Document:

Exhibit 10.41

 

Exhibit
10.41

	 	 	 	 	 

FIFTH AMENDMENT TO THE

ASSET PURCHASE AGREEMENT

BY AND AMONG

VILLA HOMES WEST, INC., D/B/A WOODSIDEMANAGEMENT GROUP,

RIDGEWOOD MANOR, LLC,

PARKVIEW REAL ESTATE, LTD.,

WOODSIDE PROPERTIES I, LTD.

WOODSIDE PROPERTIES II, LTD.

WOODSIDE REAL ESTATE I, LTD.

WOODSIDE REAL ESTATE II, LTD.

(COLLECTIVELY AS “SELLER”)

AND

OP MAUMEE, INC.,

RE MAUMEE, INC.,

OP CAREY, INC.,

RE CAREY, INC.,

OP1 FREMONT, INC.,

RE1 FREMONT, INC.,

OP2 FREMONT, INC.,

RE2 FREMONT, INC.,

OP KENTON, INC.

(COLLECTIVELY AS “BUYER”)

Dated as of February 27, 2003

 

 

FIFTH AMENDMENT TO THE

ASSET PURCHASE AGREEMENT

THIS FIFTH AMENDMENT TO THE ASSET PURCHASE AGREEMENT (“FIFTH Amendment”) is made and entered into
as of February 27, 2003, by and among VILLA HOMES WEST, INC., D/B/A WOODSIDE MANAGEMENT GROUP,
RIDGEWOOD MANOR, LLC, PARKVIEW REAL ESTATE, LTD., WOODSIDE PROPERTIES I, LTD., WOODSIDE PROPERTIES
II, LTD., WOODSIDE REAL ESTATE I, LTD., AND WOODSIDE REAL ESTATE II, LTD., (collectively as
“Seller”) and OP MAUMEE, INC., RE MAUMEE, INC., OP CAREY, INC., RE CAREY, INC., OP1 FREMONT, INC.,
RE1 FREMONT, INC., OP2 FREMONT, INC., RE2 FREMONT, INC., OP KENTON, INC. (collectively as “Buyer”).

WITNESSETH:

     WHEREAS, Seller and Buyer entered into a certain Asset Purchase Agreement as of August 30,
2002, whereby Buyer agreed to purchase from Seller certain nursing homes owned by Seller and
located throughout Ohio, as specifically set forth in said Asset Purchase Agreement (the
“Agreement”);

     WHEREAS, a set of facts had arisen that caused the parties to supplement and amend certain
terms of the Agreement, as set forth in the First Amendment as of September 30, 2002 (the “First
Amendment”), again on October 18, 2002 (the “Second Amendment”), again on December 18, 2002 (the
“Third Amendment”), and again on December 31, 2002 (the “Fourth Amendment”);

     WHEREAS, an additional set of facts has arisen that has caused the parties to desire to
supplement and amend certain terms of the Agreement, as set forth in this FIFTH Amendment.

     NOW, THEREFORE, for and in consideration of the premises, and the agreements, covenants,
representations and warranties hereinafter set forth, and other good and valuable consideration,
the receipt and adequacy of all of which are forever acknowledged and confessed, the parties
hereto, intending to be legally bound hereby, agree as follows:

     1. Over the course of due diligence, the parties have discovered that certain of the Seller
names as referenced throughout the Agreement, as amended, are not exactly the same names that are
registered with the Ohio Secretary of State. Hence, for all purposes of the Agreement, and all its
amendments, the parties agree that the correct registered names of the Sellers for all intents and
purposes are as follows: Villa Homes West, Inc., an Ohio for-profit corporation, doing business as
Ridgewood Manor, Parkside Manor Assisted Living, and Parkview Care Center; Ridgewood Real Estate,
LLC; Woodside Real Estate I, Ltd., an Ohio limited liability company; Woodside Properties I, Ltd.,
an Ohio limited liability company, d/b/a Eaglewood Care Center; Parkview Real Estate, LLC, an Ohio
limited liability company; Woodside Real Estate II, Ltd., an Ohio limited liability company;
Woodside Properties II, Ltd., an Ohio limited liability company, doing business as Ravenwood Care
Center.

 

 

     2. The parties acknowledge that there is no record of the existence of Woodside Management
Group in the Office of the Secretary of State of Ohio as either a trade or fictitious name.

     3. In all other respects, the parties hereby ratify and confirm the remaining terms of the
Agreement.

     IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to be executed in
multiple originals by their duly authorized officers, all as of the date and year first above
written. This Fifth Amendment may be executed and delivered in multiple counterparts and each such
counterpart shall be deemed an original, but all such counterparts shall together constitute one
and the same Fifth Amendment.

	 	 	 	 	 
	BUYER:                       	OP MAUMEE, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	Name:  	Lawrence R. Deering 	 
	 	Title:  	Chairman and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	RE MAUMEE, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	Name:  	Lawrence R. Deering 	 
	 	Title:  	Chairman and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	OP CAREY, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	Name:  	Lawrence R. Deering 	 
	 	Title:  	Chairman and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	RE CAREY, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	Name:  	Lawrence R. Deering 	 
	 	Title:  	Chairman and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	OP1 FREMONT, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	Name:  	Lawrence R. Deering 	 
	 	Title:  	Chairman and Chief Executive Officer 	 

-2-

 

	 	 	 	 	 

	 	 	 	 	 
	 	RE1 FREMONT, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	Name:  	Lawrence R. Deering 	 
	 	Title:  	Chairman and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	OP2 FREMONT, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	Name:  	Lawrence R. Deering 	 
	 	Title:  	Chairman and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	RE2 FREMONT, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	Name:  	Lawrence R. Deering 	 
	 	Title:  	Chairman and Chief Executive Officer 	 
	 

	 	 	 	 	 
	 	OP KENTON, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	Name:  	Lawrence R. Deering 	 
	 	Title:  	Chairman and Chief Executive Officer 	 
	 

	 	 	 	 	 
	SELLER:                          	VILLA HOMES WEST, INC., D/B/A

WOODSIDEMANAGEMENT GROUP

 	 
	 	By:  	/s/ Patrick T. Kriner
 	 
	 	Name:  	Patrick T. Kriner 	 
	 	Title:  	President 	 
	 

	 	 	 	 	 
	 	RIDGEWOOD REAL ESTATE, LLC

 	 
	 	By:  	/s/ Patrick T. Kriner
 	 
	 	Name:  	Patrick T. Kriner 	 
	 	Title:  	Member 	 
	 

	 	 	 	 	 
	 	PARKVIEW REAL ESTATE, LTD.

 	 
	 	By:  	/s/ Patrick T. Kriner
 	 
	 	Name:  	Patrick T. Kriner 	 
	 	Title:  	Member 	 

-3-

 

	 	 	 	 	 

	 	 	 	 	 
	 	WOODSIDE PROPERTIES I, LTD.

 	 
	 	By:  	/s/ Patrick T. Kriner
 	 
	 	Name:  	Patrick T. Kriner 	 
	 	Title:  	Member 	 
	 

	 	 	 	 	 
	 	WOODSIDE PROPERTIES II, LTD.

 	 
	 	By:  	/s/ Patrick T. Kriner
 	 
	 	Name:  	Patrick T. Kriner 	 
	 	Title:  	Member 	 
	 

	 	 	 	 	 
	 	WOODSIDE REAL ESTATE I, LTD.

 	 
	 	By:  	/s/ Patrick T. Kriner
 	 
	 	Name:  	Patrick T. Kriner 	 
	 	Title:  	Member 	 
	 

	 	 	 	 	 
	 	WOODSIDE REAL ESTATE II, LTD.

 	 
	 	By:  	/s/ Patrick T. Kriner
 	 
	 	Name:  	Patrick T. Kriner 	 
	 	Title:  	Member 	 
	 

-4-Exhibit 10.42

 

Exhibit 10.42

MASTER AGREEMENT

By and among

TANDEM HEALTH CARE, INC.

and

COLONIAL CARE, LLC

and

SMITH/PACKETT MED-COM, INC.

and

SP ENTERPRISES, LLC

and

JAMES R. SMITH

and

SP GRAYSON, LLC, GENERATION LEASING COMPANY, II, LLC

GENERATION DEVELOPMENT COMPANY, LLC, SP FISHERSVILLE, LLC,

SP NEWPORT NEWS, LLC, SP KINGS DAUGHTER, LLC, SP WILLIAMSBURG, LLC,

SP WINDSOR, LLC, AND SP LAFAYETTE VILLA, LLC

JANUARY 14, 1999

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	PAGE 
	1. ACQUISITION
	 	 	2	 
	 
	 	 	 	 
	1.1 Formation
	 	 	2	 
	 
	 	 	 	 
	1.2 Condition to Acquisition
	 	 	2	 
	 
	 	 	 	 
	1.3 Region of THC
	 	 	3	 
	 
	 	 	 	 
	1.4 Working Capital Loan to THCV
	 	 	3	 
	 
	 	 	 	 
	1.5 The Closing and Closing Date
	 	 	4	 
	 
	 	 	 	 
	1.6 Consideration
	 	 	4	 
	 
	 	 	 	 
	As of the Closing Date SP and THC shall make the capital contributions to THCV shown below:
	 	 	4	 
	 
	 	 	 	 
	1.7 Ongoing Working Capital Commitment
	 	 	6	 
	 
	 	 	 	 
	1.8 Closing Balance Sheet
	 	 	6	 
	 
	 	 	 	 
	1.9 Excluded Assets
	 	 	7	 
	 
	 	 	 	 
	1.10 Excluded Liabilities
	 	 	7	 
	 
	 	 	 	 
	1.11 Parkview Nursing Facility
	 	 	8	 
	 
	 	 	 	 
	1.12 Lafayette Villa
	 	 	9	 
	 
	 	 	 	 
	2. REPRESENTATIONS AND WARRANTIES OF SPMC, COLONIAL, SP, THE OPERATING COMPANIES, AND JAMES R.
SMITH
	 	 	10	 
	 
	 	 	 	 
	2.1 Organization, Qualification and Status
	 	 	10	 
	 
	 	 	 	 
	2.2 Corporate Instruments and Records
	 	 	12	 
	 
	 	 	 	 
	2.3 Capitalization
	 	 	13	 
	 
	 	 	 	 
	2.4 Ownership of Membership Rights
	 	 	13	 

 

 

	 	 	 	 	 
	 	 	PAGE 
	2.5 No Subsidiary
	 	 	14	 
	 
	 	 	 	 
	2.6 Authorization; Valid and Binding Obligation
	 	 	14	 
	 
	 	 	 	 
	2.7 No Violation
	 	 	14	 
	 
	 	 	 	 
	2.8 Financial Statements
	 	 	15	 
	 
	 	 	 	 
	2.9 Absence of Undisclosed and Contingent Liabilities
	 	 	17	 
	 
	 	 	 	 
	2.10 No Adverse Changes
	 	 	17	 
	 
	 	 	 	 
	2.11 Guarantees
	 	 	19	 
	 
	 	 	 	 
	2.12 Tax Matters
	 	 	20	 
	 
	 	 	 	 
	2.13 Litigation
	 	 	23	 
	 
	 	 	 	 
	2.14 Owned Real Estate
	 	 	23	 
	 
	 	 	 	 
	2.15 Leased Real Property
	 	 	24	 
	 
	 	 	 	 
	2.16 Owned and Leased Tangible Personal Property
	 	 	25	 
	 
	 	 	 	 
	2.17 Condition of Buildings and Tangible Personal Property
	 	 	26	 
	 
	 	 	 	 
	2.18 Accounts and Notes Receivable
	 	 	27	 
	 
	 	 	 	 
	2.19 Contracts
	 	 	27	 
	 
	 	 	 	 
	2.20 Inventories and Supplies
	 	 	28	 
	 
	 	 	 	 
	2.21 Prepaid Items and Deposits
	 	 	29	 
	 
	 	 	 	 
	2.22 Other Assets
	 	 	29	 
	 
	 	 	 	 
	2.23 Banking and Personnel Matters
	 	 	29	 
	 
	 	 	 	 
	2.24 Labor and Employment Matters
	 	 	30	 
	 
	 	 	 	 
	2.25 Termination of Business Relationships
	 	 	35	 
	 
	 	 	 	 
	2.26 Insurance
	 	 	35	 
	 
	 	 	 	 
	2.27 Compliance with Laws
	 	 	36	 
	 
	 	 	 	 
	2.28 Material and Affiliate Contracts
	 	 	37	 

 

 

	 	 	 	 	 
	 	 	PAGE 
	2.29 Licenses and Permits
	 	 	38	 
	 
	 	 	 	 
	2.30 No Interest in Suppliers
	 	 	39	 
	 
	 	 	 	 
	2.31 Absence of Questionable Payments
	 	 	39	 
	 
	 	 	 	 
	2.32 All Business Conducted by Colonial, SP and the Operating Companies
	 	 	40	 
	 
	 	 	 	 
	2.33 Absence of Anti-Boycott Violations
	 	 	40	 
	 
	 	 	 	 
	2.34 Environmental Matters
	 	 	40	 
	 
	 	 	 	 
	2.35 Intellectual Property Matters
	 	 	42	 
	 
	 	 	 	 
	2.36 Consents and Approvals
	 	 	42	 
	 
	 	 	 	 
	2.37 Medicare Participation/Accreditation
	 	 	42	 
	 
	 	 	 	 
	2.38 Hill-Burton Funds
	 	 	43	 
	 
	 	 	 	 
	2.39 Immigration Act
	 	 	44	 
	 
	 	 	 	 
	2.40 Disclosure
	 	 	44	 
	 
	 	 	 	 
	3. REPRESENTATIONS AND WARRANTIES OF THC
	 	 	45	 
	 
	 	 	 	 
	3.1 Organization and Qualification
	 	 	45	 
	 
	 	 	 	 
	3.2 Authorization; Valid and Binding Obligation
	 	 	45	 
	 
	 	 	 	 
	3.3 Litigation
	 	 	45	 
	 
	 	 	 	 
	3.4 Investment
	 	 	45	 
	 
	 	 	 	 
	3.5 Disclosure
	 	 	46	 
	 
	 	 	 	 
	3.6 Corporate Instruments and Records
	 	 	46	 
	 
	 	 	 	 
	3.7 Capitalization
	 	 	47	 
	 
	 	 	 	 
	3.8 Ownership of Shares
	 	 	47	 
	 
	 	 	 	 
	3.9 No Violation
	 	 	47	 
	 
	 	 	 	 
	3.10 Financial Statements
	 	 	48	 

 

 

	 	 	 	 	 
	 	 	PAGE 
	3.11 Absence of Undisclosed and Contingent Liabilities
	 	 	49	 
	 
	 	 	 	 
	3.12 No Adverse Changes
	 	 	49	 
	 
	 	 	 	 
	3.13 Consents and Approvals
	 	 	51	 
	 
	 	 	 	 
	4. CONSENTS AND GOVERNMENTAL FILINGS
	 	 	52	 
	 
	 	 	 	 
	5. AFFIRMATIVE COVENANTS AND UNDERTAKINGS OF SPMC, COLONIAL, SP, OPERATING COMPANIES AND JAMES R. SMITH
	 	 	52	 
	 
	 	 	 	 
	5.1 Satisfaction of Conditions
	 	 	52	 
	 
	 	 	 	 
	5.2 Preservation of Business
	 	 	52	 
	 
	 	 	 	 
	5.3 Compliance with Laws
	 	 	53	 
	 
	 	 	 	 
	5.4 Conduct of Business
	 	 	53	 
	 
	 	 	 	 
	5.5 Books and Records
	 	 	53	 
	 
	 	 	 	 
	5.6 Insurance
	 	 	53	 
	 
	 	 	 	 
	5.7 Maintenance of Properties
	 	 	54	 
	 
	 	 	 	 
	5.8 Tax Returns
	 	 	54	 
	 
	 	 	 	 
	5.9 Qualification To Do Business
	 	 	54	 
	 
	 	 	 	 
	5.10 Other Transactions
	 	 	54	 
	 
	 	 	 	 
	5.11 Report of Litigation
	 	 	55	 
	 
	 	 	 	 
	5.12 Consents
	 	 	55	 
	 
	 	 	 	 
	6. NEGATIVE COVENANTS OF COLONIAL, SP, THE OPERATING COMPANIES AND JAMES R. SMITH; JOINDER OF THC AND SPMC
	 	 	56	 
	 
	 	 	 	 
	6.1 Negative Covenants of Colonial, et al
	 	 	56	 
	 
	 	 	 	 
	6.2 Negative Covenants of THC
	 	 	59	 
	 
	 	 	 	 
	6.3 Negative Covenants of SPMC
	 	 	59	 
	 
	 	 	 	 
	7. ADDITIONAL AGREEMENTS OF THE PARTIES
	 	 	60	 

 

 

	 	 	 	 	 
	 	 	PAGE 
	7.1 THC’s Option to Purchase Remaining Interest; Shareholder’s Right to Put Remaining Interest
	 	 	60	 
	 
	 	 	 	 
	7.2 Valuation Calculations
	 	 	60	 
	 
	 	 	 	 
	7.3 Right of First Refusal on Future Projects; Obligation to Manage
	 	 	61	 
	 
	 	 	 	 
	7.4 Development Rights
	 	 	65	 
	 
	 	 	 	 
	7.5 Non-Competition
	 	 	65	 
	 
	 	 	 	 
	7.6 Incentive Fee
	 	 	66	 
	 
	 	 	 	 
	7.7 Incentive Warrants
	 	 	66	 
	 
	 	 	 	 
	7.8 Option to Purchase
	 	 	68	 
	 
	 	 	 	 
	7.9 Personnel Matters
	 	 	69	 
	 
	 	 	 	 
	7.10 Budget
	 	 	69	 
	 
	 	 	 	 
	7.11 Operating and Consultant Agreement
	 	 	69	 
	 
	 	 	 	 
	8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THC
	 	 	70	 
	 
	 	 	 	 
	8.1 Accuracy of Representations and Warranties
	 	 	70	 
	 
	 	 	 	 
	8.2 No Adverse Change
	 	 	71	 
	 
	 	 	 	 
	8.3 No Loss
	 	 	71	 
	 
	 	 	 	 
	8.4 Officer’s Certificate
	 	 	71	 
	 
	 	 	 	 
	8.5 No Injunction
	 	 	71	 
	 
	 	 	 	 
	8.6 Good Standing
	 	 	71	 
	 
	 	 	 	 
	8.7 Opinion of Counsel
	 	 	72	 
	 
	 	 	 	 
	8.8 Health Care REIT Approval
	 	 	72	 
	 
	 	 	 	 
	8.9 Consents and Proceedings
	 	 	72	 
	 
	 	 	 	 
	8.10 Resignations and Amendments
	 	 	72	 
	 
	 	 	 	 
	8.11 Due Diligence Review
	 	 	73	 

 

 

	 	 	 	 	 
	 	 	PAGE 
	8.12 Environmental Audit
	 	 	73	 
	 
	 	 	 	 
	8.13 Uniform Commercial Code Searches
	 	 	73	 
	 
	 	 	 	 
	8.14 Operating Leases
	 	 	73	 
	 
	 	 	 	 
	8.15 Section 1.2
	 	 	74	 
	 
	 	 	 	 
	8.16 Schedules and Exhibits
	 	 	74	 
	 
	 	 	 	 
	8.17 Augusta
	 	 	74	 
	 
	 	 	 	 
	9. CONDITIONS TO THE OBLIGATIONS OF SPMC, COLONIAL, SP, THE OPERATING COMPANIES, AND JAMES R. SMITH
	 	 	75	 
	 
	 	 	 	 
	9.1 Accuracy of Representations and Warranties
	 	 	75	 
	 
	 	 	 	 
	9.2 Officers’ Certificate
	 	 	75	 
	 
	 	 	 	 
	9.3 No Injunction
	 	 	75	 
	 
	 	 	 	 
	9.4 Deliveries by THC
	 	 	75	 
	 
	 	 	 	 
	9.5 Opinion of Counsel
	 	 	76	 
	 
	 	 	 	 
	10. MUTUAL COVENANTS
	 	 	76	 
	 
	 	 	 	 
	10.1 Access to and Use of Information
	 	 	76	 
	 
	 	 	 	 
	10.2 Further Mutual Covenants
	 	 	77	 
	 
	 	 	 	 
	11. EXPENSES
	 	 	77	 
	 
	 	 	 	 
	12. TERMINATION
	 	 	78	 
	 
	 	 	 	 
	13. ABSENCE OF BROKER OR FINDER
	 	 	79	 
	 
	 	 	 	 
	14. NEWS RELEASES
	 	 	79	 
	 
	 	 	 	 
	15. NOTICES
	 	 	79	 
	 
	 	 	 	 
	16. INDEMNIFICATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES
	 	 	81	 

 

 

	 	 	 	 	 
	 	 	PAGE 
	16.1 Indemnity by SP and James R. Smith
	 	 	81	 
	 
	 	 	 	 
	16.2 Indemnity by THC
	 	 	81	 
	 
	 	 	 	 
	16.3 Limitation of Indemnification Liability of SP and James R. Smith
	 	 	82	 
	 
	 	 	 	 
	16.4 Limitation of Indemnification Liability of THC
	 	 	82	 
	 
	 	 	 	 
	16.5 Survival
	 	 	82	 
	 
	 	 	 	 
	16.6 Tax Indemnity
	 	 	83	 
	 
	 	 	 	 
	16.7 Indemnification Procedures
	 	 	83	 
	 
	 	 	 	 
	16.8 Off Set
	 	 	85	 
	 
	 	 	 	 
	17. FURTHER ASSURANCES
	 	 	85	 
	 
	 	 	 	 
	18. MISCELLANEOUS
	 	 	86	 
	 
	 	 	 	 
	18.1 Governing Law
	 	 	86	 
	 
	 	 	 	 
	18.2 Counterparts/Use of Facsimiles
	 	 	86	 
	 
	 	 	 	 
	18.3 Entire Agreement
	 	 	86	 
	 
	 	 	 	 
	18.4 No Presumption Against Draftsman
	 	 	87	 
	 
	 	 	 	 
	19. SUCCESSORS AND ASSIGNS
	 	 	87	 
	 
	 	 	 	 
	20. EFFECT OF INVESTIGATION
	 	 	87	 
	 
	 	 	 	 
	21. KNOWLEDGE
	 	 	88	 
	 
	 	 	 	 
	22. SCHEDULES AND EXHIBITS
	 	 	88	 

 

 

MASTER AGREEMENT

     THIS MASTER AGREEMENT is made as of this 14th day of January, 1999, by and among TANDEM HEALTH
CARE, INC., a Pennsylvania corporation (“THC”), COLONIAL CARE, LLC, a Virginia limited liability
company (“Colonial”), SMITH/PACKETT MED-COM, INC., a Virginia corporation (“SPMC”), SP ENTERPRISES,
LLC, a Virginia limited liability company (“SP”); and JAMES R. SMITH, an individual, SP GRAYSON,
LLC, GENERATION LEASING COMPANY, II, LLC, GENERATION DEVELOPMENT COMPANY, LLC, SP FISHERSVILLE,
LLC, SP NEWPORT NEWS, LLC, SP KINGS DAUGHTER, LLC, SP WILLIAMSBURG, LLC, SP WINDSOR, LLC, AND SP
LAFAYETTE, LLC (“Operating Companies”).

WITNESSETH:

     WHEREAS, SPMC and Colonial are engaged in the business of developing, owning, operating and/or
managing skilled nursing, assisted living, and other long-term care and related types of facilities
throughout the United States; and

     WHEREAS, THC is engaged in developing, owning, operating and/or managing nursing homes
throughout the United States; and

     WHEREAS, SP is engaged in holding the interests in certain limited liability companies
referred to as the Operating Companies herein, that hold the leases and management agreements
identified as Assets on Schedule 1.1 herein; and

     WHEREAS, the parties wish to joint venture in certain efforts upon the terms and conditions as
set forth herein.

 

 

     NOW THEREFORE, for and in consideration of the premises and the mutual covenants and
agreements set forth in this Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:

1. ACQUISITION

     1.1 Formation.

          Subject to the terms and conditions of this Agreement, at the Closing on the Closing Date, as
defined in this Article, THC and SP shall form Tandem Health Care of Virginia, LLC, a Virginia
limited liability company (“THCV”). THC shall receive a 51% membership interest in THCV and SP
shall receive a 49% interest in THCV in exchange for the consideration set forth in Section 1.6
herein, and subject to the other conditions of this Agreement. Such membership interests shall be
issued free and clear of any claim, suit, proceeding, call, commitment, voting trust, proxy,
restriction, limitation, security interest, pledge or lien or encumbrance of any kind or nature
whatsoever. The acquisition of this membership interest is specifically conditioned upon Section
1.2 herein.

     1.2 Condition to Acquisition.

          Prior to the Closing Date, SP will be the sole owner of the membership interests in the
Operating Companies and Colonial. Said Operating Companies and Colonial shall also own the Assets
identified on Schedule 1.1 as of the Closing Date, all of which shall be a precondition of the
acquisitions set forth in Section 1.1.

-2-

 

     1.3 Region of THC.

          THCV shall function as a separate region of THC and THC shall have operational control subject
to the provisions of this Agreement or further agreement of the members of THCV.

     1.4 Working Capital Loan to THCV.

          THC agrees to enter into a Loan Agreement with SP in the amount of $150,000 as soon as all
membership interests in the Operating Companies and Colonial are transferred to SP. Said loan
shall be secured by the Assets of SP until the transactions contemplated in this Agreement close,
and by the personal guaranty of James R. Smith. The loan documents shall be in a form agreed to by
the parties as set forth in Schedule 1.4 attached hereto. In the event that the transaction closes,
the loan documents shall provide for the repayment of the $150,000 loan by SP to THC, together with
interest thereon at the rate of 7-1/2% per annum, on or about February 1, 2000. This amount may be
deducted from any amounts due to SP from THC pursuant to Section 1.8 herein. Further, THC agrees
that the $150,000 loan will convert to a non-refundable deposit if THC refuses to close under the
terms of this Agreement after SP has met all conditions to Closing under Articles 8 and 9 herein.
In the event that the transactions contemplated under this Agreement do not close and SP has not
met all conditions to Closing, the loan documents shall provide for the repayment of the $150,000
loan by SP to THC, together with interest thereon at the rate of 7 1/2%, on or before February 28,
1999.

-3-

 

     1.5 The Closing and Closing Date.

          The closing of the transactions contemplated hereby (the “Closing”) shall take place at the
offices of THC’s counsel at One Oxford Centre, 301 Grant Street, 20th Floor, Pittsburgh,
Pennsylvania, 15219, at 8:30 a.m. local time on or before January 29, 1999 to be effective on
February 1, 1999 or on such other date and at such other place as the parties may agree. The date
of the Closing is hereinafter referred to as the “Closing Date.”

     1.6 Consideration.

     As of the Closing Date SP and THC shall make the capital contributions to THCV shown below:

(a) SP shall contribute its membership interests in the Operating Companies and
Colonial and in the Assets identified in Schedule 1.1, free and clear of any claim,
suit, proceeding, call, commitment, voting trust, proxy, restriction, limitation,
security interest, pledge or lien or encumbrance of any kind or nature whatsoever.

(b) THC shall contribute: (i) Two Million Six Hundred Fifty Thousand Dollars
($2,650,000) in cash; (ii) a $650,000 Promissory Note of THC in the form attached
hereto as Schedule 1.6(b)(ii) which Promissory Note shall bear interest only,
payable quarterly, at 7-1/2% per annum, with the entire principal balance due on the
earlier of the third anniversary of the Closing Date, or the exercise of the option
pursuant to Section 7.8 herein, and be secured by the pledge of the THCV membership
interests transferred to THC upon the consummation of this transaction; (iii) if
THCV does not convert the management agreement for

-4-

 

Lafayette Villa to a lease pursuant to Section 1.12 on or before the maturity date
of the Promissory Note, through THCV’s own actions or inactions, but not in the case
of a failure of conditions or upon an action of SPMC, then THCV shall pay to SP an
additional $100,000 in cash on the maturity date of the $650,000 Promissory Note.

(c) To compensate SP for the value of the interests in the Operating Companies and
Colonial in excess of the value of the membership interests in THCV received by SP,
THCV shall immediately upon the Closing, unless said funds are necessary to satisfy
the provision of Section 1.8, (i) distribute to SP $550,000 of the cash capital
contribution described in subsection (b)(i); (ii) assign to SP the promissory note
described in subsection b(ii), and (iii) either assume or prepay the approximately
$800,000 balance outstanding on the Closing Date (the “HCFP Balance”) of the working
capital loan of the Operating Companies from HCFP, more fully described on Schedule
2.10, and issue to SP a promissory note in a form reasonably acceptable to THC as
attached hereto at Schedule 1.6(c), in the amount of the difference between
$2,100,000 and the HCFP Balance. The promissory note shall be fully collateralized
from the remaining cash of THCV received from the capital contribution of THC. Such
cash shall be used to acquire a certificate of deposit issued by a financial
institution chosen by James R. Smith and satisfactory to THC which shall be the sole
source of funds for repayment of the promissory note. Such promissory note shall
bear interest at the minimum applicable federal rate for demand loans as
provided in Section 1274 of the Code.

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THCV shall not have the option to prepay such
note, but such note shall be payable in whole or in part on the demand of the holder
thereof.

     1.7 Ongoing Working Capital Commitment.

          THCV and THC shall be responsible for arranging or providing the debt required for the ongoing
working capital of THCV and other purposes agreed to by the members of THCV. The working capital
debt will be a direct obligation of THCV. Such debt shall be incurred on commercially reasonable
terms. SP hereby consents to THCV entering into such arrangements to obtain the working capital
financing. James R. Smith agrees to consider delivering a guaranty that would be secondary to the
guaranty of THC or its affiliates for its account receivable financing with Healthcare Capital
Resources, Inc., if such guaranty is deemed by James R. Smith, in his sole discretion, to be
desirable (“Smith Guaranty”).

     1.8 Closing Balance Sheet.

          SP will prepare a closing balance sheet setting forth the assets and liabilities to be
transferred to THCV after the consummation of the transactions on the Closing Date (the “SP Closing
Balance Sheet”). The SP Closing Balance Sheet shall show all assets within the Operating Companies
and Colonial which interests are being transferred to THCV as evidenced by the membership interests
transferred into THCV (the “Transferred Assets”). The Transferred Assets shall be equal to or
greater than the total amount of liabilities being transferred to THCV (the “Transferred
Liabilities”). Transferred Assets and Transferred Liabilities shall be calculated in accordance
with GAAP. In no event will the excess of Transferred Liabilities over Transferred Assets exceed
$2,650,000. To the extent that Transferred Liabilities exceed Transferred Assets, SP shall cause such excess Transferred Liabilities to be satisfied (with
the contribution made by

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THC to THCV) on the Closing Date, provided that SP may leave some
unsecured intercompany debt outstanding in an amount not to exceed the certificate of deposit
purchased pursuant to Section 1.6(c) if such debt is not secured by the Assets of the Operating
Companies or Colonial. To the extent that the Transferred Assets exceed the Transferred
Liabilities, SP shall have a right to receive a payment from THCV in the amount of 50% of such
excess, without interest, on February 1, 2000, and the balance of any excess on February 1, 2001.
THCV agrees to give SP a quarterly accounting of the Closing Balance Sheet for the first four
quarters after the Closing within fifteen (15) days after the close of each quarter following the
Closing Date.

     1.9 Excluded Assets.

          SP shall transfer all Transferred Assets as evidenced by the membership interests in the
Operating Companies and Colonial listed on Schedule 1.1, with the exception of the transactions
outlined in Section 1.12 hereafter. Excluded from Transferred Assets will be (i) all payments to
be received from THCV pursuant to Section 1.6(c); and (ii) moneys received by THCV from Medicaid or
Medicare or other sources for periods prior to the Closing Date, including settlement amounts,
which shall be paid to SP within five days of THCV’s receipt of same, but only to the extent such
assets are not reflected on the SP Closing Balance Sheet in accordance with Section 1.8 herein.

     1.10 Excluded Liabilities.

          The following are Excluded Liabilities under this Agreement, which will not be assumed by THC
or THCV: (i) all claims for any liabilities of Colonial, SP the Operating Companies, SPMC, and
James R. Smith that occurred prior to the Closing Date unless reflected
on the SP Closing Balance Sheet; (ii) any indebtedness of SPMC, Colonial, SP, and the
Operating

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Companies not shown on the SP Closing Balance Sheet and (iii) any and all tax liability
of THCV or THC as it relates to the promissory note delivered pursuant to Section 1.6(c)(iii), or
under Section 1.7 as it relates to the Smith Guaranty. SPMC, Colonial, SP, and/or James R. Smith
shall satisfy all working capital lines and inter-company debt relating to the operation of all of
the Operating Companies and Colonial to the extent such debt is secured by any assets of the
Operating Companies or Colonial, except for the $300,000 loan referenced in Section 1.4 herein. SP
may elect to leave outstanding all or a portion of any unsecured debt owed to SPMC or James R.
Smith which debt when transferred to THCV shall be evidenced by the promissory note issued by THCV
to SP pursuant to Section 1.6(c)(iii) and therefore shall be reduced on THCV’s books on a dollar
for dollar basis with each payment made pursuant to such promissory note. In the event that THCV
receives any notification of any moneys owed to Medicare, Medicaid or other third party payors for
periods prior to the Closing Date, THCV shall give prompt notice of such claim to SP. SP shall
have the right to defend against such payments, at the sole expense of SP, but with the reasonable
cooperation of THCV. In the event that an actual amount must be repaid by THCV on behalf of one of
the Operating Companies to Medicare, Medicaid or other third party payors as a result of such
claim, SP shall indemnify THCV for said amount, with payment being made by SP to THCV within thirty
(30) days of the notice of the actual payment required.

     1.11 Parkview Nursing Facility.

          At Closing, THCV or its designee and Generation Development Company, LLC, one of the Operating
Companies, (“GDC”) will enter into a management agreement in the form attached hereto as Schedule 1.11. That management agreement will convert into a lease in the
form attached hereto as Schedule 1.11(a) upon satisfaction of the following conditions:

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               (a) Approval by HUD of a workout plan reasonably acceptable to GDC with respect to the HUD
financing of real property for the Parkview facility;

               (b) Consent of HUD to the lease of the Parkview facility to THCV;

               (c) Acceptance by THCV in its reasonable discretion of corrective actions to address
environmental conditions at the Parkview Nursing site identified in the Phase I Environmental Site
Assessment prepared by ATC Associates dated December 22, 1998;

               (d) Approval by THCV of the HUD workout plan or other replacement financing; and

               (e) Approval by THCV of the status of the title and confirmation that there has been no
material adverse change in the physical condition of the property at the time of the conversion to
the lease.

     1.12 Lafayette Villa.

          At Closing, THCV or its designee will enter into a management agreement for Lafayette Villa in
the form attached hereto as Schedule 1.12. That management agreement will convert at the option of
SP to a lease in the form attached hereto as Schedule 1.12(a) upon the satisfaction of the
following conditions:

          (a) For a period of three (3) consecutive months, the facility achieves EBITDA before any
management fees or rent equal to or greater than the sum of the rental payment, as rental payment
is defined in Schedule 1.12(a), i.e. the Lafayette Villa lease, for the period plus 4% of net
revenues;

          (b) Since the Closing under this Agreement, there has been no material adverse changes in the
physical condition of the facility; and

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          (c) THCV or THC shall approve the status of the title, Environmental Phase I, and licensure,
other than licensure concerns caused by THCV as manager, at the time of the conversion to the
lease.

  2.
REPRESENTATIONS AND WARRANTIES OF SPMC, COLONIAL, SP, THE OPERATING
COMPANIES, AND JAMES R.     SMITH

     SPMC, Colonial, SP, the Operating Companies, and James R. Smith, represent and warrant to THC
and THCV and covenant and agree with THC and THCV as follows, all of such representations and
warranties being made by all of the parties, regardless of whether specifically designated herein,
except that SPMC makes only the representations in Sections 2.1, 2.2, 2.6 and 2.7:

     2.1 Organization, Qualification and Status.

          SPMC is a corporation duly incorporated and organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia. SPMC has full corporate power and authority to
own, lease and use its properties and to carry on its business as presently conducted. SPMC is
duly qualified or licensed to do business and in good standing as a foreign corporation in each of
the jurisdictions listed on Schedule 2.1 hereto, which are all the jurisdictions in which the
nature of its business or the character of the properties and assets which it owns or leases makes
such qualification or licensing necessary.

          Colonial is a limited liability company duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia. Colonial has full power and
authority to own, lease and use its properties and carry on its business as presently
conducted. Colonial is duly qualified or licensed to do business and in good standing as a foreign
limited liability

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company in each of the jurisdictions listed on Schedule 2.1 hereto, which are all
the jurisdictions in which the nature of its business or the character of the properties and assets
which its owns or leases make such qualification or licensing necessary.

          SP is a limited liability company duly organized, validly existing and in good standing under
the laws of the Commonwealth of Virginia. SP has full power and authority to own, lease and use
its properties and carry on its business as presently conducted. SP is duly qualified or licensed
to do business and in good standing as a foreign limited liability company in each of the
jurisdictions listed on Schedule 2.1 hereto, which are all the jurisdictions in which the nature of
its business or the character of the properties and assets which its owns or leases make such
qualification or licensing necessary.

          The Operating Companies are limited liability companies duly organized, validly existing and
in good standing under the laws of the Commonwealth of Virginia. The Operating Companies have full
power and authority to own, lease and use their properties and carry on their business as presently
conducted. The Operating Companies are duly qualified or licensed to do business and in good
standing as foreign limited liability companies in each of the jurisdictions listed on Schedule 2.1
hereto, which are all the jurisdictions in which the nature of their business or the character of
the properties and assets which they own or lease make such qualification or licensing necessary.

          Except as set forth on Schedule 2.1 hereto, all parties have not, during the six (6) year
period immediately preceding the date hereof, changed its name, been the surviving entity of a
merger, consolidation or other reorganization, or acquired all or substantially all of the assets
of

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any person or entity. Schedule 2.1 also sets forth all fictitious names under which SPMC,
Colonial, SP, or the Operating Companies or such predecessors have conducted business.

     2.2 Corporate Instruments and Records.

          The copies of SPMC’s Articles of Incorporation and By-laws, appended hereto as Schedule 2.2,
are true, correct and complete and include all amendments to the date hereof. SPMC’s minute books,
as made available to THC, contain a true, complete and correct record of all corporate action taken
on or prior to the date hereof at the meetings of SPMC’s shareholders and directors and committees
thereof. The stock certificate books and ledgers of SPMC, as made available to THC, are true,
correct and complete, and accurately reflect, at the date hereof, the ownership of the outstanding
capital stock of SPMC.

          The copies of Colonial’s organizational and operating documents, appended hereto at Schedule
2.2(a), are true and correct and complete and include all amendments to the date hereof.
Colonial’s minute books, as made available to THC, contain a true, complete and correct record of
all limited liability company action taken on or prior to the date hereof at the meetings of
Colonial’s members and committees thereof. The membership certificate books and ledgers of
Colonial, as made available to THC, are true, correct and complete and accurately reflect, at the
date hereof, the ownership of the outstanding membership interest in Colonial.

          The copies of SP’s organizational documents, appended hereto at Schedule 2.2(a), are true and
correct and complete and include all amendments to the date hereof. SP’s minute books, as made
available to THC, contain a true, complete and correct record of all limited liability company
action taken on or prior to the date hereof at the meetings of SP’s members and committees thereof.
The membership certificate books and ledgers of SP, as made available to

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THC, are true, correct and complete and accurately reflect, at the date hereof, the ownership
of the outstanding membership interest in SP.

          The copies of the Operating Companies’ organizational documents, appended hereto at Schedule
2.2(a), are true and correct and complete and include all amendments to the date hereof. The
Operating Companies’ minute books, as made available to THC, contain a true, complete and correct
record of all limited liability company action taken on or prior to the date hereof at the meetings
of the Operating Companies’ members and committees thereof. The membership certificate books and
ledgers of the Operating Companies, as made available to THC, are true, correct and complete and
accurately reflect, at the date hereof, the ownership of the outstanding membership interest in the
Operating Companies.

     2.3 Capitalization.

          The representations and warranties in this Section are made as to what will be true on the
Closing Date. The authorized membership interests in SP are set forth on Schedule 2.3. All of
said membership rights will be validly issued, fully paid and non-assessable and entitled to vote
at the member’s meetings, and none of such membership interests have been issued in violation of
any rights of members or transferred in violation of any transfer restrictions relating thereto.
There will be no authorized or outstanding options, warrants, convertible securities, subscription
rights, puts, calls, or other rights of any nature to purchase or otherwise receive, or to require
Colonial, SPMC or SP to purchase, redeem or acquire, any membership rights or other securities of
SP and there is no outstanding security of any kind convertible into such membership right. There
are no existing membership agreements, voting agreements or voting trusts respecting any membership
interests in SP other than the Operating Agreement of SP.

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     2.4 Ownership of Membership Rights.

          The representations and warranties in this Section are made as to what will be true on the
Closing Date. The Members of SP listed on Schedule 2.4 hereto will own and hold, beneficially and
of record, the entire right, title and interest in and to the number of membership rights set forth
opposite their names, free and clear of any claim, suit, proceeding, call, commitment, voting
trust, proxy, restriction, limitation, security interest, pledge or lien or encumbrance of any kind
or nature whatsoever, and have full power and authority to vote said membership and to approve the
transactions contemplated by this Agreement, such membership rights constituting, in the aggregate,
all of the issued and outstanding membership rights of SP. Each such member will have full power
and authority to vote, transfer and dispose of the membership rights owned and held by him, her or
it, free and clear of any claim, suit, proceeding, call, voting trust, proxy, restriction, security
interest, lien or other encumbrance of any kind or nature whatsoever.

     2.5 No Subsidiary.

          Except as set forth on Schedule 2.5, SP does not have any subsidiary or any ownership interest
in any other entity. SP is not a party to any joint venture arrangement and does not have the
right to acquire any securities, membership rights or ownership interests in any other person or
entity.

     2.6 Authorization; Valid and Binding Obligation.

          SPMC, Colonial, SP and James R. Smith have the authority to execute and deliver this Agreement
and to perform their obligations hereunder and to consummate the transactions contemplated hereby.
This Agreement has been duly executed and delivered by each of SPMC,

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Colonial, SP and James R. Smith and constitutes the valid and legally binding obligation of each enforceable against them in
accordance with its terms.

     2.7 No Violation.

          Neither the execution and delivery of this Agreement nor the consummation of the transactions
contemplated hereby, nor compliance with the terms hereof, will (i) conflict with or result in a
breach of any of the terms, conditions or provisions of the Articles of Incorporation or By-laws,
or organizational or operational document, as the case may be, of SPMC, Colonial or SP, nor (ii)
violate, conflict with or result in a breach of or default under any of the terms, conditions or
provisions of any agreement, understanding, arrangement, indenture, contract, lease, sublease, loan
agreement, note, restriction, obligation or liability to which SPMC, Colonial, SP or James R. Smith
is a party or by which they are bound or to which they or its assets are subject (individually, an
“Instrument” and collectively, the “Instruments”), nor (iii) accelerate or give to others any
interests or rights, including rights of acceleration, termination, modification or cancellation,
under any Instrument or in or with respect to the business or assets of SPMC, Colonial, SP or James
R. Smith, nor (iv) result in the creation of any lien, claim, charge or encumbrance on the assets,
capital stock or properties or SPMC, Colonial, SP or James R. Smith, nor (v) conflict with, violate
or result in a breach of or constitute a default under any law, statute, rule, judgment, order,
decree, injunction, ruling or regulation of any government, governmental agency, authority or
instrumentality, court or arbitration tribunal to which SPMC, Colonial or SP or any of their
respective assets or properties are subject, nor (vi) require Colonial, SPMC, SP or the Operating
Companies or James R. Smith to give notice to, or obtain an authorization, approval, order,
license, franchise, declaration or consent of, or make a filing with, any third

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party,
including, any foreign, federal, state, county, local or other governmental or regulatory body.

     2.8 Financial Statements.

          Schedule 2.8 hereto contains true, correct and complete copies of the following financial
statements of Colonial and the Operating Companies of SP at the dates and for the periods
specified:

          (a) Audited financial statements of Colonial for December 31, 1997; and

          (b) a balance sheet and income statement of October 31, 1998 for Colonial and the Operating
Companies (the “October Balance Sheet”),

in each case together with the notes thereto. Each of the foregoing financial statements has been
prepared in conformity with generally accepted accounting principles (“GAAP”) applied on a
consistent basis, and presents fairly the financial position and results of operations and cash
flows of Colonial and the Operating Companies at the dates and for the periods specified. All
liabilities and obligations of Colonial and the Operating Companies outstanding as of the dates of
the aforesaid financial statements required to be reflected as liabilities in accordance with GAAP
have been included in said financial statements. There have been no material changes in the
financial condition, assets or liabilities of Colonial and the Operating Companies from the date of
the Balance Sheet (the “Balance Sheet Date”) to the date hereof, except changes in the ordinary
course of business, none of which, either singly or in the aggregate, has been materially adverse.
Since the Balance Sheet Date, Colonial and the Operating Companies have conducted their businesses
in a normal and customary manner. The books and records of Colonial and the

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Operating Companies from which the financial statements were prepared properly and accurately record the transactions
and activities which they purport to record.

     2.9 Absence of Undisclosed and Contingent Liabilities.

          Except as set forth on Schedule 2.9 hereto, Colonial, SP and the Operating Companies have no
liabilities of any nature (whether secured or unsecured, accrued, absolute or contingent,
unliquidated or otherwise and whether known or unknown or due or to become due) as of the date
hereof other than (i) liabilities disclosed or reserved against in the October Balance Sheet, (ii)
liabilities arising in the ordinary course of business after the date of the October Balance Sheet,
(none of which either singly or in the aggregate, will have a material adverse effect on the
business, assets, financial condition or prospects of Colonial,) and (iii) Excluded Liabilities, as
herein defined. Colonial, SP and the Operating Companies know of no basis for the assertion
against them by any person of a claim based on a liability which is not disclosed on the October
Balance Sheet.

     2.10 No Adverse Changes.

          Except as set forth on Schedule 2.10 hereto, since the October Balance Sheet Date there has
not been:

          (a) a material adverse change in the condition (financial or otherwise), properties, assets,
liabilities, rights, operations or business of Colonial, SP and the Operating Companies;

          (b) the issuance by Colonial, SP or the Operating Companies of any notes, bonds or other debt
securities or any equity securities;

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          (c) the declaration, setting aside or payment of any dividend or other distribution in respect
of the membership rights of Colonial, SP or the Operating Companies, or the purchase, redemption,
issue, sale or other disposition of any such rights, or the sale or grant of any options, warrants, puts, calls or other rights or obligations to purchase or convert
into membership rights or indebtedness of Colonial, SP or the Operating Companies;

          (d) any mortgage or pledge of, or creation of any lien, pledge, charge, security interest or
encumbrance respecting any property or assets of Colonial, SP or the Operating Companies, except
for liens of current property taxes not yet due and payable;

          (e) the borrowing of any amount of money or the incurring of or becoming subject to any
liabilities, except (i) current liabilities incurred in the ordinary course of business, and (ii)
liabilities under contracts entered into in the ordinary course of business;

          (f) the discharge or satisfaction of any lien or encumbrance or the payment of any obligation
or liability, other than current liabilities paid in the ordinary course of business;

          (g) any damage, theft, destruction or casualty loss, whether or not covered by insurance,
adversely affecting the properties or operations of Colonial, SP or the Operating Companies;

          (h) any sale, lease, transfer or assignment of any asset (tangible or intangible) of Colonial,
SP or the Operating Companies or the cancellation of any debt or claim except for a fair
consideration and in the ordinary course of business;

          (i) the disclosure of any proprietary confidential information of Colonial, SP or the
Operating Companies to any person other than their respective lenders, agents and advisors;

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          (j) any cancellation, settlement or compromise of any claim or debt due to or owing by
Colonial, SP or the Operating Companies in an amount exceeding $10,000 individually or $25,000 in
the aggregate;

          (k) any loss, waiver or release of any material rights of Colonial, SP or the Operating
Companies, whether or not in the ordinary course of business or consistent with past practice;

          (l) the negotiation or execution of any arrangement, agreement or understanding to which
Colonial, SP or the Operating Companies is a party which cannot be terminated by any of them on
notice of thirty (30) days or less without cost or penalty;

          (m) any increase in salary, bonus, fringe benefit, or incentive or other compensation payable
or to become payable to any officer, director, employee, affiliate or other person receiving
compensation of any nature from Colonial, SP or the Operating Companies or any increase in the
number of shares or membership rights obtainable under, or acceleration of the time of
exercisability of, any membership option, membership bonus or similar plan of Colonial, SP or the
Operating Companies;

          (n) any capital expenditures or commitments therefor by Colonial, SP or the Operating
Companies that aggregate in excess of $25,000.

          (o) any change in any accounting practice or procedure; or

          (p) any other transaction, contract or commitment entered into by Colonial, SP or the
Operating Companies otherwise than in the ordinary course of business.

     2.11 Guarantees.

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          Colonial, SP and the Operating Companies have not guaranteed, become surety or contingent
obligor for or assumed any obligation of any person or entity. No assets owned by Colonial, SP and
the Operating Companies are or have been pledged, hypothecated, delivered for safekeeping,
subjected to a security interest or otherwise provided in any way as security for
payment or performance of any obligation of a person other than Colonial, SP or the Operating
Companies.

     2.12 Tax Matters.

          Except as set forth on Schedule 2.12 attached hereto:

          (a) Colonial, SP and the Operating Companies (i) have timely and properly filed or caused to
be filed all tax returns which they are or have been required to file on or prior to the date
hereof, by any jurisdiction to which it or they are or have been subject, all such tax returns
being true and correct and complete in all respects, (ii) have timely paid or caused to be paid in
full all taxes which are or have become due and payable to all taxing authorities with respect to
such returns and periods, (iii) have made or caused to be made all withholdings of taxes required
to be made by it or them, and such withholdings have either been paid to the appropriate
governmental agency or set aside in appropriate accounts for such purpose, and (iv) have otherwise
satisfied all applicable laws and agreements with respect to the filing of tax returns and the
payment of taxes.

          (b) Colonial, SP or the Operating Companies have properly accrued and reflected on the October
Balance Sheet, and has thereafter to the date hereof properly accrued, and will from the date
hereof through the Closing Date properly accrue, all liabilities for taxes and

-20-

 

assessments, all such accruals being in the aggregate sufficient for payment of all such taxes and assessments.

          (c) Colonial, SP or the Operating Companies will timely and properly file or cause to be filed
all tax returns which it is or will be required to file on or before the Closing Date, all such tax
returns to be true and correct and complete in all respects, and will pay or cause
to be paid in full when due all taxes, if any, which become due and payable pursuant to such
returns or assessments received by it on or before the Closing Date.

          (d) The federal income tax returns of Colonial, SP or the Operating Companies have not been
audited by the Internal Revenue Service.

          (e) There are no unassessed tax deficiencies proposed or, to Colonial, SP or the Operating
Companies’ knowledge, threatened against Colonial, SP or the Operating Companies, nor are there any
agreements, waivers, or other arrangements providing for extension of time with respect to the
assessment or collection of any tax against Colonial, SP or the Operating Companies or any actions,
suits, proceedings, investigations or claims now pending against Colonial, SP or the Operating
Companies with respect to any tax, or any matter under discussion with any federal, state, local or
foreign authority relating to any taxes.

          (f) [Reserved]

          (g) Colonial, SP and the Operating Companies are not a party to, or bound by, and do not have
any obligation under, any tax sharing, tax indemnity, or similar agreement.

          (h) Colonial, SP and the Operating Companies have not made and will not make a change in
method of accounting for a taxable year beginning on or before the Closing

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Date, which would require them to include any adjustment under Section 481(a) of the IRC in taxable income for any
taxable year beginning on or after the Closing Date.

          (i) Colonial, SP and the Operating Companies have not filed a consent pursuant to Section
341(f) of the IRC, or agreed to have Section 341(f)(2) of the IRC apply to any disposition of any
asset owned by it.

          (j) Colonial, SP and the Operating Companies have not been a target corporation or target
affiliate in a qualified stock purchase within the meaning of Section 338 of the IRC (or any
predecessor provision).

          (k) None of the Assets is property which is required to be treated as being owned by any other
person pursuant to the so-called “safe harbor lease” provisions of former section 168(f)(8) of the
IRC.

          (l) No member of Colonial, SP or the Operating Companies is a foreign person so that Section
897 and 6039(c) of the IRC are not applicable to the transactions provided for hereunder.

          For purposes of this Agreement, “tax” and “taxes” shall include all income, gross receipts,
franchise, excise, transfer, severance, value added, ad valorem, sales, use, wage, payroll,
workmen’s compensation, employment, occupation, and real and personal property taxes; taxes
measured by or imposed on capital; levies, imposts, duties, license and legislation fees; other
taxes imposed by a federal, state, municipal, local, foreign or other governmental authority or
agency, including assessments in the nature of taxes; including without limitation, interest,
penalties, fines, assessments and deficiencies relating to any tax or taxes; and including
transferee or secondary liability for taxes and any taxes due as a result of being a member of any
affiliated, consolidated,

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combined or unitary group or any liability in respect of taxes under a
tax sharing, tax allocation, tax indemnity or other agreement.

          For purposes of this Agreement, “tax return” or “tax returns” shall mean all returns, reports,
estimates, schedules, declarations, information statements and documents relating to or required to
be filed in connection with any taxes pursuant to the statutes, rules or regulations of any
federal, state, local or foreign government taxing authority.

     2.13 Litigation.

          Except as set forth on Schedule 2.13 attached hereto, there are no actions, suits or
proceedings at law or in equity, or arbitration proceedings, or claims, demands or investigations,
pending or, to Colonial, SP or the Operating Companies’ knowledge, threatened against or involving
Colonial, SP or the Operating Companies, or state of facts existing which could give rise to any
such action, suit, proceeding, claim, demand or investigation; there are no proceedings pending or,
to Colonial, SP or the Operating Companies’ knowledge, threatened against or involving Colonial, SP
or the Operating Company by or before any governmental board, department, commission, bureau,
instrumentality or agency (including but not limited to any federal, state, local or foreign
governmental agency or body concerned with control of foreign exchange, energy, environmental
protection or pollution control, franchising or other distribution arrangements, antitrust or trade
regulation, civil rights, labor or discrimination, wages and hours, safety or health, zoning or
land use), or state of facts existing which could give rise to any such proceedings; and Colonial,
SP or the Operating Companies are not in violation of any order, ruling, decree or judgment of any
court or arbitration tribunal or governmental board, department, commission, bureau,
instrumentality or agency.

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     2.14 Owned Real Estate.

          Schedule 2.14 hereto sets forth true and correct and complete legal descriptions of all
parcels of real estate owned by Colonial, SP or the Operating Companies, (the “Real Property”)
prior to the Closing Date. Copies of all title insurance policies relating thereto have been
delivered to THC. Colonial, SP and the Operating Companies have no interest in any real estate
which was occupied by any structure with respect to which a rehabilitation tax credit, as
defined in Section 48(o) of the Internal Revenue Code, was allowed or allowable to Colonial,
SP and the Operating Companies or any other taxpayer.

          All permits and authorizations required by any federal, state, foreign, county or municipal
authority or public body with respect to the use, occupancy or operation of the Real Property and
of all real estate leased by Colonial or the Operating Companies have been obtained and are in full
force and effect, and all the buildings and improvements erected thereon and the present use of the
Real Property and of any such leased real estate is in substantial compliance with all applicable
zoning, development, fire, health and building laws, ordinances and regulations. Except as shown
on Schedule 2.14, there are no service, management, employment, collective bargaining or pension
agreements, or any other agreements which in any way affect any of the Real Property or any real
estate leased by Colonial or the Operating Companies or the use, occupancy, ownership or operation
thereof and Colonial or the Operating Companies warrants and represents that there exist neither
contracts nor agreements which contain covenants relating to compensation or occupation or
possession of any such real property. No parties have rights or options to occupy, lease or
purchase any such property. To Colonial’s, SP’s or the Operating Companies’ knowledge, there is no
claim, action or proceeding pending or threatened by any organization,

-24-

 

person, individual or governmental agency which would affect the use, occupancy or value of any of the Real Property or
the real estate leased by Colonial or the Operating Company. Colonial, SP or the Operating
Companies have no knowledge, nor have they received notice, of any violation of any federal, state,
foreign or local law, ordinance, regulation or other legal requirement in respect of any such
property.

     2.15 Leased Real Property.

          Colonial and the Operating Companies are the lessees under the real estate leases described on
Schedule 2.15 hereto. True, correct and complete copies of said leases and any amendments,
extensions and renewals thereof have heretofore been delivered by Colonial to THC. Colonial or the
Operating Companies now enjoys and on the Closing Date will enjoy quiet and undisturbed possession
under each of said leases. Colonial’s or the Operating Companies’ interest in each of such leases
is free and clear of any mortgages and liens, is not subject to any deeds of trust, assignments,
subleases or rights of any third parties other than the lessor thereof, is fully assignable without
the consent of any third party and may be subleased without the consent of any third party. Such
leased real estate is free and clear of any zoning or use or building restriction or any pending,
proposed or threatened zoning or use or building restriction which would now, or on the Closing
Date or thereafter, interfere with the present use or any use intended as of the Closing Date of
any of such leased real estate. Said leases now are, and on the Closing Date will be, valid and
binding and in full force and effect, and are not now, and on the Closing Date will not be, in
default as to the payment of rent or otherwise. Upon receipt of consent of the landlords under
said leases, the consummation of the transactions contemplated by this Agreement will not
constitute an event of default under any of said leases and the continuation, validity and

-25-

 

effectiveness of such leases will not be adversely affected by the transactions contemplated by
this Agreement.

     2.16 Owned and Leased Tangible Personal Property.

          Schedule 2.16 hereto sets forth a true and correct list and brief description of all of the
software programs, firmware, equipment, vehicles, furniture, fixtures, engineering and other
drawings, schematics, blueprints, designs, other tangible property in any form whatsoever embodying
information and know-how with respect to Colonial’s, SP’s or the Operating
Companies’ business, and other items of tangible personal property owned or leased by
Colonial, SP or the Operating Companies all being located as indicated thereon, and all being
freely removable by Colonial, SP or the Operating Companies unless otherwise indicated
(collectively “Tangible Personal Property”). Except as set forth on Schedule 2.16 hereto,
Colonial, SP or the Operating Companies have and will have on the Closing Date all right, title and
interest in, and good and marketable title to, its owned Tangible Personal Property free and clear
of any claim, lease, pledge, mortgage, security interest, conditional sale agreement or other title
retention agreement, restriction, lien or encumbrance of any kind or nature whatsoever. Each lease
and license relating to any of the Tangible Personal Property is valid and binding and in full
force and effect, and is not in default as to the payment of rent or otherwise. All leases and
licenses relating to the Tangible Personal Property have heretofore been delivered by Colonial, SP
or the Operating Companies to THC and are set forth on Schedule 2.16A. Consummation of the
transactions contemplated by this Agreement will not constitute an event of default under any of
said leases or licenses and the continuation, validity and effectiveness of such leases and
licenses will not be adversely affected by the transactions contemplated hereby.

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     2.17 Condition of Buildings and Tangible Personal Property.

          Except as shown on Schedule 2.17, all of the buildings and items of Tangible Personal Property
owned, leased or used by Colonial or the Operating Companies are in good operating condition and
repair, comply in all material respects with applicable laws, regulations and ordinances, including
but not limited to zoning, building and fire codes and are suitable and sufficient for the present
and intended conduct of Colonial’s or the Operating Companies’ business. Each building and each
item of Tangible Personal Property owned or leased by Colonial or the Operating Companies is adequately covered by one of the insurance policies
described in Section 2.26 hereto.

     2.18 Accounts and Notes Receivable.

          Except as shown on Schedule 2.18, the accounts and notes receivable reflected on the October
Balance Sheet are free and clear of any claim, security interest, pledge or lien or encumbrance of
any kind or nature whatsoever, and are good and fully collectible in the normal course of business
within 60 days of said date without setoff, third party collection efforts or suit, and the
subsequently created accounts and notes receivable of Colonial, SP or the Operating Companies from
the dates of the October Balance Sheet to the Closing Date will be free and clear of any claim,
pledge, security interest or lien or encumbrance of any kind or nature whatsoever, and will be good
and fully collectible in the normal course of business.

     2.19 Contracts.

          All contracts and agreements of any nature to which Colonial, SP or the Operating Companies
are a party, or will be a party as of the Closing Date, as listed on Schedule 2.19 have been duly
and validly executed by all parties, and are in full force and effect as of the date hereof.

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No event has occurred or condition or state of facts exists which, after notice or the passage of time
or both, would constitute a default under any such contract, as to time or manner of performance,
or as to warranties thereunder, or otherwise (insofar as any such event, condition or state of
facts is attributable to the act (or failure to act) of a party to a contract other than Colonial,
SP or the Operating Companies or a condition or state of facts that is not subject to the control
of Colonial, SP or the Operating Companies). All such contracts will continue to be binding in
accordance with their respective terms until their respective expiration dates. Colonial, SP and
the Operating Companies are not subject to any liability or payment resulting
from renegotiation of amounts paid it under any contract with the government of the United
States or any agency, department or other subdivision thereof except as set forth on Schedule 2.19.
Set forth on Schedule 2.19 attached hereto is a list of the following types of contracts to which
Colonial, SP and the Operating Companies are a party or by which it or its properties or Assets are
bound:

          (a) Unfilled commitments either (i) obligating Colonial, SP or the Operating Companies to pay
a total amount in excess of $10,000, or (ii) regardless of amount, which are not to be fully
performed within one year following the date hereof. None of such commitments materially exceeds
Colonial’s, SP’s or the Operating Companies’ normal requirements, or requires a payment materially
in excess of current market price for the goods or services being purchased; and

          (b) Unfilled commitments or agreements obligating Colonial, SP or the Operating Companies to
provide services either (i) entitling Colonial, SP or the Operating

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Companies to revenues in excess of $10,000, or (ii) regardless of amount, which are not to be fully performed within one year
following the date hereof.

     2.20 Inventories and Supplies.

          All of Colonial’s, SP’s or the Operating Companies’ inventories and supplies (a) are reflected
on the date of the October Balance Sheet in accordance with GAAP except for fluctuations in the
ordinary course of business; (b) now are and on the Closing Date will be good and salable or usable
in the ordinary course of the business of Colonial, SP or the Operating Companies; (c) now are and
on the Closing Date will be of reasonably sufficient quality and quantity for the normal operation
of such Colonial’s, SP’s or the Operating Companies’ business; (d) did not on the date of the
October Balance Sheet contain, do not now contain, and on the
Closing Date will not contain, any material quantities of obsolete items; and (e) now are, and
on the Closing Date will be, free and clear of any claim, security interest, pledge or lien or
encumbrance of any kind or nature whatsoever.

     2.21 Prepaid Items and Deposits.

          Schedule 2.21 hereto describes all of the prepaid items and deposits of the Colonial, SP or
the Operating Companies as of the date hereof.

     2.22 Other Assets.

          Except as set forth on Schedule 2.16, all other assets, both tangible and intangible, owned by
Colonial, SP or the Operating Companies are free and clear of any claim, lease, pledge, mortgage,
security interest, collateral assignment, conditional sale agreement or other title retention
agreement, restriction or lease or lien or encumbrance of any kind or nature whatsoever.

     2.23 Banking and Personnel Matters.

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          Schedule 2.23 hereto contains a true, complete and correct list of: (i) the names of all
banks and other financial institutions (with account numbers) in which Colonial has an account or
safe deposit box, and of all brokerage firms and other entities and persons holding funds or
investments of Colonial, SP and the Operating Companies, and the names of all persons authorized to
draw thereon or have access thereto; (ii) the names of all incumbent directors and officers of
Colonial, SP and the Operating Companies; (iii) the names and job designations, descriptions and
locations of all non-union employees, consultants and agents of Colonial, SP and the Operating
Companies, the current remuneration of each, including fringe benefits, and the basis for
determining such remuneration if other than a fixed salary rate; and (iv) the names of all persons
holding powers of attorney from Colonial, SP and the Operating Companies and a
summary statement of the terms thereof. There shall be no change in any of the foregoing from
the date hereof through the Closing Date without the prior written consent of THC.

     2.24 Labor and Employment Matters.

          (a) Colonial, SP and the Operating Companies at present are not and during the five (5) year
period preceding the Closing Date have not been a sponsor of, party to or obligated to contribute
to any employee benefit plan (as defined in § 3(3) of the Employee Retirement Income Security Act
of 1974, as amended (“ERISA”)), or any employment contract, employee loan, incentive compensation,
profit sharing, retirement, pension, deferred compensation, severance, termination pay, stock
option or purchase plan, guaranteed annual income plan, fund or arrangement, payroll incentive,
policy, fund, agreement or arrangement, non-competition or consulting agreement, hospitalization,
disability, life or other insurance plan, or other employee fringe benefit program or plan, or any
other plan, payroll practice, policy fund

-30-

 

agreement or arrangement similar to or in the nature of the foregoing, oral or written (“Employee Benefit Plans” or “Plans”), and has not been a party to
any collective bargaining agreements currently in effect or in effect during the five-year period
preceding the Closing Date, except as set forth on Schedule 2.24 hereto. Section 2.24 identifies
which of such Plans is a multiemployer plan as defined in Section 3(37) of ERISA. True, correct
and complete copies of all of the written Plans and labor agreements, and true, correct and
complete written descriptions of all of the oral Plans described in Schedule 2.24 have heretofore
been delivered by SPMC, Colonial or SP to THC.

          (b) Except as disclosed on Schedule 2.24, Colonial, SP and the Operating Companies have no
unfunded liabilities, or potential, contingent or actual multiemployer plan withdrawal liabilities,
on account of or in connection with any of the Plans or otherwise, all
contributions or premium payments due from Colonial, SP and the Operating Companies to such
Plans have been paid in a timely manner, and any additional contributions or premium payments due
on or before the Closing Date shall have been paid by that date.

          (c) With respect to each Employee Benefit Plan (other than a Plan which is a multiemployer
plan as defined in Section 3(37) of ERISA):

               (1) all disclosures to employees relating to each such Plan and required to have been made on
or before the Closing Date have been or will be duly made by that date;

               (2) there is no litigation, disputed claim (other than routine claims for benefits),
governmental proceeding, inquiry or investigation pending or threatened with respect to each such
Plan, its related trust, or any fiduciary, administrator or sponsor of such Plan;

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               (3) each such Plan has been established, maintained, funded and administered in all material
respects in accordance with its governing documents, and any applicable provisions of ERISA, the
Internal Revenue Code, other applicable law, and all regulations promulgated thereunder;

               (4) Colonial, SP or the Operating Companies have delivered to THC a true, correct and complete
copy of (i) each trust or custodial agreement and each deposit administration, group annuity,
insurance or other funding contract associated with each such Plan, (ii) the most recent financial
information for each such Plan, (iii) the most recent actuarial or valuation report relating to
each such Plan, (iv) if applicable, the most recent Return/Report of each Plan (including
attachments) required to be filed with any governmental agency, (v) the Plan document for each such
Plan, (vi) the summary Plan description (including summaries of material modifications, if any) for
each such Plan and (vii) if applicable, each Form 5310 (application for Determination Upon
Termination, etc.) filed with the Internal Revenue Service or the Pension Benefit Guaranty Corporation (the “PBGC”) with respect to any Plan in the
current Plan year or any of the five (5) Plan years preceding the current Plan year;

               (5) neither any such Plan nor any fiduciary has engaged in a prohibited transaction as defined
in ERISA § 406 or Internal Revenue Code § 4975 (for which no individual or class exemption exists
under ERISA § 408 or Internal Revenue Code § 4975, respectively);

               (6) all filings and reports as to each such Plan required to have been made on or before the
Closing Date to the Internal Revenue Service, or to the United States Department of Labor or to the
PBGC, have been or will be duly made by that date;

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               (7) each such Plan which is intended to qualify as a tax-qualified retirement plan under
Internal Revenue Code § 401(a) has received a favorable determination letter(s) from the Internal
Revenue Service as to qualification of such Plan for the period from its adoption through the
Closing Date; nothing has occurred, whether by action or failure to act, which has resulted in or
would cause the loss of such qualification; and each trust thereunder is exempt from tax pursuant
to Internal Revenue Code § 501(a);

               (8) no event has occurred and no condition exists relating to any such Plan that would subject
Colonial, SP or the Operating Companies to any tax under Internal Revenue Code §§ 4972 or 4979, or
to any liability under ERISA § 502; and

               (9) to the extent applicable, each such Plan has been funded in accordance with its governing
documents, ERISA and the Internal Revenue Code, has not experienced any accumulated funding
deficiency (whether or not waived) and has not exceeded its full funding limitation (within the
meaning of Internal Revenue Code § 412) at any time.

          (d) With respect to any Plan subject to Title IV of ERISA (“Pension Plan”) which covers
employees of Colonial, SP or the Operating Companies (or any person, firm or
corporation which is or was under common control within the meaning of § 4001(b) of ERISA with
Colonial (“affiliate”) during the period of such common control) (other than a Plan which is a
multiemployer Plan as defined in Section 3(37) of ERISA):

               (1) there has been no “reportable event” within the meaning of ERISA § 4043 without regard to
whether such reportable event must be reported to the PBGC;

               (2) there has been no event described in §§ 4041, 4042, 4062 or 4063 of ERISA;

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               (3) there has been no amendment to any such Pension Plan which has required or could require
Colonial, SP or the Operating Companies to provide security to such Pension Plan under Internal
Revenue Code § 401(a)(29);

               (4) all filings, premium payments, reports and notices as to each such Pension Plan required
to have been made on or before the Closing Date to the PBGC have been or will be duly made by that
date;

               (5) there has been no commencement of any proceeding to terminate any such Pension Plan
pursuant to ERISA or otherwise; and

               (6) no written notice has been given to Colonial, SP or the Operating Companies or any
affiliate of the intention to commence or seek the commencement of any such proceeding to terminate
any such Pension Plan.

          (e) With respect to any Pension Plan which is a multiemployer plan as defined in Section 3(37)
of ERISA, neither Colonial, SP nor the Operating Companies, nor James R. Smith, nor any affiliate
has any knowledge that the representations in the preceding subparagraphs (c) and (d) would not
also be true of such multiemployer Plan. Colonial, SP, the Operating Companies, and James R.
Smith, have not received any notification that any multiemployer plan is currently in reorganization or is or has been terminated or will
imminently be in reorganization or terminated. Colonial, SP or the Operating Companies have
delivered to THC data which accurately discloses its total contribution base units for any
multiemployer Pension Plan for each of the eight consecutive plan years of such Pension Plan
immediately preceding the date hereof.

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          (f) With respect to any Plan which provides group health benefits to employees of seller and
is subject to the requirements of Internal Revenue Code § 4980B and ERISA Title I Part 6 (“COBRA”):

               (1) such group health plan has been administered in every respect in accordance with its
governing documents and COBRA; and

               (2) all filings, reports, premium payments (if any) and notices as to each such group health
plan required to have been made on or before the Closing Date to government agencies, participants
and/or beneficiaries have been or will be duly made by that date.

          (g) Except as shown on Schedule 2.24, Colonial, SP and the Operating Companies (i) are not a
party to any collective bargaining agreement or discussions or negotiations with any person or
group which may reasonably be expected to result in any such agreement, (ii) have not within the
last five (5) years experienced any strike, grievance, unfair labor practice claim or other labor
difficulty (other than grievances and unfair labor practice claims in which Colonial’s, SP’s or the
Operating Companies’ only exposure was to monetary damages of $5,000.00 or less as set forth on
Schedule 2.24(g)(ii)), (iii) are aware of no threatened strike, grievance, unfair practice claim or
other labor difficulty, and there exists no reasonable basis for the assertion of any grievance or
unfair labor practice claim or other charge or complaint against Colonial, SP or the Operating Companies by or before the National Labor
Relations Board or any state labor relations board or commission or representative thereof, (iv)
are aware of no filing by any employee or employee group seeking recognition as a collective
bargaining representative or unit, (v) have no reason to believe that any former employer of any of
its employees is contemplating remedial action of any nature against that employee or Colonial, SP

-35-

 

or the Operating Companies based on the employee having terminated the former employment and having
become an employee of Colonial, SP or the Operating Companies.

          (h) Except as disclosed on Schedule 2.24, Colonial, SP or the Operating Companies are not
obligated to and does not (directly or indirectly) provide death benefits or health care coverage
to any former employees or retirees.

          (i) Colonial, SP and the Operating Companies have complied with all applicable provisions of
the Immigration Reform and Control Act of 1986.

     2.25 Termination of Business Relationships.

          No supplier of Colonial, SP or the Operating Companies which cannot be replaced on
commercially reasonable terms has evidenced to Colonial, SP and the Operating Companies any
intention to cancel or terminate its business relationship with Colonial, SP or the Operating
Companies. No key employee of Colonial, SP or the Operating Companies have notified Colonial, SP
or the Operating Companies of his/her intent or desire to terminate employment with Colonial, SP or
the Operating Companies.

     2.26 Insurance.

          Schedule 2.26 lists all policies of insurance and all surety and other bonds to which
Colonial, SP or the Operating Companies now is a party, or during the shorter of the existence of
the party or the immediately preceding seventy-two (72) months was a party,
specifying for each policy or bond the insurer, the amount of coverage, the type of insurance
and any pending claims thereunder. All of such policies and bonds which have expired were valid
and in full force and effect during their respective terms, and all other of such policies and
bonds are valid and in full force and effect at present, and no claim has been made, or notice
given, and there exists no

-36-

 

ground to cancel or avoid any of said policies or bonds or to reduce the
coverage provided thereby. No claims have been made or amounts paid pursuant to such insurance
policies except as set forth on Schedule 2.26. Such policies provide adequate coverage in adequate
amounts to insure the assets of Colonial, SP or the Operating Companies and the risks of
Colonial’s, SP’s or the Operating Companies’ business in accordance with practices in the industry.
All of said insurance policies and bonds which are now in effect shall continue to remain in full
force and effect during their respective terms. Colonial, SP and the Operating Companies have not
during the past three (3) years been denied or had revoked or rescinded by a carrier any policy of
insurance. Colonial, SP and the Operating Companies are not in default regarding the provisions of
any policy insuring Colonial, SP and the Operating Companies and have not failed to give any notice
or present any material claim required under any such policy in due and timely fashion. There are
no outstanding requirements or recommendations by any current insurer or underwriter with respect
to the business of Colonial, SP and the Operating Companies which require or recommend changes in
the conduct of the business of Colonial, SP and the Operating Companies or require any repairs or
other work to be done with respect to any of the properties, assets or operations of Colonial, SP
and the Operating Companies. Except as disclosed on Schedule 2.26, any policies expiring prior to
the Closing Date will be renewed or extended upon substantially the same terms and at substantially
the same premiums.

     2.27 Compliance with Laws.

          Except as shown on Schedule 2.27, Colonial, SP and the Operating Companies have complied in
all material respects with all applicable laws, statutes, rules and regulations, orders and
engineering standards of federal, state, local and foreign governments and

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governmental agencies applicable to them and their business, assets, properties and operations and no claim of violation
(or basis therefor) of any such laws or regulations exists on the date hereof.

     2.28 Material and Affiliate Contracts.

          Schedule 2.28 hereto sets forth a list of all other (i.e., not identified on one or more of
the foregoing Schedules hereto) written contracts, commitments, or other agreements to which
Colonial, SP and the Operating Companies are a party or by which Colonial, SP or the Operating
Companies or any of the assets or properties of Colonial, SP or the Operating Companies are bound
or subject (a) requiring or reasonably anticipated to require the payment by Colonial, SP or the
Operating Companies of more than $1,000.00 in any three- (3-) month period, (b) under which
Colonial, SP or the Operating Companies are entitled to receive $1,000.00 or more annually, (c)
covering indebtedness of Colonial, SP or the Operating Companies in the principal amount of
$1,000.00 or more, (d) covering the employment of any employee of Colonial, SP or the Operating
Companies where the annual salary of such employee is $1,000.00 or more, (e) not terminable by the
Colonial, SP or the Operating Companies, without penalty, within thirty (30) days following the
Closing Date, (f) terminable by or on behalf of the other party thereto on sixty (60) days’ notice
or less, (g) which obligates Colonial, SP or the Operating Companies to act as a guarantor or
surety irrespective of the amount involved, (h) which are sales agency, franchise or similar
agreements, or (i) which are capital leases, loan agreements, indentures, mortgages, pledges,
hypothecations, deeds of trust, conditional sale or title retention agreements, security agreements or equipment financing
agreements (collectively, the “Material Contracts”). True, correct and complete copies of the
written Material Contracts have heretofore been delivered by Colonial, SP or the Operating
Companies to THC.

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     There are no contracts, agreements, purchase orders, commitments, leases, agreements,
understandings or arrangements, including loan arrangements, between Colonial, SP and the Operating
Companies and any of their officers, directors or interest holders, or any related or affiliated
person, corporation or other entity, except as set forth on Schedule 2.28 hereto (a true, correct
and complete copy of each such written document having heretofore been delivered by Colonial, SP or
the Operating Companies to THC (collectively, the “Affiliate Contracts”)), and none shall be
entered into by Colonial, SP or the Operating Companies from the date hereof through the Closing
Date without the prior written consent of THC.

     All of the Material Contracts and Affiliate Contracts are in full force and effect, and there
exists no default, and no event has occurred which, through notice or the passage of time or
otherwise, would result in a default under the terms of any of the Material Contracts or Affiliate
Contracts.

     2.29 Licenses and Permits.

          Colonial, SP or the Operating Companies has secured all licenses, franchises, permits and
other authorizations from federal, state, local and other governmental or administrative
authorities (an “Authority”) applicable to its assets, properties and operations or necessary for
the conduct of its business, including the billing for all services (the “Permits”). Schedule 2.29
hereto sets forth a true, complete and correct list of all such Permits held or used by Colonial,
SP or the Operating Companies, and true and complete copies thereof have heretofore been delivered by Colonial, SP or the Operating Companies to THC. Each of said
Permits is in full force and effect; Colonial, SP or the Operating Companies (or other designated
permittee or licensee thereunder) is in compliance with the terms, provisions and conditions

-39-

 

thereof; there are no outstanding violations, notices of noncompliance therewith, judgments,
consent decrees, orders or judicial or administrative action(s) or proceedings(s) affecting any of
said Permits; and no condition exists and no event has occurred which (whether with or without
notice, lapse of time or the occurrence of any other event) would permit the suspension or
revocation of any of said permits other than by expiration of the term set forth therein.
Consummation of the transactions contemplated by this Agreement shall not affect the validity,
enforceability or effectiveness of any such Permit and no filing with or consent authorization or
approval of any Authority is required in connection with the consummation of the transactions
contemplated hereby.

     2.30 No Interest in Suppliers.

          Colonial, SP and the Operating Companies have no direct or indirect equity interest in, or
power to control the business or affairs of, or intention to acquire such interest in or control
of, any person or entity that is an assisted living or skilled nursing, supplier, lender, lessor or
provider of services or equipment to, or any entity or person that renders services in, the
industry in which Colonial, SP or the Operating Companies are engaged, except that certain of the
entities as shown on Schedule 2.30 have entered into contracts for pharmaceutical services with Rx
Care, LLC and certain of the entities shown on Schedule 2.30 have entered into contracts for
physical rehabilitation services with Medical Business Management, Inc. d/b/a Shenandoah Therapies.
Rx Care, LLC and Shenandoah Therapies are, or will be affiliates of SP.

     2.31 Absence of Questionable Payments.

          Neither Colonial, SP or the Operating Companies, nor any of its officers, directors, agents or
employees purporting to act on its behalf has authorized or made or agreed or offered

-40-

 

to make any payment or promise to pay any money or anything of value, or any use of Colonial’s, SP’s or the
Operating Companies’ assets (i) to or on behalf of an official of any government or foreign
government, or political party or official thereof or candidate for political office (domestic or
foreign), or other person, to or for any purpose except as permitted by applicable law, (ii) for
any of the purposes described in Section 162(c) of the Internal Revenue Code, or (iii) for
establishment or maintenance of any concealed fund or concealed bank account.

     2.32 All Business Conducted by Colonial, SP and the Operating Companies.

          The business and operations of Colonial, SP and the Operating Companies are conducted
exclusively by Colonial, SP or the Operating Companies, and not by any other business entity
whether or not affiliated with Colonial, SP or the Operating Companies.

     2.33 Absence of Anti-Boycott Violations.

          Colonial, SP and the Operating Companies have not violated and is not in violation of any
statute, law, decree, order, rule or regulation of any governmental body of the United States which
prohibits or regulates the boycotting of or refusal to deal with any person or entity, including
without limitation the Export Administration Amendments of 1977 (50 U.S.C. App. §§ 2401 et seq.),
the Ribicoff Amendments to the Tax Reform Act of 1976 (Internal Revenue Code § 999) or the Sherman
Act (15 U.S.C. §§ 1 et seq.), or any rule or regulation promulgated pursuant thereto.

     2.34 Environmental Matters.

          Except as set forth on Schedule 2.34 hereto, (i) Colonial, SP and the Operating Companies are
currently in compliance with all applicable Environmental Laws, and has
obtained all permits and other authorizations from, and submitted all forms, fees,
registrations, reports and

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similar filings to, the appropriate person or governmental agency
needed, or required, to operate its facilities in compliance with the applicable Environmental
Laws; (ii) Colonial, SP nor the Operating Companies have not violated any applicable Environmental
Law; (iii) Colonial, SP and the Operating Companies are unaware of any present requirement of any
applicable Environmental Law which is due to be imposed upon it which will increase its cost of
complying with the Environmental Laws; (iv) all past on-site generation, treatment, processing,
storage and disposal of Waste, including Hazardous Waste, by Colonial, SP and the Operating
Companies and, based solely on the environmental reports attached hereto as Schedule 2.34 (the
“Environmental Reports”), its predecessors have been done in compliance with the currently
applicable Environmental Laws; (v) all past off-site transportation, treatment, processing, storage
and disposal of Waste, including Hazardous Waste, generated by Colonial, SP and the Operating
Companies and, based solely on the Environmental Reports, its predecessors have been done in
compliance with the currently applicable Environmental Laws; (vi) Colonial, SP and the Operating
Companies and, based solely on the Environmental Reports, their predecessors have not released,
spilled, leaked or otherwise discharged into the environment any Regulated Substance except as
expressly authorized by the applicable Environmental Laws; and (vii) Colonial, SP and the Operating
Companies and, based solely on the Environmental Reports, their predecessors have not used or
otherwise managed any Regulated Substance except in strict compliance with all applicable
Environmental Laws.

     As used in this Agreement, the terms (i) “Environmental Laws” include but are not limited to
any federal, state, foreign or local law, statute, charter or ordinance, and any rule, regulation,
binding interpretation, binding policy, permit, order, court order or consent decree
issued

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pursuant to any of the foregoing, which pertains to, governs or otherwise regulates any
of the following activities: (a) the emission, discharge, release or spilling of any Regulated
Substance into the air, surface water, groundwater, soil or substrata and (b) the manufacturing,
processing, sale, generation, treatment, transportation, storage, disposal, labeling or other
management of any Waste, including any Hazardous Waste or Regulated Substance; (ii) “Waste” and
“Hazardous Waste” include any substance defined as such by any applicable Environmental Law; and
(iii) “Regulated Substances” include any substance the manufacturing, processing, sale, generation,
treatment, transportation, storage, disposal, labeling or other management or use of which is
regulated by any applicable Environmental Law.

     2.35
Intellectual Property Matters.

          Colonial,
SP and the Operating Companies own no intellectual property rights.

     2.36
Consents and Approvals.

          Except as set forth on Schedule 2.36 hereto, there are no authorizations, consents, approvals
or notices required to be obtained or given by Colonial, SP or the Operating Companies or waiting
periods required to expire in order that this Agreement and the transactions provided for herein
may be consummated by Colonial, SP or the Operating Companies.

     2.37 Medicare Participation/Accreditation.

          Colonial, SP or the Operating Companies are eligible to receive payment under Titles XVIII and
XIX of the Social Security Act and is a “provider” under existing provider agreements with the
Medicare and Medicaid Programs (the “Programs”) through the applicable intermediaries, except that
Generation Development Company, LLC, Generation Leasing Company, II, LLC, and SP Grayson, LLC, are
the only Operating Companies that have provider

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agreements with Medicare. Colonial, SP and the Operating Companies are in substantial
compliance with all of the conditions of participation in the Programs. There is not pending, nor
to the best knowledge of Colonial, SP or the Operating Companies threatened, any proceeding or
investigation under the Programs involving the Assets. The cost reports of Colonial, SP and the
Operating Companies for the Programs for the fiscal years through December 31, 1997, have been
filed. The cost reports of Colonial, SP or the Operating Companies for the Programs for the fiscal
year ending December 31, 1998 will be filed on or before their due dates, and Colonial, SP or the
Operating Companies shall promptly provide THC with copies thereof. The cost reports of Colonial,
SP and the Operating Companies were filed when due. SP, the Operating Companies and James R. Smith
hereby agree to indemnify and hold THC and THCV harmless for any losses that result from the late
filing of any cost reports that were due on or before the Closing Date. True and correct copies of
all such reports for the three (3) most recent fiscal years of Colonial, SP and the Operating
Companies have been furnished to THC. Except as shown on Schedule 2.37, there are no claims,
actions or appeals pending before any intermediary or carrier, the Provider Reimbursement Review
Board, the Department of Medical Assistance or the Administrator of the Health Care Financing
Administration, with respect to any federal or state Medicare or Medicaid cost reports or claims
filed by Colonial, SP or the Operating Companies on or before the date hereof, or any disallowances
in connection with any audit of such cost reports. Colonial, SP or the Operating Companies is in
current compliance in all respects with all rules, regulations and requirements of all governmental
agencies having jurisdiction over the programs in which Colonial, SP or the Operating Companies
participates.

     2.38 Hill-Burton Funds.

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          None of the Assets are subject to, and SP and the Operating Companies shall indemnify and hold
THC and THCV harmless from and against, any liability in respect of amounts received by Colonial,
SP and the Operating Companies or others for the purchase or improvement of the Assets or any part
thereof under restricted or conditions grants or donations received under the Public Health Service
Act, 42 U.S.C. Section 291 et seq.

     2.39 Immigration Act.

          Colonial, SP and the Operating Companies are in compliance with the terms and provisions of
the Immigration Act. For each employee (as defined in 8 C.F.R. 274a.1(f)) of Colonial, SP or the
Operating Companies for whom compliance with the Immigration Act by Colonial is required, Colonial,
SP or the Operating Companies have obtained and retained a complete and true copy of each such
employee’s Form I-9 (Employment Eligibility Verification Form) and all other records or documents
prepared, procured or retained by seller pursuant to the Immigration Act. Colonial, SP or the
Operating Companies have not been cited, fined, served with a Notice of Intent to Fine or with a
Cease and Desist Order, nor has any action or administrative proceeding been initiated or
threatened against Colonial, SP or the Operating Companies by reasons of any actual or alleged
failure to comply with the Immigration Act.

     2.40 Disclosure.

          Colonial, SP, the Operating Companies and James R. Smith have disclosed all material facts
relating to its assets, business, condition (financial and otherwise) and operations in this
Agreement (including the Schedules hereto). Neither this Agreement nor any other document,
certificate, exhibit, statement or schedule furnished or to be furnished by or on behalf of
Colonial, SP, the Operating Companies and James R. Smith to THC in connection with the

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transactions contemplated hereby contains or will contain any untrue statement of a material fact,
or omits or will omit to state a material fact necessary to make the factual statements
contained therein, in light of the circumstances under which made, not misleading.

3. REPRESENTATIONS AND WARRANTIES OF THC

     THC represents and warrants to Colonial, SP and the Operating Companies and covenants and
agrees with Colonial, SP and the Operating Companies as follows:

     3.1 Organization and Qualification.

          THC is a corporation duly organized, validly existing and in good standing under the laws of
the Commonwealth of Pennsylvania and has the corporate power and authority to carry on its business
as presently conducted.

          THC has not during the six (6) year period immediately preceding the date hereof, changed its
name, been the surviving entity of a merger, consolidation or other reorganization, or acquired all
or substantially all of the assets of any person or entity.

     3.2 Authorization; Valid and Binding Obligation.

          THC has full corporate power and authority to execute and deliver this Agreement and to
perform its obligations thereunder. This Agreement has been duly executed and delivered by THC and
constitutes the legal, valid and binding obligation of THC, enforceable against it in accordance
with its terms.

     3.3 Litigation.

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          There are no actions, proceedings, suits or investigations pending or threatened against THC
which, if resolved unfavorably, would prohibit the consummation of the transactions contemplated by
this Agreement.

     3.4 Investment.

          (a) THC acknowledges that no registration statement relating to the 51% THCV membership
interest has been or shall be filed with the United States Securities and Exchange Commission under
the Federal Securities Act of 1933, as amended, or the securities laws of any state.

          (b) The 51% THCV membership rights will be acquired solely by and for the account of THC for
investment purposes only and are not being purchased for subdivision, fractionalization, resale or
distribution; THC has no contract, undertaking, agreement or arrangement with any person to sell,
transfer or pledge the 51% to such person or anyone else and THC has no present plans or intentions
to enter into any such contract, undertaking or arrangement.

          (c) THC has relied solely upon the representations of SPMC, Colonial and SP contained in this
Agreement, documents submitted to it by SPMC, Colonial and SP and independent investigations made
by it in making the decision to purchase the 51% THCV membership interest.

     3.5 Disclosure.

          No representation or warranty of THC in this Agreement contains any untrue statement of a
material fact, or omits to state a material fact necessary to make the factual

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statements contained herein, in light of the circumstances under which such statements are made, not misleading.

     3.6 Corporate Instruments and Records.

          The copies of THC’s Articles of Incorporation and By-laws, appended hereto as Schedule 3.6,
are true, correct and complete and include all amendments to the date hereof. THC’s minute books,
as made available to SP, contain a true, complete and correct record of all
corporate action taken on or prior to the date hereof at the meetings of THC’s shareholders
and directors and committees thereof. The stock certificate books and ledgers of THC, as made
available to SP, are true, correct and complete, and accurately reflect, at the date hereof, the
ownership of the outstanding capital stock of THC.

     3.7 Capitalization.

          The authorized shares in THC are as set forth on Schedule 3.7. All of said shares are validly
issued, fully paid and non-assessable and entitled to vote at the shareholder’s meetings, and none
of such shares have been issued in violation of any rights of shareholders or transferred in
violation of any transfer restrictions relating thereto. Except as set forth on Schedule 3.7,
there are no authorized or outstanding options, warrants, convertible securities, subscription
rights, puts, calls, or other rights of any nature to purchase or otherwise receive, or to require
THC to purchase, redeem or acquire, any shares and there is no outstanding security of any kind
convertible into such shares. Except as set forth on Schedule 3.7, there are no existing
shareholder agreements, voting agreements or voting trusts respecting any shares in THC.

     3.8 Ownership of Shares.

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          The Shareholders of THC listed on Schedule 3.8 hereto own and hold, beneficially and of
record, the entire right, title and interest in and to the number of shares set forth opposite
their names, free and clear of any claim, suit, proceeding, call, commitment, voting trust, proxy,
restriction, limitation, security interest, pledge or lien or encumbrance of any kind or nature
whatsoever, and have full power and authority to vote said shares and to approve the transactions
contemplated by this Agreement, such shares constituting, in the aggregate, all of the issued and
outstanding shares of THC.

     3.9 No Violation.

          Assuming the approval required in Section 8.8, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby, nor compliance with the
terms hereof, will (i) conflict with or result in a breach of any of the terms, conditions or
provisions of the Articles of Incorporation or By-laws of THC, nor (ii) violate, conflict with or
result in a breach of or default under any of the terms, conditions or provisions of any agreement,
understanding, arrangement, indenture, contract, lease, sublease, loan agreement, note,
restriction, obligation or liability to which THC is a party or by which it is bound or to which it
is subject (individually, an “Instrument” and collectively, the “Instruments”), nor (iii)
accelerate or give to others any interests or rights, including rights of acceleration,
termination, modification or cancellation, under any Instrument or in or with respect to the
business or assets of THC, nor (iv) result in the creation of any lien, claim, charge or
encumbrance on the assets, capital stock or properties of THC, nor (v) conflict with, violate or
result in a breach of or constitute a default under any law, statute, rule, judgment, order,
decree, injunction, ruling or regulation of any government, governmental agency, authority or
instrumentality, court or arbitration tribunal to

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which THC or any of its assets or properties are subject, nor (vi) require THC to give notice to, or obtain an authorization, approval, order,
license, franchise, declaration or consent of, or make a filing with, any third party, including,
any foreign, federal, state, county, local or other governmental or regulatory body.

     3.10 Financial Statements.

          Schedule 3.10 hereto contains true, correct and complete copies of the THC audited financial
statements for the years ended June 30, 1998 (“Audit”), a balance sheet and income statement of THC
dated as of November 30, 1998 (the “November Balance Sheet”), together with the notes thereto.
Each of the foregoing financial statements has been prepared in
conformity with generally accepted accounting principles (“GAAP”) applied on a consistent
basis, and presents fairly the financial position and results of operations and cash flows of THC
at the dates and for the periods specified. All liabilities and obligations of THC outstanding as
of the dates of the aforesaid financial statements required to be reflected as liabilities in
accordance with GAAP have been included in said financial statements. There have been no material
changes in the financial condition, assets or liabilities of THC from the date of the Balance Sheet
(the “Balance Sheet Date”) to the date hereof, except changes in the ordinary course of business,
none of which, either singly or in the aggregate, has been materially adverse. Since the Balance
Sheet Date, THC has conducted its businesses in a normal and customary manner. The books and
records of THC from which the financial statements were prepared properly and accurately record the
transactions and activities which they purport to record.

     3.11 Absence of Undisclosed and Contingent Liabilities.

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          Except as set forth on Schedule 3.11 hereto, THC has no liabilities of any nature (whether
secured or unsecured, accrued, absolute or contingent, unliquidated or otherwise and whether known
or unknown or due or to become due) as of the date hereof other than (i) liabilities disclosed or
reserved against in the Audit, (ii) liabilities arising in the ordinary course of business after
the Balance Sheet Date, (none of which either singly or in the aggregate, will have a material
adverse effect on the business, assets, financial condition or prospects of THC). THC knows of no
basis for the assertion against it by any person of a claim based on a liability which is not
disclosed on the November Balance Sheet.

     3.12 No Adverse Changes.

          Except as set forth on Schedule 3.12 hereto, since the Balance Sheet Date there has not been:

          (a) a material adverse change in the condition (financial or otherwise), properties, assets,
liabilities, rights, operations or business of THC;

          (b) the issuance by THC of any notes, bonds or other debt securities or any equity securities;

          (c) the declaration, setting aside or payment of any dividend or other distribution in respect
of any shares of THC’s capital stock, or the purchase, redemption, issue, sale or other disposition
of any such shares or rights, or the sale or grant of any options, warrants, puts, calls or other
rights or obligations to purchase or convert into shares of capital stock or indebtedness of THC;

          (d) any mortgage or pledge of, or creation of any lien, pledge, charge, security interest or
encumbrance respecting any property or assets of THC;

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          (e) the borrowing of any amount of money or the incurring of or becoming subject to any
liabilities, except (i) current liabilities incurred in the ordinary course of business, and (ii)
liabilities under contracts entered into in the ordinary course of business;

          (f) the discharge or satisfaction of any lien or encumbrance or the payment of any obligation
or liability, other than current liabilities paid in the ordinary course of business;

          (g) any damage, theft, destruction or casualty loss, whether or not covered by insurance,
adversely affecting the properties or operations of THC;

          (h) any sale, lease, transfer or assignment of any asset (tangible or intangible) of THC or
the cancellation of any debt or claim except for a fair consideration and in the ordinary course of
business;

          (i) the disclosure of any proprietary confidential information of THC to any person;

          (j) any cancellation, settlement or compromise of any claim or debt due to or owing by THC in
an amount exceeding $5,000 individually or $5,000 in the aggregate;

          (k) any loss, waiver or release of any material rights of THC, whether or not in the ordinary
course of business or consistent with past practice;

          (l) except as set forth on Schedule 3.12(l), the negotiation or execution of any arrangement,
agreement or understanding to which THC is a party which cannot be terminated by THC on notice of
thirty (30) days or less without cost or penalty;

          (m) any increase in salary, bonus, fringe benefit, or incentive or other compensation payable
or to become payable to any officer, director, employee, affiliate or other person receiving
compensation of any nature from THC or any increase in the number of shares

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obtainable under, or acceleration of the time of exercisability of, any stock option, stock bonus or similar plan of
THC;

          (n) any capital expenditures or commitments therefor by THC that aggregate in excess of
$75,000;

          (o) any change in any accounting practice or procedure; or

          (p) any other transaction, contract or commitment entered into by THC otherwise than in the
ordinary course of business.

     3.13 Consents and Approvals.

          Except as set forth on Schedule 3.13 hereto, there are no authorizations, consents, approvals
or notices required to be obtained or given by THC or waiting periods required to expire in order
that this Agreement and the transactions provided for herein may be consummated by Colonial, SP or
the Operating Companies.

4. CONSENTS AND GOVERNMENTAL FILINGS

     Colonial, SP and the Operating Companies and THC shall promptly proceed to secure any consents
or approvals or the expiration of any time periods required for the consummation of the
transactions provided for hereunder and shall promptly prepare and file with the appropriate
governmental agencies and offices any documents or other information required in connection
therewith.

5. AFFIRMATIVE COVENANTS AND UNDERTAKINGS OF SPMC, COLONIAL,

SP, OPERATING COMPANIES AND JAMES R. SMITH

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     From and after the date of this Agreement to and including the Closing Date, SPMC, Colonial,
SP, Operating Companies and James R. Smith covenant and agree to comply with the provisions of this
Article 5, except as compliance may be waived in writing in a particular instance by THC.

     5.1 Satisfaction of Conditions.

          Colonial, SP, the Operating Companies and James R. Smith shall use their best efforts to
satisfy the conditions precedent to the obligations of THC specified in Article 8 hereof.

     5.2 Preservation of Business.

          Colonial, SP and the Operating Companies shall cause each other to (a) conduct its business
consistent with past business practices and preserve its current business organization, (b) use
their best efforts to keep available the services of its present employees, consultants and agents,
(c) use their best efforts to maintain its present business relationships with suppliers,
customers, brokers, sales representatives and such other persons or firms having business
relationships on the date hereof with Colonial, SP and the Operating Companies, and (d) use
their best efforts to preserve its reputation and goodwill. Colonial, SP and the Operating
Companies acknowledge that the continuation of good relationships with the suppliers and customers
of Colonial, SP and the Operating Companies is important to THC’s successful continuation of the
business acquired hereunder after the Closing. Accordingly, Colonial, SP and the Operating
Companies will, to the extent reasonably requested by THC, between the date hereof and the Closing
Date, assist THC in arranging meetings with suppliers, residents and families of residents
contracting with Colonial, SP and the Operating Companies and otherwise use their best efforts to

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assist THC in obtaining reasonable assurances that following the Closing such business
relationships will continue intact.

     5.3 Compliance with Laws.

          Colonial, SP and the Operating Companies shall cause each of them to comply with the
provisions of all laws, regulations, judicial decrees and orders applicable to each or to the
conduct of its business.

     5.4 Conduct of Business.

          Colonial, SP and the Operating Companies shall cause each other to refrain from introducing
any unusual operations or entering into any new line of business.

     5.5 Books and Records.

          Colonial, SP and the Operating Companies shall cause each other to maintain its books, records
and accounts in its customary and usual manner, and shall refrain from introducing methods of
accounting inconsistent with those used in prior periods.

     5.6 Insurance.

          Colonial, SP and the Operating Companies shall cause each other to maintain in full force and
effect all policies of insurance in effect on the date of this Agreement.

     5.7 Maintenance of Properties.

          Colonial, SP and the Operating Companies shall cause each other to maintain all of its
properties in good repair and condition consistent with past practice.

     5.8 Tax Returns.

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          Colonial, SP and the Operating Companies shall cause each other to prepare and timely and
properly file all federal, state, local, foreign and other tax returns and reports and amendments
thereto required to be filed.

     5.9 Qualification To Do Business.

          Colonial, SP and the Operating Companies shall cause each other to maintain qualification to
do business in those jurisdictions in which such qualification exists on the date of this
Agreement.

     5.10 Other Transactions.

          Through the Termination Date (as defined in Article 12 hereof), Colonial, SP and the
Operating Companies and James R. Smith shall deal exclusively and in good faith with THC with
regard to the transactions contemplated hereby and will not, and will direct each of its officers,
directors, financial advisors, accountants, agents, and counsel not to, (i) solicit submission of
proposals or offers from any person other than THC relating to any acquisition of the membership
interests in SP or all or any material part of the Assets, or any merger, consolidation or business
combination with Colonial, SP or the Operating Companies that would have the effect of preventing
the consummation of the transactions contemplated by this Agreement (an “Acquisition Proposal”),
(ii) participate in any negotiations regarding, or furnish, in connection with an Acquisition
Proposal, any information to any other person regarding Colonial, SP or the Operating Companies
other than THC and its representatives or otherwise cooperate in any way or assist, facilitate or encourage any Acquisition Proposal by any person
other than THC, or (iii) enter into any agreement or understanding, whether oral or in writing,
that would have the effect of preventing the consummation of the transactions contemplated by

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this Agreement. If, notwithstanding the foregoing, Colonial, SP or the Operating Companies or their
representatives or agents should receive any Acquisition Proposal or any inquiry regarding such
proposal from a third party, such persons shall promptly inform THC thereof.

     5.11 Report of Litigation.

          Colonial, SP and the Operating Companies shall promptly advise THC of the threat, assertion or
commencement of any litigation to which Colonial, SP or the Operating Companies are, or may be
made, a party, or by which Colonial’s, SP’s or the Operating Companies’ properties may be affected.

     5.12 Consents.

          Colonial, SP and the Operating Companies shall, at their sole cost and expense (except as
otherwise provided for herein), obtain, prior to the Closing, all consents and estoppels necessary
or appropriate for the consummation of the transactions contemplated hereby. All such consents and
estoppels will be in writing and in form and substance reasonably satisfactory to THC, and executed
counterparts thereof will be delivered to THC promptly after receipt thereof but in no event later
than the Closing.

6. NEGATIVE COVENANTS OF COLONIAL, SP, THE OPERATING

   COMPANIES AND JAMES R. SMITH; JOINDER OF THC AND SPMC

6.1 Negative Covenants of Colonial, et al.

          Colonial, SP, the Operating Companies and James R. Smith covenant and agree that from and
after the date hereof Colonial, SP, the Operating Companies and James R. Smith will not, without
the prior written consent of THC, provided that the covenants of James R. Smith are limited to
actions that could affect Colonial, SP, and the Operating Companies:

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          (a) enter into any business combination transaction (such as a merger, consolidation, sale of
stock or sale of assets) with any person;

          (b) amend or authorize any amendment to or modification of its organizational or operational
documents;

          (c) make any change in its membership interests, or enter into any contract of any nature
respecting its membership interest or otherwise make any changes in its capital structure;

          (d) make any distribution or payment in respect of membership interests or purchase or redeem
any shares of its membership interests;

          (e) enter into any contract or commitment extending beyond the Closing Date, except in the
ordinary course of business;

          (f) terminate, modify or amend any lease, license, permit, contract or other agreement, except
in the ordinary course of business and not involving an increase in liability or reduction in
revenue;

          (g) adjust in any way, either directly or indirectly, or grant or agree to grant any increase
in excess of $1,000 in the wages, salary, bonus or other compensation, remuneration
or benefits of any employee, officer, director, consultant, shareholder or agent except as
required under existing collective bargaining agreements or in other existing agreements or
arrangements described in the Schedules hereto, or become a party to any employment agreement or
any consulting arrangement, or become a party to any contract or arrangement providing for payment
of bonuses, profits, shares, stock benefits, severance payments or retirement benefits, or increase
the number of shares subject to any stock option or stock bonus plan or reduce the time required

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for exercisability of any option or vesting of any right granted under any such plan, except as
required by contract or as expressly contemplated by this Agreement;

          (h) make any capital expenditure in excess of $10,000;

          (i) incur any indebtedness, liabilities or obligations of any nature except current
liabilities in the ordinary course of business consistent with past practice;

          (j) do any act or fail to do any act which would cause a breach of any contract or commitment
to which it is a party;

          (k) sell or transfer any property otherwise than in the ordinary course of business, or
acquire or dispose of any fixed assets;

          (l) release, waive, sell or assign any debts, claims, rights or other intangible obligations,
or accept or agree to accept less than the stated or face amount in settlement, discharge or
satisfaction of any receivable;

          (m) discharge or satisfy any lien or encumbrance or pay any obligation or liability (absolute
or contingent) other than current liabilities shown on the October Balance Sheet and the current
liabilities incurred after the Balance Sheet Date in the ordinary course of business and in normal
amounts;

          (n) mortgage, pledge or subject to any lien, charge or encumbrance any assets, tangible or
intangible;

          (o) enter into any transaction other than in the ordinary course of business, except as
contemplated by this Agreement;

          (p) propose or effect a split or reclassification of its outstanding capital stock or a
recapitalization;

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          (q) take any action which would materially adversely affect the corporate existence and rights
of Colonial, SP or the Operating Companies;

          (r) mortgage, pledge or otherwise encumber any assets, or transfer or dispose of, or make any
agreement with respect to the transfer or disposition of, any assets except for the sale of the
same in the ordinary course of business provided the book value or fair market value (whichever is
greater) of the asset being sold does not exceed $10,000. This does not restrict the Health Care
Financing Partners financing, which is to be paid off at Closing;

          (s) make any bids or proposals or enter into any contracts except in the ordinary course of
business;

          (t) enter into any material lease, contract or agreement of any type, except for purchase
orders covering inventory or supplies which are entered into in the ordinary course of business
after notice to THC;

          (u) take or permit any action which would result in any asset becoming subject to a lien or
encumbrance;

          (v) institute any litigation (other than collection matters);

          (w) make any change in any method of accounting or accounting principle, practice or policy
affecting or relating to Colonial, SP or the Operating Companies; or

          (x) agree, whether in writing or otherwise, to do any of the foregoing or do any act or thing
which under the terms and conditions of this Agreement would be in violation of any of the
covenants or agreements of Colonial, SP or the Operating Companies hereunder, or which would make
any representation or warranty of Colonial, SP or the Operating Companies hereunder inaccurate or
untrue as of the Closing Date.

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     6.2 Negative Covenants of THC.

          THC agrees that it will not, whether in writing or otherwise, from the date of this Agreement,
do any act or thing which under the terms and conditions of this Agreement would be in violation of
any of the covenants or agreements of THC hereunder, or which would make any representation or
warranty of THC hereunder inaccurate or untrue as of the Closing Date.

     6.3 Negative Covenants of SPMC.

          SPMC agrees that it will not, whether in writing or otherwise, from the date of this
Agreement, do any act or thing which under the terms and conditions of this Agreement would be in
violation of any of the covenants or agreements of SPMC hereunder, or which would make any
representation or warranty of SPMC hereunder inaccurate or untrue as of the Closing Date.

7. ADDITIONAL AGREEMENTS OF THE PARTIES

     7.1 THC’s Option to Purchase Remaining Interest; Shareholder’s Right to Put Remaining
Interest.

          Commencing January 1, 2001, and ending December 31, 2003, THC shall have the option to acquire
the remaining membership interest owned by SP in THCV for the valuations calculated in Paragraph
7.2 herein and the extinguishment of the Smith Guaranty as defined in Section 1.7 herein.
Commencing January 1, 2004, and ending December 31, 2006, SP shall have the right to put the
remaining shares of THCV to THC for the valuations calculated in Paragraph 7.2 herein and the
extinguishment of the Smith Guaranty.

     7.2 Valuation Calculations.

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          7.2.1 The parties shall calculate the Earnings Before Interest, Taxes, Depreciation and
Amortization (“EBITDA”) for the specified projects listed on Schedule 7.2.1 after deduction for
rent and the allocation of THCV’s actual management expense as it relates to such facilities listed
on Schedule 7.2.1 (“THCV Management Fee”), which EBITDA shall be termed the “Adjusted EBITDA”.
THCV Management Fee shall not include any contractual management fee to any affiliate, pass through
of administrative overhead related to THC’s home office or management fee properly allocated to
other assets subsequently acquired by THCV. Notwithstanding the above, if accounting or other
functions of THCV are relocated by THC resulting in a reduction in costs, then such pro-rata share
of expenses that relate directly to THCV may be charged by THC. THC shall demonstrate the
allocation of such expenses to the reasonable satisfaction of SP. The THCV Management Fee will be
calculated by allocating THCV’s management expenses for nursing facilities and assisted living
facilities managed by THCV (“THCV Managed Facilities”) based upon the pro-rated contributing
trailing twelve month revenue of each of the THCV Managed Facilities, including the facilities on Schedule
7.2.1. Expenses of THCV for any activities other than management of THCV Managed Facilities will
be fairly allocated to such other activities and such allocation shall be demonstrated to the
reasonable satisfaction of SP. The valuation for purchase of the remaining 49% interest in THCV
shall be the trailing twelve month Adjusted EBITDA for the facilities identified on Schedule 7.2.1
(and for Parkview and/or Lafayette Villa if those facilities are leased by THCV at the time of
exercise) multiplied by 7.5, then by 49%. Absent deferral by SP, said consideration shall be paid
to SP in cash on the date of the closing of the exercise of the option or put, which closing shall
occur within thirty (30) days after exercise.

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          7.2.2 In the event that THC exercises its option prior to January 1, 2002, the valuation for
the projects identified in Schedule 7.2.2 at the option of SP shall be deferred until twelve months
after stabilization (stabilization being defined as the first day following the earlier of twelve
months of operation or achieving 92% occupancy.) In no event shall the valuation deferral extend
past June 30, 2003. In the event of deferral of valuation under this paragraph, payment with
respect to the facilities for which valuation was deferred shall be made by THC within thirty (30)
days after the valuation date.

     7.3 Right of First Refusal on Future Projects; Obligation to Manage.

          7.3.1 SPMC’s and its affiliates’ new development and acquisition of nursing home projects will
be offered exclusively to THC for THC to exercise its right of first refusal. SPMC’s offer shall
be on the following basis, but THC shall not be under an obligation to accept said offer:

               (a) A lease rate equal to the total project cost (approved in advance by THC) at SPMC’s and
its affiliates’ best available cost of debt including best amortization period, x 1.25.

               (b) The leases shall be structured as operating leases with escalators and purchase options
similar to the leases specified on Schedule 1.1. THC is also hereby granted rights of first
refusal to lease the projects in the James R. Smith Portfolio of Owned Projects upon expiration of
any existing leases in the James R. Smith Portfolio of Owned Projects. The James R. Smith
Portfolio of Owned Projects shall include those projects owned in whole or in part by entities in
which James R. Smith has voting control or otherwise has rights to control future development of
the projects as identified on Schedule 7.3.1(b) attached hereto. If a project from

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the James R. Smith Portfolio of Owned Projects is purchased or leased by THC, SPMC shall be eligible to
participate in Section 7.7 herein as indicated. In the event that THC elects not to lease projects
presented which are in the market areas of Pennsylvania, Virginia, West Virginia, North Carolina,
South Carolina, Tennessee and Florida, or in states which at the time of presentation are in the
current market area of THC, THC agrees, at the option of SP, to manage the facilities of SPMC or
its affiliates at a management fee equal to 4% of revenue with the potential to earn a management
bonus, as hereafter defined, if the facility achieves mutually agreed performance targets. The
Management Bonus shall be equal to the lower of 1% of net revenues or 50% of cash flow after
payment of debt service and the 4% management fee. This obligation to manage may be extended to
the first seven projects presented by SPMC to THC. Projects presented thereafter will be
negotiated by the parties on a facility by facility basis. THC shall have no obligation to manage
any facility which is subject to any assessed fines against it in an amount in excess of $50,000,
any ban on admissions, any notification of actions to terminate the Medicare, Medicaid or other third party provider agreements and/or the license of the
Facility, or if any such of the abovementioned actions have occurred within the twelve months
preceding the management event.

               (c) SPMC may grant THC the right to participate in the ownership of the real estate on a 50/50
basis with SPMC at the same agreed upon lease rate of 1.25 for all nursing home projects.

               (d) THC shall have the option, at the expiration of the fourth year from any new lease date,
or earlier, in the event of a THC IPO, to purchase from the owners thereof any and all of the
underlying assets owned by the lessors of said leases for the property subject to

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business and operating contracts that may be initiated pursuant to this Section, at an agreed upon price at the
time of the execution of the new lease.

               (e) The rights and obligations specified in this Section 7.3 shall survive five years from the
Closing Date.

          7.3.2 SPMC’s and its affiliates’ new development and acquisition of independent living and
assisted living projects within fifteen miles of any then existing THC or THCV project will be
offered exclusively to THC for THC to exercise its right of first refusal. SPMC’s offer shall be
on the following basis, but THC shall not be under an obligation to accept said offer:

               (a) For those assisted living projects that SPMC or any affiliate develops, THC shall have the
right of first refusal to lease or purchase the project on the terms and conditions as follows,
chosen by SPMC:

     (i) The lease rate will be equal to the total project cost, which
project cost will be approved in advance by THC at SPMC’s best available
cost of debt including best amortization x 1.25 plus a return to SPMC
of 25% per annum on the equity in the project in excess of 5% of the project
cost, but not to exceed 15% of such project cost; however, THC shall have
the right to submit a letter of credit or other collateral equal to 10% of
the project cost, at which time the lease rate would be 1.25 pursuant to the
calculation in this Section 7.3.2(a)(i); or

     (ii) The lease rate will be equal to the total project cost which
project cost will be approved in advance by THCV at SPMC’s best available
cost of debt including best amortization x 1.35, and SPMC will

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provide THC with the option to contribute 50% of the difference between the total
project cost and available third party financing in return for 50% of the
ownership of the underlying assisted living assets acquired or developed by
SPMC; or

               (b) Independent living facilities will be offered on a right of first refusal basis upon the
same terms and conditions as offered to third parties.

               (c) THC shall have the option, at the expiration of the fourth year from any new lease date,
or earlier, in the event of a THC IPO, to purchase from the owners thereof any and all of the
underlying assets owned by the lessors of said leases for the property subject to business and
operating contracts that may be initiated pursuant to this Section, at an agreed upon price at the
time of the execution of the new lease.

               (d) THC will not have any rights with respect to any assisted or independent living facility
associated with the Williamsburg Nursing Home facility.

               (e) For those assisted living projects that SPMC or any affiliate develops outside of the
fifteen mile radius discussed in 7.3.2, THC shall have the right of first refusal upon the same
terms and conditions as offered to third parties. In the event that such a project is consummated
upon the same terms and conditions as offered to third parties, SPMC shall not be entitled to
incentive warrants as set forth in Section 7.7. However, if an assisted living project is
consummated within the market area pursuant to one of the options set forth in 7.3.2(a), SPMC shall
be entitled to the incentive warrants as set forth in Section 7.7.

     7.4 Development Rights.

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          THC grants SPMC an exclusive right to develop new THC projects or to expand existing THCV
projects in the market area of THCV as identified in Paragraph 7.3.1(b) herein, or in any current
market area of THC at the time of presentation, under the provisions specified in Paragraph 7.3 in
its entirety. If THC controls and introduces the project to SPMC, then the choice of alternatives
under Section 7.3 shall be at the option of THC. All of the above applies for a five year period
from the Closing Date.

     7.5 Non-Competition.

(a) Neither SPMC nor any of its subsidiaries or affiliates shall develop, acquire,
or in any way have an ownership or management interest in any nursing home, assisted
living, or independent living facility or project, other than such facilities or
projects that have been offered to THC as provided in Sections 7.3 and 7.4, that is
within a five mile radius of any existing THC facility or THC project for a period
of five years from the date of the Closing, within the market area described in
Section 7.3.1(b).

(b) Neither SPMC nor any of its subsidiaries or affiliates shall develop, acquire,
or in any way have an ownership or management interest in any nursing home, assisted
living, or independent living facility or project, other than such facilities or
projects that have been offered to THC as provided in Sections 7.3 and 7.4, that is
between a five and fifteen mile radius of any existing THC facility or THC project
for a period of five years from the date of the Closing, within the market area
described in Section 7.3.1(b). If such a facility is offered by SPMC to THC and

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THC rejects said project, SPMC may proceed with the project, so long as it is not within
the five mile radius of any existing facility or THC project.

(c) Notwithstanding the foregoing, nothing in this Section shall be deemed to
prohibit SPMC from developing, acquiring, or in any way having an ownership or
management interest in any nursing home, assisted living, or independent living
facility or project for which written commitments have been executed prior to the
execution of this Agreement as set forth on Schedule 7.5(c).

     7.6 Incentive Fee.

          As an incentive for SPMC to bring acquisition candidates to THC, THC shall pay SPMC a finder’s
fee based on the purchase price of an acquisition which actually closes and which is a direct
result of a lead provided by SPMC. No other finder’s fee or broker’s fee will be paid to any other
party by THC. The fee shall be calculated as 2% of the purchase price for the acquisition upon
closing of said acquisition. SPMC may elect to accept the incentive warrants specified in
Paragraph 7.7 in lieu of the incentive fee, but shall not be entitled to both. The
incentive fee for third party lease transactions payable by THC to SPMC shall be calculated on
the basis of 2% of the accumulated lease payments for an imputed or actual ten year term.

     7.7 Incentive Warrants.

     Except as qualified in Section 7.3.2(e), as an incentive for SPMC to bring development
projects and acquisitions to THC, SPMC shall be eligible to receive warrants to purchase ___
shares of common stock, which amount equals 4% of the fully diluted outstanding shares of common
stock and common stock equivalents (excluding any non-vested options or shares of Lawrence R.
Deering and Joseph D. Conte) of THC at the time of the Closing of the

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transaction contemplated under this Agreement, at the strike price of $.40 per share. The warrants shall be issued upon (i)
the consummation by THC of an acquisition previously introduced by SPMC at the rate of ____ shares
(one-twelfth of the total number of shares eligible to be granted pursuant to this Agreement) per
acquisition; or (ii) the lease of a developed project which is completed by SPMC at the rate of
_____ shares (one-twelfth of the total number of shares eligible to be granted pursuant to this
Agreement) per development project; or (iii) the lease or purchase of a project which is part of
the James R. Smith Portfolio of Owned Projects, as defined herein, at the rate of ___ shares
(one-twenty-fourth of the total number of shares eligible to be granted pursuant to this Agreement)
per project or acquisition; or (iv) in the event that a lease or purchase project from the James R.
Smith Portfolio of Owned Projects or from any other source includes the addition or development of
new beds, and thereby becomes a development project, SPMC shall be entitled to ___ shares
(one-twelfth of the total number of shares eligible to be granted pursuant to this Agreement per
project). Eligible development projects shall include only free standing facilities originated by
THC but shall exclude third party leases introduced by SPMC. The warrants shall be exercised
within ten years of the Closing Date of this Agreement or shall be extinguished. The warrants may be exercised by (i) the aggregate
strike price in cash or (ii) by SPMC electing to have shares of common stock otherwise issuable
upon exercise of the warrants and having a fair market value equal to the aggregate strike price
for the warrants being exercised withheld by THC. The warrants shall further include piggyback
registration rights with respect to the shares underlying the warrants. THC shall pay the costs
and expenses (other than underwriting discounts or commissions) of any such registration and the
registration rights shall be subordinate to those previously granted to the Health Care REIT, Inc.,
Behrman Capital II,

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L.P. and Strategic Entrepreneur Fund II, L.P. The warrants shall contain
anti-dilution provisions similar to those granted by THC to the Health Care REIT, Inc.; provided,
however, that the anti-dilution provisions shall not apply to: (i) the issuance or sale of
securities to any party that is a shareholder or affiliate thereof of THC on the date hereof; (ii)
to any issuance or sale of shares of common stock, options or other securities to any director,
officer, employee or consultant of THC pursuant to any employee benefit plan or agreement approved
by the Board of Directors of THC; or (iii) issuance of securities as consideration in an
acquisition, merger or consolidation. The warrants will have the right to be included in any
private sale of stock by certain shareholders of THC.

     7.8 Option to Purchase.

          At the expiration of the fourth year from the Closing Date of this Agreement, or earlier, in
the event of a THC IPO, THC shall have the following options: (i) to purchase from the owners
thereof any and all of the underlying assets owned by the lessors for the properties subject to
business and operating contracts identified on Schedule 1.1, pursuant to the terms and conditions
as set forth in the respective Schedules 7.8 attached hereto, evidencing the separate option
agreements, for a total consideration of $48 million, (ii) to purchase Lafayette Villa for
$8.9 million pursuant to the terms and conditions as set forth in Schedule 7.8(ii) attached
hereto; and (iii) to receive an assignment of GDC’s option to purchase the stock of T&V Realty, the
owner of the underlying assets for the Parkview nursing facility, pursuant to the terms and
conditions as set forth in Schedule 7.8(iii) attached hereto. THC shall have the option to
exercise 7.8(i) above, without having to exercise options 7.8(ii) or 7.8(iii); however, THC shall
not have the right to exercise options 7.8(ii) or 7.8(iii) without also exercising 7.8(i).

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     7.9 Personnel Matters.

          THC agrees to enter into an employment agreement with Deborah Petrine containing terms
described on Schedule 7.9. Nothing herein shall be construed to create or imply a third party
beneficiary contract or other obligation, including a contract for the benefit of such employees.

     7.10 Budget.

          THC shall not permit THCV to include in any budget any item which is not reimbursable by
Medicaid without the prior written consent of SP, provided that THCV shall not be required to seek
the consent of SP for any single item of $10,000 or less, unless the aggregate of all such items in
any calendar year is $50,000 or more. If THCV includes any such item without the approval of SP
and if such item results in a loss, then such loss shall not be included in any calculation of
value of SP’s interest in connection with the purchase by THC of SP’s membership interest pursuant
to Section 7.1.

     7.11 Operating and Consultant Agreement.

          The parties agree that the Operating Agreement for THCV shall be in the form attached hereto
at Schedule 7.11. THC and SP may mutually agree that THC and SP should provide supplemental
consulting or management services to THCV, for which THCV will pay a
fee, which fee shall not be included as an expense of the Operating Companies for purposes of
valuation calculations under Paragraph 7.2 above. At any time on or after January 1, 2002, that
Available Cash Flow, as defined below, for the facilities identified in Schedule 7.2.1, is positive
for the period from Closing under this Agreement to that time, THCV shall distribute to its members
in proportion to their membership interests any Available Cash Flow generated by the

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facilities on Schedule 7.2.1, ninety (90) days after the audit of THCV. Available Cash Flow shall be defined as
the Adjusted EBITDA for the period less the sum of (i) any additional management or consulting fees
paid to THCV, THC or SP pursuant to this paragraph; (ii) any unreimbursed interest or taxes paid or
owed by or on behalf of the facilities on Schedule 7.2.1; (iii) changes in working capital; (iv)
capital expenditures; (v) mandatory repayment of debt; and (vi) plus any cash utilized to operate
projects other than cash used for facilities identified in Schedule 7.2.1. All of the foregoing
shall be computed in accordance with GAAP in the ordinary course of business.

8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THC

     The obligations of THC thereunder shall be subject to the following conditions, any or all of
which may be waived in writing by THC:

     8.1 Accuracy of Representations and Warranties.

          Each of the representations and warranties of SPMC, Colonial, SP, the Operating Companies and
James R. Smith contained herein shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though made on and as of such date and SPMC, Colonial, SP, the
Operating Companies and James R. Smith shall have performed and complied in all material respects
with each of the agreements, covenants, stipulations, terms and conditions contained herein and required to be performed or complied with by them on or prior
to the Closing Date.

     8.2 No Adverse Change.

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          Since the date hereof, there shall have been no material adverse change in the financial
condition, assets or liabilities of Colonial, SP, SPMC, the Operating Companies and James R. Smith.

     8.3 No Loss.

          Since the date hereof, Colonial, SPMC, SP, the Operating Companies and James R. Smith shall
not have suffered any loss on account of fire, flood, accident, strike or other calamity which has
a material adverse effect on the financial condition or any assets of any of them, whether or not
such loss shall have been covered by insurance.

     8.4 Officer’s Certificate.

          Each of SPMC, Colonial, SP, the Operating Companies and James R. Smith shall have executed and
delivered to THC on the Closing Date a Certificate, dated that date, in form and substance
reasonably satisfactory to THC and its legal counsel, to the effect that each of the provisions of
Sections 8.1, 8.2 and 8.3 of this Article 8 is true and correct in every respect.

     8.5 No Injunction.

          No action, proceeding or investigation shall have been instituted or threatened to set aside
the transactions provided for herein or to enjoin or prevent the consummation of the transactions
contemplated hereby.

     8.6 Good Standing.

          SPMC, Colonial, SP and the Operating Companies shall have delivered to THC a good standing
certificate and certified charter documents of SPMC, Colonial, SP and the Operating Companies each of recent date, from the Secretary of the Commonwealth of Virginia
and a good standing certificate for SPMC, Colonial, SP and the Operating Companies of recent

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date from each jurisdiction in which SPMC, Colonial, SP and the Operating Companies are qualified to do
business.

     8.7 Opinion of Counsel.

          SPMC, Colonial, SP, the Operating Companies and James R. Smith shall have furnished to THC and
to any of THC’s lenders designated by THC, on the Closing Date, an opinion of their counsel
substantially in the form of Schedule 8.7 hereto. THC’s lenders shall be entitled to rely upon
said opinion and upon request of THC, counsel to SPMC, Colonial, SP, the Operating Companies and
James R. Smith shall address said opinion to THC and to any person or entity providing funds to THC
in connection with the transactions contemplated hereby.

     8.8 Health Care REIT Approval.

          The Health Care REIT shall have approved this Agreement and the transactions contemplated by
THC hereby, if required, by January 20, 1999.

     8.9 Consents and Proceedings.

          Colonial, SP, the Operating Companies and James R. Smith shall have obtained all of the
consents, authorizations, orders or approvals required in order to execute and deliver this
Agreement and to perform its or his obligations hereunder and all actions, proceedings, instruments
and documents reasonably deemed necessary or appropriate by THC and its counsel to effectuate this
Agreement and the consummation of the transactions contemplated hereby, or incidental thereto,
shall have been obtained.

     8.10 Resignations and Amendments.

          Colonial, SP, the Operating Companies and James R. Smith shall cause to be delivered at the
Closing the resignations, to become effective at the Closing, of those directors

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and officers and managers of Colonial and the Operating Companies designated by THC. THC acknowledges that various
persons may resign as officers and directors irrespective of THC’s designations. Further, Colonial
and the Operating Companies shall amend their Operating Agreements to provide for THCV as the
Manager of each, effective as of the Closing.

     8.11 Due Diligence Review.

               THC shall have completed its due diligence review of Colonial, SP, and the Operating Companies
and be satisfied in its sole discretion with the results thereof, provided that THC will waive any
objections based on its due diligence review unless those objections are made in writing no later
than 5 p.m. on January 20, 1999.

     8.12 Environmental Audit.

          Except as set forth in Sections 1.11 and 1.12, THC shall have received the results of an
environmental audit of all of Colonial’s, SP’s and the Operating Companies’ leased or managed real
property and THC and lender shall be satisfied, in their discretion, with the results thereof.

     8.13 Uniform Commercial Code Searches.

          Uniform Commercial Code searches (which searches shall be made or caused to be made by and at
the expense of THC) of filings made pursuant to Article 9 thereof in all jurisdictions where any
assets of SPMC, Colonial, SP, the Operating Companies and James R. Smith are located, in form,
scope and substance reasonably satisfactory to THC and its counsel, shall not disclose any liens,
claims, security interests or encumbrances against any of such assets
disclosed thereby except liens, claims, security interests or encumbrances that are released
or terminated by Colonial, SP and the Operating Companies prior to or at the time of Closing.

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     8.14 Operating Leases.

          THCV or its designee will enter into the operating leases and management agreements relating
to the projects identified in Schedule 1.1 However, Colonial, SP or the Operating Companies shall
renegotiate said leases to include the provisions set forth on Schedule 8.14. The existing leases
and leases under SPMC development will be amended to contain purchase options and escalation
provisions satisfactory to THC and the owners of the real estate. Upon execution of the option or
put specified in Article VII herein, THC shall fully guaranty the leases.

     8.15 Section 1.2.

          The provisions for transfer under Section 1.2 herein shall have been accomplished prior to the
Closing Date.

     8.16 Schedules and Exhibits.

          THC shall have reviewed and accepted in its reasonable discretion, all Schedules and Exhibits
to be attached hereto on or before January 20, 1999. THC’s objections to the Schedules and
Exhibits cannot be based on information disclosed and not objected to by THC by January 20, 1999.

     8.17 Augusta.

          THC shall have received reasonable assurances that the Medicare certification for SP
Fishersville, LLC, will be received by February 28, 1999.

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9.
CONDITIONS TO THE OBLIGATIONS OF SPMC, COLONIAL, SP, THE

OPERATING COMPANIES, AND JAMES R. SMITH

     The obligations of SPMC, Colonial, SP, the Operating Companies, and James R. Smith shall be
subject to the following conditions, any or all of which may be waived in writing by THC:

     9.1 Accuracy of Representations and Warranties.

          Each of the representations and warranties of THC set forth in Article 4 hereof shall be true
and correct in all material respects on and as of the Closing Date with the same effect as though
made on and as of such date and THC shall have in all respects performed and complied with each of
the agreements, covenants, stipulations, terms and conditions contained herein and required to be
performed or complied with by THC on or prior to the Closing Date.

     9.2 Officers’ Certificate.

          An executive officer of THC shall have executed and delivered to SPMC, Colonial, SP, the
Operating Companies, and James R. Smith on the Closing Date a Certificate, dated that date, in form
and substance reasonably satisfactory to them and their legal counsel, to the effect that the
provisions of Section 10.1 hereof are true and correct in every respect.

     9.3 No Injunction.

          No action, proceeding or investigation shall have been instituted or threatened to set aside
the transactions provided for herein or to enjoin or prevent the consummation of the transactions
contemplated hereby.

     9.4 Deliveries by THC.

          THC shall have delivered to SPMC, Colonial, SP, the Operating Companies, and James R. Smith
the following:

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          (a) good standing certificate of THC from the Secretary of the Commonwealth of Pennsylvania;
and

          (b) copies of the resolutions duly adopted by the board of directors and shareholders of THC
authorizing the execution, delivery and performance of this Agreement and the other agreements,
instruments and documents contemplated hereby, duly certified by the Secretary or Assistant
Secretary of THC which shall be in full force and effect at the time of delivery on the Closing
Date.

     9.5 Opinion of Counsel.

          THC shall have furnished to SPMC, Colonial, SP, the Operating Companies, and James R. Smith,
on the Closing Date, an opinion of their counsel, Buchanan Ingersoll Professional Corporation,
substantially in the form of Schedule 9.5 hereto.

10. MUTUAL COVENANTS

     10.1 Access to and Use of Information.

          From the date hereof to the Closing Date, THC and its officers, directors, agents, lenders,
employees and representatives shall have the right at any time during normal business hours (in a
manner that does not unreasonably interfere with SPMC’s, Colonial’s, SP’s and the Operating
Companies’ business operations) with reasonable advance notice, to visit and inspect Colonial’s,
SP’s and the Operating Companies’ offices and properties and to examine and make excerpts from
their books, contracts, accounts and records, and to request and receive from Colonial, SP and the
Operating Companies information concerning its business, operations and financial condition. No
such visit, inspection, excerpting or receipt of information shall affect in

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any manner any of the representations, warranties, covenants, agreements or stipulations of
Colonial, SP and the Operating Companies under this Agreement or constitute any waiver thereof
by THC. Should the transactions contemplated hereby not be consummated for any reason, all
information received from Colonial, SPMC or the Operating Companies,
SP (and all copies thereof)
shall be immediately returned to Colonial, SP or the Operating Companies. All such information
shall be held in strict confidence by THC and THC shall not use any of such information itself nor
disclose any such information to others without Colonial’s, SP’s or the Operating Companies’
written consent unless (i) the information in question is, or becomes, public knowledge without
fault of THC, or (ii) was known to THC at the time obtained from Colonial, SP or the Operating
Companies, or (iii) is rightfully obtained from a third party with no restriction on disclosure.

     10.2 Further Mutual Covenants.

          THC, SPMC, Colonial, SP, the Operating Companies and James R. Smith shall refrain from taking
any action which would render any representations or warranties contained in Articles 2 or 3 of
this Agreement inaccurate as of the Closing Date and shall promptly notify the other party upon the
happening of any event or taking of any action which renders any such representation or warranty
inaccurate. Each party shall promptly notify the other of any action, suit or proceeding that
shall be instituted or threatened against such party to restrain, prohibit, or otherwise challenge
the legality of any transaction contemplated by this Agreement.

11. EXPENSES

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     Except as set forth in this Article 11, SP shall pay all fees and expenses incurred by SP,
Colonial or the Operating Companies in connection with the transactions provided for hereunder,
including the fees and expenses of SPMC, Colonial and SP’s counsel and accountants and any
stamp or transfer tax resulting from the acquisition of the 51% THCV membership interest
hereunder; and THC shall pay all expenses incurred by it in connection with the transactions
provided for hereunder, including the fees and expenses of its counsel, accountants.

12. TERMINATION

     This Agreement may be terminated and the transactions contemplated hereby abandoned prior to
Closing:

	 	(i)	 	by the mutual consent of Colonial and SP and THC;
	 
	 	(ii)	 	by THC if any condition in Article 8 becomes impossible of
performance or has not been satisfied in full or previously waived by THC in
writing at or prior to January 31, 1998, provided that the approval required in
Section 8.8 must be satisfied by January 22, 1999 (the “Termination Date”); or
	 
	 	(iii)	 	by SP if any condition in Article 9 becomes impossible of
performance or has not been satisfied in full or previously waived by SP in
writing at or prior to the Termination Date.

     If this Agreement is terminated pursuant to clause (i) of this Article 12, all obligations of
the parties hereunder shall terminate without any further liability or obligation of either party
to the other, except that Section 10.1 (excluding the first two sentences thereof) and Articles 11,
13 and 14 of this Agreement shall survive and continue in full force and effect notwithstanding
such termination. Except as limited by the preceding sentence, the exercise by any party of the
right to terminate this Agreement shall not terminate or limit any remedy that such party may have
at law

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or in equity by reason of another party’s breach of any obligation hereunder prior to such
termination.

     Compliance with the terms and conditions of this Agreement may be waived at any time by the
party entitled to the benefits thereof, but only by a written instrument executed by the party
waiving compliance. Any waiver by either party hereto shall be without prejudice to such
party’s future assertion of such rights, and any delay in exercising any right shall not operate as
a waiver thereof.

13. ABSENCE OF BROKER OR FINDER

     THC represents and warrants that no person is acting or has acted for it as broker or finder
in connection with the transactions provided for by this Agreement. Colonial and SP represent and
warrant to THC that no person is acting or has acted for it as broker or finder in connection
herewith.

14. NEWS RELEASES

     No notices to third parties or any publicity, including press releases, concerning any of the
transactions provided for herein shall be made unless planned and coordinated jointly between THC,
SPMC, Colonial, SP and James R. Smith.

15. NOTICES

     Any notice, request, demand or other communication given by any party under this Agreement
(each a “notice”) shall be in writing, may be given by a party or its legal counsel, and

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shall be deemed to be duly given (i) when personally delivered, or (ii) upon delivery by United States
Express Mail or similar overnight courier service which provides evidence of delivery, or (iii)
when five days have elapsed after its transmittal by registered or certified mail, postage prepaid,
return receipt requested, addressed to the party to whom directed at that party’s address as it
appears below or another address of which that party has given notice, or (iv) when
transmitted by telex (or equivalent service), the sender having received the answer back of
the addressee, or (v) when delivered by facsimile transmission if a copy thereof is also delivered
in person or by overnight courier. Notices of address change shall be effective only upon receipt
notwithstanding the provisions of the foregoing sentence.

     Notice to THC shall be sufficient if given to:

Tandem Health Care, Inc.

Cherrington Corporate Center

200 Corporate Center Drive

Suite 360

Moon Township, PA 15108

Attention: Lawrence R. Deering

Fax: 412-269-1484

          with copies to:

Buchanan Ingersoll Professional Corporation

301 Grant Street, 20th Floor

Pittsburgh, Pennsylvania 15219

Attention: Rosemary L. Corsetti

Fax: 412-562-1041

     Notice to SPMC, Colonial, SP and the Operating Companies and James R. Smith, shall be
sufficient if given to:

James R. Pietrzak, President

Smith/Packett Med-Com, Inc.

4415 Pheasant Ridge Road, S.W.

Roanoke, VA 24014

          with copies to:

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Genevieve K. Dybing

Mezzullo & McCandlish

1111 East Main Street, Suite 1500

P.O. Box 796

Richmond, VA 23218

Fax: (804) 775-3800

16. INDEMNIFICATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES

     16.1 Indemnity by SP and James R. Smith.

          SP and James R. Smith shall, jointly and severally, indemnify THC, THCV and their respective
affiliates, directors, officers, shareholders, employees, agents, representatives, successors and
assigns against any and all claims, losses, liabilities, damages, expenses (including reasonable
attorney’s fees and costs of suit) which may be asserted against, incurred or required to be paid
by THC, THCV or its respective affiliates, directors, officers, shareholders, employees, agents,
representatives, successors and assigns by reason or on account of (a) any representation or
warranty made by SPMC, Colonial, SP, the Operating Companies and James R. Smith herein being untrue
or incorrect in any respect; (b) any failure by SPMC, Colonial, SP, the Operating Companies and
James R. Smith to observe or perform their covenants and agreements set forth herein or in any
agreement entered into pursuant to this Agreement; (c) liability claims for activities prior to
Closing; (d) any additional Excluded Liabilities as set forth in Paragraph 1.10 herein.

     16.2 Indemnity by THC.

          THC shall indemnify SP and their agents, representatives, heirs and assigns against any and
all claims, losses, liabilities, damages, expenses (including reasonable attorney’s fees and

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costs of suit) which may be asserted against, incurred or required to be paid by SP or their respective
agents, representatives, heirs and assigns by reason or on account of (a) any representation or
warranty made by THC herein being untrue or incorrect; or (b) any failure by THC to observe or
perform its covenants and agreements herein or in any agreement entered into pursuant to this
Agreement.

     16.3 Limitation of Indemnification Liability of SP and James R. Smith.

          (a) SPMC shall have no liability for indemnification hereunder with respect to any claim
resulting from a breach of their representations and warranties set forth in this Agreement or for
matters set forth in Sections 16.1(c) or (d) hereof unless SPMC, Colonial and SP or James R. Smith
have been notified of the claim, in the manner provided under Article 15 hereof, and in accordance
with the provisions of this Article 16, within the survival period specified in Section 16.5
hereof.

          (b) Notwithstanding anything to the contrary set forth in this Agreement, SP and James R.
Smith shall not be liable hereunder to THC for matters set forth in clauses (a) and (b) of Section
16.1 except to the extent that the losses, liabilities or damages incurred by THC for such matters
shall exceed in the aggregate $50,000, in which event SP and James R. Smith shall be liable for any
amount in excess thereof. This $50,000 basket shall not be applicable to the true up procedures
set forth in Section 1.8, nor any tax liabilities that are an Excluded Liability under Section
1.10(c)(iii) and as discussed in Sections 16.6 and 16.8. James R. Smith hereby covenants that his
individual net worth as of the Closing is $8,000,000, and that he will maintain said net worth, in
that same amount, for the duration of the indemnity periods of this Agreement.

     16.4 Limitation of Indemnification Liability of THC.

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          THC shall have no liability for indemnification hereunder with respect to any claim resulting
from a breach of its representations and warranties set forth in this Agreement unless it has been
notified of the claim, in the manner provided under Article 15 hereof, within the survival period
specified in Section 16.5 hereof.

     16.5 Survival.

          All representations and warranties contained in or made pursuant to this Agreement or in any
agreement, certificate, document or statement delivered pursuant hereto shall survive the Closing
for a period of two years.

     16.6 Tax Indemnity.

          In addition to any other indemnification granted herein and notwithstanding the survival of
any representation contained herein or the absence of any representation herein, SP and James R.
Smith shall, jointly and severally, indemnify THC, THCV and its respective affiliates, directors,
officers, shareholders, employees, agents, representatives, successors and assigns against any and
all claims, losses, liabilities, damages, expenses (including reasonable attorney’s fees and costs
of suit) which may be asserted against, incurred or required to be paid by THC, THCV or their
respective affiliates, directors, officers, shareholders, employees, agents, representatives,
successors and assigns relating to or with respect to taxes (as defined in Section 2.12 hereof)
claimed or assessed (i) against THCV for any taxable period ending on or before the Closing Date,
or (ii) against any of the Operating Companies and Colonial for any taxable period ending on or
before the Closing Date.

     16.7 Indemnification Procedures.

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          (a) Any party making a claim for indemnification under this Article 16 (“the “Indemnitee”)
shall notify the indemnifying party (the “Indemnitor”) of the claim in writing promptly after
discovering the claim or receiving written notice of a claim against it (if by a third party),
describing the claim, the amount thereof (if known and quantifiable), and the basis thereof. The
obligations and liabilities of the Indemnitor with respect to claims resulting from the assertion
of liability by any third party shall be subject to the following terms and conditions:

          (b) In the event any action, suit or proceeding is brought against the Indemnitee, with
respect to which the Indemnitor may have liability under the indemnity agreements contained herein,
the action, suit or proceeding shall be defended (including all proceedings on appeal or for review
which counsel for the Indemnitee shall deem appropriate) by the Indemnitor. The Indemnitee shall
have the right to employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the Indemnitee’s own expense unless the Indemnitor has failed or refused to
perform its obligations under the preceding sentence or unless the employment of such counsel and
the payment of such fees and expenses both shall have been specifically authorized by the
Indemnitor in connection with the defense of such action, suit or proceeding. In such case only
that portion of such fees and expenses reasonably related to matters covered by the indemnity
agreements contained herein shall be borne by the Indemnitor. The Indemnitee shall be kept fully
informed of such action, suit or proceeding at all stages thereof whether or not it is so
represented. The Indemnitee shall make available to the Indemnitor and its attorneys and
accountants all books and records of the Indemnitee relating to such proceedings or litigation and
the parties hereto agree to render to each other such assistance as they may

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reasonably require of each other in order to ensure the proper and adequate defense of any such action, suit or
proceeding.

          (c) The Indemnitee shall not make any settlement of any claims without the written consent of
the Indemnitor. The Indemnitor shall have the right at its own expense to settle any claim on such
terms and conditions as the Indemnitor may deem acceptable, provided that the settlement does not
impose any legal obligations upon the Indemnitee.

          (d) Should SP or James R. Smith notify THC that any claim in respect of which SP or James R.
Smith are the Indemnitor is covered in whole or in part by an occurrence
policy of insurance (or a claims-made policy of insurance which has been converted to an
occurrence policy through the purchase of so-called tail coverage or any other similar arrangement)
which was in effect on or prior to the Closing Date, THC shall cause THCV to reasonably cooperate
with SP and James R. Smith (including, without limitation, by the filing and pursuit of lawful
claims upon insurers). Without limiting the SP or James R. Smith indemnification obligations to
THC under this Agreement, any amounts actually received by THCV shall either (at SP’s or James R.
Smith’s election) be retained by THCV and applied to reduce SP’s or James R. Smith’s
indemnification obligations or be paid to SP and James R. Smith. If in respect of any claim THCV
shall have any right of recourse to a third party, SP and James R. Smith shall be subrogated to all
such rights.

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     16.8 Off Set.

          In the event that THC or THCV incur any tax liability as an Excluded Liability under Section
1.10(iii) as a result of the use of THC’s capital contribution and Promissory Note as discussed in
Sections 1.6, 1.7 and 1.9 herein, THC or THCV shall have the right, in addition to the provisions
of Section 16.1 and 16.6, to off set said tax liability from any amounts THC may owe SP on the
Promissory Note set forth in Section 1.6(b)(ii).

17. FURTHER ASSURANCES

     Each party shall, upon request of any of the other parties hereto, at any time and from time
to time execute, acknowledge, deliver and perform all such further acts, deeds, assignments,
transfers, conveyances, powers of attorney and instruments of further assurances as may reasonably
be necessary or appropriate to carry out the provisions and intent of this Agreement.

18. MISCELLANEOUS

     18.1 Governing Law.

          This Agreement shall be governed by the laws of the Commonwealth of Virginia without regard to
any jurisdiction’s conflicts of laws provisions. The Commonwealth of Virginia shall also be the
appropriate forum as to venue and jurisdiction over the parties hereto.

     18.2 Counterparts/Use of Facsimiles.

          This Agreement may be executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute a single agreement. The reproduction of
signatures by means of a telecopying device shall be treated as though such

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reproductions are executed originals and each party hereto covenants and agrees to provide the other parties with a
copy of this Agreement bearing original signatures within five days following transmittal by
facsimile.

     18.3 Entire Agreement.

          This Agreement constitutes the entire agreement of the parties hereto respecting its subject
matter and supersedes all negotiations, preliminary agreements and prior or contemporaneous
discussions and understandings of the parties hereto in connection with the subject matter hereof.
This Agreement may be amended, modified, or supplemented only by a writing signed by all parties by
their duly authorized representatives. Any party may waive the benefit of a term or condition of
this Agreement and such waiver will not be deemed to constitute the waiver of another breach of the
same, or any other, term or condition. The headings in this Agreement are for reference purposes
only and shall not affect the meaning or interpretation of any provision of this Agreement.

     18.4 No Presumption Against Draftsman.

          There shall be no presumption against any party on the ground that such party or its counsel
was responsible for preparing this Agreement or any part hereof.

19. SUCCESSORS AND ASSIGNS

          This Agreement shall be binding upon and inure to the benefit of the heirs, executors,
administrators, successors and assigns of the parties hereto, but shall not be assigned by any
party hereto without the prior written consent of the other parties. Notwithstanding the
foregoing, THC may collaterally assign any or all of its rights, to one or more persons or entities
who

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provide funds to THC in connection with the transactions contemplated by this Agreement, or to
a wholly owned subsidiary of THC, or both.

20. EFFECT OF INVESTIGATION

     Any inspection, preparation, or compilation of information or schedules, or audit of the
inventories, properties, financial condition, or other matters relating to Colonial, SP or the
Operating Companies conducted by or on behalf of THC pursuant to this Agreement shall in no way
limit, affect, or impair the ability of THC to rely upon the representations, warranties,
covenants, and agreements of Colonial, SP, the Operating Companies and James R. Smith set forth
herein.

21. KNOWLEDGE

     The term “knowledge” as used in this Agreement shall mean the knowledge of a party after due
investigation of the subject matter relating thereto.

22. SCHEDULES AND EXHIBITS

     The parties agree that all Schedules and Exhibits that are not affixed hereto at the time of
the execution of this Agreement shall be so affixed on or before January 22, 1999. All Schedules
and Exhibits must be consented to by the parties hereto by that date.

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     IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed by its
duly authorized officer as of the date first above written.

	 	 	 	 	 
	 	TANDEM HEALTH CARE, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	 	Lawrence R. Deering, Chairman and CEO 	 
	 	 	 	 
	 	COLONIAL CARE, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith, CEO 	 
	 	 	 	 
	 	SMITH/PACKETT MED-COM, INC.

 	 
	 	By:  	/s/
James R. Piehzak
 	 
	 	 	James R. Piehzak, President 	 
	 	 	 	 
	 	SP ENTERPRISES, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith, Manager 	 
	 	 	 	 
	 	JAMES R. SMITH

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith  	 
	 	 	 	 
	 	SP GRAYSON, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith, Manager 	 
	 	 	 	 
	 	GENERATION LEASING COMPANY, II,

LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith, Manager 	 
	 	 	 	 
	 	GENERATION DEVELOPMENT

COMPANY, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith, Manager 	 
	 	 	 	 

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     IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed by its
duly authorized officer as of the date first above written.

	 	 	 	 	 
	 	TANDEM HEALTH CARE, INC.

 	 
	 	By:  	/s/ Lawrence R. Deering
 	 
	 	 	Lawrence R. Deering, Chairman and CEO 	 
	 	 	 	 
	 	COLONIAL CARE, LLC

 	 
	 	By:  	/s/ Deborah L. Petrine
 	 
	 	 	Deborah L. Petrine, President 	 
	 	 	 	 
	 	SMITH/PACKETT MED-COM, INC.

 	 
	 	By:  	/s/ James R. Piehzak
 	 
	 	 	James R. Piehzak, President 	 
	 	 	 	 
	 	SP ENTERPRISES, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith	 
	 	 	 	 
	 	JAMES R. SMITH

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith  	 
	 	 	 	 
	 	SP GRAYSON, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith	 
	 	 	 	 
	 	GENERATION LEASING COMPANY, II, 

LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith	 
	 	 	 	 
	 	GENERATION DEVELOPMENT 

COMPANY, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith	 
	 	 	 	 

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	 	SP FISHERSVILLE, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith 	 
	 	 	 	 
	 	SP NEWPORT NEWS, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith 	 
	 	 	 	 
	 	SP KINGS DAUGHTERS, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith 	 
	 	 	 	 
	 	SP WILLIAMSBURG, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith 	 
	 	 	 	 
	 	SP WINDSOR, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith 	 
	 	 	 	 
	 	SP LAFAYETTE VILLA, LLC

 	 
	 	By:  	/s/ James R. Smith
 	 
	 	 	James R. Smith 	 
	 	 	 	 

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