-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OCgt/egbY4/aHghDirZMm7RejoRO2VaT7tneHRKHmwyVApFp/tAKZeSGdET7XZ6U ZMbaY4cSkTRqLlNmePnAFA== 0001144204-04-015752.txt : 20041005 0001144204-04-015752.hdr.sgml : 20041005 20041005162842 ACCESSION NUMBER: 0001144204-04-015752 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040929 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Changes in Control of Registrant ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041005 DATE AS OF CHANGE: 20041005 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Integrated Healthcare Holdings CENTRAL INDEX KEY: 0001051488 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 870412182 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23511 FILM NUMBER: 041066349 BUSINESS ADDRESS: STREET 1: 9005 COBBLE LANE CITY: SANDY STATE: UT ZIP: 84093 BUSINESS PHONE: 8019420555 MAIL ADDRESS: STREET 1: 9005 COBBLE LANE CITY: SANDY STATE: UT ZIP: 84093 FORMER COMPANY: FORMER CONFORMED NAME: FIRST DELTAVISION INC DATE OF NAME CHANGE: 19971216 8-K 1 v07270_8k.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): SEPTEMBER 29, 2004 INTEGRATED HEALTHCARE HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) NEVADA 0-23511 87-0412182 (STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER OF INCORPORATION) IDENTIFICATION NO.) 695 TOWN CENTER DRIVE, SUITE 260, COSTA MESA, CALIFORNIA 92626 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (714) 434-9191 -------------------- (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ================================================================================ ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT. On September 29, 2004, Integrated Healthcare Holdings Inc. (the "Company") entered into definitive forms of agreements with Dr. Kali P. Chaudhuri involving a new investment in the Company and financial support to enable the Company to acquire hospitals and healthcare facilities from subsidiaries of Tenet Healthcare Corporation (collectively, "Tenet") as part of its business plan. The following material terms have been agreed to by the Company and Dr. Chaudhuri: o Dr. Chaudhuri will invest $500,000 in the Company in the form of a Convertible Secured Promissory Note, and may provide additional financing directly to the Company as needed; o Dr. Chaudhuri will loan $10 million to the Company to be used by the Company as a good faith deposit towards the Company's proposed acquisition of hospitals from Tenet; o Dr. Chaudhuri will provide a personal guaranty of up to $10 million to cover Tenet's post-closing liability on a lease for the Chapman Hospital that the Company proposes to acquire from Tenet. If the Company acquires the Chapman Hospital, it will assign to Dr. Chaudhuri the underlying lease and operating assets relating to the hospital; o Dr. Chaudhuri will have an option to acquire all of the real estate which the Company acquires from Tenet for $5 million, and will assume the underlying debt and other obligations relating to the real estate; o The Convertible Secured Promissory Note will be initially convertible into 160 million shares of the Company's Common Stock, or 88.8% of the Company's outstanding shares after giving effect to the new issuance (and possibly an additional 10 million shares if additional financing is provided to the Company); and o Dr. Chaudhuri will receive pre-emptive rights to participate in additional issuances of Company shares, and receive piggyback registration rights relating to his stock. On September 29, 2004, the Company entered into a definitive agreement to acquire four hospitals located in Orange County, California from subsidiaries of Tenet Healthcare Corporation. The four hospitals are: 280-bed Western Medical Center - Santa Ana; 188-bed Western Medical Center - Anaheim; 114-bed Chapman Medical Center in Orange; and 178-bed Coastal Communities Hospital in Santa Ana. The net purchase price will be approximately $70 million, subject to closing adjustments. The purchase is expected to close on November 30, 2004, subject to customary closing conditions, including regulatory approvals. The foregoing descriptions of the Company's material agreements are a summary only and are qualified in their entirety by reference to Exhibits 10.1 and 10.2 filed herewith, which are incorporated by reference herein in their entirety. ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES. On September 29, 2004, the Company entered into definitive forms of agreements with Dr. Kali P. Chaudhuri involving a new investment in the Company. Pursuant to these agreements, Dr. Chaudhuri will invest $500,000 in the Company in the form of a Convertible Secured Promissory Note which will be initially convertible into 160 million shares of the Company's Common Stock, or 88.8% of the Company's outstanding shares after giving effect to the new issuance, and possibly an additional 10 million shares if additional financing is provided to the Company. Dr. Chaudhuri will also receive pre-emptive rights to participate in additional issuances of Company shares, and receive piggyback registration rights relating to his stock. Reference is made to Exhibit 10.1 filed herewith, which is incorporated by reference herein in its entirety. ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT. On September 29, 2004, the Company entered into definitive forms of agreements which will entitle Dr. Kali P. Chaudhuri to acquire control of the Company in the form of a Convertible Secured Promissory Note which will be initially convertible into 160 million shares of the Company's Common Stock, or 88.8% of the Company's outstanding shares after giving effect to the new issuance, and possibly an additional 10 million shares if additional financing is provided to the Company. Such shares have not yet been issued, but will be issuable upon conversion by Dr. Chaudhuri of the Convertible Promissory Note. Reference is made to Exhibit 10.1 filed herewith, which is incorporated by reference herein in its entirety. ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits 10.1 Secured Convertible Note Purchase Agreement, dated as of September 28, 2004, by and between the Registrant and Kali P. Chaudhuri, M.D.* 10.2 Asset Sale Agreement, dated September 29, 2004, by and among AHM CGH, Inc., Health Resources Corporation of America - California, SHL/O Corp., UWMC Hospital Corporation, and the Registrant* * Certain exhibits and schedules are omitted but will be furnished to the Commission supplementally upon request. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Integrated Healthcare Holdings, Inc. By: /s/ Bruce Mogel ------------------------------------ Name: Bruce Mogel Title: Chief Executive Officer Date: October 5, 2004 INDEX TO EXHIBITS EXHIBIT DESCRIPTION NUMBER 10.1 Secured Convertible Note Purchase Agreement, dated as of September 28, 2004, by and between the Registrant and Kali P. Chaudhuri, M.D.* 10.2 Asset Sale Agreement, dated September 29, 2004, by and among AHM CGH, Inc., Health Resources Corporation of America - California, SHL/O Corp., UWMC Hospital Corporation, and the Registrant* * Certain exhibits and schedules are omitted but will be furnished to the Commission supplementally upon request. EX-10.1 2 v07270_ex10-1.txt SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT This Secured Convertible Note Purchase Agreement ("AGREEMENT") is made this 28th day of September, 2004 (the "EFFECTIVE DATE") by and between Integrated Healthcare Holdings, Inc., a Nevada public corporation (the "COMPANY"), and Kali Chaudhuri, M.D., an individual ("PURCHASER"). The Company desires to sell to Purchaser, and Purchaser desires to purchase from the Company, a 5% Secured Convertible Promissory Note (the "NOTE"), convertible into shares of the common stock of the Company (the "COMMON Stock"), on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the promises and mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE I AUTHORIZATION; ISSUANCE OF NOTE 1.1 AUTHORIZATION AND ISSUANCE OF NOTE. The Company has authorized the issuance and of, concurrently herewith, subject to the terms and conditions contained herein, and in reliance upon the representations, warranties and agreements contained herein, shall issue to Purchaser, pursuant to this Agreement, the Note, in the original face amount of $500,000 in substantially the form attached hereto as Exhibit A, which is presently convertible into up to 160,000,000 shares of the Company's Common Stock (the "SHARES"), which Shares represent approximately 88.8% of the issued and outstanding shares of Common Stock of the Company on a fully-diluted basis. The Company has previously delivered to Purchaser copies of the Company's current Articles of Incorporation and Bylaws. The Note shall be secured by a first lien (which may be subordinated to Company's working capital lender) against all of the assets of the Company now or hereafter acquired pursuant to a security agreement in the form attached hereto as Exhibit B. 1.2 NOTE ADVANCES. Until demand for repayment by Purchaser or full conversion of the Note, the Company may borrow, by means of advances by Purchaser in accordance with, and for purposes described in, Section 1.2.1 (amounts borrowed hereunder are referred to, singly or collectively, as an "ADVANCE" or as "ADVANCES"); provided, however, that the aggregate principal amount of Advances outstanding at any time under this Agreement shall never exceed $500,000 unless the Note is amended and restated to provide a higher amount as described in Section 1.2.4 (the "COMMITMENT LIMIT"); provided, further, that the Note (including all accrued and unpaid interest thereon) must be repaid in full no later than, and the commitment expires automatically on, the earlier to occur if (a) demand for full repayment by Purchaser or (b) conversion in full of the Note. 1.2.1 ADVANCES. An initial Advance of $75,000 shall be made by Purchaser to the Company immediately following execution of this Agreement, the Note and the Security Agreement by the parties. A second Advance of $50,000 shall be made by Purchaser to the Company on November 1, 2004. These two Advances may be used for general corporate purposes, including payment of executive compensation. Additional Advances of up to $375,000 may be used to pay transaction costs in connection with the Tenet Transaction (as defined in Section 3.22) which is presently contemplated to close on November 30, 2004. Within 60 days after the closing or termination of the Tenet Transaction, if less than $375,000 in Advances has been made to pay the transaction costs, the balance of the $375,000 shall be paid over to the Company as an Advance to be used for general corporate purposes. Payment of the transaction costs shall be made by Purchaser directly to the third party obligee by Purchaser upon receipt from Company of substantiating documentation for such fees and costs, and each such payment shall constitute an Advance. 1.2.2 CONDITION TO ADVANCES. It shall be a condition to any Advance that the Company shall have renegotiated the employment agreements of James Ligon, Bruce Mogel and Larry Anderson, in accordance with the Employment Side Bar Agreement, a copy of which is attached as Exhibit C. 1.2.3 NOTATIONS OF ADVANCES. Upon making each Advance, and upon receipt of each payment of principal on an Advance, Purchaser (or the holder of the Note) shall, and is hereby authorized to, make a notation on a schedule attached to the Note of the amount and date of the Advance or payment, and the aggregate unpaid principal balance shown on the schedule shall be presumed to be correct in the absence of manifest error. Purchaser's (or the holder's) failure to make the correct notation with respect to an Advance or with respect to any payment of principal shall not limit or otherwise affect the Company's obligations hereunder and under the Note to repay the Advance actually outstanding. Purchaser's (or the holder's) failure to make the correct notation shall not impair or otherwise affect such payment or Purchaser's (or the holder's) rights and remedies to collect the Advance or the payment actually outstanding, nor shall it impair Purchaser's rights to withhold Advances to the extent that the Commitment Limit would be exceeded. 1.2.4 FURTHER FINANCIAL ASSISTANCE FROM PURCHASER. As a material inducement to the Company to enter into this Agreement, Purchaser agrees to provide the following assistance to Company without which Company would be unable to close the Tenet Transaction: (a) Purchaser may assist Company with the payment of necessary transactional costs incurred in connection with the Tenet Transaction (as defined in Section 3.22) including fees necessary to secure financing in connection with the Tenet Transaction, which transaction costs and fees cannot be otherwise paid by the Company. The parties shall use their best efforts to negotiate and reduce the amount of such fees and costs. To the extent that such fees and costs exceed the $375,000 referred to in Section 1.2.1, Purchaser may elect to, in his reasonable discretion, advance additional funds provided, however, before any payment by Purchaser, the Company shall amend and restate the Note to reflect the increased principal amount and to provide that all such payments of fees and costs by Purchaser on the Company's behalf for this purpose shall constitute additional Advances and shall either, at Purchaser's election to be made within five days after the closing or termination of the Tenet Transaction, (i) be repaid by the Company so that the outstanding principal balance of the amended and restated Note is reduced to $500,000 or (ii) remain outstanding under the amended and restated Note, in which case a portion of the outstanding balance will be available for conversion into additional shares of Common Stock not to exceed an additional 10,000,000 shares on the same terms and at the same conversion price as the Shares. -2- (b) Purchaser shall loan the $10,000,000 ("TEN MILLION DOLLAR LOAN") to be used solely as the good faith deposit for the Tenet Transaction. The Ten Million Dollar Loan may, at Purchaser's election, be made by a transfer of funds directly to the Tenet Escrow for the Company's benefit. The Ten Million Dollar Loan shall be made on the following terms and conditions: The Ten Million Loan shall be (i) due and payable upon the earlier of the closing of the Tenet Transaction or the termination, for any reason, of the purchase agreement relating to the Tenet Transaction, (ii) secured by a lien against all of the Company's assets pari passu with the first lien of the Note and subject to possible subordination as described in Section 1.1; (iii) bear interest at the rate of 7.25% per annum; and (iv) otherwise be in the form of Exhibit E, attached hereto and made a part hereof. If the Tenet Transaction fails to close, the Company shall assign its rights to Purchaser to proceed against Tenet with regard to recovery of the good faith deposit without Purchaser waiving or releasing any rights against the Company. Any refund of the good faith deposit shall be paid directly to Purchaser. (c) In consideration of the Company's commitments under Section 1.4, Purchaser shall provide Tenet Healthcare Corporation (or its affiliate) a personal guaranty for Tenet's post closing liability on the Chapman Hospital lease (not to exceed $10,000,000). (d) The Company represents to Purchaser that it will not require or request Purchaser's personal guaranty with respect to any financing the Company shall seek with respect to the Tenet Transaction. 1.3 PURCHASER'S OPTION TO PURCHASE REAL ESTATE. In order to induce Purchaser to enter into the foregoing transaction to provide the financial support as set forth above, the Company grants an option to Purchaser (or his assignee or designee) to acquire all of the real estate which the Company will acquire in the Tenet Transaction (i.e. Western Medical Center - Santa Ana, Western Medical Center - Anaheim and Coastal Community Hospital) for the price of $5,000,000. The Company agrees to deliver title to the property free and clear of all liens of all liens and encumbrances except only those exceptions to title agreed to in the Tenet Transaction and the real estate loan the Company will incur in connection with the closing of the Tenet Transaction. The Company and Purchaser agree to cooperate in negotiating with Company's lenders to organize the financing in a manner which permits Purchaser to exercise the option and acquire the real property subject to the real estate loan while the Company will remain liable for the working capital loan. Purchaser may exercise the option to acquire the property at any time commencing with the closing of the Tenet Transaction and for a period of five years thereafter. The option shall be in the form attached hereto as Exhibit D. Purchaser may exercise the option and pay the purchase price by offsetting Purchaser's purchase price obligation against any obligations due and owing by the Company to Purchaser including those under the Note or the Ten Million Dollar Note. Upon the exercise of the option, Purchaser agrees to lease the real property back to the Company on a triple net lease at a fair market value rental which shall not be less than a 2.5% margin over the financing cost paid by Purchaser. The term of the lease shall be 15 years, with two 5-year renewal options. -3- 1.4 CHAPMAN. In consideration of Purchaser's agreement to personally guaranty Tenet's post-closing liabilities with respect to the Chapman Hospital lease at the closing of the Tenet Transaction, the Company shall assign, transfer and deliver to Purchaser all of its right, title and interest in the Chapman Hospital lease and the Chapman Hospital operating assets. Purchaser and the Company shall cooperate in processing licensure applications in Purchaser's name (or that of his affiliate) pre-closing. Purchaser agrees to cause Chapman Hospital to contract with the Company to provide management services at the Chapman Hospital to the extent permitted by law on customary terms and at fair market value. 1.5 PURCHASER'S RIGHT TO PROCEED TO CLOSE FOR HIS OWN ACCOUNT. If the Company is unable, for any reason, to obtain financing without the lender requiring Purchaser's personal guaranty(other than the personal guaranty for the Chapman Hospital Lease, as required to be given under Section 1.2.4(c) above), Purchaser may elect to proceed to obtain his own financing and close the Tenet Transaction without the Company's participation. In such event, all of the assets to be acquired in the Tenet Transaction shall then be acquired by Purchaser from Tenet and the Company shall waive and release any claim against Purchaser and any right to the Tenet assets, and (ii) in consideration of the Company's efforts in pursuing the Tenet transaction, Purchaser shall reduce his conversion right to a maximum of Sixty Million (60,000,000) shares. 1.6 FAILURE TO CLOSE TENET TRANSACTION. If, the Tenet Transaction fails to close, Purchaser agrees that he shall not exercise his right to convert the Note into Shares for a period 30 days within which Company shall have the opportunity to repay all Advances made under the Note together with accrued interest thereby fully satisfying the Note obligation and thus causing Purchaser's right of conversion to lapse. This shall be the only circumstance under which the Company shall have the right to pre-pay the Note and prevent Purchaser from exercising his conversion rights.. 1.7 PRE-EMPTIVE RIGHT TO PURCHASE ADDITIONAL SHARES. (a) Subject to the terms and conditions specified in this Section 1.3, if the Note is fully converted into Common Stock of the Company, the Company hereby grants to Purchaser a right of first refusal with respect to future sales by the Company of its equity securities or securities convertible into or exercisable for equity securities, where issuance of those securities will result in a dilution of Purchaser's as-converted equity position to less than 75% of the Common Stock of the Company on a fully-diluted basis. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of the Company's equity securities (the "NEW SHARES"), the Company shall first make an offer to Purchaser of such portion of the New Shares which equals the proportion that all securities in the Company held by to Purchaser, on an as-converted basis, bears to the total number of shares of Common Stock of the Company on a fully-diluted basis plus the New Shares (the "PRO RATA SHARE"). The closing of the sale of the Pro Rata Share shall occur simultaneously with the sale of the New Shares to other investors. -4- (b) The right of first refusal in this Section 1.3 shall not be applicable to the issuance or sale of (i) securities issued pursuant to stock splits, stock dividends, or similar transactions approved by Purchaser; (ii) shares of Common Stock issued to employees, consultants, officers or directors of the company pursuant to stock option plans or restricted stock plans or agreements approved by the Company's Board of Directors and by Purchaser; (iii) securities issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, commercial property lease transactions, or similar transactions approved by the Board of Directors and Purchaser and not for the purpose of raising capital, (iv) shares of Common Stock issued in an underwritten public offering; or (v) securities issued in connection with bona fide acquisition transactions approved by the Board of Directors and by Purchaser. (c) The right of first refusal in this Section 1.3 shall terminate and cease to have effect upon the closing of an acquisition of the Company to an unrelated third party in a transaction approved by Purchaser. ARTICLE II REGISTRATION RIGHTS 2.1 DEFINITIONS. For purposes of this Agreement, the following terms have the meanings specified with respect thereto below: "1933 ACT" means the Securities Act of 1933 and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "1934 ACT" means the Securities Exchange Act of 1934 and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "COMMISSION" means the Securities and Exchange Commission or any other Federal agency at the time administering the 1933 Act. "INDEMNIFIED PARTY" has the meaning specified in Section 2.4.3. "INDEMNIFYING PARTY" has the meaning specified in Section 2.4.3. "INSPECTORS" has the meaning specified in Section 2.3.1.8. "MAXIMUM NUMBERS OF SHARES" has the meaning specified in Section 2.2.2. "OTHER SHAREHOLDER" means any holder of shares of Common Stock or securities convertible into or entitling the holder thereof to purchase Common Stock who has Piggyback Registration rights, including Purchaser; collectively, two or more such shareholders shall be referred to as "OTHER SHAREHOLDERS." "PIGGYBACK REGISTRATION" has the meaning specified in paragraph 2.2.1 (b). "RECORDS" has the meaning specified in paragraph 2.3.1(h). -5- "REGISTRABLE SECURITIES" means, collectively, the Shares and any securities issued or issuable upon any stock dividend, stock split, recapitalization, merger, consolidation or similar event with respect to the Shares. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (i) a registration statement covering such securities shall have become effective under the 1933 Act and such securities shall have been disposed of in accordance with such registration statement, (ii) such securities shall have been distributed to the public pursuant to Rule 144 or Rule 144A (or any successor provisions) under the 1933 Act, or (iii) such securities shall have ceased to be outstanding. "SHARES" has the meaning set forth in Section 1.1. "UNDERWRITER" means a securities dealer who purchases any Registrable Securities as principal in an underwritten offering and not as part of such dealer's market-making activities. 2.2 REGISTRATION RIGHTS. 2.2.1 PIGGYBACK RIGHTS. If at any time after the initial public offering of the Company's securities, the Company proposes to file a registration statement under the 1933 Act with respect to an offering of equity securities, or securities convertible or exchangeable into equity securities, by the Company for its own account other than a registration statement (i) on Form S-4 or S-8 (or any substitute or successor form that may be adopted by the Commission), (ii) filed in connection with any employee stock option or other benefit plan, (iii) for an exchange offer or offering of securities solely to the Company's existing shareholders, or (iv) for a dividend reinvestment plan, then the Company shall: (a) give written notice of such proposed filing to the Other Shareholders as soon as practicable but in no event less than 30 days before the anticipated filing date, which notice shall describe the amount and type of securities to be included in such offering, the intended method(s) of distribution, and the name of the proposed managing Underwriter or Underwriters, if any, of the offering; and (b) offer in such notice to the Other Shareholders the opportunity to register such number of shares of Registrable Securities or shares of Common Stock as each such Other Shareholder may request in writing within ten days following receipt of such notice (a "PIGGYBACK REGISTRATION"). The Company shall cause such Registrable Securities and shares of Common Stock to be included in such registration and shall use its best efforts to cause the managing Underwriter or Underwriters of a proposed underwritten offering to permit the Registrable Securities and shares of Common Stock requested to be included in a Piggyback Registration to be included on the same terms and conditions as any similar securities of the Company and to permit the sale or other disposition of such Registrable Securities and shares of Common Stock in accordance with the intended method of distribution thereof. In the case of an initial public offering of the Company's securities, all of the provisions of this Agreement shall apply, except that the Company's obligation with respect to registration shall only apply if the underwriters agree to include Cutler's Registrable Securities in registration, and the Company shall use its reasonable best efforts to cause the underwriters to so agree. -6- 2.2.2 REDUCTION OF OFFERING. If the managing Underwriter or Underwriters for a Piggyback Registration that is to be an underwritten offering advises the Company and the Other Shareholders requesting inclusion in the Piggyback Registration, in writing, that the dollar amount or number of shares of Registrable Securities and other shares of Common Stock to be included in the offering exceeds the maximum dollar amount or number that can be sold in such offering without adversely affecting the proposed offering price, the timing, the distribution method or the probability of success of such offering ("MAXIMUM NUMBER OF SHARES") then the Company shall include in such registration: (i) first, the shares of Common Stock or other securities that the Company proposes to sell which can be sold without exceeding the Maximum Number of Shares; (ii) second, to the extent the Maximum Number of Shares has not been reached under the foregoing clause (i), the Registrable Securities as to which registration has been requested by Purchaser pursuant to his Piggyback Registration rights which can be sold without exceeding the Maximum Number of Shares, and (iii) third, to the extent the Maximum Number of Shares has not been reached under the foregoing clauses (i) and (ii), the shares of Common Stock requested to be included in such registration by Other Shareholders (other than Purchaser) which can be sold without exceeding the Maximum Number of Shares. 2.2.3 WITHDRAWAL. The Holder may elect to withdraw his request for inclusion of his Registrable Securities in any Piggyback Registration by giving written notice to the Company of his request to withdraw prior to the effectiveness of the registration statement. The Company may also elect to withdraw a registration statement including shares being registered pursuant to an Other Shareholder's Piggyback Registration rights at any time prior to the effectiveness of the registration statement. Notwithstanding any such withdrawal, the Company shall pay all expenses incurred by Purchaser in connection with such Piggyback Registration as provided in Section 2.3.3. 2.3 REGISTRATION PROCEDURES. 2.3.1 FILINGS; INFORMATION. If and whenever the Company is required to effect the registration of any Registrable Securities under the 1933 Act pursuant to Section 2.2.1, the Company shall use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof as expeditiously as practicable, and in connection with any such request: 2.3.1.1 FILING REGISTRATION STATEMENT. The Company shall, as expeditiously as possible, prepare and file with the Commission a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and use its best efforts to cause such filed registration statement to become and remain effective. 2.3.1.2 COPIES. The Company shall, prior to filing a registration statement or prospectus or any amendment or supplement thereto, furnish without charge to Purchaser and legal counsel for Purchaser, copies of such registration statement as proposed to be filed, each amendment and supplement to such registration statement (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus), and such other documents as Purchaser may request in order to facilitate the disposition of the Registrable Securities owned by Purchaser. -7- 2.3.1.3 AMENDMENTS AND SUPPLEMENTS. The Company shall prepare and file with the Commission such amendments, including post-effective amendments, and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and in compliance with the provisions of the 1933 Act until all Registrable Securities and other securities covered by such registration statement have been disposed of in accordance with the intended methods of disposition set forth in such registration statement (which period shall not exceed the sum of nine months plus any period during which any such disposition is interfered with by any stop order, injunction or other order or requirement of the Commission or any governmental agency or court) or such securities have been withdrawn. 2.3.1.4 NOTIFICATION. After the filing of the registration statement, the Company shall promptly, and in no event more than two Business Days, notify Purchaser, and confirm such advice in writing, (i) when such registration statement becomes effective, (ii) when any post-effective amendment to such registration statement becomes effective, (iii) of any stop order issued or threatened by the Commission (and the Company shall take all actions required to prevent the entry of such stop order or to remove it if entered) and (iv) of any request by the Commission for any amendment or supplement to such registration statement or any prospectus relating thereto or for additional information or of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities covered by such Registration Statement, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and promptly make available to Purchaser any such supplement or amendment; except that before filing with the Commission a registration statement or prospectus or any amendment or supplement thereto, including documents incorporated by reference, the Company shall furnish to Purchaser and to legal counsel representing Purchaser, copies of all such documents proposed to be filed sufficiently in advance of filing to provide Purchaser, Underwriters and legal counsel with a reasonable opportunity to review such documents and comment thereon, and the Company shall not file any registration statement or prospectus or amendment or supplement thereto, including documents incorporated by reference to which Purchaser or legal counsel representing Purchaser, shall object on a timely basis in light of the requirements of the 1933 Act or any other applicable laws and regulations. 2.3.1.5 STATE SECURITIES LAWS COMPLIANCE. The Company shall use its best efforts to (i) register or qualify the Registrable Securities covered by the registration statement under such securities or blue sky laws of such jurisdictions in the United States as Purchaser (in light of Purchaser's intended plan of distribution) requests and (ii) cause such Registrable Securities covered by the registration statement to be registered with or approved by such other governmental agencies or authorities in the United States as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be necessary or advisable to enable Purchaser to consummate the disposition of the Registrable Securities owned by Purchaser in such jurisdictions; provided, however, that the Company shall not be required to qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 2.3.1.5, or subject itself to taxation in any such jurisdiction. -8- 2.3.1.6 AGREEMENTS FOR DISPOSITION. The Company shall enter into customary agreements (including, if applicable, an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities. The Holder may, at his option, require that any or all of the representations, warranties and covenants of the Company in any underwriting agreement to or for the benefit of any Underwriters also be made to and for the benefit of Purchaser. The Holder shall not be required to make any representations or warranties in the underwriting agreement except with respect to its organization, good standing, authority, title to Registrable Securities, lack of conflict of such sale with its material agreements and organizational documents, and with respect to written information relating to Purchaser that Purchaser has furnished expressly for inclusion in such registration statement. 2.3.1.7 COOPERATION. The Chief Executive Officer and President of the Company, the Chief Financial Officer of the Company, any Senior Vice President of the Company and other members of the management of the Company shall cooperate fully in any offering of Registrable Securities hereunder, which cooperation shall include, without limitation, the preparation of the Registration Statement and all other offering materials and related documents, and participation in meetings with Underwriters, attorneys, accountants and potential investors. 2.3.1.8 RECORDS. The Company shall make available for inspection by Purchaser, any Underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained by Purchaser or any Underwriter (collectively, the "INSPECTORS"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "RECORDS"), as shall be necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information requested by any Inspectors in connection with such registration statement. 2.3.1.9 OPINIONS AND COMFORT LETTERS. The Company shall furnish to Purchaser a signed counterpart, addressed to Purchaser, of (i) any opinion of counsel to the Company delivered to any Underwriter and (ii) any comfort letter from the Company's independent public accountants delivered to any Underwriter. If no legal opinion is delivered to any Underwriter, the Company shall furnish to Purchaser, at any time that Purchaser elects to use a prospectus, an opinion of counsel to the Company to the effect that the registration statement containing such prospectus has been declared effective and that no stop order is in effect. 2.3.1.10 EARNINGS STATEMENT. The Company shall comply with all applicable rules and regulations of the Commission and the 1933 Act, and make available to its shareholders, as soon as practicable, an earnings statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder. -9- 2.3.1.11 LISTING. The Company shall use its best efforts to cause all such Registrable Securities registered pursuant to this Agreement to be listed on such exchanges or otherwise designated for trading in the same manner as similar securities issued by the Company are then listed or designated or, if no such similar securities are then listed or designated, in a manner satisfactory to Purchaser. 2.3.1.12 OBLIGATION TO SUSPEND DISTRIBUTION. The Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in clause 2.3.1.4(iv), Purchaser will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until Purchaser' receipt of the copies of the supplemented or amended prospectus contemplated by clause 2.3.1.4(iv), and, if so directed by the Company, Purchaser will deliver to the Company all copies, other than permanent file copies then in Purchaser's possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. If the Company gives such notice, the Company shall extend the period during which such registration statement shall be maintained effective by the number of days during the period from and including the date of the giving of notice pursuant to clause 2.3.14(iv) to the date when the Company shall make available to Purchaser a prospectus supplemented or amended to conform with the requirements of clause 2.3.1.4(iv). 2.3.1.13 REGISTRATION EXPENSES. The Company shall pay all expenses incurred in connection with any Piggyback Registration pursuant to Section 2.2, and all expenses incurred in performing or complying with the Company's obligations under this Section 2.3, whether or not the registration statement becomes effective, in each case including, but not limited to: (i) all registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses, (iv) the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (v) the fees and expenses incurred in connection with the listing of the Registrable Securities as required by Section 2.3.1.11, (vi) National Association of Securities Dealers, Inc. or Nasdaq, Inc. fees, (vii) fees and disbursements of counsel for the Company and fees and expenses for independent certified public accountants retained by the Company (including the expenses or costs associated with the delivery of any opinions or comfort letters requested pursuant to Section 2.3.1.9, (viii) the fees and expenses of any special experts retained by the Company in connection with such registration, and (ix) all fees and expenses incurred by Purchaser in connection with his participation in such registration, including, without limitation, the fees and expenses of legal counsel, and any accountants and other experts for, and chosen by, Purchaser. The Company shall have no obligation to pay any underwriting fees, discounts or selling commissions attributable to the Registrable Securities being sold by Purchaser, which expenses shall be borne by Purchaser. -10- 2.4 INDEMNIFICATION AND CONTRIBUTION. 2.4.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold harmless Purchaser and his affiliates and agents from and against any loss, claim, damage or liability and any action in respect thereof to which Purchaser and his affiliates and agents may become subject under the 1933 Act or the 1934 Act or any other statute or common law, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (a) any untrue statement or alleged untrue statement of a material fact made in connection with the sale of Registrable Securities or shares of Common Stock, whether or not such statement is contained or incorporated by reference in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, (b) any omission or alleged omission to state a material fact required to be stated in any registration statement or prospectus or necessary to make the statements therein not misleading, or (c) any violation by the Company of any Federal, state or common law, rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with such registration. The Company also shall promptly, but in no event more than ten Business Days after request for payment, pay directly or reimburse Purchaser and his affiliates and agents for any legal and other expenses incurred by Purchaser and his affiliates and agents in investigating or defending or preparing to defend against any such loss, claim, damage, liability or action. The Company shall either promptly, but in no event in more than ten Business Days after request for payment, pay directly all amounts that it is required to pay hereunder or shall reimburse the requesting party for such amounts within ten Business Days after any request for such reimbursement. The Company also shall indemnify any Underwriter of the Registrable Securities, their officers, affiliates, directors, partners, members and agents and each person who controls such Underwriters on substantially the same basis as that of the indemnification of Purchaser provided in this Section 2.4.1. The indemnity agreement contained in this Section 2.4.1 shall not apply to amounts paid in settlement of any such loss, claim, damage or liability or any action in respect thereof if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to Purchaser and his affiliates and agents in any such case for any loss, claim, damage, liability or any action in respect thereof to the extent that it arises solely from or is based solely upon and is in conformity with information related to Purchaser furnished in writing by Purchaser expressly for use in connection with such registration by Purchaser, nor shall the Company be liable to Purchaser for any such loss, claim, damage or liability or any action in respect thereof to the extent it arises solely from or is based solely upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities delivered by Purchaser after the Company had provided written notice to Purchaser that such registration statement or prospectus contained such untrue statement or alleged untrue statement of a material fact, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading after the Company had provided written notice to Purchaser that such registration statement or prospectus contained such omission or alleged omission. -11- 2.4.2 INDEMNIFICATION BY PURCHASER. The Holder shall indemnify and hold harmless the Company, its officers, directors, partners, members and agents and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing indemnity from the Company to Purchaser, but solely with reference to information in conformity with and related to Purchaser furnished in writing by Purchaser expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus. The Holder also indemnify and hold harmless any Underwriter of the Registrable Securities, their officers, directors, partners, members and agents and each person who controls such Underwriters on substantially the same basis as that of the indemnification of the Company provided in this Section 2.4.2; provided, however, that in no event shall any indemnity obligation under this Section 2.4.2 exceed the dollar amount of the net proceeds actually received by Purchaser from the sale of Registrable Securities which gave rise to such indemnification obligation under such registration statement or prospectus. 2.4.3 CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt by any person of any notice of any loss, claim, damage or liability or any action in respect of which indemnity may be sought pursuant to Section 2.4.1 or 2.4.2, such person ("INDEMNIFIED PARTY") shall, if a claim in respect thereof is to be made against any other person for indemnification hereunder, notify such other person ("INDEMNIFYING PARTY") in writing of the loss, claim damage, liability or action; provided, however, that the failure by the Indemnified Party to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which the Indemnifying Party may have to such Indemnified Party hereunder. If the Indemnified Party is seeking Indemnification with respect to any claim or action brought against the Indemnified Party, then the Indemnifying Party shall be entitled to participate in such claim or action, and, to the extent that it wishes, jointly with all other Indemnifying Parties, to assume the defense thereof with counsel satisfactory to the Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or action, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that in any action in which both the Indemnified Party and the Indemnifying Party are named as defendants, the Indemnified Party shall have the right to employ separate counsel (but no more than one such separate counsel) to represent the Indemnified Party and its controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Indemnified Party against the Indemnifying Party, with the fees and expenses of such counsel to be paid by such Indemnifying Party if, based upon the written opinion of counsel of such Indemnified Party, representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, consent to entry of judgment or effect any settlement of any claim or pending or threatened proceeding in respect of which the Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such judgment or settlement includes an unconditional release of such Indemnified Party from all liability arising out of such claim or proceeding. -12- 2.4.4 CONTRIBUTION. If the indemnification provided for in the foregoing Sections 2.4.1, 2.4.2 and 2.4.3 is unavailable to any Indemnified Party in respect of any loss, claim, damage, liability or action referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the Indemnified Parties and the Indemnifying Parties in connection with the actions or omissions which resulted in such loss, claim, damage, liability or action, as well as any other relevant equitable considerations. The relative fault of any Indemnified Party and any Indemnifying Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such Indemnified Party or such Indemnifying Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 2.4.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of any loss, claim, damage, liability or action referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 2.4.4, Purchaser shall not be required to contribute any amount in excess of the dollar amount of the net proceeds actually received by Purchaser from the sale of Registrable Securities which gave rise to such contribution obligation. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 2.5 UNDERWRITING AND DISTRIBUTION. 2.5.1 RULE 144. The Company covenants that it shall file any reports required to be filed by it under the 1933 Act and the 1934 Act and shall take such further action as Purchaser may reasonably request, all to the extent required from time to time to enable Purchaser to sell Registrable Securities without registration under the 1933 Act within the limitation of the exemptions provided by Rule 144 or Rule 144A under the 1933 Act, as such Rules may be amended from time to time, or any similar Rule or regulation hereafter adopted by the Commission. 2.5.2 "LOCK-UP" AGREEMENT BY PURCHASER. The Holder, by his acceptance hereof, agrees that, upon request, in connection with any underwritten public offering by the Company, Purchaser will enter "lock-up" agreements, in customary form, pursuant to which he will agree not to effect any sale or distribution of any securities similar to those being registered by the Company, or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 or 144A under the 1933 Act, during the 14 days prior to, and during the 180-day period beginning on, the effective date of the registration statement relating to such offering (except as part of such registration statement); provided, however, that the obligation of Purchaser to execute a lock-up agreement is subject to the execution of similar agreements by all of the officers, directors and other shareholders of the Company who hold shares of Common Stock or options or other securities exercisable or convertible for or into shares of Common Stock. -13- 2.6 NO INCONSISTENT OR SUPERIOR REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of Purchaser, (i) enter into any agreement granting demand registration rights with respect to its Common Stock or other securities, (ii) enter into any agreement granting Piggyback Registration rights with respect to the Common Stock or other securities which are inconsistent with or superior to the rights granted to Purchaser hereunder; or (iii) amend any agreement in effect as of the date hereof which grants registration rights to any other person or entity so as to cause such registration rights to be inconsistent with or superior to the rights granted to Purchaser hereunder or to otherwise adversely affect the registration rights granted to Purchaser hereunder. ARTICLE III REPRESENTATIONS OF THE COMPANY The Company hereby makes the following representations and warranties to Purchaser, upon which representations and warranties Purchaser has relied in entering into this Agreement: 3.1 ORGANIZATION, GOOD STANDING AND POWER. The Company is a corporation duly incorporated validly existing and in good standing under the laws of the State of Nevada and has all requisite corporate authority to own, lease and operate its properties and assets and to carry on its business as now being conducted. The Company's only subsidiary is the Mogel Management Group, Inc., a Nevada corporation ("MMG"), which functions as its operating Company. MMG is wholly owned by the Company. MMG itself has a wholly owned subsidiary, Mogel Management Group, LLC, a California limited liability company which conducts no business. The Company is duly qualified to do business and is in good standing as a foreign corporation in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary. 3.2 AUTHORIZATION, ENFORCEMENT. (i) The Company has the requisite corporate power and corporate authority to enter into and perform its obligations under this Agreement and to issue the Note and, upon conversion, the Shares, (ii) the execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required, and (iii) this Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligations of the Company enforceable against the Company in accordance with their terms. 3.3 CAPITALIZATION. The authorized capital stock of the Company consists of 250,000,000 shares of Common Stock of which 20,220,000 shares are issued and outstanding. All of the outstanding shares of the Company's Common Stock have been duly and validly authorized and are fully paid and non-assessable. No shares of Common Stock are entitled to preemptive rights or registration rights and there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company. Furthermore, there are no contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of the capital stock of the Company or options, securities or rights convertible into shares of capital stock of the Company. The Company is not a party to any agreement granting registration rights to any person with respect to any of its equity or debt securities. The Company is not a party to, and it has no knowledge of, any agreement restricting the voting or transfer of any shares of the capital stock of the Company. The offer and sale of all capital stock, convertible securities, rights, warrants, or options of the Company issued prior to the Effective Date complied with all applicable federal and state securities laws, and no stockholder has a right of rescission or damages with respect thereto. Exhibit F contains an accurate and current copy of the Company's Articles of Incorporation. Exhibit G contains an accurate and current copy of the Company's Bylaws. -14- 3.4 ISSUANCE OF NOTE AND SHARES. The Note to be issued under this Agreement and the Shares to be issued upon conversion of the Note have been duly authorized by all necessary corporate action and, when paid for and issued in accordance with the terms hereof and the Shares shall be validly issued and outstanding, fully paid and non-assessable, and Purchaser shall be entitled to all rights accorded to a holder of Common Stock. The Shares Company, on a fully-diluted basis, including shares of all classes and types, common and preferred, and all shares authorized for issuance under any Company equity option plan or authorized for issuance pursuant to any other options or warrants issued by the Company. 3.5 NO CONFLICTS. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated herein do not and will not (i) violate any provision of the Company's Articles of Incorporation or Bylaws, (ii) conflict with, 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, any agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company is a party, (iii) create or impose a lien, charge or encumbrance on any property of the Company under any agreement or any commitment to which the Company is a party or by which the Company is bound or by which any of its respective properties or assets are bound, or (iv) result in a violation of any federal, state, local or other foreign statute, rule, regulation, order, judgment or decree (including any federal or state securities laws and regulations) applicable to the Company or by which any property or asset of the Company are bound or affected. The business of the Company is not being conducted in violation of any laws, ordinances or regulations of any governmental entity, except for possible violations that singularly or in the aggregate do not and will not have a material adverse effect. The Company is not required under any federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement, or issue and sell the Shares and Option Shares in accordance with the terms hereof (other than any registration statement which may be filed pursuant hereto). -15- 3.6 SEC DOCUMENTS, FINANCIAL STATEMENTS. A certain number of shares of the Common Stock of the Company is registered pursuant to Section 12(g)of the 1934 Act, and, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the Commission pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d) of the 1934 Act. The Company has delivered or made available to Purchaser, true and complete copies of the documents filed with the Commission by Company since November 18, 2003, (the "SEC DOCUMENTS"). As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act or the 1933 Act, as applicable, and the rules and regulations of the Commission promulgated thereunder applicable to such documents, and, as of their respective filing dates, none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements under GAAP and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements), and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). 3.7 SARBANES-OXLEY ACT OF 2002. There has been no change in the Company's accounting policies since November 18, 2003, other than as required by applicable law, regulation or generally accepted accounting Principles (GAAP). Each required form, report and document containing financial statements that has been filed with or submitted to the Commission since November 18, 2003, was accompanied by the certifications required to be filed or submitted by Parent's chief executive officer and chief financial officer pursuant to the Sarbanes-Oxley Act of 2002 (the "SARBANES-OXLEY Act"), and at the time of filing or submission of each such certification, such certification was true and accurate and complied with the Sarbanes-Oxley Act and the rules and regulations promulgated thereunder. Since November 18, 2003, neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, employee, auditor, accountant or representative of the Company or any of its subsidiaries has received or otherwise had or obtained knowledge of any complaint, allegation, assertion or claim, whether written or oral, regarding the accounting or auditing practices, procedures, methodologies or methods of the Company or any of its subsidiaries or their respective internal accounting controls, including any complaint, allegation, assertion or claim that Parent or any of it subsidiaries has engaged in questionable accounting or auditing practices, except for (A) any complaint, allegation, assertion or claim as has been resolved without any resulting change to the Company's accounting or auditing practices, procedures methodologies or methods of the Company or any of its subsidiaries or their respective internal accounting controls and (b) questions regarding such matters raised and resolved in the ordinary course in connection with the preparation and review of the Company's financial statements and periodic reports. Since November 18, 2003, no attorney representing the Company or any of its subsidiaries, whether or not employed by the Company or any such subsidiary, has reported evidence of a material violation of securities laws, breach of fiduciary duty or similar violation by the Company or any of its officers, directors, employees or agents to the Board of Directors of the Company or any committee thereof or to any director or officer of the Company or any of its subsidiaries. To the knowledge of the Company and its subsidiaries, since November 18, 2003, no employee of the Company or any of its subsidiaries has provided or is providing information to any law enforcement agency regarding the commission or possible commission of any crime or the violation or possible violation of any applicable law. -16- 3.8 NO MATERIAL ADVERSE EFFECT. Since the date of the financial statements provided by Company to Purchaser, including those contained in the most recently filed Form 10-QSB or Form 10-KSB, whichever is most current, no material adverse effect has occurred or exists with respect to the Company, except as disclosed in the SEC Documents. 3.9 NO UNDISCLOSED LIABILITIES. The Company does not have any liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise) that would be required to be disclosed on a balance sheet of the Company or any subsidiary (including the notes thereto) in conformity with GAAP which are not disclosed in the SEC Documents, other than those incurred in the ordinary course of the Company's business since such date and which, individually or in the aggregate, do not or would not have a material adverse effect on the Company. 3.10 NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since the date of the financial statement contained in the most recently filed Form 10-QSB or Form 10-KSB, whichever is most current, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the SEC Documents. 3.11 INDEBTEDNESS. The SEC Documents set forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company, or for which the Company has commitments. For the purposes of this Agreement, "INDEBTEDNESS" shall mean (A) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (B) all guaranties, endorsements and contingent obligations in respect of Indebtedness of others, whether or not the same are or should be reflected in the Company's balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, (C) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with GAAP, (D) expenses incurred related to due diligence investigations of the four (4) hospitals, not otherwise reported may exceed $50,000. The Company is not in default with respect to any Indebtedness. 3.12 TITLE TO ASSETS. The Company has good and marketable title to all of its real and personal property, free of any mortgages, pledges, charges, liens, security interests or other encumbrances, except for those indicated in the SEC Documents. All said leases of the Company are valid and subsisting and in full force and effect. 3.13 ACTIONS PENDING. There is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company which questions the validity of this Agreement or the transactions contemplated hereby or any action taken or to be taken pursuant hereto or thereto. There is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened, against or involving the Company or any of its properties or assets. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company or any subsidiary. -17- 3.14 COMPLIANCE WITH LAW. The Company has all permits, licenses, consents and other governmental or regulatory authorizations and approvals necessary for the conduct of its businesses as now being conducted. 3.15 TAXES. Since November 18, 2003, the Company has filed all Tax Returns which it is required to file under applicable laws; all such Tax Returns are true and accurate and have been prepared in compliance with all applicable laws; the Company has paid all Taxes due and owing by it (whether or not such Taxes are required to be shown on a Tax Return) and has withheld and paid over to the appropriate taxing authorities all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third parties. Since November 18, 2003, no claim has been made by a taxing authority in a jurisdiction where the Company does not file tax returns that the Company is or may be subject to taxation by that jurisdiction. There are no foreign, federal, state or local tax audits or administrative or judicial proceedings pending or being conducted with respect to the Company. To the Company's knowledge, there are no material unresolved questions or claims concerning the Company's Tax liability. For purposes of this Section: "IRS" means the United States Internal Revenue Service; "TAX" or "TAXES" means federal, state, county, local, foreign, or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not; and "TAX RETURN" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. 3.16 CERTAIN FEES. No brokers, finders or financial advisory fees or commissions will be payable by the Company with respect to the transactions contemplated by this Agreement. 3.17 DISCLOSURE. To the best of the Company's knowledge, neither this Agreement or the exhibits hereto nor any other documents, certificates or instruments furnished to Purchaser by or on behalf of the Company or any subsidiary in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made herein or therein, in the light of the circumstances under which they were made herein or therein, not misleading. 3.18 BOOKS AND RECORDS. The records and documents of the Company accurately reflect in all material respects the information relating to the business of the Company, the location and collection of their assets, and the nature of all transactions giving rise to the obligations or accounts receivable of the Company. 3.19 SECURITIES LAWS. The Company has complied and will comply with all applicable federal and state securities laws in connection with the offer, issuance and sale of the Note and the Shares hereunder. Neither the Company nor anyone acting on its behalf, directly or indirectly, has or will sell, offer to sell or solicit offers to buy the Shares or similar securities to, or solicit offers with respect thereto from, or enter into any preliminary conversations or negotiations relating thereto with, any person (other than Purchaser), so as to bring the issuance and sale of the Shares under the registration provisions of the 1933 Act and applicable state securities laws. Neither the Company nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Note and the Shares. -18- 3.20 ABSENCE OF CERTAIN DEVELOPMENTS. Except as disclosed in SEC Documents, since the date of the financial statement contained in the most recently filed Form 10-Q or Form 10-K, whichever is most current, the Company has not: (i) issued any stock, bonds or other corporate securities or any rights, options or warrants with respect thereto; (ii) borrowed any amount or incurred or become subject to any liabilities (absolute or contingent) except current liabilities incurred in the ordinary course of business which are comparable in nature and amount to the current liabilities incurred in the ordinary course of business during the comparable portion of its prior fiscal year, as adjusted to reflect the current nature and volume of the Company's business; (iii) discharged or satisfied any lien or encumbrance or paid any obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business; (iv) declared or made any payment or distribution of cash or other property to stockholders with respect to its stock, or purchased or redeemed, or made any agreements so to purchase or redeem, any shares of its capital stock; (v) sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business; (vi) sold, assigned or transferred any intangible assets or intellectual property rights, or disclosed any proprietary confidential information to any person except to customers in the ordinary course of business or to Purchaser or his representatives; (vii) suffered any material losses; or (viii) made capital expenditures or commitments therefor that aggregate in excess of $50,000. 3.21 GOVERNMENTAL APPROVALS. Except as may be required by Article II, no authorization, consent, approval, license, exemption of, filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with, the delivery of the Note and the Shares, or for the performance by the Company of its obligations under this Agreement. 3.22 OFFER TO CITIGROUP/TENET HEALTHCARE SYSTEM. The Company has negotiated a Non-Binding Letter of Intent with Citigroup/Tenet Healthcare Corporation (the "LETTER") to purchase four hospitals (the "HOSPITALS") in Orange County, California known as Western Medical Center - Santa Ana, Western Medical Center - Anaheim, Costal Communities Hospital, and Chapman Medical Center (the "TENET TRANSACTION"). A copy of the Letter is attached hereto as Exhibit H. ARTICLE IV REPRESENTATIONS OF PURCHASER The Purchaser hereby makes the following representations and warranties to the Company, upon which representations and warranties the Company has relied in entering into this Agreement: -19- 4.1 AUTHORIZATION AND POWER. Purchaser has the requisite power and authority to enter into and perform this Agreement and to purchase the Note and the Shares being sold to it hereunder. The execution, delivery and performance of this Agreement by Purchaser shall constitute valid and binding obligations of Purchaser enforceable against Purchaser in accordance with their terms. 4.2 FINANCIAL RISKS. Purchaser acknowledges that it is able to bear the financial risks associated with an investment in the Note and the Shares and that it has been given full access to such records of the Company and the subsidiaries and to the officers of the Company and the subsidiaries as it has deemed necessary or appropriate to conduct its due diligence investigation. Purchaser is capable of evaluating the risks and merits of an investment in the Note and the Shares by virtue of his experience as an investor and his knowledge, experience, and sophistication in financial and business matters and Purchaser is capable of bearing the entire loss of its investment in the Note and the Shares. 4.3 ACCREDITED INVESTOR. Purchaser is an "accredited investor" as defined in Regulation D promulgated under the 1933 Act. 4.4 CALIFORNIA RESIDENT. Purchaser is a bona fide resident of, is domiciled in and received the offer and made the decision to invest in the Note and the Shares in the State of California. 4.5 RELIANCE. Purchaser understands and agrees that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of Purchaser set forth herein in order to determine the suitability of Purchaser to acquire the Note and the Shares. ARTICLE V COVENANTS The Company covenants that, until such time as (a) the Company has fully satisfied its obligations with respect to the payment of all principal, interest and other amounts that are or may become due and payable under the Note, or (b) if the Note has been converted in its entirety, Purchaser no longer owns Shares representing at least 5% of Company's then issued and outstanding Common Stock, or (c) the Company has completed an underwritten public offering of its Common Stock, the Company shall perform the covenants set forth in this Section 5. 5.1 VISITATION RIGHTS FOR BOARD MEETINGS. Visitation Rights for Board Meetings. Purchaser shall receive notice of and be entitled to have a representative attend as a observer all meetings of the Boards of Directors of the Company and of all committees thereof. Notice of such meetings shall be given to Purchaser in the same manner and at the same times as to members of the Board of Directors or such committees (which shall not be less than 48 hours prior to such meeting unless otherwise agreed to by Purchaser). Purchaser shall be provided with copies of (a) a meeting agenda, if any is prepared, (b) all information which is provided to the members of the Board of Directors or committee thereof (whether prior to, at, or subsequent to any such meetings) at the same time as such materials are provided to the members of the Board of Directors or such committees, as the case may be and (c) copies of the minutes of all such meetings concurrently with the distribution of such minutes to the members of the Board of Directors, but in no event later than 45 days after each such meeting. -20- 5.2 RESTRICTION ON FUNDAMENTAL CHANGES. Without Purchaser's written consent, the Company shall not do any of the following to the extent that they could in any way adversely affect the repayment of the Note, impair any of Purchaser's other rights or have a material adverse effect on the Company: (a) make any change in its business objectives, purposes, structure or operations, (b) amend its articles of incorporation or bylaws, (c) make any change in its capital structure, including the issuance of any shares of its capital stock, option rights or convertible securities or any revision of the terms of its outstanding capital stock or the granting of any preemptive rights, (d) issue any preferred stock, (e) increase management compensation, or (f) sell or otherwise dispose of assets, other than dispositions in the ordinary course of business consistent with past practice. 5.3 BOOKS, RECORDS AND INSPECTIONS. The Company shall keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. The Company shall permit officers and designated representatives and/or agents of Purchaser to visit and inspect any of the properties of the Company, and to examine the books of account of the Company and discuss the affairs, finances and accounts of the Company with, and be advised as to the same by, its officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as Purchaser may request. ARTICLE VI MISCELLANEOUS 6.1 AMENDMENT. This Agreement may be modified or amended only by mutual written agreement of the parties. Any such modification or amendment must be in writing, dated and signed by the parties and attached to this Agreement. 6.2 ASSIGNMENT. The Company may not assign any interest or obligation under this Agreement without Purchaser's prior written consent. Purchaser may freely assign his interests and/or obligations under this Agreement without the consent of the Company. 6.3 BINDING EFFECT. Subject to the foregoing, this Agreement shall be binding on and shall inure to the benefit of the parties and their respective successors and assigns. 6.4 ATTORNEYS' FEES. In any action or dispute, at law or in equity, that may arise under or otherwise relate to this Agreement, the prevailing party shall be entitled to the award of reasonable attorneys' fees and costs, in addition to whatever relief the prevailing party may be awarded. 6.5 VENUE. The parties agree that Orange County, California shall be the only proper venue for disputes related to this Agreement. 6.6 ENTIRE AGREEMENT. This Agreement is the entire understanding and agreement of the parties regarding its subject matter, and supersedes any prior oral or written agreements, representations, understandings or discussions between the parties. No other understanding between the parties shall be binding on them unless set forth in writing, signed and attached to this Agreement. -21- 6.7 GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of California, except the conflicts of laws provisions that would require the application of the laws of any other jurisdiction. 6.8 SPECIFIC PERFORMANCE. The parties acknowledge that the Note and the Shares are unique, and that damages would not be an adequate remedy for Purchaser in the event of the Company's failure to perform any of its obligations hereunder and under the Note (including, without limitation, its obligation to deliver the Shares if Purchaser elects to convert the Note). As a result, the parties agree that this Agreement may be enforced by specific performance. 6.9 HEADINGS. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 6.10 MEANING OF CERTAIN WORDS. Wherever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine, or neuter forms, and the singular form of nouns shall include the plural and vice versa. 6.11 NO THIRD-PARTY BENEFICIARY RIGHTS. The parties do not intend to confer and this Agreement shall not be construed to confer any rights or benefits to any person, firm, corporation or entity other than the parties. 6.12 NOTICES. All notices or communications required or permitted under this Agreement shall be given in writing and delivered personally or sent by United States registered or certified mail with postage prepaid and return receipt requested or by overnight delivery service (e.g., Federal Express, DHL). Notice shall be deemed given when sent, if sent as specified in this Section, or otherwise deemed given when received. In each case, notice shall be delivered or sent to: IF TO COMPANY, ADDRESSED TO: Integrated Healthcare Holdings, Inc. 695 Town Center Drive, Suite 260 Costa Mesa, CA 92626 Attention: Chief Executive Officer IF TO PURCHASER, ADDRESSED TO: c/o Strategic Global Management, Inc. 6800 Indiana Avenue, Suite 130 |Riverside, CA 92506 Attention: Kali Chaudhuri, M.D. 6.13 SEVERABILITY. If any provision of this Agreement is determined to be illegal or unenforceable, that provision shall be severed from this Agreement, and such severance shall have no effect upon the enforceability of the remainder of this Agreement. -22- 6.14 WAIVER. No delay or failure to require performance of any provision of this Agreement shall constitute a waiver of that provision as to that or any other instance. Any waiver granted by a party must be in writing to be effective, and shall apply solely to the specific instance expressly stated. 6.15 CONFIDENTIALITY. Neither party shall disclose any of the terms of this Agreement to any person or entity (other than its attorneys or accountants) without the prior written consent of the other party, unless and only to the extent such disclosure is required by law, including the 1933 Act. 6.16 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument. 6.17 CORPORATE NAME. If Purchaser elects to convert his Note into the Shares, the parties recognize he may elect to cause the Company to change its corporate name. IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. COMPANY Integrated Healthcare Holdings, Inc., a Nevada corporation /s/ Larry Anderson -------------------------------------------- Larry B. Anderson, President PURCHASER /s/ Kali Chaudhuri -------------------------------------------- Kali Chaudhuri, M.D., an individual -23- EXHIBIT A FORM OF CONVERTIBLE NOTE THE SECURITIES REPRESENTED BY THIS CONVERTIBLE PROMISSORY NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE DEBTOR THAT SUCH REGISTRATION IS NOT REQUIRED. $500,000.00 Costa Mesa, California September 28, 2004 SECURED CONVERTIBLE PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, INTEGRATED HEALTHCARE HOLDINGS, INC., a Nevada corporation (the "COMPANY"), promises to pay to Kali Chaudhuri, M.D. ("PURCHASER"), at c/o 6800 Indiana Avenue, Suite 130, Riverside, California 92506, or at such other location as is designated by Purchaser in writing hereunder, the aggregate sum of Five Hundred Thousand Dollars ($500,000), bearing simple interest on the unpaid principal balance of this Note, from the date of this Note until this Note is paid in full at a rate of five percent (5.0%) per annum. Accrued interest shall be computed based on the actual number of days elapsed. Interest only shall be payable on the first Business Day of each calendar quarter beginning January 2, 2005. All principal and accrued but unpaid interest will be due and payable in full on demand at any time after December 31, 2004 if the Tenet Transaction has not closed by that date, or otherwise on September 29, 2005 (the "DUE DATE"), if not earlier converted to equity as set forth below. All payments shall be made in lawful money of the United States, without offset, deduction, or counterclaim of any kind. 1. TERMS. Capitalized terms used herein without definition have the meanings ascribed to them in the Secured Convertible Note Purchase Agreement of even date herewith (as amended from time to time in accordance with the terms thereof, the "AGREEMENT"), by and between the Company and Purchaser. 2 PAYMENTS AND COMPUTATIONS. All payments on account of indebtedness evidenced by this Note shall be made not later than 11:00 A.M. (California time) on the day when due in lawful money of the United States and shall be first applied to interest due on the unpaid principal balance and the remainder to any principal due (it being understood that unless otherwise specified in writing by the Company, any payment which is applied to reduce the principal balance outstanding shall be applied to the last Advance evidenced by this Note first). Payments are to be made at such place as Purchaser or the legal holders of this Note may, from time to time, in writing specify, and in the absence of a specification, at the principal place of business of Purchaser as set forth in the first paragraph of this Note. This Note may not be prepaid without the express written consent of Purchaser, except that if the letter of intent of purchase agreement between the Company and Tenet Healthcare Corporation and/or its affiliates relating to the Tenet Transaction is terminated for any reason, the Company may, within 30 days of such termination, pay the full amount of all principal of and accrued interest under this Note without premium or penalty, and without the right of Purchaser to convert this Note in accordance with Section 3. 1 3. CONVERSION OF NOTE. Subject to the last sentence of Section 2, this Note is convertible into equity of the Company at the option of Purchaser and upon the other terms and conditions set forth below. 3.1 VOLUNTARY CONVERSION. Unless payment in full on this Note has earlier been made, all or any portion of the then outstanding principal and interest accrued thereon under this Note may be converted, at the option of Purchaser, into shares of the Company's Common Stock ("CONVERSION SHARES") at a conversion price of $0.003125 per share (as adjusted pursuant to the terms and conditions of this Note) ("CONVERSION PRICE"). 3.2 ANTIDILUTION ADJUSTMENTS. The Conversion Price in effect at any time and the number and kind of securities purchasable upon the conversion of this Note shall be subject to adjustment from time to time upon the happening of any of the following events: (i) If the Company issues or sells (or, pursuant to paragraph (ii) below, is deemed to have issued or sold) any shares of Common Stock (except as provided in paragraph (v) below) for a consideration per share less than the Conversion Price in effect immediately prior to such issuance or sale, then the Conversion Price, as of the date of such issuance or sale, shall be reduced to a price equal to such consideration per share. (ii) For the purposes of paragraph (i) above, the following subparagraphs (A) to (E), inclusive, shall be applicable: (A) If at any time the Company issues or sells any rights to subscribe for, or any rights or options to purchase, Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such convertible or exchangeable stock or securities being hereinafter called "CONVERTIBLE SECURITIES"), whether or not such rights or options or the right to convert or exchange any such Convertible Securities is immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (1) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of any such rights or options which shall relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (2) the total number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) is less than the Conversion Price in effect immediately prior to the time of the issue or sale of such rights or options, then the total number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share, and except as provided in paragraph (iv), no further adjustments of the Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities, upon the exercise of such rights or options or upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. 2 (B) If at any time the Company issues or sells any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) is less than the Conversion Price in effect immediately prior to the time of such issuance or sale, then the total number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, and, except as provided in paragraph (iv) no further adjustments of the Conversion Price shall be made upon the actual issuance of such Common Stock, upon conversion or exchange of such Convertible Securities. In addition, if any issuance or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the Conversion Price have been or shall be made pursuant to other provisions of this paragraph (ii), no further adjustment of the Conversion Price shall be made by reason of such issuance or sale. (C) If at any time the Company declares and pays a dividend or makes any other distribution upon the Common Stock payable in Common Stock or Convertible Securities, any such Common Stock or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration; provided, that this provision shall not apply to any shares of Common Stock issuable for additional consideration upon conversion of such Convertible Securities. (D) If at any time any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities are issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. If any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined by the Board of Directors, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. If any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities are issued in connection with any merger of another corporation into the Company, the amount of consideration therefor shall be deemed to be the fair value of such merged corporation as determined by the Board of Directors reduced by all cash and other consideration (if any) paid by the Company in connection with such merger. 3 (E) If at any time the Company fails to set a record date of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or (2) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issuance or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (iii) If at any time the Company subdivides its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced. If at any time the outstanding shares of Common Stock of the Company are combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. (iv) If the purchase or exercise price provided for in any right or option referred to in paragraph (ii) (A), or the rate at which any Convertible Securities referred to in paragraph (ii) (A) or (B) is convertible into or exchangeable for Common Stock, changes or a different purchase or exercise price or rate becomes effective at any time or from time to time, then, upon such change becoming effective, the Conversion Price then in effect hereunder shall forthwith be increased or decreased to such Conversion Price as would have been in effect had the adjustments made upon the granting or issuance of such rights or options or Convertible Securities been made upon the basis of (A) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities consideration received therefor and (B) the granting or issuance at the time of such change of any such options, rights or Convertible Securities then still outstanding for the consideration, if any, received by the Company therefor and to be received on the basis of such changed price. 4 (v) The Company shall not be required to make any adjustment to the Conversion Price in the case of: (A) the granting, after the date hereof, by the Company of stock options or stock awards with respect to shares of Common Stock under stock option plans of the Company in existence as of the date hereof and disclosed to Purchaser; (B) the issuance of shares of Common Stock pursuant to the exercise of the options referred to in paragraph (v) (A) above or any other options or other convertible securities outstanding as of the date hereof and disclosed to Purchaser; (C) the issuance of shares of Common Stock pursuant to the exercise of any warrants outstanding on the date hereof and disclosed to Purchaser. (vi) The Company shall give notice to Purchaser of any event or transaction that results in an adjustment in the Conversion Price, within ten business days thereof, at Purchaser's address as it appears on the books of the Company, including a computation of such adjustment and any further information as shall be necessary to confirm the computation of such adjustments. 3.3 CONVERSION PROCEDURE. Before Purchaser shall be entitled to receive a certificate for the Conversion Shares and any other instruments in connection with a conversion hereunder, Purchaser shall enter into any agreements required by the terms of such conversion and surrender the original of this Note, duly endorsed, at the principal office of the Company. At its expense, the Company shall, as soon as practicable thereafter, issue and deliver to Purchaser at such principal office a certificate or certificates for the number of Conversion Shares to which Purchaser shall be entitled upon such conversion (bearing such legends as are required by the terms of the conversion and applicable state and federal securities law in the opinion of counsel to the Company), together with any other securities and property to which Purchaser is entitled upon such conversion under the terms of this Note and, if the conversion is for less than all of the then outstanding balance of principal and interest on this Note, a replacement Note of like tenor in the proper denomination. 3.4 MECHANICS AND EFFECT OF CONVERSION. No fractional shares shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to Purchaser upon the conversion of this Note, the Company shall pay to Purchaser the amount of outstanding principal or interest that is not so converted, such payment to be in cash as provided below. Upon conversion of all principal of and accrued interest on this Note and/or payment of all principal and accrued interest, the Company shall be forever released from all its obligations and liabilities under this Note. 3.5 RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall at all times reserve and keep available out of its authorized but unissued shares solely for the purpose of effecting the conversion of the Note such number of its shares as shall from time to time be sufficient to effect the conversion of the Note; and if at any time the number of authorized but unissued shares is not sufficient to effect the conversion of this Note, then, in addition to such other remedies as shall be available to Purchaser, the Company will use its best efforts to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares to such number of shares as shall be sufficient for such purposes. 5 3.6 LEGEND. Each certificate or instrument evidencing Conversion Shares and any other securities issued upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event (unless no longer required in the opinion of the counsel for the Company) shall be imprinted with a legend substantially in the following form: THE SECURITIES TO WHICH THIS INSTRUMENT RELATES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS ("BLUE SKY LAWS"), AND MAY NOT BE OFFERED OR SOLD WITHOUT REGISTRATION UNDER THE SECURITIES ACT, AND AS REQUIRED BY BLUE SKY LAWS IN EFFECT AS TO SUCH TRANSFER, UNLESS THIS CORPORATION HAS RECEIVED AN OPINION FROM COUNSEL, SATISFACTORY TO THIS CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. The Company shall be entitled to enter stop transfer notices on its transfer books with respect to such securities. 4. SECURITY. Repayment of this Note is secured pursuant to the terms of a Security Agreement dated the date of this Note by and between the Company and Purchaser. 5. ATTORNEYS' FEES. If any action is instituted on this Note, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which the party or parties may be entitled. Diligence, demand, presentment, notice of dishonor, and protest are waived by the Company, and any and all makers, sureties, guarantors, and endorsers of this Note, and their successors and assigns. Time is of the essence for every obligation under this Note. 6. LAW. This Note shall be construed under the laws of the State of California, as such laws are applied to contracts entered into and performed entirely within that state by residents thereof. 7. RULES OF CONSTRUCTION/REPRESENTATION. The parties hereto agree that they are sophisticated business persons or entities who have had the opportunity to be represented by counsel during the negotiation and execution of this Note and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 6 IN WITNESS WHEREOF, the Company has executed and delivered this Note as of the day and year and at the place first above written. INTEGRATED HEALTHCARE HOLDINGS, INC. By: --------------------------------- Larry B. Anderson, President 7 Schedule attached to Note dated September 28, 2004 made by INTEGRATED HEALTHCARE HOLDINGS, INC. and payable to the order of KALI CHAUDHURI, M.D. ADVANCES AND PRINCIPAL PAYMENTS - -------------------------------------------------------------------------------- AMOUNT OF AMOUNT OF UNPAID PRINCIPAL NOTATION DATE ADVANCE PRINCIPAL REPAID BALANCE MADE BY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT B FORM OF SECURITY AGREEMENT SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement"), dated as of September 28, 2004, is made in favor of and for the benefit of Kali Chaudhuri, M.D., with an office at c/o Strategic Global Management, Inc., 6800 Indiana Avenue, Suite 130, Riverside, California 92506 ("PURCHASER"), by Integrated Healthcare Holdings, Inc., a Nevada corporation with a principal place of business located at 695 Town Center Drive, Suite 260, Costa Mesa, California 92626 (the "COMPANY"). R E C I T A L S A. Pursuant to a Secured Convertible Note Purchase Agreement ("PURCHASE AGREEMENT") dated as of September 29, 2004, by and between the Company and Purchaser, Purchaser has agreed, among other things, to purchase from the Company (i) a 5% Secured Convertible Promissory Note in the original principal amount of $500,000 and (ii) a 7.25% Secured Promissory Note in the original principal amount of $10,000,000. B. The Company will derive substantial direct and indirect benefit from the consummation of the transactions contemplated by the Purchase Agreement. C. Purchaser is willing to execute the Purchase Agreement only upon, among other things, the condition that the Company has executed and delivered this Agreement in favor of Purchaser. A G R E E M E N T In consideration of the promises and of the mutual covenants herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and to induce Purchaser to enter into the Purchase Agreement and the Related Agreements (as defined below) to which it is a party, the parties, intending to be legally bound, agree as follows: 1. DEFINITIONS. Unless otherwise defined herein, (a) any terms used in this Agreement that are defined in the Code shall be construed as set forth in the Code, (b) capitalized terms or matters of construction defined or established in the Purchase Agreement shall be applied herein as defined or established therein, and (c) the following terms shall have the respective meanings set forth below: "AGREEMENTS" means all contracts, undertakings or agreements (other than rights evidenced by chattel paper, documents or instruments) in or under which the Company may now or hereafter have any right, title or interest, including, but not limited to, any agreements relating to the terms of payment or the terms of performance of any account. "CASH EQUIVALENTS" means (a) direct obligations of the United States of America (including, but not limited to, obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America) or obligations the timely payment of the principal of and interest on which are fully guaranteed by the United States of America, all of which mature within three months from the date of acquisition thereof; (b) interest-bearing demand or time deposits that mature no more than 30 days from the date of creation thereof and that are either (i) insured by the Federal Deposit Insurance Corporation, or (ii) held in any United States commercial bank having general obligations rated at least "AA" or equivalent by Standard & Poor's Corporation or Moody's Investors Service and having capital and surplus of at least $500,000,000 or the equivalent; and (c) certificates of deposit that mature no more than 30 days from the date of creation thereof and that are either (i) insured by the Federal Deposit Insurance Corporation, or (ii) held in any United States bank having general obligations rated at least "AA" or equivalent by Standard & Poor's Corporation or Moody's Investors Service and having capital and surplus of at least $500,000,000 or the equivalent. "CHARGE" means any federal, state, county, city, municipal, local, foreign or other governmental tax at the time due and payable, levy, assessment, charge, lien, claim or encumbrance upon or relating to: (i) the Collateral; (ii) the Obligations; (iii) the employees, payroll, income or gross receipts of the Company; (iv) the ownership or use of any of the assets of the Company; or (v) any other aspect of the business of the Company. "CODE" means the Uniform Commercial Code as it may, from time to time, be in effect in the State of California; provided, that if, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or the remedies with respect to, Purchaser's security interest in any Collateral, by virtue of California Commercial Code Section 9306 or otherwise, is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of California, the term "CODE" means the Uniform Commercial Code as in effect in those other jurisdiction for purposes of the provisions of this Agreement or any other Related Agreements, relating to the attachment, perfection, priority or remedies and for purposes of the definitions related to those provisions. "COLLATERAL" has the meaning specified in Section 2.1. "COMMISSION" means the United States Securities and Exchange Commission. "DEFAULT" means any failure to pay any amount of principal or interest on the Notes when due. "GOODWILL" means all goodwill, trade secrets, proprietary or confidential information, technical information, proprietary software and computer source code, procedures, formulae, quality control standards, designs, operating and training manuals, customer lists, client databases, candidate databases, distribution agreements and general intangibles now owned or hereafter acquired by the Company. "GOVERNMENTAL AUTHORITY" means any nation or government, any state or other political subdivision thereof, and any agency, department or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "LEASES" means all of those leasehold estates in real property now owned or hereafter acquired by the Company, as lessee. -2- "LIEN" and "LIENS" means any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien (including, but not limited to, judgment liens, liens of mechanics, suppliers and other Persons for the provision of goods or services, and all other liens arising under statute, common law or judicial interpretation), liens securing any Charge, claim (including, but not limited to, reclamation claims), security interest, easement or encumbrance, preference, priority or other security agreement or other preferential arrangement of any kind or nature whatsoever intended or having the effect of providing security for an obligation (including, but not limited to, any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction). "NOTES" means, collectively, the 5% Secured Convertible Promissory Note in the original principal amount of $500,000 and the 7.25% Secured Promissory Note in the original principal amount of $10,000,000 issued by the Company and sold and delivered to Purchaser. "OBLIGATIONS" means all loans, advances, debts, guarantees, liabilities, and obligations, for monetary amounts (whether or not such amounts are liquidated or determinable) owing by the Company to Purchaser, and all covenants and duties regarding those amounts, of any kind or nature, present or future, contingent or liquidated, whether or not evidenced by any note, agreement or other instrument, the payment or performance of which is provided for or arises now or hereafter under the Purchase Agreement or any Related Agreement, including, but not limited to, all interest, fees, charges, expenses, attorneys' fees and any other sum chargeable to the Company thereunder. "PURCHASE AGREEMENT" has the meaning set forth in Recital A. "PURCHASER" means Kali Chaudhuri, M.D., and, in if all or any part of the Obligations is transferred, endorsed or assigned by Purchaser to any Person or Persons, "PURCHASER" shall be deemed to refer equally to that Person or Persons. "RELATED AGREEMENT" means the Notes, this Agreement and the Employment Side Bar Agreement attached as Exhibit C to the Purchase Agreement. "STOCK" means all shares, options, warrants, general or limited partnership interests, membership interests, participations or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity, whether voting or nonvoting, including, but not limited to, common stock, preferred stock, or any other "equity security" (as that term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934). 2. COLLATERAL. 2.1 GRANT; DESCRIPTION OF COLLATERAL. To secure the prompt and complete payment, performance and observance of all of the Obligations, and to induce Purchaser to enter into the Purchase Agreement and to purchase the Notes as provided for therein in accordance with the respective terms thereof, the Company hereby pledges and grants to Purchaser a security interest in all of the Company's right, title and interest in, to and under all of its assets, whether now owned or hereafter acquired or arising (including, but not limited to, under any trade names, styles or divisions thereof), and whether owned or consigned by or to or leased by or to the Company, and regardless of where located (all of which being hereinafter collectively referred to as the "COLLATERAL"), including, without limitation, the following: -3- (a) accounts; (b) agreements; (c) chattel paper; (d) documents; (e) equipment; (f) fixtures; (g) general intangibles; (h) instruments; (i) inventory; (j) leases; (k) shares of Stock; (l) goods, cash, Cash Equivalents, and personal property, whether tangible or intangible; (m) all books and records (including, but not limited to, customer lists, credit files, computer programs, printouts, manufacturing processes and other computer materials and records) pertaining to any of the foregoing; and (n) to the extent not otherwise included, all proceeds of the items set forth in (a) through (m) above, inclusive, and all accessions to, substitutions and replacements for, and rents, profits and products of, each of the items set forth in (a) through (m) above, inclusive. 2.2 COLLATERAL HELD BY PURCHASER. The Collateral includes any of the Company's property held by Purchaser, including, but not limited to, all property of every description now or hereafter in the possession or custody of, or in transit to, Purchaser, for any purpose, including, but not limited to, for safekeeping, collection or pledge, for the account of the Company, or as to which the Company may have any right or power. -4- 2.3 SECURITY INTEREST ABSOLUTE. All rights and security interests of Purchaser in the Collateral shall be absolute and unconditional, irrespective of: (i) any lack of validity or enforceability of any of the Obligations or any other agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from terms of the Notes; (iii) any exchange, release or non-perfection of any Collateral for all or any of the Obligations; or (iv) any other circumstance which might otherwise constitute a defense available to the Company, or a discharge of the Company's obligations, with respect to the validity or enforceability of a security interest to the Collateral. 2.4 AUTHORIZATION. The Company hereby authorizes Purchaser to file financing statements describing the Collateral in the State of California and in any other jurisdictions Purchaser deems necessary in order to perfect its security interest in the Collateral, and agrees that a carbon, photographic, photostatic or electronic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. 2.5 NEGOTIABLE COLLATERAL. To the extent not already in Purchaser's possession, the Company shall, immediately upon written request therefor from Purchaser, endorse and chattel paper and negotiable instruments over to Purchaser and deliver actual physical possession of the chattel paper and negotiable instruments to Purchaser. 2.6 COOPERATION AND CONTROL. The Company shall cooperate with Purchaser in (a) notifying any third parties who are in possession of any Collateral of Purchaser's security interest, (b) obtaining an acknowledgment from the third party that it is holding the Collateral for the benefit of Purchaser and (c) obtaining control with respect to collateral consisting of (i) deposit accounts, (ii) investment property, (iii) letter of credit rights and (iv) electronic chattel paper. 3. PURCHASER'S RIGHTS; LIMITATIONS ON PURCHASER'S OBLIGATIONS. 3.1 THIRD PARTY NOTIFICATION. Upon the occurrence and during the continuation of a Default, Purchaser may notify (and the Company shall, if requested by Purchaser, notify) account debtors, parties to the Agreements, obligors in respect of instruments, and obligors in respect of chattel paper, that the accounts and the right, title and interest of the Company in and under the Agreements, instruments, and chattel paper have been assigned to Purchaser and that payments shall be made directly to Purchaser. 3.2 ACCOUNT VERIFICATION. Subject to the following sentence, upon prior notice to the Company (unless a Default has occurred and is continuing in which case no notice is necessary), Purchaser shall have the right, at the Company's expense, no more than twice in any 12-month period (unless a Default has occurred and is continuing in which case no such limitation shall be in effect) to make test verifications of the accounts and physical verifications and appraisals of any other Collateral in any manner and through any medium that Purchaser considers advisable, and the Company agrees to furnish all such assistance and information as Purchaser may require in connection therewith. Purchaser may at any time in Purchaser's own name communicate with account debtors, parties to Agreements, obligors in respect of instruments and obligors in respect of chattel paper to verify with those Persons, to Purchaser's satisfaction, the existence, amount and terms of any accounts, agreements, instruments or chattel paper. The Company, at its own expense, shall cause its independent certified public accountants to deliver to Purchaser the results of any confirmation of all or any portion of the accounts and any physical verifications and reconciliations of all or any portion of the other Collateral made or observed by the accountants when and if any confirmation, verification or reconciliation is conducted in connection with annual audit procedures. Upon the occurrence of a Default, the Company, promptly upon Purchaser's request, at the Company's own expense, shall prepare and deliver to Purchaser the following reports: (a) an aged receivable trial balance; (b) test verifications of such accounts as Purchaser may request; (c) a schedule of all inventory; (d) a schedule of all equipment; (e) a schedule of all Leases; and (f) a schedule of all Indebtedness, including, but not limited to, purchase money indebtedness. -5- 4. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to Purchaser that: 4.1 OWNERSHIP OF COLLATERAL. Except for the Lien granted to Purchaser under this Agreement, the Company is the sole owner of its interest in each item of the Collateral in which it purports to grant a security interest hereunder, having good and marketable title thereto free and clear of any and all Liens. 4.2 FILINGS. Except with respect to the Lien granted to Purchaser under this Agreement, no effective security agreement, financing statement, equivalent security or lien instrument or continuation statement covering all or any part of the Collateral is on file or of record in any public office. 4.3 LIENS. Purchaser has a valid and continuing Lien upon the Collateral, which Lien (a) is a first priority Lien, and (b) is enforceable as such as against creditors of, and purchasers from, the Company and as against any purchaser of real property where any of the fixtures or equipment are located and any future creditor obtaining a Lien on such real property. All necessary legal action has been taken to (i) establish and perfect Purchaser's Lien in each item of the Collateral (other than items of Collateral for which Purchaser's Lien may be perfected only by possession thereof and which are in the possession of the Senior Lender or which the Senior Lender requires the Company to retain possession), and (ii) entitle Purchaser to exercise the rights and remedies provided in each of this Agreement, the Intellectual Property Assignment, the Purchase Agreement, any Related Agreements and the Code. The Company shall not at any time take any action which shall cause this Section 4.3 to become not true and correct, and the Company shall at all times take all action necessary to cause this Section 4.3 to remain true and correct. If, at any time, there are Liens on any Collateral, the Company shall use its best efforts to remove the conflicting Liens within 60 days thereafter and, in any event, shall remove the conflicting Liens within 90 days thereafter. 4.4 NAME; LOCATIONS OF COLLATERAL. The Company's exact legal name is "Integrated Healthcare Holdings, Inc." The Company's chief executive office, principal place of business, other offices, and premises within which any Collateral is stored or located, and the location of all of its records concerning the Collateral are at the address set forth on the first page hereof. The Company shall not change the state where it is located (as that term is used in Section 9307 of the Code), its chief executive office, principal place of business, any of its other offices, or the location of its records concerning the Collateral, without giving 30 days' prior written notice thereof to Purchaser and taking all actions which Purchaser instructs the Company are necessary or appropriate to continuously protect and perfect Purchaser's Lien upon the Collateral. -6- 4.5 INSTRUMENTS. All action necessary to protect and perfect the Lien of Purchaser in each instrument which is part of the Collarteral has been duly taken. The Lien of Purchaser in the instruments which are part of the Collateral is a first priority Lien and is enforceable as such against creditors of and purchasers from the Company. The Company shall not at any time take any action which shall cause this Section 4.5 to become not true and correct, and the Company shall at all times take all action necessary to cause this Section 4.5 to remain true and correct. 4.6 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in this Section 4 shall survive the execution and delivery of this Agreement. 5. COVENANTS. The Company covenants and agrees with Purchaser that, from and after the date of this Agreement and until the date on which all Obligations shall have been indefeasibly paid in full: 5.1 FURTHER ASSURANCES. At any time and from time to time, upon the request of Purchaser and at the sole expense of the Company, the Company shall promptly and duly execute and deliver any and all such further instruments and documents and take such further action as Purchaser may reasonably deem necessary to obtain the full benefits of this Agreement and of the rights and powers herein granted, including, but not limited to: (a) securing all consents and approvals necessary or appropriate for the assignment to or for the benefit of Purchaser of any Agreement held by the Company or in which the Company has any rights not heretofore assigned; (b) filing any financing or continuation statements under the Code with respect to the Lien granted hereunder; (c) transferring Collateral to Purchaser's possession (if the Collateral consists of chattel paper or if a Lien on the Collateral can be perfected only by possession, or if otherwise requested by Purchaser); (d) placing the interest of Purchaser as lienholder on the certificate of title of any vehicle owned by the Company; and (e) obtaining waivers, in form and substance satisfactory to Purchaser, of Liens from landlords and mortgagees. The Company also hereby authorizes Purchaser to file any such financing or continuation statement without the signature of the Company to the extent permitted by applicable law. Purchaser shall, upon request, provide the Company with photocopies of all such filings at the Company's expense. If any amount payable under or in connection with any of the Collateral is or shall become evidenced by any Instrument, such Instrument, other than checks received in the ordinary course of business, shall be duly endorsed in a manner satisfactory to Purchaser immediately upon the Company's receipt thereof and promptly delivered to Purchaser. 5.2 BOOKS AND RECORDS. The Company shall keep and maintain, at its own cost and expense, satisfactory and complete records of the Collateral, including, but not limited to, a record of any and all payments received and any and all credits granted with respect to the Collateral and all other dealings with the Collateral. The Company shall mark its books and records pertaining to the Collateral to evidence this Agreement and the Lien granted hereby. All chattel paper (including any chattel paper created by the Company or any of its Subsidiaries after the date hereof) shall be marked with the following legend: "This writing and the obligations evidenced or secured hereby are subject to the security interest of Kali Chaudhuri, M.D." -7- Upon the occurrence and during the continuation of a Default, the Company shall deliver and turn over all of its books and records pertaining to the Collateral to Purchaser or to Purchaser's representatives at any time on demand of Purchaser. Prior to the occurrence of a Default, upon prior notice from Purchaser, the Company shall permit any representative of Purchaser to inspect the books and records and shall provide photocopies thereof to Purchaser at the Company's expense. 5.3 CORPORATE IDENTITY. The Company shall not change its name, identity or corporate structure in any manner that might make any financing or continuation statement filed in connection herewith seriously misleading within the meaning of Section 9506 of the Code or any other applicable provision of the Code unless it has given Purchaser at least 30 days' prior written notice thereof and has taken all action (or made arrangements satisfactory to Purchaser, at the Company's expense, to take the action substantially simultaneously with the change if it is impossible to take the action in advance) necessary or requested by Purchaser to amend the financing statement or continuation statement so that it is not seriously misleading. 5.4 FIXTURES AND EQUIPMENT. The Company shall keep and maintain the fixtures and equipment in good operating condition sufficient for the continuation of the business conducted by it on a basis consistent with past practices, and the Company shall provide or arrange for all maintenance and service and all repairs necessary for such purpose. 5.5 COLLATERAL TRANSFER, REMOVAL OR SALE. The Company shall not, without the prior written consent of Purchaser, sell, assign, transfer or otherwise dispose of any Collateral, other than in the ordinary course of business, consistent with past practices and in a manner consistent with the best interests of the Company and its shareholders. 6. PURCHASER'S APPOINTMENT AS ATTORNEY-IN-FACT. 6.1 APPOINTMENT; POWERS. The Company hereby irrevocably constitutes and appoints Purchaser and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Company and in the name of the Company or in its own name, from time to time in Purchaser's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute and deliver any and all documents and instruments which may be necessary to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, hereby grants to Purchaser the power and right, on behalf of the Company, without notice to or assent by the Company, upon the occurrence and during the continuation of a Default (except as otherwise provided below), to do the following, all at the Company's expense: (a) regardless of whether a Default has occurred or is continuing, continue any insurance policies existing pursuant to the terms of this Agreement or maintained pursuant to the terms of the Purchase Agreement and pay all or any part of the premiums therefor and the costs thereof; -8- (b) in the name of the Company, in its own name or otherwise, take possession of, endorse and receive payment of any checks, drafts, notes, acceptances, or other Instruments for the payment of monies due under any Collateral; (c) receive payment of any and all monies, claims and other amounts due or to become due at any time arising out of or in respect of any Collateral; (d) ask, demand, collect, receive and give acquittances and receipts for any and all money due or to become due under any Collateral; (e) pay or discharge any charges or Liens levied or placed on or threatened against the Collateral; (f) effect any repairs or obtain any insurance called for by the terms of the Purchase Agreement and pay all or any part of the premiums therefor and costs thereof; (g) direct any party liable for any payment under or in respect of any of the Collateral to make payment of any and all monies due or to become due thereunder, directly to Purchaser or as Purchaser shall direct; (h) sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against account debtors, assignments, verifications and notices in connection with accounts and other documents constituting or related to the Collateral; (i) settle, compromise or adjust any suit, action or proceeding described in this Section 6.1 and, in connection therewith, give discharges or releases as Purchaser deems appropriate; (j) file any claim or take or commence any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Purchaser for the purpose of collecting any and all such monies due under any Collateral whenever payable; (k) commence and prosecute any suits, actions or proceedings at law or in equity in any court to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (l) defend any suit, action or proceeding brought against the Company with respect to any Collateral if the Company does not defend the suit, action or proceeding or if Purchaser believes that the Company is not pursuing the defense in a manner that will minimize the loss with respect to the Collateral and Purchaser's security interest therein; and (m) sell, transfer, pledge, make any agreement with respect to, or otherwise deal with any of the Collateral as fully and completely as though Purchaser were the absolute owner thereof for all purposes, and to do, at Purchaser's option, at any time or from time to time, all acts and other things that Purchaser deems necessary to perfect, preserve or realize upon the Collateral and Purchaser's Lien therein in order to effect the intent of this Agreement, all as fully and effectively as the Company might do. -9- 6.2 RATIFICATION. The Company hereby ratifies, to the extent permitted by law, all that said attorneys shall lawfully do or cause to be done by virtue hereof. The power of attorney granted pursuant to this Section 6 is a power coupled with an interest and shall be irrevocable until all Obligations shall have been indefeasibly paid in full. 6.3 DUTIES AND LIABILITIES. The powers conferred on Purchaser hereunder are solely to protect Purchaser's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Purchaser shall be accountable only for amounts that it actually receives as a result of the exercise of those powers and neither Purchaser nor any of its officers, directors, partners, employees, agents or representatives shall be responsible or liable to the Company for any act or failure to act. 6.4 COMMUNICATION WITH THIRD PARTIES; SALE OF COLLATERAL. The Company also authorizes Purchaser, at any time and from time to time, upon prior written notice and receipt of the Company's consent (unless a Default or an Event of Default has occurred and is continuing, in which case no notice or consent shall be necessary) to (a) communicate in Purchaser's own name with any party to any Agreement or account with regard to the assignment of the right, title and interest of the Company in and under the Agreement or account and other matters relating thereto, and (b) execute, in connection with the sale provided for in Section 8, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. 7. PERFORMANCE BY PURCHASER OF THE COMPANY'S OBLIGATIONS. If the Company fails to perform or comply with any of its agreements contained herein or in the Purchase Agreement or any Related Agreement and Purchaser, as provided for by the terms of this Agreement or the Purchase Agreement or any Related Agreement, shall itself perform or comply, or otherwise cause performance of or compliance with that agreement, then the expenses (including, but not limited to, attorneys' fees) of Purchaser incurred in connection with that performance or compliance, together with applicable interest thereon at the rate then in effect in accordance with the terms of the Notes, shall be payable by the Company to Purchaser on demand and shall constitute Obligations secured hereby. 8. REMEDIES; RIGHTS UPON DEFAULT. 8.1 RIGHTS REGARDING COLLATERAL. If any Default occurs and continues, Purchaser may exercise, in addition to all other rights and remedies granted to him under the Purchase Agreement, this Agreement, any other Related Agreement or any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Company expressly agrees that in that event Purchaser may, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Company or any other Person (all and each of which demands, advertisements and notices are hereby expressly waived to the maximum extent permitted by the Code and other applicable law), enter upon the premises of the Company where any Collateral is located through self-help, without judicial process, without first obtaining a final judgment or giving the Company notice and opportunity for a hearing on Purchaser's claim or action, and without paying rent to the Company, and collect, receive, assemble, process, appropriate and realize upon the Collateral, or any part thereof, and may immediately sell, lease, assign, give an option or options to purchase, or sell or otherwise dispose of and deliver the Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales or at any exchange, at prices it deems best, for cash or on credit or for future delivery without assumption of any credit risk. Purchaser shall have the right at any public sale or sales and, to the extent permitted by law, at any private sale or sales, to purchase for the benefit of Purchaser the whole or any part of the Collateral so sold, free of any right or equity of redemption, which equity of redemption the Company hereby releases. The sales may be adjourned or continued from time to time with or without notice. Purchaser shall have the right to conduct the sales on the Company's premises or elsewhere and shall have the right to use the Company's premises without charge for the sales for such time or times as Purchaser deems necessary or advisable. Purchaser shall give notice of any disposition of the Collateral in accordance with the provisions of Sections 9610 through 9613 of the Code. -10- The Company further agrees, if a Default has occurred and continues, at Purchaser's request, to assemble the Collateral and make it available to Purchaser at places which Purchaser shall select, whether at the Company's premises or elsewhere. Until Purchaser is able to effect a sale, lease, or other disposition of any Collateral, Purchaser shall have the right to use or operate the Collateral, or any part thereof, to the extent that it deems appropriate for the purpose of preserving the Collateral or its value or for any other purpose deemed appropriate by Purchaser. Purchaser shall have no obligation to the Company to take any action to maintain or preserve the rights of the Company as against third parties with respect to any Collateral while the Collateral is in the possession of Purchaser. Purchaser may, if it so elects, seek the appointment of a receiver or keeper to take possession of Collateral and to enforce any of Purchaser's remedies with respect to such appointment without prior notice or hearing. Purchaser shall apply the net proceeds of any collection, recovery, receipt, appropriation, realization or sale, as provided in Section 9. The Company shall remain liable for any deficiency remaining unpaid after the application, and only after so paying over the net proceeds and after the payment by Purchaser of any other amount required by any provision of law, including, but not limited to, Section 9608 of the Code (but only after Purchaser has received what Purchaser considers reasonable proof of a subordinate party's Lien), need Purchaser account for the surplus, if any, to the Company. To the maximum extent permitted by applicable law, the Company waives all claims, damages, and demands against Purchaser arising out of the repossession, retention or sale of the Collateral. The Company agrees that five days' prior notice by Purchaser to it of the time and place of any public sale or of the time after which a private sale may take place is reasonable notification. The Company shall remain liable for (a) any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Purchaser is entitled, and (b) any and all costs and expenses incurred by Purchaser, including, but not limited to, attorneys' fees, to collect the deficiency. 8.2 FEES. The Company agrees to pay any and all expenses of Purchaser (including, but not limited to, attorneys' fees and appraisal costs) incurred in connection with the enforcement of any of its rights and remedies hereunder. -11- 8.3 WAIVER. Except as otherwise specifically provided herein, (to the maximum extent permitted by applicable law), the Company hereby waives presentment, demand, protest or any notice of any kind in connection with this Agreement or any Collateral. 9. APPLICATION OF PROCEEDS. The Proceeds of any sale, disposition or other realization upon all or any part of the Collateral shall be distributed by Purchaser upon receipt, in the following order of priorities: (a) first, to Purchaser in an amount sufficient to pay in full the expenses of Purchaser in connection with such sale, disposition or other realization, including, but not limited to, all expenses, liabilities and advances incurred or made by Purchaser in connection therewith, including, but not limited to, attorneys' fees; (b) second, to Purchaser to be applied, first, to all accrued but unpaid interest on, and, second, to all principal of, the Notes; (c) third, to all other Obligations; and (d) finally, upon payment in full of all of the Obligations, to the Company or its representatives or to whomsoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. 10. LIMITATION ON PURCHASER'S DUTY IN RESPECT OF COLLATERAL. Purchaser shall use reasonable care with respect to the Collateral in its possession or under its control. Purchaser shall not have any other duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of Purchaser, or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. Upon request of the Company, Purchaser shall account for any monies received by Purchaser in respect of any foreclosure on or disposition of the Collateral. 11. REINSTATEMENT. This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against the Company for liquidation or reorganization, should the Company become insolvent or make an assignment for the benefit of creditors, or should a receiver or trustee be appointed for all or any significant part of the Company's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Obligations, whether as a "voidable preference," "fraudulent transfer" or otherwise, all as though the payment or performance had not been made. If any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by the amount paid and not so rescinded, reduced, restored or returned. 12. NOTICES. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other party, or whenever either of the parties desires to give or serve upon any other party any communication with respect to this Agreement, each notice, demand, request, consent, approval, declaration or other communication shall be in writing and given in the manner provided for in Section 6.12 of the Purchase Agreement. -12- 13. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of the prohibition or unenforceability without invalidating the remaining provisions hereof, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable the provision in any other jurisdiction. This Agreement is to be read, construed and applied together with the Purchase Agreement and the Related Agreements which, taken together, set forth the complete understanding and agreement of Purchaser and the Company with respect to the matters referred to herein and therein. 14. NO WAIVER; CUMULATIVE REMEDIES. Purchaser shall not, by any act, delay, omission or otherwise, be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by Purchaser and then only to the extent therein set forth. A waiver by Purchaser of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Purchaser would otherwise have on any future occasion. Neither Purchaser's failure to exercise, nor any delay in exercising, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms or provisions of this Agreement may be waived, altered, modified or amended except by a written instrument duly executed by Purchaser and the Company. 15. LIMITATION BY LAW. All rights, remedies and powers provided in this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Agreement are intended to be (i) subject to all applicable mandatory provisions of law that may be controlling and (ii) limited to the extent necessary so that they do not render this Agreement invalid or unenforceable, in whole or in part, or not entitled to be recorded, registered, or filed under the provisions of any applicable law. 16. TERMINATION OF THIS AGREEMENT. Subject to Section 11, this Agreement shall terminate upon the date on which all Obligations have been paid in full. For purposes of this Section 16, all Obligations shall be deemed to have been paid in full when (i) the Company has fully satisfied its obligations with respect to the payment of all principal, premium, interest and other amounts which are or may become due and payable under the Notes; and (ii) the Company has fully satisfied its obligations with respect to the payment of all accrued and unpaid expenses (including expense reimbursements) and fees then payable by the Company to Purchaser under the Purchase Agreement and this Agreement. Once Purchaser is satisfied that all Obligations have been paid in full and Purchaser does not believe that reinstatement of the Obligations pursuant to Section 11 is possible, Purchaser shall prepare, execute and deliver Code termination statement(s) to the Company to be filed with the Secretary of State of the State of Nevada. -13- 17. SUCCESSORS AND ASSIGNS. This Agreement and all obligations of the Company hereunder shall be binding upon the successors and assigns of the Company and, together with the rights and remedies of Purchaser hereunder, shall inure to the benefit of Purchaser, all future holders of any instrument evidencing any of the Obligations, and their respective successors and assigns. No sales of participations, other sales, assignments, transfers or other dispositions of any agreement governing or instrument evidencing any of the Obligations or any portion thereof or interest therein shall in any manner affect the Lien granted to Purchaser hereunder. 18. ENFORCEMENT. If the Company fails to observe or perform any covenant or agreement to be observed or performed under this Agreement, Purchaser may proceed to protect and enforce its rights by suit in equity or action at law, whether for specific performance of any term contained in this Agreement or for an injunction against the breach of any term or in aid of the exercise of any power granted in this Agreement or to enforce any other legal or equitable right of Purchaser, or to take any one or more actions. The Company shall pay all fees, costs, and expenses, including without limitation, fees and expenses of attorneys, accountants and other experts retained by Purchaser, and all fees, costs and expenses of appeals incurred or expended by Purchaser in connection with the enforcement of this Agreement or the collection of any sums due hereunder, whether or not suit is commenced, unless and to the extent that the Company prevails in any action, suit or proceeding initiated by Purchaser which a court of competent jurisdiction determines was initiated or maintained by Purchaser in bad faith. None of the rights, powers or remedies conferred under this Agreement shall be mutually exclusive, and each right, power or remedy shall be cumulative and in addition to any other right, power or remedy whether conferred by this Agreement or now or hereafter available at law, in equity, by statute or otherwise. 19. DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of this Agreement are for convenience of reference only and do not constitute a part of this Agreement and are not to be considered in construing or interpreting this Agreement. 20. GOVERNING LAW. In all respects, including all matters of construction, validity and performance, this Agreement and the rights and obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and performed in such state, without regard to principles thereof regarding conflicts. 21. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, AND UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL RIGHT, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO, THIS AGREEMENT, THE PURCHASE AGREEMENT AND/OR ANY RELATED AGREEMENT OR THE TRANSACTIONS COMPLETED HEREBY OR THEREBY. -14- IN WITNESS WHEREOF, each of the parties hereto has caused this Security Agreement to be executed and delivered by its duly authorized officer on the date first set forth above. INTEGRATED HEALTHCARE HOLDINGS, INC., a California corporation By: /s/ Larry Anderson ------------------------------------- Larry B. Anderson, President /s/ Kali Chaudhuri ---------------------------------------- Kali Chaudhuri, M.D. -15- EXHIBIT C EMPLOYMENT SIDE BAR AGREEMENT EXHIBIT D FORM OF OPTION AGREEMENT THIS OPTION SHALL NOT BECOME EFFECTIVE UNTIL EXECUTED BY OPTIONOR AND DELIVERED TO OPTIONEE AND OPTIONEE'S COMPLIANCE WITH ALL CONDITIONS THERETO. THE SUBMISSION OF THIS FORM OF OPTION TO OPTIONEE BY OPTIONOR OR OPTIONOR'S AGENT DOES NOT CONSTITUTE AN OFFER TO OPTION. NO EMPLOYEE OR AGENT OF OPTIONOR OR ANY PERSON WITH WHOM OPTIONEE MAY HAVE NEGOTIATED THIS OPTION HAS ANY AUTHORITY TO MODIFY THE TERMS HEREOF OR TO MAKE ANY AGREEMENTS, REPRESENTATIONS OR PROMISES UNLESS SAME ARE CONTAINED HEREIN OR ADDED HERETO IN WRITING. OPTION AGREEMENT THIS OPTION AGREEMENT (this "Agreement") is made this 28th day of September, 2004, ("Grant Date") by and between INTEGRATED HEALTHCARE HOLDINGS, INC., a Nevada corporation ("Optionor") and KALI CHAUDHURI, M.D. (or his assignee or designee) ("Optionee"). R E C I T A L S: A. Optionor expects to acquire title to that certain real property located in the cities of Santa Ana and Anaheim, County of Orange, State of California, more particularly described in Exhibit A attached hereto (the "Property") B. Optionor is willing to grant Optionee an option to purchase the Property subject to all of the terms, conditions and provisions of this Agreement. ARTICLE I OPTION TO PURCHASE 1.1 Grant of Option. Optionor hereby grants to Optionee an option to purchase the Property ("Option") for a purchase price consideration of $5,000,000 ("Purchase Price") upon all of the terms, covenants and conditions contained in the form of escrow instructions ("Escrow Instructions") attached hereto as Exhibit B. The Option shall commence on the Grant Date and continue for a period ending at 4:00 p.m. on the fifth anniversary of the closing of the purchase of the Property by Optionor ("Option Period"). 1.2 Automatic Termination. If Optionee has not exercised the Option pursuant to Article II, on or before 4:00 p.m. on the date of expiration of the Option Period, this Option shall automatically terminate without notice to Optionee, and all rights of Optionee under this Agreement shall then and there cease. ARTICLE II EXERCISE OF OPTION TO PURCHASE If Optionee desires to exercise this Option and has performed all acts in the time and manner as required by the terms hereof and this Option has not otherwise terminated or expired, Optionee shall do so by delivering to Optionor in accordance with Section 4.3 on or before the day which is 10 days prior to the date on which the Option or any extension previously granted hereunder would otherwise expire, three duplicate originals of the Escrow Instructions each executed by Optionee. Optionor shall thereupon promptly execute the Escrow Instructions and deposit one executed copy with the escrow holder named therein, return one executed copy to Optionee and retain one executed copy for Optionor's records. The date that the Escrow Instructions are executed and delivered by Optionee to Optionor shall be the date inserted on the first page of the Escrow Instructions. ARTICLE III ENTRY AND IMPROVEMENT OF PROPERTY 3.1 Entry for Investigation. Optionor hereby grants to Optionee a license to enter upon any portion of the Property for the purpose of conducting engineering surveys, investigations, soil tests and other studies. Optionee agrees to indemnify and hold Optionor and the Property free from any and all liability, claims, damage and expense (including but not limited to attorney's fees) caused by or resulting from the exercise of said license. Such undertaking of indemnity shall survive the exercise of the Option or the expiration thereof. The limited license herein granted shall be co-extensive with the term of this Option or any extension thereof. ARTICLE IV MISCELLANEOUS PROVISIONS 4.1 Memorandum of Option. Immediately following execution of this Option, Optionor shall execute and file with the Orange County Recorder's office a Memorandum of Option in form satisfactory to Optionee reflecting this Option and Optionee's interest therein. 4.2 Attorneys' Fees. In the event of any dispute between the parties hereto involving the covenants or conditions contained in this Option or arising out of the subject matter of this Option, the prevailing party shall be entitled to recover reasonable expenses, attorneys' fees and costs. 4.3 Notices. Unless otherwise provided for herein, any notice to be given or other document to be delivered by either party to the other hereunder shall be delivered in person to either party or may be deposited in the United States mail in the State of California, by registered or certified mail, with postage prepaid and addressed to the party to whom intended as follows: -2- To Optionor: Integrated Healthcare Holdings, Inc. 695 Town Center Drive, Suite 260 Costa Mesa, CA 92626 Attention: Chief Executive Officer To Optionee: Kali Chaudhuri, M.D. c/o Strategic Global Management, Inc. 6800 Indiana Avenue, Suite 130 Riverside, CA 92506 Either party hereto may from time to time, by written notice to the other, designate a different address which shall be substituted for the one above. Notwithstanding anything to the contrary herein contained, any notices or documents which may be delivered by mail pursuant to this Section 4.3 must be actually received by the other party on the last business day immediately preceding any deadline date specified in this Agreement. 4.4 Entire Agreement and Inurement. This Agreement and other documents incorporated herein by reference contain the entire agreement of the parties, and all negotiations and agreements between the parties hereto or their agents with respect to this transaction are merged in such instruments, which alone express the parties' rights and obligations. All obligations herein contained shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs, and assigns. 4.5 Time of the Essence. It is understood and agreed that time is of the essence for all performances herein contained. 4.6 Modification. Any amendments or modifications to this Option or attached Escrow Instructions must be in writing and executed by all of the parties to this Agreement. 4.7 Assignment. Optionee may not assign this Option, or any rights hereunder, in whole or in part, without the prior written consent of Optionor, which consent may be withheld at the sole discretion of Optionor. Optionor's consent to an assignment by Optionee shall not relieve Optionee from its obligations under this Agreement. 4.8 Optionor's Cooperation and Delivery. Optionor agrees to reasonably cooperate with Optionee in providing access to all documents in Optionor's possession concerning the Property. All documents made available or provided by Optionor to Optionee shall be delivered without representation or responsibility of Optionor for the truth, accuracy or quality of material contained in such documents. Such cooperation shall not, however, require Optionor to: (i) obtain any documents not already in its possession, (ii) provide technical assistance from persons, or (iii) expend any funds with respect to its cooperation with Optionee. 4.9 Authority to Execute. Each individual executing this Agreement on behalf of a corporation represents and warrants that he or she is duly authorized to execute and deliver this Agreement on behalf of such corporation, in accordance with a duly adopted resolution of the board of directors of such corporation, or in accordance with the by-laws of such corporation, and that this Agreement is binding upon such corporation in accordance with its terms. -3- 4.10 Interpretation. This Agreement shall be construed according to its fair meaning and as if prepared by both parties hereto. Titles and captions are for convenience only and shall not constitute a portion of this Agreement. As used in this Agreement, masculine, feminine or neuter gender and the singular or plural number shall each be deemed to include the others wherever and whenever the context so dictates. 4.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of California in effect at the time of the execution of this Agreement. Any action brought in connection with this Agreement shall be brought in a court of competent jurisdiction located in Orange County, California. 4.12 Condemnation. If all or any portion of the Property is taken or designated to be taken by condemnation proceedings, or proceedings in lieu thereof, prior to the exercise of the Option and if Optionee subsequently exercises the Option pursuant to Article II, Optionee shall be entitled to all condemnation proceeds upon consummation of the transaction, and the terms of this Agreement shall remain unmodified. Optionor shall hold any such proceeds until the close of the escrow contemplated by this Agreement for the Property. Notwithstanding the foregoing, if Optionee does not exercise the Option pursuant to Article II, Optionee shall have no claim or right to any such condemnation proceeds or be entitled to any compensation whatsoever for any of Optionee's rights under this Agreement. 4.13 Severability. If any term, provision, condition or covenant of this Agreement or the application thereof to any party or circumstances shall, to any extent, be held invalid or unenforceable, the remainder of this Agreement, or the application of such term, provision, condition or covenant to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 4.14 No Withholding Because Non-Foreign Seller. Optionor represents and warrants to Optionee that Optionor is not, and as of any closing date for the purchase of the Property, will not be a foreign person or entity within the meaning of Section 1445 of the Internal Revenue Code and that it will deliver through the escrow at closing a non-foreign affidavit in the form specified in the Escrow Instructions pursuant to Section 1445(b)(2) of the Internal Revenue Code and the Regulations promulgated thereunder 4.15 No Waiver. No delay or omission by either party hereto in exercising any right or power accruing upon the compliance or failure of performance by the other party hereto under the provisions of this Agreement shall impair any such right or power or be construed to be a waiver thereof. A waiver by either party hereto of a breach of any of the covenants, conditions or agreements hereof to be performed by the other party shall not be construed as a waiver of any succeeding breach of the same or other covenants, agreements, restrictions or conditions hereof. 4.16 Exhibits. Exhibits A and B, attached hereto, are incorporated herein by reference. -4- IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement the day and year first above written. Signed by Optionor on: September 29, 2004 INTEGRATED HEALTHCARE HOLDINGS, INC. By: ----------------------------------- Larry B. Anderson, President "Optionor" Signed by Optionee on: September 29, 2004 -------------------------------------- KALI CHAUDHURI, M.D. "Optionee" -5- EXHIBIT A LEGAL DESCRIPTION OF PROPERTY EXHIBIT A TO OPTION AGREEMENT EXHIBIT B AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS Escrow No. ___________ Date of Opening of Escrow: ______________, 200_ To: TITLE INSURANCE COMPANY ("Escrow Holder") [ADDRESS] THIS AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND ESCROW INSTRUCTIONS (this "Agreement") is made this _____ day of _______________, 200_, by and between INTEGRATED HEALTHCARE HOLDINGS, INC. ("Seller"), and _____________________________________________ ("Buyer"). R E C I T A L S: A. Seller is the owner of that certain real property located in the cities of Santa Ana and Anaheim, County of Orange, State of California, more particularly described on Exhibit A (the "Property"). B. Seller and Buyer have previously executed that certain Option Agreement ("Option Agreement") dated September 28, 2004, the terms of which are incorporated herein by this reference. A copy of the Option Agreement shall be delivered to ("Escrow Holder") on request. By execution of this Agreement and delivery of other specified performances, Buyer has exercised its option to purchase the Property. NOW, THEREFORE, the parties hereto agree as follows: TERMS AND CONDITIONS 1. PURCHASE AND SALE OF PROPERTY. Buyer hereby agrees to purchase from Seller, and Seller agrees to sell to Buyer the Property, upon the terms and conditions hereinafter set forth. 2. OPENING OF ESCROW. Within one business day after the execution of this Agreement by Seller, the parties shall open an escrow ("Escrow") with the Escrow Holder by causing an executed copy of this Agreement to be deposited with Escrow Holder. Escrow shall be deemed open on the date that Seller delivers this executed Agreement to Escrow Holder. EXHIBIT B TO OPTION AGREEMENT 3. PAYMENT OF PURCHASE PRICE. 3.1 Amount of Purchase Price. The purchase price for the Property shall be $5,000,000 ("Purchase Price"). 3.2 Payment of Purchase Price. On the day preceding Close of Escrow, Buyer shall deposit with Escrow Holder in "good funds" payable to Seller or order the sum of $5,000,000, "Good funds" shall mean a wire transfer of funds, cashier's or certified check drawn on or issued by the offices of a financial institution located in the State of California, or cash. 4. ADDITIONAL FUNDS AND DOCUMENTS REQUIRED FROM BUYER AND SELLER. 4.1 Buyer. Buyer agrees that on or before 12:00 noon on the date preceding the Closing Date, Buyer will deposit with Escrow Holder all additional funds and/or documents (executed and acknowledged, if appropriate) which are necessary to comply with the terms of this Agreement. 4.2 Seller. Seller agrees that within three days following the date that Escrow is opened hereunder, Seller will deposit with Escrow Holder an executed and recordable grant deed ("Grant Deed") conveying the Property to Buyer, together with such funds and other items and instruments as may be necessary in order for the Escrow Holder to comply with this Agreement. Escrow Holder will cause the Grant Deed to be recorded when (but in no event after the date specified in Section 5.1) it can issue the Title Policy in the form described in Section 6, and holds for the account of Seller the items described above to be delivered to Seller through Escrow, less costs, expenses and disbursements chargeable to Seller pursuant to the terms hereof. 5. CLOSING DATE; TIME OF ESSENCE. 5.1 Closing Date. Escrow shall close on or before the date which is 30 days after the date of opening of escrow ("Closing Date"). The terms "the Close of Escrow," and/or the "Closing" are used herein to mean the time Seller's Grant Deed is filed for record by the Escrow Holder in the Office of the County Recorder of Orange County, California. 5.2 Time of Essence. Buyer and Seller specifically understand that time is of the essence and Buyer and Seller specifically agrees to strictly comply and perform its obligations herein in the time and manner specified and waives any and all rights to claim such compliance by mere substantial compliance with the terms of this Agreement. 6. TITLE POLICY. When Escrow Holder holds for Buyer the Grant Deed in favor of Buyer executed and acknowledged by Seller covering the Property, Escrow Holder shall cause to be issued and delivered to Buyer and Seller as of the Closing a C.L.T.A. standard coverage policy of title insurance ("Title Policy") issued by a title insurance company acceptable to Buyer ("Title Company"), with liability in the amount of the Purchase Price, covering the Property and showing title vested in Buyer free of encumbrances, except: B-2 (a) Nondelinquent general and special real property taxes and assessments; (b) Easements, encumbrances, covenants, conditions, restrictions, reservations, rights-of-way and other matters of record of whatever kind or nature, including but not limited to, Exceptions _ through __, inclusive, as shown on that certain Preliminary Title Report No. ___________ dated as of September __, 2004, previously approved by Buyer (the "Preliminary Title Report"); (c) The standard printed exceptions and exclusions contained in the CLTA form policy; (d) Any exceptions created or consented to by Buyer, including without limitation, any exceptions arising by reason of Buyer's possession of or entry on the Property. 7. CONDITIONS PRECEDENT TO CLOSE OF ESCROW. 7.1 Conditions to Buyer's Obligations. The obligations of Buyer under this Agreement shall be subject to the satisfaction or written waiver, in whole or in part, by Buyer of each of the following conditions precedent: (a) Title Company will issue the Title Policy as required by Section 6 of this Agreement insuring title to the Property vested in Buyer. (b) Escrow Holder holds and will deliver to Buyer the instruments and funds, if any, accruing to Buyer pursuant to this Agreement. 7.2 Conditions to Seller's Obligations. The obligations of Seller under this Agreement shall be subject to the satisfaction or written waiver, in whole or in part, by Seller of each of the following conditions precedent: (a) Escrow Holder holds and will deliver to Seller the instruments and funds accruing to Seller pursuant to this Agreement. 8. ESCROW PROVISIONS. 8.1 Escrow Instructions. This Agreement, when signed by Buyer and Seller, shall also constitute escrow instructions to Title Company. If required by Escrow Holder, Buyer and Seller agree to execute Escrow Holder's standard escrow instructions, provided that the same are consistent with and do not conflict with the provisions of this Agreement. In the event of any such conflict, the provisions of this Agreement shall prevail. B-3 8.2 General Escrow Provisions. Escrow Holder shall deliver the Title Policy to Buyer and instruct the County Recorder of Orange County, California, to mail the Grant Deed to Buyer at the address set forth in Section 13.3 after recordation. All funds received in this Escrow shall be deposited in one or more general escrow accounts of the Escrow Holder with any bank doing business in Orange County, California, and may be disbursed to any other general escrow account or accounts. All disbursements shall be made by Escrow Holder's check. This Agreement and any modifications, amendments, or supplements thereto may be executed in counterparts and shall be valid and binding as if all of the parties' signatures were on one document. 8.3 Prorations Through Escrow. All nondelinquent general and special real property taxes and assessments, income and expenses of leases to which Buyer takes subject, if any, and insurance premiums (unless Buyer obtains new insurance coverage) shall be prorated to the Close of Escrow on the basis of a 30-day month and a 360-day year. Seller may terminate utility service, if any, as of Close of Escrow, and, if Buyer obtains new insurance on the Property, shall cancel the existing insurance as of Close of Escrow. 8.4 Payment of Costs. Seller shall pay one-half (1/2) of the Escrow fee, documentary transfer taxes (affixed after recordation), premium charges for the Title Policy, and the charge for drawing the Grant Deed. Buyer shall pay the one-half (1/2) of the Escrow fee and charges for recording the Grant Deed. All other costs of escrow not otherwise specifically allocated by this Agreement shall be apportioned between the parties in a manner consistent with the custom and usage of Escrow Holder. 8.5 Termination and Cancellation of Escrow. If Escrow fails to close as provided above, Escrow shall terminate automatically without further action by Escrow Holder or any party, and Escrow Holder is instructed to return all funds and documents then in Escrow to the respective depositor of the same with Escrow Holder. Cancellation of Escrow, as provided herein, shall be without prejudice to whatever legal rights Buyer or Seller may have against each other arising from the Escrow or this Agreement. 9. BROKERAGE COMMISSIONS. Each party agrees to indemnify and hold the other harmless from and against all liabilities, costs, damages and expenses, including, without limitation, attorneys' fees, resulting from any claims or fees or commissions, based upon agreements by it, if any, to pay a broker's commission and/or finder's fee. 10. POSSESSION. Possession of the Property shall be delivered to Buyer as of Close of Escrow. 11. MISCELLANEOUS. 11.1 Assignment. Buyer shall have the right to assign this Agreement and any interest or right hereunder or under the Escrow without the prior written consent and approval of Seller. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of Buyer and Seller and their respective heirs, personal representatives, successors and assigns. B-4 11.2 Attorneys' Fees. In any action between the parties hereto, seeking enforcement of any of the terms and provisions of this Agreement or the Escrow, or in connection with the Property, the prevailing party in such action shall be entitled, to have and to recover from the other party its reasonable attorney's fees and other reasonable expenses in connection with such action or proceeding, in addition to its recoverable court costs. 11.3 Notices. Any notice which either party may desire to give to the other party or to the Escrow Holder must be in writing and may be given by personal delivery or by mailing the same by registered or certified mail, return receipt requested, postage prepaid, to the party to whom the notice is directed at the address of such party hereinafter set forth, or such other address and to such other persons as the parties may hereafter designate: To Seller: Integrated Healthcare Holdings, Inc. 695 Town Center Drive, Suite 260 Costa Mesa, CA 92626 Attention: Chief Executive Officer To Buyer: Kali Chaudhuri, M.D. c/o Strategic Global Management, Inc. 6800 Indiana Avenue, Suite 130 Riverside, CA 92506 To Escrow Holder: ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________ Any notice given by mail shall be deemed received 48 hours after such notice is deposited in the United States mail, addressed as provided above, with postage fully prepaid. 11.4 Interpretation; Governing Law. This Agreement shall be construed according to its fair meaning and as if prepared by both parties hereto. This Agreement shall be construed in accordance with the laws of the State of California in effect at the time of the execution of this Agreement. Any action brought in connection with this Agreement shall be brought in a court of competent jurisdiction located in Orange County, California. Titles and captions are for convenience only and shall not constitute a portion of this Agreement. As used in this Agreement, masculine, feminine or neuter gender and the singular or plural number shall each be deemed to include the others wherever and whenever the context so dictates. 11.5 No Waiver. No delay or omission by either party hereto in exercising any right or power accruing upon the compliance or failure of performance by the other party hereto under the provisions of this Agreement shall impair any such right or power or be construed to be a waiver thereof. A waiver by either party hereto of a breach of any of the covenants, conditions or agreements hereof to be performed by the other party shall not be construed as a waiver of any succeeding breach of the same or other covenants, agreements, restrictions or conditions hereof. B-5 11.6 Modifications. Any alteration, change or modification of or to this Agreement, in order to become effective, shall be made by written instrument or endorsement thereon and in each such instance executed on behalf of each party hereto. 11.7 Severability. If any term, provision, condition or covenant of this Agreement or the application thereof to any party or circumstances shall, to any extent, be held invalid or unenforceable, the remainder of this instrument, or the application of such term, provision, condition or covenant to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 11.8 Merger of Prior Agreements and Understandings. This Agreement, the Option Agreement and other documents incorporated herein by reference contain the entire understanding between the parties relating to the transaction contemplated hereby and all prior or contemporaneous agreements, understandings, representations and statements, oral or written, are merged herein and shall be of no further force or effect. 11.9 Covenants to Survive Escrow. The covenants and agreements contained herein shall survive the Close of Escrow and shall be binding upon and inure to the benefit of the parties hereto and their representatives, heirs, successors and assigns. 11.10 Time is of the Essence. Time is hereby expressly made of the essence of this Agreement. 11.11 Execution in Counterpart. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement binding on all parties hereto, notwithstanding that all parties are not signatories to the original or the same counterpart. 11.12 No Withholding Because Non-Foreign Seller. Seller represents and warrants to Buyer that Seller is not, and as of the Closing Date for the purchase of the property, will not be a foreign person or entity within the meaning of Section 1445 of the Internal Revenue Code and that it will deliver through Escrow, on or before the Closing Date, a non-foreign affidavit in the form attached hereto as Exhibit B or if requested by Escrow Holder on Escrow Holder's standard form pursuant to Section 1445(b)(2) of the Internal Revenue Code and the Regulations promulgated thereunder. B-6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement of Purchase and Sale of Real Property and Escrow Instructions as of the date first above written. INTEGRATED HEALTHCARE HOLDINGS, INC. By: ---------------------------------------- Larry B. Anderson, President "SELLER" ------------------------------------------- KALI CHAUDHURI, M.D. "BUYER" B-7 EXHIBIT E FORM OF TEN MILLION DOLLAR NOTE $10,000,000.00 Costa Mesa, California September 28, 2004 SECURED PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, INTEGRATED HEALTHCARE HOLDINGS, INC., a Nevada corporation (the "COMPANY"), promises to pay to Kali Chaudhuri, M.D. ("HOLDER"), at c/o 6800 Indiana Avenue, Suite 130, Riverside, California 92506, or at such other location as is designated by Holder in writing hereunder, the aggregate sum of Ten Million Dollars ($10,000,000), bearing simple interest on the unpaid principal balance of this Note, from the date of this Note until this Note is paid in full at a rate of seven and one quarter percent (7.25%) per annum. Accrued interest shall be computed based on the actual number of days elapsed. Interest only shall be payable on the first Business Day of each calendar quarter beginning January 2, 2005. All principal and accrued but unpaid interest will be due and payable in full at the earlier to occur of (a) closing of the Tenet Transaction or (b) the terminate, for any reason, of the letter of intent or purchase agreement between the Company and Tenet Healthcare Corporation and/or its affiliates relating to the Tenet Transaction (the "DUE DATE"). All payments shall be made in lawful money of the United States, without offset, deduction, or counterclaim of any kind. 1. TERMS. Capitalized terms used herein without definition have the meanings ascribed to them in the Secured Convertible Note Purchase Agreement of even date herewith (as amended from time to time in accordance with the terms thereof, the "AGREEMENT"), by and between the Company and Holder. 2 PAYMENTS AND COMPUTATIONS. All payments on account of indebtedness evidenced by this Note shall be made not later than 11:00 A.M. (California time) on the day when due in lawful money of the United States and shall be first applied to interest due on the unpaid principal balance and the remainder to any principal due (it being understood that unless otherwise specified in writing by the Company, any payment which is applied to reduce the principal balance outstanding shall be applied to the last Advance evidenced by this Note first). Payments are to be made at such place as Holder or the legal holders of this Note may, from time to time, in writing specify, and in the absence of a specification, at the principal place of business of Holder as set forth in the first paragraph of this Note. 3. SECURITY. Repayment of this Note is secured pursuant to the terms of a Security Agreement dated the date of this Note by and between the Company and Holder. 4. ATTORNEYS' FEES. If any action is instituted on this Note, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which the party or parties may be entitled. Diligence, demand, presentment, notice of dishonor, and protest are waived by the Company, and any and all makers, sureties, guarantors, and endorsers of this Note, and their successors and assigns. Time is of the essence for every obligation under this Note. 5. LAW. This Note shall be construed under the laws of the State of California, as such laws are applied to contracts entered into and performed entirely within that state by residents thereof. 6. RULES OF CONSTRUCTION/REPRESENTATION. The parties hereto agree that they are sophisticated business persons or entities who have had the opportunity to be represented by counsel during the negotiation and execution of this Note and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. IN WITNESS WHEREOF, the Company has executed and delivered this Note as of the day and year and at the place first above written. INTEGRATED HEALTHCARE HOLDINGS, INC. By: /s/ Larry Anderson --------------------------------- Larry B. Anderson, President EXHIBIT F ARTICLES OF INCORPORATION EXHIBIT G BYLAWS EXHIBIT H TENET LETTER OF INTENT EX-10.2 3 v07270_ex10-2.txt ASSET SALE AGREEMENT This Asset Sale Agreement (the "Agreement") is made and entered into as of the 29th day of September, 2004 (the "Effective Date") by and among AHM CGH, Inc., a California corporation ("AHM"), Health Resources Corporation of America - - California, a Delaware corporation ("HRC"), SHL/O Corp., a Delaware corporation ("SHL/O") and UWMC Hospital Corporation, a California corporation ("UWMC") (AHM, HRC, SHL/O and UWMC are collectively referred to herein as "Seller") and Integrated Healthcare Holdings, Inc., a Nevada corporation ("Purchaser"). Purchaser and Seller are sometimes referred to herein collectively as the "Parties" or individually as a "Party," in either capital or lower case. R E C I T A L S: A. Seller (I) engages in the business of delivering acute care services to the public through the acute care hospitals identified on Schedule A-1 (the "Acute Care Hospitals"), (II) owns and operates certain medical office buildings incident to the operation of the Acute Care Hospitals as specifically identified on Schedule A-2 (the "MOBs"), and (III) owns and operates other healthcare businesses incident to the operation of the Acute Care Hospitals as specifically identified on Schedule A-3 (the "Other Businesses") (the Acute Care Hospitals, MOBs and the Other Businesses are referred to in this Agreement collectively as the "Hospitals"). B. Purchaser desires to purchase from Seller, and Seller desires to sell to Purchaser, substantially all of the assets with respect to the operation of the Hospitals, for the consideration and upon the terms and conditions contained in this Agreement. NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises and covenants contained in this Agreement, and for their mutual reliance, the parties hereto agree as follows: ARTICLE I DEFINITIONS; SALE AND TRANSFER OF ASSETS; CONSIDERATION; CLOSING 1.1 Definitions. The terms listed below are defined elsewhere in this Agreement and, for ease of reference, the section containing the definition of each such term is set forth opposite such term. TERM SECTION ---- ------- 2002 & 2003 Financials ss.2.10 2004 Financials ss.2.10 Accounts Receivable ss.1.2.1 Accrued Paid Time Off Amount ss.1.2.1 Acute Care Hospitals Recitals affiliate ss.4.6(b) Agency Settlements ss.11.2(a) Aggregate Amount ss.10.2.2(a)(viii) Aggregate Damage ss.1.14(a) Agreement Preamble AHM Preamble Assets ss.1.9 Assumed Obligations ss.1.11 Audit Periods ss.2.8(d) Bills of Sale ss.1.6.1 Business Services Agreement ss.1.6.10 Cash Purchase Price ss.1.2 Casualty Termination Notice ss.1.14(a) Casualty Termination Notice Period ss.1.14(a) CEOs ss.2.10 CFOs ss.2.10 Claim Notice ss.10.4(a) Closing ss.1.5 Closing Date ss.1.5 Closing of Financials ss.9.4 CNA ss.4.3 CNOs ss.2.10 COBRA Coverage ss.5.3(e) Code ss.2.12(b) Competing Business ss.4.13 Confidential Information ss.5.6 Confidentiality Agreement ss.5.6 Consequential Damages ss.10.2.2(a)(vii) Consultant ss.4.12 Contract and Lease Consents ss.2.6(d) Contracts ss.1.9(f) control ss.4.6(b) COOs ss.2.10 Damages ss.10.2.1 Decision Date ss.1.14(d) Disclosure Schedule ss.2 Document Retention Period ss.9.2(a) DOJ ss.4.11 Effective Date Preamble Effective Time ss.1.5 Employee Loan Liabilities ss.1.2.1 Employee on Disability ss.5.3(a) Employee Settle-Up Payments ss.9.5 Encumbrances ss.2.7(b) Environmental Laws ss.2.6(c) Environmental Permits ss.2.6(b) Environmental Survey ss.4.12 EPAs ss.5.3(g) ERISA ss.2.10 Estimated Payment Amount ss.9.5 -2- Excluded Asset Due Date ss.9.1 Excluded Assets ss.1.10 Excluded Liabilities ss.1.12 Excluded Multi-Facility Contracts ss.1.9(f) Final Balance Sheet ss.1.3 Financial Statements ss.2.10 FMLA ss.5.3(a) FTC ss.4.11 Good Faith Deposit ss.1.4(a) Government Program Transition Patients ss.11.3(a) Group Purchasing Contract ss.1.6.8 Hazardous Substances ss.2.6(c) Hired Employees ss.5.3(a) Hospitals Recitals Hospitals' Employees ss.5.3(b) HRC Preamble HSR Act ss.4.11 Indemnified Party ss.10.4 Indemnifying Party ss.10.4(a) Indemnity Notice ss.10.4(b) Independent Auditor ss.1.3 Independent Consultant ss.1.14(a) Interim Balance Sheet ss.1.2 Interim Financials ss.2.10 Inventory ss.1.9(h) JCAHO ss.2.8(b) Leadership Team ss.4.3(b) Leased Real Property ss.1.9(b) Leasehold Title Policy ss.4.8 Leases ss.1.9(e) Lender's Title Policy ss.4.8 Licenses ss.1.9(d) Material Contracts ss.2.4(b) Material Leases ss.2.4(a) Medicare Assignment Agreement ss.1.6.15 MOBs Recitals Multi-Facility Contracts ss.1.9(f) Notice Period ss.10.4(a) Offering Circular ss.5.6 Original Closing Date ss.1.14(a) Other Businesses Recitals Other Excluded Contracts ss.1.9(f) Owned Real Property ss.1.9(a) Owners' Title Policy ss.4.8 Permitted Exceptions ss.7.7 Person ss.4.6(b) -3- Personal Property ss.1.9(c) Post-Closing Adjustment Date ss.1.3 Power of Attorney ss.1.6.12 Prepaids ss.1.9(g) Prime Rate ss.1.3 Purchase Price ss.1.2 Purchaser Preamble Purchaser Confidential Information ss.4.17 Purchaser Parties ss.10.2.1 Purchaser's Information ss.4.17 Real Estate Assignments ss.1.6.2 Real Property ss.1.9(b) Receivable Records ss.1.10(l) Records ss.1.9(i) Relevant Claim ss.10.2.2(a)(viii) Retained Management Employees ss.5.3(a) SEIU ss.4.3 Seller Preamble Seller Business Service Area ss.4.13 Seller Cost Reports ss.11.2(a) Seller Payment Due Date ss.9.1 Seller Plans ss.2.12(a) Seller Tax Claims ss.10.2.1(e) Settlement Due Date ss.11.2(a) Sick Pay Amount ss.1.2.1 Submittal Date ss.1.14(d) Superseded Agreements ss.12.14 Surveys ss.4.8 Tangible Personal Property ss.1.9 Tax ss.2.16 Taxes ss.2.16 Tax Return ss.2.16 Tenet Affiliate Contracts ss.1.9(f) Termination Date ss.8.1(g) THC ss.1.6.14 Third Party Claim ss.10.4(a) Title Commitment ss.4.8 Title Company ss.1.4(a) Title Instruments ss.4.8 Title Policy ss.4.8 Transferred Information ss.4.17 Transferred Transition Patients ss.11.3(c) Transition Patients ss.11.3 Transition Services ss.11.3 Transitional Services Agreements ss.1.6.9 UNAC ss.5.3(g) -4- UWMC Preamble WARN ss.1.12(e) 1.2 Purchase Price. Subject to the terms and conditions of this Agreement, the aggregate purchase price to be paid by Purchaser to Seller for the purchase of all of the Assets shall be (a) Seventy Million Dollars ($70,000,000) (the "Purchase Price"), minus (b) the amount of Seller's capital lease obligations with respect to the Hospitals on the Closing Date, if any, that are assumed by Purchaser pursuant to Section 1.11 of this Agreement, minus (c) the net present value on the Closing Date of the Employee Loan Liabilities, minus (d) Seven Hundred Fifty Thousand ($750,000), reflecting the credit made available to Purchaser hereunder for assuming the Sick Pay Amount at Closing; minus (e) the Accrued Paid Time Off Amount on the Closing Date (the sum of (a), (b), (c), (d) and (e) being referred to for purposes of this Agreement as the "Cash Purchase Price"). The payment of the Cash Purchase Price at Closing shall be governed by Section 1.7. 1.2.1 Definitions. For purposes of this Agreement, the following terms shall have the meaning set forth below: (i) "Accounts Receivable" shall be defined as all accounts, notes, interest and other receivables of Seller, including accounts, notes or other amounts receivable from physicians, and all claims, rights, interests and proceeds related thereto, including all accounts and other receivables, disproportionate share payments and cost report settlements related thereto, arising from the rendering of services to inpatients and outpatients at any Hospital, billed and unbilled, recorded and unrecorded, for services provided by Seller while owner of the Assets whether payable by private pay patients, private insurance, third party payors, Medicare, Medi-Cal, TRICARE, Blue Cross, or by any other source. (ii) "Accrued Paid Time Off Amount" shall mean the accrued paid time off and management time off (excluding the Sick Pay Amount), including CashPlus, liabilities of Seller and Seller's affiliates, as of the Closing Date, with respect to the Hospital Employees subject to the Employee Lease Agreement on the day immediately following the Closing Date. (iii) "Employee Loan Liabilities" shall be defined as the aggregate of all liabilities and obligations of Seller to certain Hired Employees under Seller's Employee Student Loan Repayment Program for the period commencing as of the Effective Time and continuing until such liabilities and obligations are fully satisfied. (iv) "Sick Pay Amount" shall be defined as the amount of the extended sick pay (Reserve Sick) obligations of Seller and/or its affiliates to the Hired Employees. 1.2.2 Interim Balance Sheet. At least three (3) calendar days, but no more than ten (10) calendar days, prior to the Closing Date, Seller shall prepare and deliver to Purchaser the latest available unaudited balance sheet of Seller with respect to the operation of the Hospitals (the "Interim Balance Sheet"). The Interim Balance Sheet shall include a calculation (including supporting documentation which details the applicable general ledger items used in the calculation) of the amount of Seller's capital lease obligations with respect to the Hospitals on the Closing Date, if any, that are assumed by Purchaser pursuant to Section 1.11 of this Agreement, the Sick Pay Amount, the Accrued Paid Time Off Amount and the Employee Loan Liabilities on the Closing Date (as well as the net present value of the Employee Loan Liabilities on the Closing Date), all of which amounts shall, unless otherwise mutually agreed by the parties, be used to determine the Cash Purchase Price under Section 1.2. The final, pre-closing Interim Balance Sheet shall be attached hereto as Schedule 1.2-b The amounts set forth in the final pre-closing Interim Balance Sheet shall be subject to adjustment as provided below. -5- 1.3 Post-Closing Adjustment of Certain Items. Within one hundred twenty (120) calendar days after the Closing Date, the final unaudited balance sheet of the Hospitals as of the Closing Date (the "Final Balance Sheet"), which shall include a calculation (including supporting documentation which details the applicable general ledger items used in the calculation) of the amount of Seller's capital lease obligations with respect to the Hospitals on the Closing Date, if any, that are assumed by Purchaser pursuant to Section 1.11 of this Agreement, the Sick Pay Amount, the Accrued Paid Time Off Amount and the Employee Loan Liabilities on the Closing Date (as well as the net present value of the Employee Loan Liabilities on the Closing Date), shall be prepared by Seller and delivered to Purchaser. The Interim Balance Sheet and the Final Balance Sheet shall be prepared in a manner consistent with the terms of Section 2.10. If Purchaser disputes any entry on the Final Balance Sheet that affects the calculation of capital lease obligations assumed by Purchaser, the Sick Pay Amount, the Accrued Paid Time Off Amount or the net present value of the Employee Loan Liabilities, Purchaser shall notify Seller in writing (which writing shall contain Purchaser's determination of the amount of the disputed entry, unless Purchaser reasonably requires additional information from Seller for such calculation) within twenty (20) business days after Purchaser's receipt of the Final Balance Sheet from Seller. In the event of such dispute, Seller shall provide Purchaser with such additional information and documents, if any, as Purchaser may reasonably request in order to review the accuracy and fairness of the amounts presented in the Interim Balance Sheet. After Purchaser's review of all such materials, if the difference between Seller's and Purchaser's respective aggregate calculations of capital lease obligations assumed by Purchaser, the Sick Pay Amount, the Accrued Paid Time Off Amount and the net present value of the Employee Loan Liabilities is equal to or less than five percent (5%) of the respective amount of Seller's aggregate calculation, Seller's aggregate calculation shall be conclusive and binding as between Purchaser and Seller. If the difference between Seller's and Purchaser's respective aggregate calculations is greater than five percent (5%) of Seller's aggregate calculation, and Purchaser and Seller cannot resolve such dispute within thirty (30) business days after Purchaser notifies Seller in writing of such dispute, then Ernst & Young independent certified public accountants (the "Independent Auditor"), shall review the matter in dispute and, solely as to disputes relating to accounting issues and acting as an expert and not as an arbitrator, shall promptly decide the proper amounts of such disputed entries (which decision shall also include a final recalculation of the Cash Purchase Price). In the event that all or a portion of the dispute at issue involves a legal issue or an interpretation of this Agreement, such legal or interpretative dispute shall first be subject to adjudication by a court or similar tribunal, with any necessary review by the Independent Auditor under this Section 1.3 occurring following the resolution of such legal dispute. Such decision of the Independent Auditor shall be conclusive and binding as between Purchaser and Seller, and the costs of such review shall be borne by each of Seller and Purchaser in the ratio equal to (i) the dollar amount that such party's determination varies from the determination of the Independent Auditor, divided by (ii) the sum of the variances of each party's determination from the determination of the Independent Auditor. -6- Within twenty-five (25) business days after Purchaser's receipt of the Final Balance Sheet from Seller or, if disputed by Purchaser, within five (5) business days after the earlier of (a) the date Purchaser and Seller finally resolve such dispute and recalculate the Cash Purchase Price accordingly, or (b) the date of receipt of a decision from the Independent Auditor (the "Post-Closing Adjustment Date"), either (i) Seller shall pay Purchaser in cash or in other immediately available funds the amount of any decrease in the Cash Purchase Price, or (ii) Purchaser shall pay Seller in cash or in other immediately available funds the amount of any increase in the Cash Purchase Price, as the case may be. If Purchaser or Seller, as the case may be, shall fail to make such payment to the other within ten (10) days after the Post-Closing Adjustment Date, then the party failing to receive such amount due to it shall be entitled to receive interest on such unpaid amount at a per annum rate equal to the prime rate reported by the Wall Street Journal under "Money Rates" (the "Prime Rate") on the Post-Closing Adjustment Date plus two percent (2%) (or the maximum rate allowed by law, whichever is less) from such defaulting party, such interest accruing on each calendar day after the Post-Closing Adjustment Date until payment of such amount and all interest thereon is made. 1.4 Good Faith Deposit/Personal Guaranty. (a) Good Faith Deposit. Purchaser shall deliver to Chicago Title Insurance Company (the "Title Company"), for earnest money, a good faith deposit in the amount of Ten Million Dollars ($10,000,000), payable as of the Effective Date (the "Good Faith Deposit"). The Title Company shall hold the Good Faith Deposit in an interest bearing account (which interest shall be accrued to Purchaser) pursuant to the terms of the Escrow Agreement attached as Exhibit 1.4-a which Seller, Purchaser and the Title Company shall execute concurrent with the execution of this Agreement. The Good Faith Deposit is non-refundable regardless of the termination of this Agreement pursuant to Section 8.1 below, except that Purchaser shall be entitled to the return of the Good Faith Deposit, with all interest accrued thereon, in the event that (i) Purchaser terminates this Agreement pursuant to Section 8.1(c), 8.1(d), 8.1(f), 8.1(g) or 8.1(h) (provided the failure of the applicable event or condition(s) giving rise to Purchaser's right to terminate under such subsections is not in any manner due to Purchaser's fault, as provided therein, including without limitation an inability of Purchaser to obtain financing or funding for the payment of the Cash Purchase Price) or (ii) Seller terminates this Agreement pursuant to 8.1(e) or 8.1(g) based upon the failure of a condition or a failure to close, respectively, that is not in any manner due to Purchaser's failure to perform, including without limitation an inability of Purchaser to obtain financing or funding for the payment of the Cash Purchase Price. In the event the Closing occurs, however, the Good Faith Deposit shall be applied as a credit against the Purchase Price, payable at Closing pursuant to Section 1.7.2. (b) Personal Guaranty. As an inducement to Seller to execute this Agreement, Kali Chaudhuri, M.D., one of Purchaser's lender, has delivered to Seller, as of the Effective Date, a personal guaranty in the form of Exhibit 1.4-b hereto pursuant to which Dr. Chaudhuri will guaranty Purchaser's indemnification obligation under Section 10.3.1(d) of this Agreement with respect to the (i) Lease between Chapman Investment Associates, as Lessor, and Chapman General Hospital, Inc., as Lessee, dated as of December 31, 1984, as amended or assigned, and (ii) Lease between Jess Watkins, as Trustee under the Cayuga Land Trust, Lawrence Johnson and James Kirby, as lessors, and Greatwest Medical Management, Inc., as lessee, dated as of December 31, 1984, as amended or assigned, both with respect to Chapman Medical Center (the "Chapman Medical Center Leases"). -7- 1.5 Closing Date. The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place at 9:00 a.m. on November 30, 2004 (the "Closing Date"), at the offices of McDermott Will & Emery LLP, 2049 Century Park East, Suite 3400, Los Angeles, California 90067 or such other date, time and place as the parties shall mutually agree; provided that all conditions precedent and other matters required to be completed as of the Closing Date have been or will be completed on such date, and if they are not, such Closing Date shall automatically be changed to December 31, 2004. The Closing with respect to each Hospital shall be deemed to have occurred and to be effective as between the parties as of 12:01 a.m. Pacific time on the next day after the Closing Date (the "Effective Time"). 1.6 Items to be Delivered by Seller at Closing. At or before the Closing, Seller shall deliver to Purchaser, the following, duly executed by Seller where appropriate: 1.6.1 General Assignment, Bill of Sale and Assumption of Liabilities in the form of Exhibit 1.6.1 attached hereto (the "Bills of Sale"); 1.6.2 Assignment and Assumption of Real Estate Leases in the form of Exhibit 1.6.2 attached hereto with respect to each Leased Real Property (the "Real Estate Assignments"); 1.6.3 Grant Deed(s) (or such other deed comparable to grant deed(s) as is applicable to the jurisdiction at issue) in the form of Exhibit 1.6.3 attached hereto; 1.6.4 favorable original certificates of good standing, or comparable status, of Seller, issued by the respective states of incorporation of each Seller, dated no earlier than a date which is seven (7) calendar days prior to the Closing Date; 1.6.5 an opinion of Seller's or Seller's affiliates' in-house counsel in substantially the form attached hereto as Exhibit 7.6; 1.6.6 a certificate of the President or any Vice President of each Seller certifying to Purchaser (a) compliance with Seller's covenants set forth in this Agreement and (b) that all of the conditions contained in Article VI have been satisfied except those, if any, waived in writing by Seller; 1.6.7 a certificate of the corporate Secretary of each Seller certifying to Purchaser (a) the incumbency of the officers of Seller on the Effective Date and on the Closing Date and bearing the authentic signatures of all such officers who shall execute this Agreement and any additional documents contemplated by this Agreement and (b) the due adoption and text of the resolutions of the sole director of each Seller authorizing (i) the transfer of the Assets and Assumed Obligations by each Seller to Purchaser and (ii) the execution, delivery and performance of this Agreement and all ancillary documents and instruments by each Seller, and that such resolutions have not been amended or rescinded and remain in full force and effect on the Closing Date; -8- 1.6.8 the Group Purchasing Contract in the form of Exhibit 5.15 attached hereto (the "Group Purchasing Contract"), which Group Purchasing Contract shall include, without limitation, making available to Purchaser Seller's current and future Broadlane GPO pricing for capital equipment, medical/surgical supplies and overall purchasing power for a period of not less than five (5) years following the Closing Date; 1.6.9 the Transitional Services Agreements, which shall be substantially in the form of Exhibit 1.6.9 attached hereto (the "Transitional Services Agreements"), which Transitional Services Agreements shall include, without limitation, (a) leaving in place and making available to Purchaser Seller's information technology systems with respect to the operation of the Hospitals, including, but not limited to, Seller's existing Perot Systems information technology infrastructure with respect to the operation of the Hospitals and pricing to the Hospitals for the period of not less than three (3) years following the Closing Date to the extent Seller has the authority to do so pursuant to its agreements with third parties in effect as of the Effective Date, (b) a license of Seller's clinical policy and procedure manuals with respect to the operation of the Hospitals for no longer than six (6) months following the Closing Date, and (c) a license of Seller's proprietary employee and operating manuals (other than clinical policies and clinical manuals) for six (6) months following the Closing Date; 1.6.10 the Business Services Agreement, which shall be in the form of Exhibit 1.6.10 attached hereto (the "Business Services Agreement"), pursuant to which Purchaser will bill Seller's accounts receivable for sixty (60) days following the Closing Date; 1.6.11 UCC termination statements for any and all financing statements (which do not correspond to an Assumed Obligation) filed with respect to the Assets; 1.6.12 Limited Power of Attorney for use of Pharmacy License, DEA and Other Registration Numbers, and DEA Order Forms, in the form of Exhibit 1.6.12 attached hereto (the "Power of Attorney"); 1.6.13 copies of the third party consents obtained by Seller in connection with the assignment of the Material Contracts and Material Leases; 1.6.14 Guaranty Agreement of Tenet Healthcare Corporation, a Nevada corporation ("THC"), in the form of Exhibit 1.6.14 attached hereto, pursuant to which THC will agree to guaranty all of the obligations of Seller under this Agreement, including without limitation, Seller's obligations under Section 10.2 (indemnification) hereof; 1.6.15 an assignment and assumption agreement in the form of Exhibit 1.6.15 for the assignment of those certain Medicare provider numbers and Medicare provider agreements set forth on Schedule 1.6.15 (the "Medicare Assignment Agreement"); 1.6.16 the Employee Leasing Agreement, which shall be in the form of Exhibit 1.6.16 attached hereto (the "Employee Leasing Agreement"), which shall bear a term expiring, with respect to each Hospital, as of the end of the pay period with respect to such Hospital ending immediately prior to June 30, 2005; and -9- 1.6.17 such other customary instruments, certificates, consents or other documents which are reasonably necessary to carry out the transactions contemplated by this Agreement and to comply with the terms hereof, in all cases consistent with the terms of this Agreement. 1.7 Items to be Delivered by Purchaser at Closing. At or before the Closing, Purchaser shall execute and deliver or cause to be delivered to Seller the following, duly executed by Purchaser where appropriate: 1.7.1 payment of the Cash Purchase Price based upon the Interim Balance Sheet (subject to adjustment as described in Section 1.3), plus any amount which Purchaser is required to reimburse Seller pursuant to Section 1.11(d), less the Good Faith Deposit (including any and all interest accrued thereon), as adjusted to reflect the prorations provided in Section 1.8 and any adjustments to the Cash Purchase Price pursuant to Section 1.14. Such amounts shall be payable by wire transfer of immediately available funds to Seller to the account(s) specified by Seller to Purchaser in writing; 1.7.2 instructions to the Title Company to distribute the Good Faith Deposit to Seller on the Closing Date; 1.7.3 a certificate of the President or any Vice President of Purchaser certifying to Seller (a) compliance with Purchaser's covenants set forth in this Agreement, (b) that Purchaser has obtained all material licenses, permits, certificates of need and authorizations from governmental agencies or governmental bodies that are necessary or required for completion of the transactions contemplated by this Agreement (except for the hospital or other licenses, Medicare and Medi-Cal provider numbers and agreements, and the approvals that generally are not issued until after the change of ownership is complete) and (c) that all of the conditions contained in Article VII have been satisfied except those, if any, waived in writing by Purchaser 1.7.4 a certificate of the corporate Secretary of Purchaser certifying to Seller (a) the incumbency of the officers of Purchaser on the Effective Date and on the Closing Date and bearing the authentic signatures of all such officers who shall execute this Agreement and any additional documents contemplated by this Agreement and (b) the due adoption and text of the resolutions of the Board of Directors of Purchaser authorizing the execution, delivery and performance of this Agreement and all ancillary documents and instruments by Purchaser, and that such resolutions have not been amended or rescinded and remain in full force and effect on the Closing Date; 1.7.5 an opinion of Purchaser's counsel in substantially the form attached hereto as Exhibit 6.4; 1.7.6 favorable original certificate of good standing, or comparable status, of Purchaser, issued by the Nevada Secretary of State dated no earlier than a date which is seven (7) calendar days prior to the Closing Date; 1.7.7 the Bills of Sale; 1.7.8 the Real Estate Assignments; -10- 1.7.9 the Group Purchasing Contract; 1.7.10 if requested by Purchaser, the Transitional Services Agreements (along with the payment to Seller by wire transfer of immediately available funds of any amounts which must be made by Purchaser to Seller or any affiliate of Seller concurrent with the execution thereof); 1.7.11 the Business Services Agreement; 1.7.12 the Power of Attorney; 1.7.13 copies of all third party consents obtained by Purchaser in connection with the assignment of the Contracts and Leases to Purchaser; 1.7.14 the Medicare Assignment Agreement; 1.7.15 intentionally omitted; 1.7.16 the Employee Leasing Agreement; and 1.7.17 such other customary instruments, certificates, consents or other documents which are reasonably necessary to carry out the transactions contemplated by this Agreement and to comply with the terms hereof, in all cases consistent with the terms of this Agreement. 1.8 Prorations and Utilities. To the extent not otherwise prorated pursuant to this Agreement, or as reflected in the Interim Balance Sheet or the Final Balance Sheet, Purchaser and Seller shall prorate (as of the Effective Time), if applicable, the following as they relate to the Assets: real estate and personal property lease payments, real estate and personal property taxes, assessments and other similar charges against real estate, plus all other income and expenses which are normally prorated upon the sale of assets of a going concern (a "Prorated Item"). As to power and utility charges, "final readings" as of the Closing Date shall be ordered from the utilities; the cost of obtaining such "final readings," if any, to be paid for by Purchaser. If any party delivers to the other party any amount required by this Section 1.8 in respect of any Prorated Item, the receiving party shall use such amount to pay such Prorated Item and the delivering party shall no longer have any liability in respect of such Prorated Item. 1.9 Transfer of Seller Assets. On the Closing Date, Seller shall assign, transfer, convey and deliver to Purchaser, free and clear of any Encumbrances except for the Permitted Exceptions, and Purchaser shall acquire, all of each Seller's right, title and interest in and to only the following assets and properties, as such assets shall exist on the Closing Date with respect to the operation of any Hospital, such transfer being deemed to be effective at the Effective Time (collectively, the "Assets"): (a) all of the real property that is owned by such Seller or its affiliates and used with respect to the operation of any Hospital, including, without limitation, the real property that is described in Schedule 1.9(a) (such description to include a legal description and address), together with all buildings, improvements and, structures, residences, fixtures located thereupon, and all landscaping, utility lines, roads, driveways, fences, parking areas, contiguous and adjacent entry rights, construction in progress, and all other improvements located thereon and all rights, privileges and easements appurtenant to the foregoing (collectively, the "Owned Real Property"); -11- (b) all of the real property that is leased by such Seller or its affiliates and used with respect to the operation of any Hospital including, without limitation, the leased real property described in Schedule 1.9(b) (the "Leased Real Property") (the Owned Real Property and the Leased Real Property are collectively referred to in this Agreement as the "Real Property"); (c) all of the Tangible Personal Property owned by such Seller with respect to the operation of any Hospital (the "Personal Property"), including, without limitation, the Personal Property described in Schedule 1.9(c); (d) all of such Seller's rights, to the extent assignable or transferable, to all licenses, permits, approvals, certificates of need, authorizations, provider agreements (other than Medicare provider agreements), provider numbers (other than Medicare provider numbers), Medicare provider agreements and Medicare provider numbers set forth on Schedule 1.6.15, applications, certificates of exemption, franchises, accreditations and registrations and other governmental licenses, permits or approvals issued to such Seller with respect to the operation, development or expansion of any Hospital (the "Licenses"), including, without limitation, the Licenses described in Schedule 1.9(d) except to the extent Purchaser elects, in its discretion, not to take assignment of any such Licenses; (e) all of such Seller's interest, to the extent assignable or transferable, in and to all real property and personal property leases with respect to the operation of any Hospital (the "Leases"), including, without limitation, those leases described in Schedule 1.9(e); (f) all of such Seller's interest, to the extent assignable or transferable, in and to all contracts and agreements (including, but not limited to, purchase orders) with respect to the operation of any Hospital (the "Contracts"), including, without limitation, those Contracts described in Schedule 1.9(f); provided, however, the term Contracts as used in this Agreement shall exclude, subject to Section 9.3, (i) multi-hospital contracts as to which one of the Hospitals and one or more of Seller's or Seller's affiliates' other acute care hospitals (which are not among the Hospitals) participate (the "Multi-Facility Contracts"), (ii) all national or regional contracts of Seller or any affiliate thereof which are made available to any of the Hospitals by virtue of such Hospital being an affiliate of Tenet Healthcare Corporation ("THC") or its affiliates (the "Tenet Affiliate Contracts") (the Multi-Facility Contracts and the Tenet Affiliate Contracts collectively are referred to as the "Excluded Multi-Facility Contracts") and (iii) any contracts specifically identified on Schedule 1.9(f) as being excluded (the "Other Excluded Contracts"); (g) all of those advance payments, prepayments, prepaid expenses, deposits and the like which exist as of the Closing Date, subject to the prorations provided in Section 1.8 of this Agreement, which were made with respect to the operation of any Hospital or Asset (the "Prepaids"), the current categories and amounts of which are set forth on Schedule 1.9(g); -12- (h) except as excluded by Sections 1.10(d) and 1.10(i), all inventories of supplies, drugs, food, janitorial and office supplies and other disposables and consumables located at any of the Hospitals, or used with respect to the operation of any of the Hospitals (the "Inventory"); (i) all data, documents, records, operating manuals, files and computer software with respect to the operation of any of the Hospitals, including, without limitation, all patient records, medical records, employee records, financial and accounting records with respect to the operation of any of the Hospitals, equipment records, maintenance records, construction plans and specifications, warranty records, advertising and promotional materials, studies, reports and medical and administrative libraries (collectively, the "Records"); (j) to the extent assignable, all rights in all warranties of any manufacturer or vendor in connection with the Personal Property or Real Property; (k) all goodwill of the businesses evidenced by the Assets and associated with the businesses of the Hospitals; (l) all insurance proceeds arising in connection with property damage to the Assets occurring after the Effective Date and prior to the Effective Time, to the extent not expended on the repair or restoration of the Assets; (m) the names, symbols, telephone numbers and telephone directory listings used with respect to the operation of the Hospitals, including, without limitation, the names of the Hospitals set forth on Schedule 1.9(m) and all variants thereof; (n) the domain names, "www.chapmanmedicalcenter.com", "www.coastalcommhospital.com", "www.westernmedicalcenter.com", and "www.westernmedanaheim.com"; (o) any of such Assets as are owned by any affiliate of Seller; and (p) those (and only those) marketing materials and marketing brochures specifically described in Schedule 1.9(p); it being understood that Purchaser's use of such materials shall be subject to Section 5.4 (that is, any of Seller's affiliates' business names, such as, without limitation, Tenet Healthcare Corporation, shall be removed from such marketing materials and brochures prior to the use thereof by Purchaser); provided, however, that the Assets shall not include the Excluded Assets as defined in Section 1.10 below. For purposes of this Agreement, "Tangible Personal Property" shall be defined as all machinery, equipment, tools, furniture, office equipment, medical equipment, computer hardware and software, supplies, materials, vehicles, leasehold improvements and other items of tangible personal property (other than Inventory) of every kind owned or leased by Seller (wherever located and whether or not carried on Seller's books), together with any express or implied warranty by the manufacturers or sellers or lessors of any item or component part thereof and all maintenance records and other documents relating thereto. -13- In support of Section 1.9(o) above, Seller agrees that to the extent any affiliates of Seller own any interest in any property that, if owned by Seller, would constitute an Asset being transferred hereunder, Seller shall cause such affiliates to transfer, without further charge to Purchaser, all such interests in such property to Purchaser at Closing. 1.10 Excluded Assets. Notwithstanding anything to the contrary in Section 1.9, Seller shall retain all assets owned directly or indirectly by it (or any of Seller's affiliates) which are not among the Assets, including, without limitation, the following assets of Seller (collectively, the "Excluded Assets"): (a) cash, cash equivalents and short-term investments; (b) those categories of current assets of Seller with respect to the operation of any of the Hospitals which are set forth on Schedule 1.10(b); (c) such computer software, programs and hardware or data processing equipment which is (i) proprietary to Seller and/or Seller's affiliates, data processing system manuals and licensed software materials or (ii) used in connection with the operation of one or more of Seller's or Seller's affiliates' acute care hospitals other than any of the Hospitals (and not located at any of the Hospitals), as more particularly described in Schedule 1.10(c); (d) except as expressly set forth in Section 1.9(p), all of Seller's or any affiliate of Seller's proprietary manuals, marketing materials, policy and procedure manuals, standard operating procedures and marketing brochures, data and studies or analyses not developed or used exclusively for one or more of the Hospitals; (e) any asset which would revert to the employer upon the termination of any Seller Plan, including assets representing a surplus or overfunding of any Seller Plan; (f) the Excluded Multi-Facility Contracts and Other Excluded Contracts; (g) the names "Tenet Healthcare Corporation", "Tenet", "Tenet HealthSystem", "OrNda HealthCorp", and any other names, symbols or world-wide web addresses (including, without limitation, any world-wide web address containing "tenethealth.com") not used exclusively at any of the Hospitals, all abbreviations and variations thereof, and trademarks, trade names, service marks, copyrights and any applications therefor, symbols and logos related thereto, together with any promotional material, stationery, supplies or other items of inventory bearing such names or symbols or abbreviations or variations thereof; (h) all current contracts between Seller and any affiliate of Seller with respect to the operation of any Hospital, except those approved in writing by Seller and Purchaser to be assigned to Purchaser on or after the Effective Time; (i) the portions of Inventory, Prepaids and other Assets disposed of, expended or canceled, as the case may be, by any Seller after the Effective Date and prior to the Effective Time in the ordinary course of business; -14- (j) assets owned and provided by vendors of services or goods to any of the Hospitals; (k) the Accounts Receivable; (l) all documents, records, correspondence, work papers and other documents relating to the Accounts Receivable, the Seller Cost Reports or the Agency Settlements (the "Receivable Records"); (m) all claims, rights, interests and proceeds with respect to state or local tax refunds (including but not limited to property tax) resulting from periods prior to the Effective Time, and the right to pursue appeals of same; (n) all of Seller's corporate record books and minute books; (o) any Owned Real Property not purchased by, or any Leased Real Property not assigned to, Purchaser pursuant to Sections 1.14(a)(ii) or 1.14(c)(ii), as set forth in Schedule 2.7(e); (p) all insurance proceeds arising in connection with property damage to any Owned Real Property not purchased by, or any Leased Real Property not assigned to, Purchaser pursuant to Sections 1.14(a)(ii) or 1.14(c)(ii), as set forth in Schedule 2.7(e); (q) all unclaimed property of any third party, including, without limitation, property which is subject to applicable escheat laws; (r) all claims, rights, interests and proceeds (whether received in cash or by credit to amounts otherwise due to a third party) with respect to amounts overpaid by Seller to any third party with respect to periods prior to the Effective Time (e.g. such overpaid amounts may be determined by billing audits undertaken by Seller or Seller's consultants); (s) all bank accounts of Seller; (t) all rights, claims and choses in action of Seller and its affiliates with respect to periods prior to the Effective Time, and any payments, awards or other proceeds resulting therefrom; (u) all writings and other items that are protected from discovery by the attorney-client privilege, the attorney work product doctrine or any other cognizable privilege or protection, which are further described by way of example, rather than limitation, on Schedule 1.10(u); (v) Seller's current Medicare and Medi-Cal provider agreements and provider numbers, but excluding those Medicare provider agreements and Medicare provider numbers set forth on Schedule 1.6.15, unless Purchaser affirmatively elects to revise Schedule 1.6.15 on or before October 14, 2004; -15- (w) certain content of each Hospital's website, as more particularly described on Schedule 1.10(w); (x) all intercompany receivables of Seller with any of Seller's affiliates; and (y) any assets identified in Schedule 1.10(y). 1.11 Assumed Obligations. On the Closing Date, Seller shall assign, and Purchaser shall assume and agree to discharge on and after the Effective Time, the following liabilities and obligations of Seller and only the following liabilities and obligations (collectively, the "Assumed Obligations"): (a) the Contracts, but only to the extent of the obligations arising thereunder with respect to events or periods on and after the Effective Time; (b) the Leases, including the capital lease obligations of Seller listed on Schedule 1.11(b) with respect to the Hospitals, but only to the extent of the obligations arising thereunder with respect to events or periods on and after the Effective Time; (c) Intentionally omitted; (d) the Accrued Paid Time Off with respect to the Hired Employees (but only to the extent Purchaser receives a credit towards the Purchase Price as described in Section 1.2(e), as such credit is initially determined pursuant to Section 1.2.2 and such credit is finally determined pursuant to Section 1.3); provided, however, if Seller or any affiliate of Seller satisfies any portion of such obligations and liabilities existing as of the Closing Date by payment to a Hired Employee (which satisfaction of such obligations and liabilities may only occur if Seller has obtained Purchaser's express consent, unless otherwise required by law, contract or the terms of the Seller Plans), then Purchaser shall reimburse Seller the amount of such payment at Closing; (e) the Sick Pay Amount as of the Closing Date; (f) all unpaid real and personal property taxes for the current property tax year, if any, that are attributable to the Assets prior to the Effective Time, subject to the prorations provided in Section 1.8; (g) all utilities being furnished to the Assets on and after the Effective Time, subject to the prorations provided in Section 1.8; and (h) any other obligations and liabilities identified in Schedule 1.11(h). It is expressly understood and agreed that Purchaser shall not assume nor shall Purchaser be liable for any liability, obligation, governmental overpayment, claim against or contract of any Seller, any affiliate of any Seller or any Hospital of any kind or nature, whether or not accrued, whether fixed, contingent or otherwise, whether known or unknown, and whether or not recorded on the books and records of any Seller or any affiliate of any Seller, arising out of any event occurring prior to the Effective Time, unless such liability, obligation, claim or contract is expressly assumed by Purchaser pursuant to the terms of this Agreement. -16- 1.12 Excluded Liabilities. Notwithstanding anything to the contrary in Section 1.11, Purchaser shall not assume or become responsible for any of Seller's duties, obligations or liabilities, whether known or unknown, direct or indirect, foreseen or unforeseen, that are not expressly assumed by Purchaser pursuant to the terms of this Agreement, the Bills of Sale or the Real Estate Assignments (the "Excluded Liabilities"), and Seller shall remain fully and solely responsible for all of Seller's debts, liabilities, contract obligations, expenses, obligations and claims of any nature whatsoever related to Seller, the Assets or the Hospitals unless expressly assumed by Purchaser under this Agreement, in the Bills of Sale or in the Real Estate Assignments. The Excluded Liabilities shall include, without limitation: (a) any current liabilities of Seller with respect to the operation of any of the Hospitals prior to the Effective Time which are not specifically included in the Assumed Obligations; (b) all liabilities of Seller arising out of or relating to any act, omission, event or occurrence connected with the Seller, the Assets or Seller's operations, including without limitation Seller's use, ownership or operation of any of the Hospitals or any of the Assets, prior to the Effective Time, other than as specifically included in the Assumed Obligations; (c) all liabilities in connection with claims of professional malpractice or other tortious conduct to the extent arising out of or relating to acts, omissions, events or occurrences prior to the Effective Time; (d) except as otherwise subject to reimbursement pursuant to the Employee Leasing Agreement, all liabilities of each Seller for its respective shares of matching contributions for eligible beneficiaries' 401(k) plans, Section 125 plans and other Seller Plans, all liabilities and responsibilities under all defined benefit pension plans sponsored by any Seller, and all administrative costs associated with such welfare benefit plans or defined benefit pension plans; (e) any and all obligations of Seller under the Worker Adjustment and Retraining Notification Act (and California Assembly Bill AB 2957, as codified at California Labor Code Sections 1400 through 1408) (collectively, "WARN") with respect to the operation of the Hospitals as a result of the consummation of the transactions contemplated by this Agreement; (f) all liabilities of Seller relating to cost reports (and all claims with respect thereto) relating to each Seller (including home office cost reports) with respect to Medicare, Medi-Cal, TRICARE or Blue Cross programs or any other third-party payor for all periods prior to the Effective Time; (g) all liabilities of Seller relating to the Seller Cost Reports with respect to periods ending prior to the Effective Time; -17- (h) all liabilities of Seller for violations of any law, regulation or rule to the extent arising from acts, omissions, events or occurrences prior to the Effective Time, including, without limitation, those federal and state laws pertaining to Medicare, Medi-Cal and other fraud and abuse laws; (i) all liabilities of Seller under the Excluded Multi-Facility Contracts and Other Excluded Contracts; and (j) any tax liability of Seller (including income taxes) incurred as a result of the consummation of the transaction contemplated by this Agreement; (k) all liabilities and obligations of Seller with respect to any and all agreements, leases and other contracts not assigned to Purchaser hereunder, whether arising before or after the Effective Time; (l) to the extent accrued prior to Closing, all liabilities and obligations arising out of any breach by Seller prior to Closing of any Lease or Contract; (m) all liabilities of Seller and its affiliates arising under or relating in any way to the requirements of federal or state securities laws and related disclosure requirements; provided, however, this Section 1.12(m) shall not apply to any Offering Circular and the terms of this Section 1.12(m) shall be subject to Purchaser's obligations under Section 10.3.1(j); (n) all liabilities of Seller for commissions or fees owed to any finder or broker in connection with the transactions contemplated hereunder, including without limitation any fees owing to Citigroup or Bank of America or any of their respective affiliated companies; and (o) all liabilities of Seller and/or Seller's affiliates for employee bonus programs at the Hospitals (including sign-on bonus and referral bonus programs), tuition reimbursement programs, and career advancement programs, and any other similar employee benefit program as to which, as of the Closing Date, there are determinable amounts to be paid after the Closing Date have arisen based on events on or prior to the Closing Date and which amounts have not been accrued for financial reporting purposes by the Hospitals based on, among other factors, the fact that such amounts to be paid in the future are contingent on one or more future events (including without limitation the continued employment of the employee entitled to such payment on the date of payment); and (p) all liabilities of Seller and/or Seller's affiliates for any Accrued Paid Time Off in excess of the amount treated as an Assumed Obligation under Section 1.11(d). 1.13 Disclaimer of Warranties. Except as expressly set forth in Article II hereof, the Assets transferred to Purchaser will be sold by Seller and purchased by Purchaser in their physical condition at the Effective Time, "AS IS, WHERE IS AND WITH ALL FAULTS AND NONCOMPLIANCE WITH LAWS" WITH NO WARRANTY OF HABITABILITY OR FITNESS FOR HABITATION, with respect to the Real Property, land, buildings and improvements, and WITH NO WARRANTIES, INCLUDING, WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, with respect to the physical condition of the Personal Property and Inventory, any and all of which warranties (both express and implied) Seller hereby disclaims. All of the foregoing real and personal property shall be further subject to normal wear and tear on the land, buildings, improvements and equipment and normal and customary use of the inventory and supplies in the ordinary course of business up to the Effective Time. -18- 1.14 Risk of Loss. The risk of loss or damage to any of the Assets, Personal Property, Real Property, the Hospitals and all other property, transfer of which is contemplated by this Agreement, shall remain with Seller until the Effective Time and Seller shall maintain its insurance policies covering the Assets, Personal Property, Real Property, the Hospitals and all other property through the Effective Time. (a) With respect to the Real Property, if prior to the Closing, all or any part of the Real Property is destroyed or damaged by fire or the elements or by any other cause where such damage or destruction is in the aggregate (the "Aggregate Damage") less than twenty percent (20%) of the Purchase Price, the parties' duties and obligations under this Agreement shall not be affected and the Closing shall proceed as scheduled; provided, however, Seller shall assign, transfer and set over to Purchaser all of Seller's right, title and interest in and to any insurance proceeds on account of such damage or destruction and, if such insurance policy proceeds are insufficient to repair, restore and/or replace the Real Property, the difference between the cost to repair, restore and/or replace and the amount of such proceeds shall be deducted from the Cash Purchase Price. If prior to the Closing, all or any part of the Real Property is destroyed or damaged by fire or the elements or by any other cause where the Aggregate Damage exceeds twenty percent (20%) of the Purchase Price, Purchaser may elect to (i) purchase such Owned Real Property, or take assignment of such Leased Real Property, and the Closing shall proceed as scheduled (provided, however, at the Closing Seller shall assign, transfer and set over to Purchaser all of Seller's right, title and interest in and to any insurance proceeds on account of such damage or destruction loss plus the amount of any deductibles under such insurance policies) or (ii) not purchase such Owned Real Property, or not take assignment of such Leased Real Property, and, in such event, an appropriate adjustment to the Cash Purchase Price shall be made by Purchaser and Seller. If prior to the Closing, all or any part of the Real Property is destroyed or damaged by fire or the elements or by other cause where the Aggregate Damage exceeds twenty percent (20%) of the Purchase Price, Purchaser may elect to terminate this Agreement by written notice to Seller (the "Casualty Termination Notice") after the date which is fifteen (15) days after the occurrence of such damage or destruction but no later than the date which is thirty (30) days after the occurrence of such damage or destruction (the "Casualty Termination Notice Period"); provided, however, that in no event shall the Casualty Termination Notice be provided (A) after the Closing or (B) if Seller and Purchaser are unable to agree prior to the inception of the Casualty Termination Notice Period that the amount of the Aggregate Damage exceeds twenty percent (20%) of the Purchase Price. If Purchaser and Seller are unable to agree upon the amount of the Aggregate Damage by the earlier to occur of (I) the originally scheduled Closing Date (the "Original Closing Date") or (II) the inception of the Casualty Termination Notice Period, the amount of the Aggregate Damage shall be determined by Centex Rodgers (the "Independent Consultant") pursuant to Section 1.14(d). (b) With respect to any Assets other than Real Property which are destroyed or damaged by fire or the elements or by any other cause prior to the Closing, Seller shall assign, transfer and set over to Purchaser all of Seller's right, title and interest to any insurance proceeds on account of such damage or destruction and shall reimburse Purchaser for any deductible Purchaser is required to pay in connection with the receipt of such insurance proceeds. -19- (c) If prior to the Closing, all or any part of a parcel of the Real Property is made subject to an eminent domain proceeding which would in Purchaser's reasonable judgment materially adversely (whether individually or in the aggregate) impair access to the Real Property or be materially adverse (whether individually or in the aggregate) to the operation of the Hospitals, Purchaser may elect to (i) purchase such affected Owned Real Property, or take assignment of such Leased Real Property, and the Closing shall proceed as scheduled (provided, however, at the Closing Seller shall assign, transfer and set over to Purchaser all of Seller's right, title and interest in and to any award in such eminent domain proceeding) or (ii) not purchase the affected Owned Real Property, or not take assignment of such Leased Real Property, and, in such event, an appropriate adjustment to the Cash Purchase Price shall be made by Purchaser and Seller. If Purchaser and Seller are unable to agree upon the amount of the adjustment described in subsection (ii) of the preceding sentence by the Original Closing Date, the adjustment shall be resolved by the Independent Consultant pursuant to Section 1.14(d). (d) If pursuant to either Section 1.14(a) or 1.14(c), the amount of the Aggregate Damage (and any applicable Cash Purchase Price adjustment) is to be determined by the Independent Consultant, within five (5) calendar days after the earlier to occur of the Original Closing Date or the inception of the Casualty Termination Notice Period (the "Submittal Date"), each party shall submit to the other party and to the Independent Consultant its proposed Aggregate Damage (and any applicable Cash Purchase Price adjustment) as a result of the event(s) contemplated by either Section 1.14(a) or 1.14(c), along with a detailed description of the basis for such amount and any applicable adjustment. Within ten (10) calendar days after the Submittal Date (the "Decision Date"), the Independent Consultant, acting as an expert and not as an arbitrator, shall select either the Aggregate Damage (and any applicable Cash Purchase Price adjustment) proposal of Seller or the Aggregate Damage (and any applicable Cash Purchase Price adjustment) proposal of Purchaser as the definitive amount of the Aggregate Damage (and any applicable adjustment to the Cash Purchase Price) and Purchaser shall thereafter have the right to provide a Casualty Termination Notice provided that the Aggregate Damage exceeds twenty percent (20%) of the Purchase Price. If either Purchaser or Seller fails to timely provide its proposed Aggregate Damage (and any applicable Cash Purchase Price adjustment) to the Independent Consultant, the Aggregate Damage (and any applicable Cash Purchase Price adjustment) shall be the amount proposed by the submitting party and Purchaser shall thereafter have the right to provide a Casualty Termination Notice provided that the Aggregate Damage exceeds twenty percent (20%) of the Purchase Price. If neither party submits its proposed Aggregate Damage (and any applicable Cash Purchase Price adjustment) to the Independent Consultant, no adjustment to the Cash Purchase Price shall be made and Purchaser shall not have the right to provide a Casualty Termination Notice. The decision of the Independent Consultant shall be conclusive and binding as between Purchaser and Seller, and the costs of such review shall be borne by the party whose proposed Aggregate Damage (and any applicable Cash Purchase Price adjustment) is not selected by the Independent Consultant. Upon any such determination of the adjustment to the Cash Purchase Price in accordance with this Section 1.14, the parties shall, subject to the terms and conditions of this Agreement, consummate the transactions contemplated by this Agreement at a mutually agreeable time and place, in accordance with the provisions of this Agreement. If pursuant to either Section 1.14(a) or 1.14(c), the amount of the Aggregate Damage (and any applicable Cash Purchase Price adjustment) is to be determined by the Independent Consultant and either the Submittal Date or the Decision Date falls on a day which is on or after the Termination Date, then the Termination Date shall be extended to the date which is ten (10) calendar days after the Decision Date. -20- ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to Purchaser to enter into this Agreement and to consummate the transactions contemplated by this Agreement, each Seller, jointly and severally, hereby represents, warrants and covenants to Purchaser as to the following matters, except as disclosed in the disclosure schedule as of the Effective Date, as may be amended pursuant to the terms of this Agreement (the "Disclosure Schedule") hereby delivered by Seller to Purchaser. Except as otherwise provided herein, Seller shall be deemed to remake all of the following representations, warranties and covenants as of the Closing Date: 2.1 Authorization. Seller has full corporate power and authority to enter into this Agreement and full power and authority to carry out the transactions contemplated hereby. 2.2 Binding Agreement. All corporate and other actions required to be taken by each Seller to authorize the execution, delivery and performance of this Agreement, all documents executed by each Seller which are necessary to give effect to this Agreement, and all transactions contemplated hereby, have been duly and properly taken or obtained by such Seller. No other corporate or other action on the part of each Seller is necessary to authorize the execution, delivery and performance of this Agreement, all documents necessary to give effect to this Agreement and all transactions contemplated hereby. This Agreement has been duly and validly authorized, executed and delivered by each Seller and, assuming due and valid execution by Purchaser, this Agreement constitutes a valid and binding obligation of each Seller enforceable in accordance with its terms subject to (a) applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors' rights generally from time to time in effect and (b) limitations on the enforcement of equitable remedies.. 2.3 Organization and Good Standing; No Violation. (a) Each Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each Seller has full power and authority to own, operate and lease its properties and to carry on its businesses as now conducted. Each Seller is duly qualified and licensed to do business under the laws of the State of California. (b) Neither the execution and delivery by Seller of this Agreement nor the consummation of the transactions contemplated hereby by Seller nor compliance with any of the material provisions hereof by Seller, will violate, conflict with or result in a breach of any material provision of Seller's articles of incorporation or bylaws, respectively. (c) Seller, as applicable, has previously provided to Purchaser true and complete copies of its articles of incorporation and bylaws as in effect as of the Effective Date. Seller, as applicable, will provide to Purchaser true and complete copies of its articles of incorporation and bylaws as in effect as of the Closing Date, if different from those in effect as of the Effective Date. -21- (d) Seller does not have any Subsidiaries. As used in this Agreement, "Subsidiary" means any corporation, partnership, trust, limited liability company or other non-corporate business enterprise in which Seller (or another Subsidiary of Seller) holds stock or other ownership or equity interests representing (a) more than 50% of the voting power of all outstanding stock or ownership interests of such entity or (b) the right to receive more than 50% of the net assets of such entity available for distribution to the holders of outstanding stock or ownership interests upon a liquidation or dissolution of such entity. 2.4 Contracts and Leases. (a) With the exception of the Excluded Multi-Facility Contracts, Schedule 1.9(e) includes a list of all Leases in respect of Real Property or Personal Property (i) which (A) require lease payments by Seller with respect to the operation of any Hospital during the remaining term of such Lease in excess of Twenty Five Thousand Dollars ($25,000), and (B) either have a remaining term in excess of twelve (12) months or cannot be terminated by Seller upon notice of ninety (90) calendar days or less, or (ii) which are with each Hospital's referral sources (as determined by applicable health care laws, rules and regulations) ("Referral Sources"), including, without limitation, any physicians on each Hospital's medical staff. Prior to the Effective Date, Seller has made available to Purchaser true and correct copies of all of the Leases set forth in Schedule 1.9(e). The Leases set forth on Schedule 1.9(e) are referred to herein as the "Material Leases". (b) With the exception of the Excluded Multi-Facility Contracts, Schedule 1.9(f) includes a list of all Contracts (i) which (A) require the payment by Seller with respect to the operation of any Hospital during the remaining term of such instrument in excess of Twenty Five Thousand Dollars ($25,000), and (B) either have a remaining term in excess of twelve (12) months or cannot be terminated by Seller upon notice of ninety (90) calendar days or less, or (ii) which are with each Hospital's Referral Sources, including, without limitation, any physicians on each Hospital's medical staff. Prior to the Effective Date, Seller has made available to Purchaser true and correct copies of all of the Contracts set forth in Schedule 1.9(f). The Contracts set forth on Schedule 1.9(f) are referred to herein as the "Material Contracts". (c) Each Material Lease and each Material Contract, respectively, is in full force and effect and is the valid and binding obligation of Seller and, to the knowledge of Seller, of each other party thereto. (d) Schedule 2.4(d) sets forth a list of the Excluded Multi-Facility Contracts which are material to the operation of the Hospitals. (e) In all material respects, (i) all obligations required to be performed under the terms of the Material Leases and the Material Contracts by Seller have been performed, (ii) no act or omission by Seller (including, without limitation, entering into this Agreement or the consummation of the transactions contemplated herein) has occurred or failed to occur which, with the giving of notice, the lapse of time or both would constitute a default under the Material Leases or the Material Contracts, and (iii) each of such Material Leases and Material Contracts is now and will be upon the Closing Date in full force and effect without default on the part of Seller. No provision of this Section 2.4(e) shall apply to any failure to obtain consents to the assignment of the Material Leases and Material Contracts from the third parties to the Material Leases and Material Contracts in which consent is required to assign the Material Leases and Material Contracts to Purchaser. -22- 2.5 Required Consents. Except as set forth on Schedule 2.5, Seller is not a party to or bound by, nor are any of the Assets subject to, any mortgage, material lien, deed of trust, any Material Lease or any Material Contract, or any material order, judgment or decree which (a) requires the consent of another to the execution of this Agreement or (b) requires the consent of another to consummate the transactions contemplated by this Agreement. 2.6 Compliance With Laws and Contracts. (a) Except as set forth in Schedule 2.6(a), Seller, with respect to the operation of the Hospitals, including, without limitation, with respect to any Contracts and Leases with each Hospital's Referral Sources, is in compliance with all applicable laws, statutes, ordinances, orders, rules, regulations, policies, guidelines, licenses, certificates, certificates of need, judgments or decrees of all judicial or governmental authorities (federal, state, local, foreign or otherwise), including, without limitation, those relating to Medicare, Medi-Cal and the Hospitals' cost reports, except where the failure to be in such compliance would not have a material adverse effect on the Assets or the businesses of the Hospitals. Except as set forth in Schedule 2.6(a), Seller, with respect to the operation of the Hospitals, has not been charged with or given notice of, and to the best knowledge of Seller, Seller, with respect to the operation of the Hospitals, is not under investigation with respect to, any violation of, or any obligation to take remedial action under, any applicable (i) material law, statute, ordinance, rule, regulation, policy or guideline promulgated, (ii) material license, certificate or certificate of need issued, or (iii) order, judgment or decree entered, by any federal, state, local or foreign court or governmental authority relating to the Hospitals or the businesses of any of the Hospitals. Notwithstanding the foregoing, no provision of this Section 2.6(a) shall be deemed a representation or warranty by Seller as to compliance with any Environmental Laws (as defined in Section 2.6(c) below). (b) Seller's ownership and operation of each of the Hospitals and the Assets are and have been in compliance with all Environmental Laws, except where the failure to be in such compliance would not have a material adverse effect on the Assets or the businesses of the Hospitals. Seller has obtained all licenses, permits and approvals necessary or required under all applicable Environmental Laws (the "Environmental Permits") for the ownership and operation each of the Hospitals and the Assets. All such Environmental Permits are in effect and, to Seller's knowledge, no action to revoke or modify any of such Environmental Permits is pending. There is not now pending or, to Seller's knowledge, threatened, any claim, investigation or enforcement action by any governmental authority (whether judicial, executive or administrative) concerning Seller's potential liability under Environmental Laws in connection with the ownership or operation of the Hospitals or the Assets. To Seller's knowledge, there has not been a release or threatened release of any Hazardous Substance at, upon, in, under or from the Hospitals or the Assets at any time. Seller has arranged any disposal of Hazardous Substances from the Hospitals with licensed contractors in accordance with applicable Environmental Laws. -23- (c) For the purposes of this Agreement, the term "Environmental Laws" shall mean all state, federal or local laws, ordinances, codes or regulations relating to Hazardous Substances or to the protection of the environment, including, without limitation, laws and regulations relating to the storage, treatment and disposal of medical and biological waste. For purposes of this Agreement, the term "Hazardous Substances" shall mean (i) any hazardous or toxic waste, substance, or material defined as such in (or for the purposes of) any Environmental Laws, (ii) asbestos-containing material, (iii) medical and biological waste, (iv) polychlorinated biphenyls, (v) petroleum products, including gasoline, fuel oil, crude oil and other various constituents of such products, and (vi) any other chemicals, materials or substances, exposure to which is prohibited, limited or regulated by any Environmental Laws. (d) To Seller's knowledge, Seller has performed all material obligations relating to the Assets and the businesses of the Hospitals, and is not in breach or default, nor do any circumstances exist which with or without notice or lapse of time, or both, would result in breach or default, nor is there any claim of such breach or default with respect to any obligation to be performed, under any Material Contract, Material Lease, guaranty, indenture or loan agreement relating to the Assets or the businesses of the Hospitals, which breach or default or its consequences might materially adversely affect the Assets or the businesses of the Hospitals. No provision of this Section 2.6(d) shall apply to any failure to obtain consents to the assignment of the Contracts and Leases from the third parties to the Contracts and Leases in which consent is required to assign the Contracts and Leases to Purchaser (the "Contract and Lease Consents"). 2.7 Title; Sufficiency. (a) Each Seller has good and marketable fee simple or leasehold title, as the case may be, to its respective Real Property. Each Seller has good and valid title to its respective Personal Property, which individually or in the aggregate is material to the condition (financial or otherwise), operations or the business of any particular Hospital. Schedule 1.9(a) contains a complete list of all of the real property owned by each Seller that is used in connection with the conduct of the Hospitals' businesses. Schedule 1.9(e), Schedule 1.9(f) and/or Schedule 2.7(b) includes a list of all Contracts or Leases in respect of Real Property or Personal Property which contain a grant to any third party of a right or option to purchase any of the Real Property or any of the Personal Property. (b) The Real Property and the Personal Property is held by each respective Seller free and clear of all liens, pledges, claims, charges, security interests or other encumbrances ("Encumbrances"), and is not, in the case of the Real Property, subject to any rights-of-way, building or use restrictions, exceptions, variances, reservations or limitations of any nature whatsoever except, with respect to such properties, (i) liens for current real property taxes and assessments, (ii) mechanics', carriers', workmen's, repairmen's and other statutory liens, rights of way, building or use restrictions, exceptions, easements, covenants, variances, reservations and other limitations of any kind, if any, which would not have a material adverse effect on the Assets or the businesses of the Hospitals or for which, in respect of matters affecting title to the Real Property, title insurance coverage has been obtained, (iii) those standard printed exceptions customarily set forth in ALTA Extended Coverage title reports or ALTA Extended Coverage title policies (other than exceptions for matters identified in the Surveys with respect to the Real Property), and (iv) other such encumbrances as are set forth in Schedules 2.7(b) and 7.7. None of the Real Property is subject to a pending, or to Seller's knowledge threatened, condemnation or similar proceeding. -24- (c) Seller has not received notice of, nor, to Seller's knowledge, is there any action, proceeding or litigation pending (or overtly contemplated or threatened) (i) to modify the zoning of, or other governmental rules or restrictions applicable to the Real Property or the use or development thereof, or (ii) for any street widening or changes in highway or traffic lanes or patterns in the immediate vicinity of the Real Property, which in each case would be reasonably likely to interfere with the use, ownership and/or operation of the Real Property. Except as set forth in Schedule 2.7(c), to Seller's knowledge, there are no material defects in the physical condition of the HVAC or electrical systems, or the plumbing at any of the Hospitals. (d) The Inventory with respect to each Hospital is, and at the Closing Date will be, maintained in such quality and quantities as is consistent with such Hospital's historical practices. (e) The Assets and the Excluded Assets comprise substantially all of the property and assets used in the conduct of the businesses and operation of the Hospitals. The Assets and the Excluded Assets comprise all property and assets owned by the Sellers, except as set forth in Schedule 2.7(e). 2.8 Certain Representations With Respect to the Hospitals. (a) All licenses, certifications and certificates of need which are necessary to operate the business of each respective Hospital by each respective Seller are valid and in good standing, except where the failure to have such licenses, certifications and certificates of need would not have a material adverse effect on the Assets or the businesses of the Hospitals. Each of the Acute Care Hospitals is duly licensed by the State of California to operate as a general acute care hospital having that number and type of beds as set forth on such Acute Care Hospital's current general acute care hospital license. (b) Each Acute Care Hospital is duly accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") for the period set forth in Schedule 2.8(b). Except as set forth in Schedule 2.8(b), (i) Seller has not received any notices of deficiency from JCAHO with respect to the Hospitals' current accreditation period which require or request any action or response by Seller or the Hospitals and (ii) any such deficiencies have been corrected or otherwise remedied. (c) Each Acute Care Hospital is certified for participation in the Medicare, Medi-Cal and TRICARE programs, and has current and valid provider contracts with each of such programs, except where the failure to have such contracts would not have a material adverse effect on the businesses of the Hospitals. Except as set forth in Schedule 2.8(c), Seller has not received notices from the regulatory authorities which enforce the statutory or regulatory provisions in respect of any of the Medicare, Medi-Cal or TRICARE programs of any pending or threatened investigations with respect to the operation of the Hospitals. -25- (d) Notices of Program Reimbursement have been issued by the applicable fiscal intermediary with respect to the cost reports of the Hospitals for Medicare, Medi-Cal (if required) and Blue Cross (if required) through the periods set forth in Schedule 2.8(d) (the "Audit Periods"). Each of such reports was timely filed. Seller has not received notice of any material dispute between any Hospital and the applicable governmental agency or private entity, or their intermediaries or representatives, regarding such cost reports for periods subsequent to the periods specified in Schedule 2.8(d). Except as set forth in Schedule 2.8(d), there are no pending or, to Seller's knowledge, threatened material claims or investigations by any of such programs against any Hospital with respect to the Audit Periods or any period thereafter. (e) With respect to the operation of the Hospitals, no Seller has any outstanding loan, grant or loan guarantee pursuant to the Hill-Burton Act (42 USC Section 291a, et seq.). (f) Except as disclosed on Schedule 2.8(f), there are no pending or, to the knowledge of Seller, threatened disciplinary or corrective actions or appeals therefrom involving physician applicants, active medical staff members or affiliated health professionals under the medical staff bylaws at each Hospital. Seller has provided to Purchaser a true, correct and complete copy of the bylaws, rules and regulations of the medical staff at each Hospital and its executive committee. Notwithstanding the foregoing provisions of this Section 2.8(f), Seller shall not be required to disclose any information pursuant to this Section 2.8(f) where such disclosure is prohibited by state law or such disclosure would, or could reasonably be expected to, jeopardize any applicable privilege or protection described in Section 1.10(u), including, without limitation, peer review or any other privilege which is available under applicable law. (g) Seller has submitted a plan and compliance schedule ("Seismic Plan") for each Hospital to the California Office of Statewide Health Planning and Development ("OSHPD"). Each Seismic Plan reflects Seller's good faith evaluation of the seismic condition of the Hospital for which such Seismic Plan was submitted as of the date of such submission, and Seller's plan to bring such Hospital into substantial compliance with the regulations and standards developed by OSHPD pursuant to the Alfred E. Alquist Hospital Facilities Seismic Safety Act of 1983, as amended, including by SB 1953 in 1994 (the "Alquist Act") as then in effect. Seller's estimate of the cost for each Hospital to comply with the regulations and standards as in effect on the date of the submission of the Seismic Plan with respect thereto, as previously provided to Purchaser, was made in good faith and based upon assumptions that Seller believed to be reasonable as of the date of such submission. Seller has been granted extensions until 2013 by OSHPD with respect to each Hospital. Seller has delivered or otherwise made available, or will deliver or otherwise make available prior to Closing, to Purchaser copies of the Seismic Plans. 2.9 Brokers and Finders. Other than Citigroup and Bank of America, neither Seller nor any affiliate thereof, nor any officer or director thereof, has engaged any finder or broker in connection with the transactions contemplated hereunder. Seller shall be solely responsible for, and hereby indemnifies Purchaser against, any payments to Citigroup or Bank of America required to be made in connection with the negotiation or consummation of this Agreement or any of the transactions contemplated hereby. -26- 2.10 Financial Statements. The following have been or will be prepared from the books and records of Seller (a) the unaudited financial statements of each Seller with respect to the operation of the Hospitals as of December 31, 2003 and December 31, 2002, and for the years ended December 31, 2003 and December 31, 2002 (the "2002 & 2003 Financials"), (b) the unaudited financial statements of each Seller with respect to the operation of the Hospitals as of July 31, 2004 and for the seven (7) months then ended (the "2004 Financials"), (c) the unaudited financial statements of each Seller with respect to the operation of the Hospitals for months subsequent to July 2004 as made available pursuant to Section 4.5 (the ("Interim Financials") (d) the Interim Balance Sheet and (e) the Final Balance Sheet (the 2002 & 2003 Financials, the 2004 Financials, the Interim Financials, the Interim Balance Sheet and the Final Balance Sheet are collectively referred to herein as the "Financial Statements"). The 2002 & 2003 Financials and the 2004 Financials are attached as Schedule 2.10. The Financial Statements fairly present, or will fairly present, the financial position and results of operations, as applicable, of each Seller with respect to the operation of the Hospitals as of and for the periods then ended. The Financial Statements are in conformity with generally accepted accounting principles consistently applied during such periods, except that the Financial Statements: (i) do not reflect all cost report adjustments, allocations or adjustments of overhead, intercompany interest or income taxes, and other year-end adjustments, (ii) do not contain footnotes, (iii) were prepared without physical inventories, (iv) do not contain an unaudited statement of cash flow, (v) omit substantially all the disclosures required by generally accepted accounting principles, (vi) are not restated for subsequent events, (vii) may not reflect any adjustments for impairment of long-lived assets or goodwill, or restructuring charges or the reclassification of assets held for sale on the balance sheet, (viii) do not reflect accounts receivable sale transactions with an affiliate and (ix) may not fully reflect the following liabilities: (A) vacation, holiday and similar accruals and accruals in respect of Seller's or any affiliate of Seller's self-insured employee health benefits, (B) liabilities payable in connection with workers' compensation claims, (C) liabilities payable pursuant to any employee welfare benefit plan (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), maintained by Seller or any affiliate of Seller on account of any of the Hospitals' employees, the chief executive officers of the Hospitals ("CEOs"), the chief financial officers of the Hospitals ("CFOs"), the chief operating officers of the Hospitals ("COOs") and the chief nursing officers of the Hospitals ("CNOs"), (D) federal, state and local income or franchise taxes and (E) payroll and bonuses payable and vacation, holiday and similar accruals with respect to the CEOs, CFOs, COOs and CNOs. 2.11 Legal Proceedings. Except as set forth on Schedule 2.11, there are no claims, proceedings or investigations pending or, to the best knowledge of Seller, threatened relating to or affecting Seller with respect to the operation of the Hospitals or any of the Assets before any court or governmental body (whether judicial, executive or administrative) in which an adverse determination would have a material adverse effect on the Assets or the business condition of the Hospitals. Seller, with respect to the operation of the Hospitals, is not subject to any judgment, order, decree or other governmental restriction specifically (as distinct from generically) applicable to it or its assets, including the Assets, which would have a material adverse effect on the Assets or the business condition (financial or otherwise) of the Hospitals. There is no claim, proceeding, or investigation pending or, to the best knowledge of Seller, threatened, relating to or affecting Seller with respect to the operation of the Hospitals before any court or governmental body (whether judicial, executive or administrative) which: (a) materially adversely affects or seeks to prohibit, restrain or enjoin the execution and delivery of this Agreement; (b) materially adversely affects or questions the validity or enforceability of this Agreement; (c) questions the power or authority of any Seller to carry out the transactions contemplated by, or to perform its obligations under, this Agreement; or (d) would result in any change which would materially adversely affect the ability of any Seller to perform any of its obligations hereunder. -27- 2.12 Employee Benefits. (a) Schedule 2.12 contains a list of (i) each pension, profit sharing, bonus, deferred compensation, or other retirement plan or arrangement of Seller with respect to the operation of the Hospitals, whether oral or written, which constitutes an "employee pension benefit plan" as defined in Section 3(2) of ERISA, (ii) each medical, health, disability, insurance or other plan or arrangement of Seller with respect to the operation of the Hospitals, whether oral or written, which constitutes an "employee welfare benefit plan" as defined in Section 3(1) of ERISA, and (iii) each other employee benefit, program, plan or perquisite provided by Seller with respect to the operation of the Hospitals, in which any employee of Seller participates in his capacity as such (collectively, the "Seller Plans"). Copies of the summary plan descriptions and brochures with respect to the Seller Plans have previously been, or will promptly be, furnished to Purchaser. (b) With respect to each Seller Plan, to Seller's knowledge, Seller does not have any direct or indirect, actual or contingent liability, other than to make payments for contributions, premiums or benefits when due in the ordinary course, all of which payments that are due having been made. Neither the Hospitals nor any of the Assets are subject to any lien under ERISA or the Internal Revenue Code of 1986, as amended (the "Code"). (c) All of the Seller Plans have been administered in material compliance with ERISA and the applicable provisions of the Code. There are no "accumulated funding deficiencies" within the meaning of ERISA or the Code or any federal excise tax or other liability on account of any deficient fundings in respect of the Seller Plans. No reportable event(s) (within the meaning of ERISA) or prohibited transaction(s) (within the meaning of the Code), has occurred in respect of any of the Seller Plans that would result in any material liability to Seller. Other than claims for benefits, there are not pending or, to Seller's knowledge, threatened any claims relating to the Seller Plans by any employee of Seller with respect to the operation of the Hospitals, alleging a breach or breaches of fiduciary duties or violations of other applicable state or federal law which could result in liability on the part of Seller or any of the Seller Plans under ERISA or any other law that would have a material adverse effect on Seller. To Seller's knowledge, none of the Seller Plans discriminates in operation in favor of employees who are officers or who are highly compensated, except as permitted under the Code and ERISA. To Seller's knowledge, all returns, reports, disclosure statements and premium payments required to be made under ERISA and the Code with respect to any of the Seller Plans have been timely filed or delivered, except where any such failure to file or deliver would not have a material adverse effect on Seller. Except as set forth on Schedule 2.12(c) and except for routine random audits or submissions by Seller to the Voluntary Compliance Resolution Program, none of the Seller Plans have been audited or investigated by either the Internal Revenue Service, the Department of Labor or the Pension Benefit Guaranty Corporation within the last five (5) years, and there are no outstanding issues with reference to any of the Seller Plans pending before such governmental agencies. Seller currently and for the past five years has neither (i) sponsored nor contributed to a defined benefit pension plan as defined in ERISA ss. 3(2)A nor (ii) contributed to any multi-employer plan as defined in ERISA ss. 3(37)A. -28- (d) With respect to the Seller Plans, except as otherwise contained in the Assumed Obligations or as set forth in Sections 5.3 (employee matters) and 5.16 (collective bargaining obligations) of this Agreement, to the best of Seller's knowledge, there is no liability, direct or indirect, absolute or contingent, which the Purchaser shall assume, or could reasonably be expected to assume, as part of the transactions contemplated by this Agreement or otherwise. 2.13 Personnel. (a) Schedule 2.13(a) sets forth a complete list (as of the date set forth therein) of names, positions and current annual salaries or wage rates, bonus and other compensation and/or benefit arrangements, the paid time off pay, including CashPlus and Reserve Sick, and period of service credited for vesting as of the date thereof of all full-time and part-time employees of Seller with respect to the operation of the Hospitals and indicating whether such employee is a part-time or full-time employee. (b) Except as set forth on Schedule 2.13(b), there are no labor union or collective bargaining agreements in effect with respect to the employees of Seller with respect to the operation of the Hospitals. Seller has provided Purchaser with copies of all agreements and contracts described in Schedule 2.13(b). There is no unfair labor practice complaint against Seller pending, or to the best knowledge of Seller threatened, before the National Labor Relations Board with respect to the operation of the Hospitals. There is no labor strike, arbitration, dispute, slowdown or stoppage, and no union organizing campaign, pending, or to the best knowledge of Seller threatened by or involving the employees of Seller with respect to the operation of the Hospitals. 2.14 Insurance. Seller maintains, and has maintained, without interruption, at all times during each Seller's respective ownership of the Hospitals, self-insurance or policies or binders of insurance covering such risks and events, including personal injury, property damage, malpractice and general liability, to provide adequate and sufficient insurance coverage for all the assets and operations of the Hospitals. Schedule 2.14 contains a list of all such insurance maintained by Seller with respect to the operation of the Hospitals as of the Effective Date, which insurance is in full force and effect. 2.15 Solvency. No Seller or THC is insolvent and no Seller or THC will be rendered insolvent as a result of any of the transactions contemplated by this Agreement. For purposes hereof, the term "solvency" means that: (a) the fair salable value of each company's tangible assets is in excess of the total amount of its respective liabilities (including for purposes of this definition all liabilities, whether or not reflected on a balance sheet prepared in accordance with generally accepted accounting principles, and whether direct or indirect, fixed or contingent, secured or unsecured, and disputed or undisputed); (b) each company is able to pay its respective debts or obligations in the ordinary course as they mature; and (c) each company has capital sufficient to carry on its respective businesses and all businesses which it is respectively about to engage. -29- 2.16 Taxes. Seller has duly filed all federal, state and local Tax Returns required to be filed by it (all of which are true and correct in all material respects) and has duly paid or made provision for the payment of all Taxes (including any interest or penalties and amounts due state unemployment authorities) which are due and payable, whether or not in connection with such returns. Seller (with respect to the operation of the Hospitals) has withheld proper and accurate amounts from its employees' compensation, and made deposits of all such withholdings, in material compliance with all withholding and similar provisions of the Code and any and all other applicable laws. There are no liens for Taxes upon the Assets, except for statutory liens for current Taxes not yet due and payable or which may hereafter be paid without penalty or which are being contested in good faith by appropriate proceedings. No claim by any taxing authority with respect to the Hospitals (or operation thereof) or the Assets is pending in a jurisdiction where Seller does not file Tax Returns. For purposes of this Agreement, (a) the terms "Tax" and "Taxes" mean any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions, levies and liabilities, including, without limitation, taxes based upon, measured by, or with respect to income, net income, gross income, earnings, profits, or gross receipts, or any sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, environmental, alternative, add-on minimum, custom duties, capital stock, social security (or similar), unemployment, disability, gains, recapture, estimate, or other taxes, fees, assessments, or charges of any kind whatsoever, together with any interest, penalty, and addition thereto and (b) the term "Tax Return" means any return, declaration, report, claim, election, notice, or information return or statement or other document (including, without limitation, any related or supporting information, schedules, or exhibits) filed or required to be filed with any federal, state, local or foreign governmental authority or other authority in connection with any Tax or estimated Tax. 2.17 No Knowledge of Purchaser's Breach. Neither Seller nor any of its affiliates has knowledge of any breach of any representation or warranty by Purchaser or of any other condition or circumstance that would excuse Seller from its timely performance of its obligations hereunder. If information comes to Seller's attention on or before the Closing Date (whether through Purchaser or otherwise and whether before or after the Effective Date) which indicates that Purchaser has breached any of its representations and warranties under this Agreement, then Seller must immediately notify Purchaser. 2.18 Independent Auditor. The Independent Auditor is not, and during the five (5) years prior to the Effective Date has not been, Seller's or THC's primary independent auditor for financial reporting purposes. 2.19 Seller Knowledge. References in this Agreement to "Seller's knowledge", "knowledge of Seller" or the "best knowledge of Seller" mean the actual knowledge of the CEOs, CFOs, COOs, and CNOs of the Hospitals, Barry Wolfman and Ken Westbrook, Senior V.P.s of Regional Operations for Tenet California, Tenet HealthSystem's Vice President of Regional Finance Operations, California Region (which as of the Effective Date is William Durham), Paul O'Neill and Eric Tuckman, without independent investigation. No constructive or imputed knowledge shall be attributed to any such individual by virtue of any position held, relationship to any other Person or for any other reason. -30- ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER As an inducement to Seller to enter into this Agreement and to consummate the transactions contemplated by this Agreement, Purchaser hereby represents, warrants and covenants to Seller as to the following matters as of the Effective Date and, except as otherwise provided herein, shall be deemed to remake all of the following representations, warranties and covenants as of the Closing Date: 3.1 Authorization. Purchaser has full corporate power and authority to enter into this Agreement and has full corporate power and authority to carry out the transactions contemplated hereby. 3.2 Binding Agreement. All corporate and other actions required to be taken by Purchaser to authorize the execution, delivery and performance of this Agreement, all documents executed by Purchaser which are necessary to give effect to this Agreement, and all transactions contemplated hereby, have been duly and properly taken or obtained by Purchaser. No other corporate or other action on the part of Purchaser is necessary to authorize the execution, delivery and performance of this Agreement, all documents necessary to give effect to this Agreement and all transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Purchaser and, assuming due and valid execution by Seller, this Agreement constitutes a valid and binding obligation of Purchaser enforceable in accordance with its terms subject to (a) applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors' rights generally from time to time in effect and (b) limitations on the enforcement of equitable remedies. 3.3 Organization and Good Standing. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, and has full corporate power and authority to own, operate and lease its properties and to carry on its business as now conducted. 3.4 No Violation. Neither the execution and delivery by Purchaser of this Agreement nor the consummation of the transactions contemplated hereby nor compliance with any of the material provisions hereof byPurchaser will violate, conflict with or result in a breach of any material provision of the Articles of Incorporation, Bylaws or other organizational documents of Purchaser. 3.5 Brokers and Finders. Except as described on Schedule 3.5, neither Purchaser nor any affiliate thereof nor any officer or director thereof has engaged any finder or broker in connection with the transactions contemplated hereunder. 3.6 Representations of Seller. Purchaser acknowledges that it is purchasing the Assets that it will be acquiring hereunder on as "AS IS, WHERE IS" basis (as more particularly described in Section 1.13), and that Purchaser is not relying on any representation or warranty (expressed or implied, oral or otherwise) made on behalf of Seller other than as expressly set forth in this Agreement. -31- 3.7 Legal Proceedings. Except as described on Schedule 3.7, there are no claims, proceedings or investigations pending or, to the best knowledge of Purchaser, threatened relating to or affecting Purchaser or any affiliate of Purchaser before any court or governmental body (whether judicial, executive or administrative) in which an adverse determination would materially adversely affect the properties, business condition (financial or otherwise) of Purchaser or any affiliate of Purchaser. Neither Purchaser nor any affiliate of Purchaser is subject to any judgment, order, decree or other governmental restriction specifically (as distinct from generically) applicable to Purchaser or any affiliate of Purchaser which materially adversely affects the condition (financial or otherwise), operations or business of Purchaser or any affiliate of Purchaser. 3.8 No Knowledge of Seller's Breach. Neither Purchaser nor any of its affiliates has knowledge of any breach of any representation or warranty by Seller or of any other condition or circumstance that would excuse Purchaser from the timely performance of its obligations hereunder. If information comes to Purchaser's attention on or before the Closing Date (whether through Seller or otherwise and whether before or after the Effective Date) which indicates that Seller has breached any of its representations and warranties under this Agreement, then Purchaser must immediately notify Seller. 3.9 Ability to Perform. Purchaser has the ability to obtain funds in cash in amounts equal to the Cash Purchase Price by means of credit facilities or otherwise and will at the Closing have immediately available funds in cash, which are sufficient to pay the Cash Purchase Price and to pay any other amounts payable pursuant to this Agreement and to consummate the transactions contemplated by this Agreement. 3.10 Solvency. Purchaser is not insolvent nor will be rendered insolvent as a result of any of the transactions contemplated by this Agreement. For purposes hereof, the term "solvency" means that: (a) the fair salable value of Purchaser's tangible assets is in excess of the total amount of its liabilities (including for purposes of this definition all liabilities, whether or not reflected on a balance sheet prepared in accordance with generally accepted accounting principles, and whether direct or indirect, fixed or contingent, secured or unsecured, and disputed or undisputed); (b) Purchaser is able to pay its debts or obligations in the ordinary course as they mature; and (c) Purchaser has capital sufficient to carry on its businesses and all businesses which it is about to engage. 3.11 Independent Auditor. The Independent Auditor is not, and during the five (5) years prior to the Effective Date has not been, Purchaser's primary independent auditor for financial reporting purposes. 3.12 Purchaser Knowledge. References in this Agreement to "Purchaser's knowledge or "the best knowledge of Purchaser" mean the actual knowledge of the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer of Purchaser, without independent investigation. No constructive or imputed knowledge shall be attributed to any such individual by virtue of any position held, relationship to any other Person or for any other reason. -32- ARTICLE IV COVENANTS OF SELLER 4.1 Access and Information; Inspections. From the Effective Date through the Effective Time, Seller shall afford to the officers and agents of Purchaser (which shall include accountants, attorneys, bankers and other consultants and agents of Purchaser) full and complete access during normal business hours to and the right to inspect the plants, properties, books, accounts, records and all other relevant documents and information with respect to the assets, liabilities and businesses of the Hospitals. From the Effective Date through the Effective Time, Seller shall furnish Purchaser with such additional financial and operating data and other information in Seller's or an affiliate's possession as to businesses and properties of the Hospitals as Purchaser or its representatives may from time to time reasonably request, without regard to where such information may be located. Purchaser's right of access and inspection shall be exercised in such a manner as not to interfere unreasonably with the operations of the Hospitals. Such access may include consultations with the personnel of Seller; provided, however, that Purchaser shall not consult with or contact in any manner any physicians on the medical staff at any of the Hospitals without Seller's prior written consent, which consent shall not be unreasonably withheld. Further, Purchaser may, at its sole cost and expense (except as otherwise provided in Section 12.12), undertake environmental, mechanical and structural surveys of the Hospitals. Notwithstanding the foregoing, all access and inspection activities contemplated by this Section 4.1 shall be subject to the prior reasonable approval of Seller (which approval may only be granted by Paul O'Neill or his designee). 4.2 Conduct of Business. On and after the Effective Date and prior to the Effective Time, and except as otherwise consented to or approved by an authorized officer of Purchaser or required by this Agreement, Seller shall, with respect to the operation of the Hospitals: (a) carry on its respective businesses with respect to the operation of the Hospitals in substantially the same manner as presently conducted and not make any material change in personnel, operations, finance, accounting policies (unless Seller is required to adopt such changes under generally accepted accounting principles or Seller's affiliates adopt such changes on a company-wide basis), or real or personal property; (b) maintain each Hospital and all parts thereof and all other Assets in operating condition in a manner consistent with past practices, ordinary wear and tear excepted; (c) perform all of its material obligations under agreements relating to or affecting each Hospital, its respective operations or the Assets; (d) keep in full force and effect present insurance policies or other comparable self-insurance; (e) comply with all material legal requirements and contractual obligations applicable to the Assets or the businesses of the Hospitals; (f) continue all construction, renovation, and Hospitals improvement projects which are physically in progress as of the Effective Date substantially in accordance with project schedules, budgets, construction plans, designs, and furnishing plans in effect with respect to such projects as of the Effective Date; (g) use its reasonable efforts, and cause its affiliates to use their reasonable efforts, to maintain and preserve Seller's respective business organizations intact, retain Seller's respective present employees at each Hospital and maintain Seller's respective relationships with physicians, suppliers, customers and others having business relationships with each Hospital. -33- 4.3 Negative Covenants. From the Effective Date until the Effective Time, with respect to the operation of the Hospitals, Seller shall not, without the prior written consent of Purchaser or except as may be required by law: (a) amend or terminate any of the Contracts, enter into any new contract or commitment, or incur or agree to incur any liability, except in the ordinary course of business (which ordinary course of business shall include renewals of any Contract), and in no event with respect to any such contract, commitment or liability as to which the total to be paid in the future under the contract, commitment or liability exceeds Fifty Thousand Dollars ($50,000); (b) increase compensation payable or to become payable or make any bonus payment to or otherwise enter into one or more bonus agreements with any employee, except in the ordinary course of business in accordance with Seller's customary personnel policies; provided, however, this Section 4.3(b) shall not apply to (i) agreements or arrangements with any of the CEOs, CFOs, COOs or CNOs (collectively, the "Leadership Team") which are consistent with the practices of the affiliates of Seller, or (ii) any non-recurring payments or proposed non-recurring payments by Seller or any affiliate of Seller to any of the Hospitals' Employees (including any member of the Leadership Team) to provide an incentive to such Hospitals' Employees (or to any member of the Leadership Team) to remain employed at the Hospitals through the Effective Time, provided that such non-recurring payments shall not be among the Assumed Obligations or (iii) any increases in compensation or any bonus payments or any other compensation arrangements as required by labor union agreements described on Schedule 2.13(b); (c) create, assume or permit to exist any new debt, mortgage, deed of trust, pledge or other lien or encumbrance upon any of the Assets, whether now owned or hereafter acquired; (d) acquire (whether by purchase or lease) or sell, assign, lease, or otherwise transfer or dispose of any property, plant or equipment, except in the ordinary course of business with comparable replacement thereof; (e) take any action outside the ordinary course of business; (f) except with respect to life/safety/emergency or other immediate patient safety-related expenditures (as to which type of expenditures Seller shall provide prompt notice), purchase capital assets or incur costs in respect of construction in progress; (g) incur or record trade accounts payable with respect to the Hospitals other than in the ordinary course of business; -34- (h) reduce Inventory, or accelerate or delay the purchase of Inventory or the payment of amounts due to or from any vendor or other third-party, including any affiliate, except in the ordinary course of business; or (i) except to the extent required by law or by any Governmental Entity, take any affirmative act, or omit to take any action, that has the direct effect of reducing the number of licensed beds at any Acute Care Hospital or eliminating a material service provided at any Acute Care Hospital as of the Effective Date. For purposes of this Section 4.3, Seller shall be deemed to have obtained Purchaser's prior written consent to undertake the actions otherwise prohibited by this Section 4.3 if Seller gives Purchaser written notice of a proposed action and Seller does not receive from Purchaser a written notice of objection to such action within ten (10) business days after Purchaser receives Seller's written notice. Notwithstanding any provision to the contrary contained in this Agreement, neither Section 4.2 nor this Section 4.3 shall be construed to prohibit Seller from engaging in any act which Seller reasonably believes is required on an emergency basis, or the absence of which would have a material adverse effect on the ability of any Hospital to operate in accordance with its historical manner of operations. Seller shall give Purchaser prompt written notice subsequent to taking any act described in the immediately preceding sentence. Purchaser acknowledges that the terms of the applicable collective bargaining agreements provide for "Local Bargaining" (as defined therein) on certain subjects as more particularly described in such collective bargaining agreements. Except as consistent with any Board of Inquiry Report or Interest Arbitration Award under applicable collective bargaining agreements, Seller shall not without the consent of Purchaser voluntarily agree to economic terms in such Local Bargaining which are materially more costly to any Hospital than the result of Local Bargaining at other Tenet facilities in California. Seller agrees that it shall consult with Purchaser regarding the proposed terms of any amendments or agreements between Seller or any Seller affiliate and SEIU, CNA or UNAC with respect to the Hospitals that is proposed to be executed prior to the Effective Time and would materially affect the working conditions of employees at the Hospitals; such consultation with Purchaser shall occur prior to the execution of such amendment or agreement. Purchaser acknowledges and agrees that Hospital representatives can engage in such Local Bargaining prior to the Closing Date and that Purchaser shall be bound by the product of such Local Bargaining. Purchaser further acknowledges and agrees that, prior to the Closing Date, Seller shall be free to make any wage increases and/or other changes in the terms and conditions of union represented employees pursuant to the terms of any collective bargaining agreement in effect between Seller and any labor organization (including without limitation California Nurses Association ("CNA") and Service Employees International Union ("SEIU") and/or its affiliated locals) covering such employees. 4.4 Cooperation. Between the date of this Agreement and the Closing Date, Seller will: (i) use its reasonable commercial efforts to obtain, as promptly as practicable, all material Governmental Authorizations required of Seller to consummate the transactions contemplated hereby; and (ii) provide such other information and communications to Governmental Entities as such Governmental Entities may reasonably request; and (iii) reasonably cooperate with Purchaser in Purchaser's obtaining, as soon as practicable, all material Governmental Authorizations required of Purchaser to consummate the transactions contemplated hereby. For purposes of this Agreement, (a) "Governmental Entities" shall mean any local, state or federal government, including each of their respective branches, departments, agencies, commissions, boards, bureaus, courts, instrumentalities or other subdivisions, including the respective Departments of Health (or similar departments or agencies) in the State of California, the Medicare and Medi-Cal programs, TRICARE and fiscal intermediaries, and (b) "Governmental Authorizations" shall mean all licenses, permits, certificates, no objection letters, clearances and other authorizations, consents and approvals of any Governmental Entity which are required to consummate any of the transactions contemplated hereby or to operate any Hospital as currently operated under any law, including provider agreements with Medicare and Medi-Cal. -35- 4.5 Additional Financial Information. Within thirty (30) calendar days following the end of each calendar month prior to Closing, Seller shall deliver to Purchaser complete copies of the unaudited balance sheet and related unaudited statements of income relating to Seller with respect to the operation of the Hospitals for each month then ended, together with corresponding year-to-date amounts, which presentation shall be consistent with the provisions of Section 2.10 which are applicable to the Financial Statements. 4.6 No-Shop. (a) This Section 4.6(a) shall apply from and after the Effective Date until the earlier to occur of the following events: (i) the Closing Date, (ii) the termination of this Agreement, (iii) October 15, 2004, if Purchaser has not filed, on or before such date, all applications, licensing packages and other similar documents with all applicable Governmental Entities (or other third parties) which are a prerequisite to obtaining the material licenses, permits, authorizations and Medicare and Medi-Cal provider numbers which constitute conditions to closing under Section 7.1 including without limitation (x) Purchaser's Change of Hospital Ownership ("CHOW") package with the California Department of Health Services ("DHS") and (y) Purchaser's application on Form 855 for a new Medicare provider number for the Acute Care Hospitals with the applicable fiscal intermediary, Mutual of Omaha (the "FI") (but not including Purchaser's application with the California Department of Pharmacy, which is addressed in the immediately following subsection), (iv) October 25, if Purchaser has not filed, on or before such date, Purchaser's application with the California Department of Pharmacy for a new pharmacy license with respect to the Acute Care Hospitals, and (v) October 31, 2004, if Purchaser has not received written confirmation from JCAHO that Purchaser will be entitled to obtain "deemed status," based on the Acute Care Hospitals' existing accreditation by JCAHO, sufficient to avoid having to undergo a new survey of the Acute Care Hospitals as a prerequisite to obtaining approval for its CHOW application by the California Department of Health Services with respect to any Medicare provider numbers and agreements for which Purchaser has elected not to accept assignment; this Section 4.6(a) shall terminate as to being binding on Seller upon the occurrence (or failure to occur) of any of the foregoing events without regard to whether such occurrence (or failure to occur) is attributable to any fault of Purchaser. So long as this Section 4.6(a) remains in effect, Seller shall not, and shall cause its affiliates, officers, directors, employees, investment bankers or agents to not, without the prior written consent of Purchaser: (i) offer for sale or lease the assets of the Hospitals or the Assets (or any material portion thereof); (ii) solicit, encourage (by way of furnishing non-public information or otherwise), negotiate or take other action to facilitate offers to buy all or any material portion of any of the Hospitals or the Assets; (iii) hold discussions with any party (other than Purchaser) looking toward such, or in response to, an offer or solicitation; or (iv) enter into any agreement with any party (other than Purchaser) with respect to the sale or other disposition of any of the Hospitals or the Assets. Notwithstanding the foregoing, this Section 4.6 shall not be construed to prohibit Seller or its affiliates from engaging in corporate transactions involving Seller's or Seller's affiliates' stock or securities, including macro-level mergers, reorganizations or other transactions, so long as the terms thereof do not contemplate the sale or lease or other disposition of the Hospitals or the Assets. -36- (b) Any reference in this Agreement to an "affiliate" shall mean any Person directly or indirectly controlling, controlled by or under common control with a second Person; provided, however, an "affiliate" shall not include the stockholders of THC or any officer or director of any Person. The term "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. A "Person" shall mean any natural person, partnership, corporation, limited liability company, association, trust or other legal entity. 4.7 Seller's Efforts to Close. Seller shall use its reasonable commercial efforts to satisfy all of the conditions precedent set forth in Articles VI and VII to its or Purchaser's obligations under this Agreement to the extent that Seller's action or inaction can control or influence the satisfaction of such conditions. 4.8 Title Matters. Prior to the Closing Date and as an express condition to Closing, Seller shall deliver to Purchaser (a) a pro forma preliminary binder or title commitment(s) (the "Title Commitment") sufficient to confirm the Title Company's commitment to the issuance of an ALTA Extended Coverage Owner's Title Insurance Policy with respect to the Owned Real Property (the "Owner's Title Policy") and an ALTA Extended Coverage Leasehold Title Policy with respect to any ground lease(s) or other leases of record specified on Schedule 4.8 (the "Leasehold Title Policy") (the Owner's Title Policy and the Leasehold Title Policy are collectively referred to in this Agreement as the "Title Policy"), issued by the Title Company and naming Purchaser as the insured, together with true, correct and legible copies of all instruments referred to therein as conditions or exceptions to title (the "Title Instruments") and subject to no exceptions to Title except for Permitted Exceptions, and (b) ALTA surveys as required by the Title Company to issue the Title Policy, which shall, unless otherwise required by the Title Company in accordance with customary practices, be made (1) in accordance with "Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys," jointly established and adopted by ALTA and ACSM in 1999, and (2) pursuant to the Accuracy Standards (as adopted by ALTA and ACSM and in effect on the date of said certificate) of an "Urban" survey (the "Surveys"). If Purchaser finances any portion of the Purchase Price, the parties shall also cooperate in obtaining a Title Commitment for an ALTA Lender's Title Policy ("Purchaser's Lender Title Policy"), in the amount of the loan being made, in favor of the lender, and consistent with the requirements set forth above for the Title Policy and Surveys. In addition, Purchaser may request that the Title Policy include a zoning endorsement with respect to the Owned Real Property; any zoning endorsement shall be obtained by Purchaser solely at Purchaser's expense and shall not (x) constitute a condition precedent to Purchaser's obligation to consummate the transactions contemplated by this Agreement or (y) otherwise delay the Closing. Section 12.12 shall govern which party or parties hereto shall bear the costs and expenses of the Title Commitment(s), the Title Policy, Purchaser's Lender Title Policy and the Surveys. -37- 4.9 Termination of Hospitals' Employees. Upon the Transition Time, the Hospitals' Employees (other than the Retained Management Employees) shall cease to be employees of Seller and Seller's affiliates, and shall be removed from such entities' respective payrolls. Seller shall terminate effective as of the Transition Time the active participation of all of the Hospitals' Employees (other than the Retained Management Employees) in all of the Seller Plans, and shall cause each Seller Plan to comply with all applicable laws. After the Transition Time, Seller shall timely make or cause to be made by Seller's affiliates appropriate distributions to, or for the benefit of, all of the Hospitals' Employees (other than the Retained Management Employees) in respect of the Seller Plans which are in force and effect with respect to the Hospitals' Employees (other than the Retained Management Employees) at the Hospitals immediately prior to the Transition Time in accordance with ERISA, the Code and the terms and conditions of the Seller Plans and subject to the collective bargaining agreements of Seller and/or Seller's obligations under the National Labor Relations Act; provided, however, no such distribution shall be required to the extent it is among the Assumed Obligations. Except as specifically provided herein, Purchaser is not assuming and shall have no obligation or responsibility for any benefits payable from Seller Plans. Notwithstanding any provision to the contrary contained in this Agreement, Seller shall provide a notice to all of the Hospitals' Employees (as contemplated by WARN) which gives such employees at least sixty (60) days notice of termination of their employment concurrent with the Transition Time. 4.10 Termination Cost Reports. Seller shall file all Medicare, Medi-Cal and TRICARE termination cost reports required to be filed as a result of the consummation of (a) the transfer of the Assets to Purchaser and (b) the transactions contemplated by this Agreement. All such termination cost reports shall be filed by Seller in a manner that is consistent with current laws, rules and regulations. Seller will be solely responsible financially and otherwise, for the contents of all such termination cost reports (and related claims and documentation). Without limiting the generality of the foregoing, Seller will be solely obligated for all cost report deficiencies related to periods prior to the Effective Time. 4.11 Hart-Scott-Rodino Act Filings. Seller will (a) take promptly all actions necessary to make the filings required of Seller or Seller's affiliates under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and regulations promulgated thereunder (the "HSR Act"), (b) comply at the earliest practicable date with any request for additional information received by Seller or Seller's affiliates from the Federal Trade Commission (the "FTC") or Antitrust Division of the Department of Justice (the "DOJ") pursuant to the HSR Act, and (c) cooperate with Purchaser in connection with Purchaser's filings under the HSR Act and in connection with resolving any investigation or other regulatory inquiry concerning the transactions contemplated by this Agreement commenced by either the FTC or the DOJ. All fees and expenses of Seller incurred in connection with Seller's filing under the HSR Act shall be borne by Seller. 4.12 Environmental Survey. Seller shall promptly obtain from an environmental consulting firm (the "Consultant") a written environmental survey of the Owned Real Property (the "Environmental Survey") and shall deliver the Environmental Survey to Purchaser, which survey shall be identified on Exhibit 4.12 hereto. Section 12.12 shall govern which party or parties hereto shall bear the costs and expenses of the Environmental Survey. -38- 4.13 Noncompetition; Nonsolicitation. As an inducement to Purchaser to enter into this Agreement and to consummate the transactions contemplated hereby, full consideration for which is included as part of the Purchase Price, neither Seller nor any of Seller's affiliates, shall, for a period of two (2) years following the Closing Date, without the prior written consent of Purchaser, directly or indirectly, invest in, own, manage, operate, control or participate in the ownership, management, operation or control of, any Competing Business within the Seller Business Service Area. For purposes of this Agreement, the term "Competing Business" means the business of owning and operating general acute care hospitals, and the term "Seller Business Service Area" means the area within a five (5) mile radius of any of the Acute Care Hospitals. Notwithstanding the foregoing, the following shall be excluded from the foregoing provisions of this Section 4.13: (a) the general acute care hospital activities of Seller and Seller's affiliates as of the Closing Date (other than the activities of the Hospitals) and (b) Seller's or any affiliate of Seller's acquisition and operation of a general acute care hospital within the Seller Business Service Area after the Closing Date so long as such hospital was acquired in a transaction in which the amount of consideration allocated to such hospital is less than twenty-five percent (25%) of the total consideration necessary to consummate such transaction. During the period commencing on the Effective Date and ending on the second anniversary of the Closing Date, neither Seller nor any of its affiliates shall actively solicit any of the Hospitals' Employees (other than the Retained Management Employees) to remain or become an employee of Seller or any affiliate of Seller; provided, however, that at any time Seller and its affiliates may make general solicitations not directed specifically at Hospitals' Employees to recruit employees through any means (including, without limitation through job fairs or advertisements in newspapers of general circulation) and shall have the right to hire Hospitals' Employees who respond to such permitted solicitation efforts or seek such employment unsolicited by Seller or any affiliate of Seller. During the period commencing on the Effective Date and ending on the Closing Date, neither Seller nor any of its affiliates shall directly solicit any physician that is on the medical staff of any of the Acute Care Hospitals to join the medical staff of any acute care facility owned or operated by Seller or any affiliate of Seller that is not among the Acute Care Hospitals; provided, however, that this sentence shall not be construed to prevent Seller or any affiliate of Seller from (i) engaging in conversations with physicians already on the medical staff of any acute care facility owned or operated by Seller or any affiliate of Seller that is not among the Acute Care Hospitals including without limitation to retain such physicians on such medical staffs, (ii) at any time, making general solicitations in the ordinary course of business not directed specifically at physicians on the medical staff of the Acute Care Hospitals to recruit physicians or (iii) responding to physicians on the medical staff of any of the Acute Care Hospitals who are the initiators of contact with Seller or any affiliate of Seller, including without limitation regarding joining the medical staff of any acute care facility owned or operated by Seller or any affiliate of Seller that is not among the Acute Care Hospitals. Seller shall cause each of its affiliates to comply with the obligations imposed by this Section 4.13. In the event that the provisions contained in this Section 4.13 shall ever be deemed to exceed the time or geographic limits or any other limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum extent permitted by applicable law. -39- 4.14 Enforceability. Seller hereby acknowledges that the restrictions contained in Section 4.13 are reasonable and necessary to protect the legitimate interests of Purchaser following the Closing Date. The parties also hereby acknowledge and agree that any breach of Section 4.13 would result in irreparable injury to Purchaser and that any remedy at law for any breach of Section 4.13 would be inadequate. Notwithstanding any provision to the contrary contained in this Agreement, the parties therefore agree, and Seller hereby specifically consents that, without necessity of proof of actual damage, Purchaser may be granted temporary or permanent injunctive relief, that Purchaser shall be entitled to an equitable accounting of all earnings, profits and other benefits arising from such breach, and that Purchaser shall be entitled to recover its reasonable fees and expenses, including attorneys' fees, incurred by Purchaser in enforcing the restrictions contained in Section 4.13. 4.15 Material Contract Consents. Seller shall use its reasonable commercial good faith efforts to obtain the consents from the third parties under all Material Contracts and Material Leases, which, by the terms of such Material Contract or Material Lease, require such consent. To the extent any consents from third parties under any Contracts or Leases (to the assignment thereof to Purchaser) are not obtained as of the Closing, Seller and Purchaser shall comply with Section 9.3 and use their reasonable commercial good faith efforts to mitigate any costs, losses or damages associated with the failure to obtain such consents prior to Closing. Notwithstanding the foregoing, Seller's obtaining the consents described in this Section 4.15 (including any consents from third parties under any Contracts which are not among the Material Contracts or any Leases which are not among the Material Leases) shall not be a condition precedent to either party's obligation to close the transaction contemplated by this Agreement. 4.16 American with Disabilities Act. Seller shall, prior to Closing, cause the Hospitals to be released from the terms of the consent decree and nationwide settlement pertaining to Seller and/or Seller's affiliates regarding the Americans with Disabilities Act. 4.17 Confidentiality. Seller shall, and shall cause its employees, representatives and agents to, hold in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of Seller's counsel, by other requirements of law, all Purchaser's Confidential Information (as hereinafter defined), and Seller shall not disclose the Purchaser Confidential Information to any Person, except as otherwise may be reasonably necessary to carry out the transactions contemplated by this Agreement, including any business or diligence review by or on behalf of Seller. Seller's obligations set forth in the immediately preceding sentence shall apply (a) between the Effective Date and the Closing, with respect to Purchaser's Information, and (b) after the Closing for all Purchaser Confidential Information. For the purposes hereof, "Purchaser Confidential Information" shall mean (a) all information of any kind concerning Purchaser or any of its affiliates or owners or relating to the business or financial resources and condition of Purchaser or its affiliates and owners provided by Purchaser to Seller in connection with the transactions contemplated herein ("Purchaser's Information"), and (b) all Records and other materials and information sold to Purchaser under this Agreement relating to the Assets or the operation of the Hospitals, other than Records, material and information relating to the period prior to the Effective Time and/or which does not relate exclusively to the Hospitals ("Transferred Information") except information (i) ascertainable or obtained from public or published information, (ii) with respect to Purchaser's Information only, received from a third party not known by Seller to be under an obligation to Purchaser or any affiliate of Purchaser to keep such information confidential, (iii) which is or becomes known to the public (other than through a breach of this Agreement), or (iv) with respect to Purchaser's Information only, which was in Seller's possession prior to disclosure thereof to Purchaser in connection herewith. -40- 4.18 Seller's Obligation to Maintain Insurance Coverage. For a period of five (5) years after the Effective Time, at Seller's own expense, Seller shall either purchase a tail policy or continue to maintain insurance under Tenet HealthSystem's master insurance program for acts, errors and omissions of professional liability occurring at the Hospital Businesses during Seller's ownership of the Hospital Businesses prior to the Effective Time. Such coverage may be provided via commercial insurance, self-insurance, a captive insurer, or some combination thereof. ARTICLE V COVENANTS OF PURCHASER 5.1 Purchaser's Efforts to Close. Purchaser shall use its reasonable commercial efforts to satisfy all of the conditions precedent set forth in Articles VI and VII to its or Seller's obligations under this Agreement to the extent that Purchaser's action or inaction can control or influence the satisfaction of such conditions. 5.2 Required Governmental Approvals. Between the date of this Agreement and the Closing Date, Purchaser will: (a) use its reasonable commercial efforts to obtain, as promptly as practicable, all material Governmental Authorizations required of Purchaser to consummate the transactions contemplated hereby; and (b) reasonably cooperate with Seller in Seller's obtaining, as soon as practicable, all material Governmental Authorizations required of Seller to consummate the transactions contemplated hereby. Purchaser shall be entitled, but not obligated, to solicit estoppel certificates from any third party to any Lease of Real Property. Purchaser's failure to obtain any or all of such estoppel certificates as of the Closing Date shall not be a condition precedent to either party's obligation to close the transactions contemplated by this Agreement. 5.3 Certain Employee Matters. (a) During the period (the "Transition Period") commencing at the Effective Time and ending immediately prior to 12:01 a.m. on the calendar day immediately following the last day of the term of the Employee Leasing Agreement as to each Hospital (as to each such Hospital, the "Transition Time"), each Hospital Employee shall remain an employee of its employer as of the Effective Time (whether such employer is Seller or an affiliate of Seller), subject to normal personnel actions occurring in the ordinary course of business and the terms of any applicable collective bargaining agreements. During the Transition Period, or until such earlier time as any such Hospital Employee ceases to be an employee of such employer, each such Hospital Employee shall be leased to Purchaser from Seller or the employing affiliate on substantially the terms and conditions as are set forth in the Employee Leasing Agreement. During the Transition Period, each leased Hospital Employee shall continue to participate in all Seller Plans on the same basis as in effect immediately prior to the Effective Time, subject to the terms of the Employee Leasing Agreement. -41- (b) Purchaser covenants and agrees that it shall make offers of employment (in substantially equivalent positions), subject to the terms of the labor union agreements described on Schedule 2.13(b) and Section 5.15, to all of the persons who are employees of (i) Seller with respect to the operation of the Hospitals or (ii) any affiliate of Seller which employs individuals at any of the Hospitals (whether such employees are full time employees, part-time employees or on leave of absence) as of the Transition Time (the "Hospitals' Employees"); provided, however, that no Hospitals' Employee who is on any disability or leave of absence at the Transition Time, other than leave of absence pursuant to the Family and Medical Leave Act of 1993 or other similar local law (such laws being collectively referred to herein as the "FMLA") ("Employee on Disability"), shall become a Hired Employee and, Purchaser shall have no liability or obligation with respect to any Employee on Disability after the Transition Time. Notwithstanding the foregoing, Purchaser acknowledges that Seller has the right, but is not required, to retain any management-level Hospitals' Employee who does not accept Purchaser's employment offer made under this Section 5.3(b), which individuals will remain employed by Seller or its applicable affiliate as of the Transition Time (the "Retained Management Employees"). Any of the Hospitals' Employees who accept an offer of employment with Purchaser as of or after the Transition Time shall be referred to in this Agreement as the "Hired Employees". Purchaser shall ensure that the terms and conditions of employment (including initial position, cash compensation, shifts, benefits, including without limitation health, dental, disability, life insurance) of each of the Hired Employees on and after the Transition Time are substantially equivalent to that provided the Hospitals' Employees as of the Effective Date; Purchaser shall also ensure that a 401(k) retirement plan option is made available to the Hired Employees. (c) Purchaser shall give all Hired Employees full credit for extended sick pay (Reserve Sick) as reflected by the Sick Pay Amount as of the Closing Date, and all other paid time off pay, including CashPlus obligations of Seller and/or Seller's affiliates to such employees, either by (i) crediting such employees the time off reflected in the employment records of Seller and/or any of its affiliates immediately prior to the Effective Time or (ii) by making full payments to such employees of the amounts which such employees would have received had they taken such paid time off; provided, however, this Section 5.3(c)(ii) shall not be applicable to the Sick Pay Amount as of the Closing Date. (d) On and after the Transition Time, Hired Employees shall be eligible for a medical and hospital plan sponsored by Purchaser. Hired Employees shall be given credit for periods of employment with Seller and Seller's affiliates, as applicable, prior to the Transition Time for purposes of determining eligibility to participate and amount of benefits (including without limitation vesting of benefits) with respect to paid time off plans and retirement plans of Purchaser, and pre-existing condition limitations will be waived with respect to Hired Employees and their covered dependents under medical and hospital plans sponsored by Purchaser unless such pre-existing condition limitations were applicable prior to the Transition Time. In addition, if prior to the Transition Time a Hired Employee or his covered dependents paid any amounts towards a deductible or out-of-pocket maximum in Seller's or its affiliate's medical and health plan's current fiscal year, such amounts shall be applied toward satisfaction of the deductible or out-of-pocket maximum in the current fiscal year of Purchaser's medical and health plan that covers Hired Employees on and after the Transition Time. Purchaser agrees that, for any employee subject to any collective bargaining agreement, if any eligibility described in this section differs from eligibility described by the collective bargaining agreement, the eligibility descriptions of the collective bargaining agreement shall prevail. -42- (e) Within thirty (30) days after the Hospitals' Employees (other than the Retained Management Employees) cease to be employees of Seller and Seller's affiliates (as described in Section 4.9), such persons will be entitled to a distribution of their accounts under the Tenet Healthcare Corporation 401(k) Retirement Savings Plan. Any such Person whose account remains with the Tenet Healthcare Corporation 401(k) Retirement Savings Plan will be subject to the distribution provisions of such plan. Purchaser shall provide Seller (i) with periodic reports, at least quarterly, to identify termination dates for the Hired Employees and (ii) upon Seller's reasonable request, prompt verification of the termination dates for Hired Employees. (f) Seller shall be responsible to provide continuation coverage pursuant to the requirements of Code section 4980B and Part 6 of Title I of ERISA ("COBRA Coverage") with respect to the Hospitals' Employees (and their dependents) whose qualifying event occurred prior to the date on which such Hospitals' Employees become Hired Employees and for any of the Hospitals' Employees who do not elect to become Hired Employees. Purchaser shall be responsible to provide COBRA Coverage with respect to each of the Hired Employees (and their dependents) whose qualifying event occurs on or after the date on which such Hospitals' Employees become Hired Employees. (g) After the Transition Time, Purchaser's human resources department will give reasonable assistance to Seller's and its affiliates' human resources department with respect to Seller's and Seller's affiliates' post-Transition Time administration of Seller's and Seller's affiliates' pre-Transition Time employee pension benefit plans and employee health or welfare benefit plans for the Hospitals' Employees (other than the Retained Management Employees). Within fifteen (15) days after the Transition Time, Purchaser shall provide to Seller a list of all the Hospitals' Employees who were offered employment by Purchaser but refused such employment. (h) Purchaser acknowledges that affiliates of Seller are a party to an Election Procedure Agreement with the SEIU, an Election Procedure Agreement with United Nurses Association of California/Union of Health Care Professionals, NUHHCE, AFSCME, AFL-CIO ("UNAC"), and an Election Procedure Agreement with the California Nurses Association("CNA"), relating to and covering employees of the Hospitals (individually, an "EPA" and, collectively, the "EPAs"). On and after the Effective Time, Purchaser shall abide by and comply with Seller's affiliates' obligations under the EPAs relating to and covering the employees of the Hospitals (whether such employees are employed by Purchaser at the Effective Time or at any time thereafter), as more specifically set forth in Section 5.15 of this Agreement. All changes made by Purchaser to the terms and conditions of employment of union represented employees shall be subject to the terms of any applicable collective bargaining agreement and related agreements between Seller and any labor organization (including without limitation CNA, UNAC and SEIU and/or its affiliated locals) covering such employees. The terms of this Section 5.3(h) shall not be subject to the time limitations contained in Section 10.1 of the Agreement. The terms of this section and those set forth in Section 5.15 are expressly limited to the facilities and/or Hospitals covered by this Agreement and shall not extend to other facilities or operations owned or operated by Purchaser at the time of execution of this Agreement or those that may be acquired in the future. Purchaser disavows any obligations to recognize or bargain with any union representatives not otherwise specified in this Agreement. -43- (i) On and after the Transition Time, Purchaser shall take any and all action that may be necessary to comply with the terms and provisions of the National Labor Relations Act or the Labor Management Relations Act as a result of the consummation of the transactions contemplated by this Agreement, including, without limitation, obligations thereunder to any of the Hired Employees covered by the labor union agreements described on Schedule 2.13(b); provided, however, Seller, shall, as soon as reasonably possible after the Effective Date, provide to Purchaser all information reasonably necessary for the Purchaser's understanding and implementation of employee wages, benefits, and other conditions of employment required by these union agreements. (j) No provision of this Agreement (except with respect to expressly assumed Contracts) shall create any third party beneficiary or other rights in any employee or former employee (including any beneficiary or dependent thereof) of Seller or of any of its affiliates in respect of continued employment (or resumed employment) with Purchaser, and no provision of this Agreement (except with respect to expressly assumed Contracts) shall create any such rights in any such employee or former employee (or their respective dependents and beneficiaries) in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement of Purchaser or any of Purchaser's affiliates. Except as otherwise expressly provided above at Section 5.3 and below at Section 5.15, no provision of this Agreement shall constitute a limitation on the rights of Purchaser and its affiliates to amend, modify or terminate after the Transition Time any employee benefit plans or arrangements. 5.4 Use of Business Names. Purchaser covenants that it and its affiliates shall not use in their respective trades or businesses the names "Tenet Healthcare Corporation", "Tenet", "Tenet HealthSystem", "OrNda HealthCorp", and any other names or symbols not used exclusively at any of the Hospitals prior to the Effective Time, any abbreviations or variations thereof or service marks, symbols or logos related thereto, nor any promotional material, stationery, supplies or other items of inventory bearing either such names, symbols or abbreviations or variations thereof. 5.5 Excluded Assets. As soon as practicable after the Closing Date, Purchaser shall deliver to Seller or Seller's designee any intangible Excluded Assets found at any of the Hospitals on and after the Effective Time, without imposing any charge on Seller for Purchaser's storage or holding of same on and after the Effective Time. Seller shall be responsible for removing any and all tangible Excluded Assets within ten (10) business days after the Closing Date, at Seller's expense. -44- 5.6 Confidentiality. Purchaser shall, and shall cause its employees, representatives and agents to, hold in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of Purchaser's counsel, by other requirements of law, all Confidential Information (as hereinafter defined), and Purchaser shall not disclose the Confidential Information to any Person, except as otherwise may be reasonably necessary to carry out the transactions contemplated by this Agreement, including any business or diligence review by or on behalf of Purchaser. Purchaser's obligations set forth in the immediately preceding sentence shall apply (a) between the Effective Date and the Effective Time with respect to Confidential Information which is among the Assets and (b) after the Effective Date for all Confidential Information which is not described in subsection (a) above. For the purposes hereof, "Confidential Information" shall mean all information of any kind concerning Seller or the businesses of the Hospitals, in connection with the transactions contemplated by this Agreement except information (i) ascertainable or obtained from public or published information, (ii) received from a third party not known by Purchaser to be under an obligation to Seller or any affiliate of Seller to keep such information confidential, (iii) which is or becomes known to the public (other than through a breach of this Agreement), or (iv) which was in Purchaser's possession prior to disclosure thereof to Purchaser in connection herewith. Notwithstanding the foregoing, but subject to the terms of Section 12.8, Purchaser shall be permitted to disclose in an offering circular, confidential offering memorandum, private placement memorandum or similar documentation (the "Offering Circular") to prospective investors historical financial information regarding the Hospitals. Purchaser shall cause any Offering Circular to prominently contain the disclosures set forth on Schedule 5.6. The rights of Seller under this Section 5.6 shall be in addition to and not in substitution for the rights of Seller and Seller's affiliates under that certain Confidentiality Agreement between THC and Mogel Management Group, Inc., dated February 27, 2004 (the "Confidentiality Agreement"), which Confidentiality Agreement shall survive the Closing. Disclosure of Seller information by Purchaser to potential financing sources with respect to Purchaser shall be permitted, subject to execution by such financing sources of a confidentiality agreement reasonably acceptable to Seller. 5.7 Enforceability. Purchaser hereby acknowledges that the restrictions contained in Section 5.6 above are reasonable and necessary to protect the legitimate interests of Seller. The parties also hereby acknowledge and agree that any breach of Section 5.6 would result in irreparable injury to Seller and that any remedy at law for any breach of Section 5.6 would be inadequate. Notwithstanding any provision to the contrary contained in this Agreement, the parties therefore agree, and Purchaser hereby specifically consents that, without necessity of proof of actual damage, Seller may be granted temporary or permanent injunctive relief, that Seller shall be entitled to an equitable accounting of all earnings, profits and other benefits arising from such breach, and that Seller shall be entitled to recover its reasonable fees and expenses, including attorneys' fees, incurred by Seller in enforcing the restrictions contained in Section 5.6. 5.8 Hart-Scott-Rodino Act Filings. Purchaser shall (a) take promptly all actions necessary to make the filings required of Purchaser or its affiliates under the HSR Act, (b) comply at the earliest practicable date with any request for additional information received by Purchaser or its affiliates from the FTC or the DOJ pursuant to the HSR Act, and (c) cooperate with Seller in connection with Seller's or Seller's affiliates' filings under the HSR Act and in connection with resolving any investigation or other regulatory inquiry concerning the transactions contemplated by this Agreement commenced by either the FTC or the DOJ. All filing fees imposed in connection with Purchaser's filings under the HSR Act shall be borne by Purchaser. Notwithstanding the foregoing, Purchaser shall not be required to comply with any conditions which the FTC or DOJ may require as a condition to their approval of the transactions contemplated by this Agreement, if in Purchaser's reasonable judgment such conditions would materially and adversely affect Purchaser's rights and benefits as originally contemplated under this Agreement. -45- 5.9 Waiver of Bulk Sales Law Compliance. Purchaser hereby waives compliance by Seller with the requirements, if any, of Article 6 of the Uniform Commercial Code as in force in any state in which the Assets are located and all other similar laws applicable to bulk sales and transfers. 5.10 Indigent and Low Income Care. After the Effective Time, Purchaser shall comply in all material respects with all applicable laws related to the provision of care to indigent and low-income patients at the Hospitals. 5.11 Medical Staff. To ensure continuity of care in the community, Purchaser agrees that each Hospital's medical staff members in good standing as of the Effective Time shall maintain medical staff privileges at each such Hospital as of the Effective Time. On and after the Effective Time, the medical staff will be subject to each Hospital's Medical Staff Bylaws then in effect, to the extent consistent with applicable law and regulations, and requirements of JCAHO. 5.12 Comfort With Respect to Post-Closing Obligations Arising Under this Agreement. To provide Seller additional comfort regarding Purchaser's financial wherewithal to satisfy its obligations under this Agreement following the Closing, Purchaser shall provide quarterly summaries to Seller of the Hospitals' operating performance, including but not limited to profit and loss and net cash flow statements, and financial status, until the earlier to occur of the expiration of all of Purchaser's obligations under Section 10.3.1 of this Agreement or Seller's complete release and discharge of all obligations under the Chapman Medical Center Leases. Subject to Section 12.2 of this Agreement, Purchaser shall require that any purchaser or other assignee of substantially all of the assets of any of the Hospitals agree, in the agreement evidencing such transaction, to be jointly and severally liable with Purchaser for all of Purchaser's obligations under Section 10.3.1 of this Agreement that are attributable to the Hospital(s) being transferred to such purchaser or assignee pursuant to such agreement. Purchaser shall not be released or discharged from its obligations under Section 10.3.1 as to which the purchaser or assignee of a Hospital becomes jointly and severally liable. 5.13 Intentionally Omitted 5.14 Group Purchasing Contract. Following the Closing Date, Purchaser shall cause the Hospitals to participate in specified national purchasing contracts of Seller and its affiliates. Seller agrees that it will make available to Purchaser the opportunity for other health care facilities owned or operated by Purchaser or its affiliates to participate in such contracts. At Closing, Purchaser shall execute the "Group Purchasing Contract" attached hereto in the form of Exhibit 5.14 for such purpose, which contract shall have a term of no less than five (5) years after the Closing Date. -46- 5.15 Certain Collective Bargaining Matters. Purchaser shall cause each of the Hospitals to abide by the obligations set forth below that are applicable to such Hospital. (a) Chapman Medical Center. (i) On and after the Effective Time, Purchaser agrees to abide by the terms of the Election Procedure Agreements between Tenet California, Inc. and SEIU, CNA and UNAC and any amendments or other agreements entered into between Tenet California, Inc. and SEIU, CNA and/or UNAC prior to the Effective Time as to Chapman Medical Center and any applicable collective bargaining agreements.. (ii) Purchaser acknowledges that CNA is the collective bargaining representative of a bargaining unit of all full-time, part-time and per diem registered nurses employed at Chapman Medical Center. Purchaser acknowledges that Chapman Medical Center and CNA are parties to a collective bargaining agreement covering the above-described bargaining unit, a copy of which has been provided to Purchaser. On or before the Transition Time, Purchaser shall recognize CNA as the exclusive collective bargaining representative of the above-described unit, shall adopt and assume the collective bargaining agreement between Chapman Medical Center and CNA and all agreements related to such collective bargaining agreement, and shall retain all or substantially all of the employees covered by such collective bargaining agreement. (iii) Notwithstanding anything to the contrary in this Agreement, neither Seller nor Seller's affiliates will voluntarily agree with the SEIU prior to the Effective Time to conduct elections for employees of Chapman Medical Center covered by the applicable Election Procedure Agreement after the Effective Time. Upon selection of SEIU and/or any of its affiliated local unions, including without limitation SEIU Local 399 and SEIU Local 121 RN, United Nurses Association of California/Union of Health Care Professionals, NUHHCE, AFSCME, AFL-CIO ("UNAC") or any other labor organization pursuant to a representation election among employees of Chapman Medical Center covered by the terms of the applicable Election Procedure Agreement prior to or after the Effective Time, Purchaser shall recognize such labor organization as the collective bargaining representative and shall adopt and assume the applicable Western Regional Health Care Employees Model Contract and/or Western Regional Registered Nurse Model Contract (as applicable to professional employees) and all agreements related to such collective bargaining agreements. If such employees select a collective bargaining representative under the terms of the applicable Election Procedure Agreement prior to the Effective Time, Purchaser shall retain all or substantially all of the bargaining unit employees covered by the applicable collective bargaining agreement. (iv) All offers of employment to employees of Chapman Medical Center covered by an Election Procedure Agreement between Tenet California, Inc. and CNA, SEIU and/or UNAC shall be subject to the terms and conditions of such Election Procedure Agreement and any applicable collective bargaining agreement. (b) Coastal Communities Hospital. -47- (i) On and after the Effective Time, Purchaser agrees to abide by the terms of the Election Procedure Agreements between Tenet California, Inc. and SEIU, CNA and UNAC and any amendments or other agreements entered into between Tenet California, Inc. and SEIU, CNA and/or UNAC prior to the Effective Time as to Coastal Communities Hospital and any applicable collective bargaining agreements. (ii) Purchaser acknowledges that CNA is the collective bargaining representative of a bargaining unit of all full-time, part-time and per diem registered nurses employed at Coastal Communities Hospital. Purchaser acknowledges that Coastal Communities Hospital and CNA are parties to a collective bargaining agreement covering the above-described bargaining unit, a copy of which has been provided to Purchaser. On or before the Effective Time, Purchaser shall recognize CNA as the exclusive collective bargaining representative of the above-described unit, shall adopt and assume the collective bargaining agreement between Coastal Communities Hospital and CNA and all agreements related to such collective bargaining agreement, and shall retain all or substantially all of the employees covered by such collective bargaining agreement. (iii) Purchaser acknowledges that representation elections were conducted on July 16, 2004 by the National Labor Relations Board in Cases 31-RC-8403 and 31-RC-8404 among employees at Coastal Communities Hospital in the following bargaining units: (i) full-time, part-time and per diem service and maintenance, technical, skilled maintenance and business office clerical employees, and (ii) full-time, part-time and per diem professional employees (excluding registered nurses and physicians). Purchaser acknowledges that after such elections, SEIU Local 399 filed objections to both elections which objections are currently pending. Notwithstanding anything to the contrary in this Agreement, Purchaser agrees that neither Seller nor Seller's affiliates will voluntarily agree with the SEIU prior to the Effective Time to conduct elections for employees of Coastal Communities Hospital covered by the applicable Election Procedure Agreement after the Effective Time. Upon selection of SEIU Local 399 in either bargaining unit prior to or after the Effective Time, Purchaser shall recognize SEIU Local 399 as the collective bargaining representative and shall adopt and assume the applicable Western Regional Health Care Employees Model Contract and/or Western Regional Registered Nurse Model Contract (as applicable to professional employees) and all agreements related to such collective bargaining agreements. If SEIU Local 399 is selected as the collective bargaining representative prior to the Effective Time, Purchaser shall retain all or substantially all of the bargaining unit employees covered by the applicable collective bargaining agreement. (iv) All offers of employment to employees of Coastal Communities Hospital covered by an Election Procedure Agreement between Tenet California, Inc. and CNA, SEIU and/or UNAC shall be subject to the terms and conditions of such Election Procedure Agreement and any applicable collective bargaining agreement. (c) Western Medical Center - Anaheim. (i) On and after the Effective Time, Purchaser agrees to abide by the terms of the Election Procedure Agreements between Tenet California, Inc. and SEIU, CNA, and UNAC as to Western Medical Center - Anaheim and any applicable collective bargaining agreements. -48- (ii) Purchaser acknowledges that CNA is the collective bargaining representative of a bargaining unit of all full-time, part-time and per diem registered nurses employed at Western Medical Center - Anaheim. Purchaser acknowledges that Western Medical Center - Anaheim and CNA are parties to a collective bargaining agreement covering the above-described bargaining unit, a copy of which has been provided to Purchaser. On or before the Effective Time, Purchaser shall recognize CNA as the exclusive collective bargaining representative of the above-described unit, shall adopt and assume the collective bargaining agreement between Western Medical Center - Anaheim and CNA and all agreements related to such collective bargaining agreement, and shall retain all or substantially all of the employees covered by such collective bargaining agreement. (iii) Purchaser acknowledges that SEIU Local 399 is the collective bargaining representative of a bargaining unit of full-time, part-time and per diem service and maintenance, technical, skilled maintenance and business office clerical employees employed by Western Medical Center - Anaheim at its hospital facility and its three (3) affiliated clinics. Purchaser acknowledges that Western Medical Center - Anaheim and SEIU Local 399 are parties to a collective bargaining agreement covering the above-described bargaining unit, a copy of which has been provided to Purchaser. On or before the Effective Time, Purchaser shall recognize SEIU Local 399 as the exclusive collective bargaining representative of the above-described unit, shall adopt and assume the collective bargaining agreement between Western Medical Center - Anaheim and CNA and all agreements related to such collective bargaining agreement, and shall retain all or substantially all of the employees covered by such collective bargaining agreement. (iv) All offers of employment to employees of Western Medical Center - Anaheim covered by an Election Procedure Agreement between Tenet California, Inc. and CNA, SEIU and/or UNAC shall be subject to the terms and conditions of such Election Procedure Agreement and any applicable collective bargaining agreement. (d) Western Medical Center - Santa Ana. (i) On and after the Effective Time, Purchaser agrees to abide by the terms of the Election Procedure Agreements between Tenet California, Inc. and Service Employees International Union SEIU, CNA and UNAC and any amendments or other agreements entered into between Tenet California, Inc. and SEIU, CNA and/or UNAC prior to the Effective Time as to Western Medical Center - Santa Ana and any applicable collective bargaining agreements. (ii) Purchaser agrees that nothing in this Agreement prohibits Seller and/or Seller's affiliates from agreeing with CNA prior to the Effective Time to conduct elections for employees of Western Medical Center - Santa Ana covered by the applicable Election Procedure Agreement whether such elections occur prior to or after the Effective Time. Upon selection by registered nurses of CNA, UNAC or any other labor organization as their collective bargaining representative pursuant to a representation election under the terms of the applicable Election Procedure Agreement prior to or after the Effective Time, Purchaser shall recognize such labor organization and shall adopt and assume the applicable registered nurses collective bargaining agreement and all agreements related to such collective bargaining agreement. If such registered nurses select a collective bargaining representative under the terms of the applicable Election Procedure Agreement prior to the Effective Time, Purchaser shall retain all or substantially all of the bargaining unit employees covered by the applicable collective bargaining agreement. -49- (iii) Purchaser agrees that nothing in this Agreement prohibits Seller and/or Seller's affiliates from agreeing with the SEIU prior to the Effective Time to conduct elections for employees of Western Medical Center - - Santa Ana covered by the applicable Election Procedure Agreement whether such elections occur prior to or after the Effective Time. Upon selection of SEIU and/or any of its affiliated local unions, including without limitation SEIU Local 399 and SEIU Local 121 RN, UNAC or any other labor organization pursuant to a representation election among employees of Western Medical Center - Santa Ana covered by the terms of the applicable Election Procedure Agreement prior to or after the Effective Time, Purchaser shall recognize such labor organization as the collective bargaining representative and shall adopt and assume the applicable Western Regional Health Care Employees Model Contract and/or Western Regional Registered Nurse Model Contract (as applicable to professional employees) and all agreements related to such collective bargaining agreements. If such employees select a collective bargaining representative under the terms of the applicable Election Procedure Agreement prior to the closing of the sale, the Purchaser shall retain all or substantially all of the bargaining unit employees covered by the applicable collective bargaining agreement. (iv) All offers of employment to employees of Western Medical Center-Santa Ana covered by an Election Procedure Agreement between Tenet California, Inc. and CNA, SEIU and/or UNAC shall be subject to the terms and conditions of such Election Procedure Agreement and any applicable collective bargaining agreement ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER Seller's obligation to sell the Assets and to close the transactions as contemplated by this Agreement shall be subject to the satisfaction of each of the following conditions on or prior to the Closing Date unless specifically waived in writing by Seller in whole or in part at or prior to the Closing: 6.1 Signing and Delivery of Instruments. Purchaser shall have executed and delivered all documents, instruments and certificates required to be executed and delivered pursuant to the provisions of this Agreement. Purchaser acknowledges that Purchaser shall not satisfy the condition precedent set forth in this Section 6.1 (as it relates to the delivery of the amount set forth in Section 1.7.1) unless Purchaser initiates the wire transfer of the amount set forth in Section 1.7.1 to Seller, and provides to Seller a Federal Reserve wire reference number with respect thereto, on or before 12:00 noon (Pacific time) on the Closing Date. 6.2 Unfavorable Action or Proceeding. On the Closing Date, no orders, decrees, judgments or injunctions of any court or Governmental Entity shall be in effect, and no claims, actions, suits, proceedings, arbitrations or investigations shall be pending or threatened, which challenge or seek to challenge, or which could prevent or cause the rescission of, the consummation of the transactions contemplated in this Agreement. -50- 6.3 Performance of Covenants. Purchaser shall have in all respects performed or complied with each and all of the obligations, covenants, agreements and conditions required to be performed or complied with by it on or prior to the Closing Date; provided, however, this condition will be deemed to be satisfied unless (a) Purchaser was given written notice of such failure to perform or comply and did not or could not cure such failure to perform or comply within fifteen (15) business days after receipt of such notice and (b) the respects in which such obligations, covenants, agreements and conditions have not been performed have had or would more likely than not result in a material adverse effect (whether individually or in the aggregate) on Purchaser's ability to perform its obligations hereunder. Seller shall not be required to give Purchaser the notice described in Section 6.3(a) unless and until Seller is aware, or based on the applicable facts and circumstances, it is reasonable that Seller should be aware of Purchaser's alleged failure to perform or comply with the applicable terms of this Agreement. 6.4 Opinion of Counsel for Purchaser. Seller shall have received the favorable opinion of Purchaser's counsel, dated the Closing Date, in substantially the form set forth in Exhibit 6.4 attached to this Agreement. 6.5 Hart Scott Rodino Filings. All filings required to be made and notices required to be given pursuant to the HSR Act shall have been made, all approvals or consents required thereby shall have been obtained and the waiting periods required thereby, if any, shall have expired or terminated. 6.6 Governmental Authorizations. Purchaser shall have obtained all material licenses, permits, certificates of need and authorizations from Governmental Entities that are necessary or required for completion of the transactions contemplated by this Agreement including reasonable assurances that any material licenses, permits, certificates of need and authorizations not actually issued as of the Closing will be issued following Closing (which may include oral assurances from appropriate Governmental Entities). 6.7 Schedules. The material provisions of the Exhibits, Disclosure Schedule and schedules attached to this Agreement that were updated by Purchaser after the Effective Date, if any, shall be acceptable to Seller in its reasonable discretion provided, however, that Purchaser shall be deemed to have obtained Seller's approval to any such material updates of the Exhibits, Disclosure Schedule or schedules if Purchaser gives Seller written notice of an update and Purchaser does not receive from Seller a written notice of objection to such action within ten (10) business days after Seller receives Purchaser's written notice. 6.8 Representations and Warranties. The representations and warranties of Purchaser contained in this Agreement will be true and correct in all respects, except where the failure of such representations and warranties to be true and correct would not have a material adverse effect (whether individually or in the aggregate) on Purchaser's ability to consummate the transactions contemplated hereby, when made and on and as of the Closing Date (or the date otherwise specified herein) as though such representations and warranties had been made on and as of such date. -51- ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER Purchaser's obligation to purchase the Assets and to close the transactions contemplated by this Agreement shall be subject to the satisfaction of each of the following conditions on or prior to the Closing Date unless specifically waived in writing by Purchaser in whole or in part at or prior to the Closing. 7.1 Governmental Authorizations. Purchaser shall have obtained all material licenses, permits, certificates of need and authorizations (but not provider numbers, which are governed by the second sentence of this Section 7.1) from Governmental Entities that are necessary or required for the consummation of the transactions herein, including for Purchaser to operate the Hospitals in a manner consistent with Seller's operation of the Hospitals immediately prior to the Closing, including reasonable assurances (which assurances are reasonably acceptable to Purchaser) that any material licenses, permits, certificates of need and authorizations (but not provider numbers) not actually issued as of the Closing will be issued following Closing (which may include oral assurances from appropriate Governmental Entities). Except with respect to those Medicare numbers and agreements, if any, which Purchaser elects in its sole discretion to assume on or before October 14, 2004, Purchaser shall have obtained reasonable assurances (which assurances are reasonably acceptable to Purchaser) that it will be issued new Medicare and Medi-Cal provider numbers following Closing (which may include oral assurances from appropriate Governmental Entities). Notwithstanding the foregoing, for purposes of this Section 7.1, (i) Purchaser shall be deemed to have obtained reasonable assurances that it will be issued new Medicare and Medi-Cal provider numbers following Closing upon the receipt of written confirmation from the FI of the FI's approval of all of Purchaser's Form 855 applications, (ii) Purchaser's failure to have obtained a "tying notice" as of the Closing Date indicating that Purchaser can bill under the Medicare and/or Medi-Cal programs for services rendered at the Hospitals shall not be taken into account for purposes of determining whether Purchaser has obtained reasonable assurances that it will be issued new Medicare and Medi-Cal provider numbers following the Closing, and (iii) if Medicare requires a survey of the psychiatric sub-units of such Hospitals as a condition to the issuance of a new Medicare number to the Hospitals, neither the completion of such survey, nor any failures to obtain any licenses, permits, authorizations, provider numbers or provider agreements at the Hospitals as a result thereof, shall constitute a condition precedent to Purchaser's obligation to consummate the transactions contemplated by this Agreement. Seller shall have obtained all material permits and authorizations from Governmental Entities that are necessary or required for the consummation of the transactions herein, including reasonable assurances (which assurances are reasonably acceptable to Purchaser) that any such material permits and authorizations not actually issued as of the Closing will be issued following Closing (which may include oral assurances from appropriate Governmental Entities). -52- 7.2 Signing and Delivery of Instruments. Seller shall have executed and delivered all documents, instruments and certificates required to be executed and delivered pursuant to all of the provisions of this Agreement. 7.3 Performance of Covenants. Seller shall have in all material respects performed or complied with each and all of the obligations, covenants, agreements and conditions required to be performed or complied with by Seller on or prior to the Closing Date; provided, however, this condition will be deemed to be satisfied unless (a) Seller was given written notice of such failure to perform or comply and did not or could not cure such failure to perform or comply within fifteen (15) business days after receipt of such notice and (b) the respects in which such obligations, covenants, agreements and conditions have not been performed have had or would more likely than not result in a material adverse effect (whether individually or in the aggregate) on the Assets or the business of the Hospitals or Seller's ability to perform its obligations hereunder. Purchaser shall not be required to give Seller the notice described in Section 7.3(a) unless and until Purchaser is aware, or based on the applicable facts and circumstances, it is reasonable that Purchaser should be aware of Seller's alleged failure to perform or comply with the applicable terms of this Agreement. 7.4 Unfavorable Action or Proceeding. On the Closing Date, no orders, decrees, judgments or injunctions of any court or Governmental Entity shall be in effect, and no claims, actions, suits, proceedings, arbitrations or investigations shall be pending or threatened, which challenge or seek to challenge, or which could prevent or cause the rescission of, the consummation of the transactions contemplated in this Agreement. 7.5 Hart Scott Rodino Filings. All filings required to be made and notices required to be given pursuant to the HSR Act shall have been made, all approvals or consents required thereby shall have been obtained and the waiting periods required thereby, if any, shall have expired or terminated. 7.6 Opinion of Counsel. Purchaser shall have received the favorable opinion of Seller's in-house counsel dated the Closing Date, in substantially the form attached hereto as Exhibit 7.6. 7.7 Title Insurance Policy. Purchaser shall have received a fully effective Owner's Title Policy issued to Purchaser by the Title Company covering the Owned Real Property and a fully effective Leasehold Title Policy covering any ground lease or other lease of record specified on Schedule 4.8 in the amount of the full insurable value of the Owned Real Property and any such ground lease or other lease of record, respectively (which amount shall be set forth in Schedule 11.1(b)). The Owner's Title Policy shall show fee simple title to the Owned Real Property vested in Purchaser, and the Leasehold Title Policy shall show valid leasehold title to the Leased Real Property which is subject to any ground lease or other lease of record specified on Schedule 4.8, subject only to: (a) current real estate taxes not yet due and payable; and (b) the permitted title exceptions listed in Schedule 7.7 hereto (the "Permitted Exceptions"). The Title Policy shall have all standard and general exceptions deleted so as to afford full "extended form coverage". -53- 7.8 Environmental Survey. Purchaser shall have received the Environmental Survey referred to in Section 4.12. 7.9 Exhibits and Schedules. The material provisions of the Exhibits, Disclosure Schedule and all schedules attached to this Agreement that were updated by Seller after the Effective Date, if any, shall be acceptable to Purchaser in its reasonable discretion provided, however, that Seller shall be deemed to have obtained Purchaser's approval to any such material updates of the Exhibits, Disclosure Schedule or schedules if Seller gives Purchaser written notice of an update and Seller does not receive from Purchaser a written notice of objection to such action within ten (10) business days after Purchaser receives Seller's written notice. 7.10 Representations and Warranties. The representations and warranties of Seller contained in this Agreement will be true and correct in all respects, except where the failure of such representations and warranties to be true and correct would not have a material adverse effect (whether individually or in the aggregate) on Seller's ability to consummate the transactions contemplated hereby and the operation of the Hospital following the Closing Date, when made and on and as of the Closing Date (or the date otherwise specified herein) as though such representations and warranties had been made on and as of such date. ARTICLE VIII TERMINATION 8.1 Termination. This Agreement may be terminated at any time prior to Closing: (a) by the mutual written consent of the parties; (b) by Seller if a material breach of this Agreement has been committed by Purchaser and such breach has not been (i) waived in writing by Seller or (ii) cured by Purchaser to the reasonable satisfaction of Seller within fifteen (15) business days after service by Seller upon Purchaser of a written notice which describes the nature of such breach; provided, however, that if the obligation which Purchaser fails to perform is other than the failure to make payment of money, and greater than fifteen (15) business days are required to cure or perform said obligation, then Purchaser shall not be in default of this Agreement and the Agreement shall not terminated as provided hereinabove if Purchaser commences to cure the non-performance within said fifteen (15) day period and diligently pursues said cure to completion within five (5) business days thereafter; (c) by Purchaser if a material breach of this Agreement has been committed by Seller and such breach has not been (i) waived in writing by Purchaser or (ii) cured by Seller to the reasonable satisfaction of Purchaser within fifteen (15) business days after service by Purchaser upon Seller of a written notice which describes the nature of such breach; provided, however, that if the obligation which Seller fails to perform is other than the failure to make payment of money, and greater than fifteen (15) business days are required to cure or perform said obligation, then Seller shall not be in default of this Agreement and the Agreement shall not terminated as provided hereinabove if Seller commences to cure the condition of non-performance within said fifteen (15) day period and diligently pursues said cure to completion within five (5) business days thereafter; -54- (d) by Purchaser if any of the conditions in Article VII have not been satisfied as of the Closing Date or if satisfaction of any condition in Article VII is or becomes impossible and Purchaser has not waived such condition in writing on or before the Closing Date (provided that the failure to satisfy the applicable condition or conditions has occurred by reason other than (i) through the failure of Purchaser to comply with its obligations under this Agreement or (ii) Seller's failure to provide its closing deliveries on the Closing Date as a result of Purchaser not being ready, willing and able to close the transaction on the Closing Date); (e) by Seller if any of the conditions in Article VI have not been satisfied as of the Closing Date or if satisfaction of any such condition in Article VI is or becomes impossible and Seller has not waived such condition in writing on or before the Closing Date (provided that the failure to satisfy the applicable condition or conditions has occurred by reason other than (i) through the failure of Seller to comply with its obligations under this Agreement or (ii) Purchaser's failure to provide its closing deliveries on the Closing Date as a result of Seller not being ready, willing and able to close the transaction on the Closing Date); (f) by Purchaser, upon the delivery of a Casualty Termination Notice to Seller in accordance with Section 1.14; (g) by either Purchaser or Seller if the Closing has not occurred (other than through the failure of any party seeking to terminate this Agreement to comply fully with its obligations under this Agreement) on or before December 31, 2004 (the "Termination Date"); (h) by Purchaser, if, since the Effective Date, there has occurred any event, change or development that has had a "material adverse effect" on the assets, financial condition, or operations of the Hospitals considered in the aggregate; provided, however, that notwithstanding anything to the contrary contained in this Agreement, the following will be presumed not to give rise to a "material adverse effect": (a) changes or proposed changes to any law, reimbursement rates or policies of governmental agencies or bodies that are generally applicable to hospitals or healthcare facilities and (b) requirements, reimbursement rates, policies or procedures of third party payors or accreditation commissions or organizations that are generally applicable to hospitals or healthcare facilities; (i) by Seller, unless Purchaser has previously waived the condition precedent set forth at Section 7.1 relating to obtaining licensure with respect to Hospitals and "reasonable assurances" of issuance of a Medicare provider number, if Purchaser has not received, on or before December 15, 2004, written confirmation from the FI of its approval of the Purchaser's Form 855, and such failure by Purchaser to receive approval from the FI within such time frame is not attributable to a breach by Seller of its covenant to cooperate set forth in Section 4.4 of this Agreement provided, however, that no such breach by Seller shall be deemed to have occur for purposes of this Section 8.1(i) unless Purchaser has provided not less than fifteen (15) days prior written notice to Seller detailing, with reasonably particularity, the nature of such alleged breach of Section 4.4 and Seller has failed to cure such breach to the reasonable satisfaction of Purchaser by the end of such fifteen (15) day period; or -55- (j) by Purchaser, on or before October 6, 2004, if in Purchaser's reasonable discretion any item(s) identified in the Surveys, individually or in the aggregate, would materially adversely affect the ability of Purchaser to obtain commercial financing with respect to the acquisition of the Hospitals and the Assets. 8.2 Termination Consequences. If this Agreement is terminated pursuant to Section 8.1: (a) all further obligations of the parties under this Agreement shall terminate, except that the obligations in Sections 1.4, 5.6, 12.3, 12.6, 12.8, and 12.12 shall survive; (b) each party shall pay the costs and expenses incurred by it in connection with this Agreement, except as provided in Section 12.12; and (c) nothing shall prevent any party hereto from pursuing any of its legal rights or remedies that may be granted to any such party by law against any other party to this Agreement, except that no party shall be entitled to obtain Consequential Damages. ARTICLE IX POST-CLOSING MATTERS 9.1 Excluded Assets and Excluded Liabilities; Misdirected Payments. (a) Subject to Section 11.2 hereof, any asset (including Accounts Receivable) or any liability, all other remittances and all mail and other communications that is an Excluded Asset or an Excluded Liability (a) pursuant to the terms of this Agreement, (b) as otherwise determined by the parties' mutual written agreement or (c) absent such agreement, as determined by adjudication by a court or similar tribunal, and which comes into the possession, custody or control of Purchaser (or its respective successors-in-interest, assigns or affiliates) shall within ten (10) business days following receipt be transferred, assigned or conveyed by Purchaser (and its respective successors-in-interest, assigns and affiliates) to Seller at Seller's cost, unless otherwise agreed by the Parties. The portion of any disproportionate share payments received by Purchaser that are treated as Excluded Assets pursuant to Section 9.1(c) below shall be remitted to Seller in accordance with the foregoing requirements. Until such transfer, assignment and conveyance, Purchaser (and its respective successors-in-interest, assigns and affiliates) shall not have any right, title or interest in or obligation or responsibility with respect to such asset or liability except that Purchaser shall hold such asset in trust for the benefit of Seller. Purchaser (and its respective successors-in-interest, assigns and affiliates) shall have neither the right to offset amounts payable to Seller under this Section 9.1(a) against, nor the right to contest its obligation to transfer, assign and convey to Seller because of, outstanding claims, liabilities or obligations asserted by Purchaser against Seller including but not limited to pursuant to the post-Closing Cash Purchase Price adjustment of Section 1.3 and the indemnification provisions of Section 10.2. If Purchaser does not remit any payments or remittances due to Seller under this Section 9.1(a) in accordance with the first sentence of this Section 9.1(a), such payments or remittances shall bear interest at the Prime Rate in effect on the calendar day upon which such payment was required to be made to Seller (the "Seller Payment Due Date"), plus five percent (5%) per annum (or the maximum rate allowed by law, whichever is less), compounded daily, such interest accruing after the Seller Payment Due Date until payment including all interest thereon, is made to Seller. With respect to payment received by Purchaser on account of Transition Services, this Section 9.1(a) shall be subject to the provisions of Section 11.3. The terms of this Article IX shall not be subject to the time limitations contained in Section 10.1 of this Agreement. -56- (b) Any asset or any liability, all other remittances and all mail and other communications that is an Asset or an Assumed Liability (a) pursuant to the terms of this Agreement, (b) as otherwise determined by the parties' mutual written agreement or (c) absent such agreement, as determined by adjudication by a court or similar tribunal, and which comes into the possession, custody or control of Seller (or its respective successors-in-interest, assigns or affiliates) shall within ten (10) business days following receipt be transferred, assigned or conveyed by Seller (and its respective successors-in-interest, assigns and affiliates) to Purchaser at Purchaser's cost, unless otherwise agreed by the Parties. Until such transfer, assignment and conveyance, Seller (and its respective successors-in-interest, assigns and affiliates) shall not have any right, title or interest in or obligation or responsibility with respect to such asset or liability except that Seller shall hold such asset in trust for the benefit of Purchaser. Seller (and its respective successors-in-interest, assigns and affiliates) shall have neither the right to offset amounts payable to Purchaser under this Section 9.1(b) against, nor the right to contest its obligation to transfer, assign and convey to Purchaser because of, outstanding claims, liabilities or obligations asserted by Seller against Purchaser including but not limited to pursuant to the indemnification provisions of Section 10.3. If Seller does not remit any payments or remittances due to Purchaser under this Section 9.1(b) in accordance with the first sentence of this Section 9.1(b), such payments or remittances shall bear interest at the Prime Rate in effect on the calendar day upon which such payment was required to be made to Purchaser (the "Purchaser Payment Due Date"), plus five percent (5%) per annum (or the maximum rate allowed by law, whichever is less), compounded daily, such interest accruing after the Purchaser Payment Due Date until payment including all interest thereon, is made to Seller. The terms of this Article IX shall not be subject to the time limitations contained in Section 10.1 of this Agreement. (c) Notwithstanding any other terms herein to the contrary, the parties agree that any disproportionate share Medi-Cal payments (whether 855 or 1255) received related to the Hospitals shall be allocated between the parties as follows: (a) any disproportionate share Medi-Cal payments made in connection with the State of California's 2003- 2004 fiscal year (ending June 30, 2004) shall constitute an Excluded Asset; (b) Seller shall be paid a fraction of the disproportionate share Medi-Cal payments received in connection with the State's 2004- 2005 fiscal year (beginning July 1, 2004) for the Hospitals ("2005 DSH Payments") based on a fraction the numerator of which is the number of days from and including July 1, 2004 through the Closing Date and the denominator of which is three hundred sixty (360), and the remainder of all such 2005 DSH Payments shall be retained by, and the property of, the Purchaser; and (c) all disproportionate share Medi-Cal payments received in connection with the Hospitals relating to periods after the State's 2004-2005 fiscal year shall be fully retained by, and be the property of, the Purchaser. 9.2 Preservation and Access to Records After the Closing. -57- (a) From the Closing Date until seven (7) years after the Closing Date or such longer period as required by law (the "Document Retention Period"), Purchaser shall keep and preserve all medical records, patient records, medical staff records and other books and records which are among the Assets as of the Effective Time, but excluding any records which are among the Excluded Assets. Purchaser will afford to the representatives of Seller, including its counsel and accountants, full and complete access to, and copies (including, without limitation, color laser copies) of, such records with respect to time periods prior to the Effective Time (including, without limitation, access to records of patients treated at the Hospitals prior to the Effective Time) during normal business hours after the Effective Time, to the extent reasonably needed by Seller or Seller's affiliates for business purposes. Purchaser acknowledges that, as a result of entering into this Agreement and operating the Hospitals, it will gain access to patient records and other information which are subject to rules and regulations concerning confidentiality. Purchaser shall abide by any such rules and regulations relating to the confidential information it acquires. Purchaser shall maintain the patient and medical staff records at the Hospitals in accordance with applicable law and the requirements of relevant insurance carriers. After the expiration of the Document Retention Period, if Purchaser intends to destroy or otherwise dispose of any of the documents described in this Section 9.2(a), Purchaser shall provide written notice to Seller of Purchaser's intention no later than forty-five (45) calendar days prior to the date of such intended destruction or disposal. Seller shall have the right, at its sole cost, to take possession of such documents during such forty-five (45) calendar day period. If Seller does not take possession of such documents during such forty-five (45) calendar day period, Purchaser shall be free to destroy or otherwise dispose of such documentation upon the expiration of such forty-five (45) calendar day period. Any access granted to Seller shall be at Seller's sole cost and expense, and shall be at such a time and in such a manner as does not unreasonably interfere with the operations of the Hospitals and is permitted by HIPAA and other applicable confidentiality laws. (b) Purchaser shall give full cooperation to Seller, Seller's affiliates and their insurance carriers in respect of the defense of claims by third parties against Seller or any affiliate of Seller, in respect of events occurring prior to the Effective Time with respect to the operation of the Hospitals. Such cooperation shall include, without limitation, making the Hired Employees available for interviews, depositions, hearings and trials. Such cooperation shall also include making all of its employees available to assist in the securing and giving of evidence and in obtaining the presence and cooperation of witnesses (all of which shall be done without payment of any fees or expenses to Purchaser or to such employees). In addition, Seller and Seller's affiliates shall be entitled to remove from the Hospitals originals of any such records, but only for purposes of pending litigation involving the persons to whom such records refer, as certified in writing prior to removal by counsel retained by Seller or any of Seller's affiliates in connection with such litigation. Any records so removed from the Hospitals shall be promptly returned to Purchaser following Seller's or its applicable affiliate's use of such records. Any access granted to Seller shall be at Seller's sole cost and expense, and shall be at such a time and in such a manner as does not unreasonably interfere with the operations of the Hospitals and is permitted by HIPAA and other applicable confidentiality laws. (c) In connection with (i) the transition of the Hospitals pursuant to the transaction contemplated by this Agreement, (ii) Seller's rights to the Excluded Assets, (iii) Seller's obligations under the Excluded Liabilities and (iv) Seller's preparation of the Final Balance Sheet pursuant to Section 1.3, Purchaser shall after the Effective Time give Seller, Seller's affiliates and their respective representatives access during normal business hours to Purchaser's books, accounts and records and all other relevant documents and information with respect to the assets, liabilities and businesses of the Hospitals as representatives of Seller and Seller's affiliates may from time to time reasonably request, all in such manner as not to unreasonably interfere with the operations of the Hospitals. Seller acknowledges that it shall coordinate its activities contemplated by this Section 9.2(c) through Larry Anderson and William Thomas, or their designee. -58- (d) Purchaser and its representatives shall be given access by Seller during normal business hours to the extent reasonably needed by Purchaser for business purposes to all documents, records, correspondence, work papers and other documents retained by Seller pertaining to any of the Assets or with respect to the operation of the Hospitals prior to the Effective Time, all in such manner as to not interfere unreasonably with Seller's business. Such documents and other materials shall be, at Seller's option, either (i) copied by Seller for Purchaser at Purchaser's expense, or (ii) removed by Purchaser from the premises, copied by Purchaser and promptly returned to Seller. (e) Purchaser shall comply with, and be solely responsible for, all obligations under the Standards for Privacy of Individually Identifiable Health Information (45 CFR Parts 160 and 164) promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 with respect to the operation of the Hospitals on and after the Effective Time. (f) Purchaser shall cooperate with Seller, on a timely basis and as reasonably requested by Seller, in connection with the provision of data of the Hospitals and other information required by Seller for reporting to the JCAHO for the remainder of the quarterly period in which the Closing has occurred. (g) To the maximum extent permitted by law, if any Person requests or demands, by subpoena or otherwise, any documents relating to the Excluded Liabilities, including without limitation, documents relating to the operations of any of the Hospitals or any of the Hospitals' committees prior to the Effective Time, prior to any disclosure of such documents, Purchaser shall notify Seller and shall provide Seller with the opportunity to object to, and otherwise coordinate with respect to, such request or demand; provided, however, Seller shall be responsible for raising any such objections in a timely fashion. 9.3 Provision of Benefits of Certain Contracts. If, as of the Effective Time, Seller is unable to obtain any consent to the assignment of Seller's interest in a Material Contract or a Material Lease, or if Purchaser is unable to enter into a new contract with respect to an Excluded Multi-Facility Contract, until such consent is obtained or a new contract is obtained by Purchaser prior to or following the Closing (Seller shall use reasonable commercial efforts to cooperate with Purchaser's efforts to obtain any such consent or new contract prior to or following the Closing), Seller shall use reasonable commercial efforts to provide Purchaser the benefits of any such Material Contract or Material Lease and the applicable Hospital's portion of any Excluded Multi-Facility Contract selected by Purchaser, cooperate in any reasonable and lawful arrangement designed to provide such benefits to Purchaser, and allow Purchaser to directly enforce such Material Contract or Material Lease against the applicable third parties thereto. Purchaser shall use reasonable commercial efforts to perform, on behalf of Seller, the obligations of Seller thereunder or in connection therewith arising on and after the Effective Time, if Seller has previously obtained (or Purchaser will obtain) any benefits thereunder, but only to the extent that such action would not result in a material default thereunder or in connection therewith and such obligation would have been, in the case of an Excluded Multi-Facility Contract, an obligation of Purchaser had it entered into a new contract on substantially similar terms. -59- 9.4 Closing of Financials. Purchaser shall cause each of the CFOs to complete the standardized closing of Seller's financial records through the Closing Date including, without limitation, the closing of general ledger account reconciliations (collectively, the "Closing of Financials"). Purchaser shall cause each of the CFOs to use his or her good faith efforts to complete the Closing of Financials by no later than the date which is thirty (30) days after the Closing Date. Seller shall reimburse Purchaser for all payroll charges and other out-of-pocket expenses of Purchaser associated with the time which each of the CFOs devotes to the Closing of Financials. Such reimbursement shall occur no later than the date which is thirty (30) days after Purchaser provides a written statement to Seller which details such charges and expenses. Seller shall hold Purchaser harmless for any errors which are made by any of the CFOs during the course of the Closing of Financials, provided that such errors are not the result of gross negligence, fraud or intentional misconduct. 9.5 Medicare Bad Debts (a) With respect to any service provided at the Hospitals as to which Purchaser elects to take assignment of Seller's provider number, Seller shall be entitled to receive Medicare bad debt reimbursement associated with services furnished prior to Closing ("Seller's Bad Debts"). Seller shall have the right, in its sole discretion, to require that Purchaser submit a claim for reimbursement to the Center for Medicare Services ("CMS") for a Seller's Bad Debt on Purchaser's cost report(s) for the period in which such Seller's Bad Debt becomes uncollectible by Seller. (b) If Seller requests that Purchaser submit one or more Seller's Bad Debt claims to CMS, as contemplated by this Section 9.5, Seller shall provide to Purchaser a list of the Seller's Bad Debts to be claimed with a certification reasonably acceptable to Purchaser and Seller. (c) Purchaser shall remit to Seller the full amount of reimbursement received by Purchaser for Seller's Bad Debts within ten (10) business days of the tentative settlement of any cost report in which Seller's Bad Debts have been claimed pursuant to this Section 9.5. The parties will reconcile the prior payment made based on the tentative settlement pursuant to the immediately preceding sentence, with the final amount set forth in the final settlement of the cost report(s), by the making of a cash payment so as to cause the net aggregate amount paid by Purchaser to Seller with respect to any given Seller's Bad Debt to be equal to the amount set forth on the final settlement. Any additional payment due to Seller by Purchaser as a result of the cost report audit of Seller's Bad Debts claims submitted by Purchaser and/or any Final Settlement shall be remitted to Seller within ten (10) days of Purchaser's receipt of the Notice of Program Reimbursement (NPR) for the cost report(s) in question. Any payment due to Purchaser from Seller as a result of a cost report audit and/or final settlement shall be remitted to Purchaser within ten (10) days of written notice regarding the final settlement from Purchaser. -60- 9.6 OSHPD; OSHPD Reporting. (a) The California Office of Statewide Health Planning and Development ("OSHPD") has requested that Seller and its affiliates provide to OSHPD certain assurances that the purchaser of the Hospitals be informed regarding California law applicable to seismic conditions relating to acute care hospital facilities and, in particular, the condition and/or status of the Hospitals relative to such requirements. Accordingly, Purchaser acknowledges that it has received from Seller the due diligence information that is listed on Schedule 9.6 with respect to matters relating to the seismic condition of the Hospitals. (b) As of the Effective Date, Seller is in discussions with OSHPD regarding the potential requirement (in connection with the sale of the Hospitals) that Seller prepare and provide to OSHPD a nonstructural evaluation and list of all nonstructural deficiencies with respect to the Hospitals (the "Nonstructural Evaluation"). If OSHPD requires that Seller in fact prepare and provide to OSHPD the Nonstructural Evaluation and Seller is required to undertake any portion of the Nonstructural Evaluation after the Closing Date, Purchaser shall provide Seller, Seller's affiliates and their respective representatives access during normal business hours to the Hospitals in order to undertake the Nonstructural Evaluation, as representatives of Seller and Seller's affiliates may from time to time reasonably request, all in such manner as not to unreasonably interfere with the operations of the Hospitals. Seller shall bear the costs incurred by Seller, Seller's affiliates and their respective representatives associated with the preparation and filing of the Nonstructural Evaluation. Subsequent to filing the Nonstructural Evaluation, Seller shall provide Purchaser with a copy of the Nonstructural Evaluation. ARTICLE X SURVIVAL AND INDEMNIFICATION 10.1 Survival. Except as expressly set forth in this Agreement to the contrary, all representations, warranties, covenants, agreements and indemnifications of Purchaser and Seller, respectively, contained in this Agreement or in any document delivered pursuant hereto shall be deemed to be material and to have been relied upon by Purchaser and Seller, respectively, and shall continue to be fully effective and enforceable following the Closing Date for two (2) years and shall thereafter be of no further force and effect, provided, however, that the covenants contained in Sections 4.13 (non-compete and non-solicit as to Hospital Employees), 4.14 (enforceability), 4.18 (maintenance of insurance), 5.4 (use of names), 9.1 (excluded liabilities), 9.2 (access to records), Article XII and the indemnifications in Sections 10.2.1(c), 10.2.1(d), 10.3.1(c) and 10.3.1(d) shall continue to be fully effective and enforceable following the Closing Date without any time limitation or any limitation on available remedies, unless a time limitation is set forth in the particular Section; provided, further that the indemnifications in Sections 10.2.1(e) through 10.2.1(i) and Sections 10.3.1(e) through 10.3.1(j) shall continue to be fully effective and enforceable following the Closing Date without any time limitation subject only to the applicable statute of limitations; provided, however, that if there is an outstanding notice of a claim at the end of such applicable period in compliance with the terms of Section 10.4, such applicable period shall not end in respect of such claim until such claim is resolved. -61- 10.2 Indemnification of Purchaser by Seller. 10.2.1 Indemnification. Seller shall keep and save Purchaser, and its directors, officers, employees, agents and other representatives (the "Purchaser Parties"), forever harmless from and shall indemnify and defend the Purchaser Parties against any and all obligations, judgments, liabilities, penalties, violations, fees, fines, claims, losses, costs, demands, damages, liens, encumbrances and expenses including reasonable attorneys' fees (collectively, "Damages"), to the extent connected with or arising or resulting from (a) any breach of any representation or warranty of Seller under this Agreement, (b) any breach or default by Seller of any covenant or agreement of Seller under this Agreement, (c) the Excluded Liabilities, (d) the Excluded Assets, (e) all federal, state and local income taxes relating to Seller ("Seller Tax Claims"), (f) any professional liability claim arising out of the business operations of the Hospitals prior to the Effective Time, (g) any act, conduct or omission of Seller that has accrued, arisen, occurred or come into existence at any time prior to the Effective Time, (h) any of those certain pending governmental investigations of Seller or its affiliates which are described on Schedule 10.2.1 and (i) cost reports (and all claims with respect thereto) relating to Seller with respect to Medicare, Medi-Cal, TRICARE or Blue Cross programs or any other third-party payor for all periods prior to the Effective Time. Seller's obligations under this Section 10.2.1 shall remain subject to, and shall be limited by, the provisions contained in Section 1.13 as modified by Article II. No provision in this Agreement shall prevent Seller from pursuing any of its legal rights or remedies that may be granted to Seller by law against any Person or legal entity other than Purchaser. 10.2.2 Indemnification Limitations. (a) Notwithstanding any provision to the contrary contained in this Agreement, Seller shall be under no liability to indemnify Purchaser under Section 10.2.1 and no claim under Section 10.2.1 of this Agreement shall: (i) be made unless notice thereof shall have been given by or on behalf of Purchaser to Seller in the manner provided in Section 10.4, unless failure to provide such notice in a timely manner does not materially impair Seller's ability to defend its rights, mitigate damages, seek indemnification from a third party or otherwise protect its interests; (ii) be made to the extent that any loss may be recovered under a policy of insurance in force on the date of loss; provided, however, that this Section 10.2.2(a)(ii) shall not apply to the extent that coverage under the applicable policy of insurance is denied by the applicable insurance carrier; (iii) be made to the extent that such claim relates to a liability arising out of or relating to any act, omission, event or occurrence connected with: (A) the use, ownership or operation of any of the Hospitals or (B) the use, ownership or operation of any of the Assets, on and after the Effective Time (without regard to whether such use, ownership or operation is consistent with Seller's policies, procedures and/or practices prior to the Effective Time); other than as specifically included in the Excluded Liabilities; -62- (iv) be made under Section 10.2.1(a) to the extent that such claim (or the basis therefor) is set forth in the Disclosure Schedule, any Exhibit or Schedule to this Agreement; (v) Intentionally Omitted; (vi) be made to the extent such claim relates to Seller's failure to comply with or the Assets' failure to be in compliance with (A) the Americans with Disabilities Act or (B) the Alfred E. Alquist Hospital Facilities Seismic Safety Act of 1983, as amended by the California Hospitals Facilities Seismic Safety Act (codified at California Health and Safety Code ss.129675 through ss.130070); provided, however, this Section 10.2.2(a)(vi) shall not apply to the extent that such claim arises as a result of a claim brought by a non-governmental third party who has suffered personal injury prior to the Effective Time provided that this 10.2.2(a)(vi) shall not be construed to limit Purchaser's rights to indemnification under Section 10.2.1(a) for a breach by Seller of any representation or warranty under this Agreement; (vii) be made to the extent such claim seeks Damages which are consequential in nature (as opposed to direct), including, without limitation, loss of future revenue or income or loss of business reputation or opportunity (collectively, "Consequential Damages"); provided, however, the limitation contained in this Section 10.2.2(a)(vii) shall not apply to the extent (A) of any payments which Purchaser is required to make to a third party (other than any third party which is an affiliate of, investor of or lender to Purchaser) which are in the nature of Consequential Damages and (B) such third party's claim is unrelated to the failure to obtain any or all of the Contract and Lease Consents; and (viii) accrue to Purchaser under Section 10.2.1(a) unless and only to the extent that (A) the actual liability of Seller in respect of any single claim under Section 10.2.1(a) exceeds Five Thousand Dollars ($5,000) (a "Relevant Claim") and (B) the total actual liability of Seller in respect of all Relevant Claims under Section 10.2.1(a) in the aggregate exceeds Two Million Five Hundred Thousand Dollars ($2,500,000) (the "Aggregate Amount"), in which event Purchaser shall be entitled to seek indemnification under Section 10.2.1(a) for all Relevant Claims only in an amount of Damages which exceed the Aggregate Amount; provided, however, that the exception set forth in this Section 10.2.2(viii) shall not be construed to limit the indemnification available to Purchaser under Sections 10.2.1(b), (c), (d), (e), (f), (g), (h) and (i). (b) Notwithstanding any provision to the contrary contained in this Agreement, the maximum aggregate liability of Seller to Purchaser under this Agreement shall not exceed the Cash Purchase Price. (c) If Purchaser is entitled to recover any sum (whether by payment, discount, credit or otherwise) from any third party in respect of any matter for which a claim of indemnity could be made against Seller hereunder, Purchaser shall use its reasonable endeavors to recover such sum from such third party and any sum recovered will reduce the amount of the claim. If Seller pays to Purchaser an amount in respect of a claim, and Purchaser subsequently recovers from a third party a sum which is based on the same claim, Purchaser shall forthwith repay to Seller so much of the amount paid by it as does not exceed the sum recovered from the third party less all reasonable costs, charges and expenses (including reasonable attorneys fees) incurred by Purchaser in obtaining payment in respect of that claim and in recovering that sum from the third party. -63- 10.3 Indemnification of Seller by Purchaser. 10.3.1 Indemnification. Purchaser shall keep and save Seller, and Seller's respective directors, officers, employees, agents and other representatives, forever harmless from and shall indemnify and defend Seller and Seller's affiliates against any and all Damages, to the extent connected with or arising or resulting from (a) any breach of any representation or warranty of Purchaser under this Agreement, (b) any breach or default by Purchaser under any covenant or agreement of Purchaser under this Agreement, (c) cost reports (and all claims with respect thereto) relating to Purchaser with respect to Medicare, Medi-Cal, TRICARE or Blue Cross programs or any other third-party payor for all periods beginning on and after the Effective Time, (d) the Assumed Obligations, (e) any professional liability claim arising out of the business operations of the Hospitals on and after the Effective Time, (f) liabilities to the Hired Employees arising out of actions of Purchaser based wholly or in part upon the contents of the personnel records of such employees, (g) involuntary termination of the Hired Employees on and after the Effective Time, which termination would constitute a "mass layoff" or a "plant closing" within the meaning of WARN, (h) any act, conduct or omission of Purchaser that has accrued, arisen, occurred or come into existence at any time, (i) any securities litigation involving (i) Purchaser and/or (ii) any financing obtained by Purchaser which is utilized to fund, in whole or in part, the Cash Purchase Price, other than to the extent arising out of any willful misconduct of Seller or its employees, or intentionally false or intentionally misleading statements of Seller or its employees and (j) any Offering Circular or other materials or brochures provided to prospective investors in the Hospitals (whether provided by Purchaser, any affiliate of Purchaser, any Person which has or will have an equity interest in Purchaser or any affiliate of Purchaser, or any other third party) (whether any such Offering Circular, materials or brochures are issued or otherwise provided before, on or after the Effective Date), including, without limitation, any claim, suit or other action brought by any third party or Person in connection with any Offering Circular, materials or brochures (whether any such Offering Circular, materials or brochures are issued before, on or after the Effective Date) or the securities offering in connection therewith. In no event shall Purchaser's obligations under Section 10.3.1(j) in any way limit Seller's obligations to Purchaser under Section 10.2.1(a). No provision in this Agreement shall prevent Purchaser from pursuing any of its legal rights or remedies that may be granted to Purchaser by law against any Person or legal entity other than Seller or any affiliate of Seller. 10.3.2 Indemnification Limitations. (a) Notwithstanding any provision to the contrary contained in this Agreement, Purchaser shall be under no liability to indemnify Seller under 10.3.1 and no claim under Section 10.3.1 of this Agreement shall: (i) be made unless notice thereof shall have been given by or on behalf of Seller to Purchaser in the manner provided in Section 10.4, unless failure to provide such notice in a timely manner does not materially impair Purchaser's ability to defend its rights, mitigate damages, seek indemnification from a third party or otherwise protect its interests; (ii) be made to the extent that any loss may be recovered under a policy of insurance in force on the date of loss; provided, however, that this Section 10.3.2(a)(ii) shall not apply to the extent that coverage under the applicable policy of insurance is denied by the applicable insurance carrier; -64- (iii) be made to the extent that such claim relates to a liability of Seller arising out of or relating to any act, omission, event or occurrence connected with: (A) the use, ownership or operation of any of the Hospitals, or (B) the use, operation or ownership of any of the Assets, prior to the Effective Time, other than as specifically included in the Assumed Obligations; (iv) be made to the extent such claim relates to an obligation or liability for which Seller has agreed to indemnify Purchaser pursuant to Section 10.2; (v) be made to the extent such claim seeks Consequential Damages; provided, however, the limitation contained in this Section 10.3.2(a)(v) shall not apply to the extent of any payments which Seller or any affiliate of Seller is required to make to a third party which are in the nature of Consequential Damages; and (vi) accrue to Seller under Section 10.3.1(a) unless and only to the extent that (A) the actual liability of Purchaser in respect of any single claim under Section 10.3.1(a) exceeds the Relevant Claim threshold and (B) the total actual liability of Purchaser in respect of all Relevant Claims under Section 10.3.1(a) in the aggregate exceeds the Aggregate Amount, in which event Seller shall be entitled to seek indemnification under Section 10.3.1(a) for all Relevant Claims only in an amount of Damages which exceed the Aggregate Amount. (b) Notwithstanding any provision to the contrary contained in this Agreement, the maximum aggregate liability of Purchaser to Seller under this Agreement, subsequent to Purchaser paying the Cash Purchase Price at Closing, shall not exceed an additional amount equal to the Cash Purchase Price. (c) If Seller is entitled to recover any sum (whether by payment, discount, credit or otherwise) from any third party in respect of any matter for which a claim of indemnity could be made against Purchaser hereunder, Seller shall use its reasonable endeavors to recover such sum from such third party and any sum recovered will reduce the amount of the claim. If Purchaser pays to Seller an amount in respect of a claim, and Seller subsequently recovers from a third party a sum which is based on the same claim, Seller shall forthwith repay to Purchaser so much of the amount paid by it as does not exceed the sum recovered from the third party less all reasonable costs, charges and expenses (including reasonable attorneys fees) incurred by Seller in obtaining payment in respect of that claim and in recovering that sum from the third party. 10.4 Method of Asserting Claims. All claims for indemnification by any Person entitled to indemnification (the "Indemnified Party") under this Article X will be asserted and resolved as follows: -65- (a) In the event any claim or demand, for which a party hereto (an "Indemnifying Party") would be liable for the Damages to an Indemnified Party, is asserted against or sought to be collected or withheld from such Indemnified Party by a Person other than Seller, Purchaser or their affiliates (a "Third Party Claim"), the Indemnified Party shall deliver a notice of its claim (a "Claim Notice") to the Indemnifying Party within forty (40) calendar days after the Indemnified Party receives written notice of such Third Party Claim; provided, however, that notice shall be provided to the Indemnifying Party within thirty (30) calendar days after receipt of a complaint, petition or institution of other formal legal action by the Indemnified Party. If the Indemnified Party fails to provide the Claim Notice within such applicable time period after the Indemnified Party receives written notice of such Third Party Claim and thereby materially impairs the Indemnifying Party's ability to protect its interests, the Indemnifying Party will not be obligated to indemnify the Indemnified Party with respect to such Third Party Claim to the extent that the Indemnifying Party demonstrates that it has been materially prejudiced thereby. The Indemnifying Party will notify the Indemnified Party within thirty (30) calendar days after receipt of the Claim Notice (the "Notice Period") whether the Indemnifying Party desires, at the sole cost and expense of the Indemnifying Party, to defend the Indemnified Party against such Third Party Claim. (i) If the Indemnifying Party notifies the Indemnified Party within the Notice Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section 10.4(a), then the Indemnifying Party will have the right to defend, at its sole cost and expense, such Third Party Claim by all appropriate proceedings, which proceedings will be prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party. The Indemnifying Party will have full control of such defense and proceedings, including any compromise or settlement thereof. Notwithstanding the foregoing, the Indemnified Party may, at its sole cost and expense, file during the Notice Period any motion, answer or other pleadings that the Indemnified Party may deem necessary or appropriate to protect its interests or those of the Indemnifying Party and which is not prejudicial, in the reasonable judgment of the Indemnifying Party, to the Indemnifying Party. Except as provided in Section 10.4(a)(ii) hereof, if an Indemnified Party takes any such action that is prejudicial and causes a final adjudication that is adverse to the Indemnifying Party, the Indemnifying Party will be relieved of its obligations hereunder with respect to the portion of such Third Party Claim prejudiced by the Indemnified Party's action. If requested by the Indemnifying Party, the Indemnified Party agrees, at the sole cost and expense of the Indemnifying Party, to cooperate with the Indemnifying Party and its counsel in contesting any Third Party Claim that the Indemnifying Party elects to contest, or, if appropriate and related to the Third Party Claim in question, in making any counterclaim against the Person asserting the Third Party Claim, or any cross-complaint against any Person (other than the Indemnified Party or any of its affiliates). The Indemnified Party may participate in, but not control, any defense or settlement of any Third Party Claim controlled by the Indemnifying Party pursuant to this Section 10.4(a)(i), and except as specifically provided in this Section 10.4(a)(i), the Indemnified Party will bear its own costs and expenses with respect to such participation. The Indemnifying Party shall give sufficient prior notice to the Indemnified Party relating to a settlement of a Third Party Claim to allow the Indemnified Party to participate therein. -66- (ii) If the Indemnifying Party fails to notify the Indemnified Party within the Notice Period that the Indemnifying Party desires to defend the Indemnified Party pursuant to this Section 10.4(a), or if the Indemnifying Party gives such notice but fails to prosecute diligently or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Notice Period, then the Indemnified Party will have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings will be promptly and reasonably prosecuted by the Indemnified Party to a final conclusion or will be settled at the discretion of the Indemnified Party. The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party agrees, at the sole cost and expense of the Indemnifying Party, to cooperate with the Indemnified Party and its counsel in contesting any Third Party Claim which the Indemnified Party is contesting, or, if appropriate and related to the Third Party Claim in question, in making any counterclaim against the Person asserting the Third Party Claim, or any cross-complaint against any Person (other than the Indemnifying Party or any of its affiliates). Notwithstanding the foregoing provisions of this Section 10.4(a)(ii), if the Indemnifying Party has notified the Indemnified Party with reasonable promptness that the Indemnifying Party disputes its liability to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party, the Indemnifying Party will not thereafter be required to bear the costs and expenses of the Indemnified Party's defense pursuant to this Section 10.4(a)(ii) or of the Indemnifying Party's participation therein at the Indemnified Party's request, and the Indemnified Party will reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. Subject to the above terms of this Section 10.4(a)(ii), the Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this Section 10.4(a)(ii), and the Indemnifying Party will bear its own costs and expenses with respect to such participation. The Indemnified Party shall give sufficient prior notice to the Indemnifying Party of the initiation of any discussions relating to the settlement of a Third Party Claim to allow the Indemnifying Party to participate therein. (b) In the event any Indemnified Party should have a claim against any Indemnifying Party hereunder that either (i) does not involve a Third Party Claim being asserted against or sought to be collected from the Indemnified Party or (ii) is a Seller Tax Claim, the Indemnified Party shall deliver an Indemnity Notice (as hereinafter defined) to the Indemnifying Party. (The term "Indemnity Notice" shall mean written notification of a claim for indemnity under Article X hereof (which claim does not involve a Third Party Claim or is a Seller Tax Claim) by an Indemnified Party to an Indemnifying Party pursuant to this Section 10.4, specifying the nature of and specific basis for such claim and the amount or the estimated amount of such claim.) The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party's rights hereunder except to the extent that an Indemnifying Party demonstrates that it has been materially prejudiced thereby. (c) If the Indemnifying Party does not notify the Indemnified Party within thirty (30) calendar days following its receipt of a Claim Notice or an Indemnity Notice that the Indemnifying Party disputes its liability to the Indemnified Party hereunder, such claim specified by the Indemnified Party will be conclusively deemed a liability of the Indemnifying Party hereunder and the Indemnifying Party shall pay the amount of such liability to the Indemnified Party on demand, or on such later date (i) in the case of a Third Party Claim, as the Indemnified Party suffers the Damages in respect of such Third Party Claim, (ii) in the case of an Indemnity Notice in which the amount of the claim is estimated, when the amount of such claim becomes finally determined or (iii) in the case of a Seller Tax Claim, within fifteen (15) calendar days following final determination of the item giving rise to the claim for indemnity. If the Indemnifying Party has timely disputed its liability with respect to such claim, as provided above, the Indemnifying Party and the Indemnified Party agree to proceed in good faith to negotiate a resolution of such dispute, and if not resolved through negotiations, such dispute will be resolved by adjudication by a court or similar tribunal. -67- (d) The Indemnified Party agrees to give the Indemnifying Party reasonable access to the books and records and employees of the Indemnified Party in connection with the matters for which indemnification is sought hereunder, to the extent the Indemnifying Party reasonably deems necessary in connection with its rights and obligations hereunder and to the extent legally permitted. (e) In connection with any Third Party Claim, the Indemnified Party shall assist and cooperate in a commercially reasonable manner with the Indemnifying Party in the conduct of litigation, the making of settlements and the enforcement of any right of contribution to which the Indemnified Party may be entitled from any Person or entity in connection with the subject matter of any litigation subject to indemnification hereunder. In addition, in connection with any Third Party Claim, the Indemnified Party shall, upon reasonable request by the Indemnifying Party or counsel selected by the Indemnifying Party (without payment of any fees or expenses to the Indemnified Party or an employee thereof, except reasonable out-of-pocket expenses), use commercially reasonable efforts to attend hearings and trials, reasonably assist in the securing and giving of evidence, reasonably assist in obtaining the presence or cooperation of witnesses, and make available its own personnel; and shall do whatever else is necessary and appropriate to support the Indemnifying Party's efforts in connection with such litigation. The Indemnified Party shall not make any demand upon the Indemnifying Party or counsel for the Indemnifying Party in connection with any litigation subject to indemnification hereunder, except a general demand for indemnification as provided hereunder. If the Indemnified Party shall fail to perform such obligations as Indemnified Party hereunder or to reasonably cooperate with the Indemnifying Party in Indemnifying Party's defense of any suit or proceeding, such cooperation to include, without limitation, attendance at all depositions and the provision of all documents (subject to appropriate privileges and legal requirements) relevant to the defense of any claim, then, after notice to the Indemnified Party and provision of such five (5) business days to cure, the Indemnifying Party shall be released from all of its obligations under this Agreement with respect to the prejudiced suit, claim or proceeding and any other claims which had been raised in such suit or proceeding to the extent the Indemnifying Party can demonstrate it has been prejudiced thereby. (f) Following indemnification as provided for hereunder, the Indemnifying Party shall be subrogated to all rights of the Indemnified Party with respect to all Persons relating to the matter for which indemnification has been made; provided, however, that the Indemnifying Party shall have no subrogation rights to seek reimbursement through or from the Indemnified Party's insurance policies, program, coverage, carriers or beneficiaries. 10.5 Exclusive. Other than claims for fraud or equitable relief (which equitable relief claims are nevertheless subject to Section 10.1), any claim arising under this Agreement or in connection with or as a result of the transactions contemplated by this Agreement or any Damages or injury alleged to be suffered by any party as a result of the actions or failure to act by any other party shall, unless otherwise specifically stated in this Agreement, be governed solely and exclusively by the provisions of this Article X. If Seller and Purchaser cannot resolve such claim by mutual agreement, such claim shall be determined by adjudication by a court or similar tribunal subject to the provisions of this Article X. -68- ARTICLE XI TAX AND COST REPORT MATTERS 11.1 Tax Matters; Allocation of Purchase Price. (a) After the Closing Date, the parties shall cooperate fully with each other and shall make available to each other, as reasonably requested, all information, records or documents relating to tax liabilities or potential tax liabilities attributable to Seller with respect to the operation of the Hospitals for all periods prior to the Effective Time and shall preserve all such information, records and documents at least until the expiration of any applicable statute of limitations or extensions thereof. The parties shall also make available to each other as reasonably required, and at the reasonable cost of the requesting party (for out-of-pocket costs and expenses only), personnel responsible for preparing or maintaining information, records and documents in connection with tax matters. (b) The Purchase Price shall be allocated among each category of the Assets and among each of the Hospitals in accordance with Schedule 11.1(b). Seller and Purchaser hereby agree to allocate the Purchase Price in accordance with Schedule 11.1(b), to be bound by such allocations, to account for and report the purchase and sale of the Assets contemplated hereby for federal and state tax purposes in accordance with such allocations, and not to take any position (whether in tax returns, tax audits, or other tax proceedings), which is inconsistent with such allocations without the prior written consent of the other parties. 11.2 Cost Report Matters. (a) Seller shall prepare and timely file all cost reports relating to the periods ending prior to the Effective Time or required as a result of the consummation of the transactions described in this Agreement relating to Medicare, Medi-Cal or TRICARE (the "Seller Cost Reports"). Purchaser shall forward to Seller any and all correspondence relating to the Accounts Receivable, the Seller Cost Reports or rights to settlements and retroactive adjustments on the Seller Cost Reports ("Agency Settlements") within ten (10) business days of receipt by Purchaser. Purchaser shall not reply to any such correspondence without Seller's written approval. Purchaser shall remit any receipts relating to the Accounts Receivable, the Seller Cost Reports or the Agency Settlements within ten (10) business days after receipt by Purchaser (except those receipts to be retained by Purchaser pursuant to Section 11.3) and will forward any demand for payments within ten (10) business days. Purchaser (and its respective successors-in-interest, assigns and affiliates) shall have neither the right to offset amounts payable to Seller under this Section 11.2 against, nor the right to contest its obligation to transfer, assign and convey to Seller because of, outstanding claims, liabilities or obligations asserted by Purchaser against Seller including but not limited to pursuant to the post-closing Cash Purchase Price adjustment of Section 1.3 and the indemnification provisions of Section 10.2. If Purchaser does not remit the receipts relating to the Accounts Receivable, the Seller Cost Reports or the Agency Settlements to Seller in accordance with the fourth sentence of this Section 11.2(a), such receipts shall bear interest at the Prime Rate in effect on the calendar day upon which such payment was required to be made to Seller (the "Settlement Due Date") plus five percent (5%) (or the maximum rate allowed by law, whichever is less), such interest accruing on each calendar day after the Settlement Due Date until the receipts relating to the Accounts Receivable, the Seller Cost Reports or the Agency Settlements and all interest thereon is made to Seller. Seller shall retain all rights to the Seller Cost Reports and to the Accounts Receivable including, without limitation, any payables resulting therefrom or receivables relating thereto and the right to appeal any Medicare determinations relating to the Agency Settlements and the Seller Cost Reports. Seller will furnish copies of the Receivables Records to Purchaser upon request and allow Purchaser and its representatives reasonable access to such documents. -69- (b) Upon reasonable notice and during normal business office hours, Purchaser will cooperate with Seller in regard to the preparation, filing, handling, and appeals of the Seller Cost Reports. Upon reasonable notice and during normal business office hours, Purchaser will cooperate with Seller in connection with any cost report disputes and/or other claim adjudication matters relative to governmental program reimbursement. Such cooperation shall include obtaining files at the Hospitals and Purchaser's provision to Seller of data and statistics, including, without limitation, the items set forth on Schedule 11.2(b), and the coordination with Seller pursuant to adequate notice of Medicare and Medi-Cal exit conferences or meetings. Purchaser shall provide to Seller such data, statistics and items requested by Medicare or Medi-Cal, within such time period(s) as reasonably requested by Seller, at Seller's sole cost and expense (subject to appropriate privileges and legal requirements). (c) Upon reasonable notice and during normal business office hours, Seller will cooperate with Purchaser in connection with any cost report disputes and/or other claim adjudication matters relative to governmental program reimbursement which may relate to or be impacted by the Seller Cost Reports or any actions or omissions by or payments to Seller. Such cooperation shall include sharing any relevant Seller files, data and statistics related to the Hospitals not obtained by Purchaser hereunder, within such time period(s) as reasonably requested by Purchaser. 11.3 Acute Transition Services. In the event Purchaser elects (as contemplated by Section 1.10(v) of this Agreement), on or before October 15, 2004, to reject Seller's provider numbers relating to the Acute Care Hospitals, to equitably compensate the parties for services rendered and medicine, drugs, and supplies provided prior to and after the Effective Time at any of the Acute Care Hospitals, including any distinct part psychiatric sub-providers with respect thereto (the "Acute Transition Services"), with respect to patients whose medical care is paid for, in whole or in part, by Medicare, Medicaid, TRICARE/CHAMPUS, Blue Cross or any other third party payor who pays on a DRG, case rate or other similar arrangement, and who are admitted to any of the Seller Businesses prior the Effective Time but who are not discharged until after the Effective Time ("Governmental Program Acute Transition Patients"), the parties shall take the following action: -70- (a) In the event any payor payments are made following the Effective Time to one party with respect to services furnished in part by both parties (as opposed to separate payments to each party determined by the payor with respect to the services furnished by that party), as soon as practicable after the Effective Time, the party receiving such payments shall deliver to the other party a statement itemizing the inpatient hospital Acute Transition Services provided by the receiving party (with Seller's itemization being limited to the operation of the Hospitals prior to the Effective Time with respect to Governmental Program Acute Transition Patients and the Purchaser's itemization being limited to the operation of the Hospitals on and after the Effective Time with respect to Governmental Program Acute Transition Patients). Furthermore, Seller shall continue to bill Medicare under Seller's provider number(s) for all inpatient hospital services furnished to patients who were admitted prior to the Effective Time through the earlier to occur of (i) such patients' discharge date or (ii) the date which is thirty (30) days after the Effective Time (i.e., the effective date of Seller's voluntary termination from participation in the Medicare program). With respect to any payments received by either party from a payor for Acute Transition Services, each party that has received such payments shall pay to the other party an amount equal to the DRG and outlier payments, the case rate payment or other similar payment received by that party with respect to a Governmental Program Acute Transition Patient, multiplied by a fraction (the "Fraction"), the numerator of which shall be the total charges for the Acute Transition Services provided to such Governmental Program Acute Transition Patient by the other party and the denominator of which shall be the sum of the total charges for the Acute Transition Services provided to such Governmental Program Acute Transition Patient by the other party plus the total charges for the Acute Transition Services provided to such Governmental Program Acute Transition Patient by the party that received the payment from the payor after the Effective Time. The parties shall reconcile the payments within ninety (90) calendar days after both the tentative and final Medicare cost report settlement and any other payor settlement affecting the Governmental Program Acute Transition Patients (the "Reconciliation"). (b) Payments made pursuant to Section 11.3(a) shall be made monthly, on the twenty fifth (25th) day of each month, for payments received during the previous month, accompanied by copies of remittances and other supporting documentation as is reasonably requested by the other party provided, however, that a payment shall be made to the other party within five (5) business days of the date, if any, that the aggregate amount held by the receiving party subject to Section 11.3(a) equals or exceeds Fifty Thousand Dollars ($50,000). Any other payments required to be made by Seller to Purchaser, or by Purchaser to Seller, as the case may be, as a result of (i) the Reconciliation, (ii) a notice of program reimbursement with respect to the operations of any Hospitals or (iii) other notice from a governmental agency or third party payor with respect to Transition Services shall be made within thirty (30) calendar days after the Reconciliation or the receipt of any such notice, as applicable. In the event that Purchaser and Seller are unable to agree on the amount to be paid to Seller or Purchaser, as the case may be, under this Section 11.3, then such amount shall be determined by the Independent Auditor at their joint expense. (c) The parties acknowledge that all charges for outpatient and other cost-based services shall be made (i) by Seller for all periods prior to the Effective Time and (ii) by Purchaser for all periods on and after the Effective Time. -71- (d) Notwithstanding the first sentence of Section 11.3(b), Purchaser or Seller shall make a distribution to the other party within three (3) business days if at any time during the applicable calendar month the funds to be distributed to such first party pursuant to Section 11.3(a) exceed One Hundred Fifty Thousand Dollars ($150,000). The amount of such distribution shall be all amounts payable to the receiving party pursuant to Section 11.3(a) which have not been previously distributed. All such distributions shall be made by wire transfer of immediately available funds to Seller or Purchaser, as the case may be, to the account(s) specified by the receiving party to the paying party in writing from time to time. (e) Neither party (and its respective successors-in-interest, assigns and affiliates) shall have the right to offset amounts payable to the other party under this Section 11.3 against, nor the right to contest its obligation to transfer, assign and convey to such party because of, outstanding claims, liabilities or obligations asserted by the paying party against the receiving party including but not limited to pursuant to the indemnification provisions of Article X. If a party does not remit to the other party the amounts payable to the receiving party pursuant to Section 11.3(b) or 11.3(d) in accordance with the terms thereof, such amounts shall bear interest at the Prime Rate in effect on the calendar day upon which such payment was required to be made (the "Straddle Payment Due Date") plus five percent (5%) (or the maximum rate allowed by law, whichever is less), such interest accruing on each calendar day after the Straddle Payment Due Date until payment of the amount due pursuant to Section 11.3(b) or 11.3(d) and all interest thereon is made. (f) If the FI requires or requests that Seller and Purchaser use a billing method for services rendered to Transition Patients that differs from the method described in Section 11.3(a) Seller and Purchaser shall comply with the FI's requirement or request and shall equitably adjust the aggregate reimbursement received by Seller and Purchaser for such services to ensure that each party receives the same proportion of the aggregate reimbursement as such party would have received had the parties followed the method described in this Section 11.4 Non-Acute Transition Services. To compensate Seller for services rendered and medicine, drugs, and supplies provided before the Effective Time with respect to any portion of the Hospitals as to which Purchaser takes assignment of Seller's provider numbers and/or provider agreements including without limitation any of the Seller's distinct part Skilled Nursing Units (the "Non-Acute Transition Services") with respect to patients whose medical care is paid for, in whole or in part, by Medicare, Medicaid, TRICARE, Blue Cross or any other third party payor who pays on a DRG, case rate or other similar arrangement, and who are admitted to any of the Non-Acute Providers prior to the Effective Time but who are not discharged until on or after the Effective Time ("Governmental Program Non-Acute Transition Patients"), the parties shall take the following action: (a) As soon as practicable after the Closing Date, Seller shall deliver to Purchaser a statement itemizing the Non-Acute Transition Services provided by Seller with respect to the operation of the Non-Acute Providers prior to the Effective Time to Governmental Program Non-Acute Transition Patients. For the Non-Acute Transition Services, Purchaser shall pay to Seller an amount equal to the per diem, the case rate payment or other payments received by Purchaser on behalf of a Governmental Program Non-Acute Transition Patient, multiplied by a fraction (the "Fraction"), the numerator of which shall be the total charges for the Non-Acute Transition Services provided to such Governmental Program Non-Acute Transition Patient by Seller and the denominator of which shall be the sum of the total charges for the Non-Acute Transition Services provided to such Governmental Program Non-Acute Transition Patient by Seller plus the total charges for the Non-Acute Transition Services provided to such Governmental Program Non-Acute Transition Patient by Purchaser on and after the Effective Time. The parties shall reconcile the payments within ninety (90) calendar days after both the tentative and final Medicare cost report settlement and any other payor settlement affecting the Governmental Program Non-Acute Transition Patients (the "Reconciliation"). -72- (b) Subject to Section 11.4(d), payments made pursuant to Section 11.4(a) shall be made to Seller monthly, on the twenty-fifth (25th) day of each month, for payments received by Purchaser during the previous month, accompanied by copies of remittances and other supporting documentation as is reasonably requested by Seller. Any other payments required to be made by Seller to Purchaser, or by Purchaser to Seller, as the case may be, as a result of (i) the Reconciliation, (ii) a notice of program reimbursement with respect to the operations of any Hospital or (iii) other notice from a governmental agency or third party payor with respect to Transition Services shall be made within thirty (30) calendar days after the Reconciliation or the receipt of any such notice, as applicable. In the event that Purchaser and Seller are unable to agree on the amount to be paid to Seller or Purchaser, as the case may be, under this Section 11.4, then such amount shall be determined by the Independent Auditor at their joint expense. (c) The parties acknowledge that all charges for outpatient and other cost-based services shall be made (i) by Seller for all periods prior to the Effective Time and (ii) by Purchaser for all periods on and after the Effective Time. (d) Notwithstanding the first sentence of Section 11.4(b), Purchaser shall make a distribution to Seller within three (3) business days if at any time during the applicable calendar month the funds to be distributed to Seller pursuant to Section 11.4(a) exceed One Hundred Fifty Thousand Dollars ($150,000). The amount of such distribution shall be all amounts payable to Seller pursuant to Section 11.4(a) which have not been previously distributed to Seller. All such distributions shall be made by wire transfer of immediately available funds to Seller to the account(s) specified by Seller to Purchaser in writing from time to time. (e) Purchaser (and its respective successors-in-interest, assigns and affiliates) shall have neither the right to offset amounts payable to Seller under this Section 11.4 against, nor the right to contest its obligation to transfer, assign and convey to Seller because of, outstanding claims, liabilities or obligations asserted by Purchaser against Seller including but not limited to pursuant to the post-closing Cash Purchase Price adjustment of Section 1.4 and the indemnification provisions of Section 10.2. If Purchaser does not remit to Seller the amounts payable to Seller pursuant to Section 11.4(b) or 11.4(d) in accordance with the terms thereof, such amounts shall bear interest at the Prime Rate in effect on the calendar day upon which such payment was required to be made to Seller (the "Straddle Payment Due Date") plus five percent (5%) (or the maximum rate allowed by law, whichever is less), such interest accruing on each calendar day after the Straddle Payment Due Date until payment of the amount due pursuant to Section 11.4(b) or 11.4(d) and all interest thereon is made to Seller. -73- (f) If the Hospitals' fiscal intermediary requires or requests that Seller and Purchaser use a billing method for services rendered to Transition Patients that differs from the method described in Section 11.4(a) Seller and Purchaser shall comply with the fiscal intermediary's requirement or request and shall equitably adjust the aggregate reimbursement received by Seller and Purchaser for such services to ensure that each party receives the same proportion of the aggregate reimbursement as such party would have received had the parties followed the method described in this Section. ARTICLE XII MISCELLANEOUS PROVISIONS 12.1 Further Assurances and Cooperation. Seller shall execute, acknowledge and deliver to Purchaser any and all other assignments, consents, approvals, conveyances, assurances, documents and instruments reasonably requested by Purchaser at any time and shall take any and all other actions reasonably requested by Purchaser at any time for the purpose of more effectively assigning, transferring, granting, conveying and confirming to Purchaser, the Assets. Seller shall make Eric Tuckman available to Purchaser prior to Closing of the transaction contemplated by this Agreement for the purpose of communicating with financing sources identified by, and upon the reasonable request of, Purchaser; provided that any such financing source shall have delivered to Seller the executed confidentiality agreement described in the last sentence of Section 5.6. After consummation of the transaction contemplated in this Agreement, the parties agree to cooperate with each other and take such further actions as may be necessary or appropriate to effectuate, carry out and comply with all of the terms of this Agreement, the documents referred to in this Agreement and the transactions contemplated hereby. 12.2 Successors and Assigns. All of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, that no party hereto may assign any of its rights or delegate any of its duties under this Agreement without the prior written consent of the other parties, except that Purchaser may assign any of its rights or delegate any of its duties under this Agreement to (a) the separate affiliates of Purchaser that Purchaser intends to establish as designated assignees of Purchaser for each of the Hospitals, upon Seller's receipt of Purchaser's guaranty of such affiliates' obligations, in a form acceptable to Seller in its reasonable discretion or (b) any other assignee approved in writing by Seller, which approval may be given or withheld in Seller's sole discretion and, if approved by Seller, upon Seller's receipt of Purchaser's guaranty of such other assignee's obligations, in a form acceptable to Seller. Notwithstanding the foregoing sentence, an assignment of this Agreement by Purchaser that would be subject to subclause (b) of this Section 12.2 and, thereby, Seller's approval thereof in its sole discretion shall, instead, be subject to Seller's approval in its reasonable discretion if such assignee is required to become jointly and severally liable for obligations of Purchaser under Section 10.3.1 of this Agreement pursuant to the last sentence of this Section 12.2. As provided in Section 5.12 of this Agreement, Purchaser shall require that any purchaser or other assignee of substantially all of the assets of any of the Hospitals agree, in the agreement evidencing such transaction, to be jointly and severally liable for all of Purchaser's obligations under Section 10.3.1 of this Agreement that are attributable to the Hospital(s) being transferred to such purchaser or assignee pursuant to such agreement provided, however, that this sentence shall not be construed to limit the ability of any lender to sell any of the Owned Real Property or other Assets in connection with a foreclosure thereon or sale in lieu thereof. -74- 12.3 Governing Law; Venue. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California as applied to contracts made and performed within the State of California. The parties hereby waive their right to assert in any proceeding involving this Agreement that the law of any jurisdiction other than the State of California shall apply to such dispute; and the parties hereby covenant that they shall assert no such claim in any dispute arising under this Agreement. Any proceeding which arises out of or relates in any way to the subject matter of this Agreement shall be brought in the Superior Court of California, County of Orange or the United States District Court for the Central District of California. The parties hereby consent to the jurisdiction of the State of California and waive their right to challenge any proceeding involving or relating to this Agreement on the basis of lack of jurisdiction over the Person or forum non convenience. 12.4 Amendments. This Agreement may not be amended other than by written instrument signed by the parties hereto. 12.5 Exhibits, Schedules and Disclosure Schedule. The Disclosure Schedule and all exhibits and schedules referred to in this Agreement shall be deemed to have been attached hereto and incorporated by reference herein on the Effective Date provided, however, that Purchaser may update Schedule 1.6.15 on or before October 14, 2004 to reflect Seller's decision as to whether it will reject or take assignment of the provider numbers associated with the Hospitals. From the Effective Date until the Closing, the parties agree that Seller may update the Disclosure Schedule and either party may update the schedules as necessary, subject to the terms of Sections 6.7 and 7.9 of this Agreement including without limitation that any update shall be deemed approved by the other party if not acted on within ten (10) business days by the other party. Any matter disclosed in this Agreement or in the Disclosure Schedule with reference to any Section of this Agreement shall be deemed a disclosure in respect of all sections to which such disclosure may apply. 12.6 Notices. Any notice, demand or communication required, permitted, or desired to be given hereunder shall be deemed effectively given when personally delivered, when received by telegraphic or other electronic means (including facsimile) or overnight courier, or five (5) calendar days after being deposited in the United States mail, with postage prepaid thereon, certified or registered mail, return receipt requested, addressed as follows: If to Seller: Tenet HealthSystem 13737 Noel Road, Suite 100 Dallas, Texas 75240 Attention: Paul O'Neill Facsimile No.: (469) 893-2214 -75- With a copy to: Tenet HealthSystem 13737 Noel Road, Suite 100 Dallas, Texas 75240 Attention: J. Brent McDonald, Esq. Facsimile No.: (469) 893-7508 With a copy to: McDermott Will & Emery LLP 2049 Century Park East Suite 3400 Los Angeles, California 90067 Attention: Ira J. Rappeport, Esq. Facsimile No.: (310) 277-4730 If to Purchaser: Integrated Healthcare Holdings, Inc. c/o Mogel Management Group, LLC 695 Town Center Drive, Suite 260 Costa Mesa, CA 92626 Attention: Larry Anderson Facsimile No.: (714) 434-9505 With a copy to: Integrated Healthcare Holdings, Inc. c/o Strategic Global Management, Inc. 6800 Indiana Avenue, Suite 130 Riverside, CA 92506 Attention: Kali P. Chaudhuri, M.D. and William E. Thomas Facsimile (951) 782-8850 With a copy to: Hooper, Lundy & Bookman, Inc. 1875 Century Park East, Suite 1600 Los Angeles, California 90067 Attention: Robert W. Lundy, Esq. Facsimile No.: (310) 551-8181 or at such other address as one party may designate by notice hereunder to the other parties. 12.7 Headings. The section and other headings contained in this Agreement and in the Disclosure Schedule, exhibits and schedules to this Agreement are included for the purpose of convenient reference only and shall not restrict, amplify, modify or otherwise affect in any way the meaning or interpretation of this Agreement or the Disclosure Schedule, exhibits and schedules hereto. -76- 12.8 Confidentiality and Publicity. The parties hereto shall hold in confidence the information contained in this Agreement, and all information related to this Agreement, which is not otherwise known to the public, shall be held by each party hereto as confidential and proprietary information and shall not be disclosed without the prior written consent of the other parties; provided, however, Seller shall be permitted to provide a copy of this Agreement to (a) any applicable governmental or administrative authorities in connection with Seller's pursuit of any appeal of any real and personal property tax assessments on the Assets for periods prior to the Effective Time and (b) Purchaser shall be permitted to disclose in the Offering Circular to prospective investors a summary of the material terms contained in the body of this Agreement. Accordingly, except as set forth in the immediately preceding sentence, Purchaser and Seller shall not discuss with, or provide nonpublic information to, any third party (except for such party's attorneys, accountants, directors, officers and employees, the directors, officers and employees of any affiliate of any party hereto, and other consultants and professional advisors) concerning this transaction prior to the Effective Time, except: (a) as required in governmental filings or judicial, administrative or arbitration proceedings, including without limitation the filings to be made by the parties with respect to the HSR Act; (b) pursuant to public announcements made with the prior written approval of Seller and Purchaser, or (c) as otherwise expressly permitted by this Agreement. The rights of Seller under this Section 12.8 shall be in addition and not in substitution for the rights of Seller and Seller's affiliates under the Confidentiality Agreement, which shall survive Closing. 12.9 Fair Meaning. This Agreement shall be construed according to its fair meaning and as if prepared by all parties hereto. 12.10 Gender and Number; Construction. All references to the neuter gender shall include the feminine or masculine gender and vice versa, where applicable, and all references to the singular shall include the plural and vice versa, where applicable. Unless otherwise expressly provided, the word "including" followed by a listing does not limit the preceding words or terms and shall mean "including, without limitation." 12.11 Third Party Beneficiary. None of the provisions contained in this Agreement are intended by the parties, nor shall they be deemed, to confer any benefit on any Person not a party to this Agreement. 12.12 Expenses and Attorneys' Fees. Except as otherwise provided in this Agreement, each party shall bear and pay its own costs and expenses relating to the preparation of this Agreement and to the transactions contemplated by, or the performance of or compliance with any condition or covenant set forth in, this Agreement, including without limitation, the disbursements and fees of their respective attorneys, accountants, advisors, agents and other representatives, incidental to the preparation and carrying out of this Agreement, whether or not the transactions contemplated hereby are consummated. The parties expressly agree that the following shall be borne equally by Purchaser and Seller: (a) all costs of the Title Commitment and the Title Policy (including the cost of any endorsements thereto) provided, however, that the cost of any zoning endorsement to the Title Commitment or Title Policy shall, as contemplated by Section 4.8 of this Agreement, be borne solely by Purchaser; and (b) all costs of the Surveys. All costs of the Environmental Surveys shall be borne solely by the Seller. All documentary transfer taxes and recording charges in connection with the conveyance of the Assets to Purchaser and Purchaser's Lender Title Policy, if any, shall be borne solely by the Purchaser. If any action is brought by any party to enforce any provision of this Agreement, the prevailing party shall be entitled to recover its court costs and reasonable attorneys' fees. -77- 12.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement, binding on all of the parties hereto. 12.14 Entire Agreement. This Agreement, the Disclosure Schedule, the exhibits and schedules, and the documents referred to in this Agreement contain the entire understanding between the parties with respect to the transactions contemplated hereby and supersede all prior or contemporaneous agreements, understandings, representations and statements, oral or written, between the parties on the subject matter hereof (the "Superseded Agreements"), which Superseded Agreements shall be of no further force or effect. 12.15 No Waiver. Any term, covenant or condition of this Agreement may be waived at any time by the party which is entitled to the benefit thereof but only by a written notice signed by the party expressly waiving such term or condition. The subsequent acceptance of performance hereunder by a party shall not be deemed to be a waiver of any preceding breach by any other party of any term, covenant or condition of this Agreement, other than the failure of such other party to perform the particular duties so accepted, regardless of the accepting party's knowledge of such preceding breach at the time of acceptance of such performance. The waiver of any term, covenant or condition shall not be construed as a waiver of any other term, covenant or condition of this Agreement. 12.16 Severability. If any term, provision, condition or covenant of this Agreement or the application thereof to any party or circumstance shall be held to be invalid or unenforceable to any extent in any jurisdiction, then the remainder of this Agreement and the application of such term, provision, condition or covenant in any other jurisdiction or to Persons or circumstances other than those as to whom or which it is held to be invalid or unenforceable, shall not be affected thereby, and each term, provision, condition and covenant of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 12.17 Time is of the Essence. Time is of the essence for all dates and time periods set forth in this Agreement and each performance called for in this Agreement. 12.18 Consents. The Parties acknowledge that, unless otherwise expressly provided in connection with any provision of this Agreement, any references herein requiring the consent of either party shall be deemed to require that the party from which consent is required shall not unreasonably withhold or delay such consent and, except as otherwise expressly provided hereunder or with respect to monetary obligations, each Party shall be deemed to have met each obligation hereunder if such Party has performed such obligation in all material respects. This Section 12.18 shall not be applicable to any consent described in Section 12.2(b). [REMAINDER OF PAGE IS BLANK] -78- IN WITNESS WHEREOF, this Agreement has been entered into as of the day and year first above written. PURCHASER: Integrated Healthcare Holdings, Inc., a Nevada corporation By: /s/ Larry Anderson ------------------------------------------ Name: Larry Anderson ---------------------------------------- Its: President ----------------------------------------- SELLER: AHM CGH, Inc., a California corporation By: /s/ ------------------------------------------ Name: ---------------------------------------- Its: ----------------------------------------- Health Resources Corporation of America - California, a Delaware corporation By: /s/ ------------------------------------------ Name: ---------------------------------------- Its: ----------------------------------------- UWMC Hospital Corporation, a California corporation By: /s/ ------------------------------------------ Name: ---------------------------------------- Its: ----------------------------------------- SHL/O Corp., a Delaware corporation By: /s/ ------------------------------------------ Name: ---------------------------------------- Its: ----------------------------------------- -79- LIST OF SCHEDULES SCHEDULE DESCRIPTION Those schedules provided in the Disclosure Schedule; and A-1 Acute Care Hospitals A-2 MOBs A-3 Other Businesses 1.2-b Interim Balance Sheet 1.6.15 Medicare Numbers Assigned to Purchaser 1.9(a) Owned Real Property 1.9(b) Leased Real Property 1.9(c) Personal Property 1.9(d) Licenses 1.9(e) Material Leases 1.9(f) Material Contracts 1.9(g) Prepaids 1.9(m) Names of Hospitals 1.9(p) Marketing Materials and Brochures 1.10(b) Excluded Current Asset Categories 1.10(c) Excluded Proprietary Assets 1.10(v) Privileged and Protected Items 1.10(w) Excluded Website Content 1.10(y) Other Excluded Assets 1.11(b) Capital Leases 1.11(h) Other Assumed Obligations SCHEDULE DESCRIPTION 2.4(d) Excluded Multi-Facility Contracts 2.5 Consents 2.6(a) Compliance with Law 2.7(b) Real Property Encumbrances 2.7(c) HVAC, Electrical and Plumbing 2.7(e) Assets Not Included in Transaction 2.8(b) JCAHO Accreditation Periods 2.8(c) Threatened Medicare or Medi-Cal Investigations 2.8(d) Audit Periods 2.8(f) Medical Staff 2.10 Financial Statements 2.11 Legal Proceedings 2.12 Seller Plans 2.12(c) Seller Plan Audits 2.13(a) Personnel List 2.13(b) Collective Bargaining Agreements 2.14 Insurance 3.5 Brokers - Purchaser 3.7 Legal Proceedings - Purchaser 4.8 Ground Leases or Leases of Record 5.6 Offering Circular Disclosures 7.7 Permitted Exceptions SCHEDULE DESCRIPTION 10.2.1 Certain Governmental Investigations 11.1(b) Allocation of Purchase Price 11.2(b) Seller Cost Report Data LIST OF EXHIBITS SCHEDULE DESCRIPTION 1.4-a Escrow Agreement 1.4-b Guaranty Agreement 1.6.1 Bills of Sale 1.6.2 Real Estate Assignments 1.6.3 Grant Deeds 1.6.9 Transitional Services Agreements -Information Technology Transition Services Agreement -Item Master Maintenance and Service Agreement -QRS License Agreement -License Agreement for Policy and Procedure Manuals 1.6.10 Business Services Agreement 1.6.12 Power of Attorney 1.6.14 THC Guaranty Agreement 1.6.15 Medicare Assignment Agreement 4.12 Environmental Survey 5.15 Group Purchasing Contract 6.4 Opinion of Purchaser's Counsel 7.6 Opinion of Seller's In-House Counsel -----END PRIVACY-ENHANCED MESSAGE-----