AGREEMENT AND PLAN OF MERGER

WHEREAS, concurrently herewith, each Apollo Stockholder, Parent, and each Parent Major Shareholder have entered into the Shareholders’ Agreement in the form attached hereto as Exhibit A , which shall be effective as of the Effective Time.

1.1    The Merger . Upon and subject to the terms and conditions of this Agreement, the Transitory Subsidiary shall merge with and into the Company at the Effective Time. From and after the Effective Time, the separate corporate existence of the Transitory Subsidiary shall cease and the Company shall continue as the Surviving Corporation. The Merger shall have the effects set forth in Section 251 of the DGCL.

1.2    The Closing . The Closing shall take place at the offices of Riddell Williams P.S., 1001 Fourth Avenue, Suite 4500, Seattle, WA 98154, commencing at 9:00 a.m. local time on the Closing Date. The “Closing Date” shall be two (2) business days after the satisfaction or waiver of all of the conditions to the obligations of the Parties to consummate the transactions contemplated hereby (excluding the delivery at the Closing of any of the documents set forth in Article V ), or such other date as may be mutually acceptable to the Parties. 

1.3    Actions at the Closing .

(a)    At the Closing:

(i)    The Company shall deliver to Parent and the Transitory Subsidiary the various certificates, instruments and documents referred to in Section 5.2 ;

(ii)    Parent and the Transitory Subsidiary shall deliver to the Company the various certificates, instruments and documents referred to in Section 5.3 ;

(iii)    The Surviving Corporation shall file with the Secretary of State of the State of Delaware the Certificate of Merger;

(iv)    Parent shall issue and/or deliver to the Exchange Agent, the Merger Consideration and cash sufficient to make the payments required by Section 1.6(d) and 1.6(e) ;

(v)    Parent shall issue and/or deliver to each employee of the Company entitled thereto (the “Participating Employees”) such employee’s share of the Employee Participation Amount in either shares of Parent Common Stock or cash as provided in Section 1.6(e) ; 

(vi)    Each outstanding Company Warrant and Company Option, and any Company Stock Plan, shall be terminated at or prior to the Effective Time;

(vii)    Parent shall pay to Apollo the Apollo Debt Repayment and the Company shall cause Apollo to surrender to Parent the original promissory notes in respect of the Apollo Debt Repayment marked “canceled” and deliver to Parent an investment representation substantially similar to the representation set forth in Section 6.7 ; and

(viii)    On the Closing Date, Parent shall file a registration statement on Form S-8, or any successor form, to register any portion of the Employee Participation Amount issued in shares pursuant to Section 1.3(a)(v) .

(b)    The Parent and the Exchange Agent shall be entitled to deduct and withhold from amounts otherwise payable in accordance with this Agreement to the Participating Employees such amounts as the Parent or the Exchange Agent reasonably believes is required to be deducted and withheld with respect to the making of such payment under the Code or any provision of state, local or foreign Tax law. To the extent that amounts are so withheld and paid over to the appropriate taxing authority by the Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Stock or the Participating Employees in respect of which such deduction and withholding was made by the Parent or the Exchange Agent. Each Participating Employee whose portion of the Employee Participation Amount is paid in shares of Parent Common Stock shall have the number of shares to be received reduced by the number of shares required to satisfy Parent or Exchange Agent’s withholding obligation under the Code or any provision of state, local or foreign Tax law calculated based on the average of the daily market prices of the Parent Common Stock for the ten (10) consecutive trading days ending three (3) trading days prior to the Closing. The market price for each such trading day shall be the last sales price on such day as reported on the consolidated transaction reporting system for the American Stock Exchange. Such withheld amounts shall be used by Parent to satisfy its withholding obligations. Provided further, Parent shall have no obligation to pay the employer portion of any employment taxes which may be owed as a result of the Employee Participation Amount. Such portion shall instead be paid by the Participating Employee; Parent or Exchange Agent shall withhold from the Employee Participation Amount such amount as is necessary to satisfy such withholding tax obligation.

1.4    Merger Consideration . Subject to Sections 1.6(d) and 1.6(e) , the “Merger Consideration” shall be equal to (i) the Total Parent Common Stock, minus (ii) the aggregate Apollo Debt Repayment, minus (iii) the aggregate Employee Participation Amount. The “Total Parent Common Stock” means Eight Million Five Hundred Thousand (8,500,000) fully paid and nonassessable shares of common stock of Parent, par value $.0001 per share (“Parent Common Stock”).

1.5    Effects of the Merger .

(a)    At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger, and the applicable provisions of the DCGL. 

(b)    The Certificate of Incorporation of the Transitory Subsidiary immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation, except that (i) the name of the corporation set forth in Article I therein shall be changed to the name of the Company and (ii) the identity of the incorporator shall be deleted.

(c)    The Bylaws of the Transitory Subsidiary immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, except that the name of the corporation set forth therein shall be changed to the name of the Company.

(d)    The officers of the Transitory Subsidiary immediately prior to the Effective Time shall be the officers of the Surviving Corporation and will hold office until their successors are duly elected or appointed and qualify in the manner provided in the Certificate of Incorporation or Bylaws of the Surviving Corporation or as otherwise provided by law, or until their earlier death, resignation or removal.

(e)    The directors of the Transitory Subsidiary immediately prior to the Effective Time shall be the directors of the Surviving Corporation and will serve until their successors are duly elected or appointed and qualify in the manner provided in the Certificate of Incorporation or Bylaws of the Surviving Corporation or as otherwise provided by law, or until their earlier death, resignation or removal.

1.6    Effects on Capital Stock . 

(a)    As of the Effective Time, by virtue of the Merger and without any action on the part of the Transitory Subsidiary, Parent, the Company or the Company Stockholders, all such shares of Company Stock shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and each holder of a certificate formerly representing any such shares of Company Stock (the “Certificates”) shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration as allocated in this Section 1.6 upon surrender of such Certificate in accordance with Section 1.7 below:

(i)    each Common Share issued and outstanding immediately prior to the Effective Time (other than any Common Shares to be canceled pursuant to Section 1.6(c) and any Dissenting Shares) will be cancelled and retired and cease to exist and no consideration shall be issued in exchange therefore as determined in accordance with the DGGL, the Company’s Certificate of Incorporation, and the designations of the Preferred Shares;

(ii)    each share of Series A Preferred Stock issued and outstanding immediately prior to the Effective Time (other than any shares of the Series A Preferred Stock to be canceled pursuant to Section 1.6(c) and any Dissenting Shares) will be converted automatically into the right to receive the Series A Merger Consideration Per Share;

(iii)    each share of Series B-1 Preferred Stock issued and outstanding immediately prior to the Effective Time (other than any shares of the Series B-1 Preferred Stock to be canceled pursuant to Section 1.6(c) and any Dissenting Shares) will be converted automatically into the right to receive the Series B-1 Merger Consideration Per Share;

(iv)    each share of Series B-2 Preferred Stock issued and outstanding immediately prior to the Effective Time (other than any shares of the Series B-2 Preferred Stock to be canceled pursuant to Section 1.6(c) and any Dissenting Shares) will be converted automatically into the right to receive the Series B-2 Merger Consideration Per Share;

(v)    each share of Series C-1 Preferred Stock issued and outstanding immediately prior to the Effective Time (other than any shares of the Series C-1 Preferred Stock to be canceled pursuant to Section 1.6(c)   and any Dissenting Shares) will be converted automatically into the right to receive the Series C-1 Merger Consideration Per Share;

(vi)    each share of Series C-2 Preferred Stock issued and outstanding immediately prior to the Effective Time (other than any shares of the Series C-2 Preferred Stock to be canceled pursuant to Section 1.6(c)   and any Dissenting Shares) will be converted automatically into the right to receive the Series C-2 Merger Consideration Per Share;

(vii)    each share of Series D Preferred Stock issued and outstanding immediately prior to the Effective Time (other than any shares of the Series D Preferred Stock to be canceled pursuant to Section 1.6(c) and any Dissenting Shares) will be converted automatically into the right to receive the Series D Merger Consideration Per Share;

(viii)    each share of Series E Preferred Stock issued and outstanding immediately prior to the Effective Time (other than any shares of the Series E Preferred Stock to be canceled pursuant to Section 1.6(c) and any Dissenting Shares) will be converted automatically into the right to receive the Series E Merger Consideration Per Share;

(ix)    each share of Series F Preferred Stock issued and outstanding immediately prior to the Effective Time (other than any shares of the Series F Preferred Stock to be canceled pursuant to Section 1.6(c) and any Dissenting Shares) will be converted automatically into the right to receive the Series F Merger Consideration Per Share; and

(x)    each share of Series G Preferred Stock issued and outstanding immediately prior to the Effective Time (other than any shares of the Series G Preferred Stock to be canceled pursuant to Section 1.6(c) and any Dissenting Shares) will be converted automatically into the right to receive the Series G Merger Consideration Per Share;

(b)    By virtue of the Merger and without any action on the part of any Party or the holder of any of the following securities, each share of common stock, no par value, of the Transitory Subsidiary issued and outstanding immediately prior to the Effective Time shall be converted into and thereafter evidence, one share of common stock, no par value, of the Surviving Corporation.

(c)    Each share of Company Stock, if any, that is owned by the Company or held by the Company as treasury stock immediately prior to the Effective Time shall be canceled and extinguished without any exchange thereof, and no payment or distribution shall be made with respect thereto.

(d)    Notwithstanding anything in this Agreement to the contrary, no shares of Parent Common Stock will be issued by virtue of the Merger to a Company Stockholder that is not an Accredited Investor, and any Company Stockholder that is not an Accredited Investor and would, but for this Section 1.6(d) , be converted into the right to receive shares of Parent Common Stock as Merger Consideration pursuant to Section 1.6(a) shall instead be converted into the right to receive a cash payment equal to the number of such shares multiplied by the average of the market prices of the Parent Common Stock for the most recent ten (10) consecutive trading days ending three (3) trading days prior to Closing. The market price of the Parent Common Stock on a trading day shall be the last sales price on such day as reported on the consolidated transaction reporting system for the American Stock Exchange.

(e)    Notwithstanding anything in this Agreement to the contrary, for all Participating Employees, Parent shall have the option, in its sole discretion to satisfy its obligation to deliver the Employee Participation Amount by delivery of a cash payment equal to the number of such shares multiplied by the average of the market prices of the Parent Common Stock for the most recent ten (10) consecutive trading days ending three (3) trading days prior to Closing. The market price of the Parent Common Stock on a trading day shall be the last sales price on such day as reported on the consolidated transaction reporting system for the American Stock Exchange.

(f)    No fractional shares of Parent Common Stock will be issued by virtue of the Merger and any Company Stockholder entitled hereunder to receive a fractional share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock that would otherwise be received by such holder) but for this Section 1.6(f) will be entitled hereunder to receive no such fractional share but a cash payment in lieu thereof in an amount equal to such fraction multiplied by $25.60.

(g)    If between the date of this Agreement and the Effective Time, there shall be any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares or any similar event with respect to Common Shares or Parent Common Stock, the Merger Consideration and any other amounts payable pursuant to this Agreement shall be correspondingly adjusted to the extent appropriate to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares or similar event.

1.7    Exchange of Certificates . 

(a)    At or prior to the Closing, Parent shall enter into an agreement with Mellon Investor Services (or such other bank or trust company in the United States as may be designated by Parent, the “Exchange Agent”), which shall provide that Parent shall, upon the Closing, deliver to the Exchange Agent the shares of Parent Common Stock necessary for the payment of the Merger Consideration pursuant to Section 1.3(a)(iv) and cash sufficient to make the payments required by Section 1.6(d) and 1.6(e) (the “Exchange Fund”). Parent shall pay the fees and expenses of the Exchange Agent.

(b)    As soon as reasonably practicable after the Closing, Parent shall cause the Exchange Agent to deliver or mail to each holder of record of an outstanding Certificate (i) a letter of transmittal, in form and substance reasonably satisfactory to Parent, with such changes as the Exchange Agent shall reasonably request (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in surrendering Certificates in exchange for consideration specified and allocated in Section 1.6 . Upon surrender of a Certificate for cancellation to the Exchange Agent, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Exchange Agent, the holder of such Certificate shall receive in exchange therefore the Merger Consideration for which the shares formerly held by such holder are to be exchanged in accordance with Section 1.6 , and the Certificates so surrendered shall be canceled. If a transfer of ownership of shares of Company Stock represented by a Certificate has not been registered in the Company’s

(c)    All cash and/or shares of Parent Common Stock issued upon the surrender of Certificates in accordance with the terms of this Article I shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Company Stock represented by such certificates, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Stock which were outstanding immediately prior to the Closing. If, after the Effective Time, Certificates are presented to the Surviving Corporation or the Exchange Agent for any reason, they shall be canceled and exchanged as provided in this Article I , except as otherwise provided by law.

(d)    None of Parent, the Transitory Subsidiary, the Surviving Corporation or any of their respective Affiliates or the Exchange Agent shall be liable to any person in respect of any shares of Parent Common Stock or cash delivered to a public official in accordance with any applicable abandoned property, escheat or other similar law. If any Certificate shall not have been surrendered prior to three (3) years after the Effective Time (or immediately prior to such earlier date on which any amounts payable in accordance with this Article I would otherwise escheat to or become the property of any Governmental Entity), any such amounts shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interest of any Person previously entitled thereto.

(e)    If any Certificate shall have been lost, stolen or destroyed, upon the execution and delivery to the Exchange Agent by the holder of record of such Certificate of such additional documentation that the Exchange Agent may reasonably request, the payment to the Exchange Agent by such holder of any indemnity/surety bond in such amount as required by the Exchange Agent and the payment to the Exchange Agent by such holder of any handling or other fee required by the Exchange Agent, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificate the applicable Merger Consideration with respect thereto in accordance with Section 1.6 .

1.8    Dissenting Shares . Upon consummation of the Merger, Dissenting Shares shall not be converted into or represent the right to receive the Merger Consideration, if any, but shall instead be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to Section 262 of the DGCL. After the Effective Time, if a Company Stockholder forfeits or withdraws his, her or its right to appraisal of Dissenting Shares, then, as of the occurrence of such event, such holder’s Dissenting Shares shall cease to be Dissenting Shares, and each share of Company Stock held by such formerly dissenting stockholder shall thereupon be deemed to have been converted into the right to receive and become exchangeable for, at the Effective Time, the Merger Consideration specified and allocated in Section 1.6 . The Company shall give Parent (a) prompt notice of any written demands for payment of Company Stock pursuant to Section 262 of the DGCL and any written demands for appraisal of any Company Stock, withdrawals of such demands, and any other

1.9    No Further Rights . From and after the Effective Time, no Company Stock shall be deemed to be outstanding, and holders of certificates formerly representing Company Stock shall cease to have any rights with respect thereto except as provided herein or by law.

1.10    Closing of Transfer Books . At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of Company Stock shall thereafter be made. If, after the Effective Time, certificates formerly representing Company Stock are presented to Parent or the Surviving Corporation, they shall be canceled and exchanged for the Merger Consideration, if any, in accordance with Section 1.6 .

2.1    Organization and Qualification . The Company is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to carry on its business as currently being conducted and to own or lease and operate the properties it owns or leases as and in the places now owned, leased or operated, respectively. The Company has furnished, or Made Available, to Parent complete and accurate copies of its Certificate of Incorporation and Bylaws. The Company is not in default under or in violation of any provision of its Certificate of Incorporation or Bylaws. The Company is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction in which the character or location of its assets or properties (whether owned, leased or licensed) or the nature of its business make such qualification necessary, except where the failure to be so qualified or in good standing, individually or in the aggregate, has not had and would not reasonably be expected to have a Company Material Adverse Effect.

2.2    Authority; Binding Effect .

(a)    The execution and delivery by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Company. Without limiting the generality of the foregoing, the Board of Directors of the Company, by unanimous written consent has (i) determined that the Merger is fair and in the best interests of the Company

(b)    This Agreement and each agreement, instrument or document being or to be executed and delivered by the Company or any of its Subsidiaries in connection with the transactions contemplated thereby (“Company Related Documents”), upon due execution and delivery by the Company and such Subsidiaries, will constitute, assuming the due execution and delivery by the other parties thereto, the legal, valid, and binding obligation of the Company and such Subsidiary, enforceable in accordance with its respective terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors’ rights generally or by application of equitable principles).

2.3    Capitalization .

(a)    The capital stock of the Company consists of: (i) 999,962,200,000 authorized shares of common stock, $.000001 par value per share, of which 2,203,805 shares were, as of the date of this Agreement, issued and outstanding; (ii) 37,800,000 authorized shares of preferred stock, $.001 par value per share designated as follows: (A) 3,000,000 authorized shares of Series A Preferred Stock, of which, as of the date of this Agreement, 2,669,500 were issued and outstanding; (B) 7,700,000 authorized shares of Series B Preferred Stock, of which, as of the date of this Agreement, 3,076,923 shares of Series B-1 Preferred Stock were issued and outstanding and 4,349,270 shares of Series B-2 Preferred Stock were issued and outstanding; (C) 14,600,000 authorized shares of Series C Preferred Stock, of which, as of the date of this Agreement, 10,571,429 shares of Series C-1 Preferred Stock were issued and outstanding and 0 shares of Series C-2 Preferred Stock were issued and outstanding; (D) 7,200,000 authorized shares of Series D Preferred Stock, of which, as of the date of this Agreement, 6,258,217 were issued and outstanding; (E) 2,477,000 authorized shares of Series E Preferred Stock, of which, as of the date of this Agreement, 0 were issued and outstanding and 2,477,000 were reserved for issuance pursuant to Company Warrants, which shall be exercised prior to Closing; (F) 400,000

(b)    Section 2.3(b) of the Company Disclosure Letter sets forth a complete and accurate list, as of the date of this Agreement, of the holders of capital stock of the Company, showing the number of shares of capital stock held by each stockholder. Section 2.3(b) of the Company Disclosure Letter also indicates all outstanding Common Shares that constitute restricted stock or that are otherwise subject to a repurchase or redemption right, indicating the name of the applicable stockholder, the vesting schedule (including any acceleration provisions with respect thereto), and the repurchase price payable by the Company. All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and are not subject to preemptive rights. All of the issued and outstanding shares of capital stock of the Company and its Subsidiaries have been offered, issued and sold by the Company or its Subsidiaries, as applicable, in compliance with all applicable laws, including federal and state securities laws.

(c)    Section 2.3(c) of the Company Disclosure Letter sets forth a complete and accurate list, as of the date of this Agreement of: (i) all Company Stock Plans, indicating for each Company Stock Plan the number of shares of the Company’s common stock issued to date under such Plan, the number of shares of the Company’s common stock subject to outstanding options (the “Company Options”) under such Plan and the number of shares of the Company’s common stock reserved for future issuance under such Plan; and (ii) all Company Optionholders and all Company Warrantholders, indicating with respect to each Company Warrant and Company Option the agreement or other document under which it was granted, the number of shares of capital stock, and the class or series of such shares, subject to such Company Warrant and Company Option, the exercise price, the date of issuance and the expiration date thereof. The Company has provided, or Made Available, to Parent complete and accurate copies of all Company Stock Plans and all Company Warrants and Company Options. All of the shares of capital stock of the Company subject to Company Warrants and Company Option will be, upon issuance pursuant to the exercise of such instruments, duly authorized, validly issued, fully paid and nonassessable. 

(d)    Neither Company nor any its Subsidiaries is obligated to purchase, and none of them owns, directly or indirectly, any equity securities or securities convertible into or exchangeable or exercisable for equity securities of any Person nor do any of them have any direct or indirect equity or ownership interest in any Person other than a Subsidiary of Company. There are no voting trusts or other agreements or understandings in respect of the voting of the securities of Company or any of its Subsidiaries.

(e)    Except for the Company Options and the Company Warrants, (i) no subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of the Company is authorized or outstanding, (ii) the Company has no obligation (contingent or otherwise) to issue any subscription, warrant, option, convertible security or other such right, or to issue or distribute to holders of any shares

(f)    Except as set forth in Section 2.3(f) of the Company Disclosure Letter, there is no agreement, written or oral, between the Company and any holder of its securities, or, to the Company’s Knowledge, among any holders of its securities, relating to the sale or transfer of Company securities (including agreements relating to rights of first refusal, co-sale rights or “drag along” rights), registration under the Securities Act, or voting, of the capital stock of the Company.

(g)    Section 2.3(g) of the Company Disclosure Letter sets forth the liquidation preferences that each of the Series A Preferred Stock, the Series B-1 Preferred Stock, the Series B-2 Preferred Stock, the Series C-1 Preferred Stock, the Series C-2 Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the Series F Preferred Stock and the Series G Preferred Stock is entitled to receive under the Company’s Certificate of Incorporation and the designations of the Company’s Preferred Shares. 

2.4    Company Licenses . Section 2.4 of the Company Disclosure Letter sets forth all material permits, licenses and provider agreements, if any, and other authorizations issued and required by Governmental Entities for the operations of the Company Facilities as assisted living facilities (collectively, the “Company Licenses”). The Company agrees to provide Parent with copies of the existing Company Licenses within fifteen (15) days after the Effective Time to the extent not previously provided. The Company or a wholly-owned Subsidiary of the Company is the holder of all the Company Licenses. 

2.5    Governmental Entities . Except as set forth in Section 2.5 of the Company Disclosure Letter or as otherwise expressly set forth herein, the Company is not required to submit any material notice, report or other filing with any Governmental Entity in connection with its execution or delivery of this Agreement or any of the Company Related Documents or the consummation of the transactions contemplated hereby and no consent, approval or authorization of any Governmental Entity is required to be obtained by the Company in connection with the execution, delivery and performance of this Agreement, except (i) for such filings as may be required under the Hart-Scott-Rodino Act, (ii) for the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, (iii) such filings as may be required for Company Licenses, and (iv) where such failure to submit such notice, report or other filing or obtain such consent, approval or authorization would not reasonably be expected to have a Company Material Adverse Effect.

2.6    Subsidiaries .

(a)    Section 2.6(a) of the Company Disclosure Letter sets forth: (i) the name and jurisdiction of incorporation or organization of each Subsidiary of the Company; and (ii) the officers, directors, managers, and general partners of each Subsidiary. The Company holds of

(b)    Each Subsidiary of the Company is a corporation, limited liability company or limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation. Each Subsidiary of the Company is duly qualified to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its businesses or the ownership or leasing of its properties requires such qualification, except where the failure to be so qualified or in good standing, individually or in the aggregate, has not had and would not reasonably be expected to have a Company Material Adverse Effect. Each Subsidiary of the Company has all requisite power and authority to carry on the businesses in which it is engaged and to own, lease or otherwise use the properties owned, leased and used by it. The Company has delivered, or Made Available, to Parent complete and accurate copies of the charter, bylaws or other organizational documents of each Subsidiary of the Company. No Subsidiary of the Company is in default under or in violation of any provision of its charter, bylaws or other organizational documents. All of the issued and outstanding equity interests of each Subsidiary of the Company are duly authorized, validly issued, fully-paid and nonassessable. There are no outstanding or authorized options, warrants, rights, agreements, preemptive rights, or commitments to which the Company or any of its Subsidiaries is a party or which are binding on any of them providing for the issuance, sale, disposition, redemption or acquisition of any capital stock or other equity interests of any Subsidiary of the Company. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of any equity interests of any Subsidiary of the Company.

(c)    The Company does not control directly or indirectly or have any direct or indirect equity participation or similar interest in any corporation, partnership, limited liability company, joint venture, trust or other business association or entity which is not a Subsidiary of the Company.

2.7    Tax Matters . 

(a)    Except as set forth in Section 2.7(a) of the Company Disclosure Letter, the Company and each of its Subsidiaries has filed (or has had filed on their behalf) on a timely basis all Tax Returns that such entity was required to file, and all such Tax Returns were complete and accurate in all material respects; provided however that no representation is made hereunder with respect to the net operating loss or capital loss carryforwards of the Company and its Subsidiaries that will be available for any Tax period or portion thereof other than a taxable period ending on or before the Closing Date. Except as set forth in Section 2.7(a) of the Company Disclosure Letter, the Company and each of its Subsidiaries has paid on a timely basis all material Taxes that were due and payable. All material Taxes that the Company or any of its Subsidiaries is or was required by law to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Entity, and have been properly reported as required under applicable information reporting requirements.

(b)    The Company has delivered, or Made Available, to Parent complete and accurate copies of all federal and material state income Tax Returns of the Company and each of its Subsidiaries, and examination reports and statements of deficiencies assessed against or

(c)    Except as set forth in Section 2.7(c) of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries: (i) has any actual or potential liability for any material amount of Taxes of any Person (other than the Company and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar provision of federal, state, local, or foreign law), or as a transferee or successor, by contract, or otherwise; (ii) has been a member of an Affiliated Group filing a consolidated federal income Tax Return (other than an Affiliated Group the common parent of which was the Company); (iii) has participated in, or otherwise made a filing with respect to, a “reportable transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(2); (iv) has distributed stock of another person, or has had its stock distributed by another person, in a transaction that was purported or intended to be governed in whole or in part by Section 355 of the Code; (v) has participated in or cooperated with an international boycott within the meaning of Section 999 of the Code; (vi) is or was subject to the provisions of Section 1503(d) of the Code; or (vii) is or has been required to make a basis reduction pursuant to Treasury Regulation Section 1.1502-20(b) or Treasury Regulation Section 1.337(d)-2(b).

(d)    There are no material liens for Taxes upon any property or asset of the Company or any of its Subsidiaries, except for liens arising as a matter of law relating to current Taxes not yet due and liens which would not reasonably be expected to have a Company Material Adverse Effect.

(e)    Except as set forth in Section 2.7(e) of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries (i) is a party to or is bound by any Tax allocation or Tax sharing agreement or arrangement with any Person other than the Company or any of its Subsidiaries, pursuant to which it may have any obligation to make any payments after the Closing, (ii) is a party to any closing agreement pursuant to Section 7121 of the Code or any predecessor provision thereof (or any similar provision of state, local or foreign law), or any prefiling or other agreement with the Internal Revenue Service, or (iii) is bound by any private

(f)    Neither the Company nor any of its Subsidiaries is required to include in income any adjustment pursuant to Section 481(a) of the Code by reason of a voluntary change in accounting method, and the Internal Revenue Service has not proposed any such adjustment or change in accounting method.

(g)    Neither Company nor any of its Subsidiaries has taken or agreed to take any action that would prevent the Merger from constituting a reorganization within the meaning of Section 368(a) of the Code. The Company is not aware of any agreement, plan or other circumstance that would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code.

(h)    Any Tax sharing agreements or arrangements to which the Company or any of its Subsidiaries is a party or may have any liability or obligation shall be terminated effective as of the Closing.

(i)    The Company (i) is not a “personal holding company” within the meaning of Section 542 of the Code and (ii) has not been a United States real property holding corporation within the meaning of Section 897(c) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. The Company will not incur a Tax liability resulting from the Company ceasing to be a member of a consolidated or combined group that had previously filed consolidated, combined or unitary Tax returns by reason of the Merger. The Company does not own an interest in a passive foreign investment company (as defined in Section 1297 of the Code) and there are no current or accumulated earnings and profits as determined under federal tax laws with respect to any subsidiary that is treated as a foreign corporation under the Code.

(j)    The charges, reserves and accruals on the books and records of the Company and its Subsidiaries for Taxes are adequate (determined in accordance with GAAP) and are equal to or greater than the Tax liabilities of the Company and its Subsidiaries to which such charges, reserves and accrual relate.

(k)    Neither the Company, nor any of its Subsidiaries, has given a power of attorney with respect to Taxes for any period for which the statute of limitations (including any waivers or extensions) has not yet expired or that has not been since terminated or revoked.

(l)    All Taxes that the Company and its Subsidiaries are or were required to withhold or collect (including, without limitation, Taxes required to be withheld pursuant to Code Sections 1441 and 1442 and similar provisions of state, local or foreign law relating to Taxes) have been duly withheld or collected and, to the extent required, have been paid to the proper governmental body or other person within the time and in the manner prescribed by applicable law.

(m)    Neither the Company, nor any of its Subsidiaries, is a party to any joint venture, partnership or other contract or arrangement which could be treated as a partnership for Tax purposes.

(n)    The Company and its Subsidiaries represent and warrant that they have net operating losses sufficient to offset all Taxes due, in excess of $1,500,000 resulting from the amendment of the Tax Returns as required by Section 4.3(c) of this Agreement.

2.8    No Defaults . Except as set forth in Section 2.8 of the Company Disclosure Letter, the execution, delivery and performance of this Agreement and any of the Company Related Documents by Company does not and will not: 

(a)    Conflict with or result in any breach of the provisions of, or constitute a default under the organizational documents of the Company or any of its Subsidiaries;

(b)    (i) Violate any restriction to which the Company or any of its Subsidiaries is subject or, with or without the giving of notice, the passage of time, or both, (ii) violate (or give rise to any right of termination, cancellation or acceleration under) any mortgage, deed of trust, license, lease, indenture, contract or other material agreement or instrument, whether oral or written, to which the Company or any of its Subsidiaries is a party, or by which it or any of the assets of the Company and its Subsidiaries are bound (which will not be satisfied, assigned or terminated on or prior to the Closing as a result of the transactions contemplated by this Agreement), (iii) result in the termination of any such instrument or termination of any provisions in such instruments or (iv) result in the creation or imposition of any Security Interest upon the properties or assets of the Company and its Subsidiaries, including the Company Facilities (collectively, the “Company Assets”), in any such case or cases, that would reasonably be expected to have a Company Material Adverse Effect;

(c)    Constitute a violation of any applicable rule, regulation, law, statute, ordinance, or any judgment, decree, writ, injunction or order of any Governmental Entity, where such violation has not had or would not reasonably be expected to have a Company Material Adverse Effect; or

(d)    Result in the breach or violation of any of the warranties and representations herein set forth by the Company.

2.9    Contracts .

(a)    Section 2.9(a) of the Company Disclosure Letter includes a true and correct list as of the date of this Agreement of all outstanding contracts or agreements, whether written or oral, to which the Company or any of its Subsidiaries is a party, except (i) those contracts which are cancelable on thirty (30) days notice without penalty or premium, (ii) the Company Resident Care Contracts, the Company Residential Leases, and the Company Facility Leases, (iii) any agreement for the lease of personal property from or to third parties providing for lease payments of less than $25,000 per annum and (iv) any agreement for the purchase and sale of products or for the furnishing or receipt of services, providing for payments by the Company or its Subsidiaries of less than $25,000 per annum (such contracts and agreements, excluding (i) and (ii), collectively the “Company Contracts”), and the Company has Made Available, or will have Made Available within ten (10) business days of the date hereof, to Parent a true and complete copy of each Company Contract. The Company is not in material default under the terms of any Company Contracts, and to the Knowledge of the Company, there

(b)    Specimen Resident admission agreements (“Company Resident Care Contracts”), specimen residential leases (“Company Residential Leases”) and a Rent Roll dated as of December 31, 2006 for each Company Facility have been Made Available to Parent. All Company Resident Care Contracts and all Company Residential Leases are terminable by the Resident therein named upon thirty (30) days notice. Except as set forth in Section 2.9(b) of the Company Disclosure Letter, all Residents of the Company Facilities have executed Company Resident Care Contracts or Company Residential Leases and all Company Resident Care Contracts and all Company Residential Leases do not vary in any material respect from the terms of the specimen agreements contained in the Company Disclosure Letter, were entered into on an arms’ length basis and do not provide for payment of a single sum in exchange for lifetime care or other prepaid services. True, correct and complete copies of all Company Resident Care Contracts and all Company Residential Leases are located at the Company Facilities to which they relate and access thereto have been Made Available, or will be Made Available within ten (10) business days of the date hereof, for Parent’s inspection at each Company Facility.

(c)    (i)Except for any indebtedness of the Company or any of its Subsidiaries relating to its respective status as lessee under any Company Facility Lease or Company Non-Facility Lease characterized as a capital lease for accounting purposes, Section 2.9(c)(i) of the Company Disclosure Letter lists all outstanding debt (the “Company Debt Documents”) executed and delivered with respect to any indebtedness of the Company or any of its Subsidiaries as of the date hereof. Except as set forth in Section 2.9(c)(i) of the Company Disclosure Letter, the Company hereby represents and warrants that the Company and its Subsidiaries are in compliance with all material representations, warranties, covenants, requirements and conditions under each of the Company Debt Documents.

(ii)    With the exception of (A) any indebtedness of the Company or its Subsidiaries relating to its respective status as lessee under any Company Facility Lease or Company Non-Facility Lease characterized as a capital lease for accounting purposes, (B) the Closing Date Apollo Debt, and (C) as set forth in Section 2.9(c)(ii) of the Company Disclosure Letter, neither the Company nor its Subsidiaries has any outstanding indebtedness for borrowed money. 

(iii)    Except as set forth in Section 2.9(c)(iii) of the Company Disclosure Letter all of which will be fully satisfied on or before Closing, neither the Company nor any Subsidiary (A) has outstanding any loan to any Person, or (B) is a party to any agreement requiring it to acquire any debt obligations of, or make any loan or capital contribution to, any Person.

2.10    Facility Leases . 

(a)    Section 2.10 of the Company Disclosure Letter lists: (a) each of the Company Facilities that is leased, licensed or otherwise held (other than in fee) by the Company or any of its Subsidiaries, (b) the agreements (including any amendments or modifications thereto) pursuant to which the Company or any of its Subsidiaries holds such interest (the “Company Facility Leases”), (c) the current lessee of such Company Facility, (d) the street address and the current and maximum licensed capacity of such Company Facility, (e) the Landlord and owner of each such Company Facility, (f) the term of each such Company Facility Lease, and (g) any extension and expansion or purchase options with respect thereto. The Company has delivered, or Made Available, to Parent complete and accurate copies of the Company Facility Leases. Except as set forth in Section 2.10 of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries subleases or otherwise permits the occupancy by any third party (other than the Residents) of all or any portion of any of such Company Facilities. With respect to each Company Facility Lease, except as set forth in Section 2.10 of the Company Disclosure Letter:

(i)    such Company Facility Lease is legal, valid, binding, enforceable and in full force and effect, subject to bankruptcy, insolvency, reorganization, moratoriums or similar laws now or hereafter in effect relating to creditor’s rights generally or to general principles of equity; and

(ii)    neither the Company nor any of its Subsidiaries nor, to the Knowledge of the Company, any other party, is in material breach or violation of, or default under, any such Company Facility Lease.

(b)    With respect to each Company Facility, except as set forth in Section 2.10 of the Company Disclosure Letter:

(i)    none of the Company nor any of its Subsidiaries has received any written notice of (i) any material violations of any covenants or restrictions against such Company Facility, or (ii) any material violations of any zoning codes or ordinances or other laws, rules or regulations of any Governmental Entities applicable to such Company Facility;

(ii)    to the Knowledge of the Company, all Company Facilities are supplied with utilities and other services adequate for the operation of said Company Facilities for the purposes for which they are presently being used;

(iii)    to the Company’s Knowledge, each of the Company Facilities abuts on and has direct vehicular access to a public road, or has access to a public road via a permanent irrevocable easement benefiting the Company Facility, and the Company has no Knowledge of, and none of the Company nor any of its Subsidiaries has received, any notice that alleges any material breach or default under any instrument creating such easement or attempting to terminate or revoke such easement;

(iv)    to the Company’s Knowledge, there are no pending rezoning or other pending land use compliance actions affecting the Company Facilities and none of the Company nor any of its Subsidiaries has received written notice of, and the Company has no

(v)    there are no condemnation or eminent domain proceedings pending, or, to the Knowledge of the Company, threatened or contemplated against any Company Facility or any part thereof, or access thereto, and none of the Company nor any of its Subsidiaries has received notice, oral or written, of the intention of any public authority or other entity to take or use any Company Facility or any part thereof. Between the date hereof and the Closing, the Company will use good faith efforts to give Parent prompt written notice of any actual or any threatened or contemplated condemnation of any part of any Company Facility of which it receives written notice or obtains Knowledge;

(vi)    there are no outstanding options or rights of first refusal granted by the Company or its Subsidiaries to purchase the Company’s and/or its Subsidiaries’ interests in the Company Facilities or any portion thereof or interest therein, other than rights running in favor of the Company and its Subsidiaries; and

(vii)    to the Company’s Knowledge, there are no Security Interests, easements, covenants or other restrictions or title matters applicable to any Company Facility which would reasonably be expected to materially impair the current uses or the occupancy by the Company or a Company Subsidiary of such property.

2.11    Company Assets .

(a)    This Section 2.11 does not relate to real property or interests in real property, such items being the subject of Section 2.10 , or to any Intellectual Property, such items being the subject of Section 2.22 . Except as set forth in Section 2.11(a) of the Company Disclosure Letter and except as would not reasonably be expected to have a Company Material Adverse Effect, the Company or the applicable Subsidiary is the true and lawful owner, and has good and marketable title to, all of the assets (tangible or intangible) reflected on the Company’s Financial Statements or purported to be owned by the Company or its Subsidiaries, free and clear of all Security Interests. Each of the Company and its Subsidiaries owns or leases all tangible assets sufficient for the conduct of its businesses as presently conducted and as presently proposed to be conducted, and all such tangible assets are located at or on one of the Company Facilities except where any such failure of the foregoing would not reasonably be expected to have a Company Material Adverse Effect. Except as set forth in Section 2.11(a) of the Company Disclosure Letter, each such tangible asset is free from material defects, has been maintained in accordance with normal industry practice, and is suitable for the purposes for which it presently is used, except where any such failure of the foregoing would not reasonably be expected to have a Company Material Adverse Effect. 

(b)    Section 2.11(b) of the Company Disclosure Letter lists individually (i) all fixed assets (within the meaning of GAAP) of the Company or its Subsidiaries having a book value greater than $25,000, and (ii) all other assets of a tangible nature (other than Inventories) of the Company or its Subsidiaries whose book value exceeds $25,000.

2.12    Owned Real Property . Neither the Company nor any of its Subsidiaries owns any real property. 

2.13    Hazardous Substances . For purposes of this Section 2.13 , the term Knowledge, when applied to the Company, means the current actual knowledge of Granger Cobb, Stuart Koenig and Darin Piers.

(a)    Except as set forth in Section 2.13(a) of the Company Disclosure Letter, the Company Assets, the Company Facilities and the real estate on which the Company Facilities are located do not contain any Hazardous Substance, except for Common Products, which Common Products have been used, transported, stored and disposed of by the Company in compliance with all applicable Environmental Laws, and except where the failure of which would not reasonably be expected to have a Company Material Adverse Effect.

(b)    Except as set forth in Section 2.13(b) of the Company Disclosure Letter, there is no pending or, to the Company’s Knowledge, threatened litigation or proceeding before any Governmental Entity in which any Person or entity alleges the presence, release or threat of release of any Hazardous Substance or violation of Environmental Laws at a Company Facility or at any parcel of real property formerly leased or owned by the Company or any of its Subsidiaries.

(c)    Except as set forth in Section 2.13(c) of the Company Disclosure Letter, the Company has not received any written notice of, and, to the Company’s Knowledge, no Governmental Entity or employee or agent thereof has determined, or threatens to determine, or is investigating, that there is a presence, release or threat of release or placement on, in or from the Company Facilities or at any parcel of real property formerly leased or owned by the Company or any of its Subsidiaries, or the generation, transportation, storage, treatment, or disposal at the Company Facilities or at any parcel of real property formerly leased or owned by the Company or any of its Subsidiaries, of any Hazardous Substance.

(d)    Except as set forth in Section 2.13(d) of the Company Disclosure Letter, the Company has owned and operated the Company Facilities and any other parcels of real property formerly owned or leased by the Company or any of its Subsidiaries in compliance with all applicable Environmental Laws, has obtained all necessary permits under the Environmental Laws for the Company’s operations on the Company Facilities and any other parcels of real property formerly owned or leased by the Company or any of its Subsidiaries, and has not used any of the Company Facilities or any other parcels of real property formerly owned or leased by the Company or any of its Subsidiaries for the generation, storage, manufacture, use, transportation, disposal or treatment of Hazardous Substances, other than as described in Section 2.13(a) above, and except where the failure of which would not reasonably be expected to have a Company Material Adverse Effect.

(e)    Except as set forth in Section 2.13(e) of the Company Disclosure Letter, and except as would not reasonably be expected to have a Company Material Adverse Effect, there has been no discharge of any Hazardous Substance on or from any of the Company Facilities or at any parcel of real property formerly leased or owned by the Company or any of its Subsidiaries during the time of the Company’s ownership or occupancy thereof.

(f)    The Company has delivered, or Made Available, to Parent copies of all reports or tests prepared for the Company in its possession, if any, with respect to the compliance of the Company Facilities and any other parcel of real property formerly owned or leased by the Company or any of its Subsidiaries with the Environmental Laws and/or the presence of Hazardous Substances on the Company Facilities.

2.14    Survey Reports, Etc . To the Company’s Knowledge, all material survey reports, waivers of deficiencies, plans of correction, and any other investigation reports issued with respect to the Company Facilities (collectively, “Company Licensing Surveys”) for the last three (3) years (to the extent in the Company’s possession) are true and complete copies of such reports, waivers, plans and reports in the Company’s possession. Copies of the Company Licensing Surveys have been Made Available to Parent.

2.15    Capital Expenditures . Attached as Exhibit B is the Company’s capital expenditure budget for 2007 (the “Cap Ex Budget”).

2.16    Absence of Notices . Except as disclosed in Section 2.16 of the Company Disclosure Letter, the Company has not received any written notice, and has no Knowledge, that any material customer or supplier of the Company intends to discontinue, substantially alter prices or terms to, or significantly diminish its relationship with the Company, its Subsidiaries or the Company Facilities as a result of the transaction contemplated hereby or otherwise.

2.17    Resident Records . Except as provided in Section 2.17 of the Company Disclosure Letter, and except as would not reasonably be expected to have a Company Material Adverse Effect: (a) Resident records used or developed in connection with the business conducted at the Company Facilities have been maintained in accordance with all applicable federal, state or local laws or regulations governing the preparation, maintenance of confidentiality, transfer and/or destruction of such records, and (b) there is no material deficiency in the Resident records and other relevant records of the Company Facilities used or developed in connection with the operation of the business conducted at the Company Facilities.

2.18    Advance Payments and Residents Funds . The accounting for advance payments and Resident trust fund accounts provided to Parent by the Company pursuant to the provisions of this Agreement is complete and accurate in all material respects.

2.19    Medicare or Medicaid Participation . For the Company Facilities that currently participate in (a) Title XVIII (“Medicare”), or Title XIX (“Medicaid”) of the Social Security Act, (b) the CHAMPUS program, (c) the TRICARE program, or (d) any other federal, state or local governmental reimbursement programs, or successor programs to any of the above (collectively, the “Government Programs”), Section 2.19 of the Company Disclosure Letter sets forth a listing of all revenue derived from Government Programs, total revenue, and percentage of total revenue derived from Government Programs for the quarter ending December 31, 2006. 

2.20    Third Party Payor Reimbursement .

(a)    All billing practices of the Company with respect to the Company Facilities to all third party payors, including the Government Programs and private insurance companies, have been in compliance with all applicable laws, regulations and policies of such

(b)    The Company, its Subsidiaries and their senior management, officers and directors, have not been: (i) excluded from participating in any federal health care program (as defined in 42 U.S.C. §1320a-7b); (ii) subject to sanction pursuant to 42 U.S.C. §1320a-7a or 1320a-8; or (iii) convicted of a crime described in 42 U.S.C. §1320a-7b.

2.21    Licensed Beds and Units . As of the date of this Agreement, the number of licensed beds and the number of licensed units at the Company Facilities is as set forth in Section 2.21 of the Company Disclosure Letter, and such schedule also describes in reasonable detail the particulars of each such license. There are no skilled nursing beds located at any of the Company Facilities.

2.22    Intellectual Property . 

(a)    Other than the rights to use certain names associated with the Company Facilities that are owned by the Company and its Subsidiaries, and any software or other computer programs licensed to the Company and its Subsidiaries and used in connection with the operation of the Company Facilities, the Company has no other Intellectual Property of any kind. Such names and license agreements are listed in Section 2.22 of the Company Disclosure Letter. 

(b)    To the Company’s Knowledge, the Company has not infringed, misappropriated or conflicted with any Intellectual Property of any other Person. To the Company’s Knowledge, there is no third party that is infringing or violating any of the Company Intellectual Property. The Company has not granted any license or option or entered into any agreement of any kind with respect to the use of any of its Intellectual Property.

(c)    The Company has taken commercially reasonable actions to maintain the tradename registrations referenced in Section 2.22(a) and will continue to maintain such registrations prior to the Closing. To the Company’s Knowledge, no loss of Intellectual Property by the Company is threatened, pending or reasonably foreseeable.

2.23    Company Financial Statements/ No Undisclosed Liabilities . 

(a)    Attached as Section 2.23(a) of the Company Disclosure Letter are the Company Financial Statements. Except as set forth in Section 2.23 of the Company Disclosure Letter, the Company Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, fairly present, in all material respects, the consolidated financial condition, results of operations and cash flows of the Company and its Subsidiaries as of the respective dates thereof and for the periods referred to therein and are consistent with the books and records of the Company and its Subsidiaries; provided, however, that the Company Financial Statements referred to in clause (b) of the

(b)    Neither Company nor any of its Subsidiaries has any Liabilities, except: (i) as and to the extent disclosed in Section 2.23 of the Company Disclosure Letter; (ii) as and to the extent reflected or reserved against on the Company Most Recent Balance Sheet; and (iii) current Liabilities incurred subsequent to the Company Most Recent Balance Sheet Date in the Ordinary Course of Business. The reserves reflected in the Company Financial Statements are reasonable and have been calculated consistent with past practice.

2.24    No Litigation . Except as set forth in Section 2.24 of the Company Disclosure Letter and except as would not reasonably be expected to have a Company Material Adverse Effect or a potential financial impact of $50,000 or more, individually, or $250,000 in the aggregate, there are no actions, suits, dispute resolution proceedings, claims, governmental investigations or other legal or administrative proceedings, or any orders decrees or judgments in progress, pending or in effect, or, to the Knowledge of the Company, threatened against or relating to the Company or any of its Subsidiaries, the Company Facilities, the Company’s operation of the Company Facilities, any of the Company Assets, or against or relating to the transactions contemplated by this Agreement, and there are none pending in state courts, or in any federal courts, or, to the Knowledge of the Company, pending in other jurisdictions or threatened in writing, at law or in equity, by or before any federal, state or municipal court or other governmental agency, department, commission, board, bureau, instrumentality or other Governmental Entity.

2.25    Absence of Certain Changes or Events . Since December 31, 2006, through the Effective Time, the Company and its Subsidiaries have not:

(a)    Suffered any Company Material Adverse Effect;

(b)    Since December 31, 2006, the Company has operated in the Ordinary Course of Business, consistent with past practices, and has not

(i)    Other than in the Ordinary Course of Business, consistent with past practices, granted any increase in the compensation payable or to become payable by the Company to any of its officers, employees or agents (except compensation granted to new employees who are hired in the Ordinary Course of Business on substantially similar terms to existing employees with comparable duties and experience);

(ii)    contractually committed to any capital expenditure not included on the Cap Ex Budget (whether or not individually identified) in excess of $25,000;

(iii)    made any loan to, or entered into any other transaction with, any of its directors, officers, and employees;

(iv)    declared, paid, or set aside for payment any dividend or other distribution in respect of shares of its capital stock, membership interests or other securities, or redeemed, purchased or otherwise acquired, directly or indirectly, any shares of its capital stock, membership interests or other securities, or agreed to do so; or

(c)    Except as set forth in Section 2.25 of the Company Disclosure Letter, sold, transferred or otherwise disposed of, or agreed to sell, transfer or otherwise dispose of, any assets, or canceled, or agreed to cancel, any debts or claims in the amount of $25,000 or more in the aggregate except in the Ordinary Course of Business;

(d)    Made any change in any method of accounting or accounting practice; or

(e)    Except as set forth in Section 2.25 of the Company Disclosure Letter, entered into any agreement or made any commitment to do any of the foregoing.

2.26    Employees; Employee and Labor Relations .

(a)    The Company has Made Available a list (by title and compensation) of all salaried employees of Company and each of its Subsidiaries whose total compensation exceeded One Hundred Thousand Dollars during the fiscal year ended December 31, 2006 or whose total compensation is currently anticipated to exceed One Hundred Thousand Dollars during the fiscal year ended December 31, 2007. Except as specifically detailed in Section 2.26(a) of the Company Disclosure Letter immediately following Closing the Company will not have any material bonus, stock option, management incentive or similar incentive compensation plans (collectively “Bonus Pans”) in effect, nor will it have any amounts outstanding and owing under any such Bonus Plans. 

(b)    Except as provided under Section 2.26(b) of the Company Disclosure Letter:

(i)    Compliance . The Company is in compliance with all federal, state or other applicable laws, domestic or foreign, and all rules, regulations, ordinances, orders and decrees of Governmental Entities respecting employment and employment practices in all material respects (collectively, “Employment Laws”); except as would not reasonably be expected to have a Company Material Adverse Effect.

(ii)    No Claims . To the Company’s Knowledge, no legal claim in respect of application for employment, employment, the terms or conditions of employment, the handling of benefits or termination of employment of any Person has been asserted or threatened, against the Company or any of its Subsidiaries.

(iii)    No Labor Actions . No labor strike, picketing action, dispute, slowdown or stoppage, or unfair labor practices are actually pending or, to the Knowledge of the Company, threatened against, or involving, the Company, any of its Subsidiaries or any of the Company Facilities.

(iv)    No Bargaining Agreements . Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement, and no collective bargaining agreement is currently being negotiated by the Company. To the Company’s Knowledge, no petitions for representation have been filed against any of the Company Facilities nor have any demands been made for recognition.

(v)    WARN Compliance . Except as set forth in Section 2.26(b)(v) of the Company Disclosure Letter, the Company has taken, or will take prior to the Closing, as required by law, any and all actions necessary to comply with the WARN Act or state statute of similar import, with respect to any event of occurrence affecting the Company Facilities since the effective date of the WARN Act and prior to the Closing Date.

2.27    Employee Benefit Plans .

(a)    Section 2.27(a) of the Company Disclosure Letter contains a complete and accurate list of all Company Plans. Complete and accurate copies (including all applicable amendments) of (i) all Company Plans which have been reduced to writing, (ii) written summaries of all unwritten Company Plans, (iii) all related trust agreements, insurance contracts, summary plan descriptions and summaries of material modifications, and (iv) all annual reports filed on IRS Form 5500, 5500C or 5500R and (for all funded plans) and all plan financial statements, if any, in each case, for the three (3) most recent plan years for each Company Plan, have been delivered, or Made Available to, Parent. 

(b)    Each Company Plan has been administered in accordance with its terms and in all material respects in accordance with the Code, ERISA and all applicable law, and each of the Company, its Subsidiaries and the Company ERISA Affiliates has in all material respects met its obligations with respect to each Company Plan and has timely made all required contributions thereto. All filings and reports as to each Company Plan required to have been submitted to the Internal Revenue Service or to the United States Department of Labor have been duly submitted. No Company Plan has assets that include securities issued by the Company or any Company ERISA Affiliate.

(c)    There are no Legal Proceedings (except claims for benefits payable in the normal operation of the Company Plans and proceedings with respect to qualified domestic relations orders) pending against or involving any Company Plan or asserting any rights or claims to benefits under any Company Plan that could give rise to any material liability.

(d)    All the Company Plans that are intended to be qualified under Section 401(a) of the Code have received current determination letters from the Internal Revenue Service to the effect that such Company Plans are qualified and no such determination letter has been revoked and revocation has not been threatened, and no such Company Plan has been amended since the date of its most recent determination letter or application therefor in any respect, and no act or omission has occurred, that would adversely affect its qualification.

(e)    Neither the Company, any of its Subsidiaries, nor any Company ERISA Affiliate has ever maintained an Employee Benefit Plan subject to Section 412 of the Code or Title IV of ERISA.

(f)    At no time has the Company, any of its Subsidiaries or any Company ERISA Affiliate been obligated to contribute to any pension plan that is a “multiemployer plan” (as defined in Section 4001(a)(3) of ERISA) and at no time has the Company, any of its Subsidiaries or any Company ERISA Affiliate been obligated to contribute to any welfare plan that is a “multiemployer plan” (as defined in Section 4001(a)(3) of ERISA).

(g)    No Company Plan provides for post-employment life or health insurance, benefits or coverage for any participant or any beneficiary of a participant, except as may be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), or applicable state law, or which is provided at the expense of the participant or the participant’s beneficiary. Each of the Company and any Company ERISA Affiliate which maintains a “group health plan” within the meaning of Section 5000(b)(1) of the Code has complied with the notice and continuation requirements of Section 4980B of the Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations thereunder. 

(h)    No act or omission has occurred and to the Knowledge of the Company no condition exists with respect to any Company Plan that would subject the Company, any of its Subsidiaries or any Company ERISA Affiliate to any material fine, penalty, tax or liability of any kind imposed under ERISA, the Code or applicable federal or state securities laws.

(i)    No Company Plan is funded by, associated with or related to a “voluntary employee’s beneficiary association” within the meaning of Section 501(c)(9) of the Code.

(j)    Each Company Plan is amendable and terminable by the Company at any time without liability or expense to the Company or such Company Plan as a result thereof (other than for benefits accrued through the date of termination or amendment and reasonable administrative expenses related thereto) and no Company Plan, plan documentation or agreement, summary plan description or other written communication distributed generally to employees by its terms prohibits the Company from amending or terminating any such Company Plan.

(k)    Section 2.27(k) of the Company Disclosure Letter discloses each: (i) agreement with any stockholder, director, executive officer or employee of the Company or any of its Subsidiaries (A) the benefits of which are contingent, or the terms of which are altered, upon the occurrence of a transaction involving the Company or any of its Subsidiaries of the nature of any of the transactions contemplated by this Agreement (either alone or in conjunction with any other event), or (B) providing severance benefits or other benefits after the termination of employment of such director, executive officer or employee; (ii) agreement, plan or arrangement under which any Person may receive payments or benefits from the Company or any of its Subsidiaries that may be subject to the tax imposed by Section 4999 of the Code or included in the determination of such person’s potential “parachute payments” under Section 280G of the Code; and (iii) agreement or plan binding the Company or any of its Subsidiaries, including any stock option plan, stock appreciation right plan, restricted stock plan, stock purchase plan, severance benefit plan or Company Plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement. Except as set forth in Section 2.27(k) of the Company Disclosure Letter, there is no contract, agreement, plan or arrangement to which the Company or any of its Subsidiaries is a party covering any current or former employee, director or consultant of the Company or any of its Subsidiaries that, individually or collectively, will give rise to the payment of any amount that would not be deductible pursuant to Sections 162(m), 404 or 280G of the Code.

(l)    Section 2.27(l) of the Company Disclosure Letter sets forth the Company’s potential liability, as of the Closing Date, for awards payable to employees of the Company under the Company’s bonus programs, including the names of the employees to receive awards thereunder and the amount of such awards.

(m)    Neither the Company nor any of its Company ERISA Affiliates have used the services or workers provided by third party contract labor suppliers, temporary employees, “leased employees” (as that term is defined in Section 414(n) of the Code), or individuals who have provided services as independent contractors to an extent that would reasonably be expected to result in the disqualification of any of the Company Plans or the imposition of penalties or excise taxes with respect to the Company Plans by the Internal Revenue Service, the Department of Labor, or the Pension Benefit Guaranty Corporation.

(n)    No option was granted under any Company Plan with an exercise price which, on the date of grant, was less than “fair market value” (within the meaning of Section 409A of the Code and as determined in accordance with the principles and standards set forth in the proposed regulations issued thereunder and Internal Revenue Service Notices 2005-1, 2006-4 and 2006-79, collectively the “409A Authorities”). Each Company Plan that is a “nonqualified deferred compensation plan” within the meaning of, and subject to, Section 409A of the Code (a “Nonqualified Deferred Compensation Plan”) has been operated in material compliance with Section 409A of the Code since January 1, 2005, based upon a good faith, reasonable interpretation of the 409A Authorities. No Company Plan that would otherwise be a Nonqualified Deferred Compensation Plan but for the effective date provisions that are applicable to Section 409A of the Code (as set forth in Section 885 of the American Jobs Creation Act of 2004, as amended (the “AJCA”)) has been “materially modified “ within the meaning of Section 885(d)(2)(B) of the AJCA after October 3, 2004, as determined on the basis of a good faith, reasonable interpretation of the AJCA and the 409A Authorities.

2.28    Inventory and Supplies . As of the date of this Agreement and at the Closing, the Company’s Inventories are and will be in sufficient quantity and condition for the normal operation of its business at the Company Facilities and in compliance with all requirements of Governmental Entities, except as would not reasonably be expected to have a Company Material Adverse Effect.

2.29    Related Party Transactions . Except as set forth in Section 2.29 of the Company Disclosure Letter, there are no contracts of any kind, written or oral, entered into by the Company or any of its Subsidiaries with, or for the benefit of, any officer, director or stockholder of the Company or, to the Knowledge of the Company, any Affiliate of any of them, except in each case, for (a) employment agreements, fringe benefits and other compensation paid to directors, officers and employees consistent with previously established policies (including normal merit increases in such compensation in the Ordinary Course of Business) and copies of which have been provided to Parent and are listed in the Company Disclosure Letter, (b) reimbursements of ordinary and necessary expenses incurred in connection with their employment or service, and (c) amounts paid pursuant to Company Plans of which copies have been provided to Parent. To the Knowledge of the Company, none of such Persons has any material direct or indirect ownership interest in any firm or corporation with which the Company or any of its Subsidiaries has a business relationship, or with any firm or corporation that

2.30    Insurance . Section 2.30 of the Company Disclosure Letter sets forth (i) a true and complete list of all of the Company’s and each of its Subsidiaries insurance policies currently in force and (ii) a description of such risks that the Company or any of its Subsidiaries has designated as being self-insured. All such policies are in full force and effect, all premiums due thereon have been paid by the Company or one of its Subsidiaries, and the Company and its Subsidiaries are otherwise in compliance in all material respects with the terms and provisions of such policies. None of the Company or any of its Subsidiaries has received any notice of cancellation or non-renewal of any such policy or arrangement nor, to the Knowledge of the Company is the termination of any such policy or arrangements threatened.

2.31    Brokers’ Fees . Except as set forth in Section 2.31 of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries has any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement.

2.32    Books and Records . The books and records of the Company and each of its Subsidiaries are complete and correct in all material respects and have been maintained in accordance with sound business practices. True and complete copies of all minute books and stock record books of the Company and all of its Subsidiaries have been Made Available to Parent. Section 2.32 of the Company Disclosure Letter contains a list of all bank accounts and safe deposit boxes of the Company and its Subsidiaries and the names of persons having signature authority with respect thereto or access thereto.

2.33    Legal Compliance .

(a)    Except as set forth in Section 2.33(a) of the Company Disclosure Letter, each of the Company and its Subsidiaries is currently conducting, and has at all times since January 1, 2004 conducted, their respective businesses in compliance in all material respects with all applicable laws (including rules and regulations thereunder) of any federal, state, local or foreign government, or any Governmental Entity, except for any violations or defaults that, individually or in the aggregate, have not had and would not reasonably be expected to have a Company Material Adverse Effect. 

(b)    The Company and its Subsidiaries have complied, in all material respects, with all applicable security and privacy standards regarding protected health information under the Health Insurance Portability and Accountability Act of 1996 and all applicable state privacy laws, and with all applicable regulations promulgated under any such legislation.

2.34    Internal Controls . The Company maintains a system of internal accounting controls that is sufficient to provide reasonable assurance that: (a) transactions are executed in

2.35    Disclaimer . Except as expressly set forth in this Agreement or the Company Related Documents, Company makes no representation or warranty, express or implied, at law or in equity, in respect of Company, each of its Subsidiaries, or any of their respective assets, liabilities or operations, including, without limitation, with respect to merchantability or fitness for any particular purpose, and any such other representations or warranties are hereby expressly disclaimed.

3.1    Organization and Qualification . Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington, with full corporate power and authority to carry on its business as currently being conducted and to own or lease and operate the properties it owns or leases as and in the places now owned, leased or operated, respectively. Parent has furnished, or Made Available, to the Company complete and accurate copies of its Articles of Incorporation and Bylaws. Parent is not in default under or in violation of any provision of its Articles of Incorporation or Bylaws. Parent is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction in which the character or location of its assets or properties (whether owned, leased or licensed) or the nature of its business make such qualification necessary, except where the failure to be so qualified or in good standing, individually or in the aggregate, has not had and would not reasonably be expected to have a Parent Material Adverse Effect.

3.2    Authority; Binding Effect . 

(a)    The execution and delivery by each of Parent and the Transitory Subsidiary of this Agreement and the consummation by each of Parent and the Transitory Subsidiary of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of each of Parent and the Transitory Subsidiary , subject in the case of the consummation of the Merger to the Parent Shareholder Approval.   Without

(b)    This Agreement and each agreement, instrument or document being or to be executed and delivered by Parent or any of its Subsidiaries in connection with the transactions contemplated thereby (“Parent Related Documents”), upon due execution and delivery by Parent and such Subsidiaries, will constitute, assuming the due execution and delivery by the other parties thereto, the legal, valid, and binding obligation of Parent and such Subsidiary, enforceable in accordance with its respective terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors’ rights generally or by application of equitable principles).

3.3    Capitalization . 

(a)    The capital stock of Parent consists of (i) 40,000,000 authorized shares of common stock, $.0001 par value per share, of which 18,912,289 shares were, as of the date of this Agreement, issued and outstanding; (ii) 5,000,000 authorized shares of preferred stock, $.0001 par value per share designated as follows: (A) 25,000 authorized shares of Series A preferred stock, $.0001 par value per share, designated as Series A Convertible, Exchangeable, Redeemable Preferred Stock, of which, as o