EXHIBIT 2.1

Execution Copy

STOCK PURCHASE AGREEMENT

By and Among

SELECT MEDICAL CORPORATION

As Buyer

AND

BEVERLY ENTERPRISES, INC.

As Seller

AND

AMERICAN TRANSITIONAL HOSPITALS, INC.

Dated as of May 29, 1998

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ARTICLE I THE TRANSACTION...........................................................    2

          1.1.  Sale and Purchase of Stock and Notes................................    2
          1.2.  Purchase Price; Payment; Adjustment.................................    2
          1.3.  Closing.............................................................    3

ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER AND ATH.........................    4

          2.1.  Organization........................................................    4
          2.2.  Capitalization and Ownership; Power and Authority...................    4
          2.3.  Subsidiaries........................................................    5
          2.4.  Qualification; Location of Business and Assets......................    5
          2.5.  Authorization and Enforceability....................................    5
          2.6.  No Violation of Laws or Agreements..................................    6
          2.7.  Financial Statements................................................    6
          2.8.  No Undisclosed Liabilities..........................................    7
          2.9.  No Changes..........................................................    7
          2.10. Taxes...............................................................    9
          2.11. Leasehold Improvements, Inventory and Equipment.....................   11
          2.12. Accounts Receivable.................................................   11
          2.13. No Pending Litigation or Proceedings................................   11
          2.14. Contracts; Compliance...............................................   12
          2.15. Compliance With Laws................................................   13
          2.16. Consents............................................................   15
          2.17. Title...............................................................   15

          2.18. Real Estate.........................................................   15
          2.19. Transactions with Related Parties...................................   16
          2.20. Condition of Assets.................................................   16
          2.21. Compensation Arrangements; Bank Accounts; Officers and Directors....   17
          2.22. Labor Relations.....................................................   17
          2.23. Insurance...........................................................   17
          2.24. Patents and Intellectual Property Rights............................   18
          2.25. Employee Retirement Income Security Act of 1974, as amended.........   19
          2.26. Brokerage...........................................................   21
          2.27. Indebtedness........................................................   21
          2.28. Third-Party Payment Contracts.......................................   21
          2.29. Billing; Gratuitous Payments........................................   21
          2.30. Reimbursement Matters...............................................   21
          2.31. Federal Health Care Programs........................................   22
          2.32. No Criminal Proceedings.............................................   23
          2.33. PRO Denials.........................................................   23

ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER.................................   23

          3.1.  Organization........................................................   23
          3.2.  Power and Authority.................................................   23
          3.3.  Authorization and Enforceability....................................   23
          3.4.  Brokerage...........................................................   24
          3.5.  No Violation of Laws or Agreements..................................   24
          3.6.  No Pending Litigation or Proceedings................................   24

ARTICLE IV CERTAIN OBLIGATIONS......................................................   24

          4.1.  Conduct of Business Pending Closing.................................   24
          4.2.  Insurance...........................................................   26
          4.3.  Fulfillment of Agreements...........................................   27
          4.4.  Access, Information and Documents...................................   27
          4.5.  Resignations........................................................   27
          4.6.  No Transfers or Pledges of Stock....................................   27
          4.7.  Lender and Lessor Consents..........................................   28
          4.8.  Delivery of May Financial Statements................................   28
          4.9.  Information Systems Support.........................................   28
          4.10. Negotiations........................................................   28
          4.11. Assumed Debt........................................................   29
          4.12. Buyer's Knowledge...................................................   29
          4.13. Delivery of Schedules...............................................   29
          4.14. Delivery of Exhibits................................................   29
          4.15. Receivable Reserve..................................................   30
          4.16. Pharmerica Agreements...............................................   30
          4.17. Medicare Cost Reports...............................................   30

ARTICLE V CONDITIONS TO CLOSING; TERMINATION........................................   31

          5.1.  Conditions Precedent to Obligations of Buyer........................   31
          5.2.  Conditions Precedent to the Obligations of the Seller...............   33
          5.3.  Termination.........................................................   34

ARTICLE VI CERTAIN ADDITIONAL COVENANTS.............................................   35

          6.1.  Costs, Expenses and Taxes...........................................   35
          6.2.  Indemnification By the Seller.......................................   35

          6.3.  Indemnification by Buyer............................................   36
          6.4.  Limitations and Conditions of Indemnification.......................   36
          6.5.  Indemnification Procedures..........................................   37
          6.6.  Payment of Indemnification..........................................   39
          6.7.  No Right of Contribution or Subrogation.............................   39
          6.8.  Hart-Scott-Rodino Antitrust Improvements Act of 1976................   39
          6.9.  Confidentiality.....................................................   39
          6.10. Cooperation.........................................................   40
          6.11. Books and Records...................................................   40
          6.12. Employee Matters....................................................   41
          6.13. Intellectual Property...............................................   42

ARTICLE VII TAX MATTERS.............................................................   42

          7.1.  Termination of Tax Sharing..........................................   42
          7.2.  Seller's Taxes......................................................   42
          7.3.  Buyer's Taxes.......................................................   43
          7.4.  Tax Cooperation.....................................................   43
          7.5.  Indemnification.....................................................   44
          7.6.  Notification of Proceedings; Control................................   44
          7.7.  Tax Effect of Payments..............................................   45

ARTICLE VIII CERTAIN DEFINITIONS....................................................   45

          8.1.  Certain Definitions.................................................   45

ARTICLE IX MISCELLANEOUS............................................................   46

          9.1.  Nature and Survival of Representations..............................   46
          9.2.  Notices.............................................................   46

9.3.  Successors and Assigns..............................................   48
9.4.  Governing Law.......................................................   48
9.5.  Headings............................................................   48
9.6.  Counterparts........................................................   49
9.7.  Further Assurances..................................................   49
9.8.  Amendment and Waiver................................................   49
9.9.  Entire Agreement....................................................   49
9.10. Risk of Loss........................................................   49
9.11. Post-Closing Mergers................................................   49

Schedule 2.2        Capitalization and Ownership

Schedule 2.4        States of Qualification; Location of Business and Assets

Schedule 2.6        Violations of Laws or Agreements

Schedule 2.7        Financial Statements

Schedule 2.8        No Undisclosed Liabilities

Schedule 2.9        Changes Since Balance Sheet Date

Schedule 2.9(e)     Bonus, Severance and Similar Payments

Schedule 2.9(f)     New Hospitals

Schedule 2.10       Taxes

Schedule 2.12       List and Aging of Accounts Receivable

Schedule 2.13       Pending Litigation or Proceedings

Schedule 2.14       Contracts; Unfilled Firm Purchase Orders

Schedule 2.15(b)    Approvals

Schedule 2.15(c)    Certain Exceptions; Medicare and/or Medicaid Provider Number

Schedule 2.15(d)    Violation of Law, Permits and Licenses

Schedule 2.15(g)    Accredited Hospitals

Schedule 2.16       Consents

Schedule 2.17       Permitted Liens And Encumbrances

Schedule 2.18       Real Estate

Schedule 2.19       Transactions With Related Parties

Schedule 2.20       Computer Software

                                      -vi-

Schedule 2.21       Compensation Arrangements, Bank Accounts and Officers and
                    Directors

Schedule 2.22       Labor Relations

Schedule 2.23       Insurance

Schedule 2.24       Patents, Trademarks, Etc.

Schedule 2.25       Employee Benefit Plans

Schedule 2.28       Third-party Payment Contracts

Schedule 2.29       Billing; Gratuitous Payments

Schedule 2.30       Reimbursement Matters

Schedule 2.31       Federal Health Care Programs

Schedule 2.33       Pro Denials

Schedule 3.2        Capitalization and Ownership

Schedule 3.6        Pending Litigation or Proceedings

Schedule 4.6        Transfers and Pledges of Stock

Schedule 4.7        Required Lender and Lessor Consents

Schedule 8.1(a)     Accounting Principles

Exhibit A      Hospitals

Exhibit B      Subsidiaries

Exhibit C-1    Opinion of Seller's General Counsel

Exhibit C-2    Opinion of Latham & Watkins

Exhibit D      Opinion of Dechert Price & Rhoads

Exhibit E      Description of Transition Services

Exhibit F      Joint Venture Agreement

Exhibit G      Noncompete Agreement

This is a Stock Purchase Agreement (the "Agreement") dated as of May 29, 1998, by and among SELECT MEDICAL CORPORATION, a Delaware corporation ("Buyer"), BEVERLY ENTERPRISES, INC., a Delaware corporation ("Seller") and AMERICAN TRANSITIONAL HOSPITALS, INC., a Delaware corporation ("ATH").

ATH is, among other things, a leading nationwide long-term care "hospital within a hospital" company providing quality long-term acute care to chronically ill patients. ATH operates the hospitals listed on Exhibit A hereto (the "Hospitals").

Seller owns all of the issued and outstanding capital stock (the "Stock") of ATH.

Seller has made certain loans and advances to ATH and the Subsidiaries (defined below) in an aggregate amount, net of loans and advances made by ATH and the Subsidiaries to Seller. At Closing, ATH and each Subsidiary, as applicable, will execute promissory notes (the "Notes") in an aggregate amount equal to such inter-company debt, as adjusted to reflect any increase or decrease through the Closing Date ("Intercompany Debt").

ATH, ATH Heights, Inc. or Synergos, Inc. owns all of the issued and outstanding capital stock (the "Subsidiary Stock") of the corporations identified on Exhibit B (the "Subsidiaries") as noted therein.

Buyer desires to purchase, and Seller desires to sell, the Stock and the Notes, on the terms and subject to the conditions set forth in this Agreement.

Following the acquisition of the Stock and Notes, Buyer intends to consummate one or more mergers pursuant to which ATH and/or the Subsidiaries which own the Hospitals will be merged with and into Buyer and/or its subsidiaries, and the corporate existence of ATH and/or the Subsidiaries shall thereupon cease and Buyer and/or its subsidiaries shall be the successors or surviving corporations. The purpose of such post-closing mergers is to fulfill Buyer's intention to acquire the assets of ATH and the Subsidiaries.

In consideration of the mutual covenants contained herein and intending to be legally bound hereby, the parties hereto agree as follows:

At the Closing referred to in Section 1.3 below, the Seller will sell and assign to Buyer, and Buyer will purchase from the Seller, the Stock and the Notes.

(b) It is the intention and agreement of the parties that the Consolidated Net Working Capital (as hereinafter defined) of ATH and its Subsidiaries be not less than the Consolidated Net Working Capital as of December 31, 1997 based on the December 31, 1997 balance sheet included in the Financial Statements (as hereinafter defined) (the "Threshold Amount"). On the Closing Date, an estimate of the Consolidated Net Working Capital based on financial statements as of, and for the period ending on, the last day of the full month immediately preceding the month in which the Closing occurs (the "Estimated Closing Consolidated Net Working Capital") shall be mutually agreed to by Buyer and Seller. If the Estimated Closing Consolidated Net Working Capital is less than the Threshold Amount by greater than $50,000 (the "Designated Amount"), the Purchase Price otherwise due pursuant to Section 1.2(a) shall be reduced by the difference between the Estimated Closing Consolidated Net Working Capital and the Threshold Amount. If the Estimated Closing Consolidated Net Working Capital is greater than the Threshold Amount by at least the Designated Amount, the Purchase Price otherwise due pursuant to
Section 1.2(a) shall be increased by the difference between the Estimated Closing Consolidated Net Working Capital and the Threshold Amount. The Estimated Closing Consolidated Net Working Capital shall be subject to final adjustment as provided in this Section 1.2(b). Buyer shall prepare (in cooperation with Seller) and deliver to Seller within thirty (30) days after the Closing an unaudited consolidated balance sheet of ATH and its Subsidiaries as of Closing (the "Closing Balance Sheet") prepared in accordance with the Accounting Principles and applying the methodology contemplated in Section 4.15 hereof. Buyer shall determine the Consolidated Net Working Capital using the information reflected on the Closing Balance Sheet. The Closing Balance Sheet and Buyer's determination of Consolidated Net Working Capital shall be subject to verification by Seller within thirty (30) days of the date of delivery of such information to Seller, during which period Seller shall have access to the workpapers and such other documents and information relating to the preparation of

the Closing Balance Sheet and the determination of the Consolidated Net Working Capital as it shall request. Within that thirty (30) day period, Seller shall notify Buyer of any dispute with respect to the Closing Balance Sheet or the determination of the Consolidated Net Working Capital. Any such dispute which cannot be resolved after good faith negotiations within thirty (30) days from the date Buyer is so notified shall be referred to a nationally recognized firm of certified public accountants who has not previously rendered services to Buyer or Seller or an affiliate thereof chosen by the certified public accountants of Seller and Buyer, whose determination on such matters shall be final and binding on the parties and whose fees and expenses shall be shared equally by the parties. For purposes of this Agreement, the final Consolidated Net Working Capital (and the calculation of the final Purchase Price) shall be reflected on (and made from) the Closing Balance Sheet as modified by resolution of the Seller and Buyer or by the aforesaid independent accounting firm, or if the Seller fails to notify Buyer in writing of any disputed items within the prescribed thirty (30) day period, the Closing Balance Sheet as previously delivered by Buyer. If the Consolidated Net Working Capital is so determined to be less than the Estimated Closing Consolidated Net Working Capital by greater than the Designated Amount, the amount of the shortfall from the Estimated Closing Consolidated Net Working Capital shall be paid by the Seller to Buyer. If the Consolidated Net Working Capital is so determined to be greater than the Estimated Closing Consolidated Net Working Capital by greater than the Designated Amount, the amount of the overage from the Estimated Closing Consolidated Net Working Capital shall be paid by Buyer to Seller. Any amount due pursuant to this Section 1.2(b) shall be paid by Seller to Buyer or Buyer to Seller, as the case may be, within ten (10) days after (i) as to any undisputed portion, the determination of such undisputed portion of such amount, and (ii) as to any disputed portion, the final determination of the Consolidated Net Working Capital (taking into account any amounts previously paid pursuant hereto). Buyer (in cooperation with Seller) shall prepare and deliver to Seller within fifteen (15) days of Closing the profit and loss statement for such month through the Closing Date; provided, however, that in the event Closing occurs on the first or last business day of a month, such profit and loss statement shall be prepared and delivered within twelve (12) days of Closing.

(c) As used herein, the "Consolidated Net Working Capital" of ATH and its Subsidiaries shall mean the excess of the "current assets" of ATH and its Subsidiaries over the "current liabilities" (excluding the current portion of long-term debt) of ATH and its Subsidiaries, on a consolidated basis, in each case as such assets and liabilities are properly accrued and reflected on the books and records of ATH and its Subsidiaries in accordance with the Accounting Principles.

such other time, date or place as the parties shall mutually agree; provided, however, such date shall not be later than July 31, 1998. The date on which Closing occurs is sometimes referred to herein as the "Closing Date."

The Seller and ATH hereby, jointly and severally, represent and warrant to Buyer as follows:

Each of Seller, ATH and the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each of Seller, ATH and the Subsidiaries has all requisite power and authority to own or lease its properties and assets as now owned or leased and to carry on its business as and where now being conducted. Copies of the articles of incorporation and bylaws of ATH and each of the Subsidiaries, as amended to date, have been delivered to Buyer, and are correct, complete and in full force and effect.

Schedule 2.2 sets forth the authorized capital stock of ATH and each of the Subsidiaries including the number of shares of common stock, par value per share, and the number of shares which are presently issued and outstanding or held in its treasury. All of such outstanding shares have been duly authorized, validly issued and are fully paid and nonassessable, were not issued in violation of the terms of any agreement or other understanding binding upon ATH or the Subsidiaries, and were issued in compliance with all applicable federal

and state securities or "blue-sky" laws and regulations. Except as set forth on Schedule 2.2, there are no outstanding options, warrants, rights, agreements, calls, commitments or demands of any character relating to the capital stock of ATH or the Subsidiaries and no securities convertible into or exchangeable for any of such capital stock. Seller (a) is the sole record and beneficial owner of the shares of Stock, free and clear of any lien, security interest, restriction, encumbrance or claim except as set forth in Schedule 2.2, and (b) has full legal right, power and authority to enter into this Agreement, transfer such Stock to Buyer in accordance with this Agreement and to perform its other obligations hereunder, without the need for the consent of any other person or entity, other than those set forth on Schedule 2.16 and as required under the HSR Act. ATH, ATH Heights, Inc. or Synergos, Inc. is the sole record and beneficial owner of the shares of Subsidiary Stock, free and clear of any lien, security interest, restriction, encumbrance or claim except as set forth in Schedule 2.2. ATH has full legal right, power and authority to enter into this Agreement and to perform its other obligations hereunder, without the need for the consent of any other person or entity, other than those set forth on Schedule 2.16 and as required under the HSR Act.

Except for the Subsidiary Stock, ATH does not, directly or indirectly, own any stock of, or any other interest in, any other corporation, partnership, joint venture or business entity.

Each of ATH and the Subsidiaries is duly qualified and in good standing as a foreign corporation, duly authorized to do business in the jurisdictions set forth on Schedule 2.4, which jurisdictions are the only jurisdictions wherein the character of the properties owned or leased or the nature of activities conducted by it makes such qualification necessary. Set forth on Schedule 2.4 is each location (specifying state, county and city) where ATH and each of the Subsidiaries (a) has a place of business, and (b) owns or leases real property.

The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Seller and ATH. This Agreement has been duly executed and delivered by the Seller and ATH and constitutes the legal, valid and binding obligation of the Seller and ATH, enforceable against each of them in accordance with its terms. Upon delivery to Buyer at the Closing of certificates representing the Stock in accordance herewith, Buyer will acquire good and valid title to such Stock, free and clear of all liens, claims, security interests, pledges, charges, equities, options, restrictions and encumbrances of whatever nature.

Except as set forth on Schedule 2.6, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and the compliance with the terms, conditions and provisions of this Agreement by the Seller and ATH, will not (a) contravene any provision of the Seller's, ATH's or any Subsidiary's articles of incorporation or bylaws; (b) conflict with or result in a breach of or constitute a default (or an event which might, with the passage of time or the giving of notice or both, constitute a default) under any of the terms, conditions or provisions of any indenture, mortgage, loan or credit agreement or any other agreement or instrument to which the Seller, ATH or any Subsidiary is a party or by which any of them or any of their assets may be bound or affected, or any judgment or order of any court or governmental department, commission, board, agency or instrumentality, domestic or foreign, or any applicable law, rule or regulation;
(c) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of ATH's or any Subsidiary's assets or upon the Stock or give to others any interests or rights therein; (d) result in the maturation or acceleration of any liability or obligation of ATH or any Subsidiary (or give others the right to cause such a maturation or acceleration); or (e) result in the termination of or loss of any right (or give others the right to cause such a termination or loss) under any agreement or contract to which ATH or any Subsidiary is a party or by which any of them may be bound; except with respect to those matters set forth in clauses (b), (d) and
(e) above which would not have a Material Adverse Effect.

The books of account and related records of ATH and each Subsidiary fairly present its assets, liabilities and transactions in accordance with Accounting Principles. Attached as Schedule 2.7 hereto are the following unaudited financial statements which have previously been delivered by Seller and ATH to Buyer (the "Financial Statements"):

(a) consolidated and consolidating statements of the results of operations of ATH and the Subsidiaries for the fiscal years ended December 31, 1995 through December 31, 1997, inclusive, and consolidated and consolidating balance sheets of ATH and the Subsidiaries as at each of such dates, certified by a financial officer of Seller and ATH.

(b) consolidated and consolidating statement of the results of operations of ATH and the Subsidiaries for the fiscal quarter ended March 31, 1998 and a consolidated and consolidating balance sheet of ATH and the Subsidiaries as at such date, certified by a financial officer of Seller and ATH.

The Financial Statements (i) are correct and complete and in accordance with the books and records of ATH, (ii) fairly present the consolidated financial condition, assets and liabilities of ATH and the Subsidiaries and the results of their operations for the periods covered thereby, and

(iii) have been prepared in accordance with Accounting Principles. All references in this Agreement to the "Balance Sheet" shall mean the balance sheet of ATH, as at March 31, 1998 included in the Financial Statements and all references to the "Balance Sheet Date" shall mean March 31, 1998.

Neither ATH, to its knowledge, nor any Subsidiary, to its knowledge, has any liability or obligation of any nature, whether due or to become due required to be disclosed by Accounting Principles, except (a) liabilities disclosed on the consolidated and consolidating Balance Sheet, and (b) liabilities disclosed on Schedule 2.8.

Except as disclosed on Schedule 2.9, since March 31, 1998, ATH and each of its Subsidiaries has conducted its business only in the ordinary course. Without limiting the generality of the foregoing sentence, except as disclosed on Schedule 2.9, since March 31, 1998, there has not been:

(a) any change in the financial condition, assets, liabilities, net worth or business of ATH or any Subsidiary, except changes in the ordinary course of business, none of which, individually or in the aggregate, has or is reasonably likely to have a Material Adverse Effect;

(b) any damage, destruction or loss, whether or not covered by insurance, which has or is reasonably likely to have a Material Adverse Effect;

(c) any mortgage, pledge or subjection to lien, charge or encumbrance of any kind of any of ATH's or any Subsidiary's assets, tangible or intangible, other than Permitted Encumbrances (as hereinafter defined);

(d) except for the payment of cash dividends, any declaration, setting aside or payment of a dividend or other distribution in respect of any of the capital stock of ATH or any Subsidiary, or any direct or indirect redemption, purchase or other acquisition of any capital stock of ATH or any Subsidiary or any rights to purchase such capital stock or securities convertible into or exchangeable for such capital stock;

(e) except for stay, retention, successful completion or other bonuses, or severance, parachute or similar payments which are set forth on Schedule 2.9(e) and have been or will be paid in connection with the transactions contemplated hereby and for which ATH has established a full current reserve or accrual on the Closing Balance Sheet or the payment of which is otherwise Seller's responsibility, any increase in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any officer, director, employee or shareholder of ATH or any Subsidiary (except normal annual merit increases made in the ordinary course of business and consistent

with past practice for employees), or any increase in, or any addition to, other benefits (including without limitation any bonus, profit-sharing, pension or other plan) to which any of ATH's or any Subsidiary's officers, directors, employees or shareholders may be entitled, or any payments to any pension, retirement, profit-sharing, bonus or similar plan except payments in the ordinary course of business and consistent with past practice made pursuant to the employee benefit plans described on Schedule 2.25, or any other payment of any kind to or on behalf of any such officer, director, employee or shareholder other than payment of base compensation and reimbursement for reasonable business expenses in the ordinary course of business;

(f) any making or authorization of any capital expenditures in excess of $50,000 individually or $200,000 in the aggregate except for capital expenditures incurred in connection with the opening of new hospitals currently under contract and which are set forth on Schedule 2.9(f);

(g) any cancellation or waiver of any right material to the operation of ATH's or any Subsidiary's business, including, without limitation, any leases, licenses or certifications relating to the operation of the Hospitals, or any cancellation or waiver of any debts or claims of substantial value or any cancellation or waiver of any debts or claims against any Related Party;

(h) any sale, transfer or other disposition of the Stock or any assets of ATH or any Subsidiary other than sales, transfers or other dispositions of assets in the ordinary course of business;

(i) any payment, discharge or satisfaction of any liability or obligation (whether accrued, absolute, contingent or otherwise) by ATH or any Subsidiary, other than the payment, discharge or satisfaction, in the ordinary course of business, of liabilities or obligations shown or reflected on the Balance Sheet or incurred in the ordinary course of business since the Balance Sheet Date including intercompany debt (but excluding the Assumed Debt);

(j) any adverse change or, to Seller's and ATH's knowledge, any threat of any adverse change in ATH's or any Subsidiary's relations with, or any loss or, to Seller's and ATH's knowledge, threat of loss of, any of ATH's or any Subsidiary's third-party payors (including, but not limited to, Title XVIII ("Medicare") of the Social Security Act and Title XIV ("Medicaid") of the Social Security Act), suppliers, clients or customers, the loss of which would have a Material Adverse Effect;

(k) any write-offs as uncollectible of any notes or accounts receivable of ATH or any Subsidiary or write-downs of the value of any assets or inventory by ATH or any Subsidiary other than those for which reserves or accruals have been established on the Balance Sheet or those in immaterial amounts;

(l) any change by ATH or any Subsidiary in any method of accounting or keeping its books of account or accounting practices;

(m) any creation, incurrence, assumption or guarantee by ATH or any Subsidiary of any obligations or liabilities (whether absolute, accrued, contingent or otherwise and whether due or to become due), except in the ordinary course of business including intercompany debt, or any creation, incurrence, assumption or guarantee by ATH or any Subsidiary of any indebtedness for money borrowed other than intercompany debt;

(n) any payment, loan or advance of any amount to or in respect of, or the sale, transfer or lease of any properties or assets (whether real, personal or mixed, tangible or intangible) to, or entering into of any agreement, arrangement or transaction with, any Related Party, except for compensation to the officers and employees of ATH or any Subsidiary at rates not exceeding the rates of compensation disclosed on Schedule 2.21 hereto; or

(o) any transaction or agreement outside the ordinary course of ATH's or any Subsidiary's business or inconsistent with past practice which has or is reasonably likely to have a Material Adverse Effect.

(a) ATH and each Subsidiary has (i) timely filed or will timely file all returns required to be filed by it for all taxable periods up to and including the Closing Date with respect to all federal, state and local income, payroll, withholding, excise, sales, use, real and personal property, use and occupancy, business and occupation, mercantile, real estate, capital stock and franchise or other tax (all the foregoing taxes, including interest and penalties thereon and including estimated taxes, being hereinafter individually called a "Tax" and collectively called "Taxes"), (ii) paid all Taxes shown to have become due pursuant to such returns, and (iii) paid all other Taxes for which a notice of or assessment or demand for payment has been received. All Tax returns have been prepared in accordance with all applicable laws and requirements and accurately reflect the taxable income (or other measure of tax) of ATH and each Subsidiary.

(b) The accruals for Taxes contained in the Balance Sheet are adequate to cover all liabilities for Taxes of ATH and each Subsidiary for all periods ending on or before the Balance Sheet Date and include adequate provision for all deferred Taxes, and nothing has occurred subsequent to that date to make any of such accruals inadequate. All Taxes for periods beginning after the Balance Sheet Date have been paid or are the subject of an adequate current reserve on the books of ATH and each Subsidiary. ATH and each Subsidiary has timely filed all information returns or reports, including forms 1099, which are required to be filed and has accurately reported all information required to be included on such returns or reports. True copies of federal and state income tax returns of ATH and each Subsidiary for each of the fiscal years ended December 31, 1992 through December 31, 1996 have been delivered to Buyer. There are no proposed assessments of Taxes against ATH or any Subsidiary or proposed adjustments to any Tax return filed, pending against ATH or any Subsidiary or any proposed adjustments to the manner in which any Taxes of ATH or any Subsidiary are determined. Except as disclosed on Schedule 2.10, each Tax return of ATH and the Subsidiaries has been audited by the relevant authorities (and all deficiencies or proposed deficiencies resulting from

such audits have been paid or are adequately provided for in the Financial Statements), or the statute of limitations with respect to each Tax return has expired, and no Tax return is under examination by any taxing authority.

(c) Except as disclosed on Schedule 2.10, neither ATH nor any Subsidiary has with respect to any open Tax period (i) filed any consent agreement under section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) executed a waiver or consent extending any statute of limitation for any Tax liability which remains outstanding, (iii) joined in or been required to join in filing a consolidated or combined federal income Tax return, (iv) applied for a Tax ruling, (v) entered into a closing agreement with any taxing authority, or (vi) filed an election under section 338(g) or section 338(h)(10) of the Code or caused a deemed election under section 338(e) thereof.

(d) None of ATH, Seller or the Subsidiaries are "foreign persons" within the meaning of the Code and regulations promulgated thereunder.

(e) Schedule 2.10 reflects the separate net operating loss carryovers of ATH and the Subsidiaries and the portion of the Group's consolidated net operating loss carryovers allocable to ATH and its Subsidiaries allocated in accordance with Treasury Regulation (S)1.1502-21T(b) as reported for federal income tax purposes as of the close of the taxable year ended December 31, 1997; the year of origination of such net operating loss carryforwards; the portion of any such net operating loss carryforward arising in a separate return limitation year with respect to the Group; the portion of any such net operating losses subject to limitation under Section 382 of the Code, the date of any applicable change of ownership under Section 382 of the Code and the annual limitation of such net operating losses under Section 382 of the Code. Except as set forth on Schedule 2.10, none of such net operating losses are subject to limitation (i) under Section 382 of the Code by virtue of a direct or indirect "ownership change" of ATH or a Subsidiary within the meaning of Section 382 of the Code on or before the Closing Date or (ii) by reason of a consolidated return change of ownership under Treasury regulations (S)1.1502-21A on or before January 1, 1998. None of such net operating losses has been the subject of an election under Treasury regulations (S)1.1502-20(g) to have such losses reattributed to another corporation. The portion of the consolidated net operating losses of the Group allocable to ATH and the Subsidiaries in accordance with Treas. Reg. (S)1.1502- 21T(b) as of the Closing Date will not be less than $5,000,000. For purposes of this Section 2.10, "Group" means the consolidated group of corporations filing consolidated federal income tax returns of which Seller is the common parent ("Seller Parent").

(f) ATH and its Subsidiaries currently utilize the accrual method of accounting for income tax purposes and such method has not changed within the past five years. ATH and its Subsidiaries have not been required to make any adjustments under Section 481(a) of the Code as a result of a change in a tax accounting method.

All of the inventory of ATH and each Subsidiary, including that reflected in the Balance Sheet, is valued at the lower of cost or market, the cost thereof being determined on a first-in, first-out basis, except as disclosed in the Financial Statements. All of the equipment and leasehold improvements of ATH and each Subsidiary reflected in the Balance Sheet is valued at its acquisition cost less accumulated depreciation. All of the inventory and equipment of ATH and each Subsidiary reflected in the Balance Sheet and all inventory and equipment acquired since the Balance Sheet Date is maintained in quality and quantity consistent with past practice. There has been no material reduction in the level of inventory or equipment from the level set forth in the December 31, 1997 balance sheet included in the Financial Statements.

All of the accounts and notes receivable (including any amounts due from affiliates or any Related Party) of ATH and each Subsidiary represent amounts receivable for merchandise actually delivered or services actually provided (or, in the case of non-trade accounts or notes, represent amounts receivable in respect of other bona-fide business transactions), have arisen in the ordinary course of business, have been billed and are generally due within 30 days after such billing and, to Seller's and ATH's knowledge, are not subject to any counterclaims or offsets. On March 31, 1998, ATH and the Subsidiaries each had accounts receivable, net of reserves for contractual allowances and doubtful accounts (as calculated in a manner consistent with Section 4.15 hereof) equal to or greater than the dollar amount set forth on Schedule 2.12 opposite its name. Schedule 2.12 sets forth for ATH and each Subsidiary (a) the total amount of accounts receivable outstanding as of the last day of the month immediately preceding the present month and (b) the agings of such receivables based on a schedule containing the ranges of number of days outstanding from the bill date thereof used historically by ATH and each Subsidiary.

Except as set forth on Schedule 2.13, there are no actions, suits, investigations, or proceedings pending or, to the best of Seller's and ATH's knowledge, threatened against or affecting ATH, any Subsidiary or any of their assets or affecting the Stock or the Seller's rights thereto, at law or in equity, by or before any court or governmental department, agency or instrumentality, and, to Seller's and ATH's knowledge, there is no basis for any such action, suit, investigation or proceeding which is reasonably likely to cause a Material Adverse Effect. There are presently no outstanding judgments, decrees or orders of any court or any governmental or administrative agency against or affecting ATH, any Subsidiary or any of their assets or businesses or affecting the Stock or the Seller's rights thereto.

(a) Except as listed on Schedule 2.14, neither ATH nor any Subsidiary is a party to or bound by any material lease, contract or commitment, oral or written, formal or informal, including, without limitation, the following leases, contracts or commitments:

i. mortgages, indentures, security agreements or other agreements and instruments relating to the borrowing of money, the extension of credit or the granting of liens or encumbrances;

ii. employment and consulting agreements;

iii. union or other collective bargaining agreements;

iv. powers of attorney;

v. sales agency, manufacturers representative and distributorship agreements or other distribution or commission arrangements;

vi. material licenses of patent, trademark and other intellectual property rights;

vii. agreements, orders or commitments for the purchase of equipment, services, raw materials, supplies or finished products from any one supplier for an amount in excess of $35,000;

viii. agreements, orders or commitments for the rental, lease or sale of equipment, products or services for more than $50,000 to any single purchaser or lessee;

ix. contracts or options relating to the rental, sale or lease by ATH of any material asset, other than in the ordinary course of business;

x. bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation, accrued vacation pay, group insurance, welfare agreements or other plans, agreements, trusts or arrangements for the benefit of employees;

xi. agreements or commitments for capital expenditures in excess of $50,000 for any single project;

xii. partnership or joint venture agreements;

xiii. agreements, arrangements or understandings with any Related Party;

xiv. material rental or lease agreements under which it is either lessor or lessee;

xv. material agreements, contracts or commitments for any charitable or political contribution; or

xvi. other agreements, contracts and commitments which are material to the business of ATH or any Subsidiary which involve payments or receipts of more than $50,000 in any single year, or which were entered into other than in the ordinary course of business.

(b) Except as listed in Schedule 2.14, all such agreements, leases, contracts and other commitments are in full force and effect; Seller and ATH and, to Seller's and ATH's knowledge, all other parties to such agreements, leases, contracts and other commitments have complied with the provisions thereof; no such party is in default under any of the terms thereof; no event has occurred that with the passage of time or the giving of notice or both would constitute a default by ATH or any Subsidiary, or to Seller's and ATH's knowledge, any other party thereto under any provision thereof; and neither Seller, ATH nor any Subsidiary has received, or has any knowledge of the existence of, any written notice of termination or other election by a lessor under any such agreement.

(a) Each of ATH, any Subsidiary and any of their current or former shareholders, directors, officers, agents, employees and other persons acting on behalf of them, has complied, in all material respects, with all applicable federal, state and municipal statutes, rules, regulations and orders and other requirements of all courts and other governmental or regulatory authorities having jurisdiction over ATH, including without limitation those relating to third party reimbursement (including, but not limited to, Medicare, Medicaid, CHAMPUS and other Federal Health Care Programs), fraudulent or abusive practices (including but not limited to the State Health Care Programs Anti- Fraud and Abuse Amendments of the Social Security Act, as amended, commonly known as the "Anti-Kickback Statute," and the amendments to Section 1877 of the Social Security Act (42 U.S.C.(S)1395nn), enacted as part of the Omnibus Budget Reconciliation Act of 1993, commonly known as "Stark II"), health care industry regulation, environmental protection, occupational safety and health, equal employment practices and fair trade practices.

(b) ATH and all professional employees or agents of ATH hold and are in compliance with all permits, certificates (including, without limitation, certificates of need), licenses, orders, registrations, franchises, authorizations and other approvals from all federal, state, local and foreign governmental and regulatory bodies (collectively, "Approvals") which are required pursuant to all laws, rules and regulations to enable ATH to own, operate and manage its business and the failure of which to possess or be in compliance with has not had and is not reasonably likely to have a Material Adverse Effect. All such Approvals are in full force and effect. Schedule 2.15(b) sets forth a true and correct list of those Approvals held by ATH which are required to operate the Hospital facilities.

(c) All services provided by Seller, ATH, the Subsidiaries or any professional employee or agent acting on behalf of any of them or for which Seller, ATH and/or the Subsidiaries directly or indirectly receive payment under Medicare, Medicaid or other Federal Health Care Programs are, to the extent required by law, certified for participation or enrollment in all such Federal Health Care Programs, have a current and valid provider contract with such Federal Health Care Programs, are in compliance with the conditions of participation or enrollment of such Federal Health Care Programs, and, to the extent required by law, have received all approvals or qualifications necessary for capital reimbursement, except for such certifications, contracts, compliances, approvals and qualifications which are set forth on Schedule 2.15(c) or which, individually or in the aggregate, would not have a Material Adverse Effect. Seller and ATH have delivered to the Buyer true and complete copies of all Medicare and Medicaid cost reports for any period after December 31, 1994 for each location of ATH or any Subsidiary for which there is a Medicare or Medicaid provider number. Schedule 2.15(c) sets forth the applicable Medicare and/or Medicaid provider number utilized by ATH and each Subsidiary and a true and correct list of the applicable TEFRA limitation with respect to each such provider.

(d) Except as set forth on Schedule 2.15(d), none of Seller, ATH or the Subsidiaries has received, or has knowledge of the existence, of any notice, citation, summons, order, complaint or penalty, and, to the Seller's or ATH's knowledge, no investigation or review is pending or threatened by any governmental or other entity (i) with respect to any alleged violation by ATH or any Subsidiary of any law, ordinance, rule, regulation or order of any governmental entity, or (ii) with respect to any alleged failure by ATH or any Subsidiary to have any permit, certificate, license, approval, registration or authorization required in connection with its business, or (iii) with respect to any generation, treatment, storage, recycling, transportation or disposal of any hazardous or toxic or polluting substances generated by ATH or any Subsidiary.

(e) Neither ATH nor any Subsidiary has treated, stored, recycled, disposed of or released any hazardous, toxic or polluting substances on any property now or previously owned or leased by ATH or any Subsidiary, nor, to Seller's and ATH's knowledge, has anyone else treated, stored, recycled, disposed of or released any hazardous, toxic or polluting substances on any property now or previously owned or leased by ATH or at any other property which has resulted in any condition for which ATH is or could be responsible, including under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). Neither ATH nor any Subsidiary has transported any hazardous, toxic or polluting substances or arranged for the transportation of such substances to any location which is the subject of federal, state or local enforcement actions or other investigations which may lead to claims against ATH, any Subsidiary or the Buyer for clean-up costs, remedial work, damages to natural resources or for personal injury claims, including, but not limited to, claims under CERCLA. ATH's and each Subsidiary's Standard Industry Code ("SIC") number is listed on Schedule 2.15(e).

(f) ATH has correctly maintained in all material respects all records (whether financial, medical or otherwise) required by state and federal agencies and pursuant to the requirements of Medicare, Medicaid and other Federal Health Care Programs.

(g) Each Hospital set forth on Schedule 2.15(g) has been surveyed for and has received accreditation by the Joint Commission for Accreditation of Health Care Organizations ("JCAHO") and such accreditation by JCAHO remains in full force and effect and has not been modified, revoked or suspended as of the Closing Date.

Except for such consents as are set forth on Schedule 2.16 or those which arise under categories of contracts not described on such Schedule and except as required under the HSR Act, no consent, approval or authorization of, or registration or filing with, any person, including any governmental authority or other regulatory agency, is required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except where the failure to obtain any of the foregoing would not have a Material Adverse Effect.

Each of ATH and the Subsidiaries has good and, in the case of real property, marketable title (fee or leasehold) to all of its properties and assets (including equipment), including the properties and assets reflected in the Balance Sheet (except those disposed of in the ordinary course of business since the Balance Sheet Date), free and clear of any mortgage, pledge, lien, restriction, encumbrance, tenancy, license, encroachment, covenant, condition, right of way, easement, claim, security interest, charge or any other matter affecting title, except (a) minor imperfections of title, none of which, individually or in the aggregate, materially detracts from the value of or impairs the use of the affected properties and assets or impairs the operations of ATH or the Subsidiaries, (b) liens for current taxes not yet due and payable, and (c) as disclosed on Schedule 2.17 (collectively "Permitted Encumbrances").

Schedule 2.18 contains a correct list and summary description of all real properties owned (beneficially or of record) or leased by ATH or any Subsidiary and identifies all title insurance policies covering any of, and all leases relating to, such properties; and the construction, use and operation of all real properties owned or leased by ATH or any Subsidiary conform to all applicable building, zoning, safety, environmental, subdivision, and other laws, ordinances, regulations, codes, permits, licenses and certificates and all restrictions and conditions affecting title, except for any nonconformance that does not have a Material Adverse Effect. Neither ATH nor any Subsidiary has received any written, or has knowledge of the existence of any written or oral, notice for assessments for public improvements against any of such real properties which remains unpaid and no such assessment has been proposed. Neither ATH nor any Subsidiary has received any written, or has knowledge of the existence of any

written or oral, notice or order by any governmental or other public authority, any insurance company which has issued a policy with respect to any of such properties or any board of fire underwriters or other body exercising similar functions which (a) relates to violations of building, safety, fire or other ordinances or regulations, (b) claims any defect or deficiency with respect to any of such properties, or (c) requests the performance of any repairs, alterations or other work to or in any of such properties or in the streets bounding the same. Neither Seller, ATH nor any Subsidiary has received notice or has any knowledge of the existence of any pending condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of such properties and, to the best knowledge of the Seller and ATH, no such proceeding is contemplated.

Except such transactions as are disclosed on Schedule 2.19, no Related Party:

(a) has borrowed money or loaned money to ATH or any Subsidiary which has not been repaid, other than Seller;

(b) has any contractual or other claim, express or implied, of any kind whatsoever against ATH or any Subsidiary, other than claims of employees, those incurred in the ordinary course of business and disclosed in the Schedules hereto;

(c) had, since the Balance Sheet Date, any interest in any property or assets used by ATH or any Subsidiary in its business; or

(d) has been engaged, since the Balance Sheet Date, in any other transaction with ATH or any Subsidiary (other than employment relationships at the salaries disclosed in Schedule 2.21).

(a) The buildings, machinery, inventory, equipment, furniture, improvements and other assets, properties and rights of ATH and the Subsidiaries, including those reflected in the Balance Sheet, are sufficient to operate the business of ATH and the Subsidiaries as currently operated.

(b) ATH and the Subsidiaries own or license all computer hardware, software and data processing systems or other electronic data transmission, storage or computation programs used in connection with the operation of the Hospitals (collectively, the "Computer Software") which are listed on Schedule 2.20. Certain services described in Schedule 2.20 are provided by Seller to ATH and its Subsidiaries using computer hardware, software and other electronic data processing and transmission services which are not listed on Schedule 2.20, are not owned by ATH or the Subsidiaries and ATH and the Subsidiaries have no rights to their use except to the extent contemplated by Exhibit E. Except as provided for in Exhibit E, other than the Computer Software, no other computer hardware, software and data

processing systems or other electronic data transmission is currently used by ATH or any Subsidiary to operate its business as presently conducted. To the best knowledge of the Seller and ATH, there are no material malfunctions or design failures with respect to the Computer Software and related items of systems hardware.

Schedule 2.21 sets forth the following information:

(a) the names and current annual salary, including any bonus, if applicable, of all present officers and employees of ATH and each Subsidiary whose current annual salary, including any promised, expected or customary bonus, equals or exceeds $75,000, together with a statement of the full amount of all remuneration paid by ATH and each Subsidiary to each such person, during the twelve-month period preceding the date hereof;

(b) the name of each bank in which ATH and each Subsidiary has an account or safe deposit box, the identifying numbers or symbols thereof and the names of all persons authorized to draw thereon or have access thereto; or

(c) the names and titles of all directors and officers of ATH and each Subsidiary.

Except as disclosed on Schedule 2.22, (a) no employee of ATH or any Subsidiary is represented by any union or other labor organization; (b) neither Seller, ATH nor any Subsidiary has received notice, or has knowledge of the existence, of any unfair labor practice complaint against ATH or any Subsidiary pending or threatened before the National Labor Relations Board; (c) there is no labor strike, dispute, slow down or stoppage actually pending or, to the best knowledge of the Seller and ATH, threatened against or involving ATH or any Subsidiary; (d) no grievance which might have a Material Adverse Effect is pending; (e) no private agreement restricts ATH or any Subsidiary from relocating, closing or terminating any of its operations or facilities; and (f) neither ATH nor any Subsidiary has in the past three years experienced any work stoppage.

(a) Attached hereto as Schedule 2.23 is a complete and correct list of all policies of insurance of which ATH and each Subsidiary is the owner, insured or beneficiary, or covering any of its property, indicating for each policy the carrier, risks insured, the amounts of coverage, deductible, premium rate, cash value if any, expiration date and any pending claims thereunder. All such policies are outstanding and in full force and effect. There is no default with respect to any provision contained in any such policy, nor has there been any failure to give any notice or present any claim under any such policy in a timely fashion or in the manner or detail required by the policy. Except as set forth on Schedule 2.23, there are no outstanding

unpaid premiums or claims under such policies. No notice of cancellation or non- renewal with respect to, or disallowance of any claim under, any such policy has been received by ATH or any Subsidiary.

(b) Neither ATH nor any Subsidiary has been refused any insurance, nor has any of their coverage been limited by any insurance carrier to which any of them has applied for insurance or with which any of them has carried insurance during the last five years. Since June 1, 1987, all products liability and general liability policies maintained by or for the benefit of ATH or any Subsidiary have been "occurrence" policies and not "claims made" policies.

(a) Schedule 2.24 contains a complete and accurate list of all patents and patent applications, industrial design registrations, copyright registrations, trademarks, service marks, trade names, and registrations and applications for registration of trademarks, service marks, trade names, trade dress and domain names used in the conduct of ATH's and each Subsidiary's business specifying as to each such item, as applicable: (i) the owner of the item, (ii) the jurisdictions in which the item is issued or registered or in which any application for issuance or registration has been filed, (iii) the respective issuance, registration, or application number of the item, and (iv) the date of application and issuance or registration of the item.

(b) Schedule 2.24 contains a complete and accurate list of all material licenses, sublicenses, consents and other agreements (whether written or otherwise) (i) pertaining to any patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, trade secrets, computer software programs (other than standard, commercially available programs), or other intellectual property used in the conduct of ATH's or each Subsidiary's business, and (ii) by which ATH and each Subsidiary licenses or otherwise authorizes a third party to use such intellectual property. None of ATH, the Subsidiaries or any other party is in material breach of or default under any such license or other agreement and each such license or other agreement is now and immediately following the Closing will be valid and in full force and effect.

(c) Except as explicitly indicated in Schedule 2.24, ATH and each Subsidiary owns or is licensed or otherwise has the right to use all patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, inventions, technology, know-how, designs, formulae, trade secrets, confidential and proprietary information, computer software programs (other than standard, commercially available programs), domain names, and other intellectual property used in the operation of ATH's and each Subsidiary's business as it is currently conducted.

(d) The operation of ATH's and each Subsidiary's business does not, to the best knowledge of the Seller and ATH, infringe on the patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, trade secrets or other intellectual property rights of any third party, and no claim has been made, notice given, or dispute arisen to

that effect. Neither ATH nor any Subsidiary has any pending claims that a third party has violated or infringed any of ATH's and any Subsidiary's patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, trade secrets or other proprietary rights.

(e) Except as explicitly indicated in Schedule 2.24, all of the patents, industrial design registrations, trademark and service mark registrations, copyright registrations and domain name registrations indicated in Schedule 2.24 are valid and in full force, are held of record in ATH's or a Subsidiary's name, free and clear of all liens, encumbrances and other claims, and are not the subject of any cancellation or reexamination proceeding or any other proceeding challenging their extent or validity. Except as explicitly indicated in Schedule 2.24, ATH or a Subsidiary is the applicant of record in all patent applications, and applications for trademark, service mark, trade dress, industrial design, and copyright registration indicated in Schedule 2.24, and no opposition, extension of time to oppose, interference, rejection, or refusal to register has been received in connection with any such application.

(f) Prior to or at Closing, all patents, patent applications or other intellectual property rights used exclusively in the business of ATH and the Subsidiaries and held by any Related Party shall be transferred to ATH and the Subsidiaries.

(a) The only employee pension benefit plans (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), welfare benefit plans (as defined in Section 3(1) of ERISA), bonus, stock purchase, stock ownership, stock option, deferred compensation, incentive or other compensation plan or arrangement, and other material employee fringe benefit plans presently maintained by, or contributed to by ATH or any other employer (an "ERISA Affiliate") that is, or at any relevant time was, together with ATH, treated as a "single employer" under section 414(b), 414(c) or 414(m) of the Code, other than a multiemployer plan as defined in Section 3(37) of ERISA, are those listed in Schedule 2.25 (the "Benefit Plans"), a true and complete copy of each of which and, where applicable, a copy of the most recent IRS Determination Letter received, and the three most recent IRS Forms 5500 filed, with respect to each such Benefit Plan, has been made available to Buyer.

(b) Except as specifically designated on Schedule 2.25(b), all of the Benefit Plans are sponsored or maintained by the Seller or another ERISA Affiliate other than ATH or the Subsidiaries. No Benefit Plan designated on Schedule 2.25(b) is an employee pension benefit plan as defined in Section 2.25(a).

(c) Except as indicated on Schedule 2.25, all of the Benefit Plans which are pension benefit plans have received determination letters from the Internal Revenue Service ("IRS") to the effect that such plans are qualified and exempt from federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, as amended; and no determination letter with respect to any Benefit Plan has been revoked nor, to the best of Seller's and ATH's knowledge, has revocation been threatened, nor has any Benefit Plan been amended since the

date of its most recent determination letter or application therefor in any respect which would adversely affect its qualification.

(d) ATH and each ERISA Affiliate have complied with the notice and continuation coverage requirements of section 4980B of the Code and the regulations thereunder with respect to each Benefit Plan that is, or was during any taxable year of ATH or any ERISA Affiliate for which the statute of limitations on the assessment of federal income taxes remains open, by consent or otherwise, a group health plan within the meaning of section 5000(b)(1) of the Code.

(e) Set forth on Schedule 2.25 are the unfunded liabilities and projected costs, as of the date of this Agreement, of (1) the amount of any unfunded deferred compensation for which ATH or any Subsidiary is or is reasonably likely to be liable, (2) the actuarially determined present value of any obligation to provide retiree medical or life insurance benefits under any Benefit Plan and (3) any payment that will be required to be made to any Benefit Plan participant or beneficiary by ATH or any ERISA Affiliate as a direct result of the transactions contemplated by this Agreement.

(f) At no time since September 2, 1974 has Seller, ATH or any ERISA Affiliate incurred any liability which could subject Buyer to liability under Section 4062, 4063 or 4064 of ERISA.

(g) At no time since September 26, 1990, has Seller, ATH, or any ERISA Affiliate, (i) been required to contribute to, or incurred any withdrawal liability, within the meaning of Section 4201 of ERISA to any multiemployer pension plan, within the meaning of Section 3(37) of ERISA, which liability has not been fully paid as of the date hereof, or (ii) announced an intention to withdraw, but not yet completed such withdrawal, from any multiemployer plan. Neither Seller, ATH nor any ERISA Affiliate has incurred any potential withdrawal liability arising from a transaction described in Section 4204 of ERISA.

(h) Neither ATH nor any Subsidiary has incurred or is reasonably likely to incur any liability with respect to any plan or arrangement that would be included within the definition of "Benefit Plan" hereunder but for the fact that such plan or arrangement was terminated before the date of this Agreement.

(i) Except as listed on Schedule 2.25, no payment which is or may be made by from or with respect to any Benefit Plan, to any employee, former employee, director or agent of ATH or any ERISA Affiliate, either alone or in conjunction with any other payment, will or could properly be characterized as an excess parachute payment under section 280G of the Code.

(j) There are no material pension, welfare, bonus, stock purchase, stock ownership, stock option, deferred compensation, incentive, severance, termination or other compensation plan or arrangement, or other material employee fringe benefit plan presently maintained by, or contributed to by ATH or any ERISA Affiliate for the benefit of any employee

of ATH or any ERISA Affiliate, including any such plan required to be maintained or contributed to by the law of the relevant jurisdiction, which would be described in (a) above, but for the fact that such plans are maintained outside the jurisdiction of the United States.

None of the Seller, ATH or any Subsidiary has made any agreement or taken any other action which might cause anyone to become entitled to a broker's fee or commission as a result of the transactions contemplated hereunder.

Other than the Intercompany Debt and the senior secured promissory note issued by ATH Heights, Inc. to West Houston Healthcare Group, Ltd. dated September 21, 1994 in the original principal amount of $2,941,000 (the "Assumed Debt"), neither ATH nor any Subsidiary has any indebtedness or other obligations with respect to borrowed money.

ATH and each Subsidiary is approved as a participating provider of services in and under the third-party payment programs listed on Schedule 2.28. To the knowledge of the Seller and ATH, no action is pending to suspend, limit, terminate, or revoke the status of ATH or any Subsidiary as a provider in any such program, and neither ATH nor any Subsidiary has been provided notice by any such third-party payor of its intention to suspend, limit, terminate, revoke, or fail to renew any contractual arrangement with ATH or any Subsidiary as a participating provider of services in whole or in part.

Except as set forth in Schedule 2.29, all billing by, or on behalf of, the Seller, ATH or any Subsidiary to third-party payors, including, but not limited to, Medicare, Medicaid and private insurance companies has been true and correct in all material respects. None of Seller, ATH or any Subsidiary has received any notice from any third-party payor, including but not limited to, Medicare or Medicaid, that indicates that Buyer could not continue to bill in substantially the same manner and structure as ATH or any Subsidiary is billing on the date hereof.

Except as disclosed on Schedule 2.30, for the previous three years,
(a) Seller, ATH and the Subsidiaries have not received any written notice of denial of payment or overpayment of a material nature from a Federal Health Care Program or any other third party reimbursement source (inclusive of managed care organizations) with respect to items or services provided by Seller, ATH and/or any Subsidiary, other than those which have been finally resolved in any settlement for an amount less than $1,000,000, (b) to the Seller's and ATH's

knowledge, there is no basis for the assertion after the Closing of any such denial or overpayment claim, and (c) none of Seller, ATH or any Subsidiary has received written notice from a Federal Health Care Program or any other third party reimbursement source (inclusive of managed care organizations) of any pending or threatened claims, proceedings, investigations or surveys specifically with respect to, or arising out of, items or services provided by the Seller, ATH or any Subsidiary, and to the Seller's and ATH's knowledge, no such investigation or survey is pending, threatened or imminent.

(a) Neither Seller, ATH, any affiliate nor any person who has a direct or indirect ownership interest (as those terms are defined in 42 C.F.R. (S)1001.1001(a)(2)) in ATH of 5% or more, or who has an ownership or control interest (as defined in Section 1124(a)(3) of the Social Security Act or any regulations promulgated thereunder) in ATH, or who is an officer, director, agent or managing employee (as defined in 42 C.F.R. (S)1001.1001(a)(i): (a) has had a civil monetary penalty assessed against it under Section 1128A of the Social Security Act or any regulations promulgated thereunder; (b) has been excluded from participation under any Federal Health Care Program; or (c) has been convicted (as that term is defined in 42 C.F.R. (S)1001.2) of any of the categories of offenses as described in the Social Security Act Section 1128(a) and (b)(1), (2), (3) or any regulations promulgated thereunder.

(b) All cost reports to be filed under Medicare and Medicaid or any other applicable governmental or private provider regulations for the Hospitals were filed by the required filing dates. Such cost reports were prepared and filed in good faith in accordance with applicable, laws, rule and regulations and ATH and each Subsidiary has made provision to pay any net liability on all Notices of Program Reimbursement (or similar documents) received from Medicare, Medicaid or other governmental or private payors for the periods ended prior to December 31, 1994. Schedule 2.31 lists the Medicare and Medicaid cost reports duly filed by ATH and each Subsidiary covering the periods noted and which of such cost reports has been audited but not fully settled, has been settled or has not been audited or settled. Neither ATH nor any Subsidiary has received notice, or has knowledge of the existence, of any pending dispute between ATH and/or any Subsidiary and governmental authorities or the Medicare fiscal intermediary regarding such cost reports for the remaining unaudited cost reports, other than with respect to adjustments thereto made in the ordinary course of business which do not involve amounts in excess of $20,000 in the aggregate. All home office cost reports filed by Seller and ATH are true and correct and the costs contained in such reports are appropriately included therein and have been properly allocated among Seller and its subsidiaries and businesses in accordance with Medicare and Medicaid rules and regulations. The home office cost report of Seller covering the period January 1, 1998 through and including Closing will include costs incurred by Seller in an amount at least equal to the Seller's home office costs reflected on the consolidated balance sheet of ATH and the Subsidiaries for the corresponding period.

There are no pending actions, charges, indictments, or investigations of ATH, any Subsidiary or, with respect to their employment with ATH or any Subsidiary, their agents, officers or employees which involve allegations of criminal violations by ATH, any Subsidiary or their agents, officers or employees acting on behalf of ATH or any Subsidiary of any federal, state, or local statute, law, or ordinance, including without limitation, Medicare or Medicaid.

Set forth on Schedule 2.33 is a list of all Peer Review Organization denials which Seller, ATH or the Subsidiaries have received with respect to the operation of the Hospitals during the last five years, including a description of the basis therefor and of the action, if any, taken by Seller, ATH or the Subsidiaries to appeal the same and the status and/or outcome of any such appeals.

Buyer represents and warrants to the Seller as follows:

Buyer is a corporation duly organized, validly existing and in good standing under the laws of Delaware. Buyer has all requisite power and authority to own or lease its properties and assets as now owned or leased and to carry on its business as and where now being conducted.

Buyer has full legal right, power and authority to enter into this Agreement and to perform its other obligations hereunder, without the need for the consent of any other person or entity, other than as required under the HSR Act.

The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes the legal, valid and binding obligation of Buyer, enforceable against it in accordance with its terms.

Buyer has not made any agreement or taken any other action which might cause anyone to become entitled to a broker's fee or commission as a result of the transactions contemplated hereunder.

The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and the compliance with the terms, conditions and provisions of this Agreement by Buyer, will not (a) contravene any provision of Buyer's articles of incorporation or bylaws; (b) conflict with or result in a breach of or constitute a default (or an event which might, with the passage of time or the giving of notice or both, constitute a default) under any of the terms, conditions or provisions of any indenture, mortgage, loan or credit agreement or any other agreement or instrument to which Buyer is a party or by which it or any of its assets may be bound or affected, or any judgment or order of any court or governmental department, commission, board, agency or instrumentality, domestic or foreign, or any applicable law, rule or regulation, except with respect to those matters set forth in this clause (b) which would not have a material adverse effect on Buyer; (c) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon Buyer's assets or give to others any interests or rights therein except for any financing entered into by Buyer in connection with the transactions contemplated hereby.

Except as set forth on Schedule 3.6, there are no actions, suits, investigations, or proceedings pending or, to the best of Buyer's knowledge, threatened against or affecting Buyer or any of its assets which would adversely affect Buyer's ability to consummate this Agreement and the transactions contemplated herein, at law or in equity, by or before any court or governmental department, agency or instrumentality, and, to Buyer's knowledge, there is no basis for any such action, suit, investigation or proceeding. There are presently no outstanding judgments, decrees or orders of any court or any governmental or administrative agency against Buyer which would adversely affect Buyer's ability to consummate this Agreement and the transactions contemplated herein.

From and after the date hereof and pending Closing, and unless Buyer shall otherwise consent or agree in writing, the Seller and ATH covenant and agree that:

Subsidiary and to preserve for Buyer the good will of the suppliers, customers and others having business relations with ATH and each Subsidiary.

i. amend its Articles of Incorporation or Bylaws;

ii. change its authorized or issued capital stock or issue any rights or options to acquire shares of its capital stock;

iii. enter into any rental, lease, contract or commitment the performance of which may extend beyond the Closing, except those made in the ordinary course of business the terms of which are consistent with past practice and reasonable in light of current conditions;

iv. enter into any employment or consulting contract or arrangement with any person which is not terminable at will, without penalty or continuing obligation;

v. sell, transfer, rent, lease or otherwise dispose of any of their assets other than in the ordinary course of business and consistent with past practice;

vi. incur, create, assume or suffer to exist any mortgage, pledge, lien, restriction, encumbrance, tenancy, encroachment, covenant, condition, right-of-way, easement, claim, security interest, charge or other matter affecting title on any of its assets or other property, except Permitted Encumbrances;

vii. make, change or revoke any tax election or make any agreement or settlement with any taxing authority;

viii. declare or pay any dividend or other distribution in respect of any class of its capital stock, or make any payment to redeem, purchase or otherwise acquire, or call for redemption, any of such stock or any securities convertible into or exchangeable for such stock except for the payment of cash dividends which would not cause the Consolidated Net Working Capital to be less than the Threshold Amount; provided, it shall not be deemed a violation of this covenant if Seller and ATH continue normal working capital practices consistent with past practice;

ix. increase or otherwise change the compensation payable or to become payable to any officer, employee or agent except for stay, retention, successful completion or other bonuses, or severance, parachute or similar payments which are set forth on Schedule 2.9(e) and have been or will be paid in connection with the transactions contemplated hereby and for which ATH has established a full current reserve or accrual on the Closing Balance Sheet or the payment of which is otherwise Seller's responsibility;

x. make or authorize the making of any capital expenditure in excess of $50,000 individually or $200,000 in the aggregate except for capital expenditures incurred in connection with the opening of new hospitals currently under contract and which are set forth on Schedule 2.9(f);

xi. incur any debt or other obligation for money borrowed or any lease obligations required to be capitalized and reflected on the balance sheet of ATH or any Subsidiary under Accounting Principles other than intercompany debt;

xii. incur any other obligation or liability, absolute or contingent except in the ordinary course of business and consistent with past practice;

xiii. guarantee or become a co-maker or accommodation maker or otherwise become or remain contingently liable in connection with any liability or obligation of any person other than ATH or the applicable Subsidiary;

xiv. loan, advance funds or make an investment in or capital contribution to any person other than ATH or the applicable Subsidiary;

xv. take any action or permit to occur any event set forth in subparagraphs (c) through (i) and (k) through (n) of Section 2.9;

xvi. take any action or omit to take any action which will result in a violation of any applicable law or cause a breach of any agreements, contracts or commitments that would result in a Material Adverse Effect; or

xvii. enter into any agreement to do any of the foregoing.

ATH and each Subsidiary shall maintain in full force and effect the policies of insurance listed on Schedule 2.23, subject only to variations required by the ordinary operations of its business, or else will obtain, prior to the lapse of any such policy, substantially similar coverage with insurers of recognized standing and approved in writing by the Buyer. Each of the Seller and ATH shall promptly advise the Buyer in writing of any change of insurer or type of coverage in respect of the policies listed on Schedule 2.23.

(a) Each of the Seller and ATH shall use its respective commercially reasonable efforts to cause all of the conditions to the obligations of the Buyer under Section 5.1 of this Agreement to be satisfied on or prior to the Closing. Each of the Seller and ATH shall use its commercially reasonable efforts, and Seller and ATH shall cause ATH and each Subsidiary, respectively, to use its commercially reasonable efforts, to conduct its business in such a manner that at the Closing the representations and warranties of the Seller and ATH

contained in this Agreement shall be true and correct as though such representations and warranties were made on, as of, and with reference to such date. The Seller and ATH will promptly notify Buyer in writing of any event or fact which represents a breach of any of its representations, warranties, covenants or agreements. Each of the Seller and ATH shall promptly advise Buyer in writing of the occurrence of any condition or development (exclusive of general economic factors affecting business in general) of a nature that will result in a Material Adverse Effect.

(b) Buyer shall use its commercially reasonable efforts to cause all of the conditions to the obligations of the Seller under Section 5.2 of this Agreement to be satisfied on or prior to the Closing. Buyer shall use its commercially reasonable efforts to conduct its business in such a manner that at the Closing the representations and warranties of Buyer contained in this Agreement shall be true and correct as though such representations and warranties were made on, as of, and with reference to such date. Buyer will promptly notify Seller in writing of any event or fact which represents a breach of any of its representations, warranties, covenants or agreements.

ATH will give, and the Seller and ATH will cause ATH and each Subsidiary, respectively, to give, to Buyer and to Buyer's counsel, accountants and other representatives access during normal business hours to all of ATH's and the Subsidiaries' properties, books, tax returns, contracts, commitments, records, officers, personnel and accountants and will furnish to Buyer all such documents and copies of documents (certified to be true copies if requested) and all information with respect to the affairs of ATH or any Subsidiary as Buyer may request.

At the Closing, the Seller will deliver written resignations of ATH's and each Subsidiary's directors and officers and of the trustees, plan administrators and fiduciaries of the Benefit Plans.

Except as set forth on Schedule 4.6, the Seller shall not sell, transfer, assign, mortgage, pledge, encumber or otherwise dispose of the Stock and shall not incur, create, assume or suffer to exist any mortgage, pledge, loan, encumbrance, claim or security or other interest in, or affecting title to, the Stock.

Promptly after the execution of this Agreement and prior to the Closing, the Seller and ATH shall use their commercially reasonable efforts, and shall cause the Subsidiaries to use their commercially reasonable efforts, to obtain from each lender, lessor or other party to the agreements set forth on Schedule 4.7, in a form reasonably satisfactory to Buyer, the consent,

estoppel certificate or other appropriate agreement of such lender, lessor or other party to the transactions contemplated by this Agreement. Seller's and ATH's agreement to use commercially reasonable efforts pursuant to this Section 4.7 shall not be deemed to require Seller or ATH to (i) incur any material out- of-pocket expenses, (ii) amend any loan agreement to change any material terms thereof, including, without limitation, any payment term, amortization schedule, or termination date, or (ii) amend any material provision in any other contract.

The Seller and ATH shall promptly deliver to Buyer a consolidated and consolidating statement of income for ATH and the Subsidiaries for the five months ending May 31, 1998 and a consolidated and consolidating balance sheet of ATH and the Subsidiaries as at such date (the "May Financial Statements"). Delivery of the May Financial Statements to the Buyer shall constitute the Seller's and ATH's representation and warranty to Buyer that the May Financial Statements (a) are correct and complete and in accordance with the books and records of ATH, (b) fairly present the financial condition, assets and liabilities of ATH and the Subsidiaries as at May 31, 1998 and the results of their operations for the five-month period then ended, and (c) have been prepared in accordance with Accounting Principles.

The parties hereto acknowledge that the information systems used to operate the businesses of ATH and the Subsidiaries are, in many instances, linked to the information systems used generally by Seller. To facilitate the orderly transition of the operations of ATH and the Subsidiaries, Seller shall provide transitional data processing and related support services as described on Exhibit E attached hereto to Buyer for the specified period after Closing and the cost to Buyer, if any, set forth on such Exhibit.

Between the date of this Agreement and the earlier of the date this Agreement is terminated or the Closing Date, none of Seller, ATH, or any of their affiliates, officers, directors, employees, stockholders, agents or advisors, shall solicit, initiate, furnish information relating to or participate in any discussions or negotiations with any person or entity concerning the sale or other disposition of any or all of ATH or any Subsidiary, or a merger, consolidation, or sale of all or substantially all of the assets, or any material assets, of ATH or any Subsidiary. The Seller and ATH shall promptly notify Buyer if any such discussion or negotiations are sought to be initiated with, any such information is requested from, or any proposal is received by, the Seller or ATH.

At Closing, the Assumed Debt shall remain an outstanding obligation of ATH Heights, Inc., and immediately following the Closing (and as part of a closing escrow) either (i) Buyer will cause ATH Heights, Inc. to fully refinance the Assumed Debt such that the existing

debt is fully paid and released, or (ii) Buyer shall obtain and deliver to Seller an unconditional release of Seller's guarantee of the Assumed Debt.

Seller acknowledges that the results of Buyer's investigation and due diligence of ATH's and the Subsidiaries' businesses will not affect the representations and warranties provided by the Seller and ATH herein except as expressly set forth below. Notwithstanding the foregoing, in the event that the Buyer obtains actual knowledge prior to Closing of a material inaccuracy in, or breach of, any of such representations and warranties of the Seller or ATH, the Buyer agrees promptly to notify Seller and ATH, whereupon the Seller and ATH shall promptly use their best efforts to cure such material inaccuracy or breach. If such material inaccuracy or breach is not cured, as aforesaid, the Buyer shall have the option to: (y) terminate this Agreement, in accordance with
Section 5.3 hereof and to receive reimbursement from Seller of the out-of-pocket costs and expenses incurred by the Buyer from and after the date of execution of this Agreement in connection with the transaction contemplated by this Agreement, including without limitation, reasonable attorneys' and accounting fees, or (z) to waive such inaccuracy or breach and proceed to Closing in accordance with the terms hereof without a reduction in the Purchase Price; provided, however, Seller shall not have the cure or termination right provided in this sentence (and, accordingly, will remain fully liable to the Buyer in respect of such inaccuracy or breach) if (i) Seller had intentionally or knowingly attempted to conceal from the Buyer such inaccuracy or breach, or (ii) after execution of this Agreement, Seller volitionally creates or permits to occur such inaccuracy or breach. No termination of this Agreement under clause
(y) shall be effective until all fees and expenses contemplated by that clause have been paid in full.

As soon as practicable following execution of this Agreement, Seller shall deliver to Buyer the Schedules required hereunder.

As soon as practicable following execution of this Agreement, Buyer and/or Seller, as applicable, shall deliver to each other the Exhibits required hereunder.

For the purposes of this Agreement, no party shall contest the amount of the accounts receivable reserve for contractual allowances and doubtful accounts as of December 31, 1997 or the Balance Sheet Date, or the methodology underlying such reserve, which methodology shall be applied in the preparation of the Closing Balance Sheet (including without limitation consistent aging percentages) and shall be deemed adequate for the purposes of this Agreement to the extent used in the preparation of any Financial Statement as of and following December 31, 1997.

Buyer acknowledges that Seller is contractually obligated to execute and deliver pharmaceutical provider agreements with Pharmerica to replace existing agreements with Pharmacy Corporation of America. With respect to the facilities set forth on Schedule 4.16 hereto, Buyer agrees to cause ATH or its successor to execute pharmaceutical provider agreements with Pharmerica in substantially the form attached in Schedule 4.16.

The obligations of Buyer to proceed with the Closing under this Agreement are subject to the fulfillment prior to or at Closing of the following conditions (any one or more of

which may be waived in whole or in part by Buyer at Buyer's option and, upon Closing, shall be deemed satisfied or waived):

former owner of any capital stock or equity interest in ATH or any Subsidiary (whether through a derivative action or otherwise) against ATH, any Subsidiary or any officer, director or shareholder of ATH or any Subsidiary or in his capacity as such, or (iii) which is reasonably likely to have a Material Adverse Effect.

The obligations of the Seller to proceed with the Closing hereunder are subject to the fulfillment prior to or at Closing of the following conditions (any one or more of which may be waived in whole or in part by the Seller at the Seller's option and, upon Closing, shall be deemed satisfied or waived):

required by this Agreement to be performed or complied with by it on or before the Closing and Buyer shall have delivered to the Seller a certificate, signed by its President or a Vice President, to such effect.

i. By mutual consent of Buyer and the Seller;

ii. By Buyer if there has been a breach by the Seller or ATH of any of their representations, warranties, covenants or agreements;

iii. By the Seller if there has been a breach by Buyer of any of its representations, warranties, covenants or agreements;

iv. By Buyer or the Seller if Closing shall not have occurred prior to July 31, 1998; provided, that Buyer or the Seller may terminate this Agreement pursuant to this subparagraph (iv) only if such party is not in material breach hereof;

v. By Buyer or Seller in the event that one or more of the following is not acceptable to such party in its sole discretion: (x) an exhibit not attached hereto at the time of signing, or (y) a schedule not attached hereto at the time of signing and not prepared by the terminating party. Prior to any such termination pursuant to this subsection, the terminating party must give written notice of its intention to the other party stating in detail its objections to the exhibit(s) or schedule(s) objected to, and in the event the other party agrees in writing within fifteen (15) days to remedy such objections, the right to terminate based on such objections shall expire.

vi. By Buyer in the event that the schedules and exhibits are not delivered within three weeks from the date of this Agreement.

Except as set forth in Sections 6.3, 6.8 and 7.7, Seller will pay all costs and expenses, including legal fees, in connection with its and ATH's performance of and compliance with this Agreement, and all transfer, documentary and similar taxes in connection with the delivery of the shares of Stock to be made hereunder. Except as set forth in Sections 6.2, 6.8 and 7.7, Buyer will pay all costs and expenses, including legal fees, of Buyer's performance of and compliance with this Agreement.

In accordance with the procedures in Section 6.5, if applicable, the Seller and ATH hereby agree to jointly and severally indemnify and hold harmless Buyer from and against:

(a) any loss, liability, claim, obligation, damage or deficiency of or to Buyer, ATH or any Subsidiary arising out of or resulting from (i) any inaccuracy in, or breach of, any representation, warranty, covenant or nonfulfillment of any agreement on the part of the Seller or ATH contained in this Agreement or in any statement or certificate furnished or to be furnished to Buyer pursuant hereto or in connection with the transactions contemplated hereby, or (ii) any and all liabilities of Seller, ATH or any Subsidiary related to ATH's or any Subsidiary's business first arising before the Closing Date, including, without limitation, (A) the payment of retrospective or retroactive premium adjustments provided for in the insurance policies set forth on Schedule 2.23, (B) any liability, obligation or costs arising from matters set forth on Schedules 2.15(d) hereto, (C) any claim or loss as provided in Section 4.17, and (D) any liability, obligation or costs arising from the Vencor litigation including, without limitation, severance expense, lease payments and relocation expenses incurred by ATH or any Subsidiary in connection with the elimination or modification of services at the applicable Hospitals; provided, that Seller shall control any matters set forth on (B) above, and the defense of the Vencor litigation process (including any settlements or appeals) as set forth in
Section 6.5 and, in addition to attorneys' fees, court costs, severance expense, lease payments and relocation expenses as noted above, shall be solely responsible for any resulting judgment or award (including any lost profits or consequential damages, if any, awarded therein to a third party) (Seller shall have no liability to Buyer or ATH for matters in (B), (C) and (D) above except to the extent of judgments owed to third parties), and

(b) any actions, judgments, costs and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) incident to any of the foregoing or the enforcement of this Section.

For purposes for this Agreement, the aggregate amount of such losses, liabilities, claims, obligations, damages, deficiencies, costs, expenses and fees, net of all insurance proceeds, shall be hereinafter referred to as "Damage" or "Damages."

In accordance with the procedures in Section 6.5, if applicable, Buyer hereby agrees to indemnify and hold harmless the Seller from and against:

(a) any Damages arising out of or resulting from (i) any inaccuracy in, or breach, of any representation or warranty or covenant or nonfulfillment of any agreement on the part of Buyer contained in this Agreement or in any statement or certificate furnished or to be furnished to the Seller in connection with the transactions contemplated hereby, or (ii) any and all liabilities related to ATH's business first arising after the Closing Date, and

(b) any actions, judgments, costs and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) incident to any of the foregoing or the enforcement of this Section.

Notwithstanding any provision of this Agreement to the contrary:

(a) Neither Seller, ATH nor Buyer shall be responsible for lost profits or consequential damages; provided, however, with respect to Seller's and ATH's indemnity obligations, Seller and ATH shall be responsible for lost profits or consequential damages awards to third parties as provided in Section 6.2(a)(ii)(B), (C) and (D).

(b) If and to the extent any Damages for which indemnification is sought relate to events or circumstances occurring both prior to and after the Closing Date or are from both a cause that is indemnified and one that is not so indemnified, (i) Seller's and ATH's obligations hereunder shall extend only to the Damages attributable to events or circumstances prior to the Closing Date or the indemnified event, circumstances or cause, and (ii) Buyer's obligations hereunder shall extend only to the Damages attributable to events or circumstances subsequent to the Closing Date or the indemnified event, circumstances or cause.

(c) No action or claim for Damages resulting from any misrepresentation or breach of warranty shall be brought or made after the survival period set forth in Section 9.1 hereof.

(d) The aggregate Damages indemnified hereunder (i) resulting from a claim under Section 6.2(a)(i)(other than for misrepresentation or breach of warranty) or 6.2(a)(ii) shall not exceed, in the aggregate, the Purchase Price, and (ii) resulting from any misrepresentation or breach of warranty shall not exceed, in the aggregate, $20,000,000. Any adjustment made pursuant to
Section 1.2 hereof shall not apply toward the foregoing limitation.

(e) No party shall be entitled to receive an indemnification payment with respect to any Damages in respect of any misrepresentation or breach of warranty unless the aggregate payments claimed by such party hereunder with respect to all Damages equal or exceed Two Hundred Fifty Thousand Dollars ($250,000). Any adjustment made pursuant to Section 1.2 shall not apply toward the foregoing limitation.

(f) After the Closing Date, to the extent permitted by law, the provisions of Sections 6.2 through 6.5, as applicable, shall be the sole and exclusive remedy of (i) Buyer for any breach by Seller or ATH of the representations, warranties and covenants contained in this Agreement (or any other document delivered by Seller or ATH at the Closing) and Buyer waives all other remedies, and (ii) Seller for any breach by Buyer of the representations, warranties and covenants contained in this Agreement (or any other document delivered by Buyer at the Closing) and Seller waives all other remedies.

(g) Notwithstanding anything to the contrary herein, no limitation or condition of liability provided in this Section 6.4 shall apply to any misrepresentation or breach of warranty contained herein if such misrepresentation or breach of warranty resulted from fraud, any securities violation or was made willfully or with intent to deceive.

(h) For purposes of calculating the amount of any Damages incurred in connection with any such misrepresentation, breach of warranty, or nonfulfillment of any covenant or agreement, any and all references to material or Material Adverse Effect (or other correlative terms) or dollar qualifiers herein shall be disregarded.

(i) Notwithstanding anything to the contrary herein, no limitation or condition of liability (other than subsection (d) above) shall apply with respect to any liability under any Benefit Plan retained by Seller or any Benefit Plan pursuant to Section 6.12.

(a) A party seeking indemnification pursuant to this Agreement (an "Indemnified Party") shall give prompt notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any action, suit or proceeding by a third party which is not an affiliate of any party hereto in respect of which indemnity may be sought hereunder (a "Third Party Claim"), and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such notice shall not relieve the Indemnifying Party of any liability hereunder except to the extent that the Indemnifying Party is actually prejudiced thereby.

(b) The Indemnifying Party shall have the right, exercisable by written notice to the Indemnified Party within 30 days of receipt of notice from the Indemnified Party of the commencement or assertion of any Third Party Claim in respect of which indemnity may be sought hereunder, to assume and conduct the defense of such Third Party Claim with counsel selected by the Indemnifying Party and reasonably acceptable to the Indemnified Party; provided that (i) the defense of such Third Party Claim by the Indemnifying Party will not, in the judgment of the Indemnified Party, have a material adverse effect on the Indemnified Party; and (ii) the Indemnifying Party has sufficient financial resources, in the judgment of the Indemnified Party, to satisfy the amount of any adverse monetary judgment that is reasonably likely to result; and (iii) the Third Party Claim solely seeks (and continues to seek) monetary damages; and
(iv) the Indemnifying Party expressly agrees in writing that as between the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be solely obligated to satisfy and discharge the Third Party Claim (the conditions set forth in clauses (i) through (iv) are collectively referred to as the "Litigation Conditions"). If the Indemnifying Party does not assume the defense of such Third Party Claim in accordance with this Section 6.5, the Indemnified Party may continue to defend the Third Party Claim. If the Indemnifying Party has assumed the defense of a Third Party Claim as provided in this Section 6.5, the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnified Party in connection with the defense thereof; provided, however, that if (i) the Litigation Conditions cease to be met, or
(ii) the Indemnifying Party fails to take reasonable steps necessary to defend diligently such Third Party

Claim, the Indemnified Party may assume its own defense, and the Indemnifying Party will be liable for all reasonable costs or expenses paid or incurred in connection therewith.

(c) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other is defending as provided in this Agreement.

(d) The Indemnifying Party, if it shall have assumed the defense of any Third Party Claim as provided in this Agreement, shall not, without the prior written consent of the Indemnified Party, consent to a settlement of, or the entry of any judgment arising from, any such Third Party Claim (i) which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a complete release from all liability in respect of such Third Party Claim, or (ii) which grants any injunctive or equitable relief, or (iii) which may reasonably be expected to have a material adverse effect on the affected business of the Indemnified Party. The Indemnified Party shall have the right to settle any Third Party Claim, the defense of which has not been assumed by the Indemnifying Party, with the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed.

(e) Amounts payable in respect of indemnification obligations of the parties shall be treated as an adjustment to the Purchase Price unless otherwise required by law. Whether or not the Indemnifying Party chooses to defend or prosecute any Third Party Claim, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith.

The obligations of the parties pursuant to Section 6.2 and 6.3 to pay Damages shall be satisfied by the indemnifying party within five business days after demand for payment by the party entitled to such indemnification. Interest will accrue on unpaid Damages at the prime rate plus two percent (2%) per annum.

Following the Closing, the Seller waives and releases (i) any and all claims for contribution or other payment from ATH or any Subsidiary which Seller may have with respect to the payment by the Seller of any amounts pursuant to Sections 6.2 or 6.5 of the Agreement or for any breach by ATH of its representations, warranties, covenants or agreements contained herein, or (ii) any right of subrogation against ATH or any Subsidiary. The Seller acknowledges that its liability under Sections 6.2 and 6.5 is joint and several with ATH and that Buyer may seek indemnification, in its sole discretion, from any and all such parties, including the Seller exclusively.

Promptly after the date hereof, Buyer and the Seller will file the required notifications with the Federal Trade Commission ("FTC") and the Antitrust Division of the Department of Justice ("Department") pursuant to and in compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The parties hereto shall not intentionally or negligently delay submission of information requested by FTC and Department under the HSR Act and shall use their respective best efforts promptly to supply, or cause to be supplied, such information and shall use their best efforts to obtain early termination of the applicable waiting period. Buyer and the Seller shall share equally the cost of the filing fee required by the HSR Act.

(a) Each of Seller and Buyer shall, and shall cause their respective employees and representatives, and their affiliates (and the employees and representatives of such affiliates) to, keep confidential and not disclose to any other person or entity or use for its own benefit or the benefit of any other person or entity any trade secrets or other confidential proprietary information in its or their possession or control regarding the other party or their businesses and operations and, specifically with respect to Seller or its affiliates, any trade secrets or confidential information regarding ATH or its Subsidiaries or their businesses or operations. In the event that this Agreement is terminated or the transactions contemplated hereby otherwise fail to close, Buyer and its affiliates and their respective representatives shall promptly return to Seller all written materials provided to Buyer or its affiliates or their representatives by Seller, ATH or their affiliates or representatives.

(b) The obligations of the parties under this Section 6.9 shall not apply to information which (i) is or becomes generally available to the public without breach of the commitment provided for in this Section; or (ii) is required to be disclosed by law, order or regulation of a court or tribunal or governmental authority; provided, however, in any such case, that the disclosing party subject to such requirement shall notify the affected party as early as practicable prior to disclosure to allow the affected party to take appropriate measures to preserve the confidentiality of such information.

Each party shall cooperate with the other in connection with (i) the filing of any Medicare and/or Medicaid cost reports required to be filed after the Closing Date; (ii) the determination of any liability or right relating to such reports, and (iii) the conduct or defense of any investigation, audit or other proceeding related to such reports. Buyer, ATH, the Subsidiaries and Seller, and their respective affiliates, shall preserve all information, returns, books, records and documents relating to any Medicare and/or Medicaid cost reports and supporting materials with respect to an applicable period, and shall provide access to employees and former employees, until the later of the expiration of all applicable statutes of limitation and

extensions thereof, or the conclusion of all litigation with respect to the applicable reports for such period.

For a period of five (5) years from and after the Closing Date:

(a) Neither party shall dispose of or destroy any of its books and records relating to the business of ATH and any Subsidiary for periods prior to the Closing (whether on paper, electronic or other form or media) ("Books and Records") without first offering to turn over possession thereof to the other party by written notice given to the other party at least thirty (30) days prior to the proposed date of such disposition or destruction.

(b) Each party shall allow the other party and its agents access to all Books and Records (to the extent that they relate to periods prior to the Closing) during normal working hours at its principal place of business or, at such party's option, at any location where any such Books and Records are stored, and the requesting party shall have the right to make copies of any Books and Records (to the extent that they relate to periods prior to the Closing) at its own expense; provided, however, that any such access or copying shall be had or done in such a manner so as not to interfere unreasonably with the normal conduct of the business of the party to whom the request was made.

(c) Each party shall make available to the other party upon reasonable written request: (i) copies of any Books and Records (to the extent that they relate to periods prior to the Closing), or (ii) such personnel as are reasonably required to assist in locating and obtaining any such Books and Records.

plans as defined in Section 2.25(a). Seller and the Benefit Plans shall retain responsibility under those Benefit Plans for all costs and coverages and all amounts payable by reason of claims incurred by or on behalf of the ATH Participants through the Closing Date, including claims submitted after the Closing Date. A claim shall be deemed to have occurred on the date of (i) death or dismemberment in the case of claims under life insurance or accidental death and dismemberment insurance, (ii) the date of initial disability in the case of disability claims, or (iii) in the case of all other claims including medical claims, the date on which the charge or expense giving rise to such claim is incurred in the case of all other claims. Seller and the Benefit Plans shall be responsible for all legally mandated continuation coverage for ATH Participants who had or have a loss of coverage due to a "qualifying event" within the meaning of Section 603 of ERISA that occurred before the Closing Date.

As soon as reasonably practicable but in no event later than one year following Closing, ATH shall, and shall cause its Subsidiaries to, remove all of Seller's logos that are

displayed in the Hospitals or on other real and personal property or otherwise used in the business of ATH and its Subsidiaries. It is understood by the parties that, except as provided in Section 2.24 hereof, no logo, trademark, tradename, or other item of intellectual property owned by Seller or any of its subsidiaries or affiliates, other than ATH and the Subsidiaries, and no right to use such, shall be transferred in connection with the transactions contemplated hereby.

Except as otherwise provided in this Article VII, all tax sharing agreements, arrangements, policies and guidelines, formal or informal, express or implied, that may exist between ATH and/or the Subsidiaries and Seller or any of its affiliates and all obligations thereunder shall terminate as of the Closing Date and neither ATH nor any Subsidiary shall have any liability thereunder for any amounts due in respect of periods ending prior to or on the Closing Date.

ATH and the Subsidiaries shall continue to be included for all taxable periods ending on or before the Closing Date in the consolidated federal income Tax Return of which Seller is the common parent and any required state or local consolidated, combined or unitary income or franchise Tax Returns that include ATH and the Subsidiaries for any period ending prior to or on the Closing Date (all such Tax Returns including taxable periods of ATH and the Subsidiaries ending prior to or on the Closing Date being hereinafter referred to as "Pre- Closing Consolidated Returns"). Seller shall timely prepare and file or cause to be prepared and filed all Pre-Closing Consolidated Returns, all other income Tax Returns of ATH and the Subsidiaries for taxable periods ending on or prior to the Closing Date and all other Tax Returns of ATH and the Subsidiaries required to be filed on or prior to the Closing Date ("Seller's Returns"). Seller shall timely pay or cause to be paid all Taxes shown as due and payable on Seller's Returns ("Seller's Taxes"). If ATH and the Subsidiaries are permitted under any applicable state or local income tax law to treat the Closing Date as the last day of a taxable period, Buyer and Seller shall treat (and cause their respective affiliates to treat) the Closing Date as the last day of a taxable period.

Buyer shall timely prepare and file or cause to be prepared and filed all Tax Returns required by law of ATH and the Subsidiaries that are not required to be prepared and filed by Seller pursuant to Section 7.2 ("Buyer's Returns"). Buyer shall timely pay or cause to be paid all Taxes relating to Buyer's Returns ("Buyer's Taxes"). In the event a taxable period reflected in a Buyer's Return includes a period prior to the Closing Date (a "Straddle Return"), (i) such Return shall be prepared in a manner consistent with Seller's past practice and (ii) Seller shall be liable for amounts unpaid net of amounts prepaid representing the portion of Buyer's Taxes allocable to the period up to and including the Closing Date ("Sellers' Accrued Taxes").

Such allocable portion shall, in the case of real and personal property Taxes, be apportioned ratably on a per diem basis and, in the case of other Taxes, be apportioned based on the actual operations of ATH and the Subsidiaries, provided that federal income Taxes shall be allocated in accordance with the provisions of Treasury regulations (S)1.1502-76(b), determined without regard to the ratable allocation provision of Treasury regulations (S)1.1502-76(b)(2)(ii) or
(iii). At least 21 days prior to the filing of any Straddle Return, Buyer shall deliver a copy of such Return to Seller, together with Buyer's reasonably detailed computation of Seller's Accrued Taxes for such Return, for Seller's review and comment. Seller shall within ten days following receipt of the Return, deliver to Buyer any objections regarding the calculation of Taxes or Seller's Accrued Taxes with respect to the Return. Seller and Buyer shall attempt in good faith to resolve any disputes regarding such calculations, provided that if they are unable to resolve such disputes within thirty days after delivery of Seller's objections, the dispute shall be submitted to Coopers & Lybrand LLP ("Arbiter") for final resolution, with the costs of Arbiter to be borne equally by Buyer and Seller.

(a) After the Closing Date, Seller shall submit to Buyer blank Tax Return workpaper packages reasonably necessary for Seller (or its parent) to prepare any Sellers' Returns. Buyer shall cause ATH to prepare completely and accurately all information that Seller shall reasonably request in such workpaper packages and shall submit to Seller such packages within the later of 90 days after Buyer's receipt thereof or 90 days after the close of the taxable period to which a workpaper package relates.

(b) Each party shall cooperate with the other in connection with
(i) the filing of any Tax Return, amended Tax Return or claim for refund; (ii) the determination of any Tax liability or right to claim a refund, or (iii) the conduct or defense of any investigation, audit or other proceeding related to Taxes. Buyer, ATH, the Subsidiaries and Seller and their respective affiliates shall preserve all information, returns, books, records and documents relating to any liabilities for Taxes with respect to a taxable period until the later of the expiration of all applicable statutes of limitation and extensions thereof, or the conclusion of all litigation with respect to Taxes for such period.

(a) After the Closing Date, Seller shall indemnify and hold harmless Buyer from and against any Tax liability with respect to (i) any Seller's Taxes; (ii) Buyer's Taxes, to the extent of Seller's Accrued Taxes; and
(iii) any increase in Tax liability resulting from ATH and the Subsidiaries being severally liable for any Taxes of Seller's consolidated group or any other consolidated group of which ATH and the Subsidiaries were members prior to the Closing Date pursuant to Treasury Regulations (S)1.1502-6 or any analogous state or local tax provision. Seller shall pay such amounts as they are obligated to pay to Buyer under the preceding sentence within 15 days after payment of any applicable Tax liability by Buyer, ATH or any Subsidiary and to the extent not paid by Seller or Seller Parent within such 15-day period such unpaid amounts shall thereafter include interest thereon at prime rate plus 2% per annum.

(b) After the Closing Date, Buyer shall indemnify and hold harmless Seller and their affiliates from and against any Tax liability with respect to (i) Buyer's Taxes that are allocable to or apportioned to a period after the Closing Date. Buyer shall pay such amounts within 15 days after payment of any such Tax liability by Seller, Seller Parent or any affiliate and to the extent not paid by Buyer within such 15-day period such unpaid amounts shall thereafter include interest thereon at the prime rate plus 2% per annum.

(a) In the event that Buyer, ATH or any Subsidiary receives notice, whether orally or in writing, of any pending or threatened federal, state, local, municipal or foreign examinations, claims settlements, proposed adjustments, assessments or reassessments or related matters with respect to Taxes that could affect Seller or any affiliate, or if Seller or any affiliate receives notice of matters that could affect Buyer, ATH or any Subsidiary, the party receiving notice shall promptly notify in writing the potentially affected party. The failure of any party to give the notice required by this paragraph shall not impair that party's rights under this Agreement except to the extent that the other parties demonstrate that they have been damaged thereby.

(b) Seller or Buyer, as applicable (the "Controlling Party"), shall have the right, at its own expense, to control any audit or examination by any taxing authority, initiate any claim for refund, file any amended Return, contest, resolve and defend against any assessment, notice of deficiency or other adjustment or proposed adjustment relating to or with respect to any Taxes for which the Controlling Party is required to indemnify any other party pursuant to Section 7.5; provided, that, in the event that any such adjustment could have an adverse effect on the Tax liability of the other party (or affect Buyer by having an effect on the Tax liability of ATH and the Subsidiaries) (the "Affected Party"), the Controlling Party shall (i) give the Affected Party written notice of any such adjustment, (ii) permit the Affected Party to participate in the proceeding to the extent the adjustment may affect the Tax liability of the Affected Party and (iii) not settle or otherwise compromise such proceeding without the prior written consent of the Affected Party, which consent shall not be unreasonably withheld.

Any indemnification payments made pursuant to this Article VII shall be treated for tax purposes as an adjustment to the Purchase Price unless otherwise required by applicable law.

As used in this Agreement, in addition to the terms defined elsewhere, the following terms shall have the meanings set forth below:

(a) "Accounting Principles" means generally accepted accounting principles, subject to Schedule 8.1(a).

(b) "Federal Health Care Programs" means the Federal Health Care Programs as defined in Section 1128B of the Social Security Act or any regulations promulgated thereunder.

(c) "knowledge," "actual knowledge," "best knowledge," and similar phrases shall mean the actual knowledge of Seller, ATH or Buyer, as the case may be, based on the knowledge of the persons set forth as follows:

i. For Seller: T. Jerald Moore, Executive Vice President, Scott Tabakin, Executive Vice President and Chief Financial Officer, David Merrell, Vice President Financial Planning and Robert Pommerville, General Counsel;

ii. For ATH: T. Jerald Moore, President, Steve Munroe, Vice President and Chief Financial Officer, Jane Chambers, Vice President Human Resources, Greg Sassman, Vice President Development, Patrick Gandy, Group Vice President of Operations, Patricia McCullough, Group Vice President of Operations, Terri Votava, Group Vice President of Operations (and any person with a higher title in such area) and Caroline Fears, Vice President of Marketing (and any person with a higher title in such area);

iii. For Buyer: the President, Chief Executive Officer, or any officer whose title includes "Vice President" of Buyer.

(d) "Material Adverse Effect" means an event, change or effect (or series of related events, changes or effects) that is materially adverse to the financial condition, properties, assets, liabilities (contingent or otherwise), businesses or operations of ATH and its Subsidiaries, taken as a whole.

(e) "Related Party" means the Seller, any of the officers or directors of ATH or any Subsidiary, any affiliate, associate or relative of the Seller, ATH or any Subsidiary, or any of their respective officers or directors, or any business or entity in which the Seller, ATH, any Subsidiary or any affiliate, associate or relative of any such person has any material direct or indirect interest.

The representations, warranties, covenants and agreements of Buyer and the Seller and ATH contained in this Agreement, and all statements contained in this Agreement or any exhibit or schedule hereto or any certificate, financial statement or report or other document delivered pursuant to this Agreement or in connection with the transactions contemplated hereby,

shall be deemed to constitute representations, warranties, covenants and agreements of the respective party delivering the same. All such representations and warranties shall survive the Closing for a period of fifteen months; provided, however, that the foregoing time limitation shall not apply to: (i) any of the representations and warranties contained in Sections 2.1, 2.2, 2.5 and 2.17, each of which shall survive indefinitely; (ii) the representations and warranties contained in Sections 2.10, 2.15, 2.25, 2.28, 2.29, 2.30, 2.31 and 2.32, each of which shall survive until thirty days following expiration of the applicable statute of limitations; and (iii) any such claims which have been the subject of a good faith written notice prior to the expiration of the applicable survival period, which notice asserts such claim and specifies in reasonable detail the nature and basis for such claim. The covenants and agreements under this Agreement or in any statement or certificate furnished or to be furnished pursuant hereto or in connection with the transactions contemplated hereby shall survive without limitation.

All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or, if sent by telecopy, when received or, if sent by nationally recognized overnight delivery service, when delivered or, if mailed, three business days after being mailed by United States first-class, certified or registered mail, postage prepaid, to the other party at the following addresses (or at such other address as shall be given in writing by any party to the other):

If to Buyer at any time or to ATH after the Closing, to:

with a required copy to:

If to the Seller:

Beverly Enterprises, Inc.

5111 Rogers Avenue
Suite 40A
Fort Smith, AR 72919

with a copy to:

with an additional required copy to:

If to ATH prior to the Closing, to:

with a copy to:

With an additional required copy to:

This Agreement, and all rights and powers granted hereby, will bind and inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement may not be assigned, whether by contract or operation of law, by any party hereto without the prior written consent of the other parties except that Buyer may assign all or part of its rights hereunder without such consent to a wholly-owned subsidiary.

This Agreement shall be governed by and construed in accordance with the internal laws of the State of Tennessee without giving effect to principles of conflicts of laws.

The headings preceding the text of the sections and subsections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect.

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

Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby.

The parties may by mutual agreement amend this Agreement in any respect, and any party, as to such party, may (a) extend the time for the performance of any of the obligations of any other party, (b) waive any inaccuracies in representations by any other party, (c) waive compliance by any other party with any of the agreements contained herein and performance of any obligations by such other party, and (d) waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party against whom enforcement of the same is sought.

This Agreement and the Schedules and Exhibits hereto, each of which is hereby incorporated herein, set forth all of the promises, covenants, agreements, conditions and

undertakings between the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written.

The parties agree and acknowledge that the risk of loss with respect to the Stock and the assets and business of ATH and each Subsidiary remains with the Seller and ATH prior to the Closing.

Buyer acknowledges that no representation or warranty set forth herein of Seller or ATH shall be breached because of the consummation of the contemplated post-Closing mergers set forth in the Background section hereof.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.

SELECT MEDICAL CORPORATION

By: /s/ Robert A. Ortenzio
   ----------------------------------
  Name:
  Title:

BEVERLY ENTERPRISES, INC.

By: /s/ David G. Merrell
   ----------------------------------
  Name:
  Title:

AMERICAN TRANSITIONAL HOSPITALS, INC.

By: /s/ David G. Merrell
   ----------------------------------
  Name:
  Title:

Exhibit 2.2

AGREEMENT AND PLAN OF MERGER

By and Among

SELECT MEDICAL CORPORATION

SELECT MEDICAL OF MECHANICSBURG, INC.

and

INTENSIVA HEALTHCARE CORPORATION

Dated as of November 9, 1998

TABLE OF CONTENTS

                                                                           Page
ARTICLE I THE OFFER......................................................    1

  1.1.  The Offer........................................................    1
  1.2.  Conditions to the Offer..........................................    2
  1.3.  Waivers of Conditions............................................    3
  1.4.  Schedule 14D-1...................................................    5
  1.5.  Company Action...................................................    6

ARTICLE II THE MERGER                                                        7

  2.1.  The Merger.......................................................    7
  2.2.  Effective Time; Closing..........................................    7
  2.3.  Effect of the Merger.............................................    7
  2.4.  Certificate of Incorporation; By-laws............................    7
  2.5.  Directors and Officers...........................................    8
  2.6.  Conversion of Securities.........................................    8
  2.7.  Dissenting Shares................................................    8
  2.8.  Employee Stock Options...........................................    9
  2.9.  Surrender of Shares; Stock Transfer Books........................   10

ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................   11

  3.1.   Organization and Qualification; Subsidiaries....................   11
  3.2.   Certificate of Incorporation and By-laws........................   12
  3.3.   Capitalization..................................................   12
  3.4.   Authority Relating to this Agreement............................   12
  3.5.   No Conflict; Required Filings and Consents......................   13
  3.6.   SEC Filings; Financial Statements...............................   13
  3.7.   Absence of Certain Changes or Events............................   14
  3.8.   Absence of Litigation...........................................   15
  3.9.   Labor Matters; Employee Benefit Plans...........................   15
  3.10.  Offer Documents; Schedule 14D-9; Proxy Statement................   17
  3.11.  Taxes...........................................................   17
  3.12.  Compliance with Laws............................................   19
  3.13.  Exclusion.......................................................   20
  3.14.  Accounts Receivable.............................................   20
  3.15.  Brokers.........................................................   20
  3.16.  Real Property and Leases........................................   20
  3.17.  Environmental Matters...........................................   21
  3.18.  State Takeover Statutes.........................................   22

  3.19.  Vote Required...................................................   22
  3.20.  Certain Contracts...............................................   22
  3.21.  Intellectual Property...........................................   23
  3.22.  Opinion of Financial Advisor....................................   23
  3.23.  Affiliate Transactions..........................................   23
  3.24.  Prior Negotiations..............................................   23

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT
 AND PURCHASER...........................................................   24

  4.1.   Corporate Organization..........................................   24
  4.2.   Authority Relating to this Agreement............................   24
  4.3.   No Conflict; Required Filings and Consents......................   24
  4.4.   Financing.......................................................   25
  4.5.   Offer Documents; Proxy Statement................................   25
  4.6.   Brokers.........................................................   26
  4.7.   Ownership of Company Common Stock...............................   26

ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER.........................   26

  5.1.   Conduct of Business by the Company Pending the Merger...........   26
  5.2.   Additional Covenants............................................   29

ARTICLE VI ADDITIONAL AGREEMENTS.........................................   29

  6.1.   Stockholders Meeting............................................   29
  6.2.   Proxy Statement.................................................   30
  6.3.   Company Board Representation; Section 14(1).....................   30
  6.4.   Access to Information; Confidentiality..........................   31
  6.5.   No Solicitation of Transactions.................................   32
  6.6.   Employee Matters................................................   34
  6.7.   Directors' and Officers' Indemnification and Insurance..........   34
  6.8.   Further Action; Reasonable Best Efforts.........................   35
  6.9.   Public Announcements............................................   36
  6.10.  SEC and Stockholder Filings.....................................   36
  6.11.  Takeover Statutes...............................................   36
  6.12.  Advice of Breaches..............................................   37

ARTICLE VII CONDITIONS TO THE MERGER.....................................   37

  7.1.   Conditions to the Merger........................................   37
  7.2.   Parent and Purchaser Conditions to the Merger...................   37
  7.3.   Company Conditions to the Merger................................   38

ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER...........................   39

  8.1.   Termination.....................................................   39
  8.2.   Effect of Termination...........................................   41
  8.3.   Fees and Expenses...............................................   42
  8.4.   Amendment.......................................................   43
  8.5.   Waiver..........................................................   43

ARTICLE IX GENERAL PROVISIONS............................................   43

  9.1.   Non-Survival of Representations, Warranties and Agreements......   43
  9.2.   Notices.........................................................   43
  9.3.   Definitions.....................................................   45
  9.4.   Severability....................................................   48
  9.5.   Entire Agreement; Assignment....................................   48
  9.6.   Parties in Interest.............................................   49
  9.7.   Governing Law...................................................   49
  9.8.   Headings........................................................   49
  9.9.   Counterparts....................................................   49
  9.10.  Specific Performance............................................   49
  9.11.  Costs of Enforcement............................................   49

THIS AGREEMENT AND PLAN OF MERGER, dated as of November 9, 1998 (the "Agreement"), is by and among SELECT MEDICAL CORPORATION, a Delaware corporation ("Parent"), SELECT MEDICAL OF MECHANICSBURG, INC., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and INTENSIVA HEALTHCARE CORPORATION, a Delaware corporation (the "Company").

(a) The Boards of Directors of Parent, Purchaser and the Company have each determined that it is in the best interests of their respective stockholders for Parent to acquire the Company upon the terms and subject to the conditions set forth herein.

(b) In furtherance of such acquisition, Parent, Purchaser and the Company have agreed that Purchaser shall make a cash tender offer to acquire all the outstanding shares of common stock of the Company, on the terms and subject to the conditions of this Agreement.

(c) The Board of Directors of the Company has approved the making of such offer and has agreed to recommend that holders of Shares tender their Shares under such offer.

(d) The Boards of Directors of Parent, Purchaser and the Company have approved the merger of Purchaser with and into the Company following the consummation of the Offer and on the terms and subject to the conditions set forth herein.

(e) Parent and Purchaser have entered into agreements with certain holders of the Shares under which such holders agree to tender such Shares in the Offer and/or vote in favor of the Offer and the Merger (the "Stockholder Agreements").

(f) Certain capitalized terms used herein are defined in Section 9.3.

In consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Purchaser and the Company hereby agree as follows:

ARTICLE I
THE OFFER

1.1. The Offer.

Upon the terms and subject to the conditions of this Agreement, Purchaser shall commence a cash tender offer (the "Offer") to acquire all the issued and outstanding shares (the "Shares") of Common Stock, par value $0.001 per share, of the Company ("Common Stock'). The purchase price under the Offer shall be $9.625 per Share (such amount, or any greater amount per Share paid pursuant to the Offer, being hereinafter referred to as the "Per Share

Amount"), net to the seller in cash, on the terms and subject to the conditions set forth herein. Purchaser shall commence the Offer as promptly as reasonably practicable after the date hereof, but in no event later than five Business Days after the initial public announcement of Purchaser's intention to commence the Offer. Subject to the terms and conditions of the Offer and in accordance with the terms of this Agreement, Purchaser shall accept for payment and pay for, as promptly as practicable after expiration of the Offer, all Shares validly tendered and not withdrawn.

1.2. Conditions to the Offer.

The obligation of the Purchaser to accept for payment and pay for Shares tendered pursuant to the Offer shall be subject to the following conditions:

(a) At least the number of Shares that, when added to the Shares already owned by Parent, shall constitute 90% of the then outstanding Shares on a fully diluted basis (including, without limitation, all Shares issuable upon the conversion of any convertible securities or upon the exercise of any options, warrants or rights), shall have been validly tendered and not withdrawn prior to the expiration of the Offer (the "Minimum Condition");

(b) any applicable (i) waiting period under the HSR Act or (ii) period during which Parent or Purchaser shall have consented or otherwise be barred from purchasing Shares pursuant to the Offer as part of any agreement or other arrangement with any Governmental Authority involving the HSR Act or any other applicable antitrust laws has expired or been terminated prior to the expiration of the Offer (as it may be extended hereunder);

(c) the Company shall have received any required consent or approval of any Governmental Authority and there shall not be pending or threatened any action or proceeding before any court or Governmental Authority, domestic or foreign, (i) challenging or seeking to directly or indirectly restrain or prohibit, the transactions contemplated hereby including the Merger, the Offer and the Stockholders Agreements (the "Transactions"); (ii) seeking to prohibit or limit materially the ownership or operation by the Company, Parent or any of their Subsidiaries of all or any material portion of the business or assets of the Company, (iii) seeking to impose limitations on the ability of the Parent, the Purchaser or any other Affiliate of Parent to exercise effectively full rights of ownership of any Shares, (iv) seeking to require divestiture by Parent, Purchaser or any other Affiliate of Parent of any Shares, (v) seeking to prohibit Parent or any of its Subsidiaries from effectively controlling in any material respect the business or operations of the Company or its Subsidiaries,
(vi) seeking to obtain from the Company, Parent or Purchaser any damages or otherwise imposing financial burdens, penalties or fines that are material in relation to the Company and its Subsidiaries, or Parent and its Subsidiaries, in each case taken as a whole, or (vii) which is otherwise reasonably likely to have a Material Adverse Effect on the Company;

(d) there shall not have been any statute, rule, regulation, judgment, order or injunction enacted, entered, issued, enforced, promulgated or deemed applicable, or any other action taken, by any Government Authority other than the routine application of the waiting

period provisions of the HSR Act to the Offer, or the Merger, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (vii) of the preceding paragraph;

(e) there shall not have occurred, and be continuing, any change, condition, event or other development that has had a Material Adverse Effect;

(f) the representations and warranties of the Company in this Agreement shall be true and correct (for all purposes of this paragraph (f) without giving effect to any material or Material Adverse Effect qualifiers or other qualifiers based on materiality that are contained in this Agreement) as of such time (except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date), except to the extent that the failure or failures to be true or correct do not, in the aggregate, have a Material Adverse Effect;

(g) the Company shall have performed in all material respects its obligations under this Agreement which, by their terms, are to be performed prior to such date;

(h) this Agreement shall not have been terminated in accordance with its terms; and

(i) all of the holders of outstanding Company Stock Options which have not been exercised or tendered in the Offer shall have agreed to the cancellation of such Company Stock Options as described in Section 2.8 in consideration for the receipt of the Option Spread.

The obligations of the Purchaser to purchase shares pursuant to the Offer and engage in the Merger are not contingent upon the obtaining of financing by the Parent or Purchaser, and no such condition shall be implied by the conditions contained in this Section 1.2.

1.3. Waivers of Conditions.

(a) The conditions in Section 1.2 are for the sole benefit of Purchaser and Parent and may be waived by Purchaser or Parent in whole or in part at any time and from time to time in their sole discretion and Purchaser expressly reserves the right to modify the terms of the Offer, except that, without the prior written consent of the Company:

(i) the Minimum Condition may not be waived, provided that Parent and Purchaser may reduce the Minimum Condition to 66-2/3% of the outstanding Shares on a fully-diluted basis;

(ii) no change may be made which (A) decreases the price per Share payable in the Offer, (B) reduces the maximum number of Shares to be purchased in the Offer, (C) imposes conditions to the Offer other than as set forth above, or (D) is otherwise materially adverse to the Company's stockholders.

(b) The Purchaser may, without the consent of the Company, (i) extend the Offer on one or more occasions beyond the then scheduled expiration date (the initial scheduled expiration date being 20 Business Days following the commencement of the Offer computed in accordance with SEC Rules) if, at the then scheduled expiration date of the Offer, any of the conditions to Purchaser's obligation to accept for payment, and to pay for, the Shares, shall not be satisfied or waived, (ii) extend the Offer for the minimum period required by the SEC Rules applicable to the Offer including in connection with any increase in consideration or waiver of a condition which is permitted to be waived under
Section 1.3(a), (iii) extend the Offer as provided in Section 1.3(c) or (iv) extend the Offer on one or more occasions for an aggregate period of not more than 10 Business Days beyond the initial expiration date or the latest expiration date that would otherwise be permitted (or, in the case of clause
(iii), required) under clause (i), (ii) or (iii) of this sentence; provided, that, in the case of such an extension under clause (iv), the Purchaser and the Parent shall have irrevocably waived the conditions contained in Section 1.2 other than the conditions set forth in Section 1.2(a), 1.2(h) and, with respect to willful breaches, Section 1.2(g).

(c) If on the then scheduled expiration date of the Offer, any condition to the Offer set forth in Section 1.2(b)-(d) is not satisfied or waived, and all of the conditions to the Offer other than those set forth in
Section 1.2(b)-(d) have been satisfied or waived, the Purchaser shall, if requested by the Company in writing prior to the then scheduled expiration date (which notice shall describe in reasonable detail the circumstances resulting in the failure of such condition to be satisfied), extend the Offer to the extent necessary to permit such condition to be satisfied, provided that Purchaser shall not be required to extend the Offer under this Section 1.3(c) beyond the date specified in Section 8.1(b)(i) or (ii) if the conditions to the Offer specified herein cannot be satisfied on or prior to such date.

(d) If on the then scheduled expiration date of the Offer, the Minimum Condition shall not have been satisfied or waived but more than 66-2/3% of the outstanding Shares on a fully-diluted basis have been tendered and not withdrawn, then Purchaser may, in addition to or in lieu of extending the Offer pursuant to Section 1.3(b), deliver to the Company a written notice (the "Merger Notice") directing the Company to proceed with the Merger and to call and hold the Stockholders Meeting and disseminate the Proxy Statement as soon as reasonably practicable. In the event (i) Purchaser elects not to deliver a Merger Notice to the Company pursuant to the preceding sentence, (ii) the Minimum Condition shall not have been satisfied or waived but more than 66-2/3% of the outstanding Shares on a fully-diluted basis have been tendered and not withdrawn and (iii) all of the conditions to the Offer other than the Minimum Condition and those conditions set forth in Section 1.2(b)-(d) have been satisfied or waived, Purchaser shall extend the Offer for one or more periods of time to permit the Minimum Condition and the other conditions to be satisfied as provided in Section 1.3(b); provided that Purchaser shall not be required to extend the Offer under this Section 1.3(d) (x) beyond the date specified in
Section 8.1(b)(i) or (y) if the conditions to the Offer specified herein cannot be satisfied on or prior to such date.

(e) If at any time on or after January 15, 1999, (i) the Offer shall not have expired or terminated in accordance with its terms, (ii) the Minimum Condition shall not have been satisfied or waived but more than 66-2/3% of the outstanding Shares on a fully-diluted basis have been tendered and not withdrawn, and (iii) all of the conditions to the Offer other than the Minimum Condition and those conditions set forth in Section 1.2(b)-(d) have been satisfied or waived, then at such time the Company may deliver to Parent and Purchaser a written Merger Notice informing Parent and Purchaser that the Company has elected to call and hold the Stockholders Meeting and disseminate the Proxy Statement as soon as reasonably practicable.

(f) The Per Share Amount has been calculated based on the information set forth in Section 3.3. If the number of outstanding Shares or Shares issuable upon the exercise of, or subject to, options or other agreements is, at the date of acceptance of Shares under the Offer, more or less than the amounts specified in Section 3.3 by more than 10,000 Shares (including, without limitation, as a result of any stock split, reverse stock split, stock dividend, including any dividend or distribution of securities convertible into Shares, recapitalization or other like change occurring after the date of this Agreement), the Per Share Amount shall be appropriately adjusted. The provisions of this subsection (f) shall not, however, be deemed to modify the representation set forth in Section 3.3.

1.4. Schedule 14D-1.

On the date of commencement of the Offer, Parent and Purchaser shall file with the SEC a Tender Offer Statement on Schedule 14D-1 (together with all amendments and supplements thereto, the "Schedule 14D-J") with respect to the Offer, which shall contain or shall incorporate by reference an offer to purchase (the "Offer to Purchase") and forms of the related letter of transmittal and any related summary advertisement (the Schedule 14D-1, the Offer to Purchase and such other documents, together with all supplements and amendments thereto, being referred to herein collectively as the "Offer Documents"). The Offer Documents will comply in all material respects with the Securities Exchange Act of 1934, as amended (the "Exchange Act") and other applicable laws and will contain (or will be amended in a timely manner so as to contain) all information which is required to be included therein in accordance with the Exchange Act and the rules and regulations thereunder and other applicable laws. Parent, Purchaser and the Company agree to correct promptly any information provided by any of them for use in the Offer Documents which were or shall have become false or misleading, and Parent and Purchaser further agree to take all steps necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC and the other Offer Documents as so corrected to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. Parent and Purchaser will afford the Company and its counsel a reasonable opportunity to review and comment on the Offer Documents and any amendments thereto prior to the filing thereof with the SEC. Parent and Purchaser will provide the Company and its counsel in writing any comments that they or their counsel may receive from the SEC or its staff with respect to the Offer Documents promptly after receipt thereof.

1.5. Company Action.

(a) The Company hereby consents to the Offer and represents and warrants that (i) the Board, at a meeting duly called and held on November 9, 1998, by unanimous action has (A) determined that this Agreement and the Transactions, including the Offer and the Merger, are fair to and in the best interests of the holders of Shares, (B) approved and adopted this Agreement and the Transactions (such approval and adoption having been made in accordance with the provisions of (S) 203 of Delaware Law) and (C) resolved to recommend that the stockholders of the Company accept the Offer and approve and adopt this Agreement and the Merger, and (ii) Wasserstein Perella & Co. Inc. ("WP&Co.") has delivered to the Board its oral opinion (to be confirmed in writing promptly following execution of this Agreement) that, based on, and subject to, the various assumptions and qualifications set forth in such opinion, as of the date thereof, the consideration to be received by the holders of Shares pursuant to each of the Offer and the Merger is fair to the holders of Shares from a financial point of view. Unless the recommendation of the Board has been withdrawn in accordance with Section 6.5, the Company consents to the inclusion in the Offer Documents of the recommendation of the Board and the written opinion described in the immediately preceding sentence and agrees to request WP&Co. to consent to the inclusion of its written opinion in the offering documents forming a part of the Schedule 14D-9.

(b) On the date of commencement of the Offer, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto, the Schedule 14D-9") containing, unless the recommendation of the Board has been withdrawn in accordance with
Section 6.5, the recommendation of the Board described in Section 1.5(a) and shall disseminate the Schedule 14D-9 to the extent required by Rule 14d-9 promulgated under the Exchange Act, and any other applicable federal securities laws. The Company will afford the Parent and its counsel a reasonable opportunity to review and comment on the Schedule 14D-9 and its exhibits prior to the filing thereof with the SEC or dissemination to stockholders of the Company. The Company will provide Parent and its counsel in writing any comments that the Company or its counsel may receive from the SEC or its staff with respect to the Schedule 14D-9 promptly after receipt thereof. The Company represents and warrants that Schedule 14D-9 will comply in all material respects with the Exchange Act and any other applicable laws and will contain (or will be amended in a timely manner so as to contain) all information which is required to be included therein in accordance with the Exchange Act and the rules and regulations thereunder and other applicable laws. The Company, Parent and Purchaser agree to correct promptly any information provided by any of them for use in the Schedule 14D-9 which has or shall have become false or misleading, and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws.

(c) The Company shall promptly furnish Purchaser with mailing labels and any available listing or computer file containing the names and addresses of all record holders of Shares and with security position listings of Shares held in stock depositories, each as of a recent

date, and furnish Purchaser with such information and assistance as Purchaser or its agents may reasonably request in communicating the Offer to the holders of Shares. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Offer or the Merger, Parent and Purchaser shall hold in strict confidence the information contained in such labels, listings and files, shall use such information only in connection with the Offer and the Merger, and, if this Agreement shall be terminated in accordance with Section 8.1, shall promptly deliver to the Company all copies of such information then in their possession.

ARTICLE II
THE MERGER

2.1. The Merger.

Upon the terms and subject to the conditions set forth in Article VII, and in accordance with Delaware Law, at the Effective Time (as hereinafter defined), Purchaser shall be merged with and into the Company (the "Merger"). As a result of the Merger, the separate corporate existence of Purchaser shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation").

2.2. Effective Time; Closing.

As promptly as practicable after the satisfaction or, if permissible, waiver of the conditions set forth in Article VII, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger or certificate of ownership and merger (in either case, the "Certificate of Merger") with the Secretary of State of the State of Delaware, in such form as is required by, and executed in accordance with the relevant provisions of, Delaware Law. The Merger shall become effective at the time of such filing or such later time as may be specified in the Certificate of Merger (the date and time when the Merger shall become effective being the "Effective Time").

2.3. Effect of the Merger.

At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Purchaser shall vest in the Surviving Corporation, and all debts, liabilities, obligations, restrictions, disabilities and duties of the Company and Purchaser shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Corporation.

2.4. Certificate of Incorporation; By-laws.

(a) At the Effective Time, the Certificate of Incorporation of Purchaser shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as

provided by law and such Certificate of Incorporation; provided, that such Certificate of Incorporation shall be in accordance with the provisions of
Section 6.7 hereof.

(b) The By-laws of Purchaser, as in effect immediately prior to the Effective Time, shall be the By-laws of the Surviving Corporation until thereafter amended as provided by law, the Certificate of Incorporation of the Surviving Corporation and such By-laws.

2.5. Directors and Officers.

The directors of Purchaser immediately prior to the Effective Time shall be the directors of the Surviving Corporation at and after the Effective Time, each to hold office in accordance with the Certificate of Incorporation and By-laws of the Surviving Corporation, and the officers of the Purchaser at the Effective Time shall be the officers of the Surviving Corporation at and after the Effective Time, in each case until their respective successors are duly elected or appointed and qualified.

2.6. Conversion of Securities.

At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, the Company or the holders of any of the following securities:

(a) Each Share issued and outstanding immediately prior to the Effective Time (other than any Shares to be canceled pursuant to Section 2.6(b)) shall be converted automatically into the right to receive an amount equal to the Per Share Amount in cash (the 'Merger Consideration ") payable after reduction for any applicable tax withholding, without interest, to the holder of such Share, upon surrender, in the manner provided in Section 2.9, of the certificate that formerly evidenced such Share;

(b) Each Share held in the treasury of the Company and each Share owned by Purchaser, Parent or any direct or indirect wholly owned Subsidiary of Parent or of the Company immediately prior to the Effective Time shall be canceled and retired and shall cease to exist without any conversion thereof and no payment or distribution shall be made with respect thereto; and

(c) Each share of common stock of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of Common Stock, par value $.001 per share, of the Surviving Corporation.

2.7. Dissenting Shares.

Notwithstanding anything in this Agreement to the contrary, those Shares which are held by stockholders who have properly complied with the provisions of
Section 262 of the Delaware Law with respect to appraisal rights ("Dissenting Shares") shall not be converted into the right to receive the Merger Consideration as provided in Section 2.6(a) hereof, but the holders of

Dissenting Shares shall be entitled to receive such consideration as shall be determined pursuant to Section 262 of the Delaware Law; provided, that, if, pursuant to the Delaware Law, any such holder shall have failed to perfect or shall withdraw or lose such holder's right to appraisal and payment in accordance with the Delaware Law, such holder's Shares shall thereupon be deemed to have been converted as of the Effective Time into the right to receive the Merger Consideration, without any interest thereon, as provided in Section 2.6(a), and such Shares shall no longer be Dissenting Shares. The Company (and after the Effective Time, the Surviving Corporation) shall give Parent and Purchaser (A) prompt notice of any written demands for appraisal, withdrawals of demands for appraisal and any other related instruments received by the Company or the Surviving Corporation, as the case may be, and (B) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal. The Company (and, after the Effective Time, the Surviving Corporation) will not voluntarily make any payment with respect to any demands for appraisals and will not, without the prior written consent of Parent, settle or offer to settle any such demand.

2.8. Employee Stock Options.

The Company will use its reasonable best efforts to obtain from each holder of a stock option (a "Company Stock Option") outstanding, whether or not exercisable at the Effective Time under the Company's Stock Option Plan and Directors Stock Option Plan (the "Company Stock Option Plans"), such holder's agreement that such option shall be canceled by the Company immediately prior to the Effective Time. Each holder of a canceled Company Stock Option shall be entitled to receive at the Effective Time or as soon as practicable thereafter from the Company in consideration for the cancellation of such Company Stock Option an amount (the "Option Spread") equal to the product of (i) the number of Shares previously subject to such Company Stock Option and (ii) the excess, if any, of the Per Share Amount over the exercise price per share of Company Common Stock previously subject to such Company Stock Option. Each holder of a Company Stock Option shall also be given the right to tender such options, whether or not exercisable, pursuant to the Offer and to receive the Option Spread pursuant to the Offer; and each holder of Warrants referred to in Section 3.3 shall also be given the right to tender such Warrants pursuant to the Offer and to receive an amount equal to the product of(i) the number of Shares which may be purchased on exercise of the Warrants and (ii) the excess, if any, of the Per Share Amount over the per share exercise price of the Warrants. In any such case, such payment, after reduction for applicable tax withholding, if any, shall be made in cash. Each holder of a Company Stock Option or Warrants shall be given an opportunity to submit a Form W-9 and/or whatever other forms may be necessary to prevent any tax from being withheld from the amounts otherwise payable to such holder hereunder. The Company shall take all actions necessary and appropriate so that all stock option or other equity based plans maintained with respect to the Shares, including the Company Plans, shall terminate as of the Effective Time and the provisions in any other Benefit Plan providing for the issuance, transfer or grant of any capital stock of the Company shall be deleted as of the Effective Time.

2.9. Surrender of Shares; Stock Transfer Books.

(a) Prior to the Effective Time, Purchaser shall designate a bank to act as its paying agent, who shall be reasonably satisfactory to the Company (the "Paying Agent"), who shall also act as agent for the holders of Shares in connection with the Merger to receive the funds to which holders of Shares shall become entitled pursuant to Section 2.6(a). Prior to the Effective Time, Purchaser shall deposit with the Paying Agent sufficient funds to pay the Merger Consideration in respect of all of the Shares. Such funds may be invested by the Paying Agent as directed by the Surviving Corporation only in overnight or other investments which are available on demand, which are obligations of or guaranteed by the United States of America or of any agency thereof and backed by the full faith and credit of the United States of America, or in funds the assets of which consist only of such investments.

(b) Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each person who was, at the Effective Time, a holder of record of Shares entitled to receive the Merger Consideration pursuant to
Section 2.6(a) a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent) and instructions for use in effecting the surrender of the certificates evidencing the certificates evidencing the Shares (the "Certificates") pursuant to such letter of transmittal. Upon surrender to the Paying Agent of a Certificate, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions in accordance with standard market practices, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each Share formerly evidenced by such Certificate, after reduction of any applicable withholding tax and such Certificate shall then be canceled. No interest shall accrue or be paid on the Merger Consideration payable upon the surrender of any Certificate for the benefit of the holder of such Certificate as long as the Merger Consideration is made available as provided in this Section. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is registered on the stock transfer books of the Company, it shall be a condition of payment that the Certificate so surrendered shall be endorsed properly or otherwise be in proper form for transfer and that the person requesting such payment shall have paid all transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the reasonable satisfaction of the Surviving Corporation that such taxes either have been paid or are not applicable.

(c) At any time following six months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds which were deposited with the Paying Agent and not disbursed to holders of Shares (including interest and other income received by the Paying Agent in respect of all funds made available to it), and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat and other similar laws) only as general creditors thereof with respect to any Merger Consideration that may be payable upon due surrender of the Certificates

held by them. Notwithstanding the foregoing, none of Parent, the Surviving Corporation or the Paying Agent shall be liable to any holder of a Share for any Merger Consideration delivered in respect of such Share to a public official pursuant to any abandoned property, escheat or other similar law.

(d) At the close of business on the day of the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of Shares on the records of the Company. From and after the Effective Time, the holders of Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares except as otherwise provided herein or by applicable law.

(e) Parent and/or the Surviving Corporation shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts, if any, as Parent and/or the Surviving Corporation is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state or local tax law. To the extent that amounts are so withheld by Parent and/or the Surviving Corporation and properly paid over to the appropriate tax authorities, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Parent and/or the Surviving Corporation.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to Parent and Purchaser that, except as set forth in a disclosure schedule of the Company dated as of the date hereof and referencing this Agreement ("Company Disclosure Schedule"):

3.1. Organization and Qualification; Subsidiaries.

Each of the Company and each Subsidiary of the Company is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has the requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Each of the Company and each Subsidiary is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Material Adverse Effect. A true and complete list of all the Subsidiaries, together with the jurisdiction of incorporation of each Subsidiary and the percentage of the outstanding capital stock of each Subsidiary owned by the Company and each other Subsidiary, is set forth in the Company Disclosure Schedule. Except as disclosed in such Schedule, the Company and its Subsidiaries do not directly or indirectly own any equity or similar interest in, or any interest convertible into or

exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity.

3.2. Certificate of Incorporation and By-laws.

The Company has heretofore furnished to Parent a complete and correct copy of the Certificate of Incorporation and the By-laws or equivalent organizational documents, each as amended to date, of the Company and each Subsidiary. Such Certificates of Incorporation and By-Laws or equivalent organizational documents are in full force and effect, and neither the Company nor any Subsidiary is in violation of any provision thereof.

3.3. Capitalization.

The authorized capital stock of the Company consists of 70,000,000 Shares of common stock and 30,000,000 shares of undesignated preferred stock. As of the date hereof, (i) 10,078,838 Shares are issued and outstanding, all of which are duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights, (ii) no shares of preferred stock of the Company are issued or outstanding and (iii) 692,358 shares of Common Stock are issuable on exercise of outstanding stock options granted pursuant to the Company's Plans, and (iv) 15,950 shares of Common Stock are issuable upon exercise of warrants (the "Warrants"). Except as set forth above, no shares of capital stock or other equity securities of the Company are issued or outstanding. There are no bonds, debentures, notes or other indebtedness or other securities of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of the Company may vote. Except as contemplated by this Agreement, there are no shareholder, voting trust, or other agreements or understandings to which the Company or any of its Subsidiaries is a party or to which any of them are bound, or, to the knowledge of the Company, any irrevocable proxies, relating to the voting of any shares of the capital stock or other equity securities of the Company or any of its Subsidiaries. Except as set forth in this Section or in the Company Disclosure Schedule, there are no options, warrants or other rights relating to the capital stock of the Company or any Subsidiary obligating the Company or any Subsidiary to issue or sell any shares of capital stock of, or other equity interests in, the Company or any Subsidiary. All shares of Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. There are no commitments, understandings, restrictions or arrangements obligating the Company to purchase, redeem or acquire, nor is the Company party to any agreement granting preemptive or registration rights relating to, shares of capital stock of the Company.

3.4. Authority Relating to this Agreement.

The Company has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Transactions. The execution and delivery of this Agreement by the Company and the consummation by the Company of the Transactions have been duly and validly authorized by all necessary corporate

action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement and to consummate the Transactions (other than, with respect to the Merger, the approval and adoption of this Agreement by the holders of two-thirds of the then outstanding Shares if and to the extent required by applicable law, and the filing and recording of appropriate merger documents as required by Delaware Law). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Parent and Purchaser, constitutes the legal, valid and binding obligation of the Company.

3.5. No Conflict; Required Filings and Consents.

(a) The execution and delivery of this Agreement by the Company do not, and the performance of this Agreement and the consummation of the Transactions by the Company will not, (i) conflict with or violate the Certificate of Incorporation or By-laws or equivalent organizational documents of the Company or any Subsidiary, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any Subsidiary or by which any property or asset of the Company or any Subsidiary is bound or affected or (iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any right of termination, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company or any Subsidiary pursuant to, any note, bond, mortgage, indenture, contract, agreement, license, permit, franchise or other instrument or obligation, other than any such conflicts, violations, breaches or defaults that would not, individually or in the aggregate, have a Material Adverse Effect.

(b) The execution and delivery of this Agreement by the Company do not, and the performance of this Agreement and the consummation of the Transactions by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Authority, except for applicable requirements, if any, of (i) the Exchange Act (including the filing of a Schedule 14d-9), (ii) state securities or "blue sky" laws ("Blue Sky Laws"), (iii) the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), (iv) filing and recording of appropriate merger documents as required by Delaware Law, and (v) other filings, consents, approvals, authorizations or permits, the absence of which will not materially affect the ability of the parties to carry out the Transactions on the terms contemplated hereby or otherwise prevent the Company from performing its obligations under this Agreement or result in a Material Adverse Effect.

3.6. SEC Filings; Financial Statements.

(a) The Company has filed all forms, reports and documents required to be filed by it with the SEC since December 31, 1996 and has heretofore made available to Parent, in the form filed with the SEC, (i) its Annual Reports on Form 10-K for the fiscal years ended December 31, 1996 and 1997, (ii) all proxy statements relating to the Company's meetings of stockholders (whether annual or special) held since December 31, 1996 and (iii) all other forms

and reports filed by the Company with the SEC since December 31, 1996 (the forms, reports and other documents referred to in clauses (i), (ii) and (iii) above being referred to herein, collectively, as the "SEC Reports"). The SEC Reports filed prior to the date of this Agreement complied, and the SEC Reports filed with the SEC on or after the date of this Agreement (the "Subsequent SEC Reports") will comply, with the requirements of the Exchange Act, as applicable, and the rules and regulations thereunder. None of the SEC Reports (including the financial statements included therein) as of such dates contained, and none of the Subsequent SEC Reports (including the financial statements to be included therein) will contain, any untrue statement of a material fact or omitted or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. No Subsidiary is required to file any form, report or other document with the SEC.

(b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and each fairly presented the consolidated financial position, results of operations and changes in financial position of the Company and the Subsidiaries as at the respective dates thereof and for the respective periods indicated therein (except as otherwise noted therein and subject, in the case of unaudited statements, to the absence of footnotes and normal and recurring year-end adjustments).

(c) Except as and to the extent set forth on the consolidated balance sheet of the Company and its Subsidiaries as at December 31, 1997, including the notes thereto (the "1997 Balance Sheet"), or the interim unaudited balance sheet of the Company and its Subsidiaries as at June 30, 1998 (the "Interim Balance Sheet"), the Company nor any Subsidiary has any liability or obligation of any nature (whether accrued, absolute, contingent or otherwise), whether or not required to be reflected on a balance sheet and the notes thereto prepared in accordance with generally accepted accounting principles, except for liabilities and obligations (i) incurred in the ordinary course of business consistent with past practice since June 30, 1998 and not in contravention of this Agreement or
(ii) that would not, individually or in the aggregate, have a Material Adverse Effect.

3.7. Absence of Certain Changes or Events.

From December 31, 1997 through the date hereof, except as disclosed in any SEC Report or reflected in the Interim Balance Sheet, there has not been (i) a Material Adverse Effect, (ii) any material change by the Company in its accounting methods, principles or practices, except as may have been required by a change in generally accepted accounting principles, (iii) any entry by the Company or any Subsidiary into any contract material to the Company and the Subsidiaries, taken as a whole, except for contracts relating to the establishment of new locations by the Company, copies of which have been made available to the Purchaser, or contracts otherwise entered into in the ordinary course of business consistent with past practice, (iv) any

declaration, setting aside or payment of any dividend or distribution in respect of any capital stock of the Company or any redemption, purchase or other acquisition of any of its securities, (v) any increase in or establishment of any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option, stock purchase or other employee benefit plan, or any other increase in the compensation payable or to become payable to any officers or key employees of the Company or any Subsidiary, except in the ordinary course of business consistent with past practice, (vi) any adjustment, split, combination or reclassification any of its capital stock or issuance or authorization for the issuance of any other securities as a dividend on, in lieu of or in substitution for shares of its capital stock; (vii) any event, any condition, event or occurrence which, individually or in the aggregate, would have a Material Adverse Effect, (viii) any condition, event or occurrence in respect of the Company which could reasonably be expected to prevent the Company from consummating the transactions contemplated by this Agreement; (ix) any event which, if it had taken place following the execution of this Agreement, would not otherwise have been permitted by Section 5.1 without the prior consent of Parent.

3.8. Absence of Litigation.

Except as disclosed in the SEC Reports, as of the date hereof, there is no claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary, or any property or asset of the Company or any Subsidiary, before any court, arbitrator or administrative, governmental or regulatory authority or body that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect or prevent the Company from consummating the transactions contemplated by this Agreement. Neither the Company nor any Subsidiary nor any property or asset of the Company or any Subsidiary is subject to any order, writ, judgment, injunction, decree, determination or award having, individually or in the aggregate, a Material Adverse Effect.

3.9. Labor Matters; Employee Benefit Plans.

(a) Except as disclosed in the Company Disclosure Schedule, (1) neither the Company nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization representing any of its employees, (2) there is no (A) arbitration, unfair labor practice, investigation, employment discrimination or other labor or employment related charge, complaint or claim against the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened before any Governmental Authority that would have a Material Adverse Effect, or (B) adjudication on such matters by any Governmental Authority that has or would have a Material Adverse Effect, and (3) there is no labor strike, dispute, slowdown or stoppage, or, to the knowledge of the Company, any union organizational efforts pending or threatened against or involving any employees of the Company or any of its Subsidiaries.

(b) The Company Disclosure Schedule sets forth each agreement, arrangement, plan, or policy maintained or required to be contributed to by the Company or any Subsidiary that involves (i) any pension, retirement, deferred compensation, bonus, stock option,

restricted stock, stock purchase, health, welfare, or incentive plan, or (ii) welfare or "fringe" benefits, including vacation, severance, disability, medical, dental, life and other insurance, sick leave or family leave, or other employee benefits (the "Plans'). Copies of all documents creating or evidencing such Plans have been delivered to Purchaser.

(c) Each Plan has been administered in material compliance with its terms and, to the extent applicable, with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or other law applicable to any Plan. Each Plan that is intended to qualify under Section 401(a) or Section 501(c)(9) of the Code has received a favorable determination letter from the Internal Revenue Service or is a standardized prototype plan which has received a verification letter from the Internal Revenue Service (a copy of which has been provided to Purchaser) and related trusts have been determined to be exempt from taxation. Nothing has occurred that would cause and no action or proceeding is pending or threatened which, to the knowledge of Company, would be likely to result in the loss of such exemption or qualification

(d) There has been no prohibited transaction (within the meaning of
Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan that could reasonably be expected to result in a material liability to the Company or any Subsidiary. Neither the Company nor any Subsidiary is currently liable or has previously incurred any liability for any material tax or penalty arising under Section 4971, 4972, 4979, 4980 or 4980B of the Code or Section 502(c) of ERISA, and no fact or event exists which could reasonably be expected to give rise to any such liability. The Company has not incurred any material liability under, arising out of or by operation of Title IV of ERISA (other than liability for premiums to the Pension Benefit Guaranty Corporation arising in the ordinary course), including any material liability in connection with the termination or reorganization of any employee pension benefit plan subject to Title IV of ERISA, and no fact or event exists which is reasonably expected to give rise to any such liability. No complete or partial termination has occurred within the five years preceding the date hereof with respect to any Plan. No reportable event (within the meaning of Section 4043 of ERISA) has occurred or is expected to occur with respect to any Plan subject to Title IV of ERISA (other than a reportable event with respect to which the 30 day notice requirement has been waived.)

(e) No Plan is or at any time within the seven calendar years preceding the date of this Agreement has been a "multiemployer plan" within the meaning of Section 3(37) of ERISA. No Plan has been subject to Title IV of ERISA.

(f) There is no contract, agreement, plan or arrangement covering any employee or former employee of the Company or any Subsidiary that, individually or collectively, (i) may give rise to the payment of any amount that would not be deductible pursuant to the terms of Section 280G of the Code, or (ii) which creates or accrues benefits or payments by virtue of a change of control of the Company or any Subsidiary, including, without limitation, as a result of the transactions contemplated by this Agreement, except, in the case of clause (ii) of this subparagraph, as provided in the Company Stock Option Plans.

3.10. Offer Documents; Schedule 14D-9; Proxy Statement.

The information to be included in the Schedule 14D-9 and any information supplied by the Company in writing expressly for inclusion or incorporation by reference in the Offer Documents shall not, at the respective times the Schedule 14D-9, the Offer Documents or any amendments or supplements thereto are filed with the SEC or are first published, sent or given to stockholders of the Company or at the expiration date or the date of purchase, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. The information included or incorporated by reference in the proxy statement to be sent to the stockholders of the Company in connection with the Stockholders Meeting (as hereinafter defined) will not, and the information statement to be sent to such stockholders, as appropriate (such proxy statement or information statement, as amended or supplemented, being referred to herein as the "Proxy Statement"), will not, at the date the Proxy Statement (or any amendment or supplement thereto) is first mailed to stockholders of the Company, at the time of the Stockholders Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which shall have become false or misleading.
Notwithstanding the foregoing, the Company makes no representation or warranty with respect to information supplied by Parent or Purchaser in writing expressly for inclusion in the Schedule 14D-9 or Proxy Statement. The Schedule l4D-9 and the Proxy Statement shall comply in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder.

3.11. Taxes.

(a) The Company and each Subsidiary and any consolidated, combined, unitary or aggregate group for Tax purposes of which the Company or a Subsidiary is or has been a member (a "Consolidated Group") (i) has filed or caused to be filed with the appropriate Government entity all income Tax Returns and all other material Tax Returns which have been required to be filed prior to the date of this Agreement (taking into account any extensions of the time for filing such tax returns) and (ii) has paid in full all material Taxes due and payable (whether or not shown on such Tax Returns), except to the extent such liabilities are reflected on the Interim Balance Sheet. All income and other Tax Returns filed or caused to be filed by the Company or a Subsidiary or a Consolidated Group are correct and complete, and accurately reflect taxable income (or other measure of Tax), in all material respects.

(b) The Company and each Subsidiary has complied with all laws relating to the withholding of Taxes and the payment thereof and has timely and properly withheld from employee wages and paid over to the proper government entity all amounts required to be

withheld and paid over under applicable law, except to the extent that failure to do so would not have a Material Adverse Effect.

(c) Neither the Company nor any Subsidiary has waived any statute of limitations in respect of any material Tax Returns or agreed to any extension of time with respect to a material Tax assessment or deficiency.

(d) True, correct and complete copies of the federal and state income Tax Returns of the Company and the Subsidiaries for each of the fiscal years ended December 31, 1994 through December 31, 1997 have been delivered to Parent.

(e) The accruals for Taxes reflected in the Interim Balance Sheet adequately reflect, in accordance with generally accepted accounting principles, the Company's estimates of the liability of the Company and the Subsidiaries for Taxes for periods prior to the date of such Interim Balance Sheet.

(f) Except as disclosed in the Company Disclosure Schedule:

(i) no material claim for unpaid Taxes has become a lien against the property of the Company or any of its Subsidiaries or is being asserted against the Company or any of its Subsidiaries.

(ii) no audit, examination or similar proceeding with respect to Taxes or Tax Returns (a "Tax Proceeding") of the Company or any of its Subsidiaries is being conducted by a Tax authority and neither the Company nor any Subsidiary has received any notice of any threatened Tax Proceeding;

(iii) no consent under Section 341(f) of the Code has been filed with respect to the Company or any of its Subsidiaries;

(iv) neither the Company nor any of its Subsidiaries has made a payment, is obligated to make a payment or is a party to any agreement, option or arrangement that would result, separately or in the aggregate, in the actual or deemed payment (or other compensatory event) by the Company or a Subsidiary that would be classified as an "excess parachute payments" within the meaning of Section 2800 of the Code;

(v) none of the Company or its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code; and

(vi) neither the Company nor any Subsidiary is a party to any agreement providing for the allocation or sharing of Taxes with any person other than the Company or a Subsidiary;

3.12. Compliance with Laws.

(a) Each of the Company and its Subsidiaries holds or has received such certificates (including certificates of need), provider agreements, certifications, permits, consents, approvals, orders, clearances, licenses and authorizations (the "Company Licenses") as are necessary to conduct their respective businesses in the manner currently conducted, all of which are valid and in full force and effect, except to the extent that failure to so have or to maintain in full force and effect would not have, individually or in the aggregate, a Material Adverse Effect. The Company and its Subsidiaries are in compliance with their respective obligations under the Company Licenses, with only such exceptions as, individually or in the aggregate, would not have a Material Adverse Effect.

(b) The Company and its Subsidiaries are, to the extent applicable to their operations, (i) eligible to receive payment under Titles XVIII and XIX of the Social Security Act, (ii) providers under existing provider agreements with the Medicare program through applicable intermediaries and with each state Medicaid program under which they have been providers at any time since December 31, 1996 and (iii) in compliance with the conditions of participation in the Medicare program, except where such inability in the case of either items (i) or
(ii) or non-compliance in item (iii) does not have a Material Adverse Effect.

(c) The Company and each of its Subsidiaries have filed all required cost reports and other required claims and governmental filings with respect to Medicare and each state Medicaid program in which they participate, all of which were, when filed or as they have been subsequently amended, complete and correct, except to the extent that such failure to file or failure to be complete and correct would not have a Material Adverse Effect. The Company has made available to Parent complete and correct copies of all such cost reports, claims, governmental filings, audits and schedules prepared or issued by, or filed with, any Governmental Authority or private payor with respect to the operations of the Company and its Subsidiaries since December 31, 1996.

(d) Except as set forth in the Company Disclosure Schedule, there is no suit, proceeding, investigation or review pending or, to the knowledge of the Company, threatened, by any Governmental Authority or any other Person (including, without limitation, any qui tam suit) which relates to or which, if determined adversely to the Company, would adversely affect any Company License or which alleges any violation by the Company or any of its Subsidiaries of any law, ordinance, regulation or court ruling governing the operation of the Company and its Subsidiaries as health care providers.

(e) To the knowledge of the Company, the businesses of the Company and its Subsidiaries are not being conducted in violation of any law, ordinance, regulation or court ruling of any Governmental Authority (including, without limitation, laws, rules and manual

provisions pertaining to reimbursement of the Company and it Subsidiaries for services rendered, the federal False Claims Act (31 U.S.C. (S)3729) or any other applicable federal or state false claim or fraud law, the federal anti-kickback statute (42 U.S.C. (S)1320a-7b(b)), any applicable state anti-kickback law, the federal Ethics in Patient Referrals Act (42 U.S.C. (S)1395nn, commonly known as the Stark Act) or any applicable state self-referral law), except for violations which would not, individually or in the aggregate, have a Material Adverse Effect.

3.13. Exclusion.

To the knowledge of the Company, neither the Company nor any of its Subsidiaries employs or contracts with any Person who or which has been excluded from participation in a Federal Health Care Program (as defined in 42 U.S.C. (S)1320a-7b(f)) where such action could reasonably serve as a basis for the Company's or any of its Subsidiaries' suspension or exclusion from the Medicare or any state Medicaid program.

3.14. Accounts Receivable.

Since December 31, 1997, the Company has not changed any material principle or practice with respect to the recordation of accounts receivable or the calculation of reserves therefor, or any material collection, discount or write- off policy or procedure.

3.15. Brokers.

No broker, finder or investment banker (other than WP&Co.) is entitled to any brokerage, finder's or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of the Company. The fees and expenses of WP&Co. will be paid by the Company pursuant to a fee agreement between the Company and WP&Co., a copy of which has been provided to the Parent.

3.16. Real Property and Leases.

Except for any matters which would not have a Material Adverse Effect:

(a) The Company and its Subsidiaries have good, valid and marketable title to, or valid leasehold interests in, all of their properties and assets as reflected on the Interim Balance Sheet or acquired thereafter, except for assets sold in the ordinary course of business since the date of the such Balance Sheet, free and clear of all mortgages, pledges, liens, security interests, conditional and installment sale agreements, encumbrances, charges or other claims of third parties of any kind (collectively, "Liens"), other than (A) Liens for current taxes and assessments not yet past due, (B) inchoate mechanics' and materialmen's Liens for construction in progress, (C) workmen's, repairmen's, warehousemen's and carriers' Liens arising in the ordinary course of business of the Company or such Subsidiary consistent with such practice, and (D) all immaterial matters of record, Liens and other imperfections of title and encumbrances (collectively, "Permitted Liens"). To the Company's knowledge, no such real property leased by the Company or any Subsidiary is subject to any governmental decree or

order to be sold nor is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, to the best knowledge of the Company, has any such condemnation, expropriation or taking been proposed.

(b) The Company has provided to the Parent true and complete copies of each of its Long Term Acute Care Hospital Leases, as in effect on the date of this agreement pursuant to which it operates its health care facilities (the "LTAC Leases",), all of which are in full force and effect. To the knowledge of the Company, the Company is in compliance with all of its obligations under each of the LTAC Leases.

(c) All other leases of real property leased for the use or benefit of the Company or any Subsidiary to which the Company or any Subsidiary is a party requiring rental payments in excess of $150,000 during any calendar year, and all amendments and modifications thereto, are in full force and effect and have not been modified or amended, and there exists no default under any such lease by the Company or any Subsidiary, nor any event which with notice or lapse of time or both would constitute a default hereunder by the Company or any Subsidiary.

(d) Each of the Company and its Subsidiaries has all permits necessary to own or operate its properties, and no such permits will be required, as a result of the Merger or the other transactions contemplated hereby, to be issued after the Closing in order to permit the Company, following the Merger, to continue to own or operate such properties, other than any such permits which are ministerial in nature.

3.17. Environmental Matters.

Except for such matters as would not individually or in the aggregate have a Material Adverse Effect, to the knowledge of the Company:

(a) the Company is in compliance with all applicable Environmental Laws, and the Company has not received any formal notice or demand from a government entity, citizens' group or other Person which is currently pending, alleging a violation of or liability or responsibility under any Environmental Law;

(b) the Company has all permits and other authorizations required under Environmental Laws, and the Company is in compliance with such permits and other authorizations;

(c) no conditions were created by the Company at any facility currently or formerly owned, leased or operated by the Company during the period of the Company's ownership, lease or operation of such facility that require remediation under any Environmental Law;

(d) the Company has not received any formal notice, demand or request for information which is currently pending under any Environmental Law as a result of the offsite disposal of any hazardous material or waste by the Company;

(e) the Company has not entered into or agreed to any consent decree, order or agreement under any Environmental Law, and the Company is not subject to any material judgment, decree, order or other material requirement relating to compliance with any Environmental Law or to investigation, cleanup, remediation or removal of regulated substances under any Environmental Law;

(f) the Company has provided Parent and Purchaser copies of all environmental inspections, investigations, studies, audits, tests, reviews or other analysis conducted in relation to the Company and any properties now or previously-owned or leased by tile Company or its Subsidiaries or the operation of its respective businesses which are in the possession or control of he Company.

3.18. State Takeover Statutes.

The Board of Directors of the Company has approved the Offer, the Merger, this Agreement and other Transactions including agreements with certain holders of Shares as described in Subsection (e) under "Background" above, and no provision of any Takeover Statute will prevent, impair, impede or prevent, any Transaction. Section 203 of Delaware Law is and shall be inapplicable to the Offer, the Merger and, this Agreement and other Transactions, including the Stockholder Agreements.

3.19. Vote Required.

The affirmative vote of the holders of two-thirds of the outstanding Common Stock is the only vote of the holders of any class or series of Company capital stock necessary to approve the Merger, this Agreement or any of the other Transactions, including the Stockholder Agreements.

3.20. Certain Contracts.

(a) The Company Disclosure Schedule includes a list of each contract, agreement, lease, indenture or evidence of indebtedness to which the Company or any Subsidiary is a party (the "Material Contracts") which involves outstanding, contingent, or continuing liability or obligation of or to the Company or a Subsidiary and which (i) involves (A) a guarantee or indemnity involving an obligation in excess of $1,000,000, (B) a power of attorney, (C) a sharing of payments or joint venture, (D) material limitations on the ability of the Company directly or through any of its Subsidiaries to compete in or enter into any line of business or with any person in any geographic area during any period of time (other than limitations set forth in the LTAC Leases), (E) collective bargaining or union representation, (F) a payment obligation in excess of $500,000, or (ii) is not in the ordinary course of business.

(b) Each of the Material Contracts is a valid, binding and enforceable obligation of the Company and, to the knowledge of the Company, the other parties thereto. Except as indicated on the Company Disclosure Schedule,
(1) the Company and its Subsidiaries are not, and (ii) to the knowledge of Company, no other party to a Material Contract is, in material default under or in material breach or violation of any Material Contract, and no event

has occurred that, through the passage of time or the giving of notice, or both, would constitute, such a material default, breach or violation.

3.21. Intellectual Property.

(a) The Company Disclosure Schedule includes a list of all registered trademarks, service marks, copyrights and patents, and all applications therefor, included in the Intellectual Property of the Company and its Subsidiaries, specifying as to each, as applicable: (i) the nature of such Intellectual Property; (ii) the owner of such Intellectual Property; and (iii) the jurisdictions by o in which such Intellectual Property has been issued or registered or in which an application for such issuance or registration has been filed, including the respective registration or application numbers. Such Schedule contains a list of all material licenses, sublicenses and other agreements as to which the Company or its Subsidiaries is a party and pursuant to which any Person is authorized to use the Intellectual Property or any other material rights of the Company or its Subsidiaries with respect to intellectual property.

(b) Except as disclosed on the Company Disclosure Schedule, (i) there has been no claim made against the Company or any of its Subsidiaries or, to the Company and its Subsidiaries' knowledge, threatened asserting the invalidity, misuse or unenforceability of any of the Intellectual Property; (ii) the Company is not aware of any infringement or misappropriation of any of the Intellectual Property; and (iii) to its knowledge, the Company has not infringed or misappropriated any intellectual property or proprietary right of any other entity.

3.22. Opinion of Financial Advisor.

The Company has received the opinion of WP&Co. dated the date of this Agreement, to the effect that, based on, and subject to, the various assumptions and qualifications set forth in such opinion, as of the date thereof, the consideration to be received by the holders of Shares pursuant to each of the Offer and the Merger is fair to the holders of Shares from a financial point of view. The Company has delivered a copy of such opinion to the Parent.

3.23. Affiliate Transactions.

Except as disclosed in the Company Disclosure Schedule, no Related Party has borrowed money from or loaned money to the Company which remains outstanding in an aggregate amount in excess of $50,000, or entered into any material contractual arrangements with the Company which remains in effect. As used herein, a "Related Party" means any of the officers or directors of the Company, or any business or entity in which the Company or, to the knowledge of the Company, any such person or any affiliate or associate of any such persons has any direct or indirect material interest.

3.24. Prior Negotiations.

The Company, WP&Co. and the Company's other advisors and representatives have not been involved in substantive discussions with any group or person (or any of their respective

affiliates or associates) or their representatives, or furnished material confidential information to any such group or persons (or any of their respective affiliates or associates) or their representatives, in connection with a possible takeover proposal except for such groups or persons which have executed and delivered to the Company a customary confidentiality agreement. The Company will not waive its rights under any standstill agreements entered into with any such persons except in connection with actions taken in accordance with
Section 6.5(b).

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER

Parent and Purchaser hereby, jointly and severally, represent and warrant to the Company that:

4.1. Corporate Organization.

Each of Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing or in good standing or to have such power, authority and governmental approvals would not, individually or in the aggregate, have a material adverse effect on the ability of Parent or Purchaser to perform their obligations hereunder, or prevent or materially delay the consummation of the Transactions.

4.2. Authority Relating to this Agreement.

Each of Parent and Purchaser has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Transactions. The execution and delivery of this Agreement by Parent and Purchaser and the consummation by Parent and Purchaser of the Transactions have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of Parent or Purchaser are necessary to authorize this Agreement or to consummate the Transactions (other than, with respect to the Merger, the filing and recording of appropriate merger documents as required by Delaware Law). This Agreement has been duly and validly executed and delivered by Parent and Purchaser and, assuming the due authorization, execution and delivery by the Company, constitutes the legal, valid and binding obligations of each of Parent and Purchaser enforceable against each of Parent and Purchaser in accordance with their terms.

4.3. No Conflict; Required Filings and Consents.

(a) The execution and delivery of this Agreement by Parent and Purchaser do not, and the performance of this Agreement by Parent and Purchaser will not, (i) conflict with or violate the Certificate of Incorporation or By- laws of either Parent or Purchaser, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent ~r Purchaser

or by which any property or asset of either of them is bound or affected, or
(iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of Parent or Purchaser pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or Purchaser is a party or by which Parent or Purchaser or any property or asset of either of them is bound or affected, except for any such violations, breaches, defaults or other occurrences which would not, individually or in the aggregate, have a material adverse effect on the ability of Parent or Purchaser to perform their obligations hereunder, or prevent or materially delay the consummation of the Transactions.

(b) The execution and delivery of this Agreement by Parent and Purchaser do not, and the performance of this Agreement by Parent and Purchaser will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except for applicable requirements, if any, of (i) the Exchange Act and rules and regulations thereunder, (ii) Blue Sky Laws (iii) the pre-merger notification requirements of the HSR Act, (iv) filing and recording of appropriate merger documents as required by Delaware Law and (v) other filings, consents, approvals, authorizations or permits, the absence of which will not materially effect the ability of Parent or Purchaser to carry out the transactions on the terms contemplated hereby or otherwise prevent Parent or Purchaser from performing their obligations hereunder.

4.4. Financing.

Purchaser has sufficient cash or other sources of available funds to enable it to make payment of the aggregate Per Share Amount, Merger Consideration and any other amounts to be paid by it hereunder. The Purchaser has provided to the Company a written commitment confirming the availability of such funds. At the request of the Company from time to time, the Purchaser will provide to the Company further written confirmation of the availability of such funds and such related information as the Company may reasonably request.

4.5. Offer Documents; Proxy Statement.

The information to be included in the Offer Documents and any information supplied by Parent and Purchaser in writing expressly for inclusion in the Schedule 14D-9, shall not, at the time the Offer Documents, the Schedule 14D-9 or any amendments or supplements thereto are filed with the SEC or are first published, sent or given to stockholders of the Company or at the expiration date or date of purchase, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. The information supplied by Parent for inclusion in the Proxy Statement will not, on the date the Proxy Statement (or any amendment or supplement thereto) is first mailed to stockholders of the Company, at the time of the Stockholders Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances

under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which shall have become false or misleading. Notwithstanding the foregoing, Parent and Purchaser make no representation or warranty with respect to information supplied by the Company in writing expressly for inclusion in, or information derived from the Company's public SEC filings which is incorporated by reference in, the Offer Documents. The Offer Documents shall comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations thereunder.

4.6. Brokers.

No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of Parent or Purchaser.

4.7. Ownership of Company Common Stock.

Except for Shares owned by Plans maintained by Parent or contributed to by Parent to any of its subsidiaries (the "Parent Benefit Plans"), neither Parent nor, to its knowledge, any of its affiliates (i) beneficially owns (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, or
(ii) is party to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, in each case, shares of capital stock of the Company.

ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER

5.1. Conduct of Business by the Company Pending the Merger.

Except as contemplated by this Agreement, neither the Company nor any Subsidiary shall, between the date of this Agreement and the Effective Time do any of the following without the prior written consent of Parent:

(a) amend or otherwise change its Certificate of Incorporation or By- laws or equivalent organizational documents;

(b) issue any shares of capital stock of any class of the Company or any Subsidiary, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock of the Company or any Subsidiary (except for the issuance of Shares issuable pursuant to employee stock options outstanding on the date hereof and except in connection with the establishment of new wholly owned subsidiaries for new locations by the Company);

(c) sell, transfer or encumber in any material respect any assets of the Company or any Subsidiary for consideration in excess of $1,000,000 in the aggregate except for transactions relating to the establishment of new locations or modifications or improvements to its existing locations by the Company in the ordinary course of its business, and except for other transactions in the ordinary course of business consistent with past practice provided, however, that the Company shall not sell, transfer or encumber any assets for consideration which, in the opinion of the board, is less than fair value;

(d) declare or pay any dividend or other distribution with respect to any of its capital stock;

(e) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire any of its capital stock;

(f) (i) acquire any corporation, partnership, other business organization or any division thereof, except for the establishment of new wholly owned subsidiaries for new locations by the Company; (ii) except for borrowings under existing credit facilities, incur any indebtedness for borrowed money or issue any debt securities, guarantee any indebtedness for borrowed money or debt securities of another person, issue or sell any warrants or other rights to acquire any debt securities of the Company or any of its Subsidiaries, enter into any "keep well" or other agreement to maintain any financial statement condition of another person (except a Subsidiary) or enter into any arrangement having the economic effect of any of the foregoing, except in the ordinary course of business consistent with past practice, or make any loans, advances or capital contributions to, or investments in, any other person, other than to the Company or any Subsidiary; (iii) authorize capital expenditures which are, in the aggregate, in excess of $500,000 for the Company and the Subsidiaries, except for capital expenditures relating to the establishment of new locations by the Company in the ordinary course of its business, and other capital expenditures in the ordinary course of business consistent with past practice; or (iv) enter into any agreement with respect to any matter set forth in this Section;

(g) except as provided in Section 2.8, increase the compensation payable or to become payable to its current and former officers, directors or employees, except for increases in compensation (including bonuses) of employees of the Company or any Subsidiary of the Company in accordance with past practices, or, other than in accordance with past practices and policies, grant any severance or termination pay to, or enter into any employment or severance agreement with, any current or former director, officer or other employee of the Company or any Subsidiary, or establish, adopt, enter into or materially amend any collective bargaining agreement or benefit plans;

(h) other than as required by generally accepted accounting principles, make any material change to its accounting policies or procedures;

(i) make any material elections or changes in elections for Tax purposes except in accordance with past practice;

(j) pay, discharge or satisfy any claims (including claims of stockholders), liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), except for the payment, discharge or satisfaction (x) of liabilities or obligations in the ordinary course of business consistent with past practice or in accordance with their terms as in effect on the date hereof or (y) of claims settled or compromised to the extent permitted by Section 5.1(k), or waive, release, grant, or transfer any rights of material value or modify or change in any material respect any existing license, lease, contract or other document, other than in the ordinary course of business consistent with past practice;

(k) settle or compromise any litigation (whether or not commenced prior to the date of this Agreement) other than settlements or compromises of litigation (i) where the amount paid in settlement or compromise does not exceed $100,000 and (ii) potential settlements or compromises which are described in the Company Disclosure Schedule;

(l) establish any new lines of credit or other credit facilities or replace any existing credit facilities;

(m) take any action which would make any representation or warranty of the Company in this Agreement subject to a material qualifier untrue or incorrect and any representation or warranty of the Company in this Agreement that is not so qualified untrue or incorrect in any material respect;

(n) adopt a plan of complete or partial liquidation or resolutions providing for or authorizing such a liquidation or a dissolution, merger, consolidation, restructuring, recapitalization or reorganization (subject to the Company's right to take action specifically permitted by Section 6.5(b));

(o) enter into any new collective bargaining agreement or any successor collective bargaining agreement to any collective bargaining agreement disclosed in the Company Disclosure Schedule except in the ordinary course of business;

(p) agree to any modifications to any of the LTAC Leases, or waive any rights under the LTAC Leases, in any respect which would materially and adversely affect the rights of the Company thereunder;

(q) take any action to exempt under or make not subject to (x) Section 203 of Delaware Law or (y) any other Takeover Statute or state law that purports to limit or restrict business combinations or the ability to acquire or vote shares, any person or entity (other than Parent, Purchaser and their affiliates) or any action taken thereby, which person, entity or action would have otherwise been subject to the restrictive provisions thereof and not exempt therefrom except to the extent specifically permitted pursuant to Section 6.5(b);

(r) authorize any of, or commit or agree to take any of, the foregoing actions; or

(s) take any action which would result in the conditions to the Offer or the merger not being satisfied, subject to the Company's right to take such actions specifically permitted by Section 6.5(b).

5.2. Additional Covenants.

After the date hereof and prior to the Effective Time or the earlier termination of this Agreement, unless Parent shall otherwise agree, the Company shall, and shall cause each of its Subsidiaries to:

(a) Conduct their respective businesses in the ordinary and usual course of business consistent with past practice;

(b) Confer with Parent's designated representatives on a regular basis during normal business hours regarding operational matters of a material nature and the general status of the ongoing business of the Company, including matters relating to billing and collections;

(c) Promptly notify Parent of any significant changes in the business, financial condition or results of operation of the Company or its Subsidiaries taken as a whole;

(d) Maintain, with financially responsible insurance companies, insurance on its tangible assets and its business in such amounts and against such risks and losses as are consistent with past practice; and

(e) Use all reasonable best efforts to preserve the business of the Company and .its Subsidiaries and preserve the current relationships of the Company and its Subsidiaries with customers, employees, suppliers and other persons with which the Company or any Subsidiary has material business relations.

ARTICLE VI
ADDITIONAL AGREEMENTS

6.1. Stockholders Meeting.

(a) If required by applicable law in order to consummate the Merger, the Company, acting through the Board, shall, promptly after consummation of the Offer (or promptly after delivery of a Merger Notice as provided in Section 1.3(d) or (e), in accordance with applicable law and the Company's Certificate of Incorporation and By-laws, (i) hold an annual or special meeting of its stockholders as soon as practicable following consummation of the Offer for the purpose of considering and taking action on this Agreement and the Merger (the "Stockholders Meeting") and (ii) in the event a Merger Notice has been delivered and, otherwise, subject to its fiduciary duties under applicable law after receiving the advice of independent counsel, include in the Proxy Statement the recommendation of the Board that the stockholders of the Company approve and adopt this Agreement and the Merger, and use its best efforts to solicit from holders of Shares proxies in favor of this Agreement and the Merger, and

take all other appropriate action to request the vote of the holders of Shares required by Delaware Law to effect the Merger. At the Stockholders Meeting, Parent and Purchaser shall cause all Shares then owned by them and their Subsidiaries to be voted in favor of the approval and adoption of this Agreement and the Merger.

(b) Notwithstanding the foregoing, if the Purchaser shall acquire at least 90 percent of the then outstanding Shares, the parties shall, at the request of Purchaser, subject to Article VII, take all necessary and appropriate action to cause the Merger to become effective, in accordance with Section 253 of Delaware Law, as soon as reasonably practicable after such acquisition, without a meeting of the stockholders of the Company.

6.2. Proxy Statement.

If required by applicable law, as soon as practicable following consummation of the Offer (or the delivery of a Merger Notice as provided in
Section 1.3(d) or (e)), the Company shall file the Proxy Statement with the SEC under the Exchange Act, and shall use all reasonable efforts to have the Proxy Statement cleared by the SEC. Parent, Purchaser and the Company shall cooperate in the preparation of the Proxy Statement, and the Company shall notify Parent of the receipt of any comments of the SEC with respect to the Proxy Statement and of any requests by the SEC for any amendment or supplement thereto or for additional information and shall provide to Parent promptly copies of all correspondence between the Company or any representative of the Company and the SEC. The Company shall (i) give Parent and its counsel the opportunity to review the Proxy Statement prior to its being filed with the SEC; (ii) give Parent and its counsel the opportunity to review all amendments and supplements to the Proxy Statement and all responses to requests for additional information and replies to comments prior to their being filed with, or sent to, the SEC; and
(iii) consider in good faith the comments and information provided by Parent, Purchaser and their counsel with respect thereto. Each of the Company, Parent and Purchaser shall use all reasonable efforts, after consultation with the other parties hereto, to respond promptly to all such comments of and requests by the SEC and to cause the Proxy Statement and all required amendments and supplements thereto to be mailed to the holders of Shares entitled to vote at the Stockholders Meeting at the earliest practicable time.

6.3. Company Board Representation; Section 14(f).

(a) Concurrently with the purchase by Purchaser of Shares pursuant to the Offer, and from time to time thereafter, Purchaser shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Board of the Company as shall give Purchaser representation on the Board of the Company equal to the product of the total number of directors on the Board of the Company (giving effect to the directors elected pursuant to this sentence) multiplied by the percentage that the aggregate number of Shares purchased by Purchaser in the Offer bears to the total number of Shares then outstanding, and the Company shall, at such time, promptly take all actions necessary to cause Purchaser's designees to be appointed as directors of the Company, including increasing the size of the Board of the Company or securing the resignations of incumbent directors or both.

(b) The Company shall promptly take all actions required pursuant to
Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order to fulfill its obligations under this Section 6.3 and shall include in the Schedule 14D-9 such information with respect to the Company and its officers and directors as is required under Section 14(f) and Rule 14f-1 to fulfill such obligations. Parent or Purchaser shall supply to the Company and be solely responsible for any information with respect to either of them and their nominees, officers, directors and Affiliates required by such Section 14(f) and Rule 14f-l. In conjunction with the foregoing, the Company will, at the request the Parent, either increase the size of the Board and/or obtain the resignation of such number of its current directors as is necessary to enable Purchaser's designees to be elected or appointed to the Board.

(c) Following the election of designees of Purchaser pursuant to this
Section 6.3, prior to the Effective Time, any amendment of this Agreement or the Certificate of Incorporation or By-laws of the Company, any termination of this Agreement by the Company, any extension by the Company of the time for the performance of any of the obligations or other acts of Parent or Purchaser or waiver of any of the Company's rights hereunder shall require the concurrence of a majority of the directors of the Company then in office who neither were designated by Purchaser nor are employees of the Company (the "Independent Directors"), or if there is only one Independent Director, the concurrence of such Independent Director. The Company shall use its best efforts to ensure that at least one Independent Director shall remain on the Board until the Effective Time.

6.4. Access to Information; Confidentiality.

(a) From the date hereof to the Effective Time, subject to compliance by the Parent and the Purchaser with paragraph (c) below, the Company shall, and shall cause the Subsidiaries and the officers, directors, employees, auditors and agents of the Company and the Subsidiaries to, afford the officers, employees and agents of Parent and Purchaser, and (subject to such confidentiality arrangements) representatives of entities which have committed or are being asked to commit to provide financing for the Transactions reasonable access at all reasonable times during normal business hours to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company and each Subsidiary, and permit Parent and Purchaser to make such inspections as it may reasonably request (including environmental inspections), and shall furnish Parent and Purchaser all financial, operating and other data and information as Parent or Purchaser, through its officers, employees or agents, may reasonably request.

(b) The Company, Parent and Purchaser each agree to promptly advise each other of any information required to update or correct any documents filed, published or issued by such parties pursuant to the Offer or pursuant to Sections 6.1 or 6.2.

(c) All requests for information and access pursuant to this Section 6.4 shall be directed to David W. Cross, President and Chief Executive Officer of the Company, or to such other persons as he shall specify.

(d) All information obtained by Parent or Purchaser pursuant to this
Section 6.4 shall be kept confidential in accordance with the confidentiality agreement, executed October 7, 1998 (the "Confidentiality Agreement"), between Parent and the Company, which Confidentiality Agreement shall terminate upon the earlier to occur of the acceptance for payment of the shares pursuant to the Offer or the Effective Time.

6.5. No Solicitation of Transactions.

(a) The Company shall, and shall direct and cause its officers, directors, employees, representatives and agents to, immediately cease any discussions or negotiations with any parties that may be ongoing with respect to an Acquisition Proposal (as hereinafter defined). The Company shall not, nor shall it permit any of its Subsidiaries to, nor shall it authorize or permit any of its officers, directors or employees or any representative retained by it or any of its Subsidiaries to, directly or indirectly, (1) solicit, initiate or encourage (including by way of furnishing information), or take any other action designed or reasonably likely to facilitate, any inquiries or the making of any proposal which constitutes, or may reasonably be expected to lead to, any Acquisition Proposal or (ii) participate in any discussions or negotiations regarding any Acquisition Proposal, provided, that, at any time prior to the earlier to occur of(1) the acceptance for payment of the Shares pursuant to the Offer or (2) the Stockholders Meeting, the Company may, upon receipt by the Company of a written Acquisition Proposal which was not solicited after the date hereof and after consulting with outside counsel, subject to compliance with
Section 6.5(b) and (c),

(x) furnish information with respect to the Company to any person pursuant to a customary confidentiality agreement (as determined by the Company after receipt of written advice from its outside counsel), and

(y) participate in negotiations regarding an Acquisition Proposal,

if the Board determines in good faith that such Acquisition Proposal is reasonably likely to result in a Superior Proposal and the Company notifies the Parent and Purchaser in writing that it is taking such action.

(b) Except as set forth in this Section 6.5, neither the Board nor any committee thereof shall (i) withdraw or modify in a manner adverse to Parent or Purchaser, or publicly propose or announce an intention to withdraw or modify adversely, or fail to make the approval or recommendation by the Board or such committee of the Offer, the Merger, the Transactions or this Agreement, (ii) approve or recommend any Acquisition Proposal or (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement related to any Acquisition Proposal with any Person other than the Parent or its Affiliates. Notwithstanding the foregoing, if, prior to the Stockholders Meeting, the Board determines in good faith (after consulting with outside counsel) that the fiduciary duties of the Board require it to do so, in respect of an Acquisition Proposal, which is unsolicited and received following the date hereof, the Board may (A) withdraw or modify its recommendation of the Offer, the Merger, the Transactions or this Agreement, or (B) approve or

recommend a Superior Proposal or (C) terminate this Agreement and, if it so chooses, cause the Company to enter into any agreement with respect to such Acquisition Proposal. The Company may take any of the foregoing actions pursuant to the preceding sentence only if (i) Purchaser shall not have accepted Shares for payment pursuant to the Offer, (ii) the Company is not in material breach of its obligations under this Section 6.5, (iii) the Company shall have terminated this Agreement pursuant to Section 8.1(f)(ii) and (iv) the Company has paid to Parent the amounts required under Section 8.3(a). Any withdrawal or modification of the recommendation of this Agreement by the Board shall not change the approval of the Board for purposes of causing Section 203 of the Delaware Code or any other Takeover Statute to be inapplicable to the Offer, the Merger, the Shareholder Agreements or the purchase of shares under this Agreement.

(c) Subject to compliance with subsection (b) above, nothing contained in this Section 6.5 shall prohibit the Company from complying with Rule 14e-2 promulgated under the Exchange Act.

(d) If the Board receives an Acquisition Proposal or any inquiry regarding the making of an Acquisition Proposal including any request for information, then the Company shall promptly inform Parent and Purchaser, orally and in writing, of the terms and conditions of such proposal request or inquiry and the identity of the Person making it. The Company will keep Parent and Purchaser informed of the status and principal terms of any such Acquisition Proposal request, or inquiry in a manner that will provide Parent and Purchaser with sufficient and timely knowledge of such status and terms and permit Parent and Purchaser to respond meaningfully thereto.

(e) Without limiting the foregoing, it is understood that any violation of the restrictions set forth in this Section 6.5 by any director or officer of the Company or by any of its Subsidiaries or by any investment banker, financial advisor, attorney, accountant or other representative of the Company and its Subsidiaries acting on behalf of the Company of its Subsidiaries, shall be deemed to be a breach of this Section by the Company

(f) (i) "Acquisition Proposal" means any inquiry, proposal or offer from any Person relating to any direct or indirect acquisition or purchase of 25% or more of the assets of the Company and its Subsidiaries taken as a whole or 25% or more of any class of equity securities of the Company, any tender offer or exchange offer that if consummated would result in any person beneficially owning 25% or more of any class of equity securities of the Company, or any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company, other than the Transactions; and (ii) "Superior Proposal" means any bona fide Acquisition Proposal made by a third party to acquire, directly or indirectly, for consideration consisting of cash and/or securities (and without any financing contingency), all of the shares of the Company's Common Stock then outstanding or all or substantially all the assets of the Company and its Affiliates, which proposal the Board determines in its good faith judgment (following consultation with WP& Co. or other

financial advisor of nationally recognized reputation) to be materially more favorable to the Company's stockholders than the Offer and the Merger.

6.6. Employee Matters.

(a) For a period of at least one year following the Effective Time, Parent shall, or shall cause the Surviving Corporation and its Subsidiaries to, maintain employee benefit and welfare plans, programs, contracts, agreements, severance plans, policies and executive perquisites, for the benefit of active and retired employees of the Company and its Subsidiaries which in the aggregate provide benefits that are at least equal, on an overall basis, to those provided by Parent's Subsidiaries to their other employees of comparable status and seniority.

(b) Parent and Purchaser shall honor, without modification, and after the purchase of Shares pursuant to the Offer Parent shall cause the Company and its Subsidiaries to honor, all contracts, agreements, arrangements, policies, plans and commitments of the Company (or any of its Subsidiaries) in effect as of the date hereof which are applicable to any employee or former employee or any director or former director of the Company (or any of its Subsidiaries) set forth in the Company Disclosure Schedule, including the agreements of the Company (whether or not in writing) to pay commissions to employees or representatives of the Company, in accordance with the Company's prior practice, in respect of LTAC Leases which may be entered into following the date of this Agreement and which are scheduled on the Company's development plan as of October 30, 1998 (a copy of which has been provided to Parent by the Company) in respect of which such employees or representatives have provided services to the Company prior to the Effective Time.

6.7. Directors' and Officers' Indemnification and Insurance.

(a) The Certificate of Incorporation of the Surviving Corporation shall contain provisions no less favorable with respect to indemnification than are set forth in Article VII of the Certificate of Incorporation of the Company, which provisions shall not be amended, repealed or otherwise modified for a period of six years from the Effective Time in any manner that would materially and adversely affect the rights thereunder of individuals who at the Effective Time were directors, officers, employees, fiduciaries or agents of the Company, unless such modification shall be required by law.

(b) The Company shall, to the fullest extent permitted under applicable law and regardless of whether the Merger becomes effective, indemnify and hold harmless, and, after the Effective Time, Parent and the Surviving Corporation shall, jointly and severally, to the fullest extent permitted under applicable law, indemnify and hold harmless, each present and former director, officer, employee, fiduciary and agent of the Company and each Subsidiary (collectively, the "Indemnified Parties") against all costs and expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages, liabilities and settlement amounts paid in connection with any claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), whether civil, administrative or investigative, arising out of or pertaining to any action or omission in their capacity as an officer, director, employee,

fiduciary or agent, whether occurring before or after the Effective Time, for a period of six years after the date hereof (a "Claim"), provided, however, that no Indemnified Party shall be entitled to payment of any amount in respect of any Claim arising from willful misconduct, self dealing or the commission of an intentional tort by such Indemnified Person. In the event of any such claim, action, suit, proceeding or investigation, Parent or the Surviving Corporation, as the case may be, shall assume the defense thereof, and neither Parent nor the Surviving Corporation will be liable to such Indemnified Parties for any legal expenses of other counsel incurred subsequent to such assumption by such Indemnified Parties in connection with the defense thereof, provided that (i) the Parent and the Surviving Corporation shall have acknowledged in writing that their indemnity obligations hereunder are applicable in respect of the matter in issue unless and until a court of competent jurisdiction ultimately determines, and such determination becomes final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by law, (ii) no settlement shall be effected without the written consent of an Indemnified Party which does not include a full and unconditional release of such Indemnified Party and (iii) the Indemnified Parties shall cooperate in the defense of any such matter. None of the Company, Parent or the Surviving Corporation shall be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld). None of the Company, Parent nor the Surviving Corporation shall be obligated pursuant to this Section 6.7(b) to pay the fees and expenses of more than one counsel for all Indemnified Parties (who shall in any event be reasonably acceptable to the Parent) in any single action except to the extent that the named parties to any such proceeding include both the Indemnified Party and the Company or Parent, or their respective successors, and the representation of such parties by the same counsel would be proscribed under applicable standards of professional conduct and provided further that, in the event that any claim for indemnification is asserted or made within such six-year period, all rights to indemnification in respect of such claim shall continue until the disposition of such claim.

(c) Parent and the Surviving Corporation shall use their respective reasonable best efforts to maintain in effect for six years from the Effective Time, if available, the current directors' and officers' liability insurance policies maintained by the Company (provided that Parent and the Surviving Corporation may substitute therefor policies of at least the same coverage containing terms and conditions which are not materially less favorable) with respect to matters occurring prior to the Effective Time; provided, that (1) if the existing policies expire, are terminated or canceled during such period Parent or the Surviving Corporation will use its reasonable best efforts to obtain substantially similar policies and (2) Parent or the Surviving Corporation shall not be required to spend as an annual premium therefor an amount in excess of $280,000.

6.8. Further Action; Reasonable Best Efforts.

Upon the terms and subject to the conditions hereof, each of the parties hereto shall (i) make promptly its respective filings, and thereafter make any other required submissions, under the HSR Act with respect to the Transactions, provided that no material divestiture or undertaking to make such a material divestiture shall be made without the consent of the Parent,

which will not unreasonably be withheld, and (ii) use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the Transactions, including, without limitation, using all reasonable efforts to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of Governmental Authorities and parties to contracts with the Company and the Subsidiaries as are necessary for the consummation of the Transactions and to fulfill the conditions to the Offer and the Merger. The filing fee payable under the HSR Act shall be paid by the Purchaser. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable best efforts to take all such action. In furtherance of its agreement in this Section, Parent shall retain a nationally-recognized information agent to assist in soliciting the shareholders of the Company to tender their Shares in the offer and/or, in the event a Merger Notice has been delivered pursuant to Section 1.3, to vote in favor of the Merger.

6.9. Public Announcements.

Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement or any Transaction and shall not issue any such press release or make any such public statement without the prior consent of the other parties, except as may be required by law or any listing agreement with a national securities exchange to which Parent or the Company is a party.

6.10. SEC and Stockholder Filings.

The Company shall deliver to Parent a copy of all material public reports and materials as and when it sends the same to its stockholders, the SEC or any state or foreign securities commission.

6.11. Takeover Statutes.

The Company and the Board shall take all reasonable action necessary to ensure that no "fair price," "moratorium," "control share acquisition" or other similar antitakeover statute or regulation enacted under state or federal laws in the United States (each a "Takeover Statute"), including, without limitation,
Section 203 of the Delaware Code, is or becomes applicable to the Offer, the Merger, this Agreement, or any Transaction, the Company and the members of its Board of Directors (or any required and duly constituted Committee thereof) will grant such approvals, and take such actions as are necessary so that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated hereby and thereby and otherwise act to eliminate or minimize the effects of any Takeover Statute on any of the transactions contemplated hereby or thereby.

6.12. Advice of Breaches.

Parent and Purchaser, on the one hand, and the Company, on the other, shall promptly advise each other if they become aware of breaches or any event or occurrence which would be likely to cause a breach of its own representations, warranties or covenants herein.

ARTICLE VII
CONDITIONS TO THE MERGER

7.1. Conditions to the Merger.

The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions:

7.2. Parent and Purchaser Conditions to the Merger.

The obligations of the Parent and Purchaser to effect the Merger shall be subject to the condition that, at or prior to the Effective Time, the Company shall have performed in all material respects all obligations required to be performed by it under this Agreement, or such performance shall have been waived; provided, that this condition shall not apply in respect of any obligation of the Company arising after designees or representatives of Parent or Purchaser shall represent a majority of the Board. After such designees or representatives so constitute a majority of the Board, the obligations of the Parent and the Purchaser to proceed with the Transactions may not be waived, terminated or modified except as expressly permitted under the other provisions of this Agreement.

If a Merger Notice is delivered pursuant to Section 1.3(d) or (e), the obligations of Parent and Purchaser to effect the Merger shall also be subject to the satisfaction or waiver, at the Effective Time, of the following conditions:

(a) any applicable (i) waiting period under the HSR Act or (ii) period during which Parent or Purchaser shall have consented or otherwise be barred from consummating the Merger as part of any agreement or other arrangement with any Governmental Authority involving the HSR Act or any other applicable antitrust laws has expired or been terminated prior to the Effective Time;

(b) the Company shall have received any required consent or approval of any Governmental Authority and there shall not be pending or threatened any action or proceeding before any court or Governmental Authority, domestic or foreign, having any of the consequences referred to in clauses (i) through (vii) of Section 1.2(c);

(c) there shall not have been any statute, rule, regulation, judgment, order or injunction enacted, entered, issued, enforced, promulgated or deemed applicable, or any other action taken, by any Governmental Authority other than the routine application of the waiting period provisions of the HSR Act to the Merger, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (vii) of Section 1.2(c);

(d) there shall not have occurred, and be continuing, any change, condition, event or other development that has had a Material Adverse Effect;

(e) the representations and warranties of the Company in this Agreement shall be true and correct (for all purposes of this paragraph (e) without giving effect to any material or Material Adverse Effect qualifiers or other qualifiers based on materiality that are contained in this Agreement) as of such time (except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date), except to the extent that the failure or failures to be true or correct do not, in the aggregate, have a Material Adverse Effect,

(f) the number of Dissenting Shares shall not exceed 10% of the outstanding Shares.

7.3. Company Conditions to the Merger.

The obligation of the Company to effect the Merger shall be subject to the condition that, at or prior to the Effective Time, the Parent and Purchaser shall have performed in all material respects all obligations required to be performed by them under this Agreement, or such performance shall have been waived by a majority of the members of the Board of Directors of the Company who are not designees or representatives of Parent or Purchaser.

If a Merger Notice is delivered pursuant to Section 1.3(d) or (e), the obligations of the Company to effect the Merger shall also be subject to the satisfaction or waiver, at the Effective Time, of the following conditions:

(a) any applicable (i) waiting period under the HSR Act or (ii) period during which Parent or Purchaser shall have consented or otherwise be barred from consummating the Merger as part of any agreement or other arrangement with any Governmental Authority involving the HSR Act or any other applicable antitrust laws has expired or been terminated prior to the Effective Time;

(b) the Company shall have received any required consent or approval of any Governmental Authority, the absence of which could subject any of the directors, officers or other representatives of the Company to any personal liability;

(c) the representations and warranties of the Parent and the Purchaser in this Agreement shall be true and correct in all material respects as of such time (except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date), except to the extent that failure or failures to be true and correct do not, in the aggregate, materially impair the ability of Parent and Purchaser to consummate the Merger.

ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER

8.1. Termination.

This Agreement may be terminated and the Merger and the other Transactions may be abandoned at any time prior to the Effective Time, notwithstanding any approval and adoption of this Agreement and the Transactions by the stockholders of the Company:

(a) By mutual written consent duly authorized by the Boards of Directors of Parent, Purchaser and the Company, provided, that any such consent by the Board of the Company shall include at least a majority of the members of the Board who are not designees or representatives of the Parent or the Purchaser; or

(b) By either Parent, Purchaser or the Company by written notice to the other parties if

(i) The Offer (x) shall be terminated or expire in accordance with its terms without the purchase of any Shares pursuant thereto or (y) Purchaser shall not have accepted for payment any Shares pursuant to the Offer on or before January 31, 1999; provided, gnat the right to terminate this Agreement under this clause (i) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure to complete the Offer on or before such

date and provided further that the right to terminate this Agreement under this clause (i) shall not be available to any of the parties to this Agreement if a Merger Notice has been delivered pursuant to Sections 1.3(d) or (e);

(ii) the Effective Time shall not have occurred on or before May 31, 1999; provided, that the right to terminate this Agreement under this clause (ii) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; or

(iii) any court of competent jurisdiction or other Governmental Authority shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the Offer or Merger and such order, decree, ruling or other action shall have become final and nonappealable;

(c) By Parent or Purchaser, by written notice to the Company, if (i) the Board or any committee thereof shall have (1) withdrawn or modified in a manner adverse to Purchaser or Parent its approval or recommendation of the Offer, this Agreement, the Merger or any other Transaction or (2) shall have approved or recommended any Acquisition Proposal or (ii) WP&Co. shall have withdrawn, revoked, amended or modified its opinion referred to in Section 3.22 in any manner adverse to Parent or Purchaser, unless (A) at the time of or promptly following such withdrawal, revocation, amendment or modification the Board shall have publicly reaffirmed its approval and recommendation of the Transactions and (B) within 10 Business Days following such withdrawal, revocation, amendment or modification the Board shall have received a written opinion, from another financial advisor of nationally recognized reputation reasonably acceptable to Parent and Purchaser, that the Offer is fair to the shareholders of the Company from a financial point of view, a copy of which shall have been delivered to the Parent;

(d) By Parent and Purchaser, by written notice to the Company, if the Company shall have (1) exercised a right specified in Section 6.5(a) with respect to any Acquisition Proposal and the Board of Directors shall not, within 10 Business Days following a written request from the Parent to do so, have reaffirmed its recommendation of the Transactions; (ii) taken any action described in Section 6.5(b), or (iii)(1) an Acquisition Proposal that is publicly disclosed shall have been commenced, publicly proposed or communicated to the Company which contains a proposal as to price (without regard to the specificity of such price proposal) and (2) the Company shall not have rejected such proposal within 10 business days of its receipt or the date its existence first becomes publicly disclosed, if sooner;

(e) By Parent and Purchaser, by written notice to the Company:

(i) if the Company shall have breached or failed to perform in any material respect any of its representations, warranties or covenants required to be performed by it under this Agreement or the Offer, and, in

the case of any breach other than an intentional material breach, such breach or failure to perform has continued unremedied for 30 days or is not reasonably capable of being cured by the expiration date of the Offer; or

(ii) if the Company shall violate its obligations under
Section 6.5; or

(f) By the Company by written notice to the Parent and the Purchaser:

(i) if Purchaser shall have failed to publicly announce and commence the Offer (within the meaning of Rule 14d-2 under the Exchange Act) within five Business Days following the date of this Agreement; provided, that the Company may not terminate this Agreement pursuant to this subparagraph (i) if the Company is in material breach under this Agreement;

(ii) in accordance with Section 6.5 and subject to the limitations set forth therein, provided that Parent or Purchaser does not make, within 3 Business Days of receipt of the notice of termination required to be delivered pursuant to Section 6.5, an offer that the Company's Board believes in good faith, after consultation with its legal counsel and financial advisors, is at least as favorable to the holders of the Shares as such other bidder's offer, and provided, further, that no termination under this subparagraph (ii) shall be effective unless the termination fee and expense fee required under Section 8.3 is paid at the time notice of such termination is delivered;

(iii) if Parent or Purchaser shall have breached or failed to perform in any material respect any of its representations, warranties or covenants required to be performed by them under this Agreement at or prior to such date, and, in the case of any breach other than an intentional material breach, such breach or failure to perform has continued unremedied for 30 days or is not reasonably capable of being cured by the expiration date of the Offer.

8.2. Effect of Termination.

In the event of the termination of this Agreement pursuant to Section 8.1, this Agreement shall forthwith become void, and there shall be no liability on the part of any party hereto, except (i) as set forth in Sections 6.4, 8.3 and 9.1 and (ii) nothing herein shall relieve any party from liability for any breach hereof. Any attempted termination of this Agreement not in accordance with Section 8.1 shall not be effective and shall not affect the rights or obligations of the parties set forth herein.

8.3. Fees and Expenses.

(a) If this Agreement is terminated pursuant to Section 8.1(c)(i),
8.1(c)(ii) (when Parent or Purchaser's right to terminate arises as a result of the failure of the Board to publicly reaffirm its approval and recommendation of the Transactions), 8.1(d), 8.1(e)(ii) or 8.1(f)(ii), then the Company shall pay Parent $4,000,000 plus up to $1,000,000 in reimbursement of actual, verifiable expenses (the "Expenses") incurred by the Parent in connection with the negotiation, execution and delivery of this Agreement and the other documents contemplated hereby and the anticipated completion of the Transactions.

(b) If this Agreement is terminated pursuant to Section 8.1(b) (on account of the failure of the Company to satisfy the condition set forth in
Section 1.2(f)), 8.1(c)(ii) (except in the case where Parent or Purchaser's right to terminate arises as a result of the failure of the Board to publicly reaffirm its approval and recommendation of the Transactions) or 8.1(e)(i), then the Company shall pay Parent up to $1,000,000 in reimbursement of Expenses, and if, at any time within one year of the date of such termination, the Company enters into an agreement with respect to or consummates any direct or indirect acquisition or purchase by any person of 25% or more of the assets of the Company and its Subsidiaries taken as a whole or the issuance of 25% or more of any class of equity securities of the Company, any tender offer or exchange offer that if consummated would result in any person beneficially owning 25% or more of any class of equity securities of the Company, or any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company, other than the Transactions (collectively, a "Subsequent Transaction"), the Company shall pay Parent $4,000,000.

(c) If this Agreement is terminated by the Parent or the Purchaser pursuant to Section 8.1(b) on account of the failure of the Company to satisfy the condition set forth in Section 1.2(i), then the Company shall pay Parent, in consideration for the expenses incurred in anticipation of the completion of the Transactions, up to $1,000,000 in reimbursement of Expenses.

(d) If this Agreement is terminated by the Parent or the Purchaser pursuant to Section 8.1(b) (other than on account of the failure of the Company to satisfy the condition set forth in Section 1.2(f) or 1.2(i), which are addressed in subparagraphs (b) and (c) above), and if the Company enters into an agreement with respect to or consummates a Subsequent Transaction within six months following such termination, then the Company shall pay Parent $4,000,000 plus up to $1,000,000 in reimbursement of Expenses.

(e) Any amounts payable under paragraphs (a)-(d) above shall be paid within five Business Days after demand by the Parent or the Purchaser or at such earlier time as may be required under Section 6.5 or Section 8.1(f)(ii).

(f) The payment called for in paragraphs (a)-(d) above shall be in lieu of any other claims by the Parent or the Purchaser in respect of its costs, expenses, damages and losses incurred by the Parent or the Purchaser in respect of the matters referred to in such paragraphs.

The Company acknowledges that the agreements contained in this Section 8.3 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Parent and Purchaser would not enter into this Agreement.

(g) Except as set forth in this Section 8.3, all fees and expenses incurred in connection with the Offer, the Merger, this Agreement and the Transactions will be paid by the party incurring such fees or expenses, whether or not the Merger is consummated.

8.4. Amendment.

Subject to Section 6.3, this Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, that, after the approval and adoption of this Agreement and the Transactions by the stockholders of the Company, no amendment may be made which would reduce the amount or change the type of consideration into which each Share shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by the parties hereto.

8.5. Waiver.

At any time prior to the Effective Time, any party hereto may (i) extend the time for the performance of any obligation or other act of any other party hereto, (ii) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any agreement or condition contained herein.

ARTICLE IX
GENERAL PROVISIONS

9.1. Non-Survival of Representations, Warranties and Agreements.

The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 8.1, except that the agreements set forth in Article II and Sections 6.6 and 6.7 shall survive the Effective Time indefinitely, and those set forth in Sections 6.4(c), 6.7 and 8.3 and in the last clause of Section 1.5(d), shall survive termination of this Agreement indefinitely. The expiration of a representation, warranty or agreement in this Agreement pursuant to this
Section 9.1 shall not affect the rights or remedies of any party arising from a breach thereof occurring prior to such expiration.

9.2. Notices.

All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by fax or by registered or certified mail (postage prepaid, return receipt

requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section):

if to Parent or Purchaser:

Select Medical Corporation

4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055

Attn: Rocco A. Ortenzio
Chairman and Chief Executive Officer

with a copy to:

Dechert Price & Rhoads
1717 Arch Street
Philadelphia, PA 19103-2793 Attn: Henry N. Nassau

if to the Company:

Intensiva HealthCare Corporation
7733 Forsyth Boulevard, Suite 800
St. Louis, MO 63105

Attn: David W. Cross
President and Chief Executive Officer

with a copy to:

Suelthaus & Walsh, P.C.

7733 Forsyth Boulevard, Twelfth Floor,
St. Louis, Missouri 63105

Fax: (314) 727-7166
Attn: Thomas M. Walsh

and

Bryan Cave LLP
211 North Broadway
Suite 3600
St. Louis, Missouri 63102 Fax: (314)259-2020
Attn: Denis P. McCusker

9.3. Definitions.

For purposes of this Agreement, the term:

(1) "Acquisition Proposal" is defined in Section 6.5(f).

(2) "Affiliate" of a specified person means a person who directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such specified person;

(3) "Beneficial Owner" with respect to any Shares means a person who shall be deemed to be the beneficial owner of such Shares (i) which such person or any of its Affiliates or associates (as such term is defined in Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly or indirectly,
(ii) which such person or any of its Affiliates or associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of consideration rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding or (iii) which are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its Affiliates or associates or person with whom such person or any of its Affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any Shares;

(4) "Blue Sky Laws" is defined in Section 3.5(b).

(5) "Business Day" means any day on which the principal offices of the SEC in Washington, D.C. are open to accept filings, or, in the case of determining a date when any payment is due, any day on which banks are not required or authorized to close in the City of New York.

(6) "Board" means the Board of Directors of the Company.

(7) "Claim" shall have the meaning set forth in Section 6.7.

(8) "Code" means the Internal Revenue Code of 1986, as amended.

(9) "Common Stock" is defined in Section 1.1.

(10) "Company Disclosure Schedule" is defined in the first paragraph of Article III.

(11) "Confidentiality Agreement" is defined in Section 6.4(c).

(12) "Control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, as trustee or executor, by contract or credit arrangement or otherwise.

(13) "Delaware Law" means the General Corporation Law of the State of Delaware.

(14) "Dissenting Shares" is defined in Section 2.7.

(15) "Effective Time" is defined in Section 2.2

(16) "Environmental Laws" means any federal, state, or local statute, rule, regulation or order, as in effect on the date of this Agreement, relating to the protection of the environment or to the regulation of any toxic, radioactive, ignitable, corrosive, reactive, biomedical or otherwise hazardous substances, materials, contaminants, pollutants or wastes.

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

(18) "Governmental Authority" means any agency, instrumentality, department, commission, court, tribunal or board of any government, whether foreign or domestic and whether national, federal, state, provincial or local.

(19) "HSR Act" is defined in Section 3.5(b).

(20) "Indemnified Parties" is defined in Section 6.7(b).

(21) "Intellectual Property" means all of the following (in whatever form or medium) which are owned by or licensed to the Company or any of its Subsidiaries for use in connection with the operation of its business: (i) patents, trademarks, service marks, tradedress, logos, designs and copyrights,
(ii) applications for patents and for registration of trademarks, service marks and copyrights, (iii) trade secrets and trade names, and (iv) all other items of proprietary know-how or intellectual property.

(22) "Interim Balance Sheet" is defined in Section 3.6(c).

(23) "knowledge" means, in respect of the Company, the actual knowledge of the persons listed on Exhibit A hereto.

(24) "Liens" is defined in Section 3.16(a).

(25) "LTAC Leases" is defined in Section 3,16(b).

(26) "Material Adverse Effect" means any change, effect, condition, event or circumstance that is, or is reasonably likely to be, materially adverse to the business, financial condition, assets, properties, or results of operations of the Company and the Subsidiaries, taken as a whole; provided, that "Material Adverse Effect" shall not include any change, effect, condition, event or circumstance arising out of or attributable to (i) any decrease in the market price of the Shares (but not any change, effect, condition, event or circumstance underlying such decrease to the extent that it would otherwise constitute a Material Adverse Effect), (ii) changes, effects, conditions, events or circumstances that generally affect the industries in which the

Company operates (including legal and regulatory changes), (iii) general economic conditions or change, effects, conditions or circumstances affecting the securities markets generally, (iv) changes arising from the consummation of the Transactions or the announcement of the execution of this Agreement, including changes resulting from the exercise by other parties to the LTAC Leases of any contractual rights they may have (if any) under the express terms of the LTAC Leases as a result of the Transactions or the announcement of the Transactions; or (v) any matter expressly disclosed in this Agreement or the Company's Disclosure Schedule; and provided, further that, subject to the foregoing, a Material Adverse Effect shall be deemed to have occurred if the Company and its Subsidiaries shall have lost their accreditation to continue participation in the Medicare and Medicaid programs in respect of one or more of the Company's locations which represented, in the aggregate, in excess of 15% of the Company's net revenues for the most recent four fiscal quarters preceding the date of such event.

(27) "Merger" is defined in Section 2.1.

(28) "Merger Consideration" is defined in Section 2.6(a).

(29) "Merger Notice" is defined in Section 1.3(d).

(30) "1997 Balance Sheet" is defined in Section 3.6(c).

(31) "Per Share Amount" is defined in Section 1.1

(32) "Person" means an individual, corporation, partnership, limited partnership, syndicate, person (including, without limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or instrumentality of a government.

(33) "Plans" is defined in Section 3.9.

(34) "Proxy Statement" is defined in Section 3.10.

(35) "Returns" shall mean all returns, declarations, reports, statements, and other documents required to be filed with any government or taxing authority in respect of Taxes, and the term "Return" shall mean any one of the foregoing Returns.

(36) "SEC" means the Securities and Exchange Commission.

(37) "SEC Rules" means the rules, regulations or interpretations of the SEC or the staff thereof.

(38) "Stockholders Meeting" is defined in Section 6.1.

(39) "Subsidiary" or "Subsidiaries" of the Company, the Surviving Corporation, Parent or any other person means an Affiliate controlled by such person, directly or indirectly, through one or more intermediaries.

(40) "Superior Proposal" is defined in Section 6.5(f).

(41) "Surviving Corporation" is defined in Section 2.1.

(42) "Takeover Statute" is defined in Section 6.11.

(43) "Tax" or "Taxes" shall mean (A) all federal, state and local and foreign taxes and assessments of any nature whatsoever, based on the laws and regulations in effect from time to time through the Closing Date, including, without limitation, all income, profits, franchise, gross receipts, capital, sales, use, withholding, value added, ad valorem, transfer, employment, social security, disability, occupation, property, severance, production, excise, environmental and other taxes, duties and other similar governmental charges and assessments imposed by or on behalf of any government or taxing authority, including all interest, penalties and additions imposed with respect to such amounts, and (B) any obligations under any agreements or arrangements with respect to any Taxes described in clause (A) above.

(44) "Tax Returns" means any returns required to be filed with Federal, state or other applicable taxing authorities in respect of any Taxes.

(45) "Transactions" is defined in Section 1.2(c).

(46) "Warrants" is defined in Section 3.3.

9.4. Severability.

If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the Transactions is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the Transactions be consummated as originally contemplated to the fullest extent possible. The parties confirm that, if they are unable to reach such agreement, it is their intention that the provisions of this Agreement be enforced to the maximum extent permissible.

9.5. Entire Agreement; Assignment.

Except for the. Confidentiality Agreement and the Letter Agreement, this Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes, all prior agreements and undertakings, both written and oral, among the parties, or

any of them, with respect to the subject matter hereof. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Purchaser may assign all or any of their rights and obligations thereunder to any wholly- owned Subsidiary of Parent provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations.

9.6. Parties in Interest.

This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement (including, without limitation,
Section 6.6), express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, other than Section 6.7 (which is intended to be for the benefit of the persons covered thereby and may be enforced by such persons).

9.7. Governing Law.

This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware.

9.8. Headings.

The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement.

9.9. Counterparts.

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

9.10. Specific Performance.

Nothing in this Agreement shall preclude a party from seeking specific performance, injunctive relief or any other remedies not involving the payment of monetary damages in the event of any breach or violation (or threatened breach or violation) of any provision of this Agreement by the other party and each party acknowledges that, in light of the unique benefit to it of its rights under this Agreement, such remedies shall be available in respect of any such breach or violation by it in any suit properly instituted in a court of competent jurisdiction and shall be in addition to any other remedies available at law or in equity to such party.

9.11. Costs of Enforcement.

In any action, claim, suit or proceeding to enforce its rights under this Agreement, the prevailing party shall be entitled to prompt reimbursement of its reasonable costs and expenses of obtaining such enforcement, including attorneys' fees.

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

SELECT MEDICAL CORPORATION

By /s/ Rocco A. Ortenzio
  ------------------------
  Name:
  Title:

SELECT MEDICAL OF
MECHANICSBURG, INC

By /s/ Rocco A. Ortenzio
  ------------------------
  Name:
  Title:

INTENSIVA HEALTHCARE
CORPORATION

By /s/ David W. Cross
  ------------------------
  Name:
  Title:

Exhibit 2.3

STOCK PURCHASE AGREEMENT

By and Among

NovaCare, Inc.,

NC Resources, Inc.

and

Select Medical Corporation

SECTION I    PURCHASE AND SALE OF THE SHARES...........................................................................   1

  1.01.      Purchase and Sale of the Shares...........................................................................   1
  1.02.      Purchase Price............................................................................................   1
  1.03.      Delivery of the Shares....................................................................................   2
  1.04.      Intercompany Account Obligations..........................................................................   2
  1.05.      Guaranties................................................................................................   2

SECTION II   REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SELLER...............................................   3

  2.01.      Organization and Qualification: Subsidiaries: Managed Companies...........................................   3
  2.02.      Conflicts.................................................................................................   3
  2.03.      Capitalization............................................................................................   4
  2.04.      Financial Statements: No Undisclosed Liabilities..........................................................   4
  2.05.      Accounts Receivable.......................................................................................   5
  2.06.      Absence of Certain Chances................................................................................   6
  2.07.      Taxes.....................................................................................................   6
  2.08.      Real Property Owned or Leased.............................................................................   8
  2.09.      Title to Assets...........................................................................................   8
  2.10.      Contractual and Other Obligations.........................................................................   8
  2.11.      Compensation..............................................................................................  10
  2.12.      Employee Benefit Plans....................................................................................  10
  2.13.      Labor Relations...........................................................................................  11
  2.14.      Insurance.................................................................................................  11
  2.15.      Litigation................................................................................................  12
  2.16.      Permits: Compliance with Environmental Law: Compliance....................................................  12
  2.17.      Bank Accounts.............................................................................................  15
  2.18.      Trademarks................................................................................................  15
  2.19.      Transactions with Certain Persons.........................................................................  16
  2.20.      Authority.................................................................................................  16
  2.21.      Ownership of Shares.......................................................................................  17
  2.22.      Consents..................................................................................................  17
  2.23.      Foreign Person............................................................................................  17
  2.24.      Year 2000.................................................................................................  17
  2.25.      Medicare Participation!...................................................................................  17
  2.26.      Exclusion.................................................................................................  18
  2.27.      Federal Health Care Programs..............................................................................  18
  2.28.      No Criminal Proceeding....................................................................................  19
  2.29.      Third-Party Payment Contracts.............................................................................  19
  2.30.      Billing; Gratuitous Payments..............................................................................  19

  2.31.      Reimbursement Matters.....................................................................................  19
  2.32.      Solvency..................................................................................................  20
  2.33.      Opinion of Financial Advisor..............................................................................  20
  2.34.      Disclosure................................................................................................  20
SECTION III  REPRESENTATIONS AND WARRANTIES OF THE PURCHASER...........................................................  20
  3.01.      Organization..............................................................................................  20
  3.02.      Authority.................................................................................................  20
  3.03.      Conflicts.................................................................................................  20
  3.04.      Litigation; Disputes......................................................................................  21
  3.05.      Consents..................................................................................................  21
  3.06.      Investment Purpose........................................................................................  21
  3.07.      Financing.................................................................................................  21
SECTION IV.  THE CLOSING...............................................................................................  21
  4.01.      Time and Place of the Closing.............................................................................  21
  4.02.      Termination...............................................................................................  22
  4.03.      Effect on Obligations.....................................................................................  22
  4.04.      Return of Documentation...................................................................................  23
  4.05.      Sole and Exclusive Remedy.................................................................................  23
SECTION V    CONDITIONS TO THE SELLER'S OBLIGATIONS TO CLOSE...........................................................  23
  5.01.      Certificates..............................................................................................  23
  5.02.      Opinion of the Purchaser's Counsel........................................................................  24
  5.03.      Representations, Warranties and Covenants.................................................................  24
  5.04.      No Litigation.............................................................................................  24
  5.05.      HSR Act Approval..........................................................................................  24
SECTION VI.  CONDITIONS TO THE PURCHASER'S OBLIGATION TO CLOSE.........................................................  24
  6.01.      Certificates..............................................................................................  24
  6.02.      Opinion of the Parent's Counsel...........................................................................  25
  6.03.      Representations; Warranties and Covenants.................................................................  25
  6.04.      No Litigation.............................................................................................  26
  6.05.      Approvals.................................................................................................  26
  6.06.      HSR Act Approval..........................................................................................  26
  6.07.      Resignations..............................................................................................  26
  6.08.      Escrow Agreement..........................................................................................  26
  6.09.      Third Party Consents......................................................................................  26
  6.10.      PNC Liens.................................................................................................  26

SECTION VII CONDUCT OF THE BUSINESS....................................................................................  27

  7.01.      Limitations on Conduct....................................................................................  27
  7.02.      Preparation and Filing of Tax Returns.....................................................................  28
  7.03.      Access; Information and Documents.........................................................................  28
  7.04.      Preparation and Filing of Medicare and Medicaid Cost Reports..............................................  29
  7.05.      Payment of Sellers' Notes and Earn Out Amounts............................................................  29

SECTION VIII OTHER AGREEMENTS OF THE PARTIES...........................................................................  29

  8.01.      Announcements.............................................................................................  29
  8.02.      Employee Matters..........................................................................................  29
  8.03.      Labor Relations...........................................................................................  31
  8.04.      Access to Information.....................................................................................  31
  8.05.      Intentionally left blank..................................................................................  33
  8.06.      Tax Matters...............................................................................................  33
  8.07.      [Intentionally omitted]...................................................................................  36
  8.08.      Agreement by the Purchaser Regarding No Other Representations or Warranties by the Parent or the Seller...  36
  8.09.      Use of NovaCare Name......................................................................................  36
  8.10.      Employee Obligations......................................................................................  37
  8.11.      Non-Competition; Nonsolicitation..........................................................................  38
  8.12.      No Solicitation...........................................................................................  39
  8.13.      Confidentiality...........................................................................................  39
  8.14.      Acquisition of Rights to Confidentiality..................................................................  39
  8.15.      Accounts Receivable.......................................................................................  40
  8.16.      NCES Subscriber Agreement.................................................................................  40
  8.17.      NCES Office Support Services Agreement....................................................................  41
  8.18.      Transition Services Agreement.............................................................................  41
  8.19.      Transition Obligations....................................................................................  41
  8.20.      Representations regarding Working Capital, Long-Term
             Liabilities and Tax Basis.................................................................................  41
  8.21.      Contribution of Assets....................................................................................  43
  8.22.      Notice of Distributions...................................................................................  43
  8.23.      Updated Financial Information.............................................................................  43
  8.24.      Furniture, Fixtures.......................................................................................  43

SECTION IX INDEMNIFICATION.............................................................................................  44

  9.01.      Indemnification by the Parent and the Seller..............................................................  44
  9.02.      Indemnification by the Group Members......................................................................  44
  9.03.      Procedure for Indemnification.............................................................................  45
  9.04.      Limits on the Liability of the Parent and Seller..........................................................  48
  9.05.      Other Limits on Indemnification...........................................................................  48
  9.06.      Losses Net................................................................................................  48

  9.07.      Sole and Exclusive Remedy.................................................................................  48
  9.08.      Limitation on indemnification.............................................................................  49
  9.09.      Limitation on Materiality.................................................................................  49

SECTION X BROKERS AND FINDERS..........................................................................................  49

  10.01.     The Parent's and the Seller's Obligations.................................................................  49
  10.02.     The Purchaser's Obligations...............................................................................  49

SECTION XI MISCELLANEOUS...............................................................................................  50

  11.01.     Notices...................................................................................................  50
  11.02.     Assignment................................................................................................  50
  11.03.     Further Action............................................................................................  50
  11.04.     Binding Effect............................................................................................  50
  11.05.     Expenses..................................................................................................  50
  11.06.     Arbitration...............................................................................................  51
  11.07.     Schedules and Exhibits....................................................................................  51
  11.08.     Invalidity................................................................................................  51
  11.09.     Headings..................................................................................................  51
  11.10.     Governing Law.............................................................................................  52
  11.11.     Counterparts..............................................................................................  52
  11.12.     Construction..............................................................................................  52
  11.13.     Assignment of Parent Agreements...........................................................................  52

SECTION XII DEFINITIONS................................................................................................  52

  12.01.     Certain Definitions.......................................................................................  52

Schedule 1.02       Allocation of Purchase Price Among Companies
Schedule 1.02A      Seller Notes and Other Third Party Indebtedness
Schedule 1.04       Intercompany Account Obligations
Schedule 1.05       Seller Guaranteed Obligations
Schedule 2.01       Subsidiaries, Capital Stock, Managed Companies
Schedule 2.02       Group Member Conflicts
Schedule 2.03       Capitalization
Schedule 2.04       Liabilities; Financial Statements
Schedule 2.04A      Cash Receipts and Disbursements
Schedule 2.04G      1999 Cash Collection Analysis
Schedule 2.06       Certain Changes
Schedule 2.07       Taxes
Schedule 2.08       Real Property
Schedule 2.09       Title; Liens
Schedule 2.11       Compensation

                                      iv

Schedule 2.11A      Employee Contractual Severance
Schedule 2.12       Benefit Plans
Schedule 2.13       Labor Relations
Schedule 2.14       Insurance
Schedule 2.15       Litigation
Schedule 2.16       Permits: Environmental
Schedule 2.16(g)    Facility Approvals
Schedule 2.16(h)    Medicare Participation - Exceptions
Schedule 2.18       Intellectual Property
Schedule 2.19       Transactions with Certain Persons
Schedule 2.22       Consents
Schedule 2.24       Year 2000
Schedule 2.25       Medicare Provider Numbers
Schedule 2.30       Billing
Schedule 2.31       Reimbursement Matters
Schedule 7.01       Conduct of the Business
Schedule 8.02(e)    Non-PROH COBRA Individuals
Schedule 8.10       Mountain Contract
Schedule 8.20(b)-1  Consolidated Net Working Capital
Schedule 9.02       Parent Agreements

EXHIBITS

     Exhibits 1.02  Escrow Agreements

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (this "Agreement"), made as of October 1, 1999, by and among NovaCare, Inc., a Delaware corporation (the "Parent"), NC Resources, Inc., a Delaware corporation (the "Seller"), and Select Medical Corporation, a Delaware corporation (the "Purchaser"). Capitalized terms used herein and not defined in the specific Section in which they are used, shall have the meanings assigned to such terms in Section XII hereof.

WHEREAS, the Seller is the holder of all of the issued and outstanding shares of common stock, $.01 par value per share (the "Common Stock"), of each of RehabClinics, Inc., a Delaware corporation ("RehabClinics"), NovaCare Occupational Health Services, Inc., a Delaware corporation ("NOHS"), Industrial Health Care Company, Inc., a Delaware corporation ("IHCC"), CMC Center Corporation, a Delaware corporation ("CMC"), and NovaMark, Inc., a Delaware corporation ("NM") (each of RehabClinics, NOHS, IHCC, CMC, and NM hereinafter referred to, individually, as a "Company" and, collectively, as the "Companies");

WHEREAS, the Parent is the holder of all of the outstanding capital stock of the Seller; and

WHEREAS, the Purchaser desires to acquire from the Seller, and the Seller desires to sell to the Purchaser, for the consideration hereinafter provided, all of the outstanding shares of the Common Stock of the Companies (collectively, the "Shares").

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements hereinafter set forth, the parties hereto, intending to be legally bond, hereby agree as follows:

In connection with the purchase and sale of the Shares hereunder, the Parent and the Seller, jointly and severally, hereby represent and warrant to the Purchaser, as of the date hereof and as of the Closing Date, that:

of any contract or other obligation to which the Parent or the Seller is subject except where such violation, conflict, breach, termination or Lien is not reasonably likely to have a Material Adverse Effect.

(i) audited combined statements of the results of operations and cash flows of the Companies and their subsidiaries for the fiscal years ended June 30, 1999, 1998 and 1997 and combined balance sheets of the Companies and their subsidiaries as at June 30, 1999 and 1998 together with the footnotes thereto; and

(ii) unaudited combined statement of the results of operations of the Companies and their subsidiaries for the fiscal quarter ended June 30, 1999.

(b) The Financial Statements set forth in subsection (a)(i) above have been audited by PricewaterhouseCoopers, independent public accountants. The Financial Statements (i) have been prepared from and are in accordance with the books and records of the Companies, (ii) fairly present in all material respects the consolidated financial condition of the Companies and the Subsidiaries and the results of their operations and cash flows as of the date and for the periods specified therein, and iii) have been prepared in accordance with GAAP .A11 references

in this Agreement to the "Balance Sheet" shall mean the combined balance sheet of the Companies and their subsidiaries as at June 30, 1999 included in the Financial Statements. The Financial Statements include the results of operations of, and assets and liabilities of, the Managed Companies, as if they were subsidiaries of the Companies.

(i) liabilities and obligations set forth or reserved against in the Financial Statements;

(ii) liabilities and obligations incurred in the ordinary course of business subsequent to the date of the Financial Statements and reflected on the Closing Balance Sheet (as defined herein); and

(iii) liabilities and obligations described or otherwise disclosed on, or which may arise out of or with respect to the matters or Contracts described or otherwise disclosed on, the Schedules to this Agreement.

(e) Except for indebtedness to be cancelled or otherwise eliminated as set forth in Section 1.04 hereof and except for indebtedness among Group Members, no Group Member has or has guaranteed any indebtedness for borrowed funds.

which have arisen since June 30, 1999, are valid and have arisen only from bona fide arm's length transactions in the ordinary course of the business of the Group Members. .A11 of such accounts receivable have been billed and are generally due within 30 days after such billing and, to the Knowledge of Parent, are not subject to any counterclaims or offsets. The accounts receivable, net of reserves, set forth on the Balance Sheet are presented fairly on such Balance Sheet in accordance with GAAP.

(a) The Parent has filed or caused to be filed on a timely basis all returns, reports or other declarations relating to Taxes required to be filed with respect to each Group Member (the "Tax Returns"), and the Parent has timely paid or caused to be paid all Federal, state, local and foreign taxes (including, but not limited to, income, franchise, property (real, tangible and intangible), sales, use, unemployment, withholding, gross receipts, business license, transfer, capital, net worth, gains, excise, social security, workers' compensation and other taxes of any kind whatsoever and estimated income and franchise tax payments, and penalties, interest and fines with respect to any thereof) (collectively, "Taxes") set forth on such Tax Returns as due and payable with respect to the periods covered by such Tax Returns and all other taxes of any Group Members that are due and payable, whether or not reflected on a Tax Return. Since their respective dates of acquisition, the taxable income of each of the Group Members has been included in the consolidated Federal income Tax Returns of the Parent to the extent required to be included under the Code and in the consolidated, combined, unitary or individual state income Tax Returns of the Parent or an Affiliate to the extent required to be included under applicable state income Tax rules.

(b) With respect to any Taxes of any Group Member not due and payable as of June 30, 1999, adequate reserves and accruals for such Taxes have been made :n the Financial Statements and nothing has occurred subsequent to the date of such Financial Statements to make any of such reserves and accruals inadequate. All Taxes of the Group Members for periods after June 30, 1999 have been paid or are adequately reserved against on the books and records of the Companies.

(c) Neither the Seller, nor the Parent, nor any Group Member has received written notice from any taxing authority of any material deficiency, claim or other dispute relating to the payment or assessment of any Taxes for any period which remains unsettled at the date hereof, and the Parent has no reasonable basis to believe that any such deficiency exists materially in excess of reserves and accruals set forth in the Financial Statements or in the books and records of the applicable Group Member.

(d) Neither the Seller, nor the Parent, nor any Group Member has executed any waiver of any statute of limitations on the assessment or collection of Taxes with respect to any Group Member or executed any agreement now in effect extending the period of time to assess or collect any Taxes with respect to any Group Member.

(e) There are no Liens for Taxes (other than Permitted Liens) upon or, to the Knowledge of the Parent, threatened against any assets of the Group.

(f) None of the Seller, the Parent or any Group Member is a party to any pending or, to the Knowledge of the Parent, threatened examination, action, proceeding or assessment by any taxing authority, foreign or domestic, relating to any Group Member.

(g) Except for the Tax Sharing Agreement, which shall be cancelled as of the Closing Date without any effect whatsoever on any Group Member for any taxable year, no Group Member is a party to any tax sharing agreement.

(h) No election under Section 341(f) of the Code has been or will be made to treat any Group Member as a "consenting corporation" as defined in such Section 341(f).

(i) No Group Member is or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code.

(j) None of the Group Members has ever (i) been the subject of a ruling with respect to Taxes that has a continuing effect or (ii) been the subject of a closing agreement with a taxing authority with respect to Taxes that has a continuing effect.

(k) None of the Group Members has agreed to make nor is it required' to make any adjustment under Section 481 of the Code by reason of a change in accounting method or otherwise.

(l) The Parent has made available to Purchaser true, correct and complete copies of the federal and state income tax returns of each of the Group Members (prepared in the case of any consolidated or combined returns that include any entities other than the Group Members on a pro forma basis reflecting the operations of the Group Members for all taxable years beginning on or after January 1, 1995.

(m) No Group Member is party to any agreement, arrangement or understanding that, individually or in the aggregate with any other agreements, arrangements or understandings could result in the payment of any amounts that would be non-deductible under Section 280G of the Code.

(n) Following the Closing Date, the sale of any Group Member or Managed Company or any of their assets will not result in the Purchaser or any of its Affiliates having to take into account items of income or gain arising from or related to intercompany transactions within the meaning of Treas. Reg. (S)1.1502-13, that occurred with respect to such Group Member or Managed Company or assets while owned directly or indirectly by Parent on or prior to the Closing Date.

a. notes, mortgages, indentures, security agreements or other agreements and instruments relating to the borrowing of money, the extension of credit or the granting of Liens or encumbrances;
b. employment and consulting agreements;
c. union or other collective bargaining agreements;
d. material powers of attorney;
e. material licenses of patent, trademark and other intellectual property rights;
f. agreements, orders or commitments for the purchase of services, raw materials, supplies or finished products from any one supplier for an amount in excess of $50,000;
g. agreements, orders or commitments for the rental, lease or sale of equipment, products or services for more than $100,000 to any single purchaser or lessee;
h. contracts or options relating to the rental, sale or lease by a Group Member of any material asset, other than in the ordinary course of business;
i. bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation, accrued vacation pay, group insurance, welfare agreements or other plans, agreements, trusts or arrangements for the benefit of employees;
j. agreements or commitments for capital expenditures in excess of $100,000 for any single project, other than with respect to start-ups or other facility consolidations planned in the ordinary course of business and as are otherwise listed on Schedule 2.06;
k. partnership or joint venture agreements;
l. agreements, arrangements or understandings with any Affiliate of the Seller, the Parent or a Group Member;
m. material rental or lease agreements under which it is either lessor or lessee;
n. material agreements, contracts or commitments for any charitable or political contribution;
o. other agreements, contracts and commitments which are material to the business of any Group Member or any Subsidiary or which involve payments or receipts of more than $100,000 in any single year, or which were entered into other than in the ordinary course of business;
p. agreement to acquire all or substantially all the business of another entity or person;
q. agreements containing any "earn-out" obligations; or
r. indebtedness issued or assumed in connection with any acquisition of another business.

To the Knowledge of the Parent neither any Group Member nor any other party to a Contract is in default in performance of any Contract nor done any act or failed to do any required act which would result in a default, no written notice of such a default has been received by any Group Member, Seller or the Parent and none of the Seller, the Parent or any Group Member has received written notice of an event or occurrence of which with the giving of notice or the lapse of time would constitute a default which is reasonably likely to have a Material Adverse Effect. Except as set forth on Schedule 2.10 or Schedule

                                                   -------------    --------
2.22 hereto, no consents are
----

required (except for any consents as shall have been obtained prior to the Closing Date), and no event of default will occur, under any Contract as a result of the sale and transfer of the Shares from the Seller to the Purchaser, and the change in control of the Group Members as a result of the sale and transfer of the Shares from the Seller to the Purchaser will not give any person or entity the right to negotiate, change or void any terms of, or accelerate any amounts under, any Contract, any Seller Notes or any non-competition agreement or clause to which any Group member is a party.

(a) No Group Member maintains or sponsors, nor is it required to make contributions to, any pension, profit-sharing, bonus, incentive, welfare or other employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (such plans and related trusts, insurance and annuity contracts, funding media and related agreements and arrangements, other than any "multiemployer plan" (within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA), being hereinafter referred to as the "Benefit Plans" and such multiemployer plans being hereinafter referred to as the "Multiemployer Plans");

(b) Each Benefit Plan complies in all respects with all requirements of ERISA and the Code except where the failure to so comply would not have a Material Adverse Effect;

(c) Each Benefit Plan that is intended to be qualified under
Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service as to such qualification within the period of time prescribed by law;

(d) No Group Member maintains, sponsors or contributes to nor is required to contribute to) any Multiemployer Plan;

(e) No Benefit Plan is a "defined benefit plan" (within the meaning of Section 3(35) of ERISA); and

(f) None of the Parent, the Seller or any Group Member has engaged in, and the Parent has no knowledge of any fiduciary or other "disqualified person or party in interest" of any Benefit Plan of any Group Member that has engaged in, any "prohibited transaction within the meaning of Section 406 of ERISA or Section 4975c) of the Code).

(g) No Group Member, nor any other employer (an "ERISA Affiliate") that is, or at any relevant time was, together with any of the Companies, treated as a "single employer" under section 414(b), 414(c) or 414(m) of the Code, has at any time since January 1,1993 incurred any liability which could subject any Group Member or Purchaser to material liability under Section 4062, 4063 or 4064 of ERISA or (2) , been required to contribute to, or incurred any withdrawal liability, within the meaning of Section 4201 of ERISA to any multiemployer pension plan, within the meaning of Section 3(37) of ERISA nor does any Group Member or any ERISA Affiliate have any potential withdrawal liability arising from a transaction described in Section 4204 of ERISA

(h) All contributions to, and payments from, the Non-PEO Benefit Plans which have been required to be made in accordance with the Non-PEO Benefits Plans have been timely made. All such contributions to the Non-PEO Benefits Plans, and all payments under the Non-PEO Benefit Plans, except those to be made from a trust qualified under section 401(a) of the Code, for any period ending on or before June 30, 1999 that were not yet, but will be, required to be made are properly accrued and reflected on the Financial Statements.

(i) Parent has satisfied its obligations under the Parent NCES Agreement with respect to the Benefit Plans in all material respects.

(j) No payment which is or may be made by, from or with respect to any Benefit Plan, to any employee, former employee, director or agent of any Group Member, either alone or in conjunction with any other payment, will or could properly be characterized as an excess parachute payment under section 280G of the Code.

(k) Each employee of each Group Member is employed in a co- employment arrangement between that Group Member and NovaCare Employee Services, Inc. ("NCES").

(ii) Each Group Member has obtained all required Federal, state and local permits, licenses, certificates and approvals (the "Environmental Permits") relating to (A) air emissions, (B) discharges to surface water or ground water, (C) noise emissions, (D) solid, liquid or medical waste disposal, and (E) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes (intended hereby and hereafter to include any and all such materials listed in any Environmental Law, as hazardous or potentially hazardous (including, without limitation, (1) any chemical,

compound, material or substance that is defined, listed in, or otherwise classified pursuant to, any of the Environmental Laws as a hazardous substance", "hazardous material", "hazardous waste", "toxic substance" or "toxic pollutant", "contaminant", "pollutant" or "waste" and (2) petroleum, natural gas, natural gas liquids, liquefied natural gas, and synthetic gas) (collectively, "Hazardous Substances")), and all such Environmental Permits are in full force and effect, except where the failure to have obtained or maintained any such Environmental Permit would not have a Material Adverse Effect. Each Group Member is in, and has been in, compliance with all such Environmental Permits, except where the failure to be in compliance is not reasonably likely to have a Material Adverse Effect.

(iii) No Group Member has received or has knowledge of the existence of any notice of violations citations, Summons, orders, complaints or penalties of or relating to any Environmental Law or Environmental Permit which have not been cured, and to the Knowledge of the Parent, no investigation or review is pending or threatened by any governmental or other entity or person, relating to the use, ownership or occupancy of any of the Premises or the conduct of the business of the Group Members, except for any violations referred to in any such notice which would not have a Material Adverse Effect.

(iv) No Group Member has engaged in the generation, storage, treatment, recycling, transportation or disposal of any Hazardous Substance, except in compliance with applicable Environmental Laws, except where the failure to be in compliance would not have a Material Adverse Effect.

(v) No Group Member has, nor, to the Knowledge of the Parent, has any other party for which any Group Member is or could be responsible directly or indirectly, transported or arranged for the transportation of any Hazardous Substances, is listed on the National Priorities List promulgated pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), on CERCLIS (as defined in CERCLA) or on any similar Federal, state or foreign list of sites requiring investigation or cleanup.

(vi) No Group Member has nor, to the knowledge of the Parent, has anyone else generated, treated, stored, recycled, disposed of or released any Hazardous Substance on any Premises or any property previously owned or leased by any Group Member or at any other property which has resulted in any condition for which any Group Member is or is reasonably likely to be responsible, including under CERCLA or any similar Environmental Law, except for such condition which would not have a Material Adverse Effect.

(c) Each Group Member and each Subsidiary is, to the extent applicable to their operations, (i) eligible to receive payment under Titles XVIII and XIX of the Social Security Act, (ii) providers under existing provider agreements with the Medicare program through applicable intermediaries and with each state Medicaid program under which they are to have been providers and
(iii) in compliance with the conditions of participation in the Medicare

program, except where such inability in the case of either items (i) or (ii) or non-compliance in the case of item (iii) is not reasonably likely to have a Material Adverse Effect.

(d) Each Group Member and each Subsidiary has tiled all required cost reports and other required claims and governmental filings with respect to Medicare and each state Medicaid program in which they participate, all of which were, when filed or as they have been subsequently amended, complete and correct, except to the extent that such failure to file or failure to be complete and correct is not reasonably likely to have a Material Adverse Effect. Each Group Member and each Subsidiary has made available to Purchaser complete and correct copies of all such cost reports, claims, governmental filings, audits and schedules prepared or issued by, or filed with, any governmental authority or private payor with respect to the operations of each of the Group Members and each Subsidiary with respect to the prior three years.

(e) The businesses of each Group Member and each Subsidiary have not been and are not being conducted in violation of any law, ordinance, regulation or court ruling of any governmental authority (including, without limitation, laws, rules and manual provisions pertaining to reimbursement of each Group Member and each Subsidiary for services rendered, the federal False Claims Act (31 U.S.C. (S)3729) or any other applicable federal or state false claim or fraud law, the federal anti-kickback statute (42 U.S.C. (S)1320a- 7b(b)), any applicable state anti-kickback law, the federal Ethics in Patient Referrals Act (42 U.S.C. (S)1 395nn, commonly known as the Stark Act) or any applicable state self-referral law), except for violations which are not reasonably likely to, individually or in the aggregate, have a Material Adverse Effect.

(f) Each of any Company, any Subsidiary and any of their current or former shareholders, directors, officers, agents, employees and other persons acting on behalf of them, has complied, in all material respects, with all applicable federal, state and municipal statutes, rules, regulations and orders and other requirements of all courts and other governmental or regulatory authorities having jurisdiction over any Group Member, including without limitation those relating to third party reimbursement (including, but not limited to, Medicare, Medicaid, CHAMPUS and other federal health care programs), fraudulent or abusive practices (including but not limited to the state health care programs, Anti-Fraud and Abuse Amendments of the Social Security Act, as amended, commonly known as the "Anti-Kickback Statute." and the amendments to
Section 1877 of the Social Security Act (42 U.S.C. (S)1395nn), enacted as part of the Omnibus Budget Reconciliation Act of 1993, commonly known as "Stark II"), environmental protection, occupational safety and health, equal employment practices and fair trade practices., except where the failure to comply is not likely to, individually or in the aggregate have a Material Adverse Effect.

(g) The Group Members and all professional employees or agents of the Group Members hold and are in compliance with all permits, certificates (including without limitation, certificates of need), licenses, orders, registrations, franchises, authorizations and other approvals from all federal, state, local and foreign governmental and regulatory bodies

For purposes of Sections 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.10, 2.11, 2.14, 2.15, 2.16(c) through 2.16(i), 2.17, 2.25, 2.26, 2.27, 2.28, 2.29, 2.30, 2.31, the terms Group Members, Companies and Subsidiaries include the Managed Companies.

None of the Group Members or, to the knowledge of any Group Member, the Parent or the Seller, any other party is in breach of or default under any such license or other agreement and each such license or other agreement is now and immediately following the Closing shall be valid and in full force and effect.

contemplated hereby have been duly authorized by all necessary corporate action including, without limitation, shareholder approval. This Agreement has been duly executed and delivered by the Parent and the Seller and constitutes a valid arid legally binding obligation of the Parent and the Seller, enforceable against the Parent and the Seller in accordance with its terms.

(a) Neither Seller, any Group Member, any affiliate nor any person who has a direct or indirect ownership interest (as those terms are defined in 42 C.F.R. (S)1001.100 1(a)(2)) in any Group Member of 5% or more, or who has an ownership or control interest (as defined in Section 1 l24(a)(3) of the Social Security Act or any regulations promulgated thereunder) in any Group Member, or who is an officer, director, agent or managing employee (as defined in 42 C.F.R. 1001, 100 1(a)(i): (a) has had a civil monetary penalty assessed against it under Section 1 128A of the Social Security Act or any regulations promulgated thereunder; (b) has been excluded from participation under any federal health care program; or (c) has been convicted (as that term is defined in 42 C.F.R. (S) 1001.2) of any of the categories of offenses as described in the Social Security Act Section 1128(a) and (b)(l), (2), (3) or any regulations promulgated thereunder.

(b) All cost reports to be filed under Medicare and Medicaid or any other applicable governmental or private provider regulations for the Company Facilities were filed by the required filing dates. Such cost reports were prepared and filed in good faith in accordance with applicable, laws, rules and regulations and each Group Member has made provision to pay any net liability on all Notices of Program Reimbursement (or similar documents) received from Medicare, Medicaid or other governmental or private payors for the periods ended prior to December 31, 1998. Neither any Company nor any Subsidiary has received notice, or has

knowledge of the existence, of any pending dispute between any Company and/or any Subsidiary and governmental authorities or the Medicare fiscal intermediary regarding such cost reports for the remaining unaudited cost report periods other than with respect to adjustments thereto made in the ordinary course of business which do not involve amounts in excess of S20.000 in the aggregate. All home office cost reports tiled by the Seller and all Group Members, it' any, are true and correct in all material respects and the costs contained in such reports are appropriately included therein and have been properly allocated among the Seller, the Companies and the Subsidiaries and businesses in accordance with Medicare and Medicaid rules and regulations. The home office cost report of Seller and the Group Members, if any, covering the period June 30, 1998 through and including Closing will only include costs that are allowable under applicable reimbursement regulations.

In connection with the purchase and sale of the Shares hereunder, the Purchaser hereby represents and warrants to the Parent and the Seller, as of the date hereof and as of the Closing Date, that:

Purchaser or (b) constitutes a violation of any Applicable Law. Neither the execution and delivery of this Agreement by the Purchaser nor the consummation of the transactions contemplated hereby to be consummated by the Purchaser violates, conflicts with, results in any breach of any of the terms of or results in the termination of or the creation of any material lien pursuant to the terms of any material contract, commitment, agreement, or lease of any and to which the Purchaser is a party or by which the Purchaser or any of its assets are bound.

days after the expiration of the HSR thirty day waiting period, or 'ii' the date which is ten (10) business days after the receipt of early termination of the HSR waiting period, or such other time, place and date as the Purchaser and the Seller may agree (such date upon which the Closing occurs is herein referred to as the "Closing Date".

(a) at any time before the Closing, by written agreement of the Seller and the Purchaser;

(b) unless extended by written agreement of the Seller and the Purchaser, at any time after January 15, 2000 (the "Termination Date"), by either the Seller or the Purchaser in writing, if the transactions contemplated by this Agreement have not been consummated on or before such date and such terminating party is not then in material breach of this Agreement;

(c) at any time before the Closing, by the Purchaser or the Seller in writing, in the event that any Governmental Authority shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; and

(d) at any time before the Closing, by either the Purchaser or the Seller in writing, without liability to the terminating party on account of such termination, if such terminating party is not then in material breach of this Agreement and the nonterminating party shall (i) fail to perform in any material respect its agreements contained herein required to be performed on or prior to the Closing Date which failure is reasonably likely to have a Material Adverse Effect and such nonterminating party has not cured in all material respects such breach on or prior to the date which is 30 days after such nonterminating party has received written notice from the terminating party of such failure to perform or such longer period in the event that such breach cannot reasonably be expected to be cured within such 30-day period and such nonterminating party is diligently pursuing such cure, but in no event later than the Termination Date or (ii) breach any of its representations or warranties contained herein which breach is reasonably likely to have a Material Adverse Effect and such nonterminating party has not cured in all material respects such breach on or prior to the date which is 30 days after such nonterminating party has received written notice from the terminating party of such breach or such longer period in the event that such breach cannot reasonably be expected to be cured within such 30-day period and such nonterminating party is diligently pursuing such cure, but in no event later than the Termination Date.

subsection 4.02(d) above under circumstances where the nonterminating party has breached its obligation to close the transactions contemplated hereby (notwithstanding that the nonterminating party's conditions to such obligation to close contained in Section V or VI, as the case may be, have been satisfied or that the terminating parry stands ready, willing and able to satisfy such conditions but for such breach, the terminating party may exercise all available rights and remedies at law.

The obligation of the Seller to sell the Shares and otherwise to consummate the transactions contemplated by this Agreement at the Closing is subject to the following conditions precedent, any or all of which may be waived by the Seller in the Seller's sole discretion, and each of which the Purchaser hereby agrees to use its best efforts to satisfy at or prior to the Closing:

(a) Certificates of incumbency executed by the Secretary of the Purchaser in form and substance reasonably acceptable to the Seller;

(b) Certificate of the Secretary of the Purchaser certifying as to a true and correct copy of the duly adopted resolutions of the board of directors of the Purchaser, in form

and substance reasonably acceptable to the Seller, with respect to the consummation of the transactions contemplated by this Agreement and that such resolutions continue in full force and effect, without amendment, as of the Closing Date: and

(c) Such other certificates, instruments and other documents, in form and substance reasonably satisfactory to the Seller and counsel for the Seller, as the Seller shall have reasonably requested in connection with the transactions contemplated hereby.

The obligation of the Purchaser to purchase the Shares and otherwise to consummate the transactions contemplated by this Agreement at the Closing is subject to the following conditions precedent, any or all of which may be waived by the Purchaser in its sole discretion, and each of which the Seller and the Parent hereby agree to use their respective best efforts to satisfy at or prior to the Closing:

(a) A true and correct copy of the certificate of incorporation of each. Company, certified as true and correct by the Secretary of State or other appropriate governmental official of its jurisdiction of organization, and a copy of the by-laws of each Company, certified as true and correct by its Secretary:

(b) Certificate of incumbency executed by the Secretary to' the Seller in form and substance reasonably acceptable to the Purchaser:

(c) Certificate of incumbency executed by the Secretary of the Parent in form and substance reasonably acceptable to the Purchaser;

(d) Certificate of the Secretary of the Seller certifying as to a true and correct copy of the duly adopted resolutions of the board of directors and the duly adopted resolutions of the sole stockholder of the Seller and a certificate of the Secretary of the Parent certifying as to a true and correct copy of the duly adopted resolutions of the board of directors of the Parent, each in form and substance reasonably acceptable to the Purchaser, with respect to the consummation of the transactions contemplated by this Agreement and that such resolutions continue in full force and effect, without amendment, as of the Closing Date; and

(e) Such other certificates, instruments and other documents, in form and substance reasonably satisfactory to the Purchaser and counsel for the Purchaser, as the Purchaser shall have reasonably requested in connection with the transactions contemplated hereby.

(a) The representations and warranties of the Parent and Seller contained herein (without regard to any materiality or Material Adverse Effect qualifications contained therein) shall be true and correct at and as of the Closing Date with the same effect as though all such representations and warranties were made at and as of the Closing Date, except to the extent that any of such representations and warranties are, by their terms, made expressly as of the date of this Agreement or another date, in which case such representations and warranties shall have been true and correct as of the date hereof or such other date, as applicable, except where the failure to be true and correct (without giving effect to any materially qualification in any particular representation) shall not, individually or in the aggregate, have or be reasonably likely to have a Material Adverse Effect.

(b) The Parent and Seller shall have complied ~n all material respects with its covenants and agreements contained herein required to be compiled with on or prior to the Closing Date.

(c) On the Closing Date, the Parent and Seller shall deliver to the Purchaser a certificate dated as of the Closing Date to the effects of paragraph a and b of this section.

(1) amend its Articles of Incorporation or Bylaws;

(2) change its authorized or issued capital stock or issue any rights or options to acquire shares of its capital stock or securities convertible into or exchangeable for such Shares;

(3) enter into or renew any employment or consulting contract or arrangement with any person which is not terminable at will, without penalty or continuing obligation:

(4) make, change or revoke any Tax election or make any agreement or settlement with any taxing authority:

(5) guarantee or become a co-maker or accommodation maker or otherwise become or remain continently liable in connection with any liability or obligation of any person (other than the endorsement of checks in the ordinary course of business); or

(6) open any new clinic or purchase any clinic or close or sell any clinic (except capital expenditures consistent with the year-to-date capital budget);

(7) enter into or renew any real property lease, except clinic leases not having a term of greater than five (5) years or which provide for monthly base rent in excess of $10,000 per month;

(8) enter into any agreement which requires payments of more than $100,000 in a single year.

(j) enter into any agreement to do any of the foregoing.

documents (certified to be true copies if requested) and all information with respect to the affairs of any Group Member as the Purchaser may reasonably request.

(a) Except as specifically provided for herein, effective as of the Closing Date, Parent and Seller shall have no obligation to provide benefits to any Employee, former Employee or Beneficiary under the Parent NCES Agreement, or otherwise, and Purchaser and the Group Members shall be responsible for and shall promptly discharge all of Parent's liabilities under the Parent NCES Agreement with respect to the PEO Benefit Plans. Effective as of the Closing Date, Parent and Seller shall cease to have any liability with respect to the NonPEO Benefits Plans.

(b) Effective as of the Closing Date, Parent shall take, or cause to be taken, all such action as is necessary to terminate its co-sponsorship of the PEO Benefit Plans.

coverage of Employees, Former Employees or Beneficiaries under the Seller's Health Plan through the Effective Time within 30 days after receipt of an invoice or statement relating to the same. The amount of such premiums and charges shall be calculated in accordance with the Parent's and the Group Member's prior practices regarding such premiums and charges in accordance with Code (S)4980B. The Purchaser agrees to notify all Employees, Former Employees and their Beneficiaries of the manner in which pre-Effective Time Expenses under the Seller's Health Plan are to be submitted for reimbursement and to request that all such expenses be submitted within 60 days after the Closing Date.

(c) Effective as of the Closing Date, active participation of the Employees in the NCES/NovaCare, Inc. 40 1(k) Retirement Savings Plan ("Parent's 40 1(k) Plan") shall cease and Purchaser shall establish a defined contribution retirement plan qualified under Section 401(a) of the Code for the benefit of all employees of the Group Members who continue employment with the Purchaser or any Group Member thereafter (the "Retained Employees") (the "Purchaser's 40 1(k) Plan"). Within 180 days after the Closing Date, Purchaser shall provide Parent with an opinion letter of counsel acceptable to the Parent that the Purchaser's 40 1(k) Plan satisfies the requirements for qualification under Section 40 1(a) of the Code or deliver to Parent a current favorable determination letter issued by the IRS that the Purchaser's 40 1(k) Plan satisfies the requirements for qualification under Section 401(a) of the Code. As soon as practicable after the latest of(i) the expiration of 30 days following the filing of Forms 5310 with the IRS, if required and (ii) the receipt by Parent of the opinion or determination letter prescribed above, Parent shall cause the trustee of Parent's 40 1(k) Plan to transfer to the trust forming a part of the Purchaser's
401(k) Plan cash and/or securities reasonably acceptable to Purchaser (including participant notes) equal to the aggregate account balances (including loan balances) of the Retained Employees as of such transfer date.

(d) Purchaser agrees that each Retained Employee will be given credit for all service with any Group Member, the Subsidiaries and any affiliates thereof in determining such Retained Employee's eligibility to participate and vest in any employee benefits, as well as the amount of vacation and severance, if service is applicable under Purchaser's plans, offered by

Purchaser or any affiliate of Purchaser to the same extent as if that service had been performed for Purchaser. In addition, Purchaser will grant credit under its vacation, sick leave and paid time off programs for all accrued vacation, sick leave and paid time off to which the Retained Employees are entitled under comparable Benefit Plans maintained by Parent on the Closing Date.

(f) No covenant or agreement by any party hereto to indemnify any other party hereto shall release, or be deemed to release, any insurer or indemnitor of any Damages which might be the basis for any Indemnification Matter.

(g) Effective as of the Closing Date, active participation of the Employees in the NovaCare Employee Stock Purchase Plan shall cease.

businesses or operations for any and all periods prior to or including the Closing Date which another party (or any of its Affiliates) requires with respect to any reasonable business purpose, and shall (and, in the case of the Purchaser, shall cause each of the Group Members to cooperate fully with the Parent and its representatives (including, without limitation, its counsel and independent auditors) in connection with the foregoing, including, without limitation, by making tax, accounting and financial personnel and other appropriate employees and officers of the Seller, the Parent or each Group Member, as the case may be, reasonably available to the other parties and their representatives (including, without limitation, counsel and independent auditors), with regard to any reasonable business purpose.

(b) Without limiting the generality of Section 8.04(a) but subject to Section 8.04(c), from and after the Closing Date, the Purchaser shall (and shall cause each of the Group Members to) cooperate fully with, and shall cause its officers and employees (and the officers and employees of the Group Members to cooperate fully with the Parent and its representatives) (including, without limitation, its counsel and independent auditors) in connection with

(i) the Parent's preparation of the Group Members' (or any Group Member's) Federal, state or local income Tax Return, report or declaration, for any Seller Tax Period, and to that end following the Closing Date, the Parent shall submit to the Purchaser blank Tax Return workpaper packages reasonably necessary to enable the Parent to prepare such Tax Returns and the Purchaser shall cause the Group Members to prepare for and to deliver to the Parent, within 90 days following the later of receipt of such workpaper packages and the Closing Date completed workpaper packages, and shall cause the officers and employees of the Group Members to cooperate and assist the Parent in the Parent's review and verification of the same;

(ii) any Tax audit, examination or proposed or final assessment or the like (including without limitation any Tax Claim) relating to the Seller, the Parent, the Group or any Group Member, and to any Seller Tax Period;

(iii) the preparation of any financial statements of the Group Members
(or any Group Member) for (or including) any period (or portion thereof) ending on or before the Effective Time, and to that end the Purchaser shall cause each Group Member to prepare for and to deliver to the Parent any financial information of the type historically prepared by any Group Member for all periods (or portions thereof) ending on or before the Effective Time and to cause the officers and employees of any Group Member to cooperate fully and assist the Parent in its review and verification of the same;

(iv) the Parent's preparation of any statement, report, notice, response or other document for filing with the Securities and Exchange Commission, any state or foreign securities commission or authority, any other Governmental Authority or any securities exchange or market, domestic or foreign, including, without limitation, in connection with any comments, requests for information, inquiries, investigations or proceedings, formal or informal, by any of the foregoing;

(v) the investigation, prosecution or defense of or response to any Actions, claims or inquiries commenced by any Purchaser Indemnified Party, or by any Governmental Authority or any other person or entity, against the Parent or the Seller (or any other Seller Indemnified Party or any Affiliate thereof), or by the Parent or the Seller (or any Affiliate thereof) against the Purchaser or any other Purchaser Indemnified Party), including in any case relating to any Indemnification Matter under Sections
8.03. IX or X hereof.

(c) The cooperation and assistance of the Purchaser and the Group Members and their respective officers and employees under this Section 8.04 shall be rendered during normal business hours and in a manner which does not disrupt the business and operations of the applicable Group Member or interfere with the performance by employees of the Group Members of their normal duties, and subject to the foregoing the Purchaser shall use its best efforts in the case of the Parent's preparation of any Tax Return, report or declaration and any financial statements, to cause such cooperation and assistance to be rendered without adverse consequences to the Seller or the Parent during the period that each of the Group Members has normally assisted the Seller or the Parent in the Parent's preparation of Tax Returns, reports or declarations and financial statements. The Parent shall reimburse the Group Members for any out- of-pocket expenses paid by them in the cooperation and assistance by Purchaser with the Parent's preparation of any such Tax Returns, reports or declarations and any such financial statements.

(d) Purchaser and Group Member shall not in any case be required to spend more than 300 employee hours for the assistance and cooperation described herein; hours spent in excess of 300 shall be charged at Purchaser's and Group Member's fully burdened cost per hour.

(e) Without limiting the generality of subsection (a) of this
Section 8.04, following the Closing, no party shall (and no party shall cause their Affiliates to) destroy any information, files, documents or records (written and computer) relating to any Group Member or any of its businesses or operations on or before the Closing Date without giving at least 30 days' prior written notice to the other parties hereto and shall (and shall cause their Affiliates to) permit the other parties hereto to examine, duplicate (at the expense of the other parties hereto) and/or transfer (at the expense of the other parties hereto) to the other parties hereto or their representatives any of such information, files, documents or records (written and computer).

such returns. To the extent permitted by law, the Parent and the Purchaser agree to cause a taxable period of each Group Member to close on the Closing Date for state and local income Tax purposes. Except to the extent expressly permitted by the Purchaser or as specified in this Agreement, all Tax Returns prepared by the Parent with respect to the Group Members pursuant to this Section 8.06(a) shall be prepared in a manner consistent with past practice and no Tax elections shall be made or Tax accounting methods shall be applied except in a manner consistent with past practice. Parent shall provide to Purchaser a reasonable right to review and comment upon any such Tax Returns prior to the filing thereof.

(b) Except as provided in clause (a) of this Section 8.06. the Purchaser agrees to cause the Group Members to file all Tax Returns, reports and declarations required to be riled by any of them after the Closing Date and to pay all Taxes due and payable by any of them after the Closing Date, including any Taxes (other than income Taxes) that accrued prior to the Closing Date or that are otherwise allocable to any Seller Tax Period that does not end on or before the Closing Date. Without limiting the generality of Section 8.04 or this Section 8.06, the Parent and Purchaser shall be given the opportunity to review, comment upon and suggest changes or corrections to, any income Tax Returns, reports and declarations prepared by the other party covered by this
Section 8.06(a) and (b) which include any Seller Tax Period (and the work papers of the Group Members and Parent and their accountants used in the preparation thereof), in each case prior to the filing thereof (but in no event less than 30 days prior to such filing). In the event of any dispute regarding the matters set forth in the immediately preceding sentence, then PricewaterhouseCoopers (or if PricewaterhouseCoopers shall decline to arbitrate such dispute, then another nationally recognized accounting firm selected by the Parent) shall be requested to make a determination resolving any such dispute; and the determination by PricewaterhouseCoopers (or such other accounting firm) of any such dispute shall be final and binding on the parties hereto. The fees and expenses of PricewaterhouseCoopers (or such other accounting firm) in resolving such dispute shall be borne fifty percent (50%) by the Parent and fifty percent (50%) by the Purchaser.

(c) Any refunds or credits of income Taxes of any Group Member for any Seller Tax Period shall be for the account of the Parent to the extent not reflected in the calculation of Consolidated Net Working Capital reflected on the Closing Balance Sheet, and to the extent not attributable to the carryback from a taxable period following the Closing Date ("Parent's Refunds"). Applications for Parent's Refunds of Taxes, and the filing of amended Tax Returns with respect to any Seller Tax Period resulting in Parent's Refunds shall be made and prosecuted only by the Parent or the Seller. Without limiting the provisions of Section 8.04, the Purchaser shall provide and shall cause each Group Member to provide to the Parent full cooperation and assistance in connection with any application for refund or amendment made or proposed to be made by the Parent or the Seller as shall be requested by the Parent, including by causing each Group Member to authorize by appropriate powers of attorney such person as the Parent shall designate to represent such Group Member with respect to such refund claim, without charge for any cost or expense for assistance rendered by officers and employees of the Group Members in connection therewith. Neither the Parent nor the Seller shall seek any Tax refund, or amend any Tax Return, which would have the effect of increasing the Taxes of any

Group Member for any taxable period (or portion thereof) beginning after the Closing Date; however, the foregoing shall not apply to any amended Tax Return which may be required by law following resolution of a Tax dispute. Neither the Purchaser nor any Group Member shall amend, or take any similar action with respect to, any Tax Return filed by the Parent, the Seller or by any Group Member with respect to any Seller Tax Period without the prior written consent of the Parent: provided that the foregoing shall not apply to any amended Tax Return which may be required by law following resolution of a Tax dispute conducted in accordance with this Agreement. The Purchaser shall or shall cause each Group Member to forward to the Parent any Parent's Refund of income Taxes of any Group Member within five days after such refund is received or reimburse the Parent for any credit within five days after the credit is allowed or applied against other Tax liability). Notwithstanding the foregoing, the control of the prosecution of a claim for refund of Taxes paid pursuant to a deficiency assessed subsequent to the Closing Date as a result of an audit shall be governed by the provisions of 9.03(d) hereof.

(d) The Purchaser shall not file an election (or cause a deemed election) under Section 33 8(h)(l0) of the Code with respect to its acquisition of the Group Members or any Group Member hereunder. The Purchaser shall consent to the election under Treasury Regulation (S)1.1502-20(g)(l) to re-attribute any net operating losses and/or net capital losses of any Group Member to the Seller or the Parent, except for an amount of such losses as is necessary to offset the Tax liability of any Group Member arising pursuant to (S)481 of the Code, and shall cause the Group Members to execute and file such statements as may be necessary or appropriate to effect such election.

(e) All Taxes with respect to the income, property or operations of the Group Members that relate to any taxable year or period beginning before and ending after the Closing Date shall be apportioned between the Seller Tax Period and the period beginning the day after the Closing Date as follows: (A) in the case of Taxes other than income and sales or use Taxes, on a per diem basis, and (B) in the case of income Taxes (including income Taxes based on capital or other alternative bases) and sales or use Taxes, as determined from the books and records of the Parent and the Group Member in question, as though the taxable year of the Group Member terminated on the Closing Date, and based on the accounting methods, elections and conventions used by the Parent and/or the relevant Group Member in prior years.

(f) Following the Closing, and without regard to any of the limitations set forth in Section IX, the Parent and the Seller shall fully indemnify and hold harmless the Purchaser and each of the Group Members from and against any liability for any Damages that relate to Taxes (i) of the Group Members that are attributable to any taxable period or portion thereof that ends on or before the Closing Date to the extent the liability therefor exceeds the amount expressly reflected as a liability in the calculation of Consolidated Net Working Capital reflected on the Closing Balance Sheet or (ii) of any person other than a Group Member for which a Group Member may become liable (A) by reason of being a member of a consolidated or combined Tax Return that includes such other person on or before the Closing Date. B by reason of being a successor to such other person by merger, liquidation or otherwise on or before

the Closing Date or (C) by reason of being a party to a Tax sharing or Tax allocation agreement on or before the Closing Date.

(g) Except as otherwise provided in this Agreement, on or before the Closing Date, the Parent shall cause all Tax sharing agreements or arrangements that may exist between any Group Member and the Parent, the Seller or their Affiliates to be terminated and all obligations thereunder to be terminated as of the Closing Date, and none of the Group Members shall have any liability thereunder for any and all amounts due in respect of periods up to and, including the Closing Date.

(i) any projections, estimates or budgets contained in that certain Confidential Information Memorandum relating to the Group Members or otherwise heretofore or hereafter delivered to or made available to the Purchaser or its counsel, accountants, advisors, lenders, representatives or Affiliates of future revenues, expenses or expenditures, future results of operations (or any component thereof), future cash flows (or any component thereof) or future financial condition (or any component thereof) of the Group or any Group Member or the future business, operations or affairs of the Group or any Group Member; and

(ii) any other information, statements or documents heretofore or hereafter delivered to or made available to the Purchaser or its counsel, accountants, advisors, lenders, representatives or Affiliates (including, without limitation, the Confidential Information Memorandum relating to the Group Members) with respect to the Group or any Group Member or the business, operations or affairs of the Group or any Group Member.

with the Purchaser. At the end of such six month period, Parent shall promptly take such steps as are necessary to change its name to a name not including the word "NovaCare."

(b) The parties agree that, notwithstanding anything else herein, James W. McLane shall not become an employee of Purchaser and, if employed by any Group Member, shall be terminated by such Group Member as of the Closing Date. Parent shall be fully responsible for any and all payments or other obligations due or payable to Mr. McLane at or after Closing arising from his employment with Parent and the Group Members prior to the Closing Date. Parent shall indemnify and hold Purchaser harmless, as further provided in Section IX, for any and all liabilities relating thereto.

(c) Parent shall be fully responsible for any and all incentive payment obligations to any employees relating to the consummation of the transactions contemplated by this Agreement. Parent shall indemnify and hold Purchaser harmless, as further provided in Section IX, for any and all liabilities relating thereto.

hold Purchaser harmless, as further provided in Section IX, for any and all liabilities relating thereto. Parent further covenants that, if any potential obligations of Parent under this subsection "(d)" remain unsatisfied as of the date Parent intends to make any distribution of assets to shareholders or a liquidation trustee, Parent shall provide security sufficient to satisfy any such remaining obligation, to Purchaser's reasonable satisfaction.

(a) For a period of five years from and after the Closing Date, neither the Parent, the Seller nor any of their respective Affiliates (other than individuals who are officers, directors and/or controlling stockholders) (collectively, the "Restricted Parties") shall, directly or indirectly, (i) own, manage, operate, join, control or participate in the ownership, management, operation or control of, or provide any financing or lease any assets to, any entity that engages in, or that the Restricted Party knows intends to engage in, a Competing Business, or (ii) solicit, retain as a consultant, interfere with or attempt to entice away from the Purchaser, the Group or their respective Affiliates, any Protected Employee, or (iii) solicit, interfere with or attempt to entice away from the Purchaser, the Group or their respective Affiliates, any person, firm or corporation which has been or is during the two-year period commencing on the Closing Date a customer of the Purchaser or any Group Member. Ownership of not more than 2% of the outstanding stock of any publicly traded company shall not be a violation of this Section 8.11 so long as the Restricted Parties do not participate in the management of such company.

(b) The length of time for which this covenant not to compete shall be in force shall not include any period of violation or any other period required for litigation during which Purchaser or any Group Member seeks to enforce this Section 8.11. In the event that any of the covenants contained in this Section 8.11 shall be determined by any court of competent jurisdiction to be unenforceable by reason of its extending for too long a period of time or over too large a geographical area or by reason of its being too extensive in any other respect, it shall be interpreted to extend only over the longest period of time for which it may be enforceable, and/or over the largest geographical area as to which it may be enforceable and/or to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action.

(c) The restrictive covenants contained in this Section 8.11 are each covenants independent of any other provision of this Agreement, and the existence of any claim which any party may allege against any other party to this Agreement, whether based on this Agreement or otherwise, shall not prevent the enforcement on these covenants. The Seller and the Parent acknowledge that the Purchaser is purchasing the Companies in reliance on the goodwill of the

businesses of the Group and the covenants contained in this Section 8.11 are essential to the protection of the Purchaser's purchase of the Companies and that the Purchaser would not purchase the Companies but for these covenants. The Seller and the Parent agree that a breach by any of them of this Section 8.11 shall cause irreparable harm to the Purchaser and the Group -and that the Purchaser's and the Group's remedies at law for any breach or threat of breach of the provisions of this Section 8.11 shall be inadequate, and that the Purchaser and the Group shall be entitled to an injunction or injunctions to prevent breaches of this Section 8.11 and to enforce specifically the terms and provisions hereof, in addition to any other remedy to which the Purchaser or the Group may be entitled at law or in equity.

(b) In the event that despite the parties best efforts, NCES does not enter into the Purchaser NCES Agreement at or before Closing, at the Closing, Parent shall assign to Purchaser and, subject to subsection "(d)" herein, Purchaser shall assume from Parent, the Parent's rights and obligations under the Parent NCES Agreement; provided that in the event Purchaser breaches the Parent NCES Agreement by delivering a termination notice to NCES as of any date on or after the 18 months after the Closing Date or by failing or refusing to perform its obligations under the Parent NCES Agreement accruing on or after such date, Parent and Seller shall, without regard to any limitations or conditions on indemnification contained in Section IX, jointly and severally indemnify and hold harmless the Purchaser Indemnified Parties from and against all Damages arising out of such termination and breach of the Parent NCES Agreement (it being understood that Purchaser shall remain obligated to NCES with respect to any and all obligations and damages relating to the period from the Closing Date through the date of such termination); the intention of the parties being that Purchaser shall be responsible to NCES as if it had entered into the Purchaser NCES Agreement, and Parent shall be responsible for all other obligations to NCES.

(c) In the event that following the Closing, Purchaser and NCES enter into the Purchaser NCES Agreement, the assignment and assumption of the Parent NCES Agreement provided for in Section 8.16(b) shall be null and void and of no further force or effect.

(d) Purchaser's obligations under 3.16b) to assume the Parent NCES Agreement shall be conditioned on Parent having complied with its obligations under Section 5.12 of the Merger Agreement dated as of September 3, 1999 between NCES and Parent regarding the provision of a guarantee by Parent of the Minimum Fee Guarantee to be received by NCES under the Parent NCES Agreement and the posting of sufficient security to secure such guarantee, to Purchaser's reasonable satisfaction.

(a) Parent represents and warrants to Purchaser that (i) the Consolidated Net Working Capital (as defined herein) as of the Closing Date, as determined in accordance herewith, will be at least $85.8 million; (ii) the Long-Term Liability Amount (as defined herein) will be zero, and (iii) the Tax Liability Amount (as defined herein) will be zero.

(b) The Purchaser shall prepare and deliver to the Parent within one hundred twenty (120) days after the Closing a consolidated balance sheet of the Companies and its Subsidiaries as of Closing (the "Closing Balance Sheet") prepared in accordance with GAAP, applied on a basis consistent with the preparation of the audited Financial Statements, and

(c) As used herein, the "Consolidated Net Working Capital" of the Companies and their Subsidiaries shall mean the excess of the "current assets" of the Companies and their Subsidiaries (excluding deferred income taxes) over the "current liabilities" (excluding the current portion of Seller Notes and other third-party indebtedness, deferred income taxes, accrued contingent earnouts, accrued interest and intercompany accounts payable and accrued liabilities, except insurance reserves and payroll and related benefit costs) on a consolidated basis, in each case as such assets and liabilities are properly accrued and reflected on the books and records of the Companies and their Subsidiaries in accordance with GAAP applied on a basis consistent with the preparation of the audited Financial Statements. For avoidance of doubt

such insurance reserves shall be reflected as a liability on the Closing Balance Sheet. As used herein, the 'Tax Basis" shall mean the aggregate Tax basis of the assets owned by the Group Members (exclusive of Tax basis in the stock of other Group Members). As used herein the "Tax Liability Amount" shall mean 35% of the aggregate amount by which the Tax Basis is less than $240 million. As used herein, the "Long-Term Liability Amount" shall mean the amount, if any, by which the long-term liabilities (other than the long-term portion of Seller notes and other third-party indebtedness and deferred taxes) reflected on the Closing Balance Sheet are greater than the long-term liabilities (other than the long- term portion of Seller notes and other third-party indebtedness and deferred taxes) as reflected on the Balance Sheet.

(d) For purposes of this Agreement, the final Tax Liability Amount shall be based on the Tax Liability Amount reported by Purchaser or if disputed by Parent within such thirty (30) day period, the amount as modified by resolution of the Parent and Purchaser or by the aforesaid Independent Accountants. If the Consolidated Net Working Capital is so determined to be less than $85.8 million resulting in a breach of the representation set forth in 8.20(a)(i), the amount of the shortfall shall be paid by Parent to Purchaser as complete damages in respect of such breach. If the Long-Term Liability Amount is so determined to be greater than zero resulting in a breach of the representation set forth in 8.20(a)(ii), the amount of such excess shall be paid by the Parent to the Purchaser as complete damages in respect of such breach. If the Tax Liability Amount is so determined to be greater than zero resulting in a breach of the representation set forth in 8.20(a)(iii), the amount of the Tax Liability Amount, multiplied by fifty-nine percent (59%) (present value discount factor), shall be paid by the Parent to the Purchaser as complete damages in respect of such breach. Any amount due pursuant to this Section 8.20(d) shall be paid by Parent to Purchaser within fifteen (15) days after (i) as to any undisputed portion, the determination of such undisputed portion of such amount,
(ii) as to any disputed portion, the final determination of such matter in accordance with the procedures outlined herein.

(b) The indemnitor shall have the right, exercisable by written notice to the Indemnitee within 30 days of receipt of notice from the Indemnitee of the commencement or assertion of any third party claim in respect of which indemnity may be sought hereunder (the "Indemnity Notice Claim"), to assume and conduct the defenses of such third party claim with counsel selected by the Indemnitor and reasonably acceptable to the Indemnitee; provided that (i) the defense of such third party claim by the Indemnitor will not, in the judgment for the Indemnitee, have a material adverse effect of the Indemnitee; and (ii) the Indemnitor has sufficient financial resources (including amounts held in escrow pursuant to the Escrow

Agreement), in the reasonable judgment of the Indemnitee, to satisfy the amount of any adverse monetary judgement that is reasonably likely to result: and (iii) the third parry claim solely seeks (and continues to seek) monetary damages: and
(iv) the Indemnitor expressly agrees :n writing that as between the Indemnitor and the Indemnitee, the Indemnitor shall be solely obligated to satisfy and discharge the third parry claim (the conditions set forth in clauses i through
iv) collectively referred to as the "Litigation Conditions"). If the Indemnitor does nor assume the defense of such third parry claim in accordance with this
Section 9.03, the Indemnitee may continue to defend the third party claim. If the Indemnitor has assumed the defense of' a third party claim as provided in this Section 9.03. the Indemnitor will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof provided, however, that if(i) the Litigation Conditions cease to be met, or (ii) the Indemnitor fails to take reasonable steps necessary to defend diligently such third party claim, the Indemnitee may assume its own defense, and the Indemnitor will be liable for all reasonable costs or expenses paid or incurred in connection therewith. The Indemnitor or the Indemnitee, as the case may be, shall have the right to participate in (but to control) at its Own expense, the defense of any third party claim which the other is defending as provided in this Agreement. The Indemnitor, if it shall have assumed the defense of any third party claim as provided in this Agreement, shall not, without the prior written consent of the Indemnitee, consent to a settlement of, or the entry of any judgment arising from, any such third party claim (i) which does not include as a unconditional term thereof the giving by the claimant or the plaintiff to the Indemnitee a complete release from all liability in respect of such third party claim, or (ii) which grants any injunctive or equitable relief, or (iii) which may reasonably be expected to have a material adverse effect on the affected business of the Indemnitee. The Indemnitee shall have the right to settle any third party claim, the defense of which has not been assumed by the Indemnitor, with the written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. Within 30 days after the Determination Date with respect to a third parry claim, the Indemnitor shall pay the Indemnitee the amount of Damages sustained or incurred by the Indemnitee, Interest will accrue on unpaid Damages at the prime rate plus two percent (2%) per annum.

(c) In the event that liability hereunder does not involve a third party claim, the Indemnitor shall within 30 days after the date of receipt of an Indemnity Notice respond in writing to the Indemnitee (the "Indemnity Response") and set forth with reasonable specificity those items in the Indemnity Notice to which the Indemnitor does not agree as well as the summary basis upon which such disagreement is founded. Within 30 days following the receipt of the Indemnity Response by the Indemnitee, representatives of the Indemnitor and the Indemnitee shall meet to attempt to resolve through good faith negotiations the applicable Indemnification Matters. The parties shall negotiate in good faith for up to 60 days in an attempt to reach a settlement of any disputed matter. In the event that such good faith negotiations are unsuccessful or in the event of any other dispute under this Section IX, the parties shall proceed in accordance with
Section 11.07 of this Agreement.

(d) (i) If a claim shall be made by any taxing authority, which, if successful, might result in an indemnity payment to any Purchaser Indemnified Party, the Purchaser shall

promptly notify the Parent in writing (a "Tax Notice") of such claim a "Tax Claim"). If a Tax Notice is not given to the Parent within a reasonable period of time, or unreasonable detail to apprise the Parent of the nature of the Tax Claim, in each case taking into account the facts and circumstances with respect to such Tax Claim, neither the Parent nor the Seller shall be liable to any Purchaser Indemnified Party to the extent that the Parent's or the Seller's position is prejudiced as a result thereof.

(ii) With respect to any Tax Claim, the Parent and the Seller shall have the right to control and conduct all proceedings and negotiations in connection with such Tax Claim (including, without limitation, selection of counsel) and, without limiting the foregoing, may in the Parent's sole discretion pursue or forego any and all administrative appeals, proceedings, hearings and conferences with any taxing authority with respect thereto, and may, in the Parent's sole discretion, either pay the Tax claimed and sue for a refund where applicable law permits such refund suits or contest the Tax Claim ~n any permissible manner. The Parent shall, within 30 days of receipt or' a Tax Notice with respect to a Tax Claim (the "Tax Notice Period"), notify the Purchaser in writing of its intention to control and conduct the proceedings and negotiations in connection with such Tax Claim. In the event that the Parent does notify the Purchaser of its intention to control and conduct the proceedings and negotiations in connection with any Tax Claim as provided above, the Purchaser shall have the right to participate fully in such proceedings and negotiations (including, without limitation, with counsel of its choice), at its sole expense, and the Parent and the Seller shall cooperate fully with the Purchaser in connection with such participation. If the Parent does not deliver to the Purchaser within the Tax Notice Period written notice that it will control and conduct the proceedings and negotiations in connection with a Tax Claim, the Purchaser may control, or cause the applicable Group Member to control, and conduct such proceedings and negotiations in such manner as it may deem appropriate. In the event that the Parent or the Seller do not exercise their right to control and conduct the proceedings and negotiations in connection with any Tax Claim as provided above, the Parent and the Seller shall have the right to participate fully in such proceedings and negotiations (including, without limitation, with counsel of their choice), at their sole expense, and the Purchaser shall, and shall cause each Group Member to, cooperate fully with Parent and the Seller and their accountants and other representatives in connection with such participation, and in all cases the Purchaser shall keep the Parent fully informed as to all matters concerning such Tax Claim and shall promptly notify the Parent in writing of any and all significant developments relating thereto. Without limiting Sections 8.04 and 8.06, the Purchaser and each of its Affiliates shall (and the Purchaser shall cause the Group Members to) cooperate fully with the Parent and the Seller in contesting any Tax Claim, which cooperation shall include, without limitation, the retention and (upon the Parent's request) the provision to the Parent of records and information which are relevant to such Tax Claim, and making officers and employees available on a timely and mutually convenient basis to provide additional information or explanation of any material provided hereunder or to testify at proceedings relating to such Tax Claim.

(iii) Notwithstanding anything to the contrary contained herein, in no event shall the Purchaser or any Group Member settle or otherwise compromise any Tax Claim without the Parent's prior written consent which may not be withheld for any reason.

(a) Subject to Section 9.08, but notwithstanding anything else in this Section ix or Section X to the contrary and subject to the final sentence of this Section 9.05(a), no Purchaser Indemnified Party shall be entitled to indemnification pursuant to Section 9.01 hereof unless and until the aggregate amount of all Damages to which the indemnity set forth in Section 9.01 relates, sustained or incurred by all Purchaser Indemnified Parties exceeds an aggregate amount (the "Basket Amount") equal to $500,000; provided that the Basket Amount shall be increased, dollar for dollar, by the amount by which the Consolidated Net Working Capital as of the Closing Date (as determined pursuant to Section 8.20) exceeds $85.8 million. Subject to Section 9.04 and Section 9.08, if such Damages exceed the Basket Amount, then the Seller's liability for indemnification under Section 9.01 shall be limited to the amount of such Damages sustained or incurred which exceeds the Basket Amount.

(b) The representations and warranties contained in or made pursuant to this Agreement shall expire eighteen months from the Closing Date, provided that the representations and warranties contained in Sections 2.07, 2.21, 2.24, 8.15 and 8.20 shall survive for the applicable statute of limitations, and the Medicare Representations shall expire twenty-four months from the Closing Date; provided further that if written notice is properly given under this Section IX with respect to any alleged breach of a representation or warranty to which such party is entitled to be indemnified hereunder prior to the applicable expiration date, such representation or warranty with respect to such specified matter only shall continue indefinitely until the applicable claim is finally resolved.

matter of this Agreement and the transactions contemplated hereby (other than for fraud and other than disputes arising under the second sentence of Section 8.06(b) hereof which disputes shall be resolved as set forth in such Section) shall be in accordance with, and limited by, the indemnification provisions set forth in this Agreement; provided, however, that nothing contained in this Agreement shall in any manner limit the Purchaser's right to seek injunctive and other equitable relief to enforce the obligations of the Seller and the Parent under this Agreement."

firm or corporation claiming by, through or under the Purchaser (or any Affiliate thereof) in connection with this Agreement and the transactions contemplated herein, and the Purchaser hereby agrees to defend, indemnify and hold the Parent and the Seller harmless from any Damages sustained or incurred by the Seller by reason of any such claim for any such fee or other compensation.

(a) if to the Seller or the Parent:

NovaCare, Inc.

oral, of the parties, and, except as otherwise provided in Sections 6.03 and 8.05 hereof, no modification hereof shall be effective unless in writing and signed by the party against which it is sought to be enforced.

"Actions" shall have the meaning set forth in Section 2.15 hereof.

"Affiliate" means a person or entity who directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person.

"Applicable Law" shall mean the collective reference to any law, rule, regulation, ordinance, writ, judgment, injunction, decree, determination, award or other order of any Governmental Authority, in each case excluding any and all Environmental Laws.

"Beneficiary" shall mean the person(s) or entity(ies) designated by an Employee or Former Employee, by operation of law or otherwise, as the party entitled to compensation, benefits, damages, insurance coverage, payments, indemnification or any other goods or services as a result of any liability or claim under any applicable welfare or benefit plan or program.

"Benefit Plan" shall have the meaning set forth in Section 2.12 hereof.

"Best Efforts" or "best efforts" shall mean diligently, promptly and in good faith taking all actions which are reasonable, necessary and appropriate to accomplish the objective requiring the use of best efforts, but shall not include any obligation (a) to make any payment, incur any costs, commit available resources, or forego the receipt of any payment, which in any case is material in amount in light of the required objective, (b) to initiate any lawsuit or other" proceeding to achieve the required objective, or (C) to take any action which is unlawful.

"Closing" and "Closing Date" shall have the meanings set forth in
Section 4.01 hereof.

"Code" shall mean the Internal Revenue Code of 1986, as amended.

"Common Stock" shall have the meaning set forth in the recitals hereof.

"Competing Business" shall mean any business or other enterprise which engages in the business in which any Group Member currently engages.

"Confidentiality Agreement" shall have the meaning set forth in
Section 11.02 hereof.

"Contracts" shall have the meaning set forth in Section 2.10 hereof.

"Control" (including the terms "controlling", "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the person, whether through stock ownership, voting rights, governing boards or otherwise.

"Damages" shall mean any and all losses, claims, demands, damages, liabilities, obligations, costs and expenses, including without limitation, reasonable fees and disbursements of counsel (however sustained or incurred, including, without limitation, in any action or proceeding involving any third party or involving any other party to this Agreement) sustained or incurred by the Purchaser Indemnified Parties (or any of them) or the Seller Indemnified Parties (or any of them), as the case may be, and other reasonable out-of-pocket costs and expenses incurred in connection with investigating or defending any action, suit or proceeding, commenced or threatened, but excluding punitive damages (other than punitive damages payable to third parties).

"Determination" shall mean (a) the final non-appealable judgment by a court of competent jurisdiction or arbitrator with respect to any claim covered by Section IX hereof or (b)

a compromise and settlement agreement executed and delivered by both the Indemnitor and the Indemnitee with respect to any claim covered by Section IX.

"Determination Date" shall mean the date the Determination is final, legally binding, and non-appealable.

"Effective Time" shall mean at the close of business Eastern Standard Time on the Closing Date.

"Employees" shall mean (i) all individuals with whom a Group Member maintains, on the Closing Date, an employer-employee relationship, including any individuals on lay-off, disability or leave of absence, whether paid or unpaid, and (ii) individuals whose primary role and responsibilities relate to the businesses conducted by the Group.

"Environmental Laws" shall have the meaning set forth in Section 2.16(b) hereof.

"Environmental Permits" shall have the meaning set forth in Section
2.l6(b) hereof.

"ERISA" shall have the meaning set forth in Section 2.12(a) hereof.

"Financial Statements" shall have the meaning set forth in Section 2.04 hereof.

"Former Employees" shall mean all individuals as to whom an employer- employee relationship with any Group Member existed prior to the Closing Date, but does not exist on the Closing Date, who remain entitled to benefits under any applicable welfare or benefit plan or program.

"GAAP" shall mean generally accepted accounting principles, consistently applied.

"Governmental Authority" shall mean the collective reference to any court, tribunal, government, or governmental agency, authority or instrumentality, domestic or foreign.

"Group" shall mean the Companies and their respective subsidiaries, taken as a whole.

"Group Member" shall mean, individually, each of the Companies and each of its subsidiaries.

"Indemnification Matter" shall have the meaning set forth in Section 9.03 hereof.

"Knowledge of the Parent" shall mean, with respect to a particular fact or other matter, that (i) an individual who is a director or officer of the Parent, the Seller, any Company or any Group Member is actually aware of such fact or other matter or (ii) a reasonably prudent individual in the satisfaction of his or her duties as a director or officer of the Parent, the Seller, any Company or any Group Member would be reasonably expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonable investigation.

"Knowledge of the Purchaser" shall mean, with respect to a particular fact or other matter, that (i) an individual who is a director or officer of the Purchaser is actually aware of such fact or other matter or (ii) a reasonably prudent individual in the satisfaction of his or her

duties as a director or officer of the Purchaser would be reasonably expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonable investigation.

"Lien" shall mean any mortgage, pledge, encumbrance, charge or other security interest of any kind or nature whatsoever.

"Managed Company" shall have the meaning set forth in Section 2.01 hereof.

"Material Adverse Effect" shall mean any circumstance or event which, individually or in the aggregate with any other circumstance or event, is or is reasonably likely to be material and adverse to the assets, properties, businesses, results of operations or financial condition of the Group, taken as a whole, and in any case after application of the proceeds of any insurance or indemnity under any contract or agreement to which any Group Member, the Parent, the Seller or the Purchaser (or any Affiliate thereof) is a parry: provided that the term "Material Adverse Effect" as used herein shall not include any effect attributable to changes in the economy (of the United States or any other country generally changes in the industries ~n which any Group Member engages, or seasonality of the businesses of any Group Member or any changes in reimbursement regulation, legislation or regulatory interpretation, For the purposes of this Agreement, the determination of whether a breach of a representation and warranty or covenant of this Agreement shall be deemed to give rise to a Material Adverse Effect shall be determined on a cumulative basis by adding the effect of the breach of any such representation and warranty or covenant (determined without regard to any materiality or Material Adverse Effect qualifiers) to the effect of all other breaches of representations and warranties and covenants of this Agreement (determined without regard to any materiality or Material Adverse Effect qualifiers) for each of the applicable period or periods to which each such representation, warranties or covenants relate, in all cases before applying the materiality standard set forth in the preceding sentence, and then determining whether, for any of the applicable periods, such aggregate sum or effect meets or exceeds the materiality standard set forth in the preceding sentence. For purposes of this definition of Material Adverse Effect, the effect of any matter as to any past period shall be determined based on its actual effect, and its effect as to any future period shall be determined based on the effect that such matter is reasonably likely to have.

"Medicare Representations" shall mean those representations and warranties set forth in Sections 2.16 (c) through (i), 2.25, 2.27, 2.30 and 2.31 herein.

"Non-PEO Benefit Plans" shall mean the Benefit Plans not maintained pursuant to the Parent NCES Agreement.

"PEO Benefit Plans" shall mean the Benefit Plans maintained pursuant to the Parent NCES Agreement.

"Permits" shall have the meaning set forth in Section 2.16(a) hereof.

"Permitted Liens" shall mean:

(a) Liens for Taxes which are not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect to contested Taxes are maintained on the books of any Group Member;

(b) pledges or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation;

(c) easements, rights-of-way, restrictions and other similar encumbrances previously incurred in the ordinary course of business which, in respect of properties or assets of the Group. are not material, and which, in the case of such encumbrances on the assets or properties of any Group Member, do not materially detract from the value of any such properties or assets and do not materially interfere with any present use of such properties or assets:

(d) carriers', warehousemen's, mechanics', materialmen' s, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 90 days or which are being contested in good faith by appropriate proceedings;

(e) deposits to secure the performance of bids, contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

(f) statutory and contractual Liens on the property of any Group Member in favor of landlords securing leases; and

"Pre-Closing Covenants" shall have the meaning set forth in Section 9.05(c) hereof,

"Protected Employee" shall mean any current or former executive or professional employee of the Group Members or the Purchaser during the period in which the covenant set forth in Section 8.11 hereof are in effect, but excluding any persons who have not been employed by any Group Member or the Purchaser during the two-year period preceding the date on which a determination is made regarding whether a person is a Protected Employee.

"Purchaser Indemnified Parties" shall have the meaning set forth in
Section 9.01 hereof.

"Retro-Premium Insurance Amounts" shall mean any liability or other obligation paid by the Parent or the Seller (or any Affiliate of the Parent or the Seller) (whether by reimbursement to any claims security or escrow funds, any additional premiums on retrospective adjustment or otherwise) under any policies of insurance maintained by the Parent or the Seller (or any Affiliate of the Parent or the Seller) for the benefit of any Group Member attributable to events or occurrences on or prior to the Closing Date.

"Schedules" shall mean the Schedules attached hereto and made a part of this Agreement.

"Seller Indemnified Parties" shall have the meaning set forth in
Section 9 02 hereof.

"Seller's Health Plan" shall have the meaning set forth in Section 8.0 hereof

"Seller Tax Periods" shall mean and include any and all periods ending on or before the Closing Date, and in addition, the portion of any taxable period that includes, but does not end on or before, the Closing Date that consists of a partial period deemed to end on the Closing Date: provided that in the case of any Seller Tax Period that does not end on or before the Closing Date, for purposes hereof the books and records of the relevant Group Members shall be deemed to have been closed at and as of the Closing Date hereof.

"Subsidiary" and "Subsidiaries" shall have the meanings set forth in
Section 2.01

"Taxes" shall have the meaning set forth in Section 2.07 hereof.

"Tax Claim" shall have the meaning set forth in Section 9.03(d) hereof, "Tax Returns" shall have the meaning set forth in Section 2.07 hereof,

"Tax Sharing Agreement" shall mean the practice employed by the Parent in causing the Seller and each of the Group Members to pay to the Parent or to the Seller the separate company liability of each Group Member in respect of the consolidated Federal income Tax and state income Tax liabilities of the Parent's or the Seller's tax group, as applicable.

"Y2K-compliant" shall mean able to provide specific dates and calculate spans of dates, and to record, store, process and provide true and accurate dates and calculations for dates and spans of dates within and between the twentieth and twenty-first centuries prior to, including and following January 1, 2000, including by: (i) correctly processing day and date calculations; (ii) recognizing January 1, 2001 as a valid date; (iii) recognizing the year 2000 as a leap year having 366 days, and correctly processing February 29, 2000 as a valid leap year date; (iv) employing only four-digit year representations in software, components and systems owned or operated in connection with any Company or Subsidiary; and (v) incorporating interface programs sufficient to translate accurately to four-digit format (without any burden of interpretation) any two-digit year representations included in software, components or systems, including but not limited to external databases, data warehouses, software systems and user interfaces that send data to or receive data, from software, components or systems used in the Group's business.

* * *

IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first above written.

SELLER:

NC RESOURCES, INC.

By: /s/ Michael K. Fox
   ------------------------------
   Name:
   Title

PARENT:

NOVACARE, INC.

By: /s/ Timothy E. Foter
   ------------------------------
   Name:
   Title

PURCHASER:

SELECT MEDICAL CORPORATION

By: /s/ Martin F. Jackson
   ------------------------------
   Name:

   Title

-----------------------------------------------------------------------------------------------------------------------------------
Period beginning the day after the Closing                                                Ordinary Receivable Collection Target  -
Date and ending:                                                                          Percentage
---------------                                                                           ----------
-----------------------------------------------------------------------------------------------------------------------------------
February 29, 2000                                                                         53%
-----------------------------------------------------------------------------------------------------------------------------------
May 31, 2000                                                                              84%
-----------------------------------------------------------------------------------------------------------------------------------
August 31, 2000                                                                           90%
-----------------------------------------------------------------------------------------------------------------------------------
November 30, 2000                                                                         95%
-----------------------------------------------------------------------------------------------------------------------------------
February 28, 2001                                                                         97%
-----------------------------------------------------------------------------------------------------------------------------------
May 31,2001                                                                               98%
-----------------------------------------------------------------------------------------------------------------------------------
August 31, 2001                                                                           99%
------------------------------------------------------------------------------------------------------------------------------------
November 30, 2001                                                                         100%
------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
Period beginning the day after the Closing                                                Litigation Receivable Collection Target -
Date and ending:                                                                          Percentage
---------------                                                                           ----------
------------------------------------------------------------------------------------------------------------------------------------
February 29, 2000                                                                         12.5%
------------------------------------------------------------------------------------------------------------------------------------
May 31,2000                                                                               25%
------------------------------------------------------------------------------------------------------------------------------------
August 31, 2000                                                                           37.5%
------------------------------------------------------------------------------------------------------------------------------------
November 30, 2000                                                                         50%
------------------------------------------------------------------------------------------------------------------------------------
February 28, 2001                                                                         62.5%
------------------------------------------------------------------------------------------------------------------------------------
May 31,2001                                                                               75%
------------------------------------------------------------------------------------------------------------------------------------
August 31, 2001                                                                           87.5%
------------------------------------------------------------------------------------------------------------------------------------
November 30, 2001                                                                         100%
------------------------------------------------------------------------------------------------------------------------------------

By: /s/ Timothy E. Foter
   -----------------------------------
   Name:   Timothy E. Foter
   Title:  Chief Executive Officer

By: /s/ Michael K. Fox
   -----------------------------------
   Name:   Michael K. Fox
   Title:  President

By: /s/ Michael E. Tarvin
   -----------------------------------
   Name:   Michael E. Tarvin
   Title:  Vice President

By /s/ Robert Ortenzio
  ---------------------------------
  Name:
  Title:

By /s/ Michael E. Tarvin
  ---------------------------------
  Name:
  Title:

By:  /s/ Rocco A. Ortenzio
     ---------------------------------
Its:
     ---------------------------------

By:  /s/ Laura Van Buren
     ---------------------------------
Its:
     ---------------------------------

By:  /s/ Laura Van Buren
     ---------------------------------
Its:
     ---------------------------------

/s/ Laura Van Buren
---------------------------------------
Bruce Anderson

/s/ Laura Van Buren
---------------------------------------
Russell Carson

/s/ Laura Van Buren
---------------------------------------
Patrick Welsh

/s/ Laura Van Buren
---------------------------------------
Richard Stowe

/s/ Laura Van Buren
---------------------------------------
Andrew Paul

/s/ Laura Van Buren
---------------------------------------
Thomas McInerney

/s/ Laura Van Buren
---------------------------------------
Laura VanBuren

/s/ Laura Van Buren
---------------------------------------
James Hoover

/s/ Laura Van Buren
---------------------------------------
Robert Minicucci

/s/ Laura Van Buren
---------------------------------------
Anthony De Nicola

/s/ Laura Van Buren
---------------------------------------
Paul Queally

/s/ David F. Bellet
--------------------------------------
David F. Bellet

By:  /s/ James B. Hoover
     ---------------------------------

/s/ Rocco A. Ortenzio
---------------------------------------
Rocco A. Ortenzio

/s/ Robert A. Ortenzio
---------------------------------------
Robert A. Ortenzio

By:  /s/ Rocco A. Ortenzio
     ---------------------------------
Its:
     ---------------------------------

By:  /s/ Rocco A. Ortenzio
     ---------------------------------
Its:
     ---------------------------------

Mechanicsburg, Pennsylvania 17055