or any state regulatory agency or any private party and be in effect. Section 6.6. Asset Purchase Agreement Closing. The transactions -------------------------------- contemplated within the Asset Purchase Agreement shall have been consummated or shall be consummated contemporaneously with the consummation of the transactions contemplated within this Agreement. Section 6.7. Additional Agreements. Purchaser, its securities --------------------- holders and affiliates shall have entered into such additional agreements as may reasonably be required to be entered into by such parties on or before the Closing. Section 6.8. Adverse Change. There shall have been no material -------------- adverse change in condition (financial or otherwise) of the Purchaser and its subsidiaries from the date of this Agreement through the Closing Date. Section 6.9. Confirmation of Tax-Free Status. Sellers shall have ------------------------------- received confirmation from the taxing authorities in Puerto Rico that the transactions contemplated herein shall be treated as a tax-free reorganization. 13 ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS --------------------------------------- OF THE PURCHASER ---------------- All obligations of the Purchaser which are to be discharged under this Agreement at the Closing are subject to the performance or waiver, at or prior to the Closing Date, in all material respects of all covenants and agreements contained herein which are to be performed by the Sellers on or prior to the Closing Date and to the fulfillment, at or prior to the Closing Date, of each of the following conditions: Section 7.1. Representations and Warranties True. Section 7.1 of the ----------------------------------- Asset Purchase Agreement is hereby incorporated herein by reference as if set forth herein in its entirety. Section 7.2. No Obstructive Proceeding. No suit, action or other ------------------------- proceeding shall have been instituted to restrain, enjoin or otherwise prevent or question the legality of the consummation of the transactions contemplated by this Agreement. Section 7.3. Consents, Approvals and Licenses. The Purchaser shall -------------------------------- have received and been issued all licenses and approvals required under the provisions of state and federal law necessary for the Purchaser to own and operate and legally conduct all relevant operations of the Hospitals being conducted by the Companies on the Closing Date (except for the Controlled Substance Registration Certificate relating to the pharmacies in the Hospitals and such licenses and approvals which will be issued in due course and be effective as of the Closing), and the Purchaser or the Sellers shall have obtained all third party consents reasonably necessary for the legal and authorized transfer of all material assets, including, without limitation, the Scheduled Contracts and Scheduled Leases, except where the failure to receive such licenses, approvals and consents would not have a material adverse effect on the operations of Parent and its subsidiaries, taken as a whole. Section 7.4. Consents and Approvals. Purchaser shall have obtained ---------------------- all third-party consents reasonably necessary for the legal or authorized consummation of the transactions contemplated by this Agreement. Section 7.5. HSR Act; Restraining Order. The waiting period under -------------------------- the HSR Act shall have expired or been terminated and no order restraining or enjoining the transactions contemplated hereby shall have been obtained by the FTC, the DOJ or any state regulatory agency or any private party and be in effect. 14 Section 7.6. Title Insurance Policies. The Purchaser shall have been ------------------------ issued owner's title insurance policies by the Title Company in an amount set forth in Schedule 7.5 pursuant to the Title Commitments insuring as of the ------------ Closing Date the Hospital Company's good, indefeasible and, to the extent available in the applicable jurisdiction, marketable title to the Real Property which shall contain no liens except for the Permitted Encumbrances, with the survey and other standard exceptions deleted, and except for liens approved by the Purchaser which arise between the dates of the Title Commitments and the Closing. Section 7.7. Adverse Change. There shall have been no material -------------- adverse change in the assets or condition (financial or otherwise) of the business or material assets of the Companies between the date of this Agreement through the Closing Date. Section 7.8. Asset Purchase Agreement Closing. The transactions -------------------------------- contemplated within the Asset Purchase Agreement shall have been consummated or shall be consummated contemporaneously with the consummation of the transactions contemplated within this Agreement. Section 7.9. Transfer of Tax Holiday. Purchaser shall have received ----------------------- confirmation from the taxing authorities in Puerto Rico that the "tax holiday" enjoyed by the companies may be assigned to Purchaser. ARTICLE VIII TERMINATION ----------- Section 8.1. Optional Termination. This Agreement may be terminated -------------------- and the Hospital Company Merger and the Partially-Owned Company Merger abandoned (i) at any time prior to the Closing by the mutual written consent of Sellers and Parent; (ii) by Parent if Sellers adds any supplement to any Schedule to this Agreement or the Asset Purchase Agreement after the date hereof which supplement shall reasonably be expected to result in a material adverse change in the consolidated financial condition or results of operations of the Companies or, after the Closing Date, Parent, in excess of $500,000 for an individual failure or $2,500,000 for all such failures, except that, in the case of criminal activity or fraud, Parent shall have the right to terminate this Agreement without regard to the preceding dollar limitations; provided that -------- Parent must notify Sellers of its election to terminate the Agreement pursuant to this Section 8.1 within ten business days after its receipt of such supplement; (iii) by Sellers if Purchaser adds any supplement to any Schedule to this Agreement or the Asset Purchase Agreement after the date hereof which supplement shall reasonably be expected to result in a material adverse change in the consolidated financial condition or results of operations of Sellers or, after the Closing Date, Parent, in excess of $500,000 for an individual failure, $2,500,000 for all such failures other than breaches of Section 3.25 hereof for breaches of Section 3.25 and $2,500,000 for breaches of Section 3.25 hereof, except that, in the case of criminal activity or fraud, Sellers shall have the right to terminate this Agreement without regard to the preceding 15 dollar limitations; provided that Sellers must notify Parent of its election to -------- terminate the Agreement pursuant to this Section 8.1 within ten business days after its receipt of such supplement; and (iv) by Parent at any time prior to [NOVEMBER 22, 1996], if the environmental phase one surveys and engineering reports with respect to the Real Property pursuant to this Agreement should not be reasonably satisfactory to Parent. In addition, this Agreement shall immediately terminate in the event of the termination of the Asset Purchase Agreement. Section 8.2. Mandatory Termination. If the Closing has not occurred --------------------- by March 31, 1997, this Agreement shall automatically terminate, unless extended by the written agreement of CPC and the Parent. Section 8.3. Termination Consequences. In the event this Agreement ------------------------ is terminated pursuant to Section 8.1 or Section 8.2, then, except as expressly provided to the contrary in this Agreement, the parties shall be discharged from their obligations under this Agreement, and neither of the parties nor any of their respective shareholders, directors or officers shall have any liability to the other party for costs, expenses, loss of anticipated profits, consequential damages or otherwise. Promptly upon the termination of this Agreement, the Purchaser shall deliver to Sellers all documents (and copies thereof in its possession) concerning the Hospital Businesses previously delivered to the Purchaser. ARTICLE IX INDEMNIFICATION --------------- Section 9.1. Indemnification by Sellers. After the Closing and -------------------------- subject to the limitations set forth in this Article IX Sellers shall indemnify and hold harmless the Purchaser (and its stockholders, employees, officers, directors, subsidiaries, agents and representatives) from and against all liabilities, damages, costs and expenses (including reasonable attorneys' fees) incurred by such entities and persons (collectively, the "Damages") arising out of any breach, misrepresentation or nonfulfillment by Seller and, where applicable, Companies, of any of its/their representations, warranties or covenants set forth in this Agreement. Section 9.2. Indemnification by the Purchaser. After the Closing and -------------------------------- subject to the limitations set forth in this Article IX, Purchaser and the Subsidiaries shall jointly and severally indemnify and hold harmless Sellers (and their stockholders, employees, officers, directors, agents and representatives) from and against all Damages arising out of any breach, misrepresentation or nonfulfillment by any Purchaser of any 16 of its representations, warranties or covenants set forth in this Agreement. Section 9.3. Limitations. (a) Neither Sellers nor Purchaser shall ----------- have any liability to the other under this Article IX and no claim under this Article IX shall: (i) accrue unless and only to the extent that the actual liability of (A) the Sellers (as a group) pursuant to the indemnification provisions hereof and the Asset Purchase exceeds $2,500,000 in the aggregate; (B) the Purchaser (as a group) pursuant to the indemnification provisions hereof and in the Asset Purchase Agreement (other than liability arising as a result of breaches of Section 3.25 hereof and Section 3.25 of the Asset Purchase Agreement) exceeds $2,500,000 in the aggregate; (C) the Purchaser (as a group) pursuant to the indemnification provisions of this Agreement and the Merger Agreement arising as a result of breaches of Section 3.25 hereof and Section 3.25 of the Asset Purchase Agreement exceeds $2,500,000 in the aggregate (each a "Relevant Claim"); (ii) be made to the extent that any loss is recovered under a policy of insurance payable to the Indemnified Party which policy is in force on the date of loss; (iii) be made following the three year anniversary of the Closing Date. (b) The liability of Sellers shall cease, and any subsisting claim shall be withdrawn, on the date that the Hospital Businesses (or the individual Hospital relating to such claim) shall cease for any reason to be directly or indirectly wholly owned by the Purchaser or by a corporation controlled, directly or indirectly, by the Purchaser. (c) In the event that an Indemnified Party is entitled to recover any sum (whether by payment, discount, credit or otherwise) from any third party in respect of any matter for which a claim of indemnity could be made against the party hereto that would be liable for the Damages to an Indemnified Party hereunder (an "Indemnifying Party"), the Indemnified Party shall use commercially reasonable efforts to recover such sum from such 17 third party (but shall not be required to institute legal proceedings) and any sum recovered will reduce the amount of the claim; and if the Indemnifying Party pays to the Indemnified Party an amount in respect of, and the Indemnified Party subsequently recovers from a third party a sum which is referable to, that claim, the Indemnified Party shall forthwith repay to the Indemnifying Party, so much of the amount paid by it as does not exceed the sum recovered from the third party less all reasonable costs, charges and expenses incurred by the Indemnified Party in obtaining payment in respect of that claim and in recovering that sum from the third party. (d) If either party is liable to the other for Damages arising out of any breach, misrepresentation or nonfulfillment of any representations, warranties or covenants set forth in this Agreement, then the liability of the Indemnifying Party shall be reduced and any amount paid shall be refunded when and to the extent that the Indemnified Party obtains the benefit of a reduction in its liability for its tax (whether by way of credit or otherwise) which it would not have obtained had the breach which gave rise to liability of the Indemnifying Party not arisen. Section 9.4. Method of Asserting Claims. All claims for -------------------------- indemnification by any Indemnified Party under this Article IX shall be asserted and resolved in accordance with Section 9.4 of the Asset Purchase Agreement, which provisions will be deemed to be incorporated herein by this reference. Section 9.5. Exclusive. Any dispute arising under this Agreement or --------- in connection with or as a result of the transactions contemplated by this Agreement or any Damages or injury alleged to be suffered by either party as a result of the actions or failure to act by any other party shall, unless otherwise specifically stated, be governed solely and exclusively by the provisions of this Article IX. Section 9.6. Method of Payment. (a) Any amounts required to be ----------------- paid to Purchaser by Sellers pursuant to Section 9.1 hereof shall be paid in cash. (b) Any amounts required to be paid to Sellers by Purchaser pursuant to Section 9.2 and Section 11.22 hereof or by virtue of any breach of any other agreements executed concurrently herewith or in connection with the Closing (the "Additional Amounts") shall be in the form of additional shares of BHC Preferred Stock (and/or, at the election of CPC, BHC Common Stock so long as CPC thereupon owns less than 20% of the outstanding BHC Common Stock) (the "Additional Shares") such that the value of the BHC Common Stock and BHC Preferred Stock theretofore issued pursuant to this Agreement (including pursuant to this Section 9.6), with such value being determined prior to the 18 issuance of the Additional Shares (the "Original Value"), plus the value of the Additional Shares equals the Original Value plus the Additional Amounts after giving effect to the dilutive effects caused by the issuance of the Additional Shares, all as provided below. For example, assume that the value of the BHC Common Stock and BHC Preferred Stock held by Sellers prior to the issuance of Additional Shares is $50 million and that Sellers are entitled to receive $3 million from Purchaser pursuant to Section 9.2 hereof. In such case, BHC shall issue to Sellers a number of shares of BHC Preferred Stock (or BHC Common Stock as provided above) such that following the issuance of such shares (and after giving effect to the reduced value of the Original Shares as a result of the dilution caused by the issuance of the Additional Shares) Sellers shall hold BHC Common Stock and BHC Preferred Stock having a value of $53 million. (c) If at the time Additional Shares are to be issued pursuant to Section 9.2(b) BHC Common Stock is not publicly traded, the number of Additional Shares to be issued to Sellers pursuant to Section 9.6(b) hereof shall be determined as provided in this Section 9.6(c). Promptly upon determination of the Additional Amounts, Parent and CPC shall attempt in good faith to agree upon the number of Additional Shares to be issued to Sellers. If the parties are unable to agree upon the number of Additional Shares to be issued to Sellers within 30 days of the date of the determination of the Additional Amounts, Parent and CPC shall each appoint one investment banker not affiliated with either party who is experienced in valuing businesses similar to Parent's business to determine the number of Additional Shares to be issued to Sellers, taking into account the reduced value of the Original Shares as a result of the dilutive effect of the issuance of Additional Shares. If the two investment bankers are unable to agree upon the number of Additional Shares to be issued to Sellers within 30 days, CPC and Parent shall deliver to the other their determination of the number of Additional Shares to be issued to Sellers and shall jointly select a third investment banker with the same qualifications to determine the number of Additional Shares to be issued to Sellers. If CPC and Parent are unable to agree upon the third investment banker, such investment banker shall be selected by an arbitrator selected pursuant to the commercial rules of the American Arbitration Association. The third investment banker shall select either the number of Additional Shares to be issued to Sellers submitted by CPC or the number of Additional Shares to be issued to Sellers submitted by Parent as the number of Additional Shares to be issued to Sellers. Promptly following the determination of the number of Additional Shares to be issued to Sellers, Parent shall issue to Sellers such Additional Shares. The fees and expenses of such investment bankers shall be borne by Parent. 19 (d) If at the time Additional Shares are to be issued pursuant to Section 9.2(b) BHC Common Stock is publicly traded, the value of Additional Shares to be issued to Sellers pursuant to Section 9.6(b) shall be determined as provided in this Section 9.6(d). Promptly upon determination of the Additional Amounts, the Parent shall issue a press release stating, among other things, the amount owed to Sellers, that Additional Shares will be issued in satisfaction of such obligation and the method by which the value of the Additional Shares will be determined. The average closing price of the BHC Common Stock on the principal exchange on which it is traded or on the NASDAQ National Market System (or, if such stock is not so traded, then the average of the closing bid and asked prices of such stock) for the 20 business day period commencing five business days following the issuance of the press release shall then be determined (the "Average Price"). Promptly following the determination of the Average Price, the Parent shall issue to Sellers Additional Shares with an aggregate value (valuing each Additional Share at the Average Price) such that Sellers then hold BHC Common Stock and BHC Preferred Stock with an aggregate value (valuing each share at the Average Price) equal to the Original Value (for such purposes, the Original Value will be determined using the method of calculation for the Average Price, except that the 20 business day period shall be the 20 business days preceding the date of determination of the Additional Amounts plus the Additional Amounts. (e) For purposes of this Section 9.6, the value of a share of BHC Preferred Stock shall be deemed to be equal to the value of a share of BHC Common Stock. (f) Any payments required pursuant to this Section 9.6 shall be considered as adjustments to the Merger Consideration and shall not be considered a dividend. ARTICLE X TAX AND MEDICARE MATTERS ------------------------ Section 10.1. Federal, State and Local Taxes. (a) Sellers shall be ------------------------------ responsible for the preparation and filing of the federal, state and local tax returns of the Companies for all taxable periods prior to the Closing Date, it being understood that Purchaser shall be responsible for all such taxes. Where applicable, the Companies may be included in any federal consolidated income tax return or state or local consolidated or combined tax return for any affiliated group of which CPC is the common parent and for the consolidated or combined taxable year which includes the Closing Date. The Purchaser shall be responsible for the preparation and filing of federal, state and local tax returns with respect to the Companies for periods ending on or after the Closing Date. 20 (b) After the Closing, the parties shall cooperate with each other and shall make available to each other, as reasonably requested, all information, records or documents relating to tax liabilities or potential tax liabilities attributable to the Hospital Businesses for all periods prior to the Closing and shall preserve all such information, records and documents at least until the expiration of any applicable statute of limitations or extensions thereof. The parties shall also, upon reasonable prior notice, make available to each other as reasonably required, and at the reasonable cost of the requesting party (for out-of-pocket costs and expenses only), personnel responsible for preparing or maintaining information, records and documents in connection with tax matters. (c) In the event that the Purchaser receives written notice from an appropriate taxing authority of any pending or threatened examination, claim, settlement, proposed adjustment or related matter with respect to the taxes of the Sellers that could affect the Sellers or any affiliate of the Sellers, or if the Sellers or any affiliate of the Sellers receives written notice from an appropriate taxing authority of any such matters that could affect the Purchaser, any of its subsidiaries or respective affiliates, the party receiving notice shall notify in writing the potentially affected party within thirty (30) days following its receipt thereof. The failure of any party to give the notice required by this Section 10.1 shall not impair that party's rights under this Agreement except to the extent that the other party demonstrates that is has been materially prejudiced thereby. (d) In the case of any audit, examination or other proceeding (a "Proceeding") with respect to taxes for which the Sellers are or may be liable pursuant to this Agreement, the Purchaser shall promptly inform the Sellers, and the Purchaser shall execute or cause to be executed powers of attorney or other documents necessary to enable the Sellers to take all actions desired by the Sellers with respect to such Proceeding to the extent such Proceeding may affect the amount of taxes for which the Sellers are liable pursuant to this Agreement. The Sellers shall have the right to control any such Proceeding, and, if there is a reasonable basis therefor, to initiate any claim for refund, file any amended return or take any other action that they deem appropriate with respect to such taxes. All costs and expenses incurred in connection with any such Proceeding shall be borne by the Sellers, and the Purchaser shall be reimbursed by the Sellers for any and all reasonable direct costs and expenses incurred by them in connection with such Proceeding. Section 10.2. Effect of Certain Audit Adjustments. (a) In the event ----------------------------------- that any income tax audit of the affiliated group of corporations of which either of the companies is the common parent undergoes tax 21 audit adjustments for any taxable period that includes the Closing Date, then: (i) If such adjustment results in post Closing Date deductions, losses or credits to any Company, or to any affiliate group of which such Company is a member, then, Purchaser shall remit to CPC as a purchase price adjustment an amount equal to the Actual Tax Benefit (defined below) received. (ii) If such adjustment results in post Closing Date income, gains or reduction in credits, then CPC shall remit to Purchaser an amount equal to the Actual Tax Detriment (defined below) incurred. (b) In the event that, by reason of taxpayer elections or otherwise, Purchaser, the Companies, or any affiliate group of which any Company is a member shall either (i) obtain a refund of taxes paid by Sellers, any affiliated group of which CPC is now or was the common parent, or any tax return or tax reporting group of corporations, or (ii) utilize available tax loss carry forwards or credits of such taxpayer or groups of taxpayer, then Purchaser shall pay CPC as a purchase price adjustment an amount equal to the Actual Tax Benefit received as a result of the foregoing circumstance. (c) For purposes of this Section, the term "Actual Tax Benefit" shall mean the greater of (i) the deduction or loss recognized, multiplied by the tax rate applicable to Parent with respect to ordinary income or capital gain, (ii) the cash received (in the case of a tax refund), or (iii) the tax savings (in the case of a credit). For purposes of this Section, the term "Actual Tax Detriment" means the greater of (i) the gain or income recognized multiplied by the tax rate applicable to the Parent with respect to ordinary income or capital gain, (ii) the cash paid in the case of a tax payment, or (iii) the tax loss (in the case a tax credit is offset). (d) Payments hereunder shall be made on the date of filing of the tax return with respect to which any tax benefit is obtained or within ten (10) days following receipt of any cash refund or credit. ARTICLE XI MISCELLANEOUS ------------- Section 10.3 Nature of Payment. Any payments required to be made ----------------- pursuant to this Article X shall be considered as adjustments to the Hospital Merger Consideration or Partially Owned Company Merger Consideration, as applicable and not as a dividend. The provisions of Sections 11.1 through 11.24 of the Asset Purchase Agreement are hereby incorporated herein by reference as though set forth in full herein (the term "this 22 Agreement" as used in such sections being deemed to refer to this Agreement). ARTICLE XII NONCOMPETITION -------------- Sellers recognize that (i) Purchaser's entering into this Agreement is induced primarily because of the covenants and assurances made by Sellers hereunder, (ii) CPC's covenant not to compete is necessary to insure the continuation of the businesses of the Companies subsequent to the Closing, and (iii) irreparable harm and damage will be done to Purchaser in the event that CPC, or CPC's affiliates, compete with Purchaser within the area or areas specified in this Section. Therefore, in consideration of the premises and as an inducement for Purchaser to enter into this Agreement and consummate the transactions contemplated herein, CPC agrees that, for a period of three (3) years from and after the Closing Date, CPC, its affiliates (other than affiliates which become affiliates as a result of the acquisition of stock or assets of CPC) (collectively, the "Regulated Persons") will not own, lease, manage or operate any psychiatric hospitals, beds or units within the 25-mile radiuses of the Hospitals or any facility operated by Purchaser on the Closing Date (the "Proscribed Area"). Notwithstanding the foregoing, the Regulated Persons may own, lease, manage and operate psychiatric hospitals, beds and/or units within the Proscribed Area: (a) in any non-psychiatric hospital acquired by the Regulated Persons, provided that purchaser has been offered a right of first refusal to manage the psychiatric services provided at such hospital on then reasonably customary terms (provided that CPC shall not enter into any agreement to manage such psychiatric services on terms less favorable to CPC than those last offered to Purchaser) and (b) at THC New Orleans. The parties agree that no portion of the Hospital Company Merger Consideration or the Partially Owned Company Merger Consideration shall be allocated the non- competition covenant contained in this Section XII. 23 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. ENTITIES CONSTITUTING THE "SELLERS" COMMUNITY PSYCHIATRIC CENTERS By:_______________________________ Title:____________________________ COMMUNITY PSYCHIATRIC CENTERS OF PUERTO RICO, INC. By:_______________________________ Title:____________________________ CPC-PHP, INC. By:_______________________________ Title:____________________________ "PARENT" BEHAVIORAL HEALTHCARE CORPORATION By:_______________________________ Title:____________________________ 24 EX-99.3 4 AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF BHC EXHIBIT 99.3 ========================= ========================= Audited Consolidated Financial Statements ========================= Behavioral Healthcare Corporation ========================= Years ended June 30, 1996, 1995 and 1994 ========================= ========================= Behavioral Healthcare Corporation Consolidated Balance Sheets
JUNE 30 1996 1995 ------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 3,727,457 $ 14,882,602 Patient receivables, less allowance for doubtful accounts of $1,550,603 and $2,096,296, for 1996 and 1995 respectively 10,687,772 8,321,487 Supplies 368,949 306,241 Deferred income taxes 781,933 1,011,283 Other current assets 783,698 510,202 Assets held for sale 976,849 976,849 ------------------------------------- Total current assets 17,326,658 26,008,664 Property, plant and equipment: Land and improvements 6,331,213 4,742,013 Buildings and improvements 26,239,808 19,094,305 Equipment 7,548,201 5,775,525 ------------------------------------- 40,119,222 29,611,843 Less accumulated depreciation 4,619,880 2,897,510 ------------------------------------- Net property, plant and equipment 35,499,342 26,714,333 Unamortized loan costs 805,288 145,064 Other assets 189,925 127,590 ------------------------------------- Total assets $ 53,821,213 $ 52,995,651 =====================================
2
JUNE 30 1996 1995 ------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,190,657 $ 2,040,018 Accrued liabilities: Salaries and benefits 2,818,244 2,024,202 Interest 202,714 95,790 Other 564,823 1,188,604 Income taxes payable 108,681 133,648 Current maturities of long-term debt - 15,933,385 ------------------------------------ Total current liabilities 6,885,119 21,415,647 Long-term debt and subordinated notes, less current maturities 15,249,152 822,000 Deferred professional liabilitiy risks 840,347 490,387 STOCKHOLDERS' EQUITY Common Stock--$.01 par value: authorized 30,000,000 shares; issued and outstanding 5,044,214 and 5,041,714 shares in 1996 and 1995, respectively 50,442 50,417 Additional paid-in capital 31,102,505 31,069,961 Retained earnings 786,814 189,214 Cost of treasury stock (156,391 shares in 1996 and 149,078 shares in 1995) (1,093,166) (1,041,975) ------------------------------------ Total stockholders' equity 30,846,595 30,267,617 ------------------------------------ Total liabilities and stockholders' equity $ 53,821,213 $ 52,995,651 ====================================
See accompanying notes. 3 Behavioral Healthcare Corporation Consolidated Statements of Operations
YEAR ENDED JUNE 30 1996 1995 1994 ------------------------------------------- Net patient service revenue $ 57,305,100 $ 61,044,551 $ 52,988,061 Other revenue 753,680 188,597 51,395 ------------------------------------------- Total net revenue 58,058,780 61,233,148 53,039,456 Expenses: Salaries and benefits 34,276,917 33,600,938 27,361,145 Fees 8,460,722 10,544,305 9,770,245 Supplies 3,283,421 3,493,075 3,051,190 Provision for doubtful accounts 2,441,696 2,220,461 2,396,959 Interest 1,554,745 2,491,006 2,199,357 Depreciation and amortization 1,766,142 1,818,149 1,568,297 Write-down of property, plant and equipment - 2,378,600 - Other 5,218,154 6,148,328 4,758,973 ------------------------------------------- 57,001,797 62,694,862 51,106,166 ------------------------------------------- Income (loss) before income taxes 1,056,983 (1,461,714) 1,933,290 Income tax expense (benefit 459,383 (459,837) 742,199 ------------------------------------------- Net income (loss) $ 597,600 $ (1,001,877) $ 1,191,091 =========================================== Earnings (loss) per common and dilutive common equivalent share: Primary $ 0.12 $ (0.39) $ 0.66 =========================================== Fully diluted $ 0.12 $ (0.39) $ 0.66 =========================================== Weighted average number of common and common stock equivalent shares $ 4,899,653 $ 2,340,339 $ 2,014,712 ===========================================
See accompanying notes. 4 Behavioral Healthcare Corporation Consolidated Statements of Stockholders' Equity
SERIES A CONVERTIBLE SERIES B CONVERTIBLE ADDITIONAL COMMON STOCK PREFERRED STOCK PREFERRED STOCK PAID-IN ------------------------- ------------------------------ ---------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ----------- ------------ -------------- -------------- ------------ -------------- -------------- Balance at July 1, 1993 210,000 $ 2,100 - $ - - $ - $ - Issuance of Convertible Preferred Stock - - 1,280,000 7,701,528 357,143 2,405,879 - Net income - - - - - - - ----------------------------------------------------------------------------------------------------- Balance at June 30, 1994 210,000 2,100 1,280,000 7,701,528 357,143 2,405,879 - Recapitalization Plan (Note 2): Conversion of Convertible Preferred Stock 1,637,143 16,371 (1,280,000) (7,701,528) (357,143) (2,405,879) 10,091,36 Common Stock offering net of recorded expenses 2,368,884 23,689 - - - - 15,683,853 Exercise of warrants 356,158 3,562 - - - - 2,222,383 Conversion of subordinated notes 467,429 4,674 - - - - 3,059,585 Exercise of Stock options 2,100 21 - - - - 13,104 Purchase of treasury shares - - - - - - - Net loss - - - - - - - ----------------------------------------------------------------------------------------------------- Balance at June 30, 1995 5,041,714 50,417 - - - - 31,069,961 TOTAL RETAINED TREASURY STOCK STOCKHOLDER ----------------------------- EARNINGS SHARES AMOUNT EQUITY ---------------- -------------- ------------- ------------------- Balance at July 1, 1993 $ - - $ - $ 2,100 Issuance of Convertible Preferred Stock - - - 10,107,407 Net income 1,191,091 - - 1,191,091 -------------------------------------------------------------------- Balance at June 30, 1994 1,191,091 - - 11,300,598 Recapitalization Plan (Note 2): Conversion of Convertible Preferred Stock - - - - Common Stock offering net of recorded expenses - - - 15,707,542 Exercise of warrants - - - 2,225,945 Conversion of subordinated notes - - - 3,064,259 Exercise of Stock options - - - 13,125 Purchase of treasury shares - (149,078) 1,041,975) (1,041,975) Net loss (1,001,877) - - (1,001,877) ------------------------------------------------------------------- Balance at June 30, 1995 189,214 (149,078) (1,041,975) 30,267,617
Behavioral Healthcare Corporation Consolidated Statements of Stockholders' Equity (continued)
SERIES A CONVERTIBLE SERIES B CONVERTIBLE ADDITIONAL COMMON STOCK PREFERRED STOCK PREFERRED STOCK PAID-IN ------------------------ ------------------------ ------------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ---------- ---------- ---------- ---------- ---------- ---------- ------------- Balance at June 30, 1995 5,041,714 $ 50,417 - $ - - $ - $ 31,069,961 Issuance of Common Stock 2,500 25 - - - - 17,475 Purchase of treasury Shares - - - - - - - Other - - - - - - 15,069 Net income - - - - - - - ----------------------------------------------------------------------------------------------------- Balance at June 30, 1996 5,044,214 $ 50,442 - $ - - $ - $ 31,102,205 ===================================================================================================== TOTAL RETAINED TREASURY STOCK STOCKHOLDER ------------------------------------ EARNINGS SHARES AMOUNT EQUITY -------------- ----------------- ----------------- --------------- Balance at June 30, 1995 $ 189,214 (149,078) $ (1,041,975) $ 30,267,617 Issuance of Common Stock - - - 17,500 Purchase of treasury Shares - (7,313) (51,191) (51,191) Other - - - 15,069 Net income 597,600 - - 597,600 ------------------------------------------------------------------------ Balance at June 30, 1996 $ 786,814 (156,391) $ (1,093,166) $ 30,846,595 ========================================================================
See accompanying notes. Behavioral Healthcare Corporation Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30 1996 1995 1994 ------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 597,600 $ (1,001,877) $ 1,191,091 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred income taxes 229,350 (869,011) (142,272) Depreciation and amortization 1,766,142 1,818,149 1,568,297 Write-down of property, plant and equipment - 2,378,600 - Changes in operating assets and liabilities, net of effect of acquisitions: Net patient receivables (2,131,985) 988,531 519,245 Other current assets (159,072) 96,533 (135,222) Accounts payable 266,750 (288,316) 578,956 Income taxes payable (24,967) 99,177 34,471 Other accrued liabilities (22,986) (190,262) 878,569 Deferred professional liability risks 349,960 292,387 198,000 ------------------------------------------------- Net cash provided by operating activities 870,792 3,323,911 4,691,135 INVESTING ACTIVITIES Acquisition of facilities, net of cash acquired (9,038,974) (1,948,945) (35,485,622) (Increase) decrease in other assets and unamortized loan costs (704,325) 97,428 (555,170) Purchases of property, plant and equipment (742,714) (811,641) (1,390,131) ------------------------------------------------- Net cash used in investing activities (10,486,013) (2,663,158) (37,430,923)
7 Behavioral Healthcare Corporation Consolidated Statements of Cash Flows (continued)
YEAR ENDED JUNE 30 1996 1995 1994 --------------------------------------------- FINANCING ACTIVITIES Payment of principal on long-term debt $(17,246,174) $(2,116,615) $(1,730,000) Payment of Subordinated Notes - (1,761,669) - Proceeds from long-term debt 15,739,941 1,700,000 25,500,000 Issuance of Convertible Preferred Stock - - 10,107,407 Issuance of Convertible Stock 17,500 15,707,542 - Proceeds from exercise of stock options - 13,125 - Proceeds from exercise of warrants - 581,666 - Purchase of treasury stock (51,191) (1,041,975) - --------------------------------------------- Net cash provided by (used in) financing activities (1,539,924) 13,082,074 33,877,407 --------------------------------------------- Net increase (decrease) in cash and cash equivalents (11,155,145) 13,742,827 1,137,619 Cash and cash equivalents at beginning of year 14,882,602 1,139,775 2,156 --------------------------------------------- Cash and cash equivalents at end of year $ 3,727,457 $14,882,602 $ 1,139,775 ============================================= Supplemental cash flow information: Interest paid $ 1,219,182 $ 2,333,670 $ 1,914,636 ============================================= Income taxes paid $ 204,000 $ 310,000 $ 850,000 ============================================= Noncash transactions: Conversion of Preferred Stock to Common Stock $ - $10,107,407 $ - ============================================= Conversion of Subordinated Notes to Common Stock $ - $ 4,916,331 $ - =============================================
See accompanying notes. 8 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements June 30, 1996 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Behavioral Healthcare Corporation (the "Company") was formed the purpose of owning and operating healthcare facilities providing psychiatric and related mental health services. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. NET PATIENT SERVICE REVENUE Patient service revenue is reported on the accrual basis in the period in which services are provided, at established rates, regardless of whether collection in full is excepted. Net patient service revenue includes amounts estimated by management to be reimbursable by Medicare and Medicaid under provisions of cost or prospective reimbursement formulas in effect. Amounts received are generally less than the established billing rates of the facilities and the differences (contractual allowances) are reported as deductions from patient service revenue. The effect of other arrangements for providing services at less than established rates is also reported as deductions from patient service revenue. Medicare, Medicaid and CHAMPUS programs comprise approximately 18%, 13% and 5% of patient receivables, respectively, at June 30, 1996 and 20%, 11% and 5% at June 30, 1995. Receivables from Medicare include amounts from the State of Arizona, California, Nevada, New Mexico, Ohio and Texas. Remaining receivables relate primarily to various commercial insurance carries and HMO/PPO programs. 9 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET PATIENT SERVICE REVENUE (CONTINUED) Net patient service revenue is net of contractual adjustments and policy discounts of $63,918,554, $62,558,713 and $46,483,043 for the years ended June 30, 1996, 1995 and 1994, respectively. The provision for doubtful accounts is included in operating expenses. SUPPLIES Supply inventory is stated at the lower of cost (first-in, first-out) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which approximates 4 to 40 years. INTANGIBLE ASSETS Loan costs are deferred and amortized over the life of the related debt. The amounts reported are net of accumulated amortization of $109,145 and $291,072 at June 30, 1996 and 1995, respectively. INCOME TAXES Income taxes are provided based on the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109"). Under FAS 109, deferral tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. EARNINGS (LOSS) PER COMMON AND DILUTIVE COMMON EQUIVALENTS The computations of earnings (loss) per common and dilutive common equivalent share are based on the weighted average number of common shares outstanding after considering the effect of stock options and warrants using the modified treasury stock method. 10 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior period amounts have been reclassified in order to conform to current period presentation. Such reclassifications had no material effect on the financial position and results of operations as previously reported. RECENTLY ISSUED ACCOUNTING STANDARDS In fiscal 1995, the Company elected to adopt the provisions of Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." FAS 121 requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. FAS 121 also requires that assets to be disposed of should be written down to fair value less selling costs. The Company recorded impairment losses of $2,378,600 in fiscal 1995 under the provisions of FAS 121 (see Note 4). In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation," which becomes effective for fiscal years beginning after December 15, 1995. FAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. Entities will be allowed to measure compensation expense for stock-based compensation under FAS 123 or APB Opinion No. 25 ("ABP 25"), "Accounting for Stock Issued to Employees." Entities electing to continue recording the issuance of stock options in accordance with APB 25 will be required in fiscal years beginning after December 15, 1995 to make pro forma disclosures of net income and earnings per share as if the provisions of FAS 123 had been applied. At June 30, 1996, the Company has elected to continue to record the issuance of stock options in accordance with APB 25. 11 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 2. RECAPITALIZATION PLAN AND SUPPLEMENTAL EARNINGS PER SHARE DATA RECAPITALIZATION PLAN During May 1995, the Company completed a recapitalization plan (the "Recapitalization Plan") designed to raise capital, reduce the cost of its debt and improve the Company's operating flexibility. The major components of the Recapitalization Plan were: 1. The conversion of issued and outstanding shares of Series A and Series B Convertible Preferred Stock into an equivalent number of shares of Common Stock. 2. The completion of a private placement by the Company of 2,368,884 shares of its Common Stock at $7.00 per share, realizing proceeds (net of costs of the offering) of $15,707,542. The purchasers of the 2,368,884 shares of Common Stock have the option to purchase an additional equivalent number of shares of Common Stock at $7.00 per share on or before June 30, 1996. On April 24, 1996, the Board of Directors of the Company approved the extension of the option period through December 31, 1996. 3. The exercise by several holders of the 10.5% Subordinated Notes of 263,092 nondetachable warrants at $6.25 per share in exchange for the retirement of $1,644,325 principal amount of the Company's 10.5% Subordinated Notes. 4. The exercise by several holders of the 10.5% Subordinated Notes of 93,066 nondetachable warrants at $6.25 per share ($581,666). 5. The exchange by several holders of the 10.5% Subordinated Notes of $3,272,006 principal amount of the Company's 10.5% Subordinated Notes for 467,429 shares of the Company's Common Stock. In connection with this transaction, $207,793 of deferred loan costs associated with the Subordinated Notes were transferred to additional paid-in capital. 6. The increase in the authorized shares of Common Stock from 4,000,000 to 30,000,000. 7. The reduction in the authorized shares of Series A and Series B Convertible Preferred Stock from 1,280,000 shares and 357,143 shares, respectively, to zero. 12 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 3.ACQUISITIONS 1996 ACTIVITIES On May 31, 1996, the Company acquired certain assets and liabilities of four psychiatric hospitals and one residential treatment center from Mental Health Management, Inc. The acquisition was accounted for as a purchase and the operations of the acquired facilities have been included in the Statement of Operations from the date acquisition. The purchase price was allocated as follows: property, plant and equipment--$9,792,426; patient receivables--$234,300; other current assets--$177,132; other assets--$34,245; and current liabilities assumed--$1,199,129. The following facilities were acquired in the purchase; Aspen Hill Hospital Flagstaff, Arizona Pacific Shores Hospital Oxnard, California Pinion Hills Hospital Santa Fe, New Mexico Pinion Hills RTC Valerde, New Mexico Windsor Hospital Chagrin Falls, Ohio The acquisition was financed through available cash on hand and additional borrowings under the 1995 Credit Agreement (see Note 5). 1995 ACTIVITIES On December 30, 1994, the Company acquired certain assets and liabilities of Ross Hospital, a 92-bed psychiatric hospital located in Kentfield, California. The acquisition was accounted for as a purchase and the operations of the hospital have been included in the Statement of Operations from the date of acquisition. The purchase price was allocated as follows: property, plant and equipment--$2,200,000; current assets--$24,600; and current liabilities assumed--$275,655. The acquisition was financed through borrowings under the Second Amended and Restated Loan and Security Agreement with NationsBank (see Note 5). 1994 ACTIVITIES On July 1, 1993, the Company acquired certain assets and liabilities of four psychiatric hospitals and two residential treatment centers from HCA Psychiatric Company, a subsidiary of Hospital Corporation of America ("HCA"). The acquisition was accounted for as a purchase and the operations of the acquired facilities have been included in the Statement of 13 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 3. ACQUISITIONS (CONTINUED) 1994 ACTIVITIES (CONTINUED) Operations from the date of acquisition. The purchase price was allocated as follows: property, plant and equipment--$24,445,572; patient receivables-- $7,952,397; other current assets--$568,426; and current liabilities assumed-- $2,928,776. The following facilities were acquired in the purchase: Cedar Crest RTC Belton, Texas Montevista Hospital Las Vegas, Nevada Richland Hospital Richland Hills, Texas Shoal Creek Hospital Austin, Texas West Hills Hospital Reno, Nevada Willow Springs Center Reno, Nevada The acquisition was financed through the Credit Agreement with NationsBank, the issuance of 10.5% subordinated notes and the issuance of 1,280,000 shares of Series A Convertible Preferred Stock. On December 28, 1993, the Company acquired certain assets and liabilities of two additional psychiatric hospitals from HCA. The acquisition was accounted for as a purchase and the purchase price was allocated as follows: property, plant and equipment--$4,000,000; patient receivables--$1,876,866; other current assets--$188,151; and current liabilities assumed--$617,014. The following facilities were acquired in the purchase: Canyon Ridge Hospital Chino, California Cedar Vista Hospital Fresno, California The acquisition was financed through borrowings under the Amended and Restated Loan and Security Agreement NationsBank (see Note 5) and the issuance of 357,143 shares of Series B Convertible Preferred Stock. The results of operations of these two hospitals are included in the Statement of Operations from January 1, 1994. 14 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 3. ACQUISITIONS (CONTINUED) PRO FORMA RESULTS The following represents the unaudited pro forma results of operations as if the above-noted acquisitions had occurred as of July 1 of the previous year of acquisition, after giving effect to certain adjustments, including the depreciation and amortization of the assets acquired based upon their fair values, changes in net interest expense resulting from changes in consolidated debt, and decreased allocated overhead expenses;
1996 1995 1994 ----------------------------------------- Net patient service revenue $ 80,744,400 $ 90,089,496 $ 67,779,573 Net income (loss) 1,317,664 (437,458) 1,298,339 Earnings (loss per common and dilutive common equivalent share: Primary $ 0.27 $ (0.19) $ 0.71 Fully diluted 0.27 $ (0.19) $ 0.71
The pro forma information given above does not purport to be indicative of what actually would have occurred if the acquisitions had been in effect for the entire periods presented, and is not intended to be a projection of future results or trends. 4. RESTRUCTURING CHARGE As a result of continuing losses from operations and the depressed psychiatric business environment in the Dallas-Ft. Worth, Texas market, effective June 30, 1995 the Company recorded a pretax charge of $2,378,600 in connection with the decision to sell Richland Hospital. The Company expects to sell Richland Hospital by October 1996. The charge represents the write-down of property, plant and equipment to its net realizable value. The net property, plant and equipment of $976,849 is classified as "assets held for sale" on the balance sheet. 15 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 5. LONG TERM DEBT AND SUBORDINATED NOTES The Company's long-term debt and subordinated notes include the following:
JUNE 30 1996 1995 ---------------------------- Long-term debt payable to banks $ 14,427,152 $ 15,933,385 Subordinated notes (see Note 2) 822,000 822,000 ---------------------------- 15,249,152 16,755,385 Less current maturities of long-term debt - 15,933,385 ---------------------------- $ 15,249,152 $ 822,000 ============================
LONG-TERM DEBT On June 30, 1993, the Company entered into a credit agreement (the "Credit Agreement") with NationsBank which provided a term loan of $15,000,000 for acquisitions. On December 28, 1993, the Company amended and restated the credit agreement ("Amended and Restated Loan and Security Agreement") with NationsBank providing for an additional term loan of $3,000,000 for acquisitions. On December 30, 1994, certain terms of the Amended and Restated Loan Security Agreement were further amended ("Second Amended and Restated Loan and Security Agreement") in connection with Company's acquisition of Ross Hospital. The amended terms provided for an additional term loan of $1,700,000 which was also for acquisition purposes. All principal amounts outstanding under the Second Amended and Restated Loan and Security Agreement were due on June 30, 1996. On November 30, 1995, the Company entered into a credit agreement (the "1995 Credit Agreement") with a group comprised of three banks, with NationsBank as the agent, for the purpose of financing acquisitions, refinancing the outstanding principal balance due under the Second Amended and Restated Loan and Security Agreement, financing working capital, and for general corporate purposes. Under the 1995 Credit Agreement, the Company may initially borrow, on a revolving basis, an aggregate maximum principal amount of up to $45,000,000. Commencing January 1, 1997 and each quarter thereafter, the aggregate maximum principal amount available under the 1995 Credit agreement shall be reduced by $2,500,000. Amounts borrowed under the 1995 Credit Agreement may be in the form of Eurodollar Loans, Floating Rate Loans, or a combination of the two. 16 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 5. LONG-TERM DEBT AND SUBORDINATED NOTES (CONTINUED) LONG-TERM DEBT (CONTINUED) The credit facility is collateralized by the assignment of all rights, title and interest in all equipment, fixtures, real property, inventory and Common Stock of the Company and its subsidiaries. The bank required commitment fees totaling $675,000 in connection with the loan. All outstanding principal amounts under the 1995 Credit Agreement are due on july 1, 2000. In addition, any principal in excess of the aggregate maximum principal amount at the end of any quarter are payable upon demand. Interest on any Floating Rate Loans is equal to prime plus the prime rate margin (based upon the Company's funded debt to cash flow ratio and in any event than 1%). Interest on any Eurodollar Loans is equal to the LIBO rate margin (based upon the Company's funded debt to cash flow ratio and in any event no greater than 3% and no less than 1.5%). The interest rate on the outstanding principal balance under the 1995 credit Agreement at June 30, 1996 was approximately 8%. The 1995 Credit Agreement contains various financial covenants that include requirements for the Company to maintain a minimum net worth, minimum working capital, funded debt to cash flow, funded debt to capital, interest coverage, debt service coverage, and other ratios and restricts the payment of any dividends, capital expenditures, investments in new businesses, issuances or repurchases of capital stock, and disposal assets, among other things. At June 30, 1996, the Company was in compliance with all covenants of the 1995 Credit Agreement. SUBORDINATED NOTES The Subordinated Notes bear interest, payable quarterly, at 10.5% per annum and are due on June 30, 2000. The Subordinated Notes are unsecured obligations and are subordinate to all senior debt of the Company. In May 1995, in connection with completion of the Recapitalization Plan (see Notes 2), $1,644,325 principal amount of the subordinated Notes were exchanged for the exercise of 263,092 nondetachable warrants by the holders of Subordinated Notes and $3,272,006 principal amount of the Subordinated Notes were exchanged for 467,429 shares of the Company's Common Stock by the holders of the Subordinated Notes. Additionally, in May 1995, $1,761,669 of the Subordinated Notes were repaid by the Company. 17 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 5. LONG-TERM DEBT AND SUBORDINATED NOTES (CONTINUED) SUBORDINATED NOTES (CONTINUED) The remaining Subordinated Notes (see Notes 2 ) include nondetachable warrants to purchase up to 43,842 shares of the Company's common stock at a purchase price of $6.25 per share. The warrants are exercisable upon the payment of the purchase price or the surrender of notes, the principal amount of which is equal to the exercise price of the warrants. The warrants are exercisable at any time until the latter of the 5th anniversary of issuance or the date the subordinated notes have been paid in full. The holders of the notes are entitled to vote on each matter on which stockholders of the Company are entitled to vote. The number of votes is equal to the number of shares the holders is entitled to purchase with the warrants. The price shall be adjusted for certain dilutive events. Such dilutive events include: (i) issuance or sale of "Additional shares of common stock," as defined for consideration below $6.25; (ii) issuance or sale of any options or convertible securities for consideration below $6.25; or (iii) stock dividends and stock splits. OTHER LONG-TERM DEBT INFORMATION Future maturities of long-term debt are as follows: 1997 $ - 1998 - 1999 - 2000 5,249,152 2001 10,000,000 ---------------- $ 15,249,152 ================ 6. CONTINGENCIES Final determination of amounts earned under prospective payment and cost-reimbursement activities is subject to review by appropriate governmental authorities or their agents. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews. 18 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 6. CONTINGENCIES (CONTINUED) The Company carries general and professional liability insurance from an unrelated commercial insurance carrier for per occurrence losses up to $1,000,000 with policy limits of $3,000,000 in the aggregate, on a claims-made basis. In addition, the Company has an umbrella policy with the insurance carrier with coverage up to $25,000,000 per occurrence and in the aggregate. The reserve for general and professional liability risks is based on actuarially determined estimates. The Federal Trade Commission (the "FTC") is conducting a continued examination of the advertising and marketing of psychiatric and rehabilitation programs in the psychiatric industry. In that regard the FTC has requested and the Company has provided information concerning West Hills Hospital and Richland Hospital. The FTC issued a Civil Investigative Demand formally requesting information from West Hills Hospital, Shoal Creek Hospital and Cedar Crest RTC. The investigation relates to matters occurring prior to the acquisition of the hospitals by the Company, and amounts associated with the investigation exceeding $250,000 remain an obligation of the former owner of the hospitals. The Company is presently, and from time to time, subject to other various claims and lawsuits arising in the normal course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. 19 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 7.INCOME TAXES Significant components of the Company's deferred tax assets and liabilities as of June 30, 1996 and 1995 are as follows:
1996 1995 ---------------------------------- Deferred tax assets: Difference in book and tax basis of assets related to the restructuring charge $ 661,788 $ 854,631 Accrued liabilities 432,482 236,561 Accrued vacation 353,396 242,839 Minimum tax credit carryforward 261,749 189,389 State net operating loss carryforward 221,481 71,896 ---------------------------------- Total deferred tax assets 1,930,896 1,595,316 Valuation allowance for deferred tax assets (254,743) (71,896) ---------------------------------- Net deferred tax assets 1,676,153 1,523,420 Deferred tax liabilities: Differences in book and tax provision for doubtful accounts 471,693 213,604 Tax over book depreciation 422,527 298,533 ---------------------------------- Total deferred tax liabilities 894,220 512,137 ---------------------------------- Net deferred tax assets $ 781,933 $ 1,011,283
================================== The valuation allowance is attributable to state net operating loss carryforwards and the state tax benefit attributable to the restructuring charge which may expire before they are utilized. The net deferred tax asset reflects an increase in the valuation allowance of approximately $182,847. 20 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES (CONTINUED) Significant components of the provision for income taxes attributable to operations are as follows:
JUNE 30 1996 1995 1994 -------------------------------------------- Current: Federal $ 101,557 $ 334,448 $ 819,265 State 128,476 74,726 65,206 -------------------------------------------- Total current 230,033 409,174 884,471 Deferred: Federal 255,040 (712,446) 136,175) State (25,690) (156,565) (6,097) -------------------------------------------- Total deferred 229,350 (869,011) (142,272) -------------------------------------------- Provision for income taxes $ 459,383 $(459,837) $ 742,199 ============================================
The Company's consolidated effective tax rate differed from the federal statutory rate as set forth below:
JUNE 30 1996 1995 1994 ---------------------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------------------------------------------------------------- Tax at U.S. statutory rates $359,374 34% $(496,983) 34% $657,319 34% State taxes, net of federal benefits (80,061) (8) (44,415) 3 39,012 2 Changes in valuation allowance 182,847 17 47,228 (3) 24,668 1 Other, net (2,777) - 34,333 (2) 21,200 1 ---------------------------------------------------------------- Total $459,383 43% $(459,837) 32% $742,199 38% ==============================================================
21 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 8. STOCKHOLDER'S EQUITY On December 11, 1992, 10,000 shares of common stock were issued when the Company was formed as a Tennessee corporation. The 10,000 shares were exchanged for 210,000 shares on June 28, 1993 when the Tennessee corporation was merged into a Delaware corporation. Holders of common stock are entitled to one vote per share on any matter on which stockholders are entitled to vote. The Series A Convertible Preferred Stock was issued on July 1, 1993 and was convertible into 1,280,000 shares of common stock, which was based on a conversion price of $6.25 per share. The Series A Convertible Preferred Stock included a $6.25 per share preference on liquidation of the Company. The Company at its sole option had the right to require all Series A preferred shares to be converted into common stock at any time on or after a qualified public offering. The Series B Convertible Preferred Stock was issued on December 30, 1993 and was convertible into 357,143 shares of common stock, which was based on a conversion price of $7.00 per share. The Series B Convertible Preferred Stock included a $7.00 per share preference on liquidation of the Company. The Company at its sole option had the right to require all Series B preferred shares to be converted into common stock at any time on or after a qualified public offering. In connection with the Recapitalization Plan (see Note 2) all outstanding shares of the Series A and Series B Convertible Preferred Stock were converted to Common Stock and the Company and its stockholders executed an Amended and Restated Stockholders' Agreement. The Amended and Restated Stockholders' Agreement will terminate upon the earlier of a qualified public offering of Common Stock or July 1, 1998. 9. EMPLOYEE BENEFIT PLANS STOCK OPTION PLAN The 1993 Incentive Stock Plan provided for the grant of options to purchase up to 210,000 shares of Common Stock to directors, officers, and other key employees. In 1995, the Company amended the 1993 Incentive Stock Plan to increase the number of options available for grant to 447,000 options. Under the plan, the Company may grant incentive stock options and nonqualified stock options. Options are exercisable as determined by the Board of Directors. 22 Behavioral Healthcare Corporation Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFIT PLANS (CONTINUED) STOCK OPTION PLAN (CONTINUED) Incentive stock options (but not nonqualified stock options) must have a term not exceeding ten years, and must have an exercise price not less than the fair market value of the Common Stock at the date of the grant. Nonqualified options shall not have an exercise price of less than 50% of the fair market value at the date of the grant, and must have a term not exceeding ten years and become exercisable ratably over a five-year period commencing six months after the date of grant. Information with respect to the Incentive Stock Plan is as follows:
JUNE 30 1996 1995 1994 ------------------------------------------------ Options outstanding at July 1 198,312 175,875 - Granted 7,875 52,625 175,875 Exercised - (2,100) - Canceled (18,375) (28,088) - ------------------------------------------------ Options outstanding at June 30 187,812 198,312 175,875 ================================================ Options available for grant at June 30 257,088 246,588 34,125 ================================================ Options exercisable at June 30 90,325 54,337 30,450 ================================================ Option price range at June 30 $6.25-$7.00 $6.25-$7.00 $6.25-$7.00 ================================================
401(K) PLAN The Company has a defined contribution retirement plan, the Behavioral Healthcare Corporation 401(k) Plan. The plan covers all employees who have worked at least 1,000 hours in the calendar year, attained the age of 21 and have completed one year of service. The Company makes contributions to the plan each year equal to 100% of eligible employee's pretax contributions not to exceed a maximum of 3% of the eligible employee's compensation contributed to the plan. Retirement plan expense was $334,534, $284,975 and $203,559 for the years ended June 30, 1996, 1995 and 1994, respectively. 23 -----END PRIVACY-ENHANCED MESSAGE-----