Document:

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                                                                   EXHIBIT 10.12

                     TERMS OF EMPLOYMENT - DIVISIONAL V.P.

     These Terms of Employment (this "Agreement") shall govern the employment of
John McDonough("Employee") by Total Renal Care Holdings, Inc. or any of its
direct or indirect subsidiaries (the entity employing Employee at any time is
referred to herein as the "Company"). In consideration of the Company's
agreement to employ or to continue to employ Employee and the mutual promises
set forth in this Agreement, the Company and Employee, intending to be legally
bound, agree as follows:

     Section 1.     Employment and Duties.  The Company shall employ Employee,
                    ---------------------
and Employee accepts such employment, on an "at will" basis and on the terms and
conditions set forth in this Agreement.  Employee shall serve the Company in
such capacities as the Company deems appropriate from time to time and shall
perform such duties as may be assigned to Employee from time to time during the
continuance of Employee's employment by the Company by the Chief Executive
Officer of the Company or his designee.  Employee shall devote Employee's best
efforts and skills to the business and interests of the Company on a full-time
basis.  Employee shall not engage in any other business activity while employed
by the Company; provided, however, that Employee may manage personal investments
and participate in charitable and civic affairs to the extent that such
activities do not adversely affect the performance of Employee's
responsibilities to the Company hereunder.  Employee shall at all times observe
and abide by the Company's policies and procedures as in effect from time to
time.

     Section 2.     Compensation.  In consideration of the services to be
                    ------------
performed by Employee hereunder, Employee shall receive:

          2.1       Base Salary.  A salary at the rate of $130,000 per year (the
                    -----------
"Base Salary"), effective as of March 1, 1998.  The Base Salary shall be payable
in installments consistent with the Company's payroll schedule.  The Base Salary
shall be subject to adjustment annually for increases, if any, in the Consumer
Price Index for the most proximate geographic area in which Employee is then
employed (as published by the United States Department of Labor for the
immediately preceding calendar year) and will be reviewed each year during the
Company's annual salary review and the Company may, in its sole discretion,
increase the Base Salary as a result of any such review.

          2.2       Benefits.   Employee shall be provided employee benefits
                    --------
(including life, health, accident and disability insurance, stock options and
vacation) on the same basis as such benefits are generally made available to
other employees of similar position with the Company.

          2.3       Bonuses.
                    -------

               (a)  Employee shall be eligible to receive such bonuses as are
approved by the Compensation Committee of the Board of Directors of the Company,
provided that Employee
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shall be eligible to receive a bonus of up to 50% of the Base Salary each year
pursuant to such bonus plans as may be approved by the Compensation Committee
(the "Bonus"). Except as otherwise provided herein, up to 50% of the Bonus will
be awarded in connection with the achievement of a Company earnings per share
("EPS") target (the "EPS Bonus") and the remainder of the Bonus shall be subject
to the absolute discretion of the Committee based upon the Committee's
subjective judgment.

               (b)  Except as set forth below, the Company EPS target for
determination of Employee's EPS Bonus shall be determined in the sole discretion
of the Committee, provided that the EPS target used to determine Employee's EPS
Bonus shall be identical to the EPS target used to determine the EPS Bonuses for
the executive officers of the Company.  For the calendar year ending December
31, 1998 , the EPS Bonus will represent 50% of the Bonus and Employee shall be
entitled to receive (i) 50% of the EPS Bonus if the Company's EPS for such year
("1998 EPS") equals or exceeds 125% of the Company's EPS for the calendar year
ended December 31, 1997 ("1997 EPS"), (ii) 100% of the EPS Bonus if 1998 EPS
equals or exceeds 150% of 1997 EPS, and (iii) a pro rated amount between 50% and
100% of the EPS Bonus if 1998 EPS is greater than 125% of 1997 EPS but less than
150% of 1997 EPS.

               (c)  The Bonus for any year shall be paid within a reasonable
period of time after the EPS for such year has been determined, but in no event
later than 75 days after the last day of such year. Employee must be employed by
the Company (or an affiliate) on the date any Bonus is paid to be eligible to
receive such Bonus, and if Employee is not employed by the Company (or an
affiliate) on the date any Bonus is paid for any reason whatsoever, Employee
shall not be entitled to receive such Bonus; provided, however, that in the
event Employee (i) dies, (ii) is terminated by the Company by reason of
Disability (as defined below), or (iii) is terminated without Material Cause (as
defined below) following a Change of Control (as defined below), Employee shall
be entitled to receive a pro rated Bonus for that portion of any year prior to
such termination (or for the whole year and a portion of a year if such
termination occurs after December 31 of any year and prior to the date on which
the Bonus for such year is paid) regardless of whether Employee is employed on
the date such Bonus is paid. Any such prorated Bonus shall be paid at such time
as bonuses for such year are otherwise paid.

     Section 3.     Provisions Relating to Termination of Employment.
                    ------------------------------------------------

          3.1       Employment At Will.  Employee's employment with the Company
                    ------------------
is "at will" and is terminable by the Company or by Employee at any time without
prior notice and for any reason or for no reason.  Except as expressly provided
in this Section 3 or as otherwise required by law, upon the termination of
        ---------
Employee's employment with the Company for any reason, Employee (i) shall be
entitled to receive the Base Salary and benefits as set forth in Section 2.1 and
                                                                 -----------
Section 2.2 through the effective date of such termination and (ii) shall not be
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entitled to receive any other

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compensation, benefits or payments of any kind, except as otherwise required by
law or by the terms of any benefit or retirement plan or other arrangement that
would by its terms apply.

          3.2  Termination Following a Change of Control.  Although Employee's
               -----------------------------------------
employment hereunder is "at will" and may be terminated at any time by the
Company for any reason or for no reason, if, at any time following a Change of
Control, Employee's employment is terminated for any reason other than Material
Cause, death or Disability (as defined below), Employee shall be obligated to
provide consulting services to the Company as provided in Section 4 and shall be
                                                          ---------
entitled to receive (i) to the extent applicable, the bonus provided for in
Section 2.3(c) and (ii) in consideration for such consulting services, within
two business days of the effective date of such termination, a lump sum payment
in an amount equal to one-half (1/2) of Employee's then current Base Salary.

          3.3  Termination Due To Disability.  In the event the Company
               -----------------------------
terminates Employee for Disability, unless Employee is eligible to receive full
disability benefits under the disability insurance, if any, provided to Employee
by the Company, the Company shall continue to pay the Base Salary to Employee
until the first to occur of (i) six (6) months or (ii) full disability benefits
are available to Employee.

          3.4  Definitions.  For the purposes of this Section 3, the following
               -----------                            ---------
terms shall have the meanings indicated:

               (a)  "Change of Control" shall mean (i) any transaction or series
of transactions in which any person or group (within the meaning of Rule 13d-5
under the Exchange Act and Sections 13(d) and 14(d) of the Exchange Act) becomes
the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), by way of a stock issuance, tender offer, merger, consolidation,
other business combination or otherwise, of greater than 50% of the total voting
power (on a fully diluted basis as if all convertible securities had been
converted and all warrants and options had been exercised) entitled to vote in
the election of directors of the Company (including any transaction in which the
Company becomes a wholly owned or majority owned subsidiary of another
corporation), (ii) any merger or consolidation or reorganization in which the
Company does not survive, (iii) any merger or consolidation in which the Company
survives, but the shares of the Company's Common Stock outstanding immediately
prior to such merger or consolidation represent 50% or less of the voting power
of the Company after such merger or consolidation, and (iv) any transaction in
which more than 50% of the Company's assets are sold.

               (b)  "Disability" shall mean the inability, for a period of six
(6) months to adequately perform Employee's regular duties due to a physical or
mental illness, condition or disability.

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               (c)  "Material Cause" shall mean: (i) conviction of a felony
involving moral turpitude relating to the business of the Company and which
does, in fact, adversely and directly affect the business of the Company; (ii)
the adjudication by a court of competent jurisdiction that Employee has
committed any act of fraud or dishonesty resulting or intended to result
directly or indirectly in personal enrichment at the expense of the Company;
(iii) repeated failure or refusal by Employee to follow policies or directives
reasonably established by the Chief Executive Officer of the Company or his
designee that goes uncorrected for a period of thirty (30) consecutive days
after written notice has been provided to Employee; or (iv) intentional breach
by Employee of Section 5.1 or Section 5.2 of this Agreement.
               -----------    -----------

          3.5       Effect of Termination.  Upon termination, this Agreement
                    ---------------------
shall be of no further force and effect and neither party shall have any
further right or obligation hereunder; provided, however, that no termination
shall modify or affect the rights and obligations of the parties which have
accrued prior to termination; and provided further, that the rights and
obligations of the parties under Section 3, Section 4, Section 5, Section 6 and
                                 ---------  ---------  ---------  ---------
Section 7 shall survive termination of this Agreement. Notwithstanding anything
to the contrary set forth herein, upon the termination of this Agreement,
Employee shall be entitled to receive any payments or benefits under any
benefit, or retirement plans or other arrangements that would, by their terms,
apply.

     Section 4.     Consulting Services.  If Employee is entitled to receive a
                    -------------------
lump sum payment upon the termination of employment pursuant to Section 3.2 and
                                                                -----------
receives such payment, acceptance of such payment shall be deemed to constitute
an agreement by Employee to provide consulting services to the Company for a
period of one year after the termination of employment (the "Consulting Period")
on an "as needed" basis (which shall not exceed 120 hours per year).  The
consulting services to be provided during the Consulting Period will include
advising the Company as to those matters which were within the scope of
Employee's responsibilities while employed by the Company and such other
consulting services as may be mutually agreed upon by the Company and Employee.
The times and locations at which such consulting services will be provided will
be mutually agreed upon by Employee and the Company.  During the Consulting
Period, Employee will not provide any similar consulting services in any manner,
directly or indirectly, to any Person described in clause (i) or (ii) of Section
                                                                         -------
5.2(a).
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     Section 5.     Information and Competition.
                    ---------------------------

          5.1  (a)  Employee acknowledges and agrees that:  (i) in the course of
Employee's employment or continued employment by the Company, it will or may be
necessary for Employee to create, use or have access to (A) technical, business,
or customer information, materials, or data relating to  the Company's present
or planned business which has not previously been released to the public with
the Company's authorization, including, but not limited to, confidential
information, materials or proprietary data belonging to the Company or relating
to the

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Company's affairs (collectively, "Confidential Information") and (B) information
and materials that concern the Company's business that come into Employee's
possession by reason of employment with the Company (collectively, "Business
Related Information"); (ii) all Confidential Information and Business Related
Information are the property of the Company; (iii) the use, misappropriation or
disclosure of any Confidential Information or any Business Related Information
would constitute a breach of trust and could cause serious and irreparable
injury to the Company; and (iv) it is essential to the protection of the
Company's goodwill and to the maintenance of the Company's competitive position
that all Confidential Information and Business Related Information be kept
confidential and that Employee not disclose any Confidential Information or
Business Related Information to others or use any Confidential Information or
Business Related Information to Employee's own advantage or the advantage of
others.

               (b)  In recognition of the acknowledgments contained in Section
                                                                       -------
5.1(a) above, Employee agrees that, during the Term and thereafter until the
------
Confidential Information and Business Related Information becomes publicly
available (otherwise than through breach by Employee), Employee shall: (i) hold
and safeguard all Confidential Information and Business Related Information in
trust for the Company, its successors and assigns; (ii) not appropriate or
disclose or make available to anyone for use outside of the Company's
organization at any time, either during employment with the Company or
subsequent to the termination of employment with the Company for any reason, any
Confidential Information or Business Related Information, whether or not
developed by Employee, except as required in the performance of Employee's
duties to the Company; (iii) keep in strictest confidence any Confidential
Information or Business Related Information; and (iv) not to disclose or
divulge, or allow to be disclosed or divulged by any person within Employee's
control, to any person, firm or corporation, or use directly or indirectly, for
Employee's own benefit or the benefit of others, any Confidential Information or
Business Related Information.

          5.2  Competition.
               -----------

               (a)  Employee agrees that, during the Term and for a period of
one (1) year from the date Employee's employment terminates for any reason,
Employee shall not: (i) directly or indirectly, on Employee's behalf or as an
officer, director, consultant, partner, owner, stockholder, employee, creditor,
agent, trustee or advisor of any individual, partnership or limited liability
company, corporation, independent practice association or management services
organization or other entity ("Person") that is in the business of, or directly
or indirectly derives any economic benefit from, providing, arranging, offering,
managing or subcontracting dialysis services or renal care services; or (ii) in
any other capacity, own, manage, control, operate, invest or acquire an interest
in or otherwise engage in or act for or on behalf of any Person (other than the
Company and its subsidiaries and affiliates) engaged in any activity in the
United States and those countries outside the United States in which the Company
or any of its subsidiaries or affiliates had conducted any

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business during Employee's employment hereunder, where such activity is similar
to or competitive with the activities carried on by the Company or any of its
subsidiaries or affiliates. As used herein, the term "dialysis services" or
"renal care services" includes, but shall not be limited to, all dialysis
services and nephrology-related services provided by the Company at any time
during the period, including, but not limited to, hemodialysis, acute dialysis,
apheresis services, peritoneal dialysis of any type, staff-assisted
hemodialysis, home hemodialysis, dialysis-related laboratory and pharmacy
services, access-related services, Method II dialysis supplies and services, and
any other service or treatment for persons diagnosed as having end stage renal
disease ("ESRD") or pre-end stage renal disease, as well as any dialysis
services provided in an acute hospital. To the extent such regulation is changed
or amended, the term "ESRD" shall have the same meaning as set forth in Title
42, Code of Federal Regulations 405.2101 et seq. or any successor thereto.
Employee acknowledges that the nature of the Company's activities is such that
competitive activities could be conducted effectively regardless of the
geographic distance between the Company's place of business and the place of any
competitive business. Notwithstanding anything herein to the contrary, such
activity shall not include the ownership of 5% or less of the issued and
outstanding stock of a public company.

               (b)  Employee agrees that, during the Term and for a period of
one (1) years from the date Employee's employment terminates for any reason,
Employee shall not, directly or indirectly: (i) induce any patient or customer
of the Company, either individually or collectively, to patronize any competing
dialysis facility; (ii) request or advise any patient, customer or supplier of
the Company to withdraw, curtail or cancel such person's business with the
Company; (iii) enter into any contract the purpose or result of which would
benefit Employee if any patient or customer of the Company were to withdraw,
curtail or cancel such person's business with the Company; (iv) solicit, induce
or encourage any physician (or former physician) affiliated with the Company or
induce or encourage any other person employed by or under contract with the
Company to curtail or terminate such person's affiliation or employment or
contractual relationship with the Company; (iv) disclose to any Person the names
or physician addresses of any customer of the Company; or (vi) disparage the
Company or any of its agents, employees or affiliate physicians in any fashion.

          5.3  Enforcement.  In the event that any part of this Section 5 shall
               -----------                                      ---------
be held unenforceable or invalid, the remaining parts hereof shall nevertheless
continue to be valid and enforceable as though the invalid portions had not been
a part hereof.  In the event that the area, period of restriction, activity or
subject established in accordance with this Section 5 shall be deemed to exceed
                                            ---------
the maximum area, period of restriction, activity or subject that a court of
competent jurisdiction deems enforceable, such area, period of restriction,
activity or subject shall, for the purpose of this Section 5, be reduced to the
                                                   ---------
extent necessary to render them enforceable.

          5.4  Equitable Relief.  Employee agrees that any violation by Employee
               ----------------
of any covenant in this Section 5 may cause such damage to the Company as will
                        ---------
be serious and irreparable

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and the exact amount of which will be difficult to ascertain, and for that
reason, Employee agrees that the Company shall be entitled, as a matter of
right, to a temporary, preliminary and/or permanent injunction and/or other
injunctive relief, ex parte or otherwise, from any court of competent
jurisdiction, restraining any further violations by Employee. Such injunctive
relief shall be in addition to and in no way in limitation of, any and all other
remedies the Company shall have in law and equity for the enforcement of such
covenants and provisions.

          5.5       Documents.  Upon the termination of Employee's employment
                    ---------
with the Company for any reason, Employee shall promptly deliver to the Company
all materials and documents belonging to or concerning the Company or relating
to its affairs and, without limiting the foregoing, will promptly deliver to
the Company any and all other documents or materials containing or constituting
Confidential Information or Business Related Information.

     Section 6.     Amendment of Stock Options.  This Agreement shall serve to
                    --------------------------
memorialize the amendment approved by the Board of Directors of the Company on
March 2, 1998 to any and all stock options held by Employee prior to such date
(the "Options") to provide that the Options may be exercised through the
delivery of shares of Common Stock owned by Employee having a fair market value
as of the date of such exercise equal to the cash exercise price of the Options
being exercised, provided that such shares of Common Stock being so delivered
have been owned by Employee for at least six (6) months prior to the date of
such exercise. The parties acknowledge and agree that, the Options will become
fully vested and exercisable without regard to their vesting provisions in the
event that Employee is terminated by the Company for any reason at any time
following a Change of Control as set forth in Section 3.4(a) hereof.

     Section 7.     Miscellaneous.
                    -------------

               7.1  Mediation of Disputes Concerning Employment. In the event of
                    -------------------------------------------
any dispute concerning Employee's employment by the Company, whether or not
relating to this Agreement, Employee and the Company shall first attempt to
resolve such dispute through mediation as provided in this Section 7.1 before
                                                           -----------
instituting any legal action or other proceedings with respect thereto;
provided, however, that neither party shall be required to utilize such
mediation procedures to the extent that equitable relief is being sought by a
party in the good faith belief that an immediate remedy is required to avoid
irreparable injury to such party.  Except as otherwise provided in the proviso
to the immediately preceding sentence, in the event that either party desires to
institute litigation or other legal proceedings to resolve a dispute concerning
Employee's employment by the Company, such party shall first give written notice
to the other party setting forth in detail the nature of the dispute and the
facts which such party believes supports such party's position in such dispute.
The parties shall then promptly (and, in any event, within ten (10) business
days of the giving of notice of a dispute) engage the services of an impartial,
experienced employment mediator (the "Mediator") under the auspices of
JAMS/Endispute (or such other mediation service as the parties

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may mutually select) in Los Angeles County, California and shall promptly
schedule a mediation session with the Mediator for a date which is not later
than forty-five (45) days after the date of the selection of the Mediator. The
Mediator shall conduct a one-day mediation session, attended by both parties and
their counsel, in an attempt to informally resolve the dispute. By oral or
written agreement of both parties, follow-up or additional mediation sessions
may be scheduled, but neither party shall be required to participate in more
than one day of mediation. Neither party shall be required to submit briefs or
position papers to the Mediator, but both parties shall have the right to do so,
subject to such rules and procedures as the Mediator may establish in his or her
sole discretion. Except as otherwise agreed by the parties, all written
submissions to the Mediator shall remain confidential as between the submitting
party and the Mediator. The mediation process shall be treated as a settlement
negotiation and no evidence introduced in the mediation process may be used in
any way by either party or any other person in connection with any subsequent
litigation or other legal proceedings (except to the extent independently
obtained through discovery in such litigation or proceedings) and the disclosure
of any privileged information to the Mediator shall not operate as a waiver of
privilege with respect to such information. Each party shall bear all of its own
costs, attorneys' fees and expenses related to preparing for and attending any
mediation conducted under this Agreement. The fees and expenses of the Mediator
and the mediation service used, if any, shall be borne equally by the Company
and Employee.

          7.2  Entire Agreement; Amendment.  This Agreement represents the
               ---------------------------
entire understanding of the parties hereto with respect to the employment of
Employee and supersedes all prior agreements with respect thereto; provided,
however, that except as set forth in Section 6, this Agreement shall not affect
                                     ---------
any stock option agreement or similar agreement relating to equity incentives
between the Company and Employee.  This Agreement may not be altered or amended
except in writing executed by both parties hereto.

          7.3  Assignment; Benefit.  This Agreement is personal and may not be
               -------------------
assigned by Employee.  This Agreement may be assigned by the Company and shall
inure to the benefit of and be binding upon the successors and assigns of the
Company.

          7.4  Applicable Law.  This Agreement shall be governed by the laws of
               --------------
the State of California, without regard to the principles of conflicts of laws.

          7.5  Notice.  Notices and all other communications provided for in
               ------
this Agreement shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid, addressed to the Company at its principal office and
to Employee at Employee's principal residence as shown in the Company's
personnel records, provided that all notices to the Company shall be directed to
the attention of the Chief Executive Officer with a copy to the Secretary of the
Company, or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of

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change of address shall be effective only upon receipt.

          7.6  Waiver.  The waiver by any party of a breach of any provision of
               ------
this Agreement by the other shall not operate or be construed as a waiver of any
other or subsequent breach of such or any provision.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the 1/st/ day of March, 1998.

TOTAL RENAL CARE HOLDINGS, INC.             EMPLOYEE

By:_______________________________          ________________________________
                                            Signature

Its:______________________________          ________________________________
                                            John McDonough

                                       9<PAGE>

                                                                   EXHIBIT 10.16

                          SECOND AMENDED AND RESTATED
                        TOTAL RENAL CARE HOLDINGS, INC.
                         1994 EQUITY COMPENSATION PLAN

          SECTION 1.  Purpose.  The purposes of this Total Renal Care Holdings,
                      -------
Inc. 1994 Equity Compensation Plan (the "Plan") are to promote the interests of
Total Renal Care Holdings, Inc. (together with any successor thereto, the
"Company") and its stockholders by (i) attracting and retaining key employees,
directors, consultants and advisers of the Company and its Affiliates; (ii)
motivating such individuals by means of performance-related incentives to
achieve longer-range performance goals; and (iii) enabling such individuals to
participate in the long-term growth and financial success of the Company.

          SECTION 2.  Definitions.  As used in the Plan, the following terms
                      -----------
shall have the meanings set forth below:

          "Affiliate" shall mean (i) any entity that, directly or through one or
more intermediaries, controls or is controlled by the Company and (ii) any
entity in which the Company has a significant equity interest, as determined by
the Committee.

          "Award" shall mean any Option or Purchased Shares Award.

          "Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant, unless otherwise determined by the
Committee.

          "Board" shall mean the Board of Directors of the Company.

          "Cause" shall mean "Cause" as defined in the applicable employment
agreement between the Participant and the Company, or if there is no such
agreement at the relevant time or such agreement does not define such term, then
(i) a Participant's willful and continued failure substantially to perform his
duties with, or services for, the Company or its Affiliates (other than as a
result of death or Disability), (ii) a Participant's dishonesty in the
performance of his duties with, or services for, the Company or its Affiliates,
(iii) an act or acts on a Participant's part constituting a felony under the
laws of the United States or any state thereof, (iv) any other act or omission
by a Participant which is materially injurious to the financial condition or
business reputation of the Company or any of its Affiliates, or (v) the
occurrence of a Non-Compete Trigger or Confidentiality Trigger.

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

          "Committee" shall mean (i) a committee of the Board designated by the
Board to administer the Plan and composed of not less than the minimum number of
persons from time to time required by any applicable law and, during any period
in which the Company has become
<PAGE>

subject to the provisions of Section 16, Rule 16b-3, each of whom, to the extent
necessary to comply with Rule 16b-3 only, is a "disinterested person" within the
meaning of Rule 16b-3 or (ii) if the Board has not so designated a committee,
the Board.

          "Confidentiality Trigger" shall mean a Participant's disclosure or use
for his own benefit or purposes or for the benefit or purposes of any person,
firm, partnership, joint venture, association, corporation or other business
organization, entity or enterprise other than the Company and any of its
Subsidiaries or Affiliates (whether during or after the termination of his
employment, consulting or advisory relationship with the Company), of any trade
secrets, information, data, or other confidential information relating to
customers, development, programs, costs, marketing, trading, investment, sales
activities, promotion, credit and financial data, financing methods, plans, or
the business and affairs of the Company generally, or of any Subsidiary or
Affiliate of the Company; provided that the foregoing shall not apply to
                          --------
information which is not unique to the Company or which is generally known to
the industry or the public other than as a result of the Participant's breach of
this covenant or to disclosure that is required by any applicable law, rule or
regulation (including compliance with any oral or written questions,
interrogatories, requests for information or documents, subpoena, civil
investigative demand or similar process to which the Participant is subject).

          "Disability" shall mean "Disability" as defined in the applicable
employment agreement between the Participant and the Company, or if there is no
such agreement at the relevant time or such agreement does not define such term,
then the physical or mental incapacity resulting in the Participant being unable
for a period of six (6) consecutive months or for an aggregate of six (6) months
in any twenty-four (24) consecutive month period to perform his duties with, or
services for, the Company, as determined in good faith by the Committee, which
determination shall be final and conclusive for all purposes of this Plan.

          "Effective Date" shall mean the effective date of the Plan as
determined pursuant to Section 9.

          "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

          "Fair Market Value" shall mean, (A) with respect to any property other
than the Shares or any Option, the fair market value of such property determined
by such methods or procedures as shall be established from time to time by the
Committee and (B) with respect to the Shares, except as otherwise provided in
the applicable employment agreement between the Participant and the Company, as
of any date:

               (i) if there is a public market for the Shares as of such date
(x) the last reported sales price of the Shares on the principal national
securities exchange on which the Shares are listed or admitted to trading on the
date immediately preceding such date or, if no such reported sale takes place on
such day, the average of the closing bid and asked prices

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thereon, as reported in The Wall Street Journal, or (y) if the Shares are not
                        -----------------------
then listed or admitted to trading on a national securities exchange, the last
reported sales price on the NASDAQ National Market System on the date
immediately preceding such date or, if no such reported sale takes place on such
day, the average of the closing bid and asked prices thereon, as reported in The
                                                                             ---
Wall Street Journal, or (z) if the Shares are not then quoted on such National
-------------------
Market System or listed or admitted to trading on a national securities
exchange, the average of the closing bid and asked prices, as reported by The
                                                                          ---
Wall Street Journal for the over-the-counter market on the date immediately
-------------------
preceding such date; or

               (ii)  if there is no public market for the Shares as of such
date, then (x) $1.00 per Share if Fair Market Value is being determined as of a
date within one (1) year of the Effective Date or (y) the per share value as
determined by an accounting firm, investment banking firm or appraisal firm of
national standin g selected by the Committee; provided that if such value has
                                              --------
previously been determined for the Company by an accounting firm, investment
banking firm or appraisal firm of national standing with respect to a date not
more than twelve months prior to such date, at the Committee's option, the Fair
Market Value will equal the value as so determined.

          "Fair Market Value Per Option" shall mean with respect to any Option,
the excess, if any, of the aggregate Fair Market Value of the Shares represented
by the unexercised and uncancelled portion of such Option over the aggregate
purchase price of such Shares pursuant to such Option.

          "Initial Grant Options" shall mean those Options granted as of the
Effective Date pursuant to Section 6(a).

          "Initial Public Offering" shall mean the initial sale of Shares
pursuant to an effective registration statement under the Securities Act of 1933
(other than a registration statement on Form S-8 or any successor form), if, as
a result of such sale, the Company receives net proceeds of at least
$15,000,000.

          "Initial Purchased Shares" shall mean the Purchased Shares made
available for purchase pursuant to Purchased Shares Awards granted as of the
Effective Date pursuant to Section 6(b).

          "Non-Compete Trigger" shall mean the occurrence during the
Participant's employment with or retention by the Company or during the period
from the date the Participant ceases employment with, or providing consulting or
advisory services to, the Company, as the case may be, through the first
anniversary of that date, of (i) the Participant's engagement in or becoming an
employee, director, or principal or shareholder of, consultant to or equity
participant in, any Person that engages in, activities that are in competition
with the Company within the United States of America or such other geographic
area as is specified in the applicable Award

                                       3
<PAGE>

Agreement; provided that such activities will be limited to those businesses of
           --------
the Company in which the Company was engaged during the term of such
Participant's employment or provision of consulting or advisory services to the
Company; provided further that the Participant may make passive investments of
         -------- -------
not more than one percent of the outstanding shares of, or any other equity
interest in, any company or entity listed or traded on a national securities
exchange or in an over-the-counter securities market or (ii) (x) the
Participant's direct or indirect inducement of any employee of the Company or
any of its Subsidiaries, any Medical Director who is an independent contractor
for the Company or its Subsidiaries or any physician referring patients to the
Company or its Subsidiaries to (A) engage in any activity that would result in
the occurrence of a Non-Compete Trigger if engaged in by the Participant or (B)
terminate his or her employment, contractual relationship or referring
relationship, respectively, with the Company or any of its Subsidiaries or (y)
the Participant's direct or indirect employment of, or offer of employment or
other similar arrangement with, any person who is or was during the period of
the Participant's employment or consulting or advisory relationship with the
Company, or was beforehand, employed by the Company or its Subsidiaries, a
Medical Director of a dialysis facility owned or operated by the Company or its
Subsidiaries or a referring physician for any dialysis center owned or operated
by the Company or its Subsidiaries.

          "Note" shall have the meaning set forth in Section 6(b)(i) hereof.

          "Option" shall mean any Option (including any Initial Grant Option)
granted pursuant to Section 6(a).

          "Participant" shall mean any employee or director of, or consultant or
adviser to, the Company granted an Award under the Plan.

          "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, government
or political subdivision thereof or other entity.

          "Pledge" shall have the meaning set forth in Section 6(c)(vi) hereof.

          "Prime Rate" shall mean the rate of interest publicly announced by The
Bank of New York from time to time as its prime rate.

          "Purchased Shares" shall mean the shares made available for purchase
pursuant to Section 6(b) (including the Initial Purchased Shares).

          "Purchased Shares Award" shall have the meaning set forth in Section
6(b) hereof.

          "Purchased Shares Loan" shall have the meaning set forth in Section
6(b)(i) hereof.

                                       4
<PAGE>

          "Replaced Award" shall have the meaning set forth in Section 6(a)(iv)
hereof.

          "Repurchase Notice" shall have the meaning set forth in Section
6(a)(iii) hereof.

          "Repurchase Right" shall have the meaning set forth in Section
6(a)(iii) hereof.

          "Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the
Exchange Act, or any successor rule or regulation thereto as in effect from time
to time.

          "SEC" shall mean the Securities and Exchange Commission, or any
successor thereto.

          "Section 16" shall mean Section 16 of the Exchange Act, or any
successor provision thereto as in effect from time to time.

          "Shareholders Agreement" shall mean an agreement substantially in the
form of Exhibit A to the Subscription Agreement dated as of May 26, 1994 among
DLJ Merchant Banking Partners, L.P., DLJ International Partners, C.V., DLJ
Offshore Partners, C.V., DLJ Merchant Banking Funding, Inc., NME Properties
Corp., the Company and National Medical Enterprises, Inc.

          "Shares" shall mean shares of Class A Common Stock of the Company,
$.001 par value, and such other securities or property as may become the subject
of Awards or become subject to Awards pursuant to an adjustment made under
Section 4(b) of the Plan.

          "Subsidiary" shall mean any entity (including, without limitation, any
partnership) of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions (including, in the case of a partnership, a general
partner) are at the time directly or indirectly owned by the Company.

          SECTION 3.  Administration.  The Plan shall be administered by the
                      --------------
Committee.  Subject to the terms of the Plan and applicable law, and in addition
to other express powers and authorizations conferred on the Committee by the
Plan, the Committee shall have full power and authority to:  (i) designate
Participants; (ii) determine the type or types of Awards to be granted to an
eligible director or employee of, or consultant or advisor to, the Company;
(iii) determine the number of Shares to be covered by, or with respect to which
payments, rights, or other matters are to be calculated in connection with,
Awards; (iv) determine the terms and conditions of any Award; (v) determine
whether, to what extent, and under what circumstances Awards may be settled or
exercised in cash, Shares, other securities, other Awards or other property, or
canceled, forfeited, or suspended and the method or methods by which Awards may
be settled, exercised, canceled, forfeited, or suspended; (vi) determine
whether, to what extent, and under

                                       5
<PAGE>

what circumstances cash, Shares, other securities, other Awards, other property,
and other amounts payable with respect to an Award shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret and administer the Plan and any instrument or agreement relating
to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive
such rules and regulations and appoint such agents as it shall deem appropriate
for the proper administration of the Plan; and (ix) make any other determination
and take any other action that the Committee deems necessary or desirable for
the administration of the Plan. Unless otherwise expressly provided in the Plan,
all designations, determinations, interpretations, and other decisions under or
with respect to the Plan or any Award shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive, and binding
upon all Persons, including the Company, any Affiliate, any Participant, any
holder or beneficiary of any Award, any shareholder and any Employee.

          SECTION 4.  Shares Available for Awards.
                      ---------------------------

          (a) Shares Available.  Subject to adjustment as provided in Section
                       ----------------
4(b):

               (i) Calculation of Number of Shares Available.  The number of
                   -----------------------------------------
Shares with respect to which Awards may be granted under the Plan shall be
5,084,447. If, after the effective date of the Plan, any Shares covered by an
Award granted under the Plan, or to which such an Award relates, are forfeited,
or if an Award otherwise terminates or is canceled without the delivery of
Shares or of other consideration, then the Shares covered by such Award, or to
which such Award relates, or the number of Shares otherwise counted against the
aggregate number of Shares with respect to which Awards may be granted, to the
extent of any such forfeiture, termination or cancellation, shall again be, or
shall become, Shares with respect to which Awards may be granted.

               (ii) Accounting for Awards.  For purposes of this
                    ---------------------
Section 4, the number of Shares covered by any Award, or to which such Award
relates, shall be counted on the date of grant of such Award against the
aggregate number of Shares with respect to which Awards may be granted under the
Plan, provided, that Awards that operate in tandem with (whether granted
      --------
simultaneously with or at a different time from), or that are substituted for,
other Awards may be counted or not counted under procedures adopted by the
Committee in order to avoid double counting.  Any Shares delivered by the
Company, any Shares with respect to which Awards are made by the Company, or any
Shares with respect to which the Company becomes obligated to make Awards,
through the assumption of, or in substitution for, outstanding awards previously
granted by an acquired company, shall not, except in the case of Shares with
respect to which Awards are granted to employees of the Company who are officers
or directors of the Company for purposes of Section 16 or any successor section
thereto during any period in which the Company is subject to Section 16, be
counted against the Shares available for Awards under the Plan.

                                       6
<PAGE>

               (iii) Sources of Shares Deliverable Under Awards.  Any Shares
                     ------------------------------------------
delivered pursuant to an Award may consist, in whole or in part, of authorized
and unissued Shares or of treasury Shares.

          (b)  Adjustments.  In the event that the Committee determines that
               -----------
any dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee shall, in such manner as
it may deem equitable, adjust any or all of (i) the number and type of Shares
(or other securities or property) with respect to which Awards may be granted,
(ii) the number and type of Shares (or other securities or property) subject to
outstanding Awards, and (iii) the grant or exercise price with respect to any
Award or, if deemed appropriate, make provision for a cash payment to the holder
of an outstanding Award; provided that the number of Shares subject to any
                         --------
Award denominated in Shares shall always be a whole number.

          SECTION 5.  Eligibility.  Any employee or director of, or consultant
                      -----------
or adviser to, the Company or any Affiliate who is not a member of the
Committee, including any officer or employee-director of the Company or any
Affiliate, shall be eligible to be designated a Participant.

          SECTION 6.  Awards.
                      ------

          (a) Options.  The Committee is hereby authorized to grant to any
              -------
Participant an option to purchase Shares (an "Option") which shall contain the
following terms and conditions and such additional terms and conditions, which
are not inconsistent with the provisions of the Plan, as the Committee shall
determine; provided that such Options are not intended to constitute Incentive
           --------
Stock Options within the meaning of Section 422 of the Code:

               (i) Exercise Price.  The purchase price per Share purchasable
                   --------------
under an Option shall be such amount as shall be determined by the Committee in
its sole discretion, provided that the purchase price per Share for any Initial
Grant Options shall be $1.00 per Share.

               (ii) Time and Method of Exercise.  The Committee shall
                    ---------------------------
determine the time or times during which any Option may be exercised, in whole
or in part, and the conditions, if any, upon which any Option shall vest and
become exercisable on an accelerated basis or be canceled without consideration.

                                       7
<PAGE>

               (iii) Restrictions.  Except as otherwise provided in any
                     ------------
applicable Award Agreement, any Shares acquired by a Participant upon the
exercise of an Option shall, if so requested by the Committee in its sole
discretion, be held by the Participant subject to the terms and conditions of
the Shareholders Agreement, by which such Participant shall agree to be bound.
In addition, except as otherwise provided in any applicable Award Agreement,
upon termination of a Participant's employment, consulting or advising
relationship with the Company, or upon the occurrence of a Non-Compete Trigger
or a Confidentiality Trigger (whether during or after the termination of such
relationship), any portion of an Option which is not canceled by reason of such
termination and each Share acquired upon exercise of an Option shall be subject
to repurchase by the Company (the "Repurchase Right") at (A) Fair Market Value
Per Option or Fair Market Value Per Share, as the case may be, in the event of
such Participant's death, voluntary termination of his employment, consulting or
advisory relationship with the Company, or termination of such relationship due
to Disability or by the Company without Cause, as the case may be; provided than
                                                                   --------
such Repurchase Right shall not arise solely by reason of a voluntary
termination of such relationship with the Company or termination by reason of
the Participant's death or Disability, if such event occurs after an Initial
Public Offering and (B) 80% of Fair Market Value Per Option or Fair Market Value
per Share, as the case may be, in the event of the termination of such
Participant's relationship with the Company by the Company with Cause or upon
the occurrence of a Non-Compete Trigger or Confidentiality Trigger.  The Company
may exercise its Repurchase Right by giving written notice (a "Repurchase
Notice") to the Participant by no later than the 30th day following the date on
which such Repurchase Right arises.  The closing for the exercise of the
Repurchase Right shall occur as promptly as practicable (but no later than 120
days) after delivery of the Repurchase Notice.  On or prior to the closing of
the exercise of the Repurchase Right, the Participant shall deliver to a
representative of the Company certificates representing all the Shares subject
to the Repurchase Right, duly endorsed, together with all documents required to
be executed in connection with the sale of such Shares (it being understood that
in no event will the Participant be obligated to make any representations and
warranties, or to provide indemnities, with respect to any matters other than
title to the Shares subject to the Repurchase Right held by the Participant and
the authority to sell such Shares).

               (iv)  Substitute Awards.  In the event an Option is granted
                     -----------------
hereunder in substitution for an option or other award granted under this Plan
or any other plan or arrangement (a "Replaced Award"), the grant of the Option
hereunder may be conditioned and contingent upon the Participant's execution of
a written acknowledgement that such Option is in satisfaction in full of all
obligations and liabilities of the Company, its Subsidiaries and Affiliates with
respect to the Replaced Award.

          (b) Purchased Shares.  The Committee is hereby authorized to grant to
              ----------------
any Participant the right to purchase Shares from the Company (the "Purchased
Shares") at a purchase price to be determined in the sole discretion of the
Committee (a "Purchased Shares

                                       8
<PAGE>

Award"); provided that the purchase price with respect to the Initial Purchased
         --------
Shares shall be equal to $1.00 per Share. The Purchased Shares shall be subject
to such conditions or restrictions as may be determined by the Committee as
evidenced in the applicable Award Agreement. Without limiting the generality of
the foregoing, except as otherwise provided in any applicable Award Agreement,
the Purchased Shares shall, if so requested by the Committee in its sole
discretion, be held by the Participant subject to the terms and conditions of
the Shareholders Agreement, by which such Participant shall agree to be bound,
and each Purchased Share shall be subject to the Company's Repurchase Right at
(A) Fair Market Value Per Share in the event of such Participant's death,
voluntary termination of his employment, consulting or advisory relationship
with the Company, or termination of such relationship due to Disability or by
the Company without Cause, as the case may be; provided that such Repurchase
                                               --------
Right shall not arise solely by reason of a voluntary termination of such
relationship with the Company or termination by reason of the Participant's
death or Disability, if such event occurs after an Initial Public Offering, and
(B) 80% of Fair Market Value Per Share in the event of the termination of such
Participant's relationship with the Company by the Company with Cause or upon
the occurrence of a Non-Compete Trigger or Confidentiality Trigger (whether
during or after the termination of such relationship). The Company may exercise
its Repurchase Right by giving a Repurchase Notice to the Participant by no
later than the 30th day following the date on which such Repurchase Right
arises. The closing for the exercise of the Repurchase Right shall occur as
promptly as practicable (but no later than 120 days) after delivery of the
Repurchase Notice. On or prior to the closing of the exercise of the Repurchase
Right, the Participant shall deliver to a representative of the Company
certificates representing all the Shares subject to the Repurchase Right, duly
endorsed, together with all documents required to be executed in connection with
the sale of such Shares (it being understood that in no event will the
Participant be obligated to make any representations and warranties, or to
provide indemnities, with respect to any matters other than title to the Shares
subject to the Repurchase Right held by the Participant and the authority to
sell such Shares).

               (i) Purchased Shares Loan.  In order to assist Participants in
                   ---------------------
financing the purchase of Shares pursuant to any Purchased Shares Award, with
respect to any Purchased Shares Award the Participant will be eligible to
receive a loan from the Company (the "Purchased Shares Loan") with a principal
amount equal to up to 100% of the aggregate purchase price of the Shares subject
to the Purchased Shares Award, as determined by the Committee. The Purchased
Shares Loan will be evidenced by a full recourse promissory note substantially
in the form of Exhibit I hereto (the "Note") and will be secured by a pledge by
the Participant in favor of the Company of all Shares purchased by the
Participant pursuant to any Purchased Shares Award or otherwise acquired by the
Participant upon the exercise of any Option.

          (c)  General.
               -------

               (i) Awards May Be Granted Separately or Together.  Awards may,
                   --------------------------------------------
in the discretion of the Committee, be granted either alone or in addition to,
in tandem with,

                                       9
<PAGE>

or in substitution for any other Award granted under the Plan or any award
granted under any other plan of the Company or any Affiliate or under any plan
of an acquired company. Awards granted in addition to or in tandem with other
Awards or awards granted under any other plan of the Company or any Affiliate
may be granted either at the same time as or at different times from the grant
of such other Awards or awards.

               (ii) Form of Payment by Company Under Awards.  Subject to the
                    ---------------------------------------
terms of the Plan and of any applicable Award Agreement, payments or transfers
to be made by the Company or an Affiliate upon the grant, exercise or payment of
an Award may be made in such form or forms as the Committee shall determine,
including, without limitation, cash, Shares, other securities, other Awards or
other property, or any combination thereof and may be made in a single payment
or transfer, in installments, or on a deferred basis, in each case in accordance
with rules and procedures established by the Committee. Such rules and
procedures may include, without limitation, provisions for the payment or
crediting of reasonable interest on installment or deferred payments.

               (iii) Limits on Transfer of Awards.
                     ----------------------------

                     (A) Each Award, and each right under any Award, shall be
exercisable only by the Participant during the Participant's lifetime, or, if
permissible under applicable law, by the Participant's legal representative.

                     (B) No Award and no right under any such Award, may be
assigned, alienated, pledged, attached, sold or otherwise transferred or
encumbered by a Participant otherwise than by will or by the laws of community
property or of descent and distribution (or, in the case of Purchased Shares, to
the Company) and any such purported assignment, alienation, pledge, attachment,
sale, transfer or encumbrance shall be void and unenforceable against the
Company or any Affiliate.

               (iv)  Term of Awards.  The term of each Award shall be for such
                     --------------
period as may be determined by the Committee; provided, that the term of the
                                              --------
Initial Grant Options shall be 10 years from the date of grant, subject to
earlier cancellation as provided in the applicable Award Agreement.

               (v)   Rule 16b-3 Six-Month Limitations.  During any period in
                     --------------------------------
which the Company is subject to the provisions of Section 16, to the extent
required in order to comply with Rule 16b-3 only, any equity security offered
pursuant to the Plan must be held for at least six months after the date of
grant, and with respect to any derivative security issued pursuant to the Plan
at least six months must elapse from the date of acquisition of such derivative
security to the date of disposition (other than upon exercise or conversion) of
the derivative security or its underlying equity security, except in case of
death or disability. Terms

                                       10
<PAGE>

used in the preceding sentence shall, for the purposes of such sentence only,
have the meanings, if any, assigned or attributed to them under Rule 16b-3.

               (vi)  Share Certificates.  All certificates for Shares or other
                     ------------------
securities of the Company or any Affiliate delivered under the Plan pursuant to
any Award or the exercise thereof shall be subject to such stop transfer orders
and other restrictions as the Committee may deem advisable under the Plan or the
rules, regulations, and other requirements of the SEC, any stock exchange upon
which such Shares or other securities are then listed, and any applicable
Federal or state laws, and the Committee may cause a legend or legends to be put
on any such certificates to make appropriate reference to such restrictions. The
Company shall register in the name of the Participant the number of Shares
received by the Participant upon the exercise of any Option or acquired upon the
purchase of Shares pursuant to any Purchased Shares Award; provided that the
                                                           --------
Company may retain possession of the certificates relating to all such Shares,
which Shares shall be pledged (the "Pledge") by the Participant to the Company
as security for any Purchased Shares Loan provided to the Participant pursuant
to Section 6(b) on the terms and conditions set forth in the Note.

               (vii) Consideration for Grants.  Awards may be granted for
                     ------------------------
no cash consideration or for such minimal cash consideration as may be required
by applicable law.

               (viii) Delivery of Shares or Other Securities and Payment by
                      -----------------------------------------------------
Participant of Consideration.  No Shares or other securities shall be delivered
----------------------------
pursuant to any Award until payment in full of any amount required to be paid
pursuant to the Plan or the applicable Award Agreement is received by the
Company.  Such payment may be made by such method or methods and in such form or
forms as the Committee shall determine, including, without limitation, cash,
Shares, other securities, other Awards or other property, or any combination
thereof; provided that the combined value, as determined by the Committee, of
         --------
all cash and cash equivalents and the Fair Market Value of any such Shares or
other property so tendered to the Company, as of the date of such tender, is at
least equal to the full amount required to be paid pursuant to the Plan or the
applicable Award Agreement to the Company.

          SECTION 7.  Amendment and Termination.  Except to the extent
                      -------------------------
prohibited by applicable law and unless otherwise expressly provided in an Award
Agreement or in the Plan:

          (a) Amendments to the Plan.  The Board may amend, alter, suspend,
              ----------------------
discontinue, or terminate the Plan without the consent of any shareholder,
Participant, other holder or beneficiary of an Award, or other Person; provided
                                                                       --------
that any such amendment, alteration, suspension, discontinuation, or termination
that would impair the rights of any Participant, or any other holder or
beneficiary of any Award theretofore granted, shall not to that extent be
effective except to the extent the Committee shall have obtained the consent of
such Participant, holder or beneficiary pursuant to Section 7(b); and provided
                                                                      --------
further, that notwithstanding any other provision of the Plan or any Award
-------
Agreement, in the event the Company is at such time subject to the requirements
of Section 16, without the approval of the

                                       11
<PAGE>

shareholders of the Company no such amendment, alteration, suspension,
discontinuation, or termination shall be made that would:

               (i)   increase the total number of Shares available for Awards
under the Plan, except as provided in Section 4 of the Plan; or

               (ii)  otherwise cause the Plan to cease to comply with any tax or
regulatory requirement, including for these purposes any approval or other
requirement which is a prerequisite for exemptive relief from Section 16(b) of
the Exchange Act during any period in which the Company is subject to Section
16.

          (b)  Amendments to Awards.  The Committee may waive any conditions or
               --------------------
rights under, amend any terms of, or alter, suspend, discontinue, cancel or
terminate, any Award theretofore granted, prospectively or retroactively,
without the consent of any relevant Participant or holder or beneficiary of an
Award; provided that any such amendment, alteration, suspension,
discontinuation, cancellation or termination that would impair the rights of any
Participant, or any other holder or beneficiary of any Award, shall not to that
extent be effective without the consent of the Participant or such other holder
or beneficiary.

          (c)  Adjustments of Awards Upon Certain Acquisitions.  In the event
               -----------------------------------------------
the Company or any Affiliate shall assume outstanding employee awards or the
right or obligation to make future employee awards in connection with the
acquisition of another business or another corporation or business entity, the
Committee may make such adjustments, not inconsistent with the terms of the
Plan, in the terms of Awards as it shall deem appropriate in order to achieve
reasonable comparability or other equitable relationship between the assumed
awards and the Awards as so adjusted.

          (d)  Adjustment of Awards Upon the Occurrence of Certain Unusual or
               --------------------------------------------------------------
Nonrecurring Events.  Notwithstanding any other provision in the Plan or any
-------------------
Award granted hereunder, the Committee is hereby authorized to make adjustments
in the terms and conditions of, and the criteria included in, Awards in
recognition of unusual or nonrecurring events affecting the Company, any
Affiliate, or the financial statements of the Company or any Affiliate, or of
changes in applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan.

          (e)  Correction of Defects, Omissions and Inconsistencies.  The
               ----------------------------------------------------
Committee may correct any defect, supply any omission, or reconcile any
inconsistency in the Plan or any Award or Award Agreement in the manner and to
the extent it shall deem desirable to carry the Plan into effect.  In the event
of a conflict between any term or provision contained in an Award or an Award
Agreement and a term or provision contained in the Plan, the applicable terms
and conditions of the Plan shall govern and prevail.

                                       12
<PAGE>

          SECTION 8. General Provisions.
                     ------------------

          (a)  No Rights to Awards.  No Participant or other Person shall have
               -------------------
any claim to be granted any Award, and there is no obligation for uniformity of
treatment of Participants, or holders or beneficiaries of Awards. The terms and
conditions of Awards need not be the same with respect to each recipient.

          (b)  Delegation.  Subject to the terms of the Plan and applicable law,
               ----------
the Committee may delegate to one or more officers or managers of the Company or
any Affiliate, or to a committee of such officers or managers, the authority,
subject to such terms and limitations as the Committee shall determine, to grant
Awards to, or to cancel, modify or waive rights with respect to, or to alter,
discontinue, suspend, or terminate Awards held by, Participants who are not
officers or directors of the Company for purposes of Section 16, or any
successor section thereto, or who are otherwise not subject to such Section.

          (c)  Withholding.  The Company or any Affiliate is hereby authorized
               -----------
to withhold from any Award, from any payment due or transfer made under any
Award or under the Plan or from any compensation or other amount owing to a
Participant the amount (in cash, Shares, other securities, other Awards or other
property) of any applicable withholding taxes in respect of an Award, its
exercise, or any payment or transfer under an Award or under the Plan and to
take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes.

          (d)  No Limit on Other Compensation Arrangements.  Nothing contained
               -------------------------------------------
in the Plan shall prevent the Company or any Affiliate from adopting or
continuing in effect other compensation arrangements (subject to shareholder
approval if such approval is required), and such arrangements may be either
generally applicable or applicable only in specific cases.

          (e)  No Right to Employment, Etc.  The grant of an Award shall not be
               ---------------------------
construed as giving a Participant the right to be retained in the employ of, or
to provide continued consulting or advisory services to, the Company or any
Affiliate. Further, the Company or an Affiliate may at any time dismiss a
Participant from employment, consulting or advisory relationship with the
Company, as the case may be, free from any liability or any claim under the
Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.

          (f)  Governing Law.  The validity, construction, and effect of the
               -------------
Plan and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of California. Except as otherwise
provided in the applicable Award Agreement, any and all controversies, claims
and matters of difference arising out of or in respect of Awards that are
granted under the Plan shall be subject to final and binding arbitration in Los
Angeles, California,

                                       13
<PAGE>

according to the rules and practices of the American Arbitration Association,
including the selection of an arbitrator from its Employment panel pursuant to
the rules then in effect.

          (g)  Severability.  If any provision of the Plan or any Award is or
               ------------
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to applicable laws, or if it cannot be
construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall be
stricken as to such jurisdiction, Person or Award and the remainder of the Plan
and any such Award shall remain in full force and effect.

          (h)  Other Laws.  The Committee may refuse to issue or transfer any
               ----------
Shares or other consideration under an Award if, acting in its sole discretion,
it determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded to the
relevant Participant, holder or beneficiary.

          (i)  No Trust or Fund Created.  Neither the Plan nor any Award shall
               ------------------------
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant or
any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.

          (j)  No Fractional Shares.  No fractional Shares shall be issued or
               --------------------
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be canceled, terminated, or otherwise eliminated.

          (k)  Headings.  Headings are given to the Sections and subsections of
               --------
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.

          SECTION 9.  Effective Date of the Plan.  The Plan shall be effective
                      --------------------------
as of the date of its approval by the Board.

          SECTION 10.  Term of the Plan.  No Award shall be granted under the
                       ----------------
Plan after December 17, 1999.  However, unless otherwise expressly provided in
the Plan or in an

                                       14
<PAGE>

applicable Award Agreement, any Award theretofore granted may, and the authority
of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or
terminate any such Award or to waive any conditions or rights under any such
Award shall, extend beyond such date.

                                       15

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