8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of report (Date of earliest event reported): March 22, 2006

NATIONWIDE HEALTH PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	1-9028	95-3997619
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

610 Newport Center Drive, Suite 1150, Newport Beach, California 92660-6429

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (949) 718-4400

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT

On March 22, 2006, Registrant entered into material definitive agreements, which are referenced below, for the acquisition and master leaseback of the real estate holdings of Hearthstone Assisted Living, Inc., a Texas corporation (the “Company”), consisting of a portfolio of 32 assisted living and Alzheimer’s facilities. The purchase price is $419 million plus an estimated $12 million of debt defeasance and closing costs. The transaction is anticipated to close by May 31, 2006, subject to real estate, regulatory and other closing conditions. In tandem with the transaction, the Company’s current CEO and partners will acquire 100% ownership of the company that will operate the Hearthstone facilities.

Merger Agreement

On March 22, 2006, Registrant entered into an Agreement and Plan of Merger (the “Merger Agreement”) with HAL Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Registrant (“Merger Sub”) and the Company. The Merger Agreement contemplates that, subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company continuing after the merger as the surviving corporation (the “Merger”).

Pursuant to the Merger Agreement, at the effective time of the Merger, the Company shareholders will receive an aggregate of $419 million in cash, subject to adjustment for debt defeasance (other than prepayment penalties and other defeasance costs), amounts payable under the Company’s 2004 Gain Sharing Plan, amounts payable to holders of stock options and stock warrants, transactions fees of the Company, and certain other adjustments.

The Merger is subject to representations, warranties, and covenants made by the parties in the Master Transactions Agreement (described below). The Merger is subject to certain closing conditions, including accuracy of the representations and warranties made by Registrant and the Company in the Master Transactions Agreement, satisfaction of certain real estate due diligence conditions, approval of the Merger Agreement and Master Transactions Agreement by Company shareholders owning at least 90% (by vote and value) of total outstanding Company shares, and receipt of necessary regulatory approvals.

This description of the Merger Agreement is qualified in its entirety by the terms and conditions of the Merger Agreement, which is filed as Exhibit 2.1 hereto, and is incorporated herein by reference.

Master Transactions Agreement

On March 22, 2006, Registrant entered into a Master Transactions Agreement (the “Master Transactions Agreement”) with the Company and Hearthstone Operations, LLC, a Delaware limited liability company (“Newco”), that sets forth representations, warranties, covenants and agreements in connection with the transactions contemplated under the Master Transactions Agreement, the Merger Agreement, the Contribution Agreement (described below) and other related agreements (the “Transactions Agreements”).

Registrant and the Company have made representations and warranties in the Master Transactions Agreement relating to, among others, corporate status, authorization, tax matters, real property, environmental matters, and labor and employee benefits. The representations and warranties made in the Master Transactions Agreement by Registrant and the Company survive the closing of the Merger and related transactions contemplated under the Transactions Agreements for a period of 12 to 36 months. In addition, pursuant to the terms of the Master Transactions Agreement, each party has agreed to indemnify the other for damages arising from, among other things, such party’s breach of its representations, warranties or covenants under the Master Transactions Agreement, subject to limitation in accordance with the survival periods referenced above and (in the case of the Company) agreed upon threshold amounts and caps on indemnifiable damages. In connection therewith, the parties to the Master Transaction Agreement will prior to the closing of the Merger enter into an escrow agreement whereby $15,000,000 of the merger consideration to be paid by Registrant will be placed in escrow as a fund for payment of indemnification claims made by Registrant under the Master Transaction Agreement.

The Company has agreed to abide by customary covenants relating to the conduct of its business between the signing of the Transactions Agreements and the closing of the transactions contemplated thereunder. The Master Transactions Agreement may be terminated under certain circumstances including: by mutual written consent of Registrant and the Company; by either of Registrant or the Company upon a material breach of the Agreement by the other party; and by either Registrant or the Company if any governmental entity issues an order enjoining or otherwise prohibiting the transactions contemplated under the Transactions Agreements.

In connection with the signing of the Master Transactions Agreement, Registrant placed an $8 million performance deposit in escrow. If the closing of the Merger does not occur, Registrant is, under certain circumstances, entitled to the return of this deposit. If the closing of the Merger does occur, the deposit will be credited against the merger consideration payable by Registrant.

This description of the Master Transactions Agreement is qualified in its entirety by the terms and conditions of the Master Transactions Agreement, which is filed as Exhibit 2.2 hereto, and is incorporated herein by reference.

Contribution Agreement

Registrant is not a party to the Contribution Agreement but may be materially affected by the Contribution Agreement as the closing of the Merger and other related transactions are contingent upon the closing of the transactions contemplated under the Contribution Agreement.

On March 22, 2006, the Company and Newco entered into a Contribution Agreement, whereby, prior to the effective time of the Merger, the Company will contribute to Newco all of its non-real estate assets, including all working capital items, equity interests in all non-real estate holding subsidiaries (the “Contributed Subsidiaries”) and the “Hearthstone” and “Caremark” names and marks. The Contributed Subsidiaries shall retain all of their respective

liabilities and Newco shall assume all of the liabilities of the Company, except that neither the Contributed Subsidiaries nor Newco shall be liable for certain excluded liabilities, including debt to be repaid at the closing of the Merger, debt to be retained by the Company, and real estate liabilities. The Contribution Agreement contemplates that certain working capital adjustments will be made following the closing of the transactions contemplated in the Contribution Agreement and that Newco may be liable to make certain payments to former Company shareholders based upon such working capital adjustments.

The obligation of Newco and the Company to close the transactions contemplated by the Contribution Agreement is subject to certain closing conditions, including that the Merger Agreement and the Master Transactions Agreement shall not have been terminated, and that necessary regulatory approvals shall have been received.

This description of the Contribution Agreement is qualified in its entirety by the terms and conditions of the Contribution Agreement, which is filed as Exhibit 2.3 hereto, and is incorporated herein by reference.

Tax Side Letter

On March 22, 2006, Registrant entered into an agreement with Newco and the Company (the “Tax Side Letter”) whereby the parties mutually agreed that, prior to the closing of the Merger, they would work to structure the Merger and other related transactions in a way so as to reduce any adverse tax consequences incurred by Registrant in connection with the Merger and other related transactions. The Tax Side Letter further provides, however, that the Company is not required to consent to an alteration of the Merger or other related transactions to the extent that it determines in its reasonable discretion that it or any shareholder of the Company would be adversely affected by such alteration, unless Registrant agrees to indemnify the Company and the applicable shareholders.

This description of the Tax Side Letter is qualified in its entirety by the terms and conditions of the Tax Side Letter, which is filed as Exhibit 2.4 hereto, and is incorporated herein by reference.

Newco Side Letter

On March 21, 2006, Registrant entered into an agreement with Timothy Hekker, James Wang, and Laurence Daspit (“Management”) and Newco (the “Newco Side Letter”) whereby upon the satisfaction of the closing conditions relating to the obligations of Newco under the Master Transactions Agreement and the Merger Agreement (which include the closing of the contribution transaction contemplated under the Contribution Agreement), (i) Management agrees to pay (or cause an entity under the direct control and ownership of Management to pay) $6,000,000 in cash to purchase all of the equity of Newco at the closing of the Merger and other related transactions and (ii) Registrant, Newco and Management agree that upon the closing of the Merger and related transactions, Registrant will cause its applicable subsidiary or subsidiaries to, and Newco and Management shall cause the applicable subsidiary or subsidiaries of Newco to, enter into a master lease agreement (the “Master Lease”) and guaranty and letter of credit

agreements, in each case in substantially the form attached as an exhibit to the Newco Side Letter, pursuant to which Registrant’s applicable subsidiary or subsidiaries will lease to Newco’s applicable subsidiary or subsidiaries the Hearthstone real property.

This description of the Newco Side Letter is qualified in its entirety by the terms and conditions of the Newco Side Letter, which is filed as Exhibit 2.5 hereto, and is incorporated herein by reference.

Certain information contained in this Form 8-K and its attachments contain forward-looking statement. Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are not statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as “may,” “will,” “anticipates,” “expects,” “believes,” “intends,” “should” or comparable terms or the negative thereof. All forward-looking statements included in this report and the press release are based on information available to us on the date hereof. These statements speak only as of the date hereof, and we assume no obligation to update such forward-looking statements for any reason or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include (without limitation) the following: deterioration in the operating results or financial condition, including bankruptcies, of our tenants; occupancy levels at certain facilities; changes in the ratings of our debt securities; access to the capital markets and the cost of capital; government regulations, including changes in the reimbursement levels under the Medicare and Medicaid programs; the general distress of the healthcare industry; the effect of economic and market conditions and changes in interest rates; the amount and yield of any additional investments; our ability to meet acquisition goals, including the closing of the transactions referenced herein and achievement of the anticipated benefits therefrom; the ability of our operators to repay deferred rent or loans in future periods; the ability of our operators to obtain and maintain adequate liability and other insurance; our ability to attract new operators for certain facilities; our ability to sell certain facilities for their book value; changes in or inadvertent violations of tax laws and regulations and other factors that can affect real estate investment trusts and our status as a real estate investment trust; and the risk factors described in our annual report on Form 10-K filed with the SEC on February 8, 2006.

The agreements included herewith have been included to provide investors and security holders with information regarding their terms. None of them is intended to provide any other factual information about Registrant. The Master Transaction Agreement contains representations and warranties that the parties to the Master Transaction Agreement made to and solely for the benefit of each other. The assertions embodied in such representations and warranties are (in the case of the Company) qualified by information contained in a confidential disclosure schedule that the Company provided in connection with signing the Master Transaction Agreement. Accordingly, investors and security holders should not rely on such representations and warranties as characterizations of the actual state of facts or circumstances, since they were only made as of the date of the Master Transaction Agreement and are modified (in the case of the Company)

in important part by the underlying disclosure schedule. Moreover, information concerning the subject matter of such representations and warranties may change after the date of the Master Transaction Agreement, which subsequent information may or may not be fully reflected in the Registrant’s public disclosures.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS

(d) Exhibits

Exhibit Number	Description
2.1	Agreement and Plan of Merger, dated as of March 22, 2006, by and among Nationwide Health Properties, Inc., HAL Acquisition Corp., and Hearthstone Assisted Living, Inc.
	All schedules and exhibits to the above Exhibit have been omitted in accordance with 17 CFR §229.601(b)(2). The Registrant agrees to furnish a supplemental copy of all omitted schedules and exhibits to the Securities and Exchange Commission upon request.
2.2	Master Transactions Agreement, dated as of March 22, 2006, by and among Nationwide Health Properties, Inc., Hearthstone Operations, LLC, and Hearthstone Assisted Living, Inc.
	All schedules and exhibits to the above Exhibit have been omitted in accordance with 17 CFR §229.601(b)(2). The Registrant agrees to furnish a supplemental copy of all omitted schedules and exhibits to the Securities and Exchange Commission upon request.
2.3	Contribution Agreement, dated as of March 22, 2006, by and between Hearthstone Operations, LLC and Hearthstone Assisted Living, Inc.
	All schedules and exhibits to the above Exhibit have been omitted in accordance with 17 CFR §229.601(b)(2). The Registrant agrees to furnish a supplemental copy of all omitted schedules and exhibits to the Securities and Exchange Commission upon request.
2.4	Letter Agreement, dated as of March 22, 2006, by and among Hearthstone Operations, LLC, Hearthstone Assisted Living, Inc., and Nationwide Health Properties, Inc.
2.5	NewCo Side Letter Agreement, dated as of March 21, 2006, by and among Nationwide Health Properties, Inc., Hearthstone Operations, LLC, and Timothy Hekker, James Wang, and Laurence Daspit
	Certain schedules and exhibits to the above Exhibit have been omitted in accordance with 17 CFR §229.601(b)(2). The Registrant agrees to furnish a supplemental copy of all omitted schedules and exhibits to the Securities and Exchange Commission upon request.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	NATIONWIDE HEALTH PROPERTIES, INC.
Date: March 28, 2006	By:	/s/ Abdo H. Khoury
	Name:	Abdo H. Khoury
	Title:	Senior Vice President and Chief Financial and Portfolio Officer

EX-2.1

Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

NATIONWIDE HEALTH PROPERTIES, INC.,

HAL ACQUISITION CORP.

AND

HEARTHSTONE ASSISTED LIVING, INC.

TABLE OF CONTENTS

		Page
ARTICLE 1 DEFINITIONS		1
1.1	Definitions	1
ARTICLE 2 THE MERGER		7
2.1	The Merger	7
2.2	Closing	7
2.3	Effective Time	8
2.4	Effect of the Merger	8
2.5	Effect on Capital Stock	8
2.6	Articles of Incorporation and Bylaws of Surviving Corporation	13
2.7	Directors and Officers	13
2.8	Performance Deposit	13
2.9	Closing Escrow	14
2.10	Exchange of Certificates	14
2.11	Effect of the Merger on Stock Options and Stock Warrants	18
2.12	Withholding Rights	18
2.13	No Liability of the Company Parties	19
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER		19
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY		20
ARTICLE 5 SHAREHOLDERS’ MEETING		20
ARTICLE 6 CONDITIONS TO OBLIGATION TO CLOSE		20
6.1	Conditions to Obligation of the Purchaser Parties	20
6.2	Conditions to Obligation of the Company	23
ARTICLE 7 MISCELLANEOUS		25
7.1	No Third-Party Beneficiaries	25
7.2	Entire Agreement	25
7.3	Successors and Assigns	25
7.4	References and Construction	25
7.5	Notices	26
7.6	Specific Performance	26
7.7	Governing Law	26
7.8	Amendment	26

i

7.9	Waivers	26
7.10	Severability	26
7.11	Counterparts; Facsimile Signatures	27

ii

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this “Agreement”) is entered into as of March 22, 2006 by and among NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation (the “Purchaser”), HAL ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of Purchaser (“Merger Sub”), and HEARTHSTONE ASSISTED LIVING, INC., a Texas corporation (the “Company”). The Purchaser and Merger Sub are sometimes referred to collectively herein as the “Purchaser Parties” and individually as a “Purchaser Party.” The Purchaser, Merger Sub and the Company are sometimes referred to collectively herein as the “Parties” and individually as a “Party.” Capitalized terms used herein shall have the meanings set forth in Article 1.

RECITALS:

A. The board of directors of each of the Purchaser, Merger Sub and the Company has approved this Agreement and the merger of Merger Sub with and into the Company (the “Merger”) upon the terms and subject to the conditions of this Agreement and in accordance with the applicable provisions of the Texas Business Corporation Act, as amended (the “TBCA”) and the Delaware General Corporation Law (the “DGCL”); and

B. The board of directors of the Company has determined that the Merger is fair to, and in the best interests of, its shareholders; and

C. The board of directors of each of the Purchase and Merger Sub has determined that the Merger is fair to, and in the best interests of, its respective shareholders; and

D. The holders of more than two-thirds (2/3) of the issued and outstanding shares of each class of the capital stock of the Company have agreed in writing to vote in favor of this Agreement and the transactions contemplated hereby and to abide by the provisions of Section 8.11 of the Master Transactions Agreement (defined below); and

E. The Purchaser and the Company are parties to a Master Transactions Agreement of even date herewith (the “Master Transactions Agreement”) that sets forth certain representations, warranties, covenants and agreements in connection with the Merger and an Operations Transaction (as defined therein).

NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE 1

Definitions

1.1 Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Article 1:

“Affiliate” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Agreement” has the meaning set forth in the preamble to this Agreement.

“Applicable Per Share Merger Consideration” means the Merger Consideration as allocated to each Share as follows: (a) with respect to Shares of Company Common Stock, the Per Common Share Merger Consideration; (b) with respect to Shares of Series A Preferred Stock, the Per Series A Share Merger Consideration; (c) with respect to Shares of Series B Preferred Stock, the Per Series B Share Merger Consideration; (d) with respect to Shares of Series C Preferred Stock, the Per Series C Share Merger Consideration; (e) with respect to Shares of Series D Preferred Stock, the Per Series D Share Merger Consideration; and (f) with respect to Shares of Series F Preferred Stock, the Per Series F Share Merger Consideration.

“Articles of Merger” has the meaning set forth in Section 2.3.

“Business Day” means a day other than a Saturday, Sunday or other day on which commercial banks in the State of New York are authorized or required by applicable Law to be closed.

“Certificate” or “Certificates” has the meaning set forth in Section 2.5(f).

“Closing” has the meaning set forth in Section 2.2.

“Closing Condition Period” means the thirty (30) day period following the date of this Agreement, subject to extension as provided in Section 10.1(f) of the Master Transactions Agreement or Article 6 of this Agreement.

“Closing Date” has the meaning set forth in Section 2.2.

“Closing Escrow” has the meaning set forth in Section 2.9(a).

“Closing Escrow Agent” has the meaning set forth in Section 2.9(a).

“Closing Escrow Agreement” has the meaning set forth in Section 2.9(a).

“Closing Escrow Amount” has the meaning set forth in Section 2.9(a).

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

“Company” has the meaning set forth in the preamble to this Agreement.

“Company Capital Stock” means any of the Company Common Stock, the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series F Preferred Stock.

“Company Common Stock” means the common stock, par value $0.02 per share, of the Company.

“Company Disclosure Letter” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

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“Company Parties” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Confidentiality Agreement” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Contribution Agreement” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Damages” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Deducted Amounts” has the meaning set forth in Section 2.5(c)(i).

“Defeasance Costs” means those costs associated with the prepayment or defeasance of the Defeased Debt.

“Defeased Debt” means all debt listed on Schedule 2.10(b)(ii) except for the Retained Debt, all of which Defeased Debt will be paid or discharged at the Closing in accordance with the terms of this Agreement.

“Deposit Escrow Agent” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“DGCL” has the meaning set forth in Recital A.

“Dissenting Shareholder” has the meaning set forth in Section 2.5(e)(i).

“Dissenting Shareholder Sub-Escrow Amount” has the meaning set forth in Section 2.5(e)(iii).

“Dissenting Shares” has the meaning set forth in Section 2.5(e)(i).

“Effective Time” has the meaning set forth in Section 2.3.

“Gain Sharing Plan” means the Company’s 2004 Gain Sharing Plan.

“Gain Sharing Plan Awards” means all amounts payable under the Gain Sharing Plan upon and in respect of the consummation of the transactions contemplated by this Agreement.

“Governmental Entity” or “Governmental Entities” means any court, tribunal, judicial body, arbitrator, stock exchange, administrative or regulatory agency, regulatory body or commission or other governmental or quasi-governmental authority or instrumentality, whether local, state or federal, domestic or foreign.

“Hart-Scott-Rodino Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

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“Law” means any United States (federal, state or local) or foreign law, statute, ordinance, rule, regulation or Order.

“Master Transactions Agreement” has the meaning set forth in Recital E.

“Material Adverse Effect” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Merger” has the meaning set forth in Recital A.

“Merger Consideration” has the meaning set forth in Section 2.5(c)(i).

“Merger Fund” has the meaning set forth in Section 2.10(b).

“Merger Sub” has the meaning set forth in the preamble to this Agreement.

“Merger Transaction” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“NewCo” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Notice of Special Meeting” has the meaning set forth in Article 5.

“Option Holder” or “Option Holders” means the holders, or individually a holder, of Stock Options or Stock Warrants, together with their successors and assigns.

“Order” means any decree, judgment, injunction, ruling, writ or other order (whether temporary, preliminary or permanent) of any Governmental Entity.

“Participant” has the meaning given such term in the Gain Sharing Plan.

“Participant Escrow Amount” has the meaning set forth in Section 2.9(a).

“Participant Letter” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Party” or “Parties” has the meaning set forth in the preamble to this Agreement.

“Paying Agent” has the meaning set forth in Section 2.10(a).

“Paying Agent Disbursement Schedule” means a written schedule setting forth the Applicable Per Share Merger Consideration to be prepared by the Company, certified as correct by the Company and delivered to the Purchaser and the Paying Agent at the Closing.

“Per Common Share Merger Consideration” means the amount per share of Company Common Stock allocated in accordance with the Paying Agent Disbursement Schedule (which allocation takes into account the Withheld Amounts).

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“Performance Deposit” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Per Series A Share Merger Consideration” means the amount per share of Series A Preferred Stock allocated in accordance with the Paying Agent Disbursement Schedule (which allocation takes into account the Withheld Amounts).

“Per Series B Share Merger Consideration” means the amount per share of Series B Preferred Stock allocated in accordance with the Paying Agent Disbursement Schedule (which allocation takes into account the Withheld Amounts).

“Per Series C Share Merger Consideration” means the amount per share of Series C Preferred Stock allocated in accordance with the Paying Agent Disbursement Schedule (which allocation takes into account the Withheld Amounts).

“Per Series D Share Merger Consideration” means the amount per share of Series D Preferred Stock allocated in accordance with the Paying Agent Disbursement Schedule (which allocation takes into account the Withheld Amounts).

“Per Series F Share Merger Consideration” means the amount per share of Series F Preferred Stock allocated in accordance with the Paying Agent Disbursement Schedule (which allocation takes into account the Withheld Amounts).

“Person” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Pro Rata Portion” means, with respect to any Shareholder or Participant, the percentage set forth opposite such Shareholder’s or Participant’s name on Exhibit A attached hereto.

“Purchaser” has the meaning set forth in the preamble to this Agreement.

“Purchaser Indemnitees” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Purchaser Party” or “Purchaser Parties” has the meaning set forth in the preamble to this Agreement.

“Real Estate Entity” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Retained Debt” means the debt listed as such on Schedule 2.10(b)(ii) that, subject to the provisions of Section 2.10(b)(ii), will be retained by the Surviving Corporation and not discharged at the Closing.

“Series A Preferred Stock” means the Series A Convertible Preferred Stock, par value $1.00 per share, of the Company.

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“Series B Preferred Stock” means the Series B Convertible Preferred Stock, par value $1.00 per share, of the Company.

“Series C Preferred Stock” means the Series C Convertible Preferred Stock, par value $1.00 per share, of the Company.

“Series D Preferred Stock” means the Series D Convertible Preferred Stock, par value $1.00 per share, of the Company.

“Series F Preferred Stock” means the Series F Convertible Preferred Stock, par value $1.00 per share, of the Company.

“Share” or “Shares” means the shares, or individually a share, of Company Capital Stock.

“Shareholder” or “Shareholders” means the holders, or individually a holder, of Shares, together with their successors and assigns.

“Shareholder Escrow Amount” has the meaning set forth in Section 2.9(a).

“Shareholder Letter” and “Shareholder Letters” have the meanings given such terms in Section 1.1 of the Master Transactions Agreement.

“Shareholder Materials” has the meaning set forth in Article 5.

“Shareholder Representatives” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Shareholders and Participants Fund” has the meaning given such term in Section 2.5(c)(ii).

“Shareholders and Participants Fund Amount” has the meaning given such term in Section 2.5(c)(ii).

“Shareholders’ Meeting” has the meaning set forth in Article 5.

“Stockholders Agreement” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Stock Options” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Stock Plan” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Stock Warrants” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

6

“Subsidiary” or “Subsidiaries” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Surviving Corporation” has the meaning set forth in Section 2.1.

“Tax” or “Taxes” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Tax Law” means any Law relating to Tax or Taxes.

“TBCA” has the meaning set forth in Recital A.

“Termination Date” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Texas Articles of Merger” has the meaning set forth in Section 2.3.

“Transaction Agreements” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Transaction Fees” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Withheld Amounts” has the meaning set forth in Section 2.5(c)(ii).

“Working Capital” has the meaning given such term in Section 3.2(c) of the Contribution Agreement.

ARTICLE 2

The Merger

2.1 The Merger. The board of directors of the Company, at a meeting duly called and held on March 21, 2006, has determined that the Merger Transaction is advisable and fair to and in the best interests of the Company and the Shareholders and has approved the same and resolved to recommend that the Shareholders adopt the Transaction Agreements and approve the Merger Transaction. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the TBCA and the DGCL, Merger Sub shall be merged with and into the Company at the Effective Time. Following the Effective Time, the separate corporate existence of Merger Sub shall cease, and the Company shall continue as the surviving corporation (the “Surviving Corporation”) as a corporation incorporated and existing under the laws of the State of Texas; the Surviving Corporation will change its name from the name “Hearthstone Assisted Living, Inc,” to              and the Surviving Corporation shall succeed to and assume all of the rights and obligations of Merger Sub and shall continue to hold all rights and obligations of the Company as in effect prior to the Merger, all in accordance with the TBCA.

2.2 Closing. Unless this Agreement is terminated in accordance with the provisions of this Agreement, the closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Andrews Kurth LLP, 600 Travis, Suite 4200,

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Houston, Texas 77002, on the first Business Day immediately following the day on which the last of the conditions to each Party’s obligations under this Agreement (other than those that by their nature are intended to be satisfied at Closing) set forth in Article 6 shall have been satisfied or waived, or at such other time, date or place as the Parties may mutually agree. The date on which the Closing occurs is referred to herein as the “Closing Date.”

2.3 Effective Time. Subject to the provisions of this Agreement, the Company and Merger Sub shall (a) file with the Secretary of State of the State of Texas articles of merger (the “Texas Articles of Merger”) executed in accordance with the relevant provisions of the TBCA and shall make all other filings or recordings required under the TBCA to effect the Merger as soon as practicable on or before the Closing Date and (b) file with the Secretary of State of the State of Delaware a certificate of merger (together with the Texas Articles of Merger, collectively the “Articles of Merger”) executed in accordance with the relevant provisions of the DGCL and shall make such other filings or recordings required under the DGCL to effect the Merger as soon as practicable on or before the Closing Date. The Merger shall become effective at such time as the Articles of Merger are duly filed with and accepted by the Secretary of State of the State of Texas, or the Secretary of State of the State of Delaware, whichever is later, or at such later time as the Purchaser Parties and the Company shall agree and shall specify in the Articles of Merger (the “Effective Time”).

2.4 Effect of the Merger. The Merger shall have the effects set forth in this Agreement, the Articles of Merger, the TBCA and the DGCL. Without limiting the generality of the foregoing, and subject to the TBCA, the DGCL and any other applicable laws, at the Effective Time, all of the properties, rights, privileges, powers, franchises and licenses of Merger Sub shall vest in the Surviving Corporation without reversion or impairment, without further act or deed, and without any transfer or assignment having occurred; all debts, liabilities, obligations, restrictions and duties of Merger Sub shall become the debts, liabilities, obligations, restrictions and duties of the Surviving Corporation; all properties, rights, privileges, powers, franchises and licenses of the Company shall remain and continue in the Company, as the Surviving Corporation, without reversion or impairment, without further act or deed, and without any transfer or assignment having occurred; and all debts, liabilities, obligations, restrictions and duties of the Company shall remain and continue as debts, liabilities, obligations, restrictions and duties of the Company, as the Surviving Corporation.

2.5 Effect on Capital Stock. By virtue of the Merger and without any action on the part of any holder of any of the Shares or the holder of the shares of capital stock of Merger Sub, as of the Effective Time:

(a) Capital Stock of Merger Sub. Each share of the capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into one fully paid and nonassessable share of common stock, par value $0.02 per share, of the Surviving Corporation.

(b) Cancellation of Treasury Stock. All Shares that are owned by the Company as treasury stock and all Shares owned by any direct or indirect wholly-owned Subsidiary of the Company shall be cancelled and retired and shall cease to exist with no payment being made with respect thereto.

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(c) Merger Consideration.

(i) The aggregate amount of the merger consideration (the “Merger Consideration”) in respect of all Shares entitled thereto shall be equal to

(A) Four Hundred Nineteen Million and No/100 Dollars ($419,000,000.00), provided that if the Operations Purchase Price (as defined in the Master Transactions Agreement) has not been distributed to the Shareholders prior to the Effective Time and is retained by the Surviving Corporation, the Merger Consideration will be increased by the amount of the Operations Purchase Price not so distributed;

less

(B) the Retained Debt;

less

(C) the sum of (1) the Transaction Fees, (2) the aggregate amount payable to holders of Stock Options and Stock Warrants pursuant to Section 2.11 (which amount is set forth on Section 4.4(l) of the Company Disclosure Letter), (3) the aggregate amount of the Gain Sharing Plan Awards (which amount is set forth on Section 4.4(l) of the Company Disclosure Letter); provided that the Participants’ Pro Rata Portion of the Dissenting Shareholder Sub-Escrow Amount shall have been deducted; provided that the portions of the Gain Sharing Plan Awards that are to be deposited in the Closing Date Escrow or the Shareholders and Participants Fund will be distributed and paid only as and when releases are made from the Closing Escrow as provided in Section 2.9 and the Participants Fund portion of the Gain Sharing Plan Awards will be paid only as and when releases are made from the Shareholders and Participants Fund as provided herein and in the Participant Letters and (4) the amount of any Defeased Debt. The amounts deducted from the Merger Consideration as provided in Section 2.5(c)(i)(C) shall be referred to as the “Deducted Amounts” and will be paid, released or distributed as provided in, Sections 2.9, 2.10(b)(i)(B) or 2.10(b)(i)(E), as the case may be.

(ii) The following amounts (the “Withheld Amounts”) shall be withheld from the Merger Consideration, which Withheld Amounts will be held and paid as follows:

(A) the Dissenting Shareholder Sub-Escrow Amount (as determined pursuant to Section 2.5(e)), which shall be deposited pursuant to the Closing Escrow Agreement and will be paid, to the extent not applied as provided in Section 2.5(e), to the Paying Agent for disbursement to the Shareholders immediately upon final resolution of the Dissenting Shareholder claims as provided in Section 2.5(e);

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(B) the Shareholder Escrow Amount, which will be deposited pursuant to the Closing Escrow Agreement and will be applied to the satisfaction of claims by the Purchaser Indemnitees pursuant to Article 11 of the Master Transactions Agreement and the Closing Escrow Agreement. In addition, as provided in Section 2.9, the Participants Escrow Amount will be withheld from the Gain Sharing Award and deposited pursuant to the Closing Escrow Agreement to satisfy such claims. To the extent that the Shareholder Escrow Amount and the Participant Escrow Amount are not required to satisfy such claims by the Purchaser Indemnitees or expenses incurred by the Shareholder Representatives, the remaining balance of such amounts shall be released and distributed to the Shareholders and the Participants, pro rata in accordance with their respective Pro Rata Portions, as provided in Article 11 of the Master Transactions Agreement, Section 2.9 of this Agreement, and the Closing Escrow Agreement; and

(C) an amount equal to 80% of the “Shareholders and Participants Fund Amount,” which Shareholders and Participants Fund Amount will be equal to the greater of (1) $1,500,000 and (2) the Estimated Working Capital Shortfall (as defined in the Contribution Agreement) plus $1,000,000. Such amount will be deposited, along with 20% of the Shareholders and Participants Fund Amount that will be withheld from the Gain Sharing Plan Awards pursuant to Section 2.9, in an account (collectively, the “Shareholders and Participants Fund”) designated by the Shareholder Representatives. The Shareholder Representatives will apply the Shareholders and Participants Fund to satisfy the claims, if any, pursuant to Section 2.10(c)(ii) and, to the extent not so applied, to satisfy actual out-of-pocket claims or expenses of the Shareholder Representatives that are associated with the determination of Working Capital and the resolution of claims by Purchaser Indemnitees under the Master Transactions Agreement and the Closing Escrow Agreement and to the extent not so applied, shall be released by them to the Shareholders and the Participants, pro rata in accordance with their respective Pro Rata Portions, promptly after the final resolution of all claims under such agreements and in accordance with this Agreement and the provisions of the Shareholder Letters and Participant Letters.

(iii) The Purchaser shall cause to be furnished to the Paying Agent the amounts set forth in Section 2.10 at the times set forth therein.

(iv) Notwithstanding anything to the contrary in this Agreement, (A) no amount shall be included in any adjustment to, or withholding from, the Merger Consideration to the extent that such amount is included or has previously been included in any other adjustment to or withholding from the Merger Consideration (and, with respect to withheld amounts, not subsequently paid or disbursed to the Shareholders or Shareholder Representatives), (B) no portion of the Defeasance Costs shall be included in any adjustment to, or withholding from,

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the Merger Consideration, in the Working Capital Adjustment, or in the Transaction Fees, (C) no portion of the Retained Debt or Defeased Debt shall be taken into account in computing the Working Capital Adjustments and (D) the Withheld Amounts shall not be deemed paid or disbursed to the Shareholders as part of the Merger Consideration until and to the extent actually so paid or disbursed in accordance with Section 2.5(c)(iii), Section 2.5(e) and Section 2.10 of this Agreement and, with respect to the Closing Escrow Amount, in accordance with the provisions of the Master Transactions Agreement and the Closing Escrow Agreement. Any amounts not so paid or disbursed to the Shareholders shall be deemed a reduction of the Merger Consideration.

(d) Conversion of Company Capital Stock. The issued and outstanding Shares as of the Effective Time (other than Dissenting Shares) shall automatically be converted into the right to receive the Merger Consideration, payable as provided in Section 2.10. As among the Shares, the Merger Consideration will be allocated as follows: (i) in the case of each Share of Company Common Stock, the Per Common Share Merger Consideration; (ii) in the case of each Share of Series A Preferred Stock, the Per Series A Share Merger Consideration; (iii) in the case of each Share of Series B Preferred Stock, the Per Series B Share Merger Consideration; (iv) in the case of each Share of Series C Preferred Stock, the Per Series C Share Merger Consideration; (v) in the case of each Share of Series D Preferred Stock, the Per Series D Share Merger Consideration; and (vi) in the case of each Share of Series F Preferred Stock, the Per Series F Share Merger Consideration. The distribution of the Merger Consideration at and after Closing pursuant to the further provisions hereof shall be made by the Paying Agent pursuant to the Paying Agent Disbursement Schedule.

(e) Dissenting Shares.

(i) Notwithstanding anything in this Agreement to the contrary, any Shares that are issued and outstanding immediately prior to the Effective Time and that are held by a shareholder who has not voted such Shares in favor of or consented to the Merger and who complies with all the provisions of Article 5.12 of the TBCA (a “Dissenting Shareholder”) concerning the right of shareholders to dissent from the Merger and require appraisal of their Shares (“Dissenting Shares”) will not be converted as described in Section 2.5(d), but will become the right to receive such consideration as may be determined to be due to such Dissenting Shareholder pursuant to the laws of the State of Texas.

(ii) The Company will give the Purchaser and the Shareholder Representatives (A) prompt notice of any demands for appraisal of Shares received by the Company and (B) the opportunity to participate in and jointly to direct all negotiations and proceedings with respect to any such demands. The Company will not, without the prior written consent of Purchaser and two of the three Shareholder Representatives, make any payment with respect to, or settle, offer to settle, or otherwise negotiate, any such demands.

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(iii) An amount equal to the Applicable Per Share Merger Consideration multiplied by the number of Shares owned by all Dissenting Shareholders (the “Dissenting Shareholder Sub-Escrow Amount”) shall be withheld at Closing and deposited pursuant to the Closing Escrow Agreement. Upon final resolution of the amount to be paid with respect to Shares owned by Dissenting Shareholders in accordance with the laws of the State of Texas or upon settlement of claims by Dissenting Shareholders approved by Purchaser and two of the three Shareholder Representatives, the Company, the Purchaser and the Shareholder Representatives will direct the Escrow Agent to withdraw and distribute, to the extent of the Dissenting Shareholder Sub-Escrow Amount, the amount to be paid to such Dissenting Shareholders against a release of their claims and surrender of their Certificates; provided, however, that to the extent permitted by the laws of the State of Texas, from the amounts to be paid there shall be withheld such amounts determined pursuant to Sections 2.5(c)(ii) that would have been otherwise withheld with respect to the Shares owned by such Dissenting Shareholders, which amounts will be paid and distributed as and when distributions of Withheld Amounts pursuant to Section 2.5(c)(ii) are made to the other Shareholders.

(iv) If, after the Effective Time, such Dissenting Shareholder withdraws his or her demand for appraisal or fails to perfect or otherwise loses his or her right of appraisal, in any case pursuant to the TBCA, each of his or her Shares will be deemed to be converted as of the Effective Time into the right to receive the Applicable Per Share Merger Consideration, without interest, upon the surrender of the Certificate therefor in accordance with the terms of this Agreement.

(v) Upon the final resolution of Dissenting Shareholder claims, the Company, the Purchaser and the Shareholder Representatives will direct the Escrow Agent to withdraw and distribute to the Shareholders and Participants (in accordance with their respective Pro Rata Portions) an amount equal to the balance of the Dissenting Shareholder Sub-Escrow Amount, if any, remaining after the payments to the Dissenting Shareholders (and any withholdings) pursuant to Section 2.5(e)(iii).

(f) Cancellation of Shares. As of the Effective Time, all Shares that are issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares) shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and each holder of a certificate representing any Shares outstanding immediately prior to the Effective Time being converted into the right to receive the Applicable Per Share Merger Consideration for such Shares pursuant to Section 2.5(d) (each a “Certificate” and collectively, the “Certificates”) shall cease to have any rights with respect thereto, except the right to receive a cash amount equal to the Applicable Per Share Merger Consideration for such Shares multiplied by the number of Shares formerly represented by such Certificate (less an allocable portion of the Closing Escrow Amount and Shareholders Fund), to be paid in consideration therefor upon surrender of such Certificate in accordance with Section 2.10(d).

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2.6 Articles of Incorporation and Bylaws of Surviving Corporation. From the Effective Time until thereafter amended as provided by law, the articles of incorporation and bylaws of the Company, as in effect immediately prior to the Effective Time, shall be the articles of incorporation and bylaws of the Surviving Corporation.

2.7 Directors and Officers.

(a) Directors of the Surviving Corporation. The directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, each to hold office in accordance with the articles of incorporation and bylaws of the Surviving Corporation.

(b) Officers of the Surviving Corporation. From and after the Effective Time, the officers of Merger Sub immediately prior to the Effective Date, shall be the officers of the Surviving Corporation until the earlier of their death, resignation or removal or until their respective successors are duly elected and qualified, as the case may be, in accordance with the articles of incorporation and bylaws of the Surviving Corporation.

2.8 Performance Deposit.

(a) Performance Deposit. The Purchaser Parties have deposited the Performance Deposit pursuant to the Master Transactions Agreement.

(b) Disbursement to Paying Agent. If the Closing occurs, (i) the Deposit Escrow Agent shall pay the Performance Deposit to the Paying Agent for the benefit of the Shareholders and the Option Holders, by wire transfer of immediately available funds as of the Closing, whereupon the Performance Deposit will become part of the Merger Fund (and Purchaser shall receive a credit at Closing against the Merger Consideration in an amount equal to the Performance Deposit), and (ii) the Deposit Escrow Agent shall pay all interest that has then accrued on the Performance Deposit to the Purchaser by wire transfer of immediately available funds as of the Closing.

(c) Disbursement to Purchaser or Company.

(i) If

(A) the Closing does not occur as a result of a material breach of any representation, warranty, covenant or agreement on the part of the Purchaser set forth in the Transaction Agreements or the Master Transactions Agreement is terminated as a result of such breach, the Performance Deposit shall be released to the Company, together with all interest that has then accrued on the Performance Deposit;

(B) the Closing does not occur as a result of any other reason or event than specified in Section 2.8(c)(i)(A) of this Agreement, the Performance Deposit shall be released to the Purchaser, together with all interest that has then accrued on the Performance Deposit.

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(ii) Nothing contained in this Agreement or the existence or release of the Performance Deposit shall limit or affect the availability of any remedy of any Party arising by reason of the breach of any Transaction Agreement.

2.9 Closing Escrow.

(a) Escrow. At the Closing, the Purchaser shall deposit into escrow (the “Closing Escrow”) with J.P. Morgan Chase (the “Closing Escrow Agent”) Fifteen Million Dollars ($15,000,000) of which (i) Twelve Million Dollars ($12,000,000) will be derived from the Merger Consideration (the “Shareholder Escrow Amount”) and (ii) Three Million Dollars ($3,000,000) will be derived from the Gain Sharing Plan Awards that would otherwise be payable as set forth on Section 4.4(l) of the Disclosure Letter (the “Participant Escrow Amount” and collectively with the Shareholder Escrow Amount, the “Closing Escrow Amount”), by wire transfer of immediately available funds, and the Purchaser, the Shareholder Representatives and the Closing Escrow Agent shall enter into an escrow agreement substantially in the form attached hereto as Exhibit B (the “Closing Escrow Agreement”).

(b) Release of Escrow Funds.

(i) As provided more specifically in the Closing Escrow Agreement and the Master Transactions Agreement, the term of the Closing Escrow will be thirty-six (36) months, commencing on the Closing Date and ending on that date that is thirty-six (36) months thereafter, subject to asserted but unresolved claims, if any, outstanding at the end of such thirty-six (36) month period.

(ii) Releases from the Closing Escrow will be made in accordance with the Closing Escrow Agreement and the Master Transactions Agreement. When funds are so released, they will be released to the Shareholders and the Participants, pro rata in accordance with their respective Pro Rata Portions. In the case of the Shareholders, the funds that are so released will be treated as deferred payment of the Merger Consideration on the date of the release; in the case of the Participants, the funds that are so released will be treated as deferred payment of a Gain Sharing Plan Award on the date of the release.

2.10 Exchange of Certificates.

(a) Paying Agent. Immediately prior to Closing, the Company shall appoint a bank or trust company reasonably acceptable to the Purchaser to act as paying agent (the “Paying Agent”). The fees and costs associated with the Paying Agent shall be included in Transaction Fees.

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(b) Payment of Merger Consideration and Disbursements at Closing. On or before the Closing,

(i) the Purchaser shall deposit (or cause to be deposited) in cash

(A) the Merger Consideration (less the amount of the Performance Deposit and the Withheld Amounts) with the Paying Agent, which amount plus the Performance Deposit received pursuant to Section 2.8(b), shall be disbursed to the Shareholders in accordance with the Paying Agent Disbursement Schedule;

(B) the Deducted Amounts (including the Gain Sharing Plan Awards, less the Participant Escrow Amount) with the Paying Agent, which shall be paid by wire transfer by the Paying Agent to the Persons specified in joint irrevocable instructions of the Purchaser, the Company and the Shareholder Representatives at Closing;

(C) the Dissenting Shareholder Sub-Escrow Amount and the Closing Escrow Amount with the Closing Escrow Agent, which amounts will be applied or distributed as provided in Sections 2.5(e) and 2.9, respectively;

(D) the Shareholders Fund and Participants Fund amounts with the Shareholder Representatives, which amounts shall be applied or distributed as provided in Section 2.5(c)(ii)(C); and

(E) the amount of the Defeasance Costs and Defeased Debt with the Paying Agent, which shall be paid by wire transfer by the Paying Agent to the Persons specified in joint irrevocable instructions of the Purchaser, the Company and the Shareholder Representatives at Closing.

The amounts deposited as provided in (A) and (B) above and Section 2.8(b) may be referred to as the “Merger Fund.” The Merger Fund shall not include Applicable Per Share Merger Consideration for any Dissenting Shares, and the holders of Dissenting Shares shall not be entitled to receive payment of the Applicable Per Share Merger Consideration related to such Dissenting Shares from the Merger Fund. The Merger Fund shall not be used for any purpose other than to make the payments and disbursements described in this Section 2.10.

(ii) As of the date of this Agreement, the Merger Purchaser and the Company have approved Schedule 2.10(b)(ii), which sets forth the liabilities of the Company and its Subsidiaries that is secured by the real estate to be owned by the Real Estate Entity after the Closing. Such schedule also designates the Retained Debt, which is the liabilities listed on Schedule 2.10(b)(ii) that the Merger Purchaser has designated as being debt that it intends for the Company and its Subsidiaries to retain on and after the Closing. However, the Parties agree that if the consent or approval of a holder of a liability designated as Retained Debt is required in order for the Transactions to be consummated or for the Company and its Subsidiaries to retain such liability on and after the Closing, and if all of the conditions set forth in Section 6.1(a) (other than those that by their nature are intended to be satisfied at Closing) have been satisfied but such holder

15

has not granted such consent or approval, such liability will be included in the Defeased Debt and will be discharged (along with related Defeasance Costs) at Closing. The Defeasance Costs have been estimated (or the basis for computing such costs), without regard to any conversion of Retained Debt to Defeased Debt at Closing pursuant to the immediately preceding sentence, on the Defeasance Cost Schedule prepared and approved by the Parties and attached hereto as Annex 1, which will be updated prior to the Closing (including to reflect any such conversions).

(c) Working Capital.

(i) Any amounts due to the Shareholders and Participants pursuant to Section 3.2 of the Contribution Agreement shall be paid to the Shareholders and Participants pursuant to the terms of such Section 3.2.

(ii) Any amounts payable by the Shareholders and Participants pursuant to Section 3.2 of the Contribution Agreement shall be paid, solely out of and to the extent of the balance of the Shareholders and Participants Fund then held, by the Shareholder Representatives to NewCo pursuant to the terms of such Section 3.2.

(d) Exchange Procedures. Promptly after the Effective Time (but not later than five (5) Business Days after the date on which the Effective Time occurs), the Purchaser shall cause the Paying Agent to mail or deliver to each Person who was, at the Effective Time, a holder of record of Shares and whose Shares are being converted into the right to receive the Applicable Per Share Merger Consideration in respect of such Shares pursuant to Section 2.5(d) a letter of transmittal (which shall be in customary form and specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall otherwise be in a form and have such other provisions as the Purchaser may reasonably specify) containing instructions for use by holders of Certificates to effect the exchange of their Certificates for the Applicable Per Share Merger Consideration (less the applicable allocable portion of the Closing Escrow Amount) in respect of the Shares formerly represented thereby as provided herein. Subject to the other provisions of this Section 2.10, as soon as practicable after the Effective Time, provided that the holder of an outstanding Certificate has delivered at Closing an executed Shareholder Letter, upon surrender to the Paying Agent of such Certificate and such letter of transmittal duly executed and completed in accordance with the instructions thereto (together with such other documents as the Paying Agent may reasonably request) and acceptance thereof by the Paying Agent, each holder of an outstanding Certificate shall be entitled to receive, and the Paying Agent shall promptly pay out of the Merger Fund, an amount of cash (payable by check) equal to the Applicable Closing Date Per Share Merger Consideration in respect of the Shares formerly represented by such Certificate multiplied by the number of Shares formerly represented by such Certificate, as set forth on a Paying Agent Disbursement Schedule to be delivered to the Purchaser and the Paying Agent by the Company at Closing. The Paying Agent shall accept such Certificates upon compliance with such reasonable terms and conditions as the Paying Agent may impose

16

to effect an orderly exchange thereof in accordance with normal exchange practices. If cash is to be remitted to a Person other than the Person in whose name the Certificate surrendered for exchange is registered, it shall be a condition of such exchange that the Certificate so surrendered shall be properly endorsed, with signature guaranteed, or otherwise in proper form for transfer and that the Person requesting such exchange shall pay to the Paying Agent any transfer or other taxes required by reason of the payment of the Applicable Per Share Merger Consideration to a Person other than the registered holder of the Certificate so surrendered, or shall establish to the satisfaction of the Paying Agent that such tax either has been paid or is not applicable. Until surrendered as contemplated by this Section 2.10(d), at any time after the Effective Time, each Certificate shall be deemed to represent only the right to receive the Applicable Per Share Merger Consideration in respect of the Shares formerly represented by such Certificate upon such surrender as contemplated by Section 2.5. No interest shall be paid or shall accrue on any cash payable as Applicable Per Share Merger Consideration except to the extent provided, if at all, under the Closing Date Escrow Agreement. The Applicable Per Share Merger Consideration to be disbursed through the Paying Agent that is due to any holder of an outstanding Certificate who has delivered such Certificate and all other required documentation, other than the Shareholder Letter, shall be retained in the Merger Fund until such holder delivers an executed Shareholder Letter to the Paying Agent or until otherwise mandated by a court of competent jurisdiction, whichever first occurs, whereupon such funds shall be delivered to the Shareholder entitled to same.

(e) No Further Ownership Rights in Shares Exchanged for Cash. All cash paid upon the surrender for exchange of Certificates formerly representing Shares in accordance with the terms of this Article 2 shall be deemed to have been paid in full satisfaction of all rights pertaining to the Shares formerly represented by such Certificates, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the Shares which were issued and outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for transfer, then they shall be cancelled and exchanged as provided in this Article 2.

(f) Termination of Merger Fund. Any portion of the Merger Fund which remains undistributed to the holders of Certificates as of the first anniversary of the Effective Time shall be delivered to the Purchaser, and any holders of Certificates who have not theretofore complied with this Article 2 shall thereafter look only to the Purchaser for payment of the Merger Consideration, subject to escheat and abandoned property and similar laws.

(g) No Liability. None of the Parties or the Paying Agent shall be liable to any Person in respect of any cash from the Merger Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

(h) Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed, accompanied by an agreement to indemnify the Purchaser and the Surviving Corporation from and against any and all losses, costs,

17

damages or expenses incurred in reliance on such affidavit, the Paying Agent shall issue in exchange for such lost, stolen or destroyed Certificate the Applicable Per Share Merger Consideration in respect of the Shares formerly represented by such lost, stolen or destroyed Certificate payable pursuant to this Agreement.

2.11 Effect of the Merger on Stock Options and Stock Warrants.

(a) Vesting of Stock Options and Stock Warrants. Prior to the Effective Time, the board of directors of the Company or any committee administering the Stock Plan shall take all actions necessary, and obtain all consents necessary, if any, so that all outstanding Stock Options heretofore granted under the Stock Plan and all outstanding Stock Warrants whether or not then vested and exercisable shall be cancelled in exchange for the right to receive a cash payment from the Paying Agent, on behalf of the Surviving Corporation, of an amount equal to (i) the excess, if any, of (A) the Per Common Share Merger Consideration over (B) the per-share of Company Common Stock exercise price of such Stock Option or Stock Warrant, multiplied by (ii) the number of shares of Company Common Stock for which such Stock Option or Stock Warrant shall not theretofore have been exercised. Promptly after the Effective Time (but not later than five (5) Business Days after the date on which the Effective Time occurs), the Paying Agent, on behalf of the Surviving Corporation, shall pay to the Option Holders out of the Deducted Amounts contributed to the Merger Fund, the cash payments specified in this Section 2.11(a), which cash payments shall be specifically set forth on a schedule prepared by the Company and delivered to the Purchaser and the Paying Agent at the Closing.

(b) Termination of the Stock Plan. The Stock Plan shall terminate as of the Effective Time, and the provisions in any other agreement, arrangement or benefit plan providing for the issuance, transfer or grant of any capital stock of the Company or any interest in respect of any capital stock of the Company in connection with such Stock Plan shall be of no further force or effect as of the Effective Time, and the Company shall take such actions to ensure that following the Effective Time no Option Holder or any participant in or a party to the Stock Plan or other agreement, arrangement or benefit plan shall have any right thereunder to acquire any capital stock or any interest in respect of any capital stock of the Surviving Corporation.

2.12 Withholding Rights. The Paying Agent, on behalf of the Surviving Corporation, will be entitled to deduct and withhold from the amounts otherwise payable to any Shareholder, Option Holder, Gain Sharing Plan Award recipient or any other person or entity pursuant to this Article 2 such amounts as the Surviving Corporation is required to deduct and withhold with respect to the making of such payment under the Code or any provision of applicable Tax Law, including withholding pursuant to Section 1445 of the Code with respect to any Shareholder who does not provide to the Paying Agent a certification in accordance with the requirements of Section 1445 of the Code that such Shareholder is not a “foreign person,” as defined in Section 1445 of the Code. To the extent that amounts are so deducted and withheld by the Paying Agent on behalf of the Surviving Corporation, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Shareholder, Option Holder, Gain Sharing Plan Award recipient or any other person or entity, as the case may be, in respect of which such

18

deduction and withholding was made. The Purchaser shall cause the Paying Agent to promptly pay to the Surviving Corporation all such amounts so withheld, and the Surviving Corporation shall timely pay over all such amounts so withheld to the U.S. Treasury Department or applicable state taxing authorities as required by applicable Tax Law.

2.13 No Liability of the Company Parties.

(a) The provisions of Section 9.3 of the Master Transaction Agreement are incorporated by reference herein and made a part hereof for all purposes.

(b) Without limiting the foregoing, the Shareholder Representatives and any Persons acting on their behalf shall have no personal liability to, and no claim may be made by, the Purchaser, NewCo, the Operations Purchaser (as defined in the Master Transactions Agreement), the Merger Sub, the Company, the Surviving Corporation or any of their respective Affiliates with respect to or by virtue of any acts or omissions of the Shareholder Representatives in connection with the Transactions Agreements or the transactions or activities contemplated thereby or occurring by virtue of the Transaction Agreements. Each of the Parties hereto and to the Transaction Agreements, the Surviving Corporation and their respective Affiliates hereby exculpates the Shareholder Representatives and any Persons acting on their behalf from, and holds harmless, relieves, releases and acquits the Shareholder Representatives and any Persons acting on their behalf from and against, any and all losses, liabilities, claims or obligations by reason of any act or omission of the Shareholder Representatives or any Persons acting on their behalf, including negligence. The foregoing shall not limit any right or claim that the Purchaser Indemnitees (as defined in the Master Transactions Agreement) may have as against the Closing Escrow or that NewCo may have pursuant to Section 3.2 of the Contribution Agreement solely to the extent of the Shareholders and Participants Fund and not from the Shareholder Representatives (or any Persons acting on their behalf) personally. The Shareholder Representatives and Persons acting on their behalf are express and intended third party beneficiaries of this provision and may enforce this provision as if a party to this Agreement.

ARTICLE 3

Representations and Warranties

of the Purchaser

Each of the Parties hereby acknowledges that the Purchaser is making certain representations and warranties to the Company in the Master Transactions Agreement in connection with this Agreement and the transactions contemplated hereby, which representations and warranties constitute a material inducement to the Company to enter into this Agreement and to consummate the transactions contemplated hereby.

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ARTICLE 4

Representations and Warranties

of the Company

Each of the Parties hereby acknowledges that the Company is making certain representations and warranties to the Purchaser in the Master Transactions Agreement in connection with this Agreement and the transactions contemplated hereby, which representations and warranties constitute a material inducement to the Purchaser to enter into this Agreement and to consummate the transactions contemplated hereby.

ARTICLE 5

Shareholders’ Meeting

As promptly as is reasonably practicable following the execution and delivery of this Agreement, the Company, acting through its board of directors, shall duly call, give notice of (the “Notice of Special Meeting”), convene and hold a special meeting of the Shareholders (the “Shareholders’ Meeting”) for the purpose of considering and taking action on this Agreement and the Merger, the Master Transactions Agreement and the Contribution Agreement. The Notice of Special Meeting shall include the recommendation of the board of directors of the Company that the Shareholders approve and adopt this Agreement and the Merger, the Master Transactions Agreement and the Contribution Agreement and shall be accompanied by all materials required by applicable Law (collectively with the Notice of Special Meeting, the “Shareholder Materials”). The Company shall mail or deliver the Shareholder Materials to all of the Shareholders at the Company’s expense. The Company shall use its commercially reasonable efforts to obtain the approval and adoption of this Agreement and the Merger, the Master Transactions Agreement and the Contribution Agreement by the Shareholders.

ARTICLE 6

Conditions to Obligation to Close

6.1 Conditions to Obligation of the Purchaser Parties.

(a) The obligation of the Purchaser Parties to consummate the transactions to be performed by them in connection with the Closing is subject to satisfaction of the following conditions:

(i) the representations and warranties of the Company set forth in Articles 3, 4 and 5 of the Master Transactions Agreement that are qualified by materiality or Material Adverse Effect shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, in either case as of the Closing Date as though made on and as of the Closing Date (provided that, to the extent any such representation or warranty speaks as of a specified date, it need only be true and correct as of such specified date);

(ii) the Company shall have performed and complied in all material respects with all covenants and obligations required by this Agreement or the Master Transactions Agreement to be performed or complied with by the Company at or prior to the Closing;

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(iii) this Agreement and the Master Transactions Agreement and the transactions contemplated hereby and thereby, including the Merger, shall have been adopted and approved by Shareholders owning at least ninety percent (90%) of the total outstanding Shares (determined by vote and value), at the Shareholders’ Meeting or by written consent, in either case in accordance with the requirements of the Company’s articles of incorporation and bylaws and applicable Law;

(iv) there have occurred no changes, events, conditions or circumstances that have had, or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect since the date hereof;

(v) no court of competent jurisdiction in the United States or any other Governmental Entity, based otherwise than on any applicable antitrust Law, (A) shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or the Master Transactions Agreement, which Order or other action shall have become final and non-appealable or (B) shall have failed to issue an Order or to take any other action necessary to fulfill the conditions to the Closing, and which denial of a request to issue such Order or take such other action shall have become final and non-appealable;

(vi) the Company shall have received the resignations of all of its directors and officers and the directors and officers of the Real Estate Entity, effective as of the Effective Time, in a form reasonably satisfactory to the Purchaser or such directors and officers shall have otherwise been removed;

(vii) the Company shall have delivered to the Purchaser Parties a certificate executed on the Company’s behalf by a duly authorized executive officer of the Company, dated the Closing Date, certifying that each of the conditions specified above in Sections 6.1(a)(i) through 6.1(a)(vi) is satisfied;

(viii) the following shall have occurred:

(A) the “Third Party Real Estate Review Conditions” which will be (1) receipt of third party appraisals reasonably satisfactory to Merger Sub reflecting an aggregate appraised value of not less than the Merger Consideration, (2) receipt of third party real estate inspections reasonably satisfactory to Merger Sub reflecting that there are no material defects in the real estate assets taken as a whole (subject to the cure provisions of Section 6.1(b)), (3) receipt of Phase I environmental reports reasonably satisfactory to Merger Sub reflecting that there are no material environmental conditions relating to the real estate assets taken as a whole (subject to the cure provisions of Section 6.1(b)), (4) receipt of title policy binders reasonably satisfactory to Merger Sub reflecting that there are no material title defects as to the real estate assets taken as a whole (subject to the cure provisions of Section 6.1(b)); (5) receipt of third party market

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studies reasonably acceptable to Merger Sub with respect to the real estate assets taken as a whole; and (6) receipt of ALTA surveys reasonably satisfactory to Merger Sub reflecting that there are no material title defects or encroachments as to the real estate assets taken as a whole (subject to the cure provisions of Section 6.1(b)); and

(B) the “Regulatory Conditions,” which will be as follows: (1) all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated, (2) the Parties shall have received all material authorizations, consents and approvals and all material licenses, registrations, certifications and accreditations of Governmental Entities required by Law in order to consummate the transaction contemplated by this Agreement and the Master Transactions Agreement or necessary for the lawful conduct of the business of the Company and its Subsidiaries upon consummation of the Merger, other than those the failure of which to obtain would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

(ix) Shareholders representing no less than ninety percent (90%) of the voting interests of the Company shall have executed Shareholder Letters;

(x) the closing of the transactions contemplated by the Contribution Agreement shall have occurred;

(xi) the Master Transactions Agreement shall have been executed by NewCo, the Company and the Purchaser and shall not have been terminated;

(xii) the consent of Kimco Woodlands, L.P. listed on Section 3.4 of the Company Disclosure Letter to the Master Transactions Agreement shall have been obtained;

(xiii) the Amended and Restated Stockholders’ Agreement dated January 14, 2000 by and among the Company and certain of its shareholders shall have been terminated; and

(xiv) all actions to be taken by the Company in connection with consummation of the transactions contemplated by this Agreement and the Master Transactions Agreement, and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated by this Agreement and the Master Transactions Agreement, shall have been reasonably satisfactory in form and substance to the Purchaser.

(b) Notwithstanding the provisions of Section 6.1(a)(i) above:

(i) in the event that the condition stated in Section 6.1(a)(i) of this Agreement is not satisfied and the failure to so satisfy such condition would be cured by the expenditure of an aggregate of $2,000,000 or less, then such

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condition shall be deemed satisfied and the Damages (up to $2,000,000) incurred by the Purchaser as the result of such condition not being met shall be deducted from the Merger Consideration at the Closing, and no indemnification or other claim therefor shall be available in respect thereof following the Closing under the Master Transactions Agreement or the Closing Escrow Agreement.

(ii) in the event that the condition stated in Section 6.1(a)(i) of this Agreement is not satisfied and the failure to so satisfy such condition would be cured by the expenditure of more than an aggregate of $2,000,000 but less than an aggregate of $$5,000,000, such condition shall not be deemed satisfied unless (A) at least two of the Shareholder Representatives agree in writing to reduce the Merger Consideration by the amount required to cure such failure, (B) the Purchaser elects to waive such condition as provided in Section 6.1(c) of this Agreement or (C) at least two of the Shareholder Representatives agree in writing to reduce the Merger Consideration by more than $2,000,000 but less than the full amount required to cure such failure and the Purchaser elects to waive such condition as provided in Section 6.1(c) of this Agreement, in which event such condition shall be deemed satisfied and an aggregate of $2,000,000 (or such greater amount as at least two of the Shareholder Representatives shall have agreed to in writing) shall be deducted from the Merger Consideration and no indemnification or other claim therefor shall be available in respect thereof following the Closing under the Master Transactions Agreement or the Closing Escrow Agreement.

(c) The Purchaser may waive any condition specified in this Section 6.1.

6.2 Conditions to Obligation of the Company.

(a) The obligation of the Company to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

(i) the representations and warranties of the Purchaser set forth in Article 6 of the Master Transactions Agreement that are qualified as to materiality shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, in each case, as of the Closing Date as though made on and as of the Closing Date (provided that, to the extent that any such representation or warranty speaks as of a specified date, it need only be true and correct as of such specified date);

(ii) the Purchaser Parties shall have performed and complied in all material respects with all covenants and obligations required by this Agreement to be performed or complied with by them at or prior to the Closing;

(iii) this Agreement and the Master Transactions Agreement and the transactions contemplated hereby and thereby, including the Merger, shall have been adopted and approved by the Shareholders at the Shareholders’ Meeting or

23

by written consent, in either case in accordance with the requirements of the Company’s articles of incorporation and bylaws and applicable Law; provided, however, that the Company shall have complied with its obligations under Article 5;

(iv) no court of competent jurisdiction in the United States or any other Governmental Entity, based otherwise than on any applicable antitrust Law, (A) shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or the Master Transactions Agreement, which Order or other action shall have become final and non-appealable or (B) shall have failed to issue an Order or to take any other action necessary to fulfill the conditions to the Closing, and which denial of a request to issue such Order or take such other action shall have become final and non-appealable;

(v) the Purchaser Parties shall have delivered to the Company a certificate executed on the Purchaser Parties’ behalf by a duly authorized executive officer of the Purchaser and Merger Sub, dated the Closing Date, certifying that each of the conditions specified above in Sections 6.2(a)(i), (ii) and (iv) is satisfied;

(vi) all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated;

(vii) the Parties shall have received all other authorizations, consents, and approvals of Governmental Entities referred to in Section 3.4 of the Master Transactions Agreement and Section 3.4 of the Company Disclosure Letter, other than those the failure of which to obtain would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

(viii) the closing of the transactions contemplated by the Contribution Agreement shall have occurred;

(ix) the Master Transactions Agreement shall have been executed by the Operations Purchaser, the Company and the Purchaser and shall not have been terminated; and

(x) all actions to be taken by the Purchaser Parties in connection with consummation of the transactions contemplated by this Agreement and the Master Transactions Agreement, and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated by this Agreement and the Master Transactions Agreement, shall have been reasonably satisfactory in form and substance to the Company.

(b) The Company may waive any condition specified in this Section 6.2.

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ARTICLE 7

Miscellaneous

7.1 No Third-Party Beneficiaries. Except as provided in Section 2.10(c)(ii), Section 2.13 and this Section 7.1, this Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. Notwithstanding any other provision in the Transaction Agreements, (a) the Shareholder Representatives may enforce this Agreement and the other Transaction Agreements for and on behalf of the Shareholders and (b) the Company Parties may enforce the provisions of Section 2.13(a) (including the incorporated provisions from the Master Transactions Agreement) and are express and intended third party beneficiaries thereof.

7.2 Entire Agreement. This Agreement (including the documents referred to herein), the Master Transactions Agreement and the Confidentiality Agreement to which the Purchaser is a party constitute the entire agreement among the Parties and supersede any prior understandings, agreements, or representations by or among the Parties, whether oral or written, and there are no representations, warranties or other agreements between the Parties in connection with the subject matter hereof, except as specifically set forth herein or therein or contemplated hereby or thereby.

7.3 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Party.

7.4 References and Construction. In this Agreement: (a) unless the context requires otherwise, all references in this Agreement to articles, sections, subsections or other subdivisions shall be deemed to mean and refer to articles, sections, subsections or other subdivisions of this Agreement; (b) titles appearing at the beginning of any article, section, subsection or other subdivision are for convenience only and shall not constitute part of such article, section, subsection or subdivision and shall be disregarded in construing the language contained therein; (c) the words “this Agreement,” “this instrument,” “herein,” “hereof,” “hereby,” “hereunder” and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited; (d) words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires; (e) pronouns in masculine, feminine or neuter genders shall be construed to include any other gender; (f) examples shall not be construed to limit, expressly or by implication, the matters they illustrate; (g) the word “or” is not exclusive and the word “includes” and its derivatives means “including, without limitation,” and corresponding derivative expressions; (h) no consideration shall be given to the fact or presumption that one Party had a greater or lesser hand in drafting this Agreement or any provision hereof; (i) all references herein to “$” or “dollars” shall refer to U.S. Dollars; and (j) unless the context otherwise requires or unless otherwise provided herein, any reference herein to a particular agreement, instrument or document shall also refer to and include all schedules, attachments, appendices and exhibits to such agreement, instrument or document and all renewals, extensions, modifications, amendments or restatements of such agreement, instrument or document.

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7.5 Notices.

(a) All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be sent in accordance with Section 12.7 of the Master Transactions Agreement.

(b) If this Agreement provides for a designated period after a notice within which to perform an act, such period shall commence on the date of receipt or refusal of the notice.

(c) If this Agreement requires the exercise of a right by notice on or before a certain date or within a designated period, such right shall be deemed exercised on the date of delivery to the courier service, telecopying or mailing of the notice pursuant to which such right is exercised.

7.6 Specific Performance. Each of the Parties hereby expressly acknowledges and agrees that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, each of the Parties hereby expressly agrees that each Party who is not then in material breach of its obligations under this Agreement shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by any other Party and to specific performance of the terms and provisions of this Agreement, in addition to any other remedy to which such Party may be entitled at law or in equity.

7.7 Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of New York without giving effect to any choice or conflict of laws rules, provisions or principles (whether of the State of New York or any other jurisdiction) the application of which would result in the application of the Laws of any jurisdiction other than the State of New York.

7.8 Amendment. No amendment, modification or supplement of this Agreement shall be binding unless it shall be specifically designated to be an amendment, modification or supplement of this Agreement and shall be executed in writing by the Parties hereto.

7.9 Waivers. No waiver of any of the provisions of this Agreement shall be binding upon a Party unless such waiver shall be in writing and specifically designated as such and shall be executed by the Party or Parties to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement (whether or not similar), nor shall such waiver constitute a continuing waiver, unless otherwise expressly provided therein.

7.10 Severability. If any provision of this Agreement shall be held to be invalid, illegal or unenforceable by a court, tribunal or other forum of competent jurisdiction for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any subdivision of this Agreement containing any such provision held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; (b) such provision will be deemed reformed to the extent necessary to conform to applicable Law and to give maximum effect to the intent of the Parties,

26

or, if that is not possible, such provision shall be deemed severed from this Agreement; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any subdivision of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

7.11 Counterparts; Facsimile Signatures. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original copy of this Agreement, and all of which, when taken together, shall be deemed to constitute one and the same agreement. The Parties may sign and deliver this Agreement by facsimile transmission or by electronic mail in “portable document format.” Each Party agrees that the delivery of this Agreement by facsimile or by electronic mail in “portable document format” shall have the same force and effect as delivery of original signatures, and that each Party may use such facsimile or electronic mail signatures as evidence of the execution and delivery of this Agreement by all Parties to the same extent that an original signature could be used.

(SIGNATURE PAGE FOLLOWS)

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first written above.

THE “PURCHASER”
NATIONWIDE HEALTH PROPERTIES, INC.
a Maryland corporation
By:	/s/ Donald D. Bradley
Name:	Donald D. Bradley
Title:	Chief Investment Officer Senior Vice President
“MERGER SUB”
HAL ACQUISITION CORP.
a Delaware corporation
By:	/s/ Donald D. Bradley
Name:	Donald D. Bradley
Title:	President
THE “COMPANY”
HEARTHSTONE ASSISTED LIVING, INC.
a Texas corporation
By:	/s/ Timothy P. Hekker
Name:	Timothy P. Hekker
Title:	President & CEO

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EX-2.2

Exhibit 2.2

MASTER TRANSACTIONS AGREEMENT

BY AND AMONG

NATIONWIDE HEALTH PROPERTIES, INC.

HEARTHSTONE OPERATIONS, LLC

AND

HEARTHSTONE ASSISTED LIVING, INC.

TABLE OF CONTENTS

		Page
ARTICLE 1 Definitions		2
1.1	Definitions	2
ARTICLE 2 Provisions Concerning the Transactions		12
2.1	Relationship Among Transaction Agreements	12
2.2	Performance Deposit	13
2.3	Tax Treatment of Interest on Closing Escrow Amount	13
ARTICLE 3 Representations and Warranties of the Company to the Acquiring Parties		13
3.1	Organization, Qualification, and Corporate Power	14
3.2	Subsidiaries	14
3.3	Authority	15
3.4	Noncontravention; Required Filings and Consents; Broker’s or Finder’s Fees	15
3.5	Financial Statements	16
ARTICLE 4 Representations and Warranties of the Company to the Merger Purchaser		17
4.1	Capitalization	17
4.2	Property	18
4.3	Tax Matters	21
4.4	Benefit Plans and Arrangements	22
ARTICLE 5 Representations and Warranties of the Company to NewCo		25
5.1	Undisclosed Liabilities	25
5.2	Material Events Since Interim Financial Statements	26
ARTICLE 6 Representations and Warranties of the Merger Purchaser		26
6.1	Organization	26
6.2	Authority	26
6.3	Noncontravention; Required Filings and Consents	27
6.4	Advisors’ and Brokers’ Fees	27
6.5	Sufficient Funds	27
ARTICLE 7 [Intentionally Omitted]		28
ARTICLE 8 Pre-Closing Covenants		28
8.1	Notices and Consents; Cooperation	28
8.2	Conduct of the Business of the Company and its Subsidiaries	29
8.3	Access	32
8.4	Confidentiality Agreements	32
8.5	Risk of Loss	33
8.6	Director and Officer Resignations	34
8.7	Fees and Expenses	34
8.8	Commercially Reasonable Efforts	34
8.9	WARN Act	34

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8.10	Notification of Breach	35
8.11	Exclusivity	35
8.12	Section 280G	35
ARTICLE 9 Post-Closing Covenants		36
9.1	[Intentionally Omitted]	36
9.2	Indemnification; Directors’ and Officers’ Insurance	36
9.3	No Liability of Company Parties	36
ARTICLE 10 Termination		38
10.1	Termination of Agreements	38
10.2	Effect of Termination	40
ARTICLE 11 Indemnification; Remedies		40
11.1	Survival; Right to Indemnification Not Affected by Knowledge	40
11.2	Payment of Damages by or for the Benefit of the Shareholders and the Participants	41
11.3	Indemnification and Payment of Damages by Merger Acquiring Parties	45
11.4	Indemnification and Payment of Damages by NewCo	46
11.5	Remedies Exclusive	46
11.6	Procedure for Indemnification	47
11.7	Tax Benefits with Respect to Damages	50
11.8	No Duplication	50
11.9	No Special Damages	51
ARTICLE 12 Miscellaneous		51
12.1	Dispute Resolution	51
12.2	Press Releases and Public Announcements	53
12.3	No Third-Party Beneficiaries	53
12.4	Entire Agreement	53
12.5	Successors and Assigns	54
12.6	References and Construction	54
12.7	Notices	54
12.8	Governing Law	57
12.9	Amendment	57
12.10	Waivers	57
12.11	Severability	57
12.12	Counterparts; Facsimile Signatures	57

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MASTER TRANSACTIONS AGREEMENT

This MASTER TRANSACTIONS AGREEMENT (this “Agreement”) is entered into as of March 22, 2006 by and among NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation, (the “Merger Purchaser”), HEARTHSTONE OPERATIONS, LLC, a Delaware limited liability company (“NewCo”), and HEARTHSTONE ASSISTED LIVING, INC., a Texas corporation (the “Company”). The Merger Purchaser and NewCo are sometimes referred to collectively herein as the “Acquiring Parties” and individually as an “Acquiring Party.” The Merger Purchaser, NewCo and the Company are sometimes referred to collectively herein as the “Parties” and individually as a “Party.” Capitalized terms used herein shall have the meanings set forth in Article 1.

RECITALS:

A. Immediately prior to the Closing, the Company and its then current Subsidiaries will enter into a series of transactions more fully described in Exhibit A (the “Restructuring Transactions”) whereby the Real Estate Assets and Real Estate Liabilities will be transferred to the Real Estate Entity, a wholly-owned Subsidiary of the Company, subject to a master lease in favor of various Operating Entities (as defined below).

B. The Company and NewCo have entered into a Contribution Agreement of even date herewith (the “Contribution Agreement”) whereby: (i) the Company will contribute the Contributed Assets (as defined in the Contribution Agreement), which include all assets (other than the Equity Interests in the Real Estate Entity) owned by the Company, including all working capital items, all Equity Interests in the Company Subsidiaries listed on Schedule A attached to the Contribution Agreement (collectively the “Operating Entities”), and the “Hearthstone” name and mark; (ii) NewCo will agree to cause all of the Operating Entities to retain all of their respective liabilities and will assume all of the liabilities of the Company other than the Excluded Liabilities (all such assumed liabilities collectively, the “Assumed Liabilities”). The transactions described in this Recital B will be referred to as the “Contribution Transaction.”

C. Concurrently with the Closing but prior to the consummation of the Merger Transaction, the Company will sell the interests in NewCo to Hearthstone Senior Living Services, LLC (the “Operations Buyer”), which will be owned and controlled by the Management Team. Such purchase and sale will be made pursuant to the Operations Purchase Agreement of even date herewith (the “Purchase Agreement”). The purchase price will be Six Million Dollars ($6,000,000) in cash (the “Operations Purchase Price”). The transactions described in this Recital C will be referred to as the “Operations Transaction.” Immediately thereafter, the Company will make the Gain Sharing Payments and dividend the Operations Purchase Price. Thereafter the Company will make the E&P Distribution and dividend the right to receive the Positive Working Capital Amount, if any, to the Shareholders as more fully described in Section 2.1(b).

D. Concurrently with the Closing but following the consummation of the Operations Transaction, a wholly-owned subsidiary of the Merger Purchaser (“Merger Sub”) will merge with and into the Company with the Company becoming the Surviving Corporation (the “Merger

Transaction”) pursuant to that certain Agreement and Plan of Merger of even date herewith by and among the Company, the Merger Purchaser and Merger Sub (the “Merger Agreement”).

E. Although the Operations Transaction will be deemed to occur immediately prior to the Effective Time of the Merger Transaction, the Contribution Agreement and the Merger Agreement provide that the consummation of the transactions contemplated by each agreement is conditioned upon the consummation of the transactions under the other agreement.

F. All of the Parties desire to ensure that liabilities of the Company and its equity owners (prior to the Closing) arising out or as a result of the Transactions or under or relating to the Transaction Agreements, and the arrangements relating thereto, be treated in an integrated and comprehensive manner and that the Transaction Documents not be duplicative or conflicting.

NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE 1

Definitions

1.1 Definitions. As used in this Agreement and, unless otherwise defined in the Contribution Agreement or the Merger Agreement, as used in such agreements, the following terms shall have the meanings set forth in this Article 1:

“AAA” has the meaning set forth in Section 12.1(a).

“Acquiring Party” or “Acquiring Parties” has the meaning set forth in the preamble to this Agreement.

“Acquisition Transaction” has the meaning set forth in Section 8.11.

“Affiliate” means, with respect to a specified Person, any other Person who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person. For purposes of this definition, “control” (including the terms “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

“Agreement” has the meaning set forth in the preamble to this Agreement.

“Assets” has the meaning given such term in Annex I of the Contribution Agreement and includes all reserves created for liabilities and claims.

“Assumed Liabilities” has the meaning set forth in Recital B.

“Audited Financial Statements” has the meaning set forth in Section 3.5.

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“Benefits Affiliates” means (i) any corporation which is a member of a controlled group of corporations (as defined in Section 414(b) of the Code), which includes the Company, (ii) any trade or business (whether or not incorporated) that is under common control (as defined is Section 414(c) of the Code) with the Company, (iii) any organization (whether or not incorporated) that is a member of an affiliated service group (as defined in Section 414(m) of the Code), which includes the Company and (iv) any other entity required to be aggregated with the Company pursuant to the regulations issued under Section 414(o) of the Code.

“Benefit Plan” or “Benefit Plans” has the meaning set forth in Section 4.4(a).

“Business” has the meaning given such term in the recitals to the Contribution Agreement.

“Business Day” means a day other than a Saturday, Sunday or other day on which commercial banks in the State of New York are authorized or required by applicable Law to be closed.

“CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601, et seq., as amended.

“claimant” has the meaning set forth in Section 12.1(b).

“Closing” has the meaning given such term in Section 4.1 of the Contribution Agreement.

“Closing Date” has the meaning set forth in Section 4.1 of the Contribution Agreement.

“Closing Date Merger Consideration” has the meaning set forth in Section 2.1(c).

“Closing Escrow” has the meaning given such term in Section 1.1 of the Merger Agreement.

“Closing Escrow Agreement” has the meaning given such term in Section 1.1 of the Merger Agreement.

“Closing Escrow Amount” has the meaning given such term in Section 1.1 of the Merger Agreement.

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

“Company” has the meaning set forth in the preamble to this Agreement.

“Company Common Stock” means the common stock, par value $0.02 per share, of the Company.

“Company Disclosure Letter” has the meaning set forth in the preface to Article 3.

“Company Parties” has the meaning set forth in Section 9.3(c)(i).

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“Company Permits” means all permits, licenses, variances, exemptions, orders, franchises, authorizations, rights, registrations, certifications, accreditations and approvals of Governmental Entities that are necessary for the lawful conduct of the businesses of the Company and its Subsidiaries and for the ownership, occupancy and use of their respective Real Properties.

“Confidentiality Agreement” has the meaning set forth in Section 8.4.

“Contract” or “Contracts” means all of the material contracts, agreements and obligations, written or oral, to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective assets are bound, including any loan, bond, mortgage, indenture, lease instrument, franchise, license or supplier, vendor or employment agreement, but excluding any contracts, agreements or arrangements with residents of the Company’s facilities.

“Contributed Assets” has the meaning given such term in Annex I of the Contribution Agreement.

“Contribution Agreement” has the meaning set forth in Recital B.

“Contribution Transaction” has the meaning set forth in Recital B.

“Covered Claims” has the meaning set forth in Section 11.2(a).

“Damages” means an actual, and not consequential, loss, liability, claim, damage or expense, whether or not involving a third-party claim, (including reasonable costs of investigation and defense and reasonable attorney’s fees) that is recoverable based on, subject to the limitations of, the contractual provisions in Article 11.

“Deposit Escrow Agent” has the meaning set forth in Section 2.2.

“Deposit Escrow Agreement” has the meaning set forth in Section 2.2.

“Direct Claim Notice” has the meaning set forth in Section 11.6(b)(i).

“Dispute” has the meaning set forth in Section 12.1(a).

“E&P Distribution” has the meaning set forth in Section 2.1(b).

“Effective Time” has the meaning given such term in Section 1.1 of the Merger Agreement.

“Encumbrance” has the meaning set forth in Section 4.1.

“Equity Interests” means (i) with respect to a corporation, any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including all common stock and preferred stock, or warrants, options or other rights to acquire any of the foregoing and (ii) with respect to a partnership, limited liability company or similar Person, any and all units,

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interests, rights to purchase, warrants, options or other equivalents of, or other ownership interests in, any such Person.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Escrow Period” means the period commencing on the Closing Date and ending on the date on which all of the Closing Escrow Amount and all accrued interest and earnings thereon have been distributed in accordance with the terms of the Closing Escrow Agreement.

“Excluded Liabilities” has the meaning set forth in Section 2.2 of the Contribution Agreement.

“Facilities” has the meaning set forth in Section 4.2(d).

“Financial Statements” has the meaning set forth in Section 3.5.

“GAAP” means generally accepted accounting principles in the United States, consistently applied.

“Gain Sharing Plan” means the Company’s 2004 Gain Sharing Plan.

“Gain Sharing Plan Awards” means all amounts payable under the Gain Sharing Plan upon and in respect of the consummation of the transactions contemplated by this Agreement.

“Governmental Entity” or “Governmental Entities” means any court, tribunal, judicial body, arbitrator, stock exchange, administrative or regulatory agency, regulatory body or commission or other governmental or quasi-governmental authority or instrumentality, whether local, state or federal, domestic or foreign.

“Hart-Scott-Rodino Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Hazardous Substances” has the meaning set forth in Section 4.2(k).

“Hazardous Substances Laws” has the meaning set forth in Section 4.2(k).

“Health Departments” means departments of health and/or any Governmental Entity of the states where the Facilities are located which have jurisdiction over the licensing, ownership and/or operations of the Facilities.

“Interim Balance Sheet” has the meaning set forth in Section 3.5.

“Interim Financial Statements” has the meaning set forth in Section 3.5.

“Knowledge” when applied to the Company or NewCo means the actual knowledge of Timothy Hekker, President of the Company, James Wang, Chief Financial Officer, Laurence Daspit and Lloyd Schill, both Vice Presidents of Sales and Operations, and Richard Rosenberg, General Counsel, after making reasonable inquiry with respect to the relevant subject.

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“Law” means any United States (federal, state or local) or foreign law, statute, ordinance, rule, regulation or Order.

“Leased Real Property” has the meaning set forth in Section 4.2(b).

“Leases” has the meaning set forth in Section 4.2(g).

“Litigation” means any action, lawsuit, claim, proceeding, investigation or inquiry, whether civil, criminal or administrative.

“Material Adverse Effect” means any change in or effect on the business, results of operations, assets, financial condition or liabilities of the Company or any of its Subsidiaries that is materially adverse to the Company and its Subsidiaries taken as a whole; provided, however, that any adverse change or effect resulting from, or directly relating to, any of the following shall not be taken into account in making any such determination and shall not be deemed to constitute or give rise to a Material Adverse Effect, either individually or in the aggregate: (i) the announcement, pendency or consummation of the transactions contemplated by this Agreement (including, in each case to the extent arising therefrom, any decrease in customer demand, any reduction in revenues, any disruption in supplier, partner or similar relationships or any loss of employees); (ii) the taking of any action required by this Agreement or to which the Merger Purchaser has given its express written consent; (iii) the actions of the Merger Purchaser or any of its Affiliates (other than any actions permitted to be taken by the Merger Purchaser or Merger Sub pursuant to this Agreement or the Merger Agreement); (iv) general business or economic conditions affecting the economy as a whole that do not disproportionately (in comparison to other companies of comparable size in the industry) and materially adversely affect the Company or its Subsidiaries taken as a whole; (v) conditions generally affecting the assisted living industry as a whole that do not disproportionately (in comparison to other companies of comparable size in the industry) and materially adversely affect the Company or its Subsidiaries taken as a whole; or (vi) changes or developments in financial or securities markets or the economy in general, any outbreak or escalation of hostilities or the declaration by the United States of a national emergency or war, any acts of terrorism, any other international or domestic calamity or crisis or geopolitical event, or effects of weather or meteorological events that do not disproportionately (in comparison to other companies of comparable size in the industry) and materially adversely affect the Company or its Subsidiaries taken as a whole.

“Medicaid Waiver Programs” has the meaning set forth in Section 3.4(b).

“Merger Acquiring Party” means the Merger Purchaser or Merger Sub individually, and “Merger Acquiring Parties” means the Merger Purchaser and Merger Sub collectively.

“Merger Agreement” has the meaning set forth in Recital D.

“Merger Consideration” has the meaning given such term in Section 1.1 of the Merger Agreement.

“Merger Purchaser” has the meaning set forth in the preamble to this Agreement.

“Merger Sub” has the meaning set forth in Recital D.

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“Merger Transaction” has the meaning set forth in Recital D.

“NewCo” has the meaning set forth in the preamble to this Agreement.

“Notice of Arbitration” has the meaning set forth in Section 12.1(b).

“Occupancy Leases” has the meaning set forth in Section 4.2(g).

“Operations Buyer” has the meaning set forth in Recital C.

“Operations Purchase Price” has the meaning set forth in Recital C.

“Operations Transaction” has the meaning set forth in Recital C.

“Order” means any decree, judgment, injunction, ruling, writ or other order (whether temporary, preliminary or permanent) of any Governmental Entity.

“Owned Real Property” has the meaning set forth in Section 4.2(a).

“Panel” has the meaning set forth in Section 12.1(d).

“Participant” has the meaning given such term in the Gain Sharing Plan.

“Participant Letter” means a letter addressed to the Surviving Corporation and the Acquiring Parties in the form set forth in Exhibit B attached hereto executed by a Participant.

“Party” or “Parties” has the meaning set forth in the preamble to this Agreement.

“Paying Agent” has the meaning given such term in the Merger Agreement.

“PCBs” has the meaning set forth in Section 4.2(n).

“Performance Deposit” has the meaning set forth in Section 2.2.

“Permitted Liens” has the meaning set forth in Section 4.2(j).

“Person” means any natural person, firm, partnership, limited liability company, joint venture, business trust, trust, association, corporation, company, unincorporated entity or other entity.

“Positive Working Capital Amount” has the meaning given such term in the Contribution Agreement.

“Post-Closing Liabilities” means any liabilities or obligations, whether accrued, absolute, contingent or otherwise, of a Person, including Taxes, arising from or as a result of any transaction, action, event, condition or omission occurring or arising after the Effective Time of the Merger.

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“Post-Closing Taxable Period” means (A) any taxable period of the Company that begins after the Closing Date and (B) with respect to any taxable period of the Company that includes the Closing Date, the portion of such taxable period after the Closing Date.

“Potential Claims” has the meaning set forth in Section 9.3(c)(i).

“Potential Purchasers” has the meaning set forth in Section 8.11.

“Pre-Closing Taxable Period” means (A) any taxable period of the Company that ends on or before the Closing Date and (B) with respect to any taxable period of the Company that includes the Closing Date, the portion of such taxable period prior to and including the Closing Date.

“Pro Rata Portion” means, with respect to any Shareholder or Participant, the percentage set forth opposite such Shareholder’s or Participant’s name on Exhibit A attached to the Merger Agreement.

“Purchase Agreement” has the meaning set forth in Recital C.

“Purchaser Indemnitees” has the meaning set forth in Section 11.2(a).

“Real Estate Assets” has the meaning given such term in Exhibit A.

“Real Estate Entity” means one or more wholly-owned Subsidiaries of the Company to be formed prior to Closing.

“Real Estate Liabilities” has the meaning given such term in Exhibit A.

“Real Property” has the meaning set forth in Section 4.2(b).

“Rent Roll” has the meaning set forth in Section 4.2(i).

“Representatives” means, with respect to a specified Person, such Person’s officers, directors, partners, managers, employees, consultants, representatives and other agents, including investment bankers, attorneys and accountants.

“respondent” has the meaning set forth in Section 12.1(b).

“Restructuring Transactions” has the meaning set forth in Recital A.

“Satisfied and Asserted Covered Claims” means satisfied Covered Claims and set aside amounts reserved for then asserted but unresolved Covered Claims in accordance with the Company’s past actuarial and reserve practices and procedures (and in all cases net of insurance, reserves and tax benefits, as applicable).

“SEC” means the United States Securities and Exchange Commission.

“Share” or “Shares” means the shares, or individually a share, of Company Capital Stock as defined in Section 1.1 of the Merger Agreement.

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“Shareholder” or “Shareholders” means the holders, or individually a holder, of Shares, together with their successors and assigns.

“Shareholder Indemnitees” has the meaning set forth in Section 11.3(a)(i).

“Shareholder’s Title Representation” means, as to a Shareholder, the representation and warranty by such Shareholder in its Shareholder Letter with respect to title and ownership of its Shares and its authorization to consummate the Merger Transaction.

“Shareholders and Participants Fund” has the meaning set forth in Section 1.1 of the Merger Agreement.

“Shareholder Letter” and “Shareholder Letters” means a letter addressed to the Surviving Corporation and the Acquiring Parties in the form set forth in Exhibit C attached hereto executed by a Shareholder.

“Shareholder Representatives” means the three (3) Persons who, pursuant to the Shareholder Letters and the Participant Letters, have been authorized in writing by the Shareholders and Participants who have signed Shareholder Letters and Participant Letters, respectively, to act on behalf of such Shareholders and Participants with respect to the determination of any Working Capital adjustment pursuant to Section 3.2 of the Contribution Agreement and with respect to the Closing Escrow and claims against the Closing Date Escrow pursuant to Article 11 hereof, the Shareholder Letters and the Participant Letters, and for as long as such claims remain outstanding. Such term shall also include any successor Persons selected in accordance with the provisions of the Shareholder Letters and Participant Letters. The Shareholder Representatives will not have any power or authority to act on behalf of the Shareholders or the Participants under any of the provisions of the Transaction Agreements prior to the Closing.

“Stockholders Agreement” means that certain Amended and Restated Stockholders Agreement, dated as of January 14, 2000, by and among the Company and shareholders of the Company signatory thereto, as amended by that certain Amendment to the Amended and Restated Stockholders Agreement dated as of January 4, 2001, and as further amended by that certain Second Amendment to Amended and Restated Stockholders Agreement dated as of November 15, 2004.

“Stock Options” means outstanding stock options to acquire shares of Company Common Stock under the Stock Plan.

“Stock Plan” means the Hearthstone Assisted Living, Inc. 1997 Amended and Restated Stock Option Plan.

“Stock Warrants” means those certain warrants to purchase shares of Company Common Stock and issued to certain individuals not under the Stock Plan, as more particularly described in the Company Disclosure Letter.

“Subsidiary” or “Subsidiaries” means with respect to a specified Person, any other Person (A) of which such specified Person or any other Subsidiary of such specified Person is a

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general partner or managing member, (B) of which voting power to elect a majority of the board of directors or others performing similar functions with respect to such other Person is held by such specified Person or by one or more of such specified Person’s Subsidiaries or (C) of which at least 50% of the equity interests (or economic equivalent) of such other Person are, directly or indirectly, owned or controlled by such specified Person or by one or more of such specified Person’s Subsidiaries.

“Survival Period” has the meaning set forth in Section 11.1(a)(ii).

“Tail Policy” has the meaning set forth in Section 9.2(a).

“Tangible Property” has the meaning set forth in Section 4.2(c).

“Tax” or “Taxes” means (i) all taxes, charges, fees, levies and other assessments, including income, gross receipts, excise, real or personal property, sales, withholding (including dividend withholding and withholding required pursuant to Sections 1445 and 1446 of the Code), social security, occupation, use, service, license, payroll, franchise, transfer and recording taxes, fees and charges, including estimated taxes, imposed by the United States or any taxing authority (domestic or foreign), whether computed on a separate, consolidated, unitary, combined or any other basis, and any interest, fines, penalties or additional amounts attributable to or imposed upon or with respect to any such taxes, charges, fees, levies or other assessments and (ii) any liability for amounts described in clause (i) of another Person under Treasury Regulation Section 1.1502-6 (or any similar provision of Law), as a result of transferee liability, by Law, by Contract or otherwise.

“Tax Audit” means any audit, examination, action, suit, proceeding, investigation, claim or other proceeding in respect of Taxes by a Governmental Entity.

“Tax Claims” has the meaning set forth in Section 11.1(a).

“Tax Contribution Agreement” means an agreement, oral or written, (A) that has one of its purposes to permit a Person to take the position that such Person could defer federal taxable income that otherwise might have been recognized in connection with a transfer of property or contribution to any entity that is treated as a partnership for federal income tax purposes and that (1) prohibits or restricts in any manner the disposition of any assets of any entity, (2) requires that any entity maintain, put in place, or replace, indebtedness, whether or not secured by one or more properties or (3) requires that any entity offer to any Person at any time the opportunity to guarantee or otherwise assume, directly or indirectly (including through a “deficit restoration obligation,” guarantee (including a “bottom” guarantee), indemnification agreement or other similar agreement), the risk of loss for federal income Tax purposes for indebtedness or other liabilities of any entity, (B) that specifies or relates to a method of taking into account book-tax disparities under Section 704(c) of the Code with respect to one or more assets of an entity or (C) that requires a particular method for allocating one or more liabilities of any entity under Section 752 of the Code.

“Tax Returns” means any report, return, document, declaration or other information or filing required to be supplied to any taxing authority or jurisdiction (foreign or domestic) with respect to Taxes, including any schedule or attachment thereto and amendment thereof, any

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information returns, and any documents with respect to or accompanying payments of estimated Taxes, or with respect to or accompanying requests for extension of time in which to file any such report, return, document, declaration or other information.

“Terminating Company Breach” has the meaning set forth in Section 10.1(d).

“Terminating Merger Purchaser Breach” has the meaning set forth in Section 10.1(c).

“Termination Date” has the meaning set forth in Section 10.1(f).

“Transaction Agreements” means this Agreement, the Contribution Agreement, the Merger Agreement and all other agreements related hereto or thereto (not including, for the avoidance of doubt, the Facilities Master Lease as defined in the Contribution Agreement (the “Master Lease”)).

“Transaction Fees” means all of the professional fees and related costs and expenses incurred by the Company in connection with this Agreement and the transactions contemplated hereby that remain outstanding as of the Closing, including all fees and related costs and expenses owing to Andrews Kurth LLP; Stoll Keenon & Park, LLP; Bank of America Securities, LLC; CB Richard Ellis, Inc.; Ernst & Young LLP; and the Paying Agent, the costs of the insurance policy which is the subject of Section 9.2, the premiums associated with clearing and updating title insurance policies currently in place, the wiring and check distribution costs associated with distributing the Merger Consideration to the Shareholders, and, in the event that a filing is required in connection with the Transactions under the Hart-Scott-Rodino Act, an amount equal to 50% of the filing fee associated therewith (with the remaining 50% to be paid by, and solely the financial responsibility of, Merger Purchaser). Transaction Fees shall not include any of the Defeasance Costs and shall not deducted from the Merger Consideration if such fees are deducted from Working Capital in making the Working Capital adjustment pursuant to the Contribution Agreement).

“Transactions” means the Operations Transaction, the Merger Transaction, and all of the other transactions (other than pursuant to the Master Lease) occurring pursuant to, contemplated by, or in connection with the Transaction Agreements, provided that term “Transaction” shall not include, with respect to any Purchaser Party (as defined in the Merger Agreement) any transaction with respect to which such Purchaser Party is not a party to or bound by the agreement giving rise to such transaction.

“12-Month Distribution” has the meaning set forth in Section 11.2(b)(i).

“12-Month Survival Period” has the meaning set forth in Section 11.1(a).

“24-Month Distribution” has the meaning set forth in Section 11.2(b)(ii).

“24-Month Survival Period” has the meaning set forth in Section 11.1(a)(ii).

“36-Month Distribution” has the meaning set forth in Section 11.2(b)(iii).

“36-Month Survival Period” has the meaning set forth in Section 11.1(a).

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“Voting Debt” has the meaning set forth in Section 4.1.

“WARN Act” has the meaning set forth in Section 8.9.

“Welfare Plan” has the meaning set forth in Section 4.4(f).

“Withheld Amounts” has the meaning set forth in Section 1.1 of the Merger Agreement.

“Working Capital” has the meaning set forth in Section 3.2 of the Contribution Agreement.

ARTICLE 2

Provisions Concerning the Transactions

2.1 Relationship Among Transaction Agreements.

(a) The Contribution Agreement governs the Contribution Transaction.

(b) Immediately prior to the Effective Time of the Merger Transaction, the Company will dividend to the Shareholders the Operations Purchase Price and the amount that the Company estimates in good faith prior to Closing is necessary to eliminate the Company’s current and accumulated earnings and profits through the Closing Date as computed for United States federal income tax purposes (“E&P Distribution”) after giving effect to the Operations Transaction, the payment of the Gain Sharing Plan Awards and the distribution of the Operations Purchase Price. At least seven (7) days prior to the Closing, the Company will provide the Merger Purchaser with a calculation of the proposed E&P Distribution and the opportunity to review the basis upon which the determination of the E&P Distribution was made. The Company will make a distribution to the Shareholders of the right to receive the Positive Working Capital Amount, if any. The E&P Distribution will be made immediately prior to the Closing; NewCo will assume the obligation to make the payment of the Positive Working Capital Amount, if any. The Parties will abide by the terms of the Contribution Agreement with respect to the determination of Working Capital.

(c) The Merger Agreement governs the merger of the Merger Sub with and into the Company. Pursuant to the Merger Agreement, and subject to the terms and conditions provided for therein, the Shares issued and outstanding as of the Effective Time shall automatically be converted into the right to receive the sum of (i) Merger Consideration less Withheld Amounts as determined in accordance with the provisions of the Merger Agreement (the “Closing Date Merger Consideration”) and (ii) the net positive balances of Withheld Amounts if, as and when paid as provided in the Merger Agreement and this Agreement, including the Closing Escrow Amount (which will be deposited pursuant to the Closing Escrow Agreement and will be applied to the satisfaction of claims pursuant to Article 11 of this Agreement or, to the extent not required to satisfy such claims or expenses incurred by the Shareholder Representatives, released and distributed to the Shareholders as provided in the Merger Agreement and the Closing Escrow Agreement) and the Shareholders and Participants Fund (which will be deposited and applied as provided in the Merger Agreement).

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(d) This Agreement governs the relationship among the various Transaction Agreements, sets forth covenants concerning certain pre- and post-Closing matters, and sets forth the sole and exclusive method by which claims, if any, may be made by any of the Acquiring Parties (and their Affiliates, including, after the Effective Time, the Company, and any Person claiming by or through the Acquiring Parties or such Affiliates) as against the Company, any Affiliates of the Company, and any equity owner (including the Shareholders), officer, or director prior to the Closing with respect to or arising out of any event, liability, matter, omission, circumstance, transaction, arrangement, claim, relationship or condition in any way related to or affecting the Company or its Subsidiaries, their assets, their operations, their condition (financial or otherwise) or their prospects or the transactions contemplated by or related to the Transaction Agreements.

2.2 Performance Deposit. Upon execution of this Agreement, the Merger Purchaser shall deposit with J.P. Morgan Chase (the “Deposit Escrow Agent”) a cash performance deposit in the amount of Eight Million Dollars ($8,000,000) (the “Performance Deposit”), and the Merger Purchaser, the Company and the Deposit Escrow Agent shall enter into an escrow agreement substantially in the form attached hereto as Exhibit D (the “Deposit Escrow Agreement”) providing for payment of the Performance Deposit and all interest thereon by the Deposit Escrow Agent in accordance with the provisions of Section 2.8 of the Merger Agreement.

2.3 Tax Treatment of Interest on Closing Escrow Amount. The Acquiring Parties shall report as income all interest earned on the Closing Escrow Amount on the Acquiring Parties’ income tax returns, in accordance with the procedures set forth in Proposed Treasury Regulation Section 1.468B-8 or as otherwise required in final Treasury Regulations under Section 468B of the Code. The Acquiring Parties, the Shareholders, the Shareholder Representatives and the Closing Escrow Agent shall all refrain from taking any position on any U.S. federal, state, or local income tax return that is inconsistent with the preceding sentence, and the Closing Escrow Agent shall fulfill its information reporting obligations in accordance therewith. The release of any amounts of the Closing Escrow Amount or any accrued interest thereon to the Shareholders pursuant to Section 2.9 of the Merger Agreement and the Closing Escrow Agreement shall be treated as the payment of installment obligations, and imputed interest shall be computed thereon. The Merger Purchaser shall timely deliver to the Shareholders properly completed Forms 1099 as required with respect to such imputed interest.

ARTICLE 3

Representations and Warranties of the Company to the Acquiring Parties

The Company hereby represents and warrants to the Acquiring Parties, jointly but not severally, that, except as set forth in the various Sections of the Company Disclosure Letter executed and delivered by the Company concurrently with the execution and delivery of this Agreement (the “Company Disclosure Letter”) that correspond with the Sections of this Article 3, the statements contained in this Article 3 are true and correct as of the date of this Agreement and shall be true and correct in all respects as of the Closing; provided, however, that the mere inclusion of an item in the Company Disclosure Letter as an exception to a representation or warranty shall not be deemed to be an admission by the Company that such item is or was material or is or was required to be disclosed therein. Any matter disclosed, or as

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to which any exception is made, in any item in the Company Disclosure Letter shall constitute an exception to each representation and warranty under this Agreement where the applicability of the disclosed matter or circumstance to the representation or warranty in question is reasonably apparent.

3.1 Organization, Qualification, and Corporate Power. The Company is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Texas and has all corporate powers and authority required to own, lease and operate its properties and carry on its business as now conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it or the nature of its activities makes qualification necessary. A complete and correct list of every jurisdiction in which the Company and each of its Subsidiaries are incorporated or organized or qualified to do business as a foreign corporation (or other entity, as applicable) is set forth in Section 3.1 of the Company Disclosure Letter. The Company has made available to the Acquiring Parties correct and complete copies of its articles of incorporation and bylaws as amended to date. The Company is not in default under, or in violation of, the provisions of its articles of incorporation or bylaws.

3.2 Subsidiaries.

(a) All Subsidiaries of the Company, and holders of their respective outstanding capital stock or other equity interests, are identified in Section 3.2 of the Company Disclosure Letter. Each Subsidiary of the Company is a corporation, limited partnership or limited liability company duly organized, validly existing, and in good standing under the Laws of its jurisdiction of incorporation or formation and has all corporate, partnership or limited liability company powers and authority required to own, lease and operate its properties and carry on its business as now conducted. Each Subsidiary of the Company is duly qualified to do business as a foreign corporation, limited partnership or limited liability company and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it or the nature of its activities makes qualification necessary. The Company has made available to the Acquiring Parties complete and correct copies of the charter, articles of incorporation, certificate of limited partnership, bylaws, partnership or limited liability company agreement or other similar organizational or charter-type documents, each as amended to date, of each of its Subsidiaries. No Subsidiary of the Company is in default under, or in violation of, the provisions of its respective charter, articles of incorporation, certificate of limited partnership, bylaws, partnership or limited liability company agreement or other similar organizational or charter-type documents. The Company does not, directly or indirectly, have any minority ownership participation, interest, or equity investment in any entity.

(b) The Company owns, directly or indirectly, all of the issued and outstanding Equity Interests of each of its Subsidiaries, including the Operating Entities and the Real Estate Entity.

(c) One Hundred Percent (100%) of the stock of each Company Subsidiary organized as a corporation has been directly or indirectly wholly owned by the Company at all times since January 1, 2006.

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(d) Neither the Company nor any Company Subsidiary organized other than as a corporation has made an election to be taxable as a corporation for federal income tax purposes.

(e) To the Knowledge of the Company, one hundred percent (100%) of the stock of each Company Subsidiary organized as a corporation has been directly or indirectly wholly owned by the Company at all times since January 1, 2006.

(f) To the Knowledge of the Company, neither the Company nor any Company Subsidiary organized other than as a corporation has made an election to be taxable as a corporation for federal income tax purposes.

3.3 Authority. Each of the Company and its Subsidiaries has all necessary power and authority to execute and deliver the Transaction Agreements to which it is a party and to consummate the transactions contemplated thereby. The execution and delivery by each of the Company and its Subsidiaries of the Transaction Agreements to which it is a party and the consummation by each of the Company and its Subsidiaries of the transactions contemplated thereby have been duly and validly authorized and approved by the Company’s board of directors and the boards of directors of the general partner of each Subsidiary of the Company that is a limited partnership, and no other corporate proceedings on the part of the Company or any of its Subsidiaries are necessary to authorize or approve the Transaction Agreements to which they are parties or to consummate the transactions contemplated thereby (other than the approval and the adoption of the Transaction Agreements by the Shareholders to the extent required by the Company’s articles of incorporation and bylaws and by applicable Law). Each of the Transaction Agreements has been, or as of the Closing will have been, duly and validly executed and delivered by the Company and each of the Company’s Subsidiaries that is a party thereto and, assuming the due and valid authorization, execution and delivery by the Acquiring Parties of the Transaction Agreements to which they are parties, constitutes valid and binding obligations of the Company and its Subsidiaries that are parties thereto, enforceable against them in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar Laws affecting or relating to the enforcement of creditors’ rights generally or by general principles of equity, regardless of whether enforcement is pursuant to a proceeding in equity or at law.

3.4 Noncontravention; Required Filings and Consents; Broker’s or Finder’s Fees.

(a) Neither the execution and the delivery of the Transaction Agreements by the Company and its Subsidiaries that are parties thereto, nor the consummation of the transactions contemplated thereby, will (i) contravene or conflict with any provision of the articles of incorporation or bylaws of the Company or the organizational or governance documents of any of the Company’s Subsidiaries (assuming the approval and adoption of the Transaction Agreements by the Shareholders prior to the Closing, to the extent required by the Company’s articles of incorporation and bylaws and by applicable Law); (ii) assuming all required notices have been given and all required approvals have been obtained (all of which are listed in Section 3.4 of the Company Disclosure Letter), violate any Law or Company Permit, except in the case of the foregoing clause (ii) any such violation that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; or (iii) create any Encumbrance

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or contravene or conflict with any provision of material Contracts to which the Company or any of its Subsidiaries is a party, other than those Contracts listed in Section 3.4 of the Company Disclosure Letter that require the consent of the other party or parties thereto prior to effectuating the transactions contemplated by this Agreement.

(b) Except for (i) the filing of the Articles of Merger with the Secretaries of State of the State of Texas and the State of Delaware contemplated by Section 2.3 of the Merger Agreement, (ii) any notification filing required under the Hart-Scott-Rodino Act, (iii) any filings required to be made with any Governmental Entities related to the Company Permits or to the Company’s and/or its Subsidiaries’ continued participation in any Governmental Entities’ third party payor programs (the “Medicaid Waiver Programs”), all of which are listed in Section 3.4 of the Company Disclosure Letter and (iv) any other notices, authorizations, consents or approvals listed in Section 3.4 of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries is required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Entity or other Person in order to consummate the transactions contemplated by the Transaction Agreements.

(c) As of the date of this Agreement, there is no Litigation, pending or, to the Knowledge of the Company, threatened, against the Company by any Person that questions the legality, validity or propriety of this Agreement, the Contribution Agreement, the Merger Agreement or the Merger Transaction. No agent, broker, investment banker, financial advisor or other firm or Person is or shall be entitled to any broker’s or finder’s fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or its Subsidiaries (nor has any Shareholder or any Affiliate of any Shareholder done so in a manner binding upon the Company or its Subsidiaries), except for Banc of America Securities LLC and CB Richard Ellis, Inc., whose fees and expenses shall, at Closing, be paid as part of the Transaction Fees.

3.5 Financial Statements. The Company has delivered to the Acquiring Parties (a) audited consolidated balance sheets of the Company and its Subsidiaries as at December 31 in each of the years 2003 and 2004 and the related audited consolidated statements of income, changes in stockholders’ equity, and cash flow for each of the fiscal years then ended, together with the report thereon of Ernst & Young, LLP, independent registered public accountants (collectively, the “Audited Financial Statements”) and (b) an unaudited consolidated balance sheet of the Company and its Subsidiaries as at December 31, 2005 (the “Year-End Unaudited Balance Sheet”) and an unaudited consolidated balance sheet of the Company and its Subsidiaries as at February 28, 2006 (the “Interim Balance Sheet”) and the related unaudited consolidated statements of income, changes in stockholders’ equity, and cash flow for the respective twelve month and the two month period then ended, including in each case the notes thereto (collectively, the “Interim Financial Statements” and together with the Audited Financial Statements, the “Financial Statements”). The Financial Statements fairly present, on a consolidated basis, the financial condition and the results of operations, changes in stockholders’ equity, and cash flow of the Company and its Subsidiaries as at the respective dates of and for the periods referred to in the Financial Statements, all in accordance with GAAP applied on a consistent basis for the periods covered (except as set forth in the notes thereto), subject, in the case of the Interim Financial Statements, to normal recurring year-end adjustments (the effect of which will not reasonably be expected to be material) and the absence of notes (that, if presented,

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would not differ materially from those included in the December 31, 2004 consolidated balance sheet included in the Audited Financial Statements).

ARTICLE 4

Representations and Warranties of the Company to the Merger Purchaser

The Company hereby represents and warrants to the Merger Purchaser, that, except as set forth in the various Sections of the Company Disclosure Letter that correspond with the Sections of this Article 4, the statements contained in this Article 4 are true and correct as of the date of this Agreement and shall be true and correct in all respects as of the Closing; provided, however, that the mere inclusion of an item in the Company Disclosure Letter as an exception to a representation or warranty shall not be deemed to be an admission by the Company that such item is or was material or is or was required to be disclosed therein. Any matter disclosed, or as to which any exception is made, in any item in the Company Disclosure Letter shall constitute an exception to each representation and warranty under this Agreement where the applicability of the disclosed matter or circumstance to the representation or warranty in question is reasonably apparent.

4.1 Capitalization. The entire authorized, issued and outstanding capital stock of the Company is as set forth in Section 4.1 of the Company Disclosure Letter. There are no bonds, debentures, notes or other indebtedness having general voting rights similar to the voting rights of the Shares (or convertible into Shares having such rights) (“Voting Debt”) of the Company or any of the Subsidiaries of the Company issued and outstanding. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other contracts or commitments of any character, relating to the issued or unissued capital stock or other equity interests of the Company or any of its Subsidiaries, obligating the Company or any of its Subsidiaries to issue, transfer or sell, or cause to be issued, transferred or sold, any shares of capital stock or Voting Debt of, or other equity interest in, the Company or any of its Subsidiaries, except for the Stock Options and Stock Warrants set forth in Section 4.1 of the Company Disclosure Letter (which Section includes the grant date and exercise price of each Stock Option and Stock Warrant). Except as set forth in the certificates of designation relating to the Company’s preferred stock and the Stockholders’ Agreement, there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any Shares of the capital stock or other equity interests of the Company or any of its Subsidiaries. All of the outstanding Shares are, and all Shares which may be issued pursuant to the exercise of outstanding Stock Options and Stock Warrants will be (when issued in accordance with the respective terms thereof), duly authorized, validly issued, fully paid and non-assessable, and none of such Shares are or will be issued in violation of any applicable Laws or the preemptive rights of any Person. Each of the outstanding shares of capital stock or other equity interests of each of the Company’s Subsidiaries is duly authorized, validly issued, fully paid and non-assessable, and was not issued in violation of any applicable Laws or in violation of the preemptive rights of any Person, and, except as noted in Section 4.1 of the Company Disclosure Letter, such shares or other equity interests are owned by the Company or by another Subsidiary of the Company free and clear of any lien, claim, option, charge, security interest, limitation, encumbrance or restriction of any kind (each of the foregoing an “Encumbrance”). To the Company’s Knowledge, there are no voting trusts,

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proxies or other agreements or understandings with respect to the voting of the capital stock of the Company, other than the Stockholders Agreement.

4.2 Property.

(a) A complete and accurate list of all of the real property owned by the Company and its Subsidiaries is set forth in
Section 4.2(a) of the Company Disclosure Letter (collectively, the “Owned Real Property”).

(b) A complete and accurate list of all of the real property that is leased by the Company and its Subsidiaries is set forth in Section 4.2(b) of the Company Disclosure Letter (collectively, the “Leased Real Property,” and collectively with the Owned Real Property, the “Real Property”).

(c) Except as set forth in Section 4.2(c) of the Company Disclosure Letter, the Company and its Subsidiaries have good and marketable title to all of their non-leased fixtures, machinery, equipment, furniture and other tangible assets located on the Real Property (“Tangible Property”), except those subject to Permitted Liens. To the Knowledge of the Company, the Tangible Property located on the Real Property is in good operating condition and repair, reasonable wear and tear excepted.

(d) Section 4.2(d) of the Company Disclosure Letter sets forth a true, correct and complete list of each assisted living facility owned, operated, managed or leased by the Company or any of its Subsidiaries (each a “Facility” and collectively, the “Facilities”), and indicates, the ownership and location thereof, as well as the number of units occupied and unoccupied as of a recent date set forth in such Section of the Company Disclosure Letter, organized by unit type.

(e) Except as set forth in Section 4.2(e) of the Company Disclosure Letter, to the Knowledge of the Company, all of the buildings and improvements located on the Real Property are structurally sound, the roofs and roof membranes of all buildings are watertight and in good condition and repair, and all mechanical, electrical, heating, air conditioning, drainage, sewer, water and plumbing systems are in proper working order, reasonable wear and tear excepted, and are usable in the ordinary course of business and adequate and suitable for their intended use.

(f) There are no Contracts or options to sell the Owned Real Property or any portion of the Owned Real Property or any rights of first offer or rights of first refusal affecting any Owned Real Property which have been executed by the Company or any of its Subsidiaries.

(g) The Company has made available to the Merger Purchaser true and correct copies of all of the leases, including all amendments to such leases, under which (i) the Company has possession of the Leased Real Property (the “Leases”), and (ii) any third party occupies any portion of any Owned Real Property (the “Occupancy Leases”).

(h) There is no action or proceeding instituted or pending, or to the Knowledge of the Company, threatened or contemplated for eminent domain or for condemnation of any of the Real Property.

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(i) Section 4.2(i) of the Company Disclosure Letter sets forth a true and correct “rent roll” for each Facility (collectively, the “Rent Roll”) as of the most recent practicable date (as identified in such Section of the Company Disclosure Letter)

(j) The Company or one of its Subsidiaries has fee title to the Owned Real Property and a leasehold interest in the Leased Real Property, as provided in the applicable Lease, in each case, free and clear of all liens, encumbrances and defects, except for (i) liens (including liens securing indebtedness disclosed in Section 4.2(j) of the Company Disclosure Letter), encumbrances, defects, exceptions, easements, rights of way, restrictions, covenants, claims or other similar charges, which have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, (ii) taxes or assessments, special or otherwise, not yet due and payable or being contested in good faith and for which adequate reserves are maintained by the Company, (iii) standard exceptions which would be contained in an ALTA Form extended coverage owner’s policy of title insurance (or the locally available form of title insurance policy, as applicable) and contained in the title reports referred to in Section 4.2(j) of the Company Disclosure Letter, (iv) rights of those parties in possession under the Occupancy Leases and those residents pursuant to their occupancy agreements and beauticians and therapists pursuant to their Contracts, (v) any discrepancies, conflicts or boundary lines, shortages in area, encroachments, or any other facts which an accurate survey would disclose, the existence of which do not materially interfere with the continued use of the Real Property consistent with the current use thereof, and (vi) matters referred to in Section 4.2(j) of the Company Disclosure Letter (the matters described in the preceding clauses (i) through (vi) collectively, the “Permitted Liens”).

(k) Except for those matters that do not have, and would not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect on the Company or its operations or on any one or more of the Company’s Facilities: (i) all activities and operations of the Company and its Subsidiaries since December 31, 2000, have been and are being conducted in compliance with all Hazardous Substances Laws; (ii) since December 31, 2000, neither the Company nor any of its Subsidiaries has received any written notice from any Governmental Entity or other Person that there exists any violation of any Hazardous Substances Laws associated with the Company or any of its Subsidiaries, their properties, activities or operations; (iii) there are no Hazardous Substances present on, in or under any of the Real Property (other than commercially available cleaning products and medical supplies lawfully used by the Company in the ordinary course of business and fuel for generators lawfully used on the Company’s Real Property), and no discharge, spillage, uncontrolled loss, seepage, release or filtration of Hazardous Substances has occurred on, in or under any of the Real Property since December 31, 2000; (iv) there has been no notice received relating to any condition on any of the Real Property for which the Company or any of its Subsidiaries has an obligation to undertake remedial action pursuant to Hazardous Substances Laws; (v) there are no underground storage tanks currently, or historically, located on, at or under any of the Real Property; (vii) the Company has delivered to the Merger Purchaser accurate and complete copies of all environmental reports prepared by third parties and relating to the Real Property in its possession (a listing of which is set forth in Section 4.2(k) of the Company Disclosure Letter); (viii) to the Knowledge of the Company, there exists no condition relating to Hazardous Substances that would reasonably be expected to materially impair the operation of the Facilities; and (ix) to the Knowledge of the Company, there exists no potential future liability relating to the Company’s

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off-site disposal of wastes or related to predecessors in title of the Company’s properties. All matters set forth in the environmental reports listed in Section 4.2(k) of the Company Disclosure Letter shall be deemed to have been disclosed to the Acquiring Parties and shall constitute exceptions to this Section 4.2(k). None of the Facilities was previously owned by a third party, and the Company has no formerly owned assisted living facilities. For purposes hereof, “Hazardous Substances” means, without limitation: (A) those substances included within definitions of any one or more of the terms “Hazardous Substance,” “Hazardous Waste,” “Toxic Substance” and “Hazardous Material” in the CERCLA, the Resource Conservation and Recovery Act, as amended, 42 U.S.C. § 6901, et seq., the Toxic Substance Control Act, as amended, 15 U.S.C. § 2601, et seq., the Hazardous Materials Transportation Act, as amended, 49 U.S.C. § 1801 et seq., the Clean Water Act, as amended, 42 U.S.C. § 1251, et seq., the Clean Air Act, as amended, 42 U.S.C. § 7401, et seq., the Occupational Safety and Health Act, as amended, 29 U.S.C. § 651, et seq. (insofar as it relates to employee health and safety in relation to exposure to Hazardous Substances) and any other applicable Law, permit or license relating to Hazardous Substances, pollution, the protection of health and safety or the environment and natural resources (collectively, “Hazardous Substances Laws”); (B) such other substances, materials, pollutants, contaminants or wastes as are or become regulated under or are classified as hazardous or toxic under any Hazardous Substances Laws; and (C) any materials, pollutants, contaminants, wastes or substances that can be defined as (1) petroleum products or wastes, (2) asbestos, (3) polychlorinated biphenyls, (4) flammable or explosive, (5) radioactive or (6) toxic.

(l) To the Knowledge of the Company, the Company and its Subsidiaries have obtained, and are in material compliance with, all permits necessary for their current activities and operations under any and all applicable Hazardous Substances Laws.

(m) Neither the Company nor any of its Subsidiaries has ever been issued any citations or paid any civil or criminal fines, penalties, judgments, settlements or other amounts relating to any alleged failure to comply with any Hazardous Substances Laws, nor does the Company or its Subsidiaries have any obligation to do so by Contract or other agreement.

(n) To the Knowledge of the Company, no polychlorinated biphenyls or substances containing polychlorinated biphenyls (“PCBs”), nor any asbestos or materials containing asbestos are present in the structures or equipment utilized by the Company or any of its Subsidiaries, and, to the Knowledge of the Company, any such PCBs or asbestos previously present in or on such structures or equipment that were removed by the Company or any of its Subsidiaries were disposed of in accordance with all applicable Hazardous Substances Laws.

(o) The Company has not received any notice from any Governmental Entity that the Company, any of its Subsidiaries, their activities or operations, any of the Real Property or any condition existing thereon violates any Hazardous Substances Laws applicable to the Real Property in any material respect, which condition remains uncured.

(p) There is no litigation with respect to Hazardous Substances pending or, to the Knowledge of the Company, threatened against the Company, its Subsidiaries or any of the Real Property that would reasonably be expected to have a Material Adverse Effect, either individually or in the aggregate, if adversely determined.

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4.3 Tax Matters.

(a) Except as set forth in Section 4.3 of the Company Disclosure Letter, with respect to the Company and each Company Subsidiary: (i) the Tax Returns required to be filed by the Company and its Subsidiaries on or before the Closing Date have been timely filed with the appropriate Governmental Entities in all jurisdictions in which such Tax Returns are required to be filed (except where an extension of the time for filing has been properly obtained and the extended due date for filing such Tax Returns has not arrived), and are accurate and complete in all material respects; (ii) all Taxes (whether or not shown on any Tax Return) have been timely paid, except for Taxes that are not yet due and payable; (iii) all Taxes not yet due and payable have been fully accrued on the Company’s books and records (other than Taxes arising from the Transactions); (iv) the Company and its Subsidiaries have complied with all applicable Laws relating to the payment and withholding of Taxes (including withholding of Taxes pursuant to Sections 1441, 1442, 1445, 1446, 3121, 3402 and 3406 of the Code or any similar provision of Law) and has, within the time period prescribed by Law, withheld and paid over to the proper Governmental Entities all amounts required to be so withheld and paid over under applicable Laws; (v) the Company and its Subsidiaries have not engaged in any transaction that is a listed transaction within the meaning of Treasury Regulation Section 1.6011-4(b)(2) or is otherwise a reportable transaction pursuant to Treasury Regulation Section 1.6011-4(b); (vi) neither the Company nor any of its Subsidiaries is the subject of a Tax Audit, no written notice has been received by the Company or any of its Subsidiaries that a Tax Audit of the Company or any of its Subsidiaries is being considered by a Tax authority and to the Knowledge of the Company and its Subsidiaries, no such Tax Audit is being considered by any Tax authority; (vii) no deficiencies for any Taxes have been proposed, asserted or assessed in writing against the Company or any of its Subsidiaries that have not been fully paid or adequately reserved and no requests are pending for waiver of the time to assess any such Taxes; (viii) neither the Company nor any of its Subsidiaries has received written notice from any Governmental Entity of a jurisdiction in which such entity does not file a Tax Return stating that such entity is or may be subject to taxation by that jurisdiction that have not yet been assessed; (ix) neither the Company nor any of its Subsidiaries has extended or waived the application of any statute of limitations regarding the assessment or collection of any Tax from the Company or any of its Subsidiaries, which statute of limitations has not lapsed since such execution or waiver was granted; (x) neither the Company nor any of its Subsidiaries has changed any method of accounting, entered into any closing agreement that will require the inclusion of income or the deferral of deductions in any taxable period after the Closing or has requested permission from any Governmental Entity for any change in accounting method pertaining to the Company or any of its Subsidiaries; (xi) neither the Company nor any of its Subsidiaries has submitted a request for a private letter ruling (or comparable procedure under state, local or foreign law) to any Governmental Entity, which request has not yet been issued or denied; (xii) there are no Encumbrances for Taxes on or against the Company or any Subsidiary of the Company, or on or against any asset of the Company or any Subsidiary of the Company, other than for current Taxes that are not yet due and payable; (xiii) as of January 1, 2006, the Company did not have accumulated earnings and profits (as measured for federal income tax purposes) and the aggregate net accumulated earnings and profits of the Company and its Subsidiaries was less than zero; (xiv) none of the assets of the Company or any of its Subsidiaries are required to be treated as being owned by any other person pursuant to the “safe harbor lease” provisions of former Section 168(f)(8) of the Code; (xv) none of the assets of the Company or any of its Subsidiaries are “tax-exempt use

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property” within the meaning of Section 168(h) of the Code; (xvi) neither the Company, nor any of its Subsidiaries, nor any of their predecessors by merger or consolidation, has within the past three years been a party to a transaction intended to qualify under Section 355 of the Code or so much of Section 356 of the Code as relates to Section 355 of the Code; (xvii) (A) Section 4.3 of the Company Disclosure Letter sets forth the aggregate federal income tax basis of assets of the Company and each of its Subsidiaries, on a facility-by-facility basis, as of the date set forth in such Section of the Company Disclosure Letter, (B) the aggregate tax basis of the assets of each facility on such date does not differ by more than twenty percent (20%) from the aggregate Tax basis of the assets of such facility set forth in Section 4.3 of the Company Disclosure Letter, and (C) the aggregate Tax basis of all of the assets of the Company and its Subsidiaries on such date does not differ by more than ten percent (10%) from the aggregate Tax basis of such assets set forth in Section 4.3 of the Company Disclosure Letter; (xviii) neither the Company nor any of its Subsidiaries is a party to or bound by a Tax indemnity, Tax sharing or Tax allocation agreement or Tax Contribution Agreement; (xix) neither the Company nor any of its Subsidiaries has been a member of an affiliated group of corporations within the meaning of Section 1504 of the Code, except the affiliated group of which the Company and its Subsidiaries are currently members, and each of the Company’s corporate Subsidiaries has at all times since its formation been a member of the affiliated group of which the Company and its Subsidiaries are currently members and (xx) immediately prior to the Closing Date, the Company had net operating loss carryforwards that either were unrestricted by Section 382 of the Code or were within the limitation amounts that Section 382 permits to be used, in total amounts at least equal to the sum of the gain that would be realized or recognized by the Company on a sale of Newco for $6 million dollars plus the Working Capital adjustment, if any, specified in the Contribution Agreement, plus the taxable income of the Company for the period from January 1, 2006 up to and including the day before the Closing Date, without taking into account any Tax consequences related to the Transactions except the Gain Sharing Payments.

(b) [Intentionally omitted]

(c) This Section 4.3 constitutes the sole and exclusive representation or warranty of the Company relating to Tax matters.

4.4 Benefit Plans and Arrangements.

(a) Section 4.4(a) of the Company Disclosure Letter contains a list setting forth each: (i) oral or written employment or consulting agreement (excluding agreements with dietary, pharmacy and medical director consultants entered into in the ordinary course of business, providing for total compensation of under $50,000 per year, and that can be terminated by the Company or a Company Subsidiary without penalty upon 90 days or less notice) to or under which the Company or a Company Subsidiary is a party or has or may have any actual or contingent liability or obligation, and (ii) employee benefit plan, program or arrangement currently sponsored, maintained or contributed to by the Company or any Benefits Affiliates, or with respect to which the Company or any Benefits Affiliate has or may have any actual or contingent liability or obligation (including any such obligations under any terminated plan or arrangement), including but not limited to employee pension benefit plans, as defined in Section 3(2) of ERISA, multi-employer plans, as defined in Section 3(37) of ERISA, employee welfare benefit plans, as defined in Section 3(1) of ERISA, deferred compensation plans, stock option or

22

other equity compensation plans, stock purchase plans, phantom stock plans, bonus plans, fringe benefit plans, life, health, dental, vision, hospitalization, disability and other insurance plans, employee assistance program, severance or termination pay plans and policies, and sick pay and vacation plans or arrangements, whether or not described in Section 3(3) of ERISA. Each and every such plan, program, agreement or arrangement is hereinafter referred to as a “Benefit Plan.”

(b) The Company has made available to the Merger Purchaser true, correct and complete copies of: (i) the documents embodying each Benefit Plan, including all amendments thereto and all Contracts relating thereto; (ii) the three (3) most recent annual reports (Form Series 5500) filed with respect to each Benefit Plan for which such filing is required, including all schedules and other attachments thereto; (iii) the three (3) most recent actuarial valuation for each Benefit Plan which is subject to the minimum funding requirements of Section 412 of the Code; (iv) the most recent Internal Revenue Service determination letter (including copies of any outstanding requests for determination letters) or opinion letter with respect to each such Benefit Plan which is an employee pension benefit plan (as such term is defined in Section 3(2) of ERISA) intended to qualify under Section 401(a) of the Code; (v) in the case of any Benefit Plan that includes a “cash or deferred arrangement” as defined in Section 401(k)(2) of the Code, the non-discrimination testing results for that Benefit Plan for the three (3) most recent plan years; (vi) the most recent summary plan descriptions and any summaries of material modifications thereto; and (vii) Forms 5310 and any related filings with the Pension Benefit Guaranty Corporation with respect to the last six (6) plan years for each Benefit Plan subject to Title IV of ERISA.

(c) With respect to such Benefit Plans, the Company has made (or, as of the Closing Date, will make) all contributions thereto which it has accrued on the Interim Balance Sheet as a liability.

(d) The Benefit Plans and provisions thereof, the trusts created thereby, the operation of the Benefit Plans and the actions of any fiduciaries with respect to the Benefit Plans are and since December 31, 2000 have been in material compliance with, and conform and since December 31, 2000 have conformed in all material respects to, the requirements of applicable provisions of the Code, ERISA and other applicable statutes and governmental rules and regulations, and each Benefit Plan has been administered in accordance with its terms.

(e) Neither the Company nor any Benefits Affiliate has any material plan termination or withdrawal liability with respect to any Benefit Plan that is (i) a defined benefit pension plan subject to Title IV of ERISA, (ii) a plan subject to the requirements of Code Section 412 or 4971, or (iii) a multiemployer pension plan, as that term is defined in Sections 4001(a)(3) and 3(37) of ERISA; if any such plan were to be terminated as of the Closing Date, no assets of the Company or any Benefits Affiliate would be subject, directly or indirectly, to any liability, contingent or otherwise, or the imposition of any lien under the Code or ERISA as a result of, or in connection with, such termination; no “reportable event” (as defined in Section 4043 of ERISA) or an event described in Section 4062 or 4063 of ERISA has occurred with respect to any Benefit Plan; and no Benefit Plan has incurred any “accumulated funding deficiency” (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived.

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(f) With respect to any Benefit Plan that is an employee welfare benefit plan (within the meaning of Section 3(1) of ERISA) (a “Welfare Plan”), (i) each Welfare Plan for which contributions are claimed as deductions under any provision of the Code is in material compliance with all applicable requirements pertaining to such deductions; (ii) any Welfare Plan that is a group health plan (within the meaning of Section 5000(b)(1) of the Code) complies, and since December 31, 2003 has complied, in all material respects with the requirements of Part 6 of Title I of ERISA and Section 4980B of the Code; and (iii) no Welfare Plan that is a group health plan is a self-insured plan.

(g) There are no actions, suits or claims pending (other than routine claims for benefits) or, to the Knowledge of the Company, threatened with respect to any Benefit Plan or against the assets of any Benefit Plan. In addition, with respect to each Benefit Plan, to the Knowledge of the Company (i) no audits, inquiries, reviews, proceedings, clams, or demands are pending with any Governmental Entity; (ii) there are no facts which would reasonably be expected to give rise to any material liability in the event of any such investigation, claim, action, suit, audit, review, or other proceeding; and (iii) all material reports, returns and similar documents required to be filed with any governmental agency or distributed to any plan participant have been duly and timely filed or distributed.

(h) Each Benefit Plan which is intended to be a qualified plan under Code Section 401(a) has received a determination letter that takes into account the so-called “GUST” amendments, and no such determination letter has been revoked nor has revocation been threatened, nor has any amendment or other action or omission occurred with respect to any such plan since the date of its most recent determination letter, in any respect which would adversely affect its qualification, or materially increase its costs.

(i) Other than as may be required under Sections 601 through 609 of ERISA or under any applicable state continuation Law, neither the Company, nor any Benefits Affiliate nor any Benefit Plan provides, or has any obligation to provide, or contribute toward the cost of, post-retirement welfare benefits with respect to any employees, including post-retirement medical, dental, prescription drug, life insurance, severance or any other similar benefit, whether provided on an insured or self-insured basis.

(j) Except as provided in Section 2.11 of the Merger Agreement or as otherwise described in Section 4.4(j) of the Company Disclosure Letter, the consummation of the transactions contemplated by this Agreement, the Contribution Agreement and the Merger Agreement will not (i) accelerate the time of payment or vesting, or increase the amount of compensation due to any employee or director or (ii) increase the amount of any benefit otherwise payable under any Benefit Plan. The consummation of the transactions contemplated by this Agreement, the Contribution Agreement and the Merger Agreement will not result in any prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code for which an exemption is not available.

(k) Neither the Company nor any Benefits Affiliate have been involved in any transaction that would reasonably be expected to cause the Company or any current Benefits Affiliate to be subject to any liability under Section 4069 or 4212(c) of ERISA.

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(l) Set forth in Section 4.4(l) of the Company Disclosure Letter (i) is a complete and correct list of all payments (including the dollar amounts thereof) that are required to be paid, or may be paid, to directors, officers, employees, representatives or other agents of the Company as a result of the Company’s execution of this Agreement or the consummation of the Merger Transaction, including Gain Sharing Plan Awards (as defined in the Merger Agreement) and any other fees, severance payments (whether containing a single or double trigger relating to any change in control), Gain Sharing Plan Awards and other similar payments and (ii) the aggregate amount payable to holders of Stock Options and Stock Warrants pursuant to Section 2.11 of the Merger Agreement in respect of Stock Options and Stock Warrants. Except as noted in Section 4.4(l) of the Company Disclosure Letter, neither the consummation of the transactions contemplated by this Agreement, the Contribution Agreement or the Merger Agreement, nor any payments associated herewith or therewith, including, without limitation, those payments set forth in Section 2.5(c) of the Merger Agreement, is reasonably expected to result in any payment that is not deductible as a result of the application of Section 280G of the Code. Section 2.5(c)(i) of the Company Disclosure Letter is a correct and complete list of the Participants and the Gain Sharing Plan Award payable to each Participant. Payment of the Gain Sharing Plan Awards specified in Section 2.5(c)(i) of the Company Disclosure Letter shall fully discharge any and all liabilities of the Company and the Subsidiaries with respect to the Gain Sharing Award Plan. Neither the Company nor any of its Subsidiaries has any obligation to make a payment or reimbursement to any person on account of the imposition on such person of a tax under Code Section 4999 or any similar state tax law.

(m) The only person who the Company reasonably believes is a “disqualified individual” and shareholder (within the meaning of Section 280G of the Code and the regulations promulgated thereunder) as determined as of the date hereof is Timothy Hekker.

ARTICLE 5

Representations and Warranties of the Company to NewCo

The Company hereby represents and warrants to NewCo, that, except as set forth in the various Sections of the Company Disclosure Letter that correspond with the Sections of this Article 5, the statements contained in this Article 5 are true and correct as of the date of this Agreement and shall be true and correct in all respects as of the Closing; provided, however, that the mere inclusion of an item in the Company Disclosure Letter as an exception to a representation or warranty shall not be deemed to be an admission by the Company that such item is or was material or is or was required to be disclosed therein. Any matter disclosed, or as to which any exception is made, in any item in the Company Disclosure Letter shall constitute an exception to each representation and warranty under this Agreement where the applicability of the disclosed matter or circumstance to the representation or warranty in question is reasonably apparent.

5.1 Undisclosed Liabilities.

Immediately prior to the execution of this Agreement, the Company does not have any liabilities or obligations, whether accrued, absolute, contingent or otherwise, that would be required to be reflected on a balance sheet as of such date prepared in accordance with GAAP on a basis consistent with the Financial Statements except (a) to the extent reflected or taken into

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account in the Interim Balance Sheet, (b) to the extent set forth on Section 5.1 of the Company Disclosure Letter, (c) to the extent taken into account in the determination of Working Capital as of the Closing pursuant to Section 3.2 of the Contribution Agreement, (d) to the extent reserves therefor have been established and accrued on the Company’s books and records, (e) to the extent arising in the ordinary course of business since the date of the Interim Balance Sheet, (f) to the extent expressly contemplated by the Transaction Documents and/or (g) to the extent the liability or obligation is covered by any of the other representations and warranties contained in this Agreement (provided that the foregoing shall not limit or affect the scope of any other such representation and warranty).

5.2 Material Events Since Interim Financial Statements

Except as set forth in Section 5.2 of the Company Disclosure Letter, since the date of the Interim Financial Statements, there has not been any event, act or omission that had it occurred or arisen after the date of this Agreement, would constitute a breach or violation of Section 8.2.

ARTICLE 6

Representations and Warranties of the Merger Purchaser

The Merger Purchaser hereby represents and warrants to the Company that the statements contained in this Article 6 are true and correct as of the date of this Agreement and shall be true and correct as of the Closing:

6.1 Organization. Each Merger Acquiring Party is a corporation duly organized, validly existing, and in good standing under the Laws of its jurisdiction of incorporation and has all corporate powers and authority required to own, lease and operate its respective properties and carry on its respective businesses as now conducted. Each Merger Acquiring Party is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it or the nature of its activities makes qualification necessary, except where the failure to be so qualified has not had, and would not be reasonably expected to have, individually or in the aggregate, a material adverse effect on such Merger Acquiring Party’s ability to consummate the transactions contemplated by the Transactions Agreements to which such Merger Acquiring Party is a party.

6.2 Authority. Each Merger Acquiring Party has all necessary corporate power and authority to execute and deliver the Transaction Agreements to which it is a party and to consummate the transactions contemplated thereby. The execution and delivery by each Merger Acquiring Party of the Transaction Agreements to which it is a party and the consummation by each Merger Acquiring Party of the transactions contemplated thereby have been duly and validly authorized and approved by the board of directors of the Merger Purchaser and Merger Sub and, immediately after the execution and delivery of this Agreement and the Merger Agreement, will be duly and validly authorized and approved by the sole shareholder of Merger Sub, and no other corporate proceedings on the part of either Merger Acquiring Party are necessary to authorize or approve the Transaction Agreements to which either Merger Acquiring Party is a party or to consummate the transactions contemplated thereby. Each Transaction Agreement to which a Merger Acquiring Party is a party has been duly and validly executed and delivered by such Merger Acquiring Party and, assuming the due and valid authorization,

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execution and delivery of such Transaction Agreement by the other parties thereto, constitutes the valid and binding obligation of such Merger Acquiring Party enforceable against such Merger Acquiring Party in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or transfer or other similar Laws affecting or relating to the enforcement of creditors’ rights generally or by general principles of equity, regardless of whether enforcement is pursuant to a proceeding in equity or at law.

6.3 Noncontravention; Required Filings and Consents. Neither the execution and delivery by either Merger Acquiring Party of the Transaction Agreements to which it is a party nor the consummation of the transactions contemplated thereby by such Merger Acquiring Party, will violate any Law to which such Merger Acquiring Party is subject, or contravene or conflict with any provision of such Merger Acquiring Party’s charter or bylaws, except any such violation, contravention or conflict as would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on such Merger Acquiring Party’s ability to consummate the transactions contemplated thereby. Except for (i) the filing of the Articles of Merger with the Secretaries of State of the State of Texas and the State of Delaware contemplated by Section 2.3 of the Merger Agreement, (ii) the notification filing required under the Hart-Scott-Rodino Act, (iii) any filings required to be made with the SEC and (iv) the filing of any required notices, applications or other filings with any Governmental Entities related to the Company Permits or to the Company’s and/or its Subsidiaries’ continued participation in any Medicaid Waiver Programs, neither Merger Acquiring Party is required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of, any Governmental Entity in order to consummate the transactions contemplated by the Transaction Agreements. As of the date of this Agreement, there is no Litigation, pending or, to the Knowledge of the Merger Purchaser, threatened, against the either Merger Acquiring Party by any Person that questions the legality, validity or propriety of this Agreement, the Contribution Agreement, the Merger Agreement or the Merger Transaction.

6.4 Advisors’ and Brokers’ Fees. The Merger Acquiring Parties will pay all fees and charges of any advisor or broker retained by either of them in connection with the transactions contemplated by any of the Transaction Agreements.

6.5 Sufficient Funds. The Merger Acquiring Parties at Closing will have sufficient funds available to pay or deposit the amounts required to be paid or deposited by such parties pursuant to the Merger Agreement and to perform their respective other obligations pursuant to the Transaction Agreements to which they are parties. No financing approvals or consents are needed with respect to the availability of such funds for the purposes intended therefor pursuant to any of the Transaction Agreements.

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ARTICLE 7

[Intentionally Omitted]

ARTICLE 8

Pre-Closing Covenants

The Parties agree as follows with respect to the period from the date of this Agreement through the Closing:

8.1 Notices and Consents; Cooperation.

(a) The Company will give (and cause each of its Subsidiaries to give) any notices to third parties, and will use (and cause each of its Subsidiaries to use) commercially reasonable efforts to obtain any third-party consents referred to in Section 3.4 and the items set forth on Section 3.4 of the Company Disclosure Letter.

(b) Upon the terms and subject to the conditions set forth in this Agreement, each of the Parties shall: (i) make promptly any required filings, and thereafter make any other required submissions, under the Hart-Scott-Rodino Act with respect to the transactions contemplated hereby and request early termination of the waiting period under the Hart-Scott-Rodino Act in order that the Closing may proceed; (ii) make promptly any required filings with any other Governmental Entities so that the Company and its Subsidiaries shall be able to operate their respective businesses substantially as they are currently conducted immediately following the Closing; (iii) use commercially reasonable efforts to obtain as promptly as practicable (A) all necessary actions or non-actions, waivers, consents and approvals from all applicable Governmental Entities, including opposing any attempt by any Governmental Entity to obtain a preliminary or permanent injunction, or to affirm on appeal any such injunction, from the Federal Trade Commission, the Department of Justice or a federal or state court to enjoin the consummation of the transactions contemplated hereby under any antitrust Law, and provided that the Merger Purchaser shall consider in good faith but shall not be required to agree to any proposal to make any material modification to the business transaction contemplated by this Agreement in order to obtain the agreement of any Governmental Entity to permit the transactions contemplated hereby to be consummated and (B) all necessary consents, approvals or waivers from third parties; (iv) execute and deliver any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement; and (v) use commercially reasonable efforts to ensure that the conditions to the Parties’ respective obligations set forth in Article VIII of the Contribution Agreement and Article 6 of the Merger Agreement are satisfied as expeditiously as is reasonably practicable after the date hereof.

(c) The Merger Purchaser on the one hand and the Company and NewCo on the other agree that they will consult and cooperate with each other with respect to obtaining all permits, consents, approvals and authorizations of all third parties and Governmental Entities necessary or advisable to consummate the Transactions and each will keep the other apprised of the status of matters relating to completion of the transactions contemplated by the Transaction Agreements. The Company and NewCo shall reasonably cooperate with the Merger Purchaser in connection with the arrangement of the financing of the Merger Consideration, including

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participation in meetings (including with potential bank lenders), due diligence sessions, rating agency presentations and the drafting of related documentation (including collateral documents) and certificates. Notwithstanding the preceding sentence, the Merger Purchaser acknowledges that the primary obligation of the members of the Company’s and the Company Subsidiaries’ management is the operation of the Company’s and the Company Subsidiaries’ businesses, and accordingly, in scheduling such events, the Merger Purchaser shall consider the schedules of the members of the Company’s and the Company Subsidiaries’ management and use reasonable efforts to schedule such events so as to minimize the disruption to their schedules.

(d) As a result of the Transactions, Merger Purchaser will ultimately control the Real Estate Entity through the Company and, as such, will control the landlord under the Facility Master Lease under which NewCo and the Contributed Companies (as defined in the Contribution Agreement) will be tenants, lessees or guarantors. Attached hereto as Annex 2 is a signed NewCo Side Letter Agreement (the “Letter Agreement”) of even date herewith by and among Merger Purchaser, NewCo, and management of the Company, to which the form of Master Lease is attached as Exhibit A thereto and the form of Guaranty and Letter of Credit Agreement is attached as Exhibit B thereto (such Exhibits are referred to as the “Lease Documents”). Merger Purchaser and NewCo covenant and agree with the Company that each of them will perform their obligations under the Letter Agreement and that at the Closing, Merger Purchaser shall cause its applicable Subsidiary or Subsidiaries to, and NewCo and management shall cause the applicable Subsidiary or Subsidiaries of NewCo to, enter into the Lease Documents and to enter into such ancillary documents as may be desirable in connection therewith (e.g., memoranda of leases, closing certificates and the like). Merger Purchaser approves the execution, delivery and performance of the Lease Documents by the Real Estate Entity.

8.2 Conduct of the Business of the Company and its Subsidiaries. Except as contemplated by this Agreement any other Transaction Agreement or with the prior written consent of the Merger Purchaser (which shall not be unreasonably withheld, delayed or conditioned), during the period from the date of this Agreement to the Effective Time, the Company shall, and shall cause each of its Subsidiaries to, conduct its operations in the ordinary course of business consistent with past practices and shall use its commercially reasonable efforts, and shall cause each of its Subsidiaries to use its commercially reasonable efforts to, (i) preserve intact the business organization of the Company and each of the Company Subsidiaries, (ii) use, operate, maintain and repair all of its Real Property, Tangible Property, buildings, improvements and other assets in a normal business manner consistent with past practices, (iii) keep available the services of its and their present officers and key employees, (iv) preserve the goodwill of those having business relationships with the Company and/or its Subsidiaries and (v) conduct the business with suppliers, customers, creditors and others having business relationships with the Company and/or its Subsidiaries in a manner which the board of directors of the Company determines, in good faith, is in the best interests of the Company and/or its Subsidiaries.

Without limiting the generality of the foregoing, and except as otherwise required or contemplated by the Transaction Documents set forth in Section 8.2 of the Company Disclosure Letter, the Company shall not, and shall not permit any of its Subsidiaries to, prior to the Closing, without the prior written consent of the Merger Purchaser (which shall not be

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unreasonably withheld, delayed or conditioned, except that in the case of any of the actions described in Sections 8.2(a), 8.2(b), 8.2(d) or 8.2(u), the Merger Purchaser may grant or withhold their consent in its sole and absolute discretion):

(a) adopt any amendment to its charter, articles of incorporation, certificate of limited partnership, bylaws, partnership or limited liability company agreement or other similar organizational or charter-type documents;

(b) issue, reissue or sell or authorize the issuance, reissuance or sale of additional shares of capital stock of any class, or shares convertible into capital stock of any class, or any rights, warrants or options to acquire any convertible shares or capital stock, other than the issuance of shares of Company Common Stock pursuant to the conversion of any of the Shares that are convertible into Company Common Stock or pursuant to the exercise of any of the Stock Options or Stock Warrants outstanding on the date of this Agreement;

(c) set aside or pay any dividend (other than cash dividends) or other distribution, other than payments made on behalf of the Shareholders by the Company and expressly permitted by this Agreement (whether in cash, shares, or property or any combination thereof), in respect of any class or series of its capital stock other than between any of the Company and any wholly-owned Subsidiary of the Company;

(d) split, combine, subdivide, reclassify or directly or indirectly redeem, purchase or otherwise acquire, recapitalize or reclassify, or propose to redeem or purchase or otherwise acquire, any shares of its capital stock, or liquidate in whole or in part;

(e) except for increases in salary, wages and benefits of non-officer employees of the Company or its Subsidiaries in the ordinary course of business consistent with past practice, (A) increase the compensation or fringe benefits payable or to become payable to its directors, officers or employees (whether from the Company or any of its Subsidiaries), (B) pay or grant any benefit not required by any existing plan or arrangement (including, without limitation, the granting of stock options, stock appreciation rights, shares of restricted stock or performance units), (C) pay or grant any severance or termination pay to directors, officers or other employees (except pursuant to existing agreements, plans or policies and as required by such agreements, plans or policies, all of which are set forth in Section 8.2(e) of the Company Disclosure Letter), (D) enter into or modify any employment or severance agreement with any director, officer or other key employee of the Company or any of its Subsidiaries or (E) establish, adopt, enter into, or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock or Benefit Plans for the benefit or welfare of any directors, officers or current or former employees, except in each case to the extent required by applicable Laws or as contemplated by this Agreement;

(f) sell, lease, transfer or assign any of its assets, tangible or intangible, other than for a fair consideration in the ordinary course of business and other than the disposition of obsolete or un-useable property or incur any Encumbrance on the Company’s assets or the equity interests of its Subsidiaries except those Encumbrances disclosed in Section 8.2(f) of the Company Disclosure Letter or otherwise incurred in the ordinary course of business in accordance with historical past practices of the Company;

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(g) enter into any Contract (other than purchase and sales orders in the ordinary course of business in accordance with past practice and other than renewals of Contracts in existence on the date hereof on substantially identical terms) (i) that involves consideration or other expenditure in excess of $100,000, (ii) that involves consideration or other expenditure in excess of $25,000 annually and is not terminable at the will of the Company or any Company Subsidiary within ninety (90) days without penalty or (iii) outside the ordinary course of business.

(h) accelerate, terminate, modify in any material respect, or cancel any Contract (other than purchase and sales orders and other than in the ordinary course of business in accordance with past practice) that involves (i) consideration or other expenditure in excess of $100,000, (ii) consideration or other expenditure in excess of $25,000 annually and is not terminable at the will of the Company or any Company Subsidiary within ninety (90) days without penalty or (iii) the referral of residents to or by the Company or any Company Subsidiary;

(i) make any capital expenditure (or series of related capital expenditures), other than capital expenditures related to ordinary repairs and replacements, in excess of $150,000 per month or that is outside the ordinary course of business;

(j) delay or postpone the payment of accounts payable and other liabilities outside the ordinary course of business;

(k) cancel, compromise, waive or release any right or claim (or series of related rights or claims) not covered by the reserves or accruals relating to such claim in the Interim Balance Sheet in excess of $25,000 or that is outside the ordinary course of business;

(l) enter into any Contract or agreement with any Affiliate of the Company except for transactions in the ordinary course of business upon commercially reasonable terms;

(m) incur or assume any long-term debt or incur or assume any short-term debt in excess of $100,000, except that the Company and its Subsidiaries may renew and refinance existing debt and may incur or assume existing debt in the ordinary course of business consistent with past practices under existing lines of credit, in each case on substantially the same terms as are currently in effect;

(n) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other Person except for the Company as to its Subsidiaries);

(o) enter into, assume or modify any leases or management Contracts (excluding Contracts with residents of the Company’s Facilities);

(p) make any loans, advances or capital contributions to, or investments in, any other Person, including officers and directors of the Company or any Subsidiary of the Company, except loans to employees of the Company in the ordinary course of business consistent with past practice and not in excess of $5,000 per employee and except for loans, advances, capital

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contributions or investments between any wholly-owned Subsidiary of the Company and the Company or another wholly-owned Subsidiary of the Company;

(q) alter its accounting practices (except as required by GAAP or applicable Law) or change its fiscal year;

(r) make or change any Tax election, change any annual Tax accounting period, adopt or change any method of Tax accounting, file any amended Tax Return, enter into any closing agreement, settle any income Tax claim or assessment, surrender any right to claim an income Tax refund, offset or other reduction in income Tax liability, or take or omit to take any other action, if any such action or omission would have the effect of increasing the Tax liability of the Company or any Company Subsidiary;

(s) settle any law suits, arbitrations or resident claims the uninsured portion of which settlement would reasonably be expected to require a payment by the Company or any Company Subsidiary in excess of $250,000;

(t) except as contemplated by the Transaction Documents, acquire (by merger, consolidation, acquisition of stock or assets or otherwise) any business or business organization or division thereof;

(u) except as contemplated by the Transaction Documents, liquidate, dissolve or wind up the business of the Company or any of its Subsidiaries that own any assets;

(v) except as contemplated by the Transaction Documents, agree in writing or otherwise to take any of the foregoing actions.

8.3 Access. Upon reasonable advance notice and consistent with applicable Law, the Company shall permit the Representatives of the Merger Purchaser to have access at reasonable times during normal business hours, and in a manner so as not to interfere with the normal business operations of the Company or the Company’s Subsidiaries, to the Company’s and the Company’s Subsidiaries’ premises, properties, personnel, books, records (including Tax records), contracts and documents, and to make extracts and copies of such books and records subject to the terms of the Confidentiality Agreements.

8.4 Confidentiality Agreements.

The following provisions (collectively, the “Confidentiality Agreements”) shall apply to the information and materials furnished pursuant to, or as to which access is provided under, Section 8.3 or otherwise pursuant to this Agreement (including the Disclosure Letter) and all such information and materials shall be deemed to be Evaluation Materials (as defined in the Confidentiality Agreements). The “Confidentiality Agreements” consist of the following:

(a) Confidentiality Agreement, dated as of July 5, 2005, between the Merger Purchaser and the Company, the provisions of which are incorporated by reference herein;

(b) In addition, except as and to the extent required by Law (including under any Law to a Governmental Entity whose approval or consent is necessary or advisable in connection with

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any of the Transaction Agreements and/or the Transactions) or in compliance with Section 12.2 hereof, without the prior written consent of the other Parties, no Party will, and each will direct its Representatives not to, make, directly or indirectly, any public comment, statement, or communication with respect to, or otherwise to disclose or to permit the disclosure of the terms, conditions, or other aspects of the Transactions contemplated hereby. If a Party is required by Law to make any such disclosure, it must (unless such disclosure is in compliance with Section 12.2 hereof) first provide to the other Parties the content of the proposed disclosure, the reasons that such disclosure is required by Law, and the time and place that the disclosure will be made. Notwithstanding the foregoing, a Party may disclose information respecting the Transactions as permitted by the Transaction Agreements and also may make such disclosures to its Representatives who need to know such information for the purpose of evaluating, negotiating and effecting the Transactions and owning and/or operating the Business (and the various businesses of the respective Parties) following the Closing; provided, that such Party shall (i) inform each such Representative of the confidential and proprietary nature of the protected disclosures and (ii) be responsible for each such Representative’s maintaining the confidentiality of such information and for any further disclosure of such information by any such Representative (it being understood that such responsibility shall be in addition to and not in limitation of any right or remedy a Party may have against such Representative with respect to any such further disclosure).

8.5 Risk of Loss.

(a) In the event of the damage or destruction of any Real Estate Asset (whether owned by the Company or indirectly through any of its Subsidiaries) prior to the Closing, the Company shall promptly notify the Merger Purchaser of such damage or destruction, and the Company shall, at the Company’s option, either (i) repair such Real Estate Asset and restore it to the condition it was in immediately prior to such damage or destruction at the Company’s sole cost and expense or (ii) reduce the Merger Consideration (with corresponding pro rata reductions in the Applicable Per Share Merger Consideration amounts) by an amount equal to the cost to repair (or in the case of damage or destruction that cannot be repaired, the cost to replace) the damaged or destroyed Real Estate Asset, less the net insurance proceeds, if any, to be received by the Company or the applicable Subsidiary of the Company in respect of such damage or destruction. Except as provided in Section 8.5(b), the Closing shall, subject to the conditions set forth in Article VIII of the Contribution Agreement and Article 6 of the Merger Agreement, occur pursuant to Section 4.1 of the Contribution Agreement and Section 2.2 of the Merger Agreement without delay.

(b) Notwithstanding the provisions of Section 8.5(a), the Company and the Merger Purchaser agree that if the damage or destruction covered by that provision is such that the Company or the Merger Purchaser in good faith reasonably expect the amount thereof to be in excess of $30,000,000, then the Merger Purchaser may terminate this Agreement. Unless terminated as provided in this Section 8.5(b), the Transactions shall otherwise be consummated, subject to the conditions set forth in Article VIII of the Contribution Agreement and Article 6 of the Merger Agreement, as though such destruction or damage had not occurred; provided, however, that if the Merger Purchaser does not elect to terminate this Agreement, the Company shall, at the Company’s option, either (i) repair such Real Estate Asset and restore it to the condition it was in immediately prior to such damage or destruction at the Company’s sole cost

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and expense or (ii) reduce the Merger Consideration (with corresponding pro rata reductions in the Applicable Per Share Merger Consideration amounts) by an amount equal to the cost to repair (or in the case of damage or destruction that cannot be repaired, the cost to replace) the damaged or destroyed Real Estate Asset, less the net insurance proceeds, if any, to be received by the Company or the applicable Subsidiary of the Company in respect of such damage or destruction (which insurance proceeds shall remain with the Company through the Closing), as provided in Section 8.5(a).

(c) If, prior to the Closing Date, all or any significant portion (as defined in this Section 8.5(c)) of the Real Estate Assets (whether owned by the Company or indirectly through any of its Subsidiaries) is taken by eminent domain or similar taking (or is the subject of a pending taking which has not yet been consummated), the Company shall notify the Merger Purchaser of such fact promptly after obtaining Knowledge thereof, and the Merger Purchaser shall have the right to terminate this Agreement by giving notice to the Company not later than ten (10) days after the giving of the Company’s notice. For the purposes hereof, a “significant portion” of the Real Estate Assets shall mean such a portion of the Real Estate Assets as shall be necessary, as reasonably determined by the Merger Purchaser for the operation of the Company’s business or operations in the ordinary course, without causing a Material Adverse Effect; provided, however, that in any event a portion of the Real Estate Assets with an aggregate value, as reasonably determined by the Merger Purchaser, in excess of $30,000,000 shall be conclusively deemed to constitute a “significant portion” of the Real Estate Assets. If the Merger Purchaser does not elect to terminate this Agreement as provided in this Section 8.5(c), or if an “insignificant portion” (i.e., anything other than a significant portion) of the Real Estate Assets is taken by eminent domain (or becomes the subject of a pending taking), there shall be no reduction of the Merger Consideration, and the Company shall be entitled to receive and keep all awards for the taking of the Real Estate Assets or such portion thereof.

8.6 Director and Officer Resignations. At the Closing, the directors and officers of the Company and the Real Estate Entity designated by the Merger Purchaser in writing shall have delivered written resignations from their positions as directors or officers of the Company or the Real Estate Entity, as applicable, effective as of the Effective Time.

8.7 Fees and Expenses. Except as expressly provided otherwise in this Agreement or the other Transaction Agreements, all costs and expenses incurred in connection with Transactions will be paid by the Party incurring such costs and expenses.

8.8 Commercially Reasonable Efforts. The Parties shall cooperate and use their respective commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate the Transactions as soon as reasonably practicable following the execution and delivery of this Agreement; provided, however, that nothing in this Section 8.8 shall require any Party to waive any of the conditions to such Party’s obligation to consummate the Transactions set forth in Article VIII of the Contribution Agreement or Article 6 of the Merger Agreement.

8.9 WARN Act. Without limiting the Assumed Liabilities, the obligation for compliance with the federal Worker Adjustment, Retraining and Notification Act of 1988, as amended (the “WARN Act”) and for compliance with any applicable state law, shall pass from

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the Company to NewCo at the Closing relative to all of the employees of the Company and its subsidiaries. The Company’s Shareholders, directors and officers shall have no liability arising out of the WARN Act with respect to the employees of the Company and its subsidiaries in connection with actions taken by NewCo or the Surviving Corporation on or after the Closing Date.

8.10 Notification of Breach. In the event that, at any time prior to the Closing, any Party hereto acquires knowledge of any event, condition, fact or circumstance that, if existing or known to such Party as of the date hereof, would have been required to be set forth or described by such Party in the Company Disclosure Letter or would otherwise have rendered any representation or warranty of such Party contained in Article 3, Article 4, Article 5 or Article 6 of this Agreement, as applicable, untrue, such Party shall promptly (but in any event prior to the Closing) provide written notice of such event, condition, fact or circumstance to each other Party, which notice shall also state whether such Party believes such event, condition, fact or circumstance is, or if not cured within thirty (30) days after written notice of same from the appropriate Party, would become, a Terminating Company Breach or a Terminating Purchaser Breach. However, no such written notice shall be deemed to cure any breach of any such representation or warranty, whether for purposes of determining whether or not the conditions set forth in Article VIII of the Contribution Agreement and Article 6 of the Merger Agreement have been satisfied or otherwise, unless otherwise agreed in writing by all of the Parties hereto.

8.11 Exclusivity. From and after the date of this Agreement until the Closing or until the termination of this Agreement, neither the Company nor its Representatives shall, directly or indirectly, solicit or accept any offers from third parties (“Potential Purchasers”) relating to a merger of the Company, a sale of substantially all its assets, or the sale of substantially all of its capital stock (whether by a sale by existing Shareholders or the issuance of additional capital stock by the Company) or similar transaction (an “Acquisition Transaction”). In accordance therewith, the Company and its Representatives shall not: (a) permit or allow tours of the Facilities or the Company’s home offices by Potential Purchasers; (b) discuss any business arrangements with any third parties retained by Potential Purchasers to conduct due diligence on the Company; or (c) negotiate any merger or acquisition Contracts with any Potential Purchasers. Notwithstanding the foregoing covenants, the Company and its Representatives may communicate with Potential Purchasers that prior to the date hereof have made a proposal to the Company regarding an Acquisition Transaction regarding the status of the potential transaction contemplated by this Agreement, may participate in conference calls with such Potential Purchasers and may provide updates of, and supplements to, due diligence and underwriting information previously provided to such Potential Purchasers.

8.12 Section 280G. Prior to the Effective Time, (i) the Company shall use its best efforts to obtain waiver agreements from each individual which the Company has identified and listed in Section 4.4(l) as receiving payments which the Company reasonably expects may not be deductible as a result of the application of Section 280G of the Code. Such waiver agreements shall provide for the waiver by the affected individuals of all rights and entitlement to such payments to the extent that they constitute “excess parachute payments”; and (ii) shall promptly submit to the Shareholders for approval (in a manner reasonably determined by the Company to meet the requirements for shareholder approval as required by the terms of Section 280G(b)(5) of the Code) any payments and/or benefits that have been waived by such affected individuals.

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Prior to the Effective Time the Company shall deliver to the Merger Purchaser copies of any waivers obtained and evidence that (A) the Shareholder vote described in subsection (ii) above was solicited and the requisite Shareholder approval was obtained with respect to any payments and/or benefits that were subject to the Shareholder vote (the “280G Approval”), or (B) the 280G Approval was not obtained and as a consequence, that such “excess parachute payments” shall not be made or provided, pursuant to the waivers of those payments and/or benefits which were executed by the affected individuals.

ARTICLE 9

Post-Closing Covenants

The Parties agree as follows with respect to the period following the Closing:

9.1 [Intentionally Omitted]

9.2 Indemnification; Directors’ and Officers’ Insurance.

(a) The Company has purchased a “tail” policy of officers’ and directors’ liability insurance and fiduciary liability insurance (the “Tail Policy”) in respect of acts or omissions occurring at or prior to the Effective Time (including the Transactions), the costs of which are included in the computation of the Transaction Fees. For a period of four (4) years after the Effective Time, the Surviving Corporation shall, and the Merger Purchaser shall (in the event of a failure by the Surviving Corporation to do so), take all such commercially reasonable actions to insure that such policy is maintained in full force and effect. If the Surviving Corporation shall receive notice that the Tail Policy is being terminated or cancelled during such four-year period, the Surviving Corporation or the Merger Purchaser, as the case may be, shall immediately notify the Shareholders’ Representatives so that they may take such action as they deem appropriate.

(b) In the event that the Merger Purchaser or the Surviving Corporation or any of their respective successors or assigns (i) consolidates with or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person, proper provisions shall be made so that such Person assumes the obligations set forth in this Section 9.2, and the Merger Purchaser shall cause such Person to assume such obligations.

(c) This Section 9.2, which shall survive the consummation of the Merger Transaction at the Effective Time and shall continue for the periods specified herein and is intended to benefit any current and former directors, officers, employees and agents of the Company covered by the Tail Policy, each of whom are intended third-party beneficiaries and may enforce the provisions of this Section 9.2.

9.3 No Liability of Company Parties.

(a) No actions taken by the Merger Acquiring Parties in connection with the financing or consummation of the Transactions or otherwise will result in any liability or obligation on the part of the Shareholders, whether arising in connection with fraudulent conveyance laws or otherwise.

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(b) Each Merger Acquiring Party acknowledges and agrees that it did not rely on the Shareholders or their Affiliates (other than the Company and its Subsidiaries), the directors of the Company, in their capacities as such, or the Shareholder Representatives in making its decision to enter into the Transaction Agreements, and each agrees that none of the Shareholders or their Affiliates (other than the Company and its Subsidiaries), the directors of the Company, in their capacities as such, or the Shareholder Representatives, nor the respective controlling Persons, officers, directors, managers, partners, agents, or employees of any such Person, shall be liable for any action heretofore taken or hereafter taken by any of them in connection with the Transaction Agreements or the transactions contemplated thereby.

(c) The Merger Acquiring Parties, NewCo and the Company (as the Surviving Corporation) for themselves and on behalf of their Affiliates, contingent upon the occurrence of, and effective upon and as of, the Closing, hereby:

(i) agree that none of them has or will have claim, right, cause of action or remedy (whether arising by law (including under any statute, regulation, any common law theory or otherwise), by contract, in tort (including any theory of negligence, fraud, or breach of fiduciary duty), in equity or otherwise) in any way relating to or arising out of the Transaction Agreements, the transactions contemplated thereby, and/or any matters, actions, omissions, events, transactions, claims, responsibilities, circumstances or conditions relating to the Company, its Subsidiaries or any of their businesses, condition (financial or otherwise) assets or operations to the extent existing or arising with respect to any period on or before the Closing (the “Potential Claims”) as against the Shareholders and their Affiliates (other than the Company and its Subsidiaries), the directors of the Company in their capacities as such and the Shareholder Representatives (the “Company Parties”); and

(ii) releases and acquits each of the Company Parties from, waives any right at law or in equity as to, and agrees not to bring or assert any claim on or with respect to, seek or obtain any contribution or cost recovery as to, or seek or obtain any remedy or recourse to which it or they would be otherwise entitled as to, any or all Potential Claims;

provided, however, that the Acquiring Parties may assert and recover for, and the term “Potential Claims” shall not include, Damages for which (and the extent to which) this Agreement expressly permits contractual recovery (and not based on any other legal or equitable theory) arising from (y) the Covered Claims but solely to the extent of the Closing Escrow Amount and then only to the extent, and subject to the limitations, set forth in Article 11 of this Agreement and (z), as against a Shareholder severally, but not jointly, a breach of such Shareholder’s Title Representation, but only to the extent, and subject to the limitations, set forth in Article 11 of this Agreement and the provisions of the Shareholder Letters.

(d) Without limiting Section 9.3(c), the Shareholder Representatives and any Persons acting on their behalf shall have no personal liability to, and no claim may be made by, the Merger Acquiring Parties, NewCo, the Company, the Surviving Corporation or any of their respective Affiliates with respect to or by virtue of any acts or omissions of the

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Shareholder Representatives in connection with the Transaction Agreements or the transactions or activities contemplated thereby or occurring by virtue of the Transaction Agreements. Each of the Parties hereto and to the other Transaction Documents, the Surviving Corporation and their respective Affiliates hereby exculpates the Shareholder Representatives and any Persons acting on their behalf from, and holds harmless, relieves, releases and acquits the Shareholder Representatives and any Persons acting on their behalf from and against, any and all losses, liabilities, claims or obligations by reason of any act or omission of the Shareholder Representatives or any Persons acting on their behalf, including negligence. The foregoing shall not limit any right or claim that the Acquiring Parties may have as against the Closing Escrow or solely to the extent of the Shareholders and Participants Fund and not from the Shareholder Representatives (or any Persons acting on their behalf) personally, amounts due to an Acquiring Party pursuant to Section 3.2 of the Contribution Agreement to the extent provided therein.

(e) The Acquiring Parties and their Affiliates (including the Company after the Closing) shall use their commercially reasonable efforts, to the extent legally permissible, to dismiss, terminate and release any derivative claims brought by or through any of the Shareholders as against any of the directors or officers of the Company that held office at any time prior to the Closing.

(f) This Section 9.3, which shall survive the Closing and the consummation of the Merger Transaction at the Effective Time, is intended to benefit the Company Parties (including the Shareholder Representatives and the directors and officers of the Company that held office at any time prior to the Closing), each of whom is an express and intended third-party beneficiary of this Section 9.3 and may enforce the provisions of this Section 9.3 as if a party to this Agreement. However, this Section 9.3 does not affect or limit the liability of any Person under or with respect to a separate contractual relationship with the Merger Purchaser, including any contractual relationships between NewCo or its owner after the Closing.

ARTICLE 10

Termination

10.1 Termination of Agreements. This Agreement may be terminated and the transactions contemplated hereby may be abandoned (which, as provided in Section 10.2 below will automatically terminate the Contribution Agreement and the Merger Agreement) at any time prior to the Closing, notwithstanding any requisite approval and adoption of this Agreement, the Contribution Agreement or the Merger Agreement and the transactions contemplated hereby or thereby, as follows:

(a) by mutual written consent of the Merger Purchaser and the Company;

(b) by either the Merger Purchaser or the Company (so long as such terminating Party is using commercially reasonable efforts to prevent the occurrence of the below listed events or conditions), if any court of competent jurisdiction in the United States or any other Governmental Entity, based otherwise than on any applicable antitrust Law, (i) shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, the Contribution Agreement or the Merger

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Agreement and such Order or other action shall have become final and non-appealable or (ii) shall have failed to issue an Order or to take any other action necessary to fulfill the conditions to the Closing, and such denial of a request to issue such Order or take such other action shall have become final and non-appealable;

(c) by the Company by written notice to the Merger Purchaser upon a material breach of any representation, warranty, covenant or agreement on the part of the Merger Purchaser set forth in this Agreement or the Merger Agreement which would give rise to a failure of a condition set forth in Section 6.2 of the Merger Agreement and is incapable of being cured or, if capable of being cured, shall not have been cured within thirty (30) days after written notice of such breach is given to the Merger Purchaser by the Company (a “Terminating Merger Purchaser Breach”); provided, however, that the Company may not exercise the right stated in this Section 10.1(c) if the Company is then in material breach of this Agreement or the Merger Agreement;

(d) by the Merger Purchaser by written notice to the Company upon a material breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement or the Merger Agreement which would give rise to a failure of a condition set forth in Section 6.1 of the Merger Agreement and is incapable of being cured or, if capable of being cured, shall not have been cured within thirty (30) days after written notice of such breach is given to the Company by the Merger Purchaser (a “Terminating Company Breach”); provided, however, that the Merger Purchaser may not exercise the right stated in this Section 10.1(d) if the Merger Purchaser is then in material breach of this Agreement or the Merger Agreement;

(e) by the Merger Purchaser pursuant to Section 8.5(b) or Section 8.5(c) of this Agreement; and

(f) by either the Merger Purchaser or the Company unilaterally by written notice to the other Parties, if the Closing shall not have occurred on or before April 21, 2006 (which is the thirtieth day after the date of this Agreement) (the “Termination Date”); provided, however, that the right to terminate this Agreement, the Contribution Agreement and the Merger Agreement under this Section 10.1(f) shall not be available to any Party whose failure to fulfill any material obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before the Termination Date; provided further that either the Merger Purchaser or the Company, acting reasonably and in good faith, may elect to extend such date by no more than fifteen (15) days (e.g., until May 6, 2006) if any of the conditions set forth in Section 6.1(a)(viii)(A) of the Merger Agreement have not been satisfied by such date; and provided further that either the Merger Purchaser or the Company, acting reasonably and in good faith, may elect to extend such date by no more than sixty (60) days (May 21, 2006) if any of the conditions set forth in Section 6.1(a)(viii)(B) of the Merger Agreement, in the case of the Merger Purchaser, or Section 6.2(a)(vi) or (vii) of the Merger Agreement, in the case of the Company, have not been satisfied by such date; and provided moreover that if the only condition set forth in Section 6.1(a)(viii)(B) of the Merger Agreement or Section 6.2(a)(vii) of the Merger Agreement that remains unsatisfied is the issuance by one or more Governmental Entities of all material licenses required to operate the Facilities, such date shall automatically be extended until such time as all such licenses have been duly issued or until June 30, 2006 whichever first occurs.

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10.2 Effect of Termination. If either the Merger Purchaser or the Company terminate this Agreement pursuant to Section 10.1 above, then such termination shall also automatically terminate the Contribution Agreement and the Merger Agreement, as well, and this Agreement, the Contribution Agreement and the Merger Agreement shall each forthwith become void, and there shall be no further liability or obligation hereunder or thereunder on the part of any Party hereto or thereto or their respective Affiliates, officers, directors or stockholders; provided, however, that (i) Section 2.9 of the Merger Agreement, Section 9.3, this Section 10.2, Article 12 and the confidentiality and other provisions contained in the Confidentiality Agreements shall each survive termination, (ii) the Performance Deposit made pursuant to the Merger Agreement shall be released as provided in the Merger Agreement and (iii) no such termination shall release any Party from liability for a breach of any term or provision of this Agreement, the Contribution Agreement or the Merger Agreement; and provided further, that if the Merger Purchaser terminates this Agreement (and consequently, the Contribution Agreement and the Merger Agreement) pursuant to Section 10.1(d) as a result of the failure of the Company to satisfy the conditions stated in Section 6.1(a)(i) of the Merger Agreement, after giving effect to the provisions of Section 6.1(b) of the Merger Agreement, the Company shall pay to the Merger Purchaser all of their respective reasonable third party out-of-pocket costs and expenses incurred and paid by them in connection with this Agreement and the other Transaction Agreements, up to an aggregate of $750,000.

ARTICLE 11

Indemnification; Remedies

11.1 Survival; Right to Indemnification Not Affected by Knowledge.

(a) All representations and warranties, covenants and obligations of the Parties in this Agreement, the Contribution Agreement and the Merger Agreement will survive the Closing for a period of twelve (12) months following the Closing Date (the “12-Month Survival Period”); provided, however, that the representations and warranties set forth in Sections 3.2(c) and (d) shall not survive closing; provided, further, that

(i) the covenants and obligations in this Agreement that, by their terms, are to be performed prior to the Closing shall expire as of the Closing, and upon the occurrence of the Closing, shall thereafter be of no further force or effect and the covenants and obligations set forth in Articles 2, 9, 11 and 12 of this Agreement and the covenants and obligations in the Merger Agreement and the Contribution Agreement that contemplate actions after the Closing will survive indefinitely;

(ii) other than as to Tax and ERISA Representations (as defined below), the provisions set forth in Section 11.2(a)(i) and Section 11.2(a)(ii) will survive the Closing for a period of twenty-four (24) months following the Closing Date (the “24-Month Survival Period” to the extent that the breach of the representation and warranty giving rise to a Covered Claim results from claims actually made by Persons (including Governmental Entities) other than the Company, its Subsidiaries, and the Acquiring Parties and their Affiliates during the 24-Month Survival Period (the “Third Party Claims”) and notice thereof is given to the Shareholder Representatives as provided herein within the 24-Month Survival Period;

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(iii) as to breaches of the representations and warranties set forth in Sections 4.3 and 4.4 (the “Tax and ERISA Representations”) the provisions set forth in Section 11.2(a)(i), will survive the Closing for a period of thirty six (36) months following the Closing Date (the “36-Month Survival Period,” and each of the 12-Month Survival Period, the 24-Month Survival Period and the 36-Month Survival Period, as to the representations and warranties to which they apply, the “Survival Period”) to the extent that notice thereof is given to the Shareholder Representatives as provided herein (“Tax Claims”) and provided the breach of representations and warranties giving rise to a Covered Claim results in written notice of a claim or potential claim (including a request for an extension or waiver of the statute of limitations) received by the Company during the 36-Month Survival Period (except in the case of a breach of the representations in Section 4.3(a)(ii), (iii), (x), (xi), (xiv), (xv), (xvi) or (xviii), as to which a Tax Claim may arise where Damages are recoverable that do not result from a Tax Audit in the circumstances described in Section 11.2(e)(i) and the Schedule referenced therein).

(b) Except as otherwise provided in Section 11.2 below, the right to indemnification, payment of Damages or any other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation.

11.2 Payment of Damages by or for the Benefit of the Shareholders and the Participants.

(a) As provided in Section 2.9 of the Merger Agreement, the Closing Escrow Amount will be withheld from the Merger Consideration and Gain Sharing Awards otherwise payable to the Shareholders and Participants immediately after the Effective Date. Recovery from the Closing Escrow Amount shall be subject to the other limitations and provisions of this Agreement and, as so limited, shall be the sole and exclusive remedy of NewCo, the Merger Purchaser, the Surviving Corporation, and their respective representatives, shareholders, partners, controlling Persons and Affiliates (collectively, the “Purchaser Indemnitees”) as against any or all of the Shareholders, the current Company directors, the current Company officers, and their respective representatives, shareholders, partners, controlling Persons and Affiliates with respect to any Covered Claims or Damages arising therefrom. “Covered Claims” are claims for which (and the extent to which) this Agreement expressly permits contractual recovery (and not based on any other legal or equitable theory) arising from the following:

(i) As to the Merger Purchaser, Damages suffered by the Merger Purchaser arising out of a breach of any representation or warranty made by the Company set forth in Article 3 or Article 4 of this Agreement or in any certificate delivered by the Company pursuant to this Agreement or any other Transaction Agreement;

(ii) As to NewCo, Damages suffered by NewCo arising out of a breach of any representation or warranty made by the Company set forth in Article 3 or Article 5 of this Agreement;

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(b) To the extent otherwise permitted by the other provisions of this Agreement, recovery as against the Closing Escrow Amount with respect to Damages arising out of the Covered Claims shall be subject to the following and releases from the Closing Escrow Amount to the Shareholders and the Participants will be made as follows (and after any such release, no further claim as against a Shareholder or Participant may be made as to the amounts so released):

(i) Damages arising from Covered Claims under Sections 11.2(a)(i) and 11.2(a)(ii) as finally determined may be recovered solely and exclusively out of the Closing Escrow Amount to the extent the Covered Claims were properly made prior to the expiration of the 12-Month Survival Period. At the expiration of the 12-Month Survival Period, one-third of the balance (but not more than $5,000,000) of the total amount then remaining in the Closing Escrow Account over and above the Satisfied and Asserted Covered Claims shall be released to the Shareholders and Participants in accordance with their respective Pro Rata Portions; (the “12-Month Distribution”). To the extent that a Covered Claim is made against the Closing Escrow Amount and is later resolved, any reserve therefor that is not paid to a Purchaser Indemnitee in satisfaction of such claim shall be released to the Shareholders and Participants in accordance with their respective Pro Rata Portions and shall be deemed to be part of the 12-Month Distribution;

(ii) Damages arising from Covered Claims under Section 11.2(a)(i) and Section 11.2(a)(ii) solely with respect to Third Party Claims and Tax Claims as finally determined may be recovered solely and exclusively out of the Closing Escrow Amount to the extent such Covered Claims were properly made prior to the expiration of the 24-Month Survival Period. At the expiration of the 24-Month Survival Period, one half of the balance (but not more than $5,000,000) of the Closing Escrow Amount after deducting Satisfied and Asserted Covered Claims as of such time, then remaining (the “24-Month Distribution”) shall be released to the Shareholders and Participants in accordance with their respective Pro Rata Portions. To the extent that such a Covered Claim is made against the Closing Escrow Amount and is later resolved, any reserve therefor that is not paid to a Purchaser Indemnitee in satisfaction of such claim shall be released to the Shareholders and Participants in accordance with their respective Pro Rata Portions and shall be deemed to be part of the 24-Month Distribution.

(iii) After the expiration of the 24-Month Survival Period, no Covered Claims may be asserted against the Closing Escrow Amount except and solely to the extent of Damages arising from Covered Claims that are Tax Claims. Specifically, Damages arising from Covered Claims under Section 11.2(a)(i) solely with respect to Tax Claims as finally determined may be recovered solely and exclusively out of the Closing Escrow Amount to the extent such Covered Claims were properly made prior to the expiration of the 36-Month Survival Period. At the expiration of the 36-Month Survival Period, the balance of Closing Escrow Amount after deducting Satisfied and Asserted Covered Claims as of such time, then remaining (the “36-Month Distribution”) shall be released to the Shareholders and Participants in accordance with their respective Pro Rata Portions. To the extent that such a Covered Claim is made against the Closing Escrow Amount and is later resolved, any reserve therefor that is not paid to a Purchaser Indemnitee in satisfaction of such claim shall be released to the Shareholders and Participants in

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accordance with their respective Pro Rata Portions and shall be deemed to be part of the 36-Month Distribution.

(c) In the various Shareholder Letters, each of the Shareholders severally, and not jointly, will make Shareholder Title Representations. Damages arising from a breach of such representations are covered by an indemnity set forth in the Shareholder Letter and may be asserted as against such Shareholder subject to the other limitations set forth herein; provided, however, that no claim will be made as against the Closing Date Escrow by reason of a breach of such Shareholder Title Representation, except with respect to amounts that are otherwise being released from the Closing Escrow Amount to such Shareholder.

(d) The Purchaser Indemnitees shall not be entitled to any indemnification under this Agreement or to recover from the Closing Escrow Amount unless and until the aggregate amount of all Damages for which the Purchaser Indemnitees would otherwise be entitled to make claims against the Closing Escrow Amount exceeds One Million Dollars ($1,000,000), but in such event, the Purchaser Indemnitees shall be entitled to recover for the entire amount of all such Damages to the extent otherwise permitted hereby and subject to the limitations herein.

(e) For the purposes of applying Section 11.2, (i) any claims for Damages with respect to Tax matters are limited solely to claims for Taxes for Pre-Closing Taxable Periods that result from a breach of the representation in Section 4.3 (except for Damages resulting from a breach of the representations in Section 4.3(a)(x), (xi), (xiv), (xv), (xvii)(B)-(C), and (xviii), as to which Damages are recoverable of Taxes for Post-Closing Taxable Periods) (and then only to the extent otherwise recoverable under this Section 11.2) and Damages resulting from any such breach are further limited to the amount of Taxes payable in cash to a Tax authority (and expenses directly related thereto, including reasonable costs of investigation and defense and reasonable attorney’s fees) that result from a Tax Audit commenced following written notice of a claim or potential claim (including a request for an extension or waiver of the statute of limitations) actually received by the Company during the 36-Month Survival Period (except for Damages resulting from a breach of the representations in Section 4.3(a)(xvi) or (xviii), as to which Damages are recoverable that do not result from a Tax Audit and except for Damages resulting from a breach of the representations in Section 4.3(a)(ii), (iii), (x), (xi), (xiv) or (xv), as to which Damages are recoverable that do not result from a Tax Audit, but only to the extent that, in the case of Damages that do not result from a Tax Audit, the requirements of Schedule 11.2 are complied with); and, provided further, that no “Damages” shall result from a reduction of net operating loss carryforwards or other Tax attributes of the Company or any Subsidiary of the Company, except to the extent that the reduction of net operating loss carryforwards or other Tax attributes results in a cash liability for Taxes for a Pre-Closing Taxable Period resulting from a breach of the representations in Section 4.3; and provided further, that Damages shall not, under any circumstances, include Taxes arising from the Transactions except to the limited extent of a breach of the representation in Section 4.3(xx); (ii) the term “Damages” shall not include any item to the extent covered by and included in the Working Capital Adjustment or as to which repair or replacement has been made or the Merger Consideration has been reduced as contemplated by Section 8.5(a) or as to which the Company or any Company Subsidiary is entitled to a condemnation or similar award as contemplated by Section 8.5(c)); (iii) the term “Damages” shall not include any item covered by and included in Assumed Liabilities (other than any Damages incurred by Purchaser Indemnitees with respect to Liabilities which are the

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subject of Sections 4.3 and 4.4); (iv) the Shareholders and the Participants shall be credited pro rata in accordance with their Pro Rata Portions as making payment with respect to Damages covered by this Section 11.2 to the extent that payments are made pursuant to Section 6.1(b) of the Merger Agreement; and (v) the amount of any Damages a Purchaser Indemnitee would otherwise be entitled to claim shall be reduced by any reserves maintained by the Company or its Subsidiaries with respect to such Damages on their books and records as of the Closing Date, by any amounts actually received from insurance coverage provided by the Company’s captive insurance subsidiary, and by amounts actually received by such Purchaser Indemnitee with respect to such Damages under any insurance coverage or from any other Person alleged to be responsible for such Damages. If a Purchaser Indemnitee receives an amount under insurance coverage or from any such other Person with respect to Damages at any time subsequent to any indemnification provided out of the Closing Escrow Amount, then such Purchaser Indemnitee shall promptly (but in no event more than ten (10) Business Days after receipt of such amount) reimburse the Shareholders and the Participants, pro rata in accordance with their respective Pro Rata Portions, for amounts paid out of the Closing Escrow Amount to such Purchaser Indemnitee in connection with providing such indemnification up to such amount received by such Purchaser Indemnitee. Likewise, if a Purchaser Indemnitee receives an amount under insurance coverage or from any such other Person with respect to Damages at any time subsequent to any indemnification provided by a Shareholder under such Shareholder’s Shareholder Letter, then such Purchaser Indemnitee shall promptly (but in no event more than ten (10) Business Days after receipt of such amount) reimburse such Shareholder for amounts paid by such Shareholder to such Purchaser Indemnitee under such Shareholder’s Letter in connection with providing such indemnification up to such amount received by such Purchaser Indemnitee. Liabilities arising from a breach of a Shareholder Title Representation, while they may at Merger Purchaser’s option be recovered from the breaching Shareholder’s Pro Rata Portion of the Closing Escrow Amount, shall not count against the aggregate liability limitation of $15,000,000 described in subsection (f) below.

(f) In no event shall the total liability of the Shareholders and the Participants under this Agreement (including, without limitation, this Section 11.2), the Contribution Agreement, the Merger Agreement, the Shareholder Letters and the Participant Letters or otherwise in connection with the transactions contemplated hereby or thereby exceed, in the aggregate as against the Shareholders and Participants, Fifteen Million Dollars ($15,000,000) less any amounts withheld, released or paid from the Closing Escrow Amount or otherwise previously paid by any of the Shareholders or Participants, nor shall any Shareholder’s or Participant’s maximum liability exceed, in the aggregate, such Shareholder’s or Participant’s Pro Rata Portion of such amount, except that with respect to breaches of a Shareholder Title Representation by a particular Shareholder, the liability of such Shareholder shall not exceed the amount actually received by such Shareholder in respect of such Shareholder’s Shares under the Merger Agreement and this Agreement, deducting any amounts held in the Closing Escrow Amount as against such Shareholder until such amounts are released.

(g) The Purchaser Indemnitees may recover with respect to Damages only to the extent otherwise permitted by the other provisions of this Agreement and then only with respect to claims giving rise to Damages of which the applicable Purchaser Indemnitees have given proper written notice prior to the end of the applicable Survival Period; provided, however, that except with respect to claims against a particular Shareholder for breach of such Shareholder’s

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Shareholder Title Representations in such Shareholder’s Shareholder Letter, delivery of such written notice to the Shareholder Representatives shall be deemed to be written notice to the Shareholders and the Participants; and provided further that with respect to claims against a particular Shareholder for breach of such Shareholder’s Shareholder Title Representations in such Shareholder’s Shareholder Letter, such written notice shall be provided to such Shareholder at the address for such Shareholder set forth in such Shareholder’s Shareholder Letter.

11.3 Indemnification and Payment of Damages by Merger Acquiring Parties.

(a) Merger Acquiring Parties’ Indemnification Obligation. The Merger Acquiring Parties, jointly and severally, will indemnify and hold harmless

(i) the Shareholders, the Shareholder Representatives, and the respective representatives, shareholders, partners, controlling Persons and Affiliates of the Shareholders or the Shareholder Representatives (collectively, the “Shareholder Indemnitees”) and will pay to the Shareholder Indemnitees the amount of any Damages arising, directly or indirectly, from or in connection with: (A) any breach of any representation or warranty made by either of the Merger Acquiring Parties in this Agreement or in any certificate delivered by the Merger Acquiring Parties pursuant to this Agreement or any other Transaction Agreement, other than a Terminating Merger Purchaser Breach occurring after the date hereof but prior to the Closing of which any Party hereto has provided written notice to the other Parties in accordance with Section 8.10 prior to the Closing; (B) any breach by either of the Merger Acquiring Parties or the Surviving Corporation of any covenant or obligation of the Merger Acquiring Parties or the Surviving Corporation in this Agreement or the Merger Agreement to be performed following the Closing; (C) any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with the Merger Purchaser (or any Person acting on its behalf) in connection with this Agreement or the Merger Agreement or any of the transactions contemplated hereby or thereby; or (D) any Post-Closing Liabilities of any of the Merger Acquiring Parties or their Affiliates (including, after the Closing, the Real Estate Entity);

(ii) NewCo and its respective representatives, shareholders, partners, controlling Persons and Affiliates and will pay to such Persons the amount of any Damages arising, directly or indirectly, from or in connection with the Excluded Liabilities and any Post-Closing Liabilities of any of the Merger Acquiring Parties or their Affiliates (including, after the Closing, the Real Estate Entity).

(b) Limitations. The Merger Acquiring Parties’ obligation to indemnify the Shareholders under Section 11.3(a) shall be subject to Section 11.7 and the following limitations:

(i) With respect to claims for indemnification in respect of breaches of the Merger Acquiring Parties’ representations or warranties, the Merger Acquiring Parties shall be obligated to indemnify the Shareholders under this Section 11.3 only for such claims giving rise to Damages of which the applicable Shareholders have given the Merger Purchaser written notice prior to the end of the applicable survival period; and

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(ii) The amount of any Damages for which the Merger Acquiring Parties would otherwise be obligated to indemnify a Shareholder under this Section 11.3 shall be reduced by any amount actually received by such Shareholder with respect to such Damages under any insurance coverage or from any other Person alleged to be responsible for such Damages. If a Shareholder receives an amount under insurance coverage or from any such other Person with respect to Damages at any time subsequent to any indemnification provided by the Merger Acquiring Parties under this Section 11.3, then such Shareholder shall promptly (but in no event more than ten (10) Business Days after receipt of such amount) reimburse the Merger Purchaser for amounts paid by the Merger Acquiring Parties to such Shareholder in connection with providing such indemnification up to such amount received by such Shareholder.

Nothing contained in this Agreement shall limit the obligation of the Merger Purchaser to pay the amounts set forth in the Merger Agreement as being the Merger Consideration.

11.4 Indemnification and Payment of Damages by NewCo.

(a) NewCo’s Indemnification Obligation. NewCo will indemnify and hold harmless the Shareholder Indemnitees, and will pay to the Shareholder Indemnitees the amount of any Damages arising, directly or indirectly, from or in connection with (i) any breach by NewCo of any covenant or obligation in the Contribution Agreement or (ii) any Post-Closing Liabilities of NewCo, the Operating Subsidiaries or their Affiliates.

(b) Limitations. NewCo’s obligation to indemnify the Shareholders under Section 11.4(a) shall be subject to the following limitations: The amount of any Damages for which NewCo would otherwise be obligated to indemnify a Shareholder under this Section 11.4 shall be reduced by any amount actually received by such Shareholder with respect to such Damages under any insurance coverage or from any other Person alleged to be responsible for such Damages. If a Shareholder receives an amount under insurance coverage or from any such other Person with respect to Damages at any time subsequent to any indemnification provided by NewCo under this Section 11.4, then such Shareholder shall promptly (but in no event more than ten (10) Business Days after receipt of such amount) reimburse NewCo for amounts paid by NewCo to such Shareholder in connection with providing such indemnification up to such amount received by such Shareholder.

Nothing contained in this Agreement shall limit the obligation of NewCo to pay the amounts set forth in the Contribution Agreement as being the consideration for the Contributed Assets.

11.5 Remedies Exclusive.

(a) No Other Claims. The Parties hereby expressly acknowledge and agree that, if the Closing occurs, the only claims that may be brought by (i) the Merger Purchaser, the Company, the Purchaser Indemnitees (other than NewCo), the Shareholder Indemnitees, the Participants (in such capacity) or any of their respective Affiliates against each other or (ii) NewCo, the Shareholder Indemnitees, the Participants (in such capacity) or any of their respective Affiliates against each other, in each case in connection with the Transactions or any of the Transaction Agreements are the Covered Claims, claims relating to Shareholder

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Title Representations in Section 11.2(c) and the claims expressly provided for in Sections 11.3 and 11.4, and all claims for indemnification by any Purchaser Indemnitee against any Shareholder Indemnitee or Participant (in such capacity), other than claims against a particular Shareholder for breach of such Shareholder’s Shareholder Title Representations in such Shareholder’s Shareholder Letter, shall be satisfied solely and exclusively out of the Closing Escrow Amount.

(b) The remedies provided in this Article 11 will be exclusive of and shall preclude any other remedies that may be available to any of (i) the Merger Purchaser, the Company, the Purchaser Indemnitees, the Shareholder Indemnitees, the Participants (in such capacity) or any of their respective Affiliates in any action or proceeding against each other or (ii) NewCo, the Shareholder Indemnitees, the Participants (in such capacity) or any of their respective Affiliates in any action or proceeding against each other, in each case arising under this Agreement or any other Transaction Agreement or otherwise with respect to the transactions contemplated hereby or thereby.

11.6 Procedure for Indemnification.

(a) Third Party Claims.

(i) Any claim or claims under this Agreement or the Shareholder Letters may be made jointly by the Merger Purchaser and the Surviving Corporation or by NewCo. In the event any claim or claims are asserted, if either the Merger Purchaser and the Surviving Corporation or NewCo are not a party to the assertion of the claim, then the party or parties making claim or claims shall also notify the other party (the Merger Purchaser and the Surviving Corporation or NewCo, as the case may be) at the time it makes its or their claim or claims under this Agreement or the Shareholder Letters, and the party so notified shall become a party in interest to the resolution of such claim or claims and shall be bound by any resolution of the claim unless such party has incurred separate Damages therefrom, in which case such party shall be entitled to a separate resolution regarding the amount of its Damages. Claims made by the Shareholders shall be made by and through the Shareholder Representatives. The indemnified party shall give written notice to the indemnifying party of any claim or claims asserted against the indemnified party by any third Person within thirty (30) days after obtaining actual knowledge thereof, stating the nature and basis of such claim and the amount thereof, in reasonable detail, to the extent then known by the indemnified party and signed by all the requisite parties. Failure to provide such notice shall not act as a waiver of the indemnified party’s rights with respect to such claim unless, and only to the extent that, such failure materially adversely affects the indemnifying party’s ability to defend against, minimize or eliminate Damages arising out of such claim. In the event of any litigation or proceeding by or with any third Person, the indemnified party shall keep the indemnifying party informed and, unless the indemnifying party exercises the right of control set forth in Section 11.6(a)(ii) below, shall use all reasonable efforts to defend such claim, litigation, investigation or proceeding with its or his own legal counsel and present any defense reasonably suggested by the indemnifying party or its or his counsel.

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(ii) The indemnifying party shall have the right to participate in such third party claim or litigation, at its own expense, and, upon notice to the indemnified party, to assume and control, at its own expense, the defense or prosecution thereof, as the case may be, with counsel approved by the indemnified party (which approval shall not be unreasonably withheld or delayed). Notwithstanding the foregoing, the indemnified party shall have the right to assume control of such defense or prosecution if and only if (A) the assumption or control of such defense or prosecution by the indemnified party has been authorized in writing by the indemnifying party, (B) the indemnified party has reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the indemnifying party or (C) the indemnifying party has not in fact employed counsel to assume the defense or prosecution of such action promptly after receiving notice of the commencement thereof, in each of which cases the reasonable fees and expenses of counsel will be paid by the indemnifying party, and the indemnified party shall assume and control the defense or prosecution of such action, and the indemnifying party shall reimburse or pay such reasonable fees and expenses as they are incurred. If the indemnifying party assumes such defense or prosecution in accordance with this Section 11.6(a)(ii), it shall have no liability for any legal or other expenses subsequently incurred by the indemnified party in connection with such litigation or proceeding (other than the reasonable out-of-pocket costs and attorneys’ fees of investigation and cooperation with the indemnifying party that may be requested by the indemnifying party in such defense or prosecution and as contemplated in Section 11.6(a)(iii)) but the indemnifying party shall thereafter indemnify and hold the indemnified party and its Affiliates harmless from and against all Damages with respect to such litigation or proceeding in accordance with the terms of this Agreement.

(iii) The indemnified party shall have the right to participate, and cooperate, in the defense of a Claim for which the indemnifying party has assumed control pursuant to Section 11.6(a)(ii) and may retain separate co-counsel at its sole cost and expense (except that the indemnifying party shall be responsible for the fees and expenses of the separate co-counsel to the extent the indemnified party concludes reasonably that the counsel the indemnifying party has selected has a conflict of interest).

(iv) The indemnified party shall not make, or offer to make, any settlement of any litigation or proceeding which might give rise to a right of indemnification from the indemnifying party without the consent of such indemnifying party, which consent shall not be unreasonably withheld or delayed; provided that the indemnified party may do so without such consent if (A) it elects to waive its right of indemnification with respect to the amount of such settlement in connection with such litigation or proceeding or (B) the indemnifying party fails to or declines to defend the indemnified party in such litigation or proceeding. The indemnifying party shall not consent to the entry of any judgment with respect to the matter, or enter into any settlement, which does not include a provision whereby the plaintiff or claimant in the matter releases the indemnified party from all liability with respect thereto, without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld or delayed.

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(b) Direct Claims.

(i) Any claim or claims under this Agreement or the Shareholder Letters may be made jointly by the Merger Purchaser and the Surviving Corporation or by NewCo. In the event any claim or claims are asserted, if either the Merger Purchaser and the Surviving Corporation or NewCo are not a party to the assertion of the claim, then the party or parties making claim or claims shall also notify the other party (the Merger Purchaser and the Surviving Corporation or NewCo, as the case may be) at the time it makes its or their claim or claims under this Agreement or the Shareholder Letters, and the party so notified shall become a party in interest to the resolution of such claim or claims and shall be bound by any resolution of the claim unless such party has incurred separate Damages therefrom, in which case such party shall be entitled to a separate resolution regarding the amount of its Damages. Claims made by the Shareholders shall be made by and through the Shareholder Representatives. In the event of any claim for indemnification under this Article 11 other than a third-party claim under Section 11.6(a) hereof, the indemnified party shall give written notice thereof (a “Direct Claim Notice”) to the indemnifying party within forty-five (45) days after obtaining actual knowledge thereof, stating the nature and basis of such claim for indemnification and the amount thereof, in reasonable detail. Failure to provide such Direct Claim Notice within such forty-five (45) day period shall not act as a waiver of the indemnified party’s rights with respect to such claim for indemnification unless, and only to the extent that, such failure adversely affects the indemnifying party’s ability to defend against, reduce or eliminate Damages arising out of such claim.

(ii) After delivery of a Direct Claim Notice by an indemnified party, the indemnified party and the indemnifying party shall then meet in an attempt to agree upon a resolution of the claim to which such Direct Claim Notice relates. If the indemnified party and the indemnifying party have not resolved such claim within thirty (30) days after the date that the Direct Claim Notice is delivered, then prior to the expiration of the applicable Survival Period, the indemnified party shall have the right to submit such claim for resolution pursuant to binding arbitration in accordance with the provisions of Section 12.1 hereof, or if the Survival Period has then expired, the indemnified party shall have the right to pursue any and all other remedies available at law or in equity with respect to such claim.

(c) “Indemnity,” “Indemnification,” etc.

(i) References to “indemnity,” “indemnify,” “indemnification,” “indemnifying party,” “indemnified party” and all correlatives, equivalents, and substitutes for such terms shall be interpreted so as to treat the claim procedures as against the Closing Date Escrow as if it were the functional equivalent of an indemnity by the Shareholders and Participants to the extent of the Closing Date Escrow in favor of the Purchaser Indemnitees and NewCo, as the case may be.

(ii) The Shareholder Letters and Participant Letters shall provide that whenever the Shareholders and the Participants are the “indemnifying party,” as such term is used in this Article 11: (A) the Shareholder Representatives shall have full power

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and authority to act on behalf of the Shareholders and the Participants; (B) all notices to be delivered to the “indemnifying party” shall be delivered to the Shareholder Representatives at their respective addresses set forth in the Shareholder Letters and Participant Letters; and (C) the written consent or approval of at least two (2) of the Shareholder Representatives shall be conclusively deemed to be the act or decision of the Shareholders and the Participants; provided, however, that with respect to a claim against a particular Shareholder in respect of a breach of such Shareholder’s Shareholder Title Representations in such Shareholder’s Shareholder Letter, such Shareholder shall be act on his, her or its own behalf with respect to such claim, and all notices to be delivered to the “indemnifying party” with respect to such claim shall be delivered to such Shareholder at the address for such Shareholder set forth in such Shareholder’s Shareholder Letter.

11.7 Tax Benefits with Respect to Damages. Claims as against the Closing Date Escrow and indemnification payments under this Article 11, the Shareholder Letters or the Participant Letters shall be treated by the claiming or indemnified party as an adjustment of the Merger Consideration or Gain Sharing Award, as appropriate, followed, if the Merger Purchaser is the claiming or indemnified party, by a capital contribution by the claiming indemnified party to the Surviving Corporation, and shall be reduced by any Tax benefits that arise from Damages and that are recognized by the claiming or indemnified party during the taxable period or calendar year in which an indemnification payment is made. To the extent that the indemnified party recognizes Tax benefits that arise from Damages, the claiming or indemnified party shall pay the amount of such Tax benefits (but not in excess of the escrow or indemnification payment or payments actually received from the Closing Date Escrow or indemnifying party with respect to such Damages) to the beneficiaries of the Closing Date Escrow or indemnifying party as such Tax benefits are actually recognized by the claiming or indemnified party. For purposes of this Section 11.7, the claiming or indemnified party shall be deemed to recognize a Tax benefit with respect to a taxable year if, and to the extent that, the claiming or indemnified party’s cumulative liability for Taxes through the end of such taxable year, calculated by excluding any Tax items attributable to the Damages from all taxable years, exceeds the claiming or indemnified party’s actual cumulative liability for Taxes through the end of such taxable year, calculated by taking into account any Tax items attributable to the Damages for all taxable years (to the extent permitted by relevant Tax law). After each calendar year or other taxable period, upon a Shareholder Representative’s or indemnifying party’s request, the claiming or indemnified party shall certify that it has not recognized any Tax benefits that have not theretofore been paid to or used as an offset for the benefit of the beneficiaries of the Closing Date Escrow or indemnifying parties. Upon a Shareholder Representative’s or indemnifying party’s request, the claiming or indemnified party shall provide the Shareholder Representative or indemnifying party with supporting documentation and information in reasonable detail outlining the basis for its certification. In the event that, after examining such information, the Shareholder Representative or indemnifying party disagrees with the claiming or indemnified party’s certification, the parties jointly shall select an independent third party auditor to resolve such dispute and such auditor’s determination shall be final. The cost of such independent auditor shall be shared equally by the indemnifying party and the indemnified party.

11.8 No Duplication. Any claim against the Closing Date Escrow or liability for indemnification under this Agreement shall be determined without duplication of recovery by

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reason of the state of facts (a) giving rise to such liability constituting a breach of more than one representation, warranty, covenant or agreement or (b) taken into account in determining any adjustment to the Merger Consideration as a result of the determination of Working Capital as of the Closing pursuant to Section 3.2 of the Contribution Agreement.

11.9 No Special Damages. IN NO EVENT SHALL ANY PARTY, SHAREHOLDER OR PARTICIPANT BE LIABLE UNDER THIS ARTICLE 11, THE SHAREHOLDER LETTERS, THE PARTICIPANT LETTERS OR OTHERWISE IN RESPECT OF THE TRANSACTION AGREEMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY FOR EXEMPLARY, SPECIAL, PUNITIVE, INDIRECT, REMOTE, SPECULATIVE, INCIDENTAL OR CONSEQUENTIAL DAMAGES.

ARTICLE 12

Miscellaneous

12.1 Dispute Resolution.

(a) Scope. Except for disputes regarding Working Capital (which shall be resolved in the manner set forth in Section 3.2 of the Contribution Agreement), any controversy, dispute or claim, whether based on contract, tort, statute or other legal or equitable theory (including any claim of fraud, misrepresentation or fraudulent inducement or any question of validity or effect of this Agreement, the Contribution Agreement or the Merger Agreement) between the Parties to this Agreement, the Contribution Agreement or the Merger Agreement (other than solely between NewCo, on the one hand, and Merger Purchaser and/or the Surviving Corporation, on the other hand) arising out of or related to or in connection with this Agreement, the Contribution Agreement or the Merger Agreement (including any amendments, extensions and/or any agreements attached as exhibits hereto or thereto), any agreements contemplated by this Agreement, the Contribution Agreement or the Merger Agreement (but in any event not the Master Lease), any transactions arising under such matters and/or the breach or termination of any such matters (hereinafter the “Dispute”), shall be exclusively and finally settled by binding arbitration in accordance with the rules for domestic commercial arbitration – large complex, commercial disputes – of the American Arbitration Association (the “AAA”). In the event of any conflict between the provisions of such rules and the provisions hereof, this Agreement shall govern and control. The Parties agree to the consolidation or joinder of related arbitrations or claims. Any issues as to consolidation or joinder shall be decided by the first Panel constituted to hear a Dispute. The language of the arbitration shall be English.

(b) Institution of Claim. An arbitration shall be commenced by delivery by a Party (the “claimant”) of written notice (a “Notice of Arbitration”) by facsimile and/or by overnight mail, federal express or courier to the other Party to the Dispute (the “respondent”) in accordance with the provisions of Section 12.7 hereof and to the AAA. The arbitration shall be deemed to have commenced on the date the original, couriered or mailed version of the Notice of Arbitration is received by the respondent. The Notice of Arbitration shall include a brief statement of the claim, the amount of damages claimed and all information required by the rules of the AAA.

(c) Location. The seat of the arbitration shall be New York, New York.

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(d) Selection and qualifications of Arbitrators. There shall be three (3) arbitrators (hereinafter referred to as the “Panel”). At the time of the filing of its Notice of Arbitration, the claimant shall name its party arbitrator. Within fourteen (14) days thereafter, the respondent shall name its party arbitrator. Within twenty-eight (28) days after the respondent’s receipt of the Notice of Arbitration, the Parties shall attempt to agree upon the third, neutral arbitrator. Should the Parties be unable to agree upon such third arbitrator by such time, the Parties shall notify the AAA to begin the selection of the neutral arbitrator. If a Party has failed to name its party arbitrator as provided herein, such Party shall be allowed to name its Party arbitrator as long as it does so twenty-eight (28) days prior to the date scheduled for the first pre-hearing conference to be held. In the event a Party fails to appoint an arbitrator prior to that time, such arbitrator shall be appointed by the AAA. Any vacancy of a party-appointed arbitrator shall be filled by the Party within twenty-one (21) days after notice of such vacancy or by the AAA if the Party does not appoint a replacement within such time period. The AAA shall repeat the selection process if the third arbitrator must be replaced for any reason. Each arbitrator shall be qualified by education, experience and training to determine the issues in dispute.

(e) Timing and Decision by the Panel. The Panel shall endeavor to have the Parties proceed to hearing in a reasonably expeditious manner, but shall ensure that the Parties have a fair and reasonable opportunity to develop and then to present their claims and defenses. The Panel shall render a decision within sixty (60) days of the close of the hearing. The Panel’s goal should be to have the award issued within one (1) year or less from the time the Panel is constituted. The Panel shall issue a reasoned award. The award may be enforced and a judgment entered by any court of competent jurisdiction and shall be appealable to the extent provided by the laws of the State of New York and the laws of the United States. The award shall be computed and paid in United States dollars by wire transfer to an account or accounts designated by the prevailing Party.

(f) Governing Law and Costs and Expenses. In deciding a Dispute, the Panel shall apply and utilize the substantive law of the State of New York, including such matters as whether the Party’s attorney’s fees are recoverable and whether, at what rate, and under what circumstances, interest is recoverable, but the use of such substantive law shall be without regard to any conflict of law principle or rules. Each Party shall bear its own costs, expenses, the costs of its party arbitrator and attorneys’ fees. The remaining costs of the arbitration and of the neutral arbitrator shall be split between the Parties; provided, however, that the portion of such remaining amount to be paid by the Shareholders and Participants, as well as all costs and expenses incurred by the Shareholder Representatives, shall be paid out of accrued interest on the Closing Escrow Amount (to the extent that accrued interest to which Shareholders and Participants are then entitled is sufficient to cover such amounts). The Panel may, as part of its decision, award all or part of such remaining costs, as well as expert fees and costs, to the prevailing Party.

(g) Discovery. The Parties agree that each is entitled to all forms of discovery permitted by the applicable New York rules of civil procedure. The Panel shall have the power to determine the amount of such discovery and how it will be conducted, to the extent not agreed to by the Parties. The Panel shall also have the power to order the Parties to provide documents, witness lists, expert witness reports and such other materials or information needed to provide

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documents for an efficient hearing. The Panel shall promptly schedule and hold an initial pre-hearing conference and any other conferences to determine any and all such matters.

(h) Confidentiality. The Parties agree that the arbitration hearings held pursuant hereto shall not be open to any third party. Such hearings are to be private and limited to the arbitrators, court reporters, the Parties, their counsel, their representatives and the witnesses. The Parties further agree to maintain the confidentiality of, and not to disclose to a third party, any information, documents or things regarding any arbitral proceeding or disclosed in the course thereof, except as required by applicable Law or unless required in connection with an action to enforce, nullify, modify or correct an award.

(i) Enforceability and Severability. If any part of this arbitration provision is held to be unenforceable, it shall be severed and shall not affect either the duty to arbitrate or any other part of this provision.

(j) Court-Ordered Interim Relief. At any time after giving notice of a dispute, any Party may request a court of competent jurisdiction to grant interim measures of protection: (i) to preserve the status quo pending resolution of the Dispute, (ii) to prevent the destruction or loss of documents and other information or things relating to the Dispute, (iii) to prevent the transfer, dissipation or hiding of assets, or (iv) to aid the arbitration proceedings and the award. A request for such interim measures to a judicial authority shall not be deemed incompatible with the provisions of this dispute resolution agreement or a waiver of a Party’s right to arbitrate.

12.2 Press Releases and Public Announcements. Neither the Merger Acquiring Parties on the one hand nor the Company or NewCo on the other shall issue any press release or make any public announcement relating to the subject matter of this Agreement, the Contribution Agreement or the Merger Agreement prior to the Closing without the prior approval of the other; provided, however, that either the Merger Acquiring Parties or the Company or NewCo may make any public disclosure that it or they believe in good faith is required by applicable Law (including securities laws, stock exchange or other applicable requirements), in which case such Party or Parties shall use commercially reasonable efforts to advise the other Party or Parties prior to making the disclosure and to limit its or their disclosures to those required under such applicable Law or agreement. Notwithstanding the foregoing, the Company, NewCo and the Merger Acquiring Parties shall use commercially reasonable efforts to jointly draft all disclosures to employees regarding matters relating to this Agreement, the Contribution Agreement, the Merger Agreement and the Transactions.

12.3 No Third-Party Beneficiaries. Except as specifically provided in Section 9.2, Section 9.3, Section 11.2, Section 11.3, Section 11.4, Section 12.1 and this Section 12.3, this Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. Notwithstanding any other provision in the Transaction Agreements, the Shareholder Representatives may enforce this Agreement and the other Transaction Agreements for and on behalf of the Shareholders.

12.4 Entire Agreement. The Transaction Agreements (including the documents referred to herein) and the Confidentiality Agreements constitute the entire agreement among the Parties with respect to the subject matter thereof and supersede any prior understandings,

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agreements, or representations by or among the Parties, whether oral or written, and there are no representations, warranties or other agreements between the Parties in connection with the subject matter hereof, except as specifically set forth therein or contemplated thereby.

12.5 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Parties.

12.6 References and Construction. In this Agreement: (a) unless the context requires otherwise, all references in this Agreement to articles, sections, subsections or other subdivisions shall be deemed to mean and refer to articles, sections, subsections or other subdivisions of this Agreement; (b) titles appearing at the beginning of any article, section, subsection or other subdivision are for convenience only and shall not constitute part of such article, section, subsection or subdivision and shall be disregarded in construing the language contained therein; (c) the words “this Agreement,” “this instrument,” “herein,” “hereof,” “hereby,” “hereunder” and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited; (d) words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires; (e) pronouns in masculine, feminine or neuter genders shall be construed to include any other gender; (f) examples shall not be construed to limit, expressly or by implication, the matters they illustrate; (g) the word “or” is not exclusive and the word “includes” and its derivatives means “including, without limitation,” and corresponding derivative expressions; (h) no consideration shall be given to the fact or presumption that one Party had a greater or lesser hand in drafting this Agreement or any provision hereof; (i) all references herein to “$” or “dollars” shall refer to U.S. Dollars; and (j) unless the context otherwise requires or unless otherwise provided herein, any reference herein to a particular agreement, instrument or document shall also refer to and include all schedules, attachments, appendices and exhibits to such agreement, instrument or document and all renewals, extensions, modifications, amendments or restatements of such agreement, instrument or document.

12.7 Notices.

(a) All notices and other communications given or made pursuant to this Agreement, the Merger Agreement or the Contribution Agreement shall be in writing and shall be (i) sent by an overnight courier service that provides proof of receipt, (ii) mailed by registered or certified mail (postage prepaid, return receipt requested) or (iii) telecopied to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice):

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If Sent On or Prior to the Closing:

if to the Company, to:

Hearthstone Assisted Living, Inc.

Attention: Timothy Hekker, President

9595 Six Pines Drive

Suite 6300

The Woodlands, Texas 77380

Fax No.: (281) 362-3503

with copies to:

Hearthstone Assisted Living, Inc.

Board of Directors

c/o F. Zarrilli, Chairman

375 Park Avenue

Suite 3101

New York, New York 10152

Fax No.: (212) 771-1899

Andrews Kurth LLP

600 Travis Street

Suite 4200

Houston, Texas 77002

Attention: Eddy J. Rogers, Jr. and Jeff C. Dodd

Fax No.: (713) 238-7419

if to NewCo, to:

NewCo

c/o Hearthstone Assisted Living, Inc.

Attention: Timothy Hekker, President

9595 Six Pines Drive

Suite 6300

The Woodlands, Texas 77380

Fax No.: (281) 362-3503

with copies to:

Hearthstone Assisted Living, Inc.

Board of Directors

c/o F. Zarrilli, Chairman

375 Park Avenue

Suite 3101

New York, New York 10152

Fax No.: (212) 771-1899

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Andrews Kurth LLP

600 Travis Street

Suite 4200

Houston, Texas 77002

Attention: Eddy J. Rogers, Jr. and Jeff C. Dodd

Fax No.: (713) 238-7419

if to the Merger Purchaser or the Merger Sub, to:

Nationwide Health Properties Inc.

610 Newport Center Drive, Suite 1150

Newport Beach, California 92660

Attention: Chief Portfolio Officer

Fax No.: (949) 759-6887

If Sent After the Closing:

if to the Company, as Surviving Corporation, or to the Merger Purchaser, to:

c/o Nationwide Health Properties Inc.

610 Newport Center Drive, Suite 1150

Newport Beach, California 92660

Attention: Chief Portfolio Officer

Fax No.: (949) 759-6887

if to NewCo, to:

Hearthstone Operations, LLC

c/o Hearthstone Senior Living Services, LLC

Attention: Timothy Hekker, President

9595 Six Pines Drive

Suite 6300

The Woodlands, Texas 77380

Fax No.: (281) 362-3503

If to the Shareholder Representatives to:

Shareholder Representatives—Hearthstone Assisted Living, Inc.

c/o F. Zarrilli, Chairman

375 Park Avenue

Suite 3101

New York, New York 10152

Fax No.: (212) 771-1899

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Andrews Kurth LLP

600 Travis Street

Suite 4200

Houston, Texas 77002

Attention: Eddy J. Rogers, Jr. and Jeff C. Dodd

Fax No.: (713) 238-7419

(b) If this Agreement provides for a designated period after a notice within which to perform an act, such period shall commence on the date of receipt or refusal of the notice.

(c) If this Agreement requires the exercise of a right by notice on or before a certain date or within a designated period, such right shall be deemed exercised on the date of delivery to the courier service, telecopying or mailing of the notice pursuant to which such right is exercised.

12.8 Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of New York without giving effect to any choice or conflict of laws rules, provisions or principles (whether of the State of New York or any other jurisdiction) the application of which would result in the application of the Laws of any jurisdiction other than the State of New York.

12.9 Amendment. No amendment, modification or supplement of this Agreement shall be binding unless it shall be specifically designated to be an amendment, modification or supplement of this Agreement and shall be executed in writing by the Parties hereto.

12.10 Waivers. No waiver of any of the provisions of this Agreement shall be binding upon a Party unless such waiver shall be in writing and specifically designated as such and shall be executed by the Party or Parties to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement (whether or not similar), nor shall such waiver constitute a continuing waiver, unless otherwise expressly provided therein.

12.11 Severability. If any provision of this Agreement shall be held to be invalid, illegal or unenforceable by a court, tribunal or other forum of competent jurisdiction for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any subdivision of this Agreement containing any such provision held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; (b) such provision will be deemed reformed to the extent necessary to conform to applicable Law and to give maximum effect to the intent of the Parties, or, if that is not possible, such provision shall be deemed severed from this Agreement; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any subdivision of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

12.12 Counterparts; Facsimile Signatures. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original copy of this Agreement, and

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all of which, when taken together, shall be deemed to constitute one and the same agreement. The Parties may sign and deliver this Agreement by facsimile transmission or by electronic mail in “portable document format.” Each Party agrees that the delivery of this Agreement by facsimile or by electronic mail in “portable document format” shall have the same force and effect as delivery of original signatures, and that each Party may use such facsimile or electronic mail signatures as evidence of the execution and delivery of this Agreement by all Parties to the same extent that an original signature could be used.

(SIGNATURE PAGE FOLLOWS)

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first written above.

THE “MERGER PURCHASER”
NATIONWIDE HEALTH PROPERTIES INC.
By:	/s/ Donald D. Bradley
Name:	Donald D. Bradley
Title:	Chief Investment Officer Senior Vice President
“NEWCO”
HEARTHSTONE OPERATIONS, LLC
By:	/s/ Timothy P. Hekker
Name:	Timothy P. Hekker
Title:	President and CEO
THE “COMPANY”
HEARTHSTONE ASSISTED LIVING, INC.
By:	/s/ Timothy P. Hekker
Name:	Timothy P. Hekker
Title:	President and CEO

EX-2.3

Exhibit 2.3

CONTRIBUTION AGREEMENT

BY AND BETWEEN

HEARTHSTONE OPERATIONS, LLC

AND

HEARTHSTONE ASSISTED LIVING, INC.

Dated as of March 22, 2006

TABLE OF CONTENTS

ARTICLE I    CONTRIBUTION OF ASSETS		1
1.1	Transfer of Contributed Assets	2
1.2	Assets Not Being Transferred	2
1.3	Further Assurances	3
1.4	Assignment of Contracts, Permits, Rights, Etc.	3
ARTICLE II    ASSUMED OBLIGATIONS; EXCLUDED OBLIGATIONS		3
2.1	Liabilities Being Assumed at Closing	3
2.2	Liabilities Not Being Assumed	3
ARTICLE III    CONSIDERATION TO COMPANY		4
3.1	Consideration to the Company	4
3.2	Working Capital Adjustment	4
3.3	Delivery of NewCo Shares at Closing	4
ARTICLE IV    THE CLOSING		4
4.1	The Closing	4
4.2	Closing Deliveries by the Sellers	4
4.3	Closing Deliveries by NewCo	5
ARTICLE V    REPRESENTATIONS AND WARRANTIES OF THE COMPANY		5
ARTICLE VI    REPRESENTATIONS AND WARRANTIES OF NEWCO		5
ARTICLE VII    COVENANTS AND AGREEMENTS		5
7.1	Non-Solicitation of Hired Employees	5
ARTICLE VIII    CLOSING CONDITIONS		6
8.1	Conditions to Obligations of NewCo	6
8.2	Conditions to Obligations of the Company	7
ARTICLE IX    MISCELLANEOUS PROVISIONS		8
9.1	No Third Party Beneficiaries	8
9.2	Entire Agreement	8
9.3	Successors and Assigns	8
9.4	References and Construction	8
9.5	Notices	8
9.6	Specific Performance	9
9.7	Governing Law	9
9.8	Amendment	9
9.9	Waivers	9
9.10	Severability	9
9.11	Counterparts; Facsimile Signatures	10
9.12	Passage of Title and Risk of Loss	10

i

CONTRIBUTION AGREEMENT

THIS CONTRIBUTION AGREEMENT (this “Agreement”) is dated as of March 22, 2006 and entered into by and between Hearthstone Assisted Living, Inc., a Texas corporation (the “Company”), and Hearthstone Operations, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company (“NewCo”).

PREAMBLE

WHEREAS, the Company owns, directly or indirectly, all of the outstanding equity interests (the “Contributed Interests”) of the entities listed on Schedule A attached hereto (the “Contributed Subsidiaries”);

WHEREAS, the Company, directly and indirectly through the Contributed Subsidiaries, has been engaged in the business of owning and managing the assisted living facilities (the “Facilities”) set forth in Section 4.2(d) of the Company Disclosure Letter (the “Business”);

WHEREAS, simultaneously with the execution of this Agreement, the Company, NewCo and Nationwide are entering into a Master Transactions Agreement (the “Master Transactions Agreement”) pursuant to which such parties are making certain representations and warranties to each other and certain additional covenants and agreements with each other in connection with this Agreement and the Merger Agreement and the transactions contemplated hereby and thereby as further inducements to the consummation of such transactions;

WHEREAS, as part of the Transactions contemplated by the Master Transactions Agreement, (a) immediately prior to the Closing (as defined herein), the Company and its then current Subsidiaries will enter into a series of Restructuring Transactions (as defined in the Master Transactions Agreement) whereby the Real Estate Assets and Real Estate Liabilities will be transferred to the Real Estate Entity, subject to the Facility Master Lease under which the various Contributed Subsidiaries will be lessee of the facilities (the “Facility Master Lease”), (b) as contemplated hereby, the Company will make the contributions, conveyances, assignments and/or transfers to NewCo of the Contributed Subsidiaries and all Contributed Assets of the Company and NewCo will assume, or cause the Contributed Subsidiaries to retain, the Assumed Liabilities, all on the terms and subject to the limitations, exclusions and conditions contained in this Agreement; and (c) immediately after the transactions contemplated hereby, all interests in NewCo will be sold to Hearthstone Senior Living Services, LLC (the “Operations Buyer”) pursuant to an Operations Purchase Agreement of even date herewith between the Company and the Operations Buyer;

WHEREAS, the parties intend that immediately following the transactions described in the preceding recital, the Company will merge with HAL Acquisition Corp. (the “Nationwide Purchaser”), with the Company surviving, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) of even date herewith by and among the Nationwide Purchaser, the Company and Nationwide, the sole shareholder of the Nationwide Purchaser, as a result of which merger, Nationwide through the Company will control the Real Estate Entity that will be the lessor under the Facility Master Lease;

WHEREAS, the parties hereto desire to set forth certain covenants made by each to the other as an inducement to the consummation of the transactions contemplated herein and certain additional agreements related thereto;

WHEREAS, certain capitalized terms used in this Agreement are defined on Annex I attached hereto.

NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties and covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE I

CONTRIBUTION OF ASSETS

1.1 Transfer of Contributed Assets.

(a) On the terms and subject to the conditions contained in this Agreement, at the Closing the Company shall contribute, transfer and deliver to NewCo, and NewCo shall accept and acquire from the Company, all of the Company’s right, title and interest in, to and under all of the Contributed Interests and all of the Company’s other Assets other than the Excluded Assets, wherever located, including, without limitation, all Working Capital items, and the “Hearthstone” and “Carestone” names and marks (collectively, the “Contributed Assets”). As part of the Contributed Assets, the Company shall assign and transfer all of the Leases to which it is a party, other than those included in the Excluded Assets (the “Assigned Leases”) and all of the Contracts to which it is a party, other than those included in the Excluded Assets (the “Assigned Contracts”).

(b) In the event the contribution, lease, conveyance, assignment, license or transfer of any of the Permits included in the Contributed Assets (collectively referred to herein as the “Assigned Permits”) is unlawful or is not permissible under any agreement or under any Law, such terms for the purposes of this Agreement with respect to any such Assigned Permits shall be deemed to mean and require (i) the Company’s relinquishment of all of its right, title, benefit and interest in and to and authority under, such Assigned Permits as of the Closing and (ii) the issuance or grant to NewCo by the appropriate Governmental Entity or other third Person of a Permit conferring upon NewCo, as of the Closing, all right, title, benefit, interest and authority at least equal to that relinquished by the Company, as the case may be, including the right, authority and approval for NewCo to conduct the Business from and after the Closing in the same manner as the Company prior to the Closing.

1.2 Assets Not Being Transferred. On the Closing Date, the Company is not contributing, leasing, conveying, assigning, licensing, transferring or delivering to NewCo, and NewCo is not accepting or acquiring, any of the following Assets of the Company (all such Assets collectively, the “Excluded Assets”): the equity interests in the Real Estate Entity and any residual interests in the Real Estate Assets, if any.

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1.3 Further Assurances. The Company shall at any time and from time to time during the period from and after the Closing until the later of (i) the fourth anniversary of the Closing Date or (ii) such time as all consents of any Governmental Entity or other third Person to the assignment of the Assigned Contracts and Assigned Permits have been obtained, upon the request of NewCo, do, execute, acknowledge and deliver, and cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney or assurances as may be reasonably required to sell, lease, convey, assign, license, transfer and deliver to NewCo, or to aid and assist in the collection of or reducing to possession by NewCo, of the applicable Contributed Assets, or to vest in NewCo good and marketable title to the Contributed Assets.

1.4 Assignment of Contracts, Permits, Rights, Etc. Notwithstanding anything to the contrary in this Agreement, this Agreement shall not constitute an agreement or attempted agreement to transfer, sublease or assign any Assigned Contract, any Assigned Permit or Proceeding or right with respect to any benefit arising thereunder or resulting therefrom, if an attempted transfer, sublease or assignment thereof, without the required consent of any other party thereto or of any Governmental Entity or other third Person, would constitute a breach thereof or in any way affect the rights of NewCo or the Company thereunder or is unlawful or is not permissible under any agreement or under any Law.

ARTICLE II

ASSUMED OBLIGATIONS; EXCLUDED OBLIGATIONS

2.1 Liabilities Being Assumed at Closing. On the terms and subject to the conditions contained in this Agreement, simultaneously with the contribution, lease, conveyance, assignment, license, transfer and delivery to NewCo of the Contributed Assets at the Closing, (a) NewCo shall cause the Contributed Subsidiaries to retain all of their respective Liabilities (including all Liabilities as lessees under the Facility Master Lease) other than the Excluded Liabilities and (b) to the extent not covered by the foregoing retention, NewCo shall assume all of the Liabilities of the Company as of the Closing other than the Excluded Liabilities, including the obligation to pay the Positive Working Capital Amount (as defined in Schedule 3.2) to the Persons who were Shareholders of the Company immediately prior to the Effective Time (all such Liabilities other than Excluded Liabilities collectively, the “Assumed Liabilities”). Without limiting the generality of the foregoing, NewCo or its Subsidiaries shall become the sponsor, and the Company and its Subsidiaries shall cease to be the sponsor, of each Benefit Plan (as defined in the Master Agreement) as of the Effective Time.

2.2 Liabilities Not Being Assumed. NewCo and the Contributed Subsidiaries expressly do not retain or assume any of the following Liabilities of the Company or its Subsidiaries (collectively, the “Excluded Liabilities”): all Retained Debt and Defeased Debt (as such terms are defined in the Merger Agreement), any obligations of the Real Estate Entity (including any obligations under the Facility Master Lease) and all real estate conditions and Liabilities directly related to and arising as a result of the ownership of the Real Estate Assets. All Excluded Liabilities will remain the responsibility of the Company and the Real Estate Entity.

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ARTICLE III

CONSIDERATION TO COMPANY

3.1 Consideration to the Company. In exchange for the Contributed Assets, NewCo will issue and deliver to the Company 100 shares of common capital stock of NewCo, $.0001 par value (the “NewCo Shares”), and shall assume the Assumed Liabilities (collectively, the “Company Consideration”).

3.2 Working Capital Adjustment. The Working Capital adjustment shall be computed in the manner set forth on Schedule 3.2 attached hereto. Any reference to this Section 3.2 in any Transaction Agreement shall be deemed to be a reference to this Section and Schedule 3.2 which is hereby incorporated by reference and made a part hereof.

3.3 Delivery of NewCo Shares at Closing. At the Closing, subject to the satisfaction or waiver (to the extent permitted by applicable Law) of the conditions to Closing set forth in Article VIII, and subject to and in accordance with the other terms and conditions of this Agreement, NewCo shall deliver a certificate or certificates representing the NewCo Shares to the Company.

ARTICLE IV

THE CLOSING

4.1 The Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Andrews Kurth LLP, 600 Travis, Suite 4200, Houston, Texas 77002, on the first Business Day immediately following the day on which the last of the conditions to each Party’s obligations under this Agreement (other than those that by their nature are intended to be satisfied at Closing) set forth in Article VIII shall have been satisfied or waived, or at such other time, date or place as the Parties may mutually agree. The date on which the Closing occurs is referred to herein as the “Closing Date.”

4.2 Closing Deliveries by the Sellers. At the Closing, the Company shall deliver to NewCo:

(a) one or more bills of sale for all of the Contributed Assets which are tangible personal property in substantially the form attached hereto as Exhibit 4.2(a) (the “Bills of Sale”), executed by the Company;

(b) one or more assignments of all of the Contributed Assets which are intangible personal property in substantially the form attached hereto as Exhibit 4.2(b), which assignment shall also contain NewCo’s undertaking and assumption of the Assumed Liabilities (the “Assignment and Assumption Agreements”), executed by the Company;

(c) (i) assignments of all registered and pending tradenames, trademarks and service marks, patent applications and issued patents, and registered and pending copyrights included in the Contributed Assets (collectively, “Registered Intellectual Property”), in substantially the form attached hereto as Exhibit 4.2(c), executed by the Company; and

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(ii) sufficient documentation and information (including, but not limited to, passwords) for NewCo to effect transfer of the Domain Names;

(d) stock or similar certificates representing all of the Contributed Interests in genuine and unaltered form, duly endorsed in blank or accompanied by duly executed stock powers endorsed in blank, with requisite stock transfer tax stamps, if any, attached; and

(e) the certificates, consents and other Documents referred to herein as then deliverable by the Company.

4.3 Closing Deliveries by NewCo. At the Closing, NewCo shall deliver to or for the benefit of the Company (unless otherwise noted):

(a) the NewCo Shares;

(b) the Assignment and Assumption Agreements executed by NewCo; and

(c) the certificates, consents and other Documents referred to herein as then deliverable by NewCo.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Each of the Parties hereby acknowledges that the Company is making certain representations and warranties to NewCo in the Master Transactions Agreement in connection with this Agreement and the transactions contemplated hereby, which representations and warranties constitute a material inducement to NewCo to enter into this Agreement and to consummate the transactions contemplated hereby.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF NEWCO

Each of the Parties hereby acknowledges that NewCo is making certain representations and warranties to the Company in the Master Transactions Agreement in connection with this Agreement and the transactions contemplated hereby, which representations and warranties constitute a material inducement to the Company to enter into this Agreement and to consummate the transactions contemplated hereby.

ARTICLE VII

COVENANTS AND AGREEMENTS

7.1 Non-Solicitation of Hired Employees. Without the prior written consent of NewCo, neither the Company nor any of its Affiliates shall, for a period of two years after the Closing Date, hire or attempt to hire or solicit, induce or attempt to solicit or induce any Hired Employee to perform work or services for any individual or entity other than NewCo or any

5

Contributed Subsidiary or Affiliate of NewCo. The foregoing obligations of the Company and its Affiliates shall not apply to employees who are terminated or given notice thereof by NewCo or any of its Affiliates, as the case may be.

ARTICLE VIII

CLOSING CONDITIONS

8.1 Conditions to Obligations of NewCo.

(a) The obligation of NewCo to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

(i) no court of competent jurisdiction in the United States or any other Governmental Entity, based otherwise than on any applicable antitrust Law, (A) shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or the Master Transactions Agreement, which Order or other action shall have become final and non appealable or (B) shall have failed to issue an Order or to take any other action necessary to fulfill the conditions to the Closing, and which denial of a request to issue such Order or take such other action shall have become final and non-appealable;

(ii) all applicable waiting periods (and any extensions thereof) under the Hart Scott Rodino Act shall have expired or otherwise been terminated;

(iii) the Parties shall have received (A) all material authorizations, consents and approvals and (B) all material licenses, registrations, certifications and accreditations, in the case of each of clauses (A) and (B), of Governmental Entities and other third parties (other than lenders under financing agreements) required in order to consummate the transactions contemplated by this Agreement and the Master Transactions Agreement or necessary for the lawful conduct of the Business by NewCo upon consummation of the transactions contemplated hereby;

(iv) the Merger Agreement shall not have been terminated;

(v) the Master Transactions Agreement shall not have been terminated;

(vi) NewCo shall have received all of the other Documents required by Section 4.2 to be delivered to NewCo; and

(vii) all actions to be taken by the Company in connection with consummation of the transactions contemplated by this Agreement and the Master Transactions Agreement, and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated by this Agreement and the Master Transactions Agreement, shall have been reasonably satisfactory in form and substance to NewCo.

(b) NewCo may waive any condition specified in this Section 8.1.

6

8.2 Conditions to Obligations of the Company.

(a) The obligation of the Company to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

(i) no court of competent jurisdiction in the United States or any other Governmental Entity, based otherwise than on any applicable antitrust Law, (i) shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or the Master Transactions Agreement, which Order or other action shall have become final and non appealable or (ii) shall have failed to issue an Order or to take any other action necessary to fulfill the conditions to the Closing, and which denial of a request to issue such Order or take such other action shall have become final and non appealable;

(ii) all applicable waiting periods (and any extensions thereof) under the Hart Scott Rodino Act shall have expired or otherwise been terminated;

(iii) the Parties shall have received (A) all material authorizations, consents and approvals and (B) all material licenses, registrations, certifications and accreditations, in the case of each of clauses (A) and (B), of Governmental Entities and other third parties (other than lenders under financing agreements) required in order to consummate the transactions contemplated by this Agreement and the Master Transactions Agreement or necessary for the lawful conduct of the Business by NewCo upon consummation of the transactions contemplated hereby;

(iv) the Merger Agreement shall not have been terminated;

(v) the Master Transactions Agreement shall not have been terminated;

(vi) Merger Purchaser and NewCo shall have satisfied their obligations under Section 8.1(d) of the Master Transactions Agreement;

(vii) the Company shall have received all of the other Documents required by Section 4.3 to be delivered to the Company; and

(viii) all actions to be taken by NewCo in connection with consummation of the transactions contemplated by this Agreement and the Master Transactions Agreement, and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated by this Agreement and the Master Transactions Agreement, shall have been reasonably satisfactory in form and substance to the Company.

(b) The Company may waive any condition specified in this Section 8.2.

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ARTICLE IX

MISCELLANEOUS PROVISIONS

9.1 Third Party Beneficiaries. The Shareholders of the Company prior to Closing are third party beneficiaries of the obligation to pay the Positive Working Capital Amount, provided that the enforcement of such rights shall be made by the Shareholder Representatives acting on the Shareholders behalf; otherwise, this Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns.

9.2 Entire Agreement. This Agreement (including the documents referred to herein) and the Master Transactions Agreement constitute the entire agreement among the Parties and supersede any prior understandings, agreements, or representations by or among the Parties, whether oral or written, and there are no representations, warranties or other agreements between the Parties in connection with the subject matter hereof, except as specifically set forth herein or therein or contemplated hereby or thereby.

9.3 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Party.

9.4 References and Construction. In this Agreement: (a) unless the context requires otherwise, all references in this Agreement to articles, sections, subsections or other subdivisions shall be deemed to mean and refer to articles, sections, subsections or other subdivisions of this Agreement; (b) titles appearing at the beginning of any article, section, subsection or other subdivision are for convenience only and shall not constitute part of such article, section, subsection or subdivision and shall be disregarded in construing the language contained therein; (c) the words “this Agreement,” “this instrument,” “herein,” “hereof,” “hereby,” “hereunder” and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited; (d) words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires; (e) pronouns in masculine, feminine or neuter genders shall be construed to include any other gender; (f) examples shall not be construed to limit, expressly or by implication, the matters they illustrate; (g) the word “or” is not exclusive and the word “includes” and its derivatives means “including, without limitation,” and corresponding derivative expressions; (h) no consideration shall be given to the fact or presumption that one Party had a greater or lesser hand in drafting this Agreement or any provision hereof; (i) all references herein to “$” or “dollars” shall refer to U.S. Dollars; and (j) unless the context otherwise requires or unless otherwise provided herein, any reference herein to a particular agreement, instrument or document shall also refer to and include all schedules, attachments, appendices and exhibits to such agreement, instrument or document and all renewals, extensions, modifications, amendments or restatements of such agreement, instrument or document.

9.5 Notices.

(a) All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be sent in accordance with Section 12.7 of the Master Transactions Agreement.

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(b) If this Agreement provides for a designated period after a notice within which to perform an act, such period shall commence on the date of receipt or refusal of the notice.

(c) If this Agreement requires the exercise of a right by notice on or before a certain date or within a designated period, such right shall be deemed exercised on the date of delivery to the courier service, telecopying or mailing of the notice pursuant to which such right is exercised.

9.6 Specific Performance. Each of the Parties hereby expressly acknowledges and agrees that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, each of the Parties hereby expressly agrees that each Party who is not then in material breach of its obligations under this Agreement shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by any other Party and to specific performance of the terms and provisions of this Agreement, in addition to any other remedy to which such Party may be entitled at law or in equity.

9.7 Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of New York without giving effect to any choice or conflict of laws rules, provisions or principles (whether of the State of New York or any other jurisdiction) the application of which would result in the application of the Laws of any jurisdiction other than the State of New York.

9.8 Amendment. No amendment, modification or supplement of this Agreement shall be binding unless it shall be specifically designated to be an amendment, modification or supplement of this Agreement and shall be executed in writing by the Parties hereto.

9.9 Waivers. No waiver of any of the provisions of this Agreement shall be binding upon a Party unless such waiver shall be in writing and specifically designated as such and shall be executed by the Party or Parties to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement (whether or not similar), nor shall such waiver constitute a continuing waiver, unless otherwise expressly provided therein.

9.10 Severability. If any provision of this Agreement shall be held to be invalid, illegal or unenforceable by a court, tribunal or other forum of competent jurisdiction for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any subdivision of this Agreement containing any such provision held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; (b) such provision will be deemed reformed to the extent necessary to conform to applicable Law and to give maximum effect to the intent of the Parties, or, if that is not possible, such provision shall be deemed severed from this Agreement; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any subdivision of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

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9.11 Counterparts; Facsimile Signatures. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original copy of this Agreement, and all of which, when taken together, shall be deemed to constitute one and the same agreement. The Parties may sign and deliver this Agreement by facsimile transmission or by electronic mail in “portable document format.” Each Party agrees that the delivery of this Agreement by facsimile or by electronic mail in “portable document format” shall have the same force and effect as delivery of original signatures, and that each Party may use such facsimile or electronic mail signatures as evidence of the execution and delivery of this Agreement by all Parties to the same extent that an original signature could be used.

9.12 Passage of Title and Risk of Loss. Legal and equitable title to, and risk of loss with respect to, the Contributed Assets shall not pass to NewCo until the Closing occurs.

(SIGNATURE PAGE FOLLOWS)

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IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above.

THE COMPANY:
HEARTHSTONE ASSISTED LIVING, INC.
By:	/s/ Timothy P. Hekker
Name:	Timothy P. Hekker
Title:	President & CEO
NEWCO:
HEARTHSTONE OPERATIONS, LLC
By:	/s/ Timothy P. Hekker
Name:	Timothy P. Hekker
Title:	President & CEO

11

ANNEX I

DEFINITIONS

SEE SCHEDULE 3.2 TO THIS AGREEMENT FOR ADDITIONAL DEFINITIONS

“Affiliate” means, with respect to a specified Person, any other Person who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person. For purposes of this definition, “control” (including the terms “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

“Agreement” has the meaning set forth in the preamble hereto.

“Assets” means, with respect to any Person, all of the assets, rights, interests and other properties, real, personal and mixed, tangible and intangible, owned by such Person.

“Assigned Contracts” has the meaning set forth in Section 1.1(a).

“Assigned Leases” has the meaning set forth in Section 1.1(a).

“Assigned Permits” has the meaning set forth in Section 1.1(b).

“Assignment and Assumption Agreements” has the meaning set forth in Section 4.2(b).

“Assumed Liabilities” has the meaning set forth in Section 2.1.

“Bills of Sale” has the meaning set forth in Section 4.2(a).

“Business” has the meaning set forth in the recitals hereto.

“Business Day” means a day other than a Saturday, Sunday or other day on which commercial banks in the State of New York are authorized or required by applicable Law to be closed.

“Closing” has the meaning set forth in Section 4.1.

“Closing Date” has the meaning set forth in Section 4.1.

“Closing Date Working Capital Schedule” has the meaning set forth in Schedule 3.2.

“Closing Statement” has the meaning set forth in Schedule 3.2.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Company” has the meaning set forth in the preamble hereto.

Annex I - 1

“Company Disclosure Letter” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Contract” means any loan or credit agreement, note, bond, mortgage, indenture, lease, sublease, indemnity, indenture, undertaking, promise, purchase order or other agreement, commitment, instrument, or concession (whether oral or in writing).

“Contributed Assets” has the meaning set forth in Section 1.1(a).

“Contributed Subsidiary” shall mean each Subsidiary of the Company listed on Schedule A.

“Documents” shall mean any paper or other material (including computer storage media) on which is recorded (by letters, numbers or other marks) information that may be evidentially used, including legal opinions, mortgages, indentures, notes, instruments, leases, agreements, insurance policies, reports, studies, financial statements (including the notes thereto), other written financial information, schedules, certificates, charts, maps, plans, photographs, letters, memoranda and all similar materials.

“Domain Names” shall mean any top level domain name registrations used in the Business or that incorporate any tradenames, trademarks or service marks used in the Business.

“Excluded Assets” has the meaning set forth in Section 1.2.

“Excluded Liabilities” has the meaning set forth in Section 2.2.

“Facilities” has the meaning set forth in the recitals hereto.

“Facility Master Lease” has the meaning set forth in the recitals hereto.

“Governmental Entity” means any court, tribunal, judicial body, arbitrator, stock exchange, administrative or regulatory agency, regulatory body or commission or other governmental or quasi-governmental authority or instrumentality, whether local, state or federal, domestic or foreign.

“Hired Employees” means all employees of HMI who remain employed by HMI or who are employed by NewCo or an Affiliate of NewCo immediately following the Closing.

“HMI” means Hearthstone Management, Inc., a Texas corporation and a wholly-owned subsidiary of the Company that is one of the Contributed Subsidiaries.

“Law” means any United States (federal, state or local) or foreign law, statute, ordinance, rule, regulation or Order.

“Leases” means all lease agreements and other agreements for the lease, use or occupancy of, or of space in, certain facilities, buildings, offices, warehouses, structures, improvements, appurtenances, personal property, equipment, and fixtures used by the Company in connection with the Business.

Annex I - 2

“Liability” means any liability or obligation, whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated and whether due or to become due, regardless of when asserted.

“Master Transactions Agreement” has the meaning set forth in the recitals hereto.

“Merger Agreement” has the meaning set forth in the recitals hereto.

“Nationwide Purchaser” has the meaning set forth in the recitals hereto.

“Neutral Auditor” has the meaning set forth in Schedule 3.2.

“NewCo” has the meaning set forth in the preamble hereto.

“Order” means any decree, judgment, injunction, ruling, writ or other order (whether temporary, preliminary or permanent) of any Governmental Entity.

“Participant” has the meaning given the term in the Company’s 2004 Gain Sharing Plan.

“Participants Fund” has the meaning set forth in the Merger Agreement.

“Party” or “Parties” means the Company and NewCo collectively or, individually, the Company or NewCo.

“Permits” means all permits, licenses, authorizations, registrations, franchises, approvals, certificates, variances and similar rights obtained, or required to be obtained, from Governmental Entities.

“Person” means any natural person, firm, partnership, limited liability company, joint venture, business trust, trust, association, corporation, company, unincorporated entity or other entity.

“Positive Working Capital Amount” has the meaning given such term in Schedule 3.2.

“Proceedings” means any claim, action, suit, hearing, investigation or proceedings before any Governmental Entity or arbitrator.

“Real Estate Entity” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Real Property” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Registered Intellectual Property” has the meaning set forth in Section 4.2(c).

“Shareholder” or “Shareholders” has the meaning given such term in Section 1.1 of the Merger Agreement.

Annex I - 3

“Shareholder Representatives” has the meaning given such term in Section 1.1 of the Master Transactions Agreement.

“Subsidiary” means with respect to a specified Person, any other Person (A) of which such specified Person or any other Subsidiary of such specified Person is a general partner or managing member, (B) of which voting power to elect a majority of the board of directors or others performing similar functions with respect to such other Person is held by such specified Person or by one or more of such specified Person’s Subsidiaries or (C) of which at least 50% of the equity interests (or economic equivalent) of such other Person are, directly or indirectly, owned or controlled by such specified Person or by one or more of such specified Person’s Subsidiaries.

“Target Amount” has the meaning set forth in Schedule 3.2.

“Transaction Fees” has the meaning set forth in the Master Transactions Agreement.

“Working Capital” has the meaning set forth in Schedule 3.2.

Annex I - 4

EX-2.4

Exhibit 2.4

NHP

NATIONWIDE HEALTH PROPERTIES, INC.

Abdo H. Khoury	949.718.4415
Senior Vice President and Chief Financial and Portfolio Officer	abdo@nhp-reit.com

March 22, 2006

Nationwide Health Properties, Inc.

610 Newport Center Drive, Suite 1150

Newport Beach, California 92660

Ladies and Gentlemen:

Reference is hereby made to (i) the Master Transactions Agreement, dated as of the date hereof, by and among Nationwide Health Properties, Inc. (“NHP”), Hearthstone Operations, LLC (“Newco”) and Hearthstone Assisted Living, Inc. (the “Company”) (the “Master Transactions Agreement”) and (ii) the Agreement and Plan of Merger, dated as of the date hereof, by and among NHP, HAL Acquisition Corp. and the Company (the “Merger Agreement”). Capitalized terms used herein without definition shall have the meanings assigned to them in the Master Transactions Agreement or the Merger Agreement, as applicable.

The purpose of this Letter Agreement is to set forth our mutual agreement that NHP, Newco, and the Company will, following the signing hereof and prior to the Closing, (i) structure the Transactions in a way so as to reduce adverse tax consequences incurred by NHP in connection with the Transactions, including for periods following the Closing, as determined by NHP in good faith; (ii) complete Exhibit A of the Master Transactions Agreement to reflect such structuring; (iii) enter into an escrow agreement (the “Escrow”) with the Paying Agent relating to the Dissenting Shareholder Sub-Escrow Amount; (iv) cooperate in good faith to ascertain Tax-related information relevant to the Company and its Subsidiaries; and (v) enter into appropriate amendments to the Transactions Agreements, to the extent necessary, to reflect the matters in the preceding clauses (i), (ii), and (iii). Without limitation, such structuring may include (a) use of a bridge loan to the Company to finance the repayment of certain indebtedness of the Company or its Subsidiaries, payments pursuant to the Gain Sharing Plan, and the E&P Distribution, which loan would be repaid at Closing; (b) a sale of certain of the Company’s assets to NHP or a Subsidiary of NHP; (c) the liquidation for United States federal income tax purposes of certain Subsidiaries of the Company; and (d) a restructuring of the Company’s partnership or limited liability company subsidiaries in a manner that avoids or reduces deemed distributions pursuant to Section 752 of the Code or other income.

Notwithstanding the foregoing, except with respect to the Escrow, the Company shall not be required to consent to an alteration of the Transactions from those contemplated in the Master Transactions Agreement and the Merger Agreement as of the date hereof to the extent that the Company determines in its reasonable discretion that it or any Shareholder would be adversely affected by such alteration, unless NHP indemnifies the Company and the applicable Shareholders to the Company’s reasonable satisfaction for such adverse effect, provided,

610 Newport Center Drive, Suite 1150 Ÿ Newport Beach, California 92660 Ÿ Voice (949) 718-4400 Ÿ Fax (949) 759-6876

NHP

NATIONWIDE HEALTH PROPERTIES, INC.

Abdo H. Khoury	949.718.4415
Senior Vice President and Chief Financial and Portfolio Officer	abdo@nhp-reit.com

however, that such adverse effect shall exclude time required of Shareholders and Company employees and professional fees incurred by the Company and the Shareholders to investigate the consequences of such alterations to the parties and to implement such alterations.

This Letter Agreement, and all obligations hereunder (other than the indemnification obligation of NHP set forth above), shall terminate at Closing.

Please acknowledge your acceptance hereof and agreement herewith by executing and returning to the undersigned a copy of this letter agreement.

Very truly yours,
HEARTHSTONE OPERATIONS, LLC
by	/s/ Timothy P. Hekker
Name	Timothy P. Hekker
Title	President & CEO
HEARTHSTONE ASSISTED LIVING, INC.
by	/s/ Timothy P. Hekker
Name	Timothy P. Hekker
Title	President & CEO

Acknowledged and agreed to as of the date first written above:
NATIONWIDE HEALTH PROPERTIES, INC.
by	/s/ Abdo H. Khoury
	Abdo H. Khoury
	Senior Vice President and Chief Financial and Portfolio Officer

610 Newport Center Drive, Suite 1150 Ÿ Newport Beach, California 92660 Ÿ Voice (949) 718-4400 Ÿ Fax (949) 759-6876

EX-2.5

Exhibit 2.5

March 21, 2006

The Parties Shown

on the Signature Pages Hereto

This NewCo Side Letter Agreement is entered into effective as of March 21, 2006, by and among Nationwide Health Properties, Inc., a Maryland corporation (“NHP”), Hearthstone Operations, LLC, a Delaware limited liability company (“NewCo”), and Timothy Hekker, James Wang, and Laurence Daspit (collectively, “Management”).

Unless defined herein, all capitalized terms have the meaning set forth in the Master Transactions Agreement (defined below).

Concurrently with the execution of this NewCo Side Letter Agreement, NHP, NewCo, and Hearthstone Assisted Living, Inc., a Texas corporation (the “Company”), are entering into a Master Transactions Agreement dated March 22, 2006 (the “Master Transactions Agreement”), NHP, the Company and HAL Acquisition Corp., a Delaware corporation, are entering into an Agreement and Plan of Merger dated March 22, 2006 (the “Merger Agreement”), and immediately prior thereto the Company and NewCo are entering into a Contribution Agreement dated March 22, 2006 (the “Contribution Agreement”). Such documents contemplate various transactions by and among NHP, NewCo and the Company.

In order to induce NHP to enter into the Master Transactions Agreement and the Merger Agreement, and intending to be legally bound, NHP, NewCo and Management hereby agree as follows:

I. Closing Commitments:

A. Subject to the satisfaction of the closing conditions relating to the obligations of NewCo set forth in the Master Transactions Agreement and the Merger Agreement, Management hereby makes a firm commitment to pay (or to cause an entity under the direct control and ownership of Management to pay) $6,000,000 in cash to purchase all of the equity of NewCo at the Closing. Management may direct that up to the full amount (after tax withholding) paid to Management at the Closing under the 2004 Gain Sharing Plan be remitted to NewCo in satisfaction of such commitment up to the amount so remitted. NHP will reasonably cooperate with Management in its efforts to structure the capitalization of NewCo so that Management’s investment is made on a pretax basis from distributions under the 2004 Gain Sharing Plan or through Management’s ownership of options or warrants of the Company.

B. At the Closing, NHP shall cause its applicable Subsidiary or Subsidiaries to, and NewCo and Management shall cause the applicable Subsidiary or Subsidiaries of NewCo to, enter into that certain Master Lease in the form attached hereto as Exhibit A (the “Master Lease”) and the Guaranty and Letter of Credit Agreement, in substantially the forms attached hereto as Exhibit B, and to enter into such ancillary documents as may be desirable in connection therewith (e.g., memoranda of leases, closing certificates and the like)

II. Representations and Warranties: Management and NewCo jointly represent and warrant that the following statement is true and correct as of the date hereof and will be true and

correct as of the Closing: based on current business conditions and the best estimates of Management, the Working Capital of NewCo immediately following the Closing will be adequate for the conduct of the Business following the Closing.

III. Post-Closing Covenant: Provided that the Closing occurs, NHP agrees that following the Closing, Management shall have the full right, power and authority to control NewCo and the conduct of the business of NewCo as Management determines; provided that such business shall be conducted in a commercially prudent manner consistent in all material respects with past practices and then prevailing industry standards and in full compliance in all respects with the Master Lease.

(SIGNATURE PAGE FOLLOWS)

IN WITNESS WHEREOF, the parties hereto have executed this NewCo Side Letter Agreement effective as of the date first written above.

“NHP”
NATIONWIDE HEALTH PROPERTIES, INC.
By:	/s/ Donald D. Bradley
Name:	Donald D. Bradley
Title:	Chief Investment Officer Senior Vice President
“NEWCO”
HEARTHSTONE OPERATIONS, LLC
By:	/s/ Timothy P. Hekker
Name:	Timothy P. Hekker
Title:	President/CEO
“MANAGEMENT”
/s/ Timothy Hekker
Timothy Hekker
/s/ James Wang
James Wang
/s/ Laurence Daspit
Laurence Daspit

EXHIBIT A

FORM OF MASTER LEASE

See attached

A-1

MASTER LEASE

This “Master Lease” is entered into as of                                 , 2006 between [“REAL ESTATE ENTITIES”] (“Landlord”), [“OPERATING ENTITIES”], a                                                                          (“Tenant”), for the real properties and improvements thereon (collectively, the “Facilities”) as legally described on Exhibit A and the “Landlord Personal Property” associated therewith as described in Exhibit B (collectively, the “Premises”), each used as a licensed healthcare facility of the type described on Schedule 1 (individually as so utilized, and collectively, the “Business”). Pursuant to its concurrent Guaranty, HEARTHSTONE SENIOR SERVICES,         , a                                                                       (“Guarantor”) has guaranteed Tenant’s obligations hereunder. Guarantor has also executed this Master Lease and is a party hereto for purposes of certain representations, warranties, covenants and agreements set forth in Sections 11.2, 19 and 22. In consideration of the mutual covenants, conditions and agreements set forth herein, Landlord hereby leases the Premises to Tenant for the Term upon the terms and conditions provided below. Certain capitalized terms used in this Master Lease are defined on Exhibit E.

RECOGNITION OF MASTER LEASE;

IRREVOCABLE WAIVER OF CERTAIN RIGHTS

Tenant and Landlord each acknowledge and agree that this Master Lease constitutes a single, indivisible lease of the entire Premises, and the Premises constitutes a single economic unit. The Minimum Rent, Additional Rent, Supplemental Rent other amounts payable hereunder and all other provisions contained herein have been negotiated and agreed upon based on the intent to lease the entirety of the Premises as a single and inseparable transaction, and such Minimum Rent, Additional Rent, Supplemental Rent other amounts and other provisions would have been materially different had the parties intended to enter into separate leases or a divisible lease. Any Event of Default under this Master Lease shall constitute an Event of Default as to the entire Premises.

Tenant and Guarantor each acknowledge and agree that Landlord is entering into this Master Lease as an accommodation to Tenant and Guarantor. Each of the entities comprising Tenant and Guarantor, in order to induce Landlord to enter into this Master Lease, to the extent permitted by law:

A. Agrees, acknowledges and is forever estopped from asserting to the contrary that the statements set forth in the first sentence of this Section are true, correct and complete;

B. Agrees, acknowledges and is forever estopped from asserting to the contrary that this Master Lease is a new and de novo lease, separate and distinct from any other lease between any of the entities comprising Tenant and any of the entities comprising Landlord that may have existed prior to the date hereof;

C. Agrees, acknowledges and is forever estopped from asserting to the contrary that this Master Lease is a single lease pursuant to which the collective Premises are demised as a whole to Tenant;

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D. Agrees, acknowledges and is forever estopped from asserting to the contrary that if, notwithstanding the provisions of this Section, this Master Lease were to be determined or found to be in any proceeding, action or arbitration under state or federal bankruptcy, insolvency, debtor-relief or other applicable laws to constitute multiple leases demising multiple properties, such multiple leases could not, by the debtor, trustee, or any other party, be selectively or individually assumed, rejected or assigned;

E. Forever knowingly waives and relinquishes any and all rights under or benefits of the provisions of the Federal Bankruptcy Code Section 365 (11 U.S.C. § 365), or any successor or replacement thereof or any analogous state law, to selectively or individually assume, reject or assign the multiple leases comprising this Master Lease following a determination or finding in the nature of that described in the foregoing Section D.

1. Term. The “Term” of this Master Lease is the Initial Term plus all Renewal Terms, and a “Lease Year” is the twelve (12) month period commencing on                                  of each year of the Term. The “Initial Term” commences on                                 , 2006 and ends on                             , 2021, and may be extended for two (2) separate “Renewal Terms” of ten (10) years each if: (a) at least twelve (12), but not more than fifteen (15) months prior to the end of the then current Term, Tenant delivers to Landlord a “Renewal Notice” that it desires to exercise its right to extend this Master Lease for one (1) Renewal Term; (b) there is no Event of Default on the date Landlord receives the Renewal Notice (the “Exercise Date”) or on the last day of the then current Term; and (c) the Minimum Rent for the Renewal Term is determined pursuant to Section 2.2 within ninety (90) days after the Exercise Date.

2. Rent. During the Term, Tenant shall pay Landlord rent consisting of “Minimum Rent” plus “Additional Rent” (collectively, “Total Rent”) and “Supplemental Rent” (together with Total Rent, “Rent”), each as determined in accordance with this Section 2. provided, that Total Rent for any Lease Year shall not be less than one hundred percent (100%) of the Total Rent for the previous Lease Year. The Rent for any month that begins or ends on other than the first or last day of a calendar month shall be prorated based on actual days elapsed.

2.1 Initial Term Rent.

(a) During the Initial Term, subject to the redetermination thereof pursuant to Section 2.2, “Minimum Rent” is $                     [to be calculated per term sheet at close] per Lease Year, payable in advance in twelve (12) equal monthly installments. Commencing with the second (2^nd) Lease Year and continuing thereafter during the Term (excluding the eighth (8^th) Lease Year of the Initial Term and the first (1^st) Lease Year of any Renewal Term as further provided in Section 2.2), Tenant agrees to pay “Additional Rent” to Landlord monthly in advance together with the payment of Minimum Rent. Such Additional Rent (which shall be expressed as an annual amount but shall be payable in equal monthly installments) shall be equal to the sum of (a) the Additional Rent for the immediately preceding Lease Year and (b) the product of (i) the Minimum Rent and Additional Rent due for the immediately preceding Lease Year and (ii) the lesser of (x) three percent (3.0%) or (y) a percentage equal to five (5) times the CPI Increase. During the Initial Term (but not during any Renewal Term), Tenant shall also pay “Supplemental Rent” on a quarterly basis in an amount equal to the Applicable Percentage of Revenue, multiplied by Revenue for the applicable fiscal quarter. Supplemental Rent shall be

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due and payable as follows: (A) during each Lease Year (each an “Accrual Year”) prior to the Lease Year in which the Dividend Conditions (as defined in Section 4.3(b)) are first satisfied (the “Permitted Dividend Year”), Supplemental Rent shall accrue but shall not be payable; (B) in the Permitted Dividend Year, Tenant shall pay (i) Supplemental Rent for each full fiscal quarter in the Permitted Dividend Year ended prior to the date on which the Dividend Conditions are first satisfied (the “Permitted Dividend Date”) within thirty (30) days after the Permitted Dividend Date, (ii) Supplemental Rent for each full fiscal quarter ending after the Permitted Dividend Date within thirty (30) days after the end of such quarter; (iii) accrued Supplemental Rent for each Accrual Year within thirty (30) days after the Permitted Dividend Date, up to an amount equal to five percent (5%) of Funds Available for Rent for each fiscal quarter ended prior to the Permitted Dividend Date, with any such accrued Supplemental Rent remaining unpaid thereafter to be paid with the next quarterly payment of Supplemental Rent due, up to an amount equal to five percent (5%) of Funds Available for Rent for the fiscal quarter most recently ended; (C) in each Lease Year during the Initial Term following the Permitted Dividend Year, Supplemental Rent for each fiscal quarter within thirty (30) days after the end of such quarter, together with any accrued Supplemental Rent remaining unpaid pursuant to the foregoing clause (iii), in each case up to an amount equal to five percent (5%) of Funds Available for Rent for the fiscal quarter most recently ended. Notwithstanding the foregoing, in the event that, in accordance with Section 16, Landlord in its sole and absolute discretion consents to any change of control in Guarantor, or to any other transaction constituting an assignment of this Lease pursuant to the terms of Section 16, all accrued but unpaid Supplemental Rent shall be immediately due and payable.

(b) As used herein: (1) “CPI Increase” shall mean the percentage increase in the United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Wage Earners and Clerical Workers, United States Average, Subgroup “All Items” (1982 –1984 = 100) (the “CPI”), which in no event shall be a negative number; the applicable CPI Increase shall be calculated annually for each Lease Year by comparing the CPI in effect on the first calendar day of the Lease Year for which Additional Rent (or other amount hereunder) is being calculated to the first calendar day of the immediately preceding Lease Year; (2) “Revenue” shall mean revenue of Guarantor calculated in accordance with GAAP; (3) “Funds Available for Rent” means, for any period of determination, EBITDAR-X (as defined in Section 4.2(b)) for such period minus the Total Rent payable with respect to such period; and (4) “Applicable Percentage of Revenue” means, with reference to the Lease Year to which the calculation applies, the following percentage:

Lease Year	Percentage
1st	0.54	%
2nd	1.03	%
3rd	1.54	%
4th	1.90	%
5th	2.15	%
6th	2.36	%
7th	2.47	%
8th – 15th	2.63	%

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2.2 Reset of Additional Rent; Renewal Term Rent. To establish a fair market Minimum Rent for the Premises on and after the Reset Date and during the Renewal Terms, the Minimum Rent for the remainder of the Initial Term following the Reset Date and for each Renewal Term shall be reset and expressed as an annual amount equal to the product of: (a) the greater of (i) “Fair Market Value” of the Premises on the Reset Date or Exercise Date, as applicable, as established pursuant to Exhibit C, or (ii) “Landlord’s Investment” [will be equal to $419,000,000 plus NHP’s transaction costs per term sheet] in the Premises, which is                                                       Dollars ($                    ) plus any amount for Alterations advanced by Landlord pursuant to Section 8.4 or an expansion or similar agreement entered into by the parties, and minus any net award paid to Landlord for a Taking pursuant to Section 18; multiplied by (b) a percentage equal to two hundred (200) basis points over NHP’s Weighted Average Cost of Capital. As used herein, (i) “NHP’s Weighted Average Cost of Capital” as of any date of determination shall be determined and calculated in accordance with Schedule 2, and (ii) “Reset Date” shall mean the last day of the seventh (7^th) Lease Year. Commencing with the second (2^nd) Lease Year of a Renewal Term, “Additional Rent” shall be calculated as provided in Section 2.1. Notwithstanding the foregoing, in no event shall the Minimum Rent due for the first full Lease Year following the Reset Date (i.e., the eighth (8^th) Lease Year) or the first Lease Year of any Renewal Term be less than one hundred ten percent (110%) of the sum of Total Rent due for the immediately preceding Lease Year. No Supplemental Rent shall be due or payable in any Renewal Term.

2.3 Payment Terms. All Rent and other payments to Landlord shall be paid by wire transfer or ACH (Automated Clearing House) only. Minimum Rent and Additional Rent shall be paid in advance in equal monthly installments on or before the tenth (10^th) calendar day of each calendar month. Supplemental Rent shall be paid on a quarterly basis as and when provided in Section 2.1(a).

2.4 Absolute Net Lease. All Rent payments shall be absolutely net to Landlord, free of any and all Taxes, Other Charges, and operating or other expenses of any kind whatsoever, all of which shall be paid by Tenant. Tenant shall continue to perform its obligations under this Master Lease even if Tenant claims that it has been damaged by Landlord. Thus, Tenant shall at all times remain obligated under this Master Lease without any right of set-off, counterclaim, abatement, deduction, reduction or defense of any kind. Tenant’s sole right to recover damages against Landlord under this Master Lease shall be to prove such damages in a separate action.

3. Late Charges. The late payment of Rent or other amounts due will cause Landlord to lose the use of such money and incur administrative and other expenses not contemplated under this Master Lease. While the exact amount of the foregoing is extremely difficult to ascertain, the parties agree that as a reasonable estimate of fair compensation to Landlord, if any Rent or other amount is not paid within (a) five (5) days after the due date for such payment, then Tenant shall thereafter pay to Landlord on demand a late charge equal to five percent (5%) of such delinquent amounts, and (b) ten (10) days after the due date for such payment, such unpaid amount shall accrue interest from such date at the “Agreed Rate” of five percent (5%) plus the prime, commercial or similar reference rate of interest then charged by Wells Fargo Bank, N.A., San Francisco, CA, or any successor thereof or replacement therefor reasonably selected by Landlord.

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4. Security Deposit; Restriction on Distributions.

4.1 Letter of Credit. Pursuant to the parties’ concurrent Letter of Credit Agreement, Tenant shall deposit with Landlord and maintain during the Term one (1) or more irrevocable standby letters of credit in an aggregate undrawn face amount equal to Six Million Dollars ($6,000,000) as a “Security Deposit” against the faithful performance by Tenant of this Master Lease.

4.2 Additional Security Deposit.

(a) Commencing as of the third (3^rd) Lease Year, in the event that at any time the Rent Coverage Ratio for any two (2) consecutive trailing calendar quarters is less than the Minimum Rent Coverage Ratio, an Event of Default shall occur unless Tenant shall within ten (10) business days of notice from Landlord, and thereafter on a monthly basis at the time of each payment of Minimum Rent continuing until such time as the Minimum Rent Coverage Ratio is satisfied for two (2) consecutive trailing calendar quarters, deposit cash in the amount of the then aggregate monthly Gross Revenue generated by the Premises multiplied by one and one-half percent (1.5%). Tenant’s obligation to make such additional deposits shall continue until the date on which Tenant has made aggregate additional cash deposits to the Security Deposit pursuant to this Section 4.2 in an amount equal to                                                                           Dollars ($                    ) [twelve month’s Minimum Rent]. In the event that the Rent Coverage Ratio for any two (2) consecutive trailing calendar quarters is equal to the Minimum Rent Coverage Ratio at such time as Landlord holds any additional Security Deposit pursuant to this Section 4.2(a), all such amounts shall be promptly returned to Tenant, subject to Tenant’s obligation to re-commence depositing incremental increases to the Security Deposit pursuant to this Section 4.2(a) should the Rent Coverage Ratio for any two (2) consecutive calendar quarters thereafter be less than the Minimum Rent Coverage Ratio. All deposits made by Tenant pursuant to this Section 4.2(a) and pursuant to Section 4.3(a) shall constitute and be a part of the Security Deposit for purposes of this Master Lease. Tenant may from time to time substitute a standby irrevocable letter of credit for cash potions of the Security Deposit deposited pursuant to this Section 4.2(a) and Section 4.3(a). Any such letter of credit shall be in compliance with the Letter of Credit Agreement, which shall be concurrently amended to reflected the increased Letter of Credit Amount (as defined therein).

(b) As used herein, (1) “Minimum Rent Coverage Ratio” means 1.10 to 1.00; (2) “Rent Coverage Ratio” shall mean the ratio of Portfolio EBITDAR-X to Portfolio Rent Expense; (3) “Portfolio EBITDAR-X” shall mean, for any period of determination, (A) Portfolio EBITDARM minus (B) a management fee equal to the greater of (i) five percent (5%) of Gross Revenues generated during such calendar quarter, or (ii) actual overhead for such quarter, minus (C) reserves for capital expenditures in such amount reasonable approved by Landlord; (4) “Portfolio EBITDARM” shall mean, as of the end of any calendar quarter, the aggregate net income of Tenant for such period to the extent derived from the collective operation of the Premises, adjusted to add thereto, to the extent allocable to the Premises, without duplication, (A) interest expense, (B) income tax expense, (C) depreciation and amortization expense, (D) rental expense, and (E) management fee expenses, in each case determined in accordance with GAAP to the extent applicable; (5) “Portfolio Rent Expense” shall mean, for any period of determination, the amount of Total Rent payable by Tenant under

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this Master Lease in such period, provided that Rent payable on any Expansion Funds disbursed pursuant to Section 8.4(b) shall be excluded from Portfolio Rent Expense for a period of one (1) year from the start of the construction project to which such Expansion Funds are applicable, and (6) “Gross Revenues” means all revenues from any use or sublease of any portion of the Premises, calculated according to GAAP, excluding: (i) contractual allowances during the Term for payments not received from any governmental agencies or third party providers; and (ii) sales or excise taxes and taxes based upon such revenues which are part of the amount billed to the customer, whether included in the billing or stated separately.

4.3 Restriction on Distributions.

(a) Tenant shall not permit Guarantor to make any Restricted Dividend. In the event that Guarantor makes any Restricted Dividend, Tenant shall, within ten (10) business days thereof, deposit cash or post an additional irrevocable standby letter of credit with Landlord in the amount of such Restricted Dividend, which shall be added to and become a part of the Security Deposit.

(b) As used herein, (1) “Restricted Dividend” means any Dividend that is made at any time that the Dividend Conditions are not then satisfied; (2) “Dividend” means any dividend, payment or other distribution of cash or property by Guarantor to its shareholders or any other Person on account of or with respect to the capital stock of Guarantor; (3) “Dividend Conditions” means that (i) the Rent Coverage Ratio for the Preceding Fiscal Quarter is greater than or equal to 1.20 to 1.00 and (ii) that Guarantor shall have had Minimum Net Working Capital Balances for the Preceding Fiscal Quarter; and (4) “Preceding Fiscal Quarter” means the fiscal quarter immediately preceding the fiscal quarter in which the Dividend in question is made or to be made; (5) “Minimum Net Working Capital Balances” means that Guarantor shall have Net Working Capital as of the end of any applicable fiscal quarter equal to or greater than the lesser of (i) an amount equal to forty-one percent (41%) of Revenue for such quarter, or (ii) Fifteen Million Four Hundred Fifty Thousand Dollars ($15,450,000); and (6) “Net Working Capital” means [to conform to Contribution Agreement, which I have been informed is still in flux].

5. Taxes and Other Charges. At the commencement and end of the Term, all Taxes and Other Charges shall be prorated. Landlord shall promptly forward to Tenant copies of all bills and payment receipts for Taxes or Other Charges received by it. Tenant shall pay and discharge (including the filing of all required returns), prior to delinquency or imposition of any fine, penalty, interest or other cost (“Penalty”), (a) “Taxes”, consisting of any property (real and personal) and other taxes and assessments levied or assessed with respect to this Master Lease, any portion of the Premises or Landlord, with respect to the Premises (including, without limitation, any state or county occupation tax, transaction privilege, franchise taxes, business privilege, rental tax or other excise taxes, and other assessments levied or assessed against the Premises, Tenant’s interest therein or Landlord (with respect to this Master Lease and/or the Premises, but excluding any local, state or federal income tax based upon the net income of Landlord and any transfer tax or stamps for its transfer of any interest in any portion of the Premises to any Person other than Tenant or any of its Affiliates)), and (b) “Other Charges”, consisting of any utilities and other costs and expenses of the Business or any portion of the Premises and all other charges, obligations or deposits assessed against any portion of the

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Premises during the Term. Tenant may pay the foregoing in permitted installments (whether or not interest accrues on the unpaid balance) when due and before any Penalty. Within thirty (30) days of its receipt of Landlord’s written notice of payment, Tenant shall pay Landlord an amount equal to any Taxes or Penalty that Landlord at any time is assessed or otherwise becomes responsible and for which Tenant is liable under this Master Lease, whether arising from the sole liability of Landlord or the joint liability of the parties.

5.1 Protests. Each party has the right, but not the obligation, in good faith to protest or contest (a “Protest”) in whole or in part (a) the amount or payment of any Taxes or Other Charges and (b) the existence, amount or validity of any Lien (as defined in Section 8.1) by appropriate proceedings sufficient to prevent its collection or other realization and the sale, forfeiture or loss of any portion of the Premises or Rent to satisfy it (so long as it provides Landlord with reasonable security to assure the foregoing, provided that no security shall be provided if Landlord reasonably determines that there is no material risk of such collection, realization, sale, forfeiture or loss). Tenant shall diligently prosecute any such Protest at its sole cost and expense and pay such Taxes, Other Charges or Lien before the imposition of any Penalty. Landlord will cooperate fully in any Protest that involves an amount assessed against it.

5.2 Impound. At the commencement of the Term Tenant shall deposit the sum of                                                       Dollars ($                    ), [pro rated amount for current tax year] and thereafter Tenant shall include with each Minimum Rent payment a deposit of one-twelfth (1/12^th) of the amount required to discharge the annual amount of real property Taxes secured by a Lien encumbering any portion of the Premises as and when they become due. These deposits shall not bear interest nor be held by Landlord in trust or as an agent of Tenant, but rather shall be applied to the payment of the related obligations. If at any time within thirty (30) days prior to the due date the deposits shall be insufficient for the payment of the obligation in full, Tenant shall within ten (10) days after demand deposit the deficiency with Landlord. If deposits are in excess of the actual obligation, the required monthly deposits for the ensuing Lease Year shall be reduced proportionately and any such excess at the end of the final Lease Year shall be refunded to Tenant within thirty calendar (30) days. Tenant shall forward to Landlord or its designee all Tax bills, bond and assessment statements as soon as they are received, and, provided no Event of Default is then continuing, Landlord shall timely pay such bills from this tax impound. If Landlord transfers this Master Lease, it shall transfer all such deposits to the transferee, and Landlord shall thereafter have no liability of any kind with respect thereto.

6. Insurance.

6.1 General Requirements. All insurance provided for in this Master Lease shall (i) be maintained under valid and enforceable policies issued by insurers licensed and approved to do business in the state(s) where the applicable Facility or portion of the Premises is located and having general policyholders and financial ratings of not less than “A” and “XII”, respectively, in the then current Best’s Insurance Report, (ii) name Landlord as an additional insured and, for the casualty policy referenced in Section 6.1, as the owner and loss payable beneficiary, (iii) be on an “occurrence” basis, (iv) cover all of Tenant’s operations at the applicable Facility or portion of the Premises, (v) provide that the policy may not be canceled except upon not less than thirty (30) days prior written notice to Landlord and (vi) be primary

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and provide that any insurance with respect to any portion of the Premises maintained by Landlord is excess and noncontributing with Tenant’s insurance. The parties hereby waive as to each other all rights of subrogation which any insurance carrier, or either of them, may have by reason of any provision in any policy issued to them, provided such waiver does not thereby invalidate such policy. Original policies or satisfactory insurer certificates evidencing the existence of the insurance required by this Master Lease and showing the interest of Landlord shall be provided to it prior to the commencement of the Term or, for a renewal policy, not less than ten (10) days prior to the expiration date of the policy being renewed. If Landlord is provided with a certificate, it may demand that Tenant provide a complete copy of the related policy within ten (10) days. During the Term, Tenant shall maintain the following insurance and any claims thereunder shall be adjudicated by and at the expense of it or its insurance carrier:

(a) Fire and Extended Coverage with respect to each Facility against loss or damage from all causes under standard “all risk” property insurance coverage with an agreed amount endorsement (such that the insurance carrier has accepted the amount of coverage and has agreed that there will be no co-insurance penalty), without exclusion for fire, lightning, windstorm, explosion, smoke damage, vehicle damage, sprinkler leakage, flood, vandalism, earthquake, malicious mischief or any other risks normally covered under an extended coverage endorsement, in amounts that are not less than the actual replacement value of such Facility and all Tenant Personal Property associated therewith (including the cost of compliance with changes in zoning and building codes and other laws and regulations, demolition and debris removal and increased cost of construction);

(b) Commercial General Public Liability Coverage with respect to each Facility (including products liability and broad form coverage) against claims for bodily injury, death or property damage occurring on, in or about such Facility, affording the parties protection of not less than Five Million Dollars ($5,000,000) for bodily injury or death to any one person, not less than Ten Million Dollars ($10,000,000) for any one accident, and not less than One Million Dollars ($1,000,000) for property damage;

(c) Professional Liability Coverage with respect to each Facility for damages for injury, death, loss of service or otherwise on account of professional services rendered or which should have been rendered, in a minimum amount of Five Million Dollars ($5,000,000) per claim and Ten Million Dollars ($10,000,000) in the aggregate;

(d) Worker’s Compensation Coverage with respect to each Facility for injuries sustained by Tenant’s employees in the course of their employment and otherwise consistent with all applicable legal requirements;

(e) Boiler and Pressure Vessel Coverage with respect to each Facility on any fixtures or equipment which are capable of bursting or exploding, in an amount not less than Five Million Dollars ($5,000,000) for resulting damage to property, bodily injury or death and with an endorsement for boiler business interruption insurance;

(f) Business Interruption and Extra Expense Coverage with respect to each Facility for loss of rental value for a period not less than one (1) year; and

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(g) Deductibles/Self-Insured Retentions for the above policies shall not be greater than Fifty Thousand Dollars ($50,000), and Landlord shall have the right at any time to require a lower such amount or set higher policy limits, to the extent commercially available and reasonable and customary for similar properties.

6.2 Exceptions to Insurance Requirements. Tenant has advised Landlord that, to the extent described on Schedule 2, it is not in compliance as of the date hereof with the requirements set forth in Section 6.1. Tenant nonetheless represents and warrants to Landlord that the policies of insurance (including the deductible or self-insured retention provisions thereof) and risk management programs that Tenant has in effect as of the date hereof are, and as may be in effect at any time during the Term will be, consistent with custom, practice and prudent management standards in the State[s] in the business and industry in which Tenant is engaged. As and when insurance meeting the requirements set forth in Section 6.1 becomes generally available to operators of healthcare facilities similar to the Facilities and owned by institutional landlords at commercially reasonable rates, as jointly determined by Landlord and Tenant in their respective reasonable judgment, Tenant shall purchase and maintain such insurance. Tenant’s non-compliance with the requirements of Section 6.1 shall not give rise to an Event of Default so long as (a) no other Event of Default then exists, (b) such non-compliance is strictly limited to the matters described on Schedule 2, as it may be amended from time to time during the Term with the consent of Landlord in its sole and absolute discretion, (c) the representations and warranties set forth in this Section 6.2 remain true, correct and complete in all respects, and (d) Tenant is in compliance with the other covenants contained in this Section 6.2 and Section 6.3. Notwithstanding anything to the contrary set forth herein, if any insurance provided by Tenant in accordance with Schedule 2 provides for coverage on a “claims-made” basis, every “claims made” renewal or replacement policy shall continue to show the first date of claims made coverage as of the Effective Date, or a date prior thereto, as its prior acts/retroactive or continuity date. Furthermore, if any “claims made” policy is cancelled or non-renewed, and not replaced by an “occurrence” policy with “full prior acts”, Tenant will purchase an “Extended Reporting Provision Option” (i.e., tail coverage), for a minimum of two (2) years, and if any “claims made” policy is subsequently replaced by an “occurrence” policy, Tenant agrees that said “occurrence” policy will contain a “full prior acts” provision.

6.3 Reimbursement of Landlord’s Insurance Costs. During any Lease Year or portion thereof in which Tenant is not in compliance with the provisions of Section 6.1 (without consideration of the effect of Section 6.2), Tenant shall pay Landlord, within ten (10) days of Landlord’s demand therefore, for the costs of the premiums of the general liability insurance policies maintained by Landlord, or contributions to self-insurance in lieu thereof, in connection with the Premises, in the amount of              Dollars ($            ) [to be calculated as 6.5 cents psf] , as increased at the end of each Lease Year for increases since the Effective Date in the CPI. During the first two (2) Lease Years, Tenant may elect to make such reimbursement on a monthly basis , which payments shall be due at the time of each payment of Minimum Rent hereunder. Tenant shall have no right to receive any proceeds or other benefits from any such insurance. For purposes of this Section 6.3, Tenant shall not be in compliance with Section 6.1 (without consideration of the effect of Section 6.2) at any time that any insurance required hereunder is provided to Tenant by or through a “captive” insurance company or program.

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7. Use, Regulatory Compliance and Preservation of Business.

7.1 Permitted Use; Qualified Care. Tenant shall continuously use and occupy each Facility during the Term as a licensed facility engaged in the respective Business described on Schedule 1 with not less than the applicable number of beds or units shown on Schedule 1 (less any beds or units lost through a casualty or condemnation to the extent in compliance with Section 17 or 18 as applicable), and for ancillary services relating thereto, but for no other purpose. Tenant shall not allow the average occupancy for any trailing three (3) month period (a) of any individual Facility to be less than sixty-five percent (65%) of the applicable number of beds or units shown on Schedule 1 or (b) of all Facilities in the aggregate to be less than seventy-five percent (75%) of the aggregate number of beds and units shown on Schedule 1. Tenant shall provide care, treatment and services to all customers of each Facility and the Business conducted thereon in a manner consistent with all applicable laws.

7.2 Regulatory Compliance . Tenant, each Facility and the other portions of the Premises shall comply in all material respects with all licensing and other laws and all CC&R’s and other use or maintenance requirements applicable to the Business conducted thereon and, to the extent applicable to any Facility, all Medicare, Medicaid and other third-party payor certification requirements, including timely filing properly completed cost and other required reports, timely paying all expenses shown thereon, and ensuring that each Facility continues to be fully certified for participation in Medicare and Medicaid throughout the Term and when they are returned to Landlord, all without any suspension, revocation, decertification or other material limitation. Further, Tenant shall not commit any act or omission that would in any way violate any certificate of occupancy affecting any Facility, result in closure of the Business conducted at any Facility or result in the sale or transfer of all or any portion of any related certificate of need, bed rights or other similar certificate or license. All inspection fees, costs and charges associated with a change of such licensure or certification shall be borne solely by Tenant.

7.3 Preservation of Business. Tenant acknowledges that a fair return to Landlord on and protection of its investment in the Premises is dependent, in part, on Tenant’s dedication to the Business and the concentration on each Facility of similar businesses of Tenant and its Affiliates in the geographical area of such Facility. Tenant further acknowledges that the diversion of residents or patient care activities from any Facility to other facilities owned or operated by Tenant or its Affiliates at any time during the Term will have a material adverse affect on the value and utility of such Facility. Therefore, Tenant agrees that during the Term and for a period of one (1) year thereafter, neither Tenant nor any of its Affiliates shall, without the prior written consent of Landlord: (i) operate, own, participate in or otherwise receive revenues from any other business providing services similar to those of the Business of any Facility within a five (5) mile radius of such Facility, (ii) except as is necessary to provide residents or patients with an alternative level of care, recommend or solicit the removal or transfer of any resident or patient from any Facility to any other nursing, health care, senior housing or retirement housing facility or divert actual or potential residents, patients or care activities of the Business conducted at any Facility to any other facilities owned or operated by Tenant or its Affiliates or from which they receive any type of referral fees or other compensation for transfers, or (iii) except for personnel employed by [                    ] at/for [                            ] [e.g., administrative personnel employed by employed by Newco; to

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discuss] for other businesses any management or supervisory personnel working on or in connection with any portion of the Business or any Facility. The foregoing restriction shall not apply to revenues received by [                        ] pursuant to the Management Agreements entered into by and between Tenant and [                        ] concurrently with the effectiveness of this Master Lease.

8. Acceptance, Maintenance, Upgrade, Alteration and Environmental.

8.1 Acceptance “AS IS”; No Liens. Tenant acknowledges that it is presently engaged in operations like the Business conducted at each Facility in the state where such Facility is located and has expertise in such industry and, in deciding to enter into this Master Lease, has not relied on any representations or warranties, express or implied, of any kind from Landlord. Tenant has examined the condition of title to and thoroughly investigated the Premises, has selected the Premises to its own specifications, has concluded that no improvements or modifications to them are required in order to conduct the Business, and accepts them on an “AS IS” basis and assumes all responsibility and cost for the correction of any observed or unobserved deficiencies or violations. It is expressly understood and agreed that any inspection by or on behalf of the Landlord of the business conducted at the Premises or of the Premises is for Landlord’s sole and exclusive benefit and is not directly or indirectly for the benefit of, nor should be relied in any manner upon by, Tenant, its residents or any other third party. Notwithstanding its right to Protest set forth in Section 5.1, Tenant shall not cause or permit any lien, levy or attachment to be placed or assessed against any portion of the Premises or the operation thereof (a “Lien”) for any reason.

8.2 Tenant’s Maintenance Obligations. Tenant shall (a) keep and maintain the Premises in good appearance, repair and condition and maintain proper housekeeping, (b) promptly make all repairs (interior and exterior, structural and nonstructural, ordinary and extraordinary, foreseen and unforeseen) necessary to keep each Facility in good and lawful order and condition and in substantial compliance with all applicable requirements and laws relating to the Business conducted thereon, including if applicable certification for participation in Medicare and Medicaid, and (c) keep and maintain all Landlord and Tenant Personal Property in good condition, ordinary wear and tear excepted, and repair and replace such property consistent with prudent industry practice.

8.3 Upgrade Expenditures. Upgrade Expenditures. Tenant shall include with each Minimum Rent payment, starting with the first (1^st) full month of the Term, a deposit to be added to a reserve (in the aggregate, the “CapEx Reserve”) equal to, with respect to each Facility, one-twelfth 1/12^th of the amount shown on Schedule 3 based on the age of such Facility (as adjusted at the end of each Lease Year for increases since the Effective Date in the CPI, the “CapEx Amount”), multiplied by (ii) the aggregate number of units in such Facility on the date such payment is due. Landlord shall not be deemed to hold the same in trust or as an agent for Tenant. Tenant acknowledges that the impounding of such funds in the CapEx Reserve shall constitute a true escrow, and that Tenant has no, and hereby waives any, interest in or right or title to any funds escrowed pursuant to this Section 8.3, whether legal, equitable, beneficial or otherwise. From time to time, but not more often than once in any calendar month and provided that no Event of Default is then continuing, Landlord will pay to Tenant amounts from the CapEx Reserve to reimburse Tenant for Upgrade Expenditures made by Tenant during the prior

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rolling twenty-four (24) month period during the Term (or portion thereof), as reasonably determined by Landlord based on evidence of such expenditures submitted by Tenant; provided that such amount shall not exceed with respect to any individual Facility in any rolling twenty-four (24) month period during the Term, two (2) times the CapEx Amount multiplied by the average number of beds in such Facility over such period. Landlord shall make the reimbursements to Tenant required hereunder within twenty-one (21) days after satisfaction, in all material respects, of all conditions to such reimbursement. Upon reasonable advance request, Landlord may require Tenant to procure mechanic’s lien waivers, in form and substance reasonably satisfactory to Landlord, in connection with any Upgrade Expenditures in excess of Twenty-Five Thousand Dollars ($25,000). “Upgrade Expenditures” means expenditures in commercially reasonable amounts to Persons not affiliated with Tenant for (i) upgrades or improvements to each Facility that have the effect of maintaining or improving its competitive position in its respective marketplace, including new or replacement wallpaper, tiles, window coverings, lighting fixtures, painting, upgraded landscaping, carpeting, architectural adornments, common area amenities and the like, including, without limitation, capital improvements or repairs (including repairs or replacements of the roof, structural elements of the walls, parking area or the electrical, plumbing, HVAC or other mechanical or structural systems), and (ii) other improvements to each Facility as reasonably approved by Landlord, which shall include those matters, if any, that Landlord has approved in writing as of the Effective Date based on descriptions and budgets that Tenant has provided prior thereto. Any amount remaining in the CapEx Reserve at the expiration of the Term or earlier termination of this Master Lease shall be retained by Landlord as additional or supplemental Rent hereunder.

8.4 Alterations by Tenant.

(a) Tenant may alter, improve, exchange, replace, modify or expand (collectively, “Alterations”) the Facilities, equipment or appliances in the Premises from time to time as it may determine is desirable for the continuing and proper use and maintenance of the Premises; provided, that any Alterations in excess of Two Hundred Fifty Thousand Dollars ($250,000) with respect to any individual Facility in any rolling twelve (12) month period shall require Landlord’s prior written consent; provided further, that any Alterations to the Premises must satisfy the requirements set forth in Sections 4.04 (2) and (3) of Revenue Procedure 2001-28, 2001-19 I.R.B. 1156. All Alterations shall immediately become a part of the Premises and the property of Landlord subject to this Master Lease, and except to the extent that Landlord in its sole discretion agrees to fund them pursuant to a mutually acceptable development addendum or expansion agreement following Tenant’s written request therefor, or to the extent funded in accordance with Section 8.4(b), the cost of all Alterations or other purchases, whether undertaken as an on-going licensing, Medicare, Medicaid or other regulatory requirement, or otherwise shall be borne solely by Tenant. All Alterations shall be done in a good and workmanlike manner in compliance with all applicable laws and the insurance required under this Master Lease.

(b) Landlord commits to make available to Tenant additional funds in the amount of up to Fifteen Million Dollars ($15,000,000) for the Phase I Expansion and Phase II Expansion, and an amount to be determined by Landlord with respect to any Phase III Expansion that it approves (the “Expansion Funds”) to be used for the expansion of and capital improvements to Approved Expansion. As used herein, (i) “Approved Expansion” means the

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following expansion projects, each subject to customary due diligence and reasonable feasibility analysis conducted by Landlord: (A) the Phase I Expansion, which has been approved by Landlord as of the date hereof, (B) the Phase II Expansion, provided that the applicable Facilities have each achieved stabilized occupancy for six (6) consecutive months of at least ninety-five percent (95%), and (C) the Phase III Expansion to the extent reasonably approved by Landlord; and (ii) “Phase I Expansion,” “Phase II Expansion” and “Phase III Expansion” shall mean the respective expansion projects show on Schedule 5. Landlord shall have no obligation to make any disbursement of Expansion Funds during the continuance of any Event of Default. Any disbursement of Expansion Funds shall be made, and all work in connection with any Expansion shall be performed, in accordance with Landlord’s reasonable and customary construction disbursement and completion requirements and pursuant to a development addendum or expansion agreement to be entered into in connection with such Approved Expansion. Upon any disbursement of Expansion Funds, Landlord’s Investment shall be increased in the amount of such disbursement in accordance with Section 2.2(a), and the amount of Minimum Rent and Additional Rent then payable shall be recalculated and reset in accordance with Section 2.1. Landlord’s commitment to make the Expansion Funds available shall be cancelled, and Landlord’s obligation to disburse any remaining Expansion Funds shall terminate, on the date that is (i) three (3) years after the date hereof with respect to the Phase I Expansion and Phase II Expansion (provided that, subject to the other terms and conditions of this Section 8.4(b), Landlord shall remain obligated to disburse such Expansion Funds as may be required to complete any approved work in connection with a Phase I Expansion or Phase II Expansion then in process), or (ii) such date determined by Landlord with respect to any approved Phase III Expansion.

8.5 Hazardous Materials. Tenant’s use of the Premises shall comply with all Hazardous Materials Laws. If any Environmental Activities occur or are suspected to have occurred in violation of any Hazardous Materials Laws or if Tenant has received notice of any Hazardous Materials Claim against any portion of the Premises, Tenant shall promptly obtain all permits and approvals necessary to remedy any such actual or suspected problem through the removal of Hazardous Materials or otherwise, and upon Landlord’s approval of the remediation plan, remedy any such problem to the satisfaction of Landlord and all applicable governmental authorities, in accordance with all Hazardous Materials Laws and good business practices. Tenant shall immediately advise Landlord in writing of (a) any Environmental Activities in violation of any Hazardous Materials Laws; (b) any Hazardous Materials Claims against Tenant or any portion of the Premises; (c) any remedial action taken by Tenant in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about any portion of the Premises in violation of any Hazardous Materials Laws; (d) Tenant’s discovery of any occurrence or condition on or in the vicinity of any portion of the Premises that materially increase the risk that any portion of the Premises will be exposed to Hazardous Materials; and (e) all communications to or from Tenant, any governmental authority or any other Person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to any portion of the Premises, including copies thereof. Notwithstanding any other provision of this Master Lease, if any Hazardous Materials are discovered on, under or about any portion of the Premises in violation of any Hazardous Materials Law, the Term shall be automatically extended and this Master Lease shall remain in full force and effect until the earlier to occur of the completion of all remedial action or monitoring, as approved by Landlord, in accordance with all Hazardous Materials Laws, or the date specified in a written notice from Landlord to Tenant terminating this

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Master Lease (which date may be subsequent to the date upon which the Term was to have expired). Landlord shall have the right, at Tenant’s sole cost and expense (including, without limitation, Landlord’s reasonable attorneys’ fees and costs) and with counsel chosen by Landlord, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims.

9. Tenant Property and Security Interest.

9.1 Tenant Property. Tenant shall obtain and install all items of furniture, fixtures, supplies and equipment not included as Landlord Personal Property as shall be necessary or reasonably appropriate to operate each Facility in compliance with this Master Lease (“Tenant Personal Property”). (Tenant Personal Property and “Tenant Intangible Property” shall be collectively referred to herein as “Tenant Property”.) As used herein, “Tenant Intangible Property” means all the following at any time owned by Tenant in connection with its use of any portion of the Premises: Medicare, Medicaid and other accounts and proceeds thereof; rents, profits, income or revenue derived from such operation or use; all documents, chattel paper, instruments, contract rights (including contracts with residents, employees and third-party payors), deposit accounts, general intangibles and choses in action; refunds of any Taxes or Other Charges; licenses and permits necessary or desirable for Tenant’s use of any portion of the Premises, including licensed Medicaid beds, any applicable certificate of need or other similar certificate, and the exclusive right to transfer, move or apply for the foregoing and manage the Business conducted at any portion of the Premises (including the right to apply for permission to reduce the licensed bed complement, take any of the licensed beds out of service or move the beds to a different location); and the right to use for one-hundred eighty (180) days following any termination of this Master Lease (other than by expiration thereof at the end of any Term) the names set forth on Schedule 1 and any other trade or other name now or hereafter associated with its operation of the Premises.

9.2 Landlord’s Security Interest and Financing Statements. The parties intend that if Tenant defaults under this Master Lease, Landlord will control the Tenant Property so that Landlord or its designee can operate or re-let each Facility and associated personal property intact for use as a licensed facility engaged in the applicable Business. Therefore, to implement the intention of the parties, and for the purpose of securing the payment and performance of Tenant’s obligations under this Master Lease, Tenant, as debtor, hereby grants to Landlord, as secured party, a security interest in and an express contractual Lien upon, all of Tenant’s right, title and interest in and to the Tenant Property and any and all products and proceeds thereof, in which Tenant now owns or leases (subject to the immediately following sentence) or hereafter acquires an interest or right. This Master Lease constitutes a security agreement covering all such Tenant Property, and the security interest granted to Landlord is intended by the parties to be subordinate to any security interest granted in Tenant Personal Property in connection with the financing or leasing of all or any portion thereof, so long as the lessor or financier agrees to give Landlord written notice of any default by Tenant under the terms of such arrangement and a reasonable time following such notice to cure any such default and to consent to Landlord’s written assumption of such arrangement upon curing such default. This security interest and agreement shall survive the termination of this Master Lease resulting from an Event of Default. Tenant shall pay all filing and reasonable record search fees and other costs for such additional security agreements, financing statements, fixture filings and other

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documents as Landlord may reasonably require to perfect or continue the perfection of its security interest.

10. Financial, Management and Regulatory Reports. Tenant shall provide Landlord with the reports listed in Exhibit F at the time described therein, and such other information about it or the operations of the Premises and Business as Landlord may reasonably request from time to time. All financial information provided shall be prepared in accordance with GAAP. If Tenant or any Guarantor becomes subject to any reporting requirements of the Securities and Exchange Commission during the Term, it shall concurrently deliver to Landlord such reports as are delivered pursuant to applicable securities laws. Tenant shall be assessed with a $500 administrative fee for each instance in which Tenant fails to provide Landlord with the reports listed in Exhibit F within the time specified therein, which administrative fee shall be immediately due and payable to Landlord.

11. Representations and Warranties.

11.1 By Landlord and Tenant. Each party represents and warrants to the other that: (a) this Master Lease and all other documents executed or to be executed by it in connection herewith have been duly authorized and shall be binding upon it; (b) it is duly organized, validly existing and in good standing under the laws of the state of its formation and is duly authorized and qualified to perform this Master Lease within the state(s) where any portion of the Premises is located; and (c) neither this Master Lease nor any other document executed or to be executed in connection herewith violates the terms of any other agreement of such party.

11.2 By Tenant and Guarantor. Tenant and Guarantor hereby make the following additional representations and warranties to Landlord, each of which is true, correct and complete except to the extent set forth to the contrary on Schedule 4. Unless otherwise specified, initially capitalized terms used in this Section 11.2 but not otherwise defined in this Master Lease shall have the meanings given to them in the MTA.

(a) Organization, Authority, Noncontravention, Required Filings and Consents. Guarantor represents and warrants that: (a) this Master Lease and all other documents executed or to be executed by it in connection herewith (including any Transactions Agreements) have been duly authorized and shall be binding upon it; (b) it is duly organized, validly existing and in good standing under the laws of the state of its formation and is duly authorized and qualified to perform the Transactions Agreements to which it is a party within the state(s) where any portion of the Premises is located, except where the failure to be so qualified has not had, and would not be reasonably expected to have, individually or in the aggregate, a material adverse effect on Guarantor’s ability to consummate the transactions contemplated by the Transactions Agreements to which it is a party; (c) neither this Master Lease nor any other document executed or to be executed in connection herewith violates the terms of any other agreement of such party, or requires any filings, notifications, authorizations, or consents with, of, or to any Governmental Entity; (d) as of the date of this Master Lease, there is no Litigation, pending or, to the Knowledge of Guarantor, threatened, against Guarantor by any Person that questions the legality, validity or propriety of this Master Lease, the Contribution Agreement, the Merger Agreement, the Master Transaction Agreement, or the Merger Transaction.

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(b) Compliance with Laws. Except for compliance with Laws regulating environmental, tax and benefit plan/arrangements matters, which is limited to the representations and warranties set forth in Sections 4.2, 4.3 and 4.4 of the MTA, respectively, the Company and its Subsidiaries are in compliance with all Laws (including obtaining all Company Permits) to which they are subject, except where the failure to comply, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. The Company and its Subsidiaries have not received notice of any material violation or alleged violation of, and are subject to no material liability (whether accrued, absolute, contingent, direct or indirect) for an past or continuing violation of any such Laws. All material reports, registrations and returns required by any such Law to be filed by the Company and its Subsidiaries with any Governmental Entity have been filed, and were accurate and complete in all material respects when filed. The Company and its Subsidiaries are not subject to any pending (or to the Knowledge of Guarantor, threatened) Litigation or Order as against any of them, their respective businesses or any of their assets, in such amounts as, individually or in the aggregate, would have a Material Adverse Effect (including any indemnity or other amounts owing to any Person whom the Company has agreed to indemnify).

(c) Insurance. Set forth in Schedule 1.2(c) is a complete and correct list of all policies and other forms of insurance presently in effect with respect to the business and properties of the Company and its Subsidiaries (each a “Policy” and collectively, the “Policies”). The Company has made available to the Acquiring Parties true and correct copies of all of the Policies. The Company and each of its Subsidiaries is, and has been continuously since January 1, 2002, insured as provided in Schedule 1.2(c). Neither the Company nor any of its Subsidiaries has received any notice of cancellation, termination or material increase in premiums or deductibles with respect to any material Policy of the Company or any of its Subsidiaries. The Company and its Subsidiaries have duly and timely made all claims that they have been entitled to make under each Policy, other than such claims, the failure of which to make has not had, and could not reasonably be expected to have, a Material Adverse Effect. There is no claim pending by the Company or any of its Subsidiaries under any Policies as to which coverage has been questioned, denied or disputed by the underwriters of such Policies, and, to the Knowledge of the Company, there is no basis for denial of any claim under any Policy as a result of the applications and information provided by the Company to obtain such Policies, in each case which could reasonably be expected to have a Material Adverse Effect.

(d) Contracts. Schedule 1.2(d) contains, as of the date of this Master Lease, a complete and accurate listing of all Contracts that are (i) essential to the conduct of the Business (as defined in the MTA) as presently conducted and, if terminated, could not be replaced timely in the ordinary course on at least substantially the same terms or (ii) otherwise involve obligations or liabilities that are material to the Business or the conduct thereof. The Company has made available to the Acquiring Parties true and correct copies of all such Contracts, each of which is in full force and effect. There are no existing breaches or defaults by the Company or any of its Subsidiaries, or, to the Knowledge of the Company, any other party to a Contract (including for this purpose, Contracts with residents of the Facilities), under any such Contract, other than breaches or defaults which would not have a Material Adverse Effect and to the Knowledge of the Company, no event has occurred which, with the passage of time or the giving of notice or both, could reasonably be expected to constitute a breach or default of any such Contract, other than breaches or defaults which would not have a Material Adverse Effect.

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Neither the execution and delivery of the Transaction Agreements nor the consummation of the transactions contemplated thereby, will violate, breach, conflict with or result in a default under any such Contract, except any such violation, breach, conflict or default as would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Company’s ability to consummate the transactions contemplated by the Transaction Agreements.

(e) Assumed Liabilities. Pursuant to the Contribution Agreement, Guarantor has agreed to cause Tenant to retain all of its respective liabilities and will assume all of the Assumed Liabilities, which include liabilities associated with or arising under or by virtue of Laws, Litigation, Orders, and Contracts (including under insurance policies).

(f) Collective Bargaining. Neither the Company nor any of its Subsidiaries is presently, nor has it been in the past, a party to, or bound by, any collective bargaining agreement or union contract with respect to employees and no collective bargaining agreement is being negotiated by the Company or any of its Subsidiaries. The Company has no Knowledge of any activities or proceedings of any labor union to organize any employees.

(g) Additional Representations and Warranties. Tenant and Guarantor also make all representations and warranties made by HAL as set forth in Sections 3, 4 and 5 of the MTA, which representations and warranties are incorporated herein by this reference.

12. Events of Default. So long as there is no Event of Default, Tenant shall peaceably and quietly have, hold and enjoy the Premises for the Term, free of any claim or other action not caused or created by Tenant or pursuant to Sections 17 or 18. The occurrence of any of the following events will constitute an “Event of Default” on the part of Tenant, and there shall be no cure period therefor except as otherwise expressly provided:

(a) Tenant’s failure to pay when due any Rent, Taxes, Other Charges or other required payments;

(b) (i) The revocation, suspension or material limitation of any license required for the operation of any portion of the Business or any portion of the Premises or the certification of any portion of the Premises for provider status under Medicare or Medicaid, if applicable; (ii) the closure of any portion of the Business except to the extent in accordance with Section 17 or 18 or as otherwise expressly permitted hereunder; (iii) the sale or transfer of all or any portion of any certificate of need, bed rights or other similar certificate or license relating to any portion of the Business or any portion of the Premises; (iv) the use of any portion of the Premises other than for a licensed facility engaged in the applicable Business and for ancillary services relating thereto; or (v) any act or omission of Tenant that in the judgment of Landlord more likely than not will result in any of the foregoing (each a “Catastrophic Event of Default”);

(c) Any other material suspension, termination or restriction placed upon Tenant, any portion of the Premises, any portion of the Business or the ability to admit residents or patients (e.g., an admissions ban or non-payment for new admissions by Medicare or Medicaid resulting from an inspection survey);

(d) A material default by Tenant or any Guarantor (i) or any Affiliate of either under the Guaranty, the Letter of Credit Agreement or any other lease, agreement or obligation

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between it and Landlord or any of its Affiliates which is not cured within any applicable cure period specified therein, or (ii) with respect to any obligation under any other lease or financing agreement with any other party which is not cured within any applicable cure period specified therein;

(e) Any misrepresentation by Tenant under this Master Lease or material misstatement or omission of fact in any written report, notice or communication from Tenant or any Guarantor to Landlord with respect to Tenant, any Guarantor, the Premises or the Business;

(f) The failure to perform or comply with the provisions of Sections 6 or 16;

(g) (i) Tenant or any Guarantor shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make an assignment of all or substantially all of its property for the benefit of creditors; or (ii) a receiver, trustee or liquidator shall be appointed for either or them or any of their property, if within three (3) business days of such appointment Tenant does not inform Landlord in writing that they intend to cause such appointment to be discharged or such discharge is not diligently prosecuted to completion within sixty (60) days after the date of such appointment; (iii) the filing by either of them of a voluntary petition under any federal bankruptcy or state law to be adjudicated as bankrupt or for any arrangement or other debtor’s relief; or (iv) the involuntary filing of such a petition against either of them by any other party, unless Tenant within three (3) business days of such filing informs Landlord in writing of their intent to cause such petition to be dismissed, such dismissal is diligently prosecuted and such petition is dismissed within ninety (90) days after filing; or

(h) The failure to perform or comply with any other provision of this Master Lease not requiring the payment of money unless (i) within five (5) business days of Tenant’s receipt of a notice of default from Landlord, Tenant gives Landlord notice of its intent to cure such default; and (ii) Tenant cures it either (x) within thirty (30) days after such notice from Landlord or (y) if such default cannot with due diligence be so cured because of the nature of the default or delays beyond the control of Tenant and cure after such period will not have a materially adverse effect upon any portion of the Premises or any portion of the Business, then such default shall not constitute an Event of Default if Tenant uses its best efforts to cure such default by promptly commencing and diligently pursuing such cure to the completion thereof and cures it within one hundred twenty (120) days after such notice from Landlord.

13. Remedies. Upon the occurrence of an Event of Default, Landlord may exercise all rights and remedies under this Master Lease and the laws of the state(s) where the Premises are located that are available to a lessor of real and personal property in the event of a default by its lessee, and as to the Tenant Property, all remedies granted under the laws of such state(s) to a secured party under its Uniform Commercial Code. Landlord shall have no duty to mitigate damages unless required by applicable law and shall not be responsible or liable for any failure to relet any of the Premises or to collect any rent due upon any such reletting. Tenant shall pay Landlord, immediately upon demand, all expenses incurred by it in obtaining possession and reletting any of the Premises, including fees, commissions and costs of attorneys, architects, agents and brokers.

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13.1 General. Without limiting the foregoing, Landlord shall have the right (but not the obligation) to do any of the following upon an Event of Default: (a) sue for the specific performance of any covenant of Tenant as to which it is in breach; (b) enter upon any portion of the Premises, terminate this Master Lease, dispossess Tenant from the Premises and/or collect money damages by reason of Tenant’s breach, including the acceleration of all Rent which would have accrued after such termination and all obligations and liabilities of Tenant under this Master Lease which survive the termination of the Term; (c) elect to leave this Master Lease in place and sue for Rent and other money damages as the same come due; (d) (before or after repossession of the Premises pursuant to clause (b) above and whether or not this Master Lease has been terminated) relet any portion of the Premises to such tenant(s), for such term(s) (which may be greater or less than the remaining balance of the Term), rent, conditions (which may include concessions or free rent) and uses as it may determine in its sole discretion and collect and receive any rents payable by reason of such reletting; and (e) sell any Tenant Property in a non-judicial foreclosure sale.

13.2 Tenant Repurchase/Receivership. Tenant acknowledges that a Catastrophic Event of Default will materially and irreparably impair the value of Landlord’s investment in the Premises. Therefore, in addition to its other rights and remedies, upon a Catastrophic Event of Default Landlord shall have the right to put the affected Facility or Facilities and associated Landlord Personal Property to Tenant (the “Put”) and/or, as permitted and provided by applicable law, petition any appropriate court for the appointment of a receiver to take possession of the Premises, to manage the operation of the Premises, to collect and disburse all rents, issues, profits and income generated thereby and to the extent applicable and possible, to preserve or replace any affected license or provider certification for the Premises or to otherwise substitute the licensee or provider thereof (the “Receivership”). If Landlord exercises the Put, Tenant shall purchase the applicable Facility or Facilities from Landlord for a cash price equal to the greater of (a) Landlord’s Investment allocable to such Facility or Facilities, or (b) Fair Market Value on the date of Landlord’s notice of exercise (the “Put Exercise Date”) as established pursuant to Exhibit C, plus all of Landlord’s attorneys’ fees, costs and expenses incurred in connection with the Put and the attendant Catastrophic Event. Such purchase shall be consummated at Tenant’s expense within ninety (90) days of the Put Exercise Date through an escrow at a national title company selected by Landlord using the title company’s standard sale escrow instructions, without representations or warranties, any due diligence or other contingencies in favor of the buyer, and providing that Landlord shall deliver to Tenant title to the applicable portion of the Premises subject only to the applicable title exceptions shown in Exhibit D. If Landlord commences the Receivership, the receiver shall be paid a reasonable fee for its services and all such fees and other expenses of the Receivership shall be paid in addition to, and not in limitation of, the Rent otherwise due to Landlord hereunder. Tenant irrevocably consents to the Receivership upon a Catastrophic Event of Default and thus stipulates to and agrees not to contest the appointment of a receiver under such circumstances and for such purposes.

13.3 Remedies Cumulative; No Waiver. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. Any notice or cure period provided herein shall run concurrently with any provided by applicable law. No failure of

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Landlord to insist at any time upon the strict performance of any provision of this Master Lease or to exercise any option, right, power or remedy contained herein shall be construed as a waiver, modification or relinquishment thereof as to any similar or different breach (future or otherwise) by Tenant. Landlord’s receipt of any rent or other sum due hereunder (including any late charge) with knowledge of any breach shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Master Lease shall be effective unless expressed in a writing signed by it.

13.4 Performance of Tenant’s Obligations. If Tenant at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Master Lease, then Landlord may, without waiving or releasing Tenant from any obligations or default hereunder, make such payment or perform such act for the account and at the expense of Tenant, and enter upon any portion of the Premises for the purpose of taking all such action as may be reasonably necessary. No such entry shall be deemed an eviction of Tenant. All sums so paid by Landlord and all necessary and incidental costs and expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the performance of any such act by it, together with interest at the Agreed Rate from the date of the making of such payment or the incurring of such costs and expenses, shall be payable by Tenant to Landlord upon Landlord’s written demand therefor.

14. Provisions on Termination.

14.1 Surrender of Possession. On the expiration of the Term or earlier termination or cancellation of this Master Lease (the “Termination Date”), Tenant shall deliver to Landlord or its designee possession of (a) each Facility and associated Landlord Personal Property in a neat and clean condition and in as good a condition as existed at the date of their possession and occupancy pursuant to this Master Lease, ordinary wear and tear excepted, (b) a fully operational, licensed (to the extent assignable) and (to the extent applicable) certified Business at each Facility including, at Tenant’s sole cost, any Alterations necessitated by, or imposed in connection with, a change of ownership inspection survey for the transfer of operation of any portion of the Premises to Landlord or its designee, and (c) except to the extent prohibited by applicable law, all patient charts and resident records along with appropriate resident consents if necessary and copies of all its books and records relating to the Business and the Premises. Accordingly, Tenant shall not at any time during or after the Term seek to transfer, surrender, allow to lapse, or grant any security interest or any other interest in and to the licenses, permits or certifications relating to any portion of the Business or any portion of the Premises, nor shall Tenant commit or omit any act that would jeopardize any portion of the Business or any licensure or certification of any portion of the Premises. Tenant shall cooperate fully with Landlord or its designee in transferring or obtaining all necessary licenses and certifications for Landlord or its designee, and Tenant shall comply with all requests for an orderly transfer of the Business, Facility licenses, and Medicare and Medicaid certifications and possession at the time of its surrender of the Premises to Landlord or its designee. Subject to all applicable laws, Tenant hereby assigns, effective upon the Termination Date, all rights to operate the facility to Landlord or its designee including all required licenses and permits and all rights to apply for or otherwise obtain them, and all other nonproprietary Tenant Intangible Property relating to any portion of the Premises.

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14.2 Removal of Tenant Personal Property. Provided that no Event of Default then exists, in connection with the surrender of the Premises, Tenant may upon at least five (5) business days prior notice to Landlord remove from the Premises in a workmanlike manner all Tenant Personal Property, leaving the Premises in good and presentable condition and appearance, including repair of any damage caused by such removal; provided that Landlord shall have the right and option to purchase the Tenant Personal Property for its then net book value during such five (5) business day notice period, in which case Tenant shall so convey the Tenant Personal Property to Landlord by executing a bill of sale on an “as-is, where-is” basis and otherwise in a form reasonably required by Landlord. If there is any Event of Default then existing, Tenant will not remove any Tenant Personal Property from the Premises and instead will, on demand from Landlord, convey it to Landlord for no additional consideration by executing a bill of sale on an “as-is, where-is” basis and otherwise in a form reasonably required by Landlord. Title to any Tenant Personal Property which is not removed by Tenant as permitted above upon the expiration of the Term shall, at Landlord’s election, vest in Landlord; provided, however, that Landlord may remove and store or dispose at Tenant’s expense any or all of such Tenant Personal Property which is not so removed by Tenant without obligation or accounting to Tenant.

14.3 Management of Premises. Commencing on the Termination Date, Landlord or its designee, upon written notice to Tenant, may elect to assume the responsibilities and obligations for the management and operation of the Business and Tenant agrees to cooperate fully to accomplish the transfer of such management and operation without interrupting the operation of the Business. Tenant agrees that Landlord or its designee may operate the Business under Tenant’s licenses and certifications pending the issuance of new licenses and certifications to Landlord or its designee. Tenant shall not commit any act or be remiss in the undertaking of any act that would jeopardize any licensure or certification of any portion of the Premises, and Tenant shall comply with all requests for an orderly transfer of any and all facility and other licenses, Medicare and Medicaid certifications and possession of the Premises at the time of any such surrender.

14.4 Holding Over. If Tenant shall for any reason remain in possession of any portion of the Premises after the Termination Date, such possession shall be a month-to-month tenancy during which time Tenant shall pay as rental on the first (1^st) business day of each month one and one-half (1 ¹/2) times the total of the monthly Minimum Rent payable with respect to the last Lease Year plus Additional Rent allocable to the month, all additional charges accruing during the month and all other sums, if any, payable by Tenant pursuant to this Master Lease. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the Termination Date, nor shall anything contained herein be deemed to limit Landlord’s remedies.

14.5 Survival. All representations, warranties, covenants and other obligations of Tenant under this Master Lease shall survive the Termination Date.

15. Certain Landlord Rights.

15.1 Entry and Examination of Records. Landlord and its representatives may enter any portion of the Premises at any reasonable time after reasonable notice to Tenant to

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inspect the Premises for compliance, to exhibit the Premises for sale, lease or mortgaging, or for any other reason; provided that no such notice shall be required in the event of an emergency, upon an Event of Default or to post notices of non-responsibility under any mechanic’s or materialman’s lien law. No such entry shall unreasonably interfere with residents, patients, patient care or the Business. During normal business hours, Tenant will permit Landlord and its representatives, inspectors and consultants, subject to privacy or confidentiality restrictions imposed under applicable law, to examine all contracts, books and financial and other records (wherever kept) relating to Tenant’s operations at any portion of the Premises.

15.2 Grant Liens. Without the consent of Tenant, Landlord may from time to time, directly or indirectly, create or otherwise cause to exist any Lien, title retention agreement or other encumbrance upon the Premises, or any portion thereof or interest therein (including this Master Lease), whether to secure any borrowing or other means of financing or refinancing or otherwise. Upon the request of Landlord, Tenant shall subordinate this Master Lease to the Lien of any such encumbrance so long as such encumbrance provides that it is subject to the rights of Tenant under this Master Lease and that so long as no Event of Default shall exist, Tenant’s occupancy shall not be disturbed if any Person takes possession of the applicable portion of the Premises through foreclosure proceeding or otherwise.

15.3 Estoppel Certificates. Tenant shall, at any time upon not less than ten (10) days prior written request by Landlord, have an authorized representative execute, acknowledge and deliver to Landlord or its designee a written statement certifying (a) that this Master Lease, together with any specified modifications, is in full force and effect, (b) the dates to which Rent and additional charges have been paid, (c) that no default by either party exists or specifying any such default and (d) as to such other matters as Landlord may reasonably request.

15.4 Conveyance Release. If Landlord or any successor owner shall transfer any portion of the Premises in accordance with this Master Lease, they shall thereupon be released from all future liabilities and obligations hereunder arising or accruing from and after the date of such conveyance or other transfer, which instead shall thereupon be binding upon the new owner.

16. Assignment and Subletting. Without the prior written consent of Landlord, which may be withheld or conditioned at its sole discretion, this Master Lease shall not, nor shall any interest of Tenant herein, be assigned or encumbered by operation of law, nor shall Tenant voluntarily or involuntarily assign, mortgage, encumber or hypothecate any interest in this Master Lease or sublet any portion of the Premises (except if the Business at any Facility is an assisted living facility, in the ordinary course of Tenant’s business to occupants of such Facility or their immediate family members using Tenant’s standard form occupancy lease, and except for subleases to occupational and physical therapy providers and for hospice purposes in each case for not more than ten thousand (10,000) square feet in the aggregate per Facility). Any of the foregoing acts without such consent shall be void and shall, at Landlord’s sole option, constitute an Event of Default giving rise to Landlord’s right, among other things, to terminate this Master Lease. An assignment of this Master Lease by Tenant shall be deemed to include: (a) entering into a management or similar agreement relating to the operation or control of any portion of the Premises with a Person that is not an Affiliate of Tenant; (b) any change (voluntary or involuntary, by operation of law or otherwise, including the transfer, assignment,

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sale, hypothecation or other disposition of any equity interest in Tenant) in the Person that ultimately exert effective Control over the management of the affairs of Tenant as of the date hereof; provided that an initial public offering of Tenant shall not be deemed to be an assignment of the Master Lease so long as thereafter less than twenty-five percent (25%) of the voting stock of Tenant is held by any Person or related group that did not have such ownership before the initial public offering; or (c) the sale or other transfer of all or any portion of any certificate of need, bed rights or other similar certificate or license relating to any portion of the Business or any portion of the Premises. Notwithstanding the foregoing, Tenant may, without Landlord’s prior written consent, assign this Master Lease or sublet the Premises or any portion thereof to an Affiliate of Tenant or any Guarantor if all of the following are first satisfied: (w) such Affiliate fully assumes Tenant’s obligations hereunder; (x) Tenant remains fully liable hereunder and any Guarantor remains fully liable under its guaranty; (y) the use of the applicable portion of the Premises remains unchanged; and (z) Landlord in its reasonable discretion shall have approved the form and content of all documents for such assignment or sublease and received an executed counterpart thereof. In no event shall Tenant sublet any portion of the Premises on any basis such that the rental to be paid by the sublessee would be based, in whole or in part, on either the income or profits derived by the business activities of the sublessee, or any other formula, such that any portion of the sublease rental received by Landlord would fail to qualify as “rents from real property” within the meaning of Section 856(d) of the U.S. Internal Revenue Code, or any similar or successor provision thereto. [Tenant to propose permitted transfer exceptions.]

17. Damage by Fire or Other Casualty. Tenant shall promptly notify Landlord of any material damage or destruction of any portion of the Premises and diligently repair or reconstruct such portion of the Premises to a like or better condition than existed prior to such damage or destruction in accordance with Section 8.4. Any net insurance proceeds payable with respect to the casualty shall be paid directly to Landlord and, if an Event of Default has not occurred hereunder, used for the repair or reconstruction of the applicable portion of the Premises pursuant to Landlord’s disbursement requirements. If such proceeds are insufficient, Tenant shall provide the required additional funds; if they are more than sufficient, the surplus shall belong and be paid to Tenant. Tenant shall not have any right under this Master Lease, and hereby waives all rights under applicable law, to abate, reduce or offset rent by reason of any damage or destruction of any portion of the Premises by reason of an insured or uninsured casualty. Notwithstanding the foregoing, in the event of a casualty affecting all or substantially all of any Facility during the final Lease Year of the Term, Tenant shall not be required to repair or reconstruct such Facility provided that it is then in compliance with Section 6 and all net insurance proceeds with respect thereto have been paid to Landlord.

18. Condemnation. Except as provided to the contrary in this Section 18, this Master Lease shall not terminate and shall remain in full force and effect in the event of a taking or condemnation of the Premises, or any portion thereof (a “Taking”), and Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such Taking. If during the Term all or substantially all of any Facility is taken or condemned by any competent public or quasi-public authority, then Tenant may at its election made within thirty (30) days of the effective date of such Taking, terminate this Master Lease with respect thereto effective as of the last day of the third calendar month following the date of such Taking and the current Rent shall be prorated and equitably abated as of the effective date of such termination. Landlord alone shall be entitled to receive and retain any award for a taking or condemnation.

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19. Indemnification. Tenant, and Guarantor with respect to clause (a) below, agree to protect, indemnify, defend and save harmless Landlord, its directors, officers, shareholders, agents and employees from and against any and all foreseeable or unforeseeable liability, expense, loss, cost, deficiency, fine, penalty or damage (including consequential or punitive damages) of any kind or nature, including reasonable attorneys’ fees, from any suits, claims or demands, on account of any matter or thing, action or failure to act arising out of or in connection with this Master Lease, the Premises or the operations of Tenant on any portion of the Premises, including (a) the breach by Tenant or Guarantor of any of its representations, warranties, covenants or other obligations made by it hereunder, (b) any Protest, (c) all known and unknown Environmental Activities on any portion of the Premises, Hazardous Materials Claims or violations by Tenant of a Hazardous Materials Law with respect to any portion of the Premises, and (d) upon or following the Termination Date, the correction of all deficiencies of a physical nature identified by, and any liability assessed or asserted by, any governmental agency or Medicare or Medicaid providers as a result of or arising out of or in connection with this Master Lease or the related change of ownership inspection and audit (including any overpayment to any Medicare, Medicaid or other third-party payor). Guarantor will also indemnify and hold harmless the Surviving Corporation and Landlord and their respective representatives, shareholders, partners, controlling Persons and Affiliates, and will pay to such Persons the amount of any Damages incurred by such Persons arising, directly or indirectly, from or in connection with (i) the Assumed Liabilities; (ii) Post-Closing Liabilities of any of Guarantor and its Subsidiaries or their respective Affiliates; and (iii) fees and charges of any advisor or broker retained by Guarantor in connection with the transactions contemplated by any of the Transaction Agreements. Upon receiving knowledge of any suit, claim or demand asserted by a third party that Landlord believes is covered by this indemnity, it shall give Tenant and if applicable, Guarantor, notice of the matter. If Landlord does not elect to defend the matter with its own counsel at Tenant’s or Guarantor’s expense, Tenant and Guarantor shall then defend Landlord at Tenant’s and Guarantor’s expense (including Landlord’s reasonable attorneys’ fees and costs) with legal counsel satisfactory to Landlord.

20. Disputes. If any party brings any action to interpret or enforce this Master Lease, or for damages for any alleged breach, the prevailing party shall be entitled to reasonable attorneys’ fees and costs as awarded by the court in addition to all other recovery, damages and costs. EACH PARTY HEREBY WAIVES ANY RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY AGAINST THE OTHER IN CONNECTION WITH ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS MASTER LEASE, INCLUDING RELATIONSHIP OF THE PARTIES, TENANT’S USE AND OCCUPANCY OF ANY PORTION OF THE PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE RELATING TO THE FOREGOING OR THE ENFORCEMENT OF ANY REMEDY.

21. Notices. All notices and demands, certificates, requests, consents, approvals and other similar instruments under this Master Lease shall be in writing and sent by personal delivery, U. S. certified or registered mail (return receipt requested, postage prepaid) or FedEx or similar generally recognized overnight carrier regularly providing proof of delivery, addressed as follows:

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If to Tenant:	If to Landlord:
	Nationwide Health Properties, Inc.
	610 Newport Center Drive, Suite 1150
	Newport Beach, California 92660-6429
Attention:	Attention: President and General Counsel

Fax No.	Fax No. (949) 759-6876
With a copy to:	With a copy to:
	Sherry Meyerhoff Hanson & Crance LLP
	610 Newport Center Drive, Suite 1200
	Newport Beach ,California 92660
Attention:	Attention: Frank M. Crance

Fax No. Fax No. (949) 719-1200

A party may designate a different address by notice as provided above. Any notice or other instrument so delivered (whether accepted or refused) shall be deemed to have been given and received on the date of delivery established by U.S. Post Office return receipt or the carrier’s proof of delivery or, if not so delivered, upon its receipt. Delivery to any officer, general partner or principal of a party shall be deemed delivery to such party. Notice to any one co-Tenant shall be deemed notice to all co-Tenants.

22. Right of First Refusal; Right of Last Look.

(a) Until such time as Tenant, Guarantor and their respective Affiliates (collectively, the “Hearthstone Parties”), have made investments after the date of this Master Lease in healthcare related real estate assets (whether by acquisition, development, sale-leaseback or otherwise, but excluding expansion or alteration of any of the Facilities) (“Subsequent Investments”) in the aggregate amount of One Hundred Fifty Million Dollars ($150,000,000), NHP shall have the exclusive right to provide sale-leaseback financing for any Subsequent Investment by any Hearthstone Party. NHP shall have thirty (30) days from the date that it receives all information reasonably requested by it in connection with its underwriting of any Subsequent Investment to be made by any Hearthstone Party to notify the Hearthstone Parties whether it wishes to acquire and lease to a Hearthstone Party the applicable property (each a “Subsequent Asset”). In the event that NHP declines to acquire any such Subsequent Asset, the Hearthstone Parties may pursue any another Person to participate in or provide financing for such Subsequent Investment. In the event that NHP elects to acquire any such Subsequent Asset, such Subsequent Asset when acquired shall be leased to the applicable Hearthstone Party (by adding such Subsequent Asset to the Premises demised under this Master Lease, if practicable), but in any event on terms substantially similar to those contained in this Master Lease, provided that the minimum rent payable with respect to such Subsequent Asset shall be equal to one hundred fifty (150) basis points over NHP’s Weighted Average Cost of Capital as of the closing date for the applicable Subsequent Asset.

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(b) From the time that the Hearthstone Parties have made Subsequent Investments in the aggregate amount of One Hundred Fifty Million Dollars ($150,000,000) until such time as the Hearthstone Parties have made Subsequent Investments in the aggregate amount of Three Hundred Million Dollars ($300,000,000), NHP shall have a right of last look to provide sale-leaseback financing for any Subsequent Investment by any Hearthstone Party. Prior to entering into a binding agreement for sale-leaseback financing with any Person other than NHP in connection with any such Subsequent Investment, the Hearthstone Parties shall present to NHP a summary of all material terms (but shall not be required to disclose the identity of the other party) on which another Person has offered to provided sale-leaseback financing for such Subsequent Investment (a “Financing Proposal”), and NHP shall have the right to provide such financing on the terms set forth in the Financing Proposal. Upon receipt of any Financing Proposal, NHP shall have ten (10) business days to provide written notice to the Hearthstone Parties of its election to provide or to decline to provide the sale-leaseback financing for the applicable Subsequent Investment. In the event that NHP exercises its right to provide such financing, it shall provide the sale-leaseback financing for the applicable Subsequent Investment on the terms and conditions set forth in the applicable Financing Proposal, subject to approval of its Board of Directors and customary due diligence. In the event that NHP declines to exercise its right to provide such financing, the Hearthstone Parties shall be free to consummate the transaction described in the applicable Financing Proposal with the other party thereto, which transaction shall close not later than ninety (90) days after the date on which NHP provides notice of its decision to the Hearthstone Parties and shall be consummated on terms no more favorable to such party than set forth in such Financing Proposal. If any such transaction is not closed within such ninety (90) day period, or is renegotiated or otherwise subject to terms more favorable to the other party than those set forth in the applicable Financing Proposal, the Hearthstone Parties shall not consummate the applicable transaction without again allowing NHP to exercise its right of last look in accordance with the terms of this Section 22(b).

23. Miscellaneous. Since each party has been represented by counsel and this Master Lease has been freely and fairly negotiated, all provisions shall be interpreted according to their fair meaning and shall not be strictly construed against any party. While nothing contained in this Master Lease should be deemed or construed to constitute an extension of credit by Landlord to Tenant, if a portion of any payment made to Landlord is deemed to violate any applicable laws regarding usury, such portion shall be held by Landlord to pay the future obligations of Tenant as such obligations arise and if Tenant discharges and performs all obligations hereunder, such funds will be reimbursed (without interest) to Tenant on the Termination Date. If any part of this Master Lease shall be determined to be invalid or unenforceable, the remainder shall nevertheless continue in full force and effect. Time is of the essence, and whenever action must be taken (including the giving of notice or the delivery of documents) hereunder during a certain period of time or by a particular date that ends or occurs on a Saturday, Sunday or federal holiday, then such period or date shall be extended until the immediately following business day. Whenever the words “including”, “include” or “includes” are used in this Master Lease, they shall be interpreted in a non-exclusive manner as though the words “without limitation” immediately followed. Whenever the words day or days are used in this Master Lease, they shall mean “calendar day” or “calendar days” unless expressly provided to the contrary. The titles and headings in this Master Lease are for convenience of reference only and shall not in any way affect the meaning or construction of any provision. Unless otherwise expressly provided, references to any “Section” mean a section of this Master Lease (including all subsections), to

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any “Exhibit” or “Schedule” mean an exhibit or schedule attached hereto or to “Medicare” or “Medicaid” include any successor program. If more than one Person is Tenant hereunder, their liability and obligations hereunder shall be joint and several. Promptly upon the request of either party and at its expense, the parties shall prepare, enter into and record a suitable short form memorandum of this Master Lease. This Master Lease (a) contains the entire agreement of the parties as to the subject matter hereof and supersedes all prior or contemporaneous verbal or written agreements or understandings, (b) may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document, (c) may only be amended by a writing executed by the parties, (d) shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties, (e) shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the conflict of laws rules thereof, provided that the law of the State in which each Facility is located (each a “Situs State”) shall govern procedures for enforcing, in the respective Situs State, provisional and other remedies directly related to such Facility and related personal property as may be required pursuant to the law of such Situs State, including without limitation the appointment of a receiver; and, further provided that the law of the Situs State also applies to the extent, but only to the extent, necessary to create, perfect and foreclose the security interests and liens created under this Master Lease, and (f) incorporates by this reference any Exhibits and Schedules attached hereto.

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IN WITNESS WHEREOF, this Master Lease has been executed by Landlord, Tenant and Guarantor as of the date first written above.

“TENANT”	“LANDLORD”
[Signature block of Tenant]	[Signature block of Landlord Entities],
By:	By:
Name:	Name:
Title:	Title:

“GUARANTOR” (with respect to Sections 11.2, 19, and 22)

[Signature block of Guarantor]

By:   

Name:

Title:

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EXHIBIT C

FAIR MARKET VALUE

“Fair Market Value” means the fair market value of the Premises or applicable portion thereof on a specified date as agreed to by the parties, or failing such agreement within ten (10) of such date, as established pursuant the following appraisal process. Each party shall within ten (10) days after written demand by the other select one MAI Appraiser to participate in the determination of Fair Market Value. For all purposes under this Master Lease, the Fair Market Value shall be the fair market value of the Premises or applicable portion thereof unencumbered by this Master Lease. Within ten (10) days of such selection, the MAI Appraisers so selected by the parties shall select a third (3^rd) MAI Appraiser. The three (3) selected MAI Appraisers shall each determine the Fair Market Value of the Premises or applicable portion thereof within thirty days of the selection of the third appraiser. To the extent consistent with sound appraisal practices as then existing at the time of any such appraisal, and if requested by Landlord, such appraisal shall be made on a basis consistent with the basis on which the Premises or applicable portion thereof were appraised at the time of their acquisition by Landlord. Tenant shall pay the fees and expenses of any MAI Appraiser retained pursuant to this Exhibit.

If either party fails to select a MAI Appraiser within the time period set forth in the foregoing paragraph, the MAI Appraiser selected by the other party shall alone determine the fair market value of the Premises or applicable portion thereof in accordance with the provisions of this Exhibit and the Fair Market Value so determined shall be binding upon the parties. If the MAI Appraisers selected by the parties are unable to agree upon a third (3^rd) MAI Appraiser within the time period set forth in the foregoing paragraph, either party shall have the right to apply at Tenant’s expense to the presiding judge of the court of original trial jurisdiction in the county in which the Premises or applicable portion thereof are located to name the third (3^rd) MAI Appraiser.

Within five (5) days after completion of the third (3^rd) MAI Appraiser’s appraisal, all three (3) MAI Appraisers shall meet and a majority of the MAI Appraisers shall attempt to determine the fair market value of the Premises or applicable portion thereof. If a majority are unable to determine the fair market value at such meeting, the three (3) appraisals shall be added together and their total divided by three (3). The resulting quotient shall be the Fair Market Value. If, however, either or both of the low appraisal or the high appraisal are more than ten percent (10%) lower or higher than the middle appraisal, any such lower or higher appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2), and the resulting quotient shall be such Fair Market Value. If both the lower appraisal and higher appraisal are disregarded as provided herein, the middle appraisal shall be such Fair Market Value. In any event, the result of the foregoing appraisal process shall be final and binding.

“MAI Appraiser” shall mean an appraiser licensed or otherwise qualified to do business in the state(s) where the Premises or applicable portion thereof are located and who has substantial experience in performing appraisals of facilities similar to the Premises or applicable portion thereof and is certified as a member of the American Institute of Real Estate Appraisers or certified as a SRPA by the Society of Real Estate Appraisers, or, if such organizations no longer exist or certify appraisers, such successor organization or such other organization as is approved by Landlord.

C-1

EXHIBIT D

PERMITTED EXCEPTIONS

1. The standard printed exceptions, conditions and exclusions from coverage contained in the standard coverage owner’s title policy then prevailing in use at the title company that consummates the sale transaction.

2. Any matters which an accurate survey of the Premises may show.

3. Real property taxes and assessments.

4. Any matters shown as title exceptions in the Owner’s Policy of Title Insurance obtained by Landlord in connection with its acquisition of the Premises.

5. Such other matters burdening the Premises which were created with the consent or knowledge of Tenant or arising out of Tenant’s acts or omissions.

D-1

EXHIBIT E

CERTAIN DEFINITIONS

For purposes of this Master Lease, the following terms and words shall have the specified meanings:

ENVIRONMENTAL DEFINITIONS

“Environmental Activities” shall mean the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from any portion of the Premises or located on or present on or under any portion of the Premises.

“Hazardous Materials” shall mean (a) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials, known carcinogens or any other materials, contaminants or pollutants which pose a hazard to any portion of the Premises or to Persons on or about any portion of the Premises or cause any portion of the Premises to be in violation of any Hazardous Materials Laws; (b) asbestos in any form which is friable; (c) urea formaldehyde in foam insulation or any other form; (d) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (e) medical wastes and biohazards; (f) radon gas; and (g) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of any portion of the Premises or the owners and/or occupants of property adjacent to or surrounding any portion of the Premises, including, without limitation, any materials or substances that are listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) as amended from time to time.

“Hazardous Materials Claims” shall mean any and all enforcement, clean-up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or threatened by any third party against any portion of the Premises, Landlord or Tenant relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials.

“Hazardous Materials Laws” shall mean any laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, Environmental Activities, Hazardous Materials, air and water quality, waste disposal and other environmental matters.

OTHER DEFINITIONS

“Affiliate” shall mean with respect to any Person, any other Person which Controls, is Controlled by or is under common Control with the first Person.

“Assumed Liabilities” shall have the meaning given to it in the MTA.

“CC&R’s” shall mean covenants, conditions and restrictions or similar use, maintenance or ownership obligations encumbering or binding upon the real property comprising any Facility.

“Control” shall mean, as applied to any Person, the possession, directly or indirectly, of the power to direct the management and policies of that Person, whether through ownership, voting control, by contract or otherwise.

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“Damages” shall have the meaning given to it in the MTA.

“GAAP” means generally accepted accounting principles, consistently applied.

“HAL” means Hearthstone Assisted Living, Inc.

“Knowledge” shall have the meaning given to it in the MTA.

“MTA” means that certain Master Transactions Agreement dated as of                  , 2006 among HAL, Tenant and Landlord

“NHP” means Nationwide Health Properties, Inc., a Maryland corporation.

“Person” shall mean any individual, partnership, association, corporation, limited liability company or other entity.

“Surviving Corporation” shall have the meaning given to it in the MTA.

“Transaction Agreements” shall have the meaning given to it in the MTA.

E-2

EXHIBIT F

FINANCIAL, MANAGEMENT AND REGULATORY REPORTS

REPORT		DUE DATE
Monthly financial reports concerning the Business at each Facility and the combined Facilities in this lease or such other combination of this and related leases as reasonably requested by Landlord consisting of:		Thirty (30) days after the end of each calendar month
(1)	a consolidated balance sheet;
(2)	a reasonably detailed income statement showing, among other things, Gross Revenues;
(3)	a statement of management fees and general and administrative expenses for purposes of performing financial covenant calculations hereunder;
(3)	total patient days;
(4)	occupancy; and
(5)	payor mix.    (All via e-mail to financials@nhp-reit.com)
Quarterly consolidated or combined financial statements of Tenant and any Guarantor (via e-mail to financials@nhp-reit.com)		Forty-Five (45) days after the end of each of the first three quarters of the fiscal year of Tenant and such Guarantor
Annual consolidated or combined financial statements of Tenant and any Guarantor audited by a reputable certified public accounting firm (via e-mail to financials@nhp-reit.com)		Ninety (90) days after the fiscal year end of Tenant and such Guarantor
Regulatory reports with respect to each Facility, as follows:		Ten (10) business days after receipt of any report assessing monetary penalties and/or indicating that the cited deficiencies would be turned over to the Attorney General’s Office (or similar prosecuting authority) for enforcement/prosecution
(1)	all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Tenant as to any portion of the Premises and any portion of the Business, including state department of health licensing surveys;
(2)	Medicare and Medicaid certification surveys; and
(3)	life safety code reports.
Reports of regulatory violations, by written notice of the following:		With regards to nos.(1) and (3), five (5) business days after receipt of any report assessing monetary penalties and/or indicating that the cited deficiencies would be turned over to the Attorney General’s Office (or similar prosecuting authority) for enforcement/prosecution; and with regards to no. (2), five (5) business days after receipt
(1)	any violation of any federal, state or local licensing or reimbursement certification statute or regulation, including Medicare or Medicaid;
(2)	any suspension, termination or restriction placed upon Tenant or any portion of the Premises, the operation of any portion of the Business or the ability to admit residents or patients; or
(3)	any violation of any other permit, approval or certification in connection with any portion of the Premises or any portion of the Business, by any federal, state or local authority, including Medicare or Medicaid.

F-1

REPORT	DUE DATE
Annual operating budget covering the operations of each Facility and the Business conducted thereon for the forthcoming fiscal year.	Thirty (30) days prior to beginning of each fiscal year

F-2

MASTER LEASE

Between

[                                                                             ],

a                                         ,

as “Landlord”

and

                                                         ,

a                                         ,

as “Tenant”

and

                                                     ,

a                                         ,

as “Guarantor”

Dated:                                 , 2006

TABLE OF CONTENTS

(continued)

			Page
1.	Term		2
2.	Rent		2
	2.1	Initial Term Rent	2
	2.2	Renewal Term Rent	4
	2.3	Payment Terms	4
	2.4	Absolute Net Lease	4
3.	Late Charges		4
4.	Security Deposit		5
	4.1	Letter of Credit	5
	4.2	Additional Security Deposit	5
5.	Taxes and Other Charges		6
	5.1	Protests	7
	5.2	Impound	7
6.	Insurance		7
	6.1	General Requirements	7
	6.2	Exceptions to Insurance Requirements	9
	6.3	Reimbursement of Landlord’s Insurance Costs	9
7.	Use, Regulatory Compliance and Preservation of Business		10
	7.1	Permitted Use; Qualified Care	10
	7.2	Regulatory Compliance	10
	7.3	Preservation of Business	10
8.	Acceptance, Maintenance, Upgrade, Alteration and Environmental		11
	8.1	Acceptance “AS IS”; No Liens	11
	8.2	Tenant’s Maintenance Obligations	11
	8.3	Upgrade Expenditures	11
	8.4	Alterations by Tenant	12
	8.5	Hazardous Materials	13
9.	Tenant Property and Security Interest		14
	9.1	Tenant Property	14
	9.2	Landlord’s Security Interest and Financing Statements	14

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TABLE OF CONTENTS

(continued)

			Page
10.	Financial, Management and Regulatory Reports		15
11.	Representations and Warranties		15
12.	Events of Default		17
13.	Remedies		19
	13.2	Tenant Repurchase/Receivership	19
	13.3	Remedies Cumulative; No Waiver	19
	13.4	Performance of Tenant’s Obligations	20
14.	Provisions on Termination		20
	14.1	Surrender of Possession	20
	14.2	Removal of Tenant Personal Property	21
	14.3	Management of Premises	21
	14.4	Holding Over	21
	14.5	Survival	21
15.	Certain Landlord Rights		21
	15.1	Entry and Examination of Records	21
	15.2	Grant Liens	22
	15.3	Estoppel Certificates	22
	15.4	Conveyance Release	22
16.	Assignment and Subletting		22
17.	Damage by Fire or Other Casualty		23
18.	Condemnation		23
19.	Indemnification		24
20.	Disputes		24
21.	Notices		25
22.	Miscellaneous		26

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EXHIBIT B

FORM OF GUARANTY AND LETTER OF CREDIT AGREEMENT

See attached

B-1

GUARANTY OF LEASE AND

LETTER OF CREDIT AGREEMENT

THIS GUARANTY OF LEASE AND LETTER OF CREDIT AGREEMENT (this “Guaranty”) is executed as of                     , 2006 by [“NEWCO”], a                                  (“Guarantor”), in favor of [“REAL ESTATE ENTITIES”], a                                                   (“Landlord”).

RECITALS

A. Landlord and [“OPERATING COMPANIES”] (“Tenant”), have entered into that certain Master Lease of even date herewith (the “Lease”). All initially capitalized terms used herein and not otherwise defined herein shall have the same meanings given such terms in the Lease.

B. Landlord and Tenant have also entered into that certain Letter of Credit Agreement (the “Letter of Credit Agreement”) of even date herewith, whereby Tenant has agreed to post and maintain a letter of credit as partial security for Tenant’s obligations under the Lease, as more particularly set forth therein.

C. Guarantor acknowledges and agrees that this Guaranty is given in accordance with the requirements of the Lease and that Landlord would not have been willing to enter into the Lease unless Guarantor was willing to execute and deliver this Guaranty.

AGREEMENT

NOW, THEREFORE, in consideration of Landlord entering into the Lease with Tenant, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor agrees as follows:

1. Guaranty.

Guarantor hereby absolutely and unconditionally guarantees to Landlord the following (collectively, the “Guaranteed Obligations”):

(a) payment in full by Tenant of all rent (including, without limitation, Minimum Rent, Additional Rent and [Supplemental Rent]) and other amounts due under the Lease in the manner and at the time prescribed in the Lease;

(b) the full, complete and timely performance by Tenant of all covenants, indemnities and other obligations under the Lease including, without limitation, any indemnity or other obligations of Tenant which survives the expiration or earlier termination of the Lease;

(c) the full, complete and timely performance by Tenant of all covenants, agreements and other obligations under the Letter of Credit Agreement;

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(d) the accuracy and truthfulness in all material respects of all of the representations and warranties made by Tenant under the Lease and Letter of Credit Agreement; and

(e) all costs of collection or enforcement incurred by Landlord in exercising any remedies provided for in the Lease or Letter of Credit Agreement at law or in equity with respect to the matters set forth in clauses (a) through (d), inclusive, above.

2. Performance by Guarantor.

If any Minimum Rent, Additional Rent, [Supplemental Rent] or other amount due under the Lease shall not be paid, or any obligation not performed as required by the Lease or Letter of Credit Agreement, then upon demand by Landlord, Guarantor shall pay, within ten (10) days of demand by Landlord, such sums and perform such obligations as required by the Lease or Letter of Credit Agreement, as applicable, without regard to:

(a) any defense, set-off, or counterclaim which any Guarantor or Tenant may have or assert;

(b) whether or not Landlord shall have instituted any suit, action or proceeding or exhausted its remedies or taken any steps to enforce any rights against Tenant or any other person to collect all or any part of such sums, either pursuant to the provisions of the Lease, Letter of Credit Agreement or at law or in equity (it being understood that this is a guaranty of payment and not collection, and Guarantor’s liability for such payment shall be primary); or

(c) any other condition or contingency.

Guarantor waives any right of exoneration and any right to require Landlord to make an election of remedies. Guarantor covenants and agrees that it shall not cause any default under the Lease or Letter of Credit Agreement. Guarantor’s performance or satisfaction of a portion, but not all, of the Guaranteed Obligations shall in no way limit, affect, modify or abridge Guarantor’s obligation for that portion of the Guaranteed Obligations which is not performed, and Landlord shall have the right to designate the manner in which any payments made by Tenant under the Lease or by any Guarantor pursuant to this Guaranty are applied to the Guaranteed Obligations. Without in any way limiting the generality of the foregoing, in the event that Landlord receives payment for, or is awarded a judgment in any suit brought to enforce any Guarantor’s covenant to perform, a portion of the Guaranteed Obligations, such payment or judgment shall in no way be deemed to release any Guarantor from its covenant to perform or satisfy any portion of the Guaranteed Obligations which is not satisfied by such payment or collection of such judgment.

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3. Guarantor’s Representations and Warranties.

Guarantor hereby represents and warrants unto Landlord that:

(a) this Guaranty constitutes a legal, valid, and binding obligation of Guarantor and is fully enforceable against Guarantor in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws of general application and of legal or equitable principles generally and covenants of good faith and fair dealing;

(b) Guarantor is the sole owner, directly or indirectly, of all of the issued and outstanding [stock/limited liability company interests] of Tenant; and

(c) this Guaranty is duly authorized, executed and delivered by and binding upon Guarantor.

Any material breach by any Guarantor of the representations and warranties set forth herein shall be a default under this Guaranty.

4. Waiver.

Guarantor hereby knowingly, voluntarily and unequivocally waives:

(a) all notice of acceptance hereof, protest, demand and dishonor, presentment and demands of any kind now or hereafter provided for by any statute or rule of law;

(b) any and all requirements that Landlord institute any action or proceeding, or exhaust any or all of Landlord’s rights, remedies or recourse, against Tenant or anyone else as a condition precedent to bringing an action against Guarantor under this Guaranty, it being expressly agreed that the liability of Guarantor hereunder shall be primary and not secondary;

(c) any defense arising by reason of any disability, insolvency, bankruptcy, lack of authority or power, death, insanity, minority, dissolution or any other defense of Tenant, its successors and assigns, Guarantor or, if applicable, any other guarantor of the Guaranteed Obligations (even though rendering same void, unenforceable or otherwise uncollectible), it being agreed that Guarantor shall remain liable hereon regardless of whether Tenant or any other such person be found not liable thereon for any reason;

(d) the benefits of any and all statutes, laws, rules or regulations applicable in the State of California or any other State which may require the prior or concurrent joinder of any other party to any action on this Guaranty or which may require the exhaustion of remedies prior to a suit on this Guaranty, all as amended from time to time;

(e) any claim Guarantor might otherwise have against Landlord by virtue of Landlord’s invocation of any right, remedy or recourse permitted it hereunder, under the Lease or Letter of Credit Agreement or otherwise available at law or equity;

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(f) any failure, omission, delay or lack on the part of Landlord or Tenant to enforce, assert or exercise any right, power or remedy conferred on Landlord or Tenant in the Lease, Letter of Credit Agreement or this Guaranty or any action on the part of Landlord granting a waiver, indulgence or extension to Tenant or Guarantor;

(g) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets of Tenant, marshaling of assets or liabilities, receiverships, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceeding affecting Tenant or any of its assets, or the disaffirmance of the Lease or Letter of Credit Agreement in any such proceeding;

(h) any release or other reduction of the Guaranteed Obligations arising as a result of the expansion, release, substitution or replacement (whether or not in accordance with terms of the Lease) of the Premises or any portion thereof; and

(i) any release or other reduction of the Guaranteed Obligations arising as a result of the release, substitution or replacement (whether or not in accordance with terms of the Letter of Credit Agreement) of any letter of credit issued and outstanding pursuant to the Letter of Credit Agreement.

This Guaranty shall apply notwithstanding any extension or renewal of the Lease, or any holdover following the expiration or termination of the Lease Term or any renewal or extension of the Lease Term.

5. Financial Statements and Legal Proceedings.

Guarantor represents and warrants that the financial statements heretofore given to Landlord by or on behalf of Guarantor:

(a) have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby;

(b) are true and correct in all material respects;

(c) present fairly the results of operations of Guarantor for the respective periods covered thereby; and

(d) reflect accurately, in all material respects, the books and records of account of Guarantor as of such dates and for such periods.

Subject to the foregoing, Guarantor hereby warrants and represents unto Landlord that any and all balance sheets and other financial statements and data, which have heretofore been given to Landlord with respect to Guarantor, fairly and accurately present the financial condition of such Guarantor through the periods and as of the date set forth therein.

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6. Subsequent Acts.

Without notice to, consideration to, or the consent of, Guarantor:

(a) the Lease, and Tenant’s rights and obligations thereunder, may be modified, amended, renewed, assigned or sublet;

(b) the Letter of Credit Agreement, and Tenant’s rights and obligations thereunder, may be modified, amended, renewed or assigned;

(c) any additional parties who are or may become liable for the Guaranteed Obligations may hereafter be released from their liability hereunder and thereon; and/or

(d) Landlord may take, or delay in taking or refuse to take, any and all action with reference to the Lease or Letter of Credit Agreement (regardless of whether same might vary the risk or alter the rights, remedies or recourse of Guarantor), including specifically the settlement or compromise of any amount allegedly due thereunder.

No such acts shall in any way release, diminish, or affect the absolute nature of Guarantor’s obligations and liabilities hereunder. Guarantor’s obligations and liabilities under this Guaranty are primary, absolute and unconditional under any and all circumstances and until the Guaranteed Obligations are fully and finally satisfied, such obligations and liabilities shall not be discharged or released, in whole or in part, by any act or occurrence which might, but for this Section 6, be deemed a legal or equitable discharge or release of Guarantor.

7. Successors and Assigns.

This Guaranty may be enforced as to any one or more breaches either separately or cumulatively, shall inure to the benefit of Landlord (and its successors and assigns) and shall be binding upon Guarantor (and its successors and assigns). All references herein to “Landlord” shall mean the above-named Landlord and any subsequent owner of Landlord’s interest in the Lease or assignee of Landlord’s rights under the Letter of Credit Agreement. No transfer by Guarantor of its obligations hereunder shall operate to release Guarantor from such obligations.

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8. Remedies Cumulative.

All rights, remedies and recourse afforded to Landlord by reason of this Guaranty, or otherwise, are separate and cumulative and may be pursued separately, successively or concurrently, as occasion therefor shall arise and are non-exclusive and shall in no way limit or prejudice any other legal or equitable right, remedy or recourse which Landlord may have.

9. Subordination.

If for any reason whatsoever Tenant now or hereafter becomes indebted to Guarantor or any Affiliate of any Guarantor, such indebtedness and all interest thereon shall at all times be subordinate in all respects to the Guaranteed Obligations. Notwithstanding anything to the contrary contained in this Guaranty or any payments made by Guarantor, Guarantor shall not have any right of subrogation in or under the Lease or the Letter of Credit Agreement or to participate in the rights and benefits accruing to Landlord thereunder, all such rights of subrogation and participation, together with all of the contractual, statutory, or common law rights which Guarantor may have to be reimbursed for any payments Guarantor may make to, or performance by Guarantor of any of the Guaranteed Obligations for the benefit of, Landlord pursuant to this Guaranty, being hereby expressly waived and released.

10. Governing Law.

This Guaranty and all rights and duties of Guarantor and Landlord arising from this Guaranty shall be governed by, construed and enforced in accordance with the internal laws of the State of California, without regard to the conflict of law rules of such state.

11. Severability.

If any provision of this Guaranty or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the remainder of this Guaranty nor the application of such provision to any other persons or circumstances shall be affected thereby, but rather the same shall be enforced to the greatest extent permitted by law.

12. Attorneys’ Fees.

In the event any legal action or proceeding is commenced to interpret or enforce the terms of, or obligations arising out of, this Guaranty, or to recover damages for the breach thereof, the party prevailing in any such action or proceedings shall be entitled to recover from the non-prevailing party all attorneys’ fees and reasonable costs and expenses incurred by the prevailing party. As used herein, “attorneys’ fees” shall mean the fees and expenses of counsel to the parties hereto, which may include printing, photocopying, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not admitted to the bar but performing services under the supervision of an attorney. The term “attorneys’ fees” shall also include, without limitation, all such fees and expenses incurred with respect to appeals, arbitrations and bankruptcy proceedings.

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13. Confirmation.

At any time, and at the request of Landlord, Guarantor shall execute and deliver to Landlord a certificate ratifying and confirming all of Guarantor’s obligations and liabilities under this Guaranty.

14. Benefit to Guarantor.

Guarantor acknowledges that it will benefit from the execution and continued existence of the Lease, and Guarantor further acknowledges that Landlord will be relying upon Guarantor’s guarantee, representations, warranties and covenants contained herein.

15. Counterparts.

This Guaranty may be executed in multiple counterparts, each of which shall be an original, but all of which shall constitute but one instrument. The signature page of any counterpart may be detached therefrom and reattached to any other counterpart to physically form a single document.

16. Notices.

All notices, requests and demands to be made hereunder to the parties hereto shall be made in writing to the addresses set forth below and shall be given by any of the following means: (a) personal service; (b) electronic communication, whether by telex, telegram or facsimile; (c) certified or registered mail, postage prepaid, return receipt requested; or (d) nationally recognized courier or delivery service. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice, demand or request sent pursuant to either subsection (a), (b) or (d) hereof shall be deemed received upon the actual delivery thereof, and, if sent pursuant to subsection (c) shall be deemed received five (5) days following deposit in the mail. Refusal to accept delivery of any notice, request or demand shall be deemed to be delivery thereof. If Guarantor is not an individual, notice may be made on any officer, general partner or principal thereof. In the event Landlord notifies Guarantor of the name and address of Landlord’s lender, Guarantor shall cause a copy of all notices delivered to Landlord by Guarantor to be concurrently therewith delivered to such lender.

If to Guarantor:	________________________________________
	________________________________________
	________________________________________
	Attn: ____________________________________
	Facsimile No: (____) ____-________

7

with a copy to:	________________________________________
	________________________________________
	________________________________________
	Attn:____________________________________
	Facsimile No: (____) ____-_____
If to Beneficiary:	Nationwide Health Properties, Inc.
	610 Newport Center Drive, Suite 1150
	Newport Beach, California 92660
	Attn: President and General Counsel
	Facsimile No: (949) 759-6887
and with a copy to:	Sherry Meyerhoff Hanson & Crance LLP
	610 Newport Center Drive, Suite 1200
	Newport Beach, California 92660
	Attn: Frank M. Crance, Esq.
	Facsimile No: (949) 719-1212

17. Incorporation of Recitals.

The Recitals set forth above are hereby incorporated by this reference and made a part of this Guaranty. Guarantor hereby represents and warrants that the Recitals are true and correct.

18. Other Facilities.

Guarantor acknowledges that a fair return to Landlord on and protection of its investment in the Premises is dependent, in part, on Tenant’s dedication to the Business and the concentration on each Facility of similar businesses of Tenant, Guarantor and their respective Affiliates in the geographical area of such Facility. Tenant further acknowledges that the diversion of residents or patient care activities from any Facility to other facilities owned or operated by Tenant, Guarantor or their respective Affiliates at any time during the Term will have a material adverse affect on the value and utility of such Facility. Therefore, Guarantor agrees that during the Term and for a period of one (1) year thereafter, neither Guarantor nor any of its Affiliates shall, without the prior written consent of Beneficiary: (i) operate, own, participate in or otherwise receive revenues from any other business providing services similar to those of the Business of any Facility within a five (5) mile radius of such Facility, (ii) except as is necessary to provide residents or patients with an alternative level of care, recommend or solicit the removal or transfer of any resident or patient from any Facility to any other nursing, health care, senior housing or retirement housing facility or divert actual or potential residents, patients or care activities of the Business conducted at any Facility to any other facilities owned or operated by Guarantor or its Affiliates or from which they receive any type of referral fees or other compensation for transfers, or (iii) except for personnel employed by [                    ] at/for [                    ] [e.g., administrative personnel employed by employed by Newco; to discuss] for other businesses any management or supervisory personnel working on or in

8

connection with any portion of the Business or any Facility. The foregoing restriction shall not apply to revenues received by [                    ] pursuant to the Management Agreements entered into by and between Tenant and [                    ] concurrently with the effectiveness of the Master Lease.

[Remainder of page intentionally left blank.]

9

IN WITNESS WHEREOF, this Guaranty has been executed and delivered by Guarantor as of the date first set forth above.

GUARANTOR:

[“NEWCO”]

By:

Name:

Title:

10

LETTER OF CREDIT AGREEMENT

This LETTER OF CREDIT AGREEMENT (this “Agreement”) is dated as of                             , 2006, by and between [“REAL ESTATE ENTITIES”], a                                                               (“Beneficiary”), and [“OPERATING ENTITIES”], a , a                              (“LC Party”).

RECITALS

A. The Beneficiary, as landlord, and LC Party, as tenant, have entered into that certain Master Lease of even date herewith (the “Lease”) whereby Beneficiary has leased to LC Party certain property as more particularly described therein. All initially capitalized terms used herein and not otherwise defined herein shall have the same meanings given such terms in the Lease.

B. To secure LC Party’s performance under the Lease, [“NEWCO”], a                                                       (“Guarantor”), has executed that certain Guaranty of Lease (the “Guaranty”) of even date herewith guarantying the full performance by LC Party under the Lease.

C. This Agreement is referred to in the Lease as the “Letter of Credit Agreement,” and LC Party entering into this Agreement is a condition precedent to Beneficiary’s obligations under the Lease.

AGREEMENT

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows:

1. Letter of Credit.

(a) Form of Letter of Credit. On or before the effective date of the Lease, LC Party shall cause [NAME OF BANK] (“Issuer”) to issue an irrevocable letter of credit in the form of Exhibit A attached hereto (the “Letter of Credit”) naming Beneficiary, as beneficiary. The Letter of Credit shall partially secure the performance by LC Party under the Lease and the performance by Guarantor under the Guaranty. As used herein, “Letters of Credit” and “Letter of Credit” shall include the Letter of Credit and all Supplemental Letters of Credit (as hereinafter defined) and Replacement Letters of Credit (as hereinafter defined).

(b) Letter of Credit Amount. The aggregate amount of all issued and outstanding Letters of Credit shall, at all times during the term hereof as provided in Section 5, be Six Million Dollars ($6,000,000), subject to increase pursuant to the terms of Sections 4.2(b) and 4.3(b) of the Lease (as may be so increased from time to time, the “Letter of Credit Amount”). Each Letter of Credit shall be for a term of not less than

-1-

twelve (12) months and a Letter of Credit shall be in effect for at least sixty (60) days after the date upon which the Term expires.

(c) Replacement Letter of Credit. The term “Reissuance Date” shall mean a date thirty (30) days prior to the expiration date of the then issued and outstanding Letter of Credit. On or before each Reissuance Date, LC Party shall cause the Issuer to issue a replacement of the then issued and outstanding Letter of Credit, which replacement shall be in the form of Exhibit A hereto (the “Replacement Letter of Credit”).

(d) Supplemental Letter of Credit. If all or any portion of any Letter of Credit is drawn against by Beneficiary, LC Party shall, within two (2) business days after demand by Beneficiary, order Issuer to issue to Beneficiary, at LC Party’s expense, a replacement or supplementary Letter of Credit in the form of Exhibit A hereto (a “Supplemental Letter of Credit”) such that at all times during the term of this Agreement, Beneficiary shall have the ability to draw on one or more Letters of Credit totaling, in the aggregate, the Letter of Credit Amount. If Issuer does not issue to Beneficiary such Supplemental Letter of Credit within seven (7) days after Beneficiary’s demand to LC Party, it shall be a default by LC Party under this Agreement and an Event of Default under the Lease.

2. Beneficiary’s Right to Draw.

(a) General. Beneficiary shall be entitled to draw on each Letter of Credit one or more times for the purpose of compensating Beneficiary for any amounts due to Beneficiary under the Lease by reason of an Event of Default occurring under the Lease or a default by Guarantor under the Guaranty. Any amount drawn by Beneficiary shall not be deemed: (i) to fix or determine the amounts to which Beneficiary is entitled to recover under the Lease, the Guaranty or otherwise; (ii) to waive or cure any default under the Lease or the Guaranty; or (iii) to limit or waive Beneficiary’s right to pursue any remedies provided for in the Lease or the Guaranty.

(b) Replacement Letters of Credit. Upon the issuance of a Replacement Letter of Credit, Beneficiary shall have the right to draw solely on such Replacement Letter of Credit and Beneficiary shall have no right to draw against the Letter of Credit which is replaced by such Replacement Letter of Credit. If LC Party fails to cause the issuance of a Replacement Letter of Credit by the Reissuance Date, then Beneficiary shall, in addition to all other rights and remedies available at law or equity, have the right to draw the full amount of the then issued and outstanding Letters of Credit.

(c) Supplemental Letters of Credit. If LC Party fails to cause the issuance of any Supplemental Letter of Credit as required pursuant to Section 1(d) hereof, then Beneficiary shall, in addition to all other rights and remedies available at law or equity, have the right to draw the full amount of the then issued and outstanding Letters of Credit.

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3. Replacement of Issuer.

(a) Supplemental and Replacement Letters of Credit. Supplemental Letters of Credit and Replacement Letters of Credit shall be issued by a financial institution acceptable to Beneficiary in the exercise of its reasonable discretion, provided, however, Beneficiary shall have no obligation to approve any financial institution which does not have net worth, as determined in accordance with generally accepted accounting principles consistently applied, (“Net Worth”) in excess of One Billion Dollars ($1,000,000,000.00) (“Issuer’s Minimum Net Worth”). Any such replacement financial institution shall be deemed to be the “Issuer” hereunder.

(b) Creditworthiness of Issuer. In the event the Net Worth of Issuer is at any time less than the Issuer’s Minimum Net Worth or if Issuer shall admit in writing its inability to pay its debts generally as they become due, shall file a petition in bankruptcy or a petition to take advantage of any insolvency statute, shall consent to the appointment of a receiver or conservator of itself or the whole or any substantial part of its property, shall file a petition or answer seeking reorganization or arrangement under the Federal Bankruptcy Laws, shall have a receiver or conservator appointed for it, or if, in Beneficiary’s reasonable determination, Issuer is not sufficiently creditworthy or shall become subject to operational supervision by any federal or state regulatory authority, then within thirty (30) days after a written demand by Beneficiary, LC Party shall obtain a Replacement Letter of Credit from another financial institution meeting the criteria set forth in Section 3(a) hereof, whereupon such replacement financial institution shall be deemed to be the “Issuer” under this Agreement.

4. Successors and Assigns.

(a) The rights of Beneficiary under this Agreement and any outstanding Letter of Credit shall be transferable and assignable to any assignee of, or successor in interest to, Beneficiary’s rights under the Lease (including any assignment for security purposes of Beneficiary’s rights under the Lease, this Agreement or any Letter of Credit) and the term “Beneficiary” as used herein shall refer to Nationwide Health Properties, Inc., and to each successor and assign of all or any portion of its interest under the Lease. LC Party and Issuer shall accept and agree to tender performance of their obligations hereunder and under any Letter of Credit to any such successor or assign of which LC Party and Issuer have been given written notice of by Beneficiary.

(b) LC Party shall not have the right to assign its rights or duties under this Agreement without the prior written consent of Beneficiary, which consent may be granted or withheld in Beneficiary’s sole discretion.

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5. Termination of Obligation to Provide Letters of Credit. The obligation of LC Party to cause the issuance of any Letters of Credit shall terminate on the date which is sixty (60) days after the date upon which the Lease Term expires, other than an expiration or termination of the Lease Term pursuant to an Event of Default.

6. Attorneys’ Fees. If any party brings any action to interpret or enforce this Agreement, or for damages for any alleged breach thereof, the prevailing party in any such action shall be entitled to reasonable attorneys’ fees and costs as awarded by the court in addition to all other recovery, damages and costs.

7. Miscellaneous. All terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The headings in this Agreement are for the convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement and all rights and duties of LC Party and Beneficiary, arising from or relating in any way to the subject matter of this Agreement shall be governed by, construed and enforced in accordance with the laws of the State of California, without regard to the conflict of law rules of such State. This Agreement may be executed in separate counterparts, each of which shall be considered as original when such party has executed and delivered to the other one or more copies of this Agreement. The Recitals set forth above are hereby incorporated by reference and made a part hereof. LC Party represents and warrants that the Recitals are true and correct in all material respects. The obligations and liabilities of LC Party hereunder shall be joint and several among all entities comprising LC Party, if more than one.

8. Notices. All notices, requests and demands to be made hereunder to the parties hereto shall be made in writing to the addresses set forth below and shall be given by any of the following means: (a) personal service; (b) electronic communication, whether by telex, telegram or telecopying; (c) certified or registered mail, postage prepaid, return receipt requested; or (d) nationally recognized courier or delivery service. Such addresses may be changed by notice to the other parties given in the same manner as provided above. Any notice, demand or request sent pursuant to either subsection (a), (b) or (d) hereof shall be deemed received upon the actual delivery thereof, and, if sent pursuant to subsection (c) shall be deemed received five (5) days following deposit in the mail. Refusal to accept delivery of any notice, request or demand shall be deemed to be delivery thereof. If LC Party is not an individual, notice may be made on any officer, general partner or principal thereof. Notice to any one co-LC Party shall be deemed notice to all co-LC Parties. In the event Beneficiary notifies LC Party of the name and address of Beneficiary’s lender, LC Party shall cause a copy of all notices delivered to Beneficiary by LC Party to be concurrently therewith delivered to such lender.

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If to LC Party:	________________________________________
	________________________________________
	________________________________________
	________________________________________
	Facsimile No.: ____________________________
With a copy to:	________________________________________
	________________________________________
	________________________________________
	________________________________________
	Facsimile No.: ____________________________
If to Beneficiary:	c/o Nationwide Health Properties, Inc.
	610 Newport Center Drive, Suite 1150
	Newport Beach, CA 92660
	Attn: President and General Counsel
	Facsimile No.: (949) 759-6887
With a copy to:	Sherry Meyerhoff Hanson & Crance LLP
	610 Newport Center Drive, Suite 1200
	Newport Beach, California 92660
	Attn: Frank M. Crance, Esq.
	Facsimile No.: (949) 719-1212

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IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties as of the date first set forth above.

“LC PARTY”

[“OPERATING ENTITIES”]

_______________________________________

a ____________________ __________________

By:

Name:

Title:

“BENEFICIARY”

[“REAL ESTATE ENTITIES”]

_______________________________________

a ____________________ __________________

By:

Name:

Title:

S-1

ACCEPTED AND AGREED TO:

“GUARANTOR”

[“NEWCO”]

_______________________________________

a ____________________ __________________

By:

Name:

Title:

S-2

EXHIBIT A

[NAME] BANK

IRREVOCABLE LETTER OF CREDIT NO.                         

DATE:                             

EXPIRATION DATE:                             

[Real Estate Entities]

c/o Nationwide Health Properties, Inc.

610 Newport Center Drive, Suite 1150

Newport Beach, CA 92660

Ladies and Gentlemen:

We hereby establish our Irrevocable Letter of Credit in your favor for the account of                                  (“Customer”) available by your draft(s) on us payable at sight in an amount not to exceed a total of                              Dollars ($            ) when accompanied by the following documents:

1. A certificate which on its face appears to have been executed by an officer of Nationwide Health Properties, Inc., a Maryland corporation (“Agent”), as agent for [Real Estate Entities] (“Beneficiary”), stating the amount which Beneficiary is drawing and that one or more of the following events has occurred: (a) an Event of Default has occurred under the Master Lease dated                                     , 2006 between Beneficiary and Customer (the “Lease”); (b) a default under that certain Guaranty of Lease dated             , 2006, executed by [Newco]                                              , a                                          for the benefit of Beneficiary; or (c) a default has occurred under that certain Letter of Credit Agreement dated                                     , 2006, by and between Customer and Beneficiary.

2. The original Letter of Credit must accompany all drafts unless a partial draw is presented, in which case the original must accompany final draft.

This Letter of Credit will be duly honored by us at sight upon delivery of the statement set forth above without inquiry as to the accuracy of such statement and regardless of whether Customer disputes the content of such statement.

This Letter of Credit may be transferred or assigned by Beneficiary to any successor or assign of Beneficiary’s interests under the Lease or to any lender obtaining a lien or security interest in the property covered by the Lease. Each draft hereunder by any assignee or

Exhibit A - 1

successor shall be accompanied by a copy of the fully executed documents or judicial orders evidencing such encumbrance, assignment or transfer.

Any draft drawn hereunder shall be in the form attached hereto as Schedule 1. Partial drawings are permitted with the amount of the Letter of Credit being reduced, without amendment, by the amount(s) drawn hereunder.

This Letter of Credit shall expire at 2:00 p.m., California time, on the expiration date set forth above. Notwithstanding the foregoing, this Letter of Credit shall be automatically extended for additional periods of one year from the present or each future expiration date unless we have notified you in writing, not less than ninety (90) days before any such expiration date, that we elect not to renew this Letter of Credit. Our notice of any such election shall be sent by express, registered or certified mail to the address shown above.

Except so far as otherwise expressly stated, this Letter of Credit is subject to the “Uniform Customs and Practice for Documentary Credits (1/1/94 Revision), International Chamber of Commerce Publication No. 500.” We hereby agree with you and all persons negotiating such drafts that all drafts drawn and negotiated in compliance with the terms of this Letter of Credit will be duly honored upon presentment and delivery of the documents specified above by certified or registered mail to                                     ,                             , if negotiated on or before the expiration date shown above.

Very truly yours,

Authorized Signature

Exhibit A - 2

SCHEDULE 1

SIGHT DRAFT

TO:

____________________________

____________________________

____________________________

Attention: ____________________

PAY TO THE ORDER OF:

[NAME OF BENEFICIARY]

c/o [NAME OF BANK]

[ADDRESS OF BANK]

ABA No. [INSERT ABA NO.]

for the benefit of [NAME OF BENEFICIARY]

Account No. [INSERT ACCOUNT NO.]

THE SUM OF:                                  Dollars ($                    )

DRAWN ON:

Irrevocable Letter of Credit No.             

dated                     , 200     issued by

                                     Bank

[BENEFICIARY]

By:

Name:

Title:

SCHEDULE 1 - 1