Document:

EX-10.1

MEMORANDUM OF UNDERSTANDING

This Memorandum of Understanding (“MOU”) is entered into as of January 31, 2005, by and
among:

I. LTC Properties, Inc. (“LTC, Inc.”), and Texas-LTC Limited Partnership (“Texas-LTC”) (the
foregoing parties are referred to herein individually and collectively as “LTC”); and

II. Extendicare Health Services, Inc. (“EHSI”), Alpha Acquisition, Inc. (“Alpha”), Assisted
Living Concepts, Inc. (“ALC, Inc.”), and Carriage House Assisted Living, Inc. (“Carriage”).
(Assisted Living Concepts, Inc., and Carriage House Assisted Living, Inc. are referred to herein
individually and collectively as “ALC/CHAL”; Assisted Living Concepts Inc., Carriage House
Assisted Living, Inc., Alpha Acquisition Inc. and Extendicare Health Services, Inc. are referred
to herein individually and collectively as “ALC”.)

Background:

A. On November 4, 2004, EHSI and Alpha entered into a Plan of Merger and Acquisition Agreement
(“Merger Agreement”) with ALC, Inc. pursuant to which it is anticipated that Alpha, a subsidiary of
EHSI, will merge with and into ALC, Inc. and ALC, Inc. will continue as the surviving corporation
after the merger (the “Merger”). Upon conclusion of the Merger in accordance with the terms of the
Merger Agreement, EHSI will be the sole shareholder of ALC, Inc.

B. LTC leases a total of thirty-seven (37) assisted living facility properties (the “Leased
Properties”) currently containing a total of approximately 1,427 assisted living units (a “Unit”)
to ALC/CHAL under a master lease agreement or individual leases and amendments thereto
(collectively the “Leases”). The Leased Properties, their number of Units, and the respective
parties to the Leases for each Leased Property are set forth in Exhibit A. For purposes of
this MOU, a “Unit” is an apartment located within an assisted living facility in which one or more
residents could reside.

C. Under the Leases, LTC may declare an Event of Default (as defined in the Leases) if a
Change of Control (as defined in the Leases) of the tenant occurs and the surviving tenant-entity
does not have a Net Worth (as defined in the Leases) equal to or greater than Seventy-Five Million
Dollars ($75,000,000.00). Under the Leases, a Change of Control includes, but is not limited to,
circumstances where (i) any person becomes the beneficial owner of thirty percent (30%) or more of
the outstanding shares of ALC/CHAL; or (ii) the stockholders of ALC/CHAL approve a merger or
consolidation of ALC/CHAL with any other corporation.

D. At the request of ALC, Inc., representatives of LTC have previously identified certain
circumstances that they contend constitute non-conformity by ALC/CHAL with the Leases (such
matters, collectively, the “Identified Concerns”), a summary of which Identified Concerns was
disclosed as part of ALC, Inc.’s public filings with the Securities and Exchange Commission.

E. ALC and LTC agree that it is in their mutual best interests to resolve all disputes under
the Leases prior to the Merger and to ensure the continued existence of leasing arrangements by and
among LTC and ALC following the Merger.

Now, therefore, taking the foregoing Background into account, and in consideration of the
mutual covenants, agreements and conditions set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:

1. Understandings and Agreements Regarding Terms of New Master Leases:

	 	1.1.	 	Number of Units. The parties agree that the number of assisted living Units
for each of the Leased Properties shall be as set forth in Exhibit A.

	 	1.2.	 	Master Leases. LTC and ALC shall enter into two (2) master lease agreements
(the “Master Leases”) upon terms and conditions similar to those contained in the
Master Lease Agreement dated November 30, 2001, between LTC and ALC/CHAL (the “Original
Master Lease”), except as otherwise specified in this MOU. The Leased Properties shall
be grouped under the Master Leases according to the groupings set forth in Exhibit
A. The Master Leases shall be deemed as of the “Commencement Date” (as that term
is hereinafter defined) to have amended, restated, superseded and replaced the Leases,
including the Original Master Lease, for all purposes and the Master Leases and this
MOU shall constitute the only agreements between LTC and ALC with respect to the Leased
Properties; provided, however, that nothing in this MOU shall relieve ALC/CHAL (and,
following consummation of the Merger, ALC) of any accrued or unpaid obligation to pay
rent or other monies to LTC, whether under any Lease or otherwise. Notwithstanding the
foregoing, ALC and LTC agree that the Master Leases shall contain the following
elements, with the terms of this MOU superseding the terms of the Original Master Lease
to the extent they are inconsistent, conflict with, or vary from any of the terms or
conditions of the Original Master Lease:

	 	1.2.1.	 	Term. The term of the each Master Lease shall commence retroactive to
January 1, 2005, subject to the Merger becoming effective, upon the date the
Merger becomes effective (the “Commencement Date”) and shall expire (if not
sooner terminated under the terms of the Master Leases) at midnight (California
time) December 31, 2014 (the “Initial Term”).

	 	1.2.2.	 	Minimum Rent. Commencing retroactive to January 1, 2005, the monthly base
rent (“Minimum Rent”) payable under each Master Lease shall be as set forth on
Exhibit A such that the combined initial Minimum Rent under the Master
Leases during 2005 shall be equal to the total Minimum Rent paid in 2004 under
all the existing Leases increased by 2%, plus $250,000.00 (such sum, the
“Initial Fixed Amount Increase”), with such Minimum Rent being adjusted
retroactively to January 1, 2005. Specifically, it is agreed that the 2005
Minimum Rent for the First Master Lease will be $4,500,000, and the 2005
Minimum Rent for the Second Master Lease will be $4,864,785, unless modified
pursuant to Section 1.2.10 of this MOU. On January 1, 2006, and continuing
each January 1 thereafter, during the Initial Term of each Master Lease and
during the second through tenth year of each Extended Term thereof, the Minimum
Rent payable with respect to each Master Lease shall increase by two percent
(2%) per annum over the final Minimum Rent due in the preceding Lease Year. In
addition, on each January 1 of 2006, 2007 and 2008, the annual combined Minimum
Rent payable under both Master Leases shall increase by $250,000.00 each year,
respectively. A summary of the Minimum Rent payable, unless modified by
conditions specified in Section 1.2.10 of this MOU, with respect to
each of the Master Leases calculated for each Lease Year during the Initial
Term is set forth on Exhibit A.

	 	1.2.3.	 	Options to Extend. Provided there exists no uncured Event of Default under
either of the Master Leases (excepting stemming from a loss of any licenses
necessary to operate a Facility as an assisted living facility under applicable
state laws, which loss of licensure shall not be deemed an Event of Default for
purposes hereof provided ALC consummates a substitution in accordance with this
MOU and the applicable Master Lease with respect to the unlicensed Facility
within one hundred twenty (120) days of such loss of license), ALC shall have
the right to extend the term of each Master Lease for up to three (3) separate
additional periods of ten (10) years each (each, an “Extended Term”),
commencing immediately following the end of the Initial Term or the immediately
preceding Extended Term. The option to extend each Master Lease must be
exercised in writing not later than twelve (12) months prior to the end of the
Initial Term or the then-current Extended Term. Time is of the essence as to
providing timely notice of exercise. The Master Leases during any Extended
Terms shall be on the same terms and conditions as applied during the Initial
Term, except that:

	 	I.	 	The Minimum Rent during the first year of the first Extended
Term shall be increased by the greater of (a) 2% over the final Minimum Rent
due in the last year of the Initial Term , or (b) the sum of the final Minimum
Rent due during the first year of the Master Lease (calculated prior to
inclusion of the Initial Fixed Amount Increase), plus $1,000,000.00, with such
sum being multiplied by a fraction, the numerator of which is the CPI of the
second to last month of the Initial Term (i.e., November 2014) and the
denominator is the CPI of November 2004. For purposes of the Master Leases
“CPI” shall mean and refer to the Consumer Price Index published by the Bureau
of Labor Statistics of the Department of Labor, U.S. Cities Average, All Items
(1982-84=100); provided, however, that if compilation of the CPI is
discontinued or transferred to any other governmental department or bureau,
then the index most nearly the same as the CPI shall be used.

	 	II.	 	The Minimum Rent during the first year of the second Extended
Term shall be increased by the greater of (a) 2% over the final Minimum Rent
due in the last year of the first Extended Term, or (b) the final Minimum Rent
due during the first year of the first Extended Term, multiplied by a fraction,
the numerator of which is the CPI of the second to last month of the first
Extended Term (i.e., November 2024) and the denominator is the CPI of November
2014.

	 	III.	 	The Minimum Rent during the first year of the third Extended
Term shall be increased by the greater of (a) 2% over the final Minimum Rent
due during the last year of the second Extended Term, (b) the Minimum Rent due
during the first year of the second Extended Term, multiplied by a fraction,
the numerator of which is the CPI of the second to last month of the second
Extended Term (i.e., November 2034) and the denominator is the CPI of November
2024, or (c) an amount necessary to cause such Minimum Rent to be equal to Fair
Market Rent, which shall be determined as set forth on Exhibit C
attached hereto.

	 	1.2.4.	 	Right of Substitution. Provided that there is no Event of Default existing
under either of the Master Leases, then subject to the terms and conditions set
forth in this Section 1.2.4, ALC may substitute into the applicable
Master Lease one, or more, of the 122 assisted living facilities owned and
operated by ALC/CHAL prior to EHSI’s acquisition of ALC, Inc. (a “Substitute
Facility”). ALC may effect such a substitution in the event that (a) the
Facility to be substituted under the applicable Master Lease becomes
unprofitable to operate by ALC based on ALC’s reasonable commercial judgment,
or (b) the Facility to be substituted loses any licenses necessary to operate
the same as an assisted living facility under applicable state laws (such loss
of licensure not being deemed an Event of Default, provided ALC consummates a
substitution in accordance with this MOU with respect to such unlicensed
Facility).

Upon a minimum of ninety (90) days prior written notice to LTC ( a
“Substitution Notice”, which Substitution Notice shall include the
information called for in Exhibit B hereto and shall be in a form
reasonably acceptable to LTC) of ALC’s intent to effect such substitution,
ALC shall have the right to substitute into the applicable Master Lease a
Substitute Facility provided that all of the following additional conditions
with regard to such Substitute Facility are met both at the time of the
Substitution Notice and at the time of the closing of the substitution (any
Substitute Facility satisfying said conditions shall be referred to as a
“Qualifying Substitute Facility”): (i) the Substitute Facility has an equal
or greater number of assisted living units as the original Facility being
substituted out; (ii) the EBITDARM of the Substitute Facility for each of
the trailing three (3) months and the trailing twenty-four (24) months,
respectively, is equal to or greater than that of facility being substituted
out; (iii) the Substitute Facility is free of any encumbrances or liens
other than municipal and zoning ordinances and agreements entered
thereunder, recorded building and use restrictions, recorded easements and
similar matters of record, and unrecorded leases and occupancy agreements
(such matters affecting title, the “Encumbrances”), none of which,
considered individually or on a combined basis, adversely affect or diminish
the use, value or operation of the Substitute Facility, and none of which
differ materially in content, purpose or effect from the Encumbrances
affecting title to the facility being substituted out; (iv) the Substitute
Facility shall be in compliance with all state and federal regulations,
including all licensing and operating requirements, all state and local
building and zoning codes, and all other requirements necessary to operate
the Substitute Facility as an assisted living facility; (v) the Substitute
Facility shall be in compliance with all state and federal regulations and
all other requirements necessary to allow a change of ownership (vi) the
Substitute Facility be in material compliance with any applicable laws,
rules or regulations governing the use, handling, storage and disposal of
hazardous substances and that prior to the substitution ALC has delivered a
Phase I Environmental report dated no more than six (6) months prior to the
effective date of such substitution evidencing such compliance; (vi) there
have been no more than two (2) prior substitutions under the Master Lease or
this Section 1.2.4 consummated within the twelve (12) months preceding the
date of the closing of the proposed substitution, and (vii) the Substitute
Facility shall be in good physical and mechanical condition and repair and
shall not require any capital improvements or repairs in excess of $30,000,
which capital improvements shall either (a) be funded by ALC without
reimbursement by LTC, or (b) if funded or otherwise paid for by LTC, be
treated as an expansion of the Facility in question and result in the
adjustments to Minimum Rent provided for in Section 1.2.10 of this MOU, and
in any event shall be undertaken and diligently pursued to completion by ALC
within six (6) months of consummation of the substitution.

Each substitution under this Master Lease shall be treated as an exchange of
property, with the result being that LTC shall be the owner of the real
property and improvements thereon of the Qualifying Substitute Facility and
that ALC, Inc. shall be the owner of the real property and improvements
thereon of the facility being substituted out of the Master Lease (the
“Substituted Facility”). In connection with the foregoing, LTC shall have
the Substituted Facility, on or before the date of substitution, released
from any and all liens and encumbrances securing monetary obligations.

ALC agrees to pay all of LTC’s reasonable costs and out-of-pocket expenses
in connection with good-faith efforts to consummate any substitution
hereunder, whether or not such substitution is completed, excepting any
principal and accrued interest to pay off monetary obligations secured by
liens or encumbrances against the Substituted Facility. In addition, in lieu
of LTC charging ALC for the actual time and efforts of its staff in
processing a substitution hereunder, each time ALC delivers a Substitution
Notice, together with that Substitution Notice ALC shall remit to LTC the
sum of Ten Thousand Dollars ($10,000) as a flat and non-accountable fee to
reimburse LTC for its internal overhead costs and overhead expenses devoted
to effecting a substitution.

ALC shall not have the right to effect a substitution of a Facility if any
monetary lien on the Facility may not be voluntarily prepaid by LTC. Without
limitation to the foregoing, ALC shall be responsible for all acceleration
or prepayment charges (but not principal and accrued interest charges)
incurred by LTC in connection with effecting a payoff of any liens or
encumbrances. ALC shall have the right to inquire of LTC regarding the
existence of, and LTC shall provide a written statement summarizing, the
then currently applicable acceleration or prepayment charges associated with
payoff of any liens or encumbrances affecting any Facility ALC is
considering substituting, such summary to be provided to ALC prior to its
election, if any, to deliver a Substitution Notice to LTC.

Notwithstanding any of the forgoing, ALC shall not have the right to close
any substitution of a Facility under either of the Master Leases during the
last twenty-four (24) months of the Term (or any Extended Term) of said
Master Lease unless ALC has given LTC its notice to extend the Term of the
relevant Master Lease.

Furthermore, ALC shall not be entitled to substitute any of the five (5)
Facilities located in the State of Washington that are currently encumbered
by Washington State Revenue Bonds (the “WA Bonds”) until December 2, 2015.

ALC hereby agrees that it shall close, divest itself of, or lease the
Substituted Facility to an unaffiliated third-party, but in any event ALC
and its affiliates shall permanently cease to operate the Substituted
Facility as an assisted living or other healthcare related facility within
one (1) year of the effective date of such substitution. ALC’s failure to
do so shall constitute an Event of Default under the applicable Master
Lease.

LTC and ALC hereby agree that the substitution as set forth in this
Section 1.2.4 represents the entire consideration for such
Qualifying Substitute Facility and that there shall be no alteration of any
Minimum Rent due under the applicable Master Lease to LTC, and neither LTC
nor ALC shall be entitled any other consideration whether in the form of
cash or otherwise.

	 	1.2.5.	 	Insurance. The language set forth in Exhibit D attached hereto shall
replace Articles XIII and XIV of the Master Lease.

	 	1.2.6.	 	Subletting. (THE FOLLOWING LANGUAGE MODIFIES SECTION 22 OF THE
MASTER LEASE AS FOLLOWS) “Subject to the permitted exceptions set forth in
Section 22.3 below, ALC may not assign, sublease or sublet, encumber,
appropriate, pledge or otherwise transfer, the Lease or the leasehold or other
interest in the Leased Property without LTC’s consent, which may be withheld in
LTC’s sole and absolute discretion. Notwithstanding the forgoing in this
Section 22, ALC may sublet one or more Facility to a subsidiary of ALC or EHSI,
provided that (1) such subleasing agreement be in a form that is reasonably
acceptable to LTC, and (2) that ALC provides to LTC not less than thirty (30)
days prior written notice of ALC’s intent to effect such sublease. In
addition, ALC shall be permitted to sublet, within any Facility under the
Master Lease, up to 20% of the square footage to any party providing ancillary
services to the residents or employees of any Facility, provided that the
number of Units available for rent at such Facility shall not be decreased.
Upon LTC’s consent (and, in such cases where LTC’s consent is not required
pursuant to Section 22.3 below), (a) in the case of a subletting, the sublessee
shall comply with the provisions of Section 22.2, (b) ALC shall provide an
original counterpart of each such sublease, duly executed by ALC and such
sublessee, that shall be delivered promptly to LTC, and (c) ALC shall remain
primarily liable, as principal rather than as surety, for the prompt payment of
the Rent and for the performance and observance of all of the covenants and
conditions to be performed by ALC hereunder. Nothing hereunder shall preclude
LTC from selling any of the Leased Property or assigning or transferring its
interest hereunder, provided the new owner or assignee expressly assumes LTC’s
obligations under this Lease”.

SECTION 22.3 OF THE MASTER LEASE SHALL BE MODIFIED TO READ AS FOLLOWS:
“Anything contained in this Lease to the contrary notwithstanding, ALC shall
have the right at any time during the Term, without first seeking LTC’s
consent, to enter into rental agreements with residents of the Facilities,
and execute any documents necessary in connection therewith. Provided,
however, but for the fact that LTC’s consent need not be obtained in such
situations, all other restrictions and provisions contained in this Article
XXII or elsewhere in this Lease shall apply”.

	 	1.2.7.	 	Geographic Limitations. Except as otherwise provided in this Section
1.2.7, during the Initial Term and any Extended Term of the Master Leases,
and for a period of two (2) years after expiration or earlier termination
thereof, neither ALC nor any of its affiliates, directly or indirectly, shall
operate, own, manage or have any legal or beneficial interest in or otherwise
participate in or receive revenues from any other assisted living facility
within a four (4) mile radius measured outward from the outside boundary of
each Leased Property. Notwithstanding the foregoing, ALC or any of its
affiliates, EHSI and any affiliates or subsidiaries of EHSI, may, directly or
indirectly, operate, own, manage or have a legal or beneficial interest in
assisted living facilities within such four (4) mile radius, if ALC or any of
its affiliates, EHSI and any affiliates or subsidiaries of EHSI, operated,
owned, managed or had any legal or beneficial interest in or otherwise
participated in or received revenues from such assisted living facility prior
to the Commencement Date (a “Competing Facility”); provided, however, that in
order to avoid any conflict of interest with respect to any non-LTC owned
facility and a Competing Facility, ALC agrees it will not prefer or favor a
Competing Facility to the detriment of an LTC-owned facility.

	 	1.2.8.	 	Modification of Change of Control Provisions. Section 18.1 of
Article XVIII as the same appears the Original Master Lease, entitled Change of
Control, shall be modified to reduce the surviving entity Net Worth requirement
from Seventy-Five Million Dollars ($75,000,000) to Fifty Million Dollars
($50,000,000).

	 	1.2.9.	 	Books and Records. The last paragraph in Section 24.3 of the Master
Lease shall be modified as follows:

“Whether or not expressly stated elsewhere above in this Section
24.3, all information, reports, filings, etc. provided by ALC to LTC
under this Section 24.3 shall be (i) prepared in accordance with
GAAP, and (ii) accompanied with a written certificate from a duly
authorized officer of ALC certifying that to the best knowledge of
the officer executing such certificate, all accompanying information
is true and complete. ALC may satisfy the reporting requirements
with respect to providing quarterly and annual consolidated financial
statements of ALC by the timely filing of all required financial
reports with the SEC by EHSI. However, in the event that EHSI ceases
to file all such required financial reports with the SEC, Lessee
shall remain obligated for all the reporting requirements to LTC
hereunder, and shall furnish the applicable quarterly and annual
reports directly to LTC. In addition to all of the items expressly
identified and required elsewhere in this Section 24.3 (or elsewhere
in this Lease), ALC shall promptly comply with any request by LTC or
any Facility Mortgagee for the production of additional financial
information (whether relating to ALC, or a Controlling Entity of ALC)
as may be reasonably deemed relevant or prudent by LTC and/or any
Facility Mortgagee, provided, however, that such requests for
additional information pursuant to the immediately preceding sentence
(a) shall not require further detail or unconsolidated financial
analysis than is provided pursuant to any filings with the SEC
completed by EHSI, and (b) are customary in form and content and not
unreasonably or unusually burdensome to produce”.

	 	1.2.10.	 	Expansion of Leased Properties. ALC will work cooperatively with LTC to
expand the number of living Units, at mutually agreed upon Leased Properties,
with each party acting in good faith based upon the exercise of its
commercially reasonable judgment in light of, among other things, facility
occupancy rates, operating costs, and resident revenues. Prior to commencing
any such expansion, ALC and LTC shall agree upon a development plan outlining
the costs and timelines for such expansion. All costs for such expansion shall
be paid for by LTC when such expansion is completed having a certification of
occupancy and licensure of the additional Units. All expenditures must be
jointly approved by ALC and LTC, with each party acting in good faith based
upon the exercise of its commercially reasonable judgment. The monthly Minimum
Rent for any Leased Property that has been expanded shall be adjusted and
increased by increasing the Minimum Rent by an amount equal to (a) nine and
one-half percent (9.5%) plus the positive difference, if any, between the
average for the last five (5) business days prior to funding of the yield on
the U.S. Treasury 10-year note minus 420 basis points (expressed as a
percentage), multiplied by (b) the amounts actually paid to third parties by or
on behalf of ALC, and reimbursed by LTC, to complete the expansion. The
foregoing adjustment to the Minimum Rent shall occur on the first day of the
month during which such funding occurred. Subject to the provisions of this
Section 1.2.10, LTC’s funding of any expansion to the Leased Properties
shall be limited to $5,000,000.00 in any calendar year.

	 	1.3.	 	Waiver of Potential Events of Default. LTC acknowledges and agrees that EHSI
requires LTC’s agreement to allow ALC time to cure any of the Identified Concerns (a)
as inducement to cause ALC to enter into the Master Leases on the terms and conditions
set forth in this MOU, and (b) to facilitate the timely receipt of ALC, Inc.’s
shareholder approvals and closing of the Merger. LTC further acknowledges that EHSI
will not agree to proceed further with the negotiation of any Master Leases or other
renewals or extensions of the Leases with LTC without receipt of such time to cure from
LTC and without the representations and warranties contained in this Paragraph. LTC
agrees as follows:

	 	1.3.1.	 	Effect of MOU and Leases on Pre-Existing Default. It is the parties’
intention that the new Master Leases contemplated hereby, when fully executed,
shall substitute for and act as a novation of the original Leases.
Accordingly, in the event an Event of Default exists or existed under the
original Leases, LTC agrees it shall not seek to terminate the Leases or the
Master Leases or disturb ALC’s occupancy of the Leased Properties as a
consequence thereof, ALC having, to the extent not expressly waived pursuant to
the terms of this MOU, any and all rights to cure the same as were established
under the terms of the Original Master Lease; provided, however, that nothing
in this MOU or any of the new Master Leases shall relieve ALC of any accrued or
unpaid obligation to pay rent or other monies to LTC, whether under any Lease
or otherwise; and provided further that nothing herein shall prohibit or bar
LTC from enforcing any term or provision of the new Master Leases or of
Sections 1.3 and 2 of this MOU.

	 	1.3.2.	 	Specific Cure Periods and Waivers. Without limiting the generality of the
provisions of Section 1.3.1 above, in anticipation and support of ALC,
Inc. seeking shareholder approval of the Merger, and EHSI, Alpha and ALC, Inc.
closing on the Merger, and in consideration of all of the actions of the
parties taken in good-faith furtherance thereof, LTC agrees as follows:

	 	1.3.2.1.	 	LTC shall not assert an Event of Default as a consequence of a
Change of Control resulting from EHSI or any of its corporate
affiliates being or becoming the beneficial owner, as defined in the
Leases, directly or indirectly, of securities or other equity interests
of ALC, Inc. representing thirty percent (30%) of more of the combined
voting power of the then outstanding securities of equity interests of
ALC, Inc. ; and

	 	1.3.2.2.	 	LTC shall not assert an Event of Default as a consequence of a
Change of Control resulting from ALC. Inc.’s stockholders or holders of
equity interests approving the Merger of ALC, Inc. with Alpha; and

	 	1.3.2.3.	 	LTC shall not assert an Event of Default as a consequence of the
number of assisted living Units that comprise any of the Leased
Properties under the Leases for Athens, Texas, Greenville, Texas, and
Tiffen, Ohio, it being noted that Exhibit A to this MOU
specifies the agreed number of Units for each of those Facilities; and

	 	1.3.2.4.	 	ALC shall have until December 31, 2005 to cure any lack of
licensure of the assisted living facilities located on the Leased
Properties in Elkhart, Indiana and Madison, Indiana; and should such
facilities be unable to be licensed by December 31, 2005, LTC and ALC
commit to effectuate a “substitution” as defined in Section 1.2.6.,
hereunder; and

	 	1.3.2.5.	 	LTC shall not assert an Event of Default as a consequence of any
purported failure to provide audited consolidated financial statements,
or any other financial statements or reports, for ALC/CHAL where the
purported failure to provide statements or reports occurred prior to
the Commencement Date of the Master Leases; and

	 	1.3.2.6.	 	LTC shall not assert an Event of Default as a consequence of the
adequacy, nature, or scope of ALC/CHAL’s insurance coverage prior to
the Commencement Date of the Master Leases, provided that there has not
been a casualty as to which the absence or scope of insurance has
injured LTC or an LTC-owned property that is subject to the Leases; and

	 	1.3.2.7.	 	LTC shall not assert an Event of Default as a consequence of any
potential failure to fulfill any requirement of the Leases that,
following a Change of Control, the surviving entity have a Net Worth of
equal to or greater than Seventy-Five Million Dollars ($75,000,000.00),
LTC and ALC hereby acknowledging and agreeing that any such surviving
entity Net Worth requirement, whether appearing in Section 18.1
of the Original Master Lease or elsewhere in the Leases, is hereby
reduced with respect to each and all of the Leases in which it appears
to an amount equal to or greater than Fifty Million Dollars
($50,000,000).

The parties acknowledge and agree that none of EHSI nor ALC, Inc. or
Carriage concede that any of the aforementioned defaults or Events of
Defaults have occurred or are occurring under the Leases, all of the
foregoing being expressly enumerated (a) in response to previously asserted
allegations of defaults under the Leases, and/or (b) because they constitute
matters that may, will or are likely to arise in connection with
consummation of the Merger; and it being further agreed and acknowledged
that this MOU shall not waive LTC’s right to enforce any provision of the
Master Leases which might give rise to an Identified Concern or Event of
Default, unless such provision is omitted from the Master Leases.
Accordingly, if there exists an Event of Default under the Leases, and if
the New Master Lease(s) contain the provisions which give rise to such Event
of Default, nothing in this MOU shall release or waive the resulting Event
of Default.

2. Miscellaneous.

	 	2.1.	 	Successors and Assigns. This MOU shall be binding upon and inure to the
benefit of LTC, EHSI, Alpha, and ALC/CHAL and their respective successors and permitted
assigns. No party may assign either this MOU or any of its rights, interests, or
obligations hereunder without the prior written approval of the other parties hereto.

	 	2.2.	 	Releases and Public Announcements. LTC shall be permitted to disclose publicly
the execution of this MOU and of the contemplated Master Leases. The parties shall use
commercially reasonable efforts to plan and coordinate such announcements.

	 	2.3.	 	Costs. Each party shall bear its own costs associated with the drafting,
review and execution and of this MOU, and all actions taken to prepare and execute the
Master Leases.

	 	2.4.	 	Amendment. No amendment of any provision of this MOU shall be valid unless the
same shall be in writing and signed by each of the parties.

	 	2.5.	 	Period of MOU and Termination. This MOU will become effective when signed by
all parties. If the Merger does not become effective on or before March 31, 2005 this
MOU shall be null and void and of no further force and effect, and the parties shall be
restored to their respective positions as if this MOU had never been executed.

	 	2.6.	 	Governing Law. This MOU shall be governed by and construed in accordance with
the domestic laws of the State of New York without giving effect to any choice or
conflict of law provision or rule (whether of the State of New York or any other
jurisdiction) that would result in the application of the laws of any jurisdiction
other than the State of New York. The parties agree that the state and federal courts
situated in and for New York County shall be the exclusive forum for any and all
disputes arising hereunder or under the Master Leases, and consent to the exclusive
jurisdiction and venue of said courts for such purposes, and agree not to seek a change
of venue in the event an action is initiated in said courts.

	 	2.7.	 	Each of LTC, Inc. and Texas-LTC shall be jointly and severally liable for the
obligations and liabilities under this MOU and the Master Leases of the other parties
identified in this subparagraph 2.7.

	 	2.8.	 	Each of Extendicare Health Services, Inc., Alpha Acquisition, Inc., Assisted
Living Concepts, Inc., and Carriage House Assisted Living, Inc shall be jointly and
severally liable for all of the obligations and liabilities under this MOU and under
the Master Leases and all extensions, amendments, and modifications of the Master
Leases of the other parties identified in this Section 2.8.

	 	2.9.	 	Headings. The section headings contained in this MOU are inserted for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this MOU.

	 	2.10.	 	Counterparts. This MOU may be executed in one or more counterparts,
including, without limitation, facsimile counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same instrument

	 	2.11.	 	Severability. Any term or provision of this MOU that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the validity or
enforceability of the remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other situation or in any
other jurisdiction.

	 	2.12.	 	Construction. The parties have participated jointly in the negotiation and
drafting of this MOU. In the event an ambiguity or question of intent or
interpretation arises, this MOU shall be construed as if drafted jointly by the
parties, and no presumption or burden of proof shall arise favoring or disfavoring any
party by virtue of the authorship of any of the provisions of this MOU. Any reference
to any federal, state, local, or foreign statute or law shall be deemed also to refer
to all rules and regulations promulgated thereunder, unless the context requires
otherwise.

	 	2.13.	 	Further Assurances. Upon the terms and subject to the conditions of this MOU,
each of the parties shall use commercially reasonable efforts to take, or cause to be
taken, all action, to do, or cause to be done, all other things necessary, proper or
advisable to consummate and make effective as promptly as practical the transactions
contemplated by this MOU.

	 	2.14.	 	LTC confirms that to the best of its knowledge (without having undertaken any
investigation or inquiry) it has no notice or knowledge of any existing Events of
Default under the Leases, including any circumstances that could ripen into Events of
Default upon delivery of notice, passage of time or both, excepting the Identified
Concerns and the Change of Control. In addition, LTC confirms that to the best of its
knowledge (without having undertaken any investigation or inquiry) it has no notice or
knowledge of any accrued or unpaid obligation of ALC to pay rent or other moneys to
LTC, whether under any lease or otherwise, other than regularly accruing Minimum Rent
and Additional Charges under the Leases, none of which is delinquent or otherwise past
due, or, as provided in this MOU following execution thereof, the Master Leases. For
purposes of this MOU, LTC’s “knowledge” is only that information which is actually
known to Wendy Simpson or to Andre Dimitriadis as of the date of execution of this MOU.

	 	2.15.	 	Notices. All notices, requests, demands, claims, and other communications
hereunder shall be in writing. Any notice, request, demand, claim, or other
communication hereunder shall be deemed to have been duly given when delivered in
person, by overnight courier or facsimile to the intended recipient as set forth below:

If to LTC:

LTC Properties, Inc.

Attn: Chief Executive Officer

22917 Pacific Coast Highway

#350

Malibu, CA 90265

Facsimile: (805) 981-8663

with a copy to:

Reed Smith LLP

599 Lexington Avenue, 29th Floor

New York, NY 10022

Attention: Herbert Kozlov

Facsimile: (212) 521-5450

If to EHSI or Alpha:

Extendicare Health Services Inc.

111 West Michigan Street

Milwaukee, WI 53203-2903

Attention: General Counsel

Facsimile: (414) 908-8481

with a copy to:

Foley & Lardner LLP

777 East Wisconsin Avenue

Milwaukee, Wisconsin 53202-5367

Attention: Hugh J. O’Halloran

Facsimile: (414) 297-4900

If to ALC, Inc. or Carriage:

c/o Extendicare Health Services Inc.

111 West Michigan Street

Milwaukee, WI 53203-2903

Attention: General Counsel

Facsimile: (414) 908-8481

with a copy to:

Foley & Lardner LLP

777 East Wisconsin Avenue

Milwaukee, Wisconsin 53202-5367

Attention: Hugh J. O’Halloran

Facsimile: (414) 297-4900

	 	2.16	 	Signature of ALC, Inc and Carriage. EHSI and Alpha represent, warrant and
agree that immediately upon the consummation of the Merger they shall cause ALC, Inc.
and Carriage to execute and deliver this MOU to LTC, and that the failure for any
reason of EHSI and Alpha to do so would constitute a material breach by them of this
MOU. Accordingly, none of LTC, EHSI or Alpha shall assert that the failure of ALC, Inc.
and Carriage to execute this MOU prior to consummation of the Merger renders this MOU
unenforceable or incomplete.

The parties have executed this MOU as of the date first above written.

	 	 	 

1

	 	 	 
	 
	 	 
	LTC PROPERTIES, INC.

	 	EXTENDICARE HEALTH SERVICES, INC.
	 

	 	 
	 
	 	 
	By: /s/ Wendy Simpson

	 	By: /s/ Richard Bertrand
	 

	 	 
	 
	 	 
	Name: Wendy Simpson

	 	Name: Richard Bertrand
	 

	 	 
	 
	 	 
	Title: Vice Chairman, Chief

Financial Officer

	 	

Title: Chief Financial Officer
	 

	 	 
	 
	 	 
	TEXAS-LTC LIMITED PARTNERSHIP

	 	ALPHA ACQUISITION, INC.
	 

	 	 
	 
	 	 
	By: /s/ Wendy Simpson

	 	By: /s/ Richard Bertrand
	 

	 	 
	 
	 	 
	Name: Wendy Simpson

	 	Name: Richard Bertrand
	 

	 	 
	 
	 	 
	Title: Vice Chairman, Chief

Financial Officer

	 	

Title: Chief Financial Officer
	 

	 	 

	 	 	 

	 	 	 
	ASSISTED LIVING CONCEPTS, INC CARRIAGE HOUSE ASSISTED LIVING, INC.
	By: /s/ Richard Bertrand By: /

	 	s/ Richard Bertrand
	aaaaaaaaaaaaaaaaaaaaaaaa aaaaa

	 	 
	 
	 	 
	Name: Richard Bertrand Name:

	 	Richard Bertrand
	aaaaaaaaaaaaaaaaaaaaaa aaaaa

	 	 
	 
	 	 
	Title: Chief Financial

Officer Title

	 	

: Chief Financial Officer
	aaaaaaaaaaaaaaaaaaaaaaaaaaaaa aaaaa

	 	 
	 
	 	 

2

	 	 	 

	 	 	 	 	 
	EXHIBIT A	 	 
	Property	 	# of	ALC 2005	2006 2007	2008 2009	2010 2011	2012 2013	2014 2015
	Name City	 	St Cnt	Units Party	Rent Rent	Rent Rent	Rent Rent	Rent Rent	Rent Rent	Rent
	Master Lease I	 	 	 	 
	Maurice            Millville
	 	NJ                           1                     39                     (A)
	aaaaaaa aaaaaaaaa
	 	 	 	 
	Reed            N. Denison
	 	IA                           1                     35                     (A)
	aaaa aaaaaaaaaa
	 	 	 	 
	Annabelle            Caldwell
	 	ID                           1                     35                     (A)
	aaaaaaaaa aaaaaaaa
	 	 	 	 
	Clearwater            Nampa
	 	ID                           1                     39                     (A)
	aaaaaaaaaa aaaaa
	 	 	 	 
	Sylvan            Hayden
	 	ID                           1                     39                     (A)
	aaaaaa aaaaaa
	 	 	 	 
	Warren            Burley
	 	ID                           1                     35                     (A)
	aaaaaa aaaaaa
	 	 	 	 
	Caldwell            Troy
	 	OH                           1                     39                     (A)
	aaaaaaaa aaaa
	 	 	 	 
	River Bend            Wheelersburg
	 	OH                           1                     39                     (A)
	aaaaaaaaaa aaaaaaaaaaaa
	 	 	 	 
	Seneca            Tiffin
	 	OH                           1                     35                     (A)
	aaaaaa aaaaaa
	 	 	 	 
	Chestnut            Newark
	 	OH                           1                     39                     (A)
	aaaaaaaa aaaaaa
	 	 	 	 
	Rutherford            Fremont
	 	OH                           1                     39                     (A)
	aaaaaaaaaa aaaaaaa
	 	 	 	 
	Angelina            Jacksonville
	 	TX                           1                     39                     (A)
	aaaaaaaa aaaaaaaaaaaa
	 	 	 	 
	Harrison            Greenville
	 	TX                           1                     41                     (A)
	aaaaaaaa aaaaaaaaaa
	 	 	 	 
	Lakeland            Athens
	 	TX                           1                     38                     (A)
	aaaaaaaa aaaaaa
	 	 	 	 
	Neches            Lufkin
	 	TX                           1                     39                     (A)
	aaaaaa aaaaaa
	 	 	 	 
	Oakwood            Marshall
	 	TX                           1                     40                     (A)
	aaaaaaa aaaaaaaa
	 	 	 	 
	Alpine            Longview
	 	TX                           1                     30                     (A)
	aaaaaa aaaaaaaa
	 	 	 	 
	Arbor            S. Wichita Falls
	 	TX                           1                     50                     (A)
	aaaaa aaaaaaaaaaaaaaaa
	 	 	 	 
	 
	 	 	18                     690                                         4,500,000              4,660,000             4,823,200             4,989,664             5,089,457             5,191,246             5,295,071             5,400,973             5,508,992             5,619,172             5,731,556	 
	 
	 	 	 	 
	Master Lease II
	 	 	 	 
	 
	 	 	 	 
	Chenowick            Kennewick
	 	WA                           1                     36                     (A)
	aaaaaaaaa aaaaaaaaa
	 	 	 	 
	Lexington            Vancouver
	 	WA                           1                     44                     (A)
	aaaaaaaaa aaaaaaaaa
	 	 	 	 
	Mountainview            Camas
	 	WA                           1                     36                     (A)
	aaaaaaaaaaaa aaaaa
	 	 	 	 
	Orchard            Grandview
	 	WA                           1                     36                     (A)
	aaaaaaa aaaaaaaaa
	 	 	 	 
	Pioneer            Walla Walla
	 	WA                           1                     36                     (A)
	aaaaaaa aaaaaaaaaaa
	 	 	 	 
	Crawford            Kelso
	 	WA                           1                     40                     (A)
	aaaaaaaa aaaaa
	 	 	 	 
	Karr            Hoquiam
	 	WA                           1                     40                     (A)
	aaaa aaaaaaa
	 	 	 	 
	Colonial            Battleground
	 	WA                           1                     40                     (A)
	aaaaaaaa aaaaaaaaaaaa
	 	 	 	 
	Davis            Bullhead City
	 	AZ                           1                     40                     (A)
	aaaaa aaaaaaaaaaaaa
	 	 	 	 
	Jasmine            Lake Havasu
	 	AZ                           1                     36                     (A)
	aaaaaaa aaaaaaaaaaa
	 	 	 	 
	Linkville            Klamath Falls
	 	OR                           1                     36                     (A)
	aaaaaaaaa aaaaaaaaaaaaa
	 	 	 	 
	Sawyer            Eugene
	 	OR                           1                     47                     (A)
	aaaaaa aaaaaa
	 	 	 	 
	Spencer            Newport
	 	OR                           1                     36                     (A)
	aaaaaaa aaaaaaa
	 	 	 	 
	Jewel            Madison
	 	IN                           1                     39                     (A)
	aaaaa aaaaaaa
	 	 	 	 
	Beardsley            Elkhart
	 	IN                           1                     39                     (A)
	aaaaaaaaa aaaaaaa
	 	 	 	 
	Homestead            Beatrice
	 	NE                           1                     39                     (B)
	aaaaaaaaa aaaaaaaa
	 	 	 	 
	Mahoney            York
	 	NE                           1                     39                     (B)
	aaaaaaa aaaa
	 	 	 	 
	Madison            Norfolk
	 	NE                           1                     39                     (B)
	aaaaaaa aaaaaaa
	 	 	 	 
	Saunders            Wahoo
	 	NE                           1                     39                     (B)
	aaaaaaaa aaaaa
	 	 	 	 
	 
	 	 	19                     737                                         4,864,785              5,142,081             5,424,922             5,713,421             5,827,689             5,944,243             6,063,128             6,184,390             6,308,078             6,434,240             6,562,925	 
	 
	 	 	 	 
	Total — LTC
	 	 	37                    1,427                                        9,364,785              9,802,081            10,248,122            10,703,085            10,917,146            11,135,489            11,358,199            11,585,363            11,817,070            12,053,412            12,294,480	 
	 
	 	 	 	 
	(A) Assisted Living Concepts, Inc.
	 	 	 	 
	 
	 	 	 	 
	(B) Carriage House Assisted Living, Inc.
	 	 	 	 
	 
	 	 	 	 
	LTC has a floorplan and a physical site visit that supports 41 units at Greenville.

	 

3

Exhibit B

Form of Notice of Substitution

1. Date of Notice:

2. A check payable to LTC Properties, Inc. in the amount of $10,000 is attached

3. Location of Property being substituted out of Master Lease (“Substituted Property”):

4. Location of Property being substituted into the Master Lease (“Substitute Property”):

5. Anticipated closing date:

	 	6.	 	Status and list of all required licenses necessary to operate the each of the
Substituted Property and the Substitute Property as an assisted living facility under
applicable laws:

	 	7.	 	State the number of assisted living units in each the each of the Substituted Property
and the Substitute Property:

	 	8.	 	For each of the Substituted Property and the Substitute Property, measured as at the
close of the fiscal quarter immediately preceding the Notice of Substitution, the EBITDARM
for each of the trailing three (3) months and the trailing twenty-four (24) months,
respectively, were as follows.

	 	9.	 	For each of the Substituted Property and the Substitute Property identify all
encumbrances, liens, encroachments, recorded building and use restrictions, recorded
easements and similar matters of record and unrecorded leases and occupancy agreements.
Specify which of the foregoing adversely affect the use, value or operation of property.
Provide an accurate title report pertaining to the Substitute Property, which title report
shall be updated by Assisted Living Concepts, Inc. to the date of closing.

	 	10.	 	Confirm that the Substitute Property is in compliance with all state and federal
regulations, including all licensing and operating requirements, all state and local
building and zoning codes, and other requirements necessary to allow a change of ownership
or necessary to operate the Substitute Facility as an assisted living facility;

	 	11.	 	Confirm that the Substitute Property is in material compliance with all applicable
laws, rules or regulations governing the use, handling, storage and disposal of hazardous
substances; deliver all Phase I Environmental reports pertaining to the property. (Note:
Prior to the closing ALC must deliver a Phase I Environmental report dated no more than six
(6) months old evidencing compliance);

	 	12.	 	With respect to the Substitute Property, provide a report as to the physical and
mechanical condition and repair and confirm that the Substitute Property shall not require
any capital improvements or repairs in excess of $30,000.

The undersigned is duly authorized to deliver this Notice of Substitution to LTC Properties,
Inc. and understands and acknowledges that LTC Properties, Inc. shall rely on the accuracy of
the information set forth herein in LTC Properties, Inc.’s efforts to consummate the
substitution transaction contemplated hereby and by the applicable provisions of the Master
Lease. Assisted Living Concepts, Inc. agrees promptly to inform LTC Properties, Inc. of any
errors, omissions and changed circumstances with respect to the information set forth herein.
Without limitation to the foregoing, Assisted Living Concepts, Inc. shall update LTC Properties,
Inc. with respect to the information set forth in items 6-12 three business days prior to the
closing of the substitution contemplated hereby.

	 	 	 	 	 
	ASSISTED LIVING CONCEPTS, INC

	 

	 
	By:

	 

	 

	Name:

	 

	 

	Title:

	 

4

EXHIBIT C

Fair Market Rent Provisions

For purposes of the Master Leases, Fair Market Rent shall be determined as hereinafter
described:

a. If LTC and ALC cannot agree on the Fair Market Rent within thirty (30) days after the date
of ALC’s notice of exercise for the third Extended Term, each party shall, by notice to the other,
appoint a disinterested and licensed M.A.I. Real Estate Appraiser with at least five years of
experience in assisted care properties in the states in which the Leased Properties covered by the
relevant Master Lease are located (with the same type of operating license then in effect for the
relevant facilities) to determine the Fair Market Rent. If any party should fail to appoint an
appraiser within ten (10) days after notice, the appraiser selected by the other party shall
determine the Fair Market Rent. In determining the Fair Market Rent, each appraiser shall give
appropriate consideration to, among other things, generally applicable minimum rent for tenancies
of property comparable to the Leased Properties in the areas in which the Leased Properties are
located.

b. If the two appraisers selected pursuant to the foregoing paragraph cannot agree upon the
Fair Market Rent within forty-five (45) days, they shall immediately give written notice of such
inability (“Notice of Disagreement”) to both LTC and ALC setting forth the Fair Market Rent
determinations of each of the appraisers. If the determinations of each of the two appraisers of
the Fair Market Rent at the commencement of such third Extended Term differ by less than ten
percent (10%) of the lower determination, the Fair Market Rent shall be fixed at an amount equal to
the average of the two determinations.

c. If the determinations of each of the two appraisers selected pursuant to Paragraph a. above
differ by ten percent (10%) or more of the lower determination with respect to the Fair Market Rent
to be paid at the commencement of such third Extended Term, then within thirty (30) days after the
giving of the Notice of Disagreement, the two appraisers shall appoint a third disinterested and
licensed M.A.I. Real Estate Appraiser with at least 5 years of experience in the states in which
the Leased Properties covered by the relevant Master Lease are located (with the same type of
operating license then in effect for the relevant facilities). If the parties cannot then agree on
the Fair Market Rent, the third appraiser shall determine the Fair Market Rent, and in so doing,
shall give appropriate consideration to those items described in Paragraph a. above. The third
appraiser shall not select a Fair Market Rent either (a) higher than the highest of the two
appraisals made pursuant to Paragraph a. above; or (b) lower than the lowest of the two appraisals
made pursuant to Paragraph a. above. If the first two appraisers cannot agree on the selection of
a third appraiser within such thirty (30) days, or if the first two appraisers fail to provide a
Notice of Disagreement (as stated above in Paragraph b. above), then the Fair Market Rent shall be
determined by a third appraiser selected by the American Arbitration Association (or such other
organization at LTC’s election) upon application by LTC.

d. During the time before the determination of the Fair Market Rent, ALC shall continue to pay
Minimum Rent at the same rate as paid immediately preceding the subject Extended Term; provided,
however, that, once the adjusted Fair Market Rent is determined, the Minimum Rent owed by ALC at
the adjusted Fair Market Rent rate shall be effective retroactively as of the first day of such
Extended Term. If, after the Minimum Rent for the third Extended Term is adjusted and applied
retroactively as of the first day of such Extended Term, it is determined that additional Minimum
Rent is due LTC, the aggregate amount of any such additional Minimum Rent shall be paid to LTC
within thirty (30) days of the determination of the adjusted Fair Market Rent for such Extended
Term.

e. Each of the parties shall pay the fees of the appraiser that it selects pursuant to
Paragraph a. above, and shall equally share the cost of the third appraiser, if necessary, and
shall equally share the cost of arbitration (excluding attorneys’ fees), if necessary.

5

EXHIBIT D

(Per Section 1.2.5)

ARTICLE XIII

13.1. Property Insurance Requirements. Subject to the provisions of Section 13.6,
during the Term, Lessee shall at all times keep the Leased Property, and all property located in or
on the Leased Property, including Lessee’s Personal Property, insured with the kinds and amounts of
insurance described below and any additional insurance reasonably required by Lessor to protect its
interest in the Leased Property. This insurance shall be written by companies authorized to do
insurance business in the States in which the Leased Property is located. The policies must name
Lessor as an additional insured and/or loss payee, as applicable. Losses shall be payable to Lessor
or Lessee as provided in Article XIV. In addition, upon Lessor’s written request, the policies
shall name as an additional insured and/or loss payee, as applicable, the holder (“Facility
Mortgagee”) of any mortgage, deed of trust or other security agreement and any other Encumbrance
placed on the Leased Property in accordance with the provisions of Article XXXII and expressly
including, without limitation, the Existing Encumbrances (a “Facility Mortgage”) by way of a
standard form of mortgagee’s loss payable endorsement. Any loss adjustment shall require the
written consent of Lessor, Lessee, and each Facility Mortgagee. Evidence of insurance shall be
deposited with Lessor and, if requested, with any Facility Mortgagee. If any provision of any
Facility Mortgage requires deposits of premiums for insurance to be made with such Facility
Mortgagee, Lessee shall either pay to Lessor monthly the amounts required and Lessor shall transfer
such amounts to each Facility Mortgagee, or, pursuant to written direction by Lessor, Lessee shall
make such deposits directly with such Facility Mortgagee. The policies on the Leased Property,
including the Leased Improvements, Fixtures and Lessee’s Personal Property, shall insure against
the following risks:

13.1.1 Insurance against loss or damage by fire, casualty and other hazards as now are or
subsequently may be covered by an “all risk” policy or a policy covering “special” causes of loss,
with such endorsements as Lessor (or a Facility Mortgagee) may from time to time reasonably require
and which are customarily required by institutional lenders of similar properties similarly
situated, including, without limitation, building ordinance law, lightning, windstorm, civil
commotion, hail, riot, strike, water damage, sprinkler leakage, collapse, malicious mischief,
explosion, smoke, aircraft, vehicles, vandalism, falling objects and weight of snow, ice or sleet,
and covering the Leased Property in an amount equal to 100% of the full insurable replacement value
of the Leased Property (exclusive of footings and foundations below the lowest basement floor)
without deduction for depreciation. The determination of the replacement cost amount shall be
adjusted annually to comply with the requirements of the insurer issuing the coverage or, at
Lessor’s (or a Facility Mortgagee’s) election, by reference to such indexes, appraisals or
information as Lessor’s (or a Facility Mortgagee’s) determines in its reasonable discretion, and,
unless the insurance required by this paragraph shall be effected by blanket and/or umbrella
policies in accordance with the requirements of this Lease, the policy shall include inflation
guard coverage that ensures that the policy limits will be increased over time to reflect the
effect of inflation. Each policy shall, subject to Lessor’s (or a Facility Mortgagee’s) approval,
contain (i) a replacement cost endorsement, without deduction for depreciation, (ii) either an
agreed amount endorsement or a waiver of any co-insurance provisions, and (iii) an ordinance or law
coverage or enforcement endorsement if the Improvements or the use of the Property constitutes any
legal nonconforming structures or uses, and shall provide for deductibles in such amounts as Lessor
(or a Facility Mortgagee) may permit in its sole discretion.;

13.1.2 If the Leased Property contains steam boilers, steam pipes, steam engines, steam
turbines or other high pressure vessels, insurance covering the major components of the central
heating, air conditioning and ventilating systems, boilers, other pressure vessels, high pressure
piping and machinery, elevators and escalators, if any, and other similar equipment installed in
the Leased Improvements, in an amount equal to one hundred percent (100%) of the full replacement
cost of the Leased Improvements, which policies shall insure against physical damage to and loss of
occupancy and use of the Leased Improvements arising out of an accident or breakdown covered
thereunder;

13.1.3 Business and rental interruption insurance (i) covering the same perils of loss as are
required to be covered by the property insurance required under Section 13.1.1 and 13.1.2 above,
(ii) in an amount equal to the projected annual net income from the Leased Property plus carrying
costs and extraordinary expenses of the Leased Property for a period of twelve (12) months, based
upon Lessee’s reasonable estimate thereof as approved by Lessor (or a Facility Mortgagee), (iii)
including either an agreed amount endorsement or a waiver of any co-insurance provisions, so as to
prevent Lessee, Lessor and any other insured thereunder from being a co-insurer, and (iv) providing
that any covered loss thereunder shall be payable to Lessor;

13.1.4 During the period of any new construction on the Leased Property, a so called
“Builder’s All-Risk Completed Value” or “Course of Construction” insurance policy in non-reporting
form for any improvements under construction, including, without limitation, for demolition and
increased cost of construction or renovation, in an amount equal to 100% of the estimated
replacement cost value on the date of completion, including “soft cost” coverage, and Workers’
Compensation Insurance covering all persons engaged in such construction, in an amount at least
equal to the minimum required by law. In addition, each contractor and subcontractor shall be
required to provide Facility Mortgagee with a certificate of insurance for (i) workers’
compensation insurance covering all persons engaged by such contractor or subcontractor in such
construction in an amount at least equal to the minimum required by law, and (ii) general liability
insurance showing minimum limits of at least $5,000,000, including coverage for products and
completed operations. Each contractor and subcontractor also shall cover Lessee and Lessor (and
any Facility Mortgagee) as an additional insured under such liability policy and shall indemnify
and hold Lessee and Lessor (and any Facility Mortgagee) harmless from and against any and all
claims, damages, liabilities, costs and expenses arising out of, relating to or otherwise in
connection with its performance of such construction;

13.1.5. Replacement Cost. The term “full replacement cost” as used herein, shall mean the
actual replacement cost of the Leased Property requiring replacement from time to time including an
increased cost of construction endorsement, less exclusions provided in the standard form of fire
insurance policy. In the event either party believes that full replacement cost (the then
replacement cost less such exclusions) has increased or decreased at any time during the Term, it
shall have the right to have such full replacement cost redetermined;

13.1.6. Additional Insurance. In addition to the insurance described above, Lessee shall
maintain such additional insurance as may be reasonably required from time to time by Lessor or any
Facility Mortgagee; and

13.1.7. Waiver of Subrogation. All insurance policies carried by either party covering any
part of the Leased Property, the Fixtures, the Facilities, or Lessee’s Personal Property including
without limitation, contents, fire and casualty insurance, shall expressly waive any right of
subrogation on the part of the insurer against the other party. The parties hereto agree that
their policies will include such waiver clause or endorsement so long as the same are obtainable
without extra cost, and in the event of such an extra charge the other party, at its election, may
pay the same, but shall not be obligated to do so.

13.2. Other Insurance Requirements. Subject to the provisions of Section 13.6, during
the Term, Lessee shall at all times keep the Leased Property, and all property located in or on the
Leased Property, including Lessee’s Personal Property, insured with the kinds and amounts of
insurance described below.

13.2.1. Commercial general liability insurance under a policy containing “Comprehensive
General Liability Form” of coverage (or a comparably worded form of coverage) and the “Broad Form
CGL” endorsement (or a policy which otherwise incorporates the language of such endorsement), which
policy shall include, without limitation, coverage against claims for personal injury, bodily
injury, death and property damage liability without respect to the Leased Property and the
operations related thereto, whether on or off the Leased Property, and the following coverages:
Employee as Additional Insured, Product Liability/Completed Operations; Broad Form Contractual
Liability, Independent Contractor, Personal Injury and Advertising Injury Protection, Medical
Payment (with a minimum limit of $5,000 per person), Broad Form Cross Suits Liability Endorsement,
where applicable, hired and non-owned automobile coverage (including rented and leased vehicles),
and, if any alcoholic beverages shall be sold, manufactured or distributed in the Leased Property,
liquor liability coverage, all of which shall be in such amounts as Lessor may from time to time
reasonably require, but not less than One Million Dollars ($1,000,000) per occurrence, Three
Million Dollars ($3,000,000) per Facility, and a policy aggregate limit of Ten Million Dollars
($10,000,000). If such policy shall cover more than one Facility, such limits shall apply on a
“per location” basis, subject to the policy aggregate limit of Ten Million Dollars ($10,000,000).
Such liability policy shall delete the contractual exclusion under the personal injury coverage, if
possible, and if available, shall include the following endorsements: Notice of Accident, Knowledge
of Occurrence, and Unintentional Error and Omission;

13.2.2 Professional liability insurance coverage in an amount equal to not less than One
Million Dollars ($1,000,000) per occurrence and Five Million Dollars ($5,000,000) in the aggregate;

13.2.3 Flood insurance in an amount equal to the full insurable value of the Leased Property
or the maximum amount available, whichever is less, if the Leased Property is located in an area
designated by the Secretary of Housing and Urban Development or the Federal Emergency Management
Agency as having special flood hazards; and

13.2.4 Workers’ compensation insurance (including self-insurance and Texas non-subscription
coverage) and/or other similar insurance which may be required by governmental authorities or
applicable legal requirements in an amount at least equal to the minimum required by law, and
employer’s liability insurance with a limit of One Hundred Thousand Dollars ($100,000) per accident
and per disease per employee, and Five Hundred Thousand Dollars ($500,000) in the aggregate for
disease arising in connection with the operation of the Leased Property.

13.2.5 Additional Insurance. In addition to the insurance described above, Lessee shall
maintain such additional insurance as may be reasonably required from time to time by Lessor or any
Facility Mortgagee and shall further at all times maintain, to the extent required by applicable
law, worker’s compensation insurance coverage (including self-insurance and Texas non-subscription
coverage) for all persons employed by Lessee (or its agent or operator) on the Leased Property; and

13.3. Form Satisfactory, etc. All of the policies of insurance referred to in this Article
XIII shall be written in a form reasonably satisfactory to Lessor and by insurance companies
reasonably satisfactory to Lessor (and, as applicable, any Facility Mortgagee). Subject to the
foregoing, Lessor agrees that it will not unreasonably withhold or delay its approval as to the
form of the policies of insurance or as to the insurance companies selected by Lessee. Lessee
shall pay all of the premiums therefor, and deliver such policies or certificates thereof to Lessor
prior to their effective date (and, with respect to any renewal policy, prior to the expiration of
the existing policy), and in the event of the failure of Lessee either to effect such insurance as
herein called for or to pay the premiums therefor, or to deliver such policies or certificates
thereof to Lessor at the times required, Lessor shall be entitled, but shall have no obligation, to
effect such insurance and pay the premiums therefor, which premiums shall be repayable by Lessee to
Lessor upon written demand therefor, and failure to repay the same shall constitute an Event of
Default within the meaning of Section 16.1. Each insurer mentioned in this Article XIII shall
agree, by endorsement on the policy or policies issued by it, or by independent instrument
furnished to Lessor, that it will give to Lessor (and to any Facility Mortgagee, if required by the
same) thirty (30) days’ written notice before the policy or policies in questions shall be altered,
allowed to expire or canceled.

13.4. Increase in Limits. In the event that a Facility Mortgagee shall at any time reasonably
determine the limits of the personal injury or property damage, or public liability insurance then
carried to be insufficient, Lessee shall thereafter carry the insurance with increased limits until
further change pursuant to the provisions of this Section; provided that if Lessor desires to
increase the limits of insurance, and such is not pursuant to the request of a Facility Mortgagee,
then Lessor may not demand an increase in limits above the limits generally consistent with the
requirements of owners of long term care properties in the state in which the applicable Facility
is located.

13.5. Blanket Policy. Notwithstanding anything to the contrary contained in this Article
XIII, Lessee’s obligations to carry the insurance provided for herein may be brought within the
coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee;
provided, however, that the coverage afforded Lessor will not be reduced or diminished or otherwise
be different from that which would exist under a separate policy meeting all other requirements of
this Lease by reason of the use of such blanket policy of insurance, and provided further that the
requirements of this Article XIII shall be met in any such blanket policy.

13.6. No Separate Insurance. Lessee shall not on Lessee’s own initiative or pursuant to the
request or requirement of any third party take out separate insurance concurrent in form or
contributing in the event of loss with that required in this Article, to be furnished or which may
reasonably be required to be furnished, by Lessee or increase the amount of any then existing
insurance by securing any additional policy or additional policies, unless all parties having an
insurable interest in the subject matter of the insurance, including in all cases Lessor and all
Facility Mortgagees are included therein as additional insureds, and the loss is payable under said
insurance in the same manner as losses are payable under the Lease. Lessee shall immediately
notify Lessor of the taking out of any such separate insurance or of the increasing of any of the
amount of the then existing insurance.

13.7. Continuous Coverage. Prior to the Commencement Date, Lessee was the tenant and operator
of the Leased Property, and prior to that, Lessee was the owner and operator of the Leased
Property. Therefore, Lessee already has in place insurance with respect to the Leased Property.
Lessee shall assure that there is no gap in the insurance coverage provided in connection with the
Leased Property at or after the Commencement Date, and therefore, the insurance provided by Lessee
shall be continuous, with the types and amounts of coverage, described herein to be applicable on
the Commencement Date. To the extent there is not full, complete and continuous coverage for all
issues, no matter when arising, claimed or occurring, Lessee shall, at its sole cost, obtain such
insurance.

ARTICLE XIV

14.1. Insurance Proceeds. All proceeds payable by reason of any loss of or damage to
the Leased Property, or any portion thereof, which is insured under any policy of insurance
required by Article XIII of the Lease shall be paid to Lessee. Such amounts shall be
applied to the reconstruction or repair, as the case may be, of any damage to or destruction of
the Leased Property, or any portion thereof, unless Lessee exercises its right of substitution
under Section      . The funds shall be disbursed based upon work performed. Any excess
proceeds of insurance remaining after the completion of the restoration or reconstruction of the
Leased Property shall go to Lessee. All salvage resulting from any risk covered by insurance
shall belong to Lessor except that any salvage relating to Lessee’s Personal Property shall belong
to Lessee.

14.2. Reconstruction in the Event of Damage or Destruction Covered by Insurance
Proceeds. Subject to Lessee’s right of substitution, as provided by Section      , if
during the Term, the Leased Property is totally or partially destroyed by a risk covered by the
insurance described in Article XIII and whether or not any Facility thereby is rendered
Unsuitable for its Primary Intended Use, Lessee shall restore the Leased Property to substantially
the same condition as existed immediately before the damage or destruction. Lessee shall be
entitled to the insurance proceeds for the purpose of such repair and restoration.

14.3 Reconstruction in the Event of Damage or Destruction Not Covered bv Insurance.
Subject to Lessee’s right of substitution, as provided by Section      , if during the Term,
the Leased Property is damaged or destroyed irrespective of the extent of the damage from a risk
not fully covered by the insurance described in Article XIII, whether or not such damage
renders any portion of the Leased Property Unsuitable for Its Primary Intended Use, Lessee shall
restore the damaged Leased Property to substantially the same condition it was in immediately
before such damage or destruction and such damage or destruction shall not terminate this Lease
nor result in any reduction in Rent (including without limitation Minimum Rent).

14.4. Lessee’s Property. All insurance proceeds payable by reason of any loss of or
damage to any of Lessee’s Personal Property shall be paid to Lessee. Lessee shall hold such
insurance proceeds in trust to pay the cost of repairing or replacing damaged Lessee’s Personal
Property, unless Lessee exercises its right of substitution under Section      .

14.5. Restoration of Lessee’s Property. Without limiting Lessee’s obligation to
restore the Leased Property as provided in Sections 14.2 and 14.3, Lessee shall
also restore all alterations and improvements made by Lessee, including Lessee’s Personal
Property but only to the extent that Lessee’s Personal Property is necessary to the operation of
the Leased Property for its Primary Intended Use in accordance with applicable Legal
Requirements.

14.6. No Abatement of Rent. This Lease shall remain in full force and effect and
Lessee’s obligation to make rental payments and to pay all other charges required by this Lease
shall not be abated during the pendency of repair or restoration.

6EX-10.1

I, C. Matthew Smith and P. H. Glatfelter Company, (hereinafter “Glatfelter” or
“Company”), hereby enter into this Severance Agreement and General Release (hereinafter “Agreement”
or “Agreement and General Release”) dated January 31, 2005 concerning my termination of employment
with Glatfelter. I agree to the terms of this Agreement on behalf of myself, and my heirs, estate,
executors, administrators, successors, and assigns. Glatfelter enters into this Agreement on
behalf of P. H. Glatfelter Company, d/b/a Glatfelter, and its directors, officers, agents,
employees, and insurers, and its respective past, present, and future parents, affiliated
companies, subsidiaries, successors, and assigns (the “Releasees”). Glatfelter and I have agreed
to the following terms to resolve, settle and terminate any dispute or claim we may have about my
employment with Glatfelter, including but not limited to my departure therefrom:

The “Termination Date” as used herein, and as it relates to my departure from employment with the
Company, shall be January 31, 2005.

If I accept this offer by signing this Agreement and General Release, Glatfelter shall make the
following payments and provide the following benefits, provided that I abide by the terms and
conditions hereof:

(a) Severance Pay: The Company will pay me 52 weeks pay (hereinafter “Severance
Period”), less applicable withholdings, in accordance with the Company’s regular payroll practices.
Payments begin February 1, 2005 and will continue for 52 consecutive weeks.

(b) Healthcare Benefits:

(i) If I accept this offer, and elect to continue health and dental benefits
under COBRA, the Company will bridge the difference between my regular medical benefit
premium, (the “employee portion”), and the full COBRA payment, for a minimum of 2 months and
a maximum of the length of the severance period. The employee portion will either be
deducted from my severance payments, or I may be billed appropriately. This COBRA “bridge”
benefit will cease if I become eligible for reasonably equivalent healthcare benefits at the
employer’s expense with a new employer during the Severance Period. I understand that after
the end of my Severance Period (or such earlier date as of which this COBRA “bridge” benefit
shall cease), I will be responsible for the full cost of COBRA coverage.

(ii) If I accept this offer and elect to receive “bridge” payments by the Company
for continued health and dental benefits under COBRA, I am hereby waiving any and all rights
or entitlements I may have to future benefits under the Company’s retiree medical plan.
I will be presumed to have elected to receive “bridge” payments unless I specifically
request in writing upon the acceptance of this offer that the Company not make such
payments. I understand that the Company reserves its rights to modify, amend or terminate
retiree medical benefits at any time. Therefore, I understand that I am not guaranteed any
future retiree medical benefits, even if I opt out of “bridge” payments under this offer.

(c) Outplacement Assistance: The Company will provide an outplacement services
package, which will be arranged for and paid by the Company. Quinlivan and Company will provide
the outplacement services. The Company also will provide a mutually agreed upon letter of
reference if requested. All such requests for references must be directed to either the Chief
Financial Officer or the Director of Corporate Human Resources & Global Compensation & Benefits.

(d) Executive Stock Options: With respect to Company stock options which have been
granted to me under the terms of the Company’s 1992 Key Employee Long-Term Incentive Plan (“the
LTIP”), and for which my right to exercise is vested immediately prior to my Termination Date, the
Compensation Committee of the Board will act, pursuant to its authority under the Section 6.4(j) of
the LTIP, to extend the post-termination exercise period for such vested stock options to March 21,
2006, but not beyond the expiration of the stated term of the applicable stock option.

(e) Restricted Stock Awards & Performance Cash Plan. With respect to Company
Restricted Stock Awards and Performance Cash Plan granted to me under the LTIP in 2000, 2001, and
2002, the performance periods for which end December 31, 2004, December 31, 2005, and December 31,
2005, respectively, I understand that the Compensation Committee must determine whether the
corporate performance goals for the Award have or will be satisfied, and that if such performance
goals for a performance period are determined not to be satisfied, then my Restricted Stock Award
and Performance Cash Plan with respect to that performance period will not be paid. The
Compensation Committee will act, pursuant to its authority under Section 7.2(f) of the LTIP, to
waive the requirement that I remain employed during the performance period with respect to my 2002
Restricted Stock Award and Performance Cash Plan. In the event that, following the close of the
applicable performance period and the certification by the Compensation Committee that the
performance goals specified in the Restricted Stock Award Certificate(s) and Performance Cash Plan
and all other material terms of the award have been satisfied, the Company shall transfer to me, as
soon as practicable following the Compensation Committee’s certification as aforesaid, shares of
Company common stock (less applicable withholding) equal to the number of shares specified in the
applicable Restricted Stock Award Certificate multiplied by a fraction, the denominator of which is
the number of whole calendar months in the performance period and the numerator of which is the
number of whole calendar months during the performance period that I was actively employed by the
Company prior to the Termination Date. The Company will also pay the Performance Cash Plan amount
upon certification by the Compensation Committee that the performance goals specified under the
Plan and all other material terms of the Plan have been satisfied. Such transfer may be modified or
delayed as necessary to comply with federal tax rules relating to deferred compensation. If the
Company makes a payment to holders of Restricted Stock Awards or Performance Cash Plan in lieu of
or on account of the performance periods ending December 31, 2004 or December 31, 2005, I will be
included among the participants who receive such payments as if my employment had not been
terminated.

(f) Long-term Disability. I will remain eligible for coverage under the Company’s
long-term disability plan, with respect to a qualifying illness or injury I may suffer during the
Severance Period, but before the date I become covered under the long-term disability plan or
arrangement with a new employer. I understand that the Company reserves the right to modify, amend
or terminate its program of long-term disability benefits at any time and will inform me if they do
so.

(g) Employee Assistance Plan: The Employee Assistance Program will be extended beyond
my Termination Date, and will include a maximum of three (3) sessions during the Severance Period.

(h) Vacation: If I accept this offer, the Company will pay my unused and remaining
vacation entitlement of 5 weeks for the year 2005. Said payment will be processed February 28,
2005.

(i) The Company will permit me to retain and use my Company-issued computer and cell phone
throughout the Severance Period.

(j) The Company will reimburse me for reasonable out-of-pocket business expenses incurred at
the Company’s request and on its behalf through the Severance Period.

(k) If I reasonably determine that I am eligible for unemployment compensation and make a
claim for such compensation, the Company will not oppose (and will cooperate in) that claim.

(l) The Company will reimburse me for (or pay on my behalf) the reasonable costs of legal
counsel of my choosing in connection with my termination of employment and this Agreement.

3. Even if I do not accept this offer and sign this Agreement and General Release:

(a) The Company will pay me any and all bonuses, incentives, and/or commissions that were
earned in the year preceding my termination, but are still due as of the Termination Date.

(b) The Company will pay me all compensation and benefits on account of my employment prior to
my termination date, including 401(k) matching contributions and pension credit for the portion of
2005 during which I was an employee. I understand that Employee 401(k) contributions and any
matching employer 401 (k) contributions cease as of my employment termination date, regardless of
whether I accept this offer.

(c) Further, regardless of whether I accept this offer, I understand that I will receive a
COBRA notice regarding continuation of healthcare benefits, under which I may continue health AND
dental insurance benefits for up to 18 months. My election of COBRA coverage is subject to Section
2(b).

(d) I will be eligible for payment of the Final Average Compensation Pension subject to the
terms and conditions of the Company’s Supplemental Executive Retirement Plan (the “SERP”). I
understand that the terms of the SERP may be modified to conform to the requirements of section
409A of the Internal Revenue Code.

4. The payments and promises by the Company set forth in this Agreement are in full
satisfaction of all bonus pay, profit-sharing, stock options, relocation expenses, termination
benefits, statutory entitlements or other compensation to which I may be entitled by virtue of my
employment with Glatfelter or separation therefrom. I understand that the payments and benefits
outlined in paragraph 2 (a)-(l) above are in addition to any other payment or benefit to which I
otherwise may be entitled under any of Glatfelter’s benefit plans and are valuable benefits that I
would not be otherwise be entitled to if I do not accept this offer.

5. In consideration for the payments and benefits which Glatfelter will provide to me under
Paragraph 2 (a)-(l) above, on behalf of myself and my heirs, estate, executors, administrators,
successors, and assigns, I knowingly and voluntarily release and agree to forever hold harmless
Glatfelter and its directors, officers, agents, employees, insurers, affiliated companies,
subsidiaries, successors and assigns (the “Releasees”) from all actions, causes of action, claims,
disputes, judgments, obligations, damages, and liabilities from any and all known and unknown
claims, which I, my heirs, executors, administrators and assigns may presently have, including, but
not limited to:

(a) Any claim relating to my employment with Glatfelter or lack of employment with Glatfelter,
including but not limited to, my employment termination and any Glatfelter actions which led to
that termination;

(b) Any claims of discrimination, harassment or retaliation, whether based on race, color,
religion, gender, sex, age, sexual orientation, handicap and/or disability, national origin or any
other legally-protected class;

(c) Any allegation, claim or violation arising under:

Title VII of the Civil Rights Act of 1964, as amended; Section 1981 of the Civil Rights Act of
1866; the Americans with Disabilities Act (“ADA”); the Employee Retirement Income Security Act of
1974, (“ERISA”); the federal Fair Labor Standards Act, including the Equal Pay Act; the Age
Discrimination in Employment Act of 1967, (the “ADEA”); the Family and Medical Leave Act of 1993
(the “FMLA”); the Worker Adjustment and Retraining Notification Act (“WARN”); the Act pertaining to
the Employment and Reemployment Rights of Members of the Uniformed Services, (“USERRA”); the
Immigration Reform and Control Act, the Occupational Safety and Health Act; the National Labor
Relations Act; the Pennsylvania Human Relations Act, and all regulations pertaining to the above
statutes, as any of the foregoing may have been amended; as well as any and all other tort,
contract, or statutory claims, and claims for wrongful misdoings related to my employment,
including but not limited to the termination of that employment; and/or claims for attorney’s fees,
punitive, compensatory and liquidated damages, expenses or costs;

(d) Any claim for attorneys’ fees, including litigation expenses or costs; and

(e) In addition, I understand that nothing in this Agreement shall be construed to prohibit me
from engaging in any activity that is protected by the Sarbanes-Oxley Act, 18 U.S.C. § 1514A.
However, I hereby waive and release any claim that I may currently have for retaliation under the
Sarbanes-Oxley Act.

	 	6.	 	I understand and agree that this Agreement and General Release extends to every
claim, known or unknown, suspected or unsuspected, past or present, other than workers’
compensation or unemployment compensation claims, or claims for any accrued benefit
under the terms of any employee benefit plan within the meaning of ERISA maintained by
Glatfelter, except that it will apply to any severance benefits that might otherwise be
payable outside of this Agreement.

	 	7.	 	I release and discharge Releasees not only from any and all such claims and
causes of action which I could make on my own behalf, but also those that may or could
be brought by any person or organization on my behalf, and I specifically waive any
right to become and promise not to become a member of any class in any proceeding or
case in which any such claim or cause of action against Releasees may arise, in whole
or in part, from any event which occurred on or before the date I execute this
Agreement and General Release.

	 	8.	 	I represent and warrant that I have not filed any charges, complaints, claims
or actions against the Company or any of the other Releasees, based on any event that
took place on or before the date I execute this Agreement and General Release. I
further represent that I have not previously assigned or transferred or purported to
have assigned or transferred to any person or entity, any claim released by me under
the Agreement and General Release.

	 	9.	 	The release and waiver set forth in this Agreement and General Release does not
prohibit me from filing an administrative charge of alleged discrimination with the
Equal Employment Opportunity Commission. However, I waive any right to monetary or
other recovery should any federal, state or local administrative agency pursue any
claim on my behalf relating in any way to my employment with the Company, to my
separation from employment with the Company, or to any of the claims that are otherwise
subject to the release and waiver of claims set forth in this Agreement and General
Release.

	 	10.	 	I represent that I am not aware of any facts that would support any claim of
discrimination or other unlawful conduct by any other current or former employee of the
Company against the Company or any of the other Releasees.

	 	11.	 	I represent and warrant that by my termination date I will have delivered to
the Company all Company documents, keys, credit cards, equipment and other materials
acquired during the course of my employment with Glatfelter, except as otherwise
provided by this Agreement or by the Company’s permission. I further agree that I will
not make use of or disclose to anyone, without the prior written consent of the
Company, any nonpublic information or documents concerning or related to the Company,
whether confidential or not, that I have acquired to date.

In addition, I will not discuss the Company’s business, prospects, methods of operation, or
other similar topics with anyone other than the Officers or members of the Board of Directors of
the Company and I will not engage in any activities or make any statements that may disparage or
reflect negatively on the Company, its officers, directors or shareholders. This provision shall
include, but not be limited to, Internet postings under an alias, as well as anonymous media
contacts.

Other than the fact of my termination, I will keep the terms and conditions of this Agreement,
and any related agreements, and all matters concerning them confidential, except that I may reveal
the terms and conditions of this Agreement and any subsequent agreements to my immediate family, my
attorney and/or financial advisor, if any, so long as they first agree not to disclose the
information to anyone else.

12. I agree to cooperate with any reasonable request of the Company to participate in the
preparation for, response to, prosecution of and/or defense of any pending, and actual, or
threatened litigation involving the Company. The Company understands and agrees that the
reasonableness of its requests may be affected by commitments to conduct a search or my commitments
to another employer, and that such commitments may limit my ability to devote significant amounts
of time to the assistance of the Company as aforesaid. It is my, and the Company’s, intent that my
cooperation will be requested, and undertaken, in good faith with due regard both to the Company’s
reasonable expectations and my other commitments. Should the parties determine that such requests
extend beyond 40 hours in the aggregate, the parties agree to review the time requirements and
compensation associated with these requests. The Company will reimburse me for all reasonable out
–of- pocket expenses that I may incur as a result of such cooperation.

13. This Agreement is the entire agreement between Glatfelter and me on any matter relating to
my employment with Glatfelter, including but not limited to the termination of that employment. It
supersedes all other agreements between Glatfelter and me, other than any Employee’s Agreement
executed at the commencement of my employment, which shall remain in full force and effect to the
extent that it is not inconsistent with the terms herein. In the event of an inconsistency, the
terms herein shall prevail. No other consideration, agreement, plan, representation, oral
statement, understanding, or course of conduct not expressly set forth in this Agreement should be
implied or is binding. I expressly state that I am not relying upon any other agreement, plan,
representation, statement, omission, understanding or course of conduct not expressly set forth
herein. I understand and agree that neither Glatfelter nor I shall at any time or for any purpose
construe this Agreement as an admission of any liability or wrongdoing.

14. I agree that if any provision of this Agreement and General Release is or shall be
declared invalid or unenforceable by a court of competent jurisdiction, then such provision will be
modified only to the extent necessary to cure such invalidity and with a view to enforcing the
parties’ intention as set forth in this Agreement and General Release to the extent permissible and
the remaining provisions of this Agreement and General Release shall not be affected thereby and
shall remain in full force and effect. This Agreement and Release shall be governed by
Pennsylvania law, without giving effect to the principles of conflicts of law under Pennsylvania
law, and jurisdiction and venue shall be proper in any state or federal court covering York County,
Pennsylvania.

15. If any suit is brought relating to this Agreement or any breach of it, either by me or by
Glatfelter, the prevailing party in such suit shall be entitled to reimbursement for reasonable
costs, expenses and attorneys’ fees incurred by it in such suit, as well as any and all other
remedies, including injunctive relief. Glatfelter shall be entitled to seek preliminary injunctive
relief, without requirement for posting a bond, to enforce the terms of this Agreement. I also
understand and agree that, if the Company asserts that I have violated the terms and conditions of
this Agreement, the Company shall notify me of the alleged violation and afford me the reasonable
opportunity to cure the alleged violation before taking any further action to enforce its rights
under this Agreement.

16. This Agreement and Release may not be amended except by a written agreement that has been
executed by me and by an officer of Glatfelter on behalf of Glatfelter.

17. I acknowledge that I carefully have read and understand the provisions of this Agreement
and General Release and that I have twenty-one (21) days from the date I receive a copy of the
Agreement and General Release to consider entering into this Agreement and General Release and
accepting the benefits described in paragraph 2 hereof. If I sign and return this Agreement and
General Release, to [the Director of Corporate Human Resources] before the end of the twenty-one
(21) day period, I acknowledge that I will have voluntarily waived my right to consider the
Agreement and General Release for the full twenty-one (21) days.

18. I understand that the effective date of this Agreement shall be my last date of active
employment with the Company, but that I shall not be entitled to receive any payments or benefits
under Section 2(a)-(l) until the normal payroll period following my execution and return of this
Agreement and General Release to the Company, and the expiration of the revocation period described
in paragraph 21.

19. I also acknowledge that Glatfelter has advised me in writing to consult with an attorney
of my own choosing with regard to entering into this Agreement. I have executed this Agreement
voluntarily and with full knowledge of its significance, meaning, and binding effect.

20. I acknowledge that my decision to sign this Agreement and General Release has not been
influenced in any way by fraud, duress, coercion, mistake or misleading information and that I have
not relied upon any information except what is set forth in this Agreement and General Release.

21. I acknowledge that I may revoke this Agreement and General Release within seven (7) days
of my execution of this document by submitting a written notice of my revocation to [the Director
of Corporate Human Resources]. I also understand that this Agreement and General Release shall not
become effective or enforceable until the expiration of that seven (7) day period.

1

INTENDING TO BE LEGALLY BOUND HEREBY, __C. Matthew Smith_     , has executed this
Agreement and General Release, as of the date indicated below, consisting of seven (7) pages.

Signed:      /s/ C. Matthew Smith      For the Company:_/s/ William T. Yanavitch     

Date:      1/31/05          Date:      1/31/05     

2

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