Document:

Exhibit 10.1

 

SECURITIES PURCHASE
AGREEMENT

 

DATED AS OF OCTOBER 2, 2009

 

BY AND BETWEEN

 

SELECT COMFORT CORPORATION

 

AND

 

STERLING SC INVESTOR, LLC

 

 

Table
of Contents

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  1.

  	
  PURCHASE AND SALE OF COMMON SHARES AND THE WARRANT

  	
  2

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Purchase and Sale of Common Shares and the Warrant

  	
  2

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  b.

  	
  Company Closing Deliveries

  	
  3

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  c.

  	
  Investor Closing Deliveries

  	
  3

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  d.

  	
  Adjustment of Purchase Price and Number of Common Shares;
  Distributions; Purchase Rights

  	
  3

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  INVESTOR’S REPRESENTATIONS AND WARRANTIES

  	
  6

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Investment Purpose

  	
  6

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  b.

  	
  Accredited Investor Status

  	
  6

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  c.

  	
  Reliance on Exemptions

  	
  6

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  d.

  	
  Information

  	
  6

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  e.

  	
  No Governmental Review

  	
  7

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  f.

  	
  Restrictions on Transfer or Resale

  	
  7

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  g.

  	
  Legends

  	
  7

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  h.

  	
  Authorization; Enforcement; Validity

  	
  9

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  i.

  	
  Residency

  	
  9

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  j.

  	
  No Other Agreements

  	
  9

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  k.

  	
  Prior Transactions

  	
  9

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  l.

  	
  Available Funds

  	
  9

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  m.

  	
  No General Solicitation

  	
  9

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  n.

  	
  Brokers and Finders

  	
  10

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

  	
  10

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Organization and Qualification; Subsidiaries

  	
  10

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  b.

  	
  Authority; Authorization; Enforcement; Validity

  	
  10

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  c.

  	
  Capitalization

  	
  11

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  d.

  	
  Issuance of Securities

  	
  12

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  e.

  	
  No Conflicts

  	
  13

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  f.

  	
  Required Filings and Consents

  	
  13

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  g.

  	
  SEC Documents; Financial
  Statements

  	
  13

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  h.

  	
  Principal Market

  	
  15

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  i.

  	
  Rights Agreement

  	
  15

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  j.

  	
  Absence of Certain Changes

  	
  15

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  k.

  	
  Acknowledgment Regarding the Investor’s Purchase of Common
  Shares and the Warrant

  	
  15

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  l.

  	
  No General Solicitation

  	
  16

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  m.

  	
  No Integrated Offering

  	
  16

  
	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  AFFIRMATIVE COVENANTS

  	
  16

  

 

i

 

	
   

  	
  a.

  	
  Form D and Blue Sky; Other Filings

  	
  16

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  b.

  	
  Material Nonpublic Information

  	
  16

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  c.

  	
  Listing

  	
  17

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  d.

  	
  Preemptive Rights

  	
  17

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  e.

  	
  Backstop of Rights Offering

  	
  18

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  f.

  	
  Confidentiality Of Evaluation Material Produced to the
  Investor; Standstill

  	
  18

  
	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  TRANSFER AGENT

  	
  20

  
	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  TERMINATION

  	
  21

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Termination

  	
  21

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  b.

  	
  Effect of Termination

  	
  21

  
	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
  MISCELLANEOUS

  	
  21

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  a.

  	
  Governing Law; Jurisdiction; Jury Trial

  	
  21

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  b.

  	
  Counterparts

  	
  22

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  c.

  	
  Headings

  	
  23

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  d.

  	
  Severability

  	
  23

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  e.

  	
  Entire Agreement

  	
  23

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  f.

  	
  Notices

  	
  23

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  g.

  	
  Successors and Assigns

  	
  25

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  h.

  	
  No Third Party Beneficiaries

  	
  25

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  i.

  	
  Survival

  	
  25

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  j.

  	
  Further Assurances

  	
  25

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  k.

  	
  Placement Agent

  	
  25

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  l.

  	
  No Strict Construction

  	
  25

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  m.

  	
  Specific Performance

  	
  25

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  n.

  	
  Confidentiality

  	
  26

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  o.

  	
  Interpretative
  Matters

  	
  26

  

 

ii

 

EXHIBITS

 

	
  Exhibit A

  	
  -

  	
  Mutual
  Release

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit B

  	
  -

  	
  Form of
  Warrant

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit C

  	
  -

  	
  Form of
  Registration Rights Agreement

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit D

  	
   

  	
  Form of
  Guarantee

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit E

  	
  -

  	
  Closing
  Notice

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit F

  	
  -

  	
  Backstop
  Term Sheet

  	
   

  

 

iii

 

SECURITIES PURCHASE
AGREEMENT

 

SECURITIES
PURCHASE AGREEMENT (the “Agreement”),
dated as of October 2, 2009, by and between Select Comfort Corporation, a
Minnesota corporation, with principal offices located at 9800 59th Avenue
North, Minneapolis, MN 55442 (the “Company”), and
Sterling SC Investor, LLC, a Delaware limited liability company  (the “Investor”).  Capitalized terms used and not defined
elsewhere in this Agreement have the respective meanings assigned to such terms
in the Appendix hereto.

 

WHEREAS:

 

A.            On
May 22, 2009, the Company and the Investor entered into a Securities
Purchase Agreement (the “SPA”).

 

B.            Contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Settlement, Mutual Termination and General Release,
substantially in the form attached hereto as Exhibit A (the “Mutual Release”), pursuant to which each of the Company and
the Investor has agreed to terminate the SPA and release the other from certain
claims, upon terms and conditions set forth in the Mutual Release.

 

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

 

D.            The Investor desires to purchase from the Company, and
the Company wishes to sell to the Investor, upon the terms and conditions stated
in this Agreement, (i) 2,500,000 shares of the common stock, par value
$.01 per share, of the Company (the “Common Stock”)
(the shares of Common Stock purchased by the Investor hereunder being
collectively referred to herein as the “Common Shares,”
with the certificates representing the Common Shares being referred to as the “Share Certificates”), and (ii) a warrant, substantially in the form
attached as Exhibit B, to acquire 2,000,000 shares of Common Stock
(such warrant, together with any warrants or other securities issued in
exchange or substitution therefor or replacement thereof, and as any of the
same may be amended, restated or modified and in effect from time to time,
being referred to as the “Warrant”;
the shares of Common Stock issuable upon exercise of the Warrant being referred
to as the “Warrant Shares”; the
Common Shares, the Warrant and the Warrant Shares being collectively referred
to herein as the “Securities”).

 

E.             Each of the Board of Directors of the Company (the “Company Board”) and a committee of the Company Board
composed solely of “disinterested directors” (as defined in Section 673
Subd. 1(d)(3) of the Minnesota Business Corporation Act (as amended, the “MBCA”)) (the “Committee”)
has, by the vote of a requisite majority of the directors serving thereon, (i) determined
that it is in the best interests of the Company and its shareholders, and
declared it advisable, to enter into this Agreement with the Investor, and (ii) approved
the execution, delivery and performance of this Agreement and the consummation
of the Transactions, including the issuance of the Common Shares and the
Warrant to the Investor.

 

1

 

F.             Contemporaneously with the execution and delivery of
this Agreement, the Company is delivering to the Investor $1,750,000, by wire transfer of immediately available
funds in accordance with the Investor’s wire transfer instructions, as
reimbursement for the out-of-pocket expenses incurred by the Investor and its
Affiliates in connection with this Agreement, the SPA and the transactions
contemplated hereby.

 

G.            Contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially
in the form attached hereto as Exhibit C (the “Registration
Rights Agreement”), pursuant to which the Company has agreed to provide
certain registration rights under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.

 

H.            Contemporaneously
with the execution and delivery of this Agreement, and as a condition and
inducement to the Company’s willingness to enter into this Agreement, Sterling
Capital Partners III, L.P. is executing and delivering a guarantee, substantially
in the form attached hereto as Exhibit D, in favor of the Company.

 

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

 

1.             PURCHASE AND SALE OF COMMON
SHARES AND THE WARRANT.

 

a.             Purchase and Sale of Common
Shares and the Warrant.

 

(i)            Investor Option.  At any time on or after the date of this
Agreement but at or prior to 5:00 p.m., Chicago time, on June 30,
2010 (the “Investor Termination Date”),
the Investor may elect (in the Investor’s sole discretion) to purchase from the
Company the Common Shares and the Warrant, upon delivery of a written notice to
the Company (an “Investor Closing Notice”),
in the form attached hereto as Exhibit E, on such date as shall be
set forth in the Closing Notice (the “Closing
Date”), provided that the Closing Date shall be no less than five
Business Days after the date of the Closing Notice. On the Closing Date, the
Company shall issue and sell to the Investor, and the Investor shall purchase
from the Company (the “Closing”), (i) 2,500,000
Common Shares (subject to adjustment as set forth in Section 1(d) below)
at a purchase price of $4.00 per share, and (ii) the Warrant to purchase
2,000,000 Warrant Shares (subject to adjustment as set forth in Section 1(d) below
and as set forth in the Warrant).  The aggregate
purchase price (the “Purchase Price”)
for the Common Shares and the Warrant at the Closing purchased by the Investor
shall be Ten Million Dollars ($10,000,000). 
The Closing shall occur at the offices of Oppenheimer Wolff &
Donnelly LLP, 45 South Seventh Street, Minneapolis, Minnesota 55402, or at such
other place as the Company and the Investor may collectively designate in
writing.  The Investor’s right to deliver
an Investor Closing Notice, and the Investor’s right to elect to purchase from
the Company the Common Shares and the Warrant in accordance with this Section 1(a)(i),
is not, and shall not be, subject to any condition, other than the delivery of
the Investor Closing Notice and the payment of the Purchase Price as set forth
in this Section 1(a)(i), and the Company shall be obligated to
issue and deliver the Common Shares and the Warrant, and to close the
Transactions, on the Closing Date regardless of any claim or 

 

2

 

allegation
that the Investor has breached, or is in breach of any of its representations,
covenants, or obligations under any of the Transaction Documents.

 

(ii)           Company Option.  In the event that at any time on or after the
date of this Agreement but at or prior to 5:00 p.m., Chicago time, on March 31,
2010 (the “Company Termination Date”)
the Company delivers to the Investor a certificate (a “Company Closing Certificate”) certifying
that the Company and the Lenders have entered into a forbearance agreement
under the Existing Credit Facility, and have agreed to an amendment to the
Existing Credit Facility, upon terms and conditions approved in writing by the
Investor (and the Investor hereby agrees that such approval shall not be
unreasonably withheld, conditioned, or delayed), then a Closing shall occur at
10:00 a.m., Chicago time, on the fifth Business Day following the Company’s
delivery of a Company Closing Certificate or such other date as the parties
hereto collectively designate in writing (any such Closing, a “Company Triggered Closing”).  The Company’s right to deliver a Company
Closing Certificate, and the Company’s right to cause a Company Triggered
Closing to occur in accordance with this Section 1(a)(ii), is not,
and shall not be, subject to any condition, other than the delivery of the
Company Closing Certificate and the Company and the Lenders having entered into
a forbearance agreement under the Existing Credit Facility, and having agreed
to an amendment to the Existing Credit Facility, as described in this Section 1(a)(ii),
in which case a Company Triggered Closing shall occur on the Closing Date
regardless of any claim or allegation that the Company has breached, or is in
breach of any of its representations, covenants, or obligations under any of
the Transaction Documents.

 

b.             Company Closing Deliveries.  At the Closing, the Company shall deliver, or
cause to be delivered, to the Investor each of the following:

 

(i)            One or more Share Certificates
representing in the aggregate the number of Common Shares that the Investor is
purchasing hereunder on the Closing Date, in each case duly executed on behalf
of the Company and the transfer agent and registrar for the Common Stock and
registered in the name of the Investor or its designee.

 

(ii)           The Warrant (in such denominations as
the Investor shall request), duly executed on behalf of the Company.

 

c.             Investor Closing Deliveries.  At the Closing, the Investor shall deliver,
or cause to be delivered, to the Company, the Purchase Price, by wire transfer
of immediately available funds in accordance with the Company’s wire transfer
instructions.

 

d.             Adjustment of Purchase Price and
Number of Common Shares; Distributions; Purchase Rights.

 

(i)            Adjustment upon Subdivision or
Combination of Common Stock.  If the
Company at any time after the date of this Agreement but prior to, or on, the
Closing Date, subdivides (by any stock split, stock dividend, recapitalization
or otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Purchase Price per Common Share immediately prior to such
subdivision and the number 

 

3

 

of
Common Shares issuable to the Investor at the Closing will be proportionately
decreased and increased, respectively, and the number of Warrant Shares and the
Warrant Exercise Price (as defined in the Warrant) immediately prior to such
subdivision will be proportionately increased and decreased, respectively.  If the Company at any time after the date of
this Agreement combines (by combination, reverse stock split or otherwise) its
outstanding shares of Common Stock into a smaller number of shares, the
Purchase Price per Common Share immediately prior to such subdivision and the
number of Common Shares issuable to the Investor at the Closing will be
proportionately increased and decreased, respectively, and the number of
Warrant Shares and the Warrant Exercise Price immediately prior to such
subdivision will be proportionately decreased and increased, respectively.

 

(ii)           Distributions.  If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets)
to holders of Common Stock, by way of return of capital or otherwise (including
any dividend or other distribution of cash, stock or other securities, property
or options by way of a dividend, spin off, reclassification, corporate
rearrangement or other similar transaction), other than any Rights Offering
with respect to which the Company has complied with Section 1(d)(vi)(B) of
this Agreement (a “Distribution”),
at any time after the date of this Agreement but prior to, or on, the Closing
Date, then, in each such case, the Investor shall be entitled to receive such
Distribution, and the Company shall make such Distribution to the Investor,
exactly as if the Company had (A) issued to the Investor, and the Investor
had purchased from the Company, the Common Shares (and, as a result, had held
all of the Common Shares and the Warrant), and (B) exercised the Warrant
in full (and, as a result, had held all of the Warrant Shares that the Investor
would have received upon such exercise), immediately prior to the record date
for such Distribution, or if there is no record therefor, immediately prior to
the effective date of such Distribution (but without the Investor’s actually
having to consummate the Closing and purchase the Common Shares and the
Warrant, or exercise the Warrant).

 

(iii)          Purchase Rights.  If at any time the Company grants, issues or
sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any
class of its capital stock, other than any Rights Offering with respect to
which the Company has complied with Section 1(d)(vi)(B) of this
Agreement (the “Purchase Rights”),
at any time after the date of this Agreement but prior to, or on, the Closing
Date, then the Investor will be entitled to acquire, upon the terms applicable
to such Purchase Rights, the aggregate Purchase Rights that the Investor could
have acquired if the Investor had (A) held the Common Shares upon
consummation of the Closing, and (B) held the number of Warrant Shares
acquirable upon complete exercise of the Warrant, immediately before the date
on which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights; provided, however, that the Investor will not be
entitled to acquire Purchase Rights pursuant to this Section 1(d)(iii) for
grants of equity or rights to acquire equity pursuant to Company Stock Award
Plans.

 

4

 

(iv)          Organic Change.  At any time after the date of this Agreement
but prior to, or on, the Closing Date, and prior to the consummation of any (i) sale
of all or substantially all of the Company’s assets to an acquiring Person or (ii) other
Organic Change following which the Company is not a surviving entity, the Company
will secure from the Person purchasing such assets or the successor resulting
from such Organic Change (in each case, the “Acquiring
Entity”) a written agreement (in form and substance satisfactory to
the Investor) to deliver to the Investor shares of common stock and a warrant
of the Acquiring Entity (in the case of the warrant, evidenced by a written
instrument substantially similar in form and substance to the Warrant and
satisfactory to the Investor), and reflecting the terms of such consolidation,
merger or sale. At any time after the date of this Agreement but prior to, or
on, the Closing Date, and prior to the consummation of any other Organic
Change, the Company shall make appropriate provision (in form and substance
satisfactory to the Investor) to ensure that the Investor will thereafter have
the right to acquire and receive in lieu of or in addition to (as the case may
be) the Common Shares and the Warrant, such shares of stock, securities or
assets that would have been issued or payable in such Organic Change with
respect to or in exchange for the number of shares of Common Stock that would
have been acquirable and receivable pursuant to the Agreement and upon the
exercise of the Warrant as of the date of such Organic Change.

 

(v)           Certain Events.  If any event occurs of the type contemplated
by the provisions of this Section 1(d) but not expressly
provided for by such provisions, other than the grant, sale or issuance of
rights to purchase or subscription rights in any Rights Offering with respect
to which the Company has complied with Section 1(d)(vi)(B) of this
Agreement, then the Company Board will make an appropriate adjustment in the
Purchase Price per Common Share and the number of Common Shares issuable to the
Investor at the Closing, and the number of Warrant Shares and the Warrant
Exercise Price; provided that no such adjustment will decrease the number of
Common Shares issuable to the Investor at the Closing or the number of Warrant
Shares issuable upon exercise of the Warrant, or increase the Purchase Price
per Common Share or Warrant Exercise Price, as otherwise determined pursuant to
this Section 1(d).

 

(vi)          Notices.

 

(A)          As soon as
reasonably practicable, but in no event later than ten (10) Business Days
prior to any adjustment of the Purchase Price per Common Share or the number of
Common Shares issuable to the Investor pursuant to this Agreement, or any
adjustment of the Warrant Exercise Price or the number of Warrant Shares
issuable to the Investor upon exercise of the Warrant, the Company will give
written notice thereof to the Investor, setting forth in reasonable detail, and
certifying, the calculation of such adjustment; provided, however,
that neither the timing of giving any such notice nor any failure by the
Company to give such a notice shall effect any such adjustment or the effective
date thereof.

 

(B)           The Company
will give written notice to the Investor at least ten (10) Business Days
prior to the date on which the Company closes its 

 

5

 

books or takes a record (A) with respect
to any dividend or distribution upon the Common Stock, (B) with respect to
any pro rata subscription offer to holders of Common Stock, including any
Rights Offering, or (C) for determining rights to vote with respect to any
Organic Change, dissolution or liquidation, provided that such information
shall be made known to the public prior to or in conjunction with such notice
being provided to the Investor.

 

(C)           The Company
will also give written notice to the Investor at least ten (10) Business
Days prior to the date on which any Organic Change, dissolution or liquidation
will take place, provided that such information shall be made known to the
public prior to or in conjunction with such notice being provided to the
Investor.

 

2.             INVESTOR’S REPRESENTATIONS AND
WARRANTIES.

 

The Investor represents and
warrants as of the date of this Agreement to the Company that:

 

a.             Investment Purpose.  The Investor (i) is acquiring the Common
Shares and the Warrant purchased by the Investor hereunder, and (ii) upon
exercise of the Warrant issued to the Investor, will acquire the Warrant Shares
issuable upon such exercise thereof, for the Investor’s own account and not
with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered under, or exempted
from the registration requirements of, the 1933 Act; provided, however,
that by making the representations herein, the Investor does not agree to hold
any of the Securities for any minimum or other specific term and reserves the
right to dispose of the Securities at any time in accordance with or pursuant
to a registration statement or an exemption under the 1933 Act.

 

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

 

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

 

d.             Information.  The Investor and its advisors, if any, have
been furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
that have been requested by the Investor. 
The Investor and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. 
Neither such inquiries nor any other due diligence investigations
conducted by the Investor or its advisors, if any, or its representatives shall
modify, amend or affect the Investor’s right to rely on the Company’s
representations and warranties contained in Sections 3 and 7(k) below
or contained in any of the other Transaction Documents.  The Investor understands that its 

 

6

 

investment in the Securities involves a high degree of risk.  The Investor has sought such accounting,
legal and tax advice as it has considered necessary to make an informed
investment decision with respect to its acquisition of the Securities.

 

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

 

f.              Restrictions on Transfer or
Resale.  Subject to the terms and
conditions of the Registration Rights Agreement, the Investor understands and
agrees that: (i) the Securities have not been and are not being registered
under the 1933 Act or any other Securities Laws, and may not be offered for
sale, sold, assigned or transferred unless (A) subsequently registered
thereunder only pursuant to an effective registration statement under, and in
compliance with the requirements of, the 1933 Act, (B) the Investor shall
have delivered to the Company an opinion of counsel, in form and substance
reasonably satisfactory to the Company’s transfer agent, to the effect that
such Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) the Investor
provides the Company with reasonable written assurance (in the form of seller
and broker representation letters) that such Securities have been or are being
sold, assigned or transferred pursuant to Rule 144 promulgated under the
1933 Act, as amended (or a successor rule thereto) (“Rule 144”),
or can be sold without limitation pursuant to Rule 144 (whether or not
subject to any current public information requirement thereunder); (ii) any
sale of the Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144, and further, if Rule 144 is
not applicable, any resale of the Securities under circumstances in which the
seller (or the Person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or any other securities laws; (iii) other
than pursuant to the Registration Rights Agreement, neither the Company nor any
other Person is under any obligation to register the Securities under the 1933
Act or any other Securities Laws. 
Notwithstanding the foregoing, the Company acknowledges and agrees that
the Securities held by the Investor may be pledged by the Investor or its
transferees (each, including the Investor, a “Covered
Investor”) in connection with a bona
fide margin account or bona fide financing agreement secured by the
Securities.  The pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Covered Investor effecting any such pledge of Securities
shall be required to provide the Company with any notice thereof or otherwise
make any delivery to the Company pursuant to this Agreement or any other
Transaction Document.  The Company hereby
agrees to execute and deliver such documentation as a pledgee of the Securities
may reasonably request in connection with a pledge of the Securities to such
pledgee by a Covered Investor.

 

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

 

THE SECURITIES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR 

 

7

 

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

 

The legend set forth above
shall be removed and the Company shall issue a certificate or instrument, as
applicable, without the 1933 Act Legend to the holder of the Securities upon
which it is stamped, (or, in the case of any Warrant Shares being acquired upon
exercise of a Warrant, the Company shall issue the certificate representing
such Warrant Shares without the 1933 Act Legend), if (i) such Securities
are registered for resale under the 1933 Act, (ii) in connection with a
sale transaction, such holder provides the Company with an opinion of counsel,
in form and substance reasonably satisfactory to the Company’s transfer agent,
to the effect that a public sale, assignment or transfer of the Securities may
be made without registration under the 1933 Act, (iii) such holder
provides the Company reasonable written assurances (in the form of seller and
broker representation letters) that the Securities have been or are being sold
pursuant to Rule 144 or can be sold without limitation pursuant to Rule 144
(whether or not subject to a current public information requirement
thereunder), (iv) with respect to any of the Common Shares or Warrant
Shares acquired pursuant to a Cashless Exercise (as defined in the Warrant) of
the Warrant, such holder certifies, on or after the date that is six (6) months
after the Closing Date, that such holder is not an “affiliate” of the Company
(as defined in Rule 144), or (v) with respect to any Warrant Shares
acquired other than pursuant to a cashless exercise of the Warrant, such holder
certifies, on or after the date that is six (6) months after the Deemed
Delivery Date (as defined in the Warrant) of such Warrant Shares, that such
holder is not an “affiliate” of the Company. 
The Company shall be responsible for the fees of its transfer agent and
all of The Depository Trust Company (the “DTC”) fees
associated with the issuance of the Securities to the Investor and any legend
removal in accordance herewith.  At such
time as a legend is no longer required for certain Common Shares or Warrant
Shares, the Company will no later than three (3) trading days following
the delivery by the Investor to the Company or its transfer agent (with notice
to the Company) of a legended certificate representing such Common Shares or
Warrant Shares (endorsed or with stock powers attached, signatures guaranteed,
and otherwise in form necessary to affect the reissuance and/or transfer),
deliver or cause to be delivered to the Investor or the transferee of the
Investor, as applicable, a certificate representing such Common Shares or
Warrant Shares that is free from all restrictive and other legends.
Certificates for Common Shares or Warrant Shares subject to legend removal
hereunder may be transmitted by the Company’s transfer agent to the Investor by
crediting the account of the Investor’s prime broker with DTC.  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the holders of the
Securities.  Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this Section 2(g) will
be inadequate and agrees that, in the event of a breach or threatened breach of
this Section 2(g), such holder shall be entitled, in addition to
all other available remedies, to an 

 

8

 

injunctive order and/or
injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond
or other security being required.

 

h.             Authorization; Enforcement;
Validity.  There is no agreement to
which either the Investor or Sterling Capital Partners III, L.P. is a party
with an existing shareholder of the Company regarding any equity interest in
the Investor other than as has been publicly disclosed prior to the date of
this Agreement.  The Investor is a
validly existing corporation, partnership, limited liability company or other
entity and has the requisite corporate, partnership, limited liability or other
organizational power and authority to purchase the Securities pursuant to this
Agreement.  Each of this Agreement and
the other Transaction Documents to which the Investor is a party has been duly
and validly authorized, executed and delivered on behalf of the Investor and is
a valid and binding agreement of the Investor enforceable against the Investor
in accordance with its terms.  Each of
the Registration Rights Agreement and the other Transaction Documents to be
entered into and executed by the Investor in connection with the Transactions
as of the Closing will have been duly and validly authorized, executed and
delivered on behalf of the Investor as of the Closing and will constitute a
valid and binding agreement of the Investor, enforceable against the Investor
in accordance with its terms.

 

i.              Residency.  The Investor is a limited liability company
organized under the laws of the State of Delaware.

 

j.              No
Other Agreements.  From August 27,
2009 through and including the date of this Agreement, neither Investor nor any
of its Affiliates has entered into any agreement with any Person that, as of
the date of this Agreement, is a shareholder of the Company with respect to any
right to any interest in any of the Securities. 
If, at any time after the date of this Agreement but on or prior to the
Closing Date, Investor or any of its Affiliates enters into any such agreement
with any Person that, as of the date of this Agreement, is a shareholder of the
Company, Investor will promptly notify the Company thereof.

 

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

 

l.              Available
Funds.  The Investor has, or will
have sufficient funds in its possession to permit the Investor to acquire and
pay for the Securities being purchased by the Investor and to perform it
obligations under the Transaction Documents.

 

m.            No General Solicitation.  The Investor did not learn of the investment
in the Common Shares and the Warrant as a result of any public advertising or
general solicitation.

 

9

 

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

 

3.             REPRESENTATIONS AND WARRANTIES
OF THE COMPANY.

 

The Company represents and warrants as of the date of this Agreement
and, as of the Closing Date solely with respect to Sections 3(a), 3(b),
3(d), 3(e)(i), 3(e)(ii), and 3(f), to the Investor
that:

 

a.             Organization and Qualification;
Subsidiaries.  Each of the Company
and the Subsidiaries is a corporation, limited liability company, partnership
or other entity and is duly organized or formed and validly existing in good
standing under the laws of the jurisdiction in which it is incorporated or
organized and has the requisite corporate, partnership, limited liability
company or other organizational power and authority to own its properties and
to carry on its business as now being conducted and as proposed to be conducted
by the Company and the Subsidiaries.

 

b.             Authority; Authorization;
Enforcement; Validity.

 

(i)            The Company and each of the
Subsidiaries has the requisite corporate, partnership or limited liability
company power and authority to enter into and perform its obligations under
this Agreement, including the issuance of the Securities, and under each of the
other Transaction Documents and to consummate the Transactions.

 

(ii)           The execution and delivery of the
Transaction Documents by the Company and the applicable Subsidiaries and the
consummation by the Company and the Subsidiaries of the Transactions, including
the reservation for issuance and the issuance of the Common Shares, the Warrant
and the Warrant Shares issuable upon exercise of the Warrant, have been duly
authorized by each of the Company Board, the Committee and each of the
Subsidiaries’ respective boards of directors, and no further consent or
authorization is required by or of the Company, any of the Subsidiaries or any
of the Company Board (or any committee thereof, including the Committee) or the
shareholders, any of the Subsidiaries’ boards of directors, other equityholders
or holders of beneficial interests of the Company.  Without limiting the foregoing, each of the
Company Board and the Committee  has,
by the vote of a requisite majority of the directors serving thereon, (A) determined
that it is in the best interests of the Company and its shareholders, and
declared it advisable, to enter into this Agreement with the Investor, (B) approved
the execution, delivery and performance of this Agreement and the consummation
of the Transactions, including the issuance of the Common Shares and the
Warrant to the Investor, and (C) approved the Transactions for purposes of
Section 673 of the MBCA, including the Investor potentially becoming an “interested
shareholder,” as defined in Section 011 Subd. 49 of the MBCA, pursuant to
the Rights Offering or otherwise, subject to the limitations set forth in Section 4(f)(iii) of
this Agreement.

 

10

 

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

 

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

 

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

 

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

 

(A)                              45,583,724 shares are issued
and outstanding as of the date of this Agreement; and

 

(B)                                6,488,575 shares are
reserved for issuance pursuant to the Company’s stock option, restricted stock
and employee stock purchase plans described on Schedule 3(c)(ii)(B) (the
“Company Stock Award Plans”),
including no more than 5,546,821 shares issuable pursuant to outstanding awards
under the Company Stock Award Plans as of the date of this Agreement.

 

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

 

Except as set forth on Schedule 3(c):

 

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

 

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

 

11

 

calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exercisable
for, any shares of Capital Stock of the Company or any of the Subsidiaries;

 

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

 

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

 

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

 

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

 

The Company has furnished to
the Investor true and correct copies of:

 

(W)                           the Third
Restated Articles of Incorporation of the Company, as amended and in effect as
of the date of this Agreement;

 

(X)                               the Restated
Bylaws of the Company, as amended and in effect as of the date of this
Agreement;

 

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

 

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

 

d.                                      Issuance of
Securities.  The
Securities are duly authorized and, upon issuance in accordance with the terms
of this Agreement, will be validly issued, fully paid and nonassessable and
free from Taxes and Liens with respect to the issuance thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock.  At least 2,500,000 shares of Common Stock
have been duly authorized and reserved for issuance of the Common Shares upon
consummation of the Closing, and at least 2,000,000 additional shares of Common
Stock have been duly authorized and reserved for issuance upon exercise of the
Warrant.  At Closing, the Common Shares
and, upon exercise in accordance with the Warrant, the Warrant Shares will be
validly issued, fully paid and nonassessable and free from all Taxes and Liens
with respect to the issue thereof, with the holders being entitled to all
rights accorded to a holder of Common 

 

12

 

Stock.  Assuming the accuracy of
the representations and warranties of the Investor set forth in Sections
2(a), 2(b), 2(c), 2(d), 2(e), 2(g), 2(i) and 2(m), the issuance
by the Company of the Securities is exempt from registration under the 1933 Act
and any other applicable Securities Laws.

 

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

 

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

 

(ii)                                  conflict with, or constitute a breach or default (or an
event which, with the giving of notice or passage of time or both, constitutes
or would constitute a breach or default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or other remedy with
respect to, any material agreement, indenture or instrument to which the
Company or any Subsidiary is a party; or

 

(iii)                               result in a violation of any Law, rule, regulation, order,
judgment or decree (including Securities Laws and the rules and
regulations of the NASDAQ Global Select Market (the “Principal Market;” provided  however, that, if at
any time after the date of this Agreement the principal national stock exchange
or trading market for Common Stock is other than the NASDAQ Global Select
Market, the term “Principal Market”
shall at such time mean such other national stock exchange or trading market)
applicable to the Company or any Subsidiary or by which any property or asset
of the Company or any Subsidiary is bound or affected.

 

f.                                         Required
Filings and Consents.  The
execution, delivery and performance of this Agreement by the Company and the
Subsidiaries, as applicable, and the consummation by the Company and the
Subsidiaries, as applicable, of the Transactions, including the reservation for
issuance and the issuance of the Common Shares, the Warrant and the Warrant
Shares issuable upon exercise of the Warrant, do not and will not require any consent,
approval, authorization or permit of, or filing with or notification to, any
Governmental Entity or any other Person, which if not obtained would reasonably
be expected, individually or in the aggregate, to have a Company Material
Adverse Effect, except as specifically contemplated by Section 4(a) hereof.

 

g.                                      SEC Documents; Financial Statements.

 

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

 

13

 

date
this representation is made but after December 30, 2007, together with any
filings made by the Company with the SEC pursuant to the 1933 Act since December 30,
2007, are referred to herein as the “SEC
Documents.”  The Company’s
consolidated balance sheet as of July 4, 2009, as included in the Company’s
quarterly report on Form 10-Q for the period then ended, as filed with the
SEC on August 7, 2009 (the “Most Recent
10-Q”), is referred to herein as the “Most Recent Balance Sheet.” Each of the SEC Documents was
filed with the SEC via the SEC’s EDGAR system within the time frames prescribed
by the SEC for the filing of such SEC Documents such that each filing was
timely filed with the SEC.  As of their
respective dates, the SEC Documents complied in all material respects with the
Securities Laws.  None of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.  Since the filing of each of the SEC
Documents, no event has occurred that would require an amendment or supplement
to any such SEC Document and as to which such an amendment or supplement has
not been filed and made publicly available on the SEC’s EDGAR system no less
than five Business Days prior to the date this representation is made.  The Company has not received any written
comments from the SEC staff that have not been resolved to the satisfaction of
the SEC staff.

 

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

 

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

 

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

 

14

 

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

 

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

 

h.                                      Principal
Market.  The Company is not in
violation of any of the rules, regulations or requirements of the Principal
Market and has no Knowledge of any facts or circumstances which would
reasonably lead to delisting or suspension, or termination of the trading of,
the Common Stock by the Principal Market in the foreseeable future.

 

i.                                          Rights
Agreement.  The Company
has not adopted a shareholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control of
the Company.

 

j.                                          Absence of
Certain Changes.  Since July 4,
2009, neither the Company nor any of the Subsidiaries has declared or paid any
dividends or sold any assets outside of the ordinary course of business.  Since July 4, 2009, neither the Company
nor any of the Subsidiaries has had any capital expenditures outside the
ordinary course of its business.  Since July 4,
2009, other than the grant of options or restricted stock awards under existing
Company Stock Award Plans in the aggregate of not more than 10,000 shares of
Common Stock, neither the Company nor any of the Subsidiaries has had or made,
as applicable, any (i) grant or provision of severance or termination
payments or benefits to any director or officer of the Company or any
Subsidiary or employee, independent contractor or consultant of the Company or
any of the Subsidiaries, (ii) material increase in the compensation,
perquisites or benefits payable to any director, officer, employee, independent
contractor or consultant of the Company or any of the Subsidiaries, (iii) grant
of equity or equity-based awards that may be settled in shares of Common Stock,
Preferred Stock or any other securities of the Company or any Subsidiary or the
value of which is linked directly or indirectly, in whole or in part, to the price
or value of any shares of Common Stock, Preferred Stock or other securities of
the Company or any Subsidiary, (iv) acceleration in the vesting or payment
of compensation payable or benefits provided or to become payable or provided
to any current or former director, officer, employee, independent contractor or
consultant, (v) change in the terms of any outstanding Option with respect
to any shares of the Company’s Common Stock or any other securities of the
Company or (vi) establishment or adoption of any new arrangement that
would be a Company Benefit Plan or termination or material amendment of any
existing Company Benefit Plan (other than changes made in the ordinary course
of business consistent with past practice or as may be necessary to comply with
applicable Laws, in either case that do not materially increase the costs of
any such Company Benefit Plans).

 

k.                                       Acknowledgment
Regarding the Investor’s Purchase of Common Shares and the Warrant.  The Company acknowledges and agrees that the
Investor is acting solely in the capacity of an arm’s length purchaser with
respect to the Company in connection with this Agreement and the other
Transaction Documents and the Transactions. 
The Company further 

 

15

 

acknowledges that the Investor is not acting as a financial advisor or
fiduciary of any party to this Agreement or any of the other Transaction
Documents (or in any similar capacity) with respect to this Agreement and the
other Transaction Documents and the Transactions, and any advice given by the
Investor or any of its representatives or agents in connection with the
Transaction Documents and the Transactions is merely incidental to the Investor’s
purchase of the Securities. The Company further represents to the Investor that
the decision of the Company to enter into the Transaction Documents has been
based solely on the independent evaluation by such Person and its
representatives.

 

l.                                          No General
Solicitation.  Neither the
Company nor any of its Affiliates, nor any Person acting on the behalf of any
of the foregoing, has engaged or will engage in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the 1933 Act), including advertisements, articles, notices, or other
communications published in any newspaper, magazine or similar media or
broadcast over radio, television or internet or any seminar or meeting whose
attendees have been invited by general solicitation or general advertising, in
connection with the offer or sale of the Securities.

 

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

 

4.                                       AFFIRMATIVE
COVENANTS.  Unless
otherwise waived and consented to by the Investor:

 

a.                                       Form D and
Blue Sky; Other Filings.  The
Company agrees to timely file a Form D with respect to the Securities as
required under Regulation D and to provide a copy thereof to the Investor
promptly after such filing.  The Company
shall make all filings and reports relating to the offer and sale of the Securities
required under applicable Securities Laws of the states of the United States
following the Closing Date.  The Company
further agrees to timely file a notification of Listing of Additional Shares
with NASDAQ with respect to the Securities, and timely file a current report on
Form 8-K with the SEC describing the terms of the Transactions, including
the sale and issuance of the Securities to the Investor.

 

b.                                      Material
Nonpublic Information. 
Except with respect to the material terms and conditions of the
transactions contemplated by the Transaction Documents, and except with the
express written consent of the Investor and unless prior thereto the Investor
shall have executed a written agreement regarding the confidentiality and use
of such information, the Company and each Subsidiary shall instruct each of
their respective officers, directors, employees and agents, not to, and the
Investor shall not directly solicit the Company, any of its Subsidiaries or any
of their respective officers, directors, employees or agents to provide the
Investor with any material, non-public information regarding the Company or any
of its Subsidiaries.

 

16

 

c.                                       Listing.  During the period commencing on the date of
this Agreement and ending on the first date after the Closing on which the
Investor and its Affiliates, in the aggregate, beneficially own less than 5% of
the Common Stock (determined in accordance with Rule 13d-3 (as defined
below)) (the period ending on such latest date, the “Reporting
Period”), the Company shall use commercially reasonable efforts to
promptly secure the listing of all of the Common Shares, and upon exercise of
the Warrant, all of the Warrant Shares, upon each national securities exchange
and automated quotation system, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and, shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all of the
Common Shares and the Warrant Shares. 
The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section 4(c).

 

d.                                      Preemptive
Rights.  In case at any time on or
before June 30, 2010, the Company shall sell or otherwise issue to any
Person any Equity Securities (as defined below), other than any Exempted
Issuances (as defined below), and so long as the Investor and its Affiliates,
in the aggregate, beneficially own a number of shares of Common Stock
representing greater than 5% of the Common Stock Deemed Outstanding (as defined
below) as of such date, the Company shall offer to the Investor the right, at
the same price as that paid, or to be paid by the other Person who participated
or will participate in such sale or other issuance, to purchase the amount of
such Equity Securities equal to the product of (x) the total amount of
such Equity Securities sold or otherwise issued and (y) a fraction, the
numerator of which is the number of Investor Shares (as defined below)
immediately prior to such sale of Equity Securities and the denominator of
which is the number of shares of Common Stock Deemed Outstanding immediately
prior to the sale of Equity Securities. 
Such offer shall be made by written notice (the “Preemptive
Rights Notice”) of the Company to the Investor, which Preemptive
Rights Notice may be delivered prior to, but in any event shall not be
delivered any later than, five days after the date of the closing of such sale
or other issuance of Equity Securities and shall set forth the Equity Securities
sold or otherwise issued or to be sold or otherwise issued, the price per
Equity Security at which such Equity Securities were sold or otherwise issued
or will be sold or otherwise issued, and the number of Equity Securities which
the Investor shall have the opportunity to purchase pursuant hereto.  The Investor shall be entitled for a period
of 10 days after the date of the Preemptive Rights Notice to exercise its
rights hereunder.  Such rights may only
be exercised for all of the Equity Securities the Investor is entitled to
purchase hereunder and shall be exercised by wire transfer of immediately
available funds to an account designated by the Company (as set forth in the
Preemptive Rights Notice) and the delivery to the Company of duly and properly
executed originals of any documents reasonably required by the Company, all by
the later of the expiration of such 10 day period and the closing date of such
sale or other issuance of Equity Securities. 
Any purchase of Equity Securities by the Investor pursuant hereto shall
be made only of a whole number of Equity Securities, not of any fraction of
Equity Securities, and any fraction shall be rounded up or down, as
appropriate, to the nearest whole number. 
For purposes hereof, “Common Stock Deemed
Outstanding” as of any date shall mean the number of shares of
Common Stock then actually issued and outstanding; “Equity
Securities” means any equity securities of the Company, whether now
or hereafter authorized, and any Options or Convertible Securities of the Company;
“Exempted Issuances” means (A) issuances
of Options of the Company, restricted stock grants or any other similar equity
compensation arrangements pursuant to a Company Stock Award Plan approved by
the Company Board for officers, employees or consultants of the Company or any
Subsidiary (B) 

 

17

 

issuances of any Equity Securities to any seller in connection with the
acquisition by the Company or any of the Subsidiaries of a business, by
purchase or other acquisition of stock or other equity interests, or by merger,
consolidation or other business combination, or any sale of all or
substantially all of the assets of such business, (C) issuances in
connection with the subdivision of the Common Stock (including any split), any
combination of the Common Stock (including any reverse split) or any other
recapitalization, reorganization, reclassification or conversion of the
Company, in each case in which the Investor Shares are treated in the same
manner as all other outstanding shares of Common Stock, (D) issuances of
any Equity Securities to any purchaser that requires complete acceptance of
such purchaser’s terms and conditions, including the amount of Equity
Securities to be purchased, within a period of time equal to or less than two (2) Business
Days, and (E) issuances in connection with any Rights Offering (as defined
below); and “Investor Shares” means, as of any
time, the shares of Common Stock then beneficially held by the Investor and its
Affiliates, and excluding any Warrant Shares.

 

e.                                       Backstop of Rights Offering.  The Company and the Investor acknowledge and
agree that in the event that the Company desires to undertake and consummate a
rights offering with respect to certain shares of the Common Stock (the “Rights Offering”), which determination
shall be in the sole discretion of the Company’s Board, then the Company and
Investor agree in good faith to use their commercially reasonable efforts to
execute and deliver a Standby Purchase Agreement (the “Backstop Agreement”), (A) in
substantial compliance with the terms and conditions set forth in that certain
Term Sheet attached hereto as Exhibit F (the “Backstop Term Sheet”), and (B) otherwise
in form and substance mutually satisfactory to the Investor and the Company,
which Backstop Agreement shall set forth the terms and conditions upon which an
Affiliate of the Investor shall provide a Backstop Commitment (as defined in
the Backstop Term Sheet) in connection with the Rights Offering.

 

f.                                         Confidentiality
Of Evaluation Material Produced to the Investor; Standstill.

 

(i)                                     Notwithstanding anything contained in this Agreement to the
contrary, the Investor shall treat all “Confidential Information” (as defined
in the Confidentiality, Non-disclosure and Standstill Agreement between the
Parties dated February 9, 2009 (the “Confidentiality
Agreement”)) provided by the Company to Investor under the
Confidentiality Agreement, and all information provided by the Company to the
Investor pursuant to the SPA, as Confidential Information in accordance with
the terms below and the terms of Sections 2 and 3 of the Confidentiality
Agreement, which terms are expressly incorporated herein.

 

(ii)                                  Within five (5) Business Days of the date hereof,
Investor will return or destroy all information provided to it that, to its
knowledge, constitutes Confidential Information, and will certify to the
Company in writing that it has complied with the foregoing covenant; provided
that  the Investor may retain one copy of
the Confidential Information for contingency purposes provided that such
copy shall be segregated from the Investor’s normal business records
and may only be accessed for the purpose of establishing compliance with
this Agreement or in circumstances where this Agreement or the
Transactions are the subject of litigation or otherwise with the prior written
consent of the Company. 
Furthermore, the Investor and its professional advisors may retain
data or electronic records containing Confidential Information for the 

 

18

 

purposes of backup and data
recovery so long as such data or records, to the extent not permanently deleted
or overwritten in the ordinary course of business, are not accessible in the
ordinary course of business and are not accessed or used except as required for
backup or data recovery purposes.  Any Confidential Information
retained by the Investor or its professional advisors in accordance with
the provisions of this Section 4(f)(ii) shall remain subject
to the confidentiality terms set forth in Section 4(f)(i) of
this Agreement for so long as such Confidential Information is retained.

 

(iii)                               The Investor agrees that, unless specifically invited in
writing to do so by the Company, for a period of two (2) years from the
date of this Agreement, neither the Investor nor any person or entity directly
or indirectly controlling the Investor or controlled by the Investor or under
common control with the Investor (all such Persons and entities, together with
the Investor, collectively, the “Sterling
Group”) acting alone or as part of any group, will, or will
encourage or assist others to, directly or indirectly: (i) acquire, offer
or propose to acquire, or agree or seek to acquire by purchase or otherwise,
directly or indirectly, ownership (including beneficial ownership (as defined
in Rule 13d-3 under the 1934 Act (“Rule 13d-3”))
of any securities of, any direct or indirect rights with respect to or options
to acquire any securities of, or instruments representing any bank or other
debt of, Company or any Subsidiary or of any successor to, or person in control
of, the Company or any Subsidiary, or any substantial part of the assets of the
Company or any Subsidiary or divisions thereof or of any such successor or
controlling person; provided, however, that the foregoing shall not limit or
preclude the Investor or any other member of the Investor from acquiring,
individually or in the aggregate, shares of Common Stock, or direct or indirect
rights or options with respect thereto, so long as, upon such acquisition, the
members of the Sterling Group own, beneficially or of record, less than 20% of
the Common Stock (determined in accordance with Rule 13d-3); (ii) enter
into any agreement or make any public announcement with respect to, or offer,
propose or seek to enter into, or otherwise be involved in or part of, directly
or indirectly, any acquisition transaction, recapitalization, restructuring,
liquidation, dissolution, business combination or other similar transaction relating
to all or part of the Company or any Subsidiary or all or any part of the
assets of the Company or any Subsidiary or any of their respective businesses; (iii) make,
or in any way participate in, directly or indirectly, any “solicitation” of “proxies”
(as such terms are used in the rules of the SEC) or consents to vote, or
seek to advise or influence any person or entity with respect to the voting or
consent of, any voting securities of the Company or any Subsidiary (other than
in support of a proposal approved by the Company Board); (iv) form, join
or in any way participate in a “group” (within the meaning of Section 13(d)(3) of
the 1934 Act), other than the Sterling Group, with respect to any voting
securities of Company or any Subsidiary; (v) seek or propose, alone or in
concert with others that are not members of the Sterling Group, to influence or
control Company’s management or policies; (vi) initiate, directly or
indirectly, any discussions, negotiations, arrangements or understandings with
any other person with respect to any of the foregoing activities or propose any
of such activities to any other person; (vii) advise, assist, knowingly
encourage, act as a financing source for, or otherwise invest in, any other
person in connection with any of the foregoing activities; or (viii) publicly
disclose any intention, plan or arrangement inconsistent with any of the
foregoing.  The Investor also agrees that
for a period of two (2) years from the date of this Agreement, neither the
Investor nor any 

 

19

 

of its
Affiliates will (x) request the Company or its advisors, directly or
indirectly, to (A) amend or waive any provision of this section (including
this sentence) or (B) otherwise consent to any action inconsistent with
any provision of this section (including this sentence), or (y) take any
initiative with respect to the Company or any Subsidiary which could require
the Company to make a public announcement regarding: (A) such initiative, (B) any
of the activities referred to in this section, or (C) the possibility of
the Investor or any other person acquiring control of the Company, whether by
means of a business combination or otherwise, or make any public announcement
with respect thereto; provided, however, that nothing contained in this Section 4(f)(iii) shall
(I) limit the ability of any member of the Sterling Group to vote its
voting securities on any matter submitted to a vote of the shareholders of
Company or announce its opposition to any proposals approved by the Company
Board, (II) limit the ability of any person, including any designee,
representative or affiliate of the Investor, to exercise its rights as a member
of the Company Board or any committee thereof while serving as a member of the
Company Board or any committee thereof, (III) limit the ability of the
Sterling Group or any member thereof to issue any communication contemplated by
Rule 14a-1(l)(2)(iv) stating how it intends to vote and the reasons
therefore with respect to any extraordinary transaction of any kind or nature
between the Company and any third party unaffiliated with the Sterling Group, (IV) limit
the ability of the Sterling Group to file a Schedule 13D, 13G or any amendment
thereto as required by law or to make other securities or tax filings as
required by law so long as no member of the Sterling Group enters into any
contract, arrangement, understanding or relationship (legal or otherwise) with
respect to the Company’s securities, or otherwise take any action, in violation
of this Section 4(f)(iii), or (V) limit the ability of any
member of the Sterling Group to transfer any shares of Common Stock of the
Company or direct or indirect rights or options to acquire any shares of Common
Stock to any other member of the Sterling Group.

 

5.                                       TRANSFER AGENT.  The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or, provided that such transfer agent is a participant in the DTC
Fast Automated Securities Transfer Program, credit shares to the applicable
balance accounts at DTC, registered in the name of the Investor or its
respective nominee(s), for any Warrant Shares issued upon exercise of the
Warrant, as provided in the Warrant.  The
Company warrants that no other instruction other than the foregoing and any
legal opinion, written assurances or certification pursuant to Section 2(g) hereof,
as the case may be, as by such transfer agent, will be given by the Company to
its transfer agent, and that the Securities shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement.  If the
Investor effects a sale, assignment or transfer of the Securities in accordance
with Sections 2(f) and 2(g), the Company shall permit the
transfer and shall promptly instruct its transfer agent to issue one or more
Share Certificates or other certificates or, provided that such transfer agent
is a participant in the DTC Fast Automated Securities Transfer Program, credit shares
to the applicable balance accounts at DTC in such name and in such
denominations as specified by the Investor to effect such sale, transfer or
assignment.  In the event that such sale,
assignment or transfer involves Common Shares or Warrant Shares sold, assigned
or transferred pursuant to an effective registration statement or pursuant to Rule 144,
the transfer agent shall issue such Securities to the Investor, assignee or
transferee, as the case may be, without any restrictive legend.  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Investor.

 

20

 

Accordingly, the Company acknowledges
that the remedy at law for a breach of its obligations under this Section 5
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 5, that the Investor
shall be entitled, in addition to all other available remedies, to an order
and/or injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond
or other security being required. 
Neither the Company, nor any Person acting for the Company’s benefit,
shall deliver any instructions to the Company’s transfer agent that are
inconsistent with the foregoing.

 

6.                                       TERMINATION.

 

a.                                       Termination.  In the event that as of 5:00 p.m.,
Chicago time, on June 30, 2010 (the “Outside Date”),
(i) the Company has not delivered a Company Closing Certificate on or
prior to the Company Termination Date, and (ii) the Investor has not
delivered an Investor Closing Notice on or prior to the Investor Termination
Date, then this Agreement shall terminate as of 5:00 p.m., Chicago time,
on the Outside Date, and the sale and purchase of the Securities shall be
abandoned automatically and without any further action or notice.

 

b.                                      Effect of
Termination.  If this
Agreement terminates pursuant to this Section 6, it will become
void and of no further force and effect, with no liability on the part of any
party to this Agreement (or any of their respective former, current, or future
general or limited partners, shareholders, managers, members, directors,
officers, Affiliates or agents), except that the provisions of this Section 6(b) and
Section 7 will survive any termination of this Agreement; provided,
however, that nothing herein shall relieve either party from any liabilities
for damages incurred or suffered by the other party as a result of any breach
by a party of any of its representations, warranties, covenants or other
agreements set forth in this Agreement that has caused, or would reasonably be expected
to cause, any of the conditions set for in Sections (1)(b) or 1(c) not
to be satisfied in a timely manner.

 

7.                                       MISCELLANEOUS.

 

a.                                       Governing Law;
Jurisdiction; Jury Trial.

 

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

 

(ii)                                  Each of the parties hereto irrevocably agrees that any
litigation or proceeding with respect to this Agreement and the rights and
obligations arising hereunder, or for recognition and enforcement of any
judgment in respect of this Agreement and the rights and obligations arising
hereunder brought by any other party hereto or its successors or assigns, shall
be brought and determined exclusively in the state or federal courts for the State
of Delaware.  Each of the parties hereto
hereby irrevocably submits with regard to any such action or proceeding for
itself and in respect of its property, generally and unconditionally, to the
personal jurisdiction of the aforesaid 

 

21

 

courts
and agrees that it will not bring any action relating to this Agreement or any
of the Transactions in any court or tribunal other than the aforesaid
courts.  Each of the parties hereto
hereby irrevocably waives, and agrees not to assert, by way of motion, as a
defense, counterclaim or otherwise, in any action or proceeding with respect to
this Agreement and the rights and obligations arising hereunder or for
recognition and enforcement of any judgment in respect of this Agreement and
the rights and obligations arising hereunder, (A) any claim that it is not
personally subject to the jurisdiction of the above named courts for any reason
other than the failure to serve process in accordance with this Section 7(a)(ii),
(B) any claim that it or its property is exempt or immune from
jurisdiction of any such court or from any legal process commenced in such
courts (whether through service of notice, attachment prior to judgment,
attachment in aid of execution of judgment, execution of judgment or otherwise)
and (C) to the fullest extent permitted by the applicable Law, any claim
that (I) the suit, action or proceeding in such court is brought in an
inconvenient forum, (II) the venue of such suit, action or proceeding is
improper or (III) this Agreement, or the subject matter hereof, may not be
enforced in or by such courts.  Each of
the parties hereto agrees that mailing of process or other papers in connection
with any such action or proceeding in the manner provided in Section 7(f) or
in such other manner as may be permitted by applicable Laws, will be valid and
sufficient service thereof.

 

(iii)                               EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT
MAY ARISE UNDER THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS
IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH SUCH
PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION, CONTROVERSY OR OTHER LEGAL ACTION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
ACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY TO THIS AGREEMENT CERTIFIES
AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE OF ANY OTHER PARTY HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT SEEK TO
ENFORCE THE FOREGOING WAIVER IN THE EVENT OF A LEGAL ACTION, (B) SUCH
PARTY HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) SUCH PARTY MAKES
THIS WAIVER VOLUNTARILY AND (D) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO
THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN
THIS SECTION 7(a)(iii).

 

b.                                      Counterparts.  This Agreement and any amendments hereto may
be executed and delivered in two or more identical counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original, but all of which taken together shall
constitute one and the same agreement. 
This Agreement shall become effective and binding upon each party hereto
when counterparts have been signed by each party hereto and delivered to the
other parties hereto, it being understood that all parties need not sign the
same counterpart.  In the event that any
signature to this Agreement or any amendment hereto is delivered by facsimile
transmission or by e-mail delivery of a “.pdf” format data file, such signature
shall create a valid and binding obligation of the party executing (or on whose

 

22

 

behalf such signature is executed) with the same force and effect as if
such facsimile or “.pdf” signature page were an original thereof.  At the request of any party each other party
shall promptly re-execute an original form of this Agreement or any amendment
hereto and deliver the same to the other party. 
No party hereto shall raise the use of a facsimile machine or e-mail
delivery of a “.pdf” format data file to deliver a signature to this Agreement
or any amendment hereto or the fact that such signature was transmitted or
communicated through the use of a facsimile machine or e-mail delivery of a “.pdf”
format data file as a defense to the formation or enforceability of a contract,
and each party hereto forever waives any such defense.

 

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

 

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

 

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

 

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

 

If
to the Company:

 

Select Comfort Corporation

9800 59th Avenue North

Minneapolis, Minnesota 55442

Attention:   William McLaughlin

Facsimile:   (763)
551-6888

 

23

 

and

Select Comfort Corporation

9800 59th Avenue North

Minneapolis, Minnesota 55442

Attention:   Mark Kimball

Facsimile:   (763)
551-6888

 

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

 

Oppenheimer Wolff Donnelly LLP

Plaza VII, Suite 3300

45 South Seventh Street

Minneapolis, Minnesota 55402-1609

Attention:   Thomas R. Marek

Facsimile:   (612)
607-7100

 

If to the Investor:

 

Sterling SC Investor, LLC

1033 Skokie Boulevard

Suite 600

Northbrook, Illinois 60062

Attention:   Office of General
Counsel

Facsimile:   (847)
480-0199

 

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

 

Katten Muchin Rosenman LLP

525 West Monroe Street

Chicago, Illinois 60661-3693

Attention:   Saul E. Rudo

Facsimile:   (312)
902-1061

 

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

 

24

 

g.                                      Successors and
Assigns.  This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties and
their respective successors and assigns, including any purchasers of the
Securities.  The Investor shall not
directly or indirectly assign, sell, delegate or otherwise transfer (by
operation of law or otherwise, including by merger, reorganization,
reclassification, consolidation or similar transaction) this Agreement or any
rights or obligations hereunder without the prior written consent of the
Company.  Any assignment or transfer in
violation of this section shall be void.

 

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

 

i.                                          Survival.  The representations and warranties of the
Investor and the Company shall survive the Closing for a period of 12 months;
provided, however, that the representations and warranties of the Company set
forth in Sections 3(a), 3(b), 3(c) and 3(d) shall
survive indefinitely.  Neither the period
of survival nor the liability of the Company with respect to the Company’s
representations and warranties shall be reduced by any investigation made at
any time by or on behalf of the Investor. 
If written notice of a claim has been given prior to the expiration of
the applicable representation and warranty of the Company, then the relevant
representation or warranty shall survive as to such claim, until such claim has
been finally resolved.  The agreements
and covenants set forth in Sections 4 and 7 shall survive the
Closing.

 

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

 

k.                                       Placement Agent.  The Company represents and warrants to the
Investor that it has not engaged any placement agent, broker or financial
advisor in connection with the sale of the Common Shares, except for Piper
Jaffray & Co. (“Piper”).  The Company shall be responsible for the
payment of any placement agent’s fees or broker’s commissions, including any
fees or commissions of Piper.  The
Company shall pay, and hold the Investor harmless against, any liability, loss
or expense (including attorneys’ fees and out-of-pocket expenses) arising in
connection with any claim for any such payment.

 

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

 

m.                                    Specific
Performance.  The parties
to this Agreement agree that irreparable damage would occur and that the
parties to this Agreement would not have any adequate remedy at Law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached.  It is accordingly agreed that the Company, on
the one hand, and the Investor, on the other hand, shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any state or federal
court located in the State of 

 

25

 

Delaware, in each case without the necessity of posting bond or other
security or showing actual damages, and this being in addition to any other
remedy to which they are entitled at law or in equity.

 

n.                                      Confidentiality.  Each of the parties acknowledges, agrees and
covenants to keep strictly confidential, and shall not disclose, or allow or
permit any other Person to disclose, any information provided by any other
party hereto pursuant to this Agreement or any of the other Transaction
Documents, including any notices provided hereunder; provided that a
party may disclose such information to its officers, directors, employees,
partners, members, managers, equityholders, advisors and agents who agree to be
bound by the confidentiality obligation set forth in this Section 7(n).  Each party hereto shall take all actions
reasonably necessary to ensure that such information remains confidential in
accordance with the terms of this Agreement and the other Transaction
Documents.

 

o.                                      Interpretative
Matters.  Unless the context otherwise
requires, (i) all references to Sections, Schedules, Appendices or
Exhibits are to Sections, Schedules, Appendices or Exhibits contained in or
attached to this Agreement, (ii) each accounting term not otherwise
defined in this Agreement has the meaning assigned to it in accordance with
GAAP, (iii) words in the singular or plural include the singular and
plural and pronouns stated in either the masculine, the feminine or neuter
gender shall include the masculine, feminine and neuter, (iv) the words “hereof,”
“herein” and words of similar effect shall reference this Agreement in its
entirety, and (v) the use of the word “including” in this Agreement shall
be by way of example rather than limitation.

 

*  *  * 
*  *  *

 

26

 

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

 

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  SELECT
  COMFORT CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ James
  Raabe

  
	
   

  	
  Name:

  	
  James
  Raabe

  
	
   

  	
  Title:

  	
  Chief
  Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  INVESTOR:

  
	
   

  	
   

  
	
   

  	
  STERLING
  SC INVESTOR, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:
  Sterling Capital Partners III, L.P.

  
	
   

  	
  Its:
  Sole Member

  
	
   

  	
   

  
	
   

  	
  By:
  SC Partners III, L.P.

  
	
   

  	
  Its:
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:
  Sterling Capital Partners III, LLC

  
	
   

  	
  Its:
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ R.
  Christopher Hoehn-Saric

  
	
   

  	
  Name:

  	
  R.
  Christopher Hoehn-Saric

  
	
   

  	
  Title:

  	
  Senior
  Managing Director

  

 

 

APPENDIX

CERTAIN DEFINED TERMS

 

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

 

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

 

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

 

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

 

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

 

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

 

“Company
Material Adverse Effect” means any event, state of facts,
circumstance, development, change or effect that, individually or in the
aggregate with all other events, states of fact, circumstances, developments,
changes and effects, (i) would materially adversely affect the ability of
the Company to consummate the Transactions, or to perform its obligations under
any of the Transaction Documents, in a timely manner or (ii) is materially
adverse to the business, assets, liabilities, condition (financial or
otherwise) or results of operations of the Company and the Subsidiaries, taken
as a whole; provided, however, that a “Company Material Adverse
Effect” shall not include any event, state of facts, circumstance,
development, change or effect resulting from: 
(A) (1) changes in general economic conditions, general
securities and financial market conditions, or global or national political
relations or conditions, (2) a material worsening of current conditions
caused by an act of terrorism or war (whether declared or not declared)
occurring after the date of this Agreement or any natural disasters or any
national or international calamity affecting the United States, (3) changes
in GAAP, (4) changes in laws of 

 

1

 

general
applicability or interpretations thereof by any Governmental Entity, except, (x) in
the case of any of the foregoing clauses (1), (2), (3) or (4), if such
changes or developments have a disproportionate or unique impact on the
business, assets, liabilities, condition or results of operations of the
Company and the Subsidiaries, taken as a whole, relative to other participants
in the industries in which the Company conducts its businesses or (y) in
the case of the foregoing clause (2), directly affect the physical properties
of the Company and the Subsidiaries; (B) any change in the Company’s stock
price or trading volume, in and of itself, or any failure, in and of itself, by
the Company to meet revenue or earnings guidance published or otherwise
provided to the Investor; (C) actions or omissions of either party hereto
taken as expressly required by this Agreement or with the prior written consent
of the other party hereto in contemplation of the Transactions; or (D) the
public announcement of this Agreement and the Transactions.

 

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

 

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

 

“Existing
Credit Facility” means that certain Credit Agreement, dated as of June 9,
2006, by and among the Company and the Lenders, together with all pledge and
security agreements, guarantees and other definitive documents and instruments
entered into in connection therewith or related thereto, as each of the same
have been amended, restated, supplemented or otherwise modified from time to
time prior to the date of this Agreement.

 

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

 

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

 

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

 

“Lenders”
means JPMorgan Chase Bank, National Association, as administrative agent, Bank
of America, N.A., as syndication agent, and certain financial institutions
signatory to the Existing Credit Facility, including the administrative agent
and the syndication agent.

 

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

 

2

 

Capital
Lease Obligation, or any financing lease having substantially the same economic
effect as any of the foregoing).

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Taxes”
means (i) any and all federal, state, provincial, local, foreign and other
taxes, levies, fees, imposts, duties, and similar governmental charges
(including any interest, fines, assessments, penalties or additions to tax
imposed in connection therewith or with respect thereto) including (x) taxes
imposed on, or measured by, income, franchise, profits or gross receipts, and (y) ad
valorem, value added, capital gains, sales, goods and services, use, real or
personal property, Capital Stock, license, branch, payroll, estimated,
withholding, employment, social security (or similar), unemployment,
compensation, utility, severance, production, excise, stamp, occupation,
premium, windfall profits, transfer and gains taxes, and customs duties, (ii) 

 

3

 

any
liability for payment of amounts described in clause (i) whether as a
result of transferee liability, joint and several liability for being a member
of an affiliated, consolidated, combined, unitary or other group for any
period, or otherwise by operation of law, and (iii) any liability for the
payment of amounts described in clause (i) or (ii) as a result of any
tax sharing, tax indemnity or tax allocation agreement or similar agreements to
pay or indemnify any other Person on account of Taxes.

 

“Transaction
Documents” means this Agreement, the Registration Rights Agreement,
the Mutual Release and each of the other agreements or instruments to which the
Company is a party or by which it is bound and which is entered into by the
parties hereto or thereto in connection with the Transactions.

 

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

 

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

 

	
  Defined
  Term

  	
   

  	
  Location of

  Definition

  
	
  “1933
  Act Legend”

  	
   

  	
  Section 2(g)

  
	
  “1933
  Act”

  	
   

  	
  Recitals

  
	
  “1934
  Act”

  	
   

  	
  Section 2(k)

  
	
  “Acquiring
  Entity”

  	
   

  	
  Section 1(d)

  
	
  “Agreement”

  	
   

  	
  Recitals

  
	
  “Backstop
  Agreement”

  	
   

  	
  Section 4(e)

  
	
  “Backstop
  Term Sheet”

  	
   

  	
  Section 4(e)

  
	
  “Closing”

  	
   

  	
  Section 1(a)(i)

  
	
  “Closing
  Date”

  	
   

  	
  Section 1(a)(i)

  
	
  “Committee”

  	
   

  	
  Recitals

  
	
  “Common
  Shares”

  	
   

  	
  Recitals

  
	
  “Common
  Stock Deemed Outstanding”

  	
   

  	
  Section 4(d)

  
	
  “Common
  Stock”

  	
   

  	
  Recitals

  
	
  “Company”

  	
   

  	
  Recitals

  
	
  “Company
  Board”

  	
   

  	
  Recitals

  
	
  “Company
  Closing Certificate”

  	
   

  	
  Section 1(a)(ii)

  
	
  “Company
  Stock Award Plans”

  	
   

  	
  Section 3(c)

  
	
  “Company
  Termination Date”

  	
   

  	
  Section 1(a)(ii)

  
	
  “Company
  Triggered Closing”

  	
   

  	
  Section 1(a)(ii)

  
	
  “Confidentiality
  Agreement”

  	
   

  	
  Section 4(f)(i)

  
	
  “Covered
  Investor”

  	
   

  	
  Section 2(f)

  
	
  “Distribution”

  	
   

  	
  Section 1(d)

  
	
  “DTC”

  	
   

  	
  Section 2(g)

  
	
  “Equity Securities”

  	
   

  	
  Section 4(d)

  
	
  “Exempted Issuances”

  	
   

  	
  Section 4(d)

  

 

4

 

	
  Defined Term

  	
   

  	
  Location
  of

  Definition

  
	
  “Investor”

  	
   

  	
  Recitals

  
	
  “Investor
  Closing Notice”

  	
   

  	
  Section 1(a)(i)

  
	
  “Investor
  Shares”

  	
   

  	
  Section 4(d)

  
	
  “Investor
  Termination Date”

  	
   

  	
  Section 1(a)(i)

  
	
  “MBCA”

  	
   

  	
  Recitals

  
	
  “Most Recent 10-Q”

  	
   

  	
  Section 3(g)

  
	
  “Most Recent Balance Sheet”

  	
   

  	
  Section 3(g)

  
	
  “Mutual
  Release”

  	
   

  	
  Recitals

  
	
  “Outside
  Date”

  	
   

  	
  Section 6(a)

  
	
  “Piper”

  	
   

  	
  Section 7(k)

  
	
  “Pre-Signing
  Period”

  	
   

  	
  Section 2(k)

  
	
  “Preemptive Rights Notice”

  	
   

  	
  Section 4(d)

  
	
  “Principal
  Market”

  	
   

  	
  Section 3(e)

  
	
  “Private
  Offering”

  	
   

  	
  Section 4(d)(i)

  
	
  “Purchase
  Price”

  	
   

  	
  Section 1(a)(i)

  
	
  “Purchase
  Rights”

  	
   

  	
  Section 1(d)

  
	
  “Registration
  Rights Agreement”

  	
   

  	
  Recitals

  
	
  “Regulation
  D”

  	
   

  	
  Recitals

  
	
  “Reporting
  Period”

  	
   

  	
  Section 4(c)

  
	
  “Rights
  Offering”

  	
   

  	
  Section 4(e)

  
	
  “Rule 13d-3”

  	
   

  	
  Section 4(f)(iii)

  
	
  “Rule 144”

  	
   

  	
  Section 2(f)

  
	
  “SEC”

  	
   

  	
  Recitals

  
	
  “SEC
  Documents”

  	
   

  	
  Section 3(g)

  
	
  “Securities”

  	
   

  	
  Recitals

  
	
  “Share
  Certificates”

  	
   

  	
  Recitals

  
	
  “SPA”

  	
   

  	
  Recitals

  
	
  “Sterling
  Group”

  	
   

  	
  Section 4(f)(iii)

  
	
  “Suspension
  Period”

  	
   

  	
  Section 1(a)(i)

  
	
  “Warrant”

  	
   

  	
  Recitals

  
	
  “Warrant
  Shares”

  	
   

  	
  Recitals

  

 

5

 

Exhibit B

 

THE
SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT. 
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR BONA FIDE FINANCING ARRANGEMENT
SECURED BY THE SECURITIES.  THE
SECURITIES REPRESENTED BY THIS WARRANT MAY BE LESS THAN THE NUMBER SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 2(e) HEREOF.

 

 

SELECT COMFORT CORPORATION

NON-TRANSFERABLE

WARRANT TO PURCHASE COMMON STOCK

 

	
  Warrant
  No.: SC-001

  	
   

  	
  Number of Shares: 2,000,000

  
	
  Date
  of Issuance:                  ,
  20

  	
   

  	
   

  

 

Select
Comfort Corporation, a Minnesota corporation (the “Company”), hereby certifies that, for Ten United States
Dollars ($10.00) and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Sterling SC Investor, LLC, a
Delaware limited liability company, the registered holder hereof, or its
permitted assigns (the “Holder”), is
entitled, subject to the terms set forth below, to purchase from the Company upon
surrender of this Warrant (if required by Section 2(e)), at any
time or times on or after the date hereof, but not after 11:59 P.M. New
York City time on the Expiration Date (as defined in Section 1(b) below)
Two Million (2,000,000) fully paid nonassessable shares of Common Stock (as
defined in Section 1(b) below) of the Company (the “Warrant Shares”) at the Warrant Exercise
Price (as defined in Section 1(b) below).

 

Section 1.

 

(a)                                         Securities Purchase Agreement.  This Warrant was issued pursuant to that
certain Securities Purchase Agreement, dated as of even date herewith, between
the Company and Sterling SC Investor, LLC (as such agreement may be amended,
restated, modified or supplemented and in effect from time to time, the “Purchase Agreement”) or issued
in exchange or substitution therefor or replacement thereof.  Each capitalized term used, and not otherwise
defined herein, shall have the meaning ascribed thereto in the Purchase
Agreement.

 

(b)                                        Definitions.  The following words and terms as used in this
Warrant shall have the following meanings:

 

 

(i)                                     “Common Stock” means (i) the Company’s common stock, par value $0.01
per share, and (ii) any capital stock into which such Common Stock shall
have been changed or any capital stock resulting from a reclassification of
such Common Stock.

 

(ii)                                  “Convertible
Securities” means any
stock or securities (other than Options) directly or indirectly convertible
into or exchangeable or exercisable for Common Stock.

 

(iii)                               “Expiration Date” means the date that is five (5) years after the
Warrant Date (as defined in Section 12) or, if such date does not
fall on a Business Day, then the next Business Day.

 

(iv)                              “Options” means
any rights, warrants or options to subscribe for or purchase any Common Stock
or Convertible Securities.

 

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

 

(vi)                              “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization or a government or any department or agency thereof or any other
legal entity.

 

(vii)                           “Registration Rights
Agreement” means that certain Registration Rights Agreement, dated
as of even date herewith, between the Company and Sterling SC Investor, LLC, as
such agreement may be amended, restated or modified and in effect from time to
time.

 

(viii)                        “Securities Act” means the Securities Act of 1933, as amended, or any
successor thereto.

 

(ix)                                “Trading Day” means any day on which the Common Stock is traded on the
Principal Market; provided that “Trading Day” shall not include any day on
which the Common Stock is scheduled to trade, or actually trades, on such
exchange or market for less than 4.5 hours.

 

(x)                                   “Warrant” means this Warrant and all warrants issued in exchange,
transfer or replacement thereof pursuant to the terms of this Warrant.

 

(xi)                                “Warrant
Exercise Price” shall be
equal to, with respect to any Warrant Share, $0.01, subject to adjustment as
provided in Section 8 of this Warrant.

 

(xii)                             “Weighted
Average Price” means, for
any security as of any date, the dollar volume-weighted average price for such
security on its Principal Market during the period beginning at 9:30 a.m.
New York City time (or such other time as its Principal Market publicly
announces is the official open of trading) and ending at 4:00 p.m. New
York City time 

 

2

 

(or such other time as its
Principal Market publicly announces is the official close of trading) as
reported by Bloomberg Financial Markets (or any successor thereto) (“Bloomberg”) through its “Volume at Price”
functions, or if the foregoing does not apply, the dollar volume-weighted
average price of such security on the OTC Bulletin Board (or successor thereto)
during the period beginning at 9:30 a.m. New York City time (or such other
time as the OTC Bulletin Board publicly announces is the official open of
trading), and ending at 4:00 p.m. New York City time (or such other time
as the OTC Bulletin Board publicly announces is the official close of trading)
as reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the
highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported on the OTCQX (or successor thereto) or
Pink Sheets (or successor thereto) by Pink OTC Markets Inc. (or successor
thereto).  If the Weighted Average Price
cannot be calculated for such security on such date on any of the foregoing
bases, the Weighted Average Price of such security on such date shall be the
fair market value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable to
agree upon the fair market value of such security, then such dispute shall be
resolved by an investment banking firm mutually agreeable to the Holder and the
Company.  All such determinations shall
be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during any period during which the
Weighted Average Price is being determined.

 

Section 2.                                            Exercise of Warrant.

 

(a)                                         Subject to the terms and conditions hereof, this Warrant may
be exercised by the Holder hereof then registered on the books of the Company,
in whole or in part, at any time on any Business Day on or after the opening of
business on the date hereof and prior to 11:59 P.M. New York City time on
the Expiration Date by (i) delivery of a written notice, in the form of
the exercise notice attached as Exhibit A hereto (the “Exercise Notice”), of the Holder’s election to exercise this Warrant, which
notice shall specify the number of Warrant Shares to be purchased and, if such
exercise is conditioned upon consummation of any transaction (an “Exercise Trigger Transaction”), such
condition to exercise, (ii) (A) payment to the Company of an amount
equal to the Warrant Exercise Price multiplied by the number of Warrant Shares
as to which this Warrant is being exercised (such product, the “Aggregate Exercise Price”) by check or wire transfer of immediately available funds
or (B) notifying the Company that this Warrant is being exercised pursuant
to a Cashless Exercise (as defined in Section 2(d)), and (iii) if
required by Section 2(e), unless the Holder has previously
delivered this Warrant to the Company and it or a new replacement Warrant has
not yet been delivered to the Holder, the surrender to a common carrier for
overnight delivery to the Company as soon as practicable following such date,
of this Warrant (or an indemnification undertaking, in customary form, with
respect to this Warrant in the case of its loss, theft or destruction pursuant
to Section 10); provided, that if such Warrant Shares are to
be issued in any name other than that of the Holder, such issuance shall be
deemed a transfer and the provisions of Section 7 shall be
applicable.  In the event of any exercise
of the rights represented by this Warrant in compliance with this Section 2(a),
on the third (3rd)
Business Day (the “Warrant Share
Delivery Date”) following
the date of its receipt of the Exercise Notice, the Aggregate Exercise Price
(or notice of Cashless Exercise) and if required by Section 2(e) (unless
the Holder has previously delivered this Warrant to the Company and a new or
replacement Warrant has not yet been delivered to the Holder), this Warrant (or
an indemnification undertaking, in customary form, with respect to this 

 

3

 

Warrant in the case of its loss,
theft or destruction pursuant to Section 10) (the “Exercise Delivery Documents”) (or, if the exercise of this Warrant is conditioned upon
the consummation of an Exercise Trigger Transaction, on the later of such third
(3rd) Business
Day and the date of consummation of such Exercise Trigger Transaction), (A) provided
that the transfer agent is participating in The Depository Trust Company (“DTC”)
Fast Automated Securities Transfer Program and provided that the Holder is
eligible to receive shares through DTC, the Company shall credit such aggregate
number of shares of Common Stock to which the Holder shall be entitled to the
Holder’s or its designee’s balance account with DTC through its Deposit
Withdrawal Agent Commission system or (B) if not, the Company shall issue
and deliver to the address specified in the Exercise Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares
of Common Stock to which the Holder shall be entitled.  Upon the latest of (x) the date of
delivery of the Exercise Notice, (y) the date of delivery of the Aggregate
Exercise Price referred to in clause (ii)(A) above or notification to the
Company of a Cashless Exercise referred to in Section 2(d), (z) if
the exercise of this Warrant is conditioned upon the consummation of an
Exercise Trigger Transaction, the date of such consummation, the Holder shall
be deemed for all purposes to have become the Holder of record of the Warrant
Shares with respect to which this Warrant has been exercised (the date thereof
being referred to as the “Deemed Issuance
Date”), irrespective of the date of delivery of this Warrant as
required by clause (iii) above or the certificates evidencing such Warrant
Shares.

 

(b)                                        If this Warrant is submitted for exercise, and unless the
rights represented by this Warrant shall have expired or shall have been fully
exercised, the Company shall, as soon as practicable and in no event later than
five (5) Business Days after receipt of this Warrant (the “Warrant Delivery Date”) and at its own expense, issue a new Warrant identical in
all respects to this Warrant except it shall represent rights to purchase the
number of Warrant Shares purchasable immediately prior to such exercise under
this Warrant, less the number of Warrant Shares with respect to which such
Warrant is exercised (together with, in the case of a Cashless Exercise, the
number of Warrant Shares surrendered in lieu of payment of the Exercise Price).

 

(c)                                         No fractional shares of Common Stock are to be issued upon
the exercise of this Warrant, but rather the number of shares of Common Stock
issued upon exercise of this Warrant shall be rounded up or down to the nearest
whole number (with 0.5 rounded up).

 

(d)                                        Notwithstanding anything contained herein to the contrary,
the Holder may at any time prior to the Expiration Date, in its sole
discretion, exercise this Warrant in whole or in part and, in lieu of making
the cash payment otherwise contemplated to be made to the Company upon such
exercise in payment of the Aggregate Exercise Price, elect instead to receive
upon such exercise the “Net Number” of shares of Common Stock determined
according to the following formula (a “Cashless Exercise”):

 

Net
Number = (A x B) - (A x C)

B

 

For
purposes of the foregoing formula:

 

A=
the total number of shares with respect to which this Warrant is then being
exercised;

 

4

 

B=
the arithmetic average of the Weighted Average Price of the Common Stock on
each of the twenty (20) consecutive Trading Days immediately preceding the date
of the delivery of the Exercise Notice; and

 

C=
the Warrant Exercise Price then in effect for the applicable Warrant Shares at
the time of such exercise.

 

(e)                                  Book-Entry.  Notwithstanding anything to the contrary set
forth herein, upon exercise of this Warrant in accordance with the terms
hereof, the Holder shall not be required to physically surrender this Warrant
to the Company unless it is being exercised for all of the Warrant Shares
represented by the Warrant.  The Holder
and the Company shall maintain records showing the number of Warrant Shares
exercised and issued and the dates of such exercises or shall use such other method,
reasonably satisfactory to the Holder and the Company, so as not to require
physical surrender of this Warrant upon each such exercise.  In the event of any dispute or discrepancy,
such records of the Company establishing the number of Warrant Shares to which
the Holder is entitled shall be controlling and determinative in the absence of
manifest error.  Notwithstanding the
foregoing, if this Warrant is exercised as aforesaid, the Holder may not
transfer this Warrant unless the Holder first physically surrenders this
Warrant to the Company, whereupon the Company will forthwith issue and deliver
upon the order of the Holder a new Warrant of like tenor, registered as the
Holder may request, representing in the aggregate the remaining number of
Warrant Shares represented by this Warrant. 
The Holder and any assignee, by acceptance of this Warrant, acknowledge
and agree that, by reason of the provisions of this paragraph, following
exercise of any portion of this Warrant, the number of Warrant Shares represented
by this Warrant may be less than the number stated on the face hereof.

 

Section 3.                                            Covenants as to Common Stock.  The Company hereby covenants and agrees as
follows:

 

(a)                                         This Warrant is, and any Warrants issued in substitution for
or replacement of this Warrant will upon issuance be, duly authorized and
validly issued.

 

(b)                                        All Warrant Shares that may be issued upon the exercise of
the rights represented by this Warrant will, upon issuance and receipt of
payment therefor from the Holder (including pursuant to a Cashless Exercise, as
applicable), be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof.

 

(c)                                         During the period within which the rights represented by
this Warrant may be exercised, the Company will at all times have authorized
and reserved at least 100% of the number of shares of Common Stock needed to
provide for the exercise of the rights then represented by this Warrant.

 

(d)                                        The Company will not, by amendment of its articles of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of 

 

5

 

securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed by it hereunder, but will at all times
in good faith assist in the carrying out of all the provisions of this Warrant
and in the taking of all such action as may be reasonably requested by the
Holder in order to protect the exercise privilege of the Holder against
impairment, consistent with the tenor and purpose of this Warrant.  Without limiting the generality of the
foregoing, the Company (i) will not increase the par value of any shares
of Common Stock receivable upon the exercise of this Warrant, and (ii) will
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.

 

(e)                                         This Warrant will be binding upon any entity succeeding to
the Company by merger, consolidation or acquisition of all or substantially all
of the Company’s assets.

 

Section 4.                                            Taxes.  The Company shall pay any and all taxes that
may be payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.

 

Section 5.                                            Warrant Holder Not Deemed a Shareholder.  The holder of this
Warrant shall not be entitled to vote, receive dividends (except as provided in
Section 9(a) regarding Distributions), or be deemed a holder of stock
of the Company (except as provided in Section 9(b) regarding Purchase
Rights) for any purpose (other than to the extent that the Holder is deemed to
be a beneficial holder of shares under applicable securities laws) or otherwise
have any of the rights of a shareholder of the Company or any right to vote,
give or withhold consent to any corporate action (whether any reorganization,
issue of stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, or receive dividends or subscription
rights, prior to the Deemed Issuance Date of the Warrant Shares that the Holder
is then entitled to receive upon the due exercise of this Warrant.  In addition, nothing contained in this
Warrant shall be construed as imposing any liabilities on the Holder to
purchase any securities (except to the extent set forth in an Exercise Notice
that has been executed by the Holder and delivered to the Company) or as a
shareholder of the Company, whether such liabilities are asserted by the
Company or by creditors of the Company.

 

Section 6.                                            Representations of Holder.  The Holder, by the acceptance hereof,
represents that it is acquiring this Warrant, and upon exercise hereof (other
than pursuant to a Cashless Exercise) will acquire the Warrant Shares, for its
own account and not with a view towards, or for resale in connection with, the
public sale or distribution of this Warrant or the Warrant Shares, except
pursuant to sales registered, or exempted from registration, under the
Securities Act; provided, however, that by making the
representations herein, the Holder does not agree to hold this Warrant or any
of the Warrant Shares for any minimum or other specific term and reserves the
right to dispose of this Warrant and the Warrant Shares at any time in
accordance with or pursuant to a registration statement or an exemption under
the Securities Act.  The Holder further
represents, by acceptance hereof, that, as of this date, the Holder is an “accredited
investor” as such term is defined in Rule 501(a)(3) of Regulation D
promulgated by the Securities and Exchange Commission under the Securities
Act.  Each delivery of an Exercise
Notice, other than in connection with a Cashless Exercise, shall constitute
confirmation at such time by the Holder of the representations concerning the
Warrant Shares set forth in the first two sentences of this Section 6,
unless contemporaneously with the delivery of such Exercise Notice the Holder
notifies the Company in writing that it is not making such representations (a 

 

6

 

“Representation Notice”).  If the Holder
delivers a Representation Notice in connection with an exercise, it shall be a
condition to the Holder’s exercise of this Warrant and the Company’s
obligations set forth in Section 2 in connection with such
exercise, that the Company receive such other representations together with an
opinion of counsel, in a generally acceptable form, as the Company may
reasonably request to assure that the issuance of its securities upon exercise
of this Warrant shall not violate any United States or state securities laws.

 

Section 7.                                            Ownership and Transfer.

 

(a)                                         The Company shall maintain at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the Holder), a register for this Warrant, in which the Company shall
record the name and address of the person in whose name this Warrant has been
issued, as well as the name and address of each transferee.  The Company may treat the person in whose
name any Warrant is registered on the register as the owner and holder thereof
for all purposes, notwithstanding any notice to the contrary, but in all events
recognizing any transfers made in accordance with the terms of this Warrant.

 

(b)                                        This Warrant and the rights granted hereunder shall not be
assignable by Holder without the prior written consent of the Company.

 

Section 8.                                            Adjustment of Warrant Exercise Price and Number of Warrant
Shares.

 

(a)                                         Adjustment of Warrant Exercise Price upon Subdivision or
Combination of Common Stock.  If the Company at any time after the date of
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) its outstanding shares of Common Stock into a
greater number of shares, the Warrant Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced and the number of
shares of Common Stock obtainable upon exercise of this Warrant will be
proportionately increased.  If the
Company at any time after the date of issuance of this Warrant combines (by
combination, reverse stock split or otherwise) its outstanding shares of Common
Stock into a smaller number of shares, the Warrant Exercise Price in effect
immediately prior to such combination will be proportionately increased and the
number of shares of Common Stock obtainable upon exercise of this Warrant will
be proportionately decreased.  Any
adjustment under this Section 8(a) shall become effective at
the close of business on the date the subdivision or combination becomes
effective.

 

(b)                                        Certain Events.  If any event occurs of the type contemplated
by the provisions of this Section 8 but not expressly provided for
by such provisions, then the Company’s board of directors will make an
appropriate adjustment in the Warrant Exercise Price and the number of shares
of Common Stock obtainable upon exercise of this Warrant; provided that no such
adjustment will increase the Warrant Exercise Price or decrease the number of
shares of Common Stock obtainable as otherwise determined pursuant to this Section 8.

 

(c)                                         Notices.

 

(i)                                     As soon as reasonably practicable, but in no event later
than two (2) Business Days, upon any adjustment of the Warrant Exercise
Price, the Company will give written notice thereof to the Holder, setting
forth in reasonable detail, and certifying, the 

 

7

 

calculation
of such adjustment; provided, however, that neither the timing of
giving any such notice nor any failure by the Company to give such a notice
shall effect any such adjustment or the effective date thereof.

 

(ii)                                  The Company will give written notice to the Holder at least
ten (10) days prior to the date on which the Company closes its books or
takes a record (A) with respect to any dividend or distribution upon the
Common Stock, (B) with respect to any pro rata subscription offer to
holders of Common Stock or (C) for determining rights to vote with respect
to any Organic Change (as defined below), dissolution or liquidation, provided
that such information shall be made known to the public prior to or in
conjunction with such notice being provided to the Holder.

 

(iii)                               The Company will also give written notice to the Holder at
least ten (10) days prior to the date on which any Organic Change,
dissolution or liquidation will take place, provided that such information
shall be made known to the public prior to or in conjunction with such notice being
provided to the Holder.

 

Section 9.                                            Dividends, Distributions of Assets; Purchase Rights;
Reorganization, Reclassification, Consolidation, Merger or Sale.

 

(a)                                         If the Company shall declare or make any dividend or other
distribution of its assets (or rights to acquire its assets) to holders of
Common Stock, by way of return of capital or otherwise (including any dividend
or other distribution of cash, stock or other securities, property or options
by way of a dividend, spin off, reclassification, corporate rearrangement or
other similar transaction), other than rights to purchase and subscription
rights that would be granted, issued or sold in any registered rights offering
offered to existing shareholders (a “Distribution”), at any
time after the issuance of this Warrant, then, in each such case, the Holder
shall be entitled to receive such Distribution, and the Company shall make such
Distribution to the Holder, exactly as if the Holder had exercised this Warrant
in full (and, as a result, had held all of the shares of Common Stock that the
Holder would have received upon such exercise) immediately prior to the record
date for such Distribution, or if there is no record therefor, immediately
prior to the effective date of such Distribution (but without the Holder’s
actually having to so exercise this Warrant).

 

(b)                                        If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of its
capital stock, other than rights to purchase and subscription rights that would
be granted, issued or sold in any registered rights offering offered to
existing shareholders (the “Purchase Rights”),
then the Holder will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights that the Holder could have
acquired if the Holder had held the number of shares of Common Stock acquirable
upon complete exercise of this Warrant immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of Common
Stock are to be determined for the grant, issue or sale of such Purchase
Rights.

 

8

 

Section 10.                                      Lost, Stolen, Mutilated or Destroyed Warrant.  If this Warrant is
lost, stolen, mutilated or destroyed, the Company shall promptly, upon receipt
from the Holder of an indemnification undertaking, in customary form (or in the
case of a mutilated Warrant, the Warrant), issue a new Warrant of like
denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed.

 

Section 11.                                      Notice.  Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Warrant must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) Business Day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same.  The addresses and facsimile numbers for such
communications shall be:

 

If to the Company:

 

Select Comfort Corporation

9800 59th Avenue North

Minneapolis, Minnesota 55442

Attention:   President and Chief
Executive Officer

Facsimile:   (763) 551-6888

 

And

 

Select Comfort Corporation

9800 59th Avenue North

Minneapolis, Minnesota 55442

Attention:   General Counsel and
Secretary

Facsimile:   (763) 551-6888

 

With copy to:

 

Oppenheimer Wolff Donnelly LLP

Plaza VII, Suite 3300

45 South Seventh Street

Minneapolis, MN  55402-1609

Attention:   Thomas
R. Marek

Facsimile:   (612) 607-7100

 

If to the initial Holder of this Warrant, to it at the address and
facsimile number set forth in the Purchase Agreement, with copies to the Holder’s
representatives as set forth in the Purchase Agreement, or, in the case of the
Holder or any other Person named above, at such other address and/or facsimile
number and/or to the attention of such other person as the recipient party has 

 

9

 

specified by written notice to the other party at least five (5) Business
Days prior to the effectiveness of such change. 
Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or deposit with a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.

 

Section 12.                                      Date.  The date of this Warrant is            
   , 20    (the “Warrant Date”).  This
Warrant, in all events, shall be wholly void and of no effect after the earlier
to occur of: (i) 11:59 P.M., New York City time, on the Expiration
Date, and (ii) an Organic Change. 
Notwithstanding any other provisions hereof, the provisions of Section 7
shall continue in full force and effect after such date as to any Warrant
Shares or other securities issued upon the exercise of this Warrant.

 

Section 13.                                      Amendment and Waiver.  Except as otherwise provided herein, the
provisions of this Warrants may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed
by it, only if the Company has obtained the written consent of the Holder.

 

Section 14.                                      Descriptive Headings; Governing Law.  The descriptive
headings of the several sections and paragraphs of this Warrant are inserted
for convenience only and do not constitute a part of this Warrant.  All questions concerning the construction,
validity, enforcement and interpretation of this Warrant shall be governed by
the internal laws of the State of Minnesota, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State
of Minnesota or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Minnesota.

 

Section 15.                                      Expenses.  The Holder and its affiliates and any of
their successors, assigns or transferees, shall be solely responsible for any
fees and expenses incurred by them in connection with exercising their rights
under this Warrant.

 

Section 16.                                      Rules of Construction.  Unless the context otherwise requires, (a) all
references to Articles, Sections, Schedules or Exhibits are to Articles,
Sections, Schedules or Exhibits contained in or attached to this Warrant, (b) words
in the singular or plural include the singular and plural and pronouns stated
in either the masculine, the feminine or neuter gender shall include the
masculine, feminine and neuter, and (c) the use of the word “including” in
this Warrant shall be by way of example rather than limitation.

 

Section 17.                                      Signatures.  In
the event that any signature to this Warrant or any amendment hereto is
delivered by facsimile transmission or by e-mail delivery of a “.pdf” format
data file, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or “.pdf” signature page were an
original thereof.  Notwithstanding the
foregoing, the Company shall be obligated to deliver to the Holder an
originally executed Warrant.  No party
hereto shall raise the use of a facsimile machine or e-mail delivery of a “.pdf”
format data file to deliver a 

 

10

 

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

 

[Signature Page Follows]

 

11

 

IN WITNESS WHEREOF, the Company has caused
this Warrant to be signed as of the date first set forth above.

 

 

	
   

  	
  SELECT COMFORT CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

Signature Page to Warrant

 

 

EXHIBIT A TO WARRANT

 

EXERCISE NOTICE

 

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT

 

SELECT COMFORT CORPORATION

 

The undersigned holder hereby exercises the right to purchase                           
of the shares of Common Stock (“Warrant
Shares”) of SELECT COMFORT CORPORATION, a Minnesota corporation (the
“Company”), evidenced by the
attached Warrant (the “Warrant”).  Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.

 

1.  Form of Warrant Exercise
Price.  The holder intends that payment
of the Warrant Exercise Price shall be made as:

 

o                            a “Cash Exercise” with respect to                           
Warrant Shares; and/or

 

o                            a “Cashless Exercise” with respect to                           
Warrant Shares.

 

2.  Payment of Warrant Exercise
Price.  In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the Aggregate Exercise Price in
the sum of $                          
to the Company in accordance with the terms of the Warrant.

 

3.  Exercise Notice Not
Conclusive.  The exercise of the Warrant
is conditioned upon the consummation of the following Exercise Trigger
Transaction:                                                 *

 

4.  Delivery of Warrant
Shares.  The Company shall deliver                           
Warrant Shares arising from this Exercise Notice in accordance with the terms
of the Warrant in the following name and to the following address:

 

Issue to:                                                                               

 

Facsimile Number:                                                                               

 

DTC Participant Number and Name (if electronic book entry
transfer):                           

 

Account Number  (if electronic
book entry transfer):                                                     

 

Date:                           
    ,            

 

	
  Name of Registered Holder

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  
	
  Title:

  	
   

  
			

 

* No such condition applies if left blank

 

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Exercise Notice and hereby directs
[TRANSFER AGENT] to issue the above indicated
number of shares of Common Stock in accordance with the Transfer Agent
Instructions dated                           ,
200   from the Company and acknowledged and agreed to by [TRANSFER-AGENT].

 

 

	
   

  	
  SELECT COMFORT CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

EXHIBIT B TO WARRANT

 

FORM OF WARRANT POWER

 

FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to                           ,
Federal Identification No.                  ,
a warrant to purchase                           
shares of the capital stock of Select Comfort Corporation, a Minnesota
corporation, represented by warrant certificate no.             ,
standing in the name of the undersigned on the books of said corporation.  The undersigned does hereby irrevocably
constitute and appoint                           ,
attorney to transfer the warrants of said corporation, with full power of
substitution in the premises.

 

 

Dated:                            ,
200  

 

 

	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

Exhibit E

 

FORM OF
CLOSING NOTICE

 

Sterling SC
Investor, LLC

1033 Skokie
Boulevard, Suite 600

Northbrook,
Illinois 60062

(847) 480-4000

 

[INSERT DATE]

 

Select Comfort
Corporation

9800 59th Avenue
North

Minneapolis,
Minnesota 55442

Attention:  William McLaughlin

 

Re:  Notice of Closing

 

Ladies and
Gentlemen,

 

Reference is made
to that certain Securities Purchase Agreement (the “Purchase
Agreement”), dated as of October [    ],
2009, by and between Select Comfort Corporation (the “Company”)
and Sterling SC Investor, LLC (the “Investor”).  Capitalized terms used, but not otherwise
defined herein, shall have the meanings ascribed to them in the Purchase
Agreement.

 

Pursuant to, and
in accordance with, Section 1(a) of the Purchase Agreement,
the Investor hereby elects to purchase from the Company the Common Shares and
the Warrant on [INSERT DATE THAT IS NO LESS THAN FIVE
BUSINESS DAYS FROM THE DATE OF THE INVESTOR CLOSING NOTICE], which
date, for purposes of the Purchase Agreement, shall be the Closing Date.  This written notice is and shall serve, for
purposes of the Purchase Agreement, as the Investor Closing Notice.

 

Payment of the
Purchase Price shall be made by wire transfer to the following account, unless
otherwise instructed by the Company in writing at least two (2) Business
Days prior to the Closing Date:

 

[Subject to
revision or updating upon instruction of Company]

 

The Investor
hereby requests that the Company deliver the  Common
Shares in accordance with the terms of the Purchase Agreement in the following
name and to the following address:

 

Issue to:

 

Facsimile Number:

 

 

DTC Participant Number and Name (if electronic book entry
transfer):

 

Account Number  (if electronic
book entry transfer):

 

Further, the
Investor hereby requests that the Company issue the Warrant, in the name of [INSERT NAME OF THE INVESTOR OR ITS DESIGNEE], representing
the right to purchase the Warrant Shares, and deliver the Warrant to the
following address:                                                                       .

 

 

	
   

  	
  STERLING
  SC INVESTOR, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

 

	
  cc:

  	
   

  	
  Mark Kimball,
  Select Comfort Corporation

  
	
   

  	
   

  	
  Thomas R. Marek, Oppenheimer Wolff Donnelly LLP

  

 

 

Exhibit F

 

INDICATIVE
TERM SHEET

FOR
DISCUSSION PURPOSES ONLY

 

This Indicative Term
Sheet (the “Term Sheet”) sets out a summary of the principal terms in
connection with a proposed Standby Purchase Agreement (the “Backstop Agreement”)
to be entered into between one or more investment funds affiliated with
Sterling Partners (“Sterling”) and Select Comfort Corporation (the “Company”)
in connection with Sterling’s backstop of a rights offering to the shareholders
of the Company (the “Rights Offering”).

 

The Term
Sheet does not purport to summarize all the conditions, covenants,
representations, warranties and other provisions which would be contained in
definitive legal documentation for the Backstop Agreement.

 

RIGHTS
OFFERING

 

	
  Description:

  	
   

  	
  Distribution to shareholders of the Company of subscription rights to
  subscribe for and purchase shares of the Company’s common stock (“Common
  Stock”) having an anticipated aggregate purchase price of up to $15 million.
  For the avoidance of doubt, Sterling, and each of its affiliates, including
  the Investor (as defined below), may participate in the Rights Offering with
  respect to shares of issued and outstanding Common Stock (as defined in the Securities Purchase Agreement (the
  “SPA”), by and between the Company and Sterling SC Investor, LLC (the
  “Investor”), entered into in connection with the Investor’s $10 million
  investment in the Company) beneficially
  owned by such person.

  
	
   

  	
   

  	
   

  
	
  Over-Subscription

  Privilege:

  	
   

  	
  Shareholders of the
  Company, participating in the Rights Offering shall be permitted to subscribe
  for and purchase, on a pro rata basis,
  shares not subscribed for by other shareholders of the Company (the
  “Oversubscription Right”).

  
	
   

  	
   

  	
   

  
	
  Backstop Commitment:

  	
   

  	
  Upon the request of the
  Company, Sterling shall purchase from the Company, at a price per share of
  Common Stock equal to the subscription price in the Rights Offering, a number
  of shares of Common Stock equal to the result of (a) the aggregate
  number of shares of Common Stock offered in the Rights Offering, minus
  (b) the number of shares of Common Stock subscribed for and purchased
  pursuant to the Rights Offering (after giving effect to the oversubscription
  privilege exercised by all shareholders), provided that the Rights
  Offering is completed on or before the date that is six (6) months after
  the closing date of the SPA , and the subscription price per share of Common
  Stock in the Rights Offering is less than or equal to the lesser of
  (a) $5.00 per share, and (b) 80% of the dollar volume-weighted average
  price for the Common Stock on the NASDAQ Global Select Market for the twenty
  (20) consecutive trading days ending on the trading day immediately preceding
  the date the Rights Offering is priced (the “Backstop Commitment”). The
  parties agree to negotiate in good faith and use commercially reasonable
  efforts to enter into a definitive Backstop Agreement. Sterling’s obligation
  to perform under the Backstop

  

 

 

	
   

  	
   

  	
  Commitment shall be
  subject to the satisfaction of customary terms and conditions set forth in
  the Backstop Agreement. In no event shall the Backstop Commitment exceed $5
  million and it shall be reduced, dollar for dollar, by the amount for which
  Sterling has participated in the Rights Offering.

  
	
   

  	
   

  	
   

  
	
  Registration Rights:

  	
   

  	
  The Company
  will use commercially reasonable efforts to provide Sterling
  with customary registration rights to
  resell those shares of the Company acquired pursuant to the
  Backstop Commitment.  Notwithstanding the foregoing, the Company
  will not be required to register such shares if the registration would
  require shareholder approval under the rules of NASDAQ, or any
  other applicable law, rule or regulation.

  
	
   

  	
   

  	
   

  
	
  Conditions:

  	
   

  	
  The Backstop Agreement will contain customary representations,
  warranties, conditions, covenants and indemnity provisions.

  
	
   

  	
   

  	
   

  
	
  Expenses:

  	
   

  	
  The Company willreimburse Sterling for up to $30,000 of
  reasonable, actual, out-of-pocket expenses incurred by Sterling in connection
  with its participation in the Rights Offering.

  
	
   

  	
   

  	
   

  
	
  Information:

  	
   

  	
  The Company will use
  commercially reasonable efforts to inform Sterling about the progress and
  aggregate participation levels in the Rights Offering during the offering
  period.

  

 

2Exhibit
10.2

 

Exhibit
D

 

GUARANTEE

OF

STERLING
CAPITAL PARTNERS III, L.P.

 

GUARANTEE, dated as of October 2,
2009  (this “Guarantee”),
by Sterling Capital Partners III, L.P., a Delaware limited partnership (the “Guarantor”), in favor of Select Comfort Corporation, a
Delaware corporation (the “Company”).

 

1.             Guarantee. To induce the
Company to enter into that certain Securities Purchase Agreement, dated as of October 2,
2009 (as amended, supplemented or otherwise modified from time to time, the “Purchase Agreement”; capitalized terms used without
definition herein have the meanings ascribed to them in the Purchase
Agreement), by and between the Company and Sterling SC Investor, LLC, a
Delaware limited liability company (“Buyer”),
pursuant to which Buyer shall have the right to purchase shares of Common Stock
and a Warrant to acquire shares of Common Stock, the Guarantor absolutely,
unconditionally and irrevocably guarantees to the Company, the due and punctual
observance, payment, performance and discharge of all obligations of Buyer
under the Purchase Agreement (the “Obligations”).

 

2.             Nature of
Guarantee. The Company shall not be obligated to file any
claim relating to the Obligations in the event that Buyer becomes subject to a
bankruptcy, reorganization or similar proceeding, and the failure of the
Company to so file shall not affect the Guarantor’s obligations hereunder. In
the event that any payment to the Company in respect of any Obligation is
rescinded or must otherwise be returned for any reason whatsoever, the
Guarantor shall remain liable hereunder with respect to such Obligation as if
such payment had not been made. This is an unconditional guarantee of payment
and not of collectibility. The Guarantor shall have, and reserves the right to
assert, any defenses which Buyer may have to payment of any Obligations other
than defenses arising from the bankruptcy or insolvency of Buyer, fraudulent
conveyance or fraudulent transfer, moratorium, reorganization or other statutes
or proceedings affecting creditors rights generally and other defenses
expressly waived hereby.

 

3.             Changes in
Obligations, Certain Waivers. The Guarantor agrees that
the Company may at any time and from time to time, without notice to or further
consent of the Guarantor, extend the time of payment of any of the Obligations,
and may also make any agreement with Buyer for the extension, renewal, payment,
compromise, discharge or release thereof, in whole or in part, or for any
modification of the terms thereof or of any agreement between the Company and
Buyer without in any way impairing or affecting this Guarantee. The Guarantor
agrees that the obligations of the Guarantor hereunder shall not be released or
discharged, in whole or in part, or otherwise affected by (a) the failure
of the Company to assert any claim or demand or to enforce any right or remedy
against Buyer or any other Person interested in the transactions contemplated
by the Purchase Agreement; (b) any change in the time, place or manner of
payment of any of the Obligations or any rescission, waiver, compromise,
consolidation or other amendment or modification of any of the terms or
provisions of the Purchase Agreement or any other agreement evidencing,
securing or otherwise executed in connection with any of the Obligations, (c) the
addition, substitution or release of any other Person interested in the
transactions contemplated by the Purchase Agreement; (d) any change in the
corporate existence, structure or ownership of Buyer or any other Person
interested in the transactions contemplated by the Purchase Agreement; (e) any
insolvency, bankruptcy, reorganization or other similar

 

 

proceeding affecting Buyer
or any other Person interested in the transactions contemplated in the Purchase
Agreement; (f) the existence of any claim, set-off or other rights which
the Guarantor may have at any time against Buyer, whether in connection with
the Obligations or otherwise; or (g) the adequacy of any other means the
Company may have of obtaining payment of the Obligations. The Guarantor waives
promptness, diligence, notice of the acceptance of this Guarantee and of the
Obligations, presentment, demand for payment, notice of non-performance,
default, dishonor and protest, notice of any Obligations incurred and all other
notices of any kind (except for notices to be provided to Buyer in accordance
with the Purchase Agreement), all defenses which may be available by virtue of
any valuation, stay, moratorium law or other similar law now or hereafter in
effect, any right to require the marshalling of assets of Buyer or any other
Person interested in the transactions contemplated by the Purchase Agreement,
and all suretyship defenses generally (other than (i) fraud or willful
misconduct by the Company or any of its Subsidiaries or (ii) any defenses
to the payment or performance of the Obligations that are available to Buyer
under the Purchase Agreement or (iii) breach by the Company of this
Guarantee). The Guarantor acknowledges that it will receive substantial direct
and indirect benefits from the transactions contemplated by the Purchase
Agreement and that the waivers set forth in this Guarantee are knowingly made
in contemplation of such benefits. Notwithstanding anything to the contrary
contained in this Guarantee, the Company hereby agrees that, to the extent
Buyer is relieved of any Obligation under the Purchase Agreement (other than by
reason of bankruptcy or insolvency of the Buyer, fraudulent transfer,
fraudulent conveyance, moratorium, reorganization and other defenses expressly
waived hereby), the Guarantor shall be similarly relieved of such Obligation
under this Guarantee.

 

4.             No Waiver.  No failure on the part of the Company to
exercise, and no delay in exercising, any right, remedy or power hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise by
the Company of any right, remedy or power hereunder preclude any other or
future exercise of any right, remedy or power hereunder.

 

5.             Representations
and Warranties. The Guarantor hereby represents and warrants that:

 

a.             the execution, delivery and
performance of this Guarantee have been duly authorized by all necessary action
and do not contravene any provision of the Guarantor’s partnership agreement,
operating agreement or similar organizational documents or any law, regulation,
rule, decree, order, judgment or contractual restriction binding on the
Guarantor or its assets;

 

b.             all consents, approvals,
authorizations and permits of, filings with and notifications to, any
governmental authority necessary for the due execution, delivery and
performance of this Guarantee by the Guarantor have been obtained or made and
all conditions thereof have been duly complied with, and no other action by,
and no notice to or filing with, any governmental authority or regulatory body
is required in connection with the execution, delivery or performance of this
Guarantee;

 

c.             this Guarantee constitutes a
legal, valid and binding obligation of the Guarantor enforceable against the
Guarantor in accordance with its terms, subject to (i) the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws 

 

2

 

affecting creditors’ rights
generally, and (ii) general equitable principles (whether considered in a
proceeding in equity or at law);

 

d.             this Guarantee does not
constitute a breach or event of default under any other agreement to which the
Guarantor is a party, except as would not have a material adverse effect on the
Guarantor’s ability to perform its obligations hereunder; and

 

e.             the Guarantor has the
financial capacity to pay and perform its obligations under this Guarantee, and
all funds necessary for the Guarantor to fulfill its Obligations under this
Guarantee shall be available to the Guarantor for so long as this Guarantee
shall remain in effect in accordance with Section 8 hereof.

 

6.             No Assignment. Neither the
Guarantor nor the Company may assign its rights, interests or obligations
hereunder to any other Person (except by operation of law) without the prior
written consent of the other party hereto, as the case may be; provided,
however, that the Guarantor may assign all or a portion of its
obligations hereunder to an affiliate or to an entity managed or advised by an
affiliate of the Guarantor, provided that no such assignment shall relieve the
Guarantor of any liability or obligation hereunder except to the extent of
amounts actually received by the Company from the assignee.

 

7.             Notices. All notices
and other communications hereunder will be effective (a) if delivered by
hand or overnight courier, when such delivery is made at the address specified
in this Section, or (b) if delivered by facsimile, when such facsimile is
transmitted to the facsimile number specified in this Section and
appropriate confirmation is received. Any notice, request, instruction or other
communication to the Guarantor hereunder shall be in writing and delivered by
hand or overnight courier service or by facsimile:

 

To the Guarantor:

 

Sterling
Capital Partners III, L.P.

1033 Skokie Boulevard, Suite 600

Northbrook, Illinois 60062

Attention:  Office of General Counsel

Facsimile:  (847) 480-0199

 

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

 

Katten
Muchin Rosenman LLP

525
W. Monroe Street

Chicago,
Illinois 60661-3693

Attention:   Jeffrey R. Patt, Esq.

                   Mark
D. Wood, Esq.

Facsimile:  (312)
902-1061

 

or to such other address or facsimile number
as the Guarantor shall have notified the Company in a written notice delivered
to the Company in accordance with the Purchase Agreement. All notices to the
Company hereunder shall be delivered as set forth in the Purchase Agreement.

 

3

 

8.             Continuing
Guarantee. This Guarantee shall remain in full force and
effect and shall be binding on the Guarantor, its successors and assigns until
all amounts payable under this Guarantee have been indefeasibly paid or
satisfied in full. Notwithstanding the foregoing, this Guarantee shall
terminate and the Guarantor shall have no further obligations under this
Guarantee as of the earliest of (a) the Closing of the Transactions, (b) the
termination of the Purchase Agreement in accordance with its terms by mutual
consent of the parties or otherwise under circumstances in which Buyer would
thereafter have no liability to the Company for any Obligation under the
Purchase Agreement, or (c) the first anniversary of any termination of the
Purchase Agreement in accordance with its terms, except as to a claim for
payment of any Obligation presented by the Company to Buyer prior to such first
anniversary.  Notwithstanding the
foregoing, in the event that the Company or any of its affiliates asserts in
any litigation or other proceeding that the provisions of this Section 8
or Section 9 hereof are illegal, invalid or unenforceable in whole or in
part, or asserting any theory of liability against the Guarantor or any
Affiliate of the Guarantor with respect to the transactions contemplated by the
Purchase Agreement other than the liability of the Guarantor under this
Guarantee, then (i) the obligations of the Guarantor under this Guarantee
shall terminate ab initio and be null and void, and (ii) if the Guarantor
has previously made any payments under this Guarantee, it shall be entitled to
recover such payments; provided, however, that if the Guarantor
asserts in any litigation or other proceeding that this Guarantee is illegal,
invalid or unenforceable in accordance with its terms, subject to the effects
of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws affecting creditors’ rights generally and to general
equitable principles (whether considered in a proceeding in equity or at law),
then, to the extent the Company prevails in such litigation or proceeding, the
Guarantor shall pay on demand all reasonable fees and out-of-pocket expenses of
the Company in connection with such litigation or proceeding.

 

9.             No Recourse.

 

a.             The Company acknowledges
that the sole assets of Buyer are cash in a de minimus amount and its rights
under the Purchase Agreement, and that no additional funds are expected to be
contributed to Buyer unless and until the Closing occurs. Notwithstanding
anything that may be expressed or implied in this Guarantee or any document or
instrument delivered contemporaneously herewith, and notwithstanding the fact
that the Guarantor may be a limited partnership, by its acceptance of the
benefits of this Guarantee, the Company acknowledges and agrees that, other
than with respect to the Company’s rights under this Guarantee, it has no right
of recovery against, and no liability shall attach to, the former, current or
future stockholders, directors, officers, employees, agents, affiliates,
members, managers, general or limited partners or assignees of the Guarantor or
Buyer or any former, current or future stockholder, director, officer,
employee, general or limited partner, member, manager, affiliate, agent or
assignee of any of the foregoing (collectively, but not including the Guarantor,
each an “Affiliate”), or, other than its right
to recover from the Guarantor for up to the amount of the Obligations (subject
to the limitations described herein), the Guarantor, through Buyer or
otherwise, whether by or through attempted piercing of the limited partnership
veil, by or through a claim by or on behalf of Buyer against an Affiliate or
the Guarantor arising under, or in connection with, the Purchase Agreement or
the transactions contemplated thereby or otherwise relating thereto, by the
enforcement of any assessment or by any legal or equitable proceeding, by
virtue of any statute, regulation or applicable law, or otherwise. The Company 

 

4

 

hereby covenants and agrees
that it shall not institute, directly or indirectly, and shall cause its
respective affiliates not to institute, any proceeding or bring any other claim
arising under, or in connection with, the Purchase Agreement or the
transactions contemplated thereby or otherwise relating thereto, against an
Affiliate or, other than its right to recover from the Guarantor for up to the
amount of the Obligations (subject to the limitations described herein), the
Guarantor.

 

b.             Recourse against the
Guarantor under this Guarantee pursuant to their written guarantees delivered
contemporaneously herewith shall be the sole and exclusive remedy of the
Company against the Guarantor and any Affiliates in respect of any liabilities
or obligations arising under, or in connection with, the Purchase Agreement or
the transactions contemplated thereby or hereby or otherwise relating thereto
or hereto. Nothing set forth in this Guarantee shall confer or give or shall be
construed to confer or give to any Person other than the Guarantor and the
Company (including any Person acting in a representative capacity) any rights
or remedies against any Person other than the Company and the Guarantor as
expressly set forth herein.

 

c.             For all purposes of this
Guarantee, a Person shall be deemed to have pursued a claim against another
Person if such first Person brings a legal action against such Person, adds
such other Person to an existing legal proceeding, or otherwise asserts a legal
claim of any nature against such Person.

 

d.             The Company acknowledges
that the Guarantor is agreeing to enter into this Guarantee in reliance on the
provisions set forth in this Section 9. This Section 9 shall survive
termination of this Guarantee.

 

10.           Governing Law. This
Guarantee will be governed by, and construed in accordance with, the laws of
the State of Delaware, without giving effect to any applicable principles of
conflict of laws that would cause the laws of another State to otherwise govern
this Guarantee. Each of the parties hereto irrevocably agrees that any legal
action or proceeding with respect to this Guarantee and the rights and
obligations arising hereunder, or for recognition and enforcement of any
judgment in respect of this Guarantee and the rights and obligations arising
hereunder brought by the other party hereto or its successors or assigns shall
be brought and determined exclusively in any state or federal court in the
State of Delaware.  Each of the parties
hereto agrees that mailing of process or other papers in connection with any
such action or proceeding in the manner provided in Section 7 or in such
other manner as may be permitted by applicable laws, will be valid and
sufficient service thereof.  Each of the
parties hereto hereby irrevocably submits with regard to any such action or
proceeding for itself and in respect of its property, generally and
unconditionally, to the personal jurisdiction of the aforesaid courts and
agrees that it will not bring any action relating to this Guarantee or any of
the transactions contemplated by this Guarantee in any court or tribunal other
than the aforesaid courts.  Each of the
parties hereto hereby irrevocably waives, and agrees not to assert, by way of
motion, as a defense, counterclaim or otherwise, in any action or proceeding with
respect to this Guarantee and the rights and obligations arising hereunder, or
for recognition and enforcement of any judgment in respect of this Guarantee
and the rights and obligations arising hereunder (i) any claim that it is
not personally subject to the jurisdiction of the above named courts for any
reason other than the failure to serve process in accordance with this Section 10,
(ii) any claim that it or its property is exempt or immune from
jurisdiction of any such court or from any legal process commenced in such
courts (whether through service of notice, attachment prior to judgment,
attachment in aid 

 

5

 

of execution of judgment,
execution of judgment or otherwise) and (iii) to the fullest extent
permitted by the applicable law, any claim that (x) the suit, action or
proceeding in such court is brought in an inconvenient forum, (y) the
venue of such suit, action or proceeding is improper or (z) this
Guarantee, or the subject matter hereof, may not be enforced in or by such
courts.

 

11.           WAIVER OF JURY TRIAL. EACH OF THE
PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW
ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
GUARANTEE OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.

 

12.           Counterparts; Effectiveness. This
Guarantee may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to each other
party.  In the event that any signature
to this Guarantee or any amendment hereto is delivered by facsimile
transmission or by e-mail delivery of a “.pdf” format data file, such signature
shall create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) with the same force and effect as if such
facsimile or “.pdf” signature page were an original thereof.  No party hereto shall raise the use of a
facsimile machine or e-mail delivery of a “.pdf” format data file to deliver a
signature to this Guarantee or any amendment hereto or the fact that such
signature was transmitted or communicated through the use of a facsimile
machine or e-mail delivery of a “.pdf” format data file as a defense to the
formation or enforceability of a contract and each party hereto forever waives
any such defense.

 

[Signature
page follows]

 

6

 

IN WITNESS WHEREOF, the Guarantor
and the Company have caused this Guarantee to be executed and delivered as of
the date first written above by its officer thereunto duly authorized.

 

	
   

  	
  STERLING
  CAPITAL PARTNERS III, L.P.

  
	
   

  	
   

  
	
   

  	
  By:
  SC Partners III, L.P.

  
	
   

  	
  Its:
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:
  Sterling Capital Partners III, LLC

  
	
   

  	
  Its:
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  R. Christopher Hoehn-Saric

  
	
   

  	
  Name:

  	
  R.
  Christopher Hoehn-Saric

  
	
   

  	
  Title:

  	
  Senior
  Managing Director

  

 

 

	
  Accepted
  and Agreed to:

  
	
   

  
	
  SELECT
  COMFORT CORPORATION

  
	
   

  
	
   

  
	
  By:

  	
  /s/
  James Raabe

  	
   

  
	
  Name:

  	
  James
  Raabe

  	
   

  
	
  Its:

  	
  Chief Financial Officer

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