EXHIBIT 10.1

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ASSET PURCHASE AGREEMENT

DATED AS OF JANUARY 30, 2007

BY AND BETWEEN

MUSICIAN’S FRIEND, INC.

AND

DENNIS BAMBER, INC., D/B/A THE WOODWIND & THE BRASSWIND,

AND

ITS CHAPTER 11 ESTATE

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Article 1 Definitions
1
   
Article 2 Purchase and Sale of Transferred Assets; Closing
10
     
2.1
Purchase of Transferred Assets
10
 
2.2
Consideration
11
 
2.3
Closing
13
 
2.4
Purchase Price Adjustment
14
 
2.5
Calculation of Closing Date Qualified Accounts Receivable and Assumed Accrued
Liabilities
14
 
2.6
Inventory.
15
 
2.7
Allocation
16
   
Article 3 Representations and Warranties of Seller
17
     
3.1
Organization and Good Standing; Shareholders
17
 
3.2
Authorization
17
 
3.3
Real Property
17
 
3.4
Personal Property.
18
 
3.5
Environmental Matters
19
 
3.6
Contracts
19
 
3.7
No Conflict or Violation; Consents
21
 
3.8
Permits
21
 
3.9
Financial Information; Books and Records
21
 
3.10
Liabilities
22
 
3.11
Litigation
22
 
3.12
Labor Matters
22
 
3.13
Purchase Commitments and Outstanding Bids
23
 
3.14
Employee Benefit Plans
23
 
3.15
Transactions with Related Parties
23
 
3.16
Compliance with Legal Requirements
24
 
3.17
Intellectual Property
24
 
3.18
Assets Necessary to Continue to Conduct Business
25
 
3.19
Brokers; Transactions Costs
25
 
3.20
No Other Agreements to Sell the Transferred Assets
25
 
3.21
Product Liability
25
 
3.22
Approvals
26
   
Article 4 Purchaser’s Representations and Warranties
26
     
4.1
Organization
26
 
4.2
Authorization
26
 
4.3
Brokers; Transactions Costs
26
 
4.4
Transferred Assets “AS IS”; Purchaser’s Acknowledgment Regarding Same
26
 
4.5
Availability of Funds
27

 
 
 
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Article 5 Covenants
27
     
5.1
Access and Availability
27
 
5.2
Operation of the Business
27
 
5.3
Notices and Consents
29
 
5.4
Commercially Reasonable Efforts
29
 
5.5
Notice of Developments
30
 
5.6
Bankruptcy Proceedings
30
 
5.7
Expense Reimbursement Amount
30
 
5.8
Notice of Bids
31
 
5.9
Reserved
31
 
5.10
Employee Matters
31
 
5.11
Confidentiality
31
 
5.12
Change of Name
32
 
5.13
Transfer of Assets
32
 
5.14
Cure Costs
32
   
Article 6 Conditions Precedent to the Parties’ Respective Obligation to Close
32
     
6.1
No Restraints
32
 
6.2
Governmental Authorizations
33
   
Article 7 Conditions Precedent to Purchaser’s Obligation to Close
33
     
7.1
Accuracy of Representations
33
 
7.2
Performance of Obligations
33
 
7.3
Deliveries
33
 
7.4
No Material Adverse Effect
33
 
7.5
Orders
33
 
7.6
Executory Contracts
33
 
7.7
Key Software Licenses
34
 
7.8
No Proceedings
34
 
7.9
Governmental Approvals
34
   
Article 8 Conditions Precedent to Seller’s Obligation to Close
34
     
8.1
Accuracy of Representations
34
 
8.2
Performance of Obligations
34
 
8.3
Deliveries
34
 
8.4
No Proceedings
35
   
Article 9 Termination
35
     
9.1
Termination Events
35
 
9.2
Termination Procedures
36
 
9.3
Expenses; Termination Fees
36
 
9.4
Effect of Termination
36

 
 
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Article 10 Additional Covenants
36
     
10.1
General
36
 
10.2
Leases and Other Agreements
37
 
10.3
Certain Tax Matters.
37
 
10.4
Access to Books, Records, Etc.; Further Action.
38
   
Article 11 General Provisions
38
     
11.1
Applicable Law
38
 
11.2
Jurisdiction; WAIVER OF JURY TRIAL
39
 
11.3
Termination of Representations and Warranties
39
 
11.4
Notices
39
 
11.5
Confidentiality
39
 
11.6
Public Announcements
39
 
11.7
Binding Effect; Assignment
40
 
11.8
Modification
40
 
11.9
Counterparts
40
 
11.10
Severability
40
 
11.11
Entire Agreement
40
 
11.12
Interpretation of Agreement
40

 
Exhibits
             
Exhibit A
-
Reserved
 
Exhibit B
-
Reserved
 
Exhibit C
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Sale Order
 
Exhibit D
-
Reserved
 
Exhibit E
-
Form of Assignment Agreement
 
Exhibit F
-
Form of Bill of Sale
 
Exhibit G
-
Material Terms of Amendments to Real Estate Leases
 
Exhibit H
-
Form of Noncompetition Agreement
 
Exhibit I
 
Material Terms of Barrington/LA Sax Agreement

 
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ASSET PURCHASE AGREEMENT
 
THIS ASSET PURCHASE AGREEMENT (this “Agreement”) is made as of January 30, 2007,
by and between Musician’s Friend, Inc., a Delaware corporation (“Purchaser”),
and Dennis Bamber, Inc., d/b/a The Woodwind & The Brasswind, an Indiana
corporation, and its chapter 11 estate (“Seller”), pursuant to the following
terms and conditions.
 
Recitals:
 
A. Seller has filed a voluntary petition (the “Petition”) for reorganization
relief pursuant to Chapter 11 of Title 11 of the United States Code, 11 U.S.C.
§§ 101-1330 (as amended, the “Bankruptcy Code”), in the United States Bankruptcy
Court for the Northern District of Indiana (the “Bankruptcy Court”), which case
shall be administered pursuant to order of the Bankruptcy Court (the “Bankruptcy
Case”).
 
B. Purchaser desires to purchase substantially all of the assets, contracts and
properties of Seller related to the Business and to assume certain specified
liabilities from Seller (the “Acquisition”), and Seller desires to sell, convey,
assign, and transfer to Purchaser, such assets, contracts and properties
together with such specified liabilities.
 
C. The Parties intend to effectuate the transactions contemplated by this
Agreement through a sale of substantially all of Seller’s assets pursuant to
Section 363 of the Bankruptcy Code.
 
D. The execution and delivery of this Agreement and Seller’s ability to
consummate the transactions set forth in this Agreement are subject, among other
things, to the entry of an order of the Bankruptcy Court under, inter alia,
Sections 363 and 365 of the Bankruptcy Code.
 
E. Seller and Purchaser have each approved the Acquisition.
 
Agreement:
 
NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants
and agreements contained herein and other good and valuable consideration, the
adequacy of which is hereby acknowledged, Purchaser and Seller hereby agree as
follows:
 
ARTICLE 1
DEFINITIONS
 
“Accounts Receivable/Inventory Adjustment Amount” shall have the meaning set
forth in Section 2.4(a).
 
“Acquisition” shall have the meaning set forth in Recital B.
 
“Action” means any action, order, writ, injunction, judgment or decree
outstanding or claim, suit, litigation, proceeding, investigation or dispute.
 
“Adjustment Payment” shall have the meaning set forth in Section 2.2(b)(iii).
 
“Affiliate” of a Person means a Person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common control
with, the first-mentioned Person. For purposes of this definition, “control,”
when used with respect to any specified Person, means the power to direct or
cause the direction of the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities or by contract or
otherwise, and the terms “controlling” and “controlled by” have meanings
correlative to the foregoing.
 
 
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“Allocation” shall have the meaning set forth in Section 2.7.
 
“Ancillary Agreements” means the Assumption Agreement, the Bill of Sale, the
Noncompetition Agreement and each other agreement entered into in connection
herewith.
 
“Assumed Accrued Liabilities” shall have the meaning set forth in Section
2.2(c).
 
“Assumed Liabilities” shall have the meaning set forth in Section 2.2(c).
 
“Assumption Agreement” shall have the meaning set forth in Section 2.3(b).
 
“Bankruptcy Case” shall have the meaning ascribed to such term in Recital A.
 
“Bankruptcy Code” shall have the meaning ascribed to such term in Recital A.
 
“Bankruptcy Court” shall have the meaning ascribed to such term in Recital A.
 
“Bankruptcy Rules” shall mean the Federal Rules of Bankruptcy Procedure.
 
“Barrington/LA Sax Agreement” shall have the meaning set forth in Section
10.2(b).
 
“Benefit Arrangement” means any employment, consulting, severance or other
similar contract, arrangement or policy (written or oral) and each plan,
arrangement, program, agreement or commitment (written or oral) providing for
insurance coverage (including any self-insured arrangements), workers’
compensation, disability benefits, supplemental unemployment benefits, vacation
benefits, retirement benefits, life, health or accident benefits (including any
“voluntary employees’ beneficiary association” as defined in Section 501(c)(9)
of the Code providing for the same or other benefits) or for deferred
compensation, profit-sharing, bonuses, stock options, stock appreciation rights,
stock purchases or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (a) is not a Welfare Plan, Pension
Plan or Multiemployer Plan and (b) is entered into, maintained, contributed to
or required to be contributed to or has been entered into, maintained,
contributed to or required to be contributed to, by any Seller or any ERISA
Affiliate or under which any Seller or any ERISA Affiliate has or may have any
Liability.
 
“Bill of Sale” shall have the meaning set forth in Section 2.3(b).
 
“Business” means Seller’s businesses of marketing, selling, refurbishing or
repairing or otherwise providing musical instruments, as well as all other
products, parts, accessories, print materials, supplies and services related to
such instruments to consumers, students, schools and other educational
institutions, whether through the Store / Headquarters, the internet, catalog,
mail order, direct response sales or otherwise.
 
“Business Day” means any day other than a Saturday or Sunday or a legal holiday
on which banks in Los Angeles, California or New York, New York are closed.
 
“Cash” means cash and cash equivalents, including marketable securities and
short-term investments.
 
“CERCLA” shall have the meaning set forth in the definition of “Environmental
Laws.”
 
 
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“Closing” shall have the meaning set forth in Section 2.3(a).
 
“Closing Date” shall have the meaning set forth in Section 2.3(a).
 
“Closing Date Payment” shall have the meaning set forth in Section 2.2(b)(i).
 
“Closing Date Qualified Accounts Receivable” shall have the meaning set forth in
Section 2.5(a).
 
“Closing Inventory” shall have the meaning set forth in Section 2.6(a).
 
“Code” means the Internal Revenue Code of 1986, as amended.
 
“Contracts” means all agreements, contracts, leases (whether for real or
personal property), purchase orders, undertakings, covenants not to compete,
employment agreements, confidentiality agreements, licenses, instruments,
obligations and commitments relating to the Business or any of the Transferred
Assets, whether written or oral.
 
“Court Order” means any judgment, decision, consent decree, injunction, ruling
or order of any foreign, federal, state or local court or governmental agency,
department or authority that is binding on any Person or its property under
applicable law.
 
“Cure Costs” means all liabilities, obligations and commitments of Seller for
all cure, compensation and reinstatement costs or expenses of or relating to the
assumption and assignment of any Contracts to be assumed and assigned as part of
the Transferred Assets that are payable or necessary to cure any defaults
pursuant to Section 365 of the Bankruptcy Code on account of any obligation or
default arising on or before the Closing Date.
 
“Default” means (a) a breach of or default under any Contract, (b) the
occurrence of an event that with or without the passage of time or the giving of
notice or both would constitute a breach of or default under any Contract or (c)
the occurrence of an event that with or without the passage of time or the
giving of notice or both would give rise to a right of termination,
renegotiation or acceleration, or the modification of the terms or conditions,
under any Contract.
 
“Defective Merchandise” means any item of Inventory that is damaged or defective
and not saleable as “new.”
 
“Designated Employees” shall have the meaning set forth in Section 5.10(b).
 
“Disclosure Schedule” means the written disclosure schedule of Seller delivered
to Purchaser prior to the date hereof, a copy of which is attached hereto.
 
“Display, Return and Obsolete Merchandise” means any item of Inventory that (a)
has been removed from its packaging, or installed, affixed or modified for
purposes of a sample, display or for demonstrating its function or design and is
not salable as “new” under Seller’s historic sales practices, (b) has been
returned by a customer and is not resalable as “new,” under Seller’s historic
sales practices, or (c) has been discontinued by the applicable vendor.
 
“Distribution Center” means the distribution center of Seller located at 4955
Ameritech Drive, South Bend, Indiana 46628.
 
 
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“Employee Plans” means all Benefit Arrangements, Multiemployer Plans, Pension
Plans and Welfare Plans.
 
“Employee Plan Liabilities” means any Liability under, relating to or with
respect to any Employee Plans, including any Liability of any Employee Plan,
Seller or any ERISA Affiliate.
 
“Employees” means all officers and directors of Seller and all other Persons
employed by Seller in connection with the Business on a full or part-time basis
together with all persons retained as “independent contractors” in connection
with the Business as of the relevant date.
 
“Encumbrance” means any claim, lien, pledge, option, charge, easement, Tax
assessment, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties of any sort whatsoever, whether
voluntarily incurred or arising by operation of law, and includes any agreement
to give any of the foregoing in the future, and any contingent sale or other
title retention agreement or lease in the nature thereof, other than Permitted
Encumbrances.
 
“Entity” means any corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, cooperative, foundation, society, political party, union, company
(including any limited liability company or joint stock company), firm or other
enterprise, association, organization or entity.
 
“Environmental Condition” means the state of the environment, including natural
resources (e.g., flora and fauna), soil, surface water, ground water, any
present or potential drinking water supply, subsurface strata or ambient air,
relating to or arising out of the use, handing, storage, treatment, recycling,
generation, transportation, release, spilling, leaking, pumping, pouring,
emptying, discharging, injecting, escaping, leaching, disposal, dumping or
threatened release of Hazardous Substances by Seller or any of its predecessors
or successors in interest, or by any of its agents, Representatives, employees
or independent contractors when acting in such capacity on behalf of Seller.
 
“Environmental Laws” means all applicable federal, state, district and local
laws, all rules or regulations promulgated thereunder, and all orders, consent
orders, judgments, notices, permits or demand letters issued, promulgated or
entered pursuant thereto, relating to pollution or protection of the environment
(including ambient air, surface water, ground water, land surface or subsurface
strata), including (a) laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, chemicals, industrial
materials, wastes or other substances into the environment and (b) laws relating
to the identification, generation, manufacture, processing, distribution, use,
treatment, storage, disposal, recovery, transport or other handling of
pollutants, contaminants, chemicals, industrial materials, wastes or other
substances. Environmental Laws shall include the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), the
Toxic Substances Control Act, as amended, the Hazardous Materials Transportation
Act, as amended, the Resource Conservation and Recovery Act, as amended, the
Clean Water Act, as amended, the Safe Drinking Water Act, as amended, the Clean
Air Act, as amended, the Occupational Safety and Health Act, as amended, and all
analogous laws promulgated or issued by any Governmental Body.
 
“Environmental, Health and Safety Liability” means any cost, damage, Liability
or other responsibility of Seller arising from or under Environmental Law or
Occupational Safety and Health Law and consisting of or relating to: (a) any
environmental, health, or safety matters or conditions (including on-site or
off-site contamination, occupational safety and health, and regulation of
chemical substances or products); (b) fines, penalties, judgments, awards,
settlements, legal or administrative proceedings, damages, losses, claims,
demands and response, investigative, remedial, or inspection costs and expenses
arising under Environmental Law or Occupational Safety and Health Law; (c)
financial responsibility under Environmental Law or Occupational Safety and
Health Law for cleanup costs or corrective action, including any investigation,
cleanup, removal, containment, or other remediation or response actions
(“Cleanup”) required by applicable Environmental Law or Occupational Safety and
Health Law (whether or not such Cleanup has been required or requested by any
governmental body or any other Person) and for any natural resource damages; or
(d) any other compliance, corrective, investigative, or remedial measures
required under Environmental Law or Occupational Safety and Health Law. The
terms “removal,” “remedial,” and “response action,” include the types of
activities covered by CERCLA.
 
 
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“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
 
“ERISA Affiliate” means any Entity which is (or at any relevant time was) a
member of a “controlled group of corporations” with, under “common control”
with, or a member of an “affiliated service group” with, or otherwise required
to be aggregated with, Seller as set forth in Section 414(b), (c), (m) or (o) of
the Code or Section 4001 of ERISA.
 
“Excluded Assets” means Seller’s (a) rights under this Agreement, (b) Cash, (c)
avoidance and other bankruptcy estate causes of action under the Bankruptcy Code
to which Seller is, or becomes, a party, (d) all claims and causes of action of
any kind or nature relating to (i) the Excluded Assets, or (ii) any shareholder,
officer and/or director of Seller (as such) or any agreements between Seller and
any or all of its shareholders (as such), excluding for purposes of this clause
(ii) all claims and causes of action of any kind or nature against David Yoder,
(e) retainers and prepayments for Professional Fees, (f) all claims for refunds
(together with interest accrued thereon) of Seller related to Taxes in respect
of periods ending on or prior to the Closing, (g) all rights in connection with
and the assets of any Employee Plans, (h) Seller’s minute books and stock
records and other documents relating to the organization, maintenance and
existence of Seller, (i) Seller’s prepaid business, group and other insurance
policies (including without limitation the cash surrender value of any
Seller-owned life insurance policies), Contracts of insurance, all coverage,
proceeds and recoveries thereunder and all rights in connection therewith to the
extent unrelated to the Transferred Assets, (j) the capital stock or other
ownership interest held by Seller in any Subsidiary (it being understood,
however, that any assets of a Subsidiary shall nonetheless constitute
Transferred Assets hereunder unless any such asset shall be in the nature of an
Excluded Asset), (k) rights under the Asset Purchase Agreement, dated as of
December 15, 2006, between Seller, its Chapter 11 Estate and Steinway Musical
Instruments, Inc., (l) the Government A/R as of the Closing Date, and (m) the
assets identified in Section 1.1(a) of the Disclosure Schedule.
 
“Excluded Liabilities” shall have the meaning set forth in Section 2.2(d).
 
“Expense Reimbursement Amount” means all reasonable out-of-pocket costs and
expenses actually incurred by Purchaser (including expenses of counsel,
accountants, experts and other outside consultants and legal expenses related to
negotiating this Agreement and investigating Seller or the Transferred Assets),
not to exceed $350,000, which shall, subject to Bankruptcy Court approval,
constitute a priority administrative expense under Section 503(b)(1) of the
Bankruptcy Code and shall be paid as set forth in Sections 5.7 and 9.3.
 
“Facilities” means all offices, stores, warehouses, administration buildings,
plants, other facilities and all real property and related facilities owned or
leased by Seller, including the Store / Headquarters and the Distribution
Center.
 
“Facilities Leases” shall have the meaning set forth in Section 3.3(b).
 
 
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“Final Order” means an order of the Bankruptcy Court or other court of competent
jurisdiction as to which no appeal, notice of appeal or motion for rehearing or
new trial has been timely filed or, if any of the foregoing has been timely
filed, no stay shall have issued.
 
“Fixtures and Equipment” means all of the (a) furniture, office equipment,
fixtures, and furnishings of Seller, (b) machinery, computer hardware,
automobiles, trucks, trailers, vehicles, spare parts, supplies, equipment,
racking, shelving, tools, supplies, molds, jigs, patterns, dies, Refurbishment
Equipment and other tangible personal property owned or leased by Seller that is
used in the Business, wherever located, and (c) all warranty rights associated
with the foregoing.
 
“Government A/R” shall mean trade accounts receivable payable to the Seller from
federal, state or local governments.
 
“Governmental Authorization” means any approval, consent, license, permit,
waiver, or other authorization issued, granted or otherwise made available by or
under the authority of any Governmental Body.
 
“Governmental Body” means any: (a) nation, principality, state, commonwealth,
province, territory, county, municipality, district or other jurisdiction of any
nature; (b) federal, state, local, municipal, foreign or other government; (c)
governmental or quasi-governmental authority of any nature (including any
governmental division, subdivision, department, agency, bureau, branch, office,
commission, council, board, instrumentality, officer, official, representative,
organization, unit, body or Entity and any court or other tribunal); (d)
multi-national organization or body; or (e) individual, Entity or body
exercising, or entitled to exercise, any executive, legislative, judicial,
administrative, regulatory, police, military or Taxing authority or power of any
nature.
 
“Hazardous Substances” means all pollutants, contaminants, chemicals, wastes and
any other carcinogenic, ignitable, corrosive, reactive, toxic or otherwise
hazardous substances or materials (whether solids, liquids or gases) subject to
regulation, control or remediation under Environmental Laws.
 
“Holdback Amount” means $1,500,000.
 
“Indebtedness” means (a) any obligation for borrowed money, including any
obligation for accrued and unpaid interest thereon and any prepayment or other
penalties or premiums, (b) any capitalized lease obligations, (c) any obligation
evidenced by a note, deed, mortgage or secured by any property of Seller, (d)
any reimbursement obligations in respect of letters of credit, (e) any and all
obligations of Seller pursuant to the terms of the LaSalle Equipment Lease,
including without limitation all amounts necessary to exercise the purchase
option thereunder, and (f) all guarantees issued in respect of obligations of
any other Person of the type described in clauses (a) through (e).
 
“Intangible Assets” means an asset, such as goodwill, Intellectual Property
rights or similar assets, with no physical properties.
 
“Intellectual Property” means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto
and all patents, patent applications and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions and
reexaminations thereof, (b) all United States or foreign trademarks, service
marks, trade dress, logos, trade names and corporate names, together with all
translations, adaptations, derivations and combinations thereof and including
all goodwill associated therewith and all applications, registrations and
renewals in connection therewith, (c) all copyrightable works, all copyrights
and all applications, registrations and renewals in connection therewith, (d)
all mask works and all applications, registrations and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, techniques,
designs, drawings, specifications, customer and supplier lists and databases,
sales literature, promotional literature, lists of distributors, artwork,
purchasing records, pricing and cost information, business and marketing plans
and proposals, and related documentation), (f) all computer software (excluding
software commonly available through licenses on standard commercial terms, such
as software “shrink-wrap” licenses, it being understood that such licenses
nonetheless constitute Transferred Assets), including data and related
documentation and all software necessary to maintain the operation of the
Business, URLs, web sites, web portals, and other forms of technology, (g) all
other proprietary rights related to the Business or the Transferred Assets, (h)
all copies and tangible embodiments thereof (in whatever form or medium) and (i)
all rights to use telephone and facsimile numbers related to the Business or the
Transferred Assets.
 
 
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“Inventory” means all merchandise owned and intended for resale in connection
with the Business (including all Prepaid Inventory), all manufactured and
purchased parts, goods in process, raw materials, supply and packing materials
and finished goods and other tangible personal property that is used in
connection with the Business, including all instruments on hand at the Store /
Headquarters, loan, consignment and approval instruments, all Defective
Merchandise and all Display and Return Merchandise, in each case wherever
located.
 
“Inventory Value” shall have the meaning set forth in Section 2.6(a).
 
“Key Software Licenses” shall have the meaning set forth in Section 3.17(d).
 
“LaSalle Equipment Lease” shall mean the Master Lease Agreement between Seller
and LaSalle National Leasing Corporation dated June 27, 2005.
 
“Leased Real Property” shall have the meaning set forth in Section 3.3(b).
 
“Legal Requirement” means any applicable federal, state, local, municipal,
foreign or other law, statute, legislation, constitution, principle of common
law, resolution, ordinance, code, edict, decree, proclamation, treaty,
convention, rule, regulation, ruling, directive, pronouncement, requirement,
notice requirement, guideline, Court Order, specification, determination,
decision, opinion or interpretation issued, enacted, adopted, passed, approved,
promulgated, made, implemented or otherwise put into effect by or under the
authority of any Governmental Body.
 
“Liabilities Adjustment Amount” shall have the meaning set forth in Section
2.4(b).
 
“Liability” means any direct or indirect liability, Indebtedness, obligation,
commitment, expense, claim, deficiency, guaranty or endorsement of any type
whatsoever, whether accrued or unaccrued, absolute or contingent, matured or
unmatured, liquidated or unliquidated, known or unknown, asserted or unasserted,
due or to become due.
 
“Material Adverse Effect” means any material adverse effect on or change with
respect to the business, operations, assets, Liabilities, financial condition,
results of operations, properties or prospects of Seller or the Business taken
as a whole that (a) results in the inability of Seller to convey to Purchaser
all of the material elements necessary to conduct the Business, including the
Intellectual Property used in the Business, accounts receivable, Facilities,
Inventory and other assets as contemplated by this Agreement, or (b) results in
the Facilities ceasing to materially operate in their current condition;
provided, however, that any effect or change arising out of or resulting from
any of the following shall not be deemed (either alone or in combination) a
Material Adverse Effect: (i) the filing of the Bankruptcy Case or the
announcement or pendency of the Acquisition or (ii) conditions affecting the
industry or industry sector in which Seller participates or the United States
economy as a whole.
 
 
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“Material Contracts” shall have the meaning ascribed to such term in Section
3.6(a).
 
“Multiemployer Plan” means any “multiemployer plan,” as defined in Section 3(37)
or 4001(a)(3) of ERISA, which any Seller or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or maintained,
administered, contributed to or was required to contribute to, or under which
any Seller or any ERISA Affiliate has or may have any Liability.
 
“Noncompetition Agreement” shall have the meaning set forth in Section 2.3(b).
 
“Nonqualifying Closing Inventory” shall have the meaning set forth in Section
2.6(a).
 
“Occupational Safety and Health Law” means any applicable Legal Requirement
designed to provide safe and healthful working conditions and to reduce
occupational safety and health hazards.
 
“Owned Real Property” means any real property owned in fee by Seller.
 
“Party” shall mean any Person who is a party to this Agreement.
 
“PBGC” shall mean the Pension Benefit Guaranty Corporation.
 
“Pension Plan” means any “employee pension benefit plan” as defined in Section
3(2) of ERISA (other than a Multiemployer Plan) which Seller or any ERISA
Affiliate maintains, administers, contributes to or is required to contribute
to, or maintained, administered, contributed to or was required to contribute
to, or under which Seller or any ERISA Affiliate has or may have any Liability.
 
“Permits” means all licenses, permits, franchises, approvals, authorizations,
consents or orders of, or filings with, any Governmental Body, necessary or
customary for the present conduct or operation of the Business or ownership of
the Transferred Assets.
 
“Permitted Encumbrances” means the Encumbrances identified in Section 1.1(b) of
the Disclosure Schedule.
 
“Person” means an individual, Entity or Governmental Body.
 
“Personal Property Transferred Assets” shall have the meaning set forth in
Section 3.4(a).
 
“Petition” shall have the meaning ascribed to such term in the recitals hereof.
 
“Petition Date” shall mean the date that Seller commence the Bankruptcy Case
before the Bankruptcy Court.
 
“Pre-Closing Period” means the period from the date of the Agreement through the
Closing Date.
 
“Preliminary Estimate” shall have the meaning set forth in Section 2.6(a).
 
“Prepaid Inventory” means Inventory which the Seller has paid for in whole or in
part, but which the Seller has not yet received from the vendor.
 
 
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“Proceeding” means any action, suit, litigation, arbitration, proceeding
(including any civil, criminal, administrative, investigative or appellate
proceeding and any informal proceeding), prosecution, contest, hearing, inquiry,
inquest, audit, examination or investigation commenced, brought, conducted or
heard by or before, or otherwise involving, any Governmental Body or any
arbitrator or arbitration panel.
 
“Professional Fees” shall mean compensation for fees or reimbursement of
expenses of any Person in the Bankruptcy Case under Sections 327, 328, 329, 330,
331, 364, 503 or 506 of the Bankruptcy Code or otherwise.
 
“Purchaser” shall have the meaning set forth in the preamble.
 
“Purchase Price” means (a) the Closing Date Payment, plus (b) the Adjustment
Payment, plus (c) the Assumed Liabilities.
 
“Refurbishment Equipment” means any tools, supplies, inventory and spare parts
used primarily in Seller’s repair or refurbishment of instruments.
 
“Related Party” means (a) any officer, director or shareholder of Seller, and
any officer, director, partner, manager, or relative of such officers, directors
and shareholders, and (b) any Person in which Seller or any Affiliate or
relative of any such Person has any direct or indirect interest.
 
“Representative” means, with respect to any Person, any officer, director,
principal, attorney, accountant, agent, employee, financing source or other
representative of such Person.
 
“Sale Hearing” means the hearing conducted by the Bankruptcy Court to approve
the transactions contemplated by this Agreement.
 
“Sale Motion” means the motion, in form and substance reasonably acceptable to
Seller and Purchaser, filed by Seller pursuant to, inter alia, Sections 363 and
365 of the Bankruptcy Code to obtain the Sale Order and approve the transactions
contemplated by this Agreement.
 
“Sale Order” means an order of the Bankruptcy Court, in form and substance
substantially identical to the sale order attached hereto as Exhibit C, with
such subsequent changes reasonably acceptable to Purchaser.
 
“Seller” shall have the meaning set forth in the preamble.
 
“Seller’s Cost” shall have the meaning set forth in Section 2.6(b).
 
“Store / Headquarters” mean Seller’s retail store and headquarters located at
4004 Technology Drive, South Bend, Indiana 46628.
 
“Subsidiary” means, with respect to any Person, (a) any corporation of which at
least 50% of the securities or interests having, by their terms, ordinary voting
power to elect members of the board of directors, or other persons performing
similar functions with respect to such corporation, is held, directly or
indirectly by such Person and (b) any partnership or limited liability company
of which (i) such Person is a general partner or managing member or (ii) such
Person possesses a 50% or greater interest in the total capitalization or total
income of such partnership or limited liability company.
 
“Tax” means any federal, state, local or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs duties, capital stock, franchise,
profits, withholding, social security, unemployment, disability, real property,
personal property, sales, use, transfer, registration, value added, alternative
or add-on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
 
 
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“Tax Return” means any return, declaration, report, claim for refund, transfer
pricing report or information return or statement relating to Taxes, including
any schedule or attachment thereto, and including any amendment thereof.
 
“Transferred Assets” shall have the meaning set forth in Section 2.1.
 
“Transferred Employees” means Persons who were Employees of Seller immediately
prior to the Closing who become employees of Purchaser or one of its Affiliates
at the Closing.
 
“Welfare Plan” means any “employee welfare benefit plan” as defined in Section
3(1) of ERISA, which Seller or any ERISA Affiliate maintains, administers,
contributes to or is required to contribute to, or maintained, administered,
contributed to or was required to contribute to, or under which Seller or any
ERISA Affiliate has or may have any Liability.
 
ARTICLE 2
PURCHASE AND SALE OF TRANSFERRED ASSETS; CLOSING
 
2.1  Purchase of Transferred Assets. At the Closing, Seller shall cause to be
sold, assigned, transferred, conveyed and delivered to Purchaser good and valid
title to the Transferred Assets, free of any Encumbrances, on the terms and
subject to the conditions set forth in this Agreement and in accordance with
Sections 363 and 365 of the Bankruptcy Code. For purposes of this Agreement,
“Transferred Assets” means and includes substantially all of the properties,
rights, interests and other tangible and intangible assets of Seller and its
Subsidiaries relating to the Business (wherever located and whether or not
required to be reflected on a balance sheet prepared in accordance with
generally accepted accounting principles) and all Intellectual Property of
Seller including any assets acquired by Seller during the Pre-Closing Period;
provided, however, that the Transferred Assets shall not include any Excluded
Assets. Without limiting the generality of the foregoing and except for the
Excluded Assets, the Transferred Assets shall include:
 
(a)  Receivables. All accounts receivable (including all Closing Date Qualified
Accounts Receivable), notes receivable and other receivables of Seller relating
to the Business, and all rights to collect from customers (and to retain) all
fees and other amounts payable, or that may become payable, to Seller with
respect to products sold or services performed by or on behalf of Seller in
connection with the Business on or prior to the Closing Date, but excluding the
Government A/R;
 
(b)  Inventory. All Inventory (including without limitation all rights in
respect of Prepaid Inventory and any pending but not received merchandise
returns from customers);
 
(c)  Contracts. All rights of Seller under (i) purchase orders or similar
agreements (A) for branded product, and (B) for the proprietary products
identified in Section 2.1(c) of the Disclosure Schedule, and (ii) the other
executory Contracts relating to the Business identified in Section 2.1(c) of the
Disclosure Schedule, including all confidentiality, non-disclosure and
non-solicitation agreements to which Seller is a party; provided, however, that
Purchaser may add or remove Contracts from Section 2.1(c) of the Disclosure
Schedule at any time or from time to time up to the close of business on the
Business Day before the Sale Hearing;
 
 
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(d)  Intellectual Property. All Intellectual Property of Seller used in the
Business, including the items set forth in Sections 2.1(d) and 3.17(c) of the
Disclosure Schedule and software commonly available through licenses on standard
commercial terms, such as software “shrink-wrap” licenses;
 
(e)  Books and Records. All books, papers, records, files, data (in paper or
electronic format) of Seller, including all purchasing and sales records,
customer lists, vendor lists and accounting and financial records;
 
(f)  Permits. All Permits, to the extent transfer is permitted under applicable
law;
 
(g)  Prepaid Expenses and Deposits. All right, title and interest in and to all
prepaid expenses and deposits relating to the Business, including all security
or other deposits held by any third party with respect to the Store /
Headquarters and Distribution Center;
 
(h)  Causes of Actions. All claims, deposits, prepayments, refunds, causes of
action, choses in action, rights of recovery, rights of setoff and rights of
recoupment arising out of or relating to the Business or the Transferred Assets;
 
(i)  Personal and Other Property. Any other assets, including Fixtures and
Equipment, owned by Seller used in the operation of the Business as well as all
property presently subject to the LaSalle Equipment Lease;
 
(j)  Facilities Leases. All of Seller’s right, title and interest in, to and
under Leases relating to the Store / Headquarters and the Distribution Center,
subject to Section 10.2;
 
(k)  Insurance Proceeds. Proceeds under any insurance policy of Seller received
or receivable with respect to any Transferred Asset;
 
(l)  Warranty and Similar Rights. All rights and claims of Seller pursuant to
warranties, representations, guarantees and indemnities made by suppliers in
connection with the Transferred Assets or service furnished to Seller pertaining
to or affecting the Transferred Assets; and
 
(m)  Goodwill. Any and all goodwill related to the Business or any of the
foregoing.
 
2.2    Consideration.
 
(a)  Reserved.
 
(b)  Cash Consideration. As consideration for the sale of the Transferred Assets
to Purchaser:
 
(i) Purchaser shall pay to Seller $26,095,000 in cash (the “Closing Date
Payment”) on the Closing Date in accordance with Section 2.3(b)(i);
 
(ii) Purchaser shall assume the Assumed Liabilities on the Closing Date in
accordance with Section 2.2(c); and
 
(iii) Purchaser shall pay to Seller the Holdback Amount, minus the Accounts
Receivable/Inventory Adjustment Amount, and plus or minus the Liabilities
Adjustment Amount (collectively, the “Adjustment Payment”), no later than two
(2) Business Days after the latest to occur of the final determination of each
of (1) the Closing Date Qualified Accounts Receivable, (2) the Liabilities
Adjustment Amount and (3) reconciliation and verification of the Inventory Value
of the Closing Inventory.
 
 
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(c)  Assumed Liabilities. For purposes of this Agreement, “Assumed Liabilities”
means only the following Liabilities of Seller: (i) Liabilities first arising
after the Closing Date that relate solely to the operation of the Business by
Purchaser; (ii) all obligations and liabilities of Seller first arising after
the Closing Date under Contracts specifically described in Section 2.1(c) to the
extent such obligations and liabilities do not arise from or relate to any act
or omission by Seller under any of such Contracts; (iii) an amount equal to the
accrued payroll and vacation liabilities (which Purchaser may fund or, in the
case of vacation liabilities, elect to assume in the form of vacation time
credit under its policies, at its sole election) for Transferred Employees as of
Closing, such amount not to exceed $1,000,000 in the aggregate under any
circumstances; (iv) employee benefits for Transferred Employees arising after
the Closing Date, in form and amount consistent with those provided by Purchaser
to its employees; (v) an amount equal to the value of accrued liabilities
related to customer credits and other similar amounts due to customers of
Seller; and (vi) the unpaid deferred purchase price due to David Carpenter
pursuant to the secured Term Promissory Note dated April 28, 2005, between
Seller and David Carpenter in the original principal amount of $736,851.21, up
to $308,041. The accrued Liabilities described in Section 2.2(c)(iii), (v) and
(vi) are herein referred to as the “Assumed Accrued Liabilities.”
Notwithstanding anything to the contrary contained in this Agreement, payments
of amounts due pursuant to Section 2.2(c)(iii) (up to the $1,000,000 cap) shall
not constitute an assumption of the obligations and liabilities underlying or
related to such amounts unless Purchaser expressly elects to assume vacation
time credits in writing and then solely to the extent of the hours of credit it
elects to assume whether or not sufficient to extinguish the liability of Seller
to such employee. No Transferred Employee shall have any claim against Purchaser
pursuant to this Section 2.2(c) or otherwise under this Agreement except
pursuant to a written offer of employment delivered directly by Purchaser to
such individual Transferred Employee.
 
(d)  Excluded Liabilities. Notwithstanding anything to the contrary contained in
this Agreement, Purchaser shall not be obligated to assume or to perform or
discharge any Liability of Seller, any ERISA Affiliate or any Employee Plan
(such other Liabilities being referred to as “Excluded Liabilities”) other than
the Assumed Liabilities. Without limiting the foregoing, Seller shall retain and
be responsible for, and Purchaser shall not be obligated to assume or to perform
or discharge, and does not assume or perform or discharge, any Liability of
Seller, any ERISA Affiliate or any Employee Plan at any time arising from or
otherwise attributable to:
 
(i) any Liability of Seller relating to the Business that arises on or before
the Closing Date and is not specifically assumed by Purchaser;
 
(ii) any Liability of Seller relating to real property leases or Facilities not
specifically assumed by Purchaser pursuant to Section 10.2;
 
(iii) any Liability relating to the Excluded Assets;
 
(iv) any Liability of Seller relating to Seller’s execution, delivery or
performance of this Agreement or any document contemplated by this Agreement;
 
(v) all Liabilities of Seller for all Cure Costs;
 
(vi) any outstanding bids, purchase orders, customer credits, customer deposits
or lay away purchases to the extent not included in Section 2.1(c);
 
 
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(vii) any transfer Taxes with respect to the transactions contemplated by this
Agreement;
 
(viii) any Environmental, Health and Safety Liability of Seller;
 
(ix) any Employee Plan Liability; and
 
(x) any Professional Fees or brokerage fees of Seller.
 
2.3  Closing.
 
(a)  The consummation of the purchase of the Transferred Assets by Purchaser
provided for in this Agreement (the “Closing”) shall occur at the offices of
Barnes & Thornburg LLP, 100 N. Michigan Street, South Bend, Indiana 46601, at
10:00 A.M. on the first Business Day after the day on which all conditions to
Closing that must be satisfied prior to Closing have been satisfied or, to the
extent permitted, waived (other than conditions that are intended to be
satisfied or, to the extent permitted, waived, at the Closing), or at such other
date, time or place as the parties may agree (the “Closing Date”). The
Transferred Assets shall be transferred to Purchaser at the Closing on the
Closing Date, and Seller shall do all things that are deemed necessary by
Purchaser for the valid transfer of the Transferred Assets.
 
(b)  At the Closing:
 
(i) Purchaser shall pay to Seller, in cash by wire transfer of immediately
available funds, an amount equal to the Closing Date Payment;
 
(ii) Purchaser and Seller shall execute and deliver to one another, as
applicable:
 
(1) an assignment and assumption agreement in the form attached hereto as
Exhibit E (the “Assumption Agreement”);
 
(2) a bill of sale in the form attached hereto as Exhibit F (the “Bill of
Sale”); and
 
(3) amendments to the Facilities Leases in accordance with Exhibit G attached
hereto and duly countersigned by the owner of such properties
 
(4) the Barrington/LA Sax Agreement in accordance with Exhibit I attached hereto
and duly countersigned by Barrington, Inc.;
 
(iii) Seller shall deliver or cause to be delivered to Purchaser:
 
(1) a certificate executed on behalf of Seller by its president or chief
executive officer (the “Seller Closing Certificate”) confirming that, except as
expressly set forth in the Seller Closing Certificate, each of the conditions
set forth in Sections 7.1, 7.2, 7.4, 7.6 and 7.9 has been satisfied in all
respects;
 
(2) all necessary forms and certificates complying with applicable Legal
Requirements, duly executed and acknowledged by Seller, certifying that the
transactions contemplated hereby are exempt from withholding under Section 1445
of the Code;
 
 
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(3) assignments (including Intellectual Property, personal property, lease and
Contract transfer documents) and such other instruments of sale, transfer,
conveyance and assignment as Purchaser and its counsel may reasonably request;
 
(4) properly endorsed certificates of title for each vehicle that is an
Transferred Asset (and each other Transferred Asset where ownership is
established through a certificate of title);
 
(5) a certificate of the secretary of Seller in customary form;
 
(6) a Certificate of Existence, dated as of a date within five days of the
Closing Date, of Seller issued by the Secretary of State of the state of
organization of Seller;
 
(7) a noncompetition agreement in the form attached hereto as Exhibit H (the
“Noncompetition Agreement”), executed by Dennis Bamber; and
 
(8) such other documents as Purchaser or its counsel may reasonably request in
connection with the transactions contemplated by this Agreement.
 
(iv) Purchaser shall deliver or cause to be delivered to Seller a certificate
executed on behalf of Purchaser by its president or chief executive officer (the
“Purchaser Closing Certificate”) confirming that, except as expressly set forth
in the Purchaser Closing Certificate, each of the conditions set forth in
Sections 8.1 and 8.2 has been satisfied in all respects.
 
2.4  Purchase Price Adjustment. The Purchase Price is premised on (x) the (i)
Closing Date Qualified Accounts Receivable of Seller plus the Inventory Value of
the Closing Inventory of Seller being not less than $33,600,000 on the Closing
Date, and (y) the aggregate Assumed Accrued Liabilities being $1,940,000.
 
(a)  In the event that the (i) Closing Date Qualified Accounts Receivable of
Seller plus the Inventory Value of the Closing Inventory of Seller, as
determined pursuant to Sections 2.5 and 2.6, is less than $33,600,000, the
Purchase Price shall be decreased by one dollar for each dollar of such
deficiency (collectively, the “Accounts Receivable/Inventory Adjustment
Amount”).
 
(b)  In the event that the aggregate Assumed Accrued Liabilities, as determined
pursuant to Section 2.5, is more or less than $1,940,000 on the Closing Date,
the Purchase Price shall be increased or decreased, as applicable, by one dollar
for each dollar of such excess or deficiency (collectively, the “Liabilities
Adjustment Amount”).
 
(c)  To the extent that after final determination of the Closing Date Qualified
Accounts Receivable, the Assumed Accrued Liabilities and the Inventory Value of
the Closing Date Inventory of Seller, it is determined that the Closing Date
Payment exceeded the amount that was due Seller under this Agreement, any
overpayment shall be immediately refunded to Purchaser from Seller’s estate.
 
2.5  Calculation of Closing Date Qualified Accounts Receivable and Assumed
Accrued Liabilities.
 
(a)  As soon as reasonably practicable following the Closing Date, and in any
event within ten (10) days thereof, Seller shall cause to be prepared and
delivered to Purchaser calculations of (i) the aggregate accounts receivable of
Seller due from unrelated third parties (other than the Government A/R), net of
a reserve consistent with past practice under valid orders that have been fully
performed by Seller and that are not more than 365 days old at Closing (“Closing
Date Qualified Accounts Receivable”) and (ii) the aggregate Assumed Accrued
Liabilities. The Closing Date Qualified Accounts Receivable and the Assumed
Accrued Liabilities amount shall be prepared in accordance with generally
accepted accounting principles consistently applied. If reasonably requested by
Seller, Purchaser will provide Seller with access to the records of the Business
in order to determine the Closing Date Qualified Accounts Receivable and the
Assumed Accrued Liabilities. The parties also acknowledge and agree that
accounting staff previously employed by Seller shall assist Seller, at no cost
to Seller, in determining the Closing Date Qualified Accounts Receivable and the
Assumed Accrued Liabilities on behalf of Seller even though such employees may
be employed by Purchaser after the Closing.
 
 
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(b)  Upon delivery of the calculation of Closing Date Qualified Accounts
Receivable and/or the Assumed Accrued Liabilities, Seller will provide Purchaser
and its Representatives full access to Seller’s records to the extent reasonably
related to Purchaser’s evaluation of the calculation of such amounts. If
Purchaser shall disagree with the calculation of either the Closing Date
Qualified Accounts Receivable or the Assumed Accrued Liabilities, it shall
notify Seller of such disagreement in writing, setting forth in reasonable
detail the particulars of such disagreement, within twenty (20) days after
receipt of the respective calculation of Closing Date Qualified Accounts
Receivable or Assumed Accrued Liabilities (subject to extension for any period
of inadequate access to the underlying records). In the event that Purchaser
does not provide such a notice of disagreement within such twenty (20) day
period (as may be so extended), Purchaser shall be deemed to have accepted the
calculation of Closing Date Qualified Accounts Receivable and Assumed Accrued
Liabilities delivered by Seller, which shall be final, binding and conclusive on
the Parties for the purposes of determining the Accounts Receivable Adjustment
Amount and the Liabilities Adjustment Amount. In the event any such notice of
disagreement is timely provided, Purchaser and Seller shall use commercially
reasonable efforts for a period of twenty (20) days (or such longer period as
they may mutually agree) to resolve any disagreements with respect to the
calculation of Closing Date Qualified Accounts Receivable and/or the Assumed
Accrued Liabilities. If, at the end of such period, they are unable to resolve
such disagreements, then the Bankruptcy Court shall resolve any remaining
matters in dispute.
 
2.6    Inventory.
 
(a)  Inventory Valuation.
 
(i) In accordance with Section 2.6(b) of this Agreement, and prior to the
Closing, Seller shall deliver to Purchaser a preliminary estimate (the
“Preliminary Estimate”) of the aggregate value of the Inventory (“Inventory
Value”) to be acquired by Purchaser hereunder (the “Closing Inventory”), which
preliminary aggregate value estimate shall be based on the Seller’s Cost
information supplied to Purchaser for each Inventory item.
 
(ii) Purchaser and Seller shall jointly conduct an actual physical count and
inspection of the Inventory in order to (A) verify the Seller’s Cost information
provided by the Seller on the Closing Inventory and (B) examine the Closing
Inventory to identify items of Closing Inventory, if any, that constitute
Defective Merchandise or Display, Return or Obsolete Inventory (the
“Nonqualifying Closing Inventory”). The physical inventory shall commence on the
Closing Date and be completed within five (5) Business Days after the Closing
Date (unless extended by mutual agreement of the parties). Purchaser shall
prepare, and submit to Seller, for Seller’s review and approval, a proposed
final valuation of the Closing Inventory within twenty (20) Business Days after
the completion of the physical inventory. Purchaser will provide Seller with
access to its records and the Facilities to the extent reasonably related to its
review of Purchaser’s proposed final valuation of the Closing Inventory. All
items of Closing Inventory that are not Nonqualifying Closing Inventory shall be
valued at Seller’s Cost, as verified by Purchaser. All Nonqualifying Closing
Inventory shall be reviewed for appropriate lower of cost or market valuation
adjustment as mutually agreed upon by Purchaser and Seller, it being expressly
understood that the calculation of market value shall be determined by using the
expected selling price reduced by (X) normal selling costs and (Y) a reasonable
selling margin representative of the historical selling margin of Seller in the
product category.
 
 
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(b)  Inventory Valuation Methodology. The following conventions shall apply to
the identification and valuation of the Inventory, the Closing Inventory and the
Nonqualifying Closing Inventory: (i) the Preliminary Estimate shall be based on
Seller’s customary Inventory report prepared by Seller as of two business days
or less of Closing and delivered to Purchaser prior to Closing, the value for
which shall be based on Seller’s Cost as contained in such report; (ii) the
Closing Inventory and Nonqualifying Closing Inventory shall be based on the
joint physical count and inspection of the Inventory by Purchaser and Seller,
(iii) Purchaser’s proposed final valuation shall include verified Seller’s Cost
information for each item of Inventory and also shall include Inventory which
has been prepaid by Seller and received after the Closing; (iv) the Closing
Inventory shall not include “return to vendor” or repair items; (v) the value of
any Inventory acquired by Purchaser following the Closing Date (including
customer returns) shall not be included in the Inventory Value; and (vi)
Inventory value, other than Nonqualifying Closing Inventory, shall be based on
Seller’s historical costing method as verified by Purchaser (“Seller’s Cost”),
unless Seller, in its sole discretion, agrees to a lesser value, in which event
the lesser value shall become the “Seller’s Cost.” The parties shall bear their
own expenses in the valuation of the Inventory, the Nonqualifying Closing
Inventory and Closing Inventory.
 
(c)  Inventory Valuation Disputes. If Seller shall disagree with the Purchaser’s
final calculation of the value of the Closing Inventory that Seller received
from Purchaser pursuant to Section 2.6(a), it shall notify Purchaser of such
disagreement in writing, setting forth in reasonable detail the particulars of
such disagreement, within twenty (20) days after receipt of the calculation of
the valuation of the Closing Inventory, accompanied by reasonable supporting
documentation. In the event that Seller does not provide such a notice of
disagreement within such twenty (20) day period, Seller shall be deemed to have
accepted the calculation of Closing Inventory. In the event any such notice of
disagreement is timely provided, Purchaser and Seller shall use commercially
reasonable efforts for a period of twenty (20) days following receipt of the
calculation of the valuation of the Closing Inventory (or such longer period as
they may mutually agree) to resolve any disagreements with respect to the
calculation of the Closing Inventory. If, at the end of such period, they are
unable to resolve such disagreements, the Bankruptcy Court shall resolve any
remaining matters in dispute.
 
2.7  Allocation. Purchaser shall use its commercially reasonable efforts to
deliver to Seller, within ninety (90) days following the Closing Date, the
allocation of the Purchase Price, among the Transferred Assets (the
“Allocation”). The Allocation will be made by Purchaser in good faith and in
accordance with Section 1060 of the Code and the Treasury regulations
promulgated thereunder (it being understood that an allocation provided by an
independent third party shall be deemed to be in good faith). Seller and
Purchaser agree to (a) be bound by the Allocation, (b) act in accordance with
the Allocation in the preparation of financial statements and filing of all Tax
Returns (including filing Form 8594 with their United States federal income Tax
Return for the taxable year that includes the date of the Closing) and in the
course of any Tax audit, Tax review or Tax litigation relating thereto and
(c) take no position and cause their Affiliates to take no position inconsistent
with the Allocation for income Tax purposes, including United States federal and
state income Tax and foreign income Tax. Not later than thirty (30) days prior
to the filing of their respective Forms 8594 (and analogous state law forms)
relating to the Acquisition, each party shall deliver to the other party a copy
of its Form 8594 (and any analogous state law forms).
 
 
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
 
As an inducement of Purchaser to enter into this Agreement, Seller hereby makes
the following representations and warranties to Purchaser, except as otherwise
set forth in the Disclosure Schedule. The sections of the Disclosure Schedule
are numbered to correspond to the various subsections of this Article 3 setting
forth certain exceptions to the representations and warranties contained in this
Article 3 and certain other information called for by this Agreement. No
disclosure made in any particular section of the Disclosure Schedule shall be
deemed made in any other section of the Disclosure Schedule unless (a) expressly
made therein (by cross-reference or otherwise) or (b) it is reasonably apparent
on its face that such disclosure applies to such other section of the Disclosure
Schedule. As used in this Agreement, references to the “knowledge” or
“awareness” means with respect to any matter in question, in the case of Seller,
if the president or vice president of Seller has actual knowledge or knowledge
that such person would reasonably be expected to have in the ordinary course of
his employment duties.
 
3.1     Organization and Good Standing; Shareholders. Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Indiana, with full corporate power and authority to conduct its
business as presently conducted, to own or use the properties and assets that it
purports to own or use and to perform all its obligation under this Agreement.
Indiana is the only state or other jurisdiction in which either the ownership or
use of the properties owned or used by it, or the nature of the activities
conducted by it, requires Seller to be qualified to do business as a corporation
(foreign or domestic). Section 3.1(a) of the Disclosure Schedule contains a
complete and accurate list of all states or other jurisdictions in which Seller
is qualified to do business as a foreign corporation. Except as set forth in
Section 3.1(b) of the Disclosure Schedule, Seller currently has no, and has
never had, any Subsidiaries.
 
3.2     Authorization. Seller has all necessary corporate power and authority to
enter into this Agreement and the Ancillary Agreements to which it is a party
and has taken all corporate action necessary to consummate the transactions
contemplated hereby and thereby and to perform its obligations hereunder and
thereunder, subject to requisite Bankruptcy Court approval. This Agreement has
been duly executed and delivered by Seller, and subject to requisite Bankruptcy
Court approval, this Agreement is, and upon execution and delivery thereof each
Ancillary Agreement will be, a valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms, except that
enforceability may be limited by the effect of (a) bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights of creditors or (b) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
 
3.3  Real Property.
 
(a)  Each Facility is in such operating condition and repair, subject to normal
wear and tear, as is necessary for the conduct of the Business in material
compliance with applicable Legal Requirements.
 
(b)  Seller has no Owned Real Property. The Store / Headquarters and the
Distribution Center are the only Facilities of Seller, both of which are leased
by Seller. Seller has delivered a true and correct copy of the leases for the
Store / Headquarters and the Distribution Center (the “Facilities Leases”) to
Purchaser. The Facilities Leases constitute all Leases, subleases or other
occupancy agreements pursuant to which Seller occupies or uses the Facilities.
Section 3.3 of the Disclosure Schedule sets forth a true, correct and complete
list of each parcel of real property leased, subleased or occupied by Seller in
the operation of the Business (the “Leased Real Property”). The Leased Real
Property constitutes all of the real property leased, subleased or occupied by
Seller as of the date hereof in the operation of the Store / Headquarters and
the Distribution Center.
 
 
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3.4      Personal Property.
 
(a)  Seller owns or leases all Transferred Assets that constitute personal
property (“Personal Property Transferred Assets”) necessary for the conduct of
the Business as presently conducted, and the Personal Property Transferred
Assets are in such operating condition and repair, subject to normal wear and
tear, as is necessary for the conduct of the Business in material compliance
with applicable Legal Requirements. There is no material deferred maintenance,
nor any significant pending maintenance requirements, with respect to any
Personal Property Transferred Assets. As of the Closing, each item of personal
property that constitutes a Transferred Asset will be located solely at a
Facility.
 
(b)  Seller has good and marketable title to all such Personal Property
Transferred Assets owned by it, free and clear of any and all Encumbrances. With
respect to each such item of Personal Property Transferred Assets: (i) there are
no Leases, subleases, licenses, options, rights, concessions or other
agreements, written or oral, granting to any party or parties the right of use
of any portion of such item of personal property, (ii) there are no outstanding
options or rights of first refusal in favor of any other party to purchase any
such item of personal property or any portion thereof or interest therein and
(iii) there are no parties other than Seller who are in possession of or who are
using any such item of personal property.
 
(c)  Section 3.4(c) of the Disclosure Schedule sets forth all leases for
personal property that constitute Transferred Assets involving annual payments
in excess of $25,000, true and correct copies of which have been delivered to
Purchaser. Seller has good and valid leasehold title to all Fixtures and
Equipment and other tangible Personal Property Transferred Assets leased by it
from third parties, free and clear of any and all Encumbrances.
 
(d)  With respect to each lease listed in Section 3.4(c) of the Disclosure
Schedule and except as set forth in Section 3.4(d) of the Disclosure Schedule,
(i) there has been no material Default under such lease by Seller, or, to
Seller’s knowledge, by any other Person, (ii) to the knowledge of Seller, the
execution, delivery and performance of this Agreement and the Ancillary
Agreements and the consummation of the transactions contemplated hereby and
thereby will not cause (with or without notice and with or without the passage
of time) a material Default under any such lease, (iii) to Seller’s knowledge,
such lease is a valid and binding obligation of the lessor, is in full force and
effect and is enforceable by Seller in accordance with its terms, (iv) no action
has been taken by Seller and, to Seller’s knowledge, no event has occurred
which, with notice or lapse of time or both, would permit termination,
modification or acceleration by a party thereto other than by Seller without
Seller’s consent under any such lease, (v) to the knowledge of Seller, no Person
has repudiated any term thereof or threatened to terminate, cancel or not renew
any such lease and (vi) Seller has not assigned, transferred, conveyed,
mortgaged or encumbered any interest therein or in any leased personal property
subject thereto (or any portion thereof).
 
3.5  Environmental Matters. Except as set forth in Section 3.5 of the Disclosure
Schedule, Seller is, and at all times has been, in material compliance with, and
has not been and is not in material violation of or liable under, any
Environmental Law. Seller has no basis to expect, nor has any other Person for
whose conduct Seller is or may be held to be responsible received, any actual or
threatened order, notice, or other communication from (a) any Person or private
citizen acting in the public interest or (b) the current or prior owner or
operator of any Facility, of any actual or potential violation or failure to
comply with any Environmental Law, or of any actual or threatened obligation to
undertake or bear the cost of any Environmental, Health and Safety Liability
with respect to such Facility or any other properties or assets (whether real,
personal or mixed) in which Seller has had an interest. No underground tank or
other underground storage receptacle for Hazardous Substances is currently
located on any Facility, and there have been no releases of any Hazardous
Substances from any such underground tank or related piping and there have been
no releases of Hazardous Substances in quantities exceeding the reportable
quantities as defined under federal or state law on, upon or into any Facility
other than those authorized by Environmental Laws. In addition, to the knowledge
of Seller, there have been no such releases by predecessors of Seller and no
releases in quantities exceeding the reportable quantities as defined under
federal or state law on, upon or into any real property in the immediate
vicinity of any of the Facilities other than those authorized by Environmental
Laws which, through soil or ground water contamination, may have come to be
located on any Facility. Seller is not a party, whether as a direct signatory or
as successor, assign or third-party beneficiary, or otherwise bound, to any
lease or any Contract under which Seller is obligated by or entitled to the
benefits of, directly or indirectly, any representation, warranty,
indemnification, covenant, restriction or other undertaking concerning any
Environmental Condition. Seller has not released any other Person from any claim
under any Environmental Law or waived any rights concerning any Environmental
Condition.
 
 
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3.6  Contracts.
 
(a)  Disclosure. Section 3.6(a) of the Disclosure Schedule sets forth a list of
Material Contracts as of the date hereof. For purposes of this Agreement,
“Material Contracts” refer to the following Contracts, which shall be included
in the Transferred Assets:
 
(i) Contracts not made in the ordinary course of business, other than any
Contracts included in the Excluded Assets;
 
(ii) license agreements or royalty agreements involving any form of Intellectual
Property, whether Seller is the licensor or licensee thereunder (excluding
licenses that are commonly available on standard commercial terms, such as
software “shrink-wrap” licenses);
 
(iii) confidentiality and non-disclosure agreements (whether Seller is the
beneficiary or the obligated party thereunder);
 
(iv) Contracts or commitments involving future expenditures or Liabilities in
excess of $50,000 after the date hereof;
 
(v) Contracts or commitments relating to commission arrangements with others
that are material to the Business or the Transferred Assets;
 
(vi) written employment contracts, consulting contracts, severance agreements,
“stay-bonus” agreements and similar written arrangements relating to employees,
including written Contracts (A) to employ or terminate executive officers or
other personnel and other contracts with present or former officers or directors
of Seller or (B) that will result in the payment by, or the creation of any
Liability of Purchaser to pay any severance, termination, “golden parachute,” or
other similar payments to any present or former personnel following termination
of employment or otherwise as a result of the consummation of the transactions
contemplated by this Agreement;
 
(vii) indemnification agreements;
 
(viii) promissory notes, loans, agreements, indentures, evidences of
indebtedness, letters of credit, guarantees, or other instruments relating to an
obligation to pay money, whether Seller shall be the borrower, lender or
guarantor thereunder and related to any lien on any Transferred Assets
(excluding credit provided by Seller in the ordinary course of business to
buyers of its products and obligations to pay vendors in the ordinary course of
business consistent with past practice);
 
 
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(ix) Contracts containing covenants limiting the freedom of Seller or Affiliate
of Seller to engage in any line of business or compete with any Person that
relates directly or indirectly to the Business or the Transferred Assets;
 
(x) any Contract with the federal, state or local government or any agency or
department thereof;
 
(xi) any Contract or other arrangement with a Related Party (excluding payments
to shareholders as such);
 
(xii) Leases of real or personal property involving annual payments of more than
$25,000; and
 
(xiii) any other Contract under which the consequences of a Default or
termination would reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate.
 
Complete and accurate copies of all of the Contracts listed in Section 3.6(a) of
the Disclosure Schedule, including all amendments and supplements thereto, have
been delivered to Purchaser, with the exception of Contracts the existence of
which cannot be disclosed without a waiver of a confidentiality agreement,
consisting of three contracts for goods or services that are generally
commercially available without the payment of a significant advance license or
set-up fee. Seller shall use it reasonable best efforts to obtain consent to
disclose such contracts to Purchaser as soon as practicable after the execution
of this Agreement.
 
(b)  Absence of Defaults. Except as set forth in Section 3.6(b) of the
Disclosure Schedule, all of the Material Contracts are valid and binding
obligations of Seller and enforceable against Seller and, to Seller’s knowledge,
the other parties thereto in accordance with their terms (except that
enforceability may be limited by the effect of (i) bankruptcy, insolvency,
reorganization, moratorium or other similar Legal Requirements relating to or
affecting the rights of creditors or (ii) general principles of equity
(regardless of whether enforceability is considered in a proceeding at law or in
equity) with no existing or, to Seller’s knowledge, threatened Default or
dispute by Seller or, to Seller’s knowledge, any other party thereto. Seller has
fulfilled, or taken all action necessary to enable it to fulfill when due, all
of its material obligations under each of such Material Contracts. To Seller’s
knowledge, all parties to such Material Contracts have complied in all material
respects with the provisions thereof, no party is in material Default thereunder
and no notice of any claim of Default has been given to Seller.
 
3.7  No Conflict or Violation; Consents. Except as set forth in Section 3.7 of
the Disclosure Schedule, none of the execution, delivery or performance of this
Agreement or any Ancillary Agreement, the consummation of the transactions
contemplated hereby or thereby, nor compliance by Seller with any of the
provisions hereof or thereof, will (a) violate or conflict with any provision of
Seller’s articles of incorporation or bylaws, (b) violate, conflict with, or
result in a breach of or constitute a Default (with or without notice or the
passage of time) in any material respect under, or result in the termination of,
or accelerate the performance required by, or result in a right to terminate,
accelerate, modify or cancel under, or require a notice under, or result in the
creation of any Encumbrance upon any of the Transferred Assets under, any
Material Contract, franchise, permit, indenture or mortgage for borrowed money,
instrument of indebtedness, security interest or other arrangement to which
Seller is a party or by which Seller is bound or to which the Transferred Assets
or any portion thereof are subject, (c) violate any applicable Legal Requirement
in any material respect or Court Order or (d) impose any Encumbrance on any
Transferred Assets or the Business. Except as set forth in section 3.7 of the
Disclosure Schedule, no notices to, declaration, filing or registration with,
approvals or consents of, or assignments by, any Persons (including any federal,
state or local governmental or administrative authorities) are necessary to be
made or obtained by Seller in connection with the execution, delivery or
performance of this Agreement or any Ancillary Agreement or the consummation of
the transactions contemplated hereby or thereby. Except as set forth in Section
3.7 of the Disclosure Schedule, as of the date hereof, the Assumed Liabilities
do not, and as of the Closing will not, include any indebtedness for borrowed
money (including any capital lease) or outstanding letter of credit or similar
obligation.
 
 
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3.8  Permits. Seller has all Permits required under any applicable Legal
Requirement in the operation of the Business or its ownership of the Transferred
Assets, and owns or possesses such Permits free and clear of all Encumbrances,
except the failure to have a given Permit would not be material to the Business
or the Transferred Assets. Seller is neither in Default, nor has Seller received
any written notice of any claim of Default with respect to any such Permit.
 
3.9  Financial Information; Books and Records. Seller has provided to Purchaser
accurate and complete copies of the audited balance sheet and related statements
of income or loss the twelve-month period ending on December 31, 2004 and the
balance sheet, related statements of income or loss and the preliminary audit
report for the twelve-month period ending on December 31, 2005 (the “Audited
Financial Statements”), and an unaudited balance sheet and related statement of
income or loss for the nine-month period ending on September 30, 2006 (the
“Interim Financial Statements,” and together with the Audited Financial
Statements, the “Financial Statements”). Except as set forth in Section 3.9 of
the Disclosure Schedule or as noted in the Financial Statements, the Financial
Statements have been prepared in accordance with Seller’s books and records and
generally accepted accounting principles consistently applied (subject, in the
case of the Interim Financial Statements, to normal year-end adjustments and the
absence of notes) and fairly present, in all material respects, the results of
operations and financial condition of Seller for the respective periods and as
of the dates identified therein, respectively. The accounting books and records
of Seller accurately and fairly reflect the activities of Seller in connection
with the Business. Seller has not engaged in any transaction, maintained any
bank account or used any corporate funds, except for transactions, bank accounts
or funds which have been and are reflected in the normally maintained accounting
books and records.
 
3.10    Liabilities. Seller has no material Liabilities or obligations
(absolute, accrued, contingent or otherwise) relating to the Business or the
Transferred Assets except (a) Liabilities disclosed in the Financial Statements,
(b) Liabilities incurred in the ordinary course of business consistent with past
practice, (c) Liabilities arising under Contracts assumed by Purchaser under
this Agreement and (d) Liabilities expressly identified in Section 3.10 of the
Disclosure Schedule. Upon consummation of the transactions contemplated by this
Agreement, Purchaser will have no liability with respect to any such Liabilities
of Seller except to the extent they shall constitute Assumed Liabilities.
 
3.11     Litigation. Except as set forth in Section 3.11 of the Disclosure
Schedule, there is no Action pending or, to Seller’s knowledge, threatened,
against, relating to or affecting Seller or any of the Transferred Assets which
seeks to enjoin or obtain damages in respect of the transactions contemplated
hereby, and with respect to which there is a reasonable likelihood of a
determination which would prevent Seller from consummating the transactions
contemplated hereby. Except as set forth in Section 3.11 of the Disclosure
Schedule, there are presently no outstanding judgments, decrees or orders of any
court or any Governmental Body against or affecting Seller, the Business or any
of the Transferred Assets.
 
3.12     Labor Matters.
 
(a)  General. Seller is not a party to any labor agreement with respect to its
Employees with any labor organization, group or association, and Seller has not
experienced any attempt by organized labor or its representatives to make Seller
conform to demands of organized labor relating to its Employees or to enter into
a binding agreement with organized labor that would cover any of Seller’s
Employees. There is no unfair labor practice charge or complaint against Seller
pending before the National Labor Relations Board or any other governmental
agency arising out of Seller’s activities, and Seller has no knowledge of any
facts or information which would give rise thereto; there is no labor strike or
labor disturbance pending or, to the knowledge of Seller, threatened against
Seller nor is any grievance currently being asserted against Seller; and Seller
has not experienced a work stoppage or other labor difficulty. There are no
material controversies pending or, to Seller’s knowledge, threatened between
Seller and any of its Employees, and Seller is not aware of any facts which
could reasonably result in any such controversy.
 
 
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(b)  Compliance. Seller is in compliance in all material respects with all
applicable Legal Requirements respecting employment practices, terms and
conditions of employment, wages and hours, equal employment opportunity, and the
payment of social security and similar Taxes and, to the knowledge of Seller, is
not engaged in any unfair labor practice. Seller is in compliance with the
Immigration Reform and Control Act of 1986. Seller is not liable for any claims
for past due wages or any penalties for failure to comply with any of the
foregoing. Seller has not effectuated (i) a “plant closing” or partial “plant
closing” (as defined in the WARN Act or any similar Legal Requirement) affecting
any site of employment or one or more Facilities or (ii) a “mass layoff” (as
defined in the WARN Act or any similar Legal Requirement) affecting any site of
employment or Facility of Seller, except that Seller issued WARN Act notices on
or about November 22, 2006 and January 15, 2007 in the forms provided to
Purchaser.
 
(c)  Severance Obligations. Seller has not entered into any severance,
“stay-bonus” or similar arrangement in respect of any present or former Employee
that will result in any obligation (absolute or contingent) of Purchaser to make
any payment to any present or former Employee following termination of
employment (voluntary or involuntary) or upon consummation of the transactions
contemplated by this Agreement or any Ancillary Agreement (whether or not
employment is continued for any specified period after the Closing Date).
Neither the execution and delivery of this Agreement or any Ancillary Agreement
nor the consummation of the transactions contemplated hereby or thereby will
result in the acceleration or vesting of any other rights of any Person to
benefits under any Employee Plan.
 
(d)  Employees. Attached hereto as Section 3.12(d) of the Disclosure Schedule is
a list of the names of all present employees. Seller has provided Purchaser with
the amount of compensation currently payable to such employees by Seller.
 
3.13    Purchase Commitments and Outstanding Bids. As of the date of this
Agreement, Seller has not entered into any Contracts for the purchase of
products or services by Seller in connection with the Business, other than in
the ordinary course of business, except for (a) contracts relating to the
retention of professional advisors for which Seller is solely responsible and
(b) other contracts involving the expenditure of not more than $100,000 in the
aggregate. As of the date of this Agreement, Prepaid Inventory is, in all
material respects, as indicated in Schedule 3.13 (which schedule specifies all
material elements of Prepaid Inventory and the vendor to which the payment has
been made). There are no obligations to sell Inventory to any third party
outside the ordinary course of business. No outstanding purchase or outstanding
lease commitment of Seller presently is in excess of the normal, ordinary and
usual requirements of the Business. There are no outstanding or pending
obligations of Seller in connection with the Business to lease real property
other than the Facility Leases.
 
3.14   Employee Benefit Plans
 
 
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(a)  Attached hereto as Section 3.14 of the Disclosure Schedule is a true and
complete list of all Employee Plans existing on the date hereof. Except as
listed in Section 3.14 of the Disclosure Schedule, there are no Pension Plans
that are subject to Section 412 of the Code or Section 302 or Title IV of ERISA,
and there are no Multiemployer Plans.
 
(b) A true and complete copy of each of the Employee Plans listed in Section
3.14 of the Disclosure Schedule, together with any and all related trusts, any
and all amendments thereto, the most recent summary plan description, any and
all collective bargaining agreements relating to such Employee Plan, and the
most recent annual reports filed for such Employee Plan, has been delivered to
Purchaser. In the case of any Employee Plan listed on Section 3.14 of the
Disclosure Schedule which is not in written form, an accurate description of
such Employee Plan is included as part of Section 3.14 of the Disclosure
Schedule.
 
(c) Each Employee Plan listed on Section 3.14 of the Disclosure Schedule
complies, and has complied, in all material respects in form and operation with
all requirements of applicable United States federal, state, local and other law
or regulation, whether domestic or foreign. Seller represents and warrants that
all contributions and other payment obligations required to be made on or before
the Closing Date under or in connection with the Employee Plans listed on
Section 3.14 of the Disclosure Schedule have been or will be paid in full on or
as of the Closing Date.
 
3.15     Transactions with Related Parties. Except for employment agreements and
other arrangements or agreements disclosed in Section 3.15 of the Disclosure
Schedule, no Related Party has, with respect to the Business or the Transferred
Assets, (a) borrowed or loaned money or other property to Seller that has not
been repaid or returned, (b) any contractual relationship or other claims,
express or implied, of any kind whatsoever against Seller or (c) any interest in
any of the Transferred Assets (including any Intellectual Property).
 
3.16     Compliance with Legal Requirements. Seller and its predecessors have
conducted the Business in material compliance with all applicable Legal
Requirements and Court Orders. Seller has not received any notice to the effect
that, or has otherwise been advised that Seller is not in compliance with any
such Legal Requirements or Court Orders, and , to the knowledge of Seller,
Seller has no reason to anticipate that any existing circumstances are likely to
result in a violation of any of the foregoing.
 
3.17      Intellectual Property.
 
(a)  General. Section 3.17(a) of the Disclosure Schedule sets forth with respect
to Seller’s Intellectual Property: (i) for each invention material to the
Business of Seller, whether or not patented, the date of conception and
reduction to practice, names of inventors, priority date of patent applications
(if any), and issue dates of any issued patents, (ii) all material Intellectual
Property in the form of licenses of Seller, and (iii) all material trademarks,
tradenames, patents, copyright registrations and URLs owned or used by Seller or
owned or used by any Person and used in the Business. True and correct copies of
all Intellectual Property (including all pending applications, application
related documents and materials) owned, controlled or used by or on behalf of
Seller or in which Seller has any interest whatsoever have been provided or made
available to Purchaser. Section 3.17(a) of the Disclosure Schedule sets forth a
true and complete list of all trade names not owned by Seller, but that are used
in the conduct of the Business.
 
(b)  Adequacy. Seller’s Intellectual Property are all those necessary for the
normal conduct of the Business as presently conducted including the procurement,
distribution and sale of all products and services currently under development,
planned for development or in practice.
 
 
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(c)  Royalties and Licenses. Except as set forth in Section 3.17(c) of the
Disclosure Schedule, Seller has no obligation to compensate any Person for the
use of any of its Intellectual Property nor has Seller granted to any Person any
license, option or other rights to use in any manner any of its Intellectual
Property, including the trade names set forth in Section 3.17(a), whether
requiring the payment of royalties or not.
 
(d)  Ownership. Except as set forth in Section 3.17(d) of the Disclosure
Schedule, Seller owns or has the valid right to use the Intellectual Property,
including the trade names identified in Section 3.17(a) of the Disclosure
Schedule, and such Intellectual Property will remain the valid rights of Seller
(or Purchaser following the consummation of the Acquisition) following the
execution, delivery and performance of this Agreement or any Ancillary Agreement
or the consummation of the transactions contemplated hereby or thereby. Except
as set forth in Section 3.17(d) of the Disclosure Schedule, all Intellectual
Property will be fully transferable, alienable or licensable by Purchaser
without restriction and without payment of any kind to any third party. Seller
has no obligation to compensate or account to any person for the use of the
Intellectual Property except as otherwise set forth in Section 3.17(d) of the
Disclosure Schedule. The licenses identified in Section 3.17(d) of the
Disclosure Schedule as the “Key Software Licenses” constitute the only inbound
software licenses or similar services that are critical to the operation of the
Business and are not otherwise generally commercially available without the
payment of a significant advance license or set-up fee (such licenses, the “Key
Software Licenses”).
 
(e)  Absence of Claims. Except as set forth in Section 3.17(e) of the Disclosure
Schedule, Seller has not received (i) any notice alleging, or otherwise has
knowledge of facts that might give rise to, invalidity with respect to any of
the Intellectual Property or (ii) any notice of alleged infringement of any
rights of others due to any activity by Seller. Except as set forth in Section
3.17(e) of the Disclosure Schedule, Seller’s use of the Intellectual Property in
the Business does not infringe upon or otherwise violate the Intellectual
Property rights of any third party anywhere in the world. Except as set forth in
Section 3.17(e) of the Disclosure Schedule, no other Person has notified Seller
that it is claiming any ownership of or right to use any Intellectual Property
of Seller, or, to Seller’s knowledge, is infringing upon any such Intellectual
Property in any way.
 
(f)  Protection of Intellectual Property. Seller has taken reasonable steps to
safeguard and maintain its confidential information.
 
(g)  Licenses. Seller has secured any export and import licenses that are
necessary or appropriate for the conduct of the Business in accordance with all
applicable laws and regulations.
 
3.18    Assets Necessary to Continue to Conduct Business. The Transferred Assets
(a) constitute all of the assets, properties and rights (i) used in the Business
as presently conducted other than the Excluded Assets, and (ii) necessary to
conduct the Business as presently conducted, and (b) upon consummation of the
transactions contemplated by this Agreement, Purchaser will obtain the resources
necessary to conduct the Business as currently conducted by Seller. Except as
set forth in Section 3.18 of the Disclosure Schedule, no Affiliate of Seller
(which for purposes of this Section 3.18 shall include any current or prior
shareholder of Seller) has any direct or indirect interest in any asset,
property or right used in, or necessary to conduct, the Business as currently
conducted by Seller (including, without limitation, any URL’s, trade names or
trademarks related to the trade names “The Woodwind & The Brasswind” and “Music
123,” or any derivation thereof, wherever located).
 
3.19    Brokers; Transactions Costs. Except as set forth in Section 3.19 of the
Disclosure Schedule (for which Seller is solely responsible), Seller has not
entered into nor will enter into any contract, agreement, arrangement or
understanding with any Person which has or will result in the obligation of
Purchaser or Seller to pay any finder’s fee, brokerage commission, legal,
accounting or similar payment in connection with the transactions contemplated
hereby.
 
 
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3.20    No Other Agreements to Sell the Transferred Assets. Seller has no legal
obligation, absolute or contingent, to any other Person to sell the Transferred
Assets or any portion thereof or to sell any capital stock of Seller or to
effect any merger, consolidation or other reorganization of Seller or to enter
into any agreement with respect thereto, except pursuant to this Agreement.
 
3.21    Product Liability. To the knowledge of Seller, Seller has not committed
any act, and there has been no omission by Seller, which is reasonably likely to
result in, and there has been no occurrence relating to any product of Seller
which is reasonably likely to result in, product liability (whether covered by
insurance or not) on the part of Seller, with respect to products distributed,
delivered or sold by Seller prior to the Closing.
 
3.22    Approvals. Section 3.22 of the Disclosure Schedule contains a list of
all material approvals or consents relating to the Business which are required
to be given to or obtained by Seller from any Person in connection with the
consummation of the transactions contemplated by this Agreement, it being
acknowledged that the consents related to the continued use of the Key Software
Licenses shall be deemed material.
 
ARTICLE 4
PURCHASER’S REPRESENTATIONS AND WARRANTIES
 
As an inducement of Seller to enter into this Agreement, Purchaser hereby makes
the following representations and warranties to Seller.
 
4.1  Organization. Purchaser 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 conduct its business as presently being
conducted.
 
4.2  Authorization. Purchaser has all necessary corporate power and authority to
enter into this Agreement and the Ancillary Agreements and has taken all
corporate or similar action necessary to consummate the transactions
contemplated hereby and thereby and to perform its obligations hereunder and
thereunder. This Agreement has been duly executed and delivered by Purchaser,
and this Agreement is, and upon execution and delivery thereof each Ancillary
Agreement to which Purchaser is a party will be, a valid and binding obligation
of Purchaser, as the case may be, enforceable against Purchaser in accordance
with its terms, except that enforceability may be limited by the effect of (a)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights of creditors or (b) general principles of
equity (regardless of whether enforceability is considered in a proceeding at
law or in equity).
 
4.3  Brokers; Transactions Costs. Purchaser has neither entered into or will
enter into any contract, agreement, arrangement or understanding with any Person
which has or will result in the obligation of Seller to pay any finder’s fee,
brokerage commission, legal, accounting or similar payment in connection with
the transactions contemplated hereby.
 
4.4  Transferred Assets “AS IS”; Purchaser’s Acknowledgment Regarding Same.
Purchaser agrees, warrants, and represents that, except as set forth in this
Agreement, (a) Purchaser is purchasing the Transferred Assets on an “AS IS”
basis based solely on Purchaser’s own investigation of the Transferred Assets
and (b) neither Seller nor any real estate broker, agent, officer, employee,
servant, attorney, or representative of Seller has made any warranties,
representations or guarantees, express, implied or statutory, written or oral,
respecting the Transferred Assets, or any part of the Transferred Assets,
including the Leased Real Property, or any matters pertaining thereto, including
respecting the compliance or non-compliance with or the applicability or
non-applicability of, any other building, health, zoning, Environmental, Health
and Safety Laws, or any other applicable city and county, state, or federal
statute, ordinance, code, rule, regulation, or other law, relating to the
Transferred Assets, or any part thereof, or relating to the financial
performance or future prospects of the Transferred Assets or the Business, or
otherwise with regard to or pertaining to the Transferred Assets, Purchaser’s
intended use and operation thereof, or the physical condition of the Transferred
Assets. Purchaser further acknowledges that the consideration for the
Transferred Assets specified in this Agreement has been agreed upon by Seller
and Purchaser after good-faith arms’-length negotiation in light of Purchaser’s
agreement to purchase the Transferred Assets “AS IS,” except as set forth in
this Agreement. Purchaser agrees, warrants, and represents that, except as set
forth in this Agreement, Purchaser has relied, and shall rely, solely upon its
own investigation of all such matters, and that Purchaser assumes all risks with
respect thereto. EXCEPT AS SET FORTH IN THIS AGREEMENT, SELLER MAKES NO EXPRESS
WARRANTY, NO WARRANTY OF MERCHANTABILITY, NO WARRANTY OF FITNESS FOR A
PARTICULAR PURPOSE, NOR ANY IMPLIED OR STATUTORY WARRANTY WHATSOEVER WITH
RESPECT TO ANY REAL OR PERSONAL PROPERTY OR ANY MERCHANDISE, INVENTORY OR
FURNITURE, FIXTURES AND EQUIPMENT.
 
 
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4.5  Availability of Funds. Purchaser has the financial capability to consummate
the Acquisition. Purchaser’s consummation of the Acquisition is not in any way
contingent upon or otherwise subject to (a) Purchaser’s consummation of any
financing arrangements or Purchaser’s obtaining of any financing, or (b) the
availability, grant, provision or extension of any financing to Purchaser.
 
ARTICLE 5
COVENANTS
 
5.1  Access and Availability. During the Pre-Closing Period, Seller shall (a)
afford Purchaser and its Representatives reasonable access to, during normal
business hours, and if reasonably requested by Purchaser, evenings and
week-ends, in a manner so as not to interfere with the normal business
operations and upon reasonable prior written notice, the properties, Contracts,
books and records and other documents and data pertaining to Seller, the
Business, the Assumed Liabilities and the operation of the Transferred Assets,
and (b) furnish Purchaser and its Representatives with such additional
financial, operating and other data and information as they may reasonably
request.
 
5.2  Operation of the Business.
 
(a)  Except with the prior written consent of Purchaser (which consent shall not
be unreasonably withheld, delayed or conditioned), as otherwise contemplated or
permitted by this Agreement or as required by the Bankruptcy Code, during the
Pre-Closing Period, Seller shall operate the Business in the ordinary course
(taking into account Seller’s status as a debtor-in-possession), comply with all
Legal Requirements applicable to the operation of its business and preserve its
present business organization intact. During the Pre-Closing Period, Seller
shall use commercially reasonable efforts to:
 
(i) maintain in full force and effect the Permits in all material respects;
 
(ii) maintain all of the Transferred Assets in a manner consistent with past
practices, reasonable wear and tear excepted and maintain the types and levels
of insurance currently in effect in respect of the Transferred Assets;
 
 
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(iii) upon any damage, destruction or loss to any Transferred Asset, apply any
insurance proceeds received with respect thereto to the prompt repair,
replacement and restoration thereof to the condition of such Transferred Asset
before such event or, if required, to such other (better) condition as may be
required by applicable Legal Requirements;
 
(iv) replenish the Inventory such that the mix, character and quality of the
Inventory on the Closing Date is substantially similar as on the date hereof;
 
(v) pay when due all undisputed amounts owed under the Facilities Leases; and
 
(vi) consult with Purchaser on all material aspects of the Business as may be
reasonably requested from time to time by Purchaser, including, but not limited
to, personnel, accounting and financial functions.
 
(b) Except as otherwise contemplated or permitted by this Agreement, during the
Pre-Closing Period, Seller shall not, without the prior written consent of
Purchaser (which consent shall not be unreasonably withheld, delayed or
conditioned):
 
(i) terminate or amend any of the Facilities Leases (or execute any amendments
or modifications to any Facilities Leases), or cancel, modify or waive any
claims held in respect of the Transferred Assets or waive any material rights of
value;
 
(ii) do any act or fail to do any act that will cause a material breach or
default in any of the Facilities Leases;
 
(iii) sell, transfer or otherwise dispose of any of the Transferred Assets
except in the ordinary course of business, consistent with past practices;
 
(iv) modify any of its sales practices or receivables collections practices from
those in place on the date hereof, including offering any discounts, incentives
or other accommodations for early payment;
 
(v) conduct any “going out of business,” liquidation, bankruptcy, or similar
sales or take any action to fashion its business as going out of business,
liquidating or closing;
 
(vi) grant to any Employee any increase in compensation, except increases to
non-management Employees in the ordinary course of business;
 
(vii) terminate any Employee related to the Business, except non-management
Employees in the ordinary course of business;
 
(viii) make or rescind any material Tax election or take any material Tax
position (unless required by law) or file any Tax Return or change its fiscal
year or financial or Tax accounting methods, policies or practice, or settle any
Tax Liability, except in each case as would not reasonably be expected to
materially affect Purchaser;
 
(ix) modify, rescind or terminate a material Permit, allowance, or credit (or
application therefor) relating to the Business or the Transferred Assets;
 
 
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(x) dispose of or fail to keep in effect any material rights in, to, or for the
use of any of the Intellectual Property, except for rights which expire or
terminate in accordance with their terms;
 
(xi) issue any shares of stock or stock equivalents;
 
(xii) subject its assets to any material Encumbrances;
 
(xiii) directly or indirectly make any dividend or other distribution to
shareholders or repurchase or reacquire any equity interests;
 
(xiv) close the Store / Headquarters;
 
(xv) issue any purchase order for non-branded goods in excess of $100,000;
 
(xvi) incur any Indebtedness other than under current credit arrangements
provided to Purchaser; or
 
(xvii) authorize any of the foregoing, or commit or agree to take actions,
whether in writing or otherwise, to do any of the foregoing.
 
    5.3  Notices and Consents. As promptly as practicable following the
execution hereof, each of the Parties will deliver any notices to, make any
filings with and use its commercially reasonable efforts to obtain any
authorizations, consents and approvals of Governmental Bodies required in
connection with the consummation of the transactions contemplated by this
Agreement. During the Pre-Closing Period, Seller and Purchaser shall reasonably
cooperate with one another: (a) in obtaining all consents identified in Section
3.22 of the Disclosure Schedule, (b) with respect to all filings that Purchaser
is required by any Legal Requirement to make in connection with the transactions
contemplated hereby, and (c) in delivering any notices deemed necessary or
desirable by Purchaser or Seller in connection with the Bankruptcy Case. Seller
shall promptly deliver to Purchaser copies of all filings, correspondence and
orders to and from any Governmental Body in connection with the transactions
contemplated hereby.
 
        5.4  Commercially Reasonable Efforts. Subject to the terms and
conditions of this Agreement:
 
(a)  During the Pre-Closing Period, each of Seller and Purchaser shall (i) use
its commercially reasonable efforts (A) to cause the conditions in Article 7 and
Article 8, respectively, to be satisfied, (B) to deliver or cause to be
delivered at the Closing the items to be delivered by Seller and Purchaser
pursuant to Section 2.3(b), (C) obtain the right to assume and assign, or
otherwise obtain consent of the applicable licensors with respect to, the Key
Software Licenses so as to assure the continued availability of such licensed
software to Purchaser from and after the Closing, and (D) to take all other
actions to consummate the transactions contemplated hereby, and (ii) not take
any action that will have the effect of unreasonably delaying, impairing or
impeding the receipt of any authorizations, consents, orders or approvals to be
sought pursuant to this Agreement.
 
(b)  From and after the Closing, Seller and Purchaser shall use commercially
reasonable efforts to deliver or cause to be delivered such additional documents
and other papers and to take or cause to be taken such further actions as may be
necessary, proper or advisable to make effective the transactions contemplated
hereby and to carry out the provisions hereof.
 
 
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5.5  Notice of Developments. Seller shall promptly notify Purchaser in writing
of any change or development that would cause any of the representations and
warranties herein not to be true and correct in any material respect or any
other material development in the Business, the Transferred Assets, or the
Assumed Liabilities.
 
        5.6  Bankruptcy Proceedings.
 
(a)  Purchaser and Seller acknowledge that this Agreement, the sale of the
Transferred Assets, and the assumption and assignment of the Facilities Leases
of Seller are subject to Bankruptcy Court approval.
 
(b)  Seller has filed with the Bankruptcy Court a Petition for reorganization
relief pursuant to Chapter 11 of the Bankruptcy Code and the Sale Motion,
together with appropriate supporting papers and notices, seeking the entry, by
no later than January 31, 2007, of the Sale Order.
 
(c)  Seller shall use its commercially reasonable efforts to obtain entry of the
Sale Order no later than January 31, 2007.
 
(d)  In the event an appeal is taken or a stay pending appeal is requested, from
the Sale Order, Seller shall immediately notify Purchaser of such appeal or stay
request and shall provide to Purchaser promptly a copy of the related notice of
appeal or order of stay. Seller shall also provide Purchaser with written notice
of any motion or application filed in connection with any appeal from either of
such orders.
 
(e)  Seller shall not take any action that is intended, or fail to take any
action the intent of which failure to act would result in the reversal, voiding,
modification or staying of the Sale Order.
 
(f)  During the Pre-Closing Period, Seller shall use its reasonable efforts to
provide such prior notice as may be reasonable under the circumstances before
filing any papers in the Bankruptcy Case that relate, in whole or in part, to
this Agreement or Purchaser.
 
5.7  Expense Reimbursement Amount. If this Agreement is terminated for any
reason other than by Seller pursuant to Section 9.1(d) or (e) Seller shall pay
Purchaser the Expense Reimbursement Amount upon termination of this Agreement.
The Expense Reimbursement Amount shall be payable as allowed administrative
expenses under Sections 503(b) and 507(a) of the Bankruptcy Code. Purchaser’s
receipt of the Expense Reimbursement Amount in accordance with the terms of this
Section 5.7 shall be in full settlement and satisfaction of any damages of any
kind that Purchaser may suffer as a result of the termination of this Agreement
or a breach by Seller of its obligations hereunder prior to Closing and shall be
Purchaser’s sole and exclusive remedy in damages for Seller’s breach of its
obligations hereunder prior to Closing.
 
5.8  Notice of Bids. If Seller shall receive any offer, proposal or inquiry
regarding the acquisition of all or any portion of the Transferred Assets,
Seller shall within two (2) Business Days thereafter: (a) notify Purchaser, in
writing, of such proposal or offer, or any inquiry or contact with any Person
with respect thereto, and shall, in any such notice to Purchaser indicate in
reasonable detail the identity of the offeror and the terms and conditions of
any proposal and (b) after entry of the Sale Order, notify any such offeror of
the entry of the Sale Order and the fact that Seller is neither considering nor
permitted to consider any such proposal or offer.
 
5.9  Reserved. 
 
 
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5.10    Employee Matters.
 
(a)  Prior to the Closing, Purchaser shall offer to enter into a severance
agreement with David G. Yoder to become effective upon the commencement of his
employment with Purchaser, which agreement shall be on the same terms and
conditions as offered by Purchaser to its executive officers of a similar level.
 
(b)  Section 5.10 of the Disclosure Schedule, which Purchaser shall deliver not
later than the Business Day prior to the Closing Date, shall set forth the list
of the employees of Seller that are expected to become employees of Purchaser or
one of its Affiliates (the “Designated Employees”). Seller shall terminate the
employment of all Designated Employees to whom Purchaser or one of its
Affiliates offers employment immediately prior to the Closing, and Seller shall
cooperate with and use commercially reasonable efforts to assist Purchaser and
its Affiliates in their respective efforts to secure satisfactory employment
arrangements with the Designated Employees, including providing Purchaser with
access to the Designated Employees for purposes of negotiating terms of
employment. Nothing contained in this Agreement shall confer upon any Designated
Employee any right with respect to employment, or continuance thereof, with
Purchaser or one of its Affiliates, nor shall anything herein interfere with the
right of Purchaser and its Affiliates to terminate the employment of any of the
Designated Employees at any time, with our without cause and with or without
prior notice, or restrict Purchaser or its Affiliates in the exercise of their
independent business judgment in modifying any of the terms and conditions of
the employment of the Designated Employees. Purchaser shall have no obligation
with respect to claims by any employee of Seller, including any Designated
Employee, whether under any Employee Plan or for severance, unpaid wages, unpaid
accrued time off, unpaid bonuses, credit for prior service, unpaid commissions
or otherwise, except, from and after the Closing, with respect to (i) the
Assumed Liabilities specified in Section 2.2(c)(iii) and (ii) obligations under
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. Seller
shall be responsible for any and all Liability under the WARN Act or other Legal
Requirements that arises out of or results from any termination of employment by
Seller. Seller confirms that it has provided to each of its employees on or
about November 22, 2006 and January 15, 2007 all notices required to be provided
in order to comply with the WARN Act, including a valid and complete WARN Act
notice.
 
5.11    Confidentiality. Subject to the requirements of the Bankruptcy Code or
as may be imposed by the Bankruptcy Court, from and after the Closing: (a)
Seller shall, and shall cause its Affiliates to, hold in confidence all
confidential information (including trade secrets, customer lists, marketing
plans and pricing information) of Seller; (b) in the event that Seller or any of
its Affiliates shall be legally compelled to disclose any such information,
Seller shall provide Purchaser with prompt written notice of such requirement so
that Purchaser may seek a protective order or other remedy; and (c) in the event
that such protective order or other remedy is not obtained, Seller or its
Affiliate shall furnish only such information as is legally required to be
provided. Notwithstanding the forgoing, nothing in this Section 5.11 shall
restrict Seller’s provision of confidential information to other potential
bidders pursuant to a confidentiality agreement substantially in the form
executed by Purchaser, whether or not such Person is ultimately determined to be
a Qualified Bidder.
 
5.12    Change of Name. After the Closing Date, neither Seller nor any of its
Affiliates shall use the names or marks listed in Section 3.17(a) of the
Disclosure Schedule or any derivatives thereof for commercial purposes. The Sale
Order shall provide for the modification of the caption in the proceedings
before the Bankruptcy Court to reflect the change in the names of Seller, except
that during the pendency of such proceedings, Seller shall be permitted to use
the name “Woodwind & Brasswind” as its corporate alias in connection with
matters relating such case, but for no other commercial purpose. After the
Closing, Seller and its Affiliates shall promptly file with the applicable
Governmental Bodies all documents necessary to delete from their names each of
the tradenames, marks or any derivatives thereof and shall do or cause to be
done all other acts, including the payment of any fees required in connection
therewith, to cause such documents to become effective as promptly as
practicable.
 
 
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5.13    Transfer of Assets. Prior to the Closing, Seller shall cause all assets
used by Seller in the conduct of the Business that are owned by an Affiliate of
Seller to be transferred to Seller.
 
5.14    Cure Costs. On or before Closing, Seller shall pay all Cure Costs. All
Cure Costs will be agreed upon by Seller and each party entitled to receipt of a
cure payment, or will be determined by the Bankruptcy Court.
 
ARTICLE 6
CONDITIONS PRECEDENT TO THE PARTIES’ RESPECTIVE OBLIGATION TO CLOSE
 
The respective obligations of Purchaser and Seller to consummate the Acquisition
shall be subject to the satisfaction at or prior to the Closing of the following
conditions, any or all of which may be waived only by agreement of Purchaser and
Seller, in whole or in part, to the extent permitted by applicable Legal
Requirements:

6.1  No Restraints.  No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Acquisition shall
have been issued by any court of competent jurisdiction and remain in effect,
and there shall not be any Legal Requirement enacted or deemed applicable to the
consummation of the transactions contemplated by this Agreement that makes
consummation of the Acquisition illegal.
 
6.2  Governmental Authorizations. All requisite Governmental Authorizations or
waiting periods following governmental filings shall have been obtained or
expired.
 
ARTICLE 7
CONDITIONS PRECEDENT TO PURCHASER’S OBLIGATION TO CLOSE
 
The obligation of Purchaser to consummate the Acquisition shall be subject to
the satisfaction at or prior to the Closing of the following conditions, any or
all of which may be waived only by Purchaser, in whole or in part, to the extent
permitted by applicable Legal Requirements:

         7.1  Accuracy of Representations. (a) Each of the representations and
warranties of Seller in this Agreement that is qualified as to materiality shall
be true and correct in each case as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date (unless made as of a
specific date, in which event such date shall be applicable), and (b) each of
the representations and warranties of Seller in this Agreement that is not
qualified as to materiality shall be true and correct in all material respects,
in each case as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (unless made as of a specific date, in
which event such date shall be applicable), in case of each of clause (a) and
clause (b), without giving effect to any update to the Disclosure Schedule.
 
7.2  Performance of Obligations. Seller shall have complied in all material
respects with each of the covenants contained in this Agreement to be performed
by Seller prior to the Closing .
 
7.3  Deliveries. Seller shall have executed and delivered or caused to be
executed and delivered to Purchaser the agreements and documents identified in
Section 2.3(b) to be delivered to Purchaser by or on behalf of Seller or the
Affiliate of Seller identified therein, and each such agreement and document
shall be in full force and effect.
 
 
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7.4  No Material Adverse Effect. Since the date of this Agreement there shall
have been no event, condition, change, development or other matter, or any
worsening of any existing event, condition, change, development or other matter
that, individually or in combination with any other event, condition, change,
development or other matter or worsening thereof, has had or could reasonably be
expected to have a Material Adverse Effect.
 
7.5  Orders. The Bankruptcy Court shall have entered the Sale Order, and such
order shall have become a Final Order.
 
7.6  Executory Contracts. The Bankruptcy Court shall have approved and
authorized the assumption and assignment of the Contracts to be identified on
the Assignment Agreement.
 
7.7  Key Software Licenses. Purchaser shall have obtained the right to assume
and assign, or otherwise obtained consent of the applicable licensors with
respect to, the Key Software Licenses so as to assure the continued availability
of such licensed software to Purchaser from and after the Closing on terms and
conditions reasonably acceptable to Purchaser.
 
7.8  No Proceedings. Since the date of this Agreement, there shall not have been
commenced against Purchaser, or against any Person affiliated with Purchaser,
any Proceeding (a) involving any material challenge to, or seeking material
damages or other material relief in connection with, the Acquisition, or
(b) that may have the effect of preventing, materially delaying, making illegal
or otherwise materially interfering with the Acquisition. 
 
7.9  Governmental Approvals. All consents, approvals and authorizations of any
Governmental Entity required in connection with the transactions contemplated by
this Agreement shall have been obtained, in each case, without (a) the
imposition of conditions, (b) the requirement of divesting Purchaser of any
assets or property or (c) the requirement of expenditure of money by Purchaser
to a third party in exchange for any such consent.
 
ARTICLE 8
CONDITIONS PRECEDENT TO SELLER’S OBLIGATION TO CLOSE
 
The obligation of Seller to consummate the Acquisition shall be subject to the
satisfaction at or prior to the Closing of the following conditions, any or all
of which may be waived only by Seller, in whole or in part, to the extent
permitted by applicable Legal Requirements:

8.1  Accuracy of Representations. (a) Each of the representations and warranties
of Purchaser in this Agreement that is qualified as to materiality shall be true
and correct in each case as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date (unless made as of a specific
date, in which event such date shall be applicable), and (b) each of the
representations and warranties of Purchaser in this Agreement that is not
qualified as to materiality shall be true and correct in all material respects,
in each case as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (unless made as of a specific date, in
which event such date shall be applicable).
 
8.2  Performance of Obligations. Purchaser shall have complied in all material
respects with each of the covenants contained in this Agreement to be performed
by Purchaser prior to the Closing.
 
8.3  Deliveries. Purchaser shall have executed and delivered or caused to be
executed and delivered to Seller the agreements and documents identified in
Section 2.3(b) to be delivered to Seller by or on behalf of Purchaser, and each
such agreement and document shall be in full force and effect.
 
 
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8.4  No Proceedings. Since the date of this Agreement, there shall not have been
commenced against Seller, or against any Person affiliated with Seller, any
Proceeding (a) involving any material challenge to, or seeking material damages
or other material relief in connection with, the Acquisition, or (b) that may
have the effect of preventing, materially delaying, making illegal or otherwise
materially interfering with the Acquisition.
 
ARTICLE 9
TERMINATION
 
9.1  Termination Events. This Agreement may be terminated prior to the Closing
by:
 
(a)  mutual written consent of Purchaser and Seller;
 
(b)  (i) Purchaser if the Closing has not taken place on or before February 15,
2007 or (ii) Seller if the Closing has not taken place on or before March 15,
2007 (in each case other than as a result of any failure on the part of the
terminating party to comply with or perform any of their respective covenants or
obligations set forth in this Agreement);
 
(c)  Purchaser (i) if there is a material breach of any representation or
warranty or any covenant or agreement to be complied with or performed by Seller
pursuant to the terms of this Agreement or (ii) upon the failure of a condition
to the obligations of Purchaser set forth in Article 7 to be satisfied (and such
condition is not waived in writing by Purchaser) on or prior to the Closing
Date, or the occurrence of any event that results or would result in the failure
of a condition to the obligations of Purchaser set forth in Article 7 to be
satisfied on or prior to the Closing Date; provided, however, that such breach
or failure is through no fault of Purchaser; provided, further, however, that if
such inaccuracy in Seller’s representations and warranties or a breach of a
covenant by Seller is curable by Seller, then Purchaser may not terminate this
Agreement under this Section 9.1(c) on account of such inaccuracy or breach
until the earlier of (A) the expiration of a ten (10) Business Day period
commencing upon delivery of written notice from Purchaser to Seller of such
breach or inaccuracy and (B) Seller ceasing to exercise commercially reasonable
efforts to cure such breach (it being understood that this Agreement shall not
terminate pursuant to this Section 9.1(c) as a result of such particular breach
or inaccuracy if such breach by Seller is cured prior to such termination
becoming effective);
 
(d)  Seller (i) if there is a material breach of any representation or warranty
or any covenant or agreement to be complied with or performed by Purchaser
pursuant to the terms of this Agreement or (ii) upon the failure of a condition
to the obligations of Seller set forth in Article 8 to be satisfied (and such
condition is not waived in writing by Seller) on or prior to the Closing Date,
or the occurrence of any event that results or would result in the failure of a
condition to the obligations of Seller set forth in Article 8 to be satisfied on
or prior to the Closing Date; provided, however, that such breach or failure is
through no fault of Seller; provided, further, however, that if such inaccuracy
in Purchaser’s representations and warranties or a breach of a covenant by
Purchaser is curable by Purchaser, then Seller may not terminate this Agreement
under this Section 9.1(d) on account of such inaccuracy or breach until the
earlier of (A) the expiration of a ten (10) Business Day period commencing upon
delivery of written notice from Seller to Purchaser of such breach or inaccuracy
and (B) Purchaser ceasing to exercise commercially reasonable efforts to cure
such breach (it being understood that this Agreement shall not terminate
pursuant to this Section 9.1(d) as a result of such particular breach or
inaccuracy if such breach by Purchaser is cured prior to such termination
becoming effective);
 
(e)  Purchaser or Seller if a court of competent jurisdiction or other
Governmental Body (other than the Bankruptcy Court) shall have issued a final
and nonappealable order, decree or ruling, or shall have taken any other action,
having the effect of permanently restraining, enjoining or otherwise prohibiting
the Acquisition; or
 
 
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(f)  Purchaser or Seller if the Bankruptcy Court shall not have entered the Sale
Order on or before February 2, 2007, provided that such terminating party is not
in material breach of this Agreement.
 
9.2  Termination Procedures. Subject to Section 9.3, if Purchaser wishes to
terminate this Agreement pursuant to Section 9.1(a), Section 9.1(b)(i), Section
9.1(c), Section 9.1(e) or Section 9.1(f), then Purchaser shall deliver to Seller
a written notice stating that Purchaser is terminating this Agreement in
accordance with the respective section. Subject to Section 9.3, if Seller wishes
to terminate this Agreement pursuant to Section 9.1(a), Section 9.1(b)(ii),
Section 9.1(d), Section 9.1(e) or Section 9.1(f), then Seller shall deliver to
Purchaser a written notice stating that Seller is terminating this Agreement in
accordance with the respective section.
 
         9.3  Expenses; Termination Fees. Except as set forth in Section 5.7
(which obligations it is expressly agreed survive termination of this
Agreement), all fees and expenses incurred in connection with this Agreement and
the transactions contemplated by this Agreement shall be paid by the party
incurring such expenses, whether or not the Acquisition is consummated.
 
9.4  Effect of Termination. If this Agreement is terminated pursuant to
Section 9.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that the Parties shall, in all events, remain
bound by and continue to be subject to the provisions set forth in Section
2.2(a), Section 5.7, Section 5.11, Section 9.3, Section 9.4, Section 11.1,
Section 11.2, Section 11.5, Section 11.6 and Section 11.11.
 
ARTICLE 10
ADDITIONAL COVENANTS
 
The Parties further agree as follows:

10.1    General. In case at any time after the Closing any further action is
necessary to carry out the purposes of this Agreement, each of the Parties will
take such further action (including the execution and delivery of such further
instruments and documents) as any other Party reasonably may request. Seller
shall use its commercially reasonable efforts from and after the Closing to
cause any and all Encumbrances on the Transferred Assets that exist on the
Closing Date to be released without cost to Purchaser.
 
10.2    Leases and Other Agreements.
 
(a)  Purchaser shall assume all of Seller’s right, title and interest in and to,
and shall pay and perform all liabilities and obligations as and when due under,
the Facilities Leases; provided, however, that such assumption shall be
conditioned on Purchaser’s successful renegotiation of the Facilities Leases to
(i) amend the terms of the Store / Headquarters lease in accordance with the
material terms of lease amendment attached as Exhibit G-1, which shall become
effective as of the Closing Date and (ii) amend the Distribution Center lease in
accordance with the material terms of lease amendment attached as Exhibit G-2,
which shall become effective as of the Closing Date; provided, further, that the
terms in such Facilities Leases regarding rent and real property taxes payable
by the tenant shall remain in their current form for the duration of the amended
terms of the respective Facilities Leases. The assumption agreement relating to
such Facilities Leases shall include representations and warranties that Seller
has good and valid leasehold title to the Leased Real Property, that each
Facility has received all required approvals of Governmental Bodies, and
regarding the suitability of the Leased Real Property and customary estoppel
provisions. The parties acknowledge that such terms have been agreed to pursuant
to a letter agreement between Purchaser and Bamber, LLC, dated as of the date of
this Agreement.
 
 
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(b)  Purchaser and Seller and the Affiliates of Seller who control Barrington,
Inc. shall arrive at an agreement with the material terms set forth in Exhibit I
designed to provide Purchaser with continued access to such products consistent
with past practice (the “Barrington/LA Sax Agreement”).
 
(c)  At or prior to Closing, Seller shall pay and perform all liabilities and
obligations as and when due under the LaSalle Equipment Lease, including payment
of the purchase option, so as to cause the Seller to be the owner of all
property subject to such lease and such assets to become Transferred Assets
hereunder. Seller estimates the payoff amount as of January 31, 2007 to be
$2,718,343.
 
10.3    Certain Tax Matters.   The Parties agree that inasmuch as the
Transferred Assets include substantially all the operating assets of Seller, the
sale and purchase of the Transferred Assets may be exempt from sales and use
Taxes in the jurisdictions in which the Transferred Assets are located pursuant
to the bulk sale, occasional sale, or sale for resale provisions in the
applicable Legal Requirements, and the Parties hereto shall treat the transfer
of the Transferred Assets provided for herein as a bulk, occasional sale, or
sale for resale for all purposes; provided, however, that to the extent it shall
be determined after the date of the Agreement that the sale by Seller, and the
purchase by Purchaser, of all or any portion of the Transferred Assets is
subject to a sale, use or other transfer Tax, then such Tax (and any penalties
and interest) shall be paid by Seller. The Parties shall cooperate with each
other in the preparation, execution and filing of exemption certificates or any
Tax Returns that may be required in connection with such Taxes and any related
filing fees, notarial fees and other costs.
 
10.4    Access to Books, Records, Etc.; Further Action.
 
(a)  Each Party agrees that, after the Closing, it will cooperate with and make
available to the other Parties, during normal business hours and upon reasonable
notice, all books and records, and other information retained and remaining in
existence after the Closing Date with respect to the Transferred Assets or the
Assumed Liabilities that are necessary or useful in connection with any use of
the Transferred Assets or the operation of the Business by Purchaser after the
Closing. Seller agrees that it shall preserve and keep all such books and
records of Seller retained by it for a period of at least three (3) years from
the Closing Date. After such three (3) year period, Seller may dispose of such
books and records, unless notified by Purchaser at least sixty (60) days prior
to the expiration of such three (3) year period that Purchaser wishes to retain
such books and records, in which case Purchaser shall be permitted, at its sole
cost and expense, to remove all or any part of such books and records.
Additionally, Seller shall have access to the books and records acquired by
Purchaser for the period commencing on the Closing Date and ending three (3)
years from the Closing Date for any proper purpose relating to the operation of
its business prior to the Closing Date. Following the Closing, Seller shall
promptly provide Purchaser with any notices or other documents received by
Seller relating to the Business.
 
(b)  From and after the Closing Date, Seller shall cooperate with Purchaser and
its Affiliates and Representatives, and shall execute and deliver such documents
and take such other actions as Purchaser may reasonably request, for the purpose
of evidencing the Acquisition and putting Purchaser in possession and control of
all of the Transferred Assets. Without limiting the generality of the foregoing,
from and after the Closing Date, Seller shall promptly remit to Purchaser any
funds that are received by Seller and that are included in, or that represent
payment of receivables included in, the Transferred Assets. Purchaser shall
promptly remit to Seller any funds that are received by Purchaser and that are
included in the Excluded Assets. Seller: (i) hereby irrevocably authorizes
Purchaser, at all times on and after the Closing Date, to endorse in the name of
Seller any check or other instrument that is made payable to Seller and that
represents funds included in, or that represents the payment of any receivable
included in, the Transferred Assets; and (ii) hereby irrevocably nominates,
constitutes and appoints Purchaser as the true and lawful attorney-in-fact of
Seller (with full power of substitution) effective as of the Closing Date, and
hereby authorizes Purchaser, in the name of and on behalf of Seller, to execute,
deliver, acknowledge, certify, file and record any document, to institute and
prosecute any Legal Proceeding and to take any other action (on or at any time
after the Closing Date) that Purchaser may deem appropriate for the purpose of
(A) collecting, asserting, enforcing or perfecting any claim, right or interest
of any kind that is included in or relates to any of the Transferred Assets
(including, without limitation, the delivery of documents of conveyance to the
United States Patent and Trademark Office, foreign trademark registries and
domestic and foreign URL registries) , (B) defending or compromising any claim
or Legal Proceeding relating to any of the Transferred Assets, or (C) otherwise
carrying out or facilitating the Acquisition. The power of attorney referred to
in the preceding sentence is and shall be coupled with an interest and shall be
irrevocable, and shall survive the dissolution or insolvency of Seller.
Purchaser shall give prompt notice in reasonable detail to Seller of any action
taken by Purchaser under the foregoing clause (ii) of this Section 10.4,
including copies of any documents executed by Purchaser under such clause (ii).
 
 
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ARTICLE 11
GENERAL PROVISIONS
 
11.1    Applicable Law. The execution, performance and interpretation of this
Agreement shall be governed by, and construed and enforced in accordance with,
the internal laws of the State of Indiana.
 
11.2    Jurisdiction; WAIVER OF JURY TRIAL. The parties agree that the
Bankruptcy Court shall retain exclusive jurisdiction to resolve any controversy
or claim arising out of or relating to this Agreement or the implementation or
the breach hereof. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
 
11.3    Termination of Representations and Warranties. The representations and
warranties of the Parties set forth in Articles III and IV of this Agreement
shall terminate and be of no further force or effect after the Closing Date.
 
11.4    Notices. All notices required or permitted to be given under this
Agreement shall be in writing, and will be deemed given on the date of receipt
if delivered in person, or on the date of mailing if mailed by overnight courier
or registered or certified mail, postage prepaid, return receipt requested, to
the applicable Party at its address indicated on the signatures pages to this
Agreement. Any Party may change its address for purposes of this Agreement by
giving fifteen (15) days’ prior written notice of such change of address to the
other Party in the manner described in this Section 11.4.
 
11.5    Confidentiality. The following is subject to any disclosure requirements
under the Bankruptcy Code or imposed by the Bankruptcy Court: Purchaser and
Seller each agree that it will treat in confidence all documents, materials and
other information that it shall have obtained regarding the other party during
the course of the negotiations leading to the consummation of the transactions
contemplated hereby (whether obtained before or after the date of this
Agreement), the investigation provided for herein and the preparation of this
Agreement and other related documents, and, in the event the transactions
contemplated hereby shall not be consummated, at the request of the disclosing
party, will return to the other party all copies of nonpublic documents and
materials which have been furnished in connection therewith. Such non-public
documents, materials and information shall not be communicated to any third
Person (other than to Purchaser’s and Seller’s respective counsel, accountants
or financial advisors, in each case subject to the recipient’s agreement to keep
the same confidential). No other party shall use any confidential information in
any manner whatsoever except solely for the purpose of evaluating the proposed
purchase and sale of the Transferred Assets; provided, however, that after the
Closing, Purchaser may use or disclose any confidential information included in
the Transferred Assets or otherwise reasonably related to the Transferred Assets
and the business. The obligation of each party to treat such documents,
materials and other information in confidence shall not apply to any information
which (a) is or becomes available to such party from a source other than the
disclosing party, (b) is or becomes available to the public other than as a
result of disclosure by such party or its agents or (c) is required to be
disclosed under applicable law, judicial process or rule of any national
securities exchange or quotation service.
 
 
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11.6    Public Announcements. All public announcements or statements with
respect to this Agreement, the transactions contemplated hereby or the
activities and operations of the other Party shall be jointly approved by Seller
and Purchaser; provided, however, that if the Parties are unable to agree on a
public statement or announcement and Seller or Purchaser determines, after
consultation with counsel, that such statement or announcement is required by
applicable Legal Requirement or by obligations of the Parties or their
Affiliates pursuant to any listing agreement with or rules of any national
securities exchange or quotation service, then Seller or Purchaser, as the case
may be, may issue such statement or announcement.
 
11.7    Binding Effect; Assignment. No Party shall assign any of its rights, or
delegate any of its obligations under this Agreement to any third party without
the prior written consent of the other Parties; provided, however, that
Purchaser may assign this Agreement to one or more Affiliates of Purchaser
without the consent of any Party so long as Purchaser remains fully and
primarily liable under this Agreement. This Agreement is binding upon, and shall
inure solely to the benefit of, the parties hereto and their respective heirs,
personal representatives, successors and permitted assigns. This Agreement is
not intended to benefit, and shall not be construed as benefiting, any third
party, and no third party shall have standing to enforce any provision of this
Agreement. Without limiting the generality of the foregoing, no Transferred
Employee shall have any claim against Purchaser pursuant to this Agreement
except pursuant to a separate written offer of employment delivered directly by
Purchaser to such individual Transferred Employee.
 
11.8    Modification. No purported modification, amendment or waiver of any term
of this Agreement shall be effective unless it is in writing, subsequent to this
Agreement and signed by all parties hereto.
 
11.9    Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same agreement. Facsimile copies shall
also be deemed originals.
 
11.10   Severability. Purchaser and Seller agree that the provisions of this
Agreement are severable and separate and that the unenforceability of any
specific provision or part of any provision shall not affect the validity of any
other provision or term of this Agreement.
 
11.11    Entire Agreement. This Agreement, together with the Ancillary
Agreements and the instruments delivered hereunder and thereunder, constitutes
the entire agreement of Purchaser and Seller with respect to the subject matter
hereof and supersedes any and all prior and contemporaneous understandings or
agreements, whether oral or written, concerning such subject matter, including
that certain letter agreement between Purchaser and Seller dated November 3,
2006. Each Party acknowledges that it enters into this Agreement without relying
on any statement by the other Party which is not specifically set forth in this
Agreement.
 
 
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11.12    Interpretation of Agreement.
 
(a)  The words “hereof,” “herein” and “hereunder” and words of similar import
when used in this Agreement refer to this Agreement as a whole and not to any
particular provision of this Agreement, and article, section, schedule and
exhibit references are to this Agreement unless otherwise specified. The meaning
of defined terms shall be equally applicable to the singular and plural forms of
the defined terms. The terms “include” and “including” are not limiting and mean
“including without limitation.” The masculine gender shall include the feminine
and neuter genders; the feminine gender shall include the masculine and neuter
genders; and the neuter gender shall include the masculine and feminine genders.
 
(b)  References to agreements and other documents shall be deemed to include all
subsequent amendments and other modifications thereto.
 
(c)  References to statutes shall include all regulations promulgated thereunder
and references to statutes or regulations shall be construed as including all
statutory and regulatory provisions consolidating, amending or replacing the
statute or regulation.
 
(d)  The captions and headings of this Agreement are for convenience of
reference only and shall not affect the construction of this Agreement.
 
(e)  The Parties participated jointly in the negotiation and drafting of this
Agreement and the language used in this Agreement shall be deemed to be the
language chosen by the Parties to express their mutual intent. If an ambiguity
or question of intent or interpretation arises, then this Agreement will
accordingly be construed as drafted jointly by the Parties, and no presumption
or burden of proof will arise favoring or disfavoring any Party by virtue of the
authorship of any of the provisions of this Agreement.
 
(f)  The annexes, schedules and exhibits to this Agreement are a material part
hereof and shall be treated as if fully incorporated into the body of the
Agreement. For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa.
 

 
(Signature Page Follows)
 
 
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IN WITNESS WHEREOF, the parties have executed this Asset Purchase Agreement
effective as of the date first written above.

 
PURCHASER:
       
MUSICIAN’S FRIEND, INC.
             
By:
     
Leland P. Smith
   
Executive Vice President
       
Address for Notice:
         
c/o Guitar Center, Inc.
   
5795 Lindero Canyon Road
   
Westlake Village, California 91362
   
Attention: General Counsel
   
Fax: (818) 735-4923
       
with a copy (which shall not constitute notice) to:
         
Latham & Watkins LLP
   
140 Scott Drive
   
Menlo Park, California 94025
   
Attention: Anthony J. Richmond, Esq.
   
Fax: (650) 463-2600
             
SELLER:
       
DENNIS BAMBER, INC., D/B/A THE WOODWIND & THE BRASSWIND
             
By:
     
Dennis Bamber
   
President
       
Address for Notice:
         
4004 Technology Drive
   
South Bend, IN 46628
   
Fax: (574) 251-3549
       
with a copy (which shall not constitute notice) to:
         
c/o ___________
   
Attention: ________
   
Fax: (___) ________

 

 
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