<PAGE>
                                                                  EXHIBIT 10.9.1

                             SETTLEMENT AGREEMENT


     This Settlement Agreement (the "Agreement"), dated as of February 19, 1996,
is made by and among Community Psychiatric Centers, Inc. ("CPC"), Kay Seim,
Richard Seim and Continuum Healthcare, Inc. ("Continuum").

                                    RECITALS

     A.  In the course of reaching agreement on the terms of Kay Seim's
separation from CPC and amicably settling the differences between the parties, a
series of letters between the parties have been exchanged.

     B.  This Agreement is intended to definitively set forth that agreement; it
will summarize and supersede all oral and written communications that have taken
place to date.

     C.  The settlement will go into effect on the date that all parties have
signed this Agreement.

                                   AGREEMENT

     NOW, THEREFORE, the parties agree as follows:

     1.  Termination of Employment and Continuing Compensation.  The effective
         ------------------------------------------------------ 
date of the termination of Kay Seim's employment by CPC was and is November 3,
1995.  For settlement purposes only, CPC will continue to pay, on a regular bi-
weekly basis, the compensation (at the current rate) to which Kay Seim would
have been entitled for the remainder of the one-year renewal term ending on July
1, 1996, pursuant to Paragraph 3 of CPC's Employment Agreement with Kay Seim.

     2.  Employee Benefits.  Kay Seim's medical insurance benefits will continue
         ------------------
through July 1, 1996 with COBRA availability thereafter.  Any profit sharing and
401K funds may roll over.  Unused and non-accrued vacation time for 1995 (six
weeks) will be paid.  Outplacement services by Lee Hecht Harrison in Bellevue
will be paid for up to an amount of $12,000 by CPC for a period of one year
after the effective date of this settlement agreement.

     3.  Stock Options.  Kay Seim will be entitled to exercise her vested stock
         --------------
options until July 1, 1996.  However, a "blackout period" will be in effect,
such that Kay Seim will be unable to trade during the blackout period until the
tenth (10th) day after CPC releases its 1995 10-K.  Notwithstanding anything to
the contrary, Kay 

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<PAGE>
 
Seim will be released from any "blackout" period on or before May 26, 1996. Kay
Seim has been and will continue to be responsible for ensuring that she is in
compliance with state and federal securities laws governing the exercise of
stock options and trading by corporate "insiders."

     4.  Office Space.  Kay Seim will be entitled to continue to use her current
         -------------
office through and including March 31, 1996.  On or before that date, Kay Seim
will be able to purchase the furniture, furnishings and equipment from that
office listed in Attachment A for a total price of $2,500.

     5.  Repayment of Home Equity Loan and Sale of Las Vegas Residence.  CPC
         --------------------------------------------------------------
will provide Kay Seim with the opportunity to sell her Las Vegas residence until
July 1, 1996.  The unpaid remainder of the $300,000 home equity loan that CPC
made to Kay Seim, pursuant to Paragraph 3 of the Addendum to Employment
Contract, plus closing and carrying costs will be repaid from the proceeds of
the sale of the property, with Kay Seim retaining the balance of the proceeds of
sale.  In the meantime, Kay Seim will continue to pay the principal and interest
due and comply with all terms of the loan documents.

     If the residence is not sold by July 1, 1996 or Kay Seim, at her option,
has not repaid the CPC Loan, CPC will list and sell the property at its sole and
absolute discretion.  CPC will initially list the property at its fair market
value, as determined by CPC.  Once the property is sold by CPC, Kay Seim will be
paid any proceeds in excess of the remaining loan amount, carrying costs and
expenses associated with the sale transaction.

     In order to facilitate the sale of the property by CPC if the property has
not already been sold by Kay Seim or, at Kay Seim's option, she has not repaid
the CPC loan, in each case by July 1, 1996, Kay Seim agrees to provide a grant
deed (deeding the property to CPC) and escrow instructions to Nevada Title no
later than February 28, 1996.  Pursuant to the escrow instructions, the escrow
agent will deliver the deed to CPC on July 2, 1996, if Kay Seim has not already
sold the property or repaid the CPC loan by July 1, 1996.  Similarly, pursuant
to the escrow instructions, the escrow agent will return the deed to Kay Seim if
she sells the property or repays the CPC loan by July 1, 1996.

     6.  No Conflict of Interest.  In light of the fact that Continuum is
         ------------------------
referenced in the Addendum to Employment Agreement as not placing Kay Seim in a
conflict of interest, CPC acknowledges that Kay Seim's post-employment
involvement with Continuum will not violate any of her continuing obligations
under Paragraph 6.6 of the Employment Agreement, which shall otherwise be in
effect, with the exception of 

                                                                          PAGE 2
<PAGE>
 
Paragraph 6.6.7 of that Agreement, which hereafter shall be null, void and
unenforceable.

     7.  CPC Lease of Space to Continuum.  CPC will provide Continuum the
         --------------------------------
opportunity to lease space at CPC Fairfax Hospital in Kirkland, Washington.
Continuum is not obligated to enter into such a lease, however.  CPC will agree
to a five-year lease term with five one-year renewal options.  CPC will have the
ability to terminate the lease under certain circumstances including, but not
limited to, the following:  (1) the closure or sale of CPC Fairfax Hospital;
provided that CPC shall be required to provide Continuum with 120 days notice of
such a termination following consummation of an agreement to sell CPC Fairfax
Hospital or a decision to close the hospital; (2) a material change in the stock
ownership of Continuum; (3) a material breach of the lease by Continuum; (4) a
failure by Continuum to obtain or maintain insurance or necessary licenses,
permits or certification for the use; or (5) bankruptcy or insolvency of
Continuum.  the rental fee under the lease will be $750.00 per month per bed,
exclusive of "hotel services."  These services, as well as others, will be made
available by CPC to Continuum on a cost plus 10% basis.

     Unless prohibited by federal or state law and in connection with such a
lease, CPC will transfer the existing Residential Treatment Center ("RTC")
business within CPC Fairfax Hospital to Continuum and will agree not to conduct
an RTC facility in western Washington State.  CPC will provide reasonable
assistance to Continuum in employing CPC employees currently working on the RTC
unit at CPC Fairfax Hospital.  CPC will provide reasonable cooperation in the
CHAMPUS certification process. CPC will also provide reasonable cooperation to
Continuum in Continuum obtaining any necessary licensing and accreditation.  To
the extent that Continuum does not obtain the appropriate licensing and
accreditation, this Paragraph will be of no force and effect.

     Any lease entered into pursuant to this paragraph must be executed no later
than March 10, 1996 with additional standard terms agreeable to all parties for
a commencement date of thirty (30) days form execution.  Continuum will bear
responsibility and cost for preparation and submission of the lease, and, any
and all amendments required.

     8.  Adjustments With Continuum.  Any bad debt which was accrued by CPC
         ---------------------------
Fairfax Hospital for RTC receivables while the Continuum/CPC Memorandum of
Understanding was in effect will be shared with Continuum on a 50/50 basis.  In
addition, if CPC did not bill CHAMPUS for educations services during the course
of the relationship under the Memorandum of Understanding, then to the extent
legally permissible CPC shall so invoice Champus and any revenues collected from
subsequent billings for that period will be shared with Continuum on a 50/50
basis.

                                                                          PAGE 3
<PAGE>
 
     9.  Releases.  In consideration of CPC's promises and releases, Kay Seim,
         ---------
Richard Seim, and Continuum, on behalf of themselves and their shareholders,
employees, officers, directors, agents, attorneys, subsidiaries, successors and
assigns ("Kay Seim's, Richard Seim's, and Continuum's Affiliates"), fully,
finally and forever release, forgive and discharge CPC and CPC's shareholders,
employees, officers, directors, agents, attorneys, subsidiaries, successors and
assigns ("CPC's Affiliates") from all rights, claims, suits and actions that Kay
Seim, Richard Seim, Continuum and/or their Affiliates now have against CPC
and/or CPC's Affiliates arising out of any act, event or omission of any nature
whatsoever occurring prior to the effective date of this settlement agreement.

     It is the intention of Kay Seim, Richard Seim, and Continuum that this
agreement shall be a complete and final resolution of all disputes between
theses parties.  Kay Seim, Richard Seim, and Continuum agree not to bring any
claim, action, suit, arbitration or other proceeding against CPC or CPC's
Affiliates regarding or related in any manner to any claim released herein.

     Kay Seim, Richard Seim, and Continuum acknowledge and agree that this
release applies to all claims for injuries, costs, expenses, damages or losses
that Kay Seim, Richard Seim, Continuum and/or their Affiliates may have against
CPC or CPC's Affiliates whether known or unknown, foreseen or unforeseen, patent
or latent.  Kay Seim, Richard Seim, and Continuum acknowledge that they intend
to waive all claims for damages that may exist as of the effective date of this
settlement agreement but which Kay Seim, Richard Seim, Continuum or their
Affiliates do not know exist and which, if known, would have materially affected
their decision to execute this release, regardless of whether the lack of
knowledge was the result of ignorance, oversight, error, negligence or any other
cause.

     In consideration of Richard Seim's and Continuum's promises and releases,
CPC, on behalf of itself and CPC's Affiliates, fully, finally and forever
releases, forgives and discharges Richard Seim and Continuum and their
Affiliates from all rights, claims, suits and actions that CPC or CPC's
Affiliates now have against them arising out of any act, event or omission of
any nature whatsoever occurring prior to the effective date of this settlement
agreement.

     It is the intention of CPC that this agreement be a complete and final
resolution of all disputes between (i) CPC and CPC's Affiliates and (ii) Richard
Seim, Continuum and their Affiliates.  CPC on behalf of itself and the CPC's
Affiliates agrees not to bring any claim, action, suit, arbitration or other
proceeding against Richard Seim, Continuum and their Affiliates regarding or
related in any manner to any claim released herein.

                                                                          PAGE 4
<PAGE>
 
     CPC acknowledges and agrees that this release applies to all claims for
injuries, costs, expenses, damages or losses that CPC and/or CPC's Affiliates
may have against Richard Seim, Continuum and their Affiliates whether known or
unknown, foreseen or unforeseen, patent or latent.  CPC acknowledges that it
intends to waive all claims for damage that may exist as of the effective date
of this settlement agreement but which CPC and/or CPC's Affiliates do not know
exist and which, if known, would have materially affected their decision to
execute this release, regardless of whether the lack of knowledge was the result
of ignorance, oversight, error, negligence or any other cause.

     For avoidance of doubt, Kay Seim shall not be considered an Affiliate of
Richard Seim or Continuum for purposes of the preceding three paragraphs; rather
the release applicable to Kay Seim is set forth below.

     In consideration of Kay Seim's promises and release, CPC, on behalf of
itself and CPC's Affiliates, fully, finally and forever releases, forgives and
discharges Kay Seim from all rights, claims, suits and actions that CPC or CPC's
Affiliates now have against her arising out of any act, event or omission of any
nature whatsoever occurring prior to the effective date of this settlement
agreement; provided, however, that CPC and CPC's Affiliates reserve the right,
and the foregoing release shall not release, forgive or discharge any right,
claim, suit or action of CPC or CPC's Affiliates, to make or bring a claim, suit
or action against Kay Seim to seek contribution, seek indemnity or to otherwise
make a claim over against her solely with respect to and only to the extent of
damages sought by a third party in a claim, suit or action against CPC or CPC's
Affiliates arising out of any reckless or intentional misconduct of Kay Seim
("Kay Seim Third Party Claims").

     It is the intention of CPC that, except for the Kay Seim Third Party
Claims, this agreement will be a complete and final resolution of all disputes
between (i) CPC and CPC's Affiliates and (ii) Kay Seim.  Without limiting their
rights with regard to Kay Seim Third Party Claims, CPC on behalf of itself and
the CPC's Affiliates agrees not to bring any claim, action, suit, arbitration or
other proceeding against Kay Seim regarding or related in any manner to any
claim released herein.

     CPC acknowledges and agrees that, except for the Kay Seim Third Party
Claims, this release applies to all claims for injuries, costs, expenses,
damages or losses that CPC and/or CPC's Affiliates may have against Kay Seim,
whether known or unknown, foreseen or unforeseen, patent or latent.  CPC
acknowledges that, except for the Kay Seim Third Party Claims, it intends to
waive all claims for damage that may exist as of the effective date of this
settlement agreement but which CPC and/or CPC's Affiliates do not know exist and
which, if known, would have materially affected their decision to execute this
release, regardless of whether the lack of 

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<PAGE>
 
knowledge was the result of ignorance, oversight, error, negligence or any other
cause.

     10.  Governing Law.  This settlement agreement shall be governed by and
          --------------
construed in accordance with the laws of the State of Nevada.

     11.  Entire Agreement.  This agreement contains all of the terms and
          -----------------
conditions agreed upon by the parties with reference to the subject matter
herein.  No other agreements, written or oral, shall be deemed to exist or to
bind any of the parties and all prior agreements, understandings and
representations are merged herein and are superseded by the language of this
agreement.  This agreement cannot be modified or changed except in a writing
signed by all parties.

     12.  Opportunity to Consult Counsel.  All parties to this agreement have
          -------------------------------
carefully considered its terms and have had the opportunity to consult with
counsel.

     13.  Cooperation.  The parties agree that each of them will sign any and
          ------------
all additional documents (e.g., escrow instructions) necessary to effectuate the
terms of this settlement agreement.  In addition, Kay Seim agrees to cooperate
with CPC and its attorneys in connection with any ongoing legal matters in which
she may be a witness (e.g., by preparing for and attending depositions).

     14.  Name and Reputation.  The parties promise to refrain from engaging,
          --------------------
directly or indirectly, in any action or omission which is, or is likely to be,
detrimental to the reputation or goodwill of any other party or any of
directors, officers, owners, employees, related or affiliated entities of any
other party.

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<PAGE>
 
     15.  Confidentiality.  The parties agree not to disclose the terms and
          ----------------
conditions of this Agreement to any person or entity not a party hereto except
members of Kay Seim's and Richard Seim's immediate family and legal advisors who
shall be informed of and bound by this confidentiality provisions, unless such
communication is required by law or is necessary to comply with the law (e.g.,
communications to a tax preparer for purposes of submitting an income tax return
to the Internal Revenue Services), except to the extent such disclosure is
necessary to enforce the terms of this Agreement.

 
/s/ Kay Seim                  COMMUNITY PSYCHIATRIC CENTERS, INC.
----------------------------
Kay Seim
                                                   
/s/ Richard Seim              By: /s/ Ronald L. Ooley             
----------------------------  Title  Executive Vice President
Richard Seim

CONTINUUM HEALTHCARE, INC.
 
 
By: /s/ Richard Seim
Richard Seim, President
                                                                                
                                                                          PAGE 7
<PAGE>
 
                                 ATTACHMENT A

                     Items to be purchased from Kay Seim's
                               Office Inventory

<TABLE>
<CAPTION> 

           ITEM                              MODEL #                 SERIAL #
          ------                            ---------               ----------
<S>                                         <C>                      <C> 
Silver Reed electronic typewriter(1)          EX-66                  861014833
Clauson sideboard(1)                         C14 14/T
Clauson sideboard(1)                         C14 14/T
Skovby round dining table(1)                  S27 Rs18/T
Noleo 3-piece desk(2)                       No7 327/T
Executive high back office chair(1)           V11 323/bk
Kebe gamma visitor chair(4)                  DO1 291/T
Westergaard printer stand(1)                 WO2 60-70/T
Pitney-Bowes fax machine(1)                  8000                    6446496
20 page memory for fax(1)
Hewlett Packard laser jet printer            Laser Jet III           3104JE0375
 with toner cartridge and cord(1)
Lainer desktop microcassette transcriber(1)  413-1000                2238652
Westergaard bookcase with doors(1)        
Toshiba Laptop computer, 8 meg.              T4400C                  11217707
120 mb hard drive, mouse, carrying case
 and battery pack(1)
Dell 486/33 computer(1)                      486P/33                 1TC2M
Dell ultrascan monitor                       VC5                     22901709(V)
Lotus 123                                   3
Word Perfect                                5.1
Windows                                     3.1
DOS                                         5
Central Point Backup
Central Point Anti-Virus
HP/IP Plus Laser Printer(1)                  HP/IP Plus              3203J413JZ
Meg memory upgrade
Plain paper Fax Machine by HP(1)             FAX-950                 JPA4106633
Lanier Copier with doc feeder, sorter        6725                    311107    
  and 20 bin(1)                             S-2035A                 503074
Lanier desktop transcriber(1)               P120                     6295734
Teak hutch for computer desk be Faarup      706/T
Oak bookcase(1)
Gray leather desk chair(1)
Burgandy/oak side chairs(2)
Fellows paper shredder(1)
Sanyo refrigerator(1)
Burgandy armless stacking chairs(6)
Oak corner table with water damage(1)
Hon 4 drawer gray file cabinet(1)
Hon 2 drawer gray file cabinet(1)
Blue side chairs(6)
Hon 4 drawer file cabinets(3)
Lamps(5) 
</TABLE>
                                           TOTAL PURCHASE PRICE: $2500.


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