exv10w1



 




Exhibit 10.1

SECURITIES PURCHASE AGREEMENT




     This Securities Purchase Agreement (this “Agreement”) is dated as of June 1, 2007, by and
among Wilsons The Leather Experts Inc., a Minnesota corporation (the “Company”), and the purchasers
set forth on Schedule 1 attached hereto (each a “Purchaser” and collectively, the “Purchasers”).



     WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act (as defined below) and Rule 506 promulgated thereunder, the
Company desires to issue and sell to the Purchasers, and the Purchasers desire to purchase from the
Company, securities of the Company as more fully described in this Agreement.



     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for
other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged,
the Company and the Purchasers agree as follows:



ARTICLE I.

DEFINITIONS




     1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, for all
purposes of this Agreement, the following terms have the meanings indicated in this Section 1.1:




     “Action” shall have the meaning ascribed to such term in Section 3.1(j).




     “Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a Person as
such terms are used in and construed under Rule 144 under the Securities Act. With respect
to a Purchaser, any investment fund or managed account that is managed on a discretionary
basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of
such Purchaser.




     “Affiliate Transaction” shall have the meaning ascribed to such term in Section 4.9(e).




     “Board of Directors” means, at any time, the board of directors of the Company.




     “Business Day” means any day except Saturday, Sunday and any day which is a federal
legal holiday or a day on which banking institutions in the State of Minnesota or State of
New York are authorized or required by law or other governmental action to close.




     “Capital Lease” means any lease required to be capitalized in accordance with GAAP.




     “Certificate” shall have the meaning ascribed to such term in Section 2.1.


     “Closing” shall have the meaning ascribed to such term in Section 2.2.



 









 








     “Closing Date” shall have the meaning ascribed to such term in Section 2.2.




     “Closing Fee” shall have the meaning ascribed to such term in Section 5.3.




     “Common Stock” means the common stock of the Company, par value $0.01 per share, and
any other class of securities into which such securities may hereafter have been
reclassified or changed.




     “Common Stock Equivalents” means any securities of the Company or any Subsidiary which
entitle the holder thereof to acquire Common Stock at any time, including, without
limitation, any debt, preferred stock, rights, options, warrants or other instrument that is
at any time convertible into or exercisable or exchangeable for, or otherwise entitles the
holder thereof to receive, Common Stock.




     “Company Counsel” means Faegre and Benson LLP.




     “Company Group” means, collectively, the Company and its Subsidiaries.




     “Company Shareholders’ Meeting” shall have the meaning ascribed to such term in Section
4.10(b).




     “Conversion Shares” means the shares of Common Stock issuable upon conversion of the
Shares and all shares of Common Stock issued in exchange or substitution therefor.




     “Disclosure Schedules” means the Disclosure Schedules of the Company delivered
concurrently herewith.




     “EBITDA” means, for any period, the net income of the Company Group for such period
plus (a) without duplication and to the extent deducted in determining such net income, the
sum of (i) consolidated interest expense for such period, (ii) consolidated income tax
expense for such period, and (iii) all amounts attributable to depreciation and amortization
for such period, and minus (b) to the extent included in determining such net income, any
extraordinary gains and all non-cash items of income for such period, all determined on a
consolidated basis in accordance with GAAP.




     “Effective Date” means the date that the initial Registration Statement filed by the
Company pursuant to the Registration Rights Agreement is first declared effective by the
SEC.




     “Environmental and Safety Requirements” means all federal, state, local and foreign
statutes, regulations, ordinances and other provisions having the force or effect of law,
all judicial and administrative orders and determinations and all common law concerning
public health and safety, worker health and safety, and pollution or protection of the
environment, including all those relating to the presence, use, production, generation,
handling, transportation, treatment, storage, disposal, distribution, labeling,
testing, processing, discharge, release, threatened release, control, or cleanup of any
hazardous materials, substances or wastes, chemical substances or mixtures, pesticides,



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pollutants, contaminants, toxic chemicals, petroleum products or by-products, asbestos,
polychlorinated biphenyls, noise or radiation.




     “Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(r).




     “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.




     “Exchange Cap” shall have the meaning ascribed to such term in the Certificate.




     “GAAP” shall have the meaning ascribed to such term in Section 3.1(h).




     “Guarantee” of or by any Person means any obligation, contingent or otherwise, of such
Person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other
obligation of any other Person except the Company or a wholly owned Subsidiary (the “primary
obligor”) in any manner, whether directly or indirectly, and including any obligation of
such Person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such Indebtedness or
other obligation, (b) to purchase or lease property, securities or services for the purpose
of assuring the owner of such Indebtedness or other obligation of the payment of such
Indebtedness or other obligation or (c) to maintain working capital, equity capital or any
other financial statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Indebtedness or other obligation; provided,
however, that the term “Guarantee” shall not include endorsements for the collection
or deposit in the ordinary course of business of the Company consistent with past practice.




     “Governmental Agency” means any federal, state, local, foreign or other governmental
agency, instrumentality, commission, authority, board or body.




     “Indebtedness” of any Person, means, without duplication, (a) all obligations of such
Person for borrowed money or with respect to deposits or advances of any kind, (b) all
obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c)
all obligations of such Person upon which interest charges are customarily paid, (d) all
obligations such Person under conditional sale or other title retention agreements relating
to property or assets purchased by such Person, (e) all obligations of such Person issued or
assumed as the deferred purchase price of property or services (excluding trade accounts
payable and accrued obligations incurred in the ordinary course of business consistent with
past practice), (f) all Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing rights, contingent or otherwise, to be secured by) any Lien on
property owned or acquired by such Person, whether or not the obligations secured thereby
have been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all
obligations under Capital Leases of such Person, (i) all obligations of such Person as an
account party in respect of
letters of credit, and (j) all obligations of such Person in respect of bankers’
acceptances, provided that Indebtedness shall not include any indebtedness of the Company
solely to



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one or more wholly owned Subsidiaries or any indebtedness of any wholly owned
Subsidiary solely to one or more of the Company or another wholly owned Subsidiary. The
Indebtedness of any Person shall include the Indebtedness of any partnership in which such
Person is a general partner.




     “Intellectual Property Rights” shall have the meaning ascribed to such term in Section
3.1(o).




     “Liens” means a lien, charge, security interest, encumbrance, right of first refusal,
preemptive right or other restriction.




     “Losses” shall have the meaning ascribed to such term in Section 4.12(a).




     “Material Adverse Effect” shall have the meaning assigned to such term in Section
3.1(b).




     “Material Permits” shall have the meaning ascribed to such term in Section 3.1(m).




     “Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint stock company,
Governmental Agency or other entity of any kind.




     “Plan” or “Plans” shall have the meaning ascribed to such term in Section 3.1(hh).




     “Proceeding” means an action, claim, suit, investigation or proceeding (including,
without limitation, an investigation or partial proceeding, such as a deposition), whether
commenced or threatened.




     “Proxy Statement” shall mean a proxy statement relating to the Company Shareholders’
Meeting, as amended or supplemented from time to time.




     “Purchaser 1” shall mean Marathon Fund Limited Partnership V.




     “Purchaser 1 Directors” shall mean the two individuals designated by Purchaser 1 in
writing to the Company, which two individuals shall initially be Michael T. Sweeney and
Darren L. Acheson, or any successor Purchaser 1 Directors subsequently designated by
Purchaser 1 in writing to the Company.




     “Purchaser Party” shall have the meaning ascribed to such term in Section 4.7.




     “Registration Rights Agreement” means the Registration Rights Agreement, dated the date
hereof, by and among the Company and the Purchasers, in the form of Exhibit A
attached hereto.



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     “Registration Statement” means a registration statement meeting the requirements set
forth in the Registration Rights Agreement and covering the resale by the Purchasers of the
Conversion Shares, the Warrant Shares, or both.




     “Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).




     “Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC having substantially the same effect as such Rule.




     “SEC” means the United States Securities and Exchange Commission.




     “SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).




     “Securities” means the Shares, Warrants, Conversion Shares, and Warrant Shares.




     “Securities Act” means the Securities Act of 1933, as amended.




     “Shares” means the shares of Series A Preferred Stock, $0.01 par value per share,
issued or issuable to the Purchasers pursuant to the Transaction Documents.




     “Subsidiary” means any subsidiary of the Company as defined in Rule 1-02 of Regulation
S-X promulgated by the SEC pursuant to the Exchange Act.




     “Subscription Amount” means, with respect to any Purchaser, the amount set forth
opposite such Purchaser’s name in the appropriate column on Schedule 1 attached hereto.




     “Support Agreement” means the Support Agreement, dated the date hereof, by and among
the Company and the Purchasers, in the form of Exhibit B attached hereto.




     “Threshold” shall have the meaning ascribed to such term in Section 4.7(a).




     “Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market,
or (ii) if the Common Stock is not quoted on any Trading Market, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the Pink Sheets, LLC (or any
similar organization or agency succeeding to its functions of reporting prices); provided,
that in the event that the Common Stock is not listed or quoted as set forth in (i) and (ii)
hereof, then Trading Day shall mean a Business Day.




     “Trading Market” means whichever of the New York Stock Exchange, the American Stock
Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital
Market or the OTC Bulletin Board on which the Common Stock is listed or quoted for trading
on the date in question.




     “Transaction Documents” means this Agreement, the Registration Rights Agreement, the
Support Agreement, the Certificate, the Warrants and any other



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documents or agreements executed in connection with the transactions contemplated
hereunder.




     “Warrants” means the warrants, dated the date hereof, issued by the Company to each of
the Purchasers, to purchase shares of Common Stock, each such warrant in the form of
Exhibit C attached hereto, and all warrants issued in exchange or substitution
therefor.




     “Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants and all shares of Common Stock issued in exchange or substitution therefor.



ARTICLE II.

PURCHASE AND SALE




     2.1 Certificate of Designation; Purchase and Sale of Shares and Warrants. The Company
shall adopt and file with the Secretary of State of Minnesota on or before the Closing, a
Certificate of Designation of Series A Preferred Stock in the form attached hereto as Exhibit
D (the “Certificate”). At the Closing, upon the terms and subject to the conditions set forth
herein, concurrent with the execution and delivery of this Agreement, the Company agrees to issue
and sell to each Purchaser, and each Purchaser agrees to purchase, severally and not jointly, from
the Company (a) the number of Shares set forth opposite such Purchaser’s name in the appropriate
column on Schedule 1 attached hereto, and (b) a Warrant to purchase the number of shares of Common
Stock set forth opposite such Purchaser’s name in the appropriate column on Schedule 1 attached
hereto. The aggregate purchase price to be paid by each Purchaser for the Shares and the Warrant
such Purchaser is hereby purchasing shall be an amount equal to such Purchaser’s Subscription
Amount.



     2.2 Closing. The closing of the purchase and sale of the Shares and Warrants pursuant
to this Agreement (the “Closing”) shall occur upon satisfaction of the conditions set forth in
Sections 2.4, at the offices of Dorsey & Whitney LLP, 50 Sixth Street South, Minneapolis, Minnesota
55402, or such other location as the parties hereto shall mutually agree (the date of such closing,
the “Closing Date”). Subject to the terms and conditions set forth in this Agreement, at the
Closing, the Company shall deliver to each Purchaser the Shares and Warrant being purchased by such
Purchaser pursuant to this Agreement and such Purchaser shall pay to the Company such Purchaser’s
Subscription Amount.



     2.3 Deliveries.




     (a) On the Closing Date, the Company shall deliver or cause to be delivered to each
Purchaser the following:




     (i) a certificate or certificates representing the Shares, registered in the
name of such Purchaser;



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     (ii) a Warrant, exercisable for the number of Warrant Shares set forth opposite
such Purchaser’s name in the appropriate column on Schedule 1 attached hereto;




     (iii) a copy of the Certificate as filed with the Secretary of State of
Minnesota, certified by the Secretary of State of Minnesota;




     (iv) the Registration Rights Agreement duly executed by the Company; and




     (v) a legal opinion of Company Counsel opining on matters of due authorization,
execution and delivery; no required consents of governmental authorities; no
conflicts with applicable laws, charter documents, known court orders or material
contracts; due authorization of Shares; reservation and due authorization of Common
Stock upon conversion of Shares and exercise of Warrants; no registration under
federal securities laws; and enforceability against the Company of the Transaction
Documents, subject in each case to customary assumptions, qualifications and
exceptions, including those disclosed in this Agreement or the Disclosure Schedule.
Such Company Counsel may state that its opinion is limited to matters governed by
the federal laws of the United States of American and the laws of the State of
Minnesota.




     (b) On the Closing Date, each Purchaser shall deliver or cause to be delivered to the
Company the following:




     (i) the Registration Rights Agreement duly executed by such Purchaser; and




     (ii) such Purchaser’s Subscription Amount by wire transfer to an account as
specified in writing by the Company at least two Business Days prior to the Closing.



     2.4 Closing Conditions.




     (a) The obligations of the Company hereunder in connection with the Closing are subject
to the following conditions being met:




     (i) the accuracy in all material respects when made and on the Closing Date of
the representations and warranties of the Purchasers contained herein;




     (ii) all obligations, covenants and agreements of the Purchasers required to be
performed at or prior to the Closing Date shall have been performed in all material
respects; and




     (iii) the delivery by the Purchasers of the items set forth in Section 2.3(b)
of this Agreement.



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     (b) The obligations of the Purchasers hereunder in connection with the Closing are
subject to the following conditions being met:




     (i) the accuracy when made and on the Closing Date of the representations and
warranties of the Company contained herein, except to the extent any inaccuracies,
individually or in the aggregate, would not have or be reasonably likely to result
in a Material Adverse Effect (provided that solely for purposes of this Section
2.4(b)(i), any representation or warranty in Section 3.1 that is qualified by
materiality or Material Adverse Effect language shall be read as if such language
were not present);




     (ii) all obligations, covenants and agreements of the Company required to be
performed at or prior to the Closing Date shall have been performed in all material
respects;




     (iii) the delivery by the Company of the items set forth in Section 2.3(a) of
this Agreement;




     (iv) there shall have been no Material Adverse Effect since the date hereof;




     (v) application for the listing of the Conversion Shares and Warrant Shares
shall have been completed by the Company and the Company shall not have any reason
to believe that official notice of issuance will not be given by the Trading Market
prior to the Company Shareholders’ Meeting;




     (vi) representatives of Purchaser 1 shall have met with a representative of
each of the four landlords identified in Schedule 2.4(b) of the Disclosure Schedule
with respect to proposed modifications (of a nature that do not include financial or
duration modifications) to the Leases controlled by such landlords to enable the
Company to execute the future business strategy for the Company in substantially the
manner discussed by Purchaser 1 with the Company (and Purchaser 1 agrees to use its
commercially reasonable efforts to facilitate such meetings as soon as reasonably
practicable after the execution of this Agreement); and, following such meetings,
Purchaser 1 shall be satisfied, in its reasonable discretion, that such landlords
will make such modifications in their Leases within a reasonable time after the date
of such meetings; and




     (vii) The Company and General Electric Capital Corporation (“GE Credit”) shall
have entered into an amendment of the Fifth Amended and Restated Credit Agreement,
dated as of December 29, 2006, as amended as of February 12, 2007, and related
pledge agreements and guaranty, containing substantially the terms set forth in the
term sheet received by the Company and Purchaser 1 from GE Credit and consenting to
the transactions contemplated by this Agreement, in form reasonably satisfactory to
Purchaser 1.



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ARTICLE III.

REPRESENTATIONS AND WARRANTIES




     3.1 Representations and Warranties of the Company. Except as set forth under the
corresponding section of the Disclosure Schedules, the Company hereby represents and warrants to
each of the Purchasers as of the date hereof and as of the Closing Date as follows:




     (a) Subsidiaries. All direct and indirect Subsidiaries of the Company are set
forth on Schedule 3.1(a). Except as set forth on Schedule 3.1(a), the
Company owns, directly or indirectly, all of the capital stock or other equity interests of
each Subsidiary free and clear of any Liens, and all the issued and outstanding shares of
capital stock of each Subsidiary were validly issued and are fully paid, non-assessable and
free of preemptive and similar rights to subscribe for or purchase securities.




     (b) Organization and Qualification. The Company and each of the Subsidiaries
is an entity duly incorporated or otherwise organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization (as applicable),
with the requisite power and authority to own and use its properties and assets and to carry
on its business as currently conducted. Neither the Company nor any Subsidiary is in
violation or default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the Company and
each Subsidiary is duly qualified to conduct its respective business and is in good standing
as a foreign corporation or other entity in each jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary, except where
the failure to be so qualified or in good standing, as the case may be, could not have or
reasonably be expected to result in (i) a material and adverse effect on the legality,
validity or enforceability of any Transaction Document, (ii) a material and adverse effect
on the results of operations, assets, business, prospects or condition (financial or
otherwise) of the Company and the Subsidiaries, taken as a whole (other than (1) such effect
generally affecting the industry in which the Company and its Subsidiaries operate, except
to the extent that such effect disproportionately affects the Company and its Subsidiaries,
taken as a whole, (2) general economic or securities market conditions in the United States,
except to the extent that such conditions disproportionately affect the Company and its
Subsidiaries, taken as a whole, (3) the public announcement or existence of this Agreement
and the transactions contemplated hereby, (4) acts of terrorism or war (whether or not
declared), or (5) such effect resulting from or relating to compliance with the terms of, or
the taking of action required by, this Agreement, or (iii) a material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its obligations under
any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”), and no
Proceeding has been instituted in
any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or
curtail such power and authority or qualification.



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     (c) Authorization; Enforcement. The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by each of the
Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.
The execution and delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required by the
Company, its Board of Directors or its shareholders in connection therewith other than in
connection with the Required Approvals. Each Transaction Document has been (or upon
delivery will have been) duly executed by the Company and, when delivered in accordance with
the terms hereof and thereof, will constitute the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms except (i) as such
enforceability may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws of general application affecting enforcement
of creditors’ rights generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies, and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.




     (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company, the issuance and sale of the Securities, and the consummation by
the Company of the other transactions contemplated hereby and thereby do not and will not
(i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate
or articles of incorporation, bylaws or other organizational or charter documents, or (ii)
conflict with, or constitute a default (or an event that with notice or lapse of time or
both would become a default) under, result in the creation of any Lien upon any of the
properties or assets of the Company or any Subsidiary, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or any
Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is
bound or affected, or (iii) subject to the Required Approvals, conflict with or result in a
violation of any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or Governmental Agency to which the Company or a Subsidiary is
subject (including federal and state securities laws and regulations), or by which any
property or asset of the Company or a Subsidiary is bound or affected; except in the case of
each of clauses (ii) and (iii), such as would not have, and would not reasonably be expected
to result in, a Material Adverse Effect.




     (e) Filings, Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any filing or
registration with, any court or other Governmental Agency or other Person in connection with
the execution, delivery and performance by the Company of the Transaction Documents, other
than (i) filings required pursuant to Sections 4.4 and 4.6 of this
Agreement, (ii) the filing with the SEC of the Registration Statement, (iii) an
application to the NASDAQ Global Market for the listing of the Conversion Shares and Warrant
Shares for trading thereon in the time and manner required thereby, (iv) the filing of



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Form
D with the SEC and such filings as are required to be made under applicable state securities
laws, and (v) the filing of the Certificate with the Secretary of State of Minnesota
(collectively, the “Required Approvals”).




     (f) Issuance of the Securities. The Shares and Warrants are duly authorized
and, when issued and paid for in accordance with the applicable Transaction Documents, will
be duly and validly issued, fully paid and nonassessable, free and clear of all Liens
imposed by the Company other than restrictions on transfer provided for in the Transaction
Documents. The Conversion Shares and Warrant Shares, when issued in accordance with the
terms of the Transaction Documents, will be validly issued, fully paid and nonassessable,
free and clear of all Liens imposed by the Company. As of the Closing, the Company will
have reserved from its duly authorized capital stock the maximum number of shares of Common
Stock issuable upon conversion of the Shares and upon exercise of the Warrants, in each
case, as of the Closing Date.




     (g) Capitalization. The capitalization of the Company is as set forth on
Schedule 3.1(g). The Company has not issued any capital stock since its most
recently filed periodic report under the Exchange Act, other than pursuant to the exercise
of employee stock options or the issuance of shares of Common Stock to employees under any
Plans, as the case may be or pursuant to the conversion or exercise of outstanding Common
Stock Equivalents. No Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions contemplated by the
Transaction Documents. Except as a result of the purchase and sale of the Securities and as
set forth in the Company’s most recently filed periodic report under the Exchange Act, there
are no outstanding options, warrants, script rights to subscribe to, calls or commitments of
any character whatsoever relating to, or securities, rights or obligations convertible into
or exercisable or exchangeable for, or giving any Person any right to subscribe for or
acquire, any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to issue
additional shares of Common Stock or Common Stock Equivalents. The issuance and sale of the
Securities will not obligate the Company to issue shares of Common Stock or other securities
to any Person (other than the Purchasers) and will not result in a right of any holder of
Company securities to adjust the exercise, conversion, exchange or reset price under such
securities. All of the outstanding shares of capital stock of the Company are validly
issued, fully paid and nonassessable, have been issued in compliance with all federal and
state securities laws, and none of such outstanding shares was issued in violation of any
preemptive rights or similar rights to subscribe for or purchase securities. No further
approval or authorization of any shareholder, the Board of Directors or others is required
for the issuance and sale of the Securities. All grants of employee stock options comply
with the terms of the Plans, as approved by the Company’s shareholders, pursuant to such
grants were made, and with the terms of any policies and procedures with respect to stock
option grants as adopted by the Board of Directors. The Company has not granted stock
options to its employees or directors for which the grant date as determined under FAS 123R
is
different from the date of the action taken to grant the option, except when the action
taken preceded the commencement of an employee’s employment and the grant was effective upon
commencement of the employee’s employment. The Company has not



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coordinated the grant date
for employee or director stock options or restricted stock grants in a manner to benefit the
option holders from the public release of material non-public information regarding the
Company. Any statements in the SEC Reports (as defined below) regarding employee and
director stock options are complete and accurate in all material respects. There are no
shareholders agreements, voting agreements or other similar agreements with respect to the
Company’s capital stock to which the Company is a party or, to the knowledge of the Company,
between or among any of the Company’s shareholders.




     (h) SEC Reports; Financial Statements. The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it under the
Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
for the two years preceding the date hereof (the foregoing materials, including the exhibits
thereto and documents incorporated by reference therein, being collectively referred to
herein as the “SEC Reports”) on a timely basis or has received a valid extension of such
time of filing and has filed any such SEC Reports prior to the expiration of any such
extension. As of their respective dates, the SEC Reports complied in all material respects
with the requirements of the Securities Act and the Exchange Act and the rules and
regulations of the SEC promulgated thereunder, and none of the SEC Reports, when filed,
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 the
light of the circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Reports comply in all material respects with
applicable accounting requirements and the rules and regulations of the SEC with respect
thereto as in effect at the time of filing. Such financial statements have been prepared in
accordance with United States generally accepted accounting principles (“GAAP”) applied on a
consistent basis during the periods involved, except as may be otherwise specified in such
financial statements or the notes thereto and except that unaudited financial statements may
not contain all footnotes required by GAAP, and fairly present in all material respects the
financial position of the Company and its consolidated Subsidiaries as of and for the dates
thereof and the results of operations and cash flows for the periods then ended, subject, in
the case of unaudited statements, to normal, immaterial, year-end audit adjustments.




     (i) Material Changes. Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in the SEC
Reports, (i) there has been no event, occurrence or development that has had, or that could
reasonably be expected to result in, a Material Adverse Effect, (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business of the Company consistent with past
practice and (B) liabilities not required to be reflected in the Company’s financial
statements pursuant to GAAP or required to be disclosed in filings made with the SEC, (iii)
the Company has not altered its method of accounting, (iv) the Company has not declared or
made any dividend or distribution of cash or other property to its
shareholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any



12









 







officer, director or Affiliate, except pursuant to existing Plans. The Company does not
have pending before the SEC any request for confidential treatment of information.




     (j) Litigation. There is no action, suit, inquiry, notice of violation,
proceeding or investigation pending or, to the knowledge of the Company, threatened in
writing against or affecting the Company, any Subsidiary or any of their respective
properties before or by any court, arbitrator, or Governmental Agency (collectively, an
“Action”) which (i) adversely affects or challenges the legality, validity or enforceability
of any of the Transaction Documents or the Securities or (ii) would, if there were an
unfavorable decision, individually or in the aggregate, have, or would reasonably be
expected to result in, a Material Adverse Effect. Neither the Company nor any Subsidiary,
nor any director or officer thereof, is or has been the subject of any Action involving a
claim of violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is
not pending or contemplated, any investigation by the SEC involving the Company or any
current or former director or officer of the Company. The SEC has not issued any stop order
or other order suspending the effectiveness of any registration statement filed by the
Company or any Subsidiary under the Exchange Act or the Securities Act.




     (k) Labor Relations. No material labor dispute exists or, to the knowledge of
the Company, is imminent with respect to any of the employees of the Company which would
reasonably be expected to result in a Material Adverse Effect.




     (l) Compliance. Neither the Company nor any Subsidiary (i) is in default under
or in violation of (and no event has occurred that has not been waived that, with notice or
lapse of time or both, would result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a claim that it is in default under
or that it is in violation of, any indenture, loan or credit agreement or any other
agreement or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in violation of
any order of any court, arbitrator or Governmental Agency, or (iii) is or has been in
violation of any statute, rule or regulation of any Governmental Agency, including without
limitation all foreign, federal, state and local laws applicable to its business except in
each case as would not have, and would not reasonably be expected to result in, a Material
Adverse Effect.




     (m) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal, state, local or
foreign regulatory authorities necessary to conduct their respective businesses as described
in the SEC Reports, except where the failure to possess such permits would not have, and
would not reasonably be expected to result in, a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.




     (n) Title to Assets.



13









 






     (i) The Company and the Subsidiaries do not own any real property. The Company
and the Subsidiaries have good and marketable title in all personal property owned
by them that is material to the business of the Company and the Subsidiaries, in
each case free and clear of all Liens, except for Liens as do not materially affect
the value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company and the Subsidiaries and Liens
for the payment of federal, state or other taxes, the payment of which is neither
delinquent nor subject to penalties.




     (ii) Any real property and facilities held under lease by the Company and the
Subsidiaries (such leases, collectively, the “Leases”) are set forth on Schedule
3.1(n)(ii) of the Disclosure Schedule and, except for those Leases, the Company
is not a party to any other oral or written agreement conveying any interest in real
property, including, without limitation, leases, subleases and licenses. The
Company has delivered, or will deliver prior to the Closing Date, to Purchaser 1
true and complete copies of all Leases listed on Schedule 3.1(n)(ii) of the
Disclosure Schedule.




     (iii) Each Lease is presently in full force and effect.




     (iv) Each Lease, including all amendments thereof and modifications thereto,
represents the entire agreement under which the respective tenant occupies the
corresponding premises, and there are no material verbal or otherwise unwritten
agreements or understandings.




     (v) There are no material uncured defaults on the part of a landlord or a
tenant under one or more Leases, and there are no events which have occurred that,
with the giving of notice or the passage of time or both, would result in a material
default by either party thereunder.




     (vi) All material improvements required by the terms of one or more Leases to
be made by a landlord have been completed and the tenant thereunder is satisfied
with such improvements ,other than improvements that are in process or are planned
to commence after the date hereof, none of which improvements are expected to be
completed after the date contemplated by the terms of the applicable Lease therefor.




     (o) Patents and Trademarks. The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses and other similar rights that are necessary or
material for use in connection with their respective businesses as described in the SEC
Reports and which the failure to so have would have, or would reasonably be expected to
result in, a Material Adverse Effect (collectively, the “Intellectual Property Rights”).
Neither the Company nor any Subsidiary has since February 1, 2004, (i) received a written
notice that the Intellectual Property Rights used by the Company or any Subsidiary violates
or infringes upon the rights of any Person, or (ii) received a written invitation to license
any Intellectual Property Rights of a Person in order to avoid such a



14









 







violation or infringement. To the knowledge of the Company, all material Intellectual
Property Rights are enforceable and there is no existing infringement by another Person of
any material Intellectual Property Rights.




     (p) Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks, including, without
limitation, products liability, and in such amounts as are prudent and customary in the
businesses in which the Company and the Subsidiaries are engaged, including, but not limited
to, directors and officers insurance coverage at least equal to $40,000,000. To the best
knowledge of the Company, such insurance contracts and policies are accurate and complete.
Neither the Company nor any 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 on terms
consistent with market for the Company’s and such Subsidiaries respective lines of business.




     (q) Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports, none of the officers or directors of the Company, or any person who served as an
officer or director in the 12 months prior to the date of this Agreement, and, to the
knowledge of the Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or personal property
to or from, or otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any entity in which any officer, director, or
any such employee has a substantial interest or is an officer, director, trustee or partner,
in each case in excess of $10,000 other than (i) for payment of salary or consulting fees
for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and
(iii) for other employee benefits, including stock option agreements under any Plan.




     (r) Sarbanes-Oxley; Internal Accounting Controls. The Company is in material
compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it.
The Company and the Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in accordance with
management’s general or specific authorization, and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences. The Company has established disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company
and designed such disclosure controls and procedures to ensure that material information
relating to the Company, including its Subsidiaries, is made known to the certifying
officers by others within those entities, particularly during the period in which the
Company’s most recently filed periodic report under the Exchange Act, as the case may be, is
being prepared. The Company’s certifying officers have



15









 







evaluated the effectiveness of the Company’s controls and procedures as of the date
prior to the filing date of the most recently filed periodic report under the Exchange Act
(such date, the “Evaluation Date”). The Company presented in its most recently filed
periodic report under the Exchange Act the conclusions of the certifying officers about the
effectiveness of the disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no changes in the Company’s
internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the
Exchange Act) that has materially affected, or, to the knowledge of the Company, is
reasonably likely to materially affect, the Company’s internal control over financial
reporting.




     (s) Certain Fees. Except for the fees payable to Greene Holcomb & Fisher LLC,
no brokerage or finder’s fees or commissions are or will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment banker, bank or
other Person with respect to the transactions contemplated by the Transaction Documents. No
Purchaser shall have any obligation with respect to any fees or with respect to any claims
made by or on behalf of Greene Holcomb & Fisher LLC or any other Persons for fees of a type
contemplated in this Section 3.1(s) that may be due in connection with the transactions
contemplated by the Transaction Documents.




     (t) Private Placement. Assuming the accuracy of the Purchasers’ representations
and warranties set forth in Section 3.2, no registration under the Securities Act is
required for the offer and sale of the Securities by the Company to the Purchasers as
contemplated hereby. The issuance and sale of the Securities hereunder does not contravene
the rules and regulations of the Trading Market.




     (u) Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Shares and Warrants, will not be or be an
Affiliate of, an “investment company” within the meaning of the Investment Company Act of
1940, as amended (the “Investment Company Act”).




     (v) Registration Rights. Other than the Purchasers, no Person has any right to
cause the Company to effect the registration under the Securities Act of any securities of
the Company.




     (w) Listing and Maintenance Requirements. The Company’s Common Stock is
registered pursuant to Section 12(b) of the Exchange Act and listed on the NASDAQ Global
Market, and the Company has taken no action designed to, or which to its knowledge is likely
to have the effect of, terminating the registration of the Common Stock under the Exchange
Act, or the valid listing of the Common Stock on the NASDAQ Global Market, nor has the
Company received any notification that the SEC is contemplating terminating such
registration or that the NASDAQ Global Market is contemplating terminating such listing.
The authorization and issuance of the Securities will not violate any listing or maintenance
requirement of the Trading Market, or prevent the Company from listing the Conversion Shares
or the Warrant Shares on the Trading Market. After giving effect to the consummation of the
transactions contemplated by this



16









 







Agreement, the Company shall have satisfied the listing requirements of the NASDAQ
Manual.




     (x) Application of Takeover Protections. Assuming the accuracy of the
Purchasers’ representations and warranties set forth in Section 3.2, the Company and its
Board of Directors have taken all necessary action, if any, in order to render inapplicable
any control share acquisition, business combination, poison pill (including any distribution
under a rights agreement) or other similar anti-takeover provision under the Company’s
Articles of Incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to any Purchaser as a result of the such
Purchaser and the Company fulfilling their respective obligations or exercising their rights
under the Transaction Documents, including without limitation as a result of the Company’s
issuance of the Securities and such Purchaser’s ownership of the Securities.




     (y) Disclosure. All disclosure provided to the Purchasers regarding the
Company, its business and the transactions contemplated hereby, including the Disclosure
Schedules to this Agreement, furnished by or on behalf of the Company with respect to the
representations and warranties made herein are true and correct with respect to such
representations and warranties and do not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. The Company
acknowledges and agrees that no Purchaser has made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereof.




     (z) No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company, nor any of its
affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made
any offers or sales of any security or solicited any offers to buy any security, under
circumstances that would cause this offering of the Securities to be integrated with prior
offerings by the Company for purposes of the Securities Act or any applicable shareholder
approval provisions, including, without limitation, under the rules and regulations of any
Trading Market on which any of the securities of the Company are listed or designated.





     (aa) Solvency. Based on the financial condition of the Company as of the
Closing Date after giving effect to the receipt by the Company of the proceeds from the sale
of the Securities hereunder, (i) the Company’s fair saleable value of its assets exceeds the
amount that will be required to be paid on or in respect of the Company’s existing debts and
other liabilities (including known contingent liabilities) as they mature; (ii) the
Company’s assets do not constitute unreasonably small capital to carry on its business for
the current fiscal year as now conducted and as proposed to be conducted including its
capital needs taking into account the particular capital requirements of the business
conducted by the Company, and projected capital requirements and capital availability
thereof; and (iii) the current cash and anticipated cash flow of the Company, together with
the proceeds the Company would receive were it to liquidate all of its



17









 







assets, after taking into account all anticipated uses of the cash, would be sufficient
to pay all amounts on or in respect of its debt when such amounts are required to be paid.
The Company does not intend to incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash to be payable on or in respect of
its debt). Assuming the receipt by the Company of the proceeds from the sale of the
Securities hereunder, the Company has no knowledge of any facts or circumstances which lead
it to believe that it will file for reorganization or liquidation under the bankruptcy or
reorganization laws of any jurisdiction within one year from the Closing Date. The SEC
Reports set forth as of the dates thereof all outstanding secured and unsecured Indebtedness
of the Company or any Subsidiary, or for which the Company or any Subsidiary has
commitments. Neither the Company nor any Subsidiary is in default with respect to any
Indebtedness in excess of $50,000.




     (bb) Form S-3 Eligibility. The Company is eligible to register the resale of
the Conversion Shares and the Warrant Shares for resale by the Purchasers on Form S-3
promulgated under the Securities Act.




     (cc) Tax Status. Except for matters that would not, individually or in the
aggregate, have, or would reasonably be expected to result in, a Material Adverse Effect,
the Company and each Subsidiary has filed all necessary federal, state and foreign income
and franchise tax returns and has paid or accrued all taxes shown as due thereon, and the
Company has no knowledge of a tax deficiency which has been asserted or threatened against
the Company or any Subsidiary.




     (dd) No General Solicitation. Neither the Company nor any person acting on
behalf of the Company has offered or sold any of the Securities by any form of general
solicitation or general advertising. The Company has offered the Securities for sale only
to the Purchasers.




     (ee) Foreign Corrupt Practices. Neither the Company, nor to the knowledge of
the Company, any agent or other person acting on behalf of the Company, has (i) directly or
indirectly, used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully
any contribution made by the Company (or made by any person acting on its behalf of which
the Company is aware) which is in violation of law, or (iv) violated in any material
respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.




     (ff) Accountants. The Company’s accountants are set forth in the SEC Reports.
To the knowledge of the Company, such accountants, who the Company expects will express
their opinion with respect to the financial statements to be included in the Company’s
Annual Report on Form 10-K for the year ending February 2, 2008, are a registered public
accounting firm as required by the Securities Act.




     (gg) Manipulation of Price. The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause



18









 







or to result in the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for,
purchased, or paid any compensation for soliciting purchases of, any of the Securities
(other than for the placement agent’s placement of the Securities), or (iii) paid or agreed
to pay to any person any compensation for soliciting another to purchase any other
securities of the Company.




     (hh) ERISA; Employee Benefits. Section 3.1(hh) of the Disclosure
Schedules sets forth a complete and correct list of each employee benefit plan (as such term
is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”)) and each other material benefit plan, program or arrangement maintained,
established, sponsored, contributed, or required to be contributed, to by any member of the
Company Group, or with respect to which the Company Group has any material liability (each a
“Plan” and collectively, the “Plans”). The Company Group does not maintain, contribute to,
or have any liability under (or with respect to) any “defined benefit plan” (as defined in
Section 3(35) of ERISA), or any “multiemployer plan” (as defined in Section 3(37) of ERISA),
and does not otherwise have any current or potential liability under Title IV of ERISA. No
Plan that is required to be funded has any unfunded or underfunded liabilities. Each Plan
that is intended to be qualified under Section 401(a) of the Code is so qualified. Each of
the Plans has been maintained, funded and administered in material compliance with its terms
and with the applicable provisions of ERISA, the Code, and any other applicable laws. The
Company Group has no current or potential liability under ERISA or the Code by reason of
being considered a single employer under Section 414 of the Code with any Person other than
a member of the Company Group.




     (ii) Environment, Health and Safety.



                         (i) Each member of the Company
Group has complied and is in compliance with all Environmental
and Safety Requirements that are applicable to the Company Group’s business, except where the
failure to comply would not have, and would not reasonably be expected to result in, a Material
Adverse Effect;



                         (ii) Since February 1,
2004,
no member of the Company Group has received any written notice,
report or other information regarding any material liabilities or potential liabilities, including
any investigatory, remedial or corrective obligations, relating to such member of the Company Group
or such member’s facilities and arising under Environmental and Safety Requirements; and



                         (iii) No member of the Company
Group has, either expressly or by operation of law, assumed or
undertaken any liability, including any obligation for corrective or remedial action, of any other
Person relating to Environmental and Safety Requirements, which liability has not been fully
discharged.



     3.2 Representations and Warranties of the Purchasers. Each Purchaser hereby represents and warrants, severally and not jointly, as of the date hereof
and as of the Closing Date to the Company as follows:



19









 






     (a) Organization; Authority. Such Purchaser is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its organization
with full right, corporate or partnership power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents and otherwise to carry
out its obligations hereunder and thereunder. The execution, delivery and performance by
such Purchaser of the transactions contemplated by this Agreement have been duly authorized
by all necessary corporate or similar action on the part of such Purchaser. Each
Transaction Document to which it is a party has been duly executed by such Purchaser, and
when delivered by such Purchaser in accordance with the terms hereof, will constitute the
valid and legally binding obligation of such Purchaser, enforceable against it in accordance
with its terms, except (i) as such enforceability may be limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
and other similar laws of general application affecting enforcement of creditors’ rights
generally, (ii) as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.




     (b) Own Account. Such Purchaser understands that the Securities are restricted
securities and have not been registered under the Securities Act or any applicable state
securities law and such Purchaser is acquiring the Securities as principal for its own
account and not with a view to or for distributing or reselling the Securities or any part
thereof in violation of the Securities Act or any applicable state securities law, has no
present intention of distributing any of such Securities in violation of the Securities Act
or any applicable state securities law and has no arrangement or understanding with any
other persons regarding the distribution of the Securities (this representation and warranty
not limiting such Purchaser’s right to sell the Conversion Shares or the Warrant Shares
pursuant to the Registration Statement or otherwise in compliance with applicable federal
and state securities laws) in violation of the Securities Act or any applicable state
securities law. Such Purchaser does not have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.




     (c) Purchaser Status. At the time such Purchaser was offered the Securities,
it was, and at the date hereof it is, and on each date on which it converts any Shares into
Conversion Shares, or exercises a Warrant for Warrant Shares, it will be either: (i) an
“accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under
the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a)
under the Securities Act. Such Purchaser is not required to be registered as a
broker-dealer under Section 15 of the Exchange Act.




     (d) Experience of Purchasers. Such Purchaser, either alone or together with
its representatives, has such knowledge, sophistication and experience in business and
financial matters so as to be capable of evaluating the merits and risks of the prospective
investment in the Securities, and has so evaluated the merits and risks of such investment.
Such Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.



20









 






     (e) General Solicitation. Such Purchaser is not purchasing the Securities as a
result of any advertisement, article, notice or other communication regarding the Securities
published in any newspaper, magazine or similar media or broadcast over television or radio
or presented at any seminar or any other general solicitation or general advertisement.




     (f) Access to Information. Such Purchaser acknowledges that it has reviewed
the Disclosure Schedules and has been afforded (i) the opportunity to ask such questions as
it has deemed necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the offering of the Securities and the merits and
risks of investing in the Securities; (ii) access to information about the Company and the
Subsidiaries and their respective financial condition, results of operations, business,
properties, management and prospects sufficient to enable it to evaluate its investment; and
(iii) the opportunity to obtain such additional information that the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an informed
investment decision with respect to the investment. Neither such inquiries nor any other
investigation conducted by or on behalf of such Purchaser or its representatives or counsel
shall modify, amend or affect such Purchaser’s right to rely on the truth, accuracy and
completeness of the Disclosure Schedules and the Company’s representations and warranties
contained in the Transaction Documents.




     (g) Disclosure. Such Purchaser acknowledges and agrees that the Company is not
making, nor has made, any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in Section 3.1 hereof, and the
Transaction Documents.




     (h) Independent Investment Decision. Such Purchaser has independently
evaluated the merits of its decision to purchase Securities pursuant to the Transaction
Documents, and such Purchaser confirms that it has not relied on the advice of any other
Purchaser’s business and/or legal counsel in making such decision.




     (i) Facts Related to Inapplicability of Takeover Protection. Purchaser 1
represents and warrants that immediately prior to the execution and delivery of this
Agreement, it is not the beneficial owner of 10% or more of the voting power of the
outstanding shares entitled to vote of the Company and is not, immediately prior to the
execution and delivery of this agreement, an affiliate or associate of the Company, for
which purposes the terms “beneficial owner,” “affiliate,” and “associate” shall have the
meanings set forth in the respective definitions thereof in the Minnesota Business
Corporation Act. Purchaser 2 represents and warrants that it has been the beneficial owner
of 10% or more of the voting power of the outstanding shares entitled to vote of the Company
for more than four years.




     (j) GE Credit. Assuming the full cooperation of the Company and no significant
deterioration in its business after the date hereof, and credit committee approval by GE
Credit, Purchaser 1 is not aware of any facts suggesting that GE Credit will not agree
to the amendment set forth in Section 2.4(b)(vii).



21









 





ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES




     4.1 Transfer Restrictions.




     (a) The Securities may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of the Securities other than pursuant to
an effective registration statement or Rule 144, to the Company or to an affiliate of a
Purchaser who is an “accredited investor” as defined in Rule 501(a) under the Securities
Act, or in connection with a pledge as contemplated in Section 4.1(b), the Company may
require the transferor thereof to provide to the Company an opinion of counsel selected by
the transferor and reasonably acceptable to the Company, the form and substance of which
opinion shall be reasonably satisfactory to the Company, to the effect that such transfer
does not require registration of such transferred Securities under the Securities Act.




     (b) Each Purchaser agrees to the imprinting, so long as is required by this Section
4.1(b), of a legend on any of the Securities in the following form:




THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE
SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED
BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED
INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.




     The Company acknowledges and agrees that any Purchaser may from time to time pledge or
grant a security interest in some or all of the Securities to a financial institution that
is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who
agrees to be bound by the provisions of this Agreement, the Registration Rights Agreement,
and the Support Agreement and, if required under the terms of such arrangement, such
Purchaser may transfer pledged or secured Securities to the pledgees
or secured parties. Such a pledge or transfer would not be subject to approval of the
Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall
be required in connection therewith. Further, no notice shall be required of such



22









 







pledge.
At the applicable Purchaser’s expense, the Company will execute and deliver such reasonable
documentation as a pledgee or secured party of Securities may reasonably request in
connection with a pledge or transfer of the Securities, including, if the Conversion Shares
or the Warrant Shares are subject to registration pursuant to the Registration Rights
Agreement, the preparation and filing of any required prospectus supplement under Rule
424(b)(3) under the Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of selling shareholders thereunder.




     (c) Certificates evidencing the Securities shall not contain any legend (including the
legend set forth in Section 4.1(b)), (i) following the resale of Securities pursuant to an
effective registration statement (including the Registration Statement) covering the resale
of such Securities under the Securities Act, if applicable, or (ii) following any sale of
such Securities pursuant to Rule 144 (assuming the transferor is not an Affiliate of the
Company), or (iii) if such Securities are eligible for sale under Rule 144(k), or (iv) if
such legend is not required under applicable requirements of the Securities Act and the
rules and regulations promulgated thereunder (including judicial interpretations and
pronouncements issued by the staff of the SEC). The Company shall cause its counsel to
issue a legal opinion to the Company’s transfer agent promptly after the Effective Date if
required by the Company’s transfer agent to effect the removal of the legend hereunder, as
applicable. If all or any portion of the Shares are converted, or all or any portion of a
Warrant is exercised, at a time when there is an effective registration statement to cover
the resale of the Conversion Shares, the Warrant Shares, or both, as applicable, such
Conversion Shares, Warrant Shares or both, as applicable, shall be issued free of all
legends.




     (d) The Company agrees that following the Effective Date or at such time as such legend
is no longer required under Section 4.1(c), it will, no later than three Trading Days
following the delivery by a Purchaser to the Company or the Company’s transfer agent of (i)
a certificate representing Shares, Conversion Shares, or Warrant Shares, as the case may be,
or (ii) a Warrant, in each case, issued with a restrictive legend, deliver or cause to be
delivered to such Purchaser a certificate or replacement Warrant, as the case may be,
representing such shares or Warrant, as the case may be, that is free from all restrictive
and other legends. The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions on transfer
set forth in this Section 4.1. Certificates for Conversion Shares or Warrant Shares subject
to legend removal hereunder shall be transmitted by the transfer agent of the Company to the
Purchasers by crediting the account of the Purchaser’s prime broker with the Depository
Trust Company System.



     4.2 Furnishing of Information. As long as any Purchaser owns Securities, the Company
covenants to timely file (or obtain extensions in respect thereof and file within the applicable
grace period) all reports required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports pursuant to the Exchange
Act, it will prepare and furnish to such Purchaser and make publicly available in accordance with
Rule 144(c) such information as is required for such Purchaser to sell the Securities under Rule
144. The Company further covenants that it will take such further action as such Purchaser may
reasonably request, all to the extent required from



23









 







time to time to enable such Purchaser to sell
Securities without registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.



     4.3 Integration. The Company shall not sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that
would be integrated with the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities to the Purchasers or that would
be integrated with the offer or sale of the Securities for purposes of the rules and regulations of
any Trading Market such that it would require shareholder approval of the sale of the Securities to
the Purchasers unless shareholder approval is obtained before the closing of such subsequent
transaction.



     4.4 Confidentiality; Required Disclosure. Each party hereto shall, and shall cause
its affiliates to, keep confidential and not to publish (by press release, press interview, or
otherwise) or otherwise divulge or use for its own benefit or for the benefit of any third party
any information of a confidential or proprietary nature furnished to it by any other party, or the
existence and terms of this Agreement, the Support Agreement, or the Registration Rights Agreement,
or the existence or results of the parties’ collaboration hereunder or thereunder, without the
prior written approval of each other party, except to those of such party’s employees and
representatives as may need to know such information for purposes of the transactions contemplated
by the parties’ agreements, and except as required by applicable law or by obligations pursuant to
any listing agreement with or rules of any Trading Market. In the event of any such required
disclosure, including the filings described in below, the disclosing party will, to the extent
practical, (i) provide each other party with written notice of the required disclosure at least 24
hours in advance of such disclosure, and (ii) limit such disclosure to the minimum reasonably
deemed by such party to be required under the applicable law or obligations. The confidentiality
obligation described above shall not apply to information of any party which: (a) was already known
by the recipient prior to the time of its disclosure by the disclosing party to the recipient; (b)
is publicly available or later becomes publicly available through no fault of the recipient; or (c)
is disclosed to the recipient by a third party having no similar confidentiality obligation. This
obligation shall terminate three years after execution of this Agreement. Notwithstanding anything
to the contrary set forth above, the Company shall (i) timely file with the SEC a Current Report on
Form 8-K with respect to the transactions contemplated by this Agreement, the Warrants, the Support
Agreement, and the Registration Rights Agreement and may file this Agreement, the Registration
Rights Agreement, the Warrants or form of Warrant, and the Support Agreement as an Exhibit to such
8-K or a Form 10-Q, and (ii) make such other filings and notices in the manner and time required by
the SEC and the Trading Market, provided, in the case of a filing or notice described in clause (i)
or (ii) above, that the information contained in such filing or notice (other than the filing of
such Transaction Documents) is limited to the information reasonably deemed necessary by the
Company in order
for the Company to comply with the Exchange Act and the regulations promulgated thereunder or
the other applicable legal or Trading Market obligations.



     4.5 Shareholder Rights Plan. No claim will be made or enforced by the Company or, to
the knowledge of the Company, any other Person that any Purchaser is an “Acquiring Person” under
any shareholder rights plan or similar plan or arrangement in effect or hereafter adopted by the
Company, or that any Purchaser could be deemed to trigger the provisions of any such plan



24









 







or arrangement, by virtue of receiving Securities under the Transaction Documents. The Company shall
conduct its business in a manner so that it will not become subject to the Investment Company Act.



     4.6 Proxy Statement; Company Shareholders’ Meeting; Recommendation of Board of
Directors.



          (a) Proxy Statement. As promptly as practicable following the Closing Date, the
Company shall prepare, and provide to Purchaser 1 for review and comment, the Proxy Statement. The
Company shall include any comments to the Proxy Statement as Purchaser 1 shall reasonably request
to be included. Subject to such review and comment of Purchaser 1, as soon as practicable, and in
any event no later than 15 days, following the Closing Date, the Company shall file the Proxy
Statement with the SEC. The Company shall use commercially reasonable efforts to cause the Proxy
Statement to be mailed to the Company’s shareholders as promptly as practicable after the later of
(i) ten (10) days after the date the Company files the Proxy Statement with the SEC and (ii) the
date the Company receives notice from the SEC that it has no further comments on the Proxy
Statement. The Company shall cooperate and provide Purchaser 1 with an opportunity to review and
comment on any amendment or supplement to the Proxy Statement, and shall include any comments to
any such amendment or supplement as Purchaser 1 shall reasonably request to be included. The
Company will advise Purchaser 1 promptly after it receives notice of any request by the SEC for
amendment of the Proxy Statement or comments thereon and responses thereto or requests by the SEC
for additional information. If at any time any information relating to the Company, or any of its
Affiliates, officers or directors, should be discovered by the Company which should be set forth in
an amendment or supplement to the Proxy Statement, so that any of such documents would not include
any misstatement of a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made, not misleading, the
party which discovers such information shall promptly notify the other parties hereto and an
appropriate amendment or supplement.




          (b) Shareholders’ Meeting. The Company shall, as promptly as practicable after the
later of (i) ten (10) days after the date the Company files the Proxy Statement with the SEC and
(ii) the date the Company receives notice from the SEC that it has no further comments on the Proxy
Statement, take all action necessary in accordance with applicable law and the Company’s articles
of incorporation and by-laws, as each is amended, to duly give notice of, convene and hold a
meeting of its shareholders to be held as promptly as practicable to consider the approval and
adoption of the elimination of the Exchange Cap (the “Company Shareholders’ Meeting”). The Company
will use commercially reasonable efforts to solicit from its shareholders proxies in favor of the
elimination of the Exchange Cap, and will take all other action reasonably necessary or advisable
to secure the vote or consent of its shareholders
required by the rules of the NASDAQ Global Market or applicable law to obtain such approvals.
Notwithstanding anything to the contrary contained in this Agreement, the Company may adjourn or
postpone the Company Shareholders’ Meeting to the extent necessary to ensure that any necessary
supplement or amendment to the Proxy Statement is provided to its shareholders in advance of a vote
on the elimination of the Exchange Cap or, if, as of the time for which the Company Shareholders’
Meeting is originally scheduled, there are insufficient shares of Common Stock represented (either
in person or by proxy) to constitute a quorum necessary to






25









 







conduct the business of such meeting.
The Company shall use commercially reasonable efforts such that the Company Shareholders’ Meeting
is called, noticed, convened, held and conducted, and that all proxies solicited in connection with
the Company Shareholders’ Meeting are solicited in compliance with applicable law, the rules of the
NASDAQ Global Market and the Company’s articles of organization and by-laws, as each is amended.
Without the prior written consent of Purchaser 1, the elimination of the Exchange Cap shall be the
only matter which the Company shall propose to be acted on by the Company’s shareholders at the
Company Shareholders’ Meeting.





     (c) Recommendation of Board of Directors.




     (i) The Board of Directors shall recommend that its shareholders vote in favor
of the elimination of the Exchange Cap at the Company Shareholders’ Meeting.




     (ii) The Proxy Statement shall include a statement to the effect that the Board
of Directors has recommended that the Company’s shareholders vote in favor of the
elimination of the Exchange Cap.




     (iii) Neither the Board of Directors nor any committee thereof shall withdraw,
amend or modify, or propose or resolve to withdraw, amend or modify in a manner
adverse to Purchaser 1, the recommendation of the Board of Directors that the
Company’s shareholders vote in favor of the elimination of the Exchange Cap.



     4.7 Indemnification of Purchasers.



          (a) Subject to the provisions of this Section 4.7, the Company will indemnify and hold each
Purchaser and its directors, officers, stockholders, members, partners, employees and agents (each,
a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements,
court costs and reasonable attorneys’ fees and costs of investigation (collectively, “Losses”) that
any such Purchaser Party may suffer or incur as a result of or relating to (i) any breach of any of
the representations, warranties, covenants or agreements made by the Company in this Agreement or
in the other Transaction Documents, without giving effect to any materiality, Material Adverse
Effect or any similar qualifications, or (ii) any action instituted against any Purchaser, or any
of them or their respective Affiliates, by any shareholder of the Company who is not an Affiliate
of such Purchaser, with respect to any of the transactions contemplated by the Transaction
Documents (unless such action is based upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any
agreements or understandings such Purchaser may have with any such shareholder or any
violations by the Purchaser of state or federal securities laws or any conduct by such Purchaser
which constitutes fraud, gross negligence, willful misconduct or malfeasance); provided,
however, that the Company will not have any obligation under Section 4.7(a)(i) above,
unless and until the aggregate amount of all Losses for which the Company is obligated thereunder
exceeds $200,000 (the “Threshold”), and if the amount of such Losses exceeds the Threshold, then
the Company will be obligated for the entire portion of such Losses from the first dollar thereof.




26









 








          (b) If any action shall be brought against any Purchaser Party in respect of which indemnity
may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in
writing. The Company will not be liable to any Purchaser Party under this Agreement (i) for any
settlement by a Purchaser Party effected without the Company’s prior written consent, which shall
not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss,
claim, damage or liability is attributable to any Purchaser Party’s breach of any of the
representations, warranties, covenants or agreements made by the Purchasers in this Agreement or in
the other Transaction Documents. The Company shall not approve the settlement of any claims
against a Purchaser Party without the written consent of such Purchaser Party, unless such
settlement holds such Purchaser Party harmless and releases the Purchaser Party from all claims.




     4.8 Conduct of the Business. Between the date hereof and the earlier to of the
Closing Date and the date of termination of this Agreement pursuant to Section 5.1, the Company
shall be operated only in the ordinary course of its business, under the direction and control of
its board of directors.



     4.9 Notice of Certain Events and Access to Information. Between the date hereof and
the earlier to of the Closing Date and the date of termination of this Agreement pursuant to
Section 5.1, the Company shall:



          (a) promptly, and no later than 24 hours after receipt thereof, provide to Purchaser 1 notice,
and all supporting documentation received by the Company, of any inquiry, request, proposal, or
offer, whether oral or written, with respect to an investment in, or purchase of, any securities or
assets of the Company or any of its Subsidiaries, other than sales of inventory in the ordinary
course of business; provided that, the foregoing obligation shall be subject to any contractual
confidentiality obligations to which the Company is subject immediately prior to the date of this
Agreement;




          (b) provide full access at all reasonable times and upon reasonable notice to the facilities,
officers, employees, products, processes, technology, business and financial records, contracts,
business plans, budget and projections, customers, suppliers and other information regarding the
Company and the Subsidiaries as Purchaser 1 may reasonably request, and, to the extent permitted by
KPMG LLP, the work papers of KPMG LLP, the Company’s independent accountants, and otherwise provide
such assistance as is reasonably requested by Purchaser 1 in order that Purchaser 1 may have a full
opportunity to make such investigation and evaluation as it shall reasonably desire to make of the
business and affairs of the Company and the Subsidiaries; and




          (c) and shall cause its officers and directors to cooperate fully (including providing
introductions where necessary) with Purchaser 1 to enable Purchaser 1 to use its commercially
reasonable efforts to satisfy the conditions set forth in Section 2.4(b)(vi) and (vii).





27









 








ARTICLE V.

MISCELLANEOUS




     5.1 Termination. This Agreement may be terminated by the Purchasers or the Company by
written notice to the other parties hereto, if the Closing has not been consummated on or before
July 31, 2007; provided that, if the conditions set forth in Section 2.4(b)(vi) and (vii) shall not
have been satisfied on or prior to June 15, 2007 and the Purchasers shall not have waived the
conditions to Closing pursuant to Section 2.4(b)(vi) and (vii) on or prior to June 15, 2007 that
are not satisfied by that date, this Agreement may be terminated by the Company. In the event this
Agreement is terminated pursuant to the preceding sentence, all provisions of this Agreement shall
terminate and there shall be no liability on the part of any party hereto, or their respective
officers, directors, managing directors, members or shareholders, except for willful misconduct by
any party hereto and except that the following Sections shall survive any such termination
indefinitely: Sections 5.2, 5.3 (second sentence only), 5.16 and 5.17.



     5.2 Fees and Expenses. Except as expressly set forth in the Transaction Documents to
the contrary, including in Section 5.3 below, each party shall pay the fees and expenses of its
advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties
levied in connection with the delivery of any Securities.



     5.3 Closing Fee; Purchasers’ Fees and Expenses. On the Closing Date, in consideration
for the services Purchaser 1 performed in structuring and arranging the transactions contemplated
by this Agreement and the Transaction Documents, the Company will pay to Purchaser 1 a transaction
fee equal to 1% of Purchaser 1’s Subscription Amount in connection with the purchase and sale of
the Securities hereunder (the “Closing Fee”), by wire transfer of immediately available funds to an
account indicated to the Company by such Purchaser. In addition, the Company shall reimburse the
Purchasers for (i) the reasonable fees and expenses of Dorsey & Whitney LLP incurred by Purchasers
in connection with the documentation, negotiation and consummation of the transactions contemplated
by this Agreement and the Transaction Documents and (ii) all other reasonable fees and
out-of-pocket expenses incurred by the Purchasers in connection with the transactions contemplated
hereunder (collectively, “Purchaser Expenses”), provided that the aggregate amount which the
Company shall be required to reimburse shall not exceed $500,000 and if the Purchaser Expenses
exceed $500,000, Purchaser 1’s Purchaser Expenses shall be reimbursed before the other Purchasers’
Purchase Expenses and if Purchaser 1’s Purchaser Expenses do not exceed $500,000, the other
Purchasers shall be reimbursed pro rata based upon their total Purchaser Expenses. After the
Closing Date, the Company agrees to reimburse the Purchasers for all fees and expenses incurred in
connection with any future amendment to, waiver of or the enforcement by the Purchasers of any of
their rights arising under this Agreement or any of the Transaction Documents, or in connection
with the review of the Company’s proxy statement for any meeting of the Company’s shareholders.



     5.4 Entire Agreement. The Transaction Documents, together with the exhibits and
schedules thereto, contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or written, with



28









 




respect
to such matters, which the parties acknowledge have been merged into such documents, exhibits and
schedules.




     5.5 Notices. Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed given and effective on
the earliest of (a) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30
p.m. (Eastern Time) on a Trading Day, (b) the next Trading Day after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number set forth on the
signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (Eastern
Time) on any Trading Day, (c) the 2nd Trading Day following the date of mailing, if sent
by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to
whom such notice is required to be given. The address for such notices and communications shall be
as set forth on the signature pages attached hereto until changed by notice given in accordance
with this Section.



     5.6 Amendments; Waivers. No provision of this Agreement may be waived or amended
except in a written instrument signed, in the case of an amendment, by the Company and each
Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waiver is
sought. No waiver of any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair the exercise of any
such right.



     5.7 Headings. The headings herein are for convenience only, do not constitute a part
of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 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.



     5.8 Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written consent of each
Purchaser. Any Purchaser may assign any or all of its rights under this Agreement to any Person to
whom such Purchaser assigns or transfers any Securities, provided such transferee agrees in writing
to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the
“Purchasers.”



     5.9 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective successors and permitted assigns and is not for the benefit of,
nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in
Section 4.12.



     5.10 Governing Law. All questions concerning the construction, validity, enforcement
and interpretation of the Transaction Documents shall be governed by and construed and enforced in
accordance with the internal laws of the State of Minnesota, without regard to the principles of
conflicts of law thereof. Each party agrees that all legal proceedings concerning the



29









 




interpretations, enforcement and defense of the transactions contemplated by this Agreement and any
other Transaction Documents (whether brought against a party hereto or its respective affiliates,
directors, officers, stockholders, employees or agents) shall be commenced exclusively in the state
and federal courts located in Hennepin County, Minnesota, U.S.A. Each party hereto hereby
irrevocably submits to the exclusive jurisdiction of the state and federal courts located in
Hennepin County, Minnesota, U.S.A. for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein (including with respect to
the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not
to assert in any suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding has been commenced in an
improper or inconvenient venue for such proceeding. Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out
of or relating to this Agreement or the transactions contemplated hereby.




     5.11 Survival. The representations, warranties, agreements and covenants contained
herein shall survive the Closing and the delivery of the Securities.



     5.12 Execution. This Agreement may be executed in two or more counterparts, all of
which when taken together shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each party and delivered to the other party, it being
understood that both parties need not sign the same counterpart. In the event that any signature
is delivered by facsimile transmission, 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 signature page were an original thereof.



     5.13 Severability. If any provision of this Agreement is held to be invalid or
unenforceable in any respect, the validity and enforceability of the remaining terms and provisions
of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt
to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon
so agreeing, shall incorporate such substitute provision in this Agreement.



     5.14 Replacement of Securities. If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued
in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument under such
circumstances shall also pay any reasonable third-party costs associated with the issuance of such
replacement Securities. If a replacement certificate or instrument evidencing any Securities



30









 




is requested due to a mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a replacement.




     5.15 Remedies. In addition to being entitled to exercise all rights provided herein
or granted by law, including recovery of damages, each Purchaser and the Company will be entitled
to specific performance under the Transaction Documents. The parties agree that monetary damages
may not be adequate compensation for any loss incurred by reason of any breach of obligations
described in the foregoing sentence and hereby agrees to waive in any action for specific
performance of any such obligation the defense that a remedy at law would be adequate.



     5.16 Payment Set Aside. To the extent that the Company makes a payment or payments to
any Purchaser pursuant to any Transaction Document or such Purchaser enforces or exercises its
rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or
any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set
aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to
the Company, a trustee, receiver or any other person under any law (including, without limitation,
any bankruptcy law, state or federal law, common law or equitable cause of action), then to the
extent of any such restoration the obligation or part thereof originally intended to be satisfied
shall be revived and continued in full force and effect as if such payment had not been made or
such enforcement or setoff had not occurred.



     5.17 Independent Nature of Purchasers’ Obligations and Rights. The obligations of
each Purchaser under any Transaction Document are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any way for the performance of the
obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in
any Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to
constitute the Purchasers as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the Transaction Documents.
Each Purchaser shall be entitled to independently protect and enforce its rights, including without
limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and
it shall not be necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. The Company has elected to provide
all Purchasers with the same terms and Transaction Documents for the convenience of the Company and
not because it was required or requested to do so by the Purchasers.



(Signature Pages Follow)




31









 





     IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be
duly executed by their respective authorized signatories as of the date first indicated above.



	 	 	 	 	 	 	 
	THE COMPANY:	 	 	 	Address for Notice:
	 
	 	 	 	 	 	 
	WILSONS THE LEATHER EXPERTS INC.	 	 	 	7401 Boone Avenue North
	 

	 	 	 	 	 	Brooklyn Park, MN 55428
	 

	 	 	 	 	 	Attn: Chief Financial Officer
	 

	 	 	 	 	 	Fax No.: (763) 391-4000
	By:

	 	/s/ Stacy A. Kruse	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name: Stacy A. Kruse	 	 	 	 
	 

	 	Title: Chief Financial Officer
	 	 	 	With a copy to:
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	Faegre & Benson LLP
2200 Wells Fargo Center
	 

	 	 	 	 	 	90 South Seventh Street
	 

	 	 	 	 	 	Minneapolis, MN 55402
	 

	 	 	 	 	 	Attn: Philip S. Garon
	 

	 	 	 	 	 	Fax No.: (612) 766-1600






 









 






[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]




	 	 	 	 	 	 	 	 	 
	PURCHASER:	 	 	 	Address for Notice:	 	 
	 
	 	 	 	 	 	 	 	 
	MARATHON FUND LIMITED PARTNERSHIP V	 	 	 	90 South Seventh Street, Suite 3700	 	 
	 

	 	 	 	 	 	Minneapolis, MN 55402	 	 
	 

	 	 	 	 	 	Attn: Michael T. Sweeney	 	 
	By: Miltiades, LLP	 	 	 	Fax No.: (612) 338-2860	 	 
	Its: General Partner	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	 	 	With a copy to:	 	 
	By: Marathon Ultimate GP, LLC	 	 	 	 	 	 
	Its: General Partner	 	 	 	 	 	 
	 

	 	 	 	 	 	Dorsey & Whitney LLP	 	 
	 

	 	 	 	 	 	50 South Sixth Street	 	 
	 

	 	 	 	 	 	Suite 1500	 	 
	By:

	 	/s/ Michael S. Israel
 

Name: Michael S. Israel
	 	 	 	Minneapolis, MN 55402 

Attn: Robert A. Rosenbaum	 	 
	 

	 	Title: Manager
	 	 	 	Fax: (612) 340-7800	 	 






33









 






[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]




	 	 	 	 	 	 	 	 	 
	PURCHASER:	 	 	 	Address for Notice:	 	 
	 
	 	 	 	 	 	 	 	 
	PENINSULA INVESTMENT PARTNERS, L.P.	 	 	 	404B East Main Street, 2nd Floor	 	 
	 

	 	 	 	 	 	Charlottesville, VA 22902	 	 
	By: Peninsula Capital Appreciation, LLC	 	 	 	Attention: Mr. R. Ted Weschler	 	 
	Its: General Partner	 	 	 	Fax No.: (434) 220-9321	 	 
	 
	 	 	 	 	 	 	 	 
	By:

	 	/s/ R. Ted Weschler
 

Name: R. Ted Weschler
	 	 	 	 	 	 
	 

	 	Title: Managing Member	 	 	 	 	 	 






34









 






[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]




	 	 	 	 	 	 	 	 	 
	PURCHASER:	 	 	 	Address for Notice:	 	 
	 
	 	 	 	 	 	 	 	 
	QUAKER CAPITAL PARTNERS I, L.P.	 	 	 	401 Wood Street, Suite 1300	 	 
	 

	 	 	 	 	 	Pittsburgh, PA 15222	 	 
	By: Quaker Premier, LP	 	 	 	Attention: Mark G. Schoeppner	 	 
	Its: General Partner	 	 	 	Fax No.: (412) 281-0323	 	 
	 
	 	 	 	 	 	 	 	 
	By: Quaker Capital Management Corp.	 	 	 	 	 	 
	Its: General Partner	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	By:

	 	/s/ Mark G. Schoeppner
 

Name: Mark G. Schoeppner
	 	 	 	 	 	 
	 

	 	Title: President	 	 	 	 	 	 






35









 






[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]




	 	 	 	 	 	 	 	 	 
	PURCHASER:	 	 	 	Address for Notice:	 	 
	 
	 	 	 	 	 	 	 	 
	QUAKER CAPITAL PARTNERS II, L.P.	 	 	 	401 Wood Street, Suite 1300	 	 
	 

	 	 	 	 	 	Pittsburgh, PA 15222	 	 
	By: Quaker Premier II, LP	 	 	 	Attention: Mark G. Schoeppner	 	 
	Its: General Partner	 	 	 	Fax No.: (412) 281-0323	 	 
	 
	 	 	 	 	 	 	 	 
	By: Quaker Capital Management Corp.	 	 	 	 	 	 
	Its: General Partner	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	By:

	 	/s/ Mark G. Schoeppner
 

Name: Mark G. Schoeppner
	 	 	 	 	 	 
	 

	 	Title: President	 	 	 	 	 	 






36









 






Schedule 1




Purchasers




	 	 	 	 	 	 	 	 	 	 	 	 	 
	Purchaser	 	Shares	 	Warrant Shares	 	Subscription Amount
	Marathon Fund Limited Partnership V
	 	 	35,000	 	 	 	11,666,667	 	 	$	35,000,000	 
	Peninsula Investment Partners, L.P.
	 	 	5,000	 	 	 	1,666,667	 	 	$	5,000,000	 
	Quaker Capital Partners I, L.P.
	 	 	3,150	 	 	 	1,050,000	 	 	$	3,150,000	 
	Quaker Capital Partners II, L.P.
	 	 	1,850	 	 	 	616,666	 	 	$	1,850,000	 







 









 





List of Exhibits




	 	 	 
	Exhibit A

	 	Form of Registration Rights Agreement
	Exhibit B

	 	Form of Support Agreement
	Exhibit C

	 	Form of Warrant
	Exhibit D

	 	Form of Certificate







 









 





EXHIBIT A




REGISTRATION RIGHTS AGREEMENT




          This Registration Rights Agreement (this “Agreement”) is made and entered into as of
                                        
, 2007, among Wilsons The Leather Experts Inc., a Minnesota corporation (the “Company”),
and the purchasers set forth on Schedule 1 attached hereto (each a “Purchaser” and collectively,
the “Purchasers”).




          This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date
hereof, by and among the Company and the Purchasers (the “Purchase Agreement”).




          The Company and the Purchasers hereby agree as follows:




     1. Definitions. Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in the Purchase
Agreement. As used in this Agreement, the following terms shall have the following meanings:




     “Advice” shall have the meaning set forth in Section 10(d).




     “Board of Directors” means, at any time, the board of directors of the Company.




     “Excluded Registration” means (i) a registration relating to the sale of securities to
employees of the Company or a subsidiary pursuant to a stock option, stock purchase, or
similar plan; (ii) a registration relating to an SEC Rule 145 transaction; (iii) a
registration on any form that does not include substantially the same information as would
be required to be included in a Registration Statement covering the sale of the Registrable
Securities; or (iv) a registration in which the only Common Stock being registered is Common
Stock issuable upon conversion of debt securities that are also being registered.




     “Holder” or “Holders” means the holder or holders, as the case may be, from time to
time of Registrable Securities or securities convertible into Registrable Securities.




     “Holder 1” means Marathon Fund Limited Partnership V.




     “Immediate Family Member” means a child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, life partner (provided such individual lives in the same household),
sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, including adoptive relationships, of a natural person referred to herein.




     “Indemnified Party” shall have the meaning set forth in Section 7(c).




     “Indemnifying Party” shall have the meaning set forth in Section 7(c).




     “Losses” shall have the meaning set forth in Section 7(a).



 









 






     “PQ Registrable Securities” means all Registrable Securities held by Peninsula
Investment Partners, L.P., Quaker Capital Partners I, L.P. and Quaker Capital Partners II,
L.P.




     “Proceeding” means an action, claim, suit, investigation or proceeding (including,
without limitation, an investigation or partial proceeding, such as a deposition), whether
commenced or threatened.




     “Prospectus” means the prospectus included in a Registration Statement (including,
without limitation, a prospectus that includes any information previously omitted from a
prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the Registrable
Securities covered by a Registration Statement, and all other amendments and supplements to
the Prospectus, including post-effective amendments, and all material incorporated by
reference or deemed to be incorporated by reference in such Prospectus.




     “Registrable Securities” means as of the date in question all of (a) the Conversion
Shares and Warrant Shares issued or issuable, (b) any Common Stock issued or issuable (i)
upon conversion of any capital stock of the Company acquired by the Purchasers after the
date hereof, or (ii) upon exercise of any option, warrant, or other right to acquire Common
Stock acquired by the Purchasers after the date hereof, (c) any shares of Common Stock
issued or issuable upon any stock split, dividend or other distribution, recapitalization or
similar event with respect to the shares referenced in clauses (a) and (b) above, (d) any
Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right,
or other security that is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, the shares referenced in clauses (a), (b), and (c) above;
excluding in all cases, however, any Registrable Securities sold by a Person in a
transaction in which the applicable rights under this Agreement are not assigned pursuant to
Section 10(g); provided, however, that none of the above described securities shall be
treated as Registrable Securities if (a) they have been sold to or through a broker or
dealer or underwriter in a public distribution or a public securities transaction, or (b)
they have been sold in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale.




     “Registration Statement” means the registration statements required to be filed
hereunder, including (in each case) the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.




     “Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC having substantially the same purpose and effect as such Rule.



2









 






     “SEC” shall mean the United States Securities and Exchange Commission.




     “Selling Shareholder Questionnaire” shall have the meaning set forth in Section 5.



     2. Registration Rights.



          (a) Demand Registration.





     (i) Upon a written request from Holder 1, the Company shall (A) within ten (10)
days after the date such request is given, give notice thereof (the “Demand Notice”)
to all Holders other than the Holder 1, and (B) as soon as practicable, and in any
event within sixty (60) days after the date such request is given by the Holder 1,
file a Registration Statement under the Securities Act covering all Registrable
Securities that the Holder 1 requested to be registered and any additional
Registrable Securities requested to be included in such registration by any other
Holders, as specified by notice given by each such Holder to the Company within
thirty (30) days of the date the Demand Notice is given, and in each case, subject
to the limitations of Sections 2(a)(ii), 2(a)(iii), and 3(a) below.




     (ii) Notwithstanding the Company’s obligations pursuant to Section 2(a)(i)
above, after receipt of any written request from Holder 1 to file a Registration
Statement pursuant to Section 2(a)(i), if the Company furnishes to Holder 1 a
certificate signed by the Company’s chief executive officer stating that in the good
faith judgment of the Board of Directors it would be materially detrimental to the
Company and its shareholders for such Registration Statement to either become
effective or remain effective for as long as such Registration Statement otherwise
would be required to remain effective, because such action would (A) materially
interfere with a significant acquisition, corporate reorganization, or other similar
transaction involving the Company; (B) require premature disclosure of material
information that the Company has a bona fide business purpose for preserving as
confidential; or (C) render the Company unable to comply with requirements under the
Securities Act or Exchange Act, then the Company shall have the right to defer
taking action with respect to such filing, and any time periods with respect to
filing or effectiveness thereof shall be tolled correspondingly, for a period of not
more than sixty (60) days after the request of Holder 1 is given; provided,
however, that the Company may not invoke this right more than once in any
twelve (12) month period; and provided further that the Company shall not register
any securities for its own account or that of any other shareholder during such
sixty (60) day period other than an Excluded Registration.




     (iii) The Company shall not be obligated to effect, or to take any action to
effect, any registration pursuant to Section 2(a)(i) after the Company has effected
two registrations pursuant to Section 2(a)(i). A registration shall not be counted
as “effected” for purposes of this Section 2(a)(iii) until such time as the



3









 






applicable Registration Statement has been declared effective by the SEC,
unless Holder 1 withdraws its request for such registration.




     (iv) The Company shall not be obligated to effect, or take any action to
effect, any registration pursuant to Section 2(a)(i) during the period starting with
the date forty-five (45) days prior to the Company’s good faith estimate of the date
of filing of, and ending on a date ninety (90) days after the effective date of, a
registration initiated by the Company for its own issuance of securities;
provided however, that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective and the Company complied with its obligations under Section 2(b) with
respect to such registration. The Company may not invoke this right more than once
in any twelve (12) month period.




     (b) Piggy-Back Registrations. If the Company proposes to register (including,
for this purpose, a registration effected by the Company for shareholders other than the
Holders) any of its Common Stock under the Securities Act in connection with the public
offering of such securities solely for cash (other than in an Excluded Registration), the
Company shall, at such time, promptly give each Holder notice of such registration. Upon
the request of each Holder given within twenty (20) days after such notice is given by the
Company, the Company shall, subject to the provisions of Section 3(b), cause to be
registered all of the Registrable Securities that each such Holder has requested to be
included in such registration. The Company shall have the right to terminate or withdraw
any registration initiated by it under this Section 2(b) before the effective date of such
registration, whether or not any Holder has elected to include Registrable Securities in
such registration.




     (c) Termination of Registration Rights. In addition to the other limitations
contained in this Agreement, no Holder shall be entitled to exercise any rights provided in
this Agreement after such time as such Holder may freely sell all of such Holder’s
Registrable Securities within a three-month period pursuant to Rule 144, or without regard
to the volume limitations of Rule 144 pursuant to Rule 144(k).



     3. Underwriting.




     (a) If, pursuant to Section 2(a)(i), Holder 1 intends to distribute the Registrable
Securities covered by its request by means of an underwriting, it shall so advise the
Company as a part of its request made pursuant to Section 2(a)(i), and the Company shall
include such information in the Demand Notice. The underwriter(s) will be selected by
Holder 1. In such event, the right of any Holder to include such Holder’s Registrable
Securities in such registration shall be conditioned upon such Holder’s participation in
such underwriting and the inclusion of such Holder’s Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall (together with the Company as provided in Section
4(l)) enter into an underwriting agreement in customary form with the underwriter(s)
selected for such underwriting. Notwithstanding any other provision of this Section 3(a),
if the managing underwriter(s) advise(s) Holder 1 in writing that



4









 






marketing factors require a limitation on the number of shares to be underwritten, then
Holder 1 shall so advise all Holders of Registrable Securities that otherwise would be
underwritten pursuant hereto, and the number of Registrable Securities that may be included
in the underwriting shall be allocated among such Holders of Registrable Securities,
including Holder 1, in proportion (as nearly as practicable) to the number of Registrable
Securities owned by each Holder or in such other proportion as shall mutually be agreed to
by all such selling Holders; provided, however, that (i) the number of
Registrable Securities held by the Holders to be included in such underwriting shall not be
reduced unless all other securities are first entirely excluded from the underwriting, and
(ii) any Registrable Securities which are not PQ Registrable Securities shall not be
excluded from such underwriting unless all PQ Registrable Securities are first excluded from
such offering. To facilitate the allocation of shares in accordance with the above
provisions, the Company or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares. For purposes of the provision in this Section 3(a)
concerning apportionment, for any selling Holder that is a partnership, limited liability
company, or corporation, the partners, members, retired partners, retired members,
stockholders, and Affiliates of such Holder, or the estates and Immediate Family Members of
any such partners, retired partners, members, and retired members and any trusts for the
benefit of any of the foregoing Persons, shall be deemed to be a single “selling Holder,”
and any pro rata reduction with respect to such “selling Holder” shall be based upon the
aggregate number of Registrable Securities owned by all Persons included in such “selling
Holder,” as defined in this sentence.




     (b) In connection with any offering involving an underwriting of shares of the
Company’s capital stock pursuant to Section 2(b), the Company shall not be required to
include any of the Holders’ Registrable Securities in such underwriting unless the Holders
accept the terms of the underwriting as agreed upon between the Company and its
underwriters, and then only in such quantity as the underwriters in their sole discretion
determine will not jeopardize the success of the offering by the Company. If the total
number of securities, including Registrable Securities, requested by shareholders to be
included in such offering exceeds the number of securities to be sold (other than by the
Company) that the underwriters in their reasonable discretion determine is compatible with
the success of the offering, then the Company shall be required to include in the offering
only that number of such securities, including Registrable Securities, which the
underwriters and the Company in their sole discretion determine will not jeopardize the
success of the offering. If the underwriters determine that less than all of the
Registrable Securities requested to be registered can be included in such offering, then the
Registrable Securities that are included in such offering shall be allocated among the
selling Holders in proportion (as nearly as practicable) to the number of Registrable
Securities owned by each selling Holder or in such other proportions as shall mutually be
agreed to by all such selling Holders. To facilitate the allocation of shares in accordance
with the above provisions, the Company or the underwriters may round the number of shares
allocated to any Holder to the nearest 100 shares. Notwithstanding the foregoing, in no
event shall (i) the number of Registrable Securities included in such offering be reduced
unless all other securities (other than securities to be sold by the Company) are first
entirely excluded from the offering, or (ii) the number of Registrable Securities included
in the offering be reduced below thirty percent (30%) of the total number of



5









 






securities included in such offering or (iii) notwithstanding (ii) above, any
Registrable Securities which are not PQ Registrable Securities be excluded from such
underwriting unless all PQ Registrable Securities are first excluded from such offering.
For purposes of the provision in this Section 3(b) concerning apportionment, for any selling
Holder that is a partnership, limited liability company, or corporation, the partners,
members, retired partners, retired members, stockholders, and Affiliates of such Holder, or
the estates and Immediate Family Members of any such partners, retired partners, members,
and retired members and any trusts for the benefit of any of the foregoing Persons, shall be
deemed to be a single “selling Holder,” and any pro rata reduction with respect to such
“selling Holder” shall be based upon the aggregate number of Registrable Securities owned by
all Persons included in such “selling Holder,” as defined in this sentence.




     (c) For purposes of Section 2(a)(i), a registration shall not be counted as “effected”
if, as a result of an exercise of the underwriter’s cutback provisions in Section 3(a),
fewer than fifty percent (50%) of the total number of Registrable Securities that Holders
have requested to be included in such Registration Statement are actually included.



     4. Registration Procedures. Whenever required under Section 2 to effect the
registration of any Registrable Securities, the Company shall:




     (a) not less than five Trading Days prior to the filing of each Registration Statement
or any related Prospectus or any amendment or supplement thereto (including any document
that would be incorporated or deemed to be incorporated therein by reference), (i) furnish
to each Holder copies of all such documents proposed to be filed (except for any document
incorporated or document to be incorporated by reference and such post effective amendments
or supplements that are solely for the purpose of incorporating the information contained in
the periodic and/or current reports filed by the Company under the Exchange Act into the
Registration Statement or related Prospectus), which documents will be subject to the review
of such Holders, and (ii) cause its officers and directors, and use commercially reasonable
efforts to cause its counsel and independent registered public accounting firm, to respond
to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to
each Holder to conduct a reasonable investigation within the meaning of the Securities Act;




     (b) not file a Registration Statement or any such Prospectus or any amendments or
supplements thereto if Holder 1 shall reasonably object in good faith, provided that, the
Company is notified of such objection in writing no later than five (5) Trading Days after
the Holders have been so furnished copies of any Registration Statement or one (1) day after
the Holders have been so furnished copies of any related Prospectus or any amendment or
supplement;




     (c) promptly (i) make available for inspection by the selling Holders, any managing
underwriter(s) participating in any disposition pursuant to such Registration Statement, and
any attorney or accountant or other agent retained by any such underwriter or selected by
the selling Holders, all financial and other records, pertinent corporate documents, and
properties of the Company, and (ii) cause the Company’s



6









 






officers and directors, and use commercially reasonable efforts to cause the Company’s
counsel and independent registered public accounting firm, to supply all information
reasonably requested by any such selling Holder, managing underwriter, attorney, accountant,
or agent, in each case, as necessary or advisable to verify the accuracy of the information
in such Registration Statement and to conduct appropriate due diligence in connection
therewith;




     (d) subject to Sections 4(a) and (b), prepare and file, as expeditiously as reasonably
possible, with the SEC a Registration Statement with respect to such Registrable Securities
and use commercially reasonable efforts to (i) cause such Registration Statement to become
effective as promptly as possible after the filing thereof and (ii) upon the request of
Holder 1, keep such Registration Statement effective for a period of up to one hundred
eighty (180) days or, if earlier, until the distribution contemplated in the Registration
Statement has been completed; provided, however, that (A) such one hundred
eighty (180) day period shall be extended for a period of time equal to the period the
Holder refrains, at the request of an underwriter of Common Stock (or other securities) of
the Company, from selling any securities included in such registration, and (B) in the case
of any registration of Registrable Securities on Form S-3 that are intended to be offered on
a continuous or delayed basis, subject to compliance with applicable SEC rules, such one
hundred eighty (180) day period shall be extended for up to 360 days, if necessary, to keep
the Registration Statement effective until all such Registrable Securities are sold;




     (e) subject to Sections 4(a) and (b), prepare and file with the SEC such amendments and
supplements to such Registration Statement, and the Prospectus used in connection with such
Registration Statement, as may be necessary to comply with the Securities Act in order to
enable the disposition of all Registrable Securities covered by such Registration Statement;




     (f) respond as promptly as reasonably possible to any comments received from the SEC
with respect to a Registration Statement or any amendment thereto and as promptly as
reasonably possible provide the Holders true and complete copies of all correspondence from
and to the SEC relating to a Registration Statement;




     (g) comply with the provisions of the Securities Act and the Exchange Act with respect
to the disposition of all Registrable Securities covered by a Registration Statement during
the applicable period in accordance (subject to the terms of this Agreement) with the
intended methods of disposition by the Holders thereof set forth in such Registration
Statement as so amended or in such Prospectus as so supplemented;




     (h) promptly notify the Holders of Registrable Securities to be sold (which notice
shall, pursuant to clauses (ii) through (vi) hereof, be accompanied by an instruction to
suspend the use of the Prospectus until the requisite changes have been made) as promptly as
reasonably possible (and, in the case of (i)(A) below, not less than five Trading Days prior
to such filing) and (if requested by any such Holder) confirm such notice in writing no
later than one Trading Day following the day (i) (A) when a Prospectus or any Prospectus
supplement or post-effective amendment to a Registration



7









 






Statement is proposed to be filed; (B) when the SEC notifies the Company whether there
will be a “review” of such Registration Statement and whenever the SEC comments in writing
on such Registration Statement (the Company shall provide true and complete copies thereof
and all written responses thereto to each of the Holders); and (C) with respect to a
Registration Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the SEC or any other federal or state governmental authority for
amendments or supplements to a Registration Statement or Prospectus or for additional
information; (iii) of the issuance by the SEC or any other federal or state governmental
authority of any stop order suspending the effectiveness of a Registration Statement
covering any or all of the Registrable Securities or the initiation of any Proceedings for
that purpose; (iv) of the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding
for such purpose; (v) of the occurrence of any event or passage of time that makes the
financial statements included in a Registration Statement ineligible for inclusion therein
or any statement made in a Registration Statement or Prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue in any material respect or that
requires any revisions to a Registration Statement, Prospectus or other documents so that,
in the case of a Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and (vi) the occurrence or
existence of any pending corporate development with respect to the Company that the Company
believes may be material and that, in the determination of the Company, makes it not in the
best interest of the Company to allow continued availability of a Registration Statement or
Prospectus; provided that any and all of such information shall remain confidential
to each Holder until such information otherwise becomes public, unless disclosure by a
Holder is required by law, in which case the Holder shall provide the Company with the
opportunity to make such disclosure. If the Company notifies the Holders in accordance with
clauses (ii) through (vi) of this Section 4(h) to suspend the use of any Prospectus until
the requisite changes to such Prospectus have been made, then the Holders shall suspend use
of such Prospectus. The Company will use commercially reasonable efforts to ensure that the
use of the Prospectus may be resumed as promptly as is practicable;




     (i) furnish to each Holder, without charge, at least one conformed copy of each such
Registration Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by reference to
the extent requested by such Holder, and all exhibits to the extent requested by such Holder
(including those previously furnished or incorporated by reference) promptly after the
filing of such documents with the SEC;




     (j) promptly deliver to each Holder, without charge, as many copies of the Prospectus
or Prospectuses (including each form of prospectus) and each amendment or supplement thereto
as such Holder may reasonably request in connection with resales by the Holder of
Registrable Securities. Subject to the terms of this Agreement, the Company hereby consents
to the use of such Prospectus and each amendment or



8









 






supplement thereto by each of the selling Holders in connection with the offering and
sale of the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto, except after the giving of any notice pursuant to Section 4(h);




     (k) prior to any resale of Registrable Securities by a Holder, use commercially
reasonable efforts to register or qualify in connection with the registration or
qualification (or exemption from the Registration or qualification) of such Registrable
Securities for the resale by the Holder under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder reasonably requests in writing, and to
do any and all other acts or things reasonably necessary to enable the disposition in such
jurisdictions of the Registrable Securities covered by each Registration Statement;
provided, that the Company shall not be required to (i) qualify generally to do
business in any jurisdiction where it is not then so qualified, or (ii) subject the Company
to any material tax in any such jurisdiction where it is not then so subject or file a
general consent to service of process in any such jurisdiction;




     (l) in the event of any underwritten public offering, enter into and perform its
obligations under an underwriting agreement, in usual and customary form, with the
underwriter(s) of such offering;




     (m) use commercially reasonable efforts to cause all such Registrable Securities
covered by such Registration Statement to be listed on the Trading Market;




     (n) provide a transfer agent and registrar for all Registrable Securities registered
pursuant to this Agreement and provide a CUSIP number for all such Registrable Securities,
in each case not later than the effective date of such registration;




     (o) use commercially reasonable efforts to avoid the issuance of, or, if issued, obtain
the withdrawal of (i) any order suspending the effectiveness of a Registration Statement, or
(ii) any suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, at the earliest practicable moment;




     (p) if requested by Holder 1, cooperate with the Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to be delivered
to a transferee pursuant to a Registration Statement, which certificates shall be free, to
the extent permitted by the Purchase Agreement, of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and registered in such names as any
such Holders may request;




     (q) upon the occurrence of any event contemplated by Section 4(h)(v), as promptly as
reasonably possible under the circumstances taking into account the Company’s good faith
assessment of any adverse consequences to the Company and its shareholders of the premature
disclosure of such event, prepare a supplement or amendment, including a post-effective
amendment, to a Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference, and file any other
required document so that, as



9









 






thereafter delivered, neither a Registration Statement nor such Prospectus will contain
an untrue statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and




     (r) comply with all applicable rules and regulations of the SEC.



     5. Furnish Information. Each Holder agrees to furnish to the Company a completed
Questionnaire in substantially the form attached to this Agreement as Annex A, with any changes or
additions thereto as may be required to comply with applicable laws and regulations (a “Selling
Shareholder Questionnaire”), not less than two Trading Days prior to the date of filing a
Registration Statement or by the end of the fourth Trading Day following the date on which such
Holder receives a draft of such Registration Statement in accordance with Section 4(a).



     6. Registration Expenses. All fees and expenses incident to the performance of or
compliance with this Agreement by the Company (whether or not any Registrable Securities are sold
pursuant to a Registration Statement), and the reasonable fees and disbursements of one counsel for
the selling Holders, shall be borne by the Company. The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings required to be made
with the Trading Market on which the Common Stock is then listed for trading and (B) in compliance
with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing
(including, without limitation, fees and disbursements of counsel for the Company in connection
with Blue Sky qualifications or exemptions of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such jurisdictions as
requested by the Holders), (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if the printing of
prospectuses is reasonably requested by the holders of a majority of the Registrable Securities, on
an as converted basis, included in a Registration Statement), (iii) messenger, telephone and
delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act
liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all
other Persons retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the transactions contemplated by
this Agreement (including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual audit and the fees and
expenses incurred in connection with the listing of the Registrable Securities on any securities
exchange as required hereunder. In no event shall the Company be responsible for any underwriter
discounts or broker or similar commissions or, except to the extent provided for in the Transaction
Documents.



     7. Indemnification




     (a) Indemnification by the Company. The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless each Holder, the officers,
directors, agents, brokers (including brokers who offer and sell Registrable



10









 






Securities as principal as a result of a pledge or any failure to perform under a
margin call of Common Stock), investment advisors and employees of each of them, each Person
(if any) who controls any such Holder (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of
each such controlling Person, to the fullest extent permitted by applicable law, from and
against any and all losses, claims, damages, liabilities, costs (including, without
limitation, reasonable attorneys’ fees) and expenses (collectively, “Losses”), as incurred,
arising out of or relating to any untrue or alleged untrue statement of a material fact
contained in a Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be stated
therein or necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in light of the circumstances under which they were
made) not misleading, except to the extent, but only to the extent, that (i) such untrue
statements or omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder’s proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or
in any amendment or supplement thereto (it being understood that the Holder has approved
Annex A hereto for this purpose) or (ii) in the case of an occurrence of an event of the
type specified in Section 4(h)(ii)-(vi), the use by such Holder of an outdated or defective
Prospectus after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice contemplated in
Section 10(d). The Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding arising from or in connection with the transactions contemplated
by this Agreement of which the Company is aware.




     (b) Indemnification by Holders. Each Holder shall, severally and not jointly,
indemnify and hold harmless the Company, its directors, officers, agents and employees, each
Person (if any) who controls the Company (within the meaning of Section 15 of the Securities
Act and Section 20 of the Exchange Act), any other Holder selling securities pursuant to the
applicable Registration Statement, each Person (if any) who controls (within the meaning of
Section 15 of the Securities Act and Section 20 of the Exchange Act) such Holder, and the
directors, officers, agents or employees of such controlling Persons, to the fullest extent
permitted by applicable law, from and against all Losses, as incurred, to the extent arising
out of or based solely upon: (i) such Holder’s failure to comply with the prospectus
delivery requirements of the Securities Act or (ii) any untrue or alleged untrue statement
of a material fact contained in any Registration Statement, any Prospectus, or any form of
prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or
arising out of or relating to any omission or alleged omission of a material fact required
to be stated therein or necessary to make the statements therein not misleading (A) to the
extent, but only to the extent, that such untrue statement or omission is contained in any
information so furnished in writing by such Holder to the Company specifically for inclusion
in such Registration Statement or such Prospectus or (B) to the extent that (1) such untrue
statements or omissions are



11









 






based solely upon information regarding such Holder furnished in writing to the Company
by such Holder expressly for use therein, or to the extent that such information relates to
such Holder or such Holder’s proposed method of distribution of Registrable Securities and
was reviewed and expressly approved in writing by such Holder expressly for use in a
Registration Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto or (2) in the case of an occurrence of an event of the type specified in
Section 4(h)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus after
the Company has notified such Holder in writing that the Prospectus is outdated or defective
and prior to the receipt by such Holder of the Advice contemplated in Section 10(d). In no
event shall the liability of any selling Holder hereunder be greater in amount than the
dollar amount of the net proceeds received by such Holder upon the sale of the Registrable
Securities giving rise to such indemnification obligation.




     (c) Conduct of Indemnification Proceedings.




     (i) If any Proceeding shall be brought or asserted against any Person entitled
to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall
promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”)
in writing, and the Indemnifying Party shall have the right to assume the defense
thereof, including the employment of counsel reasonably satisfactory to the
Indemnified Party and the payment of all fees and expenses incurred in connection
with defense thereof; provided, that the failure of any Indemnified Party to
give such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure shall
have prejudiced the Indemnifying Party.




     (ii) An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees
and expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified Party and
the Indemnifying Party, and such Indemnified Party shall reasonably believe that a
material conflict of interest is likely to exist if the same counsel were to
represent such Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not have the right to assume the defense thereof and the reasonable fees
and expenses of one separate counsel shall be at the expense of the Indemnifying
Party). The Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any



12









 






settlement of any pending Proceeding in respect of which any Indemnified Party
is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of such
Proceeding.




     (iii) Subject to the terms of this Agreement, all reasonable fees and expenses
of the Indemnified Party (including reasonable fees and expenses to the extent
incurred in connection with investigating or preparing to defend such Proceeding in
a manner not inconsistent with this Section 7) shall be paid to the Indemnified
Party, as incurred, within ten Trading Days of written notice thereof to the
Indemnifying Party; provided, that the Indemnified Party shall promptly
reimburse the Indemnifying Party for that portion of such fees and expenses
applicable to such actions for which such Indemnified Party is not entitled to
indemnification hereunder, determined based upon the relative faults of the parties.




     (d) Contribution.




     (i) If the indemnification under Section 7(a) or 7(b) is unavailable to an
Indemnified Party or insufficient to hold an Indemnified Party harmless for any
Losses, then each Indemnifying Party in lieu of indemnifying such Indemnified Party
shall contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative fault
of the Indemnifying Party and Indemnified Party in connection with the actions,
statements or omissions that resulted in such Losses as well as any other relevant
equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things, whether
any action in question, including any untrue or alleged untrue statement of a
material fact or omission or alleged omission of a material fact, has been taken or
made by, or relates to information supplied by, such Indemnifying Party or
Indemnified Party, and the parties’ relative intent, knowledge, access to
information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable by a party as a result of any Losses shall be
deemed to include, subject to the limitations set forth in this Agreement, any
reasonable attorneys’ or other reasonable fees or expenses incurred by such party in
connection with any Proceeding to the extent such party would have been indemnified
for such fees or expenses if the indemnification provided for in this Section 7 was
available to such party in accordance with its terms.




     (ii) The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata allocation or
by any other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph. Notwithstanding
the provisions of this Section 7(d), no Holder shall be required to contribute, in
the aggregate, any amount in excess of the amount by which the proceeds actually
received by such Holder from the sale of the Registrable Securities subject to the
Proceeding exceeds the amount of any damages that such



13









 






Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission, except in the case of fraud by
such Holder.




     (iii) The indemnity and contribution agreements contained in this Section 7 are
in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.



          (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and
contribution contained in the underwriting agreement entered into in connection with the
underwritten public offering are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.




          (f) Unless otherwise superseded by an underwriting agreement entered into in connection with
an underwritten public offering, the obligations of the Company and Holders under this Section 7
shall survive the completion of any offering of Registrable Securities in a registration under
Section 2, and otherwise shall survive the termination of this Agreement.




     8. Reports Under Exchange Act. With a view to making available to the Holders the
benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or pursuant to a
registration on Form S-3, the Company shall:



          (a) make and keep available adequate current public information, as those terms are understood
and defined in Rule 144;




          (b) use commercially reasonable efforts to file with the SEC in a timely manner all reports
and other documents required of the Company under the Securities Act and the Exchange Act (at any
time the Company is subject to such reporting requirements); and




          (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith
upon request (i) to the extent accurate, a written statement by the Company that it has complied
with the reporting requirements of Rule 144, the Securities Act, and the Exchange Act (at any time
the Company is subject to such reporting requirements), or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 (at any time the Company is so qualified to use such
form); (ii) a copy of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company; and (iii) such other information as may be
reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the
selling of any such securities without registration (at any time the Company is subject to the
reporting requirements under the Exchange Act) or pursuant to Form S-3 (at any time the Company is
so qualified to use such form).




     9. Limitations on Subsequent Registration Rights. From and after the date of this
Agreement, the Company shall not, without the prior written consent of Holder 1, enter into any
agreement with any holder or prospective holder of any securities of the Company that (i) would
allow such holder or prospective holder (i) to include such securities in any registration unless,
under the terms of such agreement, such holder or prospective holder may include such securities in
any such registration only to the extent that the inclusion of such securities will not reduce the



14









 




number of the Registrable Securities of the Holders that are included or (ii) allow such
holder or prospective holder to initiate a demand for registration of any securities held by such
holder or prospective holder.




     10. Miscellaneous




     (a) Remedies. In the event of a breach by the Company or by a Holder, of any
of their obligations under this Agreement, each Holder or the Company, as the case may be,
in addition to being entitled to exercise all rights granted by law and under this
Agreement, including recovery of damages, will be entitled to specific performance of its
rights under this Agreement. The Company and each Holder agree that monetary damages would
not provide adequate compensation for any losses incurred by reason of a breach by it of any
of the provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the defense that a
remedy at law would be adequate.




     (b) No Piggyback on Registrations. Except as set forth on Schedule
10(b) attached hereto, neither the Company nor any of its security holders (other than
the Holders in such capacity pursuant hereto) may include securities of the Company in a
Registration Statement other than the Registrable Securities.




     (c) Compliance. Each Holder covenants and agrees that it will comply with the
prospectus delivery requirements of the Securities Act as applicable to it in connection
with sales of Registrable Securities pursuant to a Registration Statement.




     (d) Discontinued Disposition. Each Holder agrees by its acquisition of such
Registrable Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 4(h), such Holder will forthwith discontinue
disposition of such Registrable Securities under a Registration Statement until such
Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement or until it is advised in writing (the “Advice”) by the Company that the use of
the applicable Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement. The Company will use commercially
reasonable efforts to ensure that the use of the Prospectus may be resumed as promptly as is
practicable under the circumstances.




     (e) Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given, unless the same shall be
in writing and signed by the Company and Holder 1. Notwithstanding the foregoing, a waiver
or consent to depart from the provisions hereof with respect to a matter that relates to the
rights of one or more Holders exclusively and that does not directly or indirectly affect
the rights of the other Holders may be given by Holders of all of the Registrable Securities
to which such waiver or consent relates; provided, however, that the
provisions of this sentence may not be amended, modified, or supplemented except in
accordance with the provisions of the immediately preceding sentence.



15









 






     (f) Notices. Any and all notices or other communications or deliveries required
or permitted to be provided hereunder shall be delivered as set forth in the Purchase
Agreement.




     (g) Successors and Assigns. This Agreement shall inure to the benefit of and be
binding upon the successors and permitted assigns of each of the parties and shall inure to
the benefit of each Holder. The Company may not assign its rights or obligations hereunder
without the prior written consent of Holder 1. Each Holder may assign their respective
rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement.




     (h) No Inconsistent Agreements. Neither the Company nor any of its Subsidiaries
has entered, as of the date hereof, nor shall the Company or any of its Subsidiaries, on or
after the date of this Agreement, enter into any agreement with respect to its securities,
that would have the effect of impairing the rights granted to the Holders in this Agreement
or otherwise conflicts with the provisions hereof. Except as set forth on Schedule
10(b), neither the Company nor any of its Subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its securities to any
Person that have not been satisfied in full.




     (i) Execution and Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an original and, all
of which taken together shall constitute one and the same Agreement. In the event that any
signature is delivered by facsimile transmission, such signature shall create a valid
binding obligation of the party executing (or on whose behalf such signature is executed)
the same with the same force and effect as if such facsimile signature were the original
thereof.




     (j) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be determined with the provisions of
the Purchase Agreement.




     (k) Cumulative Remedies. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law.




     (l) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or
unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth
herein shall remain in full force and effect and shall in no way be affected, impaired or
invalidated, and the parties hereto shall use commercially reasonable efforts to find and
employ an alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.



16









 






     (m) Headings. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.




     (n) Independent Nature of Holders’ Obligations and Rights. The obligations of
each Holder hereunder are several and not joint with the obligations of any other Holder
hereunder, and no Holder shall be responsible in any way for the performance of the
obligations of any other Holder hereunder. Nothing contained herein or in any other
agreement or document delivered at any closing, and no action taken by any Holder pursuant
hereto or thereto, shall be deemed to constitute the Holders as a partnership, an
association, a joint venture or any other kind of entity, or create a presumption that the
Holders are in any way acting in concert with respect to such obligations or the
transactions contemplated by this Agreement. Each Holder shall be entitled to protect and
enforce its rights, including without limitation the rights arising out of this Agreement,
and it shall not be necessary for any other Holder to be joined as an additional party in
any proceeding for such purpose.



*************************




(Signature Pages Follow)




17









 





          IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the
date first written above.




	 	 	 	 	 
	THE COMPANY:	 	 
	 
	 	 	 	 
	WILSONS THE LEATHER EXPERTS INC.	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

Name: Stacy A. Kruse
	 	 
	 

	 	Title: Chief Financial Officer	 	 






 









 





[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]




	 	 	 	 	 
	PURCHASER:	 	 
	 
	 	 	 	 
	MARATHON FUND LIMITED PARTNERSHIP V	 	 
	 
	 	 	 	 
	By: Miltiades, LLP	 	 
	Its: General Partner	 	 
	 
	 	 	 	 
	By: Marathon Ultimate GP, LLC	 	 
	Its: General Partner	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

Name: Michael S. Israel
	 	 
	 

	 	Title: Manager	 	 






19









 





[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]




	 	 	 	 	 
	PURCHASER:	 	 
	 
	 	 	 	 
	PENINSULA INVESTMENT PARTNERS, L.P.	 	 
	 
	 	 	 	 
	By: Peninsula Capital
Appreciation, LLC	 	 
	Its: General Partner	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

Name: R. Ted Weschler
	 	 
	 

	 	Title: Managing Partner	 	 






20









 





[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]




	 	 	 	 	 
	PURCHASER:	 	 
	 
	 	 	 	 
	QUAKER CAPITAL PARTNERS I, L.P.	 	 
	 
	 	 	 	 
	By: Quaker Premier, L.P.	 	 
	Its: General Partner	 	 
	 
	 	 	 	 
	By: Quaker Capital Management Corporation	 	 
	Its: General Partner	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

Name: Mark G. Schoeppner
	 	 
	 

	 	Title: President	 	 






21









 





[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]




	 	 	 	 	 
	PURCHASER:	 	 
	 
	 	 	 	 
	QUAKER CAPITAL PARTNERS II, L.P.	 	 
	 
	 	 	 	 
	By: Quaker Premier II, L.P.	 	 
	Its: General Partner	 	 
	 
	 	 	 	 
	By: Quaker Capital Management Corporation	 	 
	Its: General Partner	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

Name: Mark G. Schoeppner
	 	 
	 

	 	Title: President	 	 






22









 





Schedule 1




Purchasers




	 	 	 	 	 	 	 
	Purchaser	 	Shares	 	Warrant Shares	 	Subscription Amount
	Marathon Fund Limited
Partnership V
	 	35,000 	 	11,666,667  	 	$35,000,000  
	Peninsula Investment
Partners, L.P.
	 	5,000	 	1,666,667	 	$5,000,000
	Quaker Capital
Partners I, L.P.
	 	3,150	 	1,050,000	 	$3,150,000
	Quaker Capital
Partners II, L.P.
	 	1,850	 	  616,666	 	$1,850,000






 









 





Annex A




Wilsons The Leather Experts Inc.




Selling Securityholder Notice and Questionnaire




     The undersigned beneficial owner of
[                                       
 ] , par value $[           
         ] per share
(the “Common Stock”), of [           
                             ] , a
[                               
         ] corporation (the “Company”),
(the “Registrable Securities”) understands that the Company has filed or intends to file with the
Securities and Exchange Commission (the “SEC”) a registration statement (the “Registration
Statement”) for the registration and resale under the Securities Act of 1933, as amended (the
“Securities Act”), of the Registrable Securities, in accordance with the terms of the Registration
Rights Agreement, dated as of
                                        
, 2007 (the “Registration Rights Agreement”), among the
Company and the Purchasers named therein. A copy of the Registration Rights Agreement is available
from the Company upon request at the address set forth below. All capitalized terms not otherwise
defined herein shall have the meanings ascribed thereto in the Registration Rights Agreement.



     Certain legal consequences arise from being named as a selling securityholder in the
Registration Statement and the related prospectus. Accordingly, holders and beneficial owners of
Registrable Securities are advised to consult their own securities law counsel regarding the
consequences of being named or not being named as a selling securityholder in the Registration
Statement and the related prospectus.



NOTICE




     The undersigned beneficial owner (the “Selling Securityholder”) of Registrable Securities
hereby elects to include the Registrable Securities owned by it and listed below in Item 3 (unless
otherwise specified under such Item 3) in the Registration Statement.



 









 




The undersigned hereby provides the following information to the Company and represents and
warrants that such information is accurate:




QUESTIONNAIRE




	 	 	 	 	 
	1.	 	Name.
	 
	 	 	 	 
	 

	 	(a)
	 	Full legal name of Selling Securityholder
	 
	 	 	 	 
	 

	 	 	 	 

	 
	 	 	 	 
	 

	 	(b)
	 	Full legal name of registered holder (if not the same as (a) above) through
which Registrable Securities listed in Item 3 below are held:
	 
	 	 	 	 
	 

	 	 	 	 

	 
	 	 	 	 
	 

	 	(c)
	 	Full legal name of Natural Control Person (which means a natural person who
directly or indirectly alone or with others has power to vote or dispose of the
securities covered by the questionnaire):
	 
	 	 	 	 
	 

	 	 	 	 







2. Address for Notices to Selling Securityholder:




	 
	 


	 

	 


	 

	 


	Telephone:

	 


	Fax:

	 


	Contact Person:

	 








3. Beneficial Ownership of Registrable Securities:




	 	 	 	 	 
	 

	 	(a)
	 	Type and number of Registrable Securities beneficially owned (describe nature
of ownership and whether voting or investment power over such Registrable Securities is
shared):
	 
	 	 	 	 
	 

	 	 	 	 

	 

	 	 	 	 

	 

	 	 	 	 







2









 





4. Broker-Dealer Status:




	 	 	 	 	 
	 

	 	(a)
	 	Are you a broker-dealer?
	 
	 	 	 	 
	 

	 	 	 	Yes          No
	 
	 	 	 	 
	 

	 	(b)
	 	If “yes” to Section 4(a), did you receive your Registrable Securities as
compensation for investment banking services to the Company.
	 
	 	 	 	 
	 

	 	 	 	Yes          No
	 
	 	 	 	 
	 

	 	Note:
	 	If no, the SEC’s staff has indicated that you should be identified
as an underwriter in the Registration Statement.
	 
	 	 	 	 
	 

	 	(c)
	 	Are you an affiliate of a broker-dealer?
	 
	 	 	 	 
	 

	 	 	 	Yes          No
	 
	 	 	 	 
	 

	 	(d)
	 	If you are an affiliate of a broker-dealer, do you certify that you bought the
Registrable Securities in the ordinary course of business, and at the time of the
purchase of the Registrable Securities to be resold, you had no agreements or
understandings, directly or indirectly, with any person to distribute the Registrable
Securities?

	 
	 	 	 	 
	 

	 	 	 	Yes          No
	 
	 	 	 	 
	 

	 	Note:
	 	If no, the SEC’s staff has indicated that you should be identified
as an underwriter in the Registration Statement.






5. Beneficial Ownership of Other Securities of the Company Owned by the Selling Securityholder.





Except as set forth below in this Item 5, the undersigned is not the beneficial or
registered owner of any securities of the Company other than the Registrable Securities
listed above in Item 3.



	 	 	 	 	 
	 

	 	(a)
	 	Type and amount of other securities beneficially owned by the Selling
Securityholder:
	 
	 	 	 	 
	 

	 	 	 	 

	 

	 	 	 	 







3









 





6. Relationships with the Company:





Except as set forth below, neither the undersigned nor any of its affiliates, officers,
directors or principal equity holders (owners of 5% of more of the equity securities of the
undersigned) has held any position or office or has had any other material relationship with
the Company (or its predecessors or affiliates) during the past three years.




State any exceptions here:


 
	 
	 


	 

	 






     The undersigned agrees to promptly notify the Company of any inaccuracies or changes in the
information provided herein that may occur subsequent to the date hereof at any time while the
Registration Statement remains effective.



     By signing below, the undersigned consents to the disclosure of the information contained
herein in its answers to Items 1 through 6 and the inclusion of such information in the
Registration Statement and the related prospectus and any amendments or supplements thereto. The
undersigned understands that such information will be relied upon by the Company in connection with
the preparation or amendment of the Registration Statement and the related prospectus.



     IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this Notice and
Questionnaire to be executed and delivered either in person or by its duly authorized agent.



	 	 	 	 	 	 	 	 	 
	Dated:

	 	 	 	 	 	Beneficial Owner:	 	 
	 

	 	 
	 	 	 	 	 	 





	 	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 	 
	 

	 	 	 	Name:
	 

	 	 	 	Title:





PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN THE ORIGINAL
BY OVERNIGHT MAIL, TO:




4









 





Schedule 10(b)

Registration Rights





	1.	 	Registration Rights Agreement, dated May 25, 1996, by and among Melville Corporation,
Wilsons The Leather Experts Inc., The Managers listed on the Signature pages thereto, Leather
Investors Limited Partnership I, and The Partners listed on the Signature Pages thereto, as
amended by that certain Amendment to Registration Rights Agreement dated as of August 12, 1999
by and among the Company and the shareholders listed on the attachments thereto (collectively,
the “1996 Agreement”). This 1996 Agreement currently provides only for piggyback registration
rights, and applies only to one eligible holder (who is currently a member of the Company’s
Board of Directors.

	 
	2.	 	Registration Rights Agreement, dated April 25, 2004, by and among Wilsons The Leather Experts
Inc. and the Purchasers named therein (the “2004 Agreement”). This 2004 Agreement will be
amended prior to Closing to provide for the shareholder parties thereto to consent to the
piggyback registration rights provided for in this Agreement and to agree to be subject to the
underwriter cutback provisions set forth in this Agreement related to any exercise of
piggyback registration rights.







 









 





EXHIBIT B




SUPPORT AGREEMENT




                    This SUPPORT AGREEMENT, dated as of June 1, 2007 (this
“Agreement”), by and among Wilsons The
Leather Experts Inc., a Minnesota corporation (the “Company”), and the shareholders of the Company
set forth on the signature pages hereof (individually, a “Shareholder” and collectively, the
“Shareholders”).



                    WHEREAS, the Company and the Shareholders have entered into
a Securities Purchase Agreement,
dated as of the date hereof (the “Securities Purchase Agreement”), pursuant to which, among other
things, the Company has agreed to issue and sell to the Shareholders and the Shareholders have
agreed severally to purchase an aggregate of (i) 45,000 shares of the Company’s Series A Preferred
Stock, par value $.01 per share (the “Preferred Stock”), and (ii) warrants (the “Warrants”) which
will be exercisable to purchase 15,000,000 shares of common stock of the Company, par value $.01
per share (the “Common Stock”) (as exercised, collectively, the “Warrant Shares”). The Preferred
Stock and the Warrants are sometimes collectively referred to herein as, the “Securities”);



                    WHEREAS, as of the date hereof, the Shareholders identified
on Annex A hereto (the “Current
Shareholders”) collectively own the aggregate number of shares of Common Stock set forth on Annex
A, which represent (i) approximately 56.63% of the total issued and outstanding Common Stock of the
Company, and (ii) approximately 56.63% of the total voting power of the Company;



                    WHEREAS, as a condition to the willingness of the
Shareholder who, prior to the closing of the
transactions contemplated by the Securities Purchase Agreement and identified as “Purchaser 1”
therein, owned no securities of the Company (such Shareholder, the “Investor”) to consummate the
transactions contemplated thereby (collectively, the “Transaction”), the parties hereto have each
agreed to enter into this Agreement.



                    NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements
contained herein, and intending to be legally bound hereby, the parties hereto hereby agree as
follows:



ARTICLE I




VOTING AGREEMENTS OF THE CURRENT SHAREHOLDERS




                    SECTION 1.01. Supporting the Transaction. Each of the
Current Shareholders hereby
agrees that, at any meeting of the shareholders of the Company, however called, and in any action
by written consent of the Company’s shareholders, such Current Shareholder shall vote the “Shares”
and the “Other Securities” (in each case, as defined below) held by it: (a) in favor of the
Transaction; provided that, the Preferred Stock, Shares acquired upon the conversion of the
Preferred Stock and the Warrant Shares may not be voted on the Transaction, and (b)



 









 







against any proposal or any other corporate action or agreement that would result in a breach
of any covenant, representation or warranty or any other obligation or agreement of the Company
under the Securities Purchase Agreement or which could result in any of the conditions to the
Company’s obligations under the Securities Purchase Agreement not being fulfilled. Each of the
Current Shareholders acknowledges receipt and review of a copy of the Securities Purchase Agreement
and exhibits thereto. Each of the Current Shareholders hereby revokes all proxies and powers of
attorney with respect to the Shares and the Other Securities that such Current Shareholder may have
heretofore appointed or granted, and no subsequent proxy or power of attorney shall be given or
written consent executed (and if given or executed, shall not be effective) by such Current
Shareholder, with respect to the matters specified in this Section 1.01, except as set forth in the
next paragraph of this Section 1.01. Any obligation of the Current Shareholders under this Section
1.01 shall be binding upon the successors and assigns of the Current Shareholders. The obligations
of the Current Shareholders under this Section 1.01 shall terminate immediately following the
earlier to occur of (i) the “Shareholder Approval” (as defined below), or (ii) the termination of
the Securities Purchase Agreement prior to the Closing (as defined therein).



                    In order to secure the performance of each Current
Shareholder’s obligations under this
Section 1.01, by entering into this Agreement, each Current Shareholder hereby irrevocably grants a
proxy appointing each managing partner of the general partner of the Investor as such Current
Shareholder’s attorney-in-fact and proxy, with full power of substitution, for and in its name, to
vote, express consent or dissent, or otherwise to utilize such voting power in the manner
contemplated by this Section 1.01 with respect to such each Current Shareholder’s Shares and Other
Securities. The proxy granted by such each Current Shareholder pursuant to this Section 1.01 is
coupled with an interest and shall be revoked automatically, without any notice or other action by
any person, upon the earlier to occur of (i) the Shareholder Approval, or (ii) the termination of
the Securities Purchase Agreement prior to the Closing (as defined therein).



                    As used herein, the following terms have the following meanings:
(i) “Shares” refers to all
shares of Common Stock now owned and which may hereafter be acquired by a Shareholder at any time
that this Agreement is in effect, (ii) “Other Securities” refers to any other securities, if any,
which a Shareholder is currently entitled to vote, or after the date hereof becomes entitled to
vote, at any meeting of the shareholders of the Company held at any time that this Agreement is in
effect, and (iii) “Shareholder Approval” means the requisite vote of the holders of voting stock of
the Company necessary to approve the Transaction.



                    SECTION 1.02. Board Representation. So long as the Investor
or one or more of its
affiliates holds at least 20% of the number of shares of Common Stock issued or issuable upon
conversion of the Preferred Stock subject to appropriate adjustment for all stock splits,
dividends, combinations, recapitalizations and the like) (the “Minimum Holding”), each of the
Current Shareholders hereby agrees that, at any meeting of the shareholders of the Company, however
called, and in any action by written consent of the Company’s shareholders, such Current
Shareholder shall vote the Shares and the Other Securities held by it: (a) in favor of at least
two nominees for election as directors identified as having been proposed by the Investor; and (b)
against any proposal or any other corporate action or agreement that would result in such nominees
not being elected as directors. Each of the Current Shareholders agrees that no



2









 







subsequent proxy or power of attorney with respect to the Shares and the Other Securities
shall be given or written consent executed (and if given or executed, shall not be effective) by
such Current Shareholder with respect to the matters specified in this Section 1.02. Any
obligation of the Current Shareholders under this Section 1.02 shall be binding upon the successors
and assigns of the Current Shareholders.



                    SECTION 1.03. Certain Transactions. So long as the Investor
or one or more of its
affiliates holds at least the Minimum Holding, each of the Current Shareholders hereby agrees that,
at any meeting of the shareholders of the Company, however called, and in any action by written
consent of the Company’s shareholders, such Current Shareholder shall vote the Shares and the Other
Securities held by it: (a) in favor of any proposed “Company Sale” (as defined below) presented to
or brought before the shareholders of the Company and identified as having been proposed by or
supported by the Investor; and (b) against any proposed Company Sale that is identified as being
opposed by the Investor or would result in any other Company Sale proposed by or supported by the
Investor not being presented to or approved by the shareholders of the Company. Each of the
Current Shareholders agrees that no subsequent proxy or power of attorney with respect to the
Shares and the Other Securities shall be given or written consent executed (and if given or
executed, shall not be effective) by such Current Shareholder with respect to the matters specified
in this Section 1.03. Any obligation of the Current Shareholders under this Section 1.03 shall be
binding upon the successors and assigns of the Current Shareholders.



                    As used herein, “Company Sale” means one or a
series of related transactions pursuant to which
a third party or group of third parties (a) acquires (whether by merger, amalgamation,
consolidation, recapitalization, reorganization, redemption, transfer or issuance of securities or
otherwise) a majority of the capital stock of the Company (or any surviving or resulting
corporation) possessing the voting power to elect a majority of the Board of Directors of the
Company (or such surviving or resulting corporation), or (b) acquires assets constituting all or
substantially all of the assets of the Company (on a consolidated basis). For the avoidance of
doubt, the parties agree that the term “third party” as used in the immediately preceding sentence
shall not include the Investor or any of its affiliates.



ARTICLE II




REPRESENTATIONS AND WARRANTIES OF THE CURRENT SHAREHOLDERS




                    Each of the Current Shareholders hereby represents and warrants,
severally and not jointly, to
the Company and the Investor as follows:



                    SECTION 2.01. Authority Relative to This Agreement. The
Current Shareholder has all
necessary power and authority, including partnership power and authority, to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the Current
Shareholder and constitutes a legal, valid and binding obligation of the Shareholder, enforceable
against the Current Shareholder in accordance with its terms, except (a) as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,



3









 







moratorium or similar laws now or hereafter in effect relating to, or affecting generally, the
enforcement of creditors’ and other obligees’ rights, (b) where the remedy of specific performance
or other forms of equitable relief may be subject to certain equitable defenses and principles and
to the discretion of the court before which the proceeding may be brought, and (c) where rights to
indemnity and contribution thereunder may be limited by applicable law and public policy.



                    SECTION 2.02. No Conflict. (a) The execution and
delivery of this Agreement by the
Current Shareholder does not, and the performance of this Agreement by the Current Shareholder
shall not, (i) conflict with or violate the partnership agreement of the Current Shareholder or any
federal, state or local law, statute, ordinance, rule, regulation, order, judgment or decree
applicable to the Current Shareholder or by which the Shares or the Other Securities owned by the
Current Shareholder are bound or affected or (ii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the Shares or the Other Securities owned by the Current
Shareholder pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Current Shareholder is a party or
by which the Shareholder or the Shares or Other Securities owned by the Current Shareholder is
bound.



                    (b)      The execution and delivery of
this Agreement by the Current Shareholder does not, and the
performance of this Agreement by the Current Shareholder shall not, require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental entity by the
Shareholder, except for applicable requirements, if any, of the Securities Exchange Act of 1934, as
amended (the “1934 Act”).



                    SECTION 2.03. Title to the Stock. As of the date hereof, the
Current Shareholder is
the beneficial owner of the number of shares of Common Stock set forth opposite its name on
Appendix A attached hereto, entitled to vote, without restriction (except to the extent a
Current Shareholder shares voting power under managed accounts), on all matters brought before
holders of capital stock of the Company, which Common Stock represents on the date hereof the
percentage of the outstanding stock and voting power of the Company set forth on such Appendix.
Such Common Stock are all the securities of the Company owned, either of record or beneficially, by
the Current Shareholder. Such Common Stock is owned free and clear of all security interests,
liens, claims, pledges, options, rights of first refusal, agreements, limitations on the Current
Shareholder’s voting rights, charges and other encumbrances of any nature whatsoever, other than
any restrictions that attach to shares deposited by a Current Shareholder with brokers in margin
accounts pursuant to standard terms of such margin account agreements. The Current Shareholder has
not appointed or granted any proxy, which appointment or grant is still effective, with respect to
the Shares or Other Securities owned by the Shareholder regarding the matters specified in Article
I hereof. The Current Shareholder has sole voting power and sole power to issue instructions with
respect to the matters set forth in Article 1 hereof, sole power of disposition and sole power to
agree to all matters set forth in this Agreement.



4









 





ARTICLE III




COVENANTS




                    SECTION 3.01. No Disposition or Encumbrance of Stock. Each
of the Current
Shareholders hereby covenants and agrees that, for a period of at least 24 months after the date of
Shareholder Approval, such Current Shareholder shall not offer or agree to sell, transfer, tender,
assign, hypothecate or otherwise dispose of, grant a proxy (except (i) with respect to not more
than 25% of the Common Stock held by each Current Shareholder as of the date hereof, for any such
sales, transfers, tenders, assigns, hypothecations or other dispositions conducted in the ordinary
course of the business of such Current Shareholder consistent with past practice, and (ii) a
customary revocable proxy in connection with an annual meeting of shareholders, which proxy does
not involve the matters set forth in Article I hereof unless such proxy directs the proxy to vote
in accordance with the agreements of such Current Shareholder set forth in this Agreement) or power
of attorney with respect to, or create or permit to exist any security interest, lien, claim,
pledge, option, right of first refusal, agreement, limitation on such Current Shareholder’s voting
rights, charge or other encumbrance of any nature whatsoever with respect to the Shares or Other
Securities, directly or indirectly, or initiate, solicit or encourage any person to take actions
which could reasonably be expected to lead to the occurrence of any of the foregoing.



          SECTION 3.02. No Solicitation or Similar Activity. Each Current Shareholder hereby
covenants and agrees that it shall not, at any time during the term of this Agreement, directly or
indirectly, through one or more intermediaries acting on its behalf, singly or as part of a
partnership, syndicate or other group (as those terms are used within the meaning of Section
13(d)(3) of the 1934 Act), and shall cause each of its Affiliates not to, directly or indirectly,
whether through the taking of shareholder action by written consent or otherwise:



          (a)      instigate, support or in any way participate in any proxy contest or otherwise engage in
the “solicitation” of “proxies” (as such terms are defined in Rule 14a-1 under the 1934 Act,
whether or not such solicitation is exempt under Rule 14a-2 under the 1934 Act) with respect to any
matter from holders of Voting Stock (including by the execution of actions by written consent) in
opposition to proposals or matters proposed, recommended or otherwise supported by the Board of
Directors of the Company (the “Board”) or the Investor;



          (b)      become a participant in any contest for the election of directors with respect to the
Company or solicit any consent or communicate with or seek to advise, encourage or influence any
third party with respect to the voting of any Voting Stock; provided, however, that
such Current Shareholder shall not be prevented hereunder from being a “participant” in support of
the management of the Company by reason of the membership of such Current Shareholder’s designee on
the Board or the inclusion of such Current Shareholder’s designee on the slate of nominees for
election to the Board proposed by the Company;



          (c)      initiate or participate in the solicitation of, or otherwise solicit, shareholders for the
approval of one or more shareholder proposals with respect to the Company, as described in Rule
14a-8 under the Exchange Act, or induce or attempt to induce any other third party to initiate any
shareholder proposal relating to the Company;



5









 





          (d) form, join, encourage the formation of or in any way participate in a 13D Group (other
than with any other Affiliate of such Current Shareholder) for the purposes of acquiring, holding,
voting or disposing of any Voting Stock;



          (e)      solicit, seek or offer to effect, negotiate with or provide any confidential information
to any party with respect to, make any statement or proposal, whether written or oral, either alone
or in concert with others, to the Board, to any director or officer of the Company or to any other
shareholder of the Company with respect to, or otherwise formulate any plan or proposal or make any
public announcement, proposal, offer or filing under the Exchange Act, any similar or successor
statute or otherwise, or take action to cause the Company to make any such filing, with respect to:
(i) any form of business combination transaction or acquisition involving the Company (other than
transactions contemplated by this Agreement), including, without limitation, a merger, exchange
offer or liquidation of the Company’s assets, (ii) any form of restructuring, recapitalization or
similar transaction with respect to the Company, including, without limitation, a merger, exchange
offer or liquidation of the Company’s assets, (iii) any acquisition or disposition of assets
material to the Company, (iv) any request to amend, waive or terminate the provisions of this
Agreement or (v) any proposal or other statement inconsistent with the terms of this Agreement,
provided, however, that such Current Shareholder and its Affiliates (x) may discuss
the affairs and prospects of the Company, the status of Such Current Shareholder’s investment in
the Company and any of the matters described in clause (i) through (v) of this paragraph at any
time, and from time to time, with the Board or any director or executive officer of the Company,
(y) may discuss any matter, including any of the foregoing, with its outside legal and financial
advisors, if as a result of any such discussions such Current Shareholder is not required to make,
and does not make, any public announcement or filing under the 1934 Act otherwise prohibited by
this Agreement and (z) may discuss non-confidential information regarding the Company with any
third parties so long as such Current Shareholder promptly informs the Board of such discussions;



          (f)      seek the removal of any of the Board’s directors (other than any designee of such
Current
Shareholder);



          (g)      seek to increase the number of directors serving on the Board above 11 or to increase the
number of such Current Shareholder’s representatives or designees on the Board above one;



          (h)      call or seek to have called any meeting of the shareholders of the Company; or



          (i)      assist, instigate or encourage any third party to take any of the actions enumerated in
this Section 3.02.



                    SECTION 3.03. Non-Disparagement. Each Current Shareholder
hereby covenants and
agrees that, during the term of this Agreement, such Current Shareholder shall not make, and will
use its reasonable efforts to prevent anyone acting on its behalf from making, any public statement
or representation, or otherwise communicate, directly or indirectly, in writing, orally, or
otherwise, with parties outside of the Company, or otherwise take any action which may, directly or
indirectly, publicly disparage or be damaging to (a) the Investor or (b) the



6









 







business strategies adopted by the Board of Directors of the Company and the implementation
thereof by Company management.



                    SECTION 3.04. Company Cooperation. The Company hereby
covenants and agrees that it
will not, and each Current Shareholder irrevocably and unconditionally acknowledges and agrees that
the Company will not (and waives any rights against the Company in relation thereto) to the extent
permitted by law, recognize any encumbrance or agreement on any of the Shares or Other Securities
subject to this Agreement, other than as noted in the last clause of the third sentence of Section
2.03.



ARTICLE IV




MISCELLANEOUS




                    SECTION 4.01. Termination. This Agreement shall terminate
upon the earlier of (i)
the fourth anniversary of the date hereof or (ii) the date of termination of the Securities
Purchase Agreement.



                    SECTION 4.02. Further Assurances. Each of the parties hereto
will execute and
deliver such further documents and instruments and take all further action as may be reasonably
necessary in order to consummate the transactions contemplated hereby.



                    SECTION 4.03. Specific Performance. The parties hereto agree
that irreparable damage
would occur in the event any provision of this Agreement was not performed in accordance with the
terms hereof. The Investor shall be entitled to specific performance of the terms hereof, in
addition to any other remedy at law or in equity, and prior to the Closing, the Company shall be
entitled to specific performance of the terms of the first paragraph of Section 1.01, in addition
to any other remedy at law or in equity.



                    SECTION 4.04. No Effect on Fiduciary Duties. Nothing herein
stated shall limit or
otherwise affect the fiduciary duties of any affiliate of any of the Shareholders as a director of
the Company. This Agreement only applies to the voting of shares and other securities of the
Company by each of the Current Shareholders in its respective capacity as a shareholder of the
Company.



                    SECTION 4.05. Limited Proxy. Notwithstanding anything stated
in this Agreement, each
of the Current Shareholders will retain at all times the right to vote, or authorize a proxy to
vote, in such Current Shareholder’s or such proxy’s sole discretion, on all matters other than
those set forth in Article I, which are at any time and from time to time presented to the
Company’s shareholders generally.



                    SECTION 4.06. Entire Agreement. This Agreement constitutes
the entire agreement
among the Company and the Shareholders (other than the Securities Purchase Agreement and the other
“Transaction Documents” (as defined therein)) with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral, among the Company and
the Shareholders with respect to the subject matter hereof.



7









 





                    SECTION 4.07. Amendment. This Agreement may not be amended
except by an instrument
in writing signed by the parties hereto.



                    SECTION 4.08. Severability. If any term or other provision
of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full force and effect so
long as the economic or legal substance of this Agreement is not affected in any manner materially
adverse to either party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as possible in a
mutually acceptable manner in order that the terms of this Agreement remain as originally
contemplated to the fullest extent possible.



                    SECTION 4.09. Governing Law. All questions concerning the
construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by and construed and
enforced in accordance with the internal laws of the State of Minnesota, without regard to the
principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning
the interpretations, enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively
in the state and federal courts located in Hennepin County, Minnesota, U.S.A. Each party hereto
hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts located in
Hennepin County, Minnesota, U.S.A. for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein (including with respect to
the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not
to assert in any suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court or that such suit, action or proceeding has been commenced in an
improper or inconvenient venue for such proceeding. Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT
OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. If either party shall
commence an action or proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other party for its
reasonable attorneys’ fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding.



                    SECTION 4.10. Notices. All notices and other communications
hereunder shall be in
writing and shall be deemed given if delivered personally, via facsimile (which is confirmed) or
sent by a nationally recognized overnight courier service to the parties at the following addresses
(or such other address for a party as shall be specified by like notice):



8









 




If to the Company:



Wilsons The Leather Experts Inc.

7401 Boone Avenue North

Brooklyn Park, MN 55428

Telephone: (763) 391-4000

Facsimile: (763)

Attention: Chief Financial Officer



With a copy to:



Faegre & Benson LLP

2200 Wells Fargo Center

90 South Seventh Street

Minneapolis, MN 55402-3901

Telephone: (612) 766-7000

Facsimile: (612) 766-1600

Attention: Philip S. Garon, Esq.



If to any of the Shareholders:



to
its address and facsimile number set forth on the signature page
hereto, with copies to such Shareholder’s representatives as set forth thereon;



or to 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 (5) days prior
to the effectiveness of such change.




9









 








               IN WITNESS WHEREOF, the Shareholders and the Company have duly executed this Support
Agreement.



	 	 	 	 	 	 	 
	 	 	THE COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	WILSONS THE LEATHER EXPERTS INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

Name: Stacy A. Kruse
	 	 
	 

	 	 	 	Title: Chief Financial Officer	 	 






 









 






[SIGNATURE PAGE TO SUPPORT AGREEMENT]




	 	 	 	 	 	 	 
	 	 	SHAREHOLDER:	 	 
	 
	 	 	 	 	 	 
	 	 	PENINSULA INVESTMENT PARTNERS, L.P.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Peninsula Capital Appreciation, LLC, its
	 	 
	 

	 	 	 	  General Partner	 	 






	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

Name: R. Ted Weschler
	 	 
	 

	 	 	 	Title: Managing Member	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	404B East Main Street, 2nd Floor	 	 
	 

	 	 	 	Charlottesville, Virginia 22902	 	 
	 

	 	 	 	Attention: Mr. R. Ted Weschler	 	 
	 

	 	 	 	Telephone: (434) 297-0811	 	 
	 

	 	 	 	Facsimile: (434) 220-9321	 	 






 









 






[SIGNATURE PAGE TO SUPPORT AGREEMENT]




	 	 	 	 	 	 	 
	 	 	SHAREHOLDER:	 	 
	 
	 	 	 	 	 	 
	 	 	QUAKER CAPITAL PARTNERS I, L.P.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Quaker Premier, LP, its general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Quaker Capital Management Corp., its general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

Name: Mark G. Schoeppner
	 	 
	 

	 	 	 	Title: President	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	401 Wood Street, Suite 1300	 	 
	 

	 	 	 	Pittsburgh, Pennsylvania 15222	 	 
	 

	 	 	 	Attention: Mark G. Schoeppner	 	 
	 

	 	 	 	Telephone: (412) 281-1948	 	 
	 

	 	 	 	Facsimile: (412) 281-0323	 	 






 









 






[SIGNATURE PAGE TO SUPPORT AGREEMENT]




	 	 	 	 	 	 	 
	 	 	SHAREHOLDER:	 	 
	 
	 	 	 	 	 	 
	 	 	QUAKER CAPITAL PARTNERS II, L.P.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Quaker Premier II, LP, its general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Quaker Capital Management Corp., its general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

Name: Mark G. Schoeppner
	 	 
	 

	 	 	 	Title: President	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	401 Wood Street, Suite 1300	 	 
	 

	 	 	 	Pittsburgh, Pennsylvania 15222	 	 
	 

	 	 	 	Attention: Mark G. Schoeppner	 	 
	 

	 	 	 	Telephone: (412) 281-1948	 	 
	 

	 	 	 	Facsimile: (412) 281-0323	 	 






 









 






[SIGNATURE PAGE TO SUPPORT AGREEMENT]




	 	 	 	 	 	 	 
	 	 	SHAREHOLDER/INVESTOR:	 	 
	 
	 	 	 	 	 	 
	 	 	Marathon Fund Limited Partnership V	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Miltiades, LLP, its general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Marathon Ultimate GP, LLC, its general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

Name: Michael S. Israel
	 	 
	 

	 	 	 	Title: Manager	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	3700 Wells Fargo Center	 	 
	 

	 	 	 	90 South Seventh Street	 	 
	 

	 	 	 	Minneapolis, Minnesota 55402	 	 
	 

	 	 	 	Attention: Michael T. Sweeney	 	 
	 

	 	 	 	Telephone: (612) 338-5912	 	 
	 

	 	 	 	Facsimile: (612) 338-2860	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	With a copy to:	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	Dorsey & Whitney LLP	 	 
	 

	 	 	 	60 South Sixth Street, Suite 1500	 	 
	 

	 	 	 	Minneapolis, Minnesota 55402	 	 
	 

	 	 	 	Attention: Robert A. Rosenbaum, Esq.	 	 
	 

	 	 	 	Telephone: (612) 340-5681	 	 
	 

	 	 	 	Facsimile: (612) 340-7800	 	 






 









 






ANNEX A




	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	Voting
	 	 	 	 	 	 	Percentage of	 	Percentage of
	 	 	Common Stock	 	Stock	 	Stock
	Shareholder	 	Owned*	 	Outstanding	 	Outstanding
	Peninsula Investment
Partners, L.P.
(“Peninsula”)*
	 	 	15,487,513	 	 	 	39.53	%	 	 	39.53	%
	Quaker Premier I, LP
and Quaker Premier II,
LP (“Quaker”)**
	 	 	6,708,110	 	 	 	17.10	%	 	 	17.10	%
	Marathon Fund Limited
Partnership V
	 	None	 	 	0	%	 	 	0	%








 




			
	*	 	In addition, Peninsula holds warrants for 2,857,142 shares of Common Stock
which would be deemed to constitute beneficial ownership by Peninsula of the
underlying shares of Common Stock but which cannot be voted until the warrants
have been exercised and Peninsula shall have acquired record ownership of the
underlying shares of Common Stock.

	 
	**	 	In addition, Quaker holds warrants for 1,142,858 shares of Common Stock
which would be deemed to constitute beneficial ownership by Quaker of the
underlying shares of Common Stock but which cannot be voted until the warrants
have been exercised and Quaker shall have acquired record ownership of the
underlying shares of Common Stock.







 









 





Exhibit C




FORM OF WARRANT




To Subscribe for and Purchase Common Stock of




Wilsons The Leather Experts Inc.




     This Warrant (this “Warrant”) certifies, for value received,
                    , a
                     (herein called “Purchaser”), or its registered assigns is entitled to subscribe for
and purchase from Wilsons The Leather Experts Inc. (herein called the “Company”), a corporation
organized and existing under the laws of the State of Minnesota, at the price specified below
(subject to adjustment as noted below) at any time from and after                     , 2007 to and including
                    , 2012, the number of fully paid and nonassessable shares of the Company’s common stock,
$0.01 par value per share (“Common Stock”), as set forth in Section 1 below. This Warrant is
issued pursuant to the terms of that certain Securities Purchase Agreement, dated as of June 1,
2007, by and among the Company, the Purchaser, and the other purchasers set forth therein (the
“Securities Purchase Agreement”).



The Exercise Price shall be $2.00 per share of Common Stock (subject to adjustment as noted below).



This Warrant is subject to the following provisions, terms and conditions:




 









 








1. Right to Purchase.




     (a) The Purchaser is entitled to purchase
                     shares of Common Stock, subject to
adjustment as provided in this paragraph 1(a). When any adjustment is required to be made to the
Exercise Price pursuant to Section 5 below, the number of shares of Common Stock purchasable upon
the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount
equal to the number of shares of Common Stock issuable upon the exercise of this Warrant
immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior
to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment.



     (b) Notwithstanding paragraph 1(a) above, the Company shall not be obligated to issue any
shares of Common Stock upon exercise of this Warrant if the issuance of such shares of Common Stock
would exceed the number of shares of Common Stock that the Company may issue to the Purchaser
without breaching the Company’s obligations under the rules and regulations of the Nasdaq Global
Select Market (as defined in the Securities Purchase Agreement) (the “Exchange Cap”), except the
limitation shall not apply in the event that the Company (a) obtains the approval of its
shareholders as required by the applicable rules of the Nasdaq Global Select Market for issuances
in excess of the Exchange Cap or (b) obtains a written opinion from outside counsel to the Company
that such approval is not required, which opinion shall be reasonably satisfactory to the
Purchaser.


2. The rights represented by this Warrant may be exercised by the holder hereof, in whole or in
part, by written notice of exercise, in the form attached hereto, delivered to the Company by the
surrender of this Warrant (properly endorsed if required) at the principal office of the Company
and upon payment to it by check of the Exercise Price in lawful money of the United States. The
Company agrees that the shares of Common Stock so purchased shall be and are deemed to be issued to
the holder hereof as the record owner of such shares of Common Stock as of the close of business on
the date on which this Warrant shall have been surrendered and payment made for such shares of
Common Stock as aforesaid. Subject to the provisions of the next succeeding paragraph,
certificates for the shares of Common Stock so purchased shall be delivered to the holder hereof
within a reasonable time, not exceeding l0 days, after the rights represented by this Warrant shall
have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number
of shares of Common Stock, if any, with respect to which this Warrant shall not then have been
exercised shall also be delivered to the holder hereof within such time.



3. Notwithstanding the foregoing, however, the Company shall not be required to deliver any
certificate for shares of Common Stock upon exercise of this Warrant except in accordance with the
provisions, and subject to the limitations, of paragraphs 8 and 9 hereof.



4. The Company covenants and agrees that all shares of Common Stock which may be issued upon the
exercise of the rights represented by this Warrant will, upon issuance as set forth above, be duly
authorized and issued, fully paid and nonassessable and free of preemptive rights. The Company
further covenants and agrees that during the period within which the rights


-2-









 






represented
by this Warrant may be exercised, the Company will at all times have authorized, and reserved for
the purpose of issue or transfer upon exercise of the subscription rights evidenced by this
Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant.



5. The above provisions are, however, subject to this paragraph 5. Notwithstanding anything in
this paragraph 5 to the contrary, no change in the Exercise Price shall be made until the
cumulative effect of the adjustments called for by this paragraph 5 since the date of the last
change in the Exercise Price would change the Exercise Price by more than 1%. However, once the
cumulative effect would result in such a change, then the Exercise Price shall be changed to
reflect all adjustments called for by this paragraph 5 and not previously made. Subject to the
foregoing, the Exercise Price shall be adjusted from time to time as set forth in this paragraph 5.




     If the occurrence of an event would cause the Exercise Price to be adjusted by more than one
subsection of this Section 5, then the Exercise Price shall be adjusted once pursuant to the
subsection that would provide the greatest dollar amount decrease in the Exercise Price.



     (a) Adjustments to Exercise Price for Consolidation, Merger, etc. In case of any
consolidation or merger of the Company with any other entity (other than a wholly owned subsidiary
of the Company), or in case of any sale or transfer of all or substantially all of the assets of
the Company, or in case of any share exchange pursuant to which all of the outstanding shares of
Common Stock are converted into other securities or property, the Company shall, prior to or at the
time of such transaction, make appropriate provision or cause appropriate provision to be made so
that the Purchaser shall have the right thereafter to exercise this Warrant into the kind and
amount of shares of stock and other securities and property receivable upon such consolidation,
merger, sale, transfer or share exchange by a holder of the number of shares of Common Stock into
which such this Warrant could have been exercised immediately prior to the effective date of such
consolidation, merger, sale, transfer or share exchange. If in connection with any such
consolidation, merger, sale, transfer or share exchange, each holder of shares of Common Stock is
entitled to elect to receive either securities, cash or other assets upon completion of such
transaction, the Company shall provide or cause to be provided to the Purchaser the right to elect
the securities, cash or other assets for which this Warrant shall be exercisable after completion
of any such transaction on the same terms and subject to the same conditions applicable to holders
of the Common Stock (including, without limitation, notice of the right to elect, limitations on
the period in which such election shall be made and the effect of failing to exercise the
election).



     (b) Adjustments to Exercise Price for Stock Splits, Reclassifications, and Certain
Distributions. In case the Company shall:



-3-









 





               (i) pay a dividend or make a distribution on its Common Stock in shares of its capital
stock;



               (ii) subdivide its outstanding Common Stock into a greater number of shares;



               (iii) combine the shares of its outstanding Common Stock into a smaller number of shares; or



               (iv) issue by reclassification of its Common Stock any shares of its capital stock,



               then in each such case the Exercise Price in effect immediately prior thereto shall be
proportionately adjusted so that the Purchaser, upon any exercise of this Warrant, shall be
entitled to receive, to the extent permitted by applicable law, the number and kind of shares of
capital stock of the Company which the Purchaser would have owned or have been entitled to receive
after the happening of such event had this Warrant, or any portion hereof, been exercised
immediately prior to the record date for such event (or if no record date is established in
connection with such event, the effective date for such action).



               An adjustment pursuant to this subparagraph (b) shall become effective immediately after the
record date in the case of a stock dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or reclassification.



     (c) Adjustments to Exercise Price for Diluting Issues.



               (i) Certain Definitions. For purposes of this paragraph 5, the following terms shall
have the following meanings:



                    (A) “Additional Shares of Common
Stock” shall mean all shares of Common Stock issued by the
Company or deemed to be issued pursuant to paragraph 5(c)(ii) below (including shares of Common
Stock subsequently reacquired or retired by the Company) after the date hereof.



                    (B) “Business Day” shall mean any day
except Saturday, Sunday or federal legal holiday, and
any other day on which the Trading Market (as defined below) is closed.



                    (C) “Convertible Security” shall mean
any evidence of indebtedness, share or other security
directly or indirectly convertible or exchangeable into or for Common Stock, excluding Options.



                    (D) “Option” shall mean any option,
warrant, right or security to purchase or otherwise
acquire Common Stock or Convertible Securities.



-4-









 





                    (E) “Trading Market” means whichever
of the New York Stock Exchange, the American Stock
Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market or
the OTC Bulletin Board on which the Common Stock is listed or quoted for trading on the date in
question.



               (ii) Additional Shares of Common Stock Deemed to be Issued.



                    (A) If after the date hereof, the Company shall issue or sell
any Options or Convertible
Securities, or shall fix a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the maximum number of shares
of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any
conditions to exercisability, convertibility or exchangeability but without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the exercise of such
Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as
of the time of such issue or, in case such a record date shall have been fixed, as of the close of
business on such record date.



                    (B) If the terms of any Option or Convertible Security, the
issuance of which resulted in an
adjustment to the Exercise Price pursuant to the terms of this subparagraph 5(c), are revised as a
result of an amendment to such terms or any other adjustment pursuant to the provisions of such
Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to
anti-dilution or similar provisions of such Option or Convertible Security) to provide for either
(1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise,
conversion and/or exchange of any such Option or Convertible Security or (2) any increase or
decrease in the consideration payable to the Company upon such exercise, conversion and/or
exchange, then, effective upon such increase or decrease becoming effective, the Exercise Price
computed upon the original issue of such Option or Convertible Security (or upon the occurrence of
a record date with respect thereto) shall be readjusted to such Exercise Price as would have
obtained had such revised terms been in effect upon the original date of issuance of such Option or
Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this subparagraph
(B) shall have the effect of increasing the Exercise Price to an amount which exceeds the lower of
(X) the Exercise Price in effect immediately prior to the original adjustment made as a result of
the issuance of such Option or Convertible Security, or (Y) the Exercise Price that would have
resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of
Additional Shares of Common Stock as a result of the issuance of such Option or Convertible
Security) between the original adjustment date and such readjustment date.



                    (C) If the terms of any Option or Convertible Security, the
issuance of which did not result
in an adjustment to the Exercise Price pursuant to the terms of this subparagraph 5(c) (either
because the consideration per share (determined pursuant to subparagraph 5(c)(iii)) of the
Additional Shares of Common Stock subject thereto was equal to or greater than the Exercise Price
then in effect and the then Current Market Price, or because such Option or Convertible Security
was issued before the date hereof), are revised after the date hereof as a result of an amendment to such terms or any other adjustment pursuant to the



-5-









 







provisions of such Option or Convertible Security (but excluding automatic adjustments to such
terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to
provide for either (1) any increase or decrease in the number of shares of Common Stock issuable
upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any
increase or decrease in the consideration payable to the Company upon such exercise, conversion or
exchange, then such Option or Convertible Security, as so amended or adjusted, and the Additional
Shares of Common Stock subject thereto (determined in the manner provided in subparagraph 5(c)(ii))
shall be deemed to have been issued effective upon such increase or decrease becoming effective.



                    (D) Upon the expiration or termination of any unexercised
Option or unconverted or unexchanged
Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon
a revision of its terms) in an adjustment to the Exercise Price pursuant to the terms of
subparagraphs 5(c)(iv) or (v), the Exercise Price shall be readjusted to such Exercise Price as
would have obtained had such Option or Convertible Security (or portion thereof) never been issued.



                    (E) If the number of shares of Common Stock issuable upon the
exercise, conversion and/or
exchange of any Option or Convertible Security, or the consideration payable to the Company upon
such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible
Security is issued or amended but is subject to adjustment based upon subsequent events, any
adjustment to the Exercise Price provided for in this subparagraph 5(c)(ii) shall be effected at
the time of such issuance or amendment based on such number of shares or amount of consideration
without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall
be treated as provided in clauses (B) and (C) of this subparagraph 5(c)(ii)). If the number of
shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or
Convertible Security, or the consideration payable to the Company upon such exercise, conversion
and/or exchange, cannot be calculated at all at the time such Option or Convertible Security is
issued or amended, any adjustment to the Exercise Price that would result under the terms of this
subparagraph 5(c)(ii) at the time of such issuance or amendment shall instead be effected at the
time such number of shares and/or amount of consideration is first calculable (even if subject to
subsequent adjustments), assuming for purposes of calculating such adjustment to the Exercise Price
that such issuance or amendment took place at the time such calculation can first be made.



               (iii) Determination of Consideration. For purposes of this paragraph 5, the
consideration received by the Company for the issue of any Additional Shares of Common Stock shall
be computed as follows:



                    (A) Cash and Property: Such consideration shall:



                              (1) insofar as it consists of cash, be computed at the
aggregate amount of cash received by
the Company, excluding amounts paid or payable for accrued interest;



-6-









 





                              (2) insofar as it consists of property other than cash, be
computed at the fair market value
thereof at the time of such issue, as determined in good faith by the Board of Directors of the
Company; and



                              (3) in the event Additional Shares of Common Stock are
issued together with other shares or
securities or other assets of the Company for consideration which covers both, be the proportion of
such consideration so received for the Additional Shares of Common Stock, computed as provided in
clauses (1) and (2) above, as determined in good faith by the Board of Directors of the Company.



                    (B) Options and Convertible Securities. The
consideration per share received by the
Company for Additional Shares of Common Stock deemed to have been issued pursuant to subparagraph
5(c)(ii), relating to Options and Convertible Securities, shall be determined by dividing:



                              (1) the minimum aggregate amount of additional
consideration (as set forth in the instruments
relating thereto, without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Company upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the
exercise of such Options for Convertible Securities and the conversion or exchange of such
Convertible Securities, by



                              (2) the maximum number of shares of Common Stock (as set
forth in the instruments relating
thereto, without regard to any provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such
Options for Convertible Securities and the conversion or exchange of such Convertible Securities.



               (iv) Issues Below Current Market Price.



                    (A) In case the Company shall issue or sell or, or is deemed
to have issued or sold pursuant
to subparagraph 5(c)(ii) above, Additional Shares of Common Stock for consideration per share less
than the average of the daily last sales price of the Common Stock on the Trading Market as
reported by Bloomberg Financial Markets, or a comparable reporting service (the “Closing Price”)
for the 10 consecutive Business Days ending on the Business Day immediately preceding the date of
such issuance (the “Current Market Price”), then in each such case the Exercise Price in effect on
such record date shall be adjusted in accordance with the formula:








               where



-7-









 





	 	 	 	 	 	 	 
	 

	 	E1
	 	=
	 	the adjusted Exercise Price.
	 

	 	E
	 	=
	 	the current Exercise Price.
	 

	 	O
	 	=
	 	the number of shares of Common Stock outstanding on
the Business Day immediately preceding the date of
such issuance (for which purpose the shares of
Common Stock outstanding shall be the sum of (1)
the number of shares of Common Stock then
outstanding, and (2) the number of shares of Common
Stock into which any other outstanding securities
of the Company are then issuable upon conversion,
exercise or exchange of such securities other than
the “Warrants” (as defined in the Securities
Purchase Agreement)).

	 

	 	N
	 	=
	 	the number of Additional Shares of Common Stock
issued, or deemed to have been issued.
	 

	 	P
	 	=
	 	the consideration per share of the Additional
Shares of Common Stock issued or deemed to have
been issued.
	 

	 	M
	 	=
	 	the Current Market Price per share of Common Stock
on the date of such issuance.






                    (B) Such adjustment shall become effective immediately after
the
date of issuance, or deemed
issuance, of such Common Stock.



(v) Issues Below Exercise Price.



                    (A) In case the Company shall issue or sell or, or is deemed
to
have issued or sold pursuant
to subparagraph 5(c)(ii) above, Additional Shares of Common Stock for consideration per share less
than the Exercise Price in effect immediately prior to the date of such issue, then in each such
case the Exercise Price in effect on such issuance date shall be adjusted in accordance with the
formula:







 where




	 	 	 	 	 	 	 
	 

	 	E1
	 	=
	 	the adjusted Exercise Price.
	 

	 	E
	 	=
	 	the current Exercise Price.
	 

	 	O
	 	=
	 	the number of shares of Common Stock outstanding on
the Business Day immediately preceding the date of
such issuance (for which purpose the shares of
Common Stock outstanding shall be the sum of (1)
the number of shares of Common Stock then
outstanding, and (2) the number of shares of Common
Stock into which any other outstanding securities
of the Company are then issuable upon conversion,
exercise or exchange of such securities other than
the “Warrants” (as defined in the Securities
Purchase Agreement)).

	 

	 	N
	 	=
	 	the number of Additional Shares of Common issued,
or deemed to have






-8-









 






	 	 	 	 	 	 	 
	 

	 	 
	 	 
	 	been issued.
	 

	 	P
	 	=
	 	the consideration per share of the Additional
Shares of Common Stock issued, or deemed to have
been issued.






                    (B) Such adjustment shall become effective immediately after
the
date of issuance, or deemed
issuance, of such Common Stock.



     (d) Adjustments to Exercise Price for Certain Distributions.




     (i) In case the Company shall, by dividend or otherwise, distribute to all holders of
its Common Stock evidences of its Indebtedness (as defined in the Securities Purchase
Agreement) or assets (including securities, but excluding (A) any Options or Convertible
Securities, and (B) any dividend or distribution paid in cash out of the retained earnings
of the Company and any dividend or distribution referred to in subparagraph 5(b) above),
then in each such case the Exercise Price then in effect shall be adjusted as of the
ex-dividend date for such dividend or distribution in accordance with the formula:








           where



	 	 	 	 	 	 	 
	 

	 	E1
	 	=
	 	the adjusted Exercise Price.
	 

	 	E
	 	=
	 	the current Exercise Price.
	 

	 	M
	 	=
	 	the Current Market Price per share of Common Stock
on the ex-dividend date for such distribution.
	 

	 	F
	 	=
	 	the amount of such cash dividend and/or the fair
market value on such ex-dividend date of the
assets, securities, rights or warrants to be
distributed divided by the number of shares of
Common Stock outstanding on such ex-dividend date.
The Board of Directors of the Company shall
determine in good faith such fair market value.






	 	 	 	 	 
	Notwithstanding the foregoing,
in no event shall

	 	M - F
	 	be deemed to be less than zero.
	 

	 	 	 	 
	 

	 	M	 	 







     (ii) Such adjustment shall become effective immediately after the ex-dividend date with
respect to such dividend or distribution.



     (e) All calculations of adjustments hereunder shall be made to the nearest cent or to the
nearest 1/100 of a share, as the case may be.



-9-









 





     (f) In the event that at any time, as a result of an adjustment made pursuant to subparagraph
(a) or (b) above, the Purchaser shall, upon any exercise of this Warrant, become entitled to
receive securities, cash or assets other than Common Stock, the number or amount of such securities
or property so receivable upon such exercise shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in subparagraphs (a) through (d) above.



     (g) Whenever the Exercise Price is adjusted as herein provided, the Company shall send to each
transfer agent for the Common Stock, and to the Trading Market, a statement signed by the Chairman
of the Board, the Chief Executive Officer, the Chief Financial Officer or any Vice President of the
Company and if required by the Trading Market by its Treasurer, its Secretary or its Assistant
Secretary stating the adjusted Exercise Price determined as provided in this paragraph 5; and any
adjustment so evidenced, given in good faith, shall be binding upon all shareholders and upon the
Company. Whenever the Exercise Price is adjusted, the Company shall give prompt notice to the
holder hereof by mail, setting forth the adjustment and the new Exercise Price. Notwithstanding
the foregoing notice provisions, failure by the Company to give such notice or a defect in such
notice shall not affect the binding nature of such corporate action of the Company.



     (h) Whenever the Company shall propose to take any of the actions specified in subparagraphs
(a) through (d) of this paragraph 5 which would result in any adjustment in the Exercise Price, the
Company shall cause a notice to be mailed at least 10 days prior to the date on which the books of
the Company will close or on which a record will be taken for such action to the holder of record
of this Warrant on the date of such notice. Such notice shall specify the action proposed to be
taken by the Company and the date as of which holders of record of the Common Stock shall
participate in any such actions or be entitled to exchange their Common Stock for securities or
other property, as the case may be. Failure by the Company to give such notice or any defect in
such notice shall not affect the validity of the transaction.



     (i) Notwithstanding any other provision of this paragraph 5, no adjustment in the Exercise
Price need be made (A) for issuances of (1) Conversion Shares or Warrant Shares (as such terms are
defined in the Securities Purchase Agreement) or (2) Common Stock or Convertible Securities
actually issued upon the exercise of Options or shares of Common Stock actually issued upon the
conversion or exchange of Convertible Securities, in each case provided such issuance is pursuant
to the terms of such Option or Convertible Security; (B) for issuances of shares of Common Stock,
Options or Convertible Securities issued as a dividend or distribution on Series A Preferred Stock
(as defined in the Securities Purchase Agreement); (C) for sales of Common Stock pursuant to a plan
for reinvestment of dividends on Common Stock, provided that the purchase price in any such sale is
at least equal to 95% of the market price of the Common Stock at the time of such sales; or (D) for
sales of Common Stock pursuant to any plan adopted by the Company for the benefit of its employees
or consultants, provided that such plan has been approved by the Company’s independent directors,
or pursuant to any plan for the benefit of the Company’s directors, provided that such plan has
been approved by the Company’s shareholders.



-10-









 





     (j) If any event occurs as to which in the opinion of the Board of Directors of the Company
the other provisions of this paragraph 5 are not strictly applicable or if strictly applicable
would not fairly protect the purchase rights of the holder of this Warrant or of Common Stock in
accordance with the essential intent and principles of such provisions, then the Board of Directors
of the Company shall make an adjustment in the application of such provisions, in accordance with
such essential intent and principles, so as to protect such purchase rights as aforesaid; provided,
however, that the members of the Board of Directors of the Company shall not be liable to the
holders hereof for any such determination made in good faith.



     (k) No fractional shares of Common Stock shall be issued upon the exercise of this Warrant,
but, instead the Company shall round such fraction of a share of Common Stock to the nearest whole
share, except that if the fraction is one-half or greater, the Company shall round the fraction up
to the nearest whole share.


6. As used herein, the term “Common Stock” shall mean and include the Company’s presently
authorized Common Stock and shall also include any capital stock of any class of the Company
hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the
rights of the holders thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company; provided that the
shares purchasable pursuant to this Warrant shall include shares designated as Common Stock of the
Company on the date of original issue of this Warrant or, in the case of any reclassification of
the outstanding shares thereof, the stock, securities, cash or assets provided for in paragraph
5(a) above.



7. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company.



8.




     (a) The holder of this Warrant acknowledges that neither this Warrant nor, as of the date of
the original issuance of this Warrant, any of the shares of Common Stock issuable upon exercise
hereof have been registered under the Securities Act of 1933, as amended (the “Act”), or any state
securities laws and that this Warrant or such shares of Common Stock may only be transferred in
accordance with this paragraph 8. The holder of this Warrant, by acceptance hereof, represents
that it has acquired this Warrant for investment and not with a view to distribution of this
Warrant or the shares of Common Stock issuable upon exercise hereof within the meaning of the Act
and the rules and regulations thereunder.



     (b) The holder realizes that the purchase of this Warrant is a speculative investment, and
that the economic benefits which may be derived therefrom are uncertain. In determining whether or
not to purchase the Warrant, the holder has relied solely upon the publicly-available materials
filed by the Company with the Securities and Exchange Commission, copies of which have been
reviewed by the Purchaser, and upon independent investigations made by the holder and its
representatives.



     (c) The holder of this Warrant, by acceptance hereof, agrees to give written notice to the
Company before exercising or transferring this Warrant, in whole or in part, or transferring
any



-11-









 







shares of Common Stock issuable or issued upon the exercise hereof, if at the time of such
transfer the shares of Common Stock are not covered by an effective registration statement under
the Act, of such holder’s intention to do so. Such holder shall also provide the Company with an
opinion of counsel reasonably satisfactory to the Company to the effect that the proposed exercise
or transfer of this Warrant or transfer of shares, if at the time of such transfer the shares are
not covered by an effective registration statement under the Act, may be effected without
registration or qualification under the Act and any applicable state securities laws. Upon receipt
of such written notice and opinion by the Company, such holder shall be entitled to exercise this
Warrant in accordance with its terms, or to transfer this Warrant, or to transfer shares of Common
Stock issuable or issued upon the exercise of this Warrant, all in accordance with the terms of the
notice delivered by such holder to the Company, provided that an appropriate legend respecting the
aforesaid restrictions on transfer may be endorsed on this Warrant, if at the time of such transfer
the shares are not covered by an effective registration statement under the Act, or the
certificates for such shares. In the event of a proposed transfer of this Warrant, prior to the
transfer the proposed transferee shall execute and deliver to the Company a warrant transfer letter
in the form attached hereto.


9. Subject to the provisions of paragraph 8 hereof, this Warrant and all rights hereunder are
transferable, without the prior approval of the Company, in whole or in part, at the principal
office of the Company by the holder hereof in person or by duly authorized attorney, upon surrender
of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the
same, consents and agrees that the bearer of this Warrant, when endorsed, may be treated by the
Company and all other persons dealing with this Warrant as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented by this Warrant, or to the
transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until
such transfer on such books, the Company may treat the registered holder hereof as the owner for
all purposes.



10. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at the principal
office of the Company, for new Warrants of like tenor representing in the aggregate the right to
subscribe for and purchase the number of shares which may be subscribed for and purchased
hereunder, each of such new Warrants to represent the right to subscribe for and purchase such
number of shares as shall be designated by said holder hereof at the time of such surrender.



11. The Company covenants and agrees that the holder of this Warrant shall have the rights of a
“Purchaser” under the Registration Rights Agreement, of even date herewith, by and among the
Company, the Purchaser, and the other purchasers set forth therein, set forth in such agreement.



12.




     (a) In addition to and without limiting the rights of the holder of this Warrant under the
terms of this Warrant, the holder of this Warrant shall have the right (the “Conversion Right”) to
convert this Warrant or any portion thereof into shares of Common Stock as provided in this
paragraph 12 at any time or from time to time prior to its expiration. Upon exercise of the
Conversion Right with respect to a particular number of shares subject to this Warrant (the
“Converted Warrant Shares”), the Company shall deliver to the holder of this Warrant, without



-12-









 







payment by the holder of any exercise price or any cash or other consideration, that number of
shares of Common Stock equal to the quotient obtained by dividing the Net Value (as defined below)
of the Converted Warrant Shares by the Market Price (as defined below) of a single share of Common
Stock, determined in each case as of the Conversion Date (as hereinafter defined). The “Net Value”
of the Converted Warrant Shares shall be determined by subtracting the aggregate Exercise Price of
the Converted Warrant Shares from the aggregate Market Price of the Converted Warrant Shares.
Notwithstanding anything in this paragraph 12 to the contrary, the Conversion Right cannot be
exercised with respect to a number of Converted Warrant Shares having a Net Value below $100. No
fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of
shares to be issued in accordance with the foregoing formula is other than a whole number, the
Company shall round such fraction of a share of Common Stock to the nearest whole share, except
that if the fraction is one-half or greater, the Company shall round the fraction up to the nearest
whole share.



     (b) The Conversion Right may be exercised by the holder of this Warrant by the surrender of
this Warrant at the principal office of the Company together with a written statement specifying
that the holder thereby intends to exercise the Conversion Right and indicating the number of
shares subject to this Warrant which are being surrendered (referred to in subparagraph (a) above
as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Warrant together with the aforesaid written
statement, or on such later date as is specified therein (the “Conversion Date”), but not later
than the expiration date of this Warrant. Certificates for the shares of Common Stock issuable
upon exercise of the Conversion Right and, in the case of a partial exercise, a new warrant
evidencing the shares remaining subject to this Warrant, shall be issued as of the Conversion Date
and shall be delivered to the holder of this Warrant within 15 days following the Conversion Date.



     (c) “Market Price” for purposes of this paragraph 12 shall mean, if the Common Stock is traded
on a securities exchange, the closing price of the Common Stock on such exchange, or, if the Common
Stock is otherwise traded in the over-the-counter market, the closing bid price, in each case
averaged over a period of 20 consecutive Business Days prior to the Conversion Date. If at any
time the Common Stock is not traded on an exchange, or otherwise traded in the over-the-counter
market, the “market price” shall be deemed to be the higher of (i) the book value thereof as
determined by any firm of independent public accountants of recognized standing selected by the
Board of Directors of the Company as of the last day of any month ending within 60 days preceding
the Conversion Date, or (ii) the fair value thereof determined in good faith by the Board of
Directors of the Company as of a date which is within l5 days of the Conversion Date.


13. The issuance of any shares or other securities upon the exercise of this Warrant, and the
delivery of certificates or other instruments representing such shares or other securities, shall
be made without charge to the holder hereof for any tax or other charge in respect of such
issuance. The Company shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in the issue and delivery of any certificate in a name other than
that of the holder hereof and the Company shall not be required to issue or deliver any such
certificate unless
and until the person or persons requesting the issue thereof shall have paid to the


-13-









 






Company the
amount of such tax or shall have established to the satisfaction of the Company that such tax has
been paid.



14. All questions concerning this Warrant will be governed and interpreted and enforced in
accordance with the internal law, not the law of conflicts, of the State of Minnesota.




(Signature Page Follows)




-14-









 








     IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized
officer and this Warrant to be dated as of ___, 2007.



	 	 	 	 	 	 	 	 	 
	 	 	WILSONS THE LEATHER EXPERTS INC.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	Its	 	 	 	 
	 

	 	 	 	 	 	 	 	 





RESTRICTION ON TRANSFER




     The securities evidenced hereby may not be transferred without (i) the opinion of counsel
satisfactory to the Company that such transfer may be lawfully made without registration under the
Securities Act of 1933, as amended, and all applicable state securities laws or (ii) such
registration.




-15-









 








ASSIGNMENT




(To Be Signed Only Upon Assignment)




     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
                                        
                                         this Warrant, and appoints
                                        
                     to transfer this Warrant on the books of
Wilsons The Leather Experts Inc. with the full power of substitution in the premises.



Dated:
                                                                                




In the presence of:
                                        
                                        




	 	 	 	 	 
	 

	 	 	 	 
	 	 	(Signature must conform in all respects to the name of the holder as
specified on the face of this Warrant without any alteration or
change whatsoever, and the signature must be guaranteed in the usual
manner)






 









 





FORM OF WARRANT TRANSFER LETTER




To: Wilsons The Leather Experts Inc.




Ladies and Gentlemen:



     The undersigned is a proposed transferee of the warrant (the “Warrant”) to purchase
                     shares of Common Stock, par value $0.01 (“Common Stock”), of Wilsons The
Leather Experts Inc., a Minnesota corporation (the “Company”), currently registered in the name of
                    . In order to induce the Company to consent to the transfer of the Warrant,
the undersigned hereby represents, warrants and agrees as follows:




	1.	 	The undersigned acknowledges that neither the Warrant nor **[any of the shares of Common
Stock issuable upon exercise thereof] have been registered under the Securities Act of 1933,
as amended (the “Act”), or any state securities laws and that, accordingly, the Warrant **[and
such shares of Common Stock] may only be transferred in accordance with the terms of
paragraphs 8 and 9 of the Warrant.

	 
	1.	 	The undersigned is an “accredited investor” as defined in Rule 501(a) of Regulation D
promulgated under the Act.





	 	 	 	 	 	 	 
	 

	 	Signature
	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Address	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Date	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 





 









 





FORM OF EXERCISE NOTICE




To be Executed by the Holder of this Warrant if such Holder




Desires to Exercise this Warrant in Whole or in Part:




To: Wilsons The Leather Experts Inc. (the “Company”)




The undersigned
                                                                                




Please insert Social Security or other

identifying number of Purchaser:





                                                                                                    



hereby irrevocably elects to exercise the right of purchase represented by this Warrant for, and to
purchase thereunder,                                         
 shares of the Common Stock provided for therein and
tenders payment herewith to the order of the Company in the amount of
$                                      
  , such
payment being made as provided on the face of this Warrant.



In order to induce the Company to consent to the exercise of this Warrant, the undersigned hereby
represents, warrants and agrees that neither this Warrant **[nor any of the shares of Common Stock
issuable upon exercise hereof] have been registered under the Securities Act of 1933, as amended
(the “Act”), or any state securities laws and that, accordingly, this Warrant may be exercised [and
the shares of Common Stock issued pursuant to this exercise] may only be transferred in accordance
with the terms of paragraphs 8 and 9 of this Warrant.





 









 









The undersigned requests that certificates for such shares of Common Stock be issued
as follows:



	 	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Address:
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	Deliver to:
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	Address:
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 




and, if such number of shares of Common Stock shall not be all the shares of Common Stock
purchasable hereunder, that a new Warrant for the balance remaining of the shares of Common Stock
purchasable under this Warrant be registered in the name of, and delivered to, the undersigned at
the address stated below.




	 	 	 	 	 
	Address:
	 	 	 	 
	 

	 	 

	 	 






	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Signature	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	(Signature must conform in all respects to the name of the
holder as written specified on the face of this Warrant
without any alteration or change whatsoever)

	 
	 	 	 	 	 	 	 	 
	Dated:
	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 






 









 





Exhibit D




WILSONS THE LEATHER EXPERTS INC.




 






CERTIFICATE OF DESIGNATIONS

FOR

SERIES A CONVERTIBLE PREFERRED STOCK

(PURSUANT TO MINNESOTA STATUTES, SECTION 302A.401, SUBD. 3(b))




 






     The undersigned, being the                      of
Wilsons The Leather Experts Inc. (the
“Corporation”), a corporation organized and existing under the Minnesota Business Corporation Act,
in accordance with the provisions of Minnesota Statutes, Section 302A.401, Subd. 3(b), does hereby
certify that:



     Pursuant to the authority vested in the Board of Directors of the Corporation by the Amended
and Restated Articles of Incorporation of the Corporation, as amended, the Board of Directors on
June 1, 2007, in accordance with Minnesota Statutes, Section 302A.401, Subd. 3, duly adopted the
following resolution establishing a series of                      shares of the Corporation’s Preferred Stock,
to be designated as its Series A Convertible Preferred Stock:



     RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation
(the “Board of Directors”) by the Amended and Restated Articles of Incorporation of the
Corporation, as amended, the Board of Directors hereby establishes a series of Preferred Stock of
the Corporation and hereby states the designation and number of shares, and fixes the relative
rights and preferences, of such series of shares as follows:



SERIES A CONVERTIBLE PREFERRED STOCK




     Section 1. Designation; Number of Shares. The shares of such series shall be
designated as “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”), and the
number of shares constituting the Series A Preferred Stock shall be                     . The Series A
Preferred Stock shall have a par value of $0.01 per share. Holders of Series A Preferred Stock
shall not be entitled to cumulate their votes in any election of Directors in which they are
entitled to vote and shall not be entitled to any preemptive rights to acquire shares of any class
or series of capital stock of the Corporation or of securities convertible into or exchangeable for
or exercisable for or carrying a right to purchase any shares of capital stock of any class or
series whatsoever, whether now or hereafter authorized and whether issued for cash or other
consideration or by way of dividend or other distribution, except as set forth in this Certificate.



     The Series A Preferred Stock shall have a liquidation preference of $1,000 per share (the
“Stated Amount”), plus an amount equal to any dividends accrued or cumulated and not paid on the
Series A Preferred Stock, whether or not declared and whether or not there are then Legally
Available Funds (as defined below), to the Liquidation Date (as defined below) (the “Liquidation
Value”).



 









 





     Section 2. Voting.




     (a) Election of Directors. So long as 20% of the aggregate amount of the shares of Series A Preferred Stock issued to the
Purchasers (as defined in that certain
Securities Purchase Agreement, dated June 1, 2007, by and among the Corporation and the
Purchasers named therein (the “Securities Purchase Agreement”)) (all capitalized terms used
in this Certificate and not otherwise defined will have the definitions assigned to them in
the Securities Purchase Agreement) at the Closing are outstanding, the holders of
outstanding shares of Series A Preferred Stock shall, voting together as a separate class,
be entitled to elect two Directors of the Corporation (the “Series A Directors”). The
Series A Directors shall be elected by a plurality vote of holders of Series A Preferred
Stock, with the elected candidates being the individuals receiving the greatest number of
affirmative votes (with each holder of Series A Preferred Stock entitled to cast one vote
for or against each candidate with respect to each share of Series A Preferred Stock held by
such holder) of the outstanding shares of Series A Preferred Stock, with votes cast against
such candidate and votes withheld having no legal effect. The election of such Directors
shall occur:




     (i) at the annual meeting of holders of capital stock;




     (ii) at any special meeting of holders of capital stock if such meeting is
called for the purpose of electing directors;




     (iii) at any special meeting of holders of Series A Preferred Stock called by
holders of not less than a majority of the outstanding shares of Series A Preferred
Stock (a “Majority Interest”); or




     (iv) by the written consent of holders of the outstanding shares of Series A
Preferred Stock entitled to vote for such Directors in the manner and on the basis
specified above.




If at any time when the holders of Series A Preferred Stock are entitled to elect such
Directors, any such Series A Director should cease to be a Director for any reason, the
vacancy shall be filled only by the vote or written consent of the holders of the
outstanding shares of Series A Preferred Stock, voting together as a separate class, in the
manner and on the basis specified above or as otherwise provided by law. The holders of
outstanding shares of Series A Preferred Stock shall also be entitled to vote in the
election of all other Directors of the Corporation together with holders of all other shares
of the Corporation’s outstanding capital stock entitled to vote thereon, voting as a single
class, with each outstanding share of Series A Preferred Stock entitled to the number of
votes specified in Section 2(b) hereof. The holders of outstanding shares of Series A
Preferred Stock may, in their sole discretion, determine not to elect Series A Directors as
provided herein from time to time, and during any such period the Board of Directors
nonetheless shall be deemed duly constituted.



2









 






     (b) Voting Generally.




     (i) Subject to the limitations of Section 2(b)(ii) and 2(b)(iii), each
outstanding share of Series A Preferred Stock shall be entitled to a number of votes
equal to the number of shares of Common Stock into which such share of Series A
Preferred Stock is then convertible pursuant to Section 7 hereof as of the record
date for the vote or written consent of shareholders, if applicable. Each holder of
outstanding shares of Series A Preferred Stock shall be entitled to notice of any
shareholders’ meeting in accordance with the by-laws of the Corporation and shall
vote with holders of the Common Stock, voting together as single class, upon all
matters submitted to a vote of shareholders, excluding those matters required to be
submitted to a class or series vote pursuant to the terms hereof (including, without
limitation, Section 9) or by law. Holders of shares of Series A Preferred Stock
shall not be entitled to cumulate their votes in any election of directors in which
they are entitled to vote. Notwithstanding anything herein stated, Series A
Preferred Stock shall not be entitled to be voted on any proposal presented to the
shareholders of the Corporation to approve the voting or conversion of shares of
Series A Preferred Stock in excess of the Exchange Cap (as defined in Section 7(g))
or the exercisability of any Warrants in excess of the Exchange Cap.




     (ii) To the extent that the conversion of shares of Series A Preferred Stock is
limited by the Exchange Cap set forth in Section 7 as of the record date for the
vote or written consent of shareholders, then each holder shall be entitled to only
such number of votes equal to the number of shares of common stock into which the shares of Series A Preferred Stock held by such holder would convert after giving
effect to the limitations of the Exchange Cap set forth in Section 7. This
limitation shall not apply in the event that the Corporation (A) obtains the
approval of its shareholders as required by the applicable rules of the Nasdaq
Global Select Market for issuances of Common Stock in excess of such amount or (B)
obtains a written opinion from outside counsel to the Corporation that such approval
is not required, which opinion shall be reasonably satisfactory to the holders of a
Majority Interest.




     (iii) Notwithstanding anything to the contrary, in no event shall the Series A
Preferred Stock be entitled to a number of votes greater than the number of shares
of Common Stock that would be issuable upon conversion of the Series A Preferred
Stock based on a Conversion Price of $1.38.



     Section 3. Rank. The Series A Preferred Stock shall, with respect to dividend rights
and rights on liquidation, winding up or dissolution, whether voluntary or involuntary, whether now
or hereafter issued, rank:




     (a) senior to any other series of Preferred Stock established hereafter by the Board of
Directors, the terms of which shall specifically provide that such series shall rank junior
to the Series A Preferred Stock with respect to dividend rights and rights on liquidation,
winding up or dissolution; and



3









 






     (b) senior to the Common Stock, $.01 par value per share, of the Corporation (the
“Common Stock”) and any other equity securities of the Corporation (all of such equity
securities of the Corporation to which the Series A Preferred Stock ranks senior, including
without limitation any Preferred Stock and the Common Stock, being collectively referred to
herein as “Junior Securities”).



     Section 4. Dividends; Payment Priorities.




     (a) Entitlement; Accrual; Payment. Holders of shares of Series A Preferred
Stock shall be entitled to receive out of funds legally available therefor (“Legally
Available Funds”), cumulative dividends (the “Series A Dividends”) at an annual rate of 8.0%
of the Stated Amount per share of Series A Preferred Stock, payable (i) semi-annually in
arrears on each June 1 and December 1 (each of such dates being a “Regular Dividend Accrual
Date”), commencing December 1, 2007, or (ii) or such date or dates as the Board of Directors
shall determine from time to time (each such date being a “Special Dividend Accrual Date”
and together with each Regular Dividend Accrual Date, a “Dividend Accrual Date”) except that
if such date is a Saturday, Sunday, legal holiday or date on which the Principal Market is
closed, then such dividend shall be payable on a date and with respect to a period ending on
the next date that is not a Saturday, Sunday, legal holiday, or day on which the Principal
Market is closed (a “Business Day”). “Principal Market “ shall mean whichever of the New
York Stock Exchange, the American Stock Exchange, the NASDAQ Global Select Market, the
NASDAQ Global Market, the NASDAQ Capital Market or the OTC Bulletin Board on which the
Common Stock is listed or quoted for trading on the date in question. Each of such
dividends shall be fully cumulative and shall accrue (whether or not declared and whether or
not there are then Legally Available Funds), without interest, on a daily basis from the
later of (x) the first day of the semi-annual period with respect to which such dividend
shall be payable as provided herein, or (y) from the first day following a Special Dividend
Accrual Date declared by the Board of Directors in any period; provided, however, that with
respect to the first Dividend Accrual Date following the issuance of shares of Series A
Preferred Stock, such dividend shall accrue from the date of issuance of such shares. The
date upon which the Corporation originally issues any share of Series A Preferred Stock
shall be deemed to be its “date of issuance” regardless of the number of times transfer of
such share of Series A Preferred Stock is made on the stock records of the Corporation, and
regardless of the number of certificates which may be issued to evidence such share of
Series A Preferred Stock. The amount of dividends payable per share of Series A Preferred
Stock for each full semi-annual period shall be computed by dividing the annual dividend
amount by two. Dividends payable with respect to the initial dividend period and any
dividend period of more or less than one semi-annual period shall be computed on the basis
of a 365-day year and the actual number of days elapsed in that period. All dividends
hereunder shall be paid by issuance of shares of Series A Preferred Stock having an
aggregate Stated Amount equal to the amount of Series A Dividends payable as of each
Dividend Accrual Date which otherwise would have been payable if the Series A Dividend were
payable in cash. All accrued and unpaid Series A Dividends payable in the form of shares of
Series A Preferred Stock shall accrue cumulative dividends annually at a rate of 8.0% of the
Stated Amount per



4









 







share from the applicable Dividend Accrual Date on which each share of Series A
Preferred Stock was deemed to have been issued pursuant to Section 4(b).




     (b) Issuance of Dividend Shares. All dividends paid in additional shares of
Series A Preferred Stock shall be deemed issued on the applicable Dividend Accrual Date and
will thereupon be duly authorized, validly issued, fully paid and nonassessable and free and
clear of all liens and charges.




     (c) No Cash Dividends. No cash dividends on shares of Series A Preferred Stock
shall be declared by the Board of Directors or paid or set apart for payment by the
Corporation.




     (d) Priority With Respect to Junior Securities.




     (i) Holders of shares of Series A Preferred Stock shall be entitled to receive
the dividends provided for in Section 4(a) in preference to and in priority over any
dividends upon any of the Junior Securities.




     (ii) So long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not pay or set apart for payment any dividend on any of the Junior
Securities or make any distribution in respect thereof and to the holders thereof,
either directly or indirectly, whether in cash, obligations or shares of the
Corporation or other property (other than dividends or distributions payable solely
in the same Junior Securities), unless prior to or concurrently with such payment or
distribution, as the case may be, all accrued and unpaid dividends, if any, on the shares of Series A Preferred Stock (whether or not declared) shall have been
declared and paid.




     (iii) So long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not make any payment on account of, or set apart for payment any
money for a sinking or other similar fund for, the purchase, redemption, retirement
or other acquisition of, or purchase, redeem, retire or otherwise acquire for value,
any of the Junior Securities or any warrants, rights, calls or options exercisable
for any of the Junior Securities, and shall not permit any corporation or other
entity directly or indirectly controlled by (as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) the Corporation to
purchase or redeem any of the Junior Securities or any warrants, rights, calls or
options exercisable for any of the Junior Securities, unless prior to or
concurrently with such payment, setting apart for payment, purchase or redemption,
as the case may be, all accrued and unpaid dividends, if any, on shares of Series A
Preferred Stock (whether or not declared) shall have been declared and paid.




     (iv) Subject to the foregoing provisions of this Section 4 and to Section
9(a)(iv), the Corporation may pay or set apart for payment dividends and other
distributions on any of the Junior Securities and may purchase or otherwise redeem
any of the Junior Securities or any warrants, rights or options exercisable



5









 







for any of the Junior Securities, and the holders of the shares of Series A
Preferred Stock shall not be entitled to share in any such dividends, distributions
or proceeds.



     Section 5. Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the holders of shares of
Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders an amount in cash equal to the
Liquidation Value for each share outstanding to and including the date of liquidation (the
“Liquidation Date”), before any payment shall be made or any assets distributed to the holders of
any of the Junior Securities. If the assets of the Corporation are not sufficient to pay in full
the liquidation payments payable to the holders of outstanding shares of Series A Preferred Stock,
then the holders of all such shares shall share pro rata in such distribution of assets in
accordance with the full respective preferential amounts that would be payable on such shares of
Series A Preferred Stock if all amounts payable thereon were paid in full.



     Section 6. Redemption Upon Triggering Event.




     (a) Triggering Event. Each of the following events shall constitute a
“Triggering Event”:




     (i) A Conversion Default (as defined below).




     (ii) The Corporation’s failure to pay to the holder of any Series A Preferred
Stock any amount of any Series A Dividend when and as due under this Certificate.




     (iii) Any default or defaults by the Corporation (A) in the payment of any
principal of, or interest on, any Indebtedness which payments, individually or in
the aggregate, exceed $1 million, when due after giving effect to any applicable
grace period in the terms of the Indebtedness, or (B) on any Indebtedness, the
principal amount of which, individually or in the aggregate, exceeds $1 million,
which default or defaults in the case of clause (B) shall have resulted in such
Indebtedness becoming due and payable prior to the date on which it would otherwise
have become due and payable.




     (iv) The Corporation or any of its Significant Subsidiaries (as defined by Rule
1-02(w) of Regulation S-X under the Exchange Act), pursuant to or within the meaning
of Title 11, U.S. Code, or any similar federal or State law for the relief of
debtors, collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B)
consent to the entry of an order for relief against it in an involuntary case, (C)
consents to the appointment of a receiver, trustee, assignee, liquidator or similar
official (a “Custodian”), (D) makes a general assignment for the benefit of its
creditors, or (E) admits in writing that it is generally unable to pay its debts as
due.




     (v) A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that (A) is for relief against the Corporation or any of its



6









 







Significant Subsidiaries in an involuntary case, (B) appoints a Custodian of
the Corporation or any of its Significant Subsidiaries or (C) orders the liquidation
of the Corporation or any of its Significant Subsidiaries.




     (vi) A final judgment or judgments or the payment of money aggregating in
excess of $1 million are rendered against the Corporation or any of its Subsidiaries
and which judgments are not, within 60 days after the entry thereof, bonded,
discharged or stayed pending appeal, or are not discharged within 60 days after the
expiration of such stay; provided however, that any judgment which
is covered by insurance or an indemnity from a credit-worthy party shall not be
included in calculating the $1 million amount set forth above so long as the
Corporation provides the holder a written statement from such insurer or indemnity
provider (which written statement shall be reasonably satisfactory to the holder) to
the effect that such judgment is covered by insurance or an indemnity and the
Corporation will receive the proceeds of such insurance or indemnity within 30 days
of the issuance of such judgment.




     (vii) The Corporation breaches any representation, warranty, covenant or other
term or condition of this Certificate, the Securities Purchase Agreement, the
Registration Rights Agreement, the Warrants, the Support Agreement or any other
agreement, document, certificate or other instrument delivered in connection with
the transactions contemplated thereby and hereby to which the holder is a party,
except to the extent that such breach would not have a Material Adverse Effect and
except, in the case of a breach of a covenant or other term or condition which is
curable, only if such breach continues for a period of at least 15 consecutive
Business Days after written notice of such default is given to the Corporation by
holders of a Majority Interest.




     (b) Redemption Right.




     (i) Promptly after the occurrence of a Triggering Event with respect to shares
of the Series A Preferred Stock, the Corporation shall deliver written notice
thereof via facsimile and overnight courier (a “Triggering Event Notice”), to each
holder. At any time after the earlier of the holder’s receipt of a Triggering Event
Notice and the holder becoming aware of a Triggering Event, the holder may require
the Corporation to redeem, to the extent that such redemption would not violate,
breach or cause a default under the GE Credit Facility (as defined below), all or a
portion of the shares of Series A Preferred Stock held by such holder by delivering
written notice thereof (the “Triggering Event Redemption Notice”) to the
Corporation, which Triggering Event Redemption Notice shall indicate the portion of
the shares of Series A Preferred Stock held by such holder that it is electing to
redeem; provided that such Triggering Event Redemption Notice may be sent only
during the period beginning on and including the date of the occurrence of the
Triggering Event and ending on and including the later of the date which is 20
Business Days after the date on which the holder receives a Triggering Event Notice
from the Corporation with respect to such Triggering Event. Redemptions shall be
made



7









 







at a per share redemption price (the “Redemption Price”) equal to the Liquidation
Value per share. “GE Credit Facility” shall mean the Fifth Amended and Restated
Credit Agreement, dated as of December 29, 2006, between the Corporation and General
Electric Capital Corporation, as amended as of February 12, 2007, and by the
amendment in effect as of the Closing Date pursuant to Section 2.4(b)(vii) of the
Securities Purchase Agreement, and the related pledge agreements and guaranty, and
any amendment, renewal, extension or replacement thereof, regardless of the identity
of the lender; provided that any such amendment, renewal, extension or replacement
must be on substantially similar terms, including, without limitation, applicable
interest terms.




     (ii) If the Corporation fails to pay any holder the Redemption Price with
respect to any share of Series A Preferred Stock within five Business Days after its
receipt of a Trigger Event Redemption Notice, then the holder of Series A Preferred
Stock entitled to redemption shall be entitled to interest on the Redemption Price
at a per annum rate equal to twelve percent from the date on which the Corporation
receives the Trigger Event Redemption Notice until the date of payment of the
Redemption Price hereunder. In the event the Corporation is not able to redeem all
of the shares of Series A Preferred Stock subject to the Trigger Event Redemption
Notices delivered prior to the date upon which such redemption is to be effected,
the Corporation shall redeem shares of Series A Preferred Stock from each holder pro
rata, based on the total number of shares of Series A Preferred Stock outstanding at
the time of redemption included by such holder in all Trigger Event Redemption
Notices delivered prior to the date upon which such redemption is to be effected
relative to the total number of shares of Series A Preferred Stock outstanding at
the time of redemption included in all of the Trigger Event Redemption Notices
delivered prior to the date upon which such redemption is to be effected.




     (c) Optional Redemption by the Corporation. To the extent permitted by law and
the terms or provisions of other agreements or instruments for or with respect to capital
stock or Indebtedness of the Corporation to which the Corporation is, or may become, a party
or subject (including without limitation any notes, debentures or indentures), the
outstanding shares of Series A Preferred Stock shall be redeemable beginning on June 1,
2010, at the option of the Corporation, in whole at any time, out of Legally Available Funds
if (A) the last reported sale price for a share of Common Stock on the Principal Market
during each trading day of the 30-day period (the “Measurement Period”) ending immediately
prior to the date of the Optional Redemption Notice (as defined below) is equal to or
greater than $3.75 (subject to adjustment for stock splits, stock dividends and
reclassifications); and (B) the Corporation shall have filed a registration statement on
Form S-3 under the Securities Act covering all shares of Common Stock issued or issuable
upon conversion of the Series A Preferred Stock or exercise of the Warrants, and such
registration statement shall have been declared effective by the Securities and Exchange
Commission and no stop order or other suspension of effectiveness with respect to such
registration statement shall have been



8









 







received by the Corporation. Redemptions shall be made at the per share Redemption
Price.




Not more than 60 nor less than 30 days prior to the redemption date, notice (the
“Optional Redemption Notice”) by first class mail, postage prepaid, shall be given to
the holders of record of the Series A Preferred Stock to be redeemed, addressed to such
shareholders at their last addresses as shown on the stock books of the Corporation.
Each such Optional Redemption Notice shall specify the date fixed for redemption, the
redemption price, the place or places of payment, that payment of the Redemption Price
will be made upon presentation and surrender of certificates representing the shares of
Series A Preferred Stock, and that on and after the redemption date, dividends will
cease to accumulate on such shares.




On or after the date fixed for redemption as stated in the Optional Redemption
Notice, each holder of the shares called for redemption shall surrender the certificate
or certificates evidencing such shares to the Corporation at the place designated in
such notice and shall thereupon be entitled to receive payment of the Redemption Price.
If fewer than all the shares represented by any such surrendered certificate or
certificates are redeemed, a new certificate shall be issued representing the
unredeemed shares. If, on the date fixed for redemption, funds necessary for the
redemption shall be available therefor and shall have been irrevocably deposited or set
aside, then, notwithstanding that the certificates evidencing any shares so called for
redemption shall not have been surrendered, the dividends with respect to the shares so
called shall cease to accumulate on and after the date fixed for redemption, such shares shall no longer be deemed outstanding, the holders thereof shall cease to be
shareholders, and all rights whatsoever with respect to such shares (except the right
of the holders thereof to receive the Redemption Price without interest upon surrender
of their certificates) shall terminate.



     Section 7. Conversion at Option of Holders.




     (a) Holders of Series A Preferred Stock may, at their option upon surrender of the
certificates therefor, convert any or all of their shares of Series A Preferred Stock into
fully paid and nonassessable shares of Common Stock (and such other securities and property
as they may be entitled to, as hereinafter provided) at any time after issuance thereof;
provided, that such conversion right shall expire at the close of business on the date, if
any, fixed for the redemption of Series A Preferred Stock in any notice of redemption given
pursuant to Section 6 hereof if there is no default in payment of the Redemption Price.
Each share of Series A Preferred Stock shall be convertible at the office of any transfer
agent for the Series A Preferred Stock, and at such other office or offices, if any, as the
Board of Directors may designate, into that number of fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a share) as shall
be equal to the Conversion Rate, determined as hereinafter provided, in effect at the time
of conversion. Shares of Series A Preferred Stock may initially be converted into full shares of Common Stock at the rate of 666.6667 shares of Common Stock for each share of
Series A Preferred Stock, subject to adjustment from time to time as provided in Section 8
(such conversion rate, as so adjusted from time to time, being referred to herein as the
“Conversion Rate”). The



9









 






“Conversion Price” shall be equal to Stated Amount per share divided by the Conversion
Rate, or initially $1.50, subject to adjustment in proportion to any adjustments to the
Conversion Rate. Upon conversion, holders of Series A Preferred Stock shall receive in
respect of any accumulated and unpaid dividends on the Series A Preferred Stock surrendered
for conversion a number of shares of Common Stock equal to the number of shares of Common
Stock that would have been issued if the accumulated and unpaid dividends in the form of
Series A Preferred Stock would have been converted at the same time.




     (b) In order to effect a conversion, a holder shall: (i) fax (or otherwise deliver) a
copy of the fully executed Notice of Conversion, attached hereto as Schedule A, to the
Corporation (Attention: Secretary) and (ii) surrender or cause to be surrendered the
original certificates representing the Series A Preferred Stock being converted (the
“Preferred Stock Certificates”), duly endorsed, along with a copy of the Notice of
Conversion as soon as practicable thereafter to the Corporation. Upon receipt by the
Corporation of a facsimile copy of a Notice of Conversion from a holder, the Corporation
shall promptly send, via facsimile, a confirmation to such holder stating that the Notice of
Conversion has been received, the date upon which the Corporation expects to deliver the
Common Stock issuable upon such conversion and the name and telephone number of a contact
person at the Corporation regarding the conversion. The Corporation shall not be obligated
to issue shares of Common Stock upon a conversion unless either the Preferred Stock
Certificates are delivered to the Corporation as provided above, or the holder notifies the
Corporation that such Preferred Stock Certificates have been lost, stolen or destroyed and
delivers satisfactory evidence of loss to the Corporation and indemnification or a bond, in
each case in a form reasonably satisfactory to the Corporation.




     (c) Upon the surrender of Preferred Stock Certificates accompanied by a Notice of
Conversion, the Corporation (itself, or through its transfer agent) shall, no later than the
later of (a) the second Business Day following the conversion date specified in the Notice
of Conversion and (b) the Business Day following the date of such surrender (the “Delivery
Period”), issue and deliver (i.e., deposit with a nationally recognized overnight courier
service postage prepaid) to the holder or its nominee (x) that number of shares of Common
Stock issuable upon conversion of such shares of Series A Preferred Stock being converted
and (y) a certificate representing the number of shares of Series A Preferred Stock not
being converted, if any. Notwithstanding the foregoing, if the Corporation’s transfer agent
is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer
program, and so long as the certificates therefor do not bear a legend (pursuant to the
terms of the Securities Purchase Agreement) and the holder thereof is not then required to
return such certificate for the placement of a legend thereon (pursuant to the terms of the
Securities Purchase Agreement), the Corporation shall cause its transfer agent to promptly
electronically transmit the Common Stock issuable upon conversion to the holder by crediting
the account of the holder or its nominee with DTC through its Deposit Withdrawal Agent
Commission system (“DTC Transfer”). If the aforementioned conditions to a DTC Transfer are
not satisfied, the Corporation shall deliver as provided above to the holder physical
certificates representing the Common Stock issuable upon conversion. Further, a holder may
instruct



10









 







the Corporation to deliver to the holder physical certificates representing the Common
Stock issuable upon conversion in lieu of delivering such shares by way of DTC Transfer.




     (d) If, at any time, (i) a holder of shares of Series A Preferred Stock submits a
Notice of Conversion and the Corporation fails for any reason (other than because such
issuance would exceed such holder’s allocated portion of the Exchange Cap) to deliver, on or
prior to the fifth Business Day following the expiration of the Delivery Period for such
conversion, such number of shares of Common Stock to which such holder is entitled upon such
conversion, or (ii) the Corporation provides written notice to any holder of Series A
Preferred Stock (or makes a public announcement via press release) at any time of its
intention not to issue shares of Common Stock, which shares shall be subject to an effective
registration statement, upon exercise by any holder of its conversion rights in accordance
with the terms of this Certificate (other than because such issuance would exceed such
holder’s allocated portion of the Exchange Cap) (each of (i) and (ii) being a “Conversion
Default”), then the holder may elect, at any time thereafter, to have all or any portion of
such holder’s outstanding shares of Series A Preferred Stock redeemed by the Corporation for
cash, at an amount per share equal to the Redemption Price.




     (e) A number of shares of the authorized but unissued Common Stock sufficient to
provide for the conversion of the Series A Preferred Stock outstanding upon the basis
hereinbefore provided shall at all times be reserved by the Corporation, free from
preemptive rights, for such conversion, subject to the provisions of the next paragraph. If
the Corporation shall issue any securities or make any change in its capital structure which
would change the number of shares of Common Stock into which each share of the Series A
Preferred Stock shall be convertible as herein provided, the Corporation shall at the same
time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion
of the outstanding Series A Preferred Stock on the new basis. The Corporation shall comply
with all securities laws regulating the offer and delivery of shares of Common Stock upon
conversion of the Series A Preferred Stock and shall use its best efforts to list such
            shares on the Principal Market.




     (f) Upon the surrender of certificates representing shares of Series A Preferred Stock
to be converted, duly endorsed or accompanied by proper instruments of transfer as provided
above, the person converting such shares shall be deemed to be the holder of record of the
Common Stock issuable upon such conversion, and all rights with respect to the shares
surrendered shall forthwith terminate except the right to receive the Common Stock or other
securities, cash or other assets as herein provided.




     (g) The Corporation shall not be obligated to issue any shares of Common Stock upon
conversion of shares of Series A Preferred Stock if the issuance of such shares of Common
Stock would exceed the number of shares of Common Stock that the Corporation may issue to
the holder of the shares of Series A Preferred Stock to be converted without breaching the
Corporation’s obligations under the rules and regulations of the Nasdaq Global Select Market
(the “Exchange Cap”), except the limitation shall



11









 







not apply in the event that the Corporation (a) obtains the approval of its
shareholders as required by the applicable rules of the Nasdaq Global Select Market for
issuances in excess of the Exchange Cap or (b) obtains a written opinion from outside
counsel to the Corporation that such approval is not required, which opinion shall be
reasonably satisfactory to the holder of the Series A Preferred Stock to be converted.



     Section 8. Adjustments to Conversion Rate. Notwithstanding anything in this Section 8
to the contrary, no change in the Conversion Rate shall be made until the cumulative effect of the
adjustments called for by this Section 8 since the date of the last change in the Conversion Rate
would change the Conversion Rate by more than 1%. However, once the cumulative effect would result
in such a change, then the Conversion Rate shall be changed to reflect all adjustments called for
by this Section 8 and not previously made. Subject to the foregoing, the Conversion Rate shall be
adjusted from time to time as set forth in this Section 8. If the occurrence of an event would
cause the Conversion Rate to be adjusted by more than one subsection of this Section 8, then the
Conversion Rate shall be adjusted only once pursuant to the subsection that would provide the
greatest share increase in the Conversion Rate.




     (a) Adjustments to Conversion Rate for Consolidation, Merger, etc. In case of
any consolidation or merger of the Corporation with any other entity (other than a wholly
owned subsidiary of the Corporation), or in case of any sale or transfer of all or
substantially all of the assets of the Corporation, or in case of any share exchange
pursuant to which all of the outstanding shares of Common Stock are converted into other
securities or property, the Corporation shall, prior to or at the time of such transaction,
make appropriate provision or cause appropriate provision to be made so that holders of each
share of Series A Preferred Stock then outstanding shall have the right thereafter to
convert such share of Series A Preferred Stock into the kind and amount of shares of stock
and other securities and property receivable upon such consolidation, merger, sale, transfer
or share exchange by a holder of the number of shares of Common Stock into which such share
of Series A Preferred Stock could have been converted immediately prior to the effective
date of such consolidation, merger, sale, transfer or share exchange. If in connection with
any such consolidation, merger, sale, transfer or share exchange, each holder of shares of
Common Stock is entitled to elect to receive either securities, cash or other assets upon
completion of such transaction, the Corporation shall provide or cause to be provided to
each holder of Series A Preferred Stock the right to elect the securities, cash or other
assets into which the Series A Preferred Stock held by such holder shall be convertible
after completion of any such transaction on the same terms and subject to the same
conditions applicable to holders of the Common Stock (including, without limitation, notice
of the right to elect, limitations on the period in which such election shall be made and
the effect of failing to exercise the election).




     (b) Adjustments to Conversion Rate for Stock Splits, Reclassifications, and Certain
Distributions. In case the Corporation shall:




     (i) pay a dividend or make a distribution on its Common Stock in shares of its
capital stock;



12









 






     (ii) subdivide its outstanding Common Stock into a greater number of shares;




     (iii) combine the shares of its outstanding Common Stock into a smaller number
of shares; or




     (iv) issue by reclassification of its Common Stock any shares of its capital
stock,




then in each such case the Conversion Rate in effect immediately prior thereto shall
be proportionately adjusted so that the holder of any Series A Preferred Stock
thereafter surrendered for conversion shall be entitled to receive, to the extent
permitted by applicable law, the number and kind of shares of capital stock of the
Corporation which such holder would have owned or have been entitled to receive
after the happening of such event had such Series A Preferred Stock been converted
immediately prior to the record date for such event (or if no record date is
established in connection with such event, the effective date for such action).




An adjustment pursuant to this subparagraph (b) shall become effective immediately
after the record date in the case of a stock dividend or distribution and shall
become effective immediately after the effective date in the case of a subdivision,
combination or reclassification.




     (c) Adjustments to Conversion Rate for Diluting Issues.




     (i) Certain Definitions. For purposes of this Section 8, the following
terms shall have the following meanings:




               (A) “Additional Shares of Common Stock” shall mean all
shares of Common Stock
issued by the Corporation or deemed to be issued pursuant to paragraph 8(c)(ii)
below (including shares of Common Stock subsequently reacquired or retired by the
Corporation) after the Series A Original Issue Date (as defined below).




               (B) “Convertible Security” shall mean any evidence of
Indebtedness, share or
other security directly or indirectly convertible or exchangeable into or for Common
Stock, excluding Options.




               (C) “Option” shall mean any option, warrant, right or
security to purchase or
otherwise acquire Common Stock or Convertible Securities.




               (D) “Series A Original Issue Date” shall mean the
date on which the first share
of Series A Preferred Stock was issued.




     (ii) Additional Shares of Common Stock Deemed to be Issued.




               (A) If after the Series A Original Issue Date, the Corporation shall
issue or
sell any Options or Convertible Securities, or shall fix a record date



13









 






for the determination of holders of any class of securities entitled to receive
any such Options or Convertible Securities, then the maximum number of shares of
Common Stock (as set forth in the instrument relating thereto, assuming the
satisfaction of any conditions to exercisability, convertibility or exchangeability
but without regard to any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in case such a record date shall have been
fixed, as of the close of business on such record date.




               (B) If the terms of any Option or Convertible Security, the issuance of
which
resulted in an adjustment to the Conversion Rate pursuant to the terms of this
subparagraph 8(c), are revised as a result of an amendment to such terms or any
other adjustment pursuant to the provisions of such Option or Convertible Security
(but excluding automatic adjustments to such terms pursuant to anti-dilution or
similar provisions of such Option or Convertible Security) to provide for either (1)
any increase or decrease in the number of shares of Common Stock issuable upon the
exercise, conversion and/or exchange of any such Option or Convertible Security or
(2) any increase or decrease in the consideration payable to the Corporation upon
such exercise, conversion and/or exchange, then, effective upon such increase or
decrease becoming effective, the Conversion Rate computed upon the original issue of
such Option or Convertible Security (or upon the occurrence of a record date with
respect thereto) shall be readjusted to such Conversion Rate as would have obtained
had such revised terms been in effect upon the original date of issuance of such
Option or Convertible Security. Notwithstanding the foregoing, no readjustment
pursuant to this subparagraph (B) shall have the effect of increasing the Conversion
Rate to an amount which exceeds the lower of (X) the Conversion Rate in effect
immediately prior to the original adjustment made as a result of the issuance of
such Option or Convertible Security, or (Y) the Conversion Rate that would have
resulted from any issuances of Additional Shares of Common Stock (other than deemed
issuances of Additional Shares of Common Stock as a result of the issuance of such
Option or Convertible Security) between the original adjustment date and such
readjustment date.




               (C) If the terms of any Option or Convertible Security, the issuance of
which
did not result in an adjustment to the Conversion Rate pursuant to the terms of this
subparagraph 8(c) (either because the consideration per share (determined pursuant
to subparagraph 8(c)(iii)) of the Additional Shares of Common Stock subject thereto
was equal to or greater than the Conversion Rate then in effect and the then Current
Market Price, or because such Option or Convertible Security was issued before the
Series A Original Issue Date), are revised after the Series A Original Issue Date as
a result of an amendment to such terms or any other adjustment pursuant to the
provisions of such Option or Convertible Security (but excluding automatic
adjustments to such terms pursuant to anti-dilution or similar provisions of such
Option or Convertible Security) to



14









 






provide for either (1) any increase or decrease in the number of shares of
Common Stock issuable upon the exercise, conversion or exchange of any such Option
or Convertible Security or (2) any increase or decrease in the consideration payable
to the Corporation upon such exercise, conversion or exchange, then such Option or
Convertible Security, as so amended or adjusted, and the Additional Shares of Common
Stock subject thereto (determined in the manner provided in subparagraph 8(c)(ii))
shall be deemed to have been issued effective upon such increase or decrease
becoming effective.




               (D) Upon the expiration or termination of any unexercised Option or
unconverted
or unexchanged Convertible Security (or portion thereof) which resulted (either upon
its original issuance or upon a revision of its terms) in an adjustment to the
Conversion Rate pursuant to the terms of subparagraphs 8(c)(iv) or (v), the
Conversion Rate shall be readjusted to such Conversion Rate as would have obtained
had such Option or Convertible Security (or portion thereof) never been issued.




               (E) If the number of shares of Common Stock issuable upon the exercise,
conversion and/or exchange of any Option or Convertible Security, or the
consideration payable to the Corporation upon such exercise, conversion and/or
exchange, is calculable at the time such Option or Convertible Security is issued or
amended but is subject to adjustment based upon subsequent events, any adjustment to
the Conversion Rate provided for in this subparagraph 8(c)(ii) shall be effected at
the time of such issuance or amendment based on such number of shares or amount of
consideration without regard to any provisions for subsequent adjustments (and any
subsequent adjustments shall be treated as provided in clauses (B) and (C) of this
subparagraph 8(c)(ii)). If the number of shares of Common Stock issuable upon the
exercise, conversion and/or exchange of any Option or Convertible Security, or the
consideration payable to the Corporation upon such exercise, conversion and/or
exchange, cannot be calculated at all at the time such Option or Convertible
Security is issued or amended, any adjustment to the Conversion Rate that would
result under the terms of this subparagraph 8(c)(ii) at the time of such issuance or
amendment shall instead be effected at the time such number of shares and/or amount
of consideration is first calculable (even if subject to subsequent adjustments),
assuming for purposes of calculating such adjustment to the Conversion Rate that
such issuance or amendment took place at the time such calculation can first be
made.




     (iii) Determination of Consideration. For purposes of this Section 8,
the consideration received by the Corporation for the issue of any Additional Shares
of Common Stock shall be computed as follows:




               (A) Cash and Property: Such consideration shall:




               (1) insofar as it consists of cash, be computed at the aggregate amount
of cash received by the Corporation, excluding amounts paid or payable for
accrued interest;



15









 






               (2) insofar as it consists of property other than cash, be computed at
the fair market value thereof at the time of such issue, as determined in
good faith by the Board of Directors of the Corporation; and




               (3) in the event Additional Shares of Common Stock are issued together
with other shares or securities or other assets of the Corporation for
consideration which covers both, be the proportion of such consideration so
received, computed as provided in clauses (1) and (2) above, as determined
in good faith by the Board of Directors of the Corporation.




               (B) Options and Convertible Securities. The consideration per share
received by the Corporation for Additional Shares of Common Stock deemed to have
been issued pursuant to subparagraph 8(c)(ii), relating to Options and Convertible
Securities, shall be determined by dividing:




               (1) the minimum aggregate amount of additional consideration (as set
forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable
to the Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by




               (2) the maximum number of shares of Common Stock (as set forth in the
instruments relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible Securities, the
exercise of such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities.




     (iv) Issues Below Current Market Price.




               (A) In case the Corporation shall issue or sell or, or is deemed to have
issued
or sold pursuant to subparagraph 8(c)(ii) above, Additional Shares of Common Stock
for consideration per share less than the average of the daily last sales price of
the Common Stock on the Principal Market as reported by Bloomberg Financial Markets,
or a comparable reporting service (the “Closing Price”) for the 10 consecutive
Business Days ending on the Business Day immediately preceding the date of such
issuance (the “Current Market Price”), then in each such case the Conversion Rate in
effect on such record date shall be adjusted in accordance with the formula:



16









 










	 	 	 	 	 
	where	 	 
	 
	 	 	 	 
	C1

	 	=
	 	the adjusted Conversion Rate.
	C

	 	=
	 	the current Conversion Rate.
	O

	 	=
	 	the number of shares of Common Stock outstanding on
the Business Day immediately preceding the date of
such issuance (for which purpose the shares of
Common Stock outstanding shall be the sum of (1)
the number of shares of Common Stock then
outstanding, and (2) the number of shares of Common
Stock into which any other outstanding securities
of the Corporation are then issuable upon
conversion, exercise or exchange of such securities
other than the Warrants (as defined in the
Securities Purchase Agreement)).

	N

	 	=
	 	the number of Additional Shares of Common Stock
issued, or deemed to have been issued.
	P

	 	=
	 	the consideration per share of the Additional
Shares of Common Stock issued or deemed to have
been issued.
	M

	 	=
	 	the Current Market Price per share of Common Stock
on the date of such issuance.







               (B) Such adjustment shall become effective immediately after the date of
issuance, or deemed issuance, of such Common Stock.




     (v) Issues Below Conversion Price.




               (A) In case the Corporation shall issue or sell or, or is deemed to have
issued
or sold pursuant to subparagraph 8(c)(ii) above, Additional Shares of Common Stock
for consideration per share less than the Conversion Price in effect immediately
prior to the date of such issue, then in each such case the Conversion Rate in
effect on such issuance date shall be adjusted in accordance with the formula:









17









 








	 	 	 	 	 
	where	 	 
	 
	 	 	 	 
	C1

	 	=
	 	the adjusted Conversion Rate.
	C

	 	=
	 	the current Conversion Rate.
	O

	 	=
	 	the number of shares of Common Stock outstanding on the Business
Day immediately preceding the date of such issuance (for which
purpose the shares of Common Stock outstanding shall be the sum
of (1) the number of shares of Common Stock then outstanding,
and (2) the number of shares of Common Stock into which any
other outstanding securities of the Corporation are then
issuable upon conversion, exercise or exchange of such
securities other than the Warrants (as defined in the Securities
Purchase Agreement)).

	N

	 	=
	 	the number of Additional Shares of Common issued, or deemed to
have been issued.
	CP

	 	=
	 	the Conversion Price in effect immediately prior to the issuance.
	P

	 	=
	 	the consideration per share of the Additional Shares of Common
Stock issued, or deemed to have been issued.







               (B) Such adjustment shall become effective immediately after the date of
issuance, or deemed issuance, of such Common Stock.




(d) Adjustments to Conversion Rate for Certain Distributions.




     (i) In case the Corporation shall, by dividend or otherwise, distribute to all
holders of its Common Stock evidences of its Indebtedness or assets (including
securities, but excluding (A) any Options or Convertible Securities, and (B) any
dividend or distribution paid in cash out of the retained earnings of the
Corporation and any dividend or distribution referred to in subparagraph 8(b)
above), then in each such case the Conversion Rate then in effect shall be adjusted
as of the ex-dividend date for such dividend or distribution in accordance with the
formula:








	 	 	 	 	 
	where	 	 
	 
	 	 	 	 
	C1

	 	=
	 	the adjusted Conversion Rate.
	C

	 	=
	 	the current Conversion Rate.
	M

	 	=
	 	the Current Market Price per share of Common Stock
on the ex-dividend date for such distribution.
	F

	 	=
	 	the amount of such cash dividend and/or the fair
market value on such ex-dividend date of the
assets, securities, rights or warrants to be
distributed divided by the number of shares of
Common Stock outstanding on such ex-dividend date.
The Board of Directors of the Corporation shall
determine in good faith such fair market value.







18









 






	 	 	 	 	 
	Notwithstanding the foregoing, in no event shall

	 	M
	 	be deemed to be less than zero.
	 

	 	 	 	 
	 

	 	M -F	 	 







     (ii) Such adjustment shall become effective immediately after the ex-dividend
date with respect to such dividend or distribution.




     (e) All calculations of adjustments hereunder shall be made to the nearest cent or to
the nearest 1/100 of a share, as the case may be.




     (f) In the event that at any time, as a result of an adjustment made pursuant to
subparagraph (a) or (b) above, the holder of any Series A Preferred Stock shall, upon
conversion of such Series A Preferred Stock, become entitled to receive securities, cash or
assets other than Common Stock, the number or amount of such securities or property so
receivable upon conversion shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in subparagraphs (a) through (d) above.




     (g) Whenever the Conversion Rate is adjusted as herein provided, the Corporation shall
send to each transfer agent for the Series A Preferred Stock and the Common Stock, and to
the Principal Market, a statement signed by the Chairman of the Board, the Chief Executive
Officer, the Chief Financial Officer or any Vice President of the Corporation and if
required by the Principal Market by its Treasurer, its Secretary or its Assistant Secretary
stating the adjusted Conversion Rate determined as provided in this Section 8; and any
adjustment so evidenced, given in good faith, shall be binding upon all shareholders and
upon the Corporation. Whenever the Conversion Rate is adjusted, the Corporation shall give
notice by mail at the time of, and together with, the next dividend payment to the holders
of record of Series A Preferred Stock, setting forth the adjustment and the new Conversion
Rate and Conversion Price. Notwithstanding the foregoing notice provisions, failure by the
Corporation to give such notice or a defect in such notice shall not affect the binding
nature of such corporate action of the Corporation.




     (h) Whenever the Corporation shall propose to take any of the actions specified in
subparagraphs (a) through (d) of this Section 8 which would result in any adjustment in the
Conversion Rate, the Corporation shall cause a notice to be mailed at least 30 days prior to
the date on which the books of the Corporation will close or on which a record will be taken
for such action to the holders of record of the outstanding Series A Preferred Stock on the
date of such notice. Such notice shall specify the action proposed to be taken by the
Corporation and the date as of which holders of record of the Common Stock shall participate
in any such actions or be entitled to exchange their Common Stock for securities or other
property, as the case may be. Failure by the Corporation to give such notice or any defect
in such notice shall not affect the validity of the transaction.




     (i) Notwithstanding any other provision of this Section 8, no adjustment in the
Conversion Rate need be made (i) for issuances of (A) Conversion Shares or Warrant Shares
(as such terms are defined in the Securities Purchase Agreement) or (B) Common



19









 






Stock or Convertible Securities actually issued upon the exercise of Options or shares
of Common Stock actually issued upon the conversion or exchange of Convertible Securities,
in each case provided such issuance is pursuant to the terms of such Option or Convertible
Security; (ii) for issuances of shares of Common Stock, Options or Convertible Securities
issued as a dividend or distribution on Series A Preferred Stock; (iii) for sales of Common
Stock pursuant to a plan for reinvestment of dividends on Common Stock, provided that the
purchase price in any such sale is at least equal to 95% of the market price of the Common
Stock at the time of such sales; or (iv) for sales of Common Stock pursuant to any plan
adopted by the Corporation for the benefit of its employees or consultants, provided that
such plan has been approved by the Corporation’s independent directors, or pursuant to any
plan for the benefit of the Corporation’s directors, provided that such plan has been
approved by the Corporation’s shareholders.




     (j) If any event occurs as to which in the opinion of the Board of Directors of the
Corporation the other provisions of this Section 8 are not strictly applicable or if
strictly applicable would not fairly protect the rights of holders of Series A Preferred
Stock in accordance with the essential intent and principles of such provisions, then the
Board of Directors shall make an adjustment in the application of such provisions, in
accordance with such essential intent and principles, so as to protect such purchase rights
as aforesaid; provided, however, that the members of the Board of Directors of the
Corporation shall not be liable to the holders hereof for any such determination made in
good faith.



     Section 9. Certain Actions Not to be Taken Without Vote of Holders of Series A Preferred
Stock.




     (a) So long as any shares of Series A Preferred Stock are outstanding , the Corporation
shall not take any of the following corporate actions (whether by merger, consolidation or
otherwise), without first obtaining the approval of the Series A Directors or holders of a
Majority Interest:




     (i) alter or change the rights, preferences or privileges of the Series A
Preferred Stock, or increase the authorized number of shares of Series A Preferred
Stock;




     (ii) alter or change the rights, preferences or privileges of any capital stock
of the Corporation in any manner that results in any adverse effect to the Series A
Preferred Stock;




     (iii) issue any shares of Series A Preferred Stock other than pursuant to the
Securities Purchase Agreement or as a Series A Dividend; or




     (iv) use the proceeds from the sale of the Shares and the Warrants pursuant to
the Securities Purchase Agreement other than (A) to pay the Closing Fee and other
fees and expenses associated with the transactions contemplated by



20









 






the Transaction Documents, and (B) to the extent the Corporation has paid in
full the Closing Fee, for working capital and general corporate purposes;




     (b) So long as at least 20% of the aggregate amount of the shares of Series A Preferred
Stock issued to the Purchasers at the Closing are outstanding, the Corporation shall not
take any of the following corporate actions (whether by merger, consolidation or otherwise),
without first obtaining the approval of the Series A Directors or holders of a Majority
Interest:




     (i) purchase or redeem (or permit any Subsidiary to purchase or redeem) or pay
or declare any dividend or make any distribution on, any shares of capital stock of
the Corporation other than (i) redemptions of or dividends or distributions on the
Series A Preferred Stock, or (ii) dividends or other distributions payable on the
Common Stock solely in the form of additional shares of Common Stock;




     (ii) issue any of the Corporation’s equity or equity-linked securities on
floating conversion rate terms, or at a price or with a conversion or exercise
price, as applicable, below (A) the Conversion Price, or (B) the Closing Price for
the Common Stock on the date of such issuance of such security; or




     (iii) permit the size of the Board of Directors to be increased beyond 11;




     (iv) incur, create, assume or in any way become liable for any Indebtedness
unless at the time of and after giving pro forma effect to such incurrence and the
application of proceeds therefrom, the ratio of the Corporation’s Indebtedness to
EBITDA for the last twelve (12) complete months would be less than or equal to 2.0
to 1.0; provided that for purposes of the foregoing calculation, the Corporation’s
Indebtedness shall exclude (x) trade and merchandise accounts payable and amounts
due under letters of credit to secure such accounts payable and (y) Indebtedness
under the GE Credit Facility.




     (c) So long as the Purchasers beneficially hold at least 20% of the aggregate amount of
the shares of Series A Preferred Stock issued to the Purchasers at the Closing, the
Corporation shall not take any of the following corporate actions (whether by merger,
consolidation or otherwise), without first obtaining the approval of the Series A Directors
or holders of a Majority Interest:




     (i) approve or adopt any annual budget, strategic plan or similar document or
any amendment thereto for the Corporation;




     (ii) prior to June 1, 2010, consummate a Company Sale unless the consideration
received by the holders of Securities in such Company Sale is solely cash, and the
amount of such cash consideration received by the holders of Securities, in the
aggregate, in such Company Sale, is equal to 300% of (A) the aggregate Subscription
Amounts paid by all Purchasers pursuant to the Securities



21









 






Purchase Agreement, plus (B) the aggregate exercise prices paid by the holders
of Warrants upon all exercises thereof prior to the consummation of such Company
Sale; or




     (iii) enter into a definitive agreement for, or complete, a Material
Acquisition;




     (d) The corporation shall not authorize, or commit or agree to take, any of the actions
set forth in subsection (a), (b) or (c) without the authorization required by the applicable
subsection. Notwithstanding the foregoing, no change pursuant to this Section 9 shall be
effective to the extent that, by its terms, it applies to less than all of the holders of shares of Series A Preferred Stock then outstanding.




     (e) Certain Definitions. For purposes of this Section 9, the following terms
shall have the following meanings:




     (i) “Company Sale” means a transaction (whether in one or a series of related
transactions) pursuant to which a Person, or group of affiliated Persons (a)
acquires (whether by merger, amalgamation, consolidation, recapitalization,
reorganization, redemption, transfer or issuance of securities or otherwise) capital
stock of the Corporation (or any surviving or resulting corporation) possessing the
voting power to elect a majority of the Board of Directors (or such surviving or
resulting corporation) other than (x) in connection with a merger or consolidation
that does not constitute a Company Sale pursuant to clause (c) hereof or (y) an
acquisition by a licensed broker-dealer or licensed underwriter who purchases voting
stock of the Corporation pursuant to an underwritten public offering solely for
purposes of resale to the public, , (b) acquires assets constituting all or
substantially all of the assets of the Company Group or (c) merges or consolidates
(or agrees to merge or consolidate) with or into any member of the Company Group
(other than in a merger involving only the Corporation and a wholly-owned Subsidiary
or, to the extent the rights of the holders of the Series A Preferred Stock are not
adversely affected thereby a merger or consolidation in which immediately following
its consummation, all or substantially all of the beneficial owners of the voting
stock of the Corporation (including owners of Series A Preferred Stock of the
Corporation) beneficially own, directly or indirectly, more than 50% of the voting
power of the then outstanding shares of voting stock (or comparable voting equity
interests) of the surviving entity of the merger or consolidation (including such
beneficial ownership of an entity that, as a result of such transaction, owns the
Corporation directly or through one or more subsidiaries) in substantially the same
proportions (as compared to the other beneficial owners of the Corporation’s voting
stock immediately prior to such transaction) as their ownership of the Corporation’s
voting stock immediately prior to such transaction).




     (ii) “EBITDA” means, for any period, the net income of the Company Group for
such period plus (i) without duplication and to the extent deducted in determining
such net income, the sum of (A) consolidated interest expense for



22









 






such period, (B) consolidated income tax expense for such period, and (C) all
amounts attributable to depreciation and amortization for such period, and minus
(ii) to the extent included in determining such net income, any extraordinary gains
and all non-cash items of income for such period, all determined on a consolidated
basis in accordance with GAAP.




     (iii) “Guarantee” of or by any Person means any obligation, contingent or
otherwise, of such Person guaranteeing or having the economic effect of guaranteeing
any Indebtedness or other obligation of any other Person except the Corporation or a
wholly owned Subsidiary (the “primary obligor”) in any manner, whether directly or
indirectly, and including any obligation of such Person, direct or indirect, (a) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation or to purchase (or to advance or supply funds for
the purchase of) any security for the payment of such Indebtedness or other
obligation, (b) to purchase or lease property, securities or services for the
purpose of assuring the owner of such Indebtedness or other obligation of the
payment of such Indebtedness or other obligation or (c) to maintain working capital,
equity capital or any other financial statement condition or liquidity of the
primary obligor so as to enable the primary obligor to pay such Indebtedness or
other obligation; provided, however, that the term “Guarantee” shall not include
endorsements for the collection or deposit in the ordinary course of business of the
Corporation consistent with past practice.




     (iv) “Indebtedness” of any Person, means, without duplication, (a) all
obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such Person upon
which interest charges are customarily paid, (d) all obligations such Person under
conditional sale or other title retention agreements relating to property or assets
purchased by such Person, (e) all obligations of such Person issued or assumed as
the deferred purchase price of property or services (excluding trade accounts
payable and accrued obligations incurred in the ordinary course of business
consistent with past practice), (f) all Indebtedness of others secured by (or for
which the holder of such Indebtedness has an existing rights, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such Person,
whether or not the obligations secured thereby have been assumed, (g) all Guarantees
by such Person of Indebtedness of others, (h) all obligations under Capital Leases
of such Person, (i) all obligations of such Person as an account party in respect of
letters of credit, and (j) all obligations of such Person in respect of bankers’
acceptances, provided that Indebtedness shall not include any indebtedness of the
Corporation solely to one or more wholly owned Subsidiaries or any indebtedness of
any wholly owned Subsidiary solely to one or more of the Corporation or another
wholly owned Subsidiary. The Indebtedness of any Person shall include the
Indebtedness of any partnership in which such Person is a general partner.



23









 






     (v) “Material Acquisition” means an acquisition of assets or equity of another
Person or group of affiliated Persons or of any facility, division or product line
and/or business operated by any Person involving consideration paid by members of
the Company Group, plus Indebtedness assumed by members of the Company Group, in the
aggregate exceeding $5,000,000, excluding purchases of inventory of the Corporation
made in the ordinary course of business of the Corporation consistent with past
practice.



     Section 10. Affirmative Covenants.




     (a) So long as at least 20% of the aggregate amount of the shares of Series A Preferred
Stock issued to the Purchasers at the Closing are outstanding , unless approved by the
Series A Directors or the holders of a Majority Interest, the Corporation shall, and the
Corporation shall cause each other member of the Company Group to:




     (i) cause the Series A Directors to be duly nominated to serve as members of
the Board of Directors; and




     (ii) cause the Series A Directors to be appointed to the Committee or
Committees of the Board of Directors that the Series A Directors designate in
writing to the Corporation from time to time provided that they shall constitute
less than 50% of each such Committee unless the Board of Directors, in its sole
discretion, shall otherwise determine, provided that the Governance and Nominating
Committee and the Board of Directors shall have determined that each such Series A
Director is “independent,” as that term is defined under Rule 4200 of the listing
rules of the NASDAQ Stock Market, and that Series A Directors shall not serve on the
Audit Committee unless they are also deemed to be independent under Rule 10A 3(b)(i)
under the Exchange Act;




     (iii) maintain and keep its properties in adequate repair, working order and
condition, and from time to time make all necessary or sufficient repairs, renewals
and replacements, so that its businesses may be properly and advantageously
conducted in all material respects at all times;




     (iv) maintain or cause to be maintained with financially sound and reputable
insurers (x) public liability and property damage insurance with respect to their
respective businesses and properties against loss or damage of the kinds and in
amounts customarily carried or maintained by companies of established reputation
engaged in similar businesses, and (y) with respect to the Corporation only,
directors’ and officers’ liability insurance providing at least the same coverage
and amounts and containing terms and conditions which are not less advantageous in
any material respect, in each case than the directors’ and officers’ liability
insurance maintained by the Corporation as of the Closing Date;




     (v) pay and discharge when due all tax liabilities, assessments and
governmental charges or levies imposed upon its properties or upon the income or
profits therefrom (in each case before the same become delinquent and before



24









 






penalties accrue thereon), unless the same are being contested in good faith by
appropriate proceedings and adequate reserves in accordance with GAAP, are being
maintained by the Corporation;




     (vi) enter into or suffer to exist any contract, agreement, arrangement or
transaction with any Affiliate (an “Affiliate Transaction”), other than a Permitted
Affiliate Transaction, with only the prior consent of the members of the Board of
Directors or a committee thereof with no interest in such Affiliate Transaction;




     (vii) at all times cause to be done all things necessary to maintain, preserve
and renew its corporate existence and all material licenses, authorizations and
permits necessary to the conduct of its businesses; and




     (viii) comply in all material respects with all applicable laws, rules and
regulations of all Governmental Agencies;




     (b) So long as any shares of Series A Preferred Stock are outstanding , unless approved
by the Series A Directors or the holders of a Majority Interest, the Corporation shall, and
the Corporation shall cause each other member of the Company Group to:




     (i) conduct its business in a manner so that it will not become subject to the
Investment Company Act;




     (ii) reserve and keep available out of the Corporation’s authorized but
unissued shares of Common Stock, solely for the purposes of issuance upon conversion
of the Shares and exercise of the Warrants, such number of shares of Common Stock as
are issuable upon the conversion of all outstanding Shares or exercise of the
Warrants; and




     (iii) if the Corporation is no longer subject to the requirements of the
Exchange Act, furnish to each holder of Series A Preferred Stock reports in
substantially the same form and at the same times as would be required if it were
subject to the Exchange Act as follows:




          (A) within 90 days after the end of each fiscal year, a report containing its
audited consolidated balance sheet and related statements of income, shareholders’
equity and cash flows as of the end of and for such year, setting forth in each case
in comparative form the figures for the previous fiscal year, all reported on by
KPMG LLP or other independent public accountants of recognized national standing
(without a “going concern” or similar qualification relating to the questionable
value of assets because of concerns regarding survivability and without any
qualification or exception as to the scope of such audit) to the effect that such
consolidated financial statements present fairly in all material respects the
financial condition and results of operations of the Company Group on a consolidated
basis in accordance with GAAP, all certified by its chief financial officer as
presenting fairly in all material respects the results of



25









 






operations of the Corporation on a consolidating basis in accordance with GAAP,
subject to normal year-end audit adjustments and the absence of footnotes; and




          (B) within 40 days after the end of each of the first three fiscal quarters of
each fiscal year, a report containing its consolidated balance sheet and related
statements of income, shareholders’ equity and cash flows as of the end of and for
such fiscal quarter and the then elapsed portion of the fiscal year, setting forth
in each case in comparative form the figures for the corresponding period or periods
of (or, in the case of the balance sheet, as of the end of) the previous fiscal
year, all certified by its chief financial officer as presenting fairly in all
material respects the results of operations of the Corporation on a consolidating
basis in accordance with GAAP, subject to normal year-end audit adjustments and the
absence of footnotes;




     (c) So long as the Purchasers beneficially hold at least 20% of the aggregate amount of
shares of Series A Preferred Stock issued to the Purchasers at the Closing, the Corporation
shall, unless approved by the Series A Directors or the holders of a Majority Interest:




     (i) by no later than November 30 of each fiscal year, submit to the Purchasers
a budget and business plan for the immediately succeeding fiscal year in the form
approved by the Board of Directors;




     (ii) create and maintain a Special Committee of the Board of Directors (the
“Special Committee”), comprised solely of the Series A Directors, to which the Board
of Directors, to the fullest extent permitted by law, shall delegate all authority
and power of the Board of Directors with respect to the termination of employment of
the Corporation’s Chief Executive Officer and, upon any termination of the
Corporation’s Chief Executive Officer by the Special Committee, the Series A
Directors shall recommend a Person to be named the Corporation’s Chief Executive
Officer and the terms for such Person’s employment. In such event, the Board of
Directors shall evaluate the Person so recommended to determine whether such
individual has reasonably adequate experience, reputation and character to serve the
Corporation as Chief Executive Officer and the Board of Directors and the
Compensation Committee of the Board of Directors shall evaluate whether the
recommended terms of employment are reasonable. If so, and if the Board of
Directors determines that hiring such Person on such terms is in the best interests
of the Corporation, the Corporation shall employ such Person as Chief Executive
Officer on such terms.




     (iii) promptly notify Purchasers of (i) the commencement or threat of any
Action, or related Actions, which, individually or in the aggregate, involve amounts
in excess of $1,000,000, or (ii) the occurrence of any event, or series of related
events, that could reasonably be expected to result in, a Material Adverse Effect;



26









 






     (iv) afford to Purchasers and their authorized representatives, upon reasonable
notice, full access during normal business hours to all properties, books, records,
contracts, and documents of the Corporation as Purchasers and such authorized
representatives may reasonably request and an opportunity to make such
investigations as Purchasers and such authorized representatives may reasonably
request, and the Corporation will furnish or cause to be furnished to Purchasers and
their authorized representatives all such information with respect to the affairs
and businesses of the Corporation as they may reasonably request; and




     (v) within 30 days after the end of each month, provide to Purchasers a
consolidated balance sheet and related statements of income, shareholders’ equity
and cash flows as of the end of and for such month and the then elapsed portion of
the fiscal year, setting forth in each case a comparative form the figures for the
corresponding period or periods of (or, in the case of the balance sheet, as of the
end of) the previous fiscal year, all certified by its chief financial officer as
presenting fairly in all material respects the results of operations of the
Corporation on a consolidating basis in accordance with GAAP, subject to normal
year-end audit adjustments and the absence of footnotes.



     Section 11. Outstanding Shares. For purposes of this Certificate of Designations, all
shares of Series A Preferred Stock shall be deemed outstanding except for (a) shares of Series A
Preferred Stock held of record or beneficially by the Corporation or any subsidiary of the
Corporation, and (b) from the date fixed for redemption pursuant to Section 6, all shares of Series
A Preferred Stock which have been called for redemption, provided that funds necessary for such
redemption are available therefor and have been irrevocably deposited or set aside for such
purpose.



     Section 12. Right of First Offer.




     (a) Subject to the terms and conditions specified in this Section 12, the Corporation
hereby grants to each holder of shares of Series A Preferred Stock a right of first offer
with respect to future sales by the Corporation of its Securities (as hereinafter defined).




     (b) Each time the Corporation proposes to offer any shares of, or securities
convertible into or exercisable for, any shares of any class of its capital stock (the
“Securities”), the Corporation shall first make an offering of such Securities to each
holder of shares of Series A Preferred Stock in accordance with the following provisions:




     (i) The Corporation shall deliver a notice by certified mail (the “Offer
Notice”) to each holder of shares of Series A Preferred Stock stating (A) its bona
fide intention to offer such Securities, (B) the number of Securities to be offered,
and (C) the price and terms, if any, upon which it proposes to offer such
Securities.



27









 






     (ii) By written notification received by the Corporation within 21 days after
giving the Offer Notice, each holder of shares of Series A Preferred Stock may elect
to purchase or obtain, at the price and on the terms specified in the Offer Notice,
up to that portion of such Securities which equals the proportion that the number of
shares of Common Stock into which the shares of Series A Preferred Stock issued and
held by such holder bears to the total number of shares of Common Stock that are
either then outstanding or issuable upon conversion of outstanding shares of Series
A Preferred Stock.




     (iii) If all Securities which the holders of Series A Preferred Stock are
entitled to obtain pursuant to this Section 12 above are not elected to be obtained,
the Corporation may, during the 90 day period following the expiration of the period
provided in this Section 12 above, offer the remaining unsubscribed portion of such
shares to any person or persons at a price not less than that, and upon terms no
more favorable to the offeree than those, specified in the Office Notice. If the
Corporation does not enter into an agreement for the sale of the Securities within
such period, or if such agreement is not consummated within 30 days of the execution
thereof, the right provided hereunder shall be deemed to be revived and such
Securities shall not be offered unless first reoffered to the holders of Series A
Preferred Stock in accordance herewith.




     (iv) The right of first offer in this Section 12 shall not be applicable to (A)
issuances of (1) Conversion Shares or Warrant Shares or (2) Securities pursuant to
the conversion or exercise of convertible or exercisable Securities outstanding on
the date of this Certificate of Designations; (B) issuances of Series A Preferred
Stock or other Securities as a dividend or distribution on Series A Preferred Stock;
(C) sales of Common Stock pursuant to a plan for reinvestment of dividends on Common
Stock, provided that the purchase price in any such sale is at least equal to 95% of
the market price of the Common Stock at the time of such sales; (D) sales of Common
Stock pursuant to any plan adopted by the Corporation for the benefit of its
employees or consultants, provided that such plan has been approved by the
Corporation’s independent directors, or pursuant to any plan for the benefit of the
Corporation’s directors, provided that such plan has been approved by the
Corporation’s shareholders; (E) issuances of Securities in connection with a bona
fide business acquisition of or by the Corporation, whether by merger,
consolidation, sale of assets, sale or exchange of stock or otherwise, in each case,
approved by the Board of Directors; or (F) sales of Common Stock in a registered
public offering approved by the Board of Directors.



     Section 13. Status of Series A Preferred Stock Upon Retirement. Shares of Series A
Preferred Stock which are acquired or redeemed by the Corporation shall return to the status of
authorized and unissued shares of Preferred Stock of the Corporation without designation as to
series. Upon the acquisition or redemption by the Corporation of all outstanding shares of Series
A Preferred stock, all provisions of this Certificate of Designations shall cease to be of further
effect. Upon the occurrence of such event, the Board of Directors of the Corporation shall have
the power, pursuant to Minnesota Statutes, Section 302A.135, Subd. 5 or any



28









 




successor provision and without shareholder action, to cause restated articles of
incorporation of the Corporation or other appropriate documents to be prepared and filed with the
Secretary of State of the State of Minnesota which reflect such removal of all provisions relating
to the Series A Preferred Stock and/or the cancellation of this Certificate of Designations.




     Section 14. Waiver. The provisions of this Certificate of Designations may be waived
and the Corporation may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if the holders of a Majority Interest consent to such waiver. Any
such waiver shall be enforceable against all holders of Series A Preferred Stock and shall not
constitute an amendment to this Certificate of Designation.



29









 





     IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by ___, its
___, this ___ day of ___.



	 	 	 	 	 
	 	 	WILSONS THE LEATHER EXPERTS INC.
	 
	 	 	 	 
	 

	 	By	 	 
	 

	 	 	 	 
	 

	 	Name:	 	 
	 

	 	 	 	 
	 

	 	Title:	 	 
	 

	 	 	 	 





30









 






Schedule A




NOTICE OF CONVERSION




(To be Executed by the Registered Holder

in order to Convert the Series A Preferred Stock)




     The
undersigned hereby irrevocably elects to convert ___ shares of Series A Preferred
Stock (the “Conversion”), represented by
Stock Certificate No(s). ___ (the “Preferred Stock
Certificates”), into shares of common stock (“Common Stock”) of Wilsons The Leather Experts Inc.
(the “Corporation”) according to the conditions of the Certificate of Designation of Series A
Convertible Preferred Stock (the “Certificate of Designation”), as of the date written below. If
securities are to be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto. No fee will be charged to the holder for
any conversion, except for transfer taxes, if any. Each Preferred Stock Certificate is attached
hereto (or evidence of loss, theft or destruction thereof).



     Except as may be provided below, the Corporation shall electronically transmit the Common
Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its
nominee (which is ___) with DTC through its Deposit Withdrawal Agent Commission System (“DTC
Transfer”).



     In the event of partial exercise, please reissue a new stock certificate for the number of
shares of Series A Preferred Stock which shall not have been converted.



     The undersigned acknowledges and agrees that all offers and sales by the undersigned of the
securities issuable to the undersigned upon conversion of the Series A Preferred Stock have been or
will be made only pursuant to an effective registration of the transfer of the Common Stock under
the Securities Act of 1933, as amended (the “Act”), or pursuant to an exemption from registration
under the Act.




	o	 	In lieu of receiving the shares of Common Stock issuable pursuant to this Notice of
Conversion by way of DTC Transfer, the undersigned hereby requests that the Corporation
issue and deliver to the undersigned physical certificates representing such shares of
Common Stock.





	 	 	 	 	 
	 

	 	Date of Conversion:	 	 
	 

	 	 	 	 





	 	 	 	 	 
	 

	 	Applicable Conversion Price:	 	 
	 

	 	 	 	 





	 	 	 	 	 
	 

	 	Signature:	 	 
	 

	 	 	 	 





	 	 	 	 	 
	 

	 	Name:	 	 
	 

	 	 	 	 





	 	 	 	 	 
	 

	 	 Address: