Document:

Exhibit
10.1

 

 

 

 

 

MERGER
AGREEMENT

AMONG

CELLU
TISSUE HOLDINGS, INC.,

CELLU
CITY ACQUISITION CORPORATION,

WAYNE
GULLSTAD

AS
THE SHAREHOLDERS’ REPRESENTATIVE,

AND

CITYFOREST
CORPORATION

 

 

 

 

 

 

February
26, 2007

 

 

TABLE
OF CONTENTS

	
  

  	
   

  	
   

  	
   

  	
   

  
	
  1.

  	
   

  	
  Definitions

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  Basic
  Transaction

  	
   

  	
   

  
	
  2.1 The Merger

  
	
  2.2 Effect of
  Merger

  	
   

  	
   

  
	
  2.3 Conversion
  of Capital Stock, Settlement of Vested Options and Warrants

  	
   

  	
   

  
	
  2.4 Deposit and
  Delivery of Merger Consideration

  	
   

  	
   

  
	
  2.5 Procedure
  for Payment

  	
   

  	
   

  
	
  2.6 Other
  Exchange Matters

  	
   

  	
   

  
	
  2.7 Merger
  Consideration Adjustment

  	
   

  	
   

  
	
  2.8 The Closing

  	
   

  	
   

  
	
  2.9 Dissenting
  Stock

  	
   

  	
   

  
	
  2.10 Payment of
  Indebtedness

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  Representations
  and Warranties of the Target

  	
   

  	
   

  
	
  3.1 Organization,
  Qualification and Power

  	
   

  	
   

  
	
  3.2 Capitalization

  	
   

  	
   

  
	
  3.3 Noncontravention;
  Consents and Approvals

  	
   

  	
   

  
	
  3.4 Brokers’
  Fees

  	
   

  	
   

  
	
  3.5 Assets

  	
   

  	
   

  
	
  3.6 Financial
  Statements

  	
   

  	
   

  
	
  3.7 Subsequent
  Events

  	
   

  	
   

  
	
  3.8 Legal
  Compliance Illegal Payments; Permits

  	
   

  	
   

  
	
  3.9 Tax Matters

  	
   

  	
   

  
	
  3.10 Real
  Property

  	
   

  	
   

  
	
  3.11 Intellectual
  Property

  	
   

  	
   

  
	
  3.12 Contracts

  	
   

  	
   

  
	
  3.13 Powers of
  Attorney

  	
   

  	
   

  
	
  3.14 Insurance

  	
   

  	
   

  
	
  3.15 Litigation

  	
   

  	
   

  
	
  3.16 Product
  Warranty

  	
   

  	
   

  

 

 i
 

 

	
  3.17 Employment Matters

  	
   

  	
   

  
	
  3.18 Employee Benefits

  	
   

  	
   

  
	
  3.19 Environmental
  Matters

  	
   

  	
   

  
	
  3.20 Undisclosed
  Liabilities

  	
   

  	
   

  
	
  3.21 Inventory;
  Equipment

  	
   

  	
   

  
	
  3.22 Notes and Accounts
  Receivable

  	
   

  	
   

  
	
  3.23 Product Liability

  	
   

  	
   

  
	
  3.24 Transactions with
  Affiliates

  	
   

  	
   

  
	
  3.25 Customers and
  Suppliers

  	
   

  	
   

  
	
  3.26 Indebtedness

  	
   

  	
   

  
	
  3.27 Disclaimer of
  Other Representations and Warranties

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  Representations and Warranties of the Parent and the
  Merger Sub

  	
   

  	
   

  
	
  4.1 Organization

  	
   

  	
   

  
	
  4.2 Authorization of
  Transaction

  	
   

  	
   

  
	
  4.3 Noncontravention

  	
   

  	
   

  
	
  4.4 Brokers’ Fees

  	
   

  	
   

  
	
  4.5 Merger Sub

  	
   

  	
   

  
	
  4.6 Financing

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  Covenants

  	
   

  	
   

  
	
  5.1 General

  	
   

  	
   

  
	
  5.2 Notices and
  Consents

  	
   

  	
   

  
	
  5.3 Operation of
  Business

  	
   

  	
   

  
	
  5.4 Full Access

  	
   

  	
   

  
	
  5.5 Notice of
  Developments

  	
   

  	
   

  
	
  5.6 Exclusivity

  	
   

  	
   

  
	
  5.7 Maintenance of Real
  Property

  	
   

  	
   

  
	
  5.8 Leases

  	
   

  	
   

  
	
  5.9 Title Insurance
  Commitments

  	
   

  	
   

  
	
  5.10 Tax Matters

  	
   

  	
   

  
	
  5.11 Special Meeting

  	
   

  	
   

  
	
  5.12 Monthly Financials

  	
   

  	
   

  
	
  5.13 Financing

  	
   

  	
   

  

 

 ii
 

 

	
  6.

  	
   

  	
  Conditions to Obligation to Close

  	
   

  	
   

  
	
  6.1 Conditions to
  Obligation of the Parent and the Merger Sub

  	
   

  	
   

  
	
  6.2 Conditions to Obligation
  of the Target

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
   

  	
  Remedies for Breaches of this Agreement

  	
   

  	
   

  
	
  7.1 Survival of
  Representations, Warranties and Covenants

  	
   

  	
   

  
	
  7.2 Indemnification for
  the Benefit of the Parent Indemnified Parties

  	
   

  	
   

  
	
  7.3 Indemnification for
  the Benefit of the Seller Indemnified Parties

  	
   

  	
   

  
	
  7.4 Matters Involving
  Third Parties

  	
   

  	
   

  
	
  7.5 Determination of
  Adverse Consequences

  	
   

  	
   

  
	
  7.6 Exclusive Remedy

  	
   

  	
   

  
	
  7.7 Recoupment
  Exclusively Against Escrow

  	
   

  	
   

  
	
  7.8 No Circular
  Recovery

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
   

  	
  Tax Matters

  	
   

  	
   

  
	
  8.1 Preparation of Tax
  Returns

  	
   

  	
   

  
	
  8.2 Straddle Periods

  	
   

  	
   

  
	
  8.3 Cooperation on Tax
  Matters

  	
   

  	
   

  
	
  8.4 Refunds and Tax
  Benefits; Amended Returns

  	
   

  	
   

  
	
  8.5 Certain Taxes

  	
   

  	
   

  
	
  8.6 Resolution of Tax
  Disputes

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
   

  	
  Termination

  	
   

  	
   

  
	
  9.1 Termination of
  Agreement

  	
   

  	
   

  
	
  9.2 Effect of
  Termination

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
   

  	
  Shareholders’ Representative

  	
   

  	
   

  
	
  10.1 Appointment

  	
   

  	
   

  
	
  10.2 Replacement and
  Vacancy

  	
   

  	
   

  
	
  10.3 Authority

  	
   

  	
   

  
	
  10.4 Indemnity; No
  Liability

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
   

  	
  Miscellaneous

  	
   

  	
   

  
	
  11.1 Press Releases and
  Public Announcements

  	
   

  	
   

  
	
  11.2 No Third-Party
  Beneficiaries

  	
   

  	
   

  
	
  11.3 Entire Agreement

  	
   

  	
   

  

 

 iii
 

 

	
  11.4 Succession and
  Assignment

  	
   

  	
   

  
	
  11.5 Counterparts and
  Facsimile Signatures

  	
   

  	
   

  
	
  11.6 Headings

  	
   

  	
   

  
	
  11.7 Notices

  	
   

  	
   

  
	
  11.8 Governing Law

  	
   

  	
   

  
	
  11.9 Amendments and
  Waivers

  	
   

  	
   

  
	
  11.10 Severability

  	
   

  	
   

  
	
  11.11 Expenses

  	
   

  	
   

  
	
  11.12 Construction

  	
   

  	
   

  
	
  11.13 Incorporation of
  Exhibits and Schedules

  	
   

  	
   

  
	
  11.14 Specific
  Performance

  	
   

  	
   

  
	
  11.15         Submission
  to Jurisdiction

  	
   

  	
   

  
	
  11.16 Waiver of Certain
  Damages

  	
   

  	
   

  
	
  11.17 Waiver of Jury
  Trial

  	
   

  	
   

  
	
  11.18         Drafting
  Conventions

  	
   

  	
   

  

EXHIBITS
AND SCHEDULES

EXHIBITS

	
  Exhibit A — Form of Articles and Plan of Merger

  
	
  Exhibit B — Form of Paying Agent Agreement

  
	
  Exhibit C — Form of Escrow Agreement

  
	
  Exhibit D — Form of Letter of Transmittal

  
	
  Exhibit E — Form of Opinion of Counsel to the Target

  

 

SCHEDULES

	
  Schedule 1 — Accounting Principles

  
	
  Target’s Disclosure Schedule

  
	
  Parent’s Disclosure Schedule

  
	
  Schedule 6.1(m) — Required Consents

  

 

 iv

 

MERGER AGREEMENT

This Merger
Agreement (this “Agreement”) among Cellu Tissue
Holdings, Inc., a Delaware corporation (the “Parent”),
Cellu City Acquisition Corporation, a Minnesota corporation and wholly-owned
subsidiary of the Parent (the “Merger Sub”), CityForest
Corporation, a Minnesota corporation (the “Target”) and
Wayne Gullstad  as the “Shareholders’
Representative,” takes effect on February 26, 2007.  The Parent, the Merger Sub, the Target and
the Shareholders’ Representative are each sometimes referred to individually as
a “Party” and collectively as the “Parties.”

RECITAL

A.                                   This
Agreement contemplates a transaction in which the Parent will acquire all of
the outstanding capital stock of the Target for cash by the merger of the
Merger Sub with and into the Target, with the Target surviving as a
wholly-owned subsidiary of the Parent, on the terms and subject to the
conditions of this Agreement.

B.                                     In
contemplation of the transaction described above, each of Wayne Gullstad and
John L. Morrison have executed Shareholder Support Agreements of even date in
favor of the Parent and the Merger Sub (the “Support
Agreements”).

AGREEMENT

In consideration
of the above recital and the promises set forth in this Agreement, the Parties
agree as follows:

1.             Definitions.

“Accounting Firm” has the meaning set
forth in Section 8.1 of this Agreement.

“Accounting Principles” means the
application of GAAP, as modified by or otherwise in accordance with the
accounting principles set forth on Schedule 1 of
this Agreement.

“Actual Net Cash” has the meaning set
forth in Section 2.7 of this Agreement.

“Additional Receivables” means each of
the following:  (a) payments totaling
approximately $156,905.91 that will become due to the Target in connection with
stop loss reinsurance carrier reimbursements for claims paid by the Target
prior to the Closing Date which are covered by stop loss reinsurance; and (b)
the Target’s right to a credit from Xcel Energy of approximately $115,000 in
connection with the Target’s electricity use in 2006.

“Adjusted Per Share Cash Amount” has the
meaning set forth in Section 2.3 of this Agreement.

 1
 

 

“Adverse Consequences”
means all actions, suits, proceedings, hearings, investigations, charges,
complaints, claims, demands, injunctions, judgments, orders, decrees, rulings,
damages, dues, penalties, fines, costs, amounts paid in settlement,
Liabilities, obligations, Taxes, liens, losses, expenses and fees, including
court costs and reasonable attorneys’ fees and expenses.

“Affiliate” has the
meaning set forth in Rule 12b-2 of the regulations promulgated under the
Securities Exchange Act of 1934, as amended.

“Aggregate Exercise Price”
means the dollar amount that is equal to the aggregate amount of the exercise
prices payable in respect of all Vested Options and Warrants.

“Agreement” has the
meaning set forth in the preface above.

“Appraisal Costs” means the sum of
(a) the excess of the total amount actually paid to the holders of
Dissenting Shares over the amount that the holders of Dissenting Shares would
have received as their proportional share of the Merger Consideration, if any,
and (b) all expenses, costs and fees, including court costs and attorneys’
fees, incurred in connection with or as a result of any appraisal, judicial
proceedings, negotiations, arbitrations or any similar occurrences with respect
to Dissenting Shares.

“Assets” has the meaning set forth in
Section 3.5 of this Agreement.

“Assumed Indebtedness” means the
aggregate principal amount of the Revenue Bonds outstanding as of immediately
prior to the Effective Time and the amounts owed by the Target to Associated
Bank under letters of credit, the revolving credit facility, rate protection
obligations and obligations related thereto.

“Cancelled Shares” has the meaning set
forth in Section 2.3 of this Agreement.

“CERCLA” means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. §
9601 et seq., as amended as of the date of this Agreement.

“Closing” has the meaning
set forth in Section 2.8 of this Agreement.

“Closing Date” has the
meaning set forth in Section 2.8 of this Agreement.

“Closing Date
Balance Sheet” has the meaning set forth in Section 2.7
of this Agreement.

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

“Company Cash” means, as
of immediately prior to the Effective Time, all of the Target’s cash and cash
equivalents and all checks and funds received by the Target or its banks (e.g.,
checks deposited or funds paid to lock-box accounts), 

 2
 

excluding the amount of any
checks written by the Target but not yet cleared and excluding the
Restricted Cash.

“Compensation” means, with respect to
any Person, all salaries, compensation, remuneration, bonuses or benefits of
any kind or character (including issuances or grants of Equity Interests), made
directly or indirectly by the Target to such Person or Affiliates of such
Person.

“Debt Certification” has the meaning set
forth in Section 2.10(a) of this Agreement.

“Deductible” has the meaning set forth
in Section 7.2 of this Agreement.

“Disclosure Documents” means any proxy
or information statement or materials or other similar documents disseminated
in connection with the transactions contemplated by this Agreement.

“Dissenting Shares” means any Target
Shares held of record by any shareholder of the Target who or which has
properly exercised his, her, or its appraisal rights under the Minnesota
Business Corporation Act.

“Draft Closing Date Balance Sheet”
has the meaning set forth in Section 2.7 of this Agreement.

“Effective Time” has the meaning set
forth in Section 2.2 of this Agreement.

“Employee
Benefit Plan” means any of the following:  (a) “employee benefit plan” as such term is
defined in ERISA § 3(3); (b) nonqualified deferred compensation or retirement plan or
arrangement; (c) profit sharing, stock bonus, stock option, stock
purchase, restricted stock, stock appreciation right or similar equity-based
plan or arrangement; (d) Employee Pension Benefit Plan (including any
Multiemployer Plan); (e) Employee Welfare Benefit Plan; or (f) material
fringe benefit or other severance, retirement, bonus, incentive, life,
disability, medical, dental or other similar plan, program or arrangement,
including any contractual obligation under which the Target is, or may become,
obligated to incur any severance pay or special Compensation obligations which
would become payable by reason of this Agreement or the transactions
contemplated hereby.

“Employee
Pension Benefit Plan” has the meaning set forth in ERISA § 3(2).

“Employee
Welfare Benefit Plan” has the meaning set forth in ERISA § 3(1).

“Enterprise Value” means an amount equal
to the Merger Consideration plus the Assumed Indebtedness.

“Environmental Laws” means the
following, each as amended as of the date of this Agreement:  (a) Laws concerning public health and
safety and pollution or protection of the environment, flora, fauna or natural
resources, including 

 3
 

CERCLA, the Resource Conservation and Recovery Act of 1976, 42 U.S.C. §
6901 et seq., the Clean Air Act, 42 U.S.C. § 7401 et seq., the Federal Water Pollution
Control Act, 33 U.S.C. § 1251 et seq., the Oil Pollution Act of 1990, 33 U.S.C.
§ 2701 et seq., the Toxic Substances and Control Act, 15 U.S.C. § 2601 et seq.,
and the Safe Drinking Water Act, 42 U.S.C. § 300f et seq.; (b) Laws
concerning Hazardous Substances; or (c) Laws relating to the management or
use of natural resources.

“Environmental Permits” means any
authorization, permit or license issued by a Governmental Authority under
Environmental Laws.

“Equipment” means each of the following
that are currently used or held for use 
in the business of the Target as presently conducted:  (a) the fixtures and other improvements to
the Real Property included in the Assets (including the facilities); and (b)
the tangible personal property of the Target included within the Assets, other
than inventory and components thereof.

“Equity Interests” means (a) any capital
stock, share, partnership or membership interest, unit of participation or
other similar interest (however designated) in any Person, and (b) any
option, warrant, purchase right, conversion right, exchange rights or other
contractual obligation which would entitle any Person to acquire any such
interest in such Person or otherwise entitle any Person to share in the equity,
profit, earnings, losses or gains of such Person (including stock appreciation,
phantom stock, profit participation or other similar rights).

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

“ERISA
Affiliate” means each entity that is treated as a single employer
with the Target for purposes of Code § 414.

“Escrow” has the meaning set forth in
Section 2.4 of this Agreement.

“Escrow Agent” has the meaning set forth
in Section 2.4 of this Agreement.

“Escrow Agreement” means the Escrow
Agreement described in Section 2.4 of this Agreement, the form of which is
attached to this Agreement as Exhibit C.

“Escrow Amount” means an amount equal to
ten percent (10.0%) of the Enterprise Value, plus any additional amount
deposited into the Escrow pursuant to Section 2.7(d)(i) of this Agreement.

“Escrow Period” means the period
following the Closing during which any portion of the Escrow is held by the
Escrow Agent.

“Estimated Closing Date Balance Sheet”
has the meaning set forth in Section 2.7 of this Agreement.

 4
 

 

“Estimated Net Cash” has the meaning set
forth in Section 2.7(a) of this Agreement.

“Estimated Net Working Capital” means
the Net Working Capital as shown on the Estimated Closing Date Balance Sheet.

“Executive Employment Agreements” means
collectively the following:  (a) a
Non-Competition and Continuing Employment Agreement between the Target and
Harry H. Simpson dated April 29, 2005 and amended effective November 7, 2006;
(b) a Non-Competition and Continuing Employment Agreement between the Target
and Maurice L. Keesler dated April 30, 2005 and amended effective November 7,
2006; and (c) a Non-Competition and Continuing Employment Agreement between the
Target and Lee T. Luft dated April 29, 2005 and amended effective November 7,
2006.

“Financial Statements” has
the meaning set forth in Section 3.6 of this Agreement.

“Financing” means the
Parent’s debt financing for the transactions contemplated by this Agreement and
the Transaction Documents.

“Financing Letter of Intent” means that
certain letter of intent related to the Financing from Citidel Investment Group
L.L.C. to the Parent dated January 30, 2007.

“Flow of Funds Memorandum” has the
meaning set forth in Section 2.4 of this Agreement.

“GAAP” means United States
generally accepted accounting principles as in effect from time to time.

“Governmental Authority”
means (a) any federal, state, local or foreign governmental,
administrative or regulatory authority, court, agency or body, or any division
or subdivision, or (b) any arbitrator, arbitration board, tribunal or
mediator.

“Hazardous Substances” means substances
that are now or ever have been defined or listed in, or otherwise classified
pursuant to, Environmental Laws as “hazardous substances,” “hazardous
materials,” “hazardous wastes,” “pollutants,” “irritants” or “toxic substances,”
and petroleum and any fraction thereof.

“HSR Act” means the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and any
similar anticompetition Laws promulgated by any Governmental Authority.

“Improvements” has the meaning set forth
in Section 3.10 of this Agreement.

 5
 

 

“Indebtedness” means the following
Liabilities of the Target: (a) all interest and principal indebtedness for
borrowed money in respect of which the Target is liable, contingently or
otherwise, as obligor or otherwise and any penalties (including prepayment
penalties), fees and premiums in connection therewith; (b) all obligations
under capitalized leases in respect of which the Target is liable, contingently
or otherwise, as obligor, guarantor or otherwise; (c) all obligations with
respect to compensation or other employee arrangements which become due or
payable as a result of this Agreement or the transactions contemplated hereby,
including those obligations arising under the Executive Employment Agreements,
the Target Share Plan, the Luft Phantom Agreement and any other outstanding or
authorized, appreciation, phantom interest, profit participation, bonus plan or
any other rights with respect to the Target, which such amount shall include an
amount equal to the “Severance Amount” as defined in the Executive Employment
Agreement between the Target and Harry H. Simpson, plus all applicable
withholdings, to the extent the Target has not terminated Mr. Simpson’s
employment with the Target and paid all such amounts (whether or not yet due
and payable) in full prior to the determination of Company Cash and Net Working
Capital, it being acknowledge and agreed that if Mr. Simpson’s employment is
not so terminated prior to the Closing, it shall terminate as of the Closing;
(d) the Selling Expenses; (e) any Liabilities evidenced by notes, bonds,
debentures or similar contractual obligations, (f) any Liabilities for deferred
purchase price of property, goods, or services, (g) any Liabilities in respect
of letters of credit and bankers’ acceptances, or under contractual obligations
relating to interest rate protection, swap agreements or collar agreements and
(h) any Liabilities in the nature of guarantees of the obligations described in
clauses (a) through (g) above of any other Person.  Notwithstanding the foregoing, Indebtedness
does not include any Liabilities of the Target incurred in connection with (i)
operating leases in respect to which the Target is liable, contingently or
otherwise, as obligor, guarantor or otherwise, (ii) trade payables and other
current working capital Liabilities incurred by the Target in the Ordinary
Course of Business to the extent reflected in the calculation of Net Working
Capital, and (iii) the Assumed Indebtedness.

“Indemnified Party” has
the meaning set forth in Section 7.4 of this Agreement.

“Indemnifying Party” has
the meaning set forth in Section 7.4 of this Agreement.

“Initial Payment Fund” has the meaning
set forth in Section 2.4 of this Agreement.

“Intellectual Property” means all of the
following in any jurisdiction throughout the world:  (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements, and
all patents, patent applications and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions and
reexaminations; (b) all
trademarks, service marks, trade dress, logos, trade names, slogans, Internet
domain names, Internet addresses, 

 6
 

corporate
names and rights in telephone numbers, together with all translations,
adaptations, derivations and combinations and including all associated
goodwill, and all applications, registrations and renewals; (c) all copyrightable works, all copyrights, and all
applications, registrations and renewals; (d) all mask works and all
applications, registrations and renewals; (e) all trade secrets and
confidential business information, including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes
and techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals; (f) all computer software, including all source code,
object code, executable code, firmware, development tools, files, records,
data, data bases and related documentation, regardless of the media on which it
is recorded, and all Internet sites (and all contents of the sites);
(g) all advertising and promotional materials; (h) all other
proprietary rights; and (i) all copies and tangible embodiments of any of
the foregoing (in whatever form or medium).

“IP Licenses” has the meaning set forth in Section
3.11 of this Agreement.

“Knowledge” means those
facts that are actually known to an individual or individuals in the employ of
the relevant Party whose work involved the management or supervision of the
applicable subject matter, or those facts which, taking into account the scope
and nature of the responsibilities of the individual in question, should have
been known to such individual.  When used
with respect to the Target, the term Knowledge means (a) generally to each of
Wayne Gullstad, Lee T. Luft, Harry H. Simpson and Maurice L. Keesler, and (b)
specifically to each of Ron Freeman (with respect only to Section 3.6
(Financial Statements), Section 3.9 (Tax Matters), Section 3.10(a) through (c)
(Real Property), Section 3.21(a) (Inventory), Section 3.23 (Product Liability),
Section 3.25 (Customers and Suppliers) and Sections 3.6, 3.9, 3.10(a) through
(c), 3.21(a), 3.23 and 3.25 of the Target’s Disclosure Schedule), Kathy Gudis
(with respect only to Section 3.8 (Legal Compliance; Illegal Payments;
Permits), Section 3.15 (Litigation), Section 3.17 (Employment Matters), Section
3.18 (Employee Benefits) and Sections 3.8, 3.15, 3.17 and 3.18 of the Target’s
Disclosure Schedule, Jeff Wallin (with respect only to Section 3.11
(Intellectual Property), Section 3.15 (Litigation) and Sections 3.11 and 3.15
of the Target’s Disclosure Schedule), Dave Bailey (with respect only to Section
3.19 (Environmental Matters) and Section 3.19 of the Target’s Disclosure
Schedule) and Paul Ihde (with respect only to Section 3.25 (Customers and
Suppliers) and Section 3.25 of the Target’s Disclosure Schedule.

“Law” means any federal,
state, local or foreign constitution, law, code, plan, statute, rule,
regulation, ordinance, order, determination, writ, injunction, ruling,
judgment, decree, charge, restriction or Permit of any Governmental Authority,
each as amended and in effect, now or in the future.

“Liability” means any liability or
obligation of whatever kind or nature, whether known or unknown, whether
asserted or unasserted, whether absolute or 

 7
 

contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due, including any liability for Taxes.

“Luft Phantom Agreement” means the
Phantom Stock Agreement between the Target and Lee T. Luft, granted on December
29, 2006.

“Material Adverse Effect”
means any change, effect, condition or circumstance that, when considered
individually or in the aggregate with all other changes, effects, conditions or
circumstances, has been or is reasonably likely to be materially adverse to the
business, operation, properties, condition (financial or otherwise), results of
operations, liabilities or assets of a Person. 
Notwithstanding the foregoing, no adverse change, event, development, or
effect arising from or relating to any of the following constitute and none of
the following will be taken into account in determining whether there has been
a Material Adverse Effect: (a) general business or economic conditions,
including such conditions related to the business of the Target except to the
extent such conditions have had or are reasonably like to have a
disproportionate effect on the Target as compared to other persons in the
industry in which the Target operates; (b) national or international political
or social conditions, including the engagement by the United States in
hostilities, whether or not pursuant to the declaration of a national emergency
or war, or the occurrence of any military or terrorist attack upon the United
States, or any of its territories, possessions, or diplomatic or consular
offices or upon any military installation, equipment or personnel of the United
States except to the extent such conditions have had or are reasonably like to
have a disproportionate effect on the Target as compared to other persons in
the industry in which the Target operates; (c) changes in GAAP; or (d) the
taking of any action expressly required under the terms of this Agreement or
otherwise specifically requested by the Parent or the Merger Sub in accordance
with this Agreement and the Transaction Documents.

“Material Contract” means any of the
following:

(a)                                  any
contractual obligation (or group of related contractual obligations) for the
purchase or sale of inventory, raw materials, commodities, supplies, goods,
products, the Equipment or other personal property, or for the furnishing or
receipt of services, in each case, the performance of which will extend over a
period of more than one year or which provides for annual payments to or by the
Target in excess of $100,000;

(b)                                 any
(i) capital lease, or (ii) other lease or other contractual obligation relating
to the Equipment providing for annual rental payments in excess of $100,000,
under which any of the Equipment is held or used by the Target;

(c)                                  any
contractual obligation, other than real property leases or leases relating to
the Equipment, relating to the lease or license of any Asset;

 8
 

 

(d)                                 any
contractual obligation relating to the acquisition or disposition of any Asset
other than in the Ordinary Course of Business;

(e)                                  any
contractual obligation under which the Target is, or may become, obligated to
pay any amount in respect of indemnification obligations, purchase price
adjustment or otherwise in connection with any (i) acquisition or disposition
of Assets or securities (other than the sale of inventory in the Ordinary
Course of Business), (ii) merger, consolidation or other business combination,
or (iii) a series or group of related transactions or events of the type
specified in clauses (i) and (ii) in this clause (e);

(f)                                    any
contractual obligation concerning or consisting of a partnership, limited
liability company or joint venture agreement;

(g)                                 any
contractual obligation or group of related contractual obligations whereby (i)
the Target has created, incurred, assumed or guaranteed any Indebtedness or
Assumed Indebtedness in excess of $100,000, or (ii) under which the Target has
permitted any Asset to become subject to a Security Interest;

(h)                                 any
contractual obligation under which any other Person has guaranteed any
Indebtedness or Assumed Indebtedness of the Target;

(i)                                     any
contractual obligation, whether the Target is subject to or the beneficiary of
such obligations which (i) relates to confidentiality, or (ii) limits or
purports to limit the ability of any Person to compete in any line of business,
with any other Person or in any geographic area;

(j)                                     any
contractual obligation under which the Target is liable, or may have any
liability to any investment bank, broker, financial advisor, finder’s agreement
or other similar Person (including an obligation to pay any legal, accounting,
brokerage, finder’s, or similar fees or expenses in connection with this
Agreement or the transactions contemplated hereby);

(k)                                  any
contractual obligation providing for the employment or consultancy with an
individual on a full-time, part-time, consulting or other basis or otherwise
providing Compensation or other benefits to any officer, director, employee or
consultant (other than an Employee Benefit Plan);

(l)                                     any
agency, dealer, distributor, sales representative, marketing or other similar
agreement;

(m)                               any
contractual obligation under which the Target has advanced or loaned an amount
to any of its Affiliates or employees other than in the Ordinary Course of
Business;

 9

 

(n)                                 any
contractual obligation that contains most favored customer pricing provisions
or grants any exclusive rights, rights of first refusal, rights of first
negotiation or similar rights to any Person;

(o)                                 any
IP Licenses; and

(p)                                 any
other contractual obligation (or group of related contractual obligations) the
performance of which involves consideration in excess of $100,000 over the life
of such contractual obligation or which is otherwise material to the Target
(other than an Employee Benefit Plan).

“Merger” has the meaning set forth in
Section 2.1 of this Agreement.

“Merger Consideration” means an amount
equal to (i) $61,000,000, minus (ii) the Assumed Indebtedness, plus
(iii) the Estimated Net Cash, plus (iv) the Restricted Cash (if
any), minus (v) the amount, if any, by which the Target Net Working
Capital exceeds the Estimated Net Working Capital, and plus (vi) the
amount, if any, by which the Estimated Net Working Capital exceeds the Target
Net Working Capital.  After the Closing,
the Merger Consideration will be subject to adjustment as set forth in this
Agreement, including Sections 2.5(d), 2.7 and 7 of this Agreement.

“Merger Sub” has the meaning set forth
in the preface above.

“Minnesota Business Corporation Act”
means the Minnesota Business Corporation Act promulgated under Minnesota law
and found at Minnesota Statutes § 302A, et. seq., as
amended.

“Most Recent Balance Sheet”
means the balance sheet contained within the Financial Statements for the Most
Recent Fiscal Year End.

“Most Recent Financial Statements”
has the meaning set forth in Section 3.6 of this Agreement.

“Most Recent Fiscal Year End”
has the meaning set forth in Section 3.6 of this Agreement.

“Multiemployer Plan” has the meaning set
forth in ERISA § 3(37).

“Net Cash” means an amount
(which may be a negative number) equal to the Company Cash immediately prior to
the Effective Time, less Indebtedness immediately prior to the Effective Time.

“Net Working Capital”
means an amount (which may be a negative number), as of immediately prior to
the Effective Time, equal to the current assets of the Target as of such time
(other than Company Cash and Restricted Cash), less the current liabilities of
the Target as of such time. 
Notwithstanding the foregoing, Net Working Capital does not include
either of the following, in each case 

 10
 

determined in accordance with the Accounting Principles:  (i) the current portion of any Indebtedness
that would be included within such current liabilities; or (ii) any Selling
Expenses to the extent taken into account in the calculation of Net Cash.

“Objection Notice” has the meaning set
forth in Section 2.7 of this Agreement.

“Option Amount” means the sum of the
Adjusted Per Share Cash Amounts for all Vested Options.

“Ordinary Course of Business”
means the ordinary course of business consistent with past custom and practice
(including with respect to quantity and frequency).

“Owned Intellectual Property” has the
meaning set forth in Section 3.11 of this Agreement.

“Parent” has the meaning set forth in
the preface above.

“Parent’s Disclosure Schedule” means the
disclosure schedule of the Parent and the Merger Sub attached to this
Agreement.

“Parent Indemnified Party” means the
Parent, the Merger Sub, each of their Affiliates (including after the Closing
Date, the Target) and each representative, respective officers, directors,
employees and Affiliates of each of the foregoing Persons.

“Party” has the meaning
set forth in the preface above.

“Parties” has the meaning set forth in
the preface above.

“Paying Agent” has the meaning set forth
in Section 2.4 of this Agreement.

“Paying Agent Agreement” has the meaning
set forth in Section 2.4 of this Agreement.

“Permit” means any
permits, authorizations, approvals, decisions, zoning orders, franchises,
registrations, licenses, filings, certificates, variances or similar rights
granted by or obtained from any Governmental Authority other than Environmental
Permits that are material to the operation of the Target’s business as
presently conducted.

“Permitted Lien” means
(a) mechanic’s, materialmen’s and similar liens that are being contested
in good faith and for which the Target has provided adequate reserves in
accordance with GAAP and which are not reasonably likely to have, a Material
Adverse Effect on the Target; (b) liens for Taxes not yet due and payable
or for Taxes that the Target is contesting in good faith through appropriate
proceedings and for which the Target has provided adequate reserves in
accordance with GAAP on the Most Recent Balance Sheet, (c) purchase money 

 11
 

liens and liens securing rental payments under capital lease
arrangements; (d) liens in favor of Associated Bank which secure obligations to
Associated Bank under the Assumed Indebtedness; and (e) other liens arising in
the Ordinary Course of Business and not incurred in connection with the
borrowing of money and which have not had a Material Adverse Effect on the
Target.

“Per Share Cash Amount” means an amount
equal to (i) the Per Share Merger Consideration, minus (ii) the Per Share
Holdback Amount.

“Per Share Escrow Amount” means an
amount equal to the quotient of (i) the Remaining Escrow (if any), divided
by (ii) the Total Target Share Number.

“Per Share Holdback Amount” means an
amount equal to the quotient of (i) the sum of (A) the Escrow Amount, plus (B)
the amount deposited into the Shareholders’ Representative Fund at the Closing,
divided by (ii) the Total Target Share Number.

“Per Share Merger Consideration” means
an amount equal to the quotient of (i) the sum of (A) the Merger Consideration,
plus (B) the Aggregate Exercise Price, divided by (ii) the Total Target
Share Number.

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

“Post-Closing Tax Period” has the
meaning set forth in Section 8.4 of this Agreement.

“Pre-Closing Tax Claim” has the meaning
set forth in Section 8.6 of this Agreement.

“Pre-Closing Tax Period” has the meaning
set forth in Section 8.2 of this Agreement.

“Product” has the meaning set forth in
Section 3.16 of this Agreement.

“Real Estate Encumbrances” has the
meaning set forth in Section 3.10 of this Agreement.

“Real Property” has the meaning set
forth in Section 3.10 of this Agreement.

“Receivable Payment Date” shall mean the
date on which the Parent or the Surviving Corporation either receives from the
applicable payor a payment of an Additional Receivable or has an Additional Receivable
credited against an amount otherwise then due on such date from the Parent or
the Surviving Corporation to the applicable payor.

 12
 

 

“Remaining Escrow” means an amount equal
to (i) the Escrow Amount remaining after satisfaction of any adjustment pursuant
to Section 2.7(d)(ii) of this Agreement and any indemnification
obligations of the Target under Section 7 of this Agreement plus (ii) the
amount of any of the Shareholders’ Representative Fund to be distributed
pursuant to Section 10.3(b) of this Agreement.

“Restricted Cash” means the Target’s
cash reserves and investment income derived therefrom required to be held by
the Target pursuant to the Revenue Bonds, which is held in the following bank
accounts of the Target:  (i) the “Senior
Debt Service Reserve Account,” account number 2287045468, maintained with
Associated Bank; and (b) the “Letter of Credit Fee Subaccount,” account number
2287045476, maintained with Associated Bank.

“Revenue Bonds” means the City of
Ladysmith, Wisconsin Variable Rate Demand Solid Waste Disposal Facility Revenue
Bonds, Series 1998 (CityForest Corporation Project).

“Security Interest” means
any mortgage, pledge, lien, encumbrance, charge or other security interest.

“Seller Indemnified Party” means each
Target Equityholder.

“Seller Returns” has the meaning set
forth in Section 8.1 of this Agreement.

“Selling Expenses” means the aggregate
amount of all fees, costs and expenses of the Target (whether incurred by
Target, on its behalf or on behalf of any Target Equityholder) incurred in
connection with the Merger, this Agreement, the other transactions contemplated
thereby and the process of the sale of the Target generally, including fees and
expenses payable to Greene Holcomb & Fisher, LLC, Gray, Plant, Mooty, Mooty
& Bennett, P.A., Wipfli LLP, the Paying Agent, and all amounts owed
pursuant to any item listed in Section 3.4 of the Target’s Disclosure Schedule.

“Shareholders’ Representative” means
initially Wayne Gullstad and thereafter any other Person or Persons appointed
to serve as the Shareholders’ Representative pursuant to Section 10 of this
Agreement.

“Shareholders’ Representative Fund” has
the meaning set forth in Section 2.4 of this Agreement.

“Special Meeting” has the meaning set
forth in Section 5.11 of this Agreement.

“Support Agreements” has the meaning set
forth in the Recital B above.

“Surviving Corporation” has the meaning
set forth in Section 2.1 of this Agreement.

“Target” has the meaning
set forth in the preface above.

 13
 

 

“Target’s Disclosure Schedule” has the meaning
set forth in Section 3.2 of this Agreement.

“Target Equityholder” means each holder
of a Target Share, Vested Option or Warrant as of immediately prior to the
Effective Time.

“Target Net Working Capital” means
$4,308,577.00.

“Target Share,” and “Target Shares” mean any share of the capital stock of the
Target, including each share of the common stock of the Target issued and
outstanding as of the Effective Time.

“Target Share Plan” means the CityForest
Corporation Employee Share Incentive Plan Restated Effective January 1, 1998,
as amended by the 2003 Amendment dated August 10, 2003 and the 2006 Amendment
dated December 29, 2006.

“Tax” and “Taxes”
mean (i) any and all federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs duties, capital stock, franchise,
profits, withholding, social security (or similar, including FICA),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind or any charge of any kind in the nature of (or similar
to) taxes whatsoever, including any interest, penalty, or addition thereto,
whether disputed or not and (ii) any liability for the payment of any amounts
of the type described in clause (i) of this definition as a result of being a
member of an affiliated, consolidated, combined or unitary group for any
period, as a result of any tax sharing or tax allocation agreement, arrangement
or understanding, or as a result of being liable for another person’s taxes as
a transferee or successor, by contract or otherwise.

“Tax Return”
means any return, declaration, report, claim for refund, or information return
or statement relating to Taxes, including any schedule, attachment or
amendment.

“Third Party Claim” has
the meaning set forth in Section 7.4 of this Agreement.

“Title Commitments” has the meaning set
forth in Section 5.9 of this Agreement.

“Title Company” has the meaning set
forth in Section 5.9 of this Agreement.

“Title Policy” has the meaning set forth
in Section 6.1 of this Agreement.

“Total Target Share Number” means the
sum of the total number of Target Shares issued and outstanding immediately
prior to the Effective Time (excluding Cancelled Shares), plus the total number
of Target Shares issuable upon exercise of the Vested Options and the Warrants.

 14
 

 

“Transaction Documents”
means all documents and agreements to be entered into by one or more of the
Parties in connection with the transactions contemplated by this Agreement.

“Transaction Payments” has
the meaning set forth in Section 8.2 of this Agreement.

“Treasury Regulations” means the
regulations promulgated by the United States Department of the Treasury with
respect to the Code.

“Vested Options” means each unexercised
option to purchase Target Shares issued and outstanding immediately prior to
the Effective Time and which have an exercise price less than the Per Share
Merger Consideration.

“Vested Option Cancellation Agreement”
has the meaning set forth in Section 6.1 of this Agreement.

“Vested Option Documents” means all
agreements, instruments and other documents representing any Vested Options.

“Warrant Documents” means all
agreements, instruments and other documents representing any Warrants.

“Warrants” means each unexercised
warrant to purchase Target Shares issued and outstanding immediately prior to
the Effective Time and which have an exercise price less than the Per Share
Merger Consideration.

2.             Basic Transaction.

2.1                                 The Merger. 
At the Effective Time, and on the terms and subject to the conditions of
this Agreement, the Merger Sub will merge with and into the Target (the “Merger”), the separate existence of the
Merger Sub will cease, and the Target will continue as the surviving
corporation under the name CityForest Corporation (the “Surviving Corporation”).

2.2                                 Effect of Merger.

(a)                                  The
Merger will become effective at the time the Target and the Merger Sub file
articles and a plan of merger substantially in the form of the attached Exhibit A with the Secretary of State of
the State of Minnesota (the “Effective Time”).

(b)                                 At
the Effective Time, the Merger will have the effect set forth in the Minnesota
Business Corporation Act.  Without
limiting the foregoing, at the Effective Time, the Surviving Corporation will
succeed to and possess all the properties, rights, privileges, immunities,
powers, franchises and purposes, and be subject to all 

 15
 

the duties, liabilities, debts, obligations, restrictions and
disabilities of the Merger Sub and the Target.

(c)                                  The
articles of incorporation and bylaws of the Merger Sub (as amended to date)
will become the articles of incorporation and bylaws of the Surviving
Corporation at and as of the Effective Time (except that each of the articles
of incorporation and bylaws will be amended and restated to reflect the name of
the Surviving Corporation).

(d)                                 The
directors and officers of the Merger Sub will become the directors and officers
of the Surviving Corporation at and as of the Effective Time, retaining their
respective positions and terms of office.

(e)                                  The
Surviving Corporation may, at any time after the Effective Time, take any
action (including executing and delivering any document) in the name and on
behalf of either the Target or the Merger Sub to carry out and effectuate the
transactions contemplated by the Transaction Documents.

2.3                                 Conversion of Capital Stock; Settlement of Vested
Options and Warrants.  At the Effective Time, by virtue of the
Merger and without any action on the part of the Parent, the Merger Sub, the
Target or the Target Equityholders:

(a)                                  Each
Target Share issued and outstanding immediately prior to the Effective Time,
other than Dissenting Shares or Cancelled Shares, will be cancelled and
extinguished and will be converted into and become the right to receive (in
accordance with terms hereof) the following:

(i)                                     an
amount in cash, payable at Closing, equal to the Per Share Cash Amount;

(ii)                                  an
amount in cash, payable after Closing, if at all, equal to the Per Share Escrow
Amount; and

(iii)                               an amount in cash,
payable after Closing, if at all, pursuant to Section 2.7(d)(i) of this
Agreement.

(b)                                 Each
Vested Option and Warrant will be cancelled and extinguished and the record holder
of each Vested Option or Warrant, as applicable, will become the right to
receive (in accordance with terms hereof) and in respect of each Target Share
issuable pursuant to each Vested Option or Warrant, as applicable, the
following:

 16
 

 

(i)                                     an
amount in cash, payable at the Closing, equal to the following (the “Adjusted Per Share Cash Amount”):  (1) the Per Share Cash Amount; less
(2) the exercise price per share for the Target Shares issuable pursuant
to such Vested Option or Warrant, as applicable;

(ii)                                  an
amount in cash, payable after Closing, if at all, equal to the Per Share Escrow
Amount; and

(iii)                               an amount in cash,
payable after Closing, if at all, pursuant to Section 2.7(d)(i) of this
Agreement.

(c)                                  The
capital stock of the Merger Sub issued and outstanding immediately before the
Effective Time will constitute the only outstanding shares of capital stock of
the Surviving Corporation.  Each stock
certificate evidencing ownership of such shares of the capital stock of the
Merger Sub will continue to evidence ownership of such shares of capital stock
of the Surviving Corporation.

(d)                                 The
Target Shares issued and outstanding immediately before the Effective Time and
owned or held in treasury by the Parent, the Merger Sub or the Target (“Cancelled Shares”) will be cancelled at the Effective Time
and extinguished without any conversion of such shares, and no payment will be
made with respect to such shares.

(e)                                  All
options or warrants to purchase any Target Shares that have an exercise price
per share equal to or greater than the Per Share Merger Consideration (if any)
will be cancelled without consideration and have no further force or effect.

(f)                                    Prior
to the Effective Time, the Target and its board of directors will adopt such
resolutions and will take such other actions as may be required to effectuate
the treatment of Vested Options and Warrants contemplated by this Section 2.3
of this Agreement.

2.4                                 Deposit and  Delivery of
Merger Consideration.

(a)                                  Immediately
after the Effective Time, the Parent will provide to the Wells Fargo Bank,
N.A., as paying agent (the “Paying Agent”),
cash in the amount of the Initial Payment Fund, who will accept such delivery
and distribute the Initial Payment Fund in accordance with the terms of a
paying agent agreement in substantially the form set forth on Exhibit B (the “Paying
Agent Agreement”) and the Flow of Funds Memorandum.  The “Initial
Payment Fund” means an amount equal to the Merger Consideration less
(i) the Escrow Amount, less (ii) the 

 17
 

Shareholders’ Representative Fund, less (iii) the
product of the Per Share Cash Amount multiplied by the number of Target Shares
that constitute Dissenting Shares, less (iv) the Option Amount.  Any fees due to the Paying Agent under the
Paying Agent Agreement will at the discretion of the Target either be (A) paid
by the Target before the Closing and the determination of Company Cash, or (B)
offset by the Paying Agent against the Initial Payment Fund.  Immediately after the Effective Time, the
Parent will provide to the Surviving Corporation, cash in the amount of the
Option Amount less the Company Cash, such cash to be used for the payment to
the holders of Vested Options as provided in Section 2.5(c).

(b)                                 Immediately
after the Effective Time, the Parent will provide to Wells Fargo Bank, N.A., as
escrow agent (the “Escrow Agent”),
cash in the amount of the Escrow
Amount (the “Escrow”).  The Escrow will serve as security for
satisfaction of any adjustment pursuant to any of Sections 2.7(d)(ii),
2.9, 8.1 or 8.5 of this Agreement and any indemnification obligations of the
Target under Section 7 of this Agreement. 
The Escrow will be held by the Escrow Agent and will be subject to the
terms of an escrow agreement substantially in the form of the attached Exhibit C (the “Escrow Agreement”).  Any fees due to the Escrow Agent under the
Escrow Agreement will be paid from the Escrow.

(c)                                  Immediately
after the Effective Time, the Parent will provide to the Shareholders’
Representative cash in the amount of $500,000 (the “Shareholders’
Representative Fund”) for use by the Shareholders’ Representative in
accordance with the terms of Section 10 of this Agreement.  The Parent will deposit the Shareholders’
Representative Fund into an account designated by the Shareholders’
Representative.

(d)                                 On
each of the first, second and third yearly anniversaries of the Closing, the
Escrow Agent will provide to the Paying Agent for payment to the Target
Equityholders all of the cash then held by the Escrow Agent in the Escrow, if
any remains, subject to the amounts that will remain in the Escrow, as
described in the Escrow Agreement.

(e)                                  Within
two business days of a Receivable Payment Date, the Parent will provide, or
cause the Surviving Corporation to provide, to the Paying Agent cash in the
amount of such credited or received Additional Receivables for disbursement to
the Target Equityholders in accordance with Section 2.5(d).

 18

 

(f)                                    At
least five business days prior to the Closing, the Target will deliver to the
Parent a form of flow of funds memorandum (which must be agreed upon and
executed by the Target and the Parent) that will set forth how the Merger
Consideration and the funds delivered in satisfaction of the Indebtedness
described in Section 2.10 of this Agreement will be distributed on the Closing
Date, including wire instructions in the case of payments to be made at the
Closing by wire transfer (the “Flow of Funds
Memorandum”).  The wire
instructions described in the Flow of Funds Memorandum will be provided to the
Parent no later than three business days prior to the Closing.

2.5                                 Procedure for Payment.

(a)                                  Immediately
after the Effective Time the Parent will cause the Paying Agent, pursuant to
the Paying Agent Agreement, to mail a letter of transmittal (with instructions
for its use) substantially in the form attached as Exhibit D to each holder of Target Shares and each holder
of a Warrant, and the Parent will mail a Vested Option Cancellation Agreement
to each holder of Vested Options (if any) who shall have not executed and
delivered to the Parent a Vested Option Cancellation Agreement prior to the
Effective Time, for such holder to use in surrendering the following against
payment of that portion of the Merger Consideration to be issued in exchange
for such certificate(s), Vested Option Documents or Warrants Documents:
(i) the certificate(s) that represented his, her or its Target Shares;
(ii) the Vested Option Documents; or (iii) the Warrants Documents.

(b)                                 Upon
the surrender of a certificate(s) representing Target Shares to the Paying
Agent, together with the applicable letter of transmittal, duly executed, and
such other documents as may be required, the Paying Agent will pay to such a
holder of Target Shares, in exchange for the delivered certificate(s), cash in
an amount equal to the product of the following:  (i) the number of Target Shares
evidenced by such certificate(s), multiplied by (ii) the Per Share
Cash Amount.

(c)                                  Upon
the surrender of Vested Option Documents representing Vested Options or Warrant
Documents representing Warrants, as applicable, together with the applicable
letter of transmittal in the case of a holder of Warrants or the Vested Option
Cancellation Agreement in the case of a holder of Vested Options, duly
executed, and such other documents as may be required, the Paying Agent in the
case of a holder of Warrants or the Surviving Corporation in the case of a
holder of Vested Options will, as applicable, pay to such holder, cash in an
amount equal to the

 19
 

following:  (i) the product
of (A) the number of Target Shares issuable pursuant to each Vested Option or
Warrant evidenced by the delivered Vested Option Documents or Warrants
Documents, as applicable; multiplied by (B) the Adjusted Per Share
Cash Amount for such Vested Option or Warrant; and less (ii) any
applicable withholding Taxes.

(d)                                 Immediately
after the Paying Agent receives any funds for distribution to the Target
Equityholders, including pursuant to Sections 2.4(e) or 2.7(d)(i) of this
Agreement from the Parent, pursuant to Section 10.3 of this Agreement from the
Shareholders’ Representative, pursuant to the Escrow Agreement from the Escrow
Agent following the release of the Remaining Escrow, if any, the Paying Agent
will pay to each Target Equityholder who satisfied the requirements set forth
in Sections 2.5(b) or 2.5(c) of this Agreement, as applicable, cash in an
amount, after subtraction of any applicable withholding Taxes, equal to the
product of the following:  (i) the
quotient of (A) the funds delivered to the Paying Agent by the Parent in
satisfaction of any of the foregoing; divided by (B) the
Total Target Share Number, multiplied by (ii) the number of Target
Shares formerly held by (or formerly available for issuance to) such Target
Equityholder.  Any funds delivered to the
Paying Agent that are in excess of the amount that is required to be paid to
Target Equityholders will promptly be paid over to the Surviving Corporation.

(e)                                  The
Parent will cause the Paying Agent to pay over to the Surviving Corporation any
cash (including any earnings thereon) remaining 365 days after the Paying Agent
received any such amount, and thereafter all Target Equityholders will be
entitled to look to the Surviving Corporation (subject to abandoned property,
escheat and other similar laws) as general unsecured creditors with respect to
any amounts then owed to such Target Equityholders pursuant to this Section 2,
as applicable, payable upon surrender of certificate(s) representing his, her
or its Target Shares or Vested Options Documents or Warrants Documents
representing his, her or its Vested Options or Warrants, as applicable.

2.6                                 Other Exchange Matters.

(a)                                  No
interest related to the Merger Consideration or any other amounts will accrue
or be paid to any Target Equityholder.

(b)                                 None
of the Parent, the Merger Sub, the Target or the Surviving Corporation will be
liable to any Target Equityholder with respect to any portion of the Merger
Consideration or any other amounts

 20
 

that is delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.

(c)                                  If
any certificate(s) representing Target Shares or any Warrants Documents
representing Warrants have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the holder of such Target Shares or Warrants
claiming that his, her or its certificate(s) or Warrants Documents, as
applicable, have been lost, stolen or destroyed and providing an indemnity reasonably
satisfactory to the Parent (which may, if reasonable under the circumstances
and requested by the Parent, include a requirement to post a bond or other
security), the Paying Agent will issue in exchange for the affidavit the holder
of such Target Shares’ or Warrants’ portion of the Merger Consideration, as
determined pursuant to this Section 2.

(d)                                 At
the Effective Time, the stock transfer books of the Target will be closed and
there will be no further registration of transfers of Target Shares on the
records of the Target.  From and after
the Effective Time, no Target Shares will be deemed outstanding and the holders
of certificates representing Target Shares will cease to have any rights with
respect to any Target Shares, except as otherwise provided in this Agreement or
by Law.

(e)                                  Each
of the rights to receive a portion of the Remaining Escrow is personal to each
Target Equityholder and is and will remain nontransferable for all purposes
other than by operation of Law or by will or the Laws of descent and
distribution.  Any attempted transfer,
except as expressly allowed in this Section 2.6, of any of the rights to
receive a portion of the Remaining Escrow is and will be null and void.

(f)                                    Until
surrendered as contemplated in Section 2.5(b) of this Agreement, each
certificate representing Target Shares will be deemed as of and at any time
after the Effective Time to represent solely the right to receive that portion
of Merger Consideration to be issued in exchange for such certificate in
connection with this Agreement.  From and
after the Effective Time, the holders of Vested Option Documents or Warrants
Documents formerly representing Vested Options or Warrants, as applicable, will
cease to have any rights with respect to such Vested Options or Warrants, as
applicable, other than the right to receive the consideration set forth in
Section 2.5(c) of this Agreement.

(g)                                 The
Merger Consideration, when delivered to the Paying Agent, in exchange for the
cancellation of the Target Shares (other than Dissenting Shares), the Vested
Options and Warrants will be

 21
 

deemed to have been issued in full satisfaction of all rights
pertaining to Target Shares (other than Dissenting Shares), Vested Options and
Warrants.

2.7           Merger
Consideration Adjustment.

(a)                                  No
later than five (5) business days before the Closing Date, the Target will
prepare and deliver to the Parent a certificate signed by an officer of the
Target setting forth the Target’s good faith determination of the estimated
draft balance sheet (the “Estimated Closing Date Balance Sheet”) for
the Target as of immediately prior to the Effective Time, which Estimated Closing Date Balance Sheet will also
include the Company’s good faith determination of the estimated Net Cash (the “Estimated Net Cash”)
for the Target as of immediately prior to the Effective Time.  The Target will prepare the Estimated Draft
Closing Date Balance Sheet in accordance with the Accounting Principles.  The Estimated Draft Closing Date Balance
Sheet will be subject to the review and approval of the Parent prior to the
Closing, and such approval will not be unreasonably withheld.

(b)                                 Within
60 days following the Closing Date, the Parent will prepare and deliver to the
Shareholders’ Representative a certificate signed by an officer of the Parent
setting forth a draft balance sheet (the “Draft
Closing Date Balance Sheet”) for the Target as of immediately prior
to the Effective Time, which will also include the actual Net Cash as of
immediately prior to the Effective Time (the “Actual Net
Cash”) and the adjustments, if any, required to be made to the
Merger Consideration.  The Parent will
prepare the Draft Closing Date Balance Sheet in accordance with the Accounting
Principles, but also using the same balance sheet line items by which the Target
determined the Estimated Closing Date Balance Sheet.  The Parent will make available to the
Shareholders’ Representative and its accountant the work papers and back-up
materials used in preparing the Draft Closing Date Balance Sheet to the extent
reasonably requested by the Shareholders’ Representative during the objection
and dispute resolutions periods described in Section 2.7(c) of this Agreement.

(c)                                  If
the Shareholders’ Representative believes that any item on the Draft Closing
Date Balance Sheet, including the Actual Net Cash and the adjustments, if any,
required to be made to the Merger Consideration, was not calculated correctly
or determined in accordance with the Accounting Principles, then the
Shareholders’ Representative must deliver a detailed statement (an “Objection Notice”) within 30 days after receiving the Draft
Closing Date Balance Sheet setting forth in reasonable detail (i) any item on
the 

 22
 

Draft Closing Date Balance Sheet that the Shareholders’ Representative
believes has not been calculated correctly or determined in accordance with the
Accounting Principles, (ii) the amount of such item that the Shareholders’
Representative believes is correct in accordance with the Accounting
Principles, and (iii) the amount of the Net Working Capital, Actual Net Cash
and the adjustments, if any, required to be made to the Merger Consideration
that the Shareholders’ Representative believes is correct assuming that each
disputed item were resolved in favor of the Shareholders’ Representative.  If the Shareholders’ Representative does not
deliver an Objection Notice then the Draft Closing Date Balance Sheet will be
conclusive, final and binding in its entirety. 
If the Shareholders’ Representative does deliver an Objection Notice,
then the Draft Closing Date Balance Sheet shall be conclusive, final and
binding with respect to those items that are not objected to in the Objection
Notice and the items set forth in the Objection Notice shall be resolved in
accordance with the procedures below. 
The Parent and the Shareholders’ Representative will use commercially
reasonable efforts to resolve any objections set forth in an Objection Notice
themselves through good faith negotiation. 
If the Parties do not obtain a final resolution with respect to any item
set forth in the Objection Notice within 30 days after the Parent has received
the Objection Notice, the Parent and the Shareholders’ Representative will
select a mutually acceptable accounting firm solely to resolve any such
remaining disputed items.  The accounting
firm will make a determination within 30 days after being retained by the
Parties.  Such determination will be set
forth in writing and will be final, conclusive and binding upon the Parties.  The accounting firm will allocate its costs
and expenses between the Parent and the Shareholders’ Representative based upon
the percentage of the contested amount submitted to the accounting firm that is
ultimately awarded to each Party such that each Party bears a percentage of
such costs and expenses equal to the percentage of the contested amount awarded
to the other Party.  For example, if the
Shareholders’ Representative claims Net Working Capital is $1,000 greater than
the amount determined by the Parent, and the Parent contests only $500 of the
amount claimed by the Shareholders’ Representative, and if the accounting firm
ultimately resolves the dispute by awarding the Shareholders’ Representative
$300 of the $500 contested, then the accounting firm’s costs and expenses will
be allocated 60% (i.e. 300/500) to the Parent and 40% (i.e.
200/500) to the Shareholders’ Representative. 
The “Closing Date Balance Sheet”
means the Draft Closing Date Balance Sheet together with any revisions made
pursuant to this Section 2.7(c) of this Agreement.

 23
 

 

(d)                                 Upon
the final determination of the Closing Date Balance Sheet, the Merger
Consideration will be adjusted as follows:

(i)                                     If
(A) the Net Working Capital plus Actual Net Cash is greater than (B) the
Estimated Net Working Capital plus Estimated Net Cash, then the Parent will pay
to the Paying Agent for the benefit of the Target Equityholders, by wire
transfer or delivery of other immediately available funds, an amount equal to
ninety  percent (90%) of such excess and
the Parent will deposit the remainder of such excess with the Escrow Agent to
be held pursuant to the Escrow Agreement as part of the Escrow Amount.  These payments will be made within five
business days after the date on which the Closing Date Balance Sheet is finally
determined pursuant to Section 2.7(c) of this Agreement.  The portion of the payment to the Target
Equityholders will be delivered by the Paying Agent to the Target Equityholders
in accordance with the Paying Agent Agreement and Section 2.5(d) of this Agreement.

(ii)                                  If
(A) the Net Working Capital plus Actual Net Cash is less than (B) the Estimated
Net Working Capital plus Actual Net Cash, then the Escrow Agent will pay to the
Parent out of the Escrow Amount, by wire transfer or delivery of other
immediately available funds, an amount equal to this deficiency.  This payment will be made within five
business days after the date on which the Closing Date Balance Sheet is finally
determined pursuant to Section 2.7(c) of this Agreement.

2.8                                 The Closing.  The closing of the transactions contemplated
by this Agreement (the “Closing”)
will take place at the offices of Gray, Plant, Mooty, Mooty & Bennett,
P.A., in Minneapolis, Minnesota, at 9:00 a.m., on the second business day
after the respective Parties have satisfied or waived all conditions to the obligations
of the Parties to consummate the transactions contemplated by this Agreement
(other than actions the Parties will take at the Closing itself) or any other
time and date as the Parties may agree (the “Closing Date”).

 24
 

 

2.9                                 Dissenting Shares.

(a)                                   Notwithstanding
any other provisions of this Agreement to the contrary, no Dissenting Shares
will be converted into or represent a right to receive any portion of the
Merger Consideration set forth in this
Section 2, and any holder of the Dissenting Shares will only be
entitled to such rights as are provided by the Minnesota Business Corporation
Act.

(b)                                  Notwithstanding
the provisions of Section 2.9(a)
of this Agreement, if any holder of Dissenting Shares effectively
withdraws or loses (through the failure to perfect or otherwise) such holder’s
appraisal rights under the Minnesota Business Corporation Act, then, as of the
later of the Effective Time or the occurrence of such event, such holder’s
Target Shares will automatically be converted into and represent only the right
to receive that portion of the Merger Consideration issuable in exchange for
such Target Shares pursuant to Section 2.3 of this Agreement, without interest
thereon, and subject to any other applicable provisions of this Agreement, upon
surrender of a certificate(s) representing such Target Shares in accordance
with Section 2.5(b) of this Agreement.

(c)                                   The
Target will give the Parent (i) prompt notice of any written demand for
appraisal received by the Target pursuant to the applicable provisions of the
Minnesota Business Corporation Act, and (ii) the opportunity to
participate in and direct all negotiations and proceedings with respect to such
demands.  The Target will not, except
with the prior written consent of the Parent, make any payment with respect to
any such demands or offer to settle or settle any such demands.  Any communication to be made by the Target to
any holder of Target Shares with respect to such demands will be submitted to
the Parent in advance and will not be presented to any holder of Target Shares
prior to the Target receiving the Parent’s consent.

(d)                                  Notwithstanding
the provisions of Section 2.9(c) of this Agreement, to the extent that the
Parent or the Surviving Corporation incurs any Appraisal Costs, the Parent will
be entitled to recover the full amount of such Appraisal Costs from the Escrow.

2.10                           Payment of Indebtedness.

(a)                                  No
later than five business days prior to the Closing, the Target will deliver to
the Parent a certificate, executed by the Chief Financial Officer of the
Target, (the “Debt Certification”) setting 

 25
 

forth (i) the amount of Indebtedness of the Target as
of such date and (ii) a reasonable, good faith estimate of the
Indebtedness as of the end of business on the Closing Date, together with such
documents and information necessary to verify the amount of Indebtedness, which
will include, payoff letters from the applicable creditor in a form reasonably
acceptable to the Parent (which letters will contain payoff amounts, per diems,
wire transfer instructions and an agreement to deliver, upon full payment,
UCC-3 termination statements, other appropriate releases and any original
promissory notes or other evidences of indebtedness marked canceled), and the
Target will provide the Parent with reasonable access to all documents and
personnel necessary for reviewing the Indebtedness amounts set forth in such
certificate.

(b)                                 At
the Closing the Surviving Corporation will assume the Assumed Indebtedness and
shall pay to Associated Bank the amounts outstanding as Assumed Indebtedness
other than in respect of the Revenue Bonds and the letters of credit.

(c)                                  On
or before the Closing the Target (or the Parent on behalf of the Target in
accordance with the Flow of Funds Memorandum) will pay, or cause to be paid in
full, all of the Indebtedness.

3.                                        Representations and Warranties of the Target.  The Target represents and warrants to the
Parent and the Merger Sub that the statements contained in this Section 3
are correct and complete as of the date of this Agreement and will be correct
and complete as of the Closing Date.

3.1                                 Organization, Qualification and Power.  The Target is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Minnesota.  The Target is duly authorized
to conduct business and is in good standing under the Laws of each jurisdiction
where such qualification is required, except where the lack of such
qualification would not have a Material Adverse Effect on the Target.  The Target has full corporate power and
authority necessary to carry on the businesses in which it is engaged, and to
own and use the properties owned and used by it.  The Target has delivered to the Parent
correct and complete copies of the charter, bylaws or other governing documents
of the Target (as amended to date).  The
Target has full corporate power and authority to execute and deliver this
Agreement and the Transaction Documents to which it is a party, and to perform
its obligations under this Agreement and the Transaction Documents to which it
is a party.  This Agreement and the
Transaction Documents to which it is a party constitute the valid, enforceable
and legally binding obligations of the Target.

3.2                                 Capitalization.  The authorized capital stock of the Target
consists of 10,000,000 shares, of which as of the date of this Agreement
1,977,848 

 26
 

Target Shares, issued as common stock, are issued and outstanding.  All of the issued and outstanding Target
Shares have been duly authorized, are validly issued, fully paid and
nonassessable, and, as of the Closing Date, will be held of record by the
respective holders of Target Shares as set forth in Section 3.2 of the
disclosure schedule of the Target attached to this Agreement (the “Target’s Disclosure Schedule”), which will be updated by the
Target as necessary as of the Closing. 
Except for (i) Warrants for the purchase of 61,375 Target Shares,
to be issued as common stock of the Target, and (ii) Vested Options for
the purchase of 100,000 Target Shares, to be issued as common stock of the Target,
there are no outstanding or authorized option, warrant, purchase right, phantom
stock or other contracts or commitments that could require the Target to issue,
sell or otherwise cause to become outstanding any of its capital stock.  Section 3.2 of the Target’s Disclosure
Schedule sets forth for each Warrant and each Vested Option, (x) the record
holder of such security, (y) the exercise price per Target Share underlying
such security, and (z) the vesting schedule (if any) applicable to such
security.  Except for the Target Share
Plan and the Luft Phantom Agreement, there are no outstanding or authorized
appreciation, phantom interest, profit participation or similar rights with
respect to the Target.  There are no
voting trusts, proxies or other agreements or understandings with respect to
the voting of the capital stock of the Target. 
The Target does not own any Equity Interests in any other Person.

3.3                                 Noncontravention; Consents and Approvals.  Neither the execution and the delivery of
this Agreement or the Transaction Documents, nor the consummation of the
transactions contemplated by this Agreement, will do any of the following:  (a) violate any Law to which the Target
is subject, or any provision of the charter, bylaws or other governing documents
of the Target (as amended to date); (b) conflict with, result in a breach
of, constitute a default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify or cancel, or require any
notice or consent under any material arrangement to which the Target is a party
or by which it is bound, or to which any of its assets is subject (or result in
the imposition of any Security Interest upon the Assets), including any (i)
agreement, (ii) contract, (iii) lease, (iv) license, or (v) instrument;
(c) result in the cancellation, forfeiture, revocation, suspension or
adverse modification of any Permit owned or held by the Target; or (d) alter,
impair or extinguish any Intellectual Property owned or purported to be owned
by Target, or rights or obligations to any third party owned Intellectual
Property.  Except as indicated in
Section 3.3 of the Target’s Disclosure Schedule and except for any filings
required under the HSR Act, the Target is not required to give any notice to, make
any filing with, or obtain any authorization, consent or approval of, any
Person (including any Governmental Authority) in order for the Parties to
consummate the transactions contemplated by this Agreement.

 27

 

3.4                                 Brokers’ Fees.  The Target has no Liability to pay any fees
or commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement (a) for which the Parent or the Merger Sub could
become liable or obligated, and (b) which does not constitute a Selling
Expense.

3.5                                 Assets. 
The Target has good, valid, legal and marketable title to, or a valid
and enforceable leasehold interest in, all material properties and assets
(tangible and intangible) used by it, located on any of its premises or shown
on the Most Recent Balance Sheet or acquired after the date of the Most Recent
Balance Sheet, and hold such properties and assets free and clear of all
Security Interests (other than Permitted Liens and, with respect to Real Property,
Real Estate Encumbrances), except for properties and assets disposed of or
otherwise consumed in the Ordinary Course of Business since the date of the
Most Recent Balance Sheet (collectively, the “Assets”).  The Assets are adequate to conduct the business
of the Target as currently conducted.

3.6                                 Financial Statements.  Attached to Section 3.6 of the Target’s
Disclosure Schedule are the following financial statements of the Target
(collectively, the “Financial Statements”):  (a) audited consolidated and
consolidating balance sheets and statements of income, changes in shareholder’s
equity, and cash flow as of and for the fiscal years ended December 31, 2003,
December 31, 2004, and December 31, 2005 (the “Most Recent Fiscal Year End”) for the Target; and
(b) unaudited consolidated and consolidating balance sheets and statements
of income, changes in shareholder’s equity and cash flow as of and for the
months ended December 31, 2006 for the Target (the “Most Recent
Financial Statements”).  The
Financial Statements (including the notes thereto) (i) have been prepared in
accordance with GAAP applied on a consistent basis as of the dates and
throughout the periods covered, (ii) are complete and correct in all material
respects and present fairly the financial condition and the results of
operations of the Target as of such dates and for such periods and (iii) have been
prepared in accordance with the books and records of the Target, which books
and records have been maintained in a manner consistent with historical
practice.  The Most
Recent Financial Statements, however, are subject to normal year-end
adjustments (which will not be material either individually or in the
aggregate) and lack footnotes and other presentation items.

3.7                                 Subsequent Events.  Since the Most Recent Fiscal Year End, (i)
the Target has operated in the Ordinary Course of Business, (ii) there have
been no changes in the Assets, business, financial condition, operations or
results of operations of the Target individually or in the aggregate that have
had or would have a Material Adverse Effect on the Target taken as a whole, and
(iii) except as described in Section 3.7 of the Target’s Disclosure Schedule,
the Target has not done any of the following:

 28
 

 

(a)                                  either
(i) amended its charter, bylaws or other governing documents, (ii) amended any
term of its outstanding Equity Interests or other securities, or (iii) issued,
sold, granted, or otherwise disposed of, its Equity Interests or other
securities;

(b)                                 become
liable in respect of any guarantee or has incurred, assumed or otherwise become
liable in respect of any Indebtedness, except for borrowings in the Ordinary
Course of Business under credit facilities in existence as of on the Most
Recent Financials;

(c)                                  permitted
any of the Assets to become subject to a Security Interest other than a
Permitted Encumbrance;

(d)                                 either
(i) made any declaration, setting aside or payment of any dividend or other
distribution with respect to, or any repurchase, redemption or other
acquisition of, any of its capital stock or other Equity Interests (except for
distributions of Company Cash declared and paid in full before the Closing Date
and which, if occurring after the date hereof, are in compliance with Section
5.2), or (ii) entered into, or performed, any transaction with, or for the
benefit of, any shareholder or any Affiliate of any shareholder (other than
payments made to officers, directors and employees in the Ordinary Course of
Business);

(e)                                  suffered
(i) material loss, destruction, damage or eminent domain taking (in each case,
whether or not insured) affecting the business of the Target or any material
Asset, or (ii) any shutdown or maintenance of any facility or paper machine
outside the Ordinary Course of Business;

(f)                                    increased
the Compensation payable or paid, whether conditionally or otherwise, to (i)
any employee, consultant or agent other than in the Ordinary Course of
Business, (ii) any director or officer, or (iii) any stockholder or any
affiliate of any stockholder;

(g)                                 entered
into any contractual obligation providing for the employment or consultancy of
any Person on a full-time, part-time, consulting or other basis or otherwise
providing Compensation or other benefits to any officer, director, employee or
consultant;

(h)                                 made
any change in its methods of accounting or accounting practices (including with
respect to reserves) or changed its policies or practices with respect to
paying payables or billing and collecting receivables;

 29
 

 

(i)                                     made,
changed or revoked any material Tax election, elected or changed any method of
accounting for Tax purposes, settled any action in respect of Taxes or entered
into any contractual obligation in respect of Taxes with any Governmental
Authority;

(j)                                     terminated
or closed any facility, business or operation;

(k)                                  adopted
any Employee Benefit Plan or, except in accordance with terms thereof as in
effect on the Most Recent Fiscal Year End increased any benefits under any
Employee Benefit Plan;

(l)                                     written
up or written down any of its material Assets or revalued its inventory; and

(m)                               entered
into any contractual obligation to do any of the things referred to elsewhere
in this Section 3.7.

3.8                                 Legal Compliance; Illegal Payments;  Permits.  Except for Laws related to health and safety
and as set forth in Section 3.8 of the Target’s Disclosure Schedule, the Target
has complied in all respects with all applicable Laws, except where the failure
to comply has not resulted in, and would not reasonably be expected to result
in, material liability to the Target. 
With respect to Laws related to health and safety, the Target has
materially complied with such Laws in a manner consistent with general
practices in the Target’s industry.  In
the conduct of the business of the Target, neither the Target or any of its
directors or officers, nor, to the Knowledge of the Target any of its employees
or other agents, has (a) directly or indirectly, given, or agreed to give, any
illegal gift, contribution, payment or similar benefit to any supplier,
customer, governmental official or employee or other Person who was, is or may
be in a position to help or hinder the Target (or assist in connection with any
actual or proposed transaction) or made, or agreed to make, any illegal
contribution, or reimbursed any illegal political gift or contribution made by
any other Person, to any candidate for federal, state, local or foreign public
office, or (b) established or maintained any unrecorded fund or asset or
made any false entries on any books or records for any purpose.  The Target has been duly granted all material
Permits under all Laws necessary for the conduct of its business.  Except as disclosed in Section 3.8 of the
Target’s Disclosure Schedule, (i) such Permits are valid and in full force and
effect and will remain so, without modification, following the Closing, and
(ii) the Target is not in breach or violation of, or default under, any
such Permit, and, to the Knowledge of the Target, no basis exists which, with
notice or lapse of time or both, would constitute any such breach, violation
nor default.

3.9                                 Tax Matters.

 30
 

 

(a)                                  The
Target has timely filed all required Tax Returns.  All such Tax Returns were correct and
complete in all material respects.  All
Taxes owed by the Target (whether or not shown on any Tax Return) are timely
paid or are reflected on the Closing Date Balance Sheet.

(b)                                 The
Target has not been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code during the applicable period
described in Section 897(c)(1)(A)(ii) of the Code.  The Target is not a party to any income Tax
allocation or sharing agreement.

(c)                                  The
Target has delivered to the Parent correct and complete copies of all federal
and state income Tax Returns for the Target for tax periods beginning on or
after January 1, 2003.  The Target is not
currently the beneficiary of any extension of time within which to file any
income Tax Return.  There are no liens
for Taxes (other than liens for Taxes not yet due and payable) upon any of the
Assets.

(d)                                 None
of the Target’s Tax Returns are currently the subject of an audit by a Tax
authority.  The Target has delivered to
the Parent correct and complete copies of any audit report issued since January
1, 2003, related to any material Taxes due from the Target or with respect to
the Target’s operations.  The Target has
not waived any statute of limitations in respect of Taxes or agreed to any
extension of time with respect to a Tax assessment or deficiency.  The Target has not executed any power of
attorney with respect to any Tax, other than powers of attorney that are no
longer in force.

(e)                                  The
Target has not distributed capital stock of another corporation, or has had its
capital stock distributed by another person, in a transaction that was
purported or intended to be governed in whole or in part by Sections 355 or 361
of the Code.

(f)                                    The
Target has been a validly electing “S” corporation within the meaning of
Sections 1361 and 1362 of the Code and for Wisconsin state Tax law purposes, at
all times since February 7, 1992, and the Target will be an S corporation up to
and including the day before the Closing Date. 
The Target has no potential liability for Tax under Section 1374 of the
Code (or any corresponding Wisconsin state or local law).  Neither the Target, nor to the Knowledge of
the Target any shareholder of the Target has taken any action, or omitted to
take any action, which action or omission could result in the loss of S
corporation status for any period beginning February 7, 1992 and ending on the
day before the Closing.  In the past 10 

 31
 

years, the Target has not (i) acquired assets from
another corporation in a transaction in which the Target’s Tax basis for the
acquired assets was determined, in whole or in part, by reference to the Tax
basis of the acquired assets (or any other property) in the hands of the
transferor, or (ii) acquired the stock of any corporation that is a qualified
subchapter S subsidiary.

(g)                                 The
Target has withheld and timely paid all material Taxes required to have been
withheld and paid in connection with any amounts paid or owing to any
employees, independent contractor, creditor, stockholder, or other third party
and Target has complied with all reporting and record keeping requirements.

(h)                                 The
Target is not required to make any adjustment pursuant to Code section 481(a)
(or any predecessor provision) or any similar provision of state, local or
foreign tax law by reason of any change in any accounting methods initiated by
the Target or previously required by a Governmental Authority, and there is no
application pending with any governmental authority requesting permission for
any changes in any of the Target’s accounting methods for Tax purposes.  To the Knowledge of the Target, no
Governmental Authority has proposed any such adjustment or change in accounting
method.

(i)                                     The
Target will not be required to include any amount in taxable income or exclude
any item of deduction or loss from taxable income for any taxable period (or
portion thereof) ending after the Closing Date as a result of (i) any “closing
agreement” as described in Code section 7121 (or any corresponding or similar
provision of state, local or foreign Income Tax law) executed by or on behalf
of the Target at or prior to the Closing, (ii) any deferred intercompany
gain or excess loss account described in Treasury Regulations under Code
section 1502 (or any corresponding or similar provision or administrative rule
of federal, state, local or foreign law) in existence as of the Closing, (iii)
any installment sale or open transaction disposition made at or prior to the
Closing, or (iv) any prepaid amount received on or prior to the Closing Date,
except (A) where the Tax liability for such amount is included as a
liability  in the Net Working Capital,
and (B) where the amount is a result of an action or transaction other than in
the Ordinary Course of Business occurring on the Closing Date but after the
Closing.

(j)                                     To
the Target’s Knowledge, the Target has not participated in any reportable
transaction within the meaning of Treasury Regulation 1.6011-4 or in nay tax
shelter within the meaning of Sections 6111 or 6112 of the Code and the
Treasury Regulations promulgated 

 32
 

thereunder or engaged in any transaction that would
trigger the imposition of penalties under Section 6662 of the Code.

3.10                           Real Property.

(a)                                  Section 3.10(a)
of the Target’s Disclosure Schedule lists and describes briefly all real
property that Target owns (collectively, the “Real
Property”).  With respect to
each parcel of Real Property:

(i)                                     The
Target has good and marketable fee simple title to the Real Property, free and
clear of any Security Interest, license, encroachment, restriction or covenant,
except the encumbrances identified in Section 3.10(a)(i) of the Target’s
Disclosure Schedule and easements, covenants, restrictions, encroachments and
other non-monetary encumbrances that do not materially interfere with the use
of such parcel as it is currently used (the “Real Estate
Encumbrances”);

(ii)                                  There
are no outstanding options or rights of first refusal to purchase the Real
Property, or any portion or interest of the Real Property; nor has the Target
leased or otherwise granted the right to use or occupy such owned Real Property
or any portion thereof;

(iii)                               The Target has received
no notice of actual or to the Target’s Knowledge threatened special assessments
or reassessments of the Real Property;

(iv)                              The
Target has received no notice of actual or to the Target’s Knowledge threatened
cancellation or suspension of any certificates of occupancy for any portion of
the Real Property;

(v)                                 The
Target has not received notice of any claims of any Governmental Authority to
the effect that the construction, operation, or use of the Real Property is in
material violation of any applicable law, ordinance, rule, regulation or order;
and

(vi)                              There
is no pending or, to the Target’s Knowledge threatened condemnation or similar
eminent domain proceeding against the Real Property.

(b)                                 Except
as set forth in Section 3.10(b) of the Target’s Disclosure Schedule, the Target
does not lease or sublease any Real Property 

 33
 

and there are no other contractual obligations that
grant to any Person the right of use or occupancy of the Real Property.

(c)                                  The
Real Property comprises all of the real property used in the business of the
Target.

(d)                                 Except
as set forth in Section 3.10(d) of the Target’s Disclosure Schedule, to the
Target’s Knowledge, all buildings, structures, fixtures and building systems,
and all components thereof, included in the Real Property (the “Improvements”) (i) have been maintained by the Target in
good condition and repair in accordance with the customary maintenance
procedures for such Improvements, as applicable, and subject to ordinary wear
and tear, and repair and replacement from time to time in the Ordinary Course
of Business of the Target, and (ii) are sufficient for the operation of the
business of the Target as currently conducted. 
The Target has not received any notice that the Real Property is in
violation of and to the Target’s Knowledge, the Real Property is not in
violation of, any applicable building, zoning, subdivision and other land use
Laws, including The Americans with Disabilities Act of 1990, as amended, or any
insurance requirements affecting the Real Property.  To the Target’s Knowledge, the consummation
of the transactions contemplated herein will not result in a violation of any
applicable zoning ordinance or termination of any zoning variance, in each case
relating to the Real Property.

(e)                                  To
the Target’s Knowledge and except as described on Section 3.10(e) of the Target’s
Disclosure Schedule, no part of the Real Property is located in a flood hazard
area (as defined by the Federal Emergency Management Agency).

(f)                                    The
improvements on the Real Property are supplied with utilities necessary for the
operation of such improvements as the same are currently operated or currently
proposed to be operated, all of which utilities are provided by public roads or
by permanent, irrevocable appurtenant easements benefiting the Real Property.  Each parcel of Real Property abuts on, and
has direct vehicular access to, a public road, or has access to a public road
via a permanent, irrevocable appurtenant easement benefiting the parcel of Real
Property, in each case, to the extent necessary for the conduct of the Target’s
business as presently conducted.

3.11                           Intellectual Property.

(a)                                  Section 3.11
of the Target’s Disclosure Schedule identifies the following:  (i) each patent, trademark registration,
or copyright 

 34
 

registration that has been issued to, and that is
currently pending and unexpired of the Target; (ii) each pending patent
application or application for registration of a trademark or copyright that
the Target has made; (iii) each unexpired material license, sublicense,
agreement or other permission that the Target has granted to any third party
with respect to Intellectual Property (together with any exceptions);
(iv) each unexpired material license, sublicense, agreement or other
permission that the Target currently has acquired from any third party with
respect to third party Intellectual Property (together with any exceptions),
but expressly excluding any “shrink-wrap,” “click-wrap,” or similar software
licenses or other licenses for generally commercially available, noncustomized
software (such agreements described in this Section 3.11(a)(iv), together with
the agreements referred to in clause (iii) above, the “IP Licenses”);
and (v) each registered or unregistered trademark, service mark, trade
name, corporate name or Internet domain name that is material to the operation
of the Target’s business as presently conducted.  The Target possesses all right, title and
interest in and to the Intellectual Property owned by it and listed or required
to be listed in Section 3.11 of the Target’s Disclosure Schedule (collectively,
“Owned Intellectual Property”) free and
clear of any Security Interests or ownership interests of any other
Person.  None of the Owned Intellectual
Property is subject to any outstanding injunction, judgment, order, decree,
ruling or other challenge and no action is pending or, to the Knowledge of the
Target, threatened that challenges the legality, validity, enforceability, use
or ownership of such Owned Intellectual Property.  To the Knowledge of the Target, no Person has
interfered with, infringed upon (whether directly, as a contributory infringer,
through inducement or otherwise), misappropriated, improperly disclosed,
violated or otherwise come in conflict with the Owned Intellectual Property,
and no confidential information or trade secret in Target’s possession, custody
or control has been lost, stolen or improperly disclosed.

(b)                                 To
the Knowledge of the Target, the Target owns or has the right to use pursuant
to license, sublicense, agreement or permission all Intellectual Property used
in or necessary for the operation of the businesses of the Target as presently
conducted.  Each item of Owned
Intellectual Property will be available for use by the Target on identical
terms and conditions immediately after the Closing.  The Target has not as of the Closing and for
five years immediately preceding the Closing interfered with, infringed upon
(whether directly, as a contributory infringer, through inducement or
otherwise), misappropriated, improperly disclosed, violated or otherwise come
in conflict with any Intellectual Property rights of any third party.  The Target has not at any time in the
preceding 

 35
 

five years received any charge, complaint, claim,
demand or notice alleging any such interference, infringement,
misappropriation, disclosure, violation or conflict, and, to the Knowledge of
the Target, none of the preceding has been threatened or is reasonably expected
to arise.  The Target has not received
any “invitations to license” or other communications asserting that it is or will
be obligated to take a license under third party Intellectual Property in order
to continue conducting its business in the ordinary course.

(c)                                  All
employees of, and consultants to, the Target have entered into non-disclosure
and intellectual property assignment agreements to the extent that such
employees or consultants have received or created trade secrets or otherwise
worked with the Target’s Intellectual Property. 
Without limiting the foregoing, each of Maurice L. Keesler, Lee T. Luft
and Harry H. Simpson have executed such agreements.

3.12                           Contracts. 
Section 3.12 of the Target’s Disclosure Schedule lists all material
contracts and other agreements, whether written or oral, to which the Target is
a party including each Material Contract. 
The Target has delivered to the Parent a correct and complete copy of
each written agreement listed or required to be listed in Section 3.12 of
the Target’s Disclosure Schedule.  With
respect to each agreement listed or required to be listed in Section 3.12 of
the Target’s Disclosure Schedule: (a) the agreement is legal, valid,
binding, enforceable and in full force and effect; (b) the agreement will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (c) no party is in breach or default; (d) no event has
occurred that, with notice or lapse of time, would constitute a breach or
default, or permit termination, modification or acceleration under the agreement;
and (e) no party has repudiated any provision of the agreement.

3.13                           Powers of Attorney. 
Except as set forth in Section 3.13 of the Target’s Disclosure
Schedule, there are no outstanding powers of attorney executed on behalf of the
Target.

3.14                           Insurance.

(a)                                  Section 3.14
of the Target’s Disclosure Schedule sets forth the following information with
respect to each insurance policy (including policies providing property,
casualty, liability and workers’ compensation coverage and bond and surety
arrangements but excluding policies related to the Employee Benefit Plans
maintained by the Target) to which the Target is or has been a party, a named
insured or otherwise the beneficiary of coverage at any time within the past
five years:  (i) the name, 

 36
 

address and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder, and the name
of each covered insured; and (iii) the policy number and the period of
coverage.  The Target is not subject to
any self-insurance arrangements.

(b)                                 With
respect to each insurance policy required to be identified in Section 3.14
of the Target’s Disclosure Schedule: 
(i) the policy is legal, valid, binding, enforceable and in full
force and effect and the policy will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms immediately
following the consummation of the transactions contemplated hereby other than
to the extent caused by facts or circumstances which are particular to any of
the Parent Indemnified Parties; (ii) neither the Target nor any other party to the policy is in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred that, with notice or the lapse of time, would
constitute a breach or default, or permit termination, modification or
acceleration, under the policy; (iii) no party to the policy has
repudiated any provision of such policy and (iv) the applicable insurer has not
denied or disputed the coverage of any claim pending under such policy.

(c)                                  The
Target has been covered during the past five years by insurance in scope and
amount customary and reasonable for the business in which it has engaged during
that period.

3.15                           Litigation. 
Section 3.15 of the Target’s Disclosure Schedule sets forth each
instance in which the Target is (a) subject to any injunction, judgment,
order, decree, ruling or charge, or (b) a party or, to the Knowledge of
the Target, is threatened to be made a party to any action, suit, proceeding, hearing
or investigation of, in or before any Governmental Authority.

3.16                           Product Warranty. 
Section 3.16 of the Target’s Disclosure Schedule includes copies of
the standard terms and conditions of sale or lease for each product or service
of the Target (containing applicable guaranty, warranty and indemnity
provisions).  Each product manufactured,
sold, leased or delivered by the Target in the five years preceding the Closing
(each, a “Product”) is not subject to any
guaranty, warranty or other indemnity beyond the applicable standard terms and
conditions of sale or lease.  Except as
disclosed in Section 3.16 of the Target’s Disclosure Schedule (and except for
other Liabilities that are incurred after the date of this Agreement and for
which there will be a reserve on the Closing Date Balance Sheet), each Product
is, and at all times has been, (a) in compliance with all applicable Laws, (b)
fit for the ordinary purposes for which it is intended to be used, and (c) in
conformity with any and all 

 37
 

contractual obligations, express and implied warranties, promises and
affirmations of fact made by the Target. 
The Target does not have any Liability (and, to the Knowledge of the
Target, there is no basis for any present or future action giving rise to any
Liability) for replacement or repair of any Products or other damages in
connection with any Products, subject only to the reserve for bad debt and
allowance reserve set forth on the face of the Most Recent Balance Sheet and
with respect to Liabilities that are incurred after the date of this Agreement,
on the Closing Date Balance Sheet, as adjusted for the passage of time in
accordance with GAAP, applied on a basis consistent with the principles applied
in the preparation of the Most Recent Balance Sheet and the Closing Date
Balance Sheet, which reserves are adequate to address all such
Liabilities.  Each Product contains
adequate warnings, the content and display of which conform with applicable Law
and current industry practice.  There is
no design defect with respect to any Product.

3.17                           Employment Matters.  The Target has complied in all material
respects with all Laws relating to employment, including all Laws concerning
equal employment opportunity, nondiscrimination, leaves and absences,
immigration, wages, hours, benefits, collective bargaining, the payment of
social security and similar Taxes, occupational safety and health, and plant
closing.  There are no unresolved
employment-related charges, claims or lawsuits involving the Target.  The Target (i) is not a party to or bound by
any collective bargaining agreement or any other labor union contract, (ii) has
not experienced any strikes, grievances, claims of unfair labor practices,
collective bargaining disputes and (iii) is not subject to any order to bargain of the National Labor Relations
Board, and to the Knowledge of the Target no question concerning union
representation is pending or is threatened respecting employees of the Target.  The Target has not committed any unfair labor
practice.  No employee of the Target is
represented by a labor union and to the Knowledge of the Target no petition has
been filed or proceeding instituted by an employee or group of employees of the
Target with any labor relations board seeking recognition of a bargaining
representative.  To the Knowledge of the
Target, there are no organizational efforts presently being made or threatened
by or on behalf of any labor union with respect to employees of the Target.

3.18                           Employee Benefits.

(a)                                  Section 3.18
of the Target’s Disclosure Schedule lists each Employee Benefit Plan that the
Target maintains or to which it has any obligation to contribute or with
respect to which the Target has or may have any Liability.

(b)                                 Each
Employee Benefit Plan (and each related trust, insurance contract or fund) has
been maintained, funded and administered in 

 38
 

all material respects in accordance with the terms of
such Employee Benefit Plan and complies in form and in operation in all
material respects with the applicable requirements of ERISA, the Code and other
applicable Laws.

(c)                                  Each
such Employee Benefit Plan which is an Employee Pension Benefit Plan is
intended to meet the requirements of a “qualified plan” under Section 401(a) of
the Code and has received, within the last five years, a favorable determination
letter from the Internal Revenue Service, and to the Knowledge of the Target,
there is no fact or circumstance that could reasonably be expected to give rise
to a revocation of such determination letter.

(d)                                 With
respect to each Employee Benefit Plan that the Target or any  ERISA Affiliate of the Target maintains or to
which any of them contributes:

(i)                                     No
action, audit, suit, proceeding, hearing or investigation with respect to any
Employee Benefit Plan (other than routine claims for benefits) is pending or,
to the Target’s Knowledge, threatened, would could result in a Liability on the
part of the Target or any Employee Benefit Plan.

(ii)                                  Neither
the Target nor any ERISA Affiliate of the Target has ever participated in,
contributes to, has any obligation to contribute to, or has any Liability under
or with respect to any Employee Pension Benefit Plan that is a “defined benefit
plan” (as defined in ERISA §3(35)) or a Multiemployer Plan.

(e)                                  Full payment has been timely made or will be
timely made on or prior to the Closing Date all of amounts that the Target is
required to pay under the terms of each of the Employee Benefit Plans that is
an employee benefit plan as such term is defined in ERISA §3(3) and
under any legal requirements (including any withheld employee contributions and
elective deferrals described in Code §402(g)(3)).

(f)                                    The
Target does not have any obligation to provide any health benefits or other
non-pension benefits to retired or other former employees, directors or
consultants except as specifically required by Part 6 of Title I of ERISA.

(g)                                 Neither
the Target nor any ERISA Affiliate has engaged in a “prohibited transaction”
(as defined in ERISA §406 and Code §4975) or any other breach of fiduciary
responsibility with respect to any Employee Benefit Plan that reasonably could
be expected to subject the Target to any material tax or penalty.

 39

 

(h)                                 Each
Employee Benefit Plan that is a “nonqualified deferred compensation plan”
subject to Code §409A has been operated in good faith in compliance with Code
§409A and guidance of the Internal Revenue Service provided thereunder.

(i)                                     The Target has delivered to the Parent correct
and complete copies of the plan documents and summary plan descriptions
(together will all subsequent summaries of material modifications), the most
recent determination letter received from the Internal Revenue Service, the three
most recent annual reports (Form 5500, with all applicable attachments), and
all related trust agreements, insurance contracts and other funding
arrangements that implement each such Employee Benefit Plan.

3.19                           Environmental Matters. 
Except as set forth in Section 3.19 of the Target’s Disclosure
Schedule:

(a)                                  The
Target has complied and is in compliance in all material respects, with
Environmental Laws.

(b)                                 Without
limiting the generality of the foregoing subsection (a) the Target has
obtained, has complied with or has timely applied for or requested renewal of,
and is in compliance with, in each case in all material respects, the
Environmental Permits for the occupation of the Real Property and the operation
of the Target’s business.  A list of
Environmental Permits held by the Target is set forth on Section 3.19 of the
Target’s Disclosure Schedule.  Neither
the execution and the delivery of this Agreement or the Transaction Documents,
nor the consummation of the transactions contemplated by this Agreement will
result in the cancellation, forfeiture, revocation, suspension or adverse
modification of any Environmental Permit owned or held by the Target.

(c)                                  Since
January 1, 2000, the Target has not received any written notice, report or
other information regarding, and the Target has not been, or to the Knowledge
of the Target, threatened to be made, a party to any action, suit, proceeding,
hearing or investigation of, in or before any Governmental Authority in respect
of, any actual or alleged material violation of Environmental Laws, or any
material Liabilities or potential material Liabilities under Environmental Laws
or any release or threatened release of any Hazardous Substance.

(d)                                 To
the Knowledge of the Target, none of the following exists at any property or
facility owned or operated by the Target: (i) underground storage tanks; (ii)
asbestos-containing material in any friable and damaged form or condition;
(iii) materials or equipment 

 40
 

containing polychlorinated biphenyls; or (iv)
landfills, surface impoundments, or disposal areas.

(e)                                  The Target has
not treated, stored, disposed of, arranged for or permitted the disposal of,
transported, handled, manufactured, distributed, or released any substance,
including any Hazardous Substance, or operated any property or facility so as
to give rise to any current or future material Liabilities under Environmental
Laws.

(f)                                    The Target has
not designed, manufactured, sold, marketed, or distributed products or other
items containing asbestos.

(g)                                 The Target has
furnished to Parent all environmental audits, reports and other material
environmental documents relating to the Target’s current properties,
facilities, or operations that are in its possession or under its reasonable
control.

(h)                                 Section 3.19
of the Target’s Disclosure Schedule sets forth each instance in which the
Target is or has been subject to any injunction, judgment, order, decree,
ruling or charge, with respect to any Environmental Law or Environmental Permit
or the release or threatened release of any Hazardous Substance.

(i)                                     Section 3.19 of
the Target’s Disclosure Schedule lists all contracts and other agreements,
whether written or oral, to which the Target is a party relating to the
treatment, storage, disposal, transportation, handling, manufacturing or
distribution of any Hazardous Substances.

The
only representations and warranties given by the Target in respect to the
Environmental Laws or Environmental Permits are those contained in this Section
3.19 and no other representation or warranty in this Agreement or the
Transaction Documents will be deemed, directly or indirectly, to be a
representation or warranty in any matter relating to Environmental Laws or
Environmental Permits.

3.20                           Undisclosed Liabilities. 
The Target has no material Liability, except for Liabilities (a) set
forth on the face of or reserved against in the Most Recent Balance Sheet
(rather than in any notes thereto), and (b) that have arisen after the Most
Recent Fiscal Year End in the Ordinary Course of Business (none of which
results from, arises out of, or relates to any breach or violation of, or
default under, a contractual obligation or Law).

3.21                           Inventory; Equipment.

(a)                                  The
inventory of the Target consists of raw materials and supplies, manufactured
and processed parts, work in process, and finished 

 41
 

goods, all of which is merchantable and fit for the
purpose for which it was procured and manufactured, and none of which is slow
moving, obsolete, damaged, or defective, subject only to the reserve for bad
debt and allowance set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for operations and transactions
through the Closing Date in accordance with the past custom and practice of the
Target.

(b)                                 Each
individual part of any piece of Equipment having a replacement cost in excess
of $100,000, is (i) adequate and suitable for its present and intended use,
(ii) in good working order, operating condition and state of repair (subject to
normal wear and tear and breakdown rates customary for that particular
Equipment), (iii) to the Knowledge of the Target has no defects (whether patent
or latent), and (iv) has been maintained in accordance with normal industry
practice.

3.22                           Notes and Accounts Receivable. All notes and accounts receivable
of the Target are reflected properly on its books and records, are valid
receivables subject to no setoffs or counterclaims and are collectible in
accordance with their terms at their recorded amounts, subject only to the
reserves set forth on the face of the Most Recent Balance Sheet (rather than in
any notes thereto) as adjusted for operations and transactions through the
Closing Date in accordance with the past custom and practice of the Target.

3.23                           Product Liability. To the Knowledge of the Target, the
Target does not have any Liability (whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due) arising out of any injury to
individuals or property as a result of the ownership, possession, or use of any
product manufactured, sold, leased, or delivered by any of the Target.

3.24                           Transactions with Affiliates.  Section 3.24 of the Target’s Disclosure
Schedule lists all current contracts and agreements between the Target, on one
hand, and any of its officers, directors, shareholders or their Affiliates, on
the other and all such contracts and agreements that were in effect at any time
since January 1, 2005.  To the Knowledge
of the Target, none of the Target’s directors, officers, employees and
shareholders, or their Affiliates, owns any material asset, tangible or
intangible, that is used in the business of the Target.

3.25                           Customers and Suppliers.   
Section 3.25 of the Target’s Disclosure Schedule sets forth a complete
and accurate list of (a) the ten  largest
customers of the Target (measured by aggregate billings) during the fiscal year
ending December 31, 2005, indicating the existing contractual obligations with
each such customer by product or service provided, and (b) the ten largest
suppliers of materials, products or services to the Target (measured by the
aggregate amount purchased by the Target) during the fiscal year ending
December 31, 2005, indicating the contractual 

 42
 

obligations for continued supply from each such supplier.  To the Knowledge of the Target, the
relationships of the Target with the customers and the suppliers required to be
listed Section 3.25 of the Target’s Disclosure Schedule are good commercial
working relationships and none of such customers or the suppliers has canceled,
terminated or otherwise materially altered (except for material alterations
permitted by the agreement between such customer or supplier and the Target and
which would not permit either party thereto to terminate such agreement in
accordance with its terms) or notified the Target of any intention to do any of
the foregoing or otherwise threatened in writing to cancel, terminate or
materially alter (except for material alterations permitted by the agreement
between such customer or supplier and the Target and which would not permit
either party thereto to terminate such agreement in accordance with its terms)
its relationship with the Target.

3.26                           Indebtedness.  Section
3.26 of the Target’s Disclosure Schedule lists each category and amount of the
Indebtedness as of the date of this Agreement. 
Except as set forth in Section 3.26 of the Target’s Disclosure Schedule,
as of the date of this Agreement the Target has no Liabilities in respect of
Indebtedness.  The Target has no
Liability in respect of a guaranty of the Liability of any other Person.

3.27                           Disclaimer of Other Representations and Warranties.  Except as expressly set forth in this
Section 3, the Target makes no representation or warranty, express or
implied, at law or in equity, in respect to the Target, or any of its
respective assets, Liabilities, operations or performances (financial or
otherwise), including any warranties with respect to merchantability, fitness
for any particular purpose or the condition thereof, and all such
representations or warranties are expressly disclaimed.  The representations and warranties contained
in this Section 3, and in the documents, instruments and certificates to be delivered
by the Target under this Agreement, do not contain and will not contain any
untrue statement of fact or omit to state any material fact necessary in order
to make the statements and information contained therein not misleading.

4.                                       Representations and Warranties of the Parent and the Merger Sub.  The Parent and the Merger Sub represent and
warrant to the Target that the statements contained in this Section 4 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date.

4.1                                 Organization.  The
Parent is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware.

 43
 

The Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota.

4.2                                 Authorization of Transaction.  Each of the Parent and the Merger Sub has
full power and authority (including full corporate power and authority) to
execute and deliver this Agreement and the Transaction Documents to which it is
a party, and to perform its obligations under this Agreement and the
Transaction Documents to which it is a party. 
This Agreement and the Transaction Documents to which it is a party
constitute the valid, enforceable and legally binding obligations of the Parent
or the Merger Sub, as applicable.

4.3                                 Noncontravention. 
Except set forth in Section 4.3 of the Parent’s Disclosure Schedules,
neither the execution and the delivery of this Agreement or the Transaction
Documents to which either the Parent or the Merger Sub is a party, nor the
consummation of the contemplated transactions, will (a) violate any Law to
which either the Parent or the Merger Sub is subject or any provision of the
charter, bylaws or other governing documents of either the Parent or the Merger
Sub (each as amended to date), or (b) conflict with, result in a breach
of, constitute a default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify or cancel, or require any
notice under any material agreement, contract, lease, license, instrument or
other arrangement to which either the Parent or the Merger Sub is a party or by
which it is bound or to which any of its assets is subject.

4.4                                 Brokers’ Fees.  Except
as set forth in Section 4.4 of the Parent’s Disclosure Schedules, neither the
Parent nor the Merger Sub has any Liability to pay any fees or commissions to
any broker, finder or agent with respect to the transactions contemplated by
this Agreement.

4.5                                 Merger Sub.  Since the
date of its incorporation, the Merger Sub has not carried on any business or
conducted any operations other than the execution of this Agreement and the
performance of its obligations under this Agreement and matters related
thereto.  The Merger Sub was incorporated
solely for the purposes of participating in the Merger and the transactions
contemplated by this Agreement.  The
authorized capital stock of the Merger Sub consists of 1000 shares of common
stock, $0.01 par value, 100 of which have been validly issued, fully paid and
nonassessable and are owned by the Parent free and clear of any Security
Interests.

4.6                                 Financing.  The Parent
has received an executed copy and provided the Target with a copy of the
Financing Letter of Intent.  If the
Parent was able to assume the Revenue Bonds as contemplated herein and were to
receive the Financing from Citadel Investment Group L.L.C. or a similar lender
pursuant to the financial terms substantially similar to 

 44
 

those described in the Financing Letter of Intent, the Parent and
the Merger Sub would have the necessary funds to consummate the Merger.

5.                                       Covenants.

5.1                                 General. 
Each of the Parties will use his, her or its commercially reasonable
efforts to take all actions and to do all things necessary, proper or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the Closing conditions to
the other party’s obligations set forth in Section 6 of this
Agreement).  If after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, the Transaction Documents and the contemplated transactions, each of
the Parties will take such further action (including the execution and delivery
of such further instruments and documents) as any other Party reasonably may
request, and the requesting Party will pay all reasonable out of pocket costs
and expenses of the requested Party (unless the requesting Party is entitled to
indemnification for the requested action under Section 7 of this Agreement).

5.2                                 Notices and Consents.

(a)                                  Except
as described in Section 5.2(b), the Target will give any notices to third
parties and will use its commercially reasonable best efforts to obtain any
third party consents at its sole cost and expense that are necessary or that
the Parent may reasonably request in connection with the transactions
contemplated by this Agreement.

(b)                                 Each
of the Parent and the Target, with the assistance and cooperation of other,
will prepare any filings required by the HSR Act, it being understood and
agreed, for the avoidance of doubt, that (i) the Parent will be responsible for
any filing fee required to be paid under the HSR Act in connection with this
Agreement, and (ii) no Party will be required to share with another Party such
information as is customarily not provided by parties in connection with filing
the relevant filing made under the HSR Act or other antitrust or anticompetiton
Laws.  In addition to and without
limiting the foregoing, the Parent and the Target will (A) take promptly all
actions necessary to make any filings required of the Parent or Target under
the HSR Act or other antitrust or anticompetiton Laws, (B) comply at the
earliest practicable date with any request for additional information received
by the Parent or the Target from the Federal Trade Commission or the Antitrust
Division of the Department of Justice, and (C) the Parties will reasonably
cooperate with each other in connection with the making of any such filings.

 45

(c)                                  Notwithstanding
the requirements of Section 5.2(b), in no event will the Parent or any of its
subsidiaries or its or their Affiliates be required to (i) dispose of any
material assets (including material contractual rights) in order to comply with
this Section 5.2, and (ii) agree to any condition with respect to its ownership
and operation of the business of the Target or any other business and material
assets which the Parent or any of its subsidiaries may have the right to
acquire to the extent such condition would materially and adversely effect the
operation of such business or asset.

(d)                                 The
Target will give the Parent written notice of any distributions of Company Cash
to be declared and made in the period between this Agreement and the Closing
Date before such distribution is made. 
The Target will complete any declared distributions prior to the Closing
Date and the determination of Company Cash.

5.3                                 Operation of Business.  The Target will not, without the consent of
the Parent, engage in any practice, take any action, or enter into any
transaction outside the Ordinary Course of Business, except as expressly
contemplated by this Agreement.  Without
limiting the generality of the preceding sentence, during the period beginning
as of the date of this Agreement and ending on the earlier of the termination
of this Agreement in accordance with Section 9 or the Closing Date, the Target
will not take or omit to take, as applicable, any action described in Section
3.7(a) through (m).  The Target will use
its commercially reasonable efforts to maintain the value of the Target as a
going concern and preserve intact its business organization and relationships
with third parties (including lessors, licensors, suppliers, distributors and
customers) and employees.

5.4                                 Full Access.  The Target will permit representatives of the
Parent and its prospective financing sources to have full access, at all
reasonable times, and in a manner so as not to materially interfere with the
normal business operations of the Target, to all premises, properties,
personnel, books, records (including Tax records), contracts and documents of
or pertaining to the Target, unless such access is prohibited under the Law,
provided, however, that in such cases the Target will promptly deliver to the
Parent a certificate in which it (a) notifies the Parent that it is restricting
access to the officers, employees, properties, offices, plants and other
facilities, books, records, data or other information specified in such notice
with respect to the subject matter described in such notice, (b) to the extent
permitted by Law, provides the basis for such restriction, (c) to the extent
permitted by Law, provides a summary of the information the Parent and its
representatives would have learned if such access were not restricted, and
further the Target will use its reasonable best efforts to implement the
necessary procedures to enable the provision of reasonable access to the extent
permissible by Law. 
Notwithstanding the foregoing, the Parties must mutually agree upon any
actions proposed to be taken by the Parent 

 46
 

or its advisors with respect to environmental matters, including the
conduct and timing of a “Phase II” environmental site review of the Real
Property.

5.5                                 Notice of Developments.

(a)                                  Each
Party will give prompt written notice to the others of any development causing
a breach or any event or circumstance that would reasonably be expected to
result in a breach of any of its own representations and warranties in Sections
3 or 4 of this Agreement.  Except as
otherwise provided in Section 5.5(b) below, no disclosure by any Party
pursuant to this Section 5.5(a) will be deemed to amend or supplement the
Target’s Disclosure Schedule or the Parent’s Disclosure Schedule, as
applicable, to have qualified the representations and warranties contained in
Sections 3 or 4 of this Agreement, or to prevent or cure any misrepresentation,
breach of warranty or breach of covenant.

(b)                                 Either
the Target or the Shareholders’ Representative may elect at any time to notify
the Parent of any development which first arises solely after the date hereof
and which causes a breach of any of the representations and warranties in
Section 3 of this Agreement.  Unless
the Parent has the right to terminate this Agreement pursuant to
Section 9.1(b) of this Agreement by reason of the development and
exercises that right within the period of 10 business days referred to in
Section 9.1(b) of this Agreement, the written notice pursuant to this
Section 5.5(b) will be deemed to have amended the Target’s Disclosure
Schedule, to have qualified the representations and warranties contained in
Section 3 of this Agreement, and to have cured any misrepresentation or
breach of warranty that otherwise might have existed hereunder by reason of the
development.  Without limiting the
foregoing, any update to Section 3.2 of the Target’s Disclosure Schedule before
the Closing will constitute an amendment to the Target’s Disclosure Schedule
and will not be deemed to have material negative effect to the Target.

5.6                                 Exclusivity.

(a)                                  From
the date of this Agreement until the earlier of the Closing or the termination
of this Agreement under Section 9 of this Agreement or otherwise, the
Target will not, and will cause its Affiliates and representatives not to,
directly or indirectly, through any employee, representative or otherwise,
(i) solicit or entertain any offers from, (ii) negotiate with or in
any manner encourage or discuss any proposal with, (iii) furnish any
information to, or (iv) authorize, approve, consummate, engage in, or
enter into any 

 47
 

agreement with, any
Person (other than the Parent or the Merger Sub) relating to a proposed
acquisition of the Target or its business or operations, in whole or in part,
whether through purchase of assets or stock, merger, lease or otherwise, or any
other transaction incompatible with that contemplated by this Agreement, or
which would constitute an alternative thereto.

(b)                                 The
Target will promptly terminate any pending discussions with respect to any
transaction contemplated by Section 5.6(a) of this Agreement with any
third party and will notify the Parent immediately if it receives any offer or
proposal or any related inquiry with respect to any transaction contemplated by
Section 5.6(a) of this Agreement.

5.7                                 Maintenance of Real Property.  The Target will maintain the Real Property in
substantially the same condition as existed on the date of this Agreement,
ordinary wear and tear excepted, and will not demolish or remove any of the
existing Improvements, or erect new improvements on the Real Property or any
portion thereof, without the prior written consent of Parent.

5.8                                 Leases.  The Target
will not enter into any new lease, sublease, license or other agreement for the
use or occupancy of any Real Property without the prior written consent of
Parent.

5.9                                 Title Insurance Commitments. 
The Parent, at its expense and as soon as practicable following the date
of this Agreement, will use commercially reasonable efforts to obtain a
commitment for an owner’s title insurance policy (current ALTA form used in
Wisconsin) for each parcel of owned Real Property (collectively, the “Title Commitments”) in an amount
designated by the Parent and issued by a title insurance company selected by
the Parent and reasonably acceptable to the Target (the “Title
Company”).  The Target
will use reasonable efforts to cooperate with the Parent in obtaining the Title
Commitments and the Title Policies described in Section 6.1 of this
Agreement.  Cooperation will include the
Target providing the Title Company with any affidavits or undertakings
reasonably requested by the Title Company to issue the Title Policies.  The Target will be responsible for the
payment of the title insurance premium with respect to the Title Policies.

5.10                           Tax Matters.  Without
the prior written consent of the Parent, the Target will not make or change any
election, change an annual accounting period, adopt or change any accounting
method, file any amended Tax Return, enter into any closing agreement, settle
any Tax claim or assessment relating to the Target, surrender any right to
claim a refund of Taxes, consent to any extension or waiver of the limitation
period applicable to any Tax claim or assessment relating to the Target, or
take any other 

 48
 

similar action relating to the filing of any Tax Return or the payment
of any Tax, if such election, adoption, change, amendment, agreement,
settlement, surrender, consent or other action could have the effect of (a)
increasing the Tax Liability of the Target for any period ending after the
Closing Date, or (b) increasing the Liability for Tax of the Target for the
period ending on or before the Closing Date unless such increased Taxes are
paid by the Target on or before the Closing Date or included as a current
liability on the Closing Date Balance Sheet.

5.11                           Special Meeting .  The Target will call a special
meeting of the holders of Target Shares (the “Special
Meeting”), as soon as practicable after the date of this Agreement
in order for the holders of Target Shares to consider and vote upon the
transactions contemplated by this Agreement, including the Merger, in
accordance with the Minnesota Business Corporation Act.  The Target will mail the Disclosure Documents
to each of the holders of Target Shares as soon as practicable, but only after
the Parent has had a reasonable opportunity to review and comment on, and has
approved, the Disclosure Documents, with such approval not to be unreasonably
withheld.  The Disclosure
Documents will include all such statements, materials or documents as are
required by law to be disseminated by the Target.  Included
within the Disclosure Documents will be recommendations from the board of
directors of the Target that the holders of Target Shares approve the
transactions contemplated by this Agreement, including the Merger and the board
of directors of the Target will not subsequently revoke, repudiate, contradict,
qualify or withdraw such recommendation in any way.

5.12                           Monthly Financials.  During the period
beginning as of the date of this Agreement and ending on the earlier of the
termination of this Agreement in accordance with Section 9 or the Closing Date,
the Target will prepare and furnish to the Parent, promptly after becoming
available and in any event within 20 days of the end of each calendar month,
monthly financials statements for each month following last month included in
the Most Recent Financial Statements through the Closing Date, in the form used
by management provided that such financial statements will be prepared in a manner
consistent with similar interim financial statements prepared for prior interim
periods.

5.13                           Financing.  The Target will take all actions
reasonably requested by the Parent in order to permit the Parent to secure the
Financing.

6.             Conditions
to Obligation to Close.

6.1                                 Conditions to Obligation of the Parent and the Merger
Sub.  The obligation of the
Parent and the Merger Sub to consummate the transactions to be performed by
them in connection with the Closing are subject to satisfaction of the following
conditions:

 49
 

 

(a)                                  the
representations and warranties set forth in Section 3 of this Agreement
(i) that are not qualified by materiality or Material Adverse Effect will be
true and correct in all material respects at and as of the Closing, and (ii)
that are qualified by materiality or Material Adverse Effect will be true in
correct in all respects at and as of the Closing;

(b)                                 the
Target will have performed and complied with all of its covenants contained in
this Agreement in all material respects through the Closing;

(c)                                  no action, suit or proceeding will be pending
before any Governmental Authority (i) in which an unfavorable injunction,
judgment, order, decree, ruling or charge would prevent consummation of any of
the transactions contemplated by this Agreement, (ii) which would limit or
otherwise adversely affect the right of the Parent to own the Target or operate
all or any material portion of the business of the Target, or (iii) which would
compel the Parent or any of its Affiliates to dispose of all or any material
portion of either the business of the Target, the Assets or the business or
assets of the Parent or any of its Affiliates;

(d)                                 the
Target will have executed and delivered to the Parent a certificate to the
effect that each of the conditions specified in this Section 6.1(a)
through (b) is satisfied in all respects;

(e)                                  the
Parties will have received all other necessary authorizations, consents and
approvals of any Governmental Authority,
all of which must be final and non-appealable;

(f)                                    the
Parent will have obtained the agreement of the Title Company to issue title
insurance policies at Closing (which may be in the form of a mark-up of a pro
forma of the Title Commitments) in accordance with the Title Commitments,
insuring Target’s fee simple title to each parcel of owned Real Property as of
the Closing Date (collectively, the “Title Policies”)
subject only to Real Property Encumbrances and other exceptions that are
acceptable to Parent;

(g)                                 the
holders of the Target Shares will have approved the Merger and the transactions
contemplated by this Agreement at the Special Meeting;

(h)                                 each
of the holders of Vested Options will have entered into an Vested Option
Cancellation Agreement with the Target in a form reasonably satisfactory to the
Parent (each, a “Vested Option Cancellation Agreement”);

 50
 

 

(i)                                     the
relevant parties will have entered into the Escrow Agreement, which must be in
full force and effect;

(j)                                     the
relevant parties will have entered into the Paying Agent Agreement, which must
be in full force and effect;

(k)                                  the
Target will have delivered to the Parent an affidavit, under penalties of
perjury, stating that the Target is not and has not been a United States real
property holding corporation, dated as of the Closing Date and in form and
substance required under Treasury Regulation §1.897-2(h), such that the Parent
is exempt from withholding any portion of the Merger Consideration thereunder;

(l)                                     the
Target will have delivered such other documents and instruments as are
reasonably necessary or appropriate to effect the consummation of the
contemplated transactions or that may be required under any Laws or any
material agreements listed in Section 3.12 of the Target’s Disclosure Schedule;

(m)                               the
Target will have obtained the third-party consents or waivers identified on Schedule 6.1(m);

(n)                                 Lee
T. Luft and Maurice L. Keesler will have entered into employment arrangements
with the Parent or its Affiliates which are reasonably acceptable to the Parent
and in the forms presented to Messrs. Luft and Keesler prior to the execution
of this Agreement, and each of such arrangements will be in full force and
effect in accordance with its respective terms;

(o)                                 the
Target will not have taken any action (other than the Merger) that would result
in Target ceasing to be an “S” corporation within the meaning of Section 1361
and 1362 of the Code;

(p)                                 the
Parent will have obtained the proceeds of the Financing, on terms and
conditions reasonably satisfactory to it, it being understood that, as to the
portion of the Financing contemplated by the Financing Letter of Intent,
financial terms not less favorable to Parent than those outlined in the
Financing Letter of Intent are reasonably satisfactory to the Parent;

(q)                                 holders
of no more than 10% of the Target Shares will have exercised any appraisal or
dissenters’ rights pursuant to the Minnesota Business Corporation Act;

(r)                                    the
Parent will have received from Gray, Plant, Mooty & Bennett, P.A., counsel
to the Target (or other counsel reasonably acceptable to the Parent), its
opinion with respect to the transactions contemplated by this Agreement, which
opinion will be in the form 

 51
 

set forth on Exhibit E and
will, at the request of the Parent, be confirmed to any provider of the
financing with respect to this Agreement;

(s)                                  each
of the Support Agreements will have been executed and delivered to the Parent
by the applicable Target Equityholder, and each of such arrangements will be in
full force and effect in accordance with its respective terms; and

(t)                                    all
actions to be taken by the Target in connection with consummation of the
contemplated transactions and all certificates, instruments and other documents
required to effect these transactions will be reasonably satisfactory in form
and substance to the Parent.

The Parent may waive any condition specified in this Section 6.1
by providing a written waiver to Target at or prior to the Closing.

6.2                                 Conditions to Obligation of the Target.  The obligation of the Target to consummate
the transactions to be performed by them in connection with the Closing is
subject to satisfaction of the following conditions:

(a)                                  the
representations and warranties set forth in Section 4 of this Agreement
(i) that are not qualified by materiality or Material Adverse Effect, and (ii)
that are qualified by materiality or Material Adverse Effect will be true and
correct in all material respects at and as of the Closing Date;

(b)                                 each
of the Parent and the Merger Sub will have performed and complied with all of
its covenants contained in this Agreement in all material respects through the
Closing;

(c)                                  no action, suit or proceeding will be pending
before any Governmental Authority in which an unfavorable injunction, judgment,
order, decree, ruling or charge would prevent consummation of any of the
transactions contemplated by this Agreement;

(d)                                 each
of the Parent and the Merger Sub will have delivered to the Target a
certificate to the effect that each of the conditions specified above in this
Section 6.2(a) and (b) is satisfied in all respects;

(e)                                  the
Parties will have received all other necessary authorizations, consents and
approvals of any Governmental Authority,
all of which must be final and non-appealable;

 52
 

 

(f)                                    the
Parent will have paid all filing fees and made all filings necessary and appropriate
with respect to the HSR Act;

(g)                                 the
Parent will have entered into the Escrow Agreement, which must be in full force
and effect;

(h)                                 the
Parent will have entered into the Paying Agent Agreement, which must be in full
force and effect;

(i)                                     each
of the Parent and the Merger Sub will have delivered such other documents and
instruments as are reasonably necessary or appropriate to effect the
consummation of the contemplated transactions or that may be required under any
Laws or any agreements to which the Parent is a party; and

(j)                                     all
actions to be taken by the Parent and the Merger Sub in connection with
consummation of the contemplated transactions and all certificates, instruments
and other documents required to effect the contemplated transactions will be
reasonably satisfactory in form and substance to the Target.

The Target may waive any condition specified in this Section 6.2
by providing a written waiver to Parent at or prior to the Closing.

7.             Remedies
for Breaches of this Agreement.

7.1                                 Survival of Representations, Warranties and Covenants.  Except for the right to indemnification set
forth in Section 7.2(b) below, the representations, warranties and covenants
set forth in this Agreement, and the right of the Parties to make a claim for
indemnification in respect thereof, will survive the Closing and continue in
full force and effect for a period of 12 months following the Closing.

7.2                                 Indemnification for the Benefit of the Parent
Indemnified Parties.

(a)                                  In
the event of any breach of or inaccuracy in any of the representations and
warranties contained in Section 3 of this Agreement (in each case, as such
representation or warranty would read if all qualifications as to materiality
or Material Adverse Effect were deleted therefrom) or any breach by the Target
or the Shareholders’ Representative of any of their respective covenants
contained in this Agreement or the Transaction Documents, provided that, if
there is an applicable survival period pursuant to Section 7.1 of this
Agreement, the Parent Indemnified Party makes a written claim for
indemnification to the Shareholders’ Representative in accordance with
Section 11.7 of this Agreement within the applicable survival period, then
in each case, from and 

 53
 

after the Closing, then the Parent Indemnified Parties
will be indemnified by the Target Equityholders from and against any Adverse
Consequences the Parent Indemnified Parties suffer arising out of or relating
to any such breach or inaccuracy.

(b)                                 Notwithstanding
the survival period stated in Section 7.1 above, if during the period of three
years following the Closing Date a Parent Indemnified Party makes a written
claim for indemnification to the Shareholders’ Representative in accordance
with Section 11.7 of this Agreement, then from and after the Closing the
Parent Indemnified Parties will be indemnified by the Target Equityholders from
and against any Adverse Consequences the Parent Indemnified Parties suffer
arising out of or relating to any action, proceeding, ruling, order, decree or
investigation by or on behalf of any Governmental Authority with respect to the
Revenue Bonds (excluding any Adverse Consequences of any action, proceeding,
ruling, order, decree or investigation by or on behalf of any Governmental
Authority with respect to the Revenue Bonds to the extent initiated in response
to any communication by the Parent Indemnified Parties (x) to a Governmental
Authority which was not made in response to a direct request by a Governmental
Authority in connection with a pending or threatened Tax audit, or (y) to a
Person other than a Governmental Authority, the intent of which was to elicit a
determination from a Governmental Authority with respect to the Tax treatment
of interest paid or payable pursuant to the Revenue Bond) including (i) any
Liability to the United States Department of the Treasury or the Internal
Revenue Service related to the Tax treatment of interest paid or accrued prior
to the Closing Date pursuant to the Revenue Bonds, (ii) any and all costs and
expenses of negotiating and arranging substitute or alternative financing for
such indebtedness (including legal and accounting fees and charges) whether
incurred by the Target or any of its Affiliates, (iii) any and all commitment,
underwriting or other fees or charges payable to, and any and all expenses of,
any provider of such other financing for which the Parent Indemnified Parties
are responsible, (iv) the net present value (calculated using a discount rate
of 10% per annum) of any difference in interest or rate of interest of such
financing as compared to the interest or rate of interest payable on the
Revenue Bonds for the period commencing on the Closing Date and ending on
December 31, 2011, and (v) the attorneys’ fees and other transaction costs
associated with settling any audit with the Internal Revenue Service that was
initiated by the Internal Revenue Service in connection with the Revenue Bonds.

 54
 

 

(c)                                  The
obligation to indemnify the Parent Indemnified Parties following the Closing
from and against any Adverse Consequences resulting from, arising out of,
relating to, in the nature of or caused by the breach (or alleged breach) under
this Section 7 will be subject to each of the following:

(i)                                     The
Parent Indemnified Parties may not assert a claim for indemnification under
Section 7.2(a) until the Parent Indemnified Parties have suffered Adverse
Consequences which, without giving effect to this clause (i), would be subject
to indemnification hereunder in excess of an aggregate threshold equal to one
percent (1%) of the Enterprise Value (the “Deductible”),
after which point the Parent Indemnified Parties will be indemnified from and
against any Adverse Consequences above such threshold amount.  The Parent Indemnified Parties may not assert
a claim for indemnification under 7.2(b) until the Parent Indemnified Parties
have suffered Adverse Consequences which, without giving effect to this clause
(i), would be subject to indemnification hereunder in excess of an aggregate
threshold equal to $100,000, after which point the Parent Indemnified Parties
will be indemnified from and against any Adverse Consequences above such
threshold amount.

(ii)                                  With
respect to claims for indemnification made by the Parent Indemnified Parties
under Section 7.2(b) above, the Target Equityholders will have no Liability for
indemnification in excess of each of the following:  (A) for the one-year period following the
Closing, an aggregate amount equal to $2,500,000; (B) for the period beginning
on the one-year anniversary of the Closing and ending on the two-year
anniversary of the Closing, an aggregate amount equal to $2,000,000; and (C)
for the period beginning on the two-year anniversary of the Closing and ending
on the three-year anniversary of the Closing, an aggregate amount equal to
$1,500,000.

(iii)                               With respect to any and
all other claims for indemnification made by the Parent Indemnified Parties,
the Target Equityholders will have no Liability for indemnification in excess
of an aggregate amount equal to ten percent (10.0%) of the Enterprise Value,
less any amount paid with respect to successful claims for indemnification
under Sections 7.2(b) and 7.2(c)(ii) above.

 55

 

(iv)                              The
Escrow Agent, on behalf of the Target Equityholders, will pay for any and all
indemnification claims of any Parent Indemnified Party on behalf of the Target
Equityholders in accordance with the terms and conditions of this Agreement and
the Escrow Agreement.

(v)                                 For
purposes of the indemnification provisions contained in this Section 7, Adverse
Consequences will not include (A) the loss of, or failure to realize (for
whatever reason), any Tax benefits to the Target or to one or more of the
Parent Indemnified Parties attributable to deductions as a result of any
Transaction Payments made on or after the Closing Date, or (B) other than with
respect to Section 7.2(b) and any other provision relating to the
indemnification provided thereunder, Taxes attributable to any affirmative
action taken by any Parent Indemnified Party or any transferee that is
inconsistent with the Ordinary Course of Business of such Parent Indemnified
Party or the Target, other than any action expressly required by this
Agreement or taken with the advance written consent of the Shareholders’
Representative.

7.3                                 Indemnification for the Benefit of the Seller
Indemnified Parties.  In the
event of any breach of or inaccuracy in any of the representations and
warranties contained in Section 4 of this Agreement (in each case, as such
representation or warranty would read if all qualifications as to materiality
or Material Adverse Effect were deleted therefrom) or any breach by the Parent
or the Merger Sub of any of their respective covenants contained in this
Agreement or the Transaction Documents, provided that, if there is an
applicable survival period pursuant to Section 7.1 of this Agreement, the
Shareholders’ Representative (on behalf of the Target Equityholders) makes a
written claim for indemnification to the Parent in accordance with
Section 11.7 of this Agreement within the applicable survival period, from
and after the Closing, the Parent agrees to indemnify the Seller Indemnified
Parties from and against any Adverse Consequences they suffer arising out of or
relating to any such breach or inaccuracy. 
Notwithstanding the foregoing, neither the Seller Indemnified Parties
nor the Shareholders’ Representative (on behalf of the Target Equityholders)
may assert a claim for indemnification against the Parent or the Merger Sub
until the Seller Indemnified Parties have suffered Adverse Consequences by
reason of all such breaches (or alleged breaches) in excess of the Deductible,
after which point the Seller Indemnified Parties will be indemnified by the
Parent, only from and against any Adverse Consequences above the Deductible.

 56
 

Further, the Parent and the Merger Sub will have no
liability for indemnification under this Section 7.3 in excess of ten percent
(10.0%) of the Enterprise Value.

7.4                                 Matters Involving Third Parties.

(a)                                  If
any third party notifies any Parent Indemnified Party or Seller Indemnified
Party (such party, the “Indemnified Party”)
with respect to any matter (a “Third Party Claim”)
which may give rise to a claim for indemnification against any Party (the “Indemnifying Party”) under this Section 7, then the
Indemnified Party will promptly (and in any event within five business days
after receiving notice of the Third Party Claim) notify each Indemnifying Party
thereof in writing provided, however, that no delay on the part of the
Indemnified Party in notifying the Indemnifying Party will relieve the
Indemnifying Party from any obligation under this Section 7, except to the
extent such delay actually and materially prejudices the Indemnifying Party.

(b)                                 Any
Indemnifying Party will have the right at any time to assume and thereafter
conduct the defense of the Third Party Claim with counsel of his, her or its
choice reasonably satisfactory to the Indemnified Party provided that (i) the
Indemnifying Party gives written notice to the Indemnified Party within fifteen
days after the Indemnified Party has given notice of the Third Party Claim that
the Indemnifying Party will indemnify the Indemnified Party from and against
the entirety of any Adverse Consequences the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of, or caused by the
Third Party Claim, (ii) the Indemnifying Party provides the Indemnified Party
with evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have adequate financial resources to defend against the
Third Party Claim, (iii) the Third Party Claim involves only money damages and
does not seek an injunction or other equitable relief against the Indemnified
Party, (iv) the Indemnified Party has not been advised that an actual or
potential conflict exists between the Indemnified Party and the Indemnifying
Party in connection with the defense of the Third Party Claim and (v) the
Indemnifying Party conducts the defense of the Third Party Claim actively and
diligently.  The Indemnifying Party will
not consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of the Indemnified
Party (not to be withheld unreasonably).

(c)                                  Unless
and until an Indemnifying Party assumes and conducts the defense of the Third
Party Claim as provided in Section 7.4(b) of 

 57
 

this Agreement, the Indemnified Party may defend
against the Third Party Claim in any manner he, she or it reasonably may deem
appropriate at the sole cost and expense of the Indemnifying Party.

(d)                                 In
no event will the Indemnified Party consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim without the
prior written consent of each of the Indemnifying Parties, not to be withheld
unreasonably, provided, however, the preceding limitation will not apply if (i)
the Indemnifying Party did not elect to assume control of the Third Party Claim
pursuant to Section 7.4(b) of this Agreement or (ii) the Indemnifying Party
fails to satisfy the requirements set forth in Section 7.4(b)(v) of this
Agreement.

7.5                                 Determination of Adverse Consequences.  The Parties will make appropriate adjustments
for Tax benefits and insurance coverage in determining Adverse Consequences for
purposes of this Section 7, but solely to the extent of any Tax benefit
actually received with respect to the tax year in which the indemnification
payment was made (if and when received and treating any such benefit as the
last item of deduction for the applicable Tax year) and of the amount of any
insurance proceeds actually received (net of the present value of any increases
in premiums and provided that, to the extent the insurance proceeds available
under policies are less than all Adverse Consequences or other losses suffered
by the applicable party of the sort covered by such policy, such proceeds will
first be applied against Adverse Consequences or other losses that are not
indemnified hereunder).  All
indemnification payments will be made initially without regard to the
foregoing.  All indemnification payments
will be deemed adjustments to the amount of the Merger Consideration.

7.6                                 Exclusive Remedy.  The
Parties acknowledge and agree that, except as provided in Sections 10.1 and
11.14 of this Agreement, the foregoing indemnification provisions in this
Section 7 will be the exclusive remedy of the Parent Indemnified Parties,
the Target, the Target Equityholders or the holders of an interest in the
Escrow with respect to any matters involving this Agreement or the transactions
contemplated by this Agreement, except that each Parent Indemnified Party does
not waive any statutory, equitable or common law rights or remedies relating to
any fraud or intentional misrepresentation.

7.7                                 Recoupment Exclusively Against Escrow.  Any indemnification to which the Parent
Indemnified Parties are entitled under this Agreement as a result of any
Adverse Consequences it may suffer will be made as a payment to the Parent
Indemnified Parties from the Escrow Amount held in the Escrow and in accordance
with the terms of the Escrow Agreement and this Agreement.  The Parent and the Merger Sub will not be entitled
to 

 58
 

any payments above
the Escrow Amount for indemnification claims resulting from Adverse
Consequences or from any source other than the Escrow.

7.8                                 No Circular Recovery. 
No Target Equityholder will be entitled to make any claim for
indemnification against the Parent, the Merger Sub or, after the Effective
Time, the Target by reason of the fact that such Person was a controlling
person, director, employee or representative of the Target or was serving as
such for another Person at the request of the Parent or the Target (whether such
claim is for Adverse Consequences of any kind or otherwise and whether such
claim is pursuant to any statute, governing documents, contractual obligation
or otherwise) with respect to any claim brought by the Parent or a Parent
Indemnified Person against any Target Equityholder relating to this Agreement
or any of the transactions contemplated hereby. 
With respect to any claim brought by the Parent or a Parent Indemnified
Person against any Target Equityholder relating to this Agreement and any of
transactions contemplated hereby, each Target Equityholder, by virtue of
receiving the Merger Consideration, will be deemed to waive any right of
subrogation, contribution, advancement, indemnification or other claim against
the Target with respect to any amounts owed by such Target Equityholder
pursuant to this Section 7.

8.                                       Tax Matters.  The following provisions will govern the
allocation of responsibility as between the Parent and the Shareholders’
Representative for certain Tax matters:

8.1                                 Preparation of Tax Returns.  The Shareholders’ Representative will prepare
or cause to be prepared and file or cause to be filed all income Tax Returns
for the Target for all periods ending on or prior to the Closing Date, whether
filed before or after the Closing Date (the “Seller
Returns”).  All Seller Returns
will be prepared on a basis consistent with the most recent Tax Returns of the
Target unless the Shareholders’ Representative determines that there is no
reasonable basis for such position, and will be true, correct and complete in
all material respects.  Not later than
thirty (30) days prior to the due date for filing of a Seller Return, the
Shareholders’ Representative will provide the Parent with a copy of such Seller
Return.  If Parent, within 15 days after
the delivery of such Seller Return notifies the Shareholders’ Representative in
writing that it objects to any of the items on such Seller Return, the
Shareholders’ Representative and the Parent will attempt in good faith to
resolve the dispute and, if they are unable to do so, the disputed items shall
be resolved (within a reasonable time) by a nationally recognized independent
accounting firm chose jointly by the Parent and the Shareholders’
Representative (the “Accounting Firm”).  The Accounting Firm will resolve any such
dispute in favor of the Shareholders’ Representative to the extent that the Tax
Return subject to the dispute was prepared on a basis consistent with the most
recent Tax Returns of the Target, unless the Accounting Firm determines that
there is no reasonable 

 59
 

basis for such position, and the fees and expenses of such Accounting
Firm will be borne equally by the Parent and the Shareholders’
Representative.  The Parent will
cooperate in the filing of the Seller Returns. 
The Shareholders’ Representative will pay exclusively from the Escrow or
the Shareholders’ Representative Fund (as determined by the Shareholders’
Representative in his, her or its sole discretion) any amount shown due on the
Seller Returns to the extent not included as a liability in the Net Working
Capital as determined for the Closing Date Balance Sheet.  The Parent will pay any Taxes shown due on
the Seller Tax Returns to the extent such Taxes were reflected as a liability
in the Net Working Capital as determined for the Closing Date Balance
Sheet.  The Parent will prepare or cause
to be prepared and will file or cause to be filed all Tax Returns other than
the Seller Returns; provided, however, that not later than thirty
(30) days prior to the due date for filing of a Tax Return for a Straddle
Period, the Parent will provide the Shareholders’ Representative with a copy of
such Tax Return.  If the Shareholders’
Representative, within 15 days after the delivery of such Tax Return notifies
Parent in writing that it objects to any of the items on such Tax Return,
Parent and the Shareholders’ Representative shall attempt in good faith to
resolve the dispute and, if they are unable to do so, the disputed items shall
be resolved (within a reasonable time) by the Accounting Firm.  In the case of a Tax Return for a Straddle
Period, the Shareholders’ Representative will pay to the Parent the Target’s
share of any Taxes due with respect to such Tax Return (determined pursuant to
Section 8.2 below) to the extent not included as a liability in the Net Working
Capital as determined for the Closing Date Balance Sheet not later than seven
(7) days prior to the due date for filing such Tax Return, it being understood
and agreed that the Shareholders’ Representative will pay such amounts
exclusively from the Escrow or the Shareholders’ Representative Fund, as
determined by the Shareholders’ Representative in his, her or its sole
discretion.  Any costs, fees and expense
of the Accounting Firm in connection with this Section 8.1 shall be equally
borne by the Parent and the Shareholders’ Representative.

8.2                                 Straddle Periods. 
Each taxable period ending on or before the Closing Date and the portion
through the end of the Closing Date for any taxable period that includes (but
does not begin or end on) the Closing Date will be a “Pre-Closing
Tax Period.”  In the case of
any taxable period that includes (but does not end on) the Closing Date (a “Straddle Period”), the amount of any Taxes of the Target
based upon or measured by net income or gain which relate to the Pre-Closing
Tax Period will be determined based on an interim closing of the books as of
the close of business on the Closing Date (and for such purpose, the Taxable
period of any partnership or other pass-through entity in which the Target hold
a beneficial interest will be deemed to terminate at such time).  The Parties understand and agree that, in
accordance with Treasury Regulation 1.1502-76(b)(1)(ii)(A)(2) the Target will
become a member of Parent’s 

 60
 

 

consolidated federal income tax group as of the beginning of the
Closing Date, with the result that any payment with respect to the Vested
Options and Warrants, any payment of Selling Expenses and any payment of
compensation to the Target’s employees and service providers (such payments,
regardless of when made, the “Transaction Payments”)
on the Closing Date, to the extent not validly accrued prior to the Closing
Date, will be treated as properly allocable to the taxable year of Parent’s
consolidated federal income tax group that includes the Closing Date.  The parties further understand and agree that
any Tax deduction attributable to any Transaction Payment shall be taken in the
Taxable period in which such Transaction Payment is made or validly accrued in
a manner consistent with the Target’s past Tax accounting practices, and that
no party shall have any obligation to pay or otherwise compensation any other
party for any benefit associated with taking such deduction.  The amount of Taxes other than Taxes of the
Target based upon or measured by net income or gain for a Straddle Period which
relate to the Pre-Closing Tax Period will be deemed to be the amount of such
Tax for the entire taxable period multiplied by a fraction, the numerator of
which is the number of days in the portion of the taxable period ending on the
Closing Date and the denominator of which is the number of days in such
Straddle Period.  To the extent not included or accounted for in the Closing Date Balance
Sheet and as a liability in Net Working Capital, any real estate Taxes and installments of special assessments that are due
and payable in the year of the Closing for the Real Property will be pro rated
between the Surviving Corporation and Shareholders’ Representative (on
behalf of the Target) on the Closing Date based upon the respective periods of
ownership for the year in which the Closing occurred.

8.3                                 Cooperation on Tax Matters.

(a)                                  The
Parties will cooperate fully, as and to the extent reasonably requested by the
other Party, in connection with the filing of Tax Returns and any audit,
litigation or other proceeding with respect to Taxes.  Such cooperation will include the retention
and (upon the other Party’s request) the provision of records and information
reasonably relevant to any such audit, litigation, or other proceeding and
making employees available on a mutually convenient basis to provide additional
information and explanation of any material provided in satisfaction of this
requirement.  The Parties agree that the
Parent will cause the Surviving Corporation to (i) retain all books and records
with respect to Tax matters pertinent to the Target relating to any taxable
period beginning before the Closing Date until the expiration of the applicable
statutes of limitations (and, to the extent notified by the Parent or the
Shareholders’ Representative, any extensions thereof) of the respective taxable
periods, and to abide by all record retention agreements entered into with any
taxing authority, and (ii) give the 

 61
 

Shareholders’ Representative reasonable written notice
prior to transferring, destroying or discarding any such books and records and,
if the Shareholders’ Representative so requests, the Surviving Corporation will
allow the Shareholders’ Representative to take possession of such books and
records.

(b)                                 The
Parties further agree, upon request, to use their commercially reasonable best
efforts to obtain any certificate or other document from any Governmental
Authority or any other Person as may be necessary to mitigate, reduce or
eliminate any Tax that could be imposed (including with respect to the
transactions contemplated by the Merger and the Transaction Documents).

8.4                                 Refunds and Tax Benefits;
Amended Returns.  Any Tax refunds that are received by the
Parent, the Surviving Corporation, or any other Affiliate of Parent, and any
amounts credited against Tax to which the Parent, the Surviving Corporation, or
any other Affiliate of the Parent become entitled  with
respect to the Pre-Closing Tax Period and that are not listed as a current
asset on the Closing Date Balance Sheet or credited as a current asset in the
calculation of Net Working Capital will be for the account of the Target
Equityholders, and the Parent will pay over
to the Paying Agent (during the Escrow Period) or to the Shareholders’
Representative (following the Escrow Period) any such refund or the amount of
any such credit within 15 days after receipt or entitlement thereto, except to
the extent that (a) such refund or credit is attributable to actions not
in the ordinary course of business taken by the Parent or the Surviving
Corporation after the Closing, or (b) such refund or credit is attributable to
the carryback of a Tax attribute (including a net operating loss, net capital
loss, foreign tax credit, or research and development credit) arising in a
period other than a Pre-Closing Tax Period (a “Post-Closing
Tax Period”), and the carryback of such Tax attribute does not
reduce the amount of any refund that would otherwise be for the amount of the
Target Equityholders.  For this purpose, the Parent, the Surviving
Corporation or, or any other Affiliate of the Parent will be treated as
entitled to a refund on the date that is it credited against then currently
owed tax.  In addition, and subject to
the limitations listed above, to the extent that a claim for refund or a
proceeding results in a payment or credit against Tax by a taxing authority to
the Parent or the Surviving Corporation of any amount accrued as a liability on
the Closing Date Balance Sheet, the Parent will pay such amount to the Paying
Agent (during the Escrow Period) or to the Shareholders’ Representative
(following the Escrow Period) within 15 days after receipt or entitlement
thereto.  Following the Closing, the
Parent will not file an amended Tax Return for the Surviving Corporation with
respect to the Pre-Closing Tax Period without the advance written consent of
the Shareholders’ Representative, which will not be unreasonably
withheld, conditioned, or delayed.  Without limiting the
generality of the foregoing, the Shareholders’ Representative will not
be deemed to have unreasonably withheld consent 

 62
 

to the filing of an
amended Tax Return if the Tax Return increases the Tax liability of the Target
or the shareholders of the Target, unless the changes on the amended Tax Return
are to correct an error.  Any dispute as
to whether an amended Tax Return is to correct an error will be resolved within
a reasonable period by the Accounting Firm, and the fees and expenses of such
Accounting Firm will be borne equally by the Parent and the Shareholders’
Representative.

8.5                                 Certain Taxes. 
Notwithstanding anything else to the contrary contained in this
Agreement, all transfer, documentary, sales, use, stamp, registration and other
such Taxes and fees (including any penalties and interest) incurred in
connection with the Merger or the Transaction Documents will be paid 50% by the
Shareholders’ Representative (it being understood and agreed that the
Shareholders’ Representative will pay such amounts from the Escrow or the
Shareholders’ Representative Fund) and 50%
by the Parent when due, and the Target will file all necessary Tax Returns and
other documentation with respect to all such transfer, documentary, sales, use,
stamp, registration and other Taxes and fees; it being understood that the expense
of filing any such Tax Returns will be borne 50% by the Shareholders’
Representative (who will satisfy such obligation with funds from the Escrow or
the Shareholders’ Representative Fund) and 50% by the Parent.

8.6                                 Resolution of Tax Disputes.

(a)                                  If the Parent receives notice of a claim by a
Governmental Authority in respect of Taxes of the Target for a Pre-Closing
Period which may give rise to a liability of Target Equityholders under this
Agreement (a “Pre-Closing Tax Claim”), then the
Parent will promptly give written notice to the Shareholders’ Representative; provided,
however, that no delay on the part of the Parent in notifying the
Shareholders’ Representative will relieve the Target Equityholders from any
obligation hereunder, except to the extent such delay actually and materially
prejudices the Target Equityholders.

(b)                                 In respect of any Pre-Closing Tax Claim, the
procedures set forth in Section 7.4 will govern the conduct of the defense of
such claim, with each reference to the Indemnifying Party taken to mean the
Shareholders’ Representative and each reference to the Indemnified Party taken
to mean the Parent.

9.             Termination.

9.1                                 Termination of Agreement.  The Parties may terminate this Agreement in
accordance with one or more of the following:

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(a)                                  The
Parent and the Target may terminate this Agreement by mutual written consent at
any time prior to the Closing;

(b)                                 The
Parent may terminate this Agreement by giving written notice to the Target at
any time prior to the Closing in the event (i) the Target has within the
then previous ten business days given the Parent any notice pursuant to Section
5.5(b) of this Agreement and the development that is the subject of the notice
is material to the Target, (ii) the Target has breached any representation,
warranty or covenant contained in this Agreement in any material respect, the
Parent notified the Target of the breach, and the breach, if capable of being
cured, has continued without cure or written waiver by the Parent for a period
of 30 days after the notice of breach, or (iii) if the Closing does not
occur on or before March 31, 2007, by reason of the failure of any condition
precedent under Section 6.1 of this Agreement (unless the failure results
primarily from the Parent itself breaching any representation, warranty or
covenant contained in this Agreement);

(c)                                  The
Target may terminate this Agreement by giving written notice to the Parent at
any time prior to the Closing (i) in the event the Parent has breached any
material representation, warranty or covenant contained in this Agreement in
any material respect, the Target has notified the Parent of the breach, and the
breach, if capable of being cured, has continued without cure or written waiver
by the Target for a period of 30 days after the notice of breach, or
(ii) if the Closing does not occur on or before March 31, 2007, by reason
of the failure of any condition precedent under Section 6.2 of this
Agreement (unless the failure results primarily from the Target itself
breaching any representation, warranty or covenant contained in this
Agreement); and

(d)                                 Either
Party may terminate this Agreement in the event that any Law becomes effective
and continues in effect for 90 days restraining, enjoining or otherwise
prohibiting or making illegal the consummation of any of the transactions
contemplated by this Agreement.

9.2                                 Effect of Termination.  If any Party terminates this Agreement
pursuant to Section 9.1 of this Agreement, all rights and obligations of
the Parties under this Agreement (other than Sections 3.4, 4.4, 7 (but only
with respect to indemnification claims for Adverse Consequences arising from a
breach of Sections 3.4 and 4.4), this Section 9.2 and Section 11) will
terminate without any Liability of any Party to any other Party (except for any
Liability of any Party then in breach).

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10.                                 Shareholders’ Representative.

10.1                           Appointment.  By
virtue of the approval of this Agreement and the Merger by the holders of
Target Shares at the Special Meeting and by the holders of Vested Options under
the Vested Option Cancellation Agreements and the holders of the Warrants under
the Letters of Transmittal, each of the Target Equityholders, as the case may
be, have or will have appointed Wayne Gullstad as the Shareholders’
Representative with respect to this Agreement and the transactions contemplated
by this Agreement.  No bond will be
required of the Shareholders’ Representative, and the Shareholders’
Representative will not receive any compensation for his, her, or its
services.  The Shareholders’
Representative will not receive any compensation for the first 50 hours of his,
her or its services.  Thereafter, the
Shareholders’ Representative, at his, her or its discretion may cause the
Paying Agent to compensate the Shareholders’ Representative for each additional
hour of service at a rate of $100 per hour by disbursing funds to the
Shareholders’ Representative for such compensation at such rate from the
Shareholders’ Representative Fund, provided that, for the avoidance of doubt,
no such compensation shall result in any obligation of the Parent or the Merger
Sub to deposit additional amounts with the Paying Agent.  To the extent that a portion of the Escrow or
the Reserved Fund (as defined in the Escrow Agreement) may be disbursed to the
Paying Agent in accordance with the Escrow Agreement, if the Shareholders’
Representative delivers a written notice to the Escrow Agent and the Parent,
then the Escrow Agent will deliver to the account of the Shareholders’
Representative Fund and designated by the Shareholders’ Representative in such
notice any such portion of the Escrow or the Reserved Fund eligible for
disbursement (including interest thereon) to be used in connection with the
Shareholders’ Representative’s duties pursuant to this Agreement and the
Transaction Documents.  Additionally, if
a Parent Indemnified Party makes a claim for indemnification against the Target
Equityholders in accordance with this Agreement and the Escrow Agreement, then
the Shareholders’ Representative, in his, her or its sole and absolute
discretion, may request that the Escrow Agent deliver any interest earned to
such date on the Escrow or the Reserved Fund and not theretofore released by
the Escrow Agent to the Shareholders’ Representative for deposit into the
Shareholders’ Representative Fund, and such interest will become a part of the
Shareholders’ Representative Fund upon such delivery.  The Shareholders’ Representative shall
indemnify and hold harmless the Parent Indemnified Parties from and against any
and all losses, liabilities, costs, damages and expenses suffered or incurred
by any of them arising from or relating to any claim by any Target Equityholder
in respect of any funds delivered or released to the Shareholders’
Representative Fund as contemplated in this Section 10.1.  If any person other than Wayne Gullstad is
appointed as the Shareholders’ Representative at the Special 

 65
 

Meeting, that Person will become a party to this Agreement before the
Closing.

10.2.                        Replacement
and Vacancy.  Any person
acting as the Shareholders’ Representative may from time to time be removed and
replaced upon not less than 30 days prior written notice to the Parent.  No more than one natural person may serve as
the Shareholders’ Representative at any one time.  No person acting as the Shareholders’
Representative may be removed or replaced unless the holders of greater than
the aggregate of a two-thirds interest of the Escrow agree to such removal and
to the identity of the substituted person to act as the Shareholders’
Representative.  The Shareholders’
Representative may not resign until the vacancy in the position of the
Shareholders’ Representative is filled by the affirmative agreement of the
holders of a majority in interest of the Escrow.  The Parent may assume that any incumbent
Shareholders’ Representative continues to serve in such capacity until the
Parent is notified in writing of a replacement and receives evidence
satisfactory to it of such removal and replacement.

10.3                           Authority.

(a)                                  The
Shareholders’ Representative is authorized, for and on behalf of each of the
Target Equityholders, to make and deliver any certificate, notice, consent or
instrument required or permitted to be made or delivered under this Agreement
or the Transaction Documents, which the Shareholders’ Representative determine
in his or her sole discretion to be necessary, appropriate or desirable.

(b)                                 The
Shareholders’ Representative may use the Shareholders’ Representative Fund for
any reasonable costs and expenses of the Shareholders’ Representative related
to this Agreement or the Transaction Documents, including reasonable attorneys’
and other professional fees and any amounts to be paid therefrom pursuant to
Section 2.7(c) of this Agreement. 
Following the expiration of the Escrow Period and the satisfaction of
any amounts to be paid from the Shareholders Representative Fund pursuant to
Section 2.7(c) of this Agreement, the Shareholders’ Representative will deliver
the remains of the Shareholders’ Representative Fund, if any, to the Paying
Agent, who will then distribute this amount to the Target Equityholders in
accordance with the Paying Agent Agreement and Section 2.5(d) of this
Agreement.

(c)                                  Any
action taken by or on behalf of the Shareholders’ Representative will represent
a decision of the Target Equityholders in the Escrow and will be final, binding
and conclusive upon the Target Equityholders.

 66

 

10.4                           Indemnity; No Liability.

(a)                                  Each
Target Equityholder will, out of their own personal funds and not out of the
funds in the Escrow, indemnify the Shareholders’ Representative and hold the
Shareholders’ Representative harmless against any Adverse Consequences arising
out of or in connection with the acceptance or administration of the
Shareholders’ Representative’s duties described in this Agreement, except for
any actions taken by or on behalf of the Shareholders’ Representative that
involve willful misconduct on the part of the Shareholders’ Representative.

(b)                                 The
Escrow Agent, the Parent and the Surviving Corporation will have no Liability
to any Person for any acts done by them in accordance with any action taken by
or on behalf of the Shareholders’ Representative.  The Escrow Agent and the Parent may rely upon
any action taken by or on behalf of the Shareholders’ Representative as being
an action taken by each Target Equityholder.

11.           Miscellaneous.

11.1                           Press Releases and Public Announcements.  No Party will issue any press release or make
any public announcement relating to the subject matter of this Agreement prior
to the Closing without the prior written approval of the Parent and the
Target.  Any Party, however, may make (a)
any public disclosure it believes in good faith is required by applicable Law,
(b) any listing or trading agreement concerning its publicly-traded securities
(in which case the disclosing Party will use its commercially reasonable best
efforts to advise the other Parties prior to making the disclosure), (c) any
disclosure made in connection with the enforcement of any right or remedy
relating to this Agreement or the transactions contemplated hereby.

11.2                           No Third-Party Beneficiaries.  This Agreement will not confer any rights or
remedies upon any Person (including employees of any of the Target) other than
the Parties and their respective successors and permitted assigns, provided
that each Parent Indemnified Party and the Seller Indemnified Parties will be a
third party beneficiary entitled to enforce the applicable provisions of
Section 7 of this Agreement.

11.3                           Entire Agreement.  This Agreement (including the documents
referred to in this Agreement) and the Transaction Documents constitute the
entire agreement among the Parties and supersede any prior understandings,
agreements or representations by or among the Parties, written or oral, to the
extent they related in any way to the subject matter of this Agreement.

 67
 

 

11.4                           Succession and Assignment.  This Agreement will be binding upon and inure
to the benefit of the Parties and their respective successors and permitted
assigns.  No Party may assign either this
Agreement or any of its rights, interests or obligations under this Agreement
without the prior written approval of the other Party.  The Parent, however, may, without the consent
of the Target or the Shareholders’ Representative, (a) assign any or all
of its rights and interests hereunder to one or more of its Affiliates or as
collateral security to any Person providing debt financing to the Parent or
(b) designate one or more of its Affiliates to perform its obligations
under this Agreement (in any or all of which cases the Parent nonetheless will
remain responsible for the performance of all its obligations hereunder).

11.5                           Counterparts and Facsimile Signatures.  This Agreement may be executed in one or more
counterparts, each of which will be deemed an original but all of which
together will constitute one and the same instrument, and by facsimile.

11.6                           Headings. 
The section headings contained in this Agreement are inserted for
convenience only and will not affect in any way the meaning or interpretation
of this Agreement.

11.7                           Notices. 
All notices, requests, demands, claims and other communications required
or permitted to be delivered, given or otherwise provided under this Agreement
must be in writing and must be delivered, given or otherwise provided in
accordance with the following: (i) by hand (in which case, it will be effective
upon delivery); (ii) by facsimile (in which case, it will be effective upon
receipt of confirmation of good transmission); or (iii) by overnight delivery
by a nationally recognized service such as Federal Express® (in which case, it
will be effective on the business day after being deposited with such service),
in each case, to the address (or facsimile number) listed below:

If to the Target:

CityForest
Corporation

1215 East Worden
Avenue

Ladysmith,
Wisconsin 54848

Attn:  Mr. Lee Luft, President

Facsimile:  (715) 532-5542

Email:  lee.luft@cityforest.com

with a copy, which
does not constitute notice, to:

Gray, Plant,
Mooty, Mooty & Bennett, P.A.

500 IDS Center

80 South Eighth
Street

 68
 

 

Minneapolis,
MN  55402

Attn:  Daniel R. Tenenbaum, Esq.

Facsimile:  (612) 632-4050

Email:  daniel.tenenbaum@gpmlaw.com

If to the
Shareholders’ Representative:

Wayne Gullstad

8241 S.E. 47th
Street

Mercer Island,
WA  98040

Fax:   (206) 275-3553

Email:  gullstad@comcast.net

with a copy, which
does not constitute notice, to:

Gray, Plant, Mooty, Mooty
& Bennett, P.A.

500 IDS Center

80 South Eighth Street

Minneapolis, MN  55402

Attn:  Daniel R. Tenenbaum, Esq.

Facsimile:  (612) 632-4050

Email:  daniel.tenenbaum@gpmlaw.com

If to the Parent,
the Merger Sub or the Surviving Corporation:

c/o Cellu Tissue
Holdings, Inc.

1855 Lockeway Drive

Suite 501

Alpharetta, GA  30004

Attn:  Russell Taylor

Fax:   (678) 393-2657

Email:  taylorru@cellutissue.com

with a copy, which does
not constitute notice, to:

Ropes & Gray LLP

1211 Avenue of the
Americas

New York, NY  10036

Attn:  Christopher Henry, Esq.

Fax:   (212) 841-5725

Email:  Christopher.Henry@ropesgray.com

Any Party may change the address to which notices, requests, demands,
claims and other communications hereunder are to be delivered by giving the
other Parties notice in the manner set forth in this Section 11.7.

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11.8                           Governing Law.  Except to the extent that the Minnesota
Business Corporation Act applies to the Merger and the respective rights of
the shareholders of the Target and the Merger Sub, this Agreement, the rights
of the Parties and all actions arising in whole or in part under or in
connection with this Agreement will be governed by and construed in accordance
with the domestic substantive laws of the State of Delaware, without giving
effect to any choice or conflict of law provision or rule (of any jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Minnesota or the State of Delaware, as applicable.

11.9                           Amendments and Waivers.  No amendment of any provision of this Agreement
will be valid unless the same is in writing and signed by the Parties.  No waiver by any Party of any provision of
this Agreement or any default, misrepresentation or breach of warranty or
covenant under this Agreement, whether intentional or not, will be deemed to
extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant under this Agreement or affect in any way any rights
arising by virtue of any prior or subsequent such default, misrepresentation or
breach of warranty or covenant.  All
waivers must be in writing and signed by the Party against whom such waiver is
sought to be enforced.

11.10                     Severability.  Any term or provision of this Agreement that
is invalid or unenforceable in any situation in any jurisdiction will not
affect the validity or enforceability of the remaining terms and provisions of
this Agreement or the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction.

11.11                     Expenses.  Each Party will bear his, her or its own
costs and expenses (including legal fees and expenses) incurred in connection
with this Agreement, the Transaction Documents and the contemplated
transactions.

11.12                     Construction.  The Parties have participated jointly in the
negotiation and drafting of this Agreement. 
In the event an ambiguity or question of intent or interpretation
arises, this Agreement must be construed as if drafted jointly by the Parties,
and no presumption or burden of proof will arise favoring or disfavoring any
Party by virtue of the authorship of any of the provisions of this Agreement.

11.13                     Incorporation
of Exhibits and Schedules. 
The Exhibits and the Schedules identified in this Agreement are
incorporated in this Agreement by reference and are made a part of this
Agreement.

11.14                     Specific
Performance.  Each of the
Parties acknowledges and agrees that the other Party would be damaged
irreparably in the event any of the provisions of this Agreement are not
performed in accordance with their 

 70
 

specific terms or otherwise are breached.  Accordingly, each of the Parties agrees that
the other Party is entitled to an injunction or injunctions to prevent breaches
of the provisions of this Agreement and to enforce specifically this Agreement
in any action instituted in any court of the United States or any state having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 11.15 of this Agreement), in addition to any other remedy
to which it may be entitled, at law or in equity.

11.15                     Submission
to Jurisdiction.  Except as
set forth in Section 2.7(c) of this Agreement with respect to disputes governed
thereby, each of the Parties submits to the jurisdiction of any federal court
sitting in Milwaukee County, Wisconsin, in any action
or proceeding arising out of or relating to this Agreement or any of the
Transaction Documents and agrees that all claims in respect of the action or
proceeding may be heard and determined there. 
Each Party also agrees not to bring any action or proceeding arising out
of or relating to this Agreement or any of the Transaction Documents in any
other court.  Each of the Parties waives
any defense of inconvenient forum to the maintenance of any action or proceeding
so brought and waives any bond, surety or other security that might be required
of any other Party.  Each Party agrees
that a final judgment in any action or proceeding so brought will be conclusive
and may be enforced by suit on the judgment or in any other manner provided by
law or in equity.

11.16                     Waiver
of Certain Damages.  IN NO EVENT WILL ANY PARTY OR
THEIR RESPECTIVE REPRESENTATIVES BE LIABLE TO ANY OTHER PARTY OR THEIR
RESPECTIVE REPRESENTATIVES UNDER THIS AGREEMENT AT ANY TIME FOR PUNITIVE
DAMAGES, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR
OTHERWISE; PROVIDED, HOWEVER, THAT FOR PURPOSES OF THIS SENTENCE ANY DAMAGES
AWARDED OR CLAIMED ON ACCOUNT OF A THIRD PARTY CLAIM WILL BE DEEMED TO BE
ACTUAL DAMAGES EVEN IF CONSTITUTING ANY OF THE FOREGOING.  EACH PARTY HEREBY EXPRESSLY RELEASES THE
OTHER PARTIES AND THEIR RESPECTIVE REPRESENTATIVES FROM ALL SUCH DAMAGES.

11.17                     Waiver
of Jury Trial. TO
THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, THE PARTIES
HEREBY WAIVE AND COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS PLAINTIFF,
DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY ACTION ARISING IN
WHOLE OR IN PART UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY, WHETHER NOW EXISTING OR HEREAFTER ARISING,
AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.  THE PARTIES AGREE THAT ANY OF THEM MAY FILE A
COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING,
VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES IRREVOCABLY TO 

 71
 

WAIVE THEIR RIGHTS TO TRIAL BY
JURY IN ANY PROCEEDING WHATSOEVER BETWEEN THEM RELATING TO THIS AGREEMENT OR
ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY, AND THAT SUCH PROCEEDINGS WILL
INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT
A JURY.

11.18                     Drafting
Conventions.  The words “hereof,” “herein,”
“hereunder” and words of similar import refer to this Agreement as a whole and
not to any particular section or provision of this Agreement.  When a reference is made in this Agreement to
sections, such reference will be to a section of this Agreement unless
otherwise indicated.  Whenever the words “include,”
“includes,” or “including,” are used in this Agreement they will be deemed to
be followed by the words “without limitation.” 
Definitions will be equally applicable to both nouns and verbs and the
singular and plural forms of the terms defined. 
The masculine, feminine and neuter genders will each include the other.

[THE REMAINDER OF
THIS PAGE IS BLANK.  SIGNATURE PAGE
FOLLOWS.]

 72
 

 

The Parties have
executed this Merger Agreement to be made effective as of the date first above
written.

	
  

  	
  PARENT:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  CELLU
  TISSUE HOLDINGS, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ RUSSELL C.
  TAYLOR

  	
   

  
	
   

  	
  Name:

  	
  Russell C.
  Taylor

  	
   

  
	
   

  	
  Title:

  	
  President &
  CEO

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  MERGER
  SUB:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  CELLU
  CITY ACQUISITION CORPORATION

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ RUSSELL C.
  TAYLOR

  	
   

  
	
   

  	
  Name:

  	
  Russell C.
  Taylor

  	
   

  
	
   

  	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  TARGET:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  CITYFOREST
  CORPORATION

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ LEE LUFT

  	
   

  
	
   

  	
  Name:

  	
  Lee Luft

  	
   

  
	
   

  	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  SHAREHOLDERS’
  REPRESENTATIVE

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Wayne
  Gullstad

  	
   

  
	
   

  	
  Wayne Gullstad,
  individually

  	
   

  

 

[SIGNATURE
PAGE TO CITYFOREST CORPORATION MERGER AGREEMENT]

 73Exhibit 10.10

[Conformed copy of
Severance Agreement with Simon M.C. Sherwood]

SEVERANCE AGREEMENT

THIS AGREEMENT, dated December 1, 2006, is made by
and between ORIENT-EXPRESS HOTELS LTD., a
Bermuda company (the “Company”), and Simon M.C. Sherwood (the “Executive”).

RECITALS

A.  The
Executive is employed by the Company or a subsidiary of the Company and is
appointed by the Company as its President and Chief Executive Officer; and

B.  The
Company considers it essential to the best interests of its shareholders to
foster the continued employment of key management personnel; and

C.  The
Company’s Board of Directors recognizes that, as is the case with many publicly
held corporations, the possibility of a change in control with respect to the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among management, may result in the departure or distraction
of senior management personnel to the detriment of the Company and its
shareholders; and

D.  The
Company’s Board of Directors has determined that appropriate steps should be
taken to reinforce and encourage the loyalty and continued attention and
dedication of the Company’s senior management, including the Executive, to
their assigned duties without distraction in the face of potentially disturbing
circumstances arising from the possibility of a change in control with respect
to the Company.

NOW, THEREFORE, the Company and the Executive hereby agree
as follows:

Section 1.          Defined Terms.  Capitalized terms are defined in Section 11.

Section 2.          Term of Agreement.  This Agreement shall commence as of the date
first written above (the “Effective Date”) and shall continue in effect
through the third anniversary of the Effective Date; provided, however, that
thereafter, the term shall automatically be extended for additional one-year
periods, unless, not later than 90 days prior to the third anniversary or any
anniversary thereafter, as applicable, the Company or the Executive shall have
given notice to the other party of its or his election not to extend the term
hereof.

Section 3.          Company’s Covenants.  In order to induce the Executive to remain in
the employ of the Company or a subsidiary of the Company, the Company agrees,
under the conditions described herein, to pay the Executive the Severance
Payment set forth in Section 4. No Severance Payment shall be payable under
this Agreement, unless during the term of this Agreement there shall have been
a termination of the Executive’s employment with the Company or a subsidiary of
the Company following a Change in Control under Section 4 hereof. This
Agreement shall not be construed as creating an express or implied contract of
employment and, except as otherwise agreed in writing between the Executive and
the Company or a subsidiary of the Company, the Executive shall not have any
right to be retained in the employ of the Company or a subsidiary of the
Company.

 1
 

Section 4.          Severance Payment.

(a)       Severance Payment Following Change in Control.  If
during the term of this Agreement (i) a Change in Control occurs and (ii) the
Executive’s employment is terminated for any reason within one year following
such Change in Control by the Company or a subsidiary of the Company or by the
Executive, then, in any such case, the Company shall pay the Executive a lump
sum severance payment (the “Severance Payment”), in cash, equal to two
times the sum of (x) the Executive’s annual base salary as in effect
immediately prior to the effective date of the termination, and (y) the most
recent annual bonus payment made to the Executive.

(b)       Termination of Employment Prior to Change in
Control.  For purposes of this Agreement, the Executive’s
employment shall be deemed to have been terminated following a Change in
Control, if (i) the Executive’s employment is terminated by the Company or a
subsidiary of the Company prior to a Change in Control and such termination was
at the request or direction of a Person who has entered into an agreement with
the Company the consummation of which constitutes a Change in Control (an “Acquiring
Person”), or (ii) the Executive terminates his employment prior to a Change
in Control after the Acquiring Person has announced to the Company its
intention to consummate a transaction constituting a Change of Control.

Section 5.          Termination of Employment Agreement. 
Notwithstanding any provisions in the employment agreement of the
Executive with the Company or a subsidiary of the Company, as in effect on the
Effective Date (the “Employment Agreement”), regarding the right to terminate
the Executive’s employment without cause or any other reason, or regarding the
required notice for termination, the Executive’s employment may only be
terminated by him or by the Company or a subsidiary of the Company without
cause or any other reason, if the party terminating shall give the other party
not less than six months’ prior written notice of the date of termination,
which shall not be sooner than June 30, 2007, unless the termination occurs
following a Change in Control.  This
Section 5 shall not affect any provisions in the Employment Agreement related
to termination for cause or any other reason.

Section 6.          Binding
Agreement.  This Agreement shall inure to the benefit of
and be enforceable by the Executive’s personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder (other than amounts which, by their terms, terminate upon the death
of the Executive) if the Executive had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the executors, personal representatives or administrators of
the Executive’s estate.

Section 7.          Notices.  For the purpose of this Agreement, notices
and all other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when (i) sent by telefax, (ii) hand
delivered, (iii) sent by courier, or (iv) mailed by registered mail, return
receipt requested, postage prepaid, addressed, if to the Executive, to the
address inserted below the Executive’s signature on the final page hereof and,
if to the Company, to the address set forth below, or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon actual
receipt:

 2
 

To the Company:

Orient-Express Hotels Ltd.

c/o Orient-Express Services Ltd.

20 Upper Ground

London SE1 9PF

England

Attention: 
Company Secretary

Fax:  +44-(0)20-7805-5908

Section 8.          Miscellaneous.

(a)       No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer as may be
specifically designated by the Company’s Board of Directors.

(b)       No waiver by either party hereto at any time
of any breach by the other party hereto of, or of any lack of compliance with,
any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.

(c)       This Agreement supersedes any other
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof which have been made by either party;
provided, however, that, except as set forth in Section 5 hereof, this
Agreement shall not supersede, but instead govern in addition to, the
Employment Agreement, and in the event of a conflict between the Employment
Agreement and this Agreement, this Agreement shall govern.

(d)       The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of Bermuda.

(e)       Any payments provided for hereunder shall be
paid net of any applicable withholding required under applicable laws.

(f)        The obligations of the Company and the
Executive under this Agreement which by their nature may require either partial
or total performance after the expiration of the term of this Agreement shall
survive such expiration.

Section 9.          Counterparts.  This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

Section 10.        Resolution of Disputes; Arbitration.

(a)       All claims by the Executive for benefits
under this Agreement shall be directed to and determined by the Company’s Board
of Directors and shall be in writing. Any denial by the Company’s Board of
Directors of a claim for payments under this Agreement shall be delivered to
the Executive in writing and shall set forth the specific reasons for the
denial and the specific provisions of this Agreement relied upon. The Company’s
Board of Directors shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim and shall further allow the Executive to
appeal to the Company’s Board of

 3
 

Directors
a decision of the Company’s Board of Directors within sixty (60) days after
notification by the Company’s Board of Directors that the Executive’s claim has
been denied.

(b)       Any further dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by arbitration
before the American Arbitration Association in New York, New York in accordance
with its commercial arbitration rules as in effect at the time when the dispute
or controversy arises.  Judgment may be
entered on the arbitrator’s award in any court having jurisdiction.
Notwithstanding any provision of this Agreement to the contrary, the Executive
shall be entitled to seek specific performance of the Executive’s right to be
paid until the effective date of the termination of his employment during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.

Section 11.        Definitions.  For purposes of this Agreement, the following
terms shall have the meanings indicated below:

(a)       “Affiliate” shall have the meaning set forth
in Rule 12b-2 promulgated under Section 12 of the Exchange Act.

(b)       “Acquiring Person” shall have the meaning set
forth in Section 4 hereof.

(c)       For purposes of this Agreement, “Change in
Control” means any of the following events:

(i)  any “person” (as that term is defined for the
purposes of Section 13(d) or 14(d) of the Exchange Act) shall directly or
indirectly acquire more than 40% of the voting shares of the Company then
outstanding and then entitled to vote generally in the election of directors of
the Company; or

(ii) individuals
who, on the date of entering into this Agreement, constitute the Company’s
Board of Directors (or the successors of such individuals nominated by such
Board of Directors or a committee thereof on which such individuals or their
successors constitute a majority) shall cease to constitute a majority of the
Company’s Board of Directors; or

(iii) the Company
amalgamates, merges or consolidates with or into any other corporation, without
the approval of its Board of Directors constituted as provided in clause (ii)
above; or

(iv) the Company sells,
leases, exchanges or otherwise disposes of all or substantially all of its
assets and business without the approval of its Board of Directors constituted
as provided in clause (ii) above.

(d)       “Company” shall mean Orient-Express Hotels
Ltd., and, except in determining under Section 11(c) hereof whether or not any
Change in Control of the Company has occurred, shall include any successor to
its business and/or assets which assumes and agrees to perform this Agreement
by operation of law, or otherwise.

(e)       “Effective Date” shall have the meaning set
forth in Section 2 hereof.

(f)        “Employment Agreement” shall have the meaning
set forth in Section 5 hereof.

 4
 

(g)       “Exchange Act” shall mean the U.S. Securities
Exchange Act of 1934, as amended from time to time.

(h)       “Executive” shall mean the individual named
in the first paragraph of this Agreement.

(i)        “Person” shall have the meaning given in
Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) thereof, except that such term shall not include (i) the Company or any
of its subsidiaries, (ii) a trustee or other fiduciary holding securities under
an employee benefit plan of the Company or any of its Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company.

(j)        “Severance Payment” shall have the meaning
set forth in Section 4 hereof.

	
  

  	
  ORIENT-EXPRESS HOTELS LTD.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Edwin S. Hetherington

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Edwin S. Hetherington

  	
   

  
	
   

  	
  Title:

  	
  Vice President,
  General Counsel

  and Secretary

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Simon M.C. Sherwood

  	
   

  	
   

  
	
   

  	
  Name: Simon M.C.
  Sherwood

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  [home address]

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
						

 

 5

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