affiliation agreement between harrison, franciscan

Subject to Final Approval

Redacted to Reflect Confidential/Proprietary Trade Secret Information

2412814.1

AFFILIATION AGREEMENT

BY AND AMONG

FRANCISCAN HEALTH SYSTEM,

CATHOLIC HEALTH INITIATIVES,

FRANCISCAN HEALTH VENTURES

AND

HARRISON MEDICAL CENTER

Dated as of _______________, 2013

i 2412814.1

TABLE OF CONTENTS

Page

1. DEFINITIONS AND REFERENCES .................................................................................2

1.1 Definitions................................................................................................................2

1.2 Other Definitional Provisions ................................................................................11

2. CHANGE OF MEMBERSHIP, CLOSING AND OTHER RELATED

MATTERS .........................................................................................................................12

2.1 Change of Membership ..........................................................................................12

2.2 Closing ...................................................................................................................12

2.3 HMC Closing Deliveries........................................................................................12

2.4 FHS’s Closing Deliveries ......................................................................................13

2.5 HMC Foundation ...................................................................................................15

2.6 Reserved .................................................................................................................15

2.7 Oversight Corporation. ..........................................................................................15

3. POST-CLOSING GOVERNANCE...................................................................................16

3.1 HMC Governance ..................................................................................................16

3.2 Governing Board Composition. .............................................................................17

4. REPRESENTATIONS AND WARRANTIES OF HMC .................................................20

4.1 Organization and Good Standing. ..........................................................................20

4.2 Authority; No Conflict. ..........................................................................................20

4.3 Membership ...........................................................................................................21

4.4 Subsidiaries and JV Entities...................................................................................21

4.5 Directors, Trustees and Officers ............................................................................21

4.6 Financial Statements ..............................................................................................22

4.7 Books and Records ................................................................................................22

4.8 Title to Properties ...................................................................................................22

4.9 HMC Real Property. ..............................................................................................22

4.10 No Undisclosed Liabilities .....................................................................................24

4.11 Taxes ......................................................................................................................24

4.12 No Material Adverse Effect ...................................................................................24

4.13 Employee Benefits .................................................................................................24

4.14 Compliance with Legal Requirements; Permits. ...................................................30

4.15 Equipment ..............................................................................................................32

4.16 Condition of Tangible Assets.................................................................................32

4.17 Legal Proceedings; Orders. ....................................................................................32

4.18 Absence of Certain Changes and Events ...............................................................32

4.19 Contracts; No Defaults. ..........................................................................................34

4.20 Insurance. ...............................................................................................................37

4.21 Environmental Matters...........................................................................................38

4.22 Employees. .............................................................................................................39

4.23 Labor Relations; Compliance ................................................................................40

4.24 Inventory ................................................................................................................40

TABLE OF CONTENTS (continued)

Page

ii 2412814.1

4.25 Intellectual Property. ..............................................................................................41

4.26 Accreditation; Participation in Government Programs and Private

Programs. ...............................................................................................................42

4.27 Healthcare Laws.....................................................................................................43

4.28 HIPAA and HITECH Act ......................................................................................44

4.29 Certain Payments ...................................................................................................45

4.30 Medical Staff ..........................................................................................................45

4.31 Assets Necessary to HMC and HMC’s Subsidiaries .............................................45

4.32 Reporting Requirements ........................................................................................45

4.33 Compliance Program .............................................................................................45

4.34 Brokers Or Finders .................................................................................................46

4.35 Hill-Burton and Other Liens ..................................................................................46

4.36 Disclosure ..............................................................................................................46

5. REPRESENTATIONS AND WARRANTIES OF FHS AND FHV ................................46



5.3 Certain Proceedings ...............................................................................................47

5.4 Directors, Trustees and Officers ............................................................................47

5.5 Financial Statements ..............................................................................................47

5.6 No Undisclosed Liabilities .....................................................................................48

5.7 Taxes ......................................................................................................................48

5.8 No Material Adverse Effect ...................................................................................48

5.9 Legal Requirements; Healthcare Laws ..................................................................48

5.10 Brokers or Finders..................................................................................................49

5.11 Disclosure ..............................................................................................................49



5.14 Certain Proceedings ...............................................................................................50

5.15 Directors, Trustees, and Officers ...........................................................................50

5.16 Brokers or Finders..................................................................................................51

5.17 Disclosure ..............................................................................................................51

6. PRE-CLOSING COVENANTS OF HMC ........................................................................51

6.1 Access ....................................................................................................................51

6.2 Operation of the Businesses of HMC, Subsidiaries, and JV Entities ....................51

6.3 Negative Covenant .................................................................................................52

6.4 Required Approvals ...............................................................................................52

6.5 Notification ............................................................................................................52

6.6 No Negotiation .......................................................................................................52

6.7 Hart-Scott-Rodino Act Filings ...............................................................................53

6.8 Closing Conditions.................................................................................................53


Page

iii 2412814.1

7. PRE-CLOSING COVENANTS OF FHS AND FHV .......................................................53

7.1 Access ....................................................................................................................53

7.2 Required Approvals ...............................................................................................53

7.3 Notification ............................................................................................................54

7.4 No Negotiation .......................................................................................................54


7.6 Closing Conditions.................................................................................................55

8. EMPLOYMENT MATTERS ............................................................................................55

8.1 HMC Employees ....................................................................................................55

8.2 Benefits ..................................................................................................................55

9. MEDICAL STAFF MATTERS .........................................................................................55

10. FINANCIAL MATTERS ..................................................................................................56

10.1 Fiscal Year .............................................................................................................56

10.2 Debt Financing .......................................................................................................56

10.3 Cash and Investments ............................................................................................56

10.4 Overhead Expense Allocation................................................................................56

11. CONDITIONS PRECEDENT TO OBLIGATIONS OF HMC.........................................57

11.1 Accuracy of Representations .................................................................................57

11.2 FHS’s and FHV’s Performance. ............................................................................57

11.3 Consents .................................................................................................................57

11.4 No Proceedings ......................................................................................................57

11.5 Department of Health Notification ........................................................................57

11.6 No Prohibition ........................................................................................................57


11.8 Strategic and Integration Plans ..............................................................................58

11.9 Due Diligence ........................................................................................................58

12. CONDITIONS PRECEDENT TO OBLIGATIONS OF FHS AND FHV ........................58

12.1 Accuracy of Representations .................................................................................58

12.2 HMC’s Performance. .............................................................................................58

12.3 Consents .................................................................................................................58

12.4 No Proceedings ......................................................................................................58

12.5 Department of Health Notification ........................................................................59

12.6 No Prohibition ........................................................................................................59

12.7 Hart Scott Rodino Filings ......................................................................................59

12.8 Change of Membership Approval ..........................................................................59

12.9 Approval of Roman Catholic Church ....................................................................59

12.10 Due Diligence ........................................................................................................59

12.11 Strategic and Integration Plans ..............................................................................59


Page

iv 2412814.1

13. ADDITIONAL COVENANTS .........................................................................................59

13.1 Post-Closing Capital Commitment ........................................................................59

13.2 IT Service Implementation ....................................................................................60

13.3 Strategic Planning ..................................................................................................60

13.4 Integration ..............................................................................................................61

13.5 Physicians ..............................................................................................................61

13.6 Quality Improvements ...........................................................................................62

13.7 Training Slots .........................................................................................................62

13.8 Joint Ventures ........................................................................................................62

13.9 Peninsula Operations .............................................................................................62

13.10 Ethical and Religious Directives ............................................................................62

13.11 Consents and Approvals ........................................................................................62

13.12 Termination ............................................................................................................63

13.13 Effect of Termination .............................................................................................63

13.14 Tax and Government Program Effect ....................................................................64

13.15 Costs. ......................................................................................................................64

13.16 Cooperation Regarding Tax Returns .....................................................................64

13.17 Further Acts and Assurances .................................................................................64

14. DISPUTE RESOLUTION .................................................................................................65

14.1 Dispute Resolution Procedures; Jurisdiction and Venue .......................................65

15. GENERAL PROVISIONS ................................................................................................66

15.1 Expenses ................................................................................................................66

15.2 Confidentiality .......................................................................................................67

15.3 Access to Records ..................................................................................................67

15.4 Notices ...................................................................................................................67

15.5 Further Assurances.................................................................................................68

15.6 Survival ..................................................................................................................68

15.7 Waiver ....................................................................................................................68

15.8 Entire Agreement and Modification ......................................................................69

15.9 Assignments, Successors, and No Third-Party Rights ..........................................69

15.10 Severability ............................................................................................................69

15.11 Article and Section Headings.................................................................................69

15.12 Time Of Essence ....................................................................................................69

15.13 Governing Law ......................................................................................................69

15.14 Execution, Delivery and Counterparts ...................................................................69

15.15 Jurisdiction and Venue ...........................................................................................70

15.16 Survival of FHS and CHI Obligations ...................................................................70

15.17 CHI Obligations and Representations and Warranties. .........................................70


Page

v 2412814.1

Exhibits:

Exhibit A – Restated Articles

Exhibit B – Restated Bylaws

Exhibit C – Form of Oversight Agreement

Exhibit D – Form of Escrow Agreement

Exhibit E –Foundation Articles

Exhibit F – Foundation Bylaws

Exhibit G – Form of Oversight Corporation Articles

Exhibit H – Form of Oversight Corporation Bylaws

Exhibit I – Initial Oversight Corporation Board

Exhibit J – FHV Articles

Exhibit K – FHV Bylaws

Exhibit L – Restricted Procedures

2412814.1

AFFILIATION AGREEMENT

THIS AFFILIATION AGREEMENT, effective as of ______________________,

2013 (the “Commitment Date”), is made and entered into by and among FRANCISCAN

HEALTH SYSTEM, a Washington nonprofit corporation (“FHS”), CATHOLIC HEALTH

INITIATIVES, solely for the purposes of Section 15.17 and for no other purposes, a Colorado

nonprofit corporation (“CHI”), FRANCISCAN HEALTH VENTURES, a Washington

nonprofit corporation (“FHV”), and HARRISON MEDICAL CENTER, a Washington

nonprofit corporation (“HMC”). FHS, FHV, and HMC are sometimes referred to individually as

a “Party” and, collectively, as the “Parties.”

RECITALS

A. HMC owns and operates (i) Harrison Medical Center, an acute care hospital that

provides services on two campuses located at 2520 Cherry Avenue, Bremerton, WA 98310, and

1800 NW Myhre Road, Silverdale, WA 98383, and (ii) other health care facilities located in

Kitsap, Mason, Jefferson and Clallam Counties in Washington (collectively, the “Facilities”),

including, without limitation, certain real property and improvements comprising the Facilities,

the furniture, fixtures, equipment and other tangible personal property used in connection with

the operation of the Facilities and other tangible and intangible assets related to the provision of

health care services in Kitsap, Mason, and Clallam Counties in Washington.

B. FHS, which operates various acute care hospitals in Western Washington, shares

HMC’s commitment to improving the health of communities and the quality and efficiency of

healthcare delivery.

C. FHS is an affiliate of CHI, and FHV has common directors and a common chief

executive officer with FHS.

D. The Parties have determined that affiliating will enable them to work more closely

and effectively to achieve their shared goal of improving efficiency and quality, and desire to

change the membership of HMC, which will be effected by designating FHV as the sole

corporate member of HMC (the “Change of Membership”).

E. Following the Change of Membership, the Parties intend that HMC shall be

operated as a secular organization.

F. The Parties believe that the Change of Membership and the other transactions

contemplated in this Agreement will promote and advance the continued delivery of high quality

acute care, ambulatory, emergency and other health care services delivered to the HMC patients

and individuals located in the Kitsap, Mason, Jefferson, and Clallam Counties in Washington.

AGREEMENT

NOW, THEREFORE, for and in consideration of the mutual promises, covenants,

conditions, representations and warranties set forth below, and for such other good and valuable

consideration, the receipt and adequacy of which are acknowledged, the Parties agree as follows:

2 2412814.1

1. DEFINITIONS AND REFERENCES

1.1 Definitions. Unless otherwise specifically defined herein, the following

capitalized terms used in this Agreement shall be defined in the following manner:

“Affiliate” shall mean, with respect to a Person, any other Person that, directly or

indirectly through one or more intermediaries, Controls, is Controlled by, or is under common

Control with, such Person;

“Agreement” shall mean this Agreement together with all Exhibits and Schedules hereto,

as amended, consolidated, supplemented, or replaced by the Parties from time to time in

accordance with this Agreement;

“Benefit Plan” shall mean a pension or retirement plan (except for Social Security);

profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted

stock, stock option, medical, hospitalization, vision, dental, life, disability, training or apprentice

plan, or other welfare benefit plan, policy or agreement; deferred compensation, change in

control or severance pay plan, policy or agreement, or any other performance, bonus, incentive

or benefit plan, policy or agreement, or any similar or related trust, fund, arrangement, policy,

agreement or understanding;

“Board Conversion Event” shall mean such point in time, if any, in which greater than

thirty percent (30%) of the members of the HMC Board consists of individuals other than the

members of HMC Board on the Closing Date or their replacements nominated by the HMC

Board and approved by FHV pursuant to Section 3.2(c) of this Agreement (“qualified

replacements”); replacements unilaterally appointed by FHV pursuant to the last sentence of

Section 3.2(c) without a nomination from the HMC Board will not be deemed qualified

replacements;

“Breach” means a breach of a representation, warranty, covenant, obligation, or other

provision of this Agreement or any instrument delivered pursuant to this Agreement, which will

be deemed to have occurred if there is or has been any inaccuracy in or breach of, or any failure

to perform or comply with, such representation, warranty, covenant, obligation, or other

provision;

“Capital Fund” shall have the meaning as set forth in Section 13.1;

“Change of Membership” shall have the meaning set forth in the recitals;

“Closing” shall have the meaning as set forth in Section 2.2;

“Closing Date” shall mean the date on which the Closing occurs;

“Commitment Date” shall have the meaning as set forth in the introductory paragraph;

“Confidentiality Agreement” shall have the meaning as set forth in Section 15.2;

3 2412814.1

“Consent” means any written approval, consent, ratification, waiver, or other written

authorization;

“Contemplated Transactions” shall mean all of the transactions contemplated by this

Agreement, including, without limitation, the Change of Membership, and the performance by

the Parties of their respective covenants and obligations under this Agreement;

“Contract” shall mean any agreement, contract, obligation, promise or undertaking

(whether written or oral and whether expressed or implied);

“Control” means the direct or indirect power and authority to direct the management and

policies of a Person, whether through corporate membership, ownership of voting securities, by

Contract, or otherwise;

“Copyrights” shall have the meaning as set forth in Section 4.24(a)(iii);

“Cost Reports” shall mean all cost and other reports related to the Facilities filed (or

required to be filed) pursuant to the requirements of the Government Programs or other third

party payors that require cost reporting, including reports of payments due to or claimed by

HMC from Government Programs, other than third party payors or their fiscal intermediaries,

contractors or agents, including all cost report receivables or payable and all related appeals and

appeal rights;

“Damages” means any loss, liability, claim, damage (including incidental and

consequential damages but only to the extent payable to an unrelated third party), expense

(including costs of investigation and defense and reasonable attorneys’ fees) or diminution of

value, whether or not involving a third-party claim;

“Days Cash on Hand Threshold” shall have the meaning as set forth in Section 10.3;

“Debt to Capitalization Threshold” shall have the meaning as set forth in Section 10.3;

“Dispute Resolution Procedures” shall have the meaning as set forth in Section 14.1;

“DOJ” shall have the meaning as set forth in Section 6.7;

“Encumbrances” shall mean liabilities, levies, claims, charges, assessments, mortgages,

security interests, liens, pledges, exceptions, conditional sales agreements, title retention

contracts, rights of first refusal, options to purchase, restrictions and other encumbrances, and

agreements or commitments to create or suffer any of the foregoing;

“Environment” means soil, land surface or subsurface strata, surface waters (including

navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), groundwaters,

drinking water supply, stream sediments, ambient air (including indoor air), plant and animal

life, and any other environmental medium or natural resource;

“Environmental Law” means any Legal Requirement enacted or in effect as of the

Closing Date that requires or relates to:

4 2412814.1

(a) advising appropriate Government Authorities, employees, and the public

of intended or actual releases of Hazardous Materials, or violations of discharge limits, or

other prohibitions and of the commencements of activities, such as resource extraction or

construction, that could have significant impact on the Environment;

(b) preventing or reducing to acceptable levels the release of Hazardous

Materials into the Environment;

(c) reducing the quantities, preventing the release, or minimizing the

hazardous characteristics of wastes that are generated;

(d) assuring that products are designed, formulated, packaged, and used so

that they do not present unreasonable risks to human health or the Environment when

used or disposed of;

(e) protecting resources, species, or ecological amenities;

(f) reducing to acceptable levels the risks inherent in the transportation of

Hazardous Materials;

(g) cleaning up Hazardous Materials that have been released, preventing the

threat of release, or paying the costs of such clean up or prevention; or

(h) making responsible parties pay private parties, or groups of them, for

damages done to their health or the Environment, or permitting self-appointed

representatives of the public interest to recover for injuries done to public assets.

“Environmental Liabilities” means any cost, damages, expense, liability, obligation, or

other responsibility arising from or under Environmental Law and consisting of or relating to:

(a) any environmental matters or conditions (including on site or off site

contamination and regulation of chemical substances or products);

(b) fines, penalties, judgments, awards, settlements, legal or administrative

proceedings, damages, losses, claims, demands and response, investigative, remedial, or

inspection costs and expenses arising under Environmental Law;

(c) financial responsibility for cleanup costs or corrective action, including

any investigation, cleanup, removal, containment, or other remedial measures or response

actions (“Cleanup”) required by applicable Environmental Law (whether or not such

Cleanup has been required or requested by any Governmental Authority or any other

Person) and for any natural resource damages; or

(d) any other compliance, corrective, investigative, or remedial measures

required under Environmental Law.

5 2412814.1

The terms “removal,” “remedial,” and “response action,” include the types of activities

covered by the United States Comprehensive Environmental Response, Compensation, and

Liability Act, 42 U.S.C. § 9601 et seq., as amended (“CERCLA”).

“Epic Costs” shall have the meaning as set forth in Section 13.2;

“ERDs” shall mean the Ethical and Religious Directives of the United States Conference

of Catholic Bishops (“USCCB”), as in effect from time to time, and/or any other rules

promulgated by the USCCB or the Catholic Church regarding the delivery of health care services

by the Health System Businesses;

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as

amended;

“ERISA Affiliate” shall have the meaning as set forth in Section 4.13(a);

“Escrow Agreement” shall have the meaning as set forth in Section 2.3(d);

“Escrow Agent” shall mean Bank of America.

“Escrow Funds” shall have the meaning as set forth in Section 2.7(d);

“Expiration Date” shall have the meaning as set forth in Section 2.7(e);

“Extended Negotiation” shall have the meaning as set forth in Section 14.1(a);

“Facilities” shall have the meaning as set forth in the recitals;

“FHS Bylaws Amendment” shall have the meaning as set forth in Section 2.4(a);

“FHS Closing Documents” shall have the meaning as set forth in Section 5.2(a);

“First Funding Source” shall have the meaning as set forth in Section 13.1;

“Foundation” shall have the meaning as set forth in Section 2.5;

“FTC” shall have the meaning as set forth in Section 6.7;

“GAAP” shall have the meaning as set forth in Section 1.2(a);

“Governing Body” means, with respect to HMC or any of its Subsidiaries, the board of

trustees, board of directors, managing members, managers, general partners or similar governing

body of HMC or such Subsidiary, as applicable.

“Governmental Authorities” shall mean all agencies, authorities, bodies, boards,

commissions, courts, instrumentalities, legislatures and offices of any nature whatsoever of any

federal, state, county, district, municipal, city or other government or quasi-government unit or

political subdivision having jurisdiction over a Person or any of such Person’s assets or

businesses;

6 2412814.1

“Government Programs” shall mean the Medicare program, the Washington Medicaid

program, Tri-Care, and any other, similar or successor federal, state or local health care payment

programs with or sponsored by Governmental Authorities and in which HMC or any of its

Subsidiaries participate;

“Hazardous Activity” means the distribution, generation, handling, importing,

management, manufacturing, processing, production, refinement, Release, storage, transfer,

transportation, treatment, or use (including any withdrawal or other use of groundwater) of

Hazardous Materials in, on, under, about, or from any of the Facilities or any part thereof into the

Environment, and any other act, business, operation, or thing that increases the danger, or risk of

danger, or poses an unreasonable risk of harm to persons or property on or off any of the

Facilities, or that may affect the value of any of the Facilities or HMC or any of its Subsidiaries;

“Hazardous Materials” means any waste or other substance that is listed, defined,

designated, or classified as, or otherwise determined to be, hazardous, radioactive, or toxic or a

pollutant or a contaminant under or pursuant to any Environmental Law, including any

admixture or solution thereof, and specifically including petroleum and all derivatives thereof or

synthetic substitutes therefor, medical, infectious and pharmaceutical waste and asbestos or

asbestos-containing materials;

“Healthcare Laws” means Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395-

1395hhh (the Medicare statute), including specifically, the Ethics in Patient Referrals Act, as

amended (the Stark Law), 42 U.S.C. § 1395nn; Title XIX of the Social Security Act, 42 U.S.C.

§§ 1396-1396v (the Medicaid statute); the Federal Health Care Program Anti-Kickback Statute,

42 U.S.C. § 1320a-7b(b); the False Claims Act, 31 U.S.C. §§ 3729-3733 (as amended); the

Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801-3812; the Anti-Kickback Act of 1986,

41 U.S.C. §§ 8701 - 8707; the Civil Monetary Penalties Law, 42 U.S.C. §§ 1320a-7a and 1320a-

7b; the Exclusion Laws, 42 U.S.C. § 1320a-7; HIPAA; the HITECH Act, all Legal Requirements

relating to the provision of, or billing or payment for health care items or services, or relating to

health care information; and all implementing regulations, rules, ordinances, judgments, and

orders applicable to HMC or any of its Subsidiaries; and any similar state and local statutes,

regulations, rules, ordinances, judgments, and orders applicable to HMC or any of its

Subsidiaries; and all federal, state, and local licensing, certificate of need, regulatory and

reimbursement, corporate practice of medicine, and physician fee splitting regulations, rules,

ordinances, orders, and judgments applicable to HMC or any of its Subsidiaries, all of the

foregoing as enacted or in effect as of the Closing Date;

“Health System Businesses” shall mean all businesses owned, leased, managed or

otherwise operated or conducted by HMC or any of its Subsidiaries, including, without

limitation, the Facilities;

“HIPAA” means the Health Insurance Portability and Accountability Act of 1996,

42 U.S.C. §§ 1320d-1329d-8;

“HIPAA Breach” means a breach of unsecured Protected Health Information as defined

in 45 C.F.R. § 164.402, as amended by the HITECH Act;

7 2412814.1

“HITECH Act” means the Health Information Technology for Economic and Clinical

Health Act, 42 U.S.C. §§ 3000 et seq.

“HMC” shall have the meaning as set forth in the recitals;

“HMC Appointees” shall have the meaning as set forth in Section 3.2(d);

“HMC Board” shall have the meaning as set forth in Section 2.3(e);

“HMC Closing Documents” shall have the meaning as set forth in Section 4.2(a);

“HMC Contract” shall mean any Contract (a) under which HMC or its Subsidiaries has or

may acquire any rights, and (b) by which HMC or its Subsidiaries or any of the assets owned or

used by it is or may become bound, excluding any Contract under which HMC or its Subsidiaries

no longer has any rights or obligations;

“HMC Financial Statements” shall have the meaning as set forth in Section 4.6;

“HMC Marks” shall have the meaning as set forth in Section 4.24(a)(i);

“HMC Other Benefit Obligation” shall have the meaning as set forth in Section 4.13(a);

“HMC Plan” shall have the meaning as set forth in Section 4.13(a);

“HMC Real Property” shall have the meaning as set forth in Section 4.9(a);

“HMC Real Property Leases” shall have the meaning as set forth in Section 4.9(b);

“HSR Act” shall have the meaning as set forth in Section 6.7;

“Initial Capital Commitment Period” shall have the meaning as set forth in Section 13.1;

“Initial Negotiation” shall have the meaning as set forth in Section 14.1(a);

“Intellectual Property Assets” shall have the meaning as set forth in Section 4.24(a);

“IRC” means the Internal Revenue Code of 1986, as amended;

“IRS” means the United States Internal Revenue Service or any successor agency and, to

the extent relevant, the United States Department of the Treasury or any successor agency;

“JAMS” shall have the meaning as set forth in Section 14.1(b);

“JDR” shall have the meaning as set forth in Section 14.1(b);

“JV Entity” means with respect to any Person (an “Owner”), any other Person of which

any equity, membership or other ownership interest (or any option or other right to purchase or

otherwise acquire any such equity or ownership interest) of such other Person is held by the

Owner, where such Owner does not Control that Person;

8 2412814.1

“Knowledge” -- an individual will be deemed to have Knowledge of a particular fact or

other matter if that individual is actually aware of that fact or matter. Notwithstanding the

foregoing, for purposes of HMC’s representations and warranties in this Agreement, the

“Knowledge” of HMC will only mean the Knowledge of HMC’s Chief Executive Officer, Chief

Financial Officer, Chief Operating Officer, Chief Medical Officer, Chief Nursing Officer, Chief

Legal Officer and General Counsel, and Compliance Officer, in each case, after completion of a

reasonable inquiry with their respective direct reports as to the completeness and accuracy of

such representations and warranties, and, for purposes of FHS’s representations and warranties in

this Agreement, the “Knowledge” of FHS will only mean the Knowledge of FHS’s Chief

Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Legal Officer, Chief

Compliance/Corporate Responsibility Officer, Chief Medical Officer and Chief Nursing Officer

in each case, after completion of a reasonable inquiry with their respective direct reports as to the

completeness and accuracy of such representations and warranties;

“Legal Requirements” means with respect to any Person, all statutes, ordinances, bylaws,

codes, rules or regulations of any Governmental Authority, and any restrictions, judgments,

orders, writs, injunctions, decrees, determinations or awards of any Governmental Authority

having jurisdiction over such Person or any of such Person’s assets or businesses;

“Losses” shall mean any and all claims, losses, orders, lawsuits, liabilities, judgments,

damages, fines, encumbrances, taxes, liens, penalties, interest, costs and expenses (including,

without limitation, all costs and expenses reasonably incurred to investigate, prepare and defend

claims, whether or not such claim is ultimately defeated) of whatever kind or nature, contingent

or otherwise, matured or unmatured, foreseeable or unforeseeable, including court costs,

administrative fees, and attorneys’, accountants’, consultants’, expert witnesses’ and other

professional advisors’ reasonable fees and expenses;

“material” means, with respect to Section 4.14, Section 4.21, Section 4.27, and Section

4.28, an amount exceeding $[REDACTED], including interest, fees, and penalties.

“Material Adverse Effect” shall mean, with respect to HMC, any result, occurrence, fact,

change, event or effect that results, or could reasonably result, in actual damages, fines,

encumbrances, taxes, liens, penalties, interest, costs and expenses to the Health System

Businesses that have not been included in HMC’s approved budget which has been provided to

FHS and, individually or in the aggregate, equal or exceed $[REDACTED]; Material Adverse

Effect shall mean, with respect to FHS, any result, occurrence, fact, change, event or effect that

results, or could reasonably result, in actual damages, fines, encumbrances, taxes, liens,

penalties, interest, costs and expenses to the Health System Businesses that have not been

included in FHS’s approved budget which has been provided to HMC and, individually or in the

aggregate, equal or exceed $[REDACTED];

“Material Contract” shall have the meaning as set forth in Section 4.19(a);

“Medicare and Medicaid programs” means Titles XVIII and XIX of the Social Security

Act, as amended.

“Multi-Employer Plan” shall have the meaning as set forth in Section 4.13(a);

9 2412814.1

“FHV Appointees” shall have the meaning as set forth in Section 3.2(a);

“FHV Closing Documents” shall have the meaning as set forth in Section 5.13(a);

“FHV Organizational Documents” shall have the meaning as set forth in Section 5.12(b);

“Obligation Sections” shall have the meaning as set forth in Section 2.7(c);

“Order” means any award, decision, injunction, judgment, order, ruling, subpoena, or

verdict entered, issued, made, or rendered by any court, administrative agency, or other

Governmental Authority or by any arbitrator;

“Ordinary Course of Business” -- an action taken by HMC will be deemed to have been

taken in the “Ordinary Course of Business” only if such action is consistent with the past

practices of HMC and is taken in the ordinary course of the normal day-to-day operations of the

Health System Businesses or is consistent with the approved capital or operating budget of

HMC;

“Organizational Documents” shall have the meaning as set forth in Section 4.1(b);

“Other Benefit Obligations” shall have the meaning as set forth in Section 4.13(a);

“Oversight Agreement” shall have the meaning as set forth in Section 2.3(c);

“Oversight Board” shall have the meaning as set forth in Section 2.7(b);

“Oversight Corporation” shall have the meaning as set forth in Section 2.7(a);

“Oversight Corporation Articles” shall have the meaning as set forth in Section 2.7(a);

“Oversight Corporation Bylaws” shall have the meaning as set forth in Section 2.7(a);

“Patents” shall have the meaning as set forth in Section 4.24(a)(ii);

“PBGC” shall have the meaning as set forth in Section 4.13(a);

“Pension Plan” shall have the meaning as set forth in Section 4.13(a);

“Permits” means all licenses, permits, certificates, and other approvals (including

pending approvals) of Governmental Authorities relating to the ownership, development, and

operations of the Facilities;

“Permitted Encumbrances” shall mean: (i) real estate taxes, assessments and other

governmental fees or other charges not yet due and payable as of the Closing Date;

(ii) mechanics and similar statutory liens arising or incurred in the Ordinary Course of Business

for amounts which are not delinquent and which are not, individually or in the aggregate,

material; (iii) zoning, entitlement, building and other land use and similar laws or regulations

imposed by any Governmental Authority having jurisdiction over such parcel which are not

violated by the current use and operation thereof; (iv) easements, covenants, conditions,

10 2412814.1

restrictions and other similar matters of record which would not materially impair the use or

occupancy of such parcel in the operation of the Health System Businesses; (v) statutory landlord

liens; (vi) matters of record; (vii) any interest of lessors in leased equipment, and (viii) the

Encumbrances described on Schedule 1.1.

“Person” shall mean any individual, limited liability company, corporation, association,

partnership, joint venture, trust, trustee, Governmental Authority or other form of business

organization recognized under applicable Legal Requirements;

“Plan” shall have the meaning as set forth in Section 4.13(a);

“Plan Sponsor” shall have the meaning as set forth in Section 4.13(a);

“Preliminary Strategic Plan” shall have the meaning set forth in Section 13.3;

“Private Programs” means any private non-governmental payor programs, including any

private insurance program, in which HMC or any of its Subsidiaries participate;

“Proceeding” means any action, arbitration, audit, hearing, investigation, litigation, or

suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought,

conducted, or heard by or before, or otherwise involving, any Governmental Authority or

arbitrator.

“Qualified Plan” shall have the meaning as set forth in Section 4.13(a);

“Release” means any spilling, leaking, emitting, discharging, depositing, escaping,

leaching, dumping, or other releasing into the Environment, whether intentional or unintentional.

“Representative” means with respect to a particular Person, any director, officer,

employee, agent, consultant, advisor, or other authorized representative of such Person, including

legal counsel, accountants, and financial advisors.

“Reserved Powers” shall have the meaning as set forth in Section 3.4;

“Restated Articles” shall have the meaning as set forth in Section 2.1(a);

“Restated Bylaws” shall have the meaning as set forth in Section 2.1(b);

“Second Funding Source” shall have the meaning as set forth in Section 13.1;

“Subsidiary” means with respect to any Person (the “Owner”), any other Person of which

securities or other interests having the power to elect a majority of that other Person’s Governing

Body, or otherwise having the power and authority to direct the business and policies of that

other Person (other than securities or other interests having such power only upon the happening

of a contingency that has not occurred) are held by the Owner or one or more of its Subsidiaries;

“Tax” shall mean any income, gross receipts, license, payroll, employment, excise,

severance, stamp, occupation, premium, windfall profits, environmental (including taxes under

11 2412814.1

Section 59A of the IRC), customs duties, capital stock, franchise, profits, withholding, social

security, unemployment, disability, real property, personal property, stamp, sales, use, transfer,

registration, value added, alternative or add-on minimum, estimated or other tax of any kind

whatsoever, including interest or penalties thereon and additions thereto, which are due to any

Governmental Authority, whether disputed or not;

“Tax Return” shall mean any return, declaration, report, claim for refund, information

return or statement relating to Taxes, including schedules and attachments and amendments;

“Termination Date” shall have the meaning as set forth in Section 13.7(d);

“Third Funding Source” shall have the meaning as set forth in Section 13.1;

“Threatened” means receipt by a Party of a written demand, statement, or notice

expressing another Person’s intent to assert a claim or dispute or to commence an action or

proceeding against that Party;

“Title IV Plans” shall have the meaning as set forth in Section 4.13(a);

“Trade Secrets” shall have the meaning as set forth in Section 4.25(a)(iv); and

“Welfare Plan” shall have the meaning as set forth in Section 4.13(a).

1.2 Other Definitional Provisions. As used in this Agreement, and unless the context

requires otherwise:

(a) Accounting terms not defined in this Agreement, and accounting terms

partly defined to the extent not defined, will have the respective meanings given to them

under U.S. generally accepted accounting principles (“GAAP”);

(b) The word “herein” and words of similar import when used in this

Agreement, refer to this Agreement as a whole and not to any particular provision of this

Agreement, and article, section, subsection, schedule and exhibit references are to this

Agreement unless otherwise specified;

(c) Words of the masculine gender include the feminine or neuter genders,

and vice versa, where applicable. Words of the singular number include the plural

number, and vice versa, where applicable;

(d) References to any agreement, document or instrument are references to

that document as amended, consolidated, supplemented or replaced by the mutual written

agreement of the parties thereto from time to time;

(e) A reference to any Legal Requirement is a reference to that Legal

Requirement as amended, consolidated, supplemented or replaced from time to time and

all rules and regulations promulgated thereunder; and

(f) References to time are references to Pacific time.

12 2412814.1

2. CHANGE OF MEMBERSHIP, CLOSING AND OTHER RELATED MATTERS

2.1 Change of Membership. Subject to the terms and conditions of this Agreement, at

the Closing, the Change of Membership will be effected as follows:

(a) The Amended and Restated Articles of Incorporation in substantially the

form attached hereto as Exhibit A (as such may hereafter be amended, restated,

supplemented, superseded or otherwise modified, the “Restated Articles”) will become

the Articles of Incorporation of HMC (subject to future amendment as provided therein)

and will be filed with the Washington Secretary of State, effective as of the Closing Date,

and pursuant to which FHV shall be designated as the sole corporate member of HMC;

and

(b) The Amended and Restated Bylaws in substantially the form attached

hereto as Exhibit B (as such may hereafter be amended, restated, supplemented,

superseded or otherwise modified, the “Restated Bylaws”) will become the Bylaws of

HMC (subject to future amendment as provided therein).

2.2 Closing. Subject to the satisfaction or waiver by the appropriate Party of all the

conditions set forth in Articles 11 and 12, the Parties will meet at the offices of Foster Pepper

PLLC, at 9:00 a.m. (Pacific Time), on or before June 28, 2013, and deliver the items

contemplated by Sections 2.3 and 2.4 (the “Pre-Closing”). If the Pre-Closing does not occur on

or before June 28, 2013, the Parties agree to continue to use commercially reasonable efforts to

cause the Pre-Closing to occur as soon as practicable, subject to the provisions of Section 13.7.

The Closing of the Contemplated Transactions shall occur and be deemed effective for all

purposes as of 12:00:01 a.m. on (A) July 1, 2013, if the Pre-Closing occurs on or before June 28,

2013, or (B) the calendar day immediately following the Pre-Closing, if the Pre-Closing occurs

after June 30, 2013.

2.3 HMC Closing Deliveries. At or prior to the Closing and unless otherwise waived

in writing by FHS, HMC or FHV, as applicable, shall deliver the following to FHS, each in form

and substance reasonably satisfactory to FHS:

(a) The Restated Articles duly executed by a duly authorized officer of HMC;

(b) The Restated Bylaws duly executed by a duly authorized officer of HMC;

(c) An Oversight Corporation Agreement, in the form attached hereto as

Exhibit C (the “Oversight Agreement”) by and among FHS, HMC, FHV, and the

Oversight Corporation, duly executed by a duly authorized officer of each of HMC and

FHV;

(d) An Escrow Agreement, in the form attached hereto as Exhibit D (the

“Escrow Agreement”) by and among FHS, HMC, and the Escrow Agent, duly executed

by a duly authorized officer of HMC;

(e) The Articles of Incorporation of FHV, duly executed by a duly authorized

officer of FHV;

13 2412814.1

(f) The Bylaws of FHV, duly executed by a duly authorized officer of FHV;

(g) Copies of resolutions duly adopted by the HMC Board of Directors (the

“HMC Board”) authorizing and approving the execution and delivery of this Agreement,

the Restated Articles, the Restated Bylaws, and the consummation of the Contemplated

Transactions, certified as true and in full force and effect as of the Closing Date by an

authorized officer of HMC;

(h) Certificate of a duly authorized officer of HMC certifying that each

representation and warranty of HMC is true and correct in all material respects as of the

Closing Date, and that each and all of the terms, covenants and agreements to be

complied with or performed by HMC on or before the Closing Date have been complied

with and performed in all material respects;

(i) Copies of resolutions duly adopted by the board of directors of FHV

authorizing and approving FHV’s execution and delivery of this Agreement, and the

consummation of the Contemplated Transactions, certified as true and in full force and

effect as of the Closing Date by an authorized officer of FHV;

(j) Certificate of a duly authorized officer of FHV certifying that each

representation and warranty of FHV is true and correct in all material respects as of the


complied with or performed by FHV on or before the Closing Date have been complied


(k) Certificate of incumbency for the officers of HMC executing the

Agreement and the other closing documents, dated as of the Closing Date;

(l) Certificate of incumbency for the officers of FHV executing the

Agreement and other closing documents, dated as of the Closing Date;

(m) A certificate of existence for HMC from the Secretary of State of

Washington, dated not more than ten (10) days prior to the Closing Date;

(n) Certificate of existence for FHV from the Secretary of State of

Washington dated not more than ten (10) days prior to the Closing Date;

(o) Tax status letter from the Washington Department of Revenue evidencing

payment of all taxes due and payable by HMC to the Washington Department of Revenue

as of the Closing Date; and

(p) Such other agreements, instruments and documents as reasonably

requested by FHS or as FHS otherwise deem reasonably necessary to effect the

Contemplated Transactions.

2.4 FHS’s Closing Deliveries. At or prior to the Closing and unless otherwise waived

in writing by HMC, FHS will deliver the following to HMC, each in form and substance

reasonably satisfactory to HMC:

14 2412814.1

(a) An amendment to the bylaws of FHS, which effects the provision of

Section 3.2(d) (the “FHS Bylaws Amendment”), duly executed by a duly authorized

officer of FHS;

(b) The Oversight Agreement, duly executed by a duly authorized officer of

FHS;

(c) The Escrow Agreement, duly executed by a duly authorized officer of

FHS;

(d) The Oversight Corporation Articles, duly executed by a duly authorized

officer of the Oversight Corporation;

(e) The Oversight Corporation Bylaws, duly executed by a duly authorized

officer of the Oversight Corporation;

(f) Copies of resolutions duly adopted by the board of directors of FHS

authorizing and approving FHS’s execution and delivery of this Agreement, the Bylaws

Amendment, and the consummation of the Contemplated Transactions, certified as true

and in full force and effect as of the Closing Date by an authorized officer of FHS;

(g) Certificate of a duly authorized officer of FHS certifying that each

representation and warranty of FHS is true and correct in all material respects as of the


complied with or performed by FHS on or before the Closing Date have been complied


(h) Copies of resolutions duly adopted by the board of directors of CHI

authorizing and approving CHI’s execution and delivery of this Agreement and the

consummation of the Contemplated Transactions, certified as true and in full force and

effect as of the Closing Date by an authorized officer of CHI;

(i) Certificate of a duly authorized officer of CHI certifying that each

representation and warranty of CHI is true and correct in all material respects as of the


complied with or performed by CHI on or before the Closing Date have been complied


(j) Certificate of incumbency for the officers of FHS and CHI executing this

Agreement and the other closing documents, dated as of the Closing Date;

(k) Certificate of existence for FHS from the Secretary of State of Washington

dated not more than ten (10) days prior to the Closing Date;

(l) Certificate of good standing for CHI from the Secretary of State of

Colorado dated not more than ten (10) days prior to the Closing Date; and

15 2412814.1

(m) Such other agreements, instruments and documents as reasonably

requested by HMC or as HMC otherwise deems reasonably necessary to effect the


2.5 HMC Foundation. After the Closing, HMC will remain the sole member of the

Harrison Medical Center Foundation (the “Foundation”). The Foundation will remain a separate

Washington nonprofit corporation governed by the governing board existing as of the Closing

Date. The Foundation articles of incorporation and bylaws are attached hereto as Exhibits E and

F, respectively, and will remain in effect until amended as provided therein.

2.6 Reserved

2.7 Oversight Corporation.

(a) On or prior to the Closing Date, the Parties will cause the incorporation of

a new Washington corporation (the “Oversight Corporation”) through the filing of

Articles of Incorporation, in the form attached hereto as Exhibit G (as such may

hereafter be amended, restated, supplemented, superseded or otherwise modified, the

“Oversight Corporation Articles”), with the Washington Secretary of State. The bylaws

of the Oversight Corporation (as such may hereafter be amended, restated, supplemented,

superseded or otherwise modified, the “Oversight Corporation Bylaws”) shall be in the

form attached hereto as Exhibit H. The Oversight Articles and the Oversight Bylaws

shall not be amended, restated, supplemented, superseded or otherwise modified without

the prior written approval of the HMC Board and FHS.

(b) The board of directors of the Oversight Corporation (the “Oversight

Board”) will consist of not more than five (5) members, one of whom shall be the Chair

of the HMC Board serving as an ex officio member with the right to vote. The initial

Oversight Board shall consist of the individuals set forth on Exhibit I, all of whom will

be directors on the HMC Board. Each subsequent member of the Oversight Board (other

than the ex officio member) shall be appointed by the Oversight Board, shall be directors

serving on the HMC Board or directors who previously served on the HMC Board. All

actions of the Oversight Corporation, including, without limitation, the appointment of

Oversight Board members and the initiation of any legal proceedings pursuant to the

Oversight Agreement, shall require the approval of a majority of the members of the

Oversight Board. The Oversight Corporation and the Oversight Board are required to act

only in the best interests of HMC pursuant to the same fiduciary duties imposed on the

HMC Board and directors on the HMC Board.

(c) Until the Board Conversion Event, if it ever occurs, the Oversight

Corporation shall have no power or authority and shall not have any rights to enforce the

obligations of FHS and CHI under the Obligation Sections. From and after the Board

Conversion Event, if it ever occurs, the Oversight Corporation shall have the sole and

exclusive purpose and power to enforce the obligations of FHS or FHV as set forth in

Sections 2.7, 3, 9, 10.3, 13.1, 13.2, 13.5, 13.10, and 14.1(e) of this Agreement and the

obligations of CHI as set forth in Sections 10.3, 13.1, 13.2, and 15.17 (collectively, the

“Obligation Sections”) pursuant to and in accordance with the Oversight Agreement,

16 2412814.1

subject to the expiration of such obligations pursuant to Section 15.16. From and after

the Board Conversion Event, if it ever occurs, HMC shall have no rights to enforce the

obligations of FHS and CHI under the Obligation Sections.

(d) On the Closing Date, FHS shall deposit the sum of [REDACTED] Dollars

($[REDACTED]) (the “Escrow Funds”) into a mutually acceptable independent escrow

account, which funds shall be held pursuant to and in accordance with the terms and

conditions of the Escrow Agreement. The Escrow Funds shall be used to fund HMC’s or

the Oversight Corporation’s, as the case may be, costs and expenses of any court

proceeding initiated by HMC or the Oversight Corporation pursuant to and in accordance

with this Agreement or the Oversight Agreement, as applicable, including HMC’s or the

Oversight Corporation’s, as the case may be, reasonable attorneys’ fees and expenses

related thereto, all as set forth in the Oversight Agreement.

(e) The Oversight Corporation shall have a limited duration of one (1) year

after the satisfaction of FHS’s and CHI’s obligations set forth in Sections 13.1 and 13.2

of this Agreement, provided that such period shall be extended until the resolution of any

dispute that may be pending pursuant to Section 14.1 (the “Expiration Date”). Upon the

Expiration Date, the Oversight Corporation shall be dissolved and its business and affairs

wound up pursuant to and in accordance with the Oversight Agreement.

3. POST-CLOSING GOVERNANCE

3.1 HMC Governance. FHV will maintain HMC as a separate Washington nonprofit

corporation, which will continue to operate the Facilities located at 2520 Cherry Avenue,

Bremerton, Washington, 98310, and 1800 NW Myhre Road, Silverdale, WA, 98383, as a

“licensed hospital” (as defined in RCW 70.41.020 or a successor statute) eligible to participate in

the Government Programs and will remain a secular entity, until such time as the HMC Board

determines otherwise prior to a Board Conversion Event.

(a) So long as HMC continues its separate existence, FHV shall maintain the

HMC Board to carry out the governance responsibilities for HMC, as set forth in this

Section 3.1 and applicable law. The governance responsibilities of the HMC Board will

be subject to the reserved powers in favor of FHV as set forth herein and in the Restated

Bylaws (“Reserved Powers”). Notwithstanding the foregoing or anything else in this

Agreement to the contrary, no provision of the Reserved Powers or the Restated Bylaws

shall restrict or limit the right of the HMC Board prior to a Board Conversion Event to

enforce the Obligation Sections in compliance with the terms of this Agreement. The

governance responsibilities of the HMC Board will include the following:

(i) Identify and report on community health needs;

(ii) Initiate and promote community health programs;

(iii) Review credentialing recommendations and approve appointments

to the HMC medical staff, with delineated privileges;

17 2412814.1

(iv) Oversee coordinated quality improvement programs in accordance

with applicable law, including RCW 70.41.200;

(v) Maintain HMC accreditation and licensure;

(vi) Govern the relationship with the HMC medical staff pursuant to

the HMC medical staff bylaws and The Joint Commission requirements;

(vii) Authority to participate in and guide regional strategic planning;

(viii) Authority to approve and/or disapprove any cessation of services

provided by the Health System Businesses and having minimum annual net

revenues of at least $1,000,000 during the immediately preceding twelve (12)

month period; and

(ix) Consistent with the operating and capital budgets and strategic

plans adopted pursuant to the Reserved Powers, approve expenditures from the

Capital Fund.

(b) Notwithstanding the foregoing or anything else in this Agreement to the

contrary, the HMC Board shall only exercise its powers and any expenditure of funds

resulting therefrom, consistent with any long range and strategic plans, operating budget,

and/or capital budget approved by the FHV Board of Directors.

(c) In addition to the powers described in Section 3.1(a), and subject to the

Reserved Powers, the HMC Board will generally review and monitor the operations of

HMC and will have such other powers as set forth in applicable law.

3.2 Governing Board Composition.

(a) The number of persons serving on the HMC Board immediately following

Closing will be not less than eighteen (18) and not more than twenty-one (21) and shall

be comprised of the individuals listed in Schedule 3.2(a) (who will be the persons

serving on the HMC Board as of the Commitment Date) plus two representatives of FHV

(the “FHV Appointees”) who will be recommended to FHV by FHS. All members of the

HMC Board shall serve for terms as described in the Restated Bylaws. HMC and FHV

agree that the HMC Trustees listed in Schedule 3.2(a) are expressly nominated and

approved to serve effective as of Closing.

(b) As soon as reasonably practicable after Closing, the FHV Board of

Directors shall appoint the FHV Appointees based upon the recommendation of FHS.

The FHV Board of Directors shall have the right to remove and replace the FHV

Appointees at any time, with or without cause. The FHV Appointees shall be subject to

approval by the HMC Board, which approval shall not be unreasonably withheld. All

FHV Appointees shall be then current members of the FHV Board of Directors for so

long as the individual serves on the HMC Board. All FHV Appointees will have the

same rights (voting or otherwise) as other HMC Directors. FHV Appointees may, but

shall not be required to, serve on committees of the HMC Board.

18 2412814.1

(c) Vacancies in the HMC Board positions held by the individuals listed in

Schedule 3.2(a) or their successors, shall be filled as follows: The HMC Board

Nominating Committee shall, prior to any annual, regular, or special meeting called for

the purpose of electing HMC Board Trustees, and within 120 days after receiving notice

of a HMC Board vacancy, meet and prepare a slate of nominees qualified to serve on the

HMC Board in accordance with the Restated Bylaws. The slate of candidates will be

submitted to the HMC Board, which shall review the nominated candidates’ names and

qualifications, and shall vote to accept or refuse each nominee. The HMC Board shall be

required to then submit to the FHV Board of Directors the slate of approved candidates

and the FHV Board of Directors shall review the names and qualifications of the

submitted candidates, and shall approve or refuse each of the submitted candidates,

provided that approval shall not be unreasonably withheld; if FHV refuses any nominees

submitted by the HMC Board, the HMC Board shall then within thirty (30) days of any

refusal submit to the FHV Board new candidates for approval for said unfilled positions

as set forth earlier in this Section. Notwithstanding the preceding procedures, if a

vacancy exists on the HMC Board for more than 150 days, FHV may unilaterally fill the

vacancy provided that at all times a super-majority of no less than two-thirds (⅔) of the

HMC Board consists of persons who live or work within Jefferson, Kitsap, or Mason

Counties.

(d) As soon as reasonably practicable after Closing, the HMC Board shall

appoint two (2) individuals to serve on the FHS Board of Directors (the “HMC

Appointees”). The HMC Board shall have the right to remove and replace the HMC

Appointees at any time with or without cause. The HMC Appointees shall be subject to

approval by the FHS Board of Directors, which approval shall not be unreasonably

withheld. Each HMC Appointee must be a member of the HMC Board for so long as the

HMC Appointee serves on the FHS Board of Directors. All HMC Appointees will have

the same rights (voting or otherwise) as other FHS Directors. HMC Appointees may, but

shall not be required to, serve on committees of the FHS Board.

The foregoing provisions of this Article 3 are subject to any amendments, restatements,

modifications, or supplements to the Restated Bylaws approved pursuant to and in accordance

with the terms set forth therein by the HMC Board prior to the Board Conversion Event.

3.3 FHV Formation and Board Composition. FHV will, effective as of the Closing,

file Amended and Restated Articles of Incorporation with the Washington Secretary of State, as

attached hereto as Exhibit J, and adopt amended and restated bylaws, as attached hereto as

Exhibit K. The FHV Board of Directors will consist of the same directors as FHS, one of whom

shall be the Chief Executive Officer of FHS serving as an ex officio member with the right to

vote and serving in an officer capacity as the President and Chief Executive Officer of FHV.

The FHV board of directors shall take any and all actions necessary to cause the composition of

the directors serving on the FHV board of directors to be identical at all times and in all

circumstances to the directors serving on the board of directors of FHS, and the board of

directors of FHV shall not take any actions that would cause the composition of the directors

serving on the board of directors of FHV to not be identical at all times and in all circumstances

to the directors serving on the board of directors of FHS. Any action taken by the FHV board of

directions at any time when directors serving on the board of directors of FHV are not identical

19 2412814.1

to the directors serving on the board of directors of FHS shall be subject to approval by the board

of directors of FHS. The individuals on the board of directors of FHV will not be deemed to

have been appointed by, or serving as agents or delegates of, FHS or CHI.

3.4 Reserved Powers.

(a) FHV will not take any of the following actions without the approval of

CHI:

(i) Incurrence of debt, including, without limitation, borrowings,

guarantees, loans, encumbrances, operating leases, and capital leases;

(ii) Merger of FHV;

(iii) Sale or disposition of all or substantially all of the assets of FHV;

(iv) Dissolution, liquidation or termination of FHV;

(v) Creation or transfer of a membership interest in FHV;

(vi) Adoption of capital or operating budgets of FHV.

(b) HMC will not take any of the following actions without the approval of

FHV;

(i) Incurrence of debt, including, without limitation, borrowings,

guarantees, loans, encumbrances, operating leases, and capital leases, in excess of

thresholds and within the limits established by FHV;

(ii) Merger of HMC;

(iii) Sale or disposition of all or substantially all of the assets of HMC;

(iv) Dissolution, liquidation or termination of HMC;

(v) Creation or transfer of a membership interest in HMC;

(vi) Adoption of capital or operating budgets of HMC;

(vii) Change of mission or philosophical direction of HMC;

(viii) Amend articles of incorporation or bylaws of HMC;

(ix) Approve members of governing board of HMC;

(x) Approve removal of members of governing board of HMC;

(xi) Approve joint ventures or partnerships involving HMC or

subsidiaries or joint ventures or partnerships of HMC;

20 2412814.1

(xii) Approve creation of subsidiaries or HMC;

(xiii) Adopt long-range and strategic plans for HMC;

(xiv) Approve variations from capital and operating budgets of HMC.

4. REPRESENTATIONS AND WARRANTIES OF HMC

HMC represents and warrants, as of the Commitment Date and as of the Closing Date,

the following representations and warranties to and for the benefit of FHS and FHV.

4.1 Organization and Good Standing.

(a) HMC is duly organized, validly existing, and in good standing under the

laws of the State of Washington, with full power and authority to conduct its business as

it is now being conducted, and to own or use the properties and assets that it purports to

own or use.

(b) HMC is duly qualified to do business as a foreign corporation and is in

good standing under the laws of each state or other jurisdiction in which either the

ownership or use of the properties owned or used by it, or the nature of the activities

conducted by it, requires such qualification.

(c) HMC has provided to FHS true and complete copies of its articles of

incorporation, bylaws, and all amendments thereto, as well as any other document

affecting Control or governance of HMC, as currently in effect (the “Organizational

Documents”). HMC is not in default under or in violation of any provision of its

Organizational Documents.

4.2 Authority; No Conflict.

(a) This Agreement constitutes the legal, valid, and binding obligation of

HMC, enforceable against it in accordance with the Agreement’s terms, except as limited

by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of

general application affecting enforcement of creditors’ rights, and as limited by general

principles of equity that restrict the availability of equitable remedies. Upon the

execution and delivery by HMC of the agreements, certificates, instruments and other

documents to be executed and delivered by HMC as contemplated by Section 2.3 (the

“HMC Closing Documents”), such agreements, certificates, instruments and other

documents will constitute the legal, valid, and binding obligations of HMC, enforceable

against HMC in accordance with their respective terms, except as limited by applicable

bankruptcy, insolvency, reorganization, moratorium or other laws of general application

affecting enforcement of creditors’ rights, and as limited by general principles of equity

that restrict the availability of equitable remedies. HMC has the absolute and unrestricted

right, power, authority, and capacity to execute and deliver this Agreement and the HMC

Closing Documents and to perform its obligations hereunder and thereunder.

21 2412814.1

(b) Except as set forth in Schedule 4.2, neither the execution and delivery of

this Agreement or any of the HMC Closing Documents nor the consummation or

performance by HMC of any of the Contemplated Transactions will, directly or indirectly

(with or without notice or lapse of time): contravene or conflict with, or result in a

violation of (a) any provision of the Organizational Documents of HMC or any of HMC’s

Subsidiaries, or (b) any resolution adopted by the HMC Board or the Governing Body of

any of HMC’s Subsidiaries; contravene or conflict with, or result in a violation of, or give

any Governmental Authority or other Person the right to challenge any of the

Contemplated Transactions or to exercise any remedy or obtain any relief under, any

Legal Requirement or any Order to which HMC or any of HMC’s Subsidiaries, or any of

the assets owned or used by HMC or any of its Subsidiaries, may be subject; contravene

or conflict with, or result in a violation of any of the terms or requirements of, or give any

Governmental Authority the right to revoke, withdraw, suspend, cancel, terminate, or

modify, any Permit that is held by HMC or any of its Subsidiaries or that otherwise

relates to the business of, or any of the assets owned or used by HMC or any of its

Subsidiaries; contravene or conflict with, or result in a violation or breach of, any

provision of, or give any Person the right to declare a default or exercise any remedy

under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify,

any Contract to which HMC or any of its Subsidiaries is a party or otherwise bound; or

result in the imposition or creation of any Encumbrance, other than the Permitted

Encumbrances, upon or with respect to any of the assets owned or used by HMC any of

its Subsidiaries.

(c) Except as set forth on Schedule 4.2, neither HMC nor any of HMC’s

Subsidiaries is or will be required to give any notice to or obtain any Consent from any

Person in connection with the execution and delivery of this Agreement or any of the

HMC Closing Documents or the consummation or performance by HMC of any of the

Contemplated Transactions,.

4.3 Membership. HMC has no members. There are no Contracts relating to the

issuance or transfer (or any right or obligation with respect thereto) of any membership or other

ownership interest in HMC.

4.4 Subsidiaries and JV Entities. Schedule 4.4 lists all Subsidiaries and JV Entities

of HMC and indicates, with respect to the equity securities, if any, of each such Subsidiary and

JV Entity, the number of shares of each class authorized, the number of shares outstanding and

the number of shares or other ownership interests owned directly or indirectly by HMC or its

Subsidiaries or JV Entities, or the percentage of equity or other ownership interests so owned, as

applicable.

4.5 Directors, Trustees and Officers. Schedule 4.5 lists all directors, trustees and

executive officers of HMC and each of its Subsidiaries. None of the foregoing has any conflict

of interest or obligation that would interfere with his or her ability to continue to serve in the

same capacity with HMC following the Closing Date. No director or trustee is employed by

HMC.

22 2412814.1

4.6 Financial Statements. HMC has provided to FHS: (A) consolidated balance

sheets of HMC as of April 30 in each of the years 2010, 2011 and 2012, and the related

consolidated statements of operations, changes in net assets, and cash flows for each of the fiscal

years then ended, which have been audited by Moss Adams, together with all notes and reports

thereto, and (B) an unaudited, consolidated balance sheet of HMC as of April 30, 2013, and the

related unaudited, consolidated statements of operations, changes in net assets, and cash flows

for the 4 months then ended. The financial statements referenced in (A) and (B) may be referred

to in this Agreement, collectively, as the “HMC Financial Statements.” The HMC Financial

Statements fairly present in all material respects the financial condition and the results of

operations, changes in net assets, and cash flows of HMC and its Subsidiaries, as the case may

be, as of the respective dates of and for the periods referred to in such HMC Financial

Statements, all in accordance with GAAP, subject, in the case of the unaudited HMC Financial

Statements, to customary, recurring year-end adjustments and the absence of notes. The HMC

Financial Statements reflect the consistent application of GAAP throughout the periods involved,

except as disclosed in the notes to such financial statements. No financial statements of any

Person other than HMC and its Subsidiaries are required by GAAP to be included in the

consolidated financial statements of HMC.

4.7 Books and Records. The minute books, membership and stock record books, and

other records of HMC and its Subsidiaries for the prior three years, true and complete copies of

which have been made available by HMC to FHS, are complete and correct in all material

respects. Such minute books of HMC and its Subsidiaries contain accurate and complete records

of all meetings held of, and material corporate or other actions taken by, the HMC Board, the

Governing Bodies of HMC’s Subsidiaries, and the committees of the HMC Board and such

Governing Bodies, as applicable.

4.8 Title to Properties. Except for Permitted Encumbrances, HMC and its

Subsidiaries own, free and clear of all Encumbrances, all right, title and interest in and to all

properties and assets (whether real, personal, or mixed and whether tangible or intangible)

located in the Facilities or reflected as owned in the books and records of HMC and its

Subsidiaries, including all of the properties and assets reflected in the HMC Financial Statements

(except for assets held under capitalized or operating leases disclosed in Schedule 4.9(b) and

personal property sold since the respective date of such HMC Financial Statements).

4.9 HMC Real Property.

(a) Schedule 4.9(a) lists all of the real property owned by HMC or any of its

Subsidiaries, together with any improvements thereon (collectively, the “HMC Real

Property”).

(b) Schedule 4.9(b) lists all leases, subleases and other Contracts relating to

the occupancy of the HMC Real Property and lease purchase arrangements, whether

relating to real property (as landlord, tenant, sublandlord, or subtenant) or personal

property (collectively, the “HMC Real Property Leases”).

(c) Except as described in Schedule 4.9(c), to HMC’s Knowledge all of the

buildings and improvements situated on and comprising part of the HMC Real Property

23 2412814.1

and all heating and air conditioning equipment and all plumbing, electrical and other

mechanical facilities which are part of, or which service, such buildings and

improvements do not require any repairs other than routine maintenance or expenditures

in the aggregate that are not in excess of aggregate expenditures for such matters during

prior periods or provided for in HMC’s approved budget as provided to FHS prior to the

Commitment Date.

(d) HMC has not received any notice from the holder of any mortgage

presently or previously encumbering any of the HMC Real Property, any insurance

company which has issued a policy with respect to any of the HMC Real Property or

from any public official or board of fire underwriters (or other Governmental Authority

exercising similar functions) claiming any defects or deficiencies in, or requesting the

performance of any repairs, alterations or other work to, any of the HMC Real Property,

except for any notices as to which all defects and requested repairs, alterations or other

work has been performed in all material respects.

(e) All certificates of occupancy and all other material licenses, permits,

authorizations, consents, certificates and approvals required by all Governmental

Authorities having jurisdiction have been issued for the HMC Real Property, are in full

force and effect, and will not be invalidated, violated or otherwise adversely affected by

the execution or performance of this Agreement or the consummation of the


(f) HMC has not received any notice of any pending or Threatened

Proceedings in the nature of eminent domain in connection with any of the HMC Real

Property.

(g) (1) HMC or a Subsidiary of HMC is the holder of the landlord’s interest,

sublandlord’s interest, lessee’s interest, or sublessee’s interest, as applicable, in each

HMC Real Property Lease and neither HMC nor any of its Subsidiaries has assigned any

HMC Real Property Lease or any interest therein or subleased any portion of the HMC

Real Property, except as set forth in Schedule 4.9(b); (2) each HMC Real Property Lease

is in full force and effect with respect to HMC and each of its Subsidiaries and, with

respect to each other party thereto; (3) neither HMC nor any of its Subsidiaries, and, to

HMC’s Knowledge no other party, is in material default under any HMC Real Property

Lease; and (4) no event has occurred which, with the giving of notice or passage of time

or both, would constitute a material default by HMC or any of its Subsidiaries or, to

HMC’s Knowledge, any other party, under any HMC Real Property Lease.

(h) HMC has not received notice of any pending proceedings for an increase

in the assessed valuation of any of the HMC Real Property for real estate tax purposes or

any pending real estate tax valuation appeals.

(i) The HMC Real Property adjoins, or is part of a building or development

which adjoins, dedicated public roadways and has, or is part of a building or development

which has, access for motor vehicles to such roadways by valid easements, and, to

24 2412814.1

HMC’s Knowledge, there are no conditions existing which could result in the termination

or reduction of the current access to existing roadways.

(j) All essential utilities are available to the HMC Real Property.

(k) The current use of the Facilities that are owned by HMC is permitted

under the applicable zoning classification. Neither HMC nor any Affiliate of HMC has

received any notice of a violation of any applicable state or local code for the HMC Real

Property which has not been cured.

4.10 No Undisclosed Liabilities. Except to the extent reflected or reserved against on

the HMC Financial Statements, neither HMC nor any of its Subsidiaries, has any material

liabilities or obligations of a nature, whether absolute, accrued, contingent or otherwise, due or to

become due, that are required under GAAP to be disclosed in financial statements (including the

notes thereto), other than liabilities or obligations incurred in the Ordinary Course of Business

since April 30, 2012.

4.11 Taxes. HMC and each of its Subsidiaries are recognized as exempt from federal

income taxation under Section 501(c)(3) of the IRC. Neither HMC nor any of its Subsidiaries is

subject to, or has received a notice of, any action by the IRS to revoke or terminate the tax status

of HMC or any of its Subsidiaries. All Tax Returns, estimates, reports, plans and other filings

required to be filed by HMC or any of its Subsidiaries with any Governmental Authority, have

been timely filed in compliance with all Legal Requirements. Each such return, report, plan and

filing contains no untrue or misleading statement and does not omit any information that would

cause it to be materially misleading or inaccurate. All Taxes due (including taxes on revenues,

properties, income, franchises, licenses, sales and payrolls) to any Governmental Authority have

been paid, other than Taxes that are being contested in good faith and as to which adequate

reserves (determined in accordance with GAAP) have been provided in the HMC Financial

Statements. There is no pending Tax examination or audit of, nor any action, suit, investigation

or claim asserted or Threatened, against HMC or any of its Subsidiaries by any Governmental

Authority. Neither HMC nor any of its Subsidiaries has given or been requested to give waivers

or extensions (or is or would be subject to a waiver or extension given by any other Person) of

any statute of limitations relating to the payment of Taxes of HMC or any of its Subsidiaries or

for which HMC or any of its Subsidiaries may be liable.

4.12 No Material Adverse Effect. Since April 30, 2012, no event has occurred or

circumstance exists that has had or is reasonably likely to have a Material Adverse Effect on

HMC or any of its Subsidiaries.

4.13 Employee Benefits.

(a) As used in this Section 4.13, the following terms have the meanings set

forth below.

“ERISA Affiliate” means, with respect to HMC or any of its Subsidiaries, any other person

that, together with HMC, would be treated as a single employer under IRC § 414.

25 2412814.1

“HMC Other Benefit Obligation” means an Other Benefit Obligation owed, adopted, or

followed by HMC or any of its Subsidiaries or an ERISA Affiliate of HMC or any of its

Subsidiaries.

“HMC Plan” means a Plan of which HMC or any of its Subsidiaries or an ERISA Affiliate of

HMC or any of its Subsidiaries is, or was within the previous five years, a Plan Sponsor, or

to which HMC or any of its Subsidiaries or an ERISA Affiliate of HMC or any of its

Subsidiaries otherwise contributes, or has within the previous five years contributed, or in

which HMC or any of its Subsidiaries or an ERISA Affiliate of HMC or any of its

Subsidiaries otherwise participates, or within the previous five years has participated. All

references to Plans are to HMC Plans unless the context requires otherwise.

“Multi-Employer Plan” has the meaning given in ERISA § 3(37)(A).

“Other Benefit Obligations” means all material obligations, arrangements, or customary

practices to provide benefits, other than salary, as compensation for services rendered, to

present or former directors, employees, or agents, other than obligations, arrangements, and

practices that are Plans. Other Benefit Obligations include consulting agreements under

which the compensation paid does not depend upon the amount of service rendered,

sabbatical policies, severance payment policies, and fringe benefits within the meaning of

IRC § 132.

“PBGC” means the Pension Benefit Guaranty Corporation, or any successor thereto.

“Pension Plan” has the meaning given in ERISA § 3(2)(A).

“Plan” has the meaning given in ERISA § 3(3).

“Plan Sponsor” has the meaning given in ERISA § 3(16)(B).

“Qualified Plan” means any Plan that meets or purports to meet the requirements of IRC

§ 401(a).

“Title IV Plans” means all Pension Plans that are subject to Title IV of ERISA, 29 U.S.C.

§ 1301 et seq., other than Multi-Employer Plans.

“Welfare Plan” has the meaning given in ERISA § 3(1).

(b) Schedule 4.13(b) sets forth the following:

(i) a complete and accurate list of all HMC Plans and HMC Other

Benefit Obligations which identifies each such HMC Plan and HMC Other

Benefit Obligations as: (A) defined benefit Pension Plans, (B) Qualified Plans,

(C) Title IV Plans, or (D) Other.

(ii) a complete and accurate list of (A) all ERISA Affiliates of HMC or

any of its Subsidiaries, and (B) all Plans of which any such ERISA Affiliate is, or

was within the previous five years, a Plan Sponsor, in which any such ERISA

Affiliate participates or has participated within the previous five years, or to

which any such ERISA Affiliate contributes or has within the previous five years

contributed; and

(c) HMC has made available to FHS:

26 2412814.1

(i) (A) a true, correct and complete copy of each HMC Plan and HMC

Other Benefit Obligation (to the extent that such Other Benefit Obligation is in

writing); (B) the trust agreement for Qualified Plans; (C) the summary plan

description of each HMC Plans for which HMC, its Subsidiaries, or the JV

Entities are required to prepare and distribute; (D) all summaries furnished to

participants and beneficiaries regarding HMC Plans and HMC Other Benefit

Obligations for which a summary plan description is not required; and (E) the

most recent actuarial statements or financial statements, as applicable for

Qualified Plans;

(ii) all personnel, payroll, and employment manuals and policies of

HMC, its Subsidiaries, and any ERISA Affiliate (to the extent applicable to the

employees of the Acquired Companies or the JV Entities);

(iii) a written description of any HMC Plan or HMC Other Benefit

Obligation that is not otherwise in writing;

(iv) all insurance contracts, policies and related insurer documents

purchased by or to provide benefits under any HMC Plan and HMC Other Benefit

Obligations;

(v) all contracts with third party administrators, actuaries, investment

managers, consultants, and other independent contractors that relate to any HMC

Plan and HMC Other Benefit Obligation;

(vi) the most recent reports submitted by third party administrators,

actuaries, investment managers, consultants, or other independent contractors

with respect to any HMC Plan and HMC Other Benefit Obligation;

(vii) the form of notifications to employees of HMC or any of its

Subsidiaries of their rights under ERISA § 601 et seq. and IRC § 4980B;

(viii) the Form 5500 filed in each of the most recent three plan years

with respect to each HMC Plan and HMC Other Benefit Obligations, if required,

including all schedules thereto and the opinions of independent accountants;

(ix) all notices that were given by the IRS, the PBGC, or the

Department of Labor to HMC or any of its Subsidiaries, any ERISA Affiliate of

HMC or any of its Subsidiaries, or any HMC Plan within the four years preceding

the Commitment Date; and

(x) with respect to Qualified Plans, the most recent determination

letter or opinion letter for each Plan of HMC or any of its Subsidiaries that is a

Qualified Plan.

(d) Except as set forth in Schedule 4.13(d):

27 2412814.1

(i) Each such HMC Plan listed on Schedule 4.13(b) is legally valid

and binding and in full force and effect in all material respects.

(ii) HMC and its Subsidiaries have performed in all material respects

all of their respective obligations under all HMC Plans and HMC Other Benefit

Obligations. HMC and its Subsidiaries have made appropriate entries in their

financial records and statements for all obligations and liabilities under such

HMC Plans and HMC Other Benefit Obligations that have accrued but are not

due.

(iii) To HMC’s Knowledge, no statement, either written or oral, has

been made by HMC or any of its Subsidiaries to any Person with regard to any

HMC Plan or HMC Other Benefit Obligation that was not in accordance with the

HMC Plan or HMC Other Benefit Obligation and that could have a material

adverse economic consequence to HMC or any of its Subsidiaries.

(iv) HMC and its Subsidiaries, with respect to all HMC Plans and

HMC Other Benefits Obligations are, and each HMC Plan and HMC Other

Benefit Obligation is, in material compliance, both in form and operation, with

ERISA, the IRC, and all other applicable Legal Requirements, including the

provisions of such Legal Requirements expressly mentioned in this Section 4.13

and each of the HMC Plans and HMC Other Benefit Obligations has been and

presently is being operated in material compliance with the terms of the operative

plan documents.

a) No transaction prohibited by ERISA § 406 and no

“prohibited transaction” under IRC § 4975(c), for which an applicable

exemption is not available, have occurred with respect to any HMC Plan

and HMC Other Benefit Obligations and remains uncorrected.

b) Neither HMC, nor any of its Subsidiaries or JV Entity has

any material liability to the IRS with respect to any HMC Plan and HMC

Other Benefit Obligations, including any liability imposed by Chapter 43

of the IRC.

c) Neither HMC, nor any of its Subsidiaries or JV Entity has

any liability to the PBGC with respect to any HMC Plan and HMC Other

Benefit Obligations or has any liability under ERISA § 502 or § 4071.

d) All filings required by ERISA and the IRC as to each HMC

Plan and HMC Other Benefit Obligations have been timely filed, and all

notices and disclosures to participants required by either ERISA or the

IRC have been timely provided.

e) All contributions and payments have been timely made or

accrued with respect to all HMC Plans and HMC Other Benefit

Obligations. No amount or any asset of any HMC Plan is subject to tax as

unrelated business taxable income.

28 2412814.1

(v) Each HMC Plan contains authority for the plan sponsor to

terminate such HMC Plan in the future, subject to applicable Legal Requirements

and the terms of any applicable collective bargaining agreement.

(vi) The consummation of the Contemplated Transactions will not

(a) entitle any current or former employee, officer, director or independent

contractor of HMC or any of its Subsidiaries to severance pay, unemployment

compensation or any other payment, (b) accelerate the time or payment or vesting,

or increase the amount of payments or compensation due any such individual, or

(c) result in any prohibited transaction described in ERISA § 406 or IRC § 4975

for which an exemption is not available.

(vii) Neither HMC, any of its Subsidiaries, any JV Entity nor any other

ERISA Affiliate has established, maintained, or contributed to, or had within the

previous five years any obligation to establish, maintain or contribute to any

(a) plan or arrangement that is a Title IV Plan, (b) Multi-Employer Plan, or

(c) multiple employer plan as defined in IRC § 413(c).

(viii) Neither HMC, any of its Subsidiaries, any JV Entity, nor any other

ERISA Affiliate has ceased operations at any facility or has withdrawn from any

Title IV Plan or Multi-Employer Plan in a manner that would subject HMC to

liability under ERISA § 4062(e), § 4063, or § 4064.

(ix) Neither HMC, any of its Subsidiaries, any JV Entity, nor any other

ERISA Affiliate has, or had within the previous five years, established,

maintained, or contributed to, or had any obligation to establish, maintain or

contribute to (a) a multiple employer welfare arrangement within the meaning of

ERISA Section 3(40)(A), or (b) a voluntary employees’ beneficiary association

under IRC § 501(c)(9).

(x) Neither HMC, any of its Subsidiaries, any JV Entity, nor any other

ERISA Affiliate has any obligation to provide any medical, life or similar benefits

to current or future retired or terminated employees, their spouses or dependents

following termination of employment except as required in ERISA § 601.

(xi) To HMC’s knowledge, other than changes in applicable law or

accompanying regulations, no event has occurred or circumstance exist that could

result in an increase in premium costs of HMC Plans and HMC Other Benefit

Obligations that are insured, or an increase in benefit costs of such HMC Plans

and HMC Other Benefit Obligations that are self-insured.

(xii) Other than claims for benefits submitted by participants or

beneficiaries, no claim against, or legal proceeding involving, any HMC Plan or

HMC Other Benefit Obligation is pending or, to HMC’s Knowledge, is

Threatened.

(xiii) Each Qualified Plan of HMC and its Subsidiaries is qualified in

form and operation under IRC § 401(a); each trust for each such Plan is exempt

29 2412814.1

from federal income tax under IRC § 501(a). To HMC’s Knowledge, no event

has occurred or circumstance exists that will or could give rise to disqualification

or loss of tax-exempt status of any such Plan or trust.

(xiv) HMC, its Subsidiaries and the JV Entities have paid, if applicable,

all amounts due to the PBGC pursuant to ERISA § 4007.

(xv) Neither HMC, any of its Subsidiaries, any JV Entity, nor any other

ERISA Affiliate has filed a notice of intent to terminate any HMC Plan or has

adopted any amendment to treat a HMC Plan as terminated. The PBGC has not

instituted proceedings to treat any HMC Plan as terminated. To HMC’s

Knowledge, no event has occurred or circumstance exists that may constitute

grounds under ERISA § 4042 for the termination of, or the appointment of a

trustee to administer, any HMC Plan.

(xvi) No amendment has been made, or is reasonably expected to be

made, to any HMC Plan that has required or could require the provision of

security under ERISA § 307 or IRC § 401(a)(29).

(xvii) No accumulated funding deficiency, whether or not waived, exists

with respect to any HMC Plan; no event has occurred or circumstance exists that

may result in an accumulated funding deficiency as of the last day of the current

plan year of any such HMC Plan.

(xviii) To HMC’s Knowledge, the actuarial report for any Pension Plan

pursuant to which HMC, its Subsidiaries, and JV Entities participated, and

pursuant to which each ERISA Affiliate of HMC, its Subsidiaries, and JV Entities

participated, fairly presents the financial condition and the results of operations of

each such Pension Plan in accordance with GAAP.

(xix) To HMC’s Knowledge, since the last valuation date for each

Pension Plan pursuant to which any HMC, its Subsidiaries, or JV Entities

participated, and pursuant to which each ERISA Affiliate of HMC, its

Subsidiaries, or JV Entities participated, no event has occurred or circumstance

exists that would materially increase the amount of benefits under any such

Pension Plan or that would cause the excess of Pension Plan assets over benefit

liabilities (as defined in ERISA § 4001) to decrease, or the amount by which

benefit liabilities exceed assets to increase, other than the normal market

fluctuation of the investments from time to time.

(xx) No reportable event (as defined in ERISA § 4043 and in

regulations issued thereunder) other than in conjunction with entering into this

Agreement has occurred.

(xxi) There is no fact or circumstance that may give rise to any liability

of HMC, its Subsidiaries, or the JV Entities to the PBGC under Title IV of

ERISA.

30 2412814.1

(xxii) HMC, its Subsidiaries, and the JV Entities have materially

complied with the provisions of ERISA § 601 et seq. and IRC § 4980B.

(xxiii) No payment that is owed or may become due to any director,

officer, employee, or agent of HMC, its Subsidiaries, or the JV Entities will be

non-deductible to the HMC, its Subsidiaries, or the JV Entities or subject to tax

under IRC § 280G or § 4999; nor will any HMC, its Subsidiaries, or the

JV Entities be required to “gross up” or otherwise compensate any such person

because of the imposition of any excise tax on a payment to such person.

(xxiv) All reports required by any governmental agency and disclosures

required to be made to participants and beneficiaries with respect to any HMC

Plan listed in Schedule 4.13(b) for any reason have been timely filed or made.

(xxv) Neither HMC, its Subsidiaries, nor any of their respective Related

Persons has made any voluntary correction program submission to either the

Internal Revenue Service or the Department of Labor with respect to any

compliance failure or operational failure as relates to any HMC Plan listed in

Schedule 4.13(b).

(xxvi) Each HMC Plan that is a “nonqualified deferred compensation

plan” (as defined in IRC § 409A(d)(1)) has been operated since January 1, 2005

in good faith compliance with IRC § 409A and the underlying IRS guidance and

Department of Treasury regulations.

(xxvii) HMC will work with FHS in good faith subsequent to close of the

Contemplated Transactions to take any and all corrective action as may be

required to comply with any Legal Requirement that was in full force and effect

as of the date of this Agreement which has not been complied with and is

applicable to the HMC Plans or HMC Other Benefit Obligations.

4.14 Compliance with Legal Requirements; Permits.

(a) Except as set forth in Schedule 4.27(a), HMC and each of its Subsidiaries

is in material compliance with each Legal Requirement that is or was, during the

applicable statute of limitations, applicable to it or to the conduct or operation of its

business or the ownership or use of any of its assets.

(b) No event has occurred or no circumstance exists that (with or without

notice or lapse of time) (a) may constitute or result in a violation by HMC or any of its

Subsidiaries of, or a failure on the part of HMC or any of its Subsidiaries to comply with,

any Legal Requirement that is likely to have a Material Adverse Effect on HMC, or (b)

may give rise to any obligation on the part of HMC or any of its Subsidiaries to

undertake, or to bear all or any portion of the cost of, any remedial action of any nature

that is likely to have a Material Adverse Effect on HMC.

(c) Neither HMC nor any of its Subsidiaries has received any written notice or

other written communication from any Governmental Authority or any other Person

31 2412814.1

acting on behalf of any Governmental Authority, of (a) any actual, alleged and

reasonably credible violation of, or failure to comply with, any Legal Requirement that is

likely to have a Material Adverse Effect on HMC, or (b) any actual, alleged and

reasonably credible obligation on the part of HMC or any of its Subsidiaries to undertake,

or to bear all or any portion of the cost of, any remedial action of any nature that is likely

to have a Material Adverse Effect on HMC.

(d) Schedule 4.14(d) contains a complete and accurate list of each Permit that

is held by HMC and each of its Subsidiaries. Each Permit listed or required to be listed

in Schedule 4.14(d) is valid and in full force and effect.

(i) Except as set forth in Schedule 4.27(a), HMC and each of its

Subsidiaries is in material compliance with all of the terms and requirements of

each Permit identified or required to be identified in Schedule 4.14(d).

(ii) Except as set forth in Schedule 4.27(a), to HMC’s Knowledge, no

event has occurred or no circumstance exists that may (with or without notice or

lapse of time) (a) constitute or result directly or indirectly in a violation of or a

failure to comply with any term or requirement of any Permit listed or required to

be listed in Schedule 4.14(d) where such violation or failure to comply would

likely have a Material Adverse Effect on HMC, or (b) result directly or indirectly

in the revocation, withdrawal, suspension, cancellation, or termination of, or

material modification to, any Permit listed or required to be listed in Schedule

4.14(d).

(iii) Except as set forth in Schedule 4.27(a), neither HMC nor any of

its Subsidiaries has received any written notice or other written communication

from any Governmental Authority or any other Person acting on behalf of any

Governmental Authority, of (a) any actual or alleged and reasonably credible

violation of or failure to comply with any term or requirement of any Permit listed

or required to be listed in Schedule 4.14(d) where such violation or failure to

comply would likely have a Material Adverse Effect on HMC or (b) any actual

revocation, withdrawal, suspension, cancellation, termination of, or material

modification to any Permit listed or required to be listed in Schedule 4.14(d); and

all applications required to have been filed for the renewal of the Permits listed or

required to be listed in Schedule 4.14(d) have been duly filed on a timely basis

with the appropriate Governmental Authorities.

(iv) To HMC’s Knowledge, all other filings required to have been

made with respect to such Permits have been duly made on a timely basis with the

appropriate Governmental Authorities.

(v) The Permits listed in Schedule 4.14(d) collectively constitute all of

the Permits necessary to permit HMC and each of its Subsidiaries lawfully to

conduct and operate their respective businesses in the manner they currently

conduct and operate such businesses and to permit HMC and each of its

32 2412814.1

Subsidiaries to own and use their respective assets in the manner in which they

currently own and use such assets.

4.15 Equipment. Schedule 4.15 sets forth a depreciation schedule as of April 30, 2013,

which takes into consideration all the equipment associated with, or constituting any part of the

Facilities having a book value greater than $3,000. Except as set forth on Schedule 4.15, since

April 30, 2013, neither HMC nor any of its Subsidiaries have sold or otherwise disposed of any

item of equipment having a value in excess of $3,000 associated with, or constituting any part of,

the Facilities, other than any such sale or disposal in the Ordinary Course of Business.

4.16 Condition of Tangible Assets. Substantially all of the tangible assets of HMC and

its Subsidiaries relating to the operation of the Facilities are in good condition and repair, except

for ordinary, routine maintenance and ordinary wear and tear.

4.17 Legal Proceedings; Orders.

(a) Schedule 4.17 lists each pending Proceeding:

(i) that has been commenced by or against HMC or any of its

Subsidiaries; or

(ii) that challenges, or that may reasonably be expected to have the

effect of preventing, delaying, making illegal, or otherwise interfering with, any

of the Contemplated Transactions.

(b) No such Proceeding has been threatened and to HMC’s Knowledge no

event has occurred or circumstance exists that is reasonably likely to give rise to or serve

as a basis for the commencement of any such Proceeding. HMC has made available to

the other Parties true and complete copies of all pleadings and orders relating to each

Proceeding listed in Schedule 4.17.

(c) There is no Order to which HMC or any of its Subsidiaries, or any of the

assets owned or used by HMC or any of its Subsidiaries, is subject (other than Orders

applicable to all companies similarly situated) that (1) may have the effect of preventing,

delaying, making illegal, or otherwise interfering with, any of the Contemplated

Transactions, or (2) is, or is reasonably likely to be, materially adverse to the business,

operations or condition (financial or otherwise) of HMC or any of its Subsidiaries.

4.18 Absence of Certain Changes and Events. Since April 30, 2012, HMC and each of

its Subsidiaries have conducted their businesses only in the Ordinary Course of Business and

there has not been any:

(a) change in HMC’s or any of its Subsidiaries’ membership interests, or

other equity interests; grant of any option or right to purchase equity or membership

interests of HMC or any of its Subsidiaries, except as set forth in Schedule 4.18(a);

(b) increase in salary or compensation or payment of any bonus by HMC to

any member of the HMC Board or any Governing Body of any of HMC’s Subsidiaries,

33 2412814.1

any officer of HMC or any of its Subsidiaries, or entry into any employment, severance,

or similar Contract with any such Person, except for payments, raises or bonuses by

HMC or any of its Subsidiaries in the Ordinary Course of Business, except as set forth in

Schedule 4.18(b);

(c) incurrence of any capital expenditures or any obligations or liabilities in

respect thereof in excess of, for any individual capital expenditure, $50,000, or, in the

aggregate for all capital expenditures, $250,000, except as set forth in Schedule 4.18(c);

(d) acquisition (whether pursuant to merger, stock or asset purchase or

otherwise) in one transaction or any series of related transactions of any assets (other than

purchases of inventory, supplies and other assets in the Ordinary Course of Business) or

any equity interests in any Person or any business or division of any Person or all or

substantially all of the assets of any Person (or business or division thereof) for a

purchase price in excess of $50,000, except as set forth in Schedule 4.18(d);

(e) adoption of, or material increase in the payments to or benefits under, any

profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or

other employee benefit plan for or with any employees of HMC or any of its Subsidiaries,

except as set forth in Schedule 4.18(e);

(f) damage to or destruction or loss of any asset or property of HMC or any of

its Subsidiaries, whether or not covered by insurance, that has or is reasonably likely to

result in a Losses in excess of $50,000, except as set forth in Schedule 4.18(f);

(g) entry into, termination of, or receipt of notice of termination of (1) any

license, distributorship, dealer, sales representative, joint venture, credit, or similar

agreement, or (2) any Contract or transaction involving a total remaining commitment by

or to HMC or any of its Subsidiaries of at least $50,000 other than in the Ordinary Course

of Business, except as set forth in Schedule 4.18(g);

(h) sale (other than sales of inventory in the Ordinary Course of Business),

lease, or other disposition of any asset or property of HMC or any of its Subsidiaries or

mortgage, pledge, or imposition of any Encumbrance on any asset or property of the

HMC or any of its Subsidiaries, except as set forth in Schedule 4.18(h);

(i) settlement of pending or threatened Proceedings for amounts in excess of

$50,000, except as set forth in Schedule 4.18(i);

(j) cancellation or waiver of any claims or rights with a value to HMC or any

of its Subsidiaries exceeding, in the aggregate, $50,000, except as set forth in

Schedule 4.18(j);

(k) assumption, guaranty, endorsement or other incurrence by HMC or any of

its Subsidiaries of any liability or responsibility (whether directly, contingently or

otherwise) for the obligations of any other Person, or any loans, advances or capital

contributions to, or investments in, any other Person other than (1) loans, advances or

capital contributions to, or investments in, any Subsidiary wholly-owned by the

34 2412814.1

Company, or (2) expense advances to employees of HMC or any of its Subsidiaries in the

Ordinary Course of Business, except as set forth in Schedule 4.18(k);

(l) termination by HMC or any of its Subsidiaries of the employment of any

employee, or engagement of any independent contractor, that is a physician or a mid-

level healthcare provider, except as set forth in Schedule 4.18(l);

(m) incurrence or assumption of any long-term indebtedness except for

borrowings under the current credit facilities of HMC or any of its Subsidiaries in the

Ordinary Course of Business, or modification or amendment to the terms thereof, except

as set forth in Schedule 4.18(m);

(n) entering into any agreement or arrangement that limits or otherwise

restricts HMC or any of its Subsidiaries or any successor thereto from engaging or

competing in any line of business or in any location, except as set forth in

Schedule 4.18(n);

(o) a change in the accounting methods used by HMC or any of its

Subsidiaries, except as set forth in Schedule 4.18(o); or

(p) agreement, whether oral or written, by HMC or any of its Subsidiaries to

do any of the foregoing, except as set forth in Schedule 4.18(p).

4.19 Contracts; No Defaults.

(a) HMC has made available to FHS true and complete copies, of the

following HMC Contracts (collectively, the “Material Contracts”):

(i) Schedule 4.19(a)(i) contains a complete and accurate list of each

HMC Contract that involves performance of services or delivery of goods or

materials by HMC or its Subsidiaries of an aggregate amount or value in excess of

$50,000;

(ii) Schedule 4.19(a)(ii) contains a complete and accurate list of each

HMC Contract that involves performance of services or delivery of goods or

materials to HMC or its Subsidiaries of an aggregate amount or value in excess of

$50,000;

(iii) Schedule 4.19(a)(iii) contains a complete and accurate list of each

HMC Contract that was not entered into in the Ordinary Course of Business and

that involves aggregate expenditures or receipts by HMC or its Subsidiaries in

excess of $50,000;

(iv) Schedule 4.19(a)(iv) contains a complete and accurate list of each

lease, rental or occupancy agreement, license, installment and conditional sale

agreement, and other HMC Contract to which HMC or an HMC Subsidiary is a

party and that affects the ownership of, leasing of, title to, use of, or any leasehold

or other interest in, any real or personal property (except personal property leases

35 2412814.1

and installment and conditional sales agreements having a value per item or

aggregate payments of less than $50,000 and with terms of less than one year);

(v) Schedule 4.19(a)(v) contains a complete and accurate list of each

licensing agreement or other HMC Contract regarding the use or non-disclosure

of any of the Intellectual Property Assets except for any license or contract

implied by the sale of a product and perpetual licenses for commonly available

software programs with a value of less than $10,000 each under which HMC is

the licensee;

(vi) Schedule 4.19(a)(vi) contains a complete and accurate list of each

collective bargaining agreement between HMC or an HMC Subsidiary and any

labor union;

(vii) Schedule 4.19(a)(vii) contains a complete and accurate list of each

joint venture agreement, partnership agreement, and other HMC Contract

(however named) involving a sharing of profits, losses, costs, or liabilities by

HMC or its Subsidiaries with any other Person;

(viii) Schedule 4.19(a)(viii) contains a complete and accurate list of

each HMC Contract containing covenants that in any way purport to restrict the

business activity of HMC or its Subsidiaries, or limit the freedom of HMC or its

Subsidiaries to engage in any line of business or to compete with any Person;

(ix) Schedule 4.19(a)(ix) contains a complete and accurate list of each

HMC Contract providing for payments in excess of $50,000 to or by any Person

based on sales, purchases, or profits, other than direct payments for goods;

(x) Schedule 4.19(a)(x) contains a complete and accurate list of each

written power of attorney, signed by a duly authorized officer of HMC or an

HMC Subsidiary and that is currently effective and outstanding;

(xi) Schedule 4.19(a)(xi) contains a complete and accurate list of each

HMC Contract entered into other than in the Ordinary Course of Business that

contains or provides for an express undertaking by HMC, its Subsidiaries, or any

JV Entities to be responsible for consequential damages;

(xii) Schedule 4.19(a)(xii) contains a complete and accurate list of each

HMC Contract providing for capital expenditures in an aggregate amount in

excess of $50,000;

(xiii) Schedule 4.19(a)(xiii) contains a complete and accurate list of

each written warranty, guaranty, and or other similar undertaking with respect to

contractual performance extended by HMC or its Subsidiaries other than in the

Ordinary Course of Business;

(xiv) Schedule 4.19(a)(xiv) contains a complete and accurate list of

each HMC Contract with a health care facility; any joint venture agreement with a

36 2412814.1

Person that is a licensed provider of health care services; employment agreements,

independent contractor agreements, or consulting agreements with a physician,

physicians or a physician-owned entity; and any other HMC Contract with any

Person that is a source of referrals to HMC or its Subsidiaries of healthcare

services that are billed to Government Programs, or with Persons for whom HMC

or its Subsidiaries is a source of referrals for healthcare services that are billed to

Government Programs (including physicians, hospitals, skilled nursing facilities,

and provider networks); and

(xv) Schedule 4.19(a)(xv) contains a complete and accurate list of each

material amendment, supplement, and modification in respect of any of the

foregoing.

(b) Except as set forth in Schedule 4.19(b), no member of the HMC Board or

any Governing Body of any of HMC’s Subsidiaries or any officer, agent, employee,

consultant, or contractor of HMC or its Subsidiaries is bound by any Contract that

purports to limit the ability of such HMC Board or Governing Body member, officer,

agent, employee, consultant, or contractor to engage in or continue any conduct, activity,

or practice relating to the business of HMC or its Subsidiaries.

(c) Except as set forth in Schedule 4.19(c), each Contract identified or

required to be identified in Schedule 4.19(a) is in full force and effect and is valid and

enforceable in accordance with its terms.

(d) Except as set forth in Schedule 4.19(d):

(i) HMC and its Subsidiaries are and at all times have been, in full

compliance with all applicable material terms and requirements of each Material

Contract;

(ii) To HMC’s Knowledge, each other Person that has or had any

obligation or liability under any Material Contract at all times has been in material

compliance with all applicable material terms and requirements of such HMC

Contract;

(iii) To HMC’s Knowledge, no event has occurred or circumstance

exists that (with or without notice or lapse of time) may result in a violation or

breach of, or give HMC or its Subsidiaries, or any other Person that is a party to

and bound by a Material Contract, the right to declare a default or exercise any

remedy under, or to accelerate the maturity or performance of, or to terminate for

cause, or unilaterally modify, any Material Contract; and

(iv) neither HMC nor its Subsidiaries has given to or received from any

other Person that is a party to and bound by a Material Contract, at any time

during the term of the Material Contract, any written notice or other written

communication regarding any actual or Threatened violation or breach of, or

default under, any Material Contract.

37 2412814.1

(e) There are no ongoing renegotiations of, outstanding rights to renegotiate,

or attempts to renegotiate, any amounts paid or payable to HMC or its Subsidiaries under

current or completed Material Contracts with any Person, and HMC has received no

written demand for such renegotiation.

(f) The Material Contracts have been entered into in the Ordinary Course of

Business and have been entered into without the commission of any act by HMC or an

HMC Subsidiary, alone or in concert with any other Person, or any consideration having

been paid or promised by HMC or an HMC Subsidiary, that is or would be in violation of

any Legal Requirement.

4.20 Insurance.

(a) Schedule 4.20(a) sets forth a list of all policies of insurance to which

HMC or any of its Subsidiaries is currently a party or under which HMC or any of its

Subsidiaries, any member of the HMC Board or Governing Body of any of HMC’s

Subsidiaries, or any officer or director of HMC or any of its Subsidiaries is currently

covered. For each such policy, Schedule 4.20(a) lists (1) the policy name; (2) the

insurer; (3) coverage amount(s); and (4) the annual premium amount. All such policies

are in full force and effect, and all premiums due and payable thereunder have been paid

in full.

(b) Schedule 4.20(b) sets forth a list of any self-insurance arrangement by or

affecting HMC or any of its Subsidiaries as to which reserves have been established,

including any reserves established thereunder. Each such arrangement has reserves that

are reasonably adequate to provide sufficient coverage of the anticipated risks relating to

HMC or any of its Subsidiaries for which such arrangement was established to cover.

(c) Except as set forth on Schedule 4.20(c):

(d) All policies to which HMC, its Subsidiaries, or JV Entity is a party or that

provide coverage to HMC, its Subsidiaries, or JV Entity or any member of the HMC

Board or any Governing Body of any of HMC’s Subsidiaries or officer of HMC, its

Subsidiaries, or JV Entity:

(i) are valid, outstanding, and enforceable;

(ii) are issued by an insurer that has an A.M. Best financial strength

rating of A or better;

(iii) taken together, provide reasonably adequate insurance coverage for

the assets and the operations of HMC, its Subsidiaries, and JV Entities for all risks

normally insured against by a Person carrying on the same business or businesses

as HMC, its Subsidiaries, and JV Entities and for all risks to which HMC, its

Subsidiaries, and JV Entities are normally exposed;

38 2412814.1

(iv) are reasonably sufficient for compliance with all Legal

Requirements and Contracts to which any HMC, its Subsidiaries, or JV Entity is a

party or by which any of them is bound;

(v) will continue in full force and effect following the consummation

of the Contemplated Transactions; and

(vi) to HMC’s Knowledge, do not provide for any retrospective

premium adjustment or other experienced-based liability on the part of HMC, its

Subsidiaries, or JV Entity.

(vii) Neither HMC, its Subsidiaries, nor JV Entity has received (a) any

refusal of coverage or any notice that a defense will be afforded with reservation

of rights (except for any such reservation received in the Ordinary Course of

Business and which has not had and is not reasonably likely to result in a Material

Adverse Effect), or (b) any notice of cancellation or any other indication that any

insurance policy is no longer in full force or effect or will not be renewed or that

the issuer of any policy is not willing or able to perform its obligations

thereunder.

(viii) HMC, its Subsidiaries, and JV Entities have paid all premiums

due, and have otherwise performed all of their respective obligations, under each

policy to which any HMC, its Subsidiaries, or JV Entity is a party or that provides

coverage to HMC, its Subsidiaries, or JV Entity or director thereof.

(ix) Subject to any exception in the Ordinary Course of Business,

HMC, its Subsidiaries, and JV Entities have given notice to the insurer of all

claims that may be insured thereby.

4.21 Environmental Matters.

(a) Except as set forth in Schedule 4.21(a), HMC and each of its Subsidiaries

is in material compliance with, and has not been, and is not, in violation of or liable

under, any Environmental Law. Neither HMC nor any of its Subsidiaries has received

any Order from any Governmental Authority or any written notice from any private

citizen acting in the public interest, or the current or prior owner or operator of the

Facilities, of any violation or failure to comply with any Environmental Law with respect

to the Facilities or any other properties or assets (whether real, personal, or mixed) in

which HMC or any of its Subsidiaries has had an interest.

(b) There are no pending or Threatened claims, Encumbrances, or other

restrictions of any nature, resulting from any Environmental Liabilities or arising under

or pursuant to any violation by HMC or its Subsidiaries of any Environmental Law that is

likely to have a Material Adverse Effect on HMC.

(c) Neither HMC nor any Subsidiary of HMC has received any citation,

directive, notice, Order, summons, warning, or any other written communication that

relates to any alleged, actual, or potential violation or failure by HMC or its Subsidiaries

39 2412814.1

to comply with any Environmental Law with respect to any property or facility to which

Hazardous Materials generated, manufactured, refined, transferred, imported, used, or

processed by HMC or any of its Subsidiaries, have been transported, treated, stored,

handled, transferred, disposed, recycled, or received that is likely to have a Material

Adverse Effect on HMC.

(d) Neither HMC nor any of HMC’s Subsidiaries has any Environmental

Liabilities that are likely to have a Material Adverse Effect on HMC with respect to the

HMC Facilities or with respect to any other properties and assets (whether real, personal,

or mixed) in which HMC or any of its Subsidiaries (or any predecessor) has an interest

that relate to or arise out of a violation of any Environmental Law.

(e) Except for those Hazardous Materials present in the Ordinary Course of

Business and in compliance with Environmental Laws, there are no Hazardous Materials

present on or in the Environment at the Facilities, including any Hazardous Materials

contained in barrels, above or underground storage tanks, landfills, land deposits, dumps,

equipment (whether moveable or fixed) or other containers, either temporary or

permanent, and deposited or located in land, water, sumps, or any other part of the

Facilities, or incorporated into any structure therein or thereon that would be reasonably

expected to result in a Material Adverse Effect to HMC. Neither HMC nor any

Subsidiary of HMC has permitted or conducted, any Hazardous Activity conducted with

respect to the Facilities or any other properties or assets (whether real, personal, or

mixed) in which HMC or any of its Subsidiaries has or had an interest, except in material

compliance with all applicable Environmental Laws.

(f) There has been no Release or, to HMC’s Knowledge, Threat of Release of

any Hazardous Materials in violation of any Environmental Laws at or from the Facilities

or to HMC’s Knowledge at any other locations where any Hazardous Materials were

generated, manufactured, refined, transferred, produced, imported, used, or processed

from or by the Facilities, or to HMC’s Knowledge from or by any other properties and

assets (whether real, personal, or mixed) in which HMC or any of its Subsidiaries has or

had an interest that is likely to have a Material Adverse Effect on HMC.

(g) HMC has made available to the other Parties true and complete copies and

results of any reports, studies, analyses, tests, or monitoring possessed by HMC and any

of HMC’s Subsidiaries pertaining to Hazardous Materials or Hazardous Activities in, on,

or under the Facilities, or concerning compliance by HMC or any of its Subsidiaries with

Environmental Laws.

4.22 Employees.

(a) HMC has provided to the other Parties a list that is complete and accurate

in all respects as of the date of such list of the following information for each employee

of HMC and each of its Subsidiaries, including each employee on leave of absence or

layoff status: employer; name; job title; current compensation paid or payable; vacation

accrued; and service credited for purposes of vesting and eligibility to participate under

HMC’s or any of its Subsidiaries’ pension, retirement, profit-sharing, thrift-savings,

40 2412814.1

deferred compensation, stock bonus, stock option, cash bonus, employee stock ownership

(including investment credit or payroll stock ownership), severance pay, insurance,

medical, welfare, or vacation plan, or any other HMC Plan.

(b) No key employee or member of the HMC Board or any Governing Body

of any of HMC’s Subsidiaries is a party to, or is otherwise bound by, any agreement or

arrangement, including any confidentiality, noncompetition, or proprietary rights

agreement, between such employee or HMC Board or Governing Body member and any

other Person that in any way affects or will affect, in an adverse manner (1) the

performance of his or her duties as an employee or HMC Board or Governing Body

member of HMC, any of its Subsidiaries, or (2) the ability of HMC or any of its

Subsidiaries to conduct its business. To HMC’s Knowledge, no key employee of HMC

or any of its Subsidiaries intends to terminate his or her employment with HMC or such

Subsidiary.

4.23 Labor Relations; Compliance. Except as set forth on Schedule 4.23, none of the

current or former employees of HMC or any of its Subsidiaries is represented in his or her

capacity as an employee of HMC or any of its Subsidiaries by any labor organization, and

neither HMC nor any of its Subsidiaries is a party to any collective bargaining or other labor

Contract with respect to such current or former employees, and there is no Threatened union

organization activity involving any such employees. There is not presently pending or existing,

and there is not Threatened, (A) any strike, slowdown, picketing or work stoppage, (B) any

Proceeding against or affecting HMC or any of its Subsidiaries relating to the alleged violation

of any Legal Requirement pertaining to labor relations or employment matters, including any

charge or complaint filed by an employee or union with the National Labor Relations Board, the

Equal Employment Opportunity Commission, or any comparable Governmental Authority,

organizational activity, or other labor or employment dispute against or affecting any of HMC or

any of its Subsidiaries, or (C) any application for certification of a collective bargaining agent.

No event has occurred or circumstance exists that could provide the basis for any work stoppage

or other labor dispute of a similar nature that would be disruptive to the operation of the business

of HMC or any of its Subsidiaries. There is no lockout of any employees by HMC or any of its

Subsidiaries, and no such action is contemplated by HMC or any of its Subsidiaries. HMC and

each of its Subsidiaries has complied in all material respects with all Legal Requirements relating

to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours,

classification of employees, benefits, workers compensation, collective bargaining, the collection

and payment of social security and similar taxes, occupational safety and health, and plant

closing. Neither HMC nor any of its Subsidiaries is liable for the payment of any compensation,

damages, taxes, fines, penalties, or other amounts, however designated, for failure to comply

with any of the foregoing Legal Requirements. During the one-year period preceding the date of

this Agreement, neither HMC nor any of its Subsidiaries has effected any “plant closing” or

“mass layoff” within the meaning of the Worker Adjustment and Retraining Notification Act, 29

U.S.C. 2101 et seq., as amended, or any similar state or local law.

4.24 Inventory. To HMC’s Knowledge, all inventory of HMC and its Subsidiaries,

whether or not reflected in the HMC Financial Statements, consists of a quality and quantity

usable and salable in the Ordinary Course of Business, except for obsolete items and items of

below-standard quality, and all such inventory has been written off or written down to net

41 2412814.1

realizable value in the HMC Financial Statements or on the accounting records of HMC as of the

Closing Date, as the case may be. To HMC’s Knowledge, all inventories not written off have

been priced as set forth in the HMC Financial Statements. To HMC’s Knowledge, the quantities

of each item of inventory (whether raw materials, work-in-process, or finished goods) are not

excessive, but are reasonable in the present circumstances of HMC or its Subsidiaries, as

applicable, and consistent with past practice.

4.25 Intellectual Property.

(a) The term “Intellectual Property Assets” includes the following assets,

properties and rights owned by HMC or one of its Subsidiaries or used or held for use at

the Facilities:

(i) all registered fictional business names, trading names, trademarks,

service marks, and applications (collectively, “HMC Marks”);

(ii) all patents, patent applications, and inventions and discoveries that

may be patentable (collectively, “Patents”);

(iii) all copyrights in both published works and unpublished works

(collectively, “Copyrights”); and

(iv) all know-how, trade secrets, confidential information, customer

lists, software, technical information, data, process technology, plans, drawings,

and blue prints (collectively, “Trade Secrets”) owned or used by HMC or any of

its Subsidiaries or licensed by HMC or any of its Subsidiaries as licensee or

licensor.

(b) The Intellectual Property Assets are all those necessary for the operation

of the Facilities as currently conducted. Except as set forth in Schedule 4.25(b), HMC

and its Subsidiaries have the right to use all of the Intellectual Property Assets without

payment to a third party.

(c) Schedule 4.25(c) contains a complete and accurate list and summary

description, including any royalties paid or received by HMC or any of its Subsidiaries,

of all Contracts relating to the Intellectual Property Assets to which HMC or any of its

Subsidiaries is a party or by which HMC or any of its Subsidiaries is bound, except for

any license implied by the sale of a product and perpetual, paid-up licenses for commonly

available software programs with a value of less than $1,000 under which HMC or any of

its Subsidiaries is the licensee. There are no outstanding or Threatened disputes or

disagreements with respect to any such Contract.

(d) Except as set forth in Schedule 4.25(d), all former and current key

employees of HMC and its Subsidiaries have executed written Contracts with HMC or its

Subsidiaries that assign to HMC or its Subsidiaries all rights to any inventions,

improvements, discoveries, or information relating to the operation of the Facilities. To

HMC’s Knowledge no employee of HMC or any of its Subsidiaries has entered into any

Contract that restricts or limits in any way the scope or type of work in which the

42 2412814.1

employee may be engaged or requires the employee to transfer, assign, or disclose

information concerning his work to anyone other than the HMC or one of its

Subsidiaries.

(e) There are no Patents owned by HMC or any of its Subsidiaries.

(f) Schedule 4.25(f) contains a complete and accurate list and summary

description of all HMC Marks. Other than the HMC Marks, HMC and its Subsidiaries

neither own nor use any fictional business names, trade names, registered or unregistered

trademarks or service marks. All HMC Marks that have been registered with the United

States Patent and Trademark Office are currently in compliance with all formal legal

requirements (including the timely post-registration filing of affidavits of use and

incontestability and renewal applications), are valid and enforceable, and are not subject

to any maintenance fees or taxes or actions falling due within ninety (90) days after the

Closing Date. No Mark has been or is now involved in any opposition, invalidation, or

cancellation, and no such action is Threatened with the respect to any of the HMC Marks

and there is no potentially interfering trademark or trademark application of any third

party. No Mark is infringed or has been challenged or Threatened in any way. None of

the HMC Marks infringes or is alleged to infringe any trade name, trademark, or service

mark of any third party. All products and materials containing a Mark bear the proper

federal registration notice where permitted by law

4.26 Accreditation; Participation in Government Programs and Private Programs.

(a) Except for any licensure survey deficiencies noted in HMC’s last

accreditation survey, to HMC’s Knowledge, there are no deficiencies presently in

existence which would preclude accreditation by The Joint Commission or other

reputable accrediting body, or licensure by the Washington State Department of Health, if

the Facilities were inspected. HMC has provided to FHS correct and complete copies of

(a) the most recent report and list of deficiencies, if any, of The Joint Commission for

HMC, (b) the most recent state licensure report and list of deficiencies, if any, relating to

HMC, (c) the most recent fire marshal’s survey for the Facilities and (d) the latest reports

on the facilities or operations of HMC by any federal, state, county or local

Governmental Authority.

(b) Except as set forth in Schedule 4.26(b), as required by applicable

Healthcare Laws, HMC and each of its Subsidiaries have (1) verified that all employees

providing clinical services have valid and current licenses, permits and credentials, and

(2) in place a program to screen, and have screened, all officers, directors, employees and

independent contractors under the list of excluded individuals/entities produced by the

Office of Inspector General of the Department of Health and Human Services or other

Government Authority.

(c) Schedule 4.26(c) sets forth each Government Program and Private

Program for which HMC and each of its Subsidiaries are certified for participation.

Neither HMC nor any of its Subsidiaries has been terminated or, to HMC’s Knowledge,

has been Threatened with termination from participation in Governmental Programs or

43 2412814.1

Private Programs, and, to HMC’s Knowledge, no event has occurred which, with the

giving of notice, the passage of time, or both, would constitute grounds for any such

actions.

4.27 Healthcare Laws.

(a) Except as set forth in Schedules 4.27(a), 4.27(f), and 4.28, HMC and each

of its Subsidiaries are, and within the applicable statutes of limitation have been, in

material compliance with each Healthcare Law that is or was applicable to it or to the

conduct or operation of its business or the ownership or use of any of its assets.

(b) Except as set forth in Schedules 4.27(a), 4.27(f), and 4.28, no event has

occurred or circumstance exists that (with or without notice or lapse of time) (a) may

constitute or result in a material violation by HMC or any of its Subsidiaries of, or a

failure on the part of HMC or any of its Subsidiaries to materially comply with any

Healthcare Laws, or (b) may give rise to any obligation on the part of HMC or any of its

Subsidiaries to undertake, or to bear all or any portion of the cost of, any remedial action

under the Healthcare Laws of any material nature.

(c) Except as set forth in Schedules 4.27(a), 4.27(f), and 4.28, neither HMC

nor any of its Subsidiaries has received any written notice or other written

communication from any Governmental Authority or any other Person acting on behalf

of any Governmental Authority (including, without limitation, any qui tam action), or any

call or other communication through HMC’s compliance hotline reporting system, of (a)

any actual, alleged and reasonably credible material violation of, or material failure to

comply with, any Healthcare Laws, or (b) any actual, alleged and reasonably credible

obligation on the part of HMC or any of its Subsidiaries to undertake, or to bear all or any

portion of the cost of, any remedial action under the Healthcare Laws of any material

nature.

(d) Neither HMC nor any of its Subsidiaries nor any of their Related Persons

or employees is subject to the terms of corporate integrity programs or compliance plans

with a Governmental Authority. HMC has provided to the other Parties a true and

complete copy of any such corporate integrity programs or compliance plans.

(e) Neither HMC nor any of its Subsidiaries has engaged in any activities that

are prohibited under the Federal Controlled Substances Act, 21 U.S.C. §§ 801 et seq., the

Federal Food, Drug and Cosmetic Act, 21 U.S.C. §§ 301 et seq., or the regulations

promulgated pursuant to such statutes or any related state or local statutes or regulations

concerning the dispensing and sale of controlled substances.

(f) HMC has timely filed all Cost Reports required to be filed in accordance

with the Government Programs in which it participates, the Private Programs with which

it is contracted, all fiscal intermediaries and contractors, and other insurance carriers. All

Cost Reports submitted by HMC to Government Programs and Private Programs were

complete and accurate in all material respects when filed and have been prepared in

material compliance with all applicable Healthcare Laws governing reimbursement and

44 2412814.1

payment of claims. HMC has made available to FHS true and complete copies of such

reports and billings for the ten (10) most recent filed years. HMC and each of its

Subsidiaries have paid or caused to be paid in the Ordinary Course of Business all known

and undisputed material refunds, overpayments or adjustments that have become due to

any Government Program or Private Program. Except as set forth in Schedules 4.27(a),

4.27(f), and 4.28, neither HMC nor any of its Subsidiaries (1) has any pending appeals,

adjustments, disputes, contested positions, challenges, litigation, or audits pending by or

before a Government Authority or a Private Program with respect to submitted claims or

cost reports, except for such appeals or individual claim denials that occur in the

Ordinary Course of Business; and (2) HMC has not been audited, surveyed or otherwise

examined in connection with any Government Program or any Private Program other

than audits, surveys or reviews that occur in the Ordinary Course of Business. Neither

HMC nor any of its Subsidiaries has received any notice of denial of a material payment,

recoupment, or overpayment from any Governmental Program or Private Program.

(g) Except as set forth in Schedules 4.27(a), 4.27(f), and 4.28, all Contracts

of HMC and its Subsidiaries with any Government Program or Private Program were

entered into by HMC and its Subsidiaries in the Ordinary Course of Business. HMC and

each of its Subsidiaries is in material compliance with each of its respective Contracts

with any Government Program or Private Program, including requirements to provide

quality assurance services, clinical service management, utilization review, outcomes

monitoring, client satisfaction, or complaint/grievance, credentialing and re-credentialing

programs. HMC has charged and billed in accordance with the terms of its respective

Contracts with any Government Programs or Private Programs, including, where

applicable, billing and collection of all deductibles and co-payments in all material

respects. All claims that have been filed by HMC and each of its Subsidiaries are for

services actually rendered, were properly coded, and were filed in material compliance

with all Government Program and Private Program requirements, including those

regarding physician certification and recertification for services.

(h) No member of the HMC Board or any Governing Body of any of HMC’s

Subsidiaries, or any officer, current employee or former employee (either before or

during the course of such former employee’s employment) of HMC or any of its

Subsidiaries, or any third party vendor or independent contractor of HMC or any of its

Subsidiaries who furnishes services or supplies that may be reimbursed in whole or in

part under any Governmental Program, is excluded, suspended or debarred from

participation, or is otherwise ineligible to participate in any Government Program, or has

been convicted of or charged with any violation of any Legal Requirements related to the

Medicare and Medicaid programs or any other Government Program that is reasonably

likely to serve as the basis for any such exclusion, suspension, debarment or other

ineligibility.

4.28 HIPAA and HITECH Act. HMC and each of its Subsidiaries have (1) completed

reviews, surveys and audits of its business and operations subject to HIPAA to the extent

required for HMC or such Subsidiary to be in compliance with HIPAA, (2) except as set forth in

Schedule 4.28, no material HIPAA Breach has occurred with respect to any unsecured Protected

Health Information maintained by or for HMC or any of its Subsidiaries that is subject to the

45 2412814.1

notification requirements of 45 C.F.R. Part 164, Subpart D, and (3) to HMC’s Knowledge, no

material information security or privacy breach event has occurred that would require

notification under any comparable state Legal Requirements.

4.29 Certain Payments. Neither HMC nor any of its Subsidiaries, nor any member of

the HMC Board or any Governing Body of any Subsidiaries, or any officer, agent or employee of

HMC or any of its Subsidiaries, has directly or indirectly (A) made any contribution, gift, bribe,

rebate, payoff, influence payment, kickback, or other payment to any Person, private or public,

regardless of form, whether in money, property, or services in violation of any Legal

Requirement (1) to obtain favorable treatment in securing business, (2) to pay for favorable

treatment for business secured, or (3) to obtain special concessions or for special concessions

already obtained, for or in respect of HMC or any of its Subsidiaries, or (B) established or

maintained any fund or asset that has not been recorded in the books and records of HMC or any

of its Subsidiaries.

4.30 Medical Staff. HMC has made available to the other Parties a correct and

complete copy of the bylaws and rules and regulations of the medical staff for HMC and each of

its Subsidiaries. To HMC’s Knowledge and except as set forth in Schedule 4.30, with regard to

each such medical staff, there are no pending or Threatened disputes with applicants, staff

members or health professional affiliates. At all times HMC and each of its Subsidiaries has

maintained a process for reviewing the credentials of its medical staff, and The Joint

Commission has not cited HMC or any of its Subsidiaries with any deficiencies in its

credentialing process or its medical staff bylaws.

4.31 Assets Necessary to HMC and HMC’s Subsidiaries. HMC and its Subsidiaries

own, license or lease all of the assets and properties that are presently being used to carry on the

businesses presently conducted by HMC and each of its Subsidiaries.

4.32 Reporting Requirements. To HMC’s Knowledge, HMC has made all required

reports to the Washington Department of Health and to the National Practitioner Data Bank.

4.33 Compliance Program. HMC and its Subsidiaries have implemented a compliance

program in light of the guidance published by the Office of Inspector General of the Department

of Health and Human Services (“OIG”), and the federal sentencing guidelines. HMC has

provided to FHS true, correct and complete copies or summaries of its current compliance

program materials, including without limitation, all program descriptions, compliance work

plans, third party assessments of the Sellers’ compliance program, Independent Review

Organization (“IRO”) reports, compliance officer and committee descriptions, ethics and risk

area policy materials, training and education materials, auditing and monitoring protocols,

reporting mechanisms, and disciplinary policies, and such documents are located in the

electronic virtual data room (“VDR”). Except as set forth in Schedules 4.27(a), 4.27(f), and

4.28, HMC and its Subsidiaries (a) are not currently a party to a corporate integrity agreement,

deferred prosecution agreement, probationary agreement or compliance related settlement

agreement with any Governmental Authority; (b) have no reporting obligations pursuant to any

agreement entered into with any Governmental Authority; (c) are not currently and have not in

the last five (5) years been the subject of any Government Reimbursement Program investigation

conducted by any Governmental Authority; (d) are not currently and have not in the last five (5)

46 2412814.1

years been a defendant in any qui tam / False Claims Act litigation; and (e) have not in the last

five (5) years been served with or received any search warrant, subpoena or civil investigative

demand, or to HMC’s Knowledge receive any contact letter or telephone or personal contact, by

or from any Governmental Authority relating to any actual or alleged noncompliance regarding

healthcare-related Legal Requirements. HMC has provided to FHS a description of each audit

and investigation conducted by HMC pursuant to its compliance program during the last three

(3) years. HMC has provided to FHS a copy of all correspondence with the OIG and HMC’s

IRO, including all IRO reports, annual reports, reportable events and overpayments.

4.34 Brokers Or Finders. Neither HMC nor any of its Subsidiaries has incurred any

obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’

commissions or other similar payment in connection with this Agreement and the Contemplated

Transactions.

4.35 Hill-Burton and Other Liens. To HMC’s Knowledge and except as set forth on

Schedule 4.35, neither HMC nor any of its Subsidiaries have received any loans, grants or loan

guarantees pursuant to the Hill-Burton Act program, the Health Professions Educational

Assistance Act, the Nurse Training Act, the National Health Planning and Resources

Development Act, and the Community Mental Health Centers Act, as amended, or similar laws

or acts relating to health care facilities. The Contemplated Transactions will not result in any

obligation to FHS or any of its Affiliates to repay any of such loans, grants or loan guarantees,

nor subject FHS or any of its Affiliates to any lien, restriction or obligation, including any

requirement to provide uncompensated care.

4.36 Disclosure. No representation or warranty of HMC in this Agreement and no

statement in the Schedules omits to state any fact necessary to make the statements herein or

therein, in light of the circumstances in which they were made, not materially misleading

5. REPRESENTATIONS AND WARRANTIES OF FHS AND FHV

FHS represents and warrants, as of the Commitment Date, with respect to Sections 5.1

through 5.11 to and for the benefit of HMC and FHV, and FHV represents and warrants, as of

the Commitment Date, with respect to Sections 5.12 through 5.17 to and for the benefit of HMC

and FHS:


(a) FHS is duly organized, validly existing, and in good standing under the



own or use.

(b) FHS has provided to HMC true and complete copies of its articles of


affecting Control or governance of FHS, as currently in effect (the “FHS Organizational

Documents”). FHS is not in default under or in violation of any provision of the FHS


47 2412814.1


(a) This Agreement constitutes the legal, valid, and binding obligation of FHS

enforceable against FHS in accordance with its terms. Upon the execution and delivery

by FHS of the agreements, certificates, instruments and other documents to be executed

and delivered by FHS as contemplated by Section 2.4 (the “FHS Closing Documents”),

such agreements, certificates, instruments and other documents will constitute the legal,

valid, and binding obligations of FHS, enforceable against FHS in accordance with their

respective terms, except as limited by applicable bankruptcy, insolvency, reorganization,

moratorium or other laws of general application affecting enforcement of creditors’

rights, and as limited by general principles of equity that restrict the availability of

equitable remedies. FHS has the absolute and unrestricted right, power, and authority to

execute and deliver this Agreement and the FHS Closing Documents and to perform its

obligations hereunder and thereunder.


this Agreement or any of the FHS Closing Documents nor the consummation or

performance by FHS of any of the Contemplated Transactions will, directly or indirectly


violation of (a) any provision of articles of incorporation or bylaws of FHS; (b) any

resolution adopted by the boards of directors or the owners of FHS; (c) contravene or

conflict with, or result in a violation of, or give any Governmental Authority or other

Person the right to challenge any of the Contemplated Transactions or to exercise any

remedy or obtain any relief under, any Legal Requirement or any Order to which FHS

may be subject; (d) contravene or conflict with any Contract to which FHS is a party or

by which FHS may be bound.

(c) Except as set forth in Schedule 5.2, FHS is not and will not be required to

obtain any Consent from any Person in connection with the execution and delivery of this

Agreement or the consummation or performance of any of the Contemplated

Transactions.

5.3 Certain Proceedings. There is no pending Proceeding that has been commenced

against FHS that challenges, or may have the effect of preventing, delaying, making illegal, or

otherwise interfering with, any of the Contemplated Transactions. To FHS’s Knowledge, no

such Proceeding has been Threatened.

5.4 Directors, Trustees and Officers. Schedule 5.5 lists all directors, trustees and

executive officers of FHS.

5.5 Financial Statements. FHS provided to HMC: (A) unaudited consolidated

balance sheets of FHS as of June 30 in each of the years 2011 and 2012, and the related

consolidated statements of operations, changes in net assets, and cash flows for each of the fiscal

years then ended (“FHS Financial Statements”). The FHS Financial Statements fairly present in

all material respects the financial condition and the results of operations, changes in net assets,

and cash flows of FHS and its Subsidiaries, as the case may be, as of the respective dates of and

48 2412814.1

for the periods referred to in such FHS Financial Statements, subject to recurring year-end

adjustments and the absence of notes.

5.6 No Undisclosed Liabilities. To FHS’s Knowledge, except to the extent reflected

or reserved against on the FHS Financial Statements, neither FHS nor any of its Subsidiaries, has

any liabilities or obligations of a nature, whether absolute, accrued, contingent or otherwise, due

or to become due, that are required under GAAP to be disclosed in financial statements

(including the notes thereto), other than liabilities or obligations incurred in the Ordinary Course

of Business since April 30, 2013.

5.7 Taxes. FHS is recognized as exempt from federal income taxation under Section

501(c)(3) of the IRC. FHS is not subject to, nor has it received a notice of, any action by the IRS

to revoke or terminate the tax-exempt status of FHS.

5.8 No Material Adverse Effect. Since April 30, 2013, no event has occurred or

circumstance exists that has had or is reasonably likely to have a Material Adverse Effect on

FHS.

5.9 Legal Requirements; Healthcare Laws. Only to the extent that the failure or

breach of the following representations and warranties would materially affect the ability of FHS

to close the Contemplated Transactions or fulfill its obligations herein, except as set forth on

Schedule 5.9:

(a) FHS is, and has been, in material compliance with each Legal

Requirement that is or was during the applicable statute of limitations applicable to it and

which are material to the conduct or operation of its business or the ownership or use of

any of its assets.

(b) No event has occurred or circumstance exists that (with or without notice

or lapse of time) (a) may constitute or result in a material violation by FHS or any of its

Subsidiaries of, or a failure on the part of FHS or any of its Subsidiaries to materially

comply with, any material Legal Requirement, or (b) may give rise to any obligation on

the part of FHS or any of its Subsidiaries to undertake, or to bear all or any portion of the

cost of, any remedial action under the Legal Requirement of any material nature.

(c) Neither FHS nor any of its Subsidiaries has received any written notice or

other written communication from any Governmental Authority or any other Person

acting on behalf of any Governmental Authority, of (a) any actual, alleged and

reasonably credible material violation of, or material failure to comply with, any Legal

Requirement, or (b) any actual, alleged and reasonably credible obligation on the part of

FHS or any of its Subsidiaries to undertake, or to bear all or any portion of the cost of,

any remedial action under the Legal Requirement of any material nature.

(d) FHS and each of its Subsidiaries is, and within the past five (5) years has

been, in material compliance with each Healthcare Law that is or was applicable to it or

to the conduct or operation of its business or the ownership or use of any of its assets. No

event has occurred or circumstance exists that (with or without notice or lapse of time)

could reasonably be expected to (a) constitute or result in a violation by FHS or any of its

49 2412814.1

Subsidiaries, or a failure on the part of FHS or any of its Subsidiaries to materially

comply with any Healthcare Laws, or (b) give rise to any obligation on the part of FHS to

undertake, or to bear all or any portion of the cost of, any remedial action under the

Healthcare Laws of any material nature. All facilities owned or operated by FHS are

licensed in accordance with all Legal Requirements and certified and/or accredited by

applicable Governmental Authorities, Government Programs, and accrediting

organizations.

(e) No member of the FHS board of directors or of any Governing Body of an

FHS Affiliate, or any officer, current employee or former employee (either before or

during the course of such former employee’s employment) of FHS or an FHS Affiliate,

or any third party vendor or independent contractor who furnishes to FHS or an FHS

Affiliate services or supplies that may be reimbursed in whole or in part under any

Government Program, is excluded, suspended or debarred from participation, or is

otherwise ineligible to participate in any Government Program, or has been convicted of

any criminal violation of any Legal Requirements related to Government Programs that is

reasonably likely to serve as the basis for any such exclusion, suspension, debarment or

other ineligibility.

(f) Neither FHS nor any of its Subsidiaries, nor any member of the FHS

Board or any Governing Body of any Subsidiaries, or any officer, agent or employee of

FHS or any of its Subsidiaries, has directly or indirectly (A) made any contribution, gift,

bribe, rebate, payoff, influence payment, kickback, or other payment to any Person,

private or public, regardless of form, whether in money, property, or services in violation

of any Legal Requirement (1) to obtain favorable treatment in securing business, (2) to

pay for favorable treatment for business secured, or (3) to obtain special concessions or

for special concessions already obtained, for or in respect of FHS or any of its

Subsidiaries that is likely to have a Material Adverse Effect on FHS, or (B) established or

maintained any fund or asset that has not been recorded in the books and records of FHS

or any of its Subsidiaries.

5.10 Brokers or Finders. FHS and its officers and agents have incurred no obligation

or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or

other similar payment in connection with this Agreement.

5.11 Disclosure. No representation or warranty of FHS in this Agreement and no


therein, in light of the circumstances in which they were made, not materially misleading.


(a) FHV is duly organized, validly existing, and in good standing under the



own or use.

50 2412814.1

(b) FHV has provided to HMC true and complete copies of its articles of


affecting Control or governance of FHV, as currently in effect (the “FHV Organizational

Documents”). FHV is not in default under or in violation of any provision of the FHV



(a) This Agreement constitutes the legal, valid, and binding obligation of

FHV enforceable against FHV in accordance with its terms. Upon the execution and

delivery by FHV of the agreements, certificates, instruments and other documents to be

executed and delivered by FHV as contemplated by Section 2.4 (the “FHV Closing

Documents”), such agreements, certificates, instruments and other documents will

constitute the legal, valid, and binding obligations of FHV, enforceable against FHV in

accordance with their respective terms, except as limited by applicable bankruptcy,

insolvency, reorganization, moratorium or other laws of general application affecting

enforcement of creditors’ rights, and as limited by general principles of equity that

restrict the availability of equitable remedies. FHV has the absolute and unrestricted

right, power, and authority to execute and deliver this Agreement and the FHV Closing

Documents and to perform its obligations hereunder and thereunder.


this Agreement or any of the FHV Closing Documents nor the consummation or

performance by FHV of any of the Contemplated Transactions will, directly or indirectly


violation of (a) any provision of the FHV Organizational Documents; (b) any resolution

adopted by the boards of directors or the owners of FHV; (c) contravene or conflict with,

or result in a violation of, or give any Governmental Authority or other Person the right

to challenge any of the Contemplated Transactions or to exercise any remedy or obtain

any relief under, any Legal Requirement or any Order to which FHV may be subject; (d)

contravene or conflict with any Contract to which FHV is a party or by which FHV may

be bound.

(c) Except as set forth in Schedule 5.13, FHV is not and will not be required

to obtain any Consent from any Person in connection with the execution and delivery of

this Agreement or the consummation or performance of any of the Contemplated

Transactions.

5.14 Certain Proceedings. There is no pending Proceeding that has been commenced

against FHV that challenges, or may have the effect of preventing, delaying, making illegal, or

otherwise interfering with, any of the Contemplated Transactions. To FHV’s Knowledge, no

such Proceeding has been Threatened.

5.15 Directors, Trustees, and Officers. Schedule 5.15 lists all directors, trustees and

executive officers of FHV.

51 2412814.1

5.16 Brokers or Finders. FHV and its officers and agents have incurred no obligation

or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or

other similar payment in connection with this Agreement.

5.17 Disclosure. No representation or warranty of FHV in this Agreement and no


therein, in light of the circumstances in which they were made, not materially misleading.

6. PRE-CLOSING COVENANTS OF HMC

6.1 Access. Between the Commitment Date and the Closing Date, HMC will, and

will cause each of its Subsidiaries, each JV Entity and their respective Representatives to,

(A) afford FHS, FHV, and their respective Representatives reasonable access during regular

business hours to HMC, its Subsidiaries and JV Entities personnel, properties, contracts, books

and records, and other documents and data, (B) make available to FHS, FHV, and their

respective Representatives with access to copies of all such contracts, books and records, and

other existing documents and data as FHS or FHV may reasonably request, and (C) furnish to

FHS, FHV, and their respective Representatives with access to such additional financial,

operating, and other data and information in HMC’s possession or control, as FHS or FHV may

reasonably request, and use its best efforts to make available to FHS and FHV any such

information not in its possession or control. The foregoing access shall require reasonable

advance notice and shall be accomplished in a manner that does not unduly interfere with or

disrupt the operations of HMC, its Subsidiaries, and the JV Entities and the activities of their

respective personnel. In addition, the foregoing access shall be provided and conducted in

accordance with the guidelines adopted by the Parties for due diligence and confidentiality, and

specific access may be subject to confidentiality obligations to which HMC, its Subsidiaries,

and/or the JV Entities are bound.

6.2 Operation of the Businesses of HMC, Subsidiaries, and JV Entities. Except as set

forth on Schedule 6.2, between the Commitment Date and the Closing Date, HMC will, and will

cause its Subsidiaries and JV Entities to:

(a) conduct its business and the business of the Subsidiaries and the

JV Entities in all respects only in the Ordinary Course of Business (including, without

limitation, the collection of receivables, purchase of inventory, provision of services,

payment of payables, incurrence and payment or financing of capital expenditures (as

scheduled in the current fiscal year capital expenditure budget) and payment of care

providers and other vendors);

(b) preserve intact, its current business organization and the current business

organization of the Subsidiaries and JV Entities, keep available the services of the current

officers, employees, and agents of HMC, its Subsidiaries, and JV Entities, and maintain

the relations and good will with physicians, patients, suppliers, customers, landlords,

creditors, employees, agents, and others having business relationships with HMC, the

Subsidiaries, or JV Entity, as applicable;

52 2412814.1

(c) confer with FHS and FHV concerning operational matters of a material

nature, to the extent permitted by applicable law;

(d) otherwise report periodically to FHS and FHV at FHS’s or FHV’s

reasonable request concerning the status of the business, operations, and finances of

HMC, a Subsidiary, or JV Entity as may be reasonably requested by FHS or FHV; and

(e) manage its working capital and the working capital of the Subsidiaries

and, the JV Entities in the Ordinary Course of Business.

6.3 Negative Covenant. Except as otherwise expressly permitted by this Agreement,

between the Commitment Date and the Closing Date, HMC will not, and will cause each

Subsidiary and (to the extent within its Control) JV Entity not to, without the prior consent of

FHS and FHV, take any affirmative action, or fail to take any reasonable action within their or its

control, as a result of which any of the changes or events listed in Section 4.18 is likely to occur.

6.4 Required Approvals. As promptly as practicable after the Commitment Date,

HMC will, and will cause each Subsidiary and (to the extent within its Control) JV Entity to,

make all filings required by Legal Requirements to be made by them in order to consummate the

Contemplated Transactions. Between the Commitment Date and the Closing Date, HMC will,

and will cause each Subsidiary and (to the extent within its Control) JV Entity to, (A) cooperate

with FHS and FHV with respect to all filings that FHS or FHV elects to make or is required by

Legal Requirements to make in connection with the Contemplated Transactions on its own

behalf or behalf of FHS or FHV necessary under applicable Legal Requirements to consummate

the Contemplated Transactions, including, without limitation, a certificate of need determination

of non-reviewability from the Washington State Department of Health, and (B) cooperate with

FHS and FHV in obtaining all consents identified in Schedule 4.2.

6.5 Notification. Between the Commitment Date and the Closing Date, HMC will

promptly notify FHS and FHV in writing if HMC, any Subsidiary, or any JV Entity becomes

aware of any fact or condition that causes or constitutes a Breach of any of HMC’s

representations and warranties as of the Commitment Date, or if HMC, any Subsidiary, or any

JV Entity becomes aware of the occurrence after the Commitment Date of any fact or condition

that would (except as expressly contemplated by this Agreement) cause or constitute a Breach of

any such representation or warranty had such representation or warranty been made as of the

time of occurrence or discovery of such fact or condition. Should any such fact or condition

require any change in the Schedules if the Schedules were dated the date of the occurrence or

discovery of any such fact or condition, HMC will promptly deliver to FHS and FHV a

supplement to the Schedules specifying such change. During the same period, HMC will

promptly notify FHS and FHV of the occurrence of any Breach of any covenant of HMC in this

Article 6 or of the occurrence of any event that may make the satisfaction of the conditions in

Article 11 impossible or unlikely.

6.6 No Negotiation. Until the earlier of the Closing Date or such time, if any, as this

Agreement is terminated pursuant to Section 13.6, HMC will not, and will cause each HMC

Subsidiary and, to the extent within its Control, JV Entity and each of its and their respective

Representatives not to, directly or indirectly solicit, initiate, or encourage any inquiries or

53 2412814.1

proposals from, discuss or negotiate with, provide any non-public information to, or consider the

merits of any unsolicited inquiries or proposals from, any Person (other than FHS or FHV)

relating to any transaction involving the sale of the business or assets (other than in the Ordinary

Course of Business) of HMC, any Subsidiary, or JV Entity, or any of the capital stock or any

other equity securities of HMC, any Subsidiary, or JV Entity, or any merger, consolidation,

business combination, or similar transaction involving HMC, any Subsidiary, or JV Entity.

6.7 Hart-Scott-Rodino Act Filings. To the extent required by law, HMC shall use

commercially reasonable efforts to (i) make the filings required of HMC under the Hart-Scott-

Rodino Antitrust Improvements Act of 1976 and the rules and regulations promulgated

thereunder (the “HSR Act”) not later than ten (10) days after the Commitment Date; (ii) comply

at the earliest practicable date with any request for additional information received by HMC or

an Affiliate of HMC from the Federal Trade Commission (the “FTC”) or Antitrust Division of

the Department of Justice (the “DOJ”) pursuant to the HSR Act; (iii) cooperate with FHS and

FHV in connection with FHS’s and FHV’s filings under the HSR Act and in connection with

resolving any investigation or other regulatory inquiry concerning the Contemplated

Transactions commenced by either the FTC or the DOJ; and (iv) thereafter, as promptly as

practicable, respond to any government requests for information and make any other required

submission under the HSR Act.

6.8 Closing Conditions. From the Commitment Date until the Closing Date, HMC

will use commercially reasonable efforts to cause the conditions specified in this Agreement over

which HMC has control to be satisfied as soon as reasonably practicable, but in all events before

the Closing Date.

7. PRE-CLOSING COVENANTS OF FHS AND FHV

7.1 Access. Between the Commitment Date and the Closing Date, each of FHS and

FHV will, and will cause each of their respective Subsidiaries, each of their respective JV

Entities and their respective Representatives to, (A) afford HMC and its Representatives

reasonable access during regular business hours to FHS and FHV, and their respective

Subsidiaries and JV Entities personnel, properties, contracts, books and records, and other

documents and data, (B) make available to HMC and its Representatives with access to copies of

all such contracts, books and records, and other existing documents and data as HMC may

reasonably request, and (C) furnish to HMC and its Representatives with access to such

additional financial, operating, and other data and information in FHS’s or FHV’s possession or

control, as HMC may reasonably request, and use its best efforts to make available to HMC any

such information not in its possession or control. The foregoing access shall require reasonable

advance notice and shall be accomplished in a manner that does not unduly interfere with or

disrupt the operations of FHS or FHV, their respective Subsidiaries, and their respective JV

Entities and the activities of their respective personnel. In addition, the foregoing access shall be

provided and conducted in accordance with the guidelines adopted by the Parties for due

diligence and confidentiality, and specific access may be subject to confidentiality obligations to

which FHS, FHV, or their respective Subsidiaries, and/or their respective JV Entities are bound.

7.2 Required Approvals. As promptly as practicable after the Commitment Date,

FHS will, and will cause each Subsidiary and (to the extent within its Control) JV Entity to,

54 2412814.1

make all filings required by Legal Requirements to be made by them in order to consummate the

Contemplated Transactions. Between the Commitment Date and the Closing Date, FHS will,

and will cause each Subsidiary and (to the extent within its Control) JV Entity to, (A) cooperate

with HMC with respect to all filings that HMC elects to make or is required by Legal

Requirements to make in connection with the Contemplated Transactions on its own behalf or

behalf of HMC necessary under applicable Legal Requirements to consummate the

Contemplated Transactions, including, without limitation, a certificate of need determination of

non-reviewability from the Washington State Department of Health, and (B) cooperate with

HMC in obtaining all consents identified in Schedules 4.2 and 5.2.

7.3 Notification. Between the Commitment Date and the Closing Date, FHS and

FHV will promptly notify HMC in writing if: (i) FHS or FHV or any Affiliate of FHS or FHV,

as applicable, becomes aware of any fact or condition that causes or constitutes a Breach of any

of FHS’s or FHV’s representations and warranties as of the Commitment Date, or if FHS or

FHV, or any Affiliate of FHS or FHV, as applicable, becomes aware of the occurrence after the

Commitment Date of any fact or condition that would (except as expressly contemplated by this

Agreement) cause or constitute a Breach of any such representation or warranty had such

representation or warranty been made as of the time of occurrence or discovery of such fact or

condition; or (ii) there is an occurrence of any Breach of any covenant of FHS or FHV, as

applicable, in this Article 7 or of the occurrence of any event that may make the satisfaction of

the conditions in Article 12 impossible or unlikely. During the same period, FHS, CHI, and FHV

will promptly notify HMC in writing if FHS, CHI, or FHV, as applicable, becomes aware of any

fact or condition that could materially affect the Contemplated Transactions and then only to the

extent that such written notification does not violate any Legal Requirements or any

confidentiality or nondisclosure agreement to which FHS, CHI, or FHV is bound.

7.4 No Negotiation. Until the earlier of the Closing Date or such time, if any, as this

Agreement is terminated pursuant to Section 13.7, FHS and FHV will provide prior notice to

HMC if FHS, FHV, or any FHS or FHV Affiliates, as applicable, including their respective

Representatives, directly or indirectly solicit, initiate, or make any inquiries or proposals to,

discuss or negotiate with, provide any non-public information to, or consider the merits of or

respond to any unsolicited inquiries or proposals from, any Person other than HMC relating to

any transaction involving a corporate affiliation similar to the Contemplated Transactions with,

purchase of assets from, merger, or other consolidation with any Person other than HMC

operating an acute care facility in Kitsap County. Neither FHS nor FHV will, and will cause their

respective Affiliates not to, including their respective Representatives, directly or indirectly,

initiate new discussions or enter into any business relationship with healthcare service providers

that would interfere with HMC’s relationships with healthcare service providers or impact

HMC’s ability to continue providing the services being provided by HMC as of the Commitment

Date.

7.5 Hart-Scott-Rodino Act Filings. To the extent required by law, FHS and FHV

shall use commercially reasonable efforts to (i) make the initial filings required of FHS or FHV,

as applicable, under the HSR Act not later than ten (10) days after the Commitment Date;

(ii) comply at the earliest practicable date with any request for additional information received by

FHS, FHV, or their respective Affiliates, as applicable, from the FTC pursuant to the HSR Act;

(iii) cooperate with HMC in connection with HMC’s or a HMC Affiliate’s filings under the HSR

55 2412814.1

Act and in connection with resolving any investigation or other regulatory inquiry concerning the

Contemplated Transactions commenced by either the FTC or the DOJ; and (iv) thereafter, as

promptly as practicable, respond to any government requests for information and make any other

required submission under the HSR Act.

7.6 Closing Conditions. From the Commitment Date until the Closing Date, FHS and

FHV will use commercially reasonable efforts to cause the conditions specified in this

Agreement over which FHS or FHV, as applicable, has control to be satisfied as soon as

reasonably practicable, but in all events before the Closing Date.

8. EMPLOYMENT MATTERS

8.1 HMC Employees. Except as provided below, the Parties agree that the employees

of HMC and its Subsidiaries as of the Closing Date (“Employees”) shall continue to be

employed by their respective employers immediately following the Closing Date. No Employee

will be terminated from employment solely because of or as a direct result of the Closing of the

Contemplated Transactions; provided however that the foregoing will not restrict the right of

HMC or any HMC Subsidiary to terminate any Employee, with or without cause, or engage in

workforce reductions prior to or following the Closing Date to the extent such termination or

reductions are consistent with then current applicable collective bargaining agreements,

applicable employment agreements, and applicable Legal Requirements. Within a reasonable

time after Closing, employees may be transitioned to compensation and benefits, employment

practices, access to education and training programs consistent with FHS employees serving in

comparable positions. As of the Closing Date, Employees will have an equal opportunity to

apply for positions at Affiliates of FHS, including, without limitation, CHI; provided, however,

that neither FHS, CHI, nor or any of their respective Affiliates can guarantee the availability of

any such positions or the hiring of any Employee.

8.2 Benefits. All HMC Plans and HMC Other Benefit Obligations existing as of the

Closing Date, including those providing contraceptive benefits, will remain in full force and

effect after the Closing Date until the same are amended, modified, replaced, or terminated in

accordance with the provisions of those Plans, Benefit Obligations, and Legal Requirements.

Following the Closing, Employees will retain full recognition and credit for then current years of

employment experience with the applicable employer for purposes of seniority recognition,

benefits eligibility, and accrual of paid time off. All executive benefit plans, deferred

compensation plans, supplemental executive retirement plans, and other executive pension plans

of HMC and its Subsidiaries existing as of the Closing Date will remain in full force and effect

following the Closing until the same are amended, modified, replaced, or terminated in

accordance with the provisions of those plans.

9. MEDICAL STAFF MATTERS

On and after the Closing, the HMC Medical Staff will remain independent of the centralized

medical staff of FHS and any medical staff at other FHS hospitals, and the HMC Medical Staff

will continue to be governed by the HMC Board pursuant to the HMC Medical Staff Bylaws.

Closing of the Contemplated Transactions and operation of HMC thereafter will not cause any

change, without the consent of a majority of the voting members of the HMC Medical Staff, to

56 2412814.1

(i) the HMC Medical Staff Bylaws and Rules and Regulations existing as of the Closing Date,

(ii) the appointments and privileges of the Medical Staff members existing as of the Closing

Date, or (iii) the appointments of Medical Staff leadership existing as of the Closing Date. The

Closing will not result in any need for any members of the HMC Medical Staff to make re-

application for then existing privileges, except as otherwise required by the HMC Medical Staff

Bylaws according to the re-application requirements set forth therein. At or after Closing, FHS

will not remove from office the then current or any incoming HMC Medical Staff officers except

in accordance with the HMC medical staff bylaws then in effect.

10. FINANCIAL MATTERS

10.1 Fiscal Year. Effective as of the Closing Date, HMC will have a fiscal year ending

June 30.

10.2 Debt Financing. After Closing, HMC will have access to capital through the CHI

combined treasury function consistent with the CHI capital allocation process, and the Parties

further intend that CHI debt financing will be made available to HMC.

10.3 Cash and Investments. After Closing, and for so long as HMC remains a separate

corporation, FHS and/or FHV shall maintain HMC’s cash and investments on HMC’s balance

sheet, provided that all cash and investments will be managed, invested and directed by CHI’s

treasury department pursuant to the CHI cash management policy, as in effect from time to time.

During the Initial Capital Commitment Period, FHS and/or FHV shall maintain: (i) HMC’s days

cash on hand in an amount no less than HMC’s days cash on hand as of Closing, plus or minus

ten percent (10%) (“Days Cash on Hand Threshold”); and (ii) an HMC debt-to-capitalization

ratio of no more than 60% (“Debt to Capitalization Threshold”). The Days Cash on Hand

Threshold and the Debt to Capitalization Threshold will remain in effect until the satisfaction of

the obligations in Section 13.1. Notwithstanding the preceding subsections (i) and/or (ii), CHI

shall have the power to transfer assets of HMC pursuant to Section 4.4.2 of the Restated Bylaws

even if such transfer results in HMC cash falling below the Days Cash on Hand Threshold or

HMC debt to exceed the Debt to Capitalization Threshold, provided, however, that FHS and/or

FHV will replace sufficient cash in HMC so that it meets the Days Cash on Hand Threshold and

the Debt to Capitalization Threshold no later than the Expiration Date unless otherwise mutually

agreed. In the event HMC cash falls below the Days Cash on Hand Threshold due to a breach by

HMC of its representations in Article 4, FHS and/or FHV will have the option to reduce the Days

Cash on Hand Threshold based on the dollar value reasonably attributable to the breach of

representation, but only if FHS and/or FHV does not exercise its set-off right in Section 7.b. of

the Oversight Agreement due to the same breach and only if the dollar value reasonably

attributable to the breach of representation exceeds $[REDACTED].

10.4 Overhead Expense Allocation. After Closing, FHS and/or FHV will allocate

FHS, FHV, and CHI overhead expenses to HMC consistent with then current policies and

procedures applicable to FHS.

57 2412814.1

11. CONDITIONS PRECEDENT TO OBLIGATIONS OF HMC

HMC’s obligations under this Agreement are subject to the satisfaction, at or prior to the

Closing, of each of the following conditions (any of which may be waived by HMC, in whole or

in part):

11.1 Accuracy of Representations. Each of FHS’s and FHV’s respective

representations and warranties in this Agreement must have been accurate in all material respects

as of the Commitment Date, and must be accurate in all material respects as of the Closing Date

as if made on the Closing Date, without giving effect to any supplement to the Schedules. For

the purposes of avoiding more than a single materiality qualifier applying to any provisions, each

of the representations and warranties in this Agreement that contains an express materiality

qualification or is subject to a Material Adverse Effect qualifier shall have been accurate in all

respects as of the Commitment Date, and shall be accurate in all respects as of the Effective Date

and the Closing Date as if then made. All disclosures contained in any supplement to the

Schedules shall be acceptable to HMC in its sole and absolute discretion.

11.2 FHS’s and FHV’s Performance.

(a) Each of the covenants and obligations that FHS and FHV is required to

perform or to comply with pursuant to this Agreement at or prior to the Closing must

have been duly performed and complied with in all material respects.

(b) Each document required to be delivered pursuant to Section 2.4 must have

been delivered as required therein.

11.3 Consents. Each Consent identified in Schedule 11.3, must have been obtained

and must be in full force and effect.

11.4 No Proceedings. Since the Commitment Date, there must not have been

commenced or Threatened against HMC, or against any Subsidiary of HMC, or any JV Entity,

any Proceeding (A) involving any challenge to, or seeking damages or other relief in connection

with, any of the Contemplated Transactions, or (B) that may have the effect of preventing,

delaying, making illegal, or otherwise interfering with any of the Contemplated Transactions.

11.5 Department of Health Notification. FHS shall have received from the

Washington State Department of Health, a determination that the Contemplated Transactions are

not subject to Certificate of Need review.

11.6 No Prohibition. Neither the consummation nor the performance of any of the

Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time),

because of any change in applicable law or other event outside HMC’s control which occurs

after the date hereof and prior to the Closing Date, contravene, or conflict with, or result in a

violation of, or cause HMC or any HMC Subsidiary or JV Entity to suffer any adverse change

under, (A) any applicable Legal Requirement or Order, or (B) any Legal Requirement or Order

that has been published, introduced, or otherwise proposed by or before any Governmental

Authority.

58 2412814.1

11.7 Hart-Scott-Rodino Act Filings. All filings required to be made and notices

required to be given pursuant to the HSR Act shall have been made, all approvals or consents

required thereby shall have been obtained and the waiting periods required thereby, if any, shall

have expired or terminated.

11.8 Strategic and Integration Plans. The Parties will have agreed to the strategic and

integration plans described in Sections 13.3 and 13.4.

11.9 Due Diligence. HMC shall have completed its due diligence investigation of

FHS, FHV, and CHI, their Subsidiaries, and JV Entities, confirming that the health system

businesses, the facilities, assets, financial, and legal condition of FHS, FHV, CHI, their

Subsidiaries, and JV Entities are satisfactory to HMC in its sole discretion.

12. CONDITIONS PRECEDENT TO OBLIGATIONS OF FHS AND FHV

FHS’s and FHV’s respective obligations under this Agreement are subject to the satisfaction, at

or prior to the Closing, of each of the following conditions (any of which may be waived by FHS

or FHV, as applicable, in whole or in part):

12.1 Accuracy of Representations. Each of HMC’s representations and warranties

must have been accurate in all material respects as of the Commitment Date, and must be

accurate in all material respects as of the Closing Date as if made on the Closing Date, without

giving effect to any supplement to the Schedules. For the purposes of avoiding more than a

single materiality qualifier applying to any provisions, each of the representations and warranties

in this Agreement that contains an express materiality qualification or is subject to a Material

Adverse Effect qualifier shall have been accurate in all respects as of the Commitment Date, and

shall be accurate in all respects as of the Effective Date and the Closing Date as if then made. All

disclosures contained in any supplement to the Schedules shall be acceptable to FHS and FHV in

their sole and absolute discretion.

12.2 HMC’s Performance.

(a) Each of the covenants and obligations that HMC is required to perform or

to comply with pursuant to this Agreement at or prior to the Closing must have been duly

performed and complied with in all respects.

(b) Each document required to be delivered pursuant to Section 2.3 must have

been delivered as required therein.

12.3 Consents. Each Consent identified in Schedule 12.3, must have been obtained

and must be in full force and effect.

12.4 No Proceedings. Since the Commitment Date, there must not have been

commenced or Threatened against FHS or FHV, or against any Affiliate of FHS or FHV, any

Proceeding (A) involving any challenge to, or seeking damages or other relief in connection

with, any of the Contemplated Transactions, or (B) that may have the effect of preventing,

delaying, making illegal, or otherwise interfering with any of the Contemplated Transactions.

59 2412814.1

12.5 Department of Health Notification. FHV shall have received from the

Washington State Department of Health, a determination that the Contemplated Transactions are

not subject to Certificate of Need review.

12.6 No Prohibition. Neither the consummation nor the performance of any of the

Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time),

because of any change in applicable law or other event outside FHS’s or FHV’s control which

occurs after the date hereof and prior to the Closing Date, contravene, or conflict with, or result

in a violation of, or cause FHS, FHV, or an Affiliate of FHS or FHV to suffer any adverse

change under, (A) any applicable Legal Requirement or Order, or (B) any Legal Requirement or

Order that has been published, introduced, or otherwise proposed by or before any Governmental

Authority.

12.7 Hart Scott Rodino Filings. All filings required to be made and notices required to

be given pursuant to the HSR Act shall have been made, all approvals or consents required

thereby shall have been obtained and the waiting periods required thereby, if any, shall have

expired or terminated.

12.8 Change of Membership Approval. The Restated Articles shall have been filed

with the Washington Secretary of State with a future effective date provided therein dated as of

the Closing Date.

12.9 Approval of Roman Catholic Church. With respect to FHS, FHS shall have

received any required approvals of the Roman Catholic Church required to be obtained by FHS

or any Affiliate of FHS under canon law, regarding the FHS’s execution of this Agreement and

the consummation of the Contemplated Transactions.

12.10 Due Diligence. With respect to FHS, FHS shall have completed its due diligence

investigation of FHV and HMC, its Subsidiaries, and JV Entities, confirming that the Health

System Businesses, the Facilities, assets, financial, and legal condition of HMC, its Subsidiaries,

and JV Entities are satisfactory to FHS in its sole discretion. With respect to FHV, FHV shall

have completed its due diligence investigation of HMC, its Subsidiaries, and JV Entities,

confirming that the Health System Businesses, the Facilities, assets, financial, and legal

condition of HMC, its Subsidiaries, and JV Entities are satisfactory to FHV in its sole discretion.

12.11 Strategic and Integration Plans. The Parties will have agreed to the strategic and

integration plans described in Section 13.3 and 13.4.

13. ADDITIONAL COVENANTS

13.1 Post-Closing Capital Commitment. During the five (5) year period following the

Closing or such longer period as the parties may establish by mutual agreement as described

below in this Section 13.1 (the “Initial Capital Commitment Period”), FHS must spend, or cause

HMC to spend in the manner set forth below, collectively, at least [REDACTED] Dollars

($[REDACTED]) for non-routine and non-maintenance capital expenditures for the Health

System Businesses to sustain and grow the healthcare mission of HMC within Kitsap, Mason,

Jefferson, and Clallam Counties and for routine capital projects within Kitsap, Mason, Jefferson,

and Clallam Counties (the “Capital Fund”). No portion of the Capital Fund shall be used to fund

60 2412814.1

capital projects to which HMC has allocated capital funds from Project Funds as defined in the

Bond Indenture dated June 1, 2012 for the Series 2012A Revenue Bonds issued on behalf of

HMC by the Washington Health Care Facilities Authority, in the Bond Indenture dated June 1,

2012 for the Series 2012B Revenue Bonds issued on behalf of HMC by the Washington Health

Care Facilities Authority or in the Supplemental Trust Indenture No. 2 dated April 1, 2010 for

the Series 2010 Revenue Bonds issued on behalf of HMC by the Washington Health Care

Facilities Authority. The Capital Fund shall be funded as follows: (i) first, from excess cash

from operations of the Health System Businesses, but only to the extent that the Days Cash on

Hand Threshold and Debt to Capitalization Threshold are maintained (the “First Funding

Source”); (ii) second, from borrowing, but only to the extent that the Days Cash on Hand

Threshold and Debt to Capitalization Threshold are maintained (the “Second Funding Source”);

and (iii) third, from additional cash contributions from FHS (the “Third Funding Source”). The

Parties anticipate that the First Funding Source will be approximately [REDACTED] Dollars

($[REDACTED]) and the Second Funding Source and Third Funding Source will comprise the

remainder of the Capital Fund. After the Initial Capital Commitment Period, HMC will be

eligible to receive routine and strategic capital pursuant to the CHI capital allocation process then

in effect. The parties intend to expend the Capital Fund pro rata over the five years after Closing

in annual amounts of approximately [REDACTED] Dollars ($[REDACTED]); provided,

however, that the Parties may, by their prior mutual written agreement, agree that during any

such year more or less than the annual pro-rata amount may be implemented in such year;

provided further, however, that any such increase or decrease in the annual pro-rata capital

commitment amount shall not increase or decrease the overall minimum amount of

[REDACTED] Dollars ($[REDACTED]) required to be spent pursuant to this Section 13.1.

13.2 IT Service Implementation. In addition to the financial commitments described in

Section 13.1, FHS shall use commercially reasonable efforts to implement the latest version of

Epic at the Health System Businesses, including the patient portal, consistent with meeting the

meaningful use requirements set forth by CMS for Stage 2. FHS shall use commercially

reasonable efforts to fully implement the inpatient and outpatient Epic modules at the Health

System Businesses no later than May 31, 2014 if the Closing Date is June 30, 2013. The Epic

implementation, including the software license, development costs, training, and other costs,

which shall be in an amount equal to [REDACTED] Dollars ($[REDACTED]) (the “Epic

Costs”) will be funded exclusively by FHS and/or CHI and not from HMC cash, HMC

borrowing, or the Capital Fund; provided, however, to the extent there are any costs for backfill

of staff for the Epic installation and any equipment purchases that are required as a result of

compatibility issues, such costs can be funded from the Capital Fund; provided further, however,

to the extent that the Epic Costs exceed [REDACTED] Dollars ($[REDACTED]) FHS and/or

CHI may utilize HMC cash, HMC borrowing, or the Capital Fund to complete the Epic

installation. To the extent permitted by Legal Requirements, between the Commitment Date and

the Closing Date, the Parties will begin the planning process for the Epic implementation plan.

13.3 Strategic Planning. The Parties agree to engage in a strategic planning process to

address the short and long-term priorities for HMC pursuant to the terms and conditions of a

strategic plan to be mutually agreed upon by HMC and FHS prior to the Closing Date that will

include, among other things, the manner in which FHS will implement health reform required

changes at the Health System Businesses, including, without limitation, value-based payments,

61 2412814.1

bundled payments, accountable care and clinical integration initiatives, as necessary and

appropriate.

13.4 Integration.

(a) Integration of Health System Businesses. The Parties agree to engage in an

integration planning process to identify potential efficiencies resulting from the

consummation of the Contemplated Transactions pursuant to the terms and conditions of

an integration plan to be mutually agreed upon by HMC and FHS prior to the Closing

Date. To the extent legally permissible, the integration plan will identify integration

action items and timeframes in areas for integration efficiencies, which may include:

revenue cycle, finance, billing integrity, human resources, quality improvement, nursing,

operational improvement, compliance and risk management. HMC and the HMC Board

shall cooperate with FHS’s efforts to identify cost savings opportunities and implement

practices and procedures that will promote the financial stability and viability of HMC,

particularly with respect to practices involving economies of scale available as a result of

the affiliation of HMC and FHV, and HMC shall not unreasonably withhold consent to

any approval required by the HMC Board with respect to implementing any identified

integration efficiencies, taking into account cost and quality goals.

(b) Medical Staff Development. The Parties agree that after the Closing, they

will work together with their respective medical staffs to evaluate and identify

opportunities for clinical integration that have the potential to enhance availability of

services and quality of care. FHS agrees to work with HMC to develop physician

practices, including physician recruitment where consistent with regulatory requirements,

to improve access to care within the HMC community. HMC Medical Staff members

will also be eligible to apply for membership on the FHS centralized medical staff.

13.5 Physicians

(a) Harrison HealthPartners. Without the consent of the HMC Board, during

the Initial Capital Commitment Period, FHS will not transfer employment of Harrison

HealthPartners physicians to Franciscan Medical Group or otherwise merge or

consolidate Harrison HealthPartners with Franciscan Medical Group.

(b) Hospital-Based Physicians. Without the consent of the HMC Board,

during the Initial Capital Commitment Period, FHS will not amend, supplement or

terminate the terms of any professional services agreements for hospital-based

professional services in effect as of the Closing Date between HMC and independent

physicians or physician groups (“hospital-based” refers to the specialties of pathology,

radiology, anesthesiology, and emergency medicine); provided, however, that (i) this

Section 13.5 does not guarantee or require the continuation of any hospital-based

professional services agreement beyond its current termination date even if such

termination date occurs before the end of the Initial Capital Commitment Period nor does

it guarantee that any current or new agreements will have a five-year term or term

extending until or through the Initial Capital Commitment Period, and (ii) as such

agreements terminate during the Initial Capital Commitment Period, such agreements can

62 2412814.1

be renegotiated and amended as agreed to by HMC provided the compensation paid is

fair market value, the agreements are consistent with then-current FHS physician

compensation methodologies, and the agreements otherwise comply with all applicable

Healthcare Laws and other Legal Requirements.

13.6 Quality Improvements. FHS shall use reasonable efforts to identify and

implement quality improvement opportunities (e.g., application of clinical protocols and best

practices) at HMC.

13.7 Training Slots. FHS shall use reasonable efforts to provide HMC executives,

management and physician leadership with equal access to training slots and programs at HMC,

FHS, CHI, or any of their Affiliates.

13.8 Joint Ventures. For a period of five (5) years following the Closing Date, HMC

will retain ownership of its interests in its joint ventures, and ownership of such interests will not

be transferred from HMC during such period without the consent of the HMC Board.

13.9 Peninsula Operations. After the Closing Date, and as part of ongoing strategic

planning processes, the Parties will work in good faith to determine opportunities for HMC and

St. Anthony to cooperate in enhancing efficiency and quality of services, and patient access to

services, on the Kitsap Peninsula.

13.10 Ethical and Religious Directives. HMC will remain a secular organization that is

not subject to the ERDs. [REDACTED]

13.11 Consents and Approvals. Subject to the other provisions of this Agreement (and

in the event of a conflict between this Section 13.8 and any such other provision, the other

provision shall govern), FHS, FHV, and HMC shall use their commercially reasonable efforts to

obtain any consents and approvals of any Governmental Authority or other Person necessary for

the performance of their respective obligations pursuant to this Agreement, and the

consummation of the Contemplated Transactions, and will cooperate fully with each other in all

reasonable respects in promptly seeking to obtain such consents and approvals. Neither FHS,

FHV nor HMC will take any action that will have the effect of delaying, impairing or impeding

the receipt of any required regulatory approvals from any Governmental Authority or any

consent required from any other Person. FHS, FHV, and HMC will promptly file any

information requested as soon as practicable after receipt of a request for information or

additional information from any Governmental Authority. The Parties will coordinate and

cooperate with one another in exchanging such information and providing such reasonable

assistance as may be requested in connection with such filings. FHS and FHV will supply HMC

with copies of all correspondence, filings or written communications (or memoranda setting

forth the substance thereof) between FHS, FHV, or their respective representatives, as

applicable, on the one hand, and any Governmental Authority or members of their respective

staffs, on the other hand, with respect to this Agreement or the Contemplated Transactions,

except those documents filed by FHS or FHV for which confidentiality was requested at the time

of filing with the Governmental Authority. HMC will supply FHS and FHV with copies of all

correspondence, filings or communications (or memoranda setting forth the substance thereof)

between HMC or their respective representatives, on the one hand, and any Governmental

63 2412814.1

Authority or members of their respective staffs, on the other hand, with respect to this

Agreement or the Contemplated Transactions, except those documents filed by HMC for which

confidentiality was requested at the time of filing with the Governmental Authority.

13.12 Termination. Notwithstanding anything to the contrary in this Agreement, prior

to Closing, this Agreement may be terminated as follows:

(a) Upon the mutual, written consent of FHS, FHV, and the HMC Board;

(b) By FHS or FHV, upon written notice to HMC, if any of the conditions in

Article 12 has not been satisfied as of the Closing Date or if satisfaction of such a

condition is or becomes impossible (other than through the failure of FHS or FHV to

comply with its obligations under this Agreement) and neither FHS nor FHV has waived

such condition on or before the Closing Date; provided, however, if the Termination Date

has not yet occurred and the reason such condition is not satisfied is due to a Breach by

HMC, neither FHS nor FHV shall have the right to terminate this Agreement unless such

Breach is not cured by HMC within twenty (20) days after receipt by HMC from FHS or

FHV of written notice of such Breach; provided, further, however, if the Breach by its

nature cannot be cured within such twenty (20) day period, such cure period shall be

extended to the extent that HMC promptly commences to cure the Breach following

receipt of such written notice and continues to proceed thereafter with reasonable

diligence to cure such Breach; provided, further, however, that such cure period shall not

extend beyond the Termination Date;

(c) By HMC, upon written notice to FHS and FHV, if any of the conditions in

Article 11 has not been satisfied as of the Closing Date or if satisfaction of such a

condition is or becomes impossible (other than through the failure of HMC to comply

with its obligations under this Agreement) and HMC has not waived such condition on or

before the Closing Date; provided, however, if the Termination Date has not yet occurred

and the reason such condition is not satisfied is due to a Breach by FHS or FHV, HMC

shall not have the right to terminate this Agreement unless such Breach is not cured by

FHS or FHV within twenty (20) days after receipt by FHS and FHV from HMC of

written notice of such Breach; provided, further, however, if the Breach by its nature

cannot be cured within such twenty (20) day period, such cure period shall be extended to

the extent that FHS or FHV promptly commences to cure the Breach following receipt of

such written notice and continues to proceed thereafter with reasonable diligence to cure

such Breach; provided, further, however, that such cure period shall not extend beyond

the Termination Date; or

(d) By HMC, FHS or FHV, upon written notice provided to the other Parties,

if the Closing shall not have taken place on or before December 31, 2013, or such later

date upon which the Parties mutually agree in writing (the “Termination Date”).

13.13 Effect of Termination. Each Party’s right of termination under Section 13.12 is in

addition to any other rights it may have under this Agreement or otherwise, and the exercise of a

right of termination will not be an election of remedies. If this Agreement is terminated pursuant

to Section 13.12, all further obligations of the Parties under this Agreement will terminate,

64 2412814.1

except that the provisions of this Section 13.13 and Article 15 will survive; provided, however,

that if this Agreement is terminated by a Party because of the Breach of the Agreement by the

other Party or because one or more of the conditions to the terminating Party’s obligations under

this Agreement is not satisfied as a result of another Party’s failure to comply with its obligations

under this Agreement, the terminating Party’s right to pursue all remedies provided under this

Agreement will survive such termination unimpaired.

13.14 Tax and Government Program Effect. Neither of the Parties (nor such Party’s

counsel or accountants) has made or is making in this Agreement any representation to the other

Party (or such Party’s counsel or accountants) concerning any of the Tax or Government

Program effects or consequences on the other Party of the Contemplated Transactions. Each

Party represents that it has obtained, or may obtain, independent Tax and Government Program

advice with respect thereto and upon which it, if so obtained, has solely relied.

13.15 Costs.

(a) HSR Filing Fees. FHS and HMC shall each bear fifty percent (50%) of all

fees and expenses of the Parties payable to the FTC in connection with the filings under

the HSR Act.

(b) Sales, Use and Transfer Taxes. The Parties agree that they do not

anticipate any sales, use or transfer Taxes to be due as a result of consummating the

Contemplated Transactions. If any such Taxes are due, however, FHS shall pay, and be

fully liable and responsible for, such sales, use or transfer Taxes that may be due in

connection with the Contemplated Transactions.

13.16 Cooperation Regarding Tax Returns. After the Closing, the Parties shall

cooperate fully, as and to the extent reasonably requested by any other Party, in connection with

the preparation and filing of any Tax Returns. Such cooperation shall include, but not be limited

to, the retention and (upon any other Party’s request) the provision of records and information

reasonably relevant to any such Tax Returns, making employees available on a mutually

convenient basis to provide additional information, and not taking any positions with respect to

any such Tax Returns that are inconsistent with the positions taken with respect to Tax Returns

that were filed prior to the Closing Date. The Parties agree (A) to retain all books and records

with respect to Tax matters relating to any taxable period beginning before the Closing Date until

the expiration of the statute of limitations, and any extensions thereof, of the respective taxable

periods, and to abide by all record retention agreements entered into with any taxing authority,

and (B) to give the other Parties reasonable written notice prior to transferring, destroying or

discarding any such books and records and, if any other Party so requests, such other Party will

have the right to take possession of such books and records or copies thereof.

13.17 Further Acts and Assurances. At any time and from time to time at and after the

Closing, upon reasonable request of a Party, the other Party shall do, execute, acknowledge and

deliver, or cause to be done, executed, acknowledged and delivered, such further acts, deeds,

assignments, transfers, conveyances, powers of attorney, confirmations and assurances as the

requesting Party may reasonably request to more effectively consummate the Contemplated

65 2412814.1

Transactions and to confirm the capacity and ability of the Party to whom the request was made

to perform its post-Closing covenants and agreements under this Agreement.

14. DISPUTE RESOLUTION

14.1 Dispute Resolution Procedures; Jurisdiction and Venue. The Parties wish to

provide for a dispute resolution mechanism designed to ensure that each Party meets its

obligations under this Agreement. If a dispute arises between the Parties relating to the Parties’

obligations under this Agreement or other dispute relating to this Agreement that cannot be

resolved informally, the Parties agree to comply with the procedures set forth in this Section 14.1

(“Dispute Resolution Procedures”).

(a) The Dispute Resolution Procedures will be initiated by either Party giving

written notice of a dispute to the other Party, and such notice shall describe with

reasonable particularity the nature of the dispute and the actions requested to resolve the

dispute. The Parties shall, for a period of ten (10) business days after receipt of such

notice, attempt in good faith to negotiate a resolution of the dispute (the “Initial

Negotiation”). The Initial Negotiation will include no less than two in-person meetings

among the CEO’s of each Party, each of whom shall have authority from the respective

governing boards of the Parties to settle the matter. If the dispute is not resolved during

the Initial Negotiation, the Parties shall, for an additional period of ten (10) business days

after the end of the Initial Negotiation period, continue to attempt in good faith to

negotiate a resolution of the dispute (the “Extended Negotiation”). The Extended

Negotiation will include no less than two in-person meetings between the Chair of the

FHS Board of Directors, the Chair of the FHV Board of Directors, and the Chair of the

HMC Board, each of whom shall have authority from the respective governing boards of

the Parties to settle the matter. All of the negotiations described in this Section 14.1(a)

shall take place at a mutually acceptable location, and each Party shall bear its own

expenses incurred in conducting the negotiations.

(b) Subject to the terms and conditions of the Oversight Agreement, HMC

may only bring a claim to enforce the obligations of FHV, FHS and CHI set forth in the

Obligation Sections as authorized by, and pursuant to and in accordance with, this

Section 14 (a “Claim”). All Claims must be brought prior to the Expiration Date and

shall be brought pursuant to the resolution of claims provisions set forth in this Section

14. HMC shall only make a Claim in the following circumstances: if, with respect to

each fiscal year prior to the Expiration Date, (i) if HMC determines that FHV, FHS

and/or CHI is in material breach of any of its obligations set forth in the Obligation

Sections of the Affiliation Agreement with respect to such fiscal year, (ii) HMC initiates

the Dispute Resolution Procedures with respect to such material breach no later than one

hundred eighty (180) days following the end of such fiscal year, and (iii) the Dispute

Resolution Procedures fail to resolve the dispute between FHV, FHS and HMC. The

Parties acknowledge and agree that, if HMC does not initiate the Dispute Resolution

Procedures with respect to any alleged material breach by FHS of the Obligation Sections

with respect to a fiscal year within the one hundred eighty (180) day period following

such fiscal year, HMC shall not thereafter be entitled to initiate the Dispute Resolution

Procedures with respect to such alleged material breach. In connection with any Claim,

66 2412814.1

the Parties acknowledge and agree that HMC shall have the evidentiary burden of proof

as to the material breach of FHS and/or CHI of any obligation set forth in the Obligation

Sections, as applicable.

(c) Any dispute arising out of or relating to this Agreement, the Breach

hereof, or the subject matter hereof, which the Parties cannot resolve pursuant to the

procedure described in Section 14.1(a), will be submitted to non-binding mediation.

Within ten (10) business days after either Party gives to the other Party written notice of

intent to mediate the dispute, the Parties shall meet to jointly select an independent and

neutral person having health law experience to serve as mediator. If the Parties are not

able to agree upon the selection of a mediator, the Parties shall submit the request for

appointment to JAMS, Seattle, Washington, (“JAMS”) or if otherwise mutually agreed

by the Parties, to Judicial Dispute Resolution, LLC, Seattle, Washington (“JDR”). The

mediation proceeding shall be held in Seattle, Washington, or at such other location upon

which the Parties agree, according to the rules of JAMS, or if otherwise mutually agreed

by the Parties, according to the rules of JDR, not more than thirty (30) days after the

mediator is selected and agreed upon. Each Party shall be responsible for an equal share

of the mediator’s fees and expenses.

(d) Subject to Section 14.1(f), any dispute arising out of or relating to the

Obligations Sections, the Breach thereof, or the subject matter thereof, which the Parties

cannot resolve pursuant to the procedures described in Sections 14.1(a) and (c), may be

settled, at the election of the Party seeking resolution of the dispute, by legal action in a

court of proper jurisdiction, which action must be initiated within forty-five (45) days

following the date the mediation pursuant to Section 14.1(c) concludes. EACH PARTY

IRREVOCABLY AND UNCONDITIONALLY WAIVES ALL RIGHT TO A TRIAL

BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM. EACH PARTY

SHALL BE RESPONSIBLE FOR ITS OWN ATTORNEYS’ FEES AND EXPENSES

INCURRED IN CONNECTION WITH ANY LEGAL ACTION COMMENDED

PURSUANT TO THIS SECTION 14.1(d).

(e) The Parties expressly agree that the following action may be asserted as a

dispute subject to the Dispute Resolution Procedures set forth in this Section 14.1:

removal by FHV of a director from the HMC Board that is not in compliance with

Section 5.6.2 of the Restated Bylaws of HMC. No other removal by FHV of a director

from the HMC Board can be challenged by HMC or the Oversight Corporation or

subjected to the Dispute Resolution Procedures or litigation.

(f) The Parties expressly agree that the sole remedy available to either Party

with respect to this Agreement is that of equitable relief and neither party shall be entitled

to monetary damages.

15. GENERAL PROVISIONS

15.1 Expenses. Except as otherwise expressly provided in this Agreement or as

otherwise expressly agreed by the Parties, each Party will bear its respective expenses incurred in

connection with the preparation, execution, and performance of this Agreement and the

67 2412814.1

Contemplated Transactions, including all fees and expenses of agents, representatives, counsel,

and accountants, whether or not the Contemplated Transactions are consummated at Closing.

15.2 Confidentiality. The Parties acknowledge and agree that the Mutual

Confidentiality and Non-Disclosure Agreement dated March 29, 2012, as amended effective as

of June 12, 2012, by and between FHS and HMC, as further amended (the “Confidentiality

Agreement”) and the Joint Defense and Confidentiality Agreement dated July 25, 2012 by and

between FHS and HMC, as amended (the “Joint Defense Agreement”) and the obligations of the

Parties thereunder, shall survive the execution and delivery of this Agreement and the Closing

and shall remain in full force and effect until terminated pursuant to the terms thereof.

15.3 Access to Records. If applicable to this Agreement or any other Agreement

entered into by the Parties in connection with the Contemplated Transactions, the Parties agree to

comply with regulations promulgated by the Centers for Medicare and Medicaid Services

implementing of Section 952 of the Omnibus Reconciliation Act of 1980, codified at 42 U.S.C.

1395x(v)(1)(i). In such event, each Party agrees, until the expiration of four (4) years after the

Closing, to make available upon written request, to the Secretary of Health and Human Services

or, upon request, to the Comptroller General, or any of their duly authorized representatives, this

Agreement, and all books, documents, and records that are necessary to verify the nature and

extent of the costs of the Contemplated Transactions and compliance with Legal Requirements.

The Parties further agree to include this requirement in any subcontract to the extent required

under the Legal Requirements.

15.4 Notices. All notices, requests, consents, approvals, waivers, demands and other

communications required or permitted to be given or made under this Agreement shall be in

writing and shall be deemed delivered to the Parties (a) on the date of personal delivery, (b) on

the date of delivery by facsimile transmission, with confirmation of completed transmission, (c)

on the first business day following the date of delivery to a nationally recognized overnight

courier service, or (d) or the third business day following the date of deposit in the United States

Mail, postage prepaid, by certified mail, return receipt requested, in each case, addressed as set

forth below, or to such other address or Person as either Party may designate by notice to the

other in accordance herewith:

FHS: Franciscan Health System.

1145 Broadway Plaza, Suite 1200

Tacoma, Washington 98402

Attention: Mike Fitzgerald, Chief Financial Officer

With a copy to: Catholic Health Initiatives

198 Inverness Drive West

Englewood, Colorado 80112

Attention: Mitch H. Melfi, Esq., Senior Vice President and

General Counsel

68 2412814.1

And a copy to: Polsinelli Shughart PC

700 W. 47th

Street, Suite 1000

Kansas City, Missouri 64112

Attention: Frank J. Ross, Jr., Esq.

HMC: Harrison Medical Center

2520 Cherry Avenue

Bremerton, WA 98310

Attn: Scott W. Bosch, CEO

With a copy to: Foster Pepper PLLC

1111 Third Avenue, 34th

Floor

Seattle, Washington 98101

Attention: Bradley J. Berg, Esq.

FHV:

Attention: Chairman of the Board

15.5 Further Assurances. The Parties agree (A) to furnish upon request to each other

such further information, (B) to execute and deliver to each other such other documents, and

(C) to do such other acts and things, all as the other Party may reasonably request for the purpose

of carrying out the intent of this Agreement and the documents referred to in this Agreement.

15.6 Survival. The representations and warranties contained in Section 4.1

(Organization and Good Standing), Section 4.2 (Authority; No Conflict), Section 4.3

(Membership), Section 5.1 (FHS Organization and Good Standing), Section 5.2 (Authority; No

Conflict), Section 5.12 (FHV Organization and Good Standing), Section 5.13 (Authority; No

Conflict), Section 15.17(b) (Representations and Warranties of CHI), will survive the Closing

indefinitely without limitation as to time. The representations and warranties contained in

Section 4.11 (Taxes), Section 4.17 (Legal Proceedings; Orders), Section 4.21 (Environmental

Matters), Section 4.25 (Accreditation; Participation in Government Programs and Private

Programs), Section 4.26 (Healthcare Laws), and Section 4.27 (HIPAA and HITECH Act), will

survive the Closing until the expiration of the applicable statutes of limitations and will

thereupon expire. All other representations and warranties of HMC contained in this Agreement

will survive the Closing for a period of one (1) year and will thereupon expire. All other

representations and warranties of FHS, FHV, and CHI under this Agreement shall expire as of

the Closing Date.

15.7 Waiver. The rights and remedies of the Parties to this Agreement are cumulative

and not alternative. Neither the failure nor any delay by any Party in exercising any right, power,

or privilege under this Agreement or the documents referred to in this Agreement will operate as

a waiver of such right, power, or privilege, and no single or partial exercise of any such right,

power, or privilege will preclude any other or further exercise of such right, power, or privilege

or the exercise of any other right, power, or privilege. To the maximum extent permitted by

applicable law, (A) no claim or right arising out of this Agreement or the documents referred to

in this Agreement may be waived by any Party, in whole or in part, unless such waiver is in

69 2412814.1

writing signed by such Party; (B) no waiver that may be given by a Party will be applicable

except in the specific instance for which it is given; and (C) no notice to or demand on one Party

will be deemed to be a waiver of any obligation of such Party or of the right of the Party giving

such notice or demand to take further action without notice or demand as provided in this

Agreement or the documents referred to in this Agreement.

15.8 Entire Agreement and Modification. This Agreement, together with the Exhibits

and Schedules hereto, supersedes all prior agreements between the Parties with respect to its

subject matter (including the Letter of Intent, which is hereby terminated in its entirety, but

excluding the Confidentiality Agreement and the Joint Defense Agreement) and constitutes

(along with the documents referred to in this Agreement, the Confidentiality Agreement, and the

Joint Defense Agreement) a complete and exclusive statement of the terms of the agreement

among the Parties with respect to its subject matter. This Agreement may not be amended

except by a written agreement executed by FHS, FHV, and HMC.

15.9 Assignments, Successors, and No Third-Party Rights. No Party may assign any

of its rights under this Agreement, directly or indirectly, by operation of law or otherwise,

without the prior consent of the other Party, which consent may be withheld or conditioned in the

consenting Party’s sole discretion. Subject to the preceding sentence, this Agreement will apply

to, be binding in all respects upon, and inure to the benefit of the successors and permitted

assigns of the Parties. Any assignment in violation of this Agreement shall be null and void.

Nothing expressed or referred to in this Agreement will be construed to give any Person other

than the Parties any legal or equitable right, remedy, or claim under or with respect to this

Agreement or any provision of this Agreement, and this Agreement and all of its provisions and

conditions are for the sole and exclusive benefit of the Parties and their successors and permitted

assigns.

15.10 Severability. If any provision of this Agreement is held invalid or unenforceable

by any court of competent jurisdiction, the other provisions of this Agreement will remain in full

force and effect. Any provision of this Agreement held invalid or unenforceable only in part or

degree will remain in full force and effect to the extent not held invalid or unenforceable.

15.11 Article and Section Headings. The headings of Articles and Sections in this

Agreement are provided for convenience only and will not affect its construction or

interpretation.

15.12 Time Of Essence. With regard to all dates and time periods set forth or referred

to in this Agreement, time is of the essence.

15.13 Governing Law. This Agreement will be governed by the laws of the State of

Washington, without regard to conflicts of laws principles.

15.14 Execution, Delivery and Counterparts. This Agreement and any amendments

hereto may be executed and delivered by facsimile or other electronic transmission, in any

number of counterparts, each of which will be deemed to be an original and all of which will

constitute one agreement that is binding upon each of the Parties, notwithstanding that both

Parties are not signatories to the same counterpart.

70 2412814.1

15.15 Jurisdiction and Venue. The Parties consent, for all purposes in connection with

this Agreement, to the exclusive jurisdiction of the Superior Court of the State of Washington,

King County and the United States District Court for the Western District of Washington,

Seattle, Washington.

15.16 Survival of FHS and CHI Obligations. Unless a shorter survival period is

otherwise established herein with respect to a specific obligation or right, all obligations of FHS,

FHV, and CHI to HMC under this Agreement, and all rights of HMC under this Agreement,

shall cease and expire on the fifth anniversary of the end of the Commitment Date; provided,

however, that the obligations under the Obligation Sections will continue until the obligations set

forth in Sections 13.1 and 13.2 are satisfied even if such date extends beyond the fifth

anniversary of the end of the Commitment Date; provided further, however, that Section 13.10

will survive indefinitely.

15.17 CHI Obligations and Representations and Warranties.

(a) CHI Obligations. CHI is a party to this agreement solely to guarantee the

obligations of FHS pursuant to Sections 10.3, 13.1 and 13.2 of this Agreement (“CHI

Obligations”). CHI is a party for no other reason and has no other obligations pursuant to

this Agreement.

(b) Representations and Warranties of CHI. CHI represents and warrants, as

of the Commitment Date, the following to and for the benefit of HMC:

(i) CHI is duly organized, validly existing, and in good standing

under the laws of the State of Colorado, with full power and authority to conduct

its business as it is now being conducted, and to own or use the properties and

assets that it purports to own or use.

(ii) CHI’s agreement to the CHI Obligations constitutes the legal,

valid, and binding obligation of CHI enforceable against CHI in accordance with

its terms, except as limited by applicable bankruptcy, insolvency, reorganization,

moratorium or other laws of general application affecting enforcement of

creditors’ rights, and as limited by general principles of equity that restrict the

availability of equitable remedies. CHI has the absolute and unrestricted right,

power, and authority to execute and deliver this Agreement and to perform the

CHI Obligations.

(iii) Except as set forth in Schedule 15.17, neither the execution and

delivery of this Agreement nor the consummation or performance by CHI of the

CHI Obligations will, directly or indirectly (with or without notice or lapse of

time): contravene or conflict with, or result in a violation of (a) any provision of

articles of incorporation or bylaws of CHI; (b) any resolution adopted by the

boards of directors or the owners of CHI; (c) contravene or conflict with, or result

in a violation of, or give any Governmental Authority or other Person the right to

challenge CHI’s performance of any of the CHI Obligations or to exercise any

remedy or obtain any relief under, any Legal Requirement or any Order to which

71 2412814.1

CHI may be subject; (d) contravene or conflict with any Contract to which CHI is

a party or by which CHI may be bound.

(iv) Except as set forth in Schedule 15.17, CHI is not and will not be

required to obtain any Consent from any Person in connection with the execution

and delivery of this Agreement or the consummation or performance by CHI of

any of the CHI Obligations.

[Remainder of this page intentionally blank.

Signatures follow on next page.]

Signature Page to Affiliation Agreement

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by

their duly authorized officers as of the Commitment Date.

FHS: FRANCISCAN HEALTH SYSTEM, a Washington

nonprofit corporation

By:

Name:

Title:

HMC: HARRISON MEDICAL CENTER, a Washington


By:

Name:

Title:

FHV: FRANCISCAN HEALTH VENTURES, a Washington


By:

Name:

Title:

Solely as to Section 15.17 and for no other purpose:

CHI: CATHOLIC HEALTH INITIATIVES, a Colorado


By:

Name:

Title:

Exhibit A - 1 2412814.1

EXHIBIT A

Restated Articles

Exhibit B - 1 2412814.1

EXHIBIT B

Restated Bylaws

Exhibit C - 1 2412814.1

EXHIBIT C

Form of Oversight Agreement

Exhibit D - 1 2412814.1

EXHIBIT D

Form of Escrow Agreement

Exhibit E - 1 2412814.1

EXHIBIT E

Foundation Articles

Exhibit F - 1 2412814.1

EXHIBIT F

Foundation Bylaws

Exhibit G - 1 2412814.1

EXHIBIT G

Form of Oversight Articles

Exhibit H - 1 2412814.1

EXHIBIT H

Form of Oversight Bylaws

Exhibit I - 1 2412814.1

EXHIBIT I

Initial Oversight Corporation Board

Exhibit J - 1 2412814.1

EXHIBIT J

FHV Articles of Incorporation

Exhibit K - 1 2412814.1

EXHIBIT K

FHV Bylaws

Exhibit L - 1 2412814.1

[REDACTED]