2.5% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2025 PURCHASE AGREEMENT

 

<PAGE>

 

                                                                    EXHIBIT 10.2

 

                                                                  EXECUTION COPY

 

                                  $150,000,000

 

                         GENESIS HEALTHCARE CORPORATION

 

                 2.5% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES

                                    DUE 2025

 

                               PURCHASE AGREEMENT

 

                                                               February 24, 2005

 

Wachovia Capital Markets, LLC

   As Representative of the Several

   Initial Purchasers named in Schedule

   I hereto

c/o Wachovia Capital Markets, LLC

301 South College Street, 4th Floor

Charlotte, North Carolina 28288-0735

 

Dear Sirs and Mesdames:

 

      Genesis HealthCare Corporation, a Pennsylvania corporation (the

"COMPANY"), confirms its agreement with respect to the proposed issuance and

sale to the several purchasers named in Schedule I hereto (the "INITIAL

PURCHASERS") of $150,000,000 principal amount of the Company's 2.5% Convertible

Senior Subordinated Debentures Due 2025 (the "FIRM SECURITIES") to be issued

pursuant to the provisions of an Indenture to be dated as of March 2, 2005 (the

"INDENTURE") among the Company, the Guarantors (as defined below), and The Bank

of New York, as Trustee (the "TRUSTEE"). The Company also proposes to issue and

sell to the Initial Purchasers not more than an additional $30,000,000 principal

amount of its 2.5% Convertible Senior Subordinated Debentures Due 2025 (the

"ADDITIONAL SECURITIES", and together with the Firm Securities, the

"SECURITIES") if and to the extent that you shall have determined to exercise,

on behalf of the Initial Purchasers, the right to purchase such Additional

Securities granted to the Initial Purchasers in Section 2 hereof. Subject to the

provisions of the Indenture, the Securities will be fully and unconditionally

guaranteed (the "SUBSIDIARY GUARANTEES") on an unsecured senior subordinated

basis by all of the domestic subsidiaries of the Company listed on the signature

pages to this Agreement and certain of the Company's future domestic

subsidiaries (collectively, the "GUARANTORS"). The Securities will be

convertible into shares of Common Stock, par value $0.01 per share, of the

Company (the "COMMON STOCK", and such shares into which the Securities are

convertible, the "UNDERLYING SECURITIES").

 

<PAGE>

 

      Wachovia Capital Markets, LLC has agreed to act as the sole book-running

manager and as Representative of the Initial Purchasers (in such capacity, the

"REPRESENTATIVE") in connection with the offering and sale of the Securities.

 

      The Securities, the Underlying Securities and the Subsidiary Guarantees

will be offered without being registered under the Securities Act of 1933, as

amended (the "SECURITIES ACT"), to qualified institutional buyers in compliance

with the exemption from registration provided by Rule 144A under the Securities

Act.

 

      The Initial Purchasers and their direct and indirect transferees will be

entitled to the benefits of a Registration Rights Agreement (the "REGISTRATION

RIGHTS AGREEMENT"), to be dated the Closing Date (as defined herein) among the

Company, the Guarantors and the Initial Purchasers.

 

      The Company has prepared and delivered to each Initial Purchaser copies of

a preliminary offering memorandum dated February 23, 2005 (the "PRELIMINARY

MEMORANDUM") and has prepared and will deliver to each Initial Purchaser, on the

date hereof or the next succeeding day, copies of a final offering memorandum

dated February 24, 2005 (the "FINAL MEMORANDUM"), each for use by such Initial

Purchaser in connection with its solicitation of purchases of, or offering of,

the Securities. "MEMORANDUM" means, with respect to any date or time referred to

in this Agreement, the most recent offering memorandum (whether the Preliminary

Memorandum or the Final Memorandum, or any amendment or supplement to either

such document), including exhibits thereto and any documents incorporated by

reference therein, which has been prepared and delivered by the Company to the

Initial Purchasers in connection with their solicitation of purchases of, or

offering of, the Securities. The terms "SUPPLEMENT", "AMENDMENT" and "AMEND" as

used herein with respect to a Memorandum shall include all documents

incorporated by reference in the Memorandum that are filed subsequent to the

date of the Memorandum with the Securities and Exchange Commission (the

"COMMISSION") pursuant to the Securities Exchange Act of 1934, as amended (the

"EXCHANGE ACT").

 

      All references in this Agreement to the Common Stock shall be deemed to

include the rights evidenced by such Common Stock to the extent provided in the

Rights Agreement dated as of November 18, 2003 between the Company and

StockTrans, Inc., as rights agent.

 

      1. Representations and Warranties. The Company and each of the Guarantors

jointly and severally represent and warrant to, and agree with, you that:

 

            (a) (i) Each document, if any, filed or to be filed pursuant to the

       Exchange Act and incorporated by reference in the Memorandum complied when

      filed or will comply when so filed in all material respects with the

      Exchange Act and the applicable rules and regulations of the

 

                                        2

<PAGE>

 

      Commission thereunder and (ii) the Memorandum, in the form used by the

      Initial Purchasers to confirm sales, as of its date and the Closing Date

      (as defined in Section 4), will not contain any untrue statement of a

      material fact or omit to state a material fact necessary to make the

      statements therein, in the light of the circumstances under which they

      were made, not misleading, except that the representations and warranties

      set forth in this paragraph do not apply to statements or omissions in the

      Memorandum based upon information relating to any Initial Purchaser

      furnished to the Company in writing by such Initial Purchaser through you

      expressly for use therein.

 

            (b) The Memorandum has been prepared by the Company for use by the

      Initial Purchasers as contemplated herein. No order or decree preventing

      the use of the Memorandum, or any order asserting that the transactions

      contemplated by this Agreement are subject to the registration

      requirements of the Securities Act has been issued and no proceeding for

      that purpose has commenced or is pending or, to the knowledge of the

      Company or any of the Guarantors, is contemplated.

 

            (c) The Company has been duly incorporated, is validly existing as a

      corporation in good standing under the laws of the Commonwealth of

      Pennsylvania, has the corporate power and authority to own its property

      and to conduct its business as described in the Memorandum and is duly

      qualified to transact business and is in good standing in each

      jurisdiction in which the conduct of its business or its ownership or

      leasing of property requires such qualification, except to the extent that

      the failure to be so qualified or be in good standing would not have a

      material adverse effect on the condition, financial or otherwise, or in

      the earnings, business affairs or business prospects of the Company and

      its subsidiaries, considered together as one enterprise, whether or not

      arising in the ordinary course of business (a "MATERIAL ADVERSE EFFECT").

 

            (d) Each of the subsidiaries of the Company has been duly

      incorporated, organized or formed, as the case may be, and is validly

      existing as a corporation, limited liability company or limited

      partnership, as the case may be, in good standing under the laws of its

      jurisdiction of incorporation, organization or formation; each of the

       subsidiaries of the Company has power and authority to own, lease and

      operate its properties and to conduct its business as described in the

      Memorandum, is duly qualified as a foreign entity to transact business and

      is in good standing in each jurisdiction in which such qualification is

      required, whether by reason of the ownership or leasing of property or the

      conduct of business, except where the failure so to qualify or to be in

      good standing would not have a Material Adverse Effect; the issued and

      outstanding capital stock or ownership interests, as the case may be, of

      each of the Company's subsidiaries has been duly authorized and validly

      issued, is fully paid and non-assessable, and, other than those

      subsidiaries listed in Schedule 1(d),

 

                                       3

<PAGE>

 

      is owned by the Company, directly or indirectly, free and clear of any

      security interest, mortgage, pledge, lien, encumbrance or claim, other

       than such security interests, mortgages, pledges, liens, encumbrances or

      claims pursuant to the Company's Senior Credit Agreement dated as of

      December 1, 2003, as amended; none of the outstanding shares of capital

      stock or ownership interests, as the case may be, of any of the Company's

      subsidiaries held directly or indirectly by the Company was issued in

      violation of the preemptive or similar rights of any securityholder of

      such subsidiary.

 

            (e) This Agreement has been duly authorized, executed and delivered

      by the Company and each of the Guarantors.

 

            (f) The authorized capital stock of the Company conforms as to legal

      matters to the description thereof contained in the Memorandum.

 

            (g) The shares of Common Stock outstanding prior to the issuance of

      the Securities have been duly authorized and are validly issued, fully

      paid and non-assessable.

 

            (h) The Company and each of the Guarantors have all requisite

      corporate, limited liability company, partnership or limited liability

      partnership, as the case may be, power and authority to enter into this

      Agreement and perform their respective obligations hereunder.

 

            (i) The Company has all requisite corporate power and authority to

      execute, issue and deliver the Securities and perform its obligations

      thereunder. The Firm Securities and the Additional Securities have been

      duly authorized and, when executed and authenticated in accordance with

      the provisions of the Indenture and delivered to and paid for by the

      Initial Purchasers in accordance with the terms of this Agreement, will be

      valid and binding obligations of the Company, enforceable in accordance

      with their terms, subject to applicable bankruptcy, fraudulent conveyance,

      insolvency, reorganization, moratorium and similar laws affecting

      creditors' rights generally and equitable principles of general

      applicability and an implied covenant of good faith and fair dealing, and

      will be entitled to the benefits of the Indenture and the Registration

      Rights Agreement.

 

            (j) The Company has all requisite corporate power and authority to

      execute, issue and deliver the Underlying Securities. The Underlying

      Securities issuable upon conversion of the Securities have been duly

      authorized and reserved and, when issued upon conversion of the Securities

      in accordance with the terms of the Securities, will be validly issued,

      fully paid and non-assessable, and the issuance of the Underlying

      Securities will not be subject to any preemptive or similar rights.

 

                                       4

<PAGE>

 

            (k) Each of the Guarantors has all requisite corporate, limited

      liability company, partnership or limited liability partnership, as the

      case may be, power and authority to execute, issue and deliver the

      Subsidiary Guarantees and perform its obligations thereunder. The

      Subsidiary Guarantees have been duly authorized by each of the Guarantors

      and when the Subsidiary Guarantees are duly endorsed on the Securities in

      accordance with the terms of the Indenture and delivered to and paid for

      by the Initial Purchasers pursuant to this Agreement on the Closing Date,

      assuming due authorization of the Securities by the Trustee, such

      Subsidiary Guarantees will constitute legally valid and binding

      obligations of the respective Guarantors, entitled to the benefits of the

      Indenture and enforceable against the respective Guarantors in accordance

      with their terms, subject to applicable bankruptcy, fraudulent conveyance,

      insolvency, reorganization, moratorium and similar laws affecting

      creditors' rights generally and equitable principles of general

      applicability and an implied covenant of good faith and fair dealing.

 

            (l) The Company and each of the Guarantors have all requisite

      corporate, limited liability company, partnership or limited liability

      partnership, as the case may be, power and authority to enter into the

      Indenture and the Registration Rights Agreement, and to perform their

      respective obligations thereunder. Each of the Indenture and the

      Registration Rights Agreement has been duly authorized, and when executed

      and delivered by the Company and each of the Guarantors, will be a valid

      and binding agreement of the Company and each of the Guarantors,

      enforceable in accordance with its terms, subject to applicable

      bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium

      and similar laws affecting creditors' rights generally and equitable

      principles of general applicability and an implied covenant of good faith

      and fair dealing and except as rights to indemnification and contribution

      under the Registration Rights Agreement may be limited by applicable law.

 

            (m) The execution and delivery by the Company and each of the

      Guarantors, and the performance by the Company and each of the Guarantors,

      as the case may be, of their obligations under, this Agreement, the

      Indenture, the Registration Rights Agreement, the Securities and the

      Subsidiary Guarantees will not result in (i) the violation of any

      provision of applicable law or the certificate of incorporation or by-laws

      or other constitutive documents of the Company or any such Guarantor, or

      any judgment, order or decree of any governmental body, agency or court

      having jurisdiction over any such entity, or (ii) breach of, or default

      under, any agreement or other instrument binding upon any such entity that

      is material to the Company and its subsidiaries, considered together as

      one enterprise, or to which any of the property or assets of any such

      entity is subject, and no consent, approval, authorization or order of, or

      qualification with, any governmental body or agency is required for the

 

                                       5

<PAGE>

 

      performance by any such entity of their respective obligations under this

      Agreement, the Indenture, the Registration Rights Agreement, the

      Securities and the Subsidiary Guarantees, as the case may be, except such

      as may be required by the securities or Blue Sky laws of the various

      states in connection with the offer and sale of the Securities, Subsidiary

      Guarantees and Underlying Securities and by Federal and state securities

      laws with respect to the conversion of the Securities and the obligations

      of the Company and the Guarantors under the Registration Rights Agreement.

 

            (n) The subsidiaries of the Company set forth on Schedule II hereto

      comprise approximately 64% of the Company's total revenue under generally

      accepted accounting principles in the United States for the fiscal year

      ended September 30, 2004, as reported in the Company's annual report on

      Form 10-K for such fiscal year, and no other subsidiary of the Company

      represented greater than 3% of the Company's total revenue under generally

      accepted accounting principles in the United States for such fiscal year.

 

            (o) Except for the registration rights contained in the Registration

      Rights Agreement, the Company has not granted or agreed to grant to any

      Person any rights (including "piggy-back" registration rights) to have any

      securities of the Company registered with the Commission or any other

      governmental authority that have not been satisfied.

 

            (p) There are no voting agreements, voting trusts, proxies or other

      agreements or understandings with respect to the voting of any capital

       stock of the Company or any of its subsidiaries to which the Company or

      any of its subsidiaries is a party.

 

            (q) Except as otherwise disclosed in the Memorandum, subsequent to

      the respective dates as of which information is given in the Memorandum,

      (i) there has not occurred any material adverse change in the condition,

      financial or otherwise, or in the earnings, business affairs or business

      prospects of the Company and its subsidiaries, considered together as one

      enterprise, whether or not arising in the ordinary course of business;

      (ii) the Company and its subsidiaries, considered as one entity, have not

      incurred any material liability or obligation, indirect, direct or

      contingent, not in the ordinary course of business nor entered into any

      material transaction or agreement not in the ordinary course of business;

      and (iii) there has been no dividend or distribution of any kind declared,

      paid or made by the Company or, except for dividends paid to the Company

      or its subsidiaries, any of its subsidiaries on any class of capital stock

      or repurchase or redemption by the Company or any of its subsidiaries of

      any class of capital stock.

 

                                        6

<PAGE>

 

            (r) None of the Company or any of its subsidiaries is (i) in

      violation of its charter or by-laws or its partnership or operating

      agreement, as applicable; (ii) in default, and no event has occurred

      which, with notice or the lapse of time or both, would constitute such a

      default, in the due performance or observance of any obligation,

      agreement, covenant or condition contained in any indenture, loan

      agreement, mortgage, lease or other agreement or instrument that is

      material to the Company and its subsidiaries, considered together as one

      enterprise and to which such entity is a party or by which such entity or

      its property is bound; or (iii) to the knowledge of the Company, is in

      violation in any respect of any law, ordinance, governmental rule,

      regulation or court decree to which it or its property or assets may be

      subject, except for such defaults that would not, singly or in the

      aggregate, have a Material Adverse Effect.

 

            (s) No subsidiary of the Company is currently prohibited, directly

      or indirectly, from paying dividends to the Company, from making any other

      distribution on such subsidiary's capital stock, from repaying to the

      Company any loans or advances to such subsidiary from the Company or from

      transferring any of such subsidiary's property or assets to the Company or

      any other subsidiary of the Company, except as described in the

      Memorandum.

 

            (t) There are no legal or governmental proceedings pending or, to

      the knowledge of the Company, threatened to which the Company or any of

      its subsidiaries is a party or to which any of the properties of such

      entity is subject other than proceedings accurately described in all

      material respects in the Memorandum and proceedings that would not have a

      Material Adverse Effect or a material adverse effect on the ability of the

      Company or any of the Guarantors to perform their respective obligations

      under the Purchase Agreement, the Indenture, the Registration Rights

      Agreement, the Securities and the Subsidiary Guarantees or to consummate

      the transactions contemplated therein.

 

            (u) The Company and each of its subsidiaries (i) are in compliance

      with any and all applicable foreign, federal, state and local laws and

      regulations relating to the protection of human health and safety, the

      environment or hazardous or toxic substances or wastes, pollutants or

      contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,

      licenses or other approvals required of it under applicable Environmental

      Laws to conduct their respective businesses, (iii) are in compliance with

      all terms and conditions of any such permit, license or approval, (iv) are

      in compliance with any applicable provision of the Employee Retirement

      Income Security Act of 1974, as amended, ("ERISA") or the rules and

      regulations promulgated thereunder and (v) are in compliance with any

      applicable provision of the Foreign Corrupt Practice Act of 1977, as

      amended, or the rules and regulations promulgated thereunder, except where

      such noncompliance with Environmental Laws, failure to receive

 

                                       7

<PAGE>

 

      required permits, licenses or other approvals, failure to comply with the

      terms and conditions of such permits, licenses or approvals, or

      noncompliance with ERISA or the Foreign Corrupt Practices Act of 1977, as

      amended, would not in each case, singly or in the aggregate, have a

      Material Adverse Effect.

 

            (v) There are no costs or liabilities associated with Environmental

      Laws (including, without limitation, any capital or operating expenditures

      required for clean-up, closure of properties or compliance with

      Environmental Laws or any permit, license or approval, any related

      constraints on operating activities and any potential liabilities to third

      parties) which would, singly or in the aggregate, have a Material Adverse

      Effect.

 

            (w) The Company is not, and after giving effect to the offering and

      sale of the Securities and the application of the proceeds thereof as

      described in the Memorandum will not be, an "investment company" as such

      term is defined in the Investment Company Act of 1940, as amended.

 

            (x) Neither the Company nor any of its affiliates (as defined in

      Rule 501(b) of Regulation D under the Securities Act, each an "AFFILIATE")

      has directly, or through any agent, (i) sold, offered for sale, solicited

      offers to buy or otherwise negotiated in respect of, any security (as

      defined in the Securities Act) which is or will be integrated with the

      sale of the Securities in a manner that would require the registration

      under the Securities Act of the Securities, the Underlying Securities and

      the Subsidiary Guarantees or (ii) offered, solicited offers to buy or sold

      the Securities by any form of general solicitation or general advertising

      (as those terms are used in Regulation D under the Securities Act) or in

      any manner involving a public offering within the meaning of Section 4(2)

      of the Securities Act.

 

            (y) Based on the representations and warranties of the Initial

      Purchasers and compliance with the covenants by the Initial Purchasers as

      set forth in Section 7 of this Agreement, it is not necessary in

      connection with the offer, sale and delivery of the Securities to the

      Initial Purchasers in the manner contemplated by this Agreement to

      register the Securities, the Subsidiary Guarantees or the Underlying

       Securities under the Securities Act or to qualify the Indenture under the

      Trust Indenture Act of 1939, as amended.

 

            (z) The Securities satisfy the requirements set forth in Rule

      144A(d)(3) under the Securities Act.

 

             (aa) The Company has established and maintained disclosure controls

      and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15) which

      (i) are designed to ensure that material information relating to the

      Company and its subsidiaries is made known to its chief executive

 

                                       8

<PAGE>

 

      officer and chief financial officer by others within the Company and its

      subsidiaries; (ii) have been evaluated for effectiveness as of the date of

      the most recent annual and quarterly reports of the Company; and (iii) are

      effective in all material respects to perform the functions for which they

      were established.

 

            (bb) Based on the evaluation of its disclosure controls and

       procedures, and other than as disclosed in the Company's quarterly report

      for the quarter ended December 31, 2004, the Company is not aware of (i)

      any significant deficiency in the design or operation of its internal

      controls which could adversely affect its ability to record, process,

      summarize and report financial data or any material weaknesses in internal

      controls; or (ii) any fraud, whether or not material, that involves

      management or other employees who have a significant role in its internal

      controls.

 

            (cc) Since the date of the most recent evaluation of such disclosure

      controls and procedures, and other than as disclosed in the Company's

      quarterly report for the quarter ended December 31, 2004, there have been

      no significant changes in internal controls or in other factors that could

      significantly affect internal controls, including any corrective actions

      with regard to significant deficiencies and material weaknesses.

 

            (dd) The Company has complied and will comply with the currently

      applicable provisions of the Sarbanes-Oxley Act of 2002, and to the best

      of the Company's knowledge, its directors and officers in their capacities

      as such have complied and will comply with the currently applicable

      provisions of the Sarbanes-Oxley Act of 2002.

 

            (ee) The books, records and accounts of the Company and each of its

      subsidiaries accurately and fairly reflect, in reasonable detail, the

      transactions in, and dispositions of, the assets of, and the results of

      operations of, such entity. The Company and each of its subsidiaries,

      taken as a whole, maintain a system of accounting controls sufficient to

      provide reasonable assurances that (a) transactions are executed in

      accordance with management's general or specific authorization, (b)

      transactions are recorded as necessary to permit preparation of financial

      statements in conformity with generally accepted accounting principles in

      the United States and to maintain accountability for assets and (c) access

      to assets is permitted only in accordance with management's general or

      specific authorization.

 

            (ff) The Company and each of its subsidiaries own or possess, or own

      or possess licenses or other rights to use, all material patents, patent

      rights, licenses, inventions, copyrights, know-how (including trade

      secrets and other unpatented and/or unpatentable proprietary or

      confidential information, systems or procedures), trademarks, service

 

                                       9

<PAGE>

 

      marks and trade names (collectively, the "INTELLECTUAL PROPERTY")

      currently employed or required by such entity in connection with the

      business currently conducted by such entity as described in the

      Memorandum, except such as the failure to so own or possess would not

      have, singly or in the aggregate, a Material Adverse Effect.

 

             (gg) The Company and each of its subsidiaries have all material

      permits, licenses, consents, exemptions, franchises, authorizations and

      other approvals (each, an "AUTHORIZATION") of, and have made all filings

      with and notices to, all appropriate federal, state, local or foreign

      governmental or regulatory authorities and self regulatory organizations

      and all courts and other tribunals, as are necessary to own, lease,

      license and operate their respective properties and to conduct their

      respective businesses, except to the extent the failure to have any such

      Authorization or to make any such filing or notice would not, singly or in

      the aggregate, have a Material Adverse Effect. Each such Authorization is

      valid and in full force and effect and such entity is in compliance with

      all the terms and conditions thereof and with the rules and regulations of

      the authorities and governing bodies having jurisdiction with respect

      thereto; and no event has occurred (including, without limitation, the

      receipt of any notice from any authority or governing body) which allows

      or, after notice or lapse of time or both, would allow, revocation,

      suspension or termination of any such Authorization or results or, after

      notice or lapse of time or both, would result in any other impairment of

      the rights of the holder of any such Authorization; and such

      Authorizations contain no restrictions that are burdensome to such entity;

      except to the extent such failure to be valid and in full force and effect

      or to be in compliance, the occurrence of any such event or the presence

      of any such restriction would not, singly or in the aggregate, have a

      Material Adverse Effect.

 

            (hh) There are no outstanding subscriptions, rights, warrants,

      options, calls or convertible securities, granted or issued by the Company

      or any of its subsidiaries relating to or entitling any person to purchase

      or otherwise to acquire any shares of the capital stock of such entity,

      except for options and restricted stock granted to directors and employees

      of the Company in the ordinary course of business or as described in the

      Memorandum.

 

            (ii) The financial statements of the Company included or

      incorporated by reference in the Memorandum, together with related

      schedules and notes, present fairly the financial position, results of

      operations and changes in financial position of the Company on the basis

      stated therein at the respective dates or for the respective periods to

      which they apply; such statements and related schedules and notes have

      been prepared in accordance with generally accepted accounting principles

      in the United States consistently applied throughout the periods involved;

      and the other financial and statistical information and data of the

      Company

 

                                       10

<PAGE>

 

      set forth in the Memorandum are, in all material respects, accurately

      presented and prepared on a basis consistent with such financial

      statements and the books and records of the Company. The financial

      information relating to the Company set forth under the captions "Summary-

      Summary Financial and Operating Data" and "Capitalization" in the

      Memorandum are derived from the accounting records of the Company and its

      subsidiaries and fairly present, on the basis stated in the Memorandum,

      the information included therein. The pro forma financial information of

      the Company and its subsidiaries included or incorporated by reference in

      the Memorandum present fairly the information contained therein, have been

      prepared in accordance with the Commission's rules and guidelines with

      respect to pro forma financial information and have been properly

      presented on the bases described therein, and the assumptions used in the

      preparation thereof are reasonable and the adjustments used therein are

      appropriate to give effect to the transactions and circumstances referred

      to therein.

 

            (jj) KPMG LLP, who have certified certain financial statements of

      the Company, whose reports appear or are incorporated by reference in the

      Memorandum and who have delivered the letters referred to in Section 7

      hereof, are independent public accountants as required by the Securities

      Act and the rules and regulations of the Commission.

 

            (kk) There are no existing or, to the knowledge of the Company,

      threatened labor disputes with the employees of the Company or any of its

      subsidiaries which would have a Material Adverse Effect.

 

            (ll) The statements relating to legal matters, documents or

      proceedings included in the Memorandum under the captions "Description of

      Capital Stock", "Business -- Revenue Sources" and "Business -- Government

      Regulation" and in "Item 3 -- Legal Proceedings" of the Company's most

      recent annual report on Form 10-K incorporated by reference in the

      Memorandum, and in "Part II Item 1 -- Legal Proceedings" of the Company's

      most recent quarterly report on Form 10-Q incorporated by reference in the

      Memorandum, insofar as such descriptions constitute a summary of the legal

      matters, documents or proceedings referred to therein, fairly summarize in

      all material respects such matters, documents or proceedings.

 

            (mm) Neither the Company, nor to its knowledge, any of its officers,

      directors or affiliates has taken, or will take, directly or indirectly,

      any action designed to or which might reasonably be expected to cause or

      result in, or which has constituted or which might reasonably be expected

      to constitute, the stabilization or manipulation of the price of the

      Common Stock or any security convertible into or exchangeable for Common

      Stock to facilitate the sale or resale of any of the Securities.

 

                                       11

<PAGE>

 

            (nn) The Company and each of its subsidiaries have filed all

      Federal, state, local and foreign tax returns which are required to be

      filed through the date hereof (except where the failure to so file would

      not be reasonably likely to have a Material Adverse Effect), which returns

      are true and correct in all material respects, or have received extensions

      thereof, and have paid all taxes shown on such returns and all assessments

      received by them to the extent that the same are material and have become

      due. There are no tax audits or investigations pending, which if adversely

      determined, would have a Material Adverse Effect.

 

            (oo) The Company and each of its subsidiaries are insured against

      such losses and risks and in such amounts containing such deductibles and

      covering such risks as are customary in the businesses in which they are

      engaged. None of the Company or any of its subsidiaries has reason to

      believe that it will not be able to renew its existing insurance coverage

      as and when such coverage expires or to obtain similar coverage from

      similar insurers as may be necessary to continue its business at a cost

      that would not have a Material Adverse Effect.

 

            (pp) None of the Company or any of its subsidiaries or, to the

      knowledge of the Company and its subsidiaries, any other person associated

      with or acting on behalf of such entity including, without limitation, any

      director, officer, agent or employee of such entity has, directly or

      indirectly, while acting on behalf of such entity (i) used any corporate

      funds for unlawful contributions, gifts, entertainment or other unlawful

      expenses relating to political activity; (ii) made any unlawful payment to

      foreign or domestic government officials or employees or to foreign or

      domestic political parties or campaigns from corporate funds; (iii)

      violated any provision of the Foreign Corrupt Practices Act of 1977, as

      amended; or (iv) made any other unlawful payment.

 

            (qq) The Company and each of its subsidiaries have good and

      marketable title in fee simple to all real property and good and

      marketable title to all personal property owned by such entity, in each

      case free and clear of all liens, encumbrances and defects, other than

      mortgages with respect to real property owned by the Company or its

       subsidiaries in the ordinary course of business, except such as are

      described in the Memorandum or such as would not have a Material Adverse

      Effect. Any real property and buildings held under lease by such entity is

      held by it under valid, subsisting and enforceable leases with such

      exceptions as are not material and do not interfere with the use made and

      proposed to be made of such property and buildings by such entity.

 

            (rr) The industry, statistical and market-related data included or

      incorporated by reference in the Memorandum are derived from sources that

      the Company reasonably and in good faith believes to be accurate,

 

                                       12

<PAGE>

 

      reasonable and reliable, and such data agrees with the sources from which

      they were derived.

 

            (ss) The Indenture, the Registration Rights Agreement, the

      Securities, the Underlying Securities and the Subsidiary Guarantees will

      conform as of the Closing Date in all material respects to the

      descriptions thereof contained in the Memorandum.

 

            (tt) There is no document, contract or other agreement of a

      character required to be filed under the Exchange Act which is not

      described or filed as required by the Exchange Act or the rules and

      regulations of the Commission thereunder. Each description of a contract,

      document or other agreement in the Memorandum fairly reflects in all

      respects the material terms of the underlying document, contract or

      agreement. Each agreement described in the Memorandum or incorporated by

      reference is in full force and effect and is valid and enforceable by and

      against the Company or a subsidiary, as the case may be, in accordance

      with its terms.

 

            (uu) Each certificate signed by any officer of the Company or any

      Guarantor and delivered to the Initial Purchasers or counsel to the

      Initial Purchasers shall be deemed to be a representation and warranty by

      the Company or such Guarantor to the Initial Purchasers as to the matters

      covered thereby.

 

      2. Agreements to Sell and Purchase. The Company hereby agrees to sell to

the several Initial Purchasers, and each Initial Purchaser, upon the basis of

the representations and warranties herein contained, but subject to the

conditions hereinafter stated, agrees, severally and not jointly, to purchase

from the Company the respective principal amount of Firm Securities set forth in

Schedule I hereto opposite its name at a purchase price of 97.3% of the

principal amount thereof (the "PURCHASE PRICE").

 

      On the basis of the representations and warranties contained in this

Agreement, and subject to its terms and conditions, the Company agrees to sell

to the Initial Purchasers the Additional Securities, and the Initial Purchasers

shall have the right to purchase, severally and not jointly, up to $30,000,000

principal amount of Additional Securities at the Purchase Price plus accrued

interest, if any, to the date of payment and delivery. You may exercise this

right on behalf of the Initial Purchasers in whole or from time to time in part

by giving written notice not later than 30 days after the Closing Date. Any

exercise notice shall specify the principal amount of Additional Securities to

be purchased by the Initial Purchasers and the date on which such Additional

Securities are to be purchased. Each purchase date must be at least one business

day after the written notice is given and may not be earlier than the closing

date for the Firm Securities nor later than ten business days after the date of

such notice. On each day, if any, that Additional Securities are to be purchased

(an "OPTION CLOSING DATE"), each

 

                                        13

<PAGE>

 

Initial Purchaser agrees, severally and not jointly, to purchase the principal

amount of Additional Securities (subject to such adjustments to eliminate

fractional Securities as you may determine) that bears the same proportion to

the total principal amount of Additional Securities to be purchased on such

Option Closing Date as the principal amount of Firm Securities set forth in

Schedule I opposite the name of such Initial Purchaser bears to the total

principal amount of Firm Securities.

 

      The Company hereby agrees that, without the prior written consent of the

Representative, on behalf of the Initial Purchasers, it will not, during the

period ending 90 days after the date of the Memorandum, (i) offer, pledge, sell,

contract to sell, sell any option or contract to purchase, purchase any option

or contract to sell, grant any option, right or warrant to purchase, lend, or

otherwise transfer or dispose of, directly or indirectly, any shares of Common

Stock or any securities convertible into or exercisable or exchangeable for

Common Stock or (ii) enter into any swap or other arrangement that transfers to

another, in whole or in part, any of the economic consequences of ownership of

the Common Stock, whether any such transaction described in clause (i) or (ii)

above is to be settled by delivery of Common Stock or such other securities, in

cash or otherwise. The foregoing sentence shall not apply to (A) the sale of the

Securities under this Agreement, (B) the granting of options and restricted

stock pursuant to the Company's employee benefit plans existing on the date

hereof or (C) the issuance by the Company of any shares of Common Stock upon the

exercise of an option or warrant or the conversion of a security outstanding on

the date hereof of which the Initial Purchasers have been advised in writing.

 

      3. Terms of Offering. You have advised the Company that the Initial

Purchasers will make an offering of the Securities purchased by the Initial

Purchasers hereunder on the terms to be set forth in the Memorandum, as soon as

practicable after this Agreement is entered into as in your judgment is

advisable.

 

      4. Payment and Delivery. Payment for the Firm Securities shall be made to

the Company in Federal or other funds immediately available in New York City

against delivery of such Firm Securities for the respective accounts of the

several Initial Purchasers at 10:00 a.m., New York City time, on March 2, 2005,

or at such other time on the same or such other date, not later than March 14,

2005, as shall be agreed upon by the Company and you. The time and date of such

payment are hereinafter referred to as the "CLOSING DATE."

 

      Payment for any Additional Securities shall be made to the Company in

Federal or other funds immediately available in New York City against delivery

of such Additional Securities for the respective accounts of the several Initial

Purchasers at 10:00 a.m., New York City time, on the date specified in the

corresponding notice described in Section 2 or at such other time on the same or

on such other date, in any event not later than April 11, 2005 as shall be

agreed upon by the Company and you.

 

                                       14

<PAGE>

 

      The Securities shall be in definitive form or global form, as specified by

you, and registered in such names and in such denominations ($1,000 or integral

multiples of $1,000 in excess thereof) as you shall request in writing not later

than one full business day prior to the Closing Date or the applicable Option

Closing Date, as the case may be. The Securities shall be delivered to you on

the Closing Date or an Option Closing Date, as the case may be, for the account

of the Initial Purchaser, with any transfer taxes payable in connection with the

transfer of the Securities to the Initial Purchaser duly paid, against payment

of the Purchase Price therefor plus accrued interest, if any, to the date of

payment and delivery.

 

      5. Conditions to the Initial Purchasers' Obligations. The several

obligations of the Initial Purchasers to purchase and pay for the Firm

Securities are subject to the accuracy, when made and on the Closing Date, of

the representations and warranties of the Company and each of the Guarantors, to

the performance by the Company and each of the Guarantors of their respective

obligations hereunder and to each of the following additional terms and

conditions:

 

            (a) Subsequent to the execution and delivery of this Agreement and

      prior to the Closing Date:

 

                  (i) there shall not have occurred any downgrading, nor shall

            any notice have been given of any intended or potential downgrading

            or of any review for a possible change that does not indicate the

            direction of the possible change, in the rating accorded the Company

            or any of the Company's securities or in the rating outlook for the

            Company by any "nationally recognized statistical rating

            organization," as such term is defined for purposes of Rule

             436(g)(2) under the Securities Act; and

 

                  (ii) there shall not have occurred any change, or any

            development involving a prospective change, in the condition,

            financial or otherwise, or in the earnings, business or operations

            of the Company and its subsidiaries taken as one enterprise, from

            that set forth in the Memorandum provided to prospective purchasers

            of the Securities that, in your judgment, is material and adverse

             and that makes it, in your judgment, impracticable to market the

            Securities on the terms and in the manner contemplated in the

            Memorandum.

 

            (b) The Initial Purchasers shall have received on the Closing Date a

      certificate, dated the Closing Date and signed by an executive officer of

      the Company, to the effect set forth in Section 5(a)(i) and to the effect

      that the representations and warranties of the Company and of the

      Guarantors contained in this Agreement are true and correct as of the

      Closing Date and that the Company and each of the Guarantors have complied

      with all of the agreements and satisfied all of the conditions on

 

                                       15

<PAGE>

 

      their part to be performed or satisfied hereunder on or before the Closing

      Date.

 

            The officer signing and delivering such certificate may rely upon

      the best of his or her knowledge as to proceedings threatened.

 

            (c) The Initial Purchasers shall have received on the Closing Date

      an opinion of (i) Blank Rome LLP, outside counsel for the Company, dated

      the Closing Date, to the effect set forth in Exhibit A and (ii) Murtha

      Cullina LLP, New Hampshire outside counsel for the Company, relating to

      certain matters regarding McKerley Health Care Centers, Inc. Such opinions

      shall be rendered to the Initial Purchasers at the request of the Company

      and shall so state therein.

 

            (d) The Initial Purchasers shall have received on the Closing Date

      an opinion of Davis Polk & Wardwell, counsel for the Initial Purchasers,

      dated the Closing Date, to the effect set forth in Exhibit B.

 

            (e) The Initial Purchasers shall have received on each of the date

      hereof and the Closing Date a letter, dated the date hereof or the Closing

      Date, as the case may be, in form and substance satisfactory to the

      Initial Purchasers, from KPMG LLP, independent public accountants, with

      respect to the financial information