PURCHASE AND SALE AGREEMENT

PLAN OF MERGER

AND

ACQUISITION AGREEMENT

BY AND AMONG

EXTENDICARE HEALTH SERVICES, INC.,

ALPHA ACQUISITION, INC.

AND

ASSISTED LIVING CONCEPTS, INC.

November 4, 2004

1

TABLE OF CONTENTS

Page

ANNEX A – Definitions

2

PLAN OF MERGER AND ACQUISITION AGREEMENT

This PLAN OF MERGER AND ACQUISITION AGREEMENT (this “ Agreement ”) is entered into as of November 4, 2004 by and among EXTENDICARE HEALTH SERVICES, INC., a Delaware corporation (the “ Buyer ”); ALPHA ACQUISITION, INC., a Nevada corporation and a wholly-owned subsidiary of the Buyer (“ Alpha Acquisition ”) having its principal office at 111 West Michigan Street, Milwaukee, Wisconsin 53203 (the Buyer and Alpha Acquisition are referred to herein collectively as the “ Acquiring Companies ” and individually as an “ Acquiring Company ”); and ASSISTED LIVING CONCEPTS, INC., a Nevada corporation (the “ Company ”) having its principal office at 1349 Empire Central, Suite 900, Dallas, Texas 75247. The Acquiring Companies and the Company are referred to collectively herein as the “ Parties ” and individually as a “ Party .” Capitalized terms used herein shall have the meanings set forth therefor in Annex A.

RECITALS:

A. The respective boards of directors of the Acquiring Companies and the Company have approved this Agreement and the merger of Alpha Acquisition with and into the Company (the “ Merger ”), in accordance with Chapter 92A of the Nevada Revised Statutes (the “ Nevada Act ”) and upon the terms and subject to the conditions hereof, whereby each Share issued and outstanding prior to the Merger will be converted into the right to receive the Per Share Merger Consideration provided for herein.

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

C. The Acquiring Companies and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger.

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 agree that the foregoing recitals are true and correct and further agree as follows:

Article 1

The Merger

1.1 The Merger . Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Nevada Act, Alpha Acquisition shall be merged with and into the Company at the Effective Time. Following the Effective Time, the separate corporate existence of Alpha Acquisition 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 Nevada under the name “Assisted Living Concepts, Inc.”, and the Surviving Corporation shall succeed to and assume all of the rights and obligations of Alpha Acquisition and shall continue to hold all rights and obligations of the Company as in effect prior to the Merger, all in accordance with the Nevada Act.

1.2 The Closing . The closing of the Merger (the “ Closing ”) shall take place on a date to be specified by the Parties (the “ Closing Date ”), which shall be no later than the third business day after the satisfaction or waiver of the conditions set forth in Sections 6.1 and 6.2 , at the offices of Andrews Kurth LLP in Houston, Texas, unless another date or place is agreed to in writing by the Parties.

1.3 Effective Time . Subject to the provisions of this Agreement, the Company and Alpha Acquisition shall file with the Secretary of State of the State of Nevada Articles of Merger (the “ Articles of Merger ”) executed in accordance with the relevant provisions of the Nevada Act and shall make all other filings or recordings required under the Nevada Act 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 Nevada, or at such later time as the Acquiring Companies and the Company shall agree and shall specify in the Articles of Merger (the “ Effective Time ”).

1.4 Effect of the Merger . The Merger shall have the effects set forth in this Agreement, the Articles of Merger and the Nevada Act. Without limiting the generality of the foregoing, and subject to the Nevada Act and to any other applicable laws, at the Effective Time, all of the properties, rights, privileges, powers, franchises and licenses of Alpha Acquisition 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 Alpha Acquisition 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.

1.5 Effect on Capital Stock . By virtue of the Merger and without any action on the part of any holder of the Shares or the holder of the shares of common stock of Alpha Acquisition, as of the Effective Time:

(a) Common Stock . Each share of common stock, par value $1.00 per share, of Alpha Acquisition issued and outstanding immediately prior to the Effective Time shall be converted into one fully paid and nonassessable share of common stock, par value $.01 per share, of the Surviving Corporation.

(b) Conversion of the Company Shares . Each Share issued and outstanding as of the Effective Time (other than any Shares (i) held by the Acquiring Companies, (ii) held by any wholly-owned Subsidiary of the Acquiring Companies, (iii) in the treasury of the Company or (iv) held by any wholly-owned Subsidiary of the Company, which Shares, by virtue of the Merger and without any action on the part of the holder thereof, shall be cancelled and shall cease to exist with no payment being made with respect thereto, and other than Dissenting Shares) shall automatically be converted into the right to receive US$18.50 in cash (the “ Per Share Merger Consideration ”). The aggregate amount of the Per Share Merger Consideration in respect of all Shares entitled thereto, and the aggregate amount payable to holders of Stock Options pursuant to Section 1.10 , are collectively referred to as the “ Merger Consideration .”

(c) Dissenting Shares . Notwithstanding anything in this Agreement to the contrary, Shares that are issued and outstanding immediately prior to the Effective Time and that are held by a holder who was entitled to demand, and has validly demanded, dissenter’s rights in accordance with Section 92A of the Nevada Act (the “ Dissenting Shares ”) shall not be converted into the right to receive the Per Share Merger Consideration unless and until such holder shall have failed to perfect or shall have effectively withdrawn or lost such holder’s dissenter’s rights under the Nevada Act but instead shall be converted into the right to receive payment from the Surviving Corporation with respect to such Dissenting Shares in accordance with the Nevada Act. If any such holder shall have failed to perfect or shall have effectively withdrawn or lost such holder’s dissenter’s rights, then each of such holder’s Shares shall be treated as a Share that had been converted as of the Effective Time into the right to receive the Per Share Merger Consideration in accordance with Section 1.5(b) .

(d) 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 Per Share Merger Consideration pursuant to Section 1.5(b) (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 Per Share Merger Consideration multiplied by the number of Shares formerly represented by the Certificate, to be paid in consideration therefor upon surrender of such Certificate in accordance with Section 1.9(b) .

1.6 Articles of Incorporation and Bylaws of the 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.

1.7 Directors and Officers.

(a) The directors of Alpha Acquisition 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) From and after the Effective Time, the officers of the Company shall be the officers of the Surviving Corporation until the earlier of their 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.

1.8 Assets, Liabilities, Reserves and Accounts . At the Effective Time, the assets, liabilities, reserves and accounts of Alpha Acquisition and the Company shall be taken up on the books of the Surviving Corporation in such manner as may be appropriate to give effect to the Merger in accordance with GAAP.

1.9 Exchange of Certificates.

(a) Paying Agent; Payment of Merger Consideration . Prior to the Effective Time, the Buyer shall appoint a bank or trust company reasonably acceptable to the Company to act as paying agent (the “ Paying Agent ”) for the payment of the Merger Consideration for the benefit of the Stockholders and the Option Holders. On or before the Closing, the Buyer shall deposit (or cause to be deposited) the Merger Consideration (such cash consideration being hereinafter referred to as the “ Merger Fund ”) with the Paying Agent for the benefit of the Stockholders and the Option Holders. The Merger Fund shall not include Per Share Merger Consideration for any Dissenting Shares, and the holders of Dissenting Shares shall not be entitled to receive payment of the Per Share Merger Consideration related to such Dissenting Shares from the Merger Fund. The Paying Agent shall, pursuant to irrevocable instructions of the Buyer given on the Closing Date, transfer to the Surviving Corporation such amount as is necessary to pay the Option Holders all amounts due to them under Section 1.10 and to make other payments of the Merger Consideration out of the Merger Fund. The Merger Fund shall not be used for any other purpose.

(b) 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 Buyer 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 Per Share Merger Consideration pursuant to Section 1.5(b) 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 Buyer may reasonably specify) containing instructions for use by holders of Certificates to effect the exchange of their Certificates for the Per Share Merger Consideration as provided herein. As soon as practicable after the Effective Time, each holder of an outstanding Certificate or Certificates shall, upon surrender to the Paying Agent of such Certificate or Certificates 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 (or, if such shares are held in book-entry or other uncertificated form, upon the entry through a book-entry transfer agent of the surrender of such Shares on a book-entry account statement (it being understood that any references herein to “Certificates” shall be deemed to include references to book-entry account statements relating to the ownership of Shares)), be entitled to an amount of cash (payable by check) equal to the Per Share Merger Consideration multiplied by the number of Shares formerly represented by such Certificate or Certificates. The Paying Agent shall accept such Certificates upon compliance with such reasonable terms and conditions as the Paying Agent may impose 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 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 1.9(b) , at any time after the Effective Time, each Certificate shall be deemed to represent only the right to receive the Per Share Merger Consideration upon such surrender as contemplated by Section 1.5 . No interest shall be paid or shall accrue on any cash payable as Per Share Merger Consideration.

(c) 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 1 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 1 .

(d) Termination of Merger Fund . Any portion of the Merger Fund which remains undistributed to the holders of Certificates for twelve (12) months after the Effective Time shall be delivered to the Buyer, and any holders of Certificates who have not theretofore complied with this Article 1 shall thereafter look only to the Buyer for payment of the Merger Consideration, subject to escheat and abandoned property and similar laws.

(e) 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.

(f) Investment of Merger Fund . The Paying Agent shall invest any cash in the Merger Fund, as directed by the Buyer; provided , however , that such investments shall be in obligations of, or guaranteed by, the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, respectively, or in certificates of deposit, bank repurchase agreements or banker’s acceptances of commercial banks with capital exceeding $1 billion. Any interest and other income resulting from such investments shall be paid to the Buyer.

(g) Withholding Rights . The Buyer or the Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Shares such amounts as the Buyer or the Paying Agent is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign Tax law. To the extent that amounts are so deducted and withheld by the Buyer or the Paying Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Shares in respect of which such deduction and withholding was made by the Buyer or the Paying Agent.

(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 and, if required by the Buyer, the posting by such Person of a bond in such reasonable amount as the Buyer may require as indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent shall issue in exchange for such lost, stolen or destroyed Certificate the Per Share Merger Consideration payable pursuant to this Agreement.

1.10 Effect of the Merger on Stock Options.

(a) Vesting of Stock Options . Subject to the applicable provisions of the Stock Plan, at, or immediately 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 shall become fully vested and exercisable at the Effective Time and shall be cancelled in exchange for the right to receive a cash payment from the Acquiring Companies of an amount equal to (i) the excess, if any, of (x) the Per Share Merger Consideration over (y) the exercise price per share of the Shares subject to such Stock Option, multiplied by (ii) the number of Shares for which such Stock Option 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 Acquiring Companies shall pay the Option Holders the cash payments specified in this Section 1.10(a) .

(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 and 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.

(c) Withholding Rights . The Acquiring Companies will be entitled to deduct and withhold from the amounts otherwise payable pursuant to this Section 1.10 to any Option Holder such amounts as the Acquiring Companies are required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign Tax law. To the extent that amounts are so deducted and withheld by the Acquiring Companies, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Option Holder in respect of which such deduction and withholding was made by the Acquiring Companies.

1.11 Stockholders’ Meeting .

(a) If required by the Company’s articles of incorporation and/or any other applicable laws in order to consummate the Merger, the Company, acting through its board of directors, shall, in accordance with applicable laws:

(i) promptly prepare and file with the SEC a preliminary information or proxy statement relating to the Merger and this Agreement and (x) obtain and furnish the information required to be included by the SEC in the Proxy Statement and, after consultation with the Buyer, respond promptly to any comments made by the SEC with respect to the preliminary information or proxy statement and, subject to compliance with the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and SEC rules and regulations promulgated thereunder, cause a notice of a special meeting and a definitive information or proxy statement (the “ Proxy Statement ” ) to be mailed to the Stockholders no later than the time required by applicable laws and the articles of incorporation and bylaws of the Company, and (y) subject to Section 4.7 , seek to obtain the necessary approvals of the Merger and this Agreement by the Stockholders;

(ii) duly call, give notice of, convene and hold a special meeting of the Stockholders (the “ Stockholders’ Meeting ” ) as soon as practicable after the date on which the Proxy Statement has been mailed to the Stockholders for the purpose of considering and taking action upon the Merger and this Agreement; and

(iii) subject to Section 4.7 , include in the Proxy Statement the recommendation of the Company’s board of directors that the Stockholders vote in favor of the approval of the Merger and the adoption of this Agreement.

(b) If, at any time prior to the Stockholders’ Meeting, any event shall occur relating to the Company or the transactions contemplated by this Agreement that should be set forth in an amendment or a supplement to the Proxy Statement, the Company shall promptly notify in writing the Buyer of such event. In such case, the Company, with the cooperation of the Buyer, shall promptly prepare, file with the SEC and mail such amendment or supplement.

(c) The Acquiring Companies shall furnish to the Company the information relating to the Acquiring Companies required under the Exchange Act and SEC rules and regulations promulgated thereunder to be set forth in the Proxy Statement and any amendments or supplements thereto.

(d) The Company shall consult with the Buyer with respect to the Proxy Statement, and any amendments or supplements thereto, and shall afford the Buyer reasonable opportunity to comment thereon prior to finalization of the Proxy Statement. The Company agrees to notify the Buyer at least three (3) Business Days prior to the mailing of the Proxy Statement, or any amendments or supplements thereto, to the Stockholders.

(e) The Buyer agrees that it will (i) vote, or cause to be voted, all of the Shares, if any, owned by it and (ii) take, or cause to be taken, all corporate actions necessary for it to adopt and approve the Merger and this Agreement.

Article 2

Representations and Warranties

of the Acquiring Companies

Each Acquiring Company hereby jointly and severally represents and warrants to the Company that the statements contained in this Article 2 are true and correct as of the date of this Agreement:

2.1 Organization . Each Acquiring Company is a corporation duly organized, validly existing, and in good standing under the laws of its respective 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 Acquiring 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, 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 the Acquiring Company.

2.2 Authority . Each Acquiring Company has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by each Acquiring Company and the consummation by each Acquiring Company of the transactions contemplated hereby have been duly and validly authorized and approved by the board of directors of the Buyer and Alpha Acquisition and, immediately after the execution and delivery of this Agreement, will be duly and validly authorized and approved, by the sole stockholder of Alpha Acquisition, and no other corporate proceedings on the part of either Acquiring Company are necessary to authorize or approve this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each Acquiring Company and, assuming the due and valid authorization, execution and delivery of this Agreement by the Company, constitutes the valid and binding obligation of each Acquiring Company enforceable against each of them in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to the enforcement of creditors’ rights generally and (ii) is subject to general principles of equity.

2.3 Noncontravention; Required Filings and Consents . Neither the execution and the delivery of this Agreement by either of the Acquiring Companies, nor the consummation of the transactions contemplated hereby by either of the Acquiring Companies, will violate any statute, regulation, law, rule, injunction, judgment, order, decree or ruling of any Governmental Entity to which either Acquiring Company is subject, or contravene or conflict with any provision of their respective charters or bylaws, except any such violation, contravention or conflict that would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Acquiring Company. Except for (i) the filings contemplated by Section 1.3 , (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 Governmental Entities’ third party payor programs (the “ Medicaid Waiver Programs ”), neither Acquiring Company 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 this Agreement.

2.4 Advisors’ and Brokers’ Fees . The Acquiring Companies will pay all fees and charges of any advisor or broker retained by them in connection with the transactions contemplated by this Agreement.

2.5 Sufficient Funds . The Acquiring Companies have, and at all times will continue to have, sufficient funds available to pay the Merger Consideration (including the consideration payable pursuant to Section 1.10 hereof) and to perform their other obligations pursuant to this Agreement. The Acquiring Companies have identified on Schedule 2.5 the source of funds to be used for the Merger Consideration, and no financing approvals or consents are needed with respect to the availability of such funds for the purposes intended therefor pursuant to this Agreement.

2.6 No Share Ownership. As of the date of this Agreement, neither of the Acquiring Companies beneficially owns (as such term is defined in Rule 13d-3 of the Exchange Act) any Shares.

Article 3

Representations and Warranties

of The Company

The Company represents and warrants to the Acquiring Companies that, except as set forth in Schedules 3.1 to 3.23, inclusive, (the “ Company Disclosure Schedules ”) 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; provided , however , that the mere inclusion of an item on the Company Disclosure Schedules 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 thereon. Any matter disclosed, or as to which any exception is made, in any item on the Company Disclosure Schedules 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 Nevada 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, except where the failure to be so qualified has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. A complete and correct list of every jurisdiction in which the Company and each of its Subsidiaries are incorporated or qualified to do business as a foreign corporation is set forth on Schedule 3.1 . The Company has made available to the Buyer 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 . All Subsidiaries of the Company, and holders of their respective outstanding capital stock or other equity interests, are identified on Schedule 3.2 . Each Subsidiary of the Company is a corporation or limited partnership duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation or formation and has all corporate or partnership 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 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 reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The Company has made available to the Buyer complete and correct copies of the charter, certificate of limited partnership, bylaws, partnership agreement or other organizational or similar 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, certificate of limited partnership, bylaws, partnership agreement or other similar organizational or similar charter-type documents.

3.3 Authority . The Company has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized and approved by the Company’s board of directors, and no other corporate proceedings on the part of the Company are necessary to authorize or approve this Agreement or to consummate the transactions contemplated hereby (other than the approval and adoption of the Merger and this Agreement by the Stockholders to the extent required by the Company’s articles of incorporation and by applicable laws). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due and valid authorization, execution and delivery of this Agreement by the Acquiring Companies, constitutes a valid and binding obligation of the Company enforceable against it in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to the enforcement of creditors’ rights generally and (ii) is subject to general principles of equity.

3.4 Noncontravention; Required Filings and Consents . Neither the execution and the delivery of this Agreement by the Company, nor the consummation of the transactions contemplated hereby, will (a) contravene or conflict with any provision of the articles of incorporation or bylaws of the Company or (b) violate any statute, regulation, law, rule, injunction, judgment, order, decree or ruling of any Governmental Entity to which the Company is subject, except in the case of the foregoing clause (b) any such violation that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. Except for (i) the filings contemplated by Section 1.3 , (ii) the notification filing required under the Hart-Scott-Rodino Act, (iii) any filings required to be made with the SEC and (iv) 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’ Medicaid Waiver Programs, the Company is not required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Entity (other than lenders under financing arrangements) in order to consummate the transactions contemplated by this Agreement.

3.5 Capitalization . The entire authorized capital stock of the Company is as set forth on Schedule 3.5 , and no Shares other than those reflected on such Schedule as being currently outstanding have been issued since January 1, 2002. 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 set forth on Schedule 3.5 (which Schedule includes the grant date and exercise price of each Stock Option). Except as contemplated by this Agreement, there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any Shares or 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 will be (when issued in accordance with the respective terms thereof), duly authorized, validly issued, fully paid and nonassessable, and such Shares were not issued in violation of any laws. 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 nonassessable, and was not issued in violation of any laws, and such shares 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 and restriction of any kind. To the Company’s Knowledge, there are no voting trusts, proxies or other agreements or understandings with respect to the voting of the capital stock of the Company.

3.6 Contracts . Schedule 3.6 contains, as of the date of this Agreement, a complete and accurate listing of all Contracts that (i) involve consideration or other expenditure in excess of $100,000, (ii) involve consideration or other expenditure in excess of $30,000 annually and are not terminable at the will of the Company within three years without penalty, and (iii) involve the referral of residents to or by the Company. The Company has made available to the Buyer true and correct copies of all such Contracts. 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, under any 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 Contract, other than breaches or defaults which would not have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any stockholders’ rights agreement or similar anti-takeover agreement.

3.7 Insurance . Set forth on Schedule 3.7 is a complete and correct list of all policies of fire, liability, product liability, professional liability, environmental impairment, workers compensation, health, medical, director and officer liability 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 Buyer 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 with the insurers listed on Schedule 3.7 . Neither the Company nor any Subsidiary of the Company has received any notice of cancellation or termination 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. Neither the Company nor any of its Subsidiaries has received any written notice from or on behalf of any insurance carrier issuing any Policy that insurance rates therefore will hereafter be substantially increased (except to the extent that insurance rates may be increased for all similarly situated risks) or that there will hereafter be a cancellation or an increase in a deductible (or an increase in premiums in order to maintain an existing deductible) or nonrenewal of any such Policy.

3.8 Financial Statements; Fees .

(a) Financial Statements . The Company has made available to the Buyer the audited balance sheets, statements of operations/income, statements of stockholders’ equity and statements of cash flows, including the notes thereto, of the Company as of and for the fiscal years ended December 31, 2002 and 2003 (the “ Financial Statements ”). The Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and present fairly the financial condition of the Company as of such dates and the results of operations of the Company for such periods. As of the date of the Company’s financial statements filed with its most recent Quarterly Report on Form 10-Q (the “ Report Date ” ) , neither the Company nor any of its Subsidiaries had any liabilities or obligations of any nature (whether absolute, accrued, contingent, unmatured, unaccrued, unliquidated, unasserted, conditional or otherwise) that are required to be reflected, disclosed or reserved against in a balance sheet prepared in accordance with GAAP that were not reflected, disclosed or reserved against in the Financial Statements, the Company SEC Documents or otherwise disclosed on Schedule 3.8(a) .

(b) Fees . Set forth on Schedule 3.8(b) 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 (other than payments to be made pursuant to Section 1.10 in respect of Stock Options) as a result of the Company’s execution of this Agreement or the consummation of the Merger, including fees, severance payments (whether containing a single or double trigger relating to any change in control) and other similar payments.

3.9 SEC Filings . Available in the SEC’s online EDGAR database is a true and complete copy of each report, schedule, registration statement and definitive proxy statement filed by the Company with the SEC since January 1, 2002 (the “ Company SEC Documents ”), which are all of the documents that the Company was required to file with the SEC since January 1, 2002. As of their respective dates, the Company SEC Documents complied in all material respects with the requirements of the Securities Act of 1933, as amended, or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder, and none of the Company SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

3.10 Certain Events . Except as otherwise disclosed in the Company SEC Documents, since December 31, 2003 to the date of this Agreement, there has not been any Material Adverse Change. In addition, since June 30, 2004, the Company and its Subsidiaries have conducted their businesses only in the ordinary course of business consistent with past practices and there has not been, directly or indirectly, any:

(a) capital expenditure by the Company or any of its Subsidiaries, in any single transaction or series of transactions relating to a single project, exceeding $1.5 million;

(b) destruction, damage to, or loss of any assets of the Company or any of its Subsidiaries exceeding $1.5 million;

(c) change in accounting methods, principles or practices (including, without limitation, any change in depreciation or amortization policies) by the Company and its Subsidiaries, except insofar as such changes are (i) required by a change in GAAP or (ii) not required to be disclosed by GAAP;

(d) sale or transfer of any assets of the Company or its Subsidiaries having a value in excess of $1.5 million, in any single transaction or series of related transactions;

(e) employment agreement or agreements entered into by the Company or any Subsidiary of the Company pursuant to which the employee is employed otherwise than at will;

(f) payment or granting by the Company or any of its Subsidiaries of any increase in compensation to any director or executive officer of the Company or, except as consistent with past practices, any employee of the Company or its Subsidiaries;

(g) granting by the Company or any of its Subsidiaries to any of its respective directors, executive officers or employees of any increase in severance or termination pay, except as required under employment, severance or termination agreements or plans in effect prior to the date of this Agreement;

(h) adoption or increase in payments to, or benefits under, any of the Benefit Plans of the Company;

(i) declaration or payment of any dividend or any other distribution in respect of the Company’s capital stock or any direct or indirect redemption, purchase or other acquisition of any such stock of the Company; or

(j) agreement or commitment to do any of the things described in the preceding clauses (a) through (i) .

3.11 Property.

(a) A complete and accurate list of all of the real property owned by the Company and its Subsidiaries is set forth on Schedule 3.11(a) (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 on Schedule 3.11(b) (collectively, the “ Leased Real Property ”) (the Owned Real Property and the Leased Real Property are collectively referred to herein as the “ Property ”).

(c) The Company and its Subsidiaries have good and marketable title to all of their non-leased machinery, equipment, furniture and other tangible assets located on the Property (“ Tangible Property ”), except those subject to Permitted Liens. To the actual knowledge of the chief executive officer, chief operating officer and chief financial officer of the Company, the Tangible Property located on the Property is in good operating condition and repair, reasonable wear and tear excepted.

(d) To the actual knowledge of the chief executive officer, chief operating officer and chief financial officer of the Company, all of the buildings and improvements located on the Property are structurally sound, 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.

(e) There are no contracts or options to sell the Owned Real Property or any portion of the Owned Real Property which have been executed by the Company and its Subsidiaries.

(f) The Company has made available to the Acquiring Companies true and correct copies of all of the leases, including all amendments to such leases, under which the Company has possession of the Leased Real Property (the “ Leases ”).

(g) 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 the Property.

(h) 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, encumbrances, defects, exceptions, easements, rights of way, restrictions, covenants, claims or other similar charges, which have not, individually or in the aggregate, had a Material Adverse Effect, (ii) taxes or assessments, special or otherwise, not due and payable or being contested in good faith, (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), (iv) rights of parties in possession, including residents, beauticians and physical therapists, (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 have not materially interfered with the continued use of the Property consistent with the current use thereof, (vi) matters referred to in Schedule 3.11(h) and (vii) any exceptions to title contained in a title policy listed on Schedule 3.11(h) (collectively, (i) through (vii), the “ Permitted Liens ”).

(i) Except for those matters that do not have, and would not reasonably be expected to have, a Material Adverse Effect: (i) all activities and operations of the Company and its Subsidiaries since January 1, 2002 have been and are being conducted in compliance with all Hazardous Substances Laws; (ii) since January 1, 2002, the Company has not 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 its Subsidiaries, their properties, activities or operations; (iii) there are no Hazardous Substances present on, in or under the Property, and no discharge, spillage, uncontrolled loss, seepage or filtration of Hazardous Substances has occurred on, in or under the Property since January 1, 2002; (iv) there is no condition on the Property for which the Company or any of its Subsidiaries has an obligation to undertake any remedial action pursuant to Hazardous Substances Laws; and (v) there are no underground storage tanks currently, or historically, located on, at or under the Property. For purposes hereof, “ Hazardous Substances ” means, without limitation (1) 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 exposu