Exhibit 10.1


 


SECURITIES
PURCHASE AGREEMENT


 


Dated
as of May 22, 2009


 


by
and among


 


Select
Comfort Corporation,


 


Sterling
SC Investor, LLC


 


and


 


the
other investors, if any, listed on the Schedule of Buyers attached hereto


 





















 


Table
of Contents


 


	
   

  	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  1.

  	
  PURCHASE AND SALE OF COMMON SHARES

  	
   

  	
  2

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Purchase and Sale of Common Shares

  	
   

  	
  2

  
	
   

  	
  b.

  	
  Closing Date

  	
   

  	
  2

  
	
   

  	
  c.

  	
  Form of Payment and Delivery

  	
   

  	
  2

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  BUYERS’ REPRESENTATIONS AND WARRANTIES

  	
   

  	
  3

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Investment Purpose

  	
   

  	
  3

  
	
   

  	
  b.

  	
  Accredited Investor Status

  	
   

  	
  3

  
	
   

  	
  c.

  	
  Reliance on Exemptions

  	
   

  	
  3

  
	
   

  	
  d.

  	
  Information

  	
   

  	
  3

  
	
   

  	
  e.

  	
  No Governmental Review

  	
   

  	
  3

  
	
   

  	
  f.

  	
  Transfer or Resale

  	
   

  	
  3

  
	
   

  	
  g.

  	
  Legends

  	
   

  	
  4

  
	
   

  	
  h.

  	
  Authorization; Enforcement; Validity

  	
   

  	
  5

  
	
   

  	
  i.

  	
  Residency

  	
   

  	
  5

  
	
   

  	
  j.

  	
  No Other Agreements

  	
   

  	
  5

  
	
   

  	
  k.

  	
  Prior Transactions

  	
   

  	
  5

  
	
   

  	
  l.

  	
  Available Funds

  	
   

  	
  5

  
	
   

  	
  m.

  	
  No General Solicitation

  	
   

  	
  5

  
	
   

  	
  n.

  	
  Brokers and Finders

  	
   

  	
  6

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  REPRESENTATIONS AND WARRANTIES OF THE
  COMPANY

  	
   

  	
  6

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Organization and Qualification; Subsidiaries

  	
   

  	
  6

  
	
   

  	
  b.

  	
  Authority; Authorization; Enforcement; Validity

  	
   

  	
  6

  
	
   

  	
  c.

  	
  Capitalization

  	
   

  	
  7

  
	
   

  	
  d.

  	
  Issuance of Securities

  	
   

  	
  9

  
	
   

  	
  e.

  	
  No Conflicts

  	
   

  	
  9

  
	
   

  	
  f.

  	
  Required Filings and Consents

  	
   

  	
  10

  
	
   

  	
  g.

  	
  SEC Documents; Financial Statements

  	
   

  	
  10

  
	
   

  	
  h.

  	
  Sarbanes-Oxley Compliance; Internal Accounting Controls; Disclosure
  Controls and Procedures; Books and Records

  	
   

  	
  12

  
	
   

  	
  i.

  	
  Absence of Certain Changes

  	
   

  	
  13

  
	
   

  	
  j.

  	
  Absence of Litigation

  	
   

  	
  14

  
	
   

  	
  k.

  	
  Full Disclosure; No Undisclosed Events, Liabilities, Developments or
  Circumstances

  	
   

  	
  14

  
	
   

  	
  l.

  	
  Acknowledgment Regarding Buyers’ Purchase of Common Shares

  	
   

  	
  14

  
	
   

  	
  m.

  	
  No General Solicitation

  	
   

  	
  14

  
	
   

  	
  n.

  	
  No Integrated Offering

  	
   

  	
  15

  
	
   

  	
  o.

  	
  Benefit Plans

  	
   

  	
  15

  
	
   

  	
  p.

  	
  Employee Relations

  	
   

  	
  18

  



 





















 


	
   

  	
  q.

  	
  Intellectual Property Rights

  	
   

  	
  18

  
	
   

  	
  r.

  	
  Environmental Laws

  	
   

  	
  20

  
	
   

  	
  s.

  	
  Insurance

  	
   

  	
  20

  
	
   

  	
  t.

  	
  Regulatory Permits

  	
   

  	
  21

  
	
   

  	
  u.

  	
  Principal Market

  	
   

  	
  21

  
	
   

  	
  v.

  	
  Tax Status

  	
   

  	
  21

  
	
   

  	
  w.

  	
  Transactions With Related Parties

  	
   

  	
  23

  
	
   

  	
  x.

  	
  Application of Takeover Protections; Rights Agreement

  	
   

  	
  23

  
	
   

  	
  y.

  	
  Foreign Corrupt Practices

  	
   

  	
  23

  
	
   

  	
  z.

  	
  Outstanding Indebtedness; Liens

  	
   

  	
  23

  
	
   

  	
  aa.

  	
  Real Property

  	
   

  	
  24

  
	
   

  	
  bb.

  	
  Personal Property

  	
   

  	
  24

  
	
   

  	
  cc.

  	
  Contracts

  	
   

  	
  24

  
	
   

  	
  dd.

  	
  Investment Company

  	
   

  	
  25

  
	
   

  	
  ee.

  	
  Fairness Opinion

  	
   

  	
  25

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  PRE-CLOSING COVENANTS

  	
   

  	
  26

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Shareholders Meeting

  	
   

  	
  26

  
	
   

  	
  b.

  	
  Proxy Material

  	
   

  	
  26

  
	
   

  	
  c.

  	
  Conduct of Business of the Company

  	
   

  	
  27

  
	
   

  	
  d.

  	
  Pre-Closing Access

  	
   

  	
  30

  
	
   

  	
  e.

  	
  Reasonable Best Efforts

  	
   

  	
  31

  
	
   

  	
  f.

  	
  Registration Rights Agreement

  	
   

  	
  31

  
	
   

  	
  g.

  	
  Amended and Restated Credit Agreement

  	
   

  	
  31

  
	
   

  	
  h.

  	
  Bylaw Amendment

  	
   

  	
  31

  
	
   

  	
  i.

  	
  No Dissenters’ or Appraisal Rights

  	
   

  	
  32

  
	
   

  	
  j.

  	
  Board Resignations

  	
   

  	
  32

  
	
   

  	
  k.

  	
  No Solicitation of Transactions

  	
   

  	
  32

  
	
   

  	
  l.

  	
  Retail Store Closings

  	
   

  	
  35

  
	
   

  	
  m.

  	
  Notice of Certain Events

  	
   

  	
  35

  
	
   

  	
  n.

  	
  Obligation to Update Schedules

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  OTHER AFFIRMATIVE COVENANTS

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Company Board

  	
   

  	
  36

  
	
   

  	
  b.

  	
  Disclosure of Transactions and Other Material Information

  	
   

  	
  38

  
	
   

  	
  c.

  	
  Form D and Blue Sky

  	
   

  	
  39

  
	
   

  	
  d.

  	
  Reporting Status

  	
   

  	
  39

  
	
   

  	
  e.

  	
  Financial Information

  	
   

  	
  39

  
	
   

  	
  f.

  	
  Internal Accounting Controls

  	
   

  	
  39

  
	
   

  	
  g.

  	
  Listing

  	
   

  	
  40

  
	
   

  	
  h.

  	
  Patriot Act, Investor Secrecy Act and Office of Foreign Assets
  Control

  	
   

  	
  40

  
	
   

  	
  i.

  	
  Preemptive Rights

  	
   

  	
  40

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  OTHER NEGATIVE COVENANTS

  	
   

  	
  41

  



 


ii





















 


	
   

  	
  a.

  	
  Restriction on Purchases or Payments

  	
   

  	
  41

  
	
   

  	
  b.

  	
  Corporate Existence; Reorganization

  	
   

  	
  41

  
	
   

  	
  c.

  	
  Investment Company

  	
   

  	
  42

  
	
   

  	
  d.

  	
  No Avoidance of Obligations

  	
   

  	
  42

  
	
   

  	
  e.

  	
  Regulation M

  	
   

  	
  42

  
	
   

  	
  f.

  	
  No Integrated Offering

  	
   

  	
  42

  
	
   

  	
  g.

  	
  Amendments to Articles of Incorporation or Bylaws

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
  OTHER AGREEMENTS

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Continuing Directors

  	
   

  	
  42

  
	
   

  	
  b.

  	
  Vacancies

  	
   

  	
  43

  
	
   

  	
  c.

  	
  Voting for Continuing Directors

  	
   

  	
  43

  
	
   

  	
  d.

  	
  Directors’ and Officers’ Insurance

  	
   

  	
  44

  
	
   

  	
  e.

  	
  Corporate Governance

  	
   

  	
  45

  
	
   

  	
  f.

  	
  No Waiver

  	
   

  	
  45

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
  TRANSFER AGENT

  	
   

  	
  45

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
  CONDITIONS TO EACH PARTY’S OBLIGATIONS
  UNDER THIS AGREEMENT

  	
   

  	
  46

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
  CONDITIONS TO THE OBLIGATIONS OF THE
  COMPANY TO SELL THE COMMON SHARES

  	
   

  	
  46

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
  CONDITIONS TO BUYERS’ OBLIGATIONS TO
  PURCHASE THE COMMON SHARES

  	
   

  	
  47

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.

  	
  TERMINATION, AMENDMENT AND WAIVER

  	
   

  	
  49

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Termination by Mutual Consent

  	
   

  	
  49

  
	
   

  	
  b.

  	
  Termination by Either a Majority of the Buyers or the Company

  	
   

  	
  49

  
	
   

  	
  c.

  	
  Termination by a Majority of the Buyers

  	
   

  	
  49

  
	
   

  	
  d.

  	
  Termination by the Company

  	
   

  	
  50

  
	
   

  	
  e.

  	
  Effect of Termination

  	
   

  	
  51

  
	
   

  	
  f.

  	
  Termination Fees

  	
   

  	
  51

  
	
   

  	
  g.

  	
  Amendment

  	
   

  	
  52

  
	
   

  	
  h.

  	
  Extension; Waiver

  	
   

  	
  52

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  13.

  	
  INDEMNIFICATION

  	
   

  	
  53

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Rights to Indemnification

  	
   

  	
  53

  
	
   

  	
  b.

  	
  Limitations on Indemnification

  	
   

  	
  55

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.

  	
  MISCELLANEOUS

  	
   

  	
  55

  



 


iii





















 


	
   

  	
  a.

  	
  Governing Law; Jurisdiction; Jury Trial

  	
   

  	
  55

  
	
   

  	
  b.

  	
  Counterparts

  	
   

  	
  56

  
	
   

  	
  c.

  	
  Headings

  	
   

  	
  57

  
	
   

  	
  d.

  	
  Severability

  	
   

  	
  57

  
	
   

  	
  e.

  	
  Entire Agreement

  	
   

  	
  57

  
	
   

  	
  f.

  	
  Notices

  	
   

  	
  57

  
	
   

  	
  g.

  	
  Successors and Assigns

  	
   

  	
  58

  
	
   

  	
  h.

  	
  No Third Party Beneficiaries

  	
   

  	
  58

  
	
   

  	
  i.

  	
  Survival; Time Limits on Indemnification Obligations

  	
   

  	
  58

  
	
   

  	
  j.

  	
  Further Assurances

  	
   

  	
  59

  
	
   

  	
  k.

  	
  Placement Agent

  	
   

  	
  59

  
	
   

  	
  l.

  	
  No Strict Construction

  	
   

  	
  59

  
	
   

  	
  m.

  	
  Expenses

  	
   

  	
  59

  
	
   

  	
  n.

  	
  Specific Performance

  	
   

  	
  60

  
	
   

  	
  o.

  	
  Confidentiality

  	
   

  	
  61

  
	
   

  	
  p.

  	
  Independent Nature of Buyers

  	
   

  	
  61

  
	
   

  	
  q.

  	
  Interpretative Matters

  	
   

  	
  61

  



 


iv





















 


EXHIBITS


 


	
  Exhibit A

  	
  -

  	
  Form of Restated Bylaws

  
	
   

  	
   

  	
   

  
	
  Exhibit B

  	
  -

  	
  Form of Restated Charter

  
	
   

  	
   

  	
   

  
	
  Exhibit C

  	
  -

  	
  Form of Guarantee

  
	
   

  	
   

  	
   

  
	
  Exhibit D

  	
  -

  	
  Form of Registration Rights Agreement

  
	
   

  	
   

  	
   

  
	
  Exhibit E

  	
  -

  	
  Term Sheet for Amended and Restated Credit Agreement

  
	
   

  	
   

  	
   

  
	
  Exhibit F

  	
  -

  	
  Form of Company Counsel’s Legal Opinion

  
	
   

  	
   

  	
   

  
	
  Exhibit G

  	
  -

  	
  Form of Management Services Agreement

  
	
   

  	
   

  	
   

  
	
  Exhibit H

  	
  -

  	
  Form of Escrow Agreement

  
	
   

  	
   

  	
   

  
	
  Exhibit I

  	
   

  	
  Form of Officer’s Termination Certificate

  



 





















 


SECURITIES
PURCHASE AGREEMENT


 


SECURITIES PURCHASE
AGREEMENT
(the “Agreement”), dated as of May 22,
2009, by and among Select Comfort Corporation, a Minnesota corporation, with
principal offices located at 9800 59th Avenue North, Minneapolis, MN 55442 (the
“Company”), Sterling SC Investor, LLC, a
Delaware limited liability company  (“Sterling”) and the other investors, if any, listed on the
Schedule of Buyers attached hereto (including Sterling, each, a “Buyer” and, collectively, the “Buyers”).  Capitalized terms used and not defined
elsewhere in this Agreement have the respective meanings assigned to such terms
in the Appendix hereto.


 


WHEREAS:


 


A.                                   The Company and the Buyers are
executing and delivering this Agreement in reliance upon the exemption from
securities registration afforded by Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States
Securities and Exchange Commission (the “SEC”) under the
Securities Act of 1933, as amended (the “1933 Act”).


 


B.                                     The Buyers, severally and not
jointly, desire to purchase from the Company, and the Company wishes to sell to
the Buyers, upon the terms and conditions stated in this Agreement, shares of
the common stock, par value $.01 per share, of the Company (the “Common Stock”) (the shares of Common Stock purchased by all
of the Buyers hereunder being collectively referred to herein as the “Common Shares” or the “Securities,”
with the certificates representing the Common Shares being referred to as the “Share Certificates”).


 


C.                                     Each of the Board of Directors of
the Company (the “Company Board”)
and a committee of the Company Board composed solely of “disinterested
directors” (as defined in Section 673 Subd.1(d)(3) of the Minnesota
Business Corporation Act (as amended, the “MBCA”)) (the “Committee”) has, by the vote of a requisite majority of the
directors serving thereon, (i)(a) determined that it is in the best
interests of the Company and its shareholders, and declared it advisable, to
enter into this Agreement with the Buyers, and (b) approved the execution,
delivery and performance of this Agreement and the consummation of the
Transactions, including the issuance of the Common Shares to the Buyers and the
adoption of the Second Restated Bylaws of the Company (the “Restated Bylaws”), in the form attached hereto as Exhibit A;
(ii) approved a resolution adopting the Fourth Restated Articles of
Incorporation of the Company (the “Restated Charter”),
in the form attached hereto as Exhibit B, and resolved to submit to
the shareholders of the Company the Restated Charter for approval at a meeting
of the shareholders of the Company; and (iii) resolved to recommend to the
shareholders of the Company the approval of the execution, delivery and
performance of this Agreement, the issuance of the Common Shares to the Buyers
and the approval and adoption of the Restated Charter (collectively, the “Proposals”).  The
recommendations of the Company Board and the Committee that the shareholders
vote in favor of each Proposal are collectively referred to herein as the “Company Board Recommendation”.


 


D.                                    Concurrently with the execution
of this Agreement, and as a condition and inducement to the Company’s
willingness to enter into this Agreement, Sterling Capital Partners III, L.P.
has entered into a guarantee, dated as of the date hereof and in the form
attached hereto as Exhibit C, in favor of the Company.


 





















 


NOW THEREFORE, the Company and each of the
Buyers, severally and not jointly, hereby agree as follows:


 


1.                                       PURCHASE
AND SALE OF COMMON SHARES.


 


a.                                       Purchase and Sale of Common Shares.  Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 9, 10 and 11 below,
the Company shall issue and sell to each Buyer, and each Buyer severally, but
not jointly, agrees to purchase from the Company (the “Closing”),
that number of Common Shares set forth opposite such Buyer’s name on the Schedule
of Buyers, at a purchase price of $0.70 per share, subject to proportional
adjustment for stock splits, stock dividends, stock combinations and similar
events after the date of this Agreement and prior to the Closing.  The aggregate purchase price (the “Purchase Price”) for the Common Shares at the Closing
purchased by the Buyers shall be $35,000,000.


 


b.                                      Closing Date.  The date and time of the closing of the
purchase and sale of the Common Shares (the “Closing Date”)
shall be 10:00 a.m., Chicago  time, on the
third Business Day following the satisfaction (or waiver) of the conditions to
the Closing set forth in Sections 9, 10 and 11 below (other than
any such condition required to be satisfied at the Closing), or such later or
earlier date and time as is mutually agreed to by the Company and a Majority of
the Buyers.  The Closing shall occur at
the offices of Katten Muchin Rosenman LLP, 525 West Monroe Street, Chicago,
Illinois 60661, or at such other place as the Company and the Buyers may
collectively designate in writing.


 


c.                                       Form of Payment and Delivery.


 


(i)                                     On
the Closing Date, (A) each Buyer shall pay to the Company for the Common
Shares to be issued and sold to such Buyer on the Closing Date an amount equal
to the investment amount for the Common Shares purchased by such Buyer as set
forth opposite such Buyer’s name on the Schedule of Buyers, by wire
transfer of immediately available funds in accordance with the Company’s
written wire instructions, provided that any payment to be made by
Sterling shall be subject to Sterling’s right of set-off for its Expenses (as
defined below) pursuant to Section 14(m) hereof, and (B) the
Company shall deliver to each Buyer a Share Certificate representing the Common
Shares that such Buyer is purchasing hereunder on the Closing Date, in each
case duly executed on behalf of the Company and the transfer agent and
registrar for the Common Stock and registered in the name of such Buyer or its
designee.


 


(ii)                                  If
any one or more of the Buyers (other than Sterling or any of its Affiliates)
shall fail or refuse to fund its obligation under Section 1(c)(i) in
a timely manner, or otherwise fail or refuse to purchase the Common Shares that
it has or they have agreed to purchase hereunder (such Common Shares,
collectively, the “Defaulting Buyer Common
Shares”), then, at the election of Sterling, in its  sole discretion, Sterling, or any of its
designees (if Sterling so elects, any such purchaser, a “Replacement Buyer,” and, if multiple
purchasers, collectively, the “Replacement
Buyers”),  may, but
shall not be obligated to, purchase all or any portion of the Defaulting Buyer
Common Shares on the Closing Date, and each of the Allocation Percentage and
the Schedule of Buyers shall be deemed to reflect such adjustment to the
number of Common Shares to


 


2





















 


be purchased
by the Replacement Buyer or Replacement Buyers pursuant to this Section 1(c).  In no event shall the foregoing relieve any
Buyer of its obligations under this Agreement, nor shall it act as a cure of,
or election of a remedy with respect to, any breach by a defaulting Buyer.


 


2.                                       BUYERS’
REPRESENTATIONS AND WARRANTIES.


 


Each Buyer severally (and
not jointly) represents and warrants, as of the date of this Agreement and the
Closing Date, with respect to only itself, that:


 


a.                                       Investment Purpose.  Such Buyer is acquiring the Securities for
such Buyer’s own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered under, or exempted from the registration requirements of, the
1933 Act; provided, however, that by making the representations
herein, such Buyer does not agree to hold any of the Securities for any minimum
or other specific term and reserves the right to dispose of the Securities at
any time in accordance with or pursuant to a registration statement or an
exemption under the 1933 Act.


 


b.                                      Accredited Investor Status.  Such Buyer is an “accredited investor” as
that term is defined in Rule 501(a) of Regulation D.


 


c.                                       Reliance on Exemptions.  Such Buyer understands that the Securities
are being offered and sold to it in reliance on specific exemptions from the
registration requirements of the Securities Laws and that the Company is
relying in part upon the truth and accuracy of, and such Buyer’s compliance
with, the representations, warranties, agreements, acknowledgments and
understandings of such Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of such Buyer to acquire
the Securities.


 


d.                                      Information.  Such Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Securities that have been requested by such Buyer.  Such Buyer and its advisors (pursuant to Section 4(d) below
or otherwise), if any, have been afforded the opportunity to ask questions of
the Company.  Neither such inquiries nor
any other due diligence investigations conducted by such Buyer or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer’s right
to rely on the Company’s representations and warranties contained in Sections
3 and 14(k) below or contained in any of the other Transaction
Documents.  Such Buyer understands that
its investment in the Securities involves a high degree of risk.  Such Buyer has sought such accounting, legal
and tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.


 


e.                                       No Governmental Review.  Such Buyer understands that no Governmental
Entity has passed on or made any recommendation or endorsement of the
Securities or the fairness or suitability of an investment in the Securities
nor have such authorities passed upon or endorsed the merits of the offering of
the Securities.


 


f.                                         Transfer or Resale.  Such Buyer understands that, other than in
accordance with the Registration Rights Agreement (as defined in Section 4(f) below):  (i) the Securities have not been and are
not being registered under the 1933 Act or any other Securities Laws, and may
not


 


3





















 


be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such
Buyer shall have delivered to the Company an opinion of counsel, in a generally
acceptable form, to the effect that such Securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration, or (C) such Buyer provides the Company with reasonable
assurance that such Securities have been or are being sold, assigned or
transferred pursuant to Rule 144 promulgated under the 1933 Act, as
amended (or a successor rule thereto) (“Rule 144”);
(ii) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144, and further, if Rule 144
is not applicable, any resale of the Securities under circumstances in which
the seller (or the Person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or any other securities laws; (iii) other
than pursuant to the Registration Rights Agreement, neither the Company nor any
other Person is under any obligation to register the Securities under the 1933
Act or any other Securities Laws. 
Notwithstanding the foregoing, the Company acknowledges and agrees that
the Securities of a Buyer may be pledged by such Buyer or its transferees
(each, including each Buyer, an “Investor”) in
connection with a bona fide margin agreement or other loan secured by the
Securities.  The pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Investor effecting any such pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document.  The Company hereby agrees to
execute and deliver such documentation as a pledgee of the Securities may
reasonably request in connection with a pledge of the Securities to such
pledgee by an Investor.


 


g.                                      Legends.  Such Buyer understands that, except as set
forth below, the Share Certificates shall bear a restrictive legend in the
following form (the “1933 Act Legend”)
(and a stop-transfer order may be placed against transfer of such Share
Certificates):


 


THE SECURITIES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.


 


The legend set forth above
shall be removed and the Company shall issue a certificate without the 1933 Act
Legend to the holder of the Securities upon which it is stamped, if (i) such
Securities are registered for resale under the 1933 Act, (ii) in
connection with a sale transaction, such holder provides the Company with an
opinion of counsel, in a generally acceptable form, to the effect that a public
sale, assignment or transfer of the Securities may be made without


 


4




















 


registration
under the 1933 Act, or (iii) such holder provides the Company reasonable
assurances that the Securities have been or are being sold pursuant to Rule 144.  The Company shall be responsible for the fees
of its transfer agent and all of The Depository Trust Company (the “DTC”) fees associated with the issuance of the Securities to
the Buyers and any legend removal in accordance herewith.  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the holders of the
Securities.  Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this Section 2(g) will
be inadequate and agrees that, in the event of a breach or threatened breach of
this Section 2(g), such holder shall be entitled, in addition to
all other available remedies, to an injunctive order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.


 


h.             Authorization;
Enforcement; Validity.  Such Buyer is a validly existing corporation,
partnership, limited liability company or other entity and has the requisite
corporate, partnership, limited liability or other organizational power and
authority to purchase the Securities pursuant to this Agreement.  Each of this Agreement and the other
Transaction Documents to which such Buyer is a party has been duly and validly
authorized, executed and delivered on behalf of such Buyer and is a valid and
binding agreement of such Buyer enforceable against such Buyer in accordance
with its terms.  Each of the Registration
Rights Agreement and the other Transaction Documents to be entered into and
executed by such Buyer in connection with the Transactions as of the Closing
will have been duly and validly authorized, executed and delivered on behalf of
such Buyer as of the Closing and will constitute a valid and binding agreement
of such Buyer, enforceable against such Buyer in accordance with its terms.


 


i.              Residency. Such Buyer is a resident of
that jurisdiction specified below its address on the Schedule of Buyers.


 


j.              No Other Agreements.  Such Buyer has not, directly or indirectly,
made any agreements with the Company relating to the terms or conditions of the
Transactions except as set forth in the Transaction Documents.


 


k.             Prior
Transactions. 
During the period commencing on February 9, 2009 and ending on the
Business Day immediately preceding the Closing Date (the “Pre-Closing
Period”), such Buyer did not purchase or sell any shares of Common
Stock.  Without limiting the foregoing,
during the Pre-Closing Period, such Buyer did not engage in any transaction
constituting a “short sale” (as defined in Rule 200 of Regulation SHO
under the Securities Exchange Act of 1934, as amended and the rules and
regulations promulgated thereunder (the “1934 Act”)) of
shares of Common Stock or establish an open “put equivalent position” (within
the meaning of Rule 16a-1(h) under the 1934 Act) with respect to the
Common Stock.


 


l.              Available Funds.  Such Buyer has, or will have on or prior to
the Closing, sufficient funds in its possession to permit such Buyer to acquire
and pay for the Common Shares being purchased by such Buyer at the Closing.


 


m.            No
General Solicitation.  Such Buyer did not learn of the investment in
the Common Shares as a result of any public advertising or general
solicitation.


 


5

















 


n.             Brokers
and Finders. 
Other than as contemplated in this Agreement, no Person will have, as a
result of the transaction contemplated by the Transaction Documents, any valid
right, interest or claim against or upon the Company or any Subsidiary for any
commission, fee or other compensation pursuant to any agreement, arrangement or
understanding entered into by or on behalf of such Buyer.


 


3.             REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.


 


The Company represents and warrants, as of the date
of this Agreement and on the Closing Date, to each Buyer, that:


 


a.             Organization
and Qualification; Subsidiaries.  Each of the Company and the Subsidiaries is a
corporation, limited liability company, partnership or other entity and is duly
organized or formed and validly existing in good standing under the laws of the
jurisdiction in which it is incorporated or organized and has the requisite
corporate, partnership, limited liability company or other organizational power
and authority to own its properties and to carry on its business as now being
conducted and as proposed to be conducted by the Company and the
Subsidiaries.  Schedule 3(a) sets
forth a true and correct list of the Subsidiaries and the jurisdiction in which
each is organized or incorporated, together with their respective jurisdictions
of organization and the percentage of the outstanding Capital Stock or other
equity interests of each such entity that is held by the Company or any of the
Subsidiaries.  Other than with respect to
the entities listed on Schedule 3(a), the Company does not directly or
indirectly own any security or beneficial ownership interest, in any other
Person (including through joint venture or partnership agreements) or have any
interest in any other Person.  Except as
set forth on Schedule 3(a), each of the Company and the Subsidiaries is
duly qualified to do business and is in good standing in every jurisdiction in
which its ownership or lease of property or the nature of the business
conducted or proposed to be conducted by the Company and the Subsidiaries will
make such qualification necessary, except where such failure to qualify could
not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.  Except as set
forth in Schedule 3(a), the Company holds all right, title and interest
in and to 100% of the Capital Stock, equity or similar interests of each of the
Subsidiaries, in each case, free and clear of any Liens, including any
restriction on the use, voting, transfer, receipt of income or other exercise
of any attributes of free and clear ownership by a current holder, other than
the Liens set forth on Schedule 3(a), and no such Subsidiary owns
Capital Stock or holds an equity or similar interest in any other Person.


 


b.             Authority;
Authorization; Enforcement; Validity.


 


(i)            Subject
to receipt of the Shareholder Approval (as defined below) (prior to the
issuance of the Common Shares), and the filing with the Secretary of State of
Minnesota of the Restated Charter (prior to the issuance of the Common Shares),
the Company and each of the Subsidiaries has the requisite corporate,
partnership or limited liability company power and authority to enter into and
perform its obligations under this Agreement, including the issuance of the
Common Shares, and under the Registration Rights Agreement, the Management
Services Agreement (as defined below), the Amended and Restated Credit
Agreement and each of the other Transaction Documents and to consummate the
Transactions.


 


6

















 


(ii)           The
execution and delivery of the Transaction Documents by the Company and the
applicable Subsidiaries and the consummation by the Company and the
Subsidiaries of the Transactions, including the issuance of Common Shares and
the election or appointment of the Buyer Designees (as defined below) to the
Company Board pursuant to Section 5(a) hereof, have been duly
authorized by each of the Company Board, the Committee and each of the
Subsidiaries’ respective boards of directors, and no further consent or
authorization is required by or of the Company, any of the Subsidiaries or any
of the Company Board (or any committee thereof, including the Committee) or the
shareholders, any of the Subsidiaries’ boards of directors, other equityholders
or holders of beneficial interests of the Company, except for the Shareholder
Approval.  Without limiting the
foregoing, each of the Company Board and the Committee  has, by the vote of a requisite majority
of the directors serving thereon, (A)(I) determined that it is in the best
interests of the Company and its shareholders, and declared it advisable, to
enter into this Agreement with the Buyers, and (II) approved the
execution, delivery and performance of this Agreement and the consummation of
the Transactions, including the issuance of the Common Shares to the Buyers and
the adoption of a Second Restated Bylaws of the Restated  Bylaws; (B) approved a resolution
adopting the Restated Charter, and resolved to submit to the shareholders of
the Company the Restated Charter for approval at a meeting of the shareholders
of the Company; and (C) resolved to recommend the adoption of the
Proposals by the shareholders of the Company. 
The only votes of the Company’s shareholders required to approve and
adopt the Transaction Documents and the Transactions are, in the case of each
of the Proposals, the affirmative vote of the holders of the greater of (1) a
majority of the voting power of the shares of Common Stock present in person or
represented by proxy and entitled to vote on such business at a duly called
meeting of the Company’s shareholders, and (2) a majority of the voting
power of the minimum number of the shares of Common Stock entitled to vote that
would constitute a quorum for the transaction of such business at the meeting
(the receipt of sufficient votes required to approve all such Proposals is
referred to herein as the “Shareholder
Approval”).


 


(iii)          This
Agreement and the other Transaction Documents dated of even date herewith have
been duly executed and delivered by the Company and, to the extent applicable,
by the Subsidiaries, and constitute the valid and binding obligations of the
Company and the Subsidiaries that are party thereto, enforceable against the
Company and the Subsidiaries, as applicable, in accordance with their
respective terms.  As of the Closing, the
Transaction Documents dated after the date of this Agreement and on or prior to
the Closing Date shall have been duly executed and delivered by the Company
and, to the extent applicable, the Subsidiaries, and shall constitute the valid
and binding obligations of each of the Company and the Subsidiaries that are
party thereto, enforceable against the Company and the Subsidiaries, as
applicable, in accordance with their respective terms.


 


c.             Capitalization.  The authorized Capital
Stock of the Company consists of:


 


(i)            5,000,000
shares of Preferred Stock, of which no shares are issued or outstanding; and


 


7

















 


(ii)           142,500,000
shares of Common Stock, of which:


 


(A)          45,240,763 shares are issued and outstanding
as of the date of this Agreement; and


 


(B)           6,725,797 shares are reserved for issuance
pursuant to the Company’s stock option, restricted stock and employee stock
purchase plans described on Schedule 3(c)(ii)(B) (the “Company Stock Award Plans”), including no
more than 4,853,521 shares issuable pursuant to outstanding awards under the
Company Stock Award Plans as of the date of this Agreement.


 


No shares of
Common Stock or Preferred Stock are reserved for issuance under any plan,
agreement or arrangement, other than shares of Common Stock reserved for
issuance under the Company Stock Award Plans; and except as described in the
foregoing provisions of this Section 3(c), there are no shares of
Capital Stock, Options, Convertible Securities or other equity securities of
the Company authorized, issued or outstanding. 
All of the outstanding or issuable shares of Capital Stock of the
Company have been duly authorized and have been, or upon issuance will be,
validly issued and are, or upon issuance will be, fully paid and nonassessable.


 


Except as set forth on Schedule
3(c):


 


(1)           no shares of the Capital Stock of the Company
or any of the Subsidiaries are subject to preemptive rights or any other
similar rights or any Liens suffered or permitted by the Company or any of the
Subsidiaries;


 


(2)           there are no outstanding Options, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable for, any shares of Capital Stock of the Company
or any of the Subsidiaries, or Contracts by which the Company or any of the
Subsidiaries is or may become bound to issue additional shares of Capital Stock
of the Company or any of the Subsidiaries or Options, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into
or exercisable for, any shares of Capital Stock of the Company or any of the
Subsidiaries;


 


(3)           there are no agreements or arrangements under
which the Company or any of the Subsidiaries is obligated to register the sale
of any of its securities under the 1933 Act;


 


(4)           there are no outstanding securities or
instruments of the Company or any of the Subsidiaries that contain any
redemption or similar provisions, and there are no Contracts by which the
Company or any of the Subsidiaries is or may become bound to redeem a security
of the Company or any of the Subsidiaries, and there are no other shareholder
agreements or similar agreements to which the Company, any of the Subsidiaries
or, to the Company’s Knowledge, any holder of the Company’s Capital Stock is a
party;


 


8

















 


(5)           there are no securities or instruments
containing anti-dilution or similar provisions that will or may be triggered by
the issuance of the Securities;


 


(6)           the Company does not have any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan
or agreement; and


 


(7)           to the Company’s Knowledge, no officer or
director of the Company or beneficial owner of any of the Company’s outstanding
Common Stock has pledged Common Stock in connection with a margin account or
other loan secured by such Common Stock.


 


The Company has
furnished to each Buyer true and correct copies of:


 


(W)         the Third
Restated Articles of Incorporation of the Company, as amended and in effect
(the “Articles of Incorporation”);


 


(X)          the Restated
Bylaws of the Company, as amended and in effect (the “Bylaws”);


 


(Y)           the
organizational documents of each of the Subsidiaries, as amended and in effect;
and


 


(Z)           all documents
and instruments containing the terms of all securities, if any, that, directly
or indirectly, are convertible into, or exercisable or exchangeable for, Common
Stock, and the material rights of the holders thereof in respect thereto.


 


d.             Issuance
of Securities. 
The Securities are duly authorized and, upon issuance in accordance with
the terms of this Agreement, will be validly issued, fully paid and
nonassessable and free from Taxes and Liens with respect to the issuance thereof,
with the holders being entitled to all rights accorded to a holder of Common
Stock.  Assuming the accuracy of the
representations and warranties of the Buyers set forth in Sections 2(a),
2(b), 2(c), 2(d), 2(e), 2(g), 2(i) and 2(m), the issuance by the
Company of the Securities is exempt from registration under the 1933 Act and
any other applicable Securities Laws.


 


e.             No
Conflicts. 
Except as provided on Schedule 3(e), the execution and delivery
of this Agreement and the other Transaction Documents by the Company and each
of the Subsidiaries that is a party thereto, the performance by the Company and
each of such Subsidiaries of its respective obligations hereunder and
thereunder and the consummation by the Company of the Transactions (including
the issuance of the Common Shares) will not:


 


(i)            result
in a violation of the certificate or articles of incorporation, certificate or
articles of organization, bylaws, operating agreement, partnership agreement or
any other governing documents, as applicable, of the Company or any of the
Subsidiaries;


 


(ii)           conflict
with, or constitute a breach or default (or an event which, with the giving of
notice or passage of time or both, constitutes or would constitute a


 


9

















 


breach
or default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or other remedy with respect to, any material
agreement, indenture or instrument to which the Company or any Subsidiary is a
party; or


 


(iii)          result
in a violation of any Law, rule, regulation, order, judgment or decree
(including Securities Laws and the rules and regulations of the Principal
Market (as defined below)) applicable to the Company or any Subsidiary or by
which any property or asset of the Company or any Subsidiary is bound or
affected.


 


Neither the
Company nor any of the Subsidiaries is in violation of any term of its
certificate or articles of incorporation, certificate or articles of
organization, bylaws, operating agreement, partnership agreement or any other
governing document, as applicable. 
Neither the Company nor any of the Subsidiaries is or has been in
violation of any term of or in default under (or with the giving of notice or
passage of time or both would be in violation of or default under) any
Contract, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any Law applicable to the Company or the Subsidiaries, except where
such violation or default could not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect or result in
the acceleration of any Indebtedness or other obligation.  The business of the Company and the
Subsidiaries has not been and is not being conducted, in violation of any Law
of any Governmental Entity except as could not, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.


 


f.              Required Filings and Consents.  The execution, delivery and performance of
this Agreement by the Company and the Subsidiaries, as applicable, and the
consummation by the Company and the Subsidiaries, as applicable, of the
Transactions, including the issuance of the Common Shares to the Buyers, do not
and will not require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Entity or any other Person,
which if not obtained would reasonably be expected, individually or in the
aggregate, to have a Company Material Adverse Effect, other than: (i) the
filing and recordation of the Restated Charter with the Secretary of State of
the State of Minnesota; (ii) applicable requirements of the 1934 Act; (iii) any
filings with, and approvals from, relevant state securities administrators or
related to the blue sky laws of various states; (iv) the filing with the
SEC of the Proxy Statement (as defined below); (v) filings with The NASDAQ
Stock Market (“NASDAQ”); (vi) the
Shareholder Approval; and (vii) those consents, approvals or other
authorizations of, or filings with or notifications to, any Governmental Entity
or any other Person identified in Schedule 3(f)(vii), including the
waiver and consent by GE Money Bank with respect to the Amended and Restated
Private Label Consumer Credit Program Agreement, dated as of December 5,
2005, between the Company and GE Money Bank (the “GE Consent”;
the GE Consent and the items described in clauses (i) through (vi) of
this Section 3(f), collectively are referred to as the “Required Company Consents”).


 


g.             SEC
Documents; Financial Statements.


 


(i)            Since December 31,
2006, the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the 1934 Act.  All of the
foregoing items filed with the SEC (but not those items that merely were furnished
to the SEC) prior to the


 


10

















 


date
this representation is made but after December 30, 2007, together with any
filings made by the Company with the SEC pursuant to the 1933 Act since December 30,
2007, are referred to herein as the “SEC
Documents.”  The Company’s
consolidated balance sheet as of January 3, 2009, as included in the
Company’s annual report on Form 10-K for the period then ended, as filed
with the SEC on March 19, 2009 and amended on Form 10-K/A on May 4,
2009 (the “Most Recent 10-K”), is
referred to herein as the “Most Recent
Balance Sheet.”  A complete
and accurate list of the SEC Documents is set forth on Schedule 3(g)(i).  Each of the SEC Documents was filed with the
SEC via the SEC’s EDGAR system within the time frames prescribed by the SEC for
the filing of such SEC Documents such that each filing was timely filed with
the SEC.  As of their respective dates,
the SEC Documents complied in all material respects with the Securities Laws.  None of the SEC Documents, at the time they
were filed with the SEC, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.  Since
the filing of each of the SEC Documents, no event has occurred that would
require an amendment or supplement to any such SEC Document and as to which such
an amendment or supplement has not been filed and made publicly available on
the SEC’s EDGAR system no less than five Business Days prior to the date this
representation is made.  The Company has
not received any written comments from the SEC staff that have not been
resolved to the satisfaction of the SEC staff.


 


(ii)           As of
their respective filing dates, the consolidated financial statements of the
Company and the Subsidiaries included in the SEC Documents complied as to form
in all material respects with applicable accounting requirements and the
Securities Laws with respect thereto. 
Such financial statements have been prepared in accordance with GAAP,
consistently applied, during the periods involved (except (A) as may be
otherwise indicated in such financial statements or the notes thereto, or (B) in
the case of unaudited interim statements, to the extent they may exclude
footnotes as permitted under SEC rules) and fairly present in all material
respects the financial position of the Company and the Subsidiaries as of the
dates thereof and the results of their operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments that are not material individually or in the
aggregate).


 


(iii)          Since December 31,
2006, none of the Company, the Subsidiaries and their respective officers and
directors has made any filing with the SEC, issued any press release or made,
distributed, paid for or approved (or engaged any other Person to make or
distribute) any other public statement, report, advertisement or communication
on behalf of the Company or any of the Subsidiaries or otherwise relating to
the Company or any of the Subsidiaries that contains any untrue statement of a
material fact or omits any statement of material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
are or were made, not misleading or has provided any other information to any
Buyer, including information referred to in Section 2(d), that,
considered in the aggregate, contains any untrue statement of a material fact
or omits to state any material fact necessary in order to make the statements


 


11

















 


therein,
in the light of the circumstances under which they are or were made, not
misleading. 


 


(iv)          Except
as required by the Amended and Restated Credit Agreement (as defined in Section 4(g)),
the Company is not required to file any agreement, note, lease, mortgage, deed
or other instrument entered into prior to the date this representation is made
and in effect on the date this representation is made and to which the Company
or any Subsidiary is a party or by which the Company or any Subsidiary is bound
that has not been previously filed as an exhibit (including by way of
incorporation by reference) to its reports filed or made with the SEC under the
1934 Act.


 


(v)           There
is no material transaction, arrangement or other relationship between the
Company and an unconsolidated or other off-balance-sheet entity that is required
to be disclosed by the Company in its reports pursuant to the 1934 Act that has
not been so disclosed in the SEC Documents at least five Business Days prior to
the date of this Agreement.


 


(vi)          Since December 31,
2006, there have been no internal or SEC inquiries or investigations (formal or
informal) regarding accounting or revenue recognition discussed with, reviewed
by or initiated at the direction of any executive officer, board of directors
or any committee thereof of the Company or any of the Subsidiaries.


 


(vii)         The
Company has never been a “shell company” (as defined in Rule 12b-2 under
the 1934 Act).


 


h.             Sarbanes-Oxley
Compliance; Internal Accounting Controls; Disclosure Controls and Procedures;
Books and Records.


 


(i)            The
Company and the Subsidiaries are in all material respects in compliance with
the applicable provisions of the Sarbanes-Oxley Act of 2002, as amended, and
the rules and regulations thereunder (collectively, “Sarbanes-Oxley”).


 


(ii)           Since December 31,
2006, neither the Company nor any of the Subsidiaries nor any director or
officer of the Company or any of the Subsidiaries has received or otherwise had
or obtained Knowledge of any complaint, allegation, assertion or claim, whether
written or oral, regarding the accounting or auditing practices, procedures,
methodologies or methods of the Company or any of the Subsidiaries or its
internal accounting controls, including any complaint, allegation, assertion or
claim that the Company or any of the Subsidiaries has engaged in any improper
accounting or auditing practices.


 


(iii)          Since December 31,
2006, no attorney representing the Company or any of the Subsidiaries, whether
or not employed by the Company or any of the Subsidiaries, has reported
evidence of a material violation of Securities Laws, breach of fiduciary duty
or similar violation by the Company or any of the Subsidiaries or any of their
respective officers, directors, employees or agents to their respective boards
of directors or any committee thereof or pursuant to Section 307 of
Sarbanes-Oxley.


 


12

















 


(iv)          The
Company has kept, and has caused each of the Subsidiaries to, at all times
since December 31, 2006, keep, books, records and accounts with respect to
all of such Person’s business activities, in accordance with GAAP consistently
applied.  The Company and each of the
Subsidiaries maintains a system of internal accounting controls sufficient to
provide reasonable assurance that (A) transactions are executed in
accordance with management’s general or specific authorizations, (B) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset and liability accountability, (C) access
to assets or incurrence of liability is permitted only in accordance with
management’s general or specific authorization and (D) the recorded
accountability for assets and liabilities is compared with the existing assets
and liabilities at reasonable intervals and appropriate action is taken with
respect to any differences.


 


(v)           The
Company has timely filed and made publicly available on the SEC’s EDGAR system
no less than five Business Days prior to the date of this representation, all
certifications and statements required by (A) Rule 13a-14 or Rule 15d-14
under the 1934 Act and (B) Section 906 of Sarbanes-Oxley with respect
to any SEC Documents.


 


(vi)          The
Company maintains disclosure controls and procedures required by Rule 13a-15
or Rule 15d-15 under the 1934 Act; such disclosure controls and procedures
are, and at all times have been, effective to ensure that the information
required to be disclosed by the Company in the reports that it files with or
submits to the SEC (A) is recorded, processed, summarized and reported
accurately within the time periods specified in the SEC’s rules and forms
and (B) is accumulated and communicated to the Company’s management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.


 


(vii)         The
Company maintains internal control over financial reporting required by Rule 13a-14
or Rule 15d-14 under the 1934 Act; and such internal control is effective
and does not have any material weaknesses or significant deficiencies.


 


i.              Absence of Certain Changes.  Since January 3, 2009, neither the
Company nor any of the Subsidiaries has declared or paid any dividends or sold
any assets outside of the ordinary course of business.  Since January 3, 2009, except as set
forth on Schedule 3(i), neither the Company nor any of the Subsidiaries
has had any capital expenditures outside the ordinary course of its
business.  Since January 3, 2009,
except as set forth on Schedule 3(i), neither the Company nor any of the
Subsidiaries has had or made, as applicable, any (i) grant or provision of
severance or termination payments or benefits to any director or officer of the
Company or any Subsidiary or employee, independent contractor or consultant of
the Company or any of the Subsidiaries, (ii) material increase in the
compensation, perquisites or benefits payable to any director, officer,
employee, independent contractor or consultant of the Company or any of the
Subsidiaries, (iii) grant of equity or equity-based awards that may be
settled in shares of Common Stock, Preferred Stock or any other securities of
the Company or any Subsidiary or the value of which is linked directly or
indirectly, in whole or in part, to the price or value of any shares of Common
Stock, Preferred Stock or other securities of the Company or any Subsidiary, (iv) acceleration
in the vesting or payment of compensation payable or benefits provided or to


 


13

















 


become payable or provided to any current or
former director, officer, employee, independent contractor or consultant, (v) change
in the terms of any outstanding Option with respect to any shares of the
Company’s Common Stock or any other securities of the Company or (vi) establishment
or adoption of any new arrangement that would be a Company Benefit Plan or
termination or material amendment of any existing Company Benefit Plan (other
than changes made in the ordinary course of business consistent with past
practice or as may be necessary to comply with applicable Laws, in either case
that do not materially increase the costs of any such Company Benefit Plans).


 


j.              Absence of Litigation.  Except as set forth on Schedule 3(j), (i) there
is no material action, suit, proceeding, inquiry or investigation (“Litigation”) before or by any court, public board,
Governmental Entity, self-regulatory organization or body pending or, to the
Company’s Knowledge, threatened against or affecting the Company or any of the
Subsidiaries, and (ii) to the Knowledge of the Company, no director or
officer of the Company or any of the Subsidiaries has been involved in
securities-related Litigation since January 1, 2004.


 


k.             Full
Disclosure; No Undisclosed Events, Liabilities, Developments or Circumstances.  Since January 3,
2009, there has been no Company Material Adverse Effect and no circumstances
exist that, in the aggregate, would reasonably be expected to be, cause or have
a Company Material Adverse Effect. 
Except (i) as and to the extent disclosed or reserved against on
the Most Recent Balance Sheet or specifically described in the notes to the
financial statements set forth in the Most Recent 10-K, (ii) as incurred
since the date thereof in the ordinary course of business consistent with past
practice, (iii) as incurred on the Closing Date under the Transaction
Documents, or (iv) as set forth on Schedule 3(k), neither the
Company, nor any of the Subsidiaries has any material liabilities or
obligations of any nature, whether fixed or unfixed, known or unknown, secured
or unsecured, absolute, accrued, contingent or otherwise and whether due or to
become due.  To the Company’s Knowledge,
no representation or warranty or other statement made by the Company in this
Agreement or any of the other Transaction Documents, the Schedules hereto or
any certificate or instrument delivered pursuant to this Agreement contains any
untrue statement or omits to state a material fact necessary to make any such
statement, in light of the circumstances in which it was made, not misleading.


 


l.              Acknowledgment Regarding Buyers’ Purchase of Common Shares.  The Company acknowledges
and agrees that each Buyer is acting solely in the capacity of an arm’s length
purchaser with respect to the Company in connection with this Agreement and the
other Transaction Documents and the Transactions.  The Company further acknowledges that no
Buyer is acting as a financial advisor or fiduciary of any party to this
Agreement or any of the other Transaction Documents (or in any similar
capacity) with respect to this Agreement and the other Transaction Documents
and the Transactions, and any advice given by any Buyer or any of its
representatives or agents in connection with the Transaction Documents and the
Transactions is merely incidental to such Buyer’s purchase of the Securities.
The Company further represents to each Buyer that the decision of the Company
to enter into the Transaction Documents has been based solely on the
independent evaluation by such Person and its representatives.


 


m.            No
General Solicitation.  Neither the Company nor any of its
Affiliates, nor any Person acting on the behalf of any of the foregoing, has
engaged or will engage in any form of general solicitation or general
advertising (within the meaning of Regulation D under the 1933


 


14
















 


Act), including advertisements, articles,
notices, or other communications published in any newspaper, magazine or
similar media or broadcast over radio, television or internet or any seminar or
meeting whose attendees have been invited by general solicitation or general
advertising, in connection with the offer or sale of the Securities.


 


n.             No
Integrated Offering.  Neither the Company nor any of its
Affiliates, nor any Person acting on the behalf of any of the foregoing, has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to purchase any security, under circumstances that would require
registration of any of the Securities under the 1933 Act or cause this offering
of the Securities to be integrated with prior offerings by the Company for
purposes of the 1933 Act, or the shareholder approval requirements of the
Principal Market (as defined in Section 3(u)), or any other
regulatory or self-regulatory authority.


 


o.             Benefit
Plans.


 


(i)            Schedule
3(o)(i) contains a true, complete and
correct list of each Material Company Benefit Plan. Each Company Stock Award
Plan is denoted as such on Schedule 3(o)(i).  No Company Benefit Plan is a “multiemployer
plan” (within the meaning of Section 3(37) of ERISA) (a “Multiemployer Plan”) or a “multiple
employer plan” (within the meaning of Section 4063 of ERISA) (a “Multiple Employer Plan”).  No entity other than the Company and the
Subsidiaries is a member of the Company’s “controlled group” (within the
meaning of Section 414 of the Code).


 


(ii)           With
respect to each Material Company Benefit Plan, the Company has provided or made
available to the Buyers true, complete and correct copies of (A) all such
plan texts and agreements and related trust agreements (or other funding
vehicles); (B) the most recent summary plan descriptions and material
employee communications concerning the extent of the benefits provided under a
Material Company Benefit Plan; (C) the three most recent annual reports
(including all schedules); (D) the three most recent annual audited
financial statements and opinions; (E) if the plan is intended to qualify
under Section 401(a) of the Code, the most recent determination
letter received from the Internal Revenue Service (the “IRS”); and (vi) all material
communications with any Governmental Entity given or received since January 1,
2003. There is no present intention that any Material Company Benefit Plan be
materially amended, suspended or terminated, or otherwise modified to adversely
change benefits (or the level thereof) under any Company Benefit Plan at any
time within the 12 months immediately following the date of this Agreement.


 


(iii)          Since December 31,
2007, there has not been any amendment or change in interpretation relating to
any Company Benefit Plan, which would, in the case of any Material Company
Benefit Plan, materially increase the cost of administering or providing
benefits under such Material Company Benefit Plan, or, in the case of any
Company Benefit Plan other than a Material Company Benefit Plan, materially
increase the aggregate cost to the Company of all Company Benefit Plans that
are not Material Company Benefit Plans.


 


15

















 


(iv)          No
Material Company Benefit Plan is subject to Title IV or Section 302 or 303
of ERISA or Section 412, 430 or 4971 of the Code and the Company and each
of the Subsidiaries will have no liability with respect to any “employee
benefit plan” (as defined in Section 3(3) of ERISA) which is subject
to Title IV or Section 302 or 303 of ERISA or Section 412, 430 or
4971 of the Code.  Neither the Company
nor any of the Subsidiaries has, at any time during the last six years,
contributed to or been obligated to contribute to, or had any liability with
respect to, any Multiemployer Plan or Multiple Employer Plan.


 


(v)           Each
Company Benefit Plan that requires registration with a Governmental Entity has
been properly registered, except where any failure to register would not
reasonably be expected to result in material liability to the Company. Each
Company Benefit Plan which is intended to qualify under Section 401(a) of
the Code has been issued a favorable determination letter by the IRS with
respect to such qualification, its related trust has been determined to be
exempt from taxation under Section 501(a) of the Code and no event
has occurred since the date of such determination that would reasonably be
expected to adversely affect such qualification or exemption. Each Company
Benefit Plan has been established and administered in compliance with its terms
and with the applicable provisions of ERISA, the Code and other applicable
Laws, except where such noncompliance would not reasonably be expected to
result in material liability to the Company. No event has occurred and no
condition exists that would subject the Company by reason of its affiliation
with any current or former member of its “controlled group” (within the meaning
of Section 414 of the Code) to any material (A) Tax, penalty, fine, (B) Lien
(other than a Permitted Lien) or (C) other liability imposed by ERISA, the
Code or other applicable Laws.


 


(vi)          There
are no (A) Company Benefit Plans under which welfare benefits are provided
to past employees or made available to present employees of the Company and the
Subsidiaries beyond their retirement or other termination of service, other
than coverage mandated by the Consolidated Omnibus Budget Recommendation Act of
1985, as amended or Section 4980B of the Code, the cost of which is fully
paid by such employees or their dependents; or (B) unfunded Company
Benefit Plan obligations with respect to any past or present employees of the
Company and the Subsidiaries that are not fairly reflected by reserves shown on
the most recent financial statements contained in the SEC Documents, except as
would not have, or reasonably be expected to have, a Company Material Adverse
Effect.


 


(vii)         Except
as set forth on Schedule 3(o)(vii), neither the execution and delivery
of this Agreement nor the consummation of the Transactions will (either alone
or in combination with another event): (A) result in any payment becoming
due, or increase the amount of any compensation or benefits due, to any current
or former employee of the Company and the Subsidiaries or with respect to any
Company Benefit Plan; (B) increase any benefits otherwise payable under
any Company Benefit Plan; (C) result in the acceleration of the time of
payment or vesting of any such compensation or benefits; (D) result in a
non-exempt “prohibited transaction” within the meaning of Section 406 of
ERISA or Section 4975 of the Code; (E) limit or restrict the right of
the Company to merge, amend or terminate any of the Company Benefit Plans; or (F) result


 


16

















 


 in the payment of any amount that would,
individually or in combination with any other such payment, reasonably be
expected to constitute an “excess parachute payment,” as defined in Section 280G(b)(1) of
the Code.


 


(viii)        None
of the Company, any of the Subsidiaries, or any Company Benefit Plan, nor to
the Knowledge of the Company, any “disqualified person” (as defined in Section 4975
of the Code) or “party in interest” (as defined in Section 3(18) of
ERISA), has engaged in any non-exempt prohibited transaction (within the
meaning of Section 4975 of the Code or Section 406 of ERISA) which
has resulted or would reasonably be expected to result in any material
liability to the Company and the Subsidiaries, taken as a whole. With respect
to any Material Company Benefit Plan (A) no claims, actions, suits, demand
letters, judicial, administrative or regulatory proceedings, or hearings,
notices of violation, or investigations before any Governmental Entity
(including any administrative investigation, audit or other proceeding by the
Department of Labor or the IRS but excluding routine claims for benefits in the
ordinary course) are pending or, to the Knowledge of the Company, threatened,
and (B) to the Knowledge of the Company, no events or conditions have
occurred or exist that would reasonably be expected to give rise to any such
claims, actions, suits, demand letters, judicial, administrative or regulatory
proceedings, or hearings, notices of violation, or investigations before any
Governmental Entity, except in each case such as would not reasonably be
expected to have a Company Material Adverse Effect.


 


(ix)           Each “nonqualified
deferred compensation plan” (as defined in Section 409A(d)(1) of the
Code) of the Company is in a form which complies with the requirements of Code Section 409A
so that the additional tax (described in Code Section 409A(a)(1)(B)) will
not be assessed with respect to amounts that are or may become due thereunder.
Each Company Option is exempt from being considered deferred compensation for
purposes of Code Section 409A as a result of compliance with Treasury
Regulation Section 1.409A-1(b)(5)(i)(A).


 


(x)            Every
Option issued by the Company was issued in compliance with the terms of the
plan under which it was issued and in compliance with applicable laws, rules and
regulations, including the rules and regulations of NASDAQ, and (ii) has
been accounted for in accordance with GAAP and otherwise been disclosed
accurately and completely and in accordance with the requirements of the 1933
Act and the 1934 Act and the rules and regulations thereunder, including Rule 402
of Regulation S-K, and the Company has paid, or properly reserved for, all
taxes payable with respect to each such Option (including the issuance and
exercise thereof), and has not deducted any amounts from its taxable income
that it is not entitled to deduct with respect to any such Option (including
the issuance and exercise thereof).


 


(xi)           Each
Company Benefit Plan that has been adopted or maintained by the Company or any
of its Affiliates, whether informally or formally, or with respect to which the
Company or any of its Affiliates will or may have any liability, for the
benefit of employees of the Company or any of the Subsidiaries who perform
services outside the United States (each a “Company
International Employee Plan”) has been established, maintained and
administered in material compliance with its terms and


 


17

















 


conditions
and with the requirements prescribed by any and all statutory or regulatory
laws that are applicable to such Company International Employee Plan.  No Company International Employee Plan is a
defined benefit pension plan. 
Furthermore, no Company International Employee Plan has unfunded
liabilities that, as of the Closing, will not be offset by insurance or fully
accrued on the Company’s balance sheets included in or incorporated by
reference into the SEC Documents.  Except
as required by law, no condition exists that would prevent the Company from
terminating or amending any Company International Employee Plan at any time for
any reason without liability to the Company or any of its Affiliates (other
than ordinary administration expenses or routine claims for benefits).  Except as would not reasonably be expected to
result in a material liability to the Company, each Company International
Employee Plan (A) has been maintained in accordance with all applicable
requirements, and (B) is intended to qualify for special tax treatment,
meets all requirements for such treatment.


 


p.             Employee
Relations.  Neither the Company nor any of the
Subsidiaries is involved in any labor union dispute nor, to the Knowledge of
the Company, is any such dispute threatened. 
None of the employees of the Company or any of the Subsidiaries is or
has been a member of a union that relates to such employee’s relationship with
the Company, and neither the Company nor any of the Subsidiaries is a party to
any collective bargaining agreement.  No
executive officer (as defined in Rule 3b-7 under the 1934 Act), nor any
other individual whose termination would be required to be disclosed on a
current report on Form 8-K, has notified the Company that such individual
intends to leave the Company or otherwise terminate such individual’s
employment with the Company.  To the
Knowledge of the Company, no executive officer of the Company is, or has been,
in violation of any material term of any employment Contract, confidentiality,
disclosure or proprietary information agreement or non-competition agreement,
or any other Contract or any restrictive covenant, and the employment of each
such individual does not, has not and will not subject the Company or any of
the Subsidiaries to any liability with respect to any of the foregoing
matters.  To the Knowledge of the
Company, and each of the Subsidiaries, it is and has been since December 31,
2006, in compliance in all material respects with all Laws relating to
employment and employment practices, terms and conditions of employment and
wages and hours.


 


q.             Intellectual
Property Rights.


 


(i)            The
Company or one of the Subsidiaries owns all right, title and interest in and
to, or has a valid license to use and distribute, in the manner in which it is
used and/or distributed, all Intellectual Property used or distributed in
connection with the business of the Company and the Subsidiaries (“Company IP”). The consummation of the
Transactions will not impair the validity, enforceability, ownership or right
of the Company or any of the Subsidiaries to use or distribute, in the manner
in which it is used and/or distributed, any Intellectual Property currently
owned, used or distributed by the Company or any of the Subsidiaries.


 


(ii)           Schedule
3(q)(ii) sets forth all registered and
material unregistered trademarks and service marks, trademark and service mark
registration applications, domain name registrations, copyright registrations,
copyright registration applications,


 


18

















 


patents
and patent applications, currently owned by, or exclusively licensed to, the Company
or any of the Subsidiaries (“Listed IP”).


 


(iii)          Each
trademark registration, service mark registration, copyright registration,
domain name registration and patent that is owned by the Company or any of the
Subsidiaries has been maintained in compliance in all material respects with
all legal requirements applicable to post-filing maintenance and
post-registration maintenance thereof (including the timely post-registration
filing of affidavits of use and incontestability and renewal applications with
respect to trademarks, and the payment of filing, examination and annuity and
maintenance fees with respect to patents). All Intellectual Property owned by
the Company or the Subsidiaries (“Owned IP”)
is owned free and clear of all Liens, except for the Liens set forth on Schedule
3(q)(iii) and the Permitted Liens. Except as set forth on Schedule
3(q)(iii), no Owned IP is currently involved in any opposition,
cancellation, interference, reissue or re-examination proceeding, or other
challenge to its validity or enforceability, and no such action has been
threatened in writing against the Company within the three years prior to
the date of this Agreement. To the Knowledge of the Company, neither the
Company’s in-house legal counsel nor outside intellectual property counsel
retained by the Company has formally concluded that any of the Listed IP is, or
may be, invalid or unenforceable.


 


(iv)          There
are no, and have not been within the previous three years any, claims, actions,
causes of action, proceedings, judgments or investigations  pending or instituted against the Company
or any of the Subsidiaries or, to the Knowledge of the Company, threatened by
any Person, contesting or challenging the right of the Company or any of the
Subsidiaries to use or distribute, or the validity or enforceability of, any of
the Company IP or alleging that any Company IP infringes, misappropriates,
dilutes or otherwise violates the Intellectual Property of any third
party.  Neither the Company nor any of
the Subsidiaries has received any notice (written or oral) claiming that it has
infringed, misappropriated, diluted or otherwise violated any Intellectual
Property of any third party. The Company has not undertaken or authorized legal
counsel to undertake any investigation as to whether any Company IP infringes,
misappropriates or otherwise violates any third party Intellectual Property
and, without limiting the generality of the foregoing, the Company has not
received a non-infringement legal opinion with respect to any Company IP.
Except as set forth in Schedule 3(q)(iv), to the Knowledge of the
Company, no Person is infringing, misappropriating, diluting or otherwise
violating any of the Owned IP.


 


(v)           The
Company and the Subsidiaries make reasonable efforts to secure ownership, protect
and maintain the Owned IP, including, (A) requiring each employee and
independent contractor involved in the development of any Intellectual Property
on behalf of the Company or the Subsidiaries to assign all rights, title and
interest in and to such Intellectual Property to the Company or the
Subsidiaries, as applicable, and (B) assuring that all agreements granting
to third parties the right to manufacture or distribute products under the
Company or any of the Subsidiaries trademarks give the Company or the
Subsidiaries rights to control the quality of such products sold under the
agreements. To the Knowledge of the Company, there has been


 


19

















 


no
material unauthorized disclosure of any confidential information or trade
secrets used in connection with the conduct of the business of the Company or
any Subsidiary.


 


(vi)          Except
as set forth on Schedule 3(q)(vi), none of the products of the Company
or any Subsidiary contain any software commonly referred to as “open source,” “free”
or “public library” software (such as, but not limited to, software licensed
under the GNU General Public License, BSD License or Apache) (collectively, “Open Source Software,” and all licenses
under which such Open Source Software is used is herein, collectively, the “Open Source Licenses”).  Except as set forth on Schedule 3(q)(vi),
(A) the Company and the Subsidiaries have complied with all of the
material requirements of the Open Source Licenses, including, all notice
requirements of the Open Source Licenses, (B) none of the Open Source
Software as incorporated in any product of the Company or any Subsidiary has
been modified by either the Company or any of the Subsidiaries, and (C) neither
the Company nor any of the Subsidiaries is required to provide any source code
for any product of the Company or any Subsidiary to any party pursuant to any
of the Open Source Licenses or as a result of using any of the Open Source
Software.


 


(vii)         The
computer software, hardware, systems and databases used internally in, or
outsourced to others for, the operation of the businesses of the Company and
the Subsidiaries, has not suffered any material failures, errors or breakdowns
in within the past 12 months which have caused any substantial disruption or
interruption in their business.


 


(viii)        The
Company and the Subsidiaries are in compliance in all material respects with
applicable Laws relating to data protection and privacy and their own privacy
policies. Except as set forth on Schedule 3(q)(viii), neither the
Company nor the Subsidiaries have been the subject of a security breach which,
under any applicable Law, required notice thereof to any Person. To the Company’s
Knowledge, the Company has not experienced any such breach of security of personally
identifiable information maintained, processed or transmitted by the Company
whether or not such security breach required notice thereof to any Person under
any applicable Law.


 


r.              Environmental Laws.  To the Knowledge of the Company, each of the Company
and the Subsidiaries (i) is, and has at all times been, in compliance with
any and all, and has not violated any, Environmental Laws, (ii) has no,
and has never had any, liability for failure to comply with any Environmental
Law, (iii) has received all permits, licenses or other approvals required
of it under applicable Environmental Laws to conduct its business as presently
conducted, and (iv) is in compliance with all terms and conditions of any
such permit, license or approval.


 


s.             Insurance.  Schedule 3(s) sets
forth a list of all material insurance policies of the Company and each
Subsidiary (including the insurer, the type of policy and the policy limits)
relating to the business of the Company and each Subsidiary.  The Company and each of the Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and the
Subsidiaries are engaged.  Neither the
Company


 


20

















 


nor any such Subsidiary has been refused any
insurance coverage sought or applied for, and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not reasonably be expected to have a Company Material
Adverse Effect.


 


t.              Regulatory Permits.  To the Company’s Knowledge, the Company and
the Subsidiaries possess all certificates, authorizations, approvals, licenses
and permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses as conducted at
the time this representation is made (“Permits”), and
neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such Permit.  The Company and the Subsidiaries have no
reason to believe that they will not be able to obtain necessary Permits as and
when necessary to enable the Company and the Subsidiaries to conduct their
respective businesses.


 


u.             Principal
Market.  The
Company is not in violation of any of the rules, regulations or requirements of
the NASDAQ Global Select Market (the “Principal Market;”
provided  however, that, if at any time after the date of this
Agreement the principal national stock exchange or trading market for Common
Stock is other than the NASDAQ Global Select Market, the term “Principal Market” shall at such time mean such other
national stock exchange or trading market) and has no Knowledge of any facts or
circumstances which would reasonably lead to delisting or suspension, or
termination of the trading of, the Common Stock by the Principal Market in the
foreseeable future.  Since December 30,
2006, (i) the Common Stock has been quoted on the Principal Market, (ii) trading
in the Common Stock has not been suspended by the SEC or the Principal Market
and (iii) the Company has received no communication, written or oral, from
the SEC or the Principal Market regarding the suspension or delisting, or
termination of the trading, of the Common Stock from the Principal Market.


 


v.             Tax
Status.


 


(i)            The
Company and each of the Subsidiaries (A) has made or filed all federal,
state, local and foreign income and all other Tax returns, reports and
declarations required by any jurisdiction to which it is subject and all such
Tax returns are true, correct and complete in all material respects, (B) has
paid fully and timely all Taxes and other governmental assessments and charges
shown or determined to be due on such returns, reports and declarations, except
those being contested in good faith and for which the Company has made
appropriate reserves on its books, and (C) has set aside on its books
provisions reasonably adequate for the payment of all Taxes for periods
subsequent to the periods to which such returns, reports or declarations
(referred to in clause (A) above) apply. 
There are no unpaid Taxes claimed to be due from the Company or any of
the Subsidiaries by the taxing authority of any jurisdiction, and, to the
Company’s Knowledge, there is no basis for any such claim.


 


(ii)           Except
as set forth on Schedule 3(v)(ii), there are no outstanding agreements
extending or waiving the statutory period of limitations applicable to any
claim for, or the period for the collection, assessment or reassessment of,
Taxes due from the Company or any of the Subsidiaries for any taxable period
and no request for any


 


21

















 


such
waiver or extension is currently pending. 
The Company has not received any requests for information by any Tax
authority that are currently outstanding that would reasonably be expected to
adversely affect in any material respect the Taxes of the Company or any of the
Subsidiaries.


 


(iii)          Except
as set forth on Schedule 3(v)(iii), no audit or other proceeding by any
Governmental Entity is pending or, to the Knowledge of the Company, threatened
with respect to any Taxes due from or with respect to the Company or any of the
Subsidiaries.


 


(iv)          Neither
the Company nor any of the Subsidiaries is a party to any Tax sharing or
similar Tax agreement (other than an agreement exclusively between or among the
Company and the Subsidiaries) pursuant to which it will have any obligation to
make any payments on account of indemnification for Taxes.  Neither the Company nor any of the
Subsidiaries has any liability as a result of being or having been a member of
an affiliated, consolidated, combined or unitary group, other than a group of
which the Company and the Subsidiaries are currently members, or as a result of
a Tax sharing, Tax indemnity or Tax allocation agreement.


 


(v)           Neither
the Company nor any of the Subsidiaries has distributed stock of another Person
or, to the Company’s Knowledge, had its stock distributed by another Person in
a transaction that was intended to be governed in whole or in part by Section 355
or 361 of the Code in the two years prior to the date of this Agreement.


 


(vi)          To the
Company’s Knowledge, neither the Company nor any of the Subsidiaries will be
required based upon actions taken by the Company or any of the Subsidiaries
prior to the Closing to include any item of income in, or exclude any item of
deduction from, taxable income for any taxable period (or portion thereof)
ending after the Closing Date as a result of any (A) change in method of accounting
for a taxable period ending on or prior to the Closing Date, (B) “closing
agreement” as described in Section 7121 of the Code (or any corresponding
or similar provision of state, local or foreign income Tax law) executed on or
prior to the Closing Date, (C) installment sale or open transaction
disposition made on or prior to the Closing Date or (D) prepaid amount
received on or prior to the Closing Date.


 


(vii)         Neither
the Company nor any of the Subsidiaries is a party to any understanding or arrangement
described in Section 6111(d) or Section 6662(d)(2)(C)(ii) of
the Code, or has “participated” in a “reportable transaction” within the
meaning of Treasury Regulations Section 1.6011-4 (without regard to Section (b)(3) thereof)
(each a “Prohibited Transaction”).


 


(viii)        Neither
the Company nor any of the Subsidiaries has participated in or cooperated with
an international boycott within the meaning of Section 999 of the Code or
been requested to do so in connection with any transaction or proposed transaction.


 


22

















 


(ix)           Neither
the Company nor any of the Subsidiaries is a “United States real property
holding corporation” (“USRPHC”) as
that term is defined in Section 897(c)(2) of the Code, and the
Treasury Regulations promulgated thereunder.


 


(x)            The
Company has provided or made available to Buyer true, complete and correct
copies of (A) all material Tax returns filed by the Company or any of the
Subsidiaries for Tax years ending in 2005 and thereafter and (B) all
material ruling requests, private letter rulings, notices of proposed
deficiencies, closing agreements, settlement agreements, and similar documents
sent to or received by the Company or any of the Subsidiaries relating to
Taxes.


 


w.            Transactions
With Related Parties.  Except as set forth on Schedule 3(w),
there have been no transactions that are required to be reported under 17
C.F.R. 229.404(a) (“Related Party Transactions”),
that have not already been disclosed in the SEC Documents.


 


x.             Application
of Takeover Protections; Rights Agreement.  The Company, the Company Board and the
Committee have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, or other
similar takeover, anti-takeover, moratorium, fair price, interested shareholder
or similar provision under the Articles of Incorporation or any certificates of
designations or the Laws of the State of Minnesota to the Transactions, the
Company’s issuance of the Securities in accordance with the terms hereof and
any Buyer’s ownership of the Securities. 
The Company has not adopted a shareholder rights plan or similar
arrangement relating to accumulations of beneficial ownership of Common Stock
or a change in control of the Company.


 


y.             Foreign
Corrupt Practices. 
Neither the Company, nor any of the Subsidiaries, nor to the Knowledge
of the Company, any director, officer, agent, employee or other person acting
on behalf of the Company or any of the Subsidiaries has, in the course of its
actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.


 


z.             Outstanding
Indebtedness; Liens.  Except as set forth on Schedule 3(z)(i),
(i) neither the Company nor any of the Subsidiaries has any, nor upon
consummation of the Transactions will have any, outstanding Indebtedness, (ii) there
are no, and upon consummation of the Transactions there will not be any, Liens
on any of the assets of the Company and the Subsidiaries other than Permitted
Liens, and (iii) there are no, and upon consummation of the Transactions
there will not be any, financing statements securing obligations of any amounts
filed against the Company or any of the Subsidiaries or any of their respective
assets.  Other than the “Defaults” and “Events
of Default” (each as defined in the Existing Credit Agreement (as defined
below)) identified on Schedule 3(z)(ii) (collectively, the “Existing Credit Defaults”), there are no other “Defaults” or
“Events of Default.”


 


23

















 


aa.           Real
Property. 
Except as set forth on Schedule 3(aa)(i), neither the Company nor
any of the Subsidiaries owns in fee any real property.  All of the Real Property Leases (as defined
below) are valid and in full force and effect and are enforceable against all
parties thereto.  Neither the Company nor
any of the Subsidiaries nor, to the Company’s Knowledge, any other party
thereto is in default in any material respect under any of such Real Property
Leases and no event has occurred which with the giving of notice or the passage
of time or both could constitute a default under, or otherwise give any party
the right to terminate, any of such Real Property Leases, or could adversely
affect the Company’s or any of the Subsidiaries’ interest in and title to the
Real Property subject to any of such Real Property Leases.  Except as set forth on Schedule 3(aa)(ii),
no Real Property Lease is subject to termination, modification or acceleration
as a result of the sale of the Common Shares or any of the other
Transactions.  For purposes hereof, “Real Property Lease” means each lease and other agreement
with respect to which the Company or any of the Subsidiaries is a party or
otherwise bound or affected with respect to the Real Property, except
easements, rights of way, access agreements, surface damage agreements, surface
use agreements or similar agreements that pertain to Real Property that is
contained wholly within the boundaries of any leased Real Property; and “Real Property” means all the real property, facilities and
fixtures that (i) are leased or, in the case of fixtures, otherwise owned
or possessed by the Company or any of the Subsidiaries, (ii) in connection
with which the Company or any of the Subsidiaries has entered into an option
agreement, participation agreement or acquisition agreement or (iii) the
Company or any of the Subsidiaries has agreed to lease or otherwise acquire or
may be obligated to lease or otherwise acquire in connection with the conduct
of its business.


 


bb.          Personal
Property. 
The Company and the Subsidiaries have good and marketable title to all
of the personal property owned by them that are material to their businesses,
in each case free and clear of any Lien, other than Permitted Liens, and holds
any leased personal property under valid and enforceable leases with no
exceptions that would materially interfere with the use made thereof by them
(the “Assets”).  The Assets include all personal property
necessary for the conduct of the Company’s and the Subsidiaries’ businesses as
presently proposed to be conducted.  The
Assets that are facilities, fixtures, equipment, and other personal property
have been maintained in accordance with normal industry practice, and are in
good operating condition and repair (subject to normal wear and tear), and are
suitable for the purposes for which they are now used and proposed to be
used.  There are no existing agreements,
options, commitments or rights with, of or to any Person to acquire any such
Assets, or any interests therein, that would be material to the business of the
Company or any of the Subsidiaries.


 


cc.           Contracts.


 


(i)            As of
the date of this Agreement, except for those Contracts listed on Schedule
3(cc)(i) or as an exhibit to the Most Recent 10-K (the “Company Contracts”), neither the Company
nor any of the Subsidiaries is a party to or bound by any Contract: (A) which
is a “material contract” (as such term is defined in Item 601(b)(10) of
Regulation S-K promulgated under the 1933 Act) to be performed in full or in
part after the date of this Agreement; (B) which constitutes a Contract
relating to Indebtedness for borrowed money (whether incurred, assumed,
guaranteed or secured by any asset) by it; (C) which constitutes a
Contract relating to the deferred purchase price


 


24
















 


of
property (whether incurred, assumed, guaranteed or secured by any asset) in
excess of $250,000; (D) with any sole source supplier material to the
conduct of the business of the Company or the Subsidiaries; (E) which
grants any third party any exclusive rights or pursuant to which the Company
has licensed any Owned IP to any third party (other than to distributors or
manufacturers in the ordinary course of business of the Company or any
Subsidiary); or (F) which contains any provision that would restrict or
limit, in any material respect, the conduct of business of the Company, any
Subsidiary or any of their respective Affiliates (or any Affiliate of any such
Affiliate of the Company or any of the Subsidiaries) after the Closing.  The Company has provided the Buyers access to
true, complete and correct copies of each Contract of the type described in
clause (i) of this Section 3(cc).


 


(ii)           Each
Company Contract is valid and binding on the Company and any of the
Subsidiaries that is a party thereto, as applicable, and in full force and
effect, other than any such Company Contract that expires or is terminated
after the date of this Agreement in accordance with its terms or amended by
agreement with the counterparty thereto (provided that, if any such Company
Contract is so amended in accordance with its terms after the date of this
Agreement (provided such amendment is not prohibited by the terms of this
Agreement), then to the extent the representation and warranty contained in
this sentence is made or deemed made as of any date that is after the date of
such amendment, the reference to “Company
Contract” in the first clause of this sentence shall be deemed to be
a reference to such contract as so amended). Except as set forth on Schedule
3(cc)(ii), to the Knowledge of the Company, each Company Contract is in
good standing, valid and effective against the counterparties thereto, in
accordance with its terms, and there is not, under any of such Company
Contracts, any existing default by the Company or any of the Subsidiaries or,
to the Knowledge of the Company, the counterparties thereto, or any event or
circumstance which, with notice or lapse of time or both, would become a
default by the Company or any of the Subsidiaries or, to the Knowledge of the
Company, the counterparties thereto, other than failures to be in good standing
and defaults under such Company Contracts which would not reasonably be
expected to result in the non-renewal, termination or material modification of
the terms of any Company Contract or otherwise have a Company Material Adverse
Effect.  No party to any Company Contract
has notified the Company or any Subsidiary that such party intends to cancel,
not renew or terminate the Company Contract, exercise any rights or remedies
under a Company Contract that would be adverse to the Company, or exercise or
not exercise any option under a Company Contract.  Except as set forth on Schedule 3(cc)(ii),
no Company Contract is subject to termination, modification or acceleration as
a result of the sale of the Common Shares or any of the other Transactions.


 


dd.          Investment
Company. 
The Company is not, and upon the Closing will not be, an “investment
company,” a company controlled by an “investment company,” or an “affiliated
person” of, or “promoter” or “principal underwriter” for, an “investment
company,” as such terms are defined in the Investment Company Act.


 


ee.           Fairness
Opinion. 
The Company has received a written opinion from Duff & Phelps
LLC, financial advisor to the Company Board, to the effect that, as of the date
of such opinion, and based upon and subject to the matters set forth therein,
the Purchase Price to be


 


25





















 


received by the Company in exchange for the
issuance and sale of the Common Shares is fair, from a financial point of view,
to the common shareholders of the Company (without giving effect to any impact
of the proposed Transaction on any particular shareholder other than in its
capacity as a shareholder).


 


4.             PRE-CLOSING
COVENANTS. 
Unless otherwise waived and consented to by a Majority of the Buyers
from the date of this Agreement until the Closing Date or the date this
Agreement terminates:


 


a.             Shareholders
Meeting. 
The Company shall take all action necessary to duly call, give notice
of, convene and hold a meeting of shareholders (the “Company
Shareholders Meeting”) for the purpose of obtaining the Shareholder
Approval as promptly as reasonably practicable after the SEC confirms that it
has no further comments on the Proxy Statement or the Company otherwise
determines in good faith that such Proxy Statement will not be reviewed by the
SEC.  The Company shall use its
reasonable best efforts to obtain the Shareholder Approval at the Company
Shareholders Meeting.


 


b.             Proxy
Material.


 


(i)            In
connection with the Company Shareholders Meeting, the Company will (A) as
promptly as reasonably practicable after the date of this Agreement prepare and
file with the SEC a proxy statement (as it may be amended or supplemented from
time to time, the “Proxy Statement”)
related to the consideration of the Proposals at the Company Shareholders
Meeting, (B) respond as promptly as reasonably practicable to any comments
received from the SEC with respect to such filings and provide copies of such
comments to Sterling  promptly upon
receipt and provide copies of proposed responses to Sterling a reasonable time
prior to filing to allow Sterling the opportunity to provide meaningful
comment, (C) as promptly as reasonably practicable prepare and file any amendments
or supplements necessary to be filed in response to any SEC comments or as
otherwise required by applicable Law, (D) mail to its shareholders as
promptly as reasonably practicable the Proxy Statement and all other customary
proxy or other materials for meetings such as the Company Shareholders Meeting,
(E) to the extent required by applicable Law, as promptly as reasonably
practicable prepare, file and distribute to the Company’s shareholders any
supplement or amendment to the Proxy Statement if any event shall occur which
requires such action at any time prior to the Company Shareholders Meeting, and
(F) otherwise comply with all requirements of Law applicable to any
Company Shareholders Meeting.  The Buyers
shall cooperate with the Company in connection with the preparation of the
Proxy Statement and any amendments or supplements thereto, including promptly
furnishing the Company, upon request, with any and all information as may be
required to be set forth in the Proxy Statement under applicable law.  The Company will provide Sterling a
reasonable opportunity to review and comment upon the Proxy Statement, or any
amendments or supplements thereto, and shall give reasonable consideration to
any such comments proposed, prior to mailing the Proxy Statement to the Company’s
shareholders.  The Proxy Statement shall
include the Company Board Recommendation.


 


26

















 


(ii)           If, at
any time prior to the Company Shareholders Meeting, any information relating to
the Company or any of the Buyers or any of their respective Affiliates should
be discovered by the Company or any of the Buyers which should be set forth in
an amendment or supplement to the Proxy Statement so that the Proxy Statement
shall not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading, the party that discovers such information shall promptly notify
the other parties and, to the extent required by applicable law, the Company
shall disseminate an appropriate amendment thereof or supplement thereto
describing such information to the Company’s shareholders.


 


(iii)          The Company
represents, warrants, covenants and agrees that (A) none of the
information included or incorporated by reference in the Proxy Statement or any
other document filed with the SEC in connection with the Transactions (all such
other documents, the “Other Filings”)
shall, in the case of the Proxy Statement, at the date it is first mailed to
the Company’s shareholders or at the time of the Company Shareholders Meeting
or at the time of any amendment or supplement thereof, or, in the case of any
Other Filing, at the date it is first mailed to the Company’s shareholders or
at the date it is first filed with the SEC, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, except that no
covenant is made by the Company with respect to statements made or incorporated
by reference therein in reliance on, and conformity with, information supplied
in writing by or on behalf of the Buyers or in connection with the preparation
of the Proxy Statement or the Other Filings expressly for inclusion therein,
and (B) the Proxy Statement and the Other Filings that are filed by the
Company shall comply as to form in all material respects with the requirements
of the 1934 Act.


 


(iv)          Each
of the Buyers severally and not jointly, represents, warrants, covenants and
agrees that none of the information supplied in writing by or on behalf of such
Buyer expressly for inclusion in the Proxy Statement or the Other Filings will,
in the case of the Proxy Statement, at the date it is first mailed to the
Company’s shareholders or at the time of the Company Shareholders Meeting or at
the time of any amendment or supplement thereof, or, in the case of any Other
Filing, at the date it is first mailed to the Company’s shareholders or at the
date it is first filed with the SEC, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.


 


c.             Conduct
of Business of the Company.  Except as expressly required or expressly
contemplated by this Agreement or as set forth on Schedule 4(c), the
Company will, and will cause each of the Subsidiaries to, (A) conduct its
operations only in the ordinary course of business consistent with past
practice and (B) use its reasonable best efforts to maintain and preserve
intact its business organization, including the services of its key employees
and the goodwill of its commercial dealings with customers, lenders,
distributors, suppliers, customers, financing sources and other Persons with
whom it has material business relationships. 
Without limiting the generality of the foregoing, except as expressly
contemplated by this Agreement or


 


27

















 


as set forth on Schedule 4(c), the
Company will not, and will cause each of the Subsidiaries not to, take any of
the following actions:


 


(i)            propose
or adopt any changes to the Articles of Incorporation, the Bylaws or any of the
organizational documents of the Subsidiaries;


 


(ii)           make,
declare, set aside, or pay any dividend or distribution on any shares of its
Capital Stock, other than dividends paid by a wholly-owned Subsidiary to its
parent corporation in the ordinary course of business;


 


(iii)          (A) adjust,
split, combine or reclassify or otherwise amend the terms of its Capital Stock,
(B) repurchase, redeem, purchase, acquire, encumber, pledge, dispose of or
otherwise transfer, directly or indirectly, any shares of its Capital Stock or
any securities or other rights convertible or exchangeable into or exercisable
for any shares of its Capital Stock or such securities or other rights, or
offer to do the same, (C) issue, grant, deliver or sell any shares of its
Capital Stock or any securities or other rights convertible or exchangeable
into or exercisable for any shares of its Capital Stock or such securities or
rights (which term, for purposes of this Agreement, will be deemed to include
stock appreciation rights, “phantom stock” or other commitments that provide
any right to receive value or benefits similar to such Capital Stock, securities
or other rights), other than pursuant to the exercise of Options of the Company
outstanding as of the date of this Agreement, in all cases in accordance with
the terms of the applicable award or plan as in effect on the date of this
Agreement, (D) enter into any Contract, understanding or arrangement with
respect to the sale, voting, pledge, encumbrance, disposition, acquisition,
transfer, registration or repurchase of its Capital Stock or such securities or
other rights, or (E) register for sale, resale or other transfer any
shares of Common Stock under the 1933 Act on behalf of the Company or any other
Person;


 


(iv)          (A) increase
the compensation or benefits payable or to become payable to, or make any
payment not otherwise due to, any of its past or present directors, officers,
employees, or other service providers, except for increases in the ordinary
course of business to employees who are not officers consistent with past
practice in timing and amount, (B) grant any severance or termination pay
to any of its past or present directors or officers, (C) hire or engage
any employees, independent contractors or consultants, or promote any current
employees or change the employment status or titles of any of the current
employees, or cause any reductions in force, except for the hiring, engagement
or promotion of non-officer employees, independent contractors or consultants
in the ordinary course of business consistent with past practices at
compensation rates comparable to other current non-officer employees,
independent contractors or consultants at similar levels, (D) enter into
any new employment or severance agreement with any of its past or present
directors or officers, (E) establish, adopt, enter into, amend or take any
action to accelerate rights under any Company Benefit Plan or any plan,
agreement, program, policy, trust, fund or other arrangement that would be a
Company Benefit Plan if it were in existence as of the date of this Agreement, (F) contribute
any funds to a “rabbi trust” or similar grantor trust, (G) change any
actuarial assumptions currently being utilized with respect to Company Benefit
Plans, except as required by applicable Law or by GAAP, (H) grant any
equity or


 


28

















 


equity-based
awards to directors, officers or employees, (I) terminate any executive
officer (as defined in Rule 3b-7 under the 1934 Act), or any other
individual whose termination would be required to be disclosed on a current
report on Form 8-K, or (J) release or rescind any resignation by any
director, officer or material employee or consultant of the Company or any
Subsidiary, including the Board Resignations;


 


(v)           terminate,
waive, amend or modify any provision of, or grant permission or request under,
any standstill or confidentiality agreement to which the Company or any
Subsidiary is a party, or any non-solicitation, non-competition or similar
agreement entered into by any employee or former employee of the Company or any
Subsidiary or any other Person with the Company or any Subsidiary for the
benefit of the Company or any Subsidiary;


 


(vi)          merge
or consolidate the Company or any of the Subsidiaries with any Person;


 


(vii)         sell,
lease or otherwise dispose of any assets or securities, including by merger,
consolidation, asset sale or other business combination (including formation of
a joint venture ) or by property transfer, other than sales of assets in the
ordinary course of business consistent with past practice;


 


(viii)        other
than in the ordinary course of business consistent with past practice, mortgage
or pledge any material assets (tangible or intangible), or create, assume or
suffer to exist any Liens thereupon, other than Permitted Liens;


 


(ix)           make
any acquisitions, by purchase or other acquisition of stock or other equity
interests, or by merger, consolidation or other business combination (including
formation of a joint venture) or make any purchases of any property or assets
from any Person (other than a wholly owned Subsidiary), in all such cases other
than acquisitions or purchases in the ordinary course of business operations
consistent with past practice;


 


(x)            enter
into, renew, extend, amend or terminate any Contract or Contracts that,
individually or in the aggregate with other such entered, renewed, extended,
amended or terminated Contracts, would reasonably be expected to have a Company
Material Adverse Effect;


 


(xi)           except
as permitted under the Amended and Restated Credit Agreement, incur, assume,
guarantee or prepay any Indebtedness for borrowed money or offer, place or
arrange any issue of debt securities or commercial bank or other credit
facilities;


 


(xii)          make
any loans, advances or capital contributions to, or investments in, any other
Person;


 


(xiii)         authorize
or make any capital expenditures other than those in the ordinary course of
business consistent with past practice, which capital expenditures shall


 


29

















 


in
no event exceed $250,000, individually, or $1,000,000 in the aggregate, for the
period commencing with the date of this Agreement and ending on the Closing;


 


(xiv)        change
its financial accounting policies or procedures, other than as required by Law
or GAAP, or write up, write down or write off the book value of any assets of
the Company and the Subsidiaries, including writing down the value of inventory
in any material manner, other than (A) in the ordinary course of business
consistent with past practice or (B) as may be required by Law or GAAP;


 


(xv)         waive,
release, assign, settle or compromise any Litigation, other than waivers,
releases, assignments, settlements or compromises that involve only the payment
of monetary damages not in excess of $100,000 with respect to any individual
case or series of related cases, or $200,000 in the aggregate, in any case
without the imposition of any restrictions on the business and operations of
the Company or any of the Subsidiaries;


 


(xvi)        adopt
a plan of complete or partial liquidation or resolutions providing for a
complete or partial liquidation, dissolution, restructuring, recapitalization
or other reorganization of the Company or any of the Subsidiaries;


 


(xvii)       (A) make
or amend any Tax election (except for filing any Tax election made on a Tax
return filed after the date of this Agreement that is required by applicable
law and is consistent with past practice) or take any position on any Tax
return filed on or after the date of this Agreement or adopt any method therein
that is inconsistent with elections made, positions taken or methods used in
preparing or filing similar returns in prior periods unless such position or
election is required pursuant to a change in applicable law or the Code; (B) enter
into any settlement or compromise of any Tax liability or audit; (C) file
any amended Tax returns that would result in a change in Tax liability, taxable
income or loss to the Company or any of the Subsidiaries or any of their
Affiliates; (D) change any annual Tax accounting period, (E) enter
into any closing agreement relating to any Tax liability or file a request for
a Tax ruling, determination letter or other written or oral advice from a Tax
authority; (F) surrender any right to claim a Tax refund or credit, offset
or other reduction in Tax liability; or (G) give or request any waiver of a
statute of limitation with respect to any Tax return, claim or assessment;


 


(xviii)      enter
into, amend, waive or terminate (other than terminations in accordance with
their terms) any Affiliate or Related Party Transactions; and


 


(xix)         agree
or commit to do any of the foregoing.


 


d.             Pre-Closing
Access.  The
Company will, and will cause each of the Subsidiaries and their respective
directors, officers, employees, accountants, consultants, legal counsel,
advisors, agents and other representatives (collectively, “Company
Representatives”) to, during normal business hours and upon
reasonable advance notice, (i) provide to Sterling full access to the
officers, employees, offices, properties, Contracts, commitments, books and
records and other information (including Tax returns) of the Company and such
Subsidiaries (so long as such access does not unreasonably interfere with the
operations of the Company) as Sterling


 


30

















 


reasonably requests, (ii) promptly upon
request therefor, provide to Sterling all documents that Sterling reasonably
requests, including any and all available financial, technical and operating
data and other information pertaining to the Company and the Subsidiaries and (iii) otherwise
cooperate with Sterling in its investigation of the Company and the
Subsidiaries.


 


e.             Reasonable
Best Efforts. 
Each party shall use its reasonable best efforts to timely satisfy each
of the conditions to be satisfied by it as provided in Sections 9, 10
and 11 of this Agreement.


 


f.              Registration Rights Agreement.  Subject to the terms and conditions hereof,
at or prior to the Closing, the parties shall enter into a Registration Rights
Agreement substantially in the form attached hereto as Exhibit D
(the “Registration Rights Agreement”),
pursuant to which the Company agrees to provide certain registration rights
with respect to the Common Shares, under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state Securities Laws.


 


g.             Amended
and Restated Credit Agreement.  The Company (in its capacity as borrower) is
party to that certain Credit Agreement, dated as of June 9, 2006, by and
among the Company, JPMorgan Chase Bank, National Association, as administrative
agent, Bank of America, N.A., as syndication agent, and certain financial
institutions signatory thereto (collectively, including the administrative
agent and the syndication agent, the “Lenders,” and
such credit agreement, together with all pledge and security agreements,
guarantees and other definitive documents and instruments entered into in
connection therewith or related thereto, as each of the same have been amended,
restated, supplemented or otherwise modified from time to time prior to the
date of this Agreement, collectively, the “Existing Credit Agreement”).  At or prior to the Closing, the Company shall
use its reasonable best efforts to amend and restate the Existing Credit
Agreement pursuant to an amended and restated credit agreement, among the
Company, the Subsidiaries and each of the Lenders, and pledge and security
agreements, guarantees and other definitive documents and instruments related
thereto, in each case, the conditions, terms, and provisions of which are (A) in
substantial compliance with the terms and conditions set forth in that certain
Term Sheet attached hereto as Exhibit E, and (B) otherwise in
form and substance satisfactory to a Majority of the Buyers (collectively, the “Amended and Restated Credit Agreement”).  Without limiting the foregoing, the Company
shall, and shall cause each of the Subsidiaries to, use its reasonable best
efforts to, and cause each of the Company Representatives to, participate in
any meetings (in-person or otherwise), presentations and negotiation sessions
with the Lenders as necessary or reasonable to satisfy this condition in a
timely manner, and provide to the Lenders financial statements, projections,
pro forma financial information and other financial and business information
reasonably requested by the Lenders.  The
Company shall provide prior notification to Sterling of any such meetings,
presentations and negotiation sessions, provide to Sterling, contemporaneously
with the distribution to the Lenders, copies of all such financial statements,
projections, pro forma financial information and other financial and business
information provided to the Lenders, and permit Sterling to participate in each
such meeting, presentation or negotiation session.


 


h.             Bylaw
Amendment. 
At or prior to Closing, the Company and the Company Board shall adopt
the Restated Bylaws, and shall not, thereafter and prior to the Closing, amend,
modify, rescind or revoke the Restated Bylaws.


 


31

















 


i.              No Dissenters’ or Appraisal Rights.  Neither the Company nor the Company Board
shall take any action to provide to any shareholder of the Company, or allow
any shareholder of the Company to exercise, any appraisal, dissenters’ or
similar rights under applicable Law with respect to their shares of Common
Stock in connection with the Transactions, including pursuant to Sections 471
and 473 of the MBCA or any other provision under the MBCA or otherwise.


 


j.              Board Resignations.  Each of William R. McLaughlin, Thomas J.
Albani, Christine M. Day, Stephen L. Gulis, Jr., Michael A. Peel and Ervin
R. Shames (each, a “Resigning Board Member”
and, collectively, the “Resigning Board Members”)
has delivered to the Company such Resigning Board Member’s irrevocable
resignation from the Company Board (each, a “Board
Resignation” and, collectively, the “Board
Resignations”), in each case, subject to, and effective immediately
following, the Closing (which resignations shall terminate and be of no force
and effect upon the termination of this Agreement in accordance with Section 12
hereof).  The Company shall accept,
effective immediately following the Closing, and without the necessity of any
further action by the Company or any of the Resigning Board Members, each of
the Board Resignations.  Neither the
Company nor the Company Board shall take any action, or permit any action to be
taken, to rescind or release any of the Board Resignations, or otherwise
release, or permit or consent to the release of, any Resigning Board Member
from such Resigning Board Member’s irrevocable obligation thereunder.


 


k.             No
Solicitation of Transactions.


 


(i)            Subject
to clauses (ii), (iv) and (vii) of this Section 4(k),
from and after the date of this Agreement until the Closing or, if earlier, the
termination of this Agreement in accordance with Section 12, the
Company shall not, and shall cause the Subsidiaries and each of the Company
Representatives not to, directly or indirectly: (A) initiate, solicit or
knowingly encourage (including by way of providing information) the submission
of any inquiries, proposals or offers or any other efforts or attempts that
constitute, or may reasonably be expected to lead to, any Competing Proposal or
engage in any discussions or negotiations with respect thereto or otherwise
cooperate with or assist or participate in or facilitate any such inquiries,
proposals, offers, discussions or negotiations, (B) approve or recommend,
or publicly propose to approve or recommend, any Competing Proposal, (C) withdraw,
change, amend, modify or qualify, or propose publicly to withdraw, change,
amend, modify or qualify, in a manner adverse to any Buyer, the Company Board
Recommendation (D) enter into any merger agreement, letter of intent,
agreement in principle, share purchase agreement, asset purchase agreement,
share exchange agreement, option agreement or other similar Contract relating
to a Competing Proposal or enter into any Contract or agreement in principle
requiring the Company to abandon, terminate or breach its obligations hereunder
or fail to consummate the Transactions, or (E) resolve, propose or agree
to do any of the foregoing (any action or failure to act set forth in the
foregoing clauses (B), (C), (D) or (E), to the extent related to the
foregoing clauses (B) or (C), is referred to herein as a “Change of Board Recommendation”).  The Company shall immediately cease and cause
to be terminated any solicitation, knowing encouragement, discussion or
negotiation with any Persons conducted theretofore by the Company, the
Subsidiaries or any of the Company Representatives with respect to any
Competing Proposal and cause to be returned or


 


32

















 


destroyed
all confidential information provided by or on behalf of the Company or any
Subsidiary to such Person.


 


(ii)           Notwithstanding
anything to the contrary contained in this Section 4(k), if at any
time following the date of this Agreement and prior to the Closing (A) the
Company has received a bona fide written Competing Proposal from a third party,
(B) the Company has not knowingly breached Section 4(k)(i), (C) the
Company Board determines in good faith, after consultation with its financial
advisors and outside counsel, that such Competing Proposal constitutes, or is
reasonably likely to result in, a Superior Proposal and (D) after
consultation with its outside counsel, the Company Board determines in good
faith that such action is necessary to comply with its fiduciary duties to the
shareholders of the Company under applicable Law, then the Company or the
Company Representatives may (x) furnish information with respect to the
Company and the Subsidiaries to the Person making such Competing Proposal and (y) participate
in discussions or negotiations with the Person making such Competing Proposal
regarding such Competing Proposal; provided that the Company (I) shall
have notified Sterling in writing (which may be by electronic mail) at least 24
hours prior to any determination concerning a Competing Proposal pursuant to
this Section 4(k)(ii), (II) will not, and will not allow the
Subsidiaries and the Company Representatives to, disclose any information to
such Person without first entering into an Acceptable Confidentiality
Agreement, and (III) will promptly provide to Sterling any material
information concerning the Company or the Subsidiaries provided to such other
Person which was not previously provided to Sterling.  The Company shall not, and shall cause the Subsidiaries not
to, enter into any Contract with any Person subsequent to the date of this
Agreement, and neither the Company nor any of the Subsidiaries is party to any
Contract that prohibits the Company from providing such information to
Sterling, other than any Contract entered into by the Company or any of the
Subsidiaries in the ordinary course of business that does not relate to a Competing
Proposal.


 


(iii)          The
Company shall promptly (and in any event within 24 hours) notify Sterling in
the event that the Company, any Subsidiary or any Company Representative
receives (A) any Competing Proposal or indication by any Person that it is
considering making a Competing Proposal, (B) any request for non-public
information relating to the Company or any Subsidiary, other than requests for
information in the ordinary course of business consistent with past practice
and unrelated to a Competing Proposal, (C) any inquiry or request for
discussions or negotiations regarding any Competing Proposal, or (D) any
notice or indication that any Person is reinstituting any Competing Proposal
that the Company, any Subsidiary or any of the Company Representatives received
prior to the date of this Agreement.  The
Company shall keep Sterling reasonably informed on a current basis (and in any
event at Sterling’s request and otherwise no later than 48 hours after the
occurrence of any material developments) of the status of any Competing
Proposal, indication, notice, inquiry or request (including the terms and
conditions thereof and of any modification thereto), and any developments,
discussions and negotiations.  Without limiting
the foregoing, the Company shall promptly (and in any event within 48 hours)
notify Sterling orally and in writing if it determines to begin providing
information or to engage in discussions or negotiations concerning a Competing
Proposal pursuant to Section 4(k)(ii).  The Company shall not,


 


33

















 


and
shall cause the Subsidiaries not to, terminate, waive, amend or modify any
provision of, or grant permission under, any standstill or confidentiality
Contract to which the Company or any Subsidiary is a party, and the Company
shall, and shall cause the Subsidiaries to, enforce the provisions of any such
agreement; provided, however, that the Company may grant a
limited waiver of a standstill agreement solely to permit a Competing Proposal
to be made if it determines in good faith, after consultation with outside
counsel, that such actions are necessary to comply with the fiduciary duties of
the Company Board to the shareholders of the Company under applicable Law.


 


(iv)          Notwithstanding
anything to the contrary contained in Section 4(k)(i), if the
Company receives a Competing Proposal which the Company Board concludes in good
faith, after consultation with outside counsel and its financial advisors,
constitutes a Superior Proposal, after giving effect to all of the adjustments
to the terms of this Agreement which may be offered by Sterling (including
pursuant to clause (B) below), the Company Board may at any time prior to
the Closing, if it determines in good faith, after consultation with outside counsel,
that such action is necessary to comply with its fiduciary duties to the
shareholders of the Company under applicable Law, terminate this Agreement to
pursue a definitive agreement with respect to such Superior Proposal; provided,
however, that the Company shall not terminate this Agreement, and any
purported termination shall be void and of no force or effect, unless in
advance of or concurrently with such termination the Company pays Sterling the
Termination Fee and otherwise complies with the provisions of Section 12(d)(ii) and
Section 12(f) and Section 14(m); and provided
further that the Company Board may not terminate this Agreement pursuant
to the foregoing unless (1) the Company shall not have breached in any
material respect this Section 4(k) and (2):


 


(A)          the
Company shall have provided prior written notice to Sterling, at least three
Business Days in advance (the “Notice Period”),
of its intention to take action with respect to such Superior Proposal, which
notice shall specify the material terms and conditions of such Superior
Proposal (including the identity of the party making such Superior Proposal),
and shall have contemporaneously provided a copy of the relevant proposed
transaction agreements with the party making such Superior Proposal and other
material documents, including the definitive agreement with respect to such
Superior Proposal (the “Alternative Acquisition
Agreement”); and


 


(B)           prior
to terminating this Agreement to enter into a definitive agreement with respect
to such Superior Proposal, the Company shall, and shall cause the Company
Representatives to, during the Notice Period, negotiate with Sterling in good
faith (to the extent Sterling desires to negotiate) to make such adjustments in
the terms and conditions of this Agreement so that such Competing Proposal
ceases to constitute a Superior Proposal (a “Sterling
Superior Offer”) or Sterling shall have provided the Company with
written reasonable assurances that Sterling will present a Sterling Superior
Offer not later than two Business Days after the expiration of the Notice
Period.  If Sterling fails to provide the
Company Board with a Sterling Superior Offer, or reasonable assurances that
Sterling will present a Sterling Superior Offer, in any event, in accordance
with


 


34
















 


this Section 4(k)(iv),
the Company may terminate this Agreement to pursue a definitive agreement with
respect to such Superior Proposal; provided, however, that the
Company shall not terminate this Agreement, and any purported termination shall
be void and of no force or effect, unless in advance of or concurrently with
such termination the Company pays Sterling the Termination Fee and otherwise
complies with the provisions of Section 12(d)(ii) and Sections
12(f) and 14(m).


 


In the event of
any material revisions to the Superior Proposal, the Company shall be required
to deliver a new written notice to the Buyers and to comply with the
requirements of this Section 4(k)(iv) with respect to such new
written notice.


 


(v)           The
Company shall not take any action, and shall not permit any Subsidiary to take
any action, to exempt any Person (other than the Buyers) from the restrictions
of any control share acquisition, business combination, or other similar
takeover, anti-takeover, moratorium, fair price, interested shareholder or
similar provision under the Articles of Incorporation or any certificates of
designations or the Laws of the State of Minnesota or otherwise cause such
restrictions not to apply unless such actions are taken simultaneously with a
termination of this Agreement pursuant to Section 12(d)(ii) hereof.


 


(vi)          The
Company agrees that any knowing or intentional conduct by any of the Company
Representatives that violates in any material manner the provisions of this Section 4(k) shall
be deemed to be a material breach of this Agreement (including this Section 4(k))
by the Company.


 


(vii)         Nothing
contained in this Section 4(k) shall prohibit the Company
Board from disclosing to the shareholders of the Company a position
contemplated by Rule 14e-2(a) and Rule 14d-9 promulgated under
the 1934 Act; provided, however, that any disclosure other than a
“stop, look and listen” or similar communication of the type contemplated by Rule 14d-9(f) under
the 1934 Act, an express rejection of any applicable Competing Proposal or an
express reaffirmation of its recommendation to its shareholders in favor of the
sale of the Common Shares to the Buyers and the other Transactions shall be
deemed to be a Change of Board Recommendation (including for purposes of Section 12(c)(i)).


 


l.              Retail Store
Closings.  Except as set forth on Schedule
4(l), from the date of this Agreement until the Closing Date, without the
prior written consent of Sterling, which consent shall not be unreasonably
withheld, the Company shall not, and the Company shall not permit any of the
Subsidiaries to, terminate, renew or extend, fail to renew or extend prior to a
deadline therefor, modify or compromise, or waive any rights or remedies
with respect to, any Real Property Lease relating to any retail location.


 


m.            Notice of Certain
Events.  The Company will notify
Sterling promptly (and promptly provide copies if applicable) of (i) any
written or oral communication from (A) any Governmental Entity, or (B) any
counterparty to any material Contract, in each case alleging that the consent
of such Person is or may be required in connection with the Transactions, (ii) any


 


35

















 


communication from any Governmental Entity or third
party in connection with the Transactions (and the response thereto from the
Company, any of the Subsidiaries or any Company Representatives), (iii) any
Litigation commenced against or otherwise affecting the Company or any of the
Subsidiaries that are related to the Transactions (and the response thereto
from the Company, any of the Subsidiaries or any Company Representatives), (iv) any
settlement offers relating to any Litigation, whether or not related to the
Transactions, and (v) any event, change, occurrence, circumstance or
development between the date of this Agreement and the Closing of which causes,
or is reasonably likely to cause, any condition to the Company performing its
obligations with respect to the Transactions not to be satisfied.  With respect to any of the foregoing, the
Company will consult with Sterling so as to permit the Company and Sterling and
their respective representatives a reasonable opportunity to take appropriate
measures to avoid or mitigate any adverse consequences that may result from any
of the foregoing.


 


n.             Obligation to
Update Schedules.  Prior to the
Closing, the Company shall promptly supplement or amend the Schedules to this
Agreement if the Company becomes aware of any fact, event, circumstance or
matter arising or occurring after the date of this Agreement which, if it
existed at or prior to the date of this Agreement, would have been required to
be set forth or described in such Schedules (collectively, the “New Information”).  To
the extent that the absence of any item of New Information from the Schedules
to this Agreement would constitute a material breach of any representation or
warranty of the Company set forth in this Agreement (any such items of New
Information, the “Material New Information”),
the Company shall have until the earlier of (i) 20 days from the date on
which the Company first becomes aware of any such item of Material New
Information, and (ii) the fifth Business Day prior to the Outside Date, to
cure any such breach. For purposes of determining satisfaction of the
conditions set forth in Section 11(b), the Schedules delivered by
the Company shall be deemed to include only that information contained therein
on the date of this Agreement and shall be deemed to exclude any information
contained in any subsequent supplement or amendment thereto.  For purposes of determining rights to
indemnification set forth in Section 13, if, after disclosure of
any item of Material New Information to the Buyers, the Buyers do not exercise
their right to terminate this Agreement pursuant to Section 12(c)(iii),
the Buyers’ rights to indemnification pursuant to Section 13,
solely with respect to any breach or breaches of this Agreement directly
resulting from such item of Material New Information, but not the sum of all
Material New Information, shall not exceed $500,000.


 


5.             OTHER
AFFIRMATIVE COVENANTS.  Unless
otherwise waived and consented to by a Majority of the Buyers:


 


a.             Company Board.


 


(i)            Prior to
the Closing, the Company, the Corporate Governance and Nominating Committee of
the Company Board and the Company Board shall take all actions (including
making any filings and disclosures, and taking any other actions, necessary to
comply with applicable Law and the Marketplace Rules of NASDAQ (the “NASDAQ Market Place Rules”)) so that,
immediately following the Closing, without any further action by the Company or
the Company Board (or any committee thereof), (A) the Company Board
consists of a total of nine members, (B) those individuals listed on Schedule
5(a)(i) (each such individual, and any successor thereto, substitute
therefor


 


36





















 


or
replacement thereof designated by the Sterling Investors (as defined below),
being referred to herein as a “Sterling
Designee” and collectively as the “Sterling
Designees”) become members of the Company Board, filling the
vacancies created by the Company Board Resignations and allocated among the
classes of directors on the Company Board as set forth on Schedule 5(a)(i),
and (C) the Company shall be treated as a “controlled company” as defined
by the NASDAQ Marketplace Rule 5615(c)(1) (a “Controlled Company”).  So long as, after the Closing, the Company
qualifies as a Controlled Company, the Company shall elect to be, and take all
action necessary to be, treated as a Controlled Company.


 


(ii)           The
Company’s obligation to appoint the Sterling Designees to the Company Board as
provided above shall be subject to Section 14(f) of the 1934 Act and Rule 14f-1
promulgated thereunder.  The Company
shall promptly take all actions required pursuant to Section 14(f) of
the 1934 Act and Rule 14f-1 in order to fulfill its obligations under this
Section 5(a)(ii), including mailing to shareholders any information
required by Section 14(f) of the 1934 Act and Rule 14f-1, to
enable the Sterling Designees to be elected or appointed to the Company Board
at the time or times contemplated by this Section 5(a)(ii).  Sterling shall supply or cause to be supplied
to the Company any information with respect to the Buyers and proposed Sterling
Designees required by Section 14(f) of the 1934 Act and Rule 14f-1.


 


(iii)          After
the Company Shareholders Meeting, in connection with any annual meeting of the
shareholders of the Company or any special meeting of the shareholders of the
Company at which directors are to be elected following the Closing, so long as
Sterling and its Affiliates (the “Sterling
Investors”) beneficially own, in the aggregate, at least 20% of the
total voting power of the outstanding shares of Common Stock entitled to vote
generally in the election of directors on the record date for such meeting, the
Corporate Governance and Nominating Committee of the Company Board shall
recommend the nomination of, and the Company Board shall nominate for
reelection (or election), recommend that the Company’s shareholders vote in
favor of election to the Company Board of, and solicit proxies in favor of the
election of, and the Company and the Company Board shall otherwise take all
actions as are reasonably necessary or desirable to elect, those Sterling
Designees whose terms of office expire at such shareholder meeting (or, in the
discretion of the Sterling Investors, such replacements thereof or successors
thereto designated by the Sterling Investors) to the Company Board; provided,
however, that, in the event that the Company Board determines in good
faith, after consultation with outside legal counsel, that its nomination of a
particular Sterling Designee would constitute a breach of its fiduciary duties
to the Company’s shareholders, then the Company shall nominate another
individual designated for election to the Company Board by Sterling (subject in
each case to this proviso) and the Company Board and the Company shall take all
of the actions required by this Section 5(a)(iii) with respect
to the election at such shareholder meeting of such substitute Sterling
Designee; and provided, further, that the Company Board shall
only be obligated pursuant to this Section 5(a)(iii) to
nominate for election at such shareholder meeting (and take the other required
actions with respect to) that number of the Sterling Designees such that the
sum of the number of such Sterling Designees and the number of any Sterling
Designees then serving on the Company Board and whose terms are not


 


37





















 


expiring
at such shareholder meeting, equals the product of the total number of
directors on the Company Board multiplied by the percentage that the aggregate
number of Common Shares then beneficially owned by the Buyers, collectively,
represents of the total number of shares of Common Stock then outstanding,
rounded up to the nearest whole number of directors.  If, as a result of the last proviso of the
immediately preceding sentence, the Company Board is entitled, and intends, to
nominate less than all of the Sterling Designees at a particular meeting,
Sterling shall determine which of such Sterling Designees shall no longer
constitute Sterling Designees.  The
provisions of this Section 5(a)(iii) are in addition to and
shall not limit any rights that any of the Buyers or any of their respective
Affiliates may have as a record holder or beneficial owner of shares of Common
Stock as a matter of applicable Law with respect to the election of directors
or otherwise.


 


(iv)          In the
event that at any time there is a vacancy on the Company Board resulting from
retirement, resignation or other termination of service for any reason of a
Sterling Designee, the Company shall promptly fill such vacancy (for the
remainder of the then current term) with an individual designated by Sterling, provided,
however, that, in the event that the Company Board determines in good
faith, after consultation with outside legal counsel, that its appointment of a
particular Sterling Designee to fill such vacancy would constitute a breach of
its fiduciary duties to the Company’s shareholders, then the Company shall fill
such vacancy with another individual designated by Sterling (subject again in
each case to this proviso).


 


(v)           The
Company Board shall take such actions so that at all times (A) the number
of Sterling Designees on each of the Nominating Committee of the Company Board,
the Compensation Committee of the Company Board and each other standing
committee of the Company Board (other than the Audit Committee) equals no less
than the product of the total number of members of such committee, multiplied
by a fraction, the numerator of which is the total number of Sterling Designees
on the Company Board, and the denominator of which is the total number of
directors on the Company Board, rounded up to the nearest whole number of
Sterling Designees, and (B) if permitted by NASDAQ Marketplace Rules,
there is at least one Sterling Designee on the Audit Committee of the Company
Board; provided, however, that there shall not be a violation of
this Section 5(a)(v) if, as a result of the termination of
service of a Sterling Designee or other change in the composition of the
Company Board or a committee of the Company Board that does not in and of
itself constitute, or result from, a breach of this Section 5(a)(v),
the number of Sterling Designees on a committee of the Company Board is less
than the minimum number required by this Section 5(a)(v), so long
as the Company Board takes prompt action to cause the number of Sterling
Designees on such committee to be at least such minimum number.


 


b.             Disclosure of
Transactions and Other Material Information.  During the period commencing on the date of
this Agreement and ending on the first date after the Closing on which the
Buyers, in the aggregate, own less than 20% of the then issued and outstanding
shares of Common Stock (the period ending on such latest date, the “Reporting Period”), the Company shall make all filings and
disclosures required by Securities Laws or any other Laws, including any
current reports on Form 8-K, in connection with the Transaction Documents
and the


 


38

















 


Transactions, and shall provide Sterling a
reasonable opportunity to review and comment upon any filings or disclosures so
required by Securities Laws or any other Laws, any amendments or supplements
thereto, any public disclosures made by or on behalf of the Company in
connection with the Transaction Documents or the Transactions, and shall give
reasonable consideration to any such comments proposed.


 


c.             Form D and
Blue Sky.  The Company agrees to
timely file a Form D with respect to the Securities as required under
Regulation D and to provide a copy thereof to each Buyer promptly after such
filing.  The Company shall, on or before
the Closing Date, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for, or to qualify the Securities
for, sale to the Buyers at the Closing to occur on the Closing Date pursuant to
this Agreement under applicable Securities Laws of the states of the United
States, and shall provide to each Buyer evidence of any such action so taken on
or prior to the Closing Date.  The
Company shall make all filings and reports relating to the offer and sale of
the Securities required under applicable Securities Laws of the states of the
United States following the Closing Date.


 


d.             Reporting Status.  During the Reporting Period, the Company
shall timely file all reports required to be filed with the SEC pursuant to the
1934 Act, and the Company shall not terminate its status as an issuer required
to file reports under the 1934 Act even if the Securities Laws otherwise would
permit such termination.


 


e.             Financial
Information.  During the Reporting Period,
the Company agrees to send the following to Sterling (A) unless the
following are filed with the SEC through EDGAR and are immediately available to
the public through the EDGAR system, within one Business Day after the filing
thereof with the SEC, a copy of each of its quarterly reports on Form 10-Q
and annual reports on Form or 10-K, as the case may be (each, a “Periodic Report”), current reports on Form 8-K,
registration statements (other than on Form S-8) and amendments and
supplements to each of the foregoing, (B) unless immediately available
through Bloomberg, facsimile copies of all press releases issued by the Company
or any of the Subsidiaries, contemporaneously with the issuance thereof, (C) unless
the following are filed with the SEC through EDGAR and are immediately
available to the public through the EDGAR system, copies of any notices and
other information made available or given to the shareholders of the Company
generally, contemporaneously with the making available or giving thereof to the
shareholders of the Company, (D) internal monthly financial statements and
budget forecasts pertaining to the operations of the Company and/or any of the
Subsidiaries, and (E) promptly upon the request to the Company by
Sterling, any financial, operating or other type of information requested by
Sterling to the extent that it is reasonably available or can be developed
without significant effort or expense to the Company, which request may be for
specified information or for information to be provided by the Company on an
ongoing basis, as specified by Sterling.


 


f.              Internal
Accounting Controls.  During the
Reporting Period, the Company shall, and, shall cause each of the Subsidiaries
to:


 


(i)            at all
times keep books, records and accounts with respect to all of such Person’s
business activities, in accordance with sound accounting practices and GAAP
consistently applied;


 


39

















 


(ii)           maintain
a system of internal accounting controls sufficient to provide reasonable
assurance that (A) transactions are executed in accordance with management’s
general or specific authorizations, (B) transactions are recorded as
necessary to permit preparation of financial statements in conformity with GAAP
and to maintain asset and liability accountability, (C) access to assets
or incurrence of liability is permitted only in accordance with management’s
general or specific authorization and (D) the recorded accountability for
assets and liabilities is compared with the existing assets and liabilities at
reasonable intervals and appropriate action is taken with respect to any
differences; and


 


(iii)          timely
file and make publicly available on the SEC’s EDGAR system, all certifications
and statements required by (A) Rule 13a-14 or Rule 15d-14 under
the 1934 Act and (B) Section 906 of Sarbanes Oxley with respect to
any Periodic Reports.


 


g.             Listing.  During the Reporting Period, the Company
shall use its reasonable best efforts to promptly secure the listing of all of
the Common Shares upon each national securities exchange and automated
quotation system, upon which shares of Common Stock are then listed (subject to
official notice of issuance) and, shall maintain, so long as any other shares
of Common Stock shall be so listed, such listing of all Common Shares from time
to time issuable under the terms of the Transaction Documents.  So long as any Securities are outstanding,
the Company shall maintain the Common Stock’s listing on the Principal Market
(or a United States national securities exchange) and shall not take any action
that would reasonably be expected to result in the suspension or termination of
trading of the Common Stock on the Principal Market, except to begin trading on
a different United States national securities exchange).  The Company shall pay all fees and expenses
in connection with satisfying its obligations under this Section 5(g).


 


h.             Patriot Act,
Investor Secrecy Act and Office of Foreign Assets Control.  During the Reporting Period, as required by
federal Law and such Buyer’s policies and practices, each Buyer may need to
obtain, verify and record certain customer identification information and
documentation in connection with opening or maintaining accounts, or
establishing or continuing to provide services, and, the Company agrees to, and
shall cause each of the Subsidiaries to, provide such information.


 


i.              Preemptive
Rights.  In case at any time the
Company shall sell or otherwise issue to any Person any Equity Securities (as
defined below), other than any Exempted Issuances (as defined below), and so
long as the Buyers, in the aggregate, beneficially own a number of shares of
Common Stock representing greater than 20% of the Common Stock Deemed
Outstanding (as defined below) as of such date, the Company shall offer to
Sterling the right, at the same price as that paid, or to be paid by the other
Person who participated or will participate in such sale or other issuance, to
purchase the amount of such Equity Securities equal to the product of (x) the
total amount of such Equity Securities sold or otherwise issued and (y) a
fraction, the numerator of which is the number of Sterling Shares (as defined
below) immediately prior to such sale of Equity Securities and the denominator
of which is the number of shares of Common Stock Deemed Outstanding immediately
prior to the sale of Equity Securities. 
Such offer shall be made by written notice (the “Preemptive
Rights Notice”) of the Company to Sterling, which


 


40

















 


Preemptive Rights Notice may be delivered prior to,
but in any event shall not be delivered any later than, five days after the
date of the closing of such sale or other issuance of Equity Securities and
shall set forth the Equity Securities sold or otherwise issued or to be sold or
otherwise issued, the price per Equity Security at which such Equity Securities
were sold or otherwise issued or will be sold or otherwise issued, and the
number of Equity Securities which Sterling shall have the opportunity to
purchase pursuant hereto.  Sterling shall
be entitled for a period of 10 days after the date of the Preemptive Rights
Notice to exercise its rights hereunder. 
Such rights may only be exercised for all of the Equity Securities
Sterling is entitled to purchase hereunder and shall be exercised by wire
transfer of immediately available funds to an account designated by the Company
(as set forth in the Preemptive Rights Notice) and the delivery to the Company
of duly and properly executed originals of any documents reasonably required by
the Company, all by the later of the expiration of such 10 day period and the
closing date of such sale or other issuance of Equity Securities.  Any purchase of Equity Securities by Sterling
pursuant hereto shall be made only of a whole number of Equity Securities, not
of any fraction of Equity Securities, and any fraction shall be rounded up or
down, as appropriate, to the nearest whole number.  For purposes hereof, “Common Stock
Deemed Outstanding” as of any date shall mean the number of shares
of Common Stock then actually issued and outstanding; “Equity
Securities” means any equity securities of the Company, whether now
or hereafter authorized, and any Options or Convertible Securities of the
Company; “Exempted Issuances” means (A) issuances
of Options of the Company, restricted stock grants or any other similar equity
compensation arrangements pursuant to a Company Stock Award Plan approved by
the Company Board and shareholders of the Company for officers, employees or
consultants of the Company or any Subsidiary (B) issuances of any Equity
Securities to any seller in connection with the acquisition by the Company or
any of the Subsidiaries of a business, by purchase or other acquisition of
stock or other equity interests, or by merger, consolidation or other business
combination, or any sale of all or substantially all of the assets of such
business, and (C) issuances in connection with the subdivision of the
Common Stock (including any split), any combination of the Common Stock (including
any reverse split) or any other recapitalization, reorganization,
reclassification or conversion of the Company, in each case in which the Common
Shares are treated in the same manner as all other outstanding shares of Common
Stock; and “Sterling Shares” means, as of any
time, the Common Shares  then held by
Sterling and its Affiliates, plus any Equity Securities issued to Sterling
pursuant to this Section 5(i).


 


6.             OTHER NEGATIVE
COVENANTS.  During the Reporting
Period, unless otherwise waived and consented to by a Majority of the Buyers:


 


a.             Restriction on
Purchases or Payments.  The Company
shall not (i) split, combine or reclassify any Capital Stock of the
Company or any of the Subsidiaries, or issue or authorize the issuance of any
other securities in respect or, in lieu of, or in substitution for any Capital
Stock of the Company or any of the Subsidiaries, or establish or set any record
date with respect to any of the foregoing, or (ii) purchase, redeem or
otherwise acquire, directly or indirectly, any shares of the Company’s Capital
Stock.


 


b.             Corporate
Existence; Reorganization.  The
Company shall not enter into a transaction resulting in a Change of Control or
Organic Change.  From the date of this
Agreement until the end of the Reporting Period, the Company shall maintain its
corporate existence.


 


41

















 


c.             Investment
Company.  The Company shall not
become an “investment company,” a company controlled by an “investment company,”
or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment
company,” as such terms are defined in the Investment Company Act.


 


d.             No Avoidance of
Obligations. The Company shall not, and shall not permit any of the
Subsidiaries to, enter into any agreement which would limit or restrict the
Company’s or any Subsidiary’s ability to perform under, or take any other
voluntary action to avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed by it under, this Agreement and the
other Transaction Documents.


 


e.             Regulation M.  Neither the Company, nor any of the
Subsidiaries nor any of their respective Affiliates will take any action
prohibited by Regulation M under the 1934 Act in connection with the offer,
sale and delivery of the Securities contemplated hereby.


 


f.              No Integrated
Offering.  Neither the Company, nor
any of the Subsidiaries, nor any of their respective Affiliates, nor any Person
acting on behalf of any of the foregoing shall, directly or indirectly, make
any offers or sales of any security or solicit any offer to purchase any
security, under any circumstances that would require registration of any of the
Securities under the 1933 Act or cause the offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act, or
the shareholder approval requirements of the Principal Market.


 


g.             Amendments to
Articles of Incorporation or Bylaws. 
The Company shall not authorize, approve, adopt, amend or repeal (i) any
provision of the Bylaws, as it may be amended from time to time (other than any
such actions taken solely by action of shareholders of the Company in their
capacity as such), or (ii) any provision of the Articles of Incorporation,
as it may be amended from time to time.


 


7.             OTHER AGREEMENTS.


 


a.             Continuing
Directors.  Prior to the Closing, the
Company Board shall designate those four current members of the Company Board
listed on Schedule 7(a) as the members of the Company Board as of
the date of this Agreement that will continue on the Company Board following
the Closing, with such members allocated among the classes of directors on the
Company Board as set forth on Schedule 5(a)(i) (each such
individual, and any successor thereto, substitute therefor or replacement
thereof designated by a majority of the Continuing Directors then on the
Company Board (and, if designated prior to the Closing, approved by a Majority
of the Buyers, which approval shall not be unreasonably withheld) being
referred to herein as a “Continuing Director”
and collectively as the “Continuing Directors”).  After the Company Shareholders Meeting, in
connection with any annual meeting of the shareholders of the Company or any
special meeting of the shareholders of the Company at which directors are to be
elected following the Closing, until and including the 2011 annual meeting of
the shareholders of the Company (and any special meetings of shareholders held
during such period),  the Corporate
Governance and Nominating Committee of the Company Board shall recommend the
nomination of, and the Company Board shall nominate for reelection (or
election), recommend that the Company’s shareholders vote in favor of election
to the Company Board of, and solicit 


 


42

















 


proxies in favor of the election of, and the Company
and the Company Board shall otherwise take all actions as are reasonably
necessary or desirable to elect, those Continuing Directors whose terms of
office expire at such shareholder meeting (or, in the discretion of the
Continuing Directors, such replacements thereof or successors thereto
designated by a majority of the Continuing Directors then on the Company Board)
to the Company Board; provided, however, that, in the event that the Company Board
determines in good faith, after consultation with outside legal counsel, that
its nomination of a particular Continuing Director would constitute a breach of
its fiduciary duties to the Company’s shareholders, then the Company shall
nominate another individual designated for election to the Company Board by a
majority of the Continuing Directors then on the Company Board (subject in each
case to this proviso) and the Company Board and the Company shall take all of
the actions required by this Section 7 with respect to the election
at such shareholder meeting of such substitute Continuing Director.


 


b.             Vacancies.  Until, but not including, the 2014 annual
meeting of the shareholders of the Company, in the event that at any time there
is a vacancy on the Company Board resulting from retirement, resignation or
other termination of service for any reason of a Continuing Director, the
Company shall promptly fill such vacancy (for the remainder of the then current
term) with an individual designated by a majority of the Continuing Directors
then on the Company Board; provided, however, that, in the event that the
Company Board determines in good faith, after consultation with outside legal
counsel, that its appointment of a particular Continuing Director to fill such
vacancy would constitute a breach of its fiduciary duties to the Company’s
shareholders, then the Company shall fill such vacancy with another individual
designated by a majority of the Continuing Directors then on the Company Board
(subject again in each case to this proviso).


 


c.             Voting for
Continuing Directors; Standstill. 
Subject to the terms and conditions hereof, each Buyer irrevocably and
unconditionally agrees that until and including the 2011 annual meeting of the
shareholders of the Company, each Buyer will (I) appear at such a meeting,
or otherwise cause its Common Shares to be counted as present there at, for
purposes of calculating a quorum and respond to any other request by the
Company for written consent, if any, and (II) vote, or cause to be voted
(including by written consent, if applicable) all of the outstanding Common
Shares of such Buyer as of the relevant time in favor of the election of the
Continuing Directors.  From the Closing Date until the earlier of the end
of the Reporting Period or the one-year anniversary of the Closing Date (the “Standstill Period”), each Buyer agrees that it will not,
directly or indirectly, or in conjunction with any other Person, without the prior approval of the Company Board
and, to the extent there are any Continuing Directors on the Company Board at such time, a majority of
the Continuing Directors then on the Company Board, effect, enter into any agreement with
respect to, or publicly seek, offer or propose to effect or participate in, (A) any
acquisition of beneficial ownership of shares of Common Stock that would cause
such Buyer to beneficially own a percentage of the Common Stock Deemed
Outstanding at that time that is greater than the percentage of Common Stock
Deemed Outstanding beneficially owned by such Buyer and its Affiliates
immediately after giving effect to the Closing, (B) any tender or exchange
offer, merger or other business combination involving the Company, (C) any
recapitalization, restructuring, liquidation, dissolution or other
extraordinary transaction with respect to the Company, or (D) any “solicitation”
of “proxies” (as such terms are defined in Rule 14a-1 under the 1934 Act)
or


 


43

















 


consents to vote any securities of the Company,
other than any such solicitation on behalf of the Company.


 


d.             Directors’ and
Officers’ Insurance.


 


(i)            For a
period of not less than seven years after the date of this Agreement, the
Buyers shall, and shall cause the Company and its Subsidiaries to, maintain in
effect, the current policies of directors’ and officers’ liability insurance
maintained by the Company as of the date of this Agreement (provided that the
Company may substitute therefor policies with a substantially comparable
insurer of substantially equivalent coverage and amounts containing terms and
conditions which are no less advantageous to the insured), or, if the Company’s
current policy or substantially equivalent insurance coverage is unavailable,
the best available coverage, with respect to claims arising from facts or
events which occurred at or before the date of this Agreement (including
matters, acts or omissions occurring in connection with the approval of this
Agreement and the consummation of the transactions contemplated hereby) (the “D&O Policy”); provided, however, that
the Company shall not be required to pay an annual premium for the D&O
Policy in excess of 200% of the last annual premium paid prior to the date of
this Agreement, which premium the Company represents and warrants to be
approximately $690,000 (it being understood and agreed that in the event such
D&O Policy cannot be obtained for 200% of such last annual premium or less,
in the aggregate, the Company shall remain obligated to provide the greatest
D&O Policy coverage as may be obtained for such amount). Notwithstanding
anything to the contrary, in lieu of its obligations under the first sentence
of this Section 7(d), the Company may purchase a seven-year “tail”
prepaid policy on the D&O Policy on terms and conditions substantially
comparable to such policy; provided, however, that the aggregate premium for
such “tail” prepaid policy may not exceed $1,000,000 (and if the aggregate
premium for such policy would exceed $1,000,000, then the Company may purchase
such coverage as is available for an aggregate premium of $1,000,000), and in
the event that the Company shall purchase such a “tail” policy, the Company
shall maintain such “tail” policy in full force and effect and continue to
honor its obligations thereunder, in lieu of all other obligations of the
Company under the first sentence of this Section 7(d)(i) for
so long as such “tail” policy shall be maintained in full force and effect and
the Company shall have no obligations under the first sentence of this Section 7(d).  The Company shall pay (as incurred) all
expenses, including reasonable, actual and documented fees and expenses of
counsel, which an indemnified person may incur in enforcing the indemnity and
other obligations provided for in this Section 7(d).


 


(ii)           If the
Company or any of its successors or assigns (i) consolidates with or
merges into any other person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, or (ii) transfers
or conveys all or substantially all of its properties and assets to any person,
then, and in each such case, to the extent necessary, proper provision shall be
made so that the successors and assigns of the Company, as the case may be,
shall assume the obligations set forth in this Section 7(d).


 


44
















 


(iii)          The
obligations under this Section 7(d) shall not be terminated,
amended or otherwise modified in such a manner as to adversely affect in any
material respect any Person covered by the policy or any other person who is a
beneficiary under the D&O Policy or the “tail” policy referred to in Section 7(d)(i) (and
their heirs and representatives) (collectively, “Insured Party”) without the prior written consent of such
affected Insured Party.  Each Insured
Party is intended to be a third party beneficiary of this Section 7(d),
with full rights of enforcement as if a party hereto or thereto.  The rights of each Insured Party shall be in
addition to, and not in substitution for, any other rights to indemnification
or contribution that such persons may have under the certificate or articles of
incorporation, bylaws or other equivalent organizational documents of, and any
and all indemnification and other agreements entered into by, the Company or
any of the Subsidiaries, or applicable legal requirements (whether at law or in
equity).  The Company shall pay all
reasonable, actual and documented expenses that may be incurred by an Insured
Party in enforcing its rights under this Section 7(d).


 


e.             Corporate
Governance.  The affirmative vote of
a majority of the Continuing Directors shall be required, (i) until the
earlier of the three-year anniversary of the Closing or the end of the
Reporting Period, for (A) any alteration, amendment or repeal, in whole or
in part, of the Restated Charter or of any of the following provisions of the
Restated Bylaws of the Company: Article II, Section 13; Article III;
or Article VIII, (B) any transaction between: (I) the Company, a
Subsidiary, or another controlled Affiliate of the Company or Subsidiary, on
the one hand, and (II) Sterling or any Affiliate of Sterling, on the other
hand, (C) any decrease to the compensation payable to the Continuing
Directors as set forth on Schedule 7(e), or (D) any increase in the
number of members on the Company Board to more than nine members, or (ii) until
the earlier of the two-year anniversary of the Closing and the end of the
Reporting Period, (A) for the Company to terminate its status as an issuer
required to file reports under the 1934 Act, even if the Securities Laws
otherwise would permit such termination, (B) any of the transactions
described in clauses (a) or (b) of Article XV of the Restated
Charter, or (C) a going private transaction under Rule 13e-3 of the
1934 Act.


 


f.              No Waiver.  This Section 7 may not be
altered, amended or repealed, not may any provision hereof be waived on behalf
of the Company, in whole or in part, whether through amendments or alterations
to the Restated Charter or the Restated Bylaws or otherwise, without the prior
approval of a majority of the Continuing Directors then on the Company Board.


 


8.             TRANSFER AGENT.  The Company warrants that the Securities
shall be freely transferable on the books and records of the Company as and to
the extent provided in this Agreement and the other Transaction Documents.  If a Buyer effects a sale, assignment or
transfer of the Securities in accordance with Section 2(f), the
Company shall permit the transfer and shall promptly instruct its transfer
agent to issue one or more Share Certificates or, provided that such transfer
agent is a participant in the DTC Fast Automated Securities Transfer Program,
credit shares to the applicable balance accounts at DTC in such name and in
such denominations as specified by such Buyer to effect such sale, transfer or
assignment.  In the event that such sale,
assignment or transfer involves Common Shares sold, assigned or transferred
pursuant to an effective registration statement or pursuant to Rule 144,
the transfer agent shall issue such Securities to the Buyer, assignee or
transferee, as the case may be, without any restrictive legend.  The Company acknowledges that a breach by it
of its obligations hereunder will cause


 


45

















 


irreparable harm to a Buyer.  Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 8
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 8, that a Buyer shall
be entitled, in addition to all other available remedies, to an order and/or
injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond
or other security being required. 
Neither the Company, nor any Person acting for the Company’s benefit,
shall deliver any instructions to the Company’s transfer agent that are
inconsistent with the foregoing.


 


9.             CONDITIONS TO
EACH PARTY’S OBLIGATIONS UNDER THIS AGREEMENT.  The respective obligations of each party to this
Agreement to effectuate the Transactions, including the sale by the Company of
the Common Shares to, and the purchase of the Common Shares by, the Buyers is
subject to the satisfaction or waiver, at or before the Closing Date, of each
of the following conditions:


 


a.             This Agreement and
the Proposals shall have been duly adopted and the Shareholder Approval shall
have been obtained.


 


b.             No Governmental
Entity will have enacted, issued, promulgated, enforced or entered any Laws or
orders, judgments, injunctions, awards, decrees or writs handed down, including
any consent decree, settlement agreement or similar written agreement (whether
temporary, preliminary or permanent) which is then in effect that enjoins or
otherwise prohibits consummation of the Transactions.


 


10.           CONDITIONS TO THE
OBLIGATIONS OF THE COMPANY TO SELL THE COMMON SHARES.  The obligation of the Company to issue and
sell the Common Shares to each Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date (unless otherwise specifically
provided in this Section 10), of each of the following conditions,
provided that these conditions are for the Company’s sole benefit and may be
waived by the Company at any time in its sole discretion by providing each
Buyer with prior written notice thereof:


 


a.             Such Buyer shall
have executed each of the Transaction Documents to which it is a party and
delivered the same to the Company.


 


b.             Such Buyer shall
have delivered to the Company such Buyer’s investment amount as set forth next to
such Buyer’s name on the Schedule of Buyers for the Common Shares being
purchased by such Buyer at the Closing by wire transfer of immediately
available funds pursuant to the wire instructions provided by the Company,
subject to adjustment in accordance with Section 1(c)(ii), provided
that, in the case of Sterling, any payment to be made shall be subject to
Sterling’s right of set-off for its Expenses pursuant to Section 14(m).


 


c.             The representations
and warranties of such Buyer herein shall be true and correct as of the date
when made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date, which shall be
true and correct as of such date), and such Buyer shall have performed, satisfied
and complied with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by such Buyer
at or prior to the Closing Date.


 


46

















 


11.           CONDITIONS TO
BUYERS’ OBLIGATIONS TO PURCHASE THE COMMON SHARES.  The obligation of each Buyer to purchase the
Common Shares from the Company at the Closing is subject to the satisfaction,
at or before the Closing Date (unless otherwise specifically provided in this Section 11),
of each of the following conditions, provided that these conditions are for the
Buyers’ benefit and may be waived only by a Majority of the Buyers at any time
in the sole discretion of such Buyers by providing the Company with prior written
notice thereof:


 


a.             The Company and
each of the Subsidiaries shall have executed and delivered to such Buyer the
Transaction Documents to which such Person is a party.


 


b.             The representations
and warranties of the Company herein and in all of the other Transaction
Documents shall be true and correct as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date, which shall be true and correct as
of such date) and the Company shall have performed, satisfied and complied with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or prior to the
Closing Date.  The chief executive
officer of the Company shall have executed and delivered a certificate to such
Buyer, dated as of the Closing Date, to the foregoing effect and as to such
other matters as may be reasonably requested by a Majority of the Buyers.


 


c.             The Restated
Charter shall have been duly filed with the Secretary of State of the State of
Minnesota and shall be in full force and effect, enforceable against the
Company in accordance with its terms and shall not have been amended.


 


d.             Such Buyer shall
have received the opinion of Oppenheimer Wolff Donnelly LLP, dated as of the
Closing Date, which opinion will include the opinions set forth on Exhibit F
hereto, and will otherwise be in form, scope and substance reasonably
satisfactory to a Majority of the Buyers.


 


e.             The Company shall
have executed and delivered to such Buyer the Share Certificate to be issued to
such Buyer.


 


f.              The Amended and
Restated Credit Agreement shall have been duly executed and delivered by each
of the Company, the Subsidiaries and each of the Lenders, and each of the
Amended and Restated Credit Agreement and that certain
Amended and Restated Private Label Consumer Credit Program Agreement, dated as
of December 5, 2005, between the Company and GE Money Bank, shall
be in full force and effect.


 


g.             Each of the Board
Resignations shall have become effective and each of the Buyer Designees shall
have been duly appointed to the Company Board with a term commencing
immediately following the Closing.


 


h.             The Required
Company Consents shall have been obtained or made, and copies of the Required
Company Consents shall have been delivered to such Buyer, and each of the
Required Company Consents shall be in full force and effect.


 


47

















 


i.              The
Company’s net sales for the three-month period ended on the last day of the
month prior to the month in which the Closing Date is scheduled to occur shall
not be less than the corresponding amount for such period as set forth on Schedule
11(i).


 


j.              The Company shall
not have received notice from any Governmental Entity of any event, development
or determination that has resulted in, or would reasonably be expected to
result in, or the Company otherwise has not determined that a reserve should be
established with respect to, any portion in excess of $2,000,000 of the
approximately $23,000,000 U.S. federal income Tax refund the Company received
in March 2009 being repaid to any Governmental Entity.


 


k.             The Company shall
have made all filings under all applicable Securities Laws necessary to
consummate the Transactions (excluding any beneficial ownership filings
required to be made by any of the Buyers in accordance with Securities Laws as
a result of the Transactions), including the issuance of the Securities
pursuant to this Agreement, in compliance with such Laws.


 


l.              That
certain Management Services Agreement, between the Company and Sterling Fund
Management, LLC (“SFM”), shall
have been duly executed and delivered by the Company, in substantially the form
attached hereto as Exhibit G (the “Management Services Agreement”).


 


m.            Each of the Company
Board and the Committee shall have adopted, and not rescinded or otherwise
amended or modified, resolutions consistent with Section 3(b) above
and in a form reasonably acceptable to a Majority of the Buyers (collectively,
the “Resolutions”).


 


n.             The Company shall
have delivered to such Buyer a certificate evidencing the incorporation (or
other organization) and good standing of the Company and each Subsidiary in
such entity’s state or other jurisdiction of incorporation or organization,
issued by the Secretary of State (or other applicable authority) of such state
or jurisdiction of incorporation or organization as of a date within ten days
of the Closing Date.


 


o.             The Company shall
have delivered to such Buyer a secretary’s certificate, dated as of the Closing
Date, certifying as to (i) the Resolutions, (ii) the Restated
Charter, (iii) the Restated Bylaws, (iv) the certificate or articles
of incorporation or other organizational documents of each of the Subsidiaries,
each certified as of a date within 10 days of such Closing Date, by the
Secretary of State of the state of such entity’s jurisdiction of incorporation
or organization, and (v) the bylaws or other similar documents of each of
the Subsidiaries, each as in effect at the Closing.


 


p.             The Company shall
have delivered to such Buyer a letter from the Company’s transfer agent
certifying the number of shares of Common Stock outstanding as of a date within
five days of such Closing Date.


 


q.             The Company shall
have delivered to such Buyer such other documents relating to the Transactions
as a Majority of the Buyers or their counsel may reasonably request.


 


48

















 


12.           TERMINATION, AMENDMENT AND WAIVER.


 


a.             Termination by
Mutual Consent.  This Agreement may
be terminated at any time prior to the Closing, by mutual written consent of a
Majority of the Buyers and the Company.


 


b.             Termination by
Either a Majority of the Buyers or the Company.  This Agreement may be terminated by either a
Majority of the Buyers or the Company at any time prior to the Closing:


 


(i)            whether
before or after satisfaction of the condition set forth in Section 9(a),
if the Closing has not occurred by October 31, 2009 (the “Outside Date”), except that the right to
terminate this Agreement under this clause will not be available to any party
to this Agreement whose failure to fulfill any of its obligations under this
Agreement has been a principal cause of, or resulted in, the failure to
consummate the Closing by such date, provided, however, that the
Company may not terminate this Agreement pursuant to this paragraph, and any
purported termination pursuant to this paragraph shall be void and of no force
or effect, unless in advance of or concurrently with such termination the
Company reimburses Sterling for its Expenses in the manner provided for in Section 14(m);


 


(ii)           whether
before or after satisfaction of the condition set forth in Section 9(a),
if any Law or Governmental Entity prohibits consummation of the Closing or if
any order, judgment, injunction, award, decree or writ handed down, adopted or
imposed by, any court of competent jurisdiction or Governmental Entity
restrains, enjoins or otherwise prohibits consummation of the Closing, and such
order, judgment, injunction, award, decree or writ has become final and
nonappealable; provided, however, that the Company may not
terminate this Agreement pursuant to this paragraph, and any purported
termination pursuant to this paragraph shall be void and of no force or effect,
unless in advance of or concurrently with such termination the Company
reimburses Sterling for its Expenses in the manner provided for in Section 14(m);
or


 


(iii)          if this
Agreement has been submitted to the shareholders of the Company for adoption at
a duly convened Company Shareholders Meeting and the Shareholder Approval shall
not have been obtained at such Company Shareholders Meeting (including any
adjournment or postponement thereof).


 


c.             Termination by a
Majority of the Buyers.  This
Agreement may be terminated by a Majority of the Buyers at any time prior to
the Closing:


 


(i)            if (A) the
Company Board effects a Change of Board Recommendation (or any action by any
committee of the Company Board which, if taken by the full Company Board, would
be a Change of Board Recommendation), or (B) the Company or the Company
Board resolves or publicly announces its intention to do the foregoing;


 


(ii)           if (A) the
Company materially breaches its obligations under Sections 4(a), 4(b) or
4(k), or the Company Board or any committee thereof shall resolve to do
any of the foregoing, (B) the Company Board fails to reaffirm (publicly,
if so requested) its recommendation in favor of the adoption and approval of
this Agreement,


 


49

















 


the
issuance of the Common Shares to the Buyers and the other Transactions, within
10 calendar days after a Majority of the Buyers requests in writing that such
recommendation be reaffirmed, or (C) a tender or exchange offer relating
to the Company’s securities shall have been commenced by a Person unaffiliated
with any of the Buyers, and the Company shall not have sent to its
securityholders pursuant to Rule 14e-2 promulgated under the 1933 Act,
within 10 Business Days after such tender or exchange offer is first published,
sent or given, a statement disclosing that the Company Board recommends
rejection of such tender or exchange offer;


 


(iii)          provided
that none of the Buyers who is a party to such termination action is in
material breach of its respective obligations under this Agreement, if a breach
or failure of any representation, warranty or covenant of the Company contained
in this Agreement shall have occurred, which breach (A) would reasonably
be expected to give rise to the failure of a condition set forth in Section 11(b) and
(B) as a result of such breach, such condition would not reasonably be
expected to be satisfied prior to the Outside Date; or


 


(iv)          provided
that none of the Buyers who is a party to such termination action is in
material breach of its respective obligations under this Agreement, if the
Company Shareholders Meeting has not occurred on or prior to August 31,
2009, provided, however, that, if prior to the termination of
this Agreement pursuant to this Section 12(c)(iv), the initial
Company Shareholders Meeting is completed, a Majority of the Buyers shall no
longer be entitled to terminate this Agreement pursuant to this Section 12(c)(iv) (but
the foregoing proviso shall in no way limit or otherwise affect the termination
rights of a Majority of the Buyers under any other provision of this Section 12).


 


d.             Termination by
the Company. This Agreement may be terminated by the Company at any time
prior to the Closing:


 


(i)            provided
that the Company is not in material breach of its obligations under this
Agreement, if a breach or failure of any representation, warranty or covenant
of the Buyers contained in this Agreement shall have occurred, which breach (A) would
reasonably be expected to give rise to the failure of a condition set forth in Section 10(c) and
(B) as a result of such breach, such condition would not reasonably be
expected to be satisfied prior to the Outside Date; provided that, the
Company may only terminate this Agreement pursuant to this Section 12(d)(i) if
the Allocation Percentage of such breaching Buyer or Buyers, in the aggregate,
exceeds 20% of the Purchase Price; or


 


(ii)           if the
Company Board determines to accept a Superior Proposal, but only if the Company
shall have complied in all respects with its obligations under Section 4(k) with
respect to such Superior Proposal (and any Competing Proposal that was a
precursor thereto) and is otherwise permitted to accept such Superior Proposal
pursuant to Section 4(k)(iv); provided, however, that
the Company shall not terminate this Agreement pursuant to this paragraph, and
any purported termination pursuant to this paragraph shall be void and of no
force or effect, unless in advance of or concurrently with such termination the
Company enters into the Alternative Acquisition Agreement


 


50

















 


and
the Company pays the Termination Fee and the Expenses in the manner provided
for in Section 12(f)(i) and 14(m).


 


e.             Effect of
Termination. If this Agreement is terminated pursuant to this Section 12,
it will become void and of no further force and effect, with no liability on
the part of any party to this Agreement (or any of their respective former,
current, or future general or limited partners, shareholders, managers,
members, directors, officers, Affiliates or agents), except that the provisions
of this Section 12(e), Section 12(f), Section 13
and Section 14, including the Company’s obligations under Section 14(m),
will survive any termination of this Agreement; provided, however, that nothing
herein shall relieve the Company from liabilities for damages incurred or
suffered by any Buyer as a result of any knowing or intentional breach by the
Company of any of its representations, warranties, covenants or other
agreements set forth in this Agreement that would reasonably be expected to
cause any of the conditions set forth in Sections 9 and 11(b) not
to be satisfied.


 


f.              Termination
Fees.


 


(i)            The
Company will pay, or cause to be paid, to an account or accounts designated by
Sterling, by wire transfer of immediately available funds an amount equal to
the Termination Fee:


 


(A)          if this Agreement is terminated by a Majority of the Buyers
pursuant to Section 12(c)(i) or Section 12(c)(ii),
in which event payment will be made within five Business Days after such
termination;


 


(B)           if this Agreement is terminated by the Company pursuant to
Section 12(d)(ii), in which event payment must be made in advance
of or concurrent with such termination;


 


(C)           if (1) this Agreement is terminated by a Majority of
the Buyers or the Company pursuant to Section 12(b)(i) (but
subject to the limitations set forth in Section 12(f)(ii) below),
by either a Majority of the Buyers or the Company pursuant to Section 12(b)(iii),
by a Majority of the Buyers pursuant to Section 12(c)(iii) or
by a Majority of the Buyers pursuant to Section 12(c)(iv), and (2) within
12 months (or 6 months if a termination occurs pursuant to Section 12(b)(iii) and
no Competing Proposal has been publicly disclosed prior to the date of the
Company Shareholders Meeting) following the date of such termination, the
Company enters into a definitive agreement providing for the implementation of
any Competing Proposal or consummates any Competing Proposal, in which event
payment will be made on or prior to the date on which the Company enters into
such definitive agreement or consummates such Competing Proposal, as
applicable.


 


(ii)           Notwithstanding the foregoing, the
Company shall not be obligated to pay or cause to be paid to Sterling the
Termination Fee pursuant to Section 12(f)(i)(C) above if all
of the following conditions have been met: (A) this Agreement has been


 


51

















 


terminated
by a Majority of the Buyers pursuant to Section 12(b)(i), (B) no
Competing Proposal has been received by the Company or publicly disclosed prior
to the date of the notice of termination, (C) each of the conditions set forth in Sections 9 and 11
has been satisfied, other than (1) those conditions that only can be
satisfied at Closing, and (2) either of the conditions set forth in Section 11(f),
(D) the Company is ready, willing and able to satisfy at Closing each of
the conditions described in clause (C)(1) of this Section 12(f)(ii),
(E) the Company has satisfied in all material respects all of its
obligations under this Agreement, including pursuant to Section 4(g) and
otherwise with respect to satisfaction of the conditions set forth in Section 11(f),
and (F) on the Outside Date, the Company delivers to Sterling a
certificate in the form attached hereto as Exhibit I, duly executed
by the chief executive officer of the Company, to the foregoing effect.


 


(iii)          Each of
the Company and each of the Buyers acknowledges that the agreements contained
in this Section 12(f) are an integral part of the
Transactions, that without these agreements the Company and each of the Buyers
would not have entered into this Agreement, and that any amounts payable
pursuant to this Section 12(f) do not constitute a penalty. If
the Company fails to pay as directed in writing by Sterling any amounts due to
accounts designated by Sterling pursuant to this Section 12(f) within
the time periods specified in this Section 12(f), the Company shall
pay the costs and expenses (including reasonable legal fees and expenses)
incurred by Sterling in connection with any action, including the filing of any
lawsuit, taken to collect payment of such amounts, together with interest on
such unpaid amounts at the prime lending rate prevailing during such period as
published in The Wall Street Journal plus 500
basis points, calculated on a daily basis from the date such amounts were
required to be paid until the date of actual payment.


 


g.             Amendment.  This Agreement may be amended by the parties
to this Agreement at any time prior to the Closing, whether before or after
Shareholder Approval; provided, however, that (i) no
amendment that requires further shareholder approval under applicable Laws
after Shareholder Approval hereof will be made without such required further
approval and (ii) such amendment has been duly authorized or approved by a
Majority of the Buyers and the Company. 
This Agreement may not be amended, modified or supplemented except by an
instrument in writing signed by the Company and a Majority of the Buyers.  Any such amendment shall apply to, and bind
all Buyers.


 


h.             Extension;
Waiver. At any time, whether prior to, on or after the Closing, a Majority
of the Buyers, on the one hand, and the Company, on the other hand, may, as
applicable (i) extend the time for the performance of any of the
obligations of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained in this Agreement
or in any Transaction Document, or (iii) unless prohibited by applicable
Laws, waive compliance with any of the covenants or conditions contained in
this Agreement.  Any agreement on the
part of a party to any extension or waiver will be valid only if set forth in
an instrument in writing signed by such party. 
The failure of any party to assert any of its rights under this
Agreement or otherwise will not constitute a waiver of such rights.


 


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13.           INDEMNIFICATION.


 


a.             Rights to
Indemnification.


 


(i)            In
consideration of each Buyer’s execution and delivery of this Agreement and the
other Transaction Documents to be executed by such Buyer and acquiring the
Securities hereunder and thereunder and in addition to all of the Company’s and
the Subsidiaries’ other obligations under the Transaction Documents, the
Company shall defend, protect, indemnify and hold harmless such Buyer and each
other holder of the Securities and all of their shareholders, partners,
officers, directors, members, managers, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives
(including those retained in connection with the Transactions) (collectively,
the “Indemnitees”) from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitees is a party to the action for
which indemnification hereunder is sought), and including reasonable attorneys’
fees and disbursements (the “Indemnified
Liabilities”), incurred by any Indemnitees as a result of, or
arising out of, or relating to (A) any misrepresentation or breach of any
representation or warranty made by the Company or any of the Subsidiaries in
any of the Transaction Documents, (B) any breach of any covenant,
agreement or obligation of the Company or any of the Subsidiaries contained in
the Transaction Documents, or (C) any cause of action, suit or claim
brought or made against such Indemnitees and arising out of or resulting from
the execution, delivery, performance or enforcement of the Transaction
Documents in accordance with the terms thereof (other than a cause of action,
suit or claim brought or made against an Indemnitee by such Indemnitee’s
owners, investors or Affiliates).  To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall, subject to Section 13(b), make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities that is permissible under applicable law.


 


(ii)           Promptly
after receipt by the Indemnitee under this Section 13 of notice of
the commencement of any action or proceeding (including by any Governmental
Entity) involving any Indemnified Liabilities, such Indemnitee shall, if a
claim in respect thereof is to be made against the Company under this Section 13,
deliver to the Company a written notice of the commencement thereof, and the
Company shall have the right to participate in, and, to the extent the Company
so desires, to assume control of the defense thereof with counsel mutually
satisfactory to the Company and the Indemnitee. 
In any action or proceeding under this Section 13, any
Indemnitee may retain its own counsel, but the fees and expenses of that
counsel will be at the expense of that Indemnitee, unless (A) the Company
and the Indemnitee shall have mutually agreed to the retention of that counsel,
(B) the Company does not assume the defense of such proceeding in a timely
manner, or (C) in the reasonable opinion of counsel retained by the
Indemnitee, the representation by such counsel for the Indemnitee and the
Company would be inappropriate due to actual or potential differing interests
between such Indemnitee and any other party represented by such counsel in such
proceeding.  If the Indemnitee is
entitled to retain its own counsel at the expense of the Company as provided in
the preceding sentence, the Company shall pay the reasonable fees for only one
separate legal counsel (plus local counsel, if necessary) for the Indemnitees,
and such legal counsel shall be selected by a Majority of the Buyers, subject
to the Company’s


 


53

















 


approval
(which shall not be unreasonably withheld, delayed or conditioned).  The Indemnitee shall cooperate with the
Company in connection with any negotiation or defense of any such Indemnified
Liabilities by the Company and shall furnish to the Company all information
reasonably available to the Indemnitee which relates to such Indemnified
Liabilities.  The Company shall keep the
Indemnitee fully apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto. 
The Company shall not be liable for indemnification hereunder as to any
settlement of any action, claim or proceeding effected without its prior
written consent; provided, however, that the Company shall not
unreasonably withhold, delay or condition its consent.  The Company shall not, without the prior written
consent of the Indemnitee, which consent shall not be unreasonably withheld,
delayed or conditioned, consent to entry of any judgment or enter into any
settlement or other compromise with respect to any pending or threatened action
or claim in respect of which indemnification or contribution may be or has been
sought hereunder (whether or not the Indemnitee is an actual or potential party
to such action or claim) which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnitee of a release
from all liability in respect to such claim or litigation and such settlement
shall not include any admission as to fault on the part of the Indemnitee.  Following indemnification as provided for
hereunder, the Company shall be subrogated to all rights of the Indemnitee with
respect to all third parties, firms or corporations relating to the matter for
which indemnification has been made.  The
failure to deliver written notice to the Company within a reasonable time of
the commencement of any such action shall not relieve the Company of any
liability to the Indemnitee under this Section 13, except to the
extent that the Company is prejudiced in its ability to defend such action.


 


(iii)          Notwithstanding
anything to the contrary, each Buyer hereby agrees that any claim for
indemnification pursuant to this Section 13 may only be made if
such claim has been authorized and approved in writing by a Majority of the
Buyers, and any action taken in furtherance of any such claim shall require the
authorization and approval of a Majority of the Buyers.  Any action taken with respect to any claim
for indemnification pursuant to this Section 13 by or on behalf of
any Indemnitee without the authorization and approval contemplated herein shall
be void and of no force or effect.


 


(iv)          The
indemnification required by this Section 13 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Liabilities are
incurred.


 


(v)           Each of
the Buyers acknowledges and agrees that, after the Closing, in the absence of
fraud by the Company, any of the Subsidiaries or any of their respective
Affiliates or representatives, the indemnity agreements contained in this Section 13,
together with any remedies that may be available pursuant to Section 14(n) hereof,
shall be the sole and exclusive remedies for the Buyers for (A) any cause
of action or similar right of the Indemnitee against the Company or others, and
(B) any liabilities the Company may be subject to pursuant to Laws, in any
event, arising from, or otherwise related to, the Transactions.  For purposes of clarification, nothing set
forth in this Section 13(a)(v) shall serve to limit the rights
of any Buyer under Sections 12(f) or 14(m) hereof.


 


54
















 


b.             Limitations
on Indemnification.


 


(i)            Indemnitees
shall not be entitled to receive any indemnification payments under Section 13
until the aggregate amount of Indemnified Liabilities incurred by the
Indemnitees exceed Two Hundred Fifty Thousand Dollars ($250,000) (the “Basket Amount”), and then the Company shall
be liable for the amount of Indemnified Liabilities in excess of the Basket
Amount.


 


(ii)           The
maximum aggregate amount of indemnification payments under Section 13
to which the Indemnitees shall be entitled to receive, upon the triggering of
any indemnification obligation hereunder, shall not exceed, Five Million
Dollars ($5,000,000) (the “Cap Amount”);
provided, however, that the Cap Amount shall not apply to any indemnification
payments under Section 13 to the Indemnitees arising out of or
otherwise by virtue of any inaccuracy in any of the representations and
warranties contained in Sections 3(a), 3(b), 3(d), 3(o) or
3(v).


 


(iii)          Notwithstanding
anything to the contrary in this Agreement, any indemnification payments based
upon or any Indemnified Liabilities related to claims of fraud or willful
misconduct, shall not be subject to either the Basket Amount set forth in Section 13(b)(i) or
the Cap Amount set forth in Section 13(b)(ii) and shall not be
used in calculating whether the Cap Amount set forth in Section 13(b)(ii) has
been met.


 


(iv)          All
indemnification payments under Section 13 shall be determined net
of any net tax benefits realized by and available to the Indemnitees with
respect to the related Indemnified Liabilities.


 


14.           MISCELLANEOUS.


 


a.             Governing Law; Jurisdiction;
Jury Trial.


 


(i)            All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the Laws of the State of Delaware,
without giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Delaware  or any
other jurisdiction) that would cause the application of the Laws of any
jurisdiction other than the State of Delaware.


 


(ii)           Each of
the parties hereto irrevocably agrees that any Litigation or proceeding with
respect to this Agreement and the rights and obligations arising hereunder, or
for recognition and enforcement of any judgment in respect of this Agreement
and the rights and obligations arising hereunder brought by any other party
hereto or its successors or assigns, shall be brought and determined
exclusively in the state or federal courts for the State of Delaware.  Each of the parties hereto hereby irrevocably
submits with regard to any such action or proceeding for itself and in respect
of its property, generally and unconditionally, to the personal jurisdiction of
the aforesaid courts and agrees that it will not bring any action relating to
this Agreement or any of the Transactions in any court or tribunal other than
the aforesaid courts.  Each of the
parties hereto hereby irrevocably waives, and agrees not to assert, by way of
motion, as a defense, counterclaim or otherwise, in any action or proceeding
with respect to this 


 


55

















 


Agreement
and the rights and obligations arising hereunder or for recognition and
enforcement of any judgment in respect of this Agreement and the rights and
obligations arising hereunder, (A) any claim that it is not personally
subject to the jurisdiction of the above named courts for any reason other than
the failure to serve process in accordance with this Section 14(a)(ii),
(B) any claim that it or its property is exempt or immune from jurisdiction
of any such court or from any legal process commenced in such courts (whether
through service of notice, attachment prior to judgment, attachment in aid of
execution of judgment, execution of judgment or otherwise) and (C) to the
fullest extent permitted by the applicable Law, any claim that (I) the
suit, action or proceeding in such court is brought in an inconvenient forum, (II) the
venue of such suit, action or proceeding is improper or (III) this
Agreement, or the subject matter hereof, may not be enforced in or by such
courts.  Each of the parties hereto
agrees that mailing of process or other papers in connection with any such
action or proceeding in the manner provided in Section 14(f) or
in such other manner as may be permitted by applicable Laws, will be valid and
sufficient service thereof.


 


(iii)          EACH
PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER
THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH SUCH PARTY IRREVOCABLY
AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION, CONTROVERSY OR OTHER LEGAL ACTION DIRECTLY OR
INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS
CONTEMPLATED BY THIS AGREEMENT. EACH PARTY TO THIS AGREEMENT CERTIFIES AND
ACKNOWLEDGES THAT (A) NO REPRESENTATIVE OF ANY OTHER PARTY HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT SEEK TO
ENFORCE THE FOREGOING WAIVER IN THE EVENT OF A LEGAL ACTION, (B) SUCH
PARTY HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) SUCH PARTY MAKES
THIS WAIVER VOLUNTARILY AND (D) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO
THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN
THIS SECTION 14(a)(iii).


 


b.             Counterparts.  This Agreement and any amendments hereto may
be executed and delivered in two or more identical counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original, but all of which taken together shall
constitute one and the same agreement. 
This Agreement shall become effective and binding upon each party hereto
when counterparts have been signed by each party hereto and delivered to the
other parties hereto, it being understood that all parties need not sign the
same counterpart.  In the event that any
signature to this Agreement or any amendment hereto is delivered by facsimile
transmission or by e-mail delivery of a “.pdf” format data file, such signature
shall create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) with the same force and effect as if such
facsimile or “.pdf” signature page were an original thereof.  At the request of any party each other party
shall promptly re-execute an original form of this Agreement or any amendment
hereto and deliver the same to the other party. 
No party hereto shall raise the use of a facsimile machine or e-mail 


 


56

















 


delivery of a “.pdf” format data file to
deliver a signature to this Agreement or any amendment hereto or the fact that
such signature was transmitted or communicated through the use of a facsimile
machine or e-mail delivery of a “.pdf” format data file as a defense to the
formation or enforceability of a contract, and each party hereto forever waives
any such defense.


 


c.             Headings.  The headings of this Agreement are for
convenience of reference only and shall not form part of, or affect the meaning
or interpretation of, this Agreement.


 


d.             Severability.  If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.


 


e.             Entire
Agreement.  This Agreement supersedes
all prior oral or written agreements between each Buyer, the Company, the Subsidiaries,
their Affiliates and Persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters.


 


f.              Notices.  Any notice, consent, waiver, request,
instruction or other communication required or permitted to be given under the
terms of this Agreement shall be in writing and will be deemed to have been
duly given:  (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after
deposit with a nationally recognized overnight delivery service, in each case
properly addressed to the party to receive the same.  The addresses and facsimile numbers for such
communications shall be:


 


If
to the Company:


 


Select Comfort Corporation


9800 59th Avenue North


Minneapolis, Minnesota 55442


Attention:   William
McLaughlin


Facsimile:   (763) 551-6888


 


and


 


Select Comfort Corporation


9800 59th Avenue North


Minneapolis, Minnesota 55442


Attention:   Mark Kimball


Facsimile:   (763) 551-6888


 


With a copy to (which shall not constitute
notice):


 


57

















 


Oppenheimer Wolff Donnelly LLP


Plaza VII, Suite 3300


45 South Seventh Street


Minneapolis, MN  55402-1609


Attention:   Thomas R. Marek


Facsimile:   (612) 607-7100


 


If
to a Buyer, to it at the address and facsimile number set forth on the Schedule
of Buyers, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers, or, in the case of a Buyer or any party named above, at such
other address and/or facsimile number and/or to the attention of such other
person as the recipient party has specified by written notice given to each
other party five days prior to the effectiveness of such change.  Written confirmation of receipt (A) given
by the recipient of such notice, consent, waiver or other communication, (B) mechanically
or electronically generated by the sender’s facsimile machine containing the
time, date, recipient facsimile number and an image of the first page of
such transmission or (C) provided by a nationally recognized overnight
delivery service shall be rebuttable evidence of personal service, receipt by
facsimile or deposit with a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.


 


g.             Successors
and Assigns.  This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties and
their respective successors and assigns, including any purchasers of the
Securities.  The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of a Majority of the Buyers, including by merger or consolidation.  A Buyer may not assign this Agreement or any
rights or obligations hereunder without the prior written consent of the
Company and a Majority of the Buyers, including by merger or
consolidation.  Notwithstanding the
preceding sentence, Sterling may assign some or all of its rights and
obligations hereunder to an Affiliate of Sterling without the consent of the
Company; provided, however, that any such assignment shall not release Sterling
from its obligations hereunder unless such obligations are assumed by such
assignee (evidenced in writing in form and substance reasonably acceptable to
the Company) and the Company has consented to such assignment and assumption,
which consent shall not be unreasonably withheld.  Notwithstanding anything to the contrary
contained in the Transaction Documents, a Buyer shall be entitled to pledge the
Securities in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities.


 


h.             No
Third Party Beneficiaries.  This
Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns and, to the extent provided in Section 13
hereof, each Indemnitee, and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person.


 


i.              Survival;
Time Limits on Indemnification Obligations..  The representations and warranties of each
Buyer and the Company shall survive the Closing for a period of 12 months;
provided, however, that (i) the representations and warranties of the
Company set forth in Sections 3(a), 3(b), 3(c) and 3(d) shall
survive indefinitely; and (ii) the representations and warranties of the
Company set forth in Sections 3(o), 3(r) and 3(v) shall
survive for 90 days following the expiration of the period of limitations
applicable to the liabilities in question (giving effect to any waiver,
mitigation or extension thereof). 
Neither the period of survival nor 


 


58

















 


the liability of the Company with respect to
the Company’s representations and warranties shall be reduced by any
investigation made at any time by or on behalf of any Buyer.  No Indemnitee will be indemnified and held
harmless for any liability for a breach of any representation or warranty of
the Company unless the Company is given written notice by or on behalf of a
Majority of the Buyers asserting a claim on or before the expiration of such
representation or warranty of the Company. 
If written notice of a claim has been given prior to the expiration of
the applicable representation and warranty of the Company, then the relevant
representation or warranty shall survive as to such claim, until such claim has
been finally resolved.  The agreements
and covenants set forth in Sections 5, 6, 7, 8 and 14
shall survive the Closing.  Each Buyer
shall be responsible only for its own representations, warranties, agreements
and covenants hereunder.


 


j.              Further
Assurances.  Each party shall do and
perform, or cause to be done and performed, all such further acts and things,
and shall execute and deliver all such other agreements, certificates,
instruments and documents, as the other party may reasonably request in order
to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the Transactions.


 


k.             Placement
Agent.  The Company represents and
warrants to each Buyer that it has not engaged any placement agent, broker or
financial advisor in connection with the sale of the Common Shares, except for
Piper Jaffray & Co. (“Piper”).  The Company shall be responsible for the
payment of any placement agent’s fees or broker’s commissions, all of which are
set forth in that certain Letter Agreement, dated September 2, 2008, as
amended on January 13, 2009, a copy of which has been provided to each
Buyer prior to the date of this Agreement, relating to or arising out of the
Transactions, including any fees or commissions of Piper.  The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including attorneys’ fees and
out-of-pocket expenses) arising in connection with any claim for any such
payment.


 


l.              No
Strict Construction.  The language
used in this Agreement will be deemed to be the language chosen by the parties
to express their mutual intent, and no rules of strict construction will
be applied against any party.


 


m.            Expenses.


 


(i)            On or
prior to the earlier of the Closing and the termination of this Agreement
pursuant to Section 12 hereof, except for any termination by the
Company pursuant to Section 12(d)(i),  the Company shall reimburse
Sterling for the reasonable actual and documented out-of-pocket
expenses incurred by Sterling and its Affiliates in connection with this
Agreement and the Transactions, including reasonable, actual and documented
fees and expenses of attorneys relating to negotiating and preparing the
Transaction Documents and consummating the Transactions (collectively, the “Expenses”), in an amount not to exceed $1,000,000 (the “Aggregate Expense Cap”).  In addition to the obligations of the Company
set forth in this Section 14(m), and not in limitation thereof, but
in all events subject to the Aggregate Expense Cap, the Company shall reimburse
Sterling for the reasonable, actual and documented out-of-pocket fees, costs
and expenses incurred by Sterling and its Affiliates in connection with any
amendment, modification or waiver of any of the Transaction Documents, the 


 


59

















 


enforcement
of Sterling’s or any Buyer’s rights and remedies under any of the Transaction
Documents.  If and to the extent there
are any amounts payable by Sterling to the Company pursuant to this Agreement
or any of the other Transaction Documents, including any amount to be delivered
by Sterling to the Company for Sterling’s Allocation Percentage of the Purchase
Price for the Common Shares to be purchased by Sterling at Closing, Sterling
may, in its sole discretion, set-off any amounts payable by the Company to
Sterling pursuant to this Section 14(m) against any amounts
payable by Sterling to the Company.  In
addition, at the Closing, the Company shall pay the financial advisory fees and
expenses of Signal Hill Capital Group LLC (“Signal
Hill”) in connection with the Transactions, all of which are set
forth in that certain letter agreement, dated May 15, 2009, a copy of
which has been provided to the Company prior to the date of this Agreement; provided,
however, that in no event shall the Company be obligated to pay any fees
and expenses of Signal Hill in excess of $1,270,000 (the “Signal Hill Cap”).  Sterling shall pay and hold the Company
harmless against any liability, loss or expense (including attorneys’ fees and
out-of-pocket expenses) arising in connection with any action, claim or proceeding
under Section 14(m) for any amounts in excess of the Aggregate
Expense Cap and the Signal Hill Cap.


 


(ii)           Each of
the Company and each of the Buyers acknowledges that the agreements contained
in this Section 14(m) are an integral part of the Transactions,
that without these agreements the Company and each of the Buyers would not have
entered into this Agreement, and that any amounts payable pursuant to this Section 14(m) do
not constitute a penalty. If the Company fails to pay as directed in writing by
Sterling any amounts due to accounts designated by Sterling pursuant to this Section 14(m) within
the time periods specified in this Section 14(m), the Company shall
pay the costs and expenses (including reasonable legal fees and expenses)
incurred by Sterling in connection with any action, including the filing of any
lawsuit, taken to collect payment of such amounts, together with interest on
such unpaid amounts at the prime lending rate prevailing during such period as
published in The Wall Street Journal plus 500
basis points, calculated on a daily basis from the date such amounts were
required to be paid until the date of actual payment.


 


(iii)          On or
prior to the date hereof, the Company has deposited $350,000 in an escrow
account, pursuant to the terms of an escrow agreement, a copy of which is
attached hereto as Exhibit H (the “Escrow Agreement”), to secure the Company’s obligations
pursuant to this Section 14(m).


 


n.             Specific
Performance.  The parties to this
Agreement agree that irreparable damage would occur and that the parties to
this Agreement would not have any adequate remedy at Law in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. 
It is accordingly agreed that the Company, on the one hand, and the
Buyers, with the written consent of a Majority of the Buyers, on the other
hand, shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions of this
Agreement in any state or federal court located in the State of Delaware, in
each case without the necessity of posting bond or other security or showing
actual damages, and this being in addition to any other remedy to which they
are entitled at law or in equity.  For
purposes of clarification, each Buyer 


 


60

















 


hereby acknowledges and agrees that any
action by any Buyer pursuant to this Section 14(n) may only be
made by a Majority of the Buyers.


 


o.             Confidentiality.  Each of the parties acknowledges, agrees and
covenants to keep strictly confidential, and shall not disclose, or allow or
permit any other Person to disclose, any information provided by any other
party hereto pursuant to this Agreement or any of the other Transaction
Documents, including any notices provided hereunder; provided that a
party may disclose such information to its officers, directors, employees,
partners, members, managers, equityholders, advisors and agents who agree to be
bound by the confidentiality obligation set forth in this Section 14(o).  Each party hereto shall take all actions
reasonably necessary to ensure that such information remains confidential in
accordance with the terms of this Agreement and the other Transaction
Documents.


 


p.             Independent
Nature of Buyers.  The obligations of
each Buyer hereunder are several and not joint with the obligations of any
other Buyer, and no Buyer shall be responsible in any way for the performance
of the obligations of any other Buyer hereunder.  Each Buyer shall be responsible only for its
own representations, warranties, agreements and covenants hereunder.  The decision of each Buyer to purchase the
Securities pursuant to this Agreement has been made by such Buyer independently
of any other Buyer and independently of any information, materials, statements
or opinions as to the business, affairs, operations, assets, properties,
liabilities, results of operations, condition (financial or otherwise) or
prospects of the Company or any of the Subsidiaries which may have been made or
given by any other Buyer or by any agent or employee of any other Buyer, and no
Buyer or any of its agents or employees shall have any liability to any other
Buyer (or any other Person or entity) relating to or arising from any such
information, materials, statements or opinions. 
Nothing contained herein, and no action taken by any Buyer pursuant
hereto or thereto, shall be deemed to constitute the Buyers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Buyers are in any way acting in concert or as a group with
respect to such obligations or the Transactions.  Each Buyer shall be entitled to independently
protect and enforce its rights, including the rights arising out of this
Agreement, the Common Shares and the other Transaction Documents, and it shall
not be necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose.  Each of the
Buyers acknowledges and agrees that (i) no Buyer shall be liable to any
other Buyer by reason of any act, or failure to act (including with respect to
any matter requiring the approval of Buyers representing a specified percentage
in interest, whether a Majority of the Buyers or otherwise) in connection with
this Agreement or any of the other Transaction Documents, and (ii) no
Buyer shall owe any duties, fiduciary or otherwise, or any obligations to any
other Buyer with respect to the Transaction Documents or the Transactions.  Each Buyer hereby unconditionally,
irrevocably and absolutely releases and discharges each other Buyer and such
Buyer’s Affiliates, directors, officers, partners, members, managers,
employees, agents, successors and/or assigns, from any and all loss, liability,
claims, costs (including attorneys’ fees), demands, causes of action, or suits
of any type, whether in law and/or in equity, related directly or indirectly to
any action, or any inaction, by any such Buyer in connection with the Transactions,
this Agreement or any other Transaction Document.


 


q.             Interpretative
Matters.  Unless the context
otherwise requires, (i) all references to Sections, Schedules, Appendices
or Exhibits are to Sections, Schedules, Appendices or Exhibits contained in or
attached to this Agreement, (ii) each accounting term not otherwise
defined in 


 


61

















 


this Agreement has the meaning assigned to it
in accordance with GAAP, (iii) words in the singular or plural include the
singular and plural and pronouns stated in either the masculine, the feminine
or neuter gender shall include the masculine, feminine and neuter, (iv) the
words “hereof,” “herein” and words of similar effect shall reference this
Agreement in its entirety, and (v) the use of the word “including” in this
Agreement shall be by way of example rather than limitation.


 


* 
*  *  * 
*  *


 


62

















 


IN WITNESS WHEREOF, each
party hereto has caused this Securities Purchase Agreement to be duly executed
as of the date first written above.


 


 


	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  SELECT COMFORT CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. McLaughlin

  
	
   

  	
  Name:

  	
  William R. McLaughlin

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  STERLING SC INVESTOR, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: Sterling Capital Partners III, L.P.

  
	
   

  	
  Its: Sole Member

  
	
   

  	
   

  
	
   

  	
  By: SC Partners III, L.P.

  
	
   

  	
  Its: General Partner

  
	
   

  	
   

  
	
   

  	
  By: Sterling Capital Partners III, LLC

  
	
   

  	
  Its: General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ R. Christopher Hoehn-Saric

  
	
   

  	
  Name: R. Christopher Hoehn-Saric

  
	
   

  	
  Title: Senior Managing Director

  
				



 

















 


SCHEDULE OF BUYERS


 


	
  Buyer’s Name

  and legal

  status

  	
   

  	
  Buyer Address and

  Facsimile Number

  	
   

  	
  Investment

  Amount

  	
   

  	
  Common

  Shares

  	
   

  	
  Buyer’s Representative’s

  Address and Facsimile

  Number (to receive copies of

  notices)

  	
   

  
	
  Sterling SC 

  Investor, LLC

  	
   

  	
  1033 Skokie Boulevard

  Suite 600  

  Northbrook,
  Illinois 60062

  Attention: Office of 

  General Counsel  

  Facsimile: (847)
  480-0199

  	
   

  	
  $

  	
  35,000,000

  	
   

  	
  50,000,000

  	
   

  	
  Katten Muchin Rosenman LLP

  525 W.
  Monroe Street  

  Chicago, Illinois
  60661-3693  

  Attention: Jeffrey R. Patt, Esq.  Mark
  D. Wood, Esq.  

  Facsimile:(312) 902-1061

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  $

  	
  35,000,000

  	
   

  	
   

  	
   

  	
   

  	
   

  



 
















 


APPENDIX


CERTAIN
DEFINED TERMS


 


For
purposes of this Agreement, the following terms shall have the following
meanings:


 


“Acceptable Confidentiality Agreement” means a
confidentiality and standstill agreement that contains confidentiality and
standstill provisions that are no less favorable in the aggregate to the
Company than those contained in the Confidentiality Agreement.


 


“Affiliate” means, with respect to any Person, another Person
that, directly or indirectly, (i) has a five percent (5%) equity interest
in that Person, (ii) has a common ownership with that Person, (iii) controls
that Person, (iv) is controlled by that Person or (v) shares common
control with that Person; and “control” or “controls” means that a Person has the power, direct or
indirect, to conduct or govern the policies of another Person.


 


“Allocation Percentage” means, for any Buyer, the quotient of
(A) the investment amount for the Common Shares purchased by such Buyer as
set forth opposite such Buyer’s name on the Schedule of Buyers, divided
by (B) the Purchase Price.


 


“Bloomberg” means Bloomberg Financial Markets (or any
successor thereto).


 


“Business Day” means any day other than Saturday, Sunday or
other day on which commercial banks in the New York City are authorized or
required by law to remain closed.


 


“Capital Lease Obligation” means, as to any Person, any
obligation that is required to be classified and accounted for as a capital
lease on a balance sheet of such Person prepared in accordance with GAAP, and
the amount of such obligation shall be the capitalized amount thereof,
determined in accordance with GAAP.


 


“Capital Stock” means any and all shares, interests,
participations or other equivalents (however designated) of capital stock of a
corporation, and any and all equivalent ownership interests in a Person (other
than a corporation).


 


“Change of Control” means (i) the consolidation, merger
or other business combination of the Company with or into another Person (other
than (A) a consolidation, merger or other business combination in which
holders of the Company’s voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, a majority of
the combined voting power of the surviving entity or entities entitled to vote
generally for the election of a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Company); (ii) the
sale or transfer of all or substantially all of the Company’s assets
(including, for the avoidance of doubt, the sale of all or substantially all of
the assets of the Subsidiaries in the aggregate); or (iii) the consummation
of a purchase, tender or exchange offer made to, and accepted by, the holders
of more than a majority of the outstanding Common Stock.


 


“Code” means the Internal Revenue Code of 1986, as amended.


 

















 


“Company Benefit Plan” means each “employee benefit plan”
within the meaning of Section 3(3) of ERISA, including each
multiemployer plan within the meaning of Section 3(37) of ERISA, and each
other stock purchase, stock option, restricted stock, severance, retention,
employment, consulting, change-of-control, collective bargaining, bonus,
incentive, deferred compensation, employee loan, fringe benefit and other
benefit plan, agreement, program, policy, commitment or other arrangement
(including any related funding mechanism now in effect or required in the
future) whether or not subject to ERISA, whether formal or informal, oral or
written, in each case under which any past or present director, officer,
employee, consultant or independent contractor of the Company or any of the
Subsidiaries has any present or future right to benefits or with respect to
which the Company or any of the Subsidiaries has any liability.


 


“Company Material Adverse Effect” means any event, state of
facts, circumstance, development, change or effect that, individually or in the
aggregate with all other events, states of fact, circumstances, developments,
changes and effects, (i) would materially adversely affect the ability of
the Company to consummate the Transactions, or to perform its obligations under
any of the Transaction Documents, in a timely manner or (ii) is materially
adverse to the business, assets, liabilities, condition (financial or
otherwise) or results of operations of the Company and the Subsidiaries, taken
as a whole; provided, however, that a “Company Material Adverse
Effect” shall not include any event, state of facts, circumstance,
development, change or effect resulting from: 
(A) (1) changes in general economic conditions, general
securities and financial market conditions, or global or national political
relations or conditions, (2) a material worsening of current conditions
caused by an act of terrorism or war (whether declared or not declared)
occurring after the date of this Agreement or any natural disasters or any
national or international calamity affecting the United States, (3) changes
in GAAP, (4) changes in laws of general applicability or interpretations
thereof by any Governmental Entity, except, (x) in the case of any of the
foregoing clauses (1), (2), (3) or (4), if such changes or developments have
a disproportionate or unique impact on the business, assets, liabilities,
condition or results of operations of the Company and the Subsidiaries, taken
as a whole, relative to other participants in the industries in which the
Company conducts its businesses or (y) in the case of the foregoing clause
(2), directly affect the physical properties of the Company and the
Subsidiaries; (B) any change in the Company’s stock price or trading
volume, in and of itself, or any failure, in and of itself, by the Company to
meet revenue or earnings guidance published or otherwise provided to the
Buyers; (C) actions or omissions of either party hereto taken as expressly
required by this Agreement or with the prior written consent of the other party
hereto in contemplation of the Transactions; or (D) the public
announcement of this Agreement and the Transactions.


 


“Competing Proposal” means any proposal or offer from any
Person or group of Persons other than Sterling or its Affiliates relating to
any direct or indirect acquisition or purchase of (i) a business or
division (or more than one of them) that in the aggregate constitutes 15% or
more of the net revenues, net income or assets of the Company and the
Subsidiaries, taken as a whole, (ii) 15% or more of the equity interest in
the Company (by vote or value), (iii) any tender offer or exchange offer
that if consummated would result in any Person or group of Persons beneficially
owning 15% or more of the equity interest (by vote or value) in the Company, (iv) any
merger, reorganization, consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution or similar transaction involving the
Company (or any Subsidiary or Subsidiaries of the Company whose business
constitutes 15% or more of the net revenues, net income or assets of the
Company and the Subsidiaries, taken as a whole), or (v) 


 

















 


subordinated debt (whether convertible into
equity or not) that in the aggregate constitutes a value of 15% or more of the
net revenues, net income or assets of the Company and the Subsidiaries, taken
as a whole.


 


“Confidentiality Agreement” means that certain
Confidentiality, Non-disclosure and Standstill Agreement, dated as of February 9,
2009, by and between the Company and SFM.


 


“Contingent Obligation” means, as to any Person, any direct
or indirect liability, contingent or otherwise, of such Person with respect to
any indebtedness, lease, dividend or other obligation of another Person if a
primary purpose or intent of the Person incurring such liability, or a primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.


 


“Contract” means any agreement, arrangement, commitment or
understanding that would constitute an enforceable contract under, in each
case, the Law governing such agreement, arrangement or understanding.


 


“Convertible Securities” means any stock or securities (other
than Options) directly or indirectly convertible into or exchangeable or
exercisable for shares of common stock.


 


“Environmental Laws” means all Laws relating to any matter
arising out of or relating to public health and safety, or pollution or
protection of the environment (including ambient air, surface water,
groundwater, land surface or subsurface strata) or workplace, including any of
the foregoing relating to the presence, use, production, generation, handling,
transport, treatment, storage, disposal, distribution, discharge, emission,
release, threatened release, control or cleanup of any Hazardous Materials.


 


“ERISA” means the Employee Retirement Security Act of 1974,
as amended.


 


“GAAP” means U.S. generally accepted accounting principles.


 


“Governmental Entity” means the government of the United
States or any other nation, or any political subdivision thereof, whether
state, provincial or local, or any agency (including any self-regulatory agency
or organization), authority, instrumentality, regulatory body, court, central
bank or other entity exercising executive, legislative, judicial, taxing,
regulatory or administration powers or functions of or pertaining to
government.


 


“Hazardous Materials” means any hazardous, toxic or dangerous
substance, materials and wastes, including hydrocarbons (including naturally
occurring or man-made petroleum and hydrocarbons), flammable explosives,
asbestos, urea formaldehyde insulation, radioactive materials, biological
substances, polychlorinated biphenyls, pesticides, herbicides and any other
kind and/or type of pollutants or contaminants (including materials which
include hazardous constituents), sewage, sludge, industrial slag, solvents
and/or any other similar substances, materials, or wastes and including any
other substances, materials or wastes that are or become regulated under any
Environmental Law (including any that are or become classified as hazardous or
toxic under any Environmental Law).


 

















 


“Indebtedness” of any Person means, without duplication:


 


(i)            All indebtedness for borrowed money;


 


(ii)           All obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than
unsecured account trade payables that are (A) entered into or incurred in
the ordinary course of the Company’s and the Subsidiaries’ business, (B) on
terms that require full payment within 90 days from the date entered into or
incurred and (C) not unpaid in excess of 90 days from the date entered
into or incurred, or are being contested in good faith and as to which such
reserve as is required by GAAP has been made;


 


(iii)          All reimbursement or payment
obligations with respect to letters of credit, surety bonds and other similar
instruments;


 


(iv)          All obligations evidenced by notes,
bonds, debentures, redeemable Capital Stock or similar instruments, including
obligations so evidenced incurred in connection with the acquisition of
property, assets or businesses;


 


(v)           All indebtedness created or arising
under any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller, bank or other financing source under such agreement in the event of
default are limited to repossession or sale of such property);


 


(vi)          All Capital Lease Obligations;


 


(vii)         All indebtedness referred to in clauses
(i) through (vi) above secured by (or for which the holder of such
indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, lien, pledge, charge, security interest or other encumbrance upon
or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person that owns such assets or property has not
assumed or become liable for the payment of such indebtedness; and


 


(viii)        All Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (i) through
(vii) above.


 


“Intellectual Property” means all United States and foreign (i) inventions
or discoveries (whether patentable or unpatentable and whether or not reduced
to practice), all improvements thereto, and patents, patent applications, and
patent disclosures, including all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof; (ii) trade
names, trade dress, logos, slogans, brand names, corporate names, domain names,
trademarks, service marks and other source indicators, including all
registrations, registration applications, and renewals thereof and all goodwill
associated therewith; (iii) copyrightable works (including files, computer
programs, software, firmware, Internet site content, databases and
compilations, advertising and promotional materials, curricula, course
materials, instructional video tapes, tape recordings, visual aids and textual
works), copyrights and copyright registrations and registration applications
and renewals thereof; (iv) trade secrets and confidential, proprietary, or
non-public 


 

















 


business information (including ideas,
research and development, know-how, technology, formulas, compositions,
manufacturing and production processes and techniques, technical data, designs,
drawings, specifications, customer, licensee and supplier lists, pricing and
cost information, and business and marketing plans and proposals); and all
other intellectual property, in any medium, including digital, and in any
jurisdiction.


 


“Investment Company Act” means the Investment Company Act of
1940, as amended.


 


“Knowledge,” “Knowledge of the Company,”
“to the Company’s Knowledge” and similar
language means the actual knowledge of any “officer” (as such term is defined
in Rule 16a-1 under the 1934 Act) of the Company or of any Subsidiary and
the knowledge any such Person would be expected to have after reasonable due
diligence and inquiry, or, with respect to any Buyer, any similarly situated
Person of such Buyer or its Affiliates.


 


“Laws” means all present or future federal, state local or
foreign laws, statutes, common law duties, rules, regulations, ordinances and
codes, together with all administrative or judicial orders, consent agreements,
directed duties, requests, licenses, authorizations and permits of, and
agreements with, any Governmental Entity.


 


“Lien” means with respect to any asset or property, any
mortgage, lien, pledge, hypothecation, charge, security interest, encumbrance
or adverse claim of any kind and any restrictive covenant, condition,
restriction or exception of any kind that has the practical effect of creating
a mortgage, lien, pledge, hypothecation, charge, security interest, encumbrance
or adverse claim of any kind (including any of the foregoing created by,
arising under or evidenced by any conditional sale or other title retention
agreement, the interest of a lessor with respect to a Capital Lease Obligation,
or any financing lease having substantially the same economic effect as any of
the foregoing).


 


“Majority of the Buyers” means Buyers that purchased at least
a majority of the Common Shares on the Closing Date, or if prior to the Closing
Date, by the Buyers listed on the Schedule of Buyers as being obligated
to purchase at least a majority of the Common Shares.


 


“Material Company Benefit Plan” means (i) all Company
Benefit Plans other than those that both (x) relate to fewer than 100
employees and (y) do not relate to or affect any officer, director, senior
corporate executive or other employee that is a member of corporate
headquarters staff and (ii) all Company Stock Award Plans.


 


“Options” means any rights, warrants or options to subscribe
for or purchase shares of common stock or Convertible Securities.


 


“Organic Change” means any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of
the Company’s assets to another Person or other transaction that is effected in
such a way that holders of Common Stock are entitled to receive (either
directly or upon subsequent liquidation) stock, securities or assets with
respect to, or in exchange for, Common Stock.


 


“Permitted Lien” means:


 

















 


(i)            Liens arising from or related to the
Amended and Restated Credit Agreement;


 


(ii)           Liens for Taxes or other governmental
charges not at the time due and payable, or which are being contested in good
faith by appropriate proceedings diligently prosecuted, so long as foreclosure,
distraint, sale or other similar proceedings have not been initiated, and in
each case for which the Company and the Subsidiaries maintain adequate reserves
in accordance with GAAP in respect of such Taxes and charges;


 


(iii)          Liens arising in the ordinary course
of business in favor of carriers, warehousemen, mechanics and materialmen, or
other similar Liens imposed by law, which remain payable without penalty or
which are being contested in good faith by appropriate proceedings diligently
prosecuted, which proceedings have the effect of preventing the forfeiture or
sale of the property subject thereto, and in each case for which adequate
reserves in accordance with GAAP are being maintained;


 


(iv)          Liens arising in the ordinary course
of business in connection with worker’s compensation, unemployment compensation
and other types of social security (excluding Liens arising under ERISA);


 


(v)           Attachments, appeal bonds (and cash
collateral securing such bonds), judgments and other similar Liens, for sums
not exceeding $250,000 in the aggregate for the Company and the Subsidiaries,
arising in connection with court proceedings, provided that the execution or
other enforcement of such Liens is effectively stayed;


 


(vi)          Pledges
and deposits to secure the performance of bids, trade contracts, leases, surety
bonds, performance bonds and other obligations of a similar nature, in each
case in the ordinary course of business;


 


(vii)        As to any leased real estate, all liens
and encumbrances and other liens of any nature created or incurred by any
owner, landlord, sublandlord or other person in title;


 


(viii)        Easements, rights of way, restrictions,
minor defects or irregularities in title and other similar Liens arising in the
ordinary course of business and not materially detracting from the value of the
property subject thereto and not interfering in any material respect with the
ordinary conduct of the business of the Company or any of the Subsidiaries;


 


(ix)           Liens arising solely by virtue of any
statutory or common law provision relating to banker’s liens, rights of set-off
or similar rights and remedies and burdening only deposit accounts or other
funds maintained with a creditor depository institution, provided that no such
deposit account is a dedicated cash collateral account or is subject to
restrictions against access by the depositor in excess of those set forth by
regulations promulgated by the Board of Governors of the U.S. Federal Reserve
System and that no such deposit account is intended by the Company or any of
the Subsidiaries to provide collateral to the depository institution.


 

















 


“Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, a Governmental Entity or any other legal entity.


 


“Preferred Stock” means the Company’s undesignated preferred
stock.


 


“Sale Transaction” means any transaction, or offer or
proposal with respect to a transaction, that results, or would result, in the
acquisition by any Person or group (within the meaning of Section 13(d)(3) of
the 1934 Act) of Persons of beneficial ownership of 80% or more of either the
voting power of the outstanding voting securities of the Company or the Company’s
Capital Stock, excluding for purposes of this definition only any shares of
Common Stock beneficially owned by any such Person as of the date of this Agreement
but only to the extent such beneficial ownership has been reported publicly on
a Schedule 13D or 13G filed with the SEC on or prior to the date of this
Agreement.


 


“Securities Laws” means the securities laws (including “Blue
Sky” laws), legislation and regulations of, and the instruments, policies,
rules, orders, codes, notices and interpretation notes of, the securities
regulatory authorities (including the SEC) of the United States and any
applicable states and other jurisdictions.


 


“Subsidiary” means any entity in which the Company, directly
or indirectly:


 


(i)            beneficially owns or otherwise holds
10% or more of the equity or similar interests;


 


(ii)           beneficially owns or otherwise holds
or controls 10% or more of the outstanding securities entitled to vote
generally in the election of such entity’s directors (or the equivalent
thereof);


 


(iii)          if the entity is a limited
partnership, is a general partner;


 


(iv)          if the entity is a limited liability
company, is a manager or managing member; or


 


(v)           otherwise has the ability or right to
control (whether by ownership, contractual right or otherwise) the management
and policies of such entity.


 


“Superior Proposal” means a bona fide written Competing
Proposal that (i) the Board reasonably determines (after consultation with
a financial advisor of nationally recognized reputation) to be (a) more
favorable to the Company from a financial point of view than the Transaction
(taking into account all the terms and conditions of such Competing Proposal
and any other factors as the Board deems relevant), and (b) reasonably
capable of being completed on the terms so proposed, taking into account all
financial, legal, regulatory and other aspects of such proposal, (ii) was
not solicited by the Company after the date of this Agreement, (iii) was
proposed after the date of this Agreement and (iv) did not otherwise
result from a knowing or material breach of Section 4(k)(i).


 

















 


“Taxes” means (i) any and all federal, state,
provincial, local, foreign and other taxes, levies, fees, imposts, duties, and
similar governmental charges (including any interest, fines, assessments,
penalties or additions to tax imposed in connection therewith or with respect
thereto) including (x) taxes imposed on, or measured by, income, franchise,
profits or gross receipts, and (y) ad valorem, value added, capital gains,
sales, goods and services, use, real or personal property, Capital Stock,
license, branch, payroll, estimated, withholding, employment, social security
(or similar), unemployment, compensation, utility, severance, production,
excise, stamp, occupation, premium, windfall profits, transfer and gains taxes,
and customs duties, (ii) any liability for payment of amounts described in
clause (i) whether as a result of transferee liability, joint and several
liability for being a member of an affiliated, consolidated, combined, unitary
or other group for any period, or otherwise by operation of law, and (iii) any
liability for the payment of amounts described in clause (i) or (ii) as
a result of any tax sharing, tax indemnity or tax allocation agreement or
similar agreements to pay or indemnify any other Person on account of Taxes.


 


“Termination Fee” means $1,500,000, except that (x) if a
termination occurs in connection with a Sale Transaction, then the Termination
Fee shall be $4,000,000, or (y) if a termination occurs pursuant to Section 12(b)(iii),
then so long as no Competing Proposal has been publicly disclosed prior to the
date of the Company Shareholders Meeting, the Termination Fee shall be
$750,000.


 


“Transaction Documents” means this Agreement, Restated
Charter, the Restated Bylaws, the Registration Rights Agreement, the Management
Services Agreement, the Amended and Restated Credit Agreement, the Escrow
Agreement and each of the other agreements or instruments to which the Company
or any of the Subsidiaries is a party or by which it is bound and which is
entered into by the parties hereto or thereto in connection with the
Transactions.


 


“Transactions” means the sale and issuance of the Common
Shares to the Buyers, and the execution and delivery of the Transaction
Documents and the consummation by the Company of all of the transactions
contemplated therein.


 


The following terms have the meaning set
forth in the referenced Sections set forth below:


 


	
  Defined Term

  	
   

  	
  Location of

  Definition

  
	
  “1933 Act Legend”

  	
   

  	
  Section 2(g)

  
	
  “1933 Act”

  	
   

  	
  Recitals

  
	
  “1934 Act”

  	
   

  	
  Section 2(k)

  
	
  “Aggregate Expense Cap”

  	
   

  	
  Section 14(m)(i)

  
	
  “Agreement”

  	
   

  	
  Recitals

  
	
  “Alternative Acquisition Agreement”

  	
   

  	
  Section 4(k)(iv)(A)

  
	
  “Amended and Restated Credit Agreement”

  	
   

  	
  Section 4(g)

  
	
  “Articles of Incorporation”

  	
   

  	
  Section 3(c)(7)(W)

  
	
  “Assets”

  	
   

  	
  Section 3(bb)

  
	
  “Basket Amount”

  	
   

  	
  Section 13(b)(i)

  
	
  “Board Resignation”

  	
   

  	
  Section 4(j)

  



 

















 


	
  Defined Term

  	
   

  	
  Location of

  Definition

  
	
  “Buyer”

  	
   

  	
  Recitals

  
	
  “Bylaws”

  	
   

  	
  Section 3(c)(7)(X)

  
	
  “Cap Amount”

  	
   

  	
  Section 13(b)(ii)

  
	
  “Change of Board Recommendation”

  	
   

  	
  Section 4(k)(i)

  
	
  “Closing Date”

  	
   

  	
  Section 1(b)

  
	
  “Closing”

  	
   

  	
  Section 1(a)

  
	
  “Committee”

  	
   

  	
  Recitals

  
	
  “Common Shares”

  	
   

  	
  Recitals

  
	
  “Common Stock Deemed Outstanding”

  	
   

  	
  Section 5(i)

  
	
  “Common Stock”

  	
   

  	
  Recitals

  
	
  “Company”

  	
   

  	
  Recitals

  
	
  “Company Board Recommendation”

  	
   

  	
  Recitals

  
	
  “Company Board”

  	
   

  	
  Recitals

  
	
  “Company Contracts”

  	
   

  	
  Section 3(cc)(i)

  
	
  “Company International Employee Plan”

  	
   

  	
  Section 3(o)(xi)

  
	
  “Company IP”

  	
   

  	
  Section 3(q)(i)

  
	
  “Company Representatives”

  	
   

  	
  Section 4(d)

  
	
  “Company Shareholders Meeting”

  	
   

  	
  Section 4(a)

  
	
  “Company Stock Award Plans”

  	
   

  	
  Section 3(c)

  
	
  “Continuing Director”

  	
   

  	
  Section 7(a)

  
	
  “Controlled Company”

  	
   

  	
  Section 5(a)(i)

  
	
  “D&O Policy”

  	
   

  	
  Section 7(d)(i)

  
	
  “Defaulting Buyer Common Shares”

  	
   

  	
  Section 1(c)(ii)

  
	
  “DTC”

  	
   

  	
  Section 2(g)

  
	
  “Equity Securities”

  	
   

  	
  Section 5(i)

  
	
  “Escrow Agreement”

  	
   

  	
  Section 14(m)(iii)

  
	
  “Exempted Issuances”

  	
   

  	
  Section 5(i)

  
	
  “Existing Credit Agreement”

  	
   

  	
  Section 4(g)

  
	
  “Existing Credit Defaults”

  	
   

  	
  Section 3(z)

  
	
  “Expenses”

  	
   

  	
  Section 14(m)(i)

  
	
  “GE Consent”

  	
   

  	
  Section 3(f)

  
	
  “Indemnified Liabilities”

  	
   

  	
  Section 13(a)(i)

  
	
  “Indemnities”

  	
   

  	
  Section 13(a)(i)

  
	
  “Insured Party”

  	
   

  	
  Section 7(d)(iii)

  
	
  “Investor”

  	
   

  	
  Section 2(f)

  
	
  “IRS”

  	
   

  	
  Section 3(o)(ii)

  
	
  “Lenders”

  	
   

  	
  Section 4(g)

  
	
  “Listed IP”

  	
   

  	
  Section 3(q)(ii)

  
	
  “Litigation”

  	
   

  	
  Section 3(j)

  
	
  “Management Services Agreement”

  	
   

  	
  Section 11(l)

  
	
  “Material New Information”

  	
   

  	
  Section 4(n)

  
	
  “MBCA”

  	
   

  	
  Recitals

  
	
  “Most Recent 10-K”

  	
   

  	
  Section 3(g)

  



 

















 


	
  Defined Term

  	
   

  	
  Location of

  Definition

  
	
  “Most Recent Balance Sheet”

  	
   

  	
  Section 3(g)

  
	
  “Multiemployer Plan”

  	
   

  	
  Section 3(o)(i)

  
	
  “Multiple Employer Plan”

  	
   

  	
  Section 3(o)(i)

  
	
  “NASDAQ Market Place Rules”

  	
   

  	
  Section 5(a)(i)

  
	
  “NASDAQ”

  	
   

  	
  Section 3(f)

  
	
  “New Information”

  	
   

  	
  Section 4(n)

  
	
  “Notice Period”

  	
   

  	
  Section 4(k)(iv)(A)

  
	
  “Open Source Licenses”

  	
   

  	
  Section 3(q)(vi)

  
	
  “Open Source Software”

  	
   

  	
  Section 3(q)(vi)

  
	
  “Other Filings”

  	
   

  	
  Section 4(b)(iii)

  
	
  “Outside Date”

  	
   

  	
  Section 12(b)(i)

  
	
  “Owned IP”

  	
   

  	
  Section 3(q)(iii)

  
	
  “Periodic Report”

  	
   

  	
  Section 5(e)

  
	
  “Permits”

  	
   

  	
  Section 3(t)

  
	
  “Piper”

  	
   

  	
  Section 14(k)

  
	
  “Pre-Closing Period”

  	
   

  	
  Section 2(k)

  
	
  “Preemptive Rights Notice”

  	
   

  	
  Section 5(i)

  
	
  “Principal Market”

  	
   

  	
  Section 3(u)

  
	
  “Prohibited Transaction”

  	
   

  	
  Section 3(v)(vii)

  
	
  “Proposals”

  	
   

  	
  Recitals

  
	
  “Proxy Statement”

  	
   

  	
  Section 4(b)(i)

  
	
  “Purchase Price”

  	
   

  	
  Section 1(a)

  
	
  “Real Property Lease”

  	
   

  	
  Section 3(aa)

  
	
  “Real Property”

  	
   

  	
  Section 3(aa)

  
	
  “Registration Rights Agreement”

  	
   

  	
  Section 4(f)

  
	
  “Regulation D”

  	
   

  	
  Recitals

  
	
  “Related Party Transactions”

  	
   

  	
  Section 3(w)

  
	
  “Replacement Buyer”

  	
   

  	
  Section 1(c)(ii)

  
	
  “Reporting Period”

  	
   

  	
  Section 5(b)

  
	
  “Required Company Consents”

  	
   

  	
  Section 3(f)

  
	
  “Resigning Board Member”

  	
   

  	
  Section 4(j)

  
	
  “Resolutions”

  	
   

  	
  Section 11(m)

  
	
  “Restated Bylaws”

  	
   

  	
  Recitals

  
	
  “Restated Charter”

  	
   

  	
  Recitals

  
	
  “Rule 144”

  	
   

  	
  Section 2(f)

  
	
  “Sarbanes-Oxley”

  	
   

  	
  Section 3(h)(i)

  
	
  “SEC Documents”

  	
   

  	
  Section 3(g)

  
	
  “SEC”

  	
   

  	
  Recitals

  
	
  “Securities”

  	
   

  	
  Recitals

  
	
  “SFM”

  	
   

  	
  Section 11(l)

  
	
  “Share Certificates”

  	
   

  	
  Recitals

  
	
  “Shareholder Approval”

  	
   

  	
  Section 3(b)(ii)

  
	
  “Signal Hill”

  	
   

  	
  Section 14(m)(i)

  



 

















 


	
  Defined Term

  	
   

  	
  Location of

  Definition

  
	
  “Signal Hill Cap”

  	
   

  	
  Section 14(m)(i)

  
	
  “Standstill Period”

  	
   

  	
  Section 7(c)

  
	
  “Sterling”

  	
   

  	
  Recitals

  
	
  “Sterling Designee”

  	
   

  	
  Section 5(a)(i)

  
	
  “Sterling Investors”

  	
   

  	
  Section 5(a)(iii)

  
	
  “Sterling Shares”

  	
   

  	
  Section 5(i)

  
	
  “Sterling Superior Offer”

  	
   

  	
  Section 4(k)(iv)(B)

  
	
  “USRPHC”

  	
   

  	
  Section 3(v)(ix)