Document:

Exhibit 10(ii) A(1)

 

EMPLOYMENT CONTRACT

 

THIS EMPLOYMENT AGREEMENT (“Agreement”) is made as of the 1st day of January 2005,
between MONTEREY COUNTY BANK, a California corporation (Bank”), and CHARLES T. CHRIETZBERG,
JR. (“Executive”)

 

W  I  T  N  E  S
S  E  T  H

 

WHEREAS, Executive has served as the Chairman and Chief Executive
Officer of Bank since 1987 with distinction, leading the Bank to a “Premier
Performing” rating in 1992, “Super Premier Performing” rating in 2003, reducing
the level of non—performing loans from one far in excess of state averages to
one which is far below state averages, and becoming the only Chief Executive
Officer in the Bank’s history whose tenure generated net profits; and

 

WHEREAS, the latest Employment Agreement between Executive and Bank
expires as of December 31, 2005; and

 

WHEREAS, Bank desires that Executive continue to be employed as Bank’s
Chairman, President and Chief Executive Officer, and to document the terms of
such employment; and

 

WHEREAS, Executive is willing to be employed as Bank’s Chairman,
President and Chief Executive Officer under the terms and conditions herein
stated.

 

NOW,
THEREFORE, in consideration of the mutual covenants and agreements hereinafter
contained, and other good and valuable consideration, it is hereby agreed by and between
the parties hereto as follows:

 

A.                                    TERM
OF EMPLOYMENT

 

1.                                     Term.
Bank hereby agrees to continue to employ Executive, and Executive hereby
accepts employment with Bank, for the period of three (3) years,
commencing on January 1, 2005, subject however, to prior termination of
this Agreement as hereinafter provided (the “Term”).  When used herein, “Term” shall refer to the
entire period of employment of Executive by Bank hereunder commencing January 1,
2005 (the “Effective Date”), whether for the period provided above, or whether
terminated earlier as hereinafter provided.

 

B.                                      DUTIES OF
EXECUTIVE

 

1.                                       Duties.
Executive shall perform the duties of Chairman of the Board, President and
Chief Executive Officer of Bank, subject to the powers by law vested in the
Board of Directors                    of
Bank and in Bank’s shareholders, and shall serve as a Director of Bank if
elected by the shareholders.  During the
Term, Executive shall perform exclusively the services herein contemplated to
be performed by Executive with due care, faithfully, diligently, to the best of
Executive’s ability and in compliance with all applicable laws, policies
adopted by the Board of Directors, and Bank’s Articles of

 

 

Incorporation and Bylaws.

 

2.                                     Exclusivity.
Executive shall devote Executive’s entire productive time, ability and
attention to the business of Bank during the Term. Executive shall not directly
or indirectly render any services of a business, commercial or professional
nature to any other person, firm or corporation, whether for compensation or
otherwise, without prior consent evidenced by a resolution duly adopted by the
Board of Directors of the Bank, or the Executive Committee thereof.
Notwithstanding the foregoing, Executive may make investments of a passive nature
in any business or venture, provided however, that such business or venture is
neither in competition or conflict,

 

3.                                     Uniqueness  of Executive’s  Services. The Executive hereby represents
that the services to be performed by him under the terms of this contract are
of a special, unique, unusual, extraordinary, and intellectual character, which
give them a peculiar value, the loss of which cannot be reasonably or
adequately compensated in damages in an action at law. The Executive therefore
expressly agrees that the Bank, in addition to any other rights or remedies
which the Bank may possess, shall be entitled to injunctive and other equitable
relief to prevent a breach of this contract by the Executive.

 

4.                                     Physical
Examination. Executive shall take an annual physical examination during
each year during the Term of this contract. Said physical examination(s) shall
be conducted at the expense of the Bank.

 

C.                                    COMPENSATION

 

1.                                     Salary.
For Executive’s services hereunder, Bank shall pay or cause to be paid as
annual gross base salary to Executive the amount of not less than $240,000
during each of the years of the Term, beginning with the Effective Date.
Executive shall also, so long as he serves on the Board of Directors, be
entitled to director’s fees on the same basis as paid to outside directors, if
the Board of Directors does not exclude him from such directors fees.  The Board of Directors shall also, from time
to time, and at least once each calendar year grant such additional “merit”
increases, if any, in the base salary as are determined after review to be
appropriate in the discretion of the Board of Directors.  Executive’s salary shall be payable in equal
installments in conformity with Bank’s normal payroll periods as in effect from
time to time.

 

D.                                   EXECUTIVE
BENEFITS

 

1.                                     Vacation.
Executive shall be entitled to a vacation leave of four (4) weeks during
each year of the Term, of which two (2) weeks must be taken consecutively
in each calendar year.  Executive shall
be entitled to vacation pay, in lieu of up to two (2) weeks of vacation
during each calendar year, with the consent of the Board of Directors.

 

2.                                     Automobile
Allowance. During the term hereunder, Bank shall provide Executive, for
Executive’s sole use, a suitable full—size automobile, or if the Executive
desires to use his own automobile, Bank shall pay Executive a comparable auto
allowance (not less than $750 per month) as determined by the Board of
Directors. Bank

 

2

 

shall pay all operating expenses of any nature whatsoever with regard
to such automobile.  Executive shall use
reasonable efforts to furnish to Bank substantially adequate records and other
documentary evidence required by federal and state statutes and regulations
issued by the appropriate taxing authorities substantiating the extent to which
such payments are deductible business expenses of Bank and not deductible
additional compensation to Executive. 
Bank shall also procure, pay for and maintain in force adequate
insurance coverage for such automobile. Bank and Executive agree that the value
of Executive’s personal use of the automobile is twenty (20%) of the annual
cost of the automobile lease, repairs, and gasoline which shall be treated for
tax purposes as additional compensation to Executive, subject to appropriate
withholding.

 

3.                                     Group
Medical and Life Insurance Benefits. Bank shall provide for Executive, at
Bank’s expense to the extent permitted by Bank policy, participation in a
comprehensive major medical, dental, and optical plan, with accident benefits,
equivalent to either (i) the maximum available from time to time under the
California Bankers Association Group Insurance Program for an employee of
Executive’s salary level; or (ii) the benefits under an insurance program
adopted on a non—discriminatory basis for the employees of the Bank
generally.  Life insurance benefits shall
be provided to Executive, at Bank’s expense to the extent not prohibited by
Bank policy during the term hereof in an amount not less than $200,000, with
Executive to designate beneficiary thereunder.

 

4.                                       Salary
Continuation Plan.  Bank shall
provide for Executive a Salary Continuation Plan that provides for payments of
$90,000 per year, for Mr. Chrietzberg’s lifetime, if he remains with the
Bank until normal retirement, commencing age 65.   The Salary Continuation Plan shall provide
the following with regard to the division of death proceeds should Mr. Chrietzberg
die before his sixty-fifth (65th) birthday; his beneficiary(ies)
shall be entitled to an amount equal to $2,940,000 or the net at risk insurance
portion of the proceeds, whichever amount is less.  The net at risk insurance portion is the
total proceeds less the cash value of the policy.  Should Mr. Chrietzberg die on or
subsequent to his sixty-fifth (65th) birthday, his beneficiary(ies)
shall be entitled to an amount equal to $1,000,000 plus the present value of
the remaining retirement benefits due to Mr. Chrietzberg or the net at
risk insurance portion of the proceeds, whichever is less, and the Bank shall
be entitled to the remainder of such proceeds.

 

5.                                     Bonus.
For the calendar year 2005, and for each full calendar year of the Term
completed by Executive pursuant to this Agreement, he shall be entitled to an
Incentive Bonus determined in accordance with this paragraph.  The Incentive Bonus shall equal the lesser of
(i) $250,000, or (ii) the sum of the ROA Bonus and the ROE Bonus,
determined in accordance with the Exhibit D-4.  This bonus shall be payable in January of
the year following completion of the year on which it is based, or as soon
thereafter as is practical after the Bank’s certified public accountants have
delivered their report on the Bank’s condition and results of operations for
the year.

 

6.                                     Sick
Leave.     Executive shall be entitled to days of
paid

 

3

 

sick leave in accordance with Bank policy.

 

E.                                       BUSINESS
EXPENSES AND REIMBURSEMENT.

 

1.                                     Business
Expenses. Executive shall be entitled to reimbursement by Bank for any ordinary
and necessary business expenses incurred by Executive in the performance of
Executive’s duties and in acting for Bank during the Term.  Types of expenses qualifying for such
reimbursement shall be determined by the Board of Directors. Executive shall furnish
to Bank adequate records and other documentary evidence required by federal and
state statutes and regulations issued by the appropriate taxing authorities for
the substantiation of such payments as deductible business expenses of Bank and
not as deductible compensation to Executive; provided, however, that
reimbursement of such expenses shall not be dependent on proving deductibility
of such expenses for tax purposes if such expenses are otherwise determined by
the Board of Directors, in its sole discretion, to be appropriate.

 

F.                                      TERMINATION.

 

1.                                     Termination
With Cause. Except as otherwise provided herein, this Agreement may be
terminated by Bank, at Bank’s option with notice to Executive, upon the
occurrence of any of the following events:

 

(a)                               A material
breach by Executive of any of the terms or provisions of this Agreement;

 

(b)                              Executive
is convicted of illegal activity by a court of competent jurisdiction or pleads
guilty to or nolo contendere to, illegal activity, which activity materially adversely
affects Bank’s reputation in the community or which evidences the lack of
Executive’s fitness or ability to perform Executive’s duties, as determined by
the Board of Directors in good faith; or

 

(c)                               Executive
has committed any illegal or dishonest act which would cause termination of
coverage under Bank’s Bankers Blanket Bond as to Employee, as distinguished
from termination of coverage as to Bank as a whole; or

 

(d)                              Executive
materially fails to perform or habitually neglects Executive’s duties or commits
a material act of malfeasance or misfeasance in connection therewith; or

 

(e)                               Executive
becomes permanently disabled as such is defined in his or Bank’s disability
insurance policy and such disability makes Executive eligible for benefits
thereunder (or if no such definition, as defined by federal law or regulation
pursuant to the Social Security Act or a rebated statute).  Any controversy concerning Executive’s
disability shall be settled by arbitration in accordance with the rules of
the American Arbitration Association. 
Any termination pursuant to this subsection (d) shall not
affect the continued operation of any disability income continuation plan,
which may be established for the benefit of Executive;

 

4

 

(f)                                 An
order under 12 U.S.C. 1818(b) or (e) or any similar statute is issued
against Executive or Bank which calls for his suspension or removal from
office; or

 

(g)                              The Superintendent
of Banks, or other supervisory or regulatory authority having jurisdiction
takes possession of the property and business of Bank pursuant to applicable
statute or regulation.

 

2.                                       Termination
Without Cause.

 

(a)                               During
the Term, this Agreement may be terminated by Bank without cause upon written
notice to Executive.

 

(b)                              During
the Term, this Agreement may be terminated by Executive without cause upon
sixty (60) days’ prior written notice to Bank. Executive and Bank agree that it
would be impractical or extremely difficult to fix the actual damage caused by
Executive’s breach of this Section F.2(b). 
Accordingly, the amount of damage suffered and recoverable by Bank in
the event of Executive’s breach of this provision shall be equal to the amount
of Base Salary for Executive for two months. Bank and Executive agree such sum
is a reasonable estimate of damage under the circumstances at the date this
Agreement is made.

 

3.                                     Compensation
Upon Termination. (a) If Executive’s employment with Bank is
terminated by Bank pursuant to Section F.1. hereof or by Executive
pursuant to Section F.2. hereof, Executive shall then only be entitled to
receive salary through the effective date of such termination (without
pro-ration of the Incentive Bonus described in Section D.4 above) and
shall receive any incurred but not reimbursed business expenses (subject to the
provisions of Section E.1. hereof).

 

(b)                              If
Executive’s employment is terminated by Bank pursuant to Section F.2.
hereof, Executive shall be entitled to receive Executive’s salary through the
effective date of such termination; any incurred but not reimbursed business
expenses (subject to the provisions of Section E.1. hereof); plus
Executive’s salary (as in effect immediately prior to termination) for the “Severance
Period”, which shall be the greater of two (2) years from the effective
date of termination or the remainder of the Term to be paid in equal
installments in conformity with Bank’s normal payroll periods as in effect from
time to time.  However, if Executive’s
employment is terminated by the Bank pursuant to Section F.2 within one
year (1) after the announcement or consummation, or during the pendency,
of a Change in Control Transaction, the Severance Period shall be the greater
of 24 months from the effective date of termination, or the remainder of the
Term.  A “Change in Control Transaction”
shall be limited to an acquisition by a person, or group of persons acting in
concert, of shares having the power to elect a majority of the directors of the
Bank, or a merger or other acquisition of the Bank or its assets and business,
in which the power to elect a majority of the directors of the surviving
corporation is in the hands of persons who were not shareholders of the Bank as
of one of the date hereof or a date two years prior to such merger or other
acquisition.  In addition to compensation
for the Severance Period, Executive shall be entitled to a lump sum payment of
his Incentive Bonus (when calculated in accordance with the timing set forth in
Section D.4) for any 

 

5

 

calendar year in which his employment is terminated by the Bank
pursuant Section F.2 in an amount equal to a pro—rated portion of the
Incentive Bonus provided in Section D.4 above (calculated as though the
period from the beginning of the year until the end of the month prior to the
termination were a full year)

 

G.   GENERAL PROVISIONS.

 

1.                                     Ownership
of Books and Records; Confidentiality. (a) All records or copies
thereof of the accounts of customers, and any other records and books relating
in any manner whatsoever to the customers of Bank, and all other files, books
and records and other materials owned by Bank or used by it in connection with
the conduct of its business, whether prepared by Executive or otherwise coming
into his possession, shall be the exclusive property of Bank regardless of who
actually prepared the original material, book or record.  All such books and records and other
materials, together with all copies thereof, shall be immediately returned to
Bank by Executive on any termination of his employment.

 

(b)                              During
the Term, Executive will have access to and become acquainted with what
Executive and Bank acknowledge are trade secrets, to wit, knowledge or data
concerning Bank, including its operations and business, and the identity of customers
of Bank, including knowledge of their financial condition, their financial
needs, as well as their methods of doing business.  Executive shall not disclose any of the
aforesaid trade secrets, directly or indirectly, or use them in any way, either
during the Term or thereafter, except as required in the course of Executive’s
employment with Bank.  Executive shall
not solicit any employee or customer of Bank to become an employee or customer
of another institution until the later of six (6) months following the end
of the Term or the end of the Severance Period.

 

2.                                     Assignment
and Modification. This Agreement, and the rights and duties hereunder, may
not be assigned by either party hereto without the prior written consent of the
other, and the parties expressly agree that any attempt to assign the rights of
any party hereunder without such consent will be null and void; provided,
however, that Bank’s rights and obligations hereunder shall be assignable
without consent by operation of law in the event of a merger or similar
transaction involving the Bank.

 

3.                                     Further
Assurance. From time to time each party will execute and deliver such further
instruments and will take such other action as the other party reasonably may
request in order to discharge and perform the obligations and agreements
hereunder.

 

4.                                     ARBITRATION
- If the Parties hereto shall be unable to reach an agreement on material
provisions of this Agreement or on other issues then such disputes shall be
submitted to the American Arbitration Association (“AAA”) of closest to
Monterey, California for resolution, in accordance with the Commercial
Arbitration Rules of the AAA (or by some other arbitrator mutually agreed
to by the parties) . Such arbitration shall be conducted in the following
manner:

 

6

 

a.                                       The
Party desiring to resolve the dispute through arbitration shall serve upon the
Party a written notice of intent to exercise rights under this arbitration
provision.  One arbitrator shall be required,
and that arbitrator shall be selected by the arbitration service, in a manner
determined by the AAA.  The arbitrator
shall be furnished with a statement of issues in dispute and a summary of each
party’s position.

 

b.                                      The
arbitrator shall set a date for a hearing which shall be no less than thirty
(30) days and no more than one hundred twenty (120) days after the arbitrator
is selected.  At the arbitration, each
party shall present to the arbitrator the reasons why the respective positions
of the parties should be upheld.  In
considering such arguments, the arbitrator may consider any evidence reasonably
believed by him to be credible and relevant to the determination which he is
called upon to make. The arbitrator may consider such hearsay and opinions of
the parties as he desires and may consider copies of any writings.  The best evidence rule will not apply
nor any formal prerequisites required by the California Evidence Code for the
introduction of documents.  Nothing
contained herein shall prevent either party from arguing about the weight to be
given any evidence under the Evidence Code or otherwise.  The arbitrator shall not be bound by either
the Evidence Code, or the Code of Civil Procedure in determining the evidence
to be presented, admitted by him, or the method by which evidence and arguments
may be presented.  All methods of
discovery permitted by the Code of Civil Procedure shall be permitted except
use of requests for admissions. 
Furthermore, a party shall only have fifteen (15) days from receipt of
interrogatories, or request for production to respond to the propounding
party.  Each party shall have the right
to take the deposition of the other on twenty (20) days notice.  The arbitrator shall determine a method for
resolution of any discovery dispute, which may include selecting one arbitrator
to resolve disputes by telephone conference. 
The arbitrator may establish such rules as he deems reasonable for
the conduct of the arbitration, including requirements for the filing of
memoranda supporting the parties’ positions.

 

c.                                       The
decision of the arbitrator shall be binding upon the Parties and shall
constituted a complete determination of the issues considered by the
arbitrator.  The provisions this Section shall
constitute a binding arbitration agreement between the Parties pursuant to Code
of Civil Procedure Section 1321 et seq.

 

d.                                      Each
party shall be responsible for one—half of all costs of the arbitration. Each
party shall deposit with the AAA, one—half (1/2) of all required deposits.  The failure of either party to make such
deposit within thirty (30) days of notice of such cost shall automatically
entitle the other party to an arbitration determination favorable to the party
making the required deposit.  Each party
shall pay their own fees and attorneys’ fees and costs for the arbitration.

 

e.                                       No
arbitrator shall have ever been employed by either party or their successors in
interest or any of their Shareholders, officers, directors, partners nor shall
they be related to any of such individuals by any relationship closer than
consanguinity in the third degree.

 

7

 

NOTICE. BY
INITIALING IN THE SPACE BELOW YOU ARE AGREEING TOHAVE ANY DISPUTE ARISING OUT
OF THE MATTERS INCLUDED IN THE “ARBITRATION OF DISPUTES” PROVISIONS DECIDED BY
NEUTRAL ARBITRATION, AS PROVIDED HEREIN AND BY CALIFORNIA LAW, AND YOU HEREBY
AGREE TO WAIVE ANY RIGHTS YOU MAY POSSESS TO HAVE SUCH DISPUTE LITIGATED
AND RESOLVED IN A COURT OR JURY TRIAL.

 

BY INITIALING IN THE SPACE BELOW YOU HEREBY
WAIVE YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE
INCLUDED IN THIS ARBITRATION OF DISPUTES PROVISION.

 

IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER
AGREEING TO THISPROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR EXECUTION OF THIS
AGREEMENT AND YOUR APPROVAL, SPECIFICALLY OF THIS PARAGRAPH 16, ACKNOWLEDGES
THAT YOUR EXECUTION OF THIS PROVISION IS VOLUNTARY AND THAT PRIOR TO SUCH
EXECUTION YOU HAVE CONSULTED WITH INDEPENDENT COUNSEL CONCERNING THE EFFECTS OF
SUCH PROVISION TO THE EXTENT YOU HAVE DEEMED NECESSARY, PRIOR TO YOUR EXECUTION
OF THIS PROVISION.

 

THE
PARTIES HEREBY ACKNOWLEDGE, UNDERSTAND AND AGREE TO, THE
TERMS HEREOF AND TO THE SUBMISSION OF ANY DISPUTES
TO ARBITRATION BY THE AAA, AS SET FORTH HEREIN.

 

	
  /s/BNW

  	
   

  	
  /s/CTC

  	
   

  
	
  Bank’s
  Initials

  	
  Executive’s
  Initials

  

 

4.                                       Notices.      All
notices required or permitted hereunder shall be in writing and shall be
delivered in person or sent by certified or registered mail, return receipt
requested, postage prepaid as follows:

 

	
  To Bank:

  	
  Monterey County Bank

  
	
   

  	
  601 Munras Ave

  
	
   

  	
  Monterey, California 93940

  
	
   

  	
  Attn: Board of Directors

  
	
   

  	
   

  
	
   

  	
   

  
	
  To Executive:

  	
  Charles T. Chrietzberg, Jr.

  
	
   

  	
  P.O. Box 1344

  
	
   

  	
  Carmel, CA 93921

  

 

or to such other party or address as either
of the parties may designate in a written notice served upon the other party in
the manner provided herein.  All notices
required or 

8

 

permitted hereunder shall be deemed duly
given and received on the date of delivery if delivered in person or on the
second day next succeeding the date of mailing if sent by certified or
registered mail, postage prepaid.

 

5.                                       Successors.     This
Agreement shall be binding upon, and shall inure to the benefit of, the
successors and assigns of the parties.

 

6.                                       Entire  Agreement. Except as provided herein,
this Agreement constitutes the entire agreement between the parties, and all
prior negotiations, representations, or agreements between the parties, whether
oral or written, are merged into this Agreement.  This Agreement may only be modified by an
agreement in writing executed by both of the parties hereto.

 

7.                                       Governing Law.  This Agreement shall be construed in

 

accordance with the laws of the State of
California.

 

8.                                       Executed
Counterparts.  This Agreement may be
executed in one or more counterparts, all of which together shall constitute a
single agreement and each of which shall be an original for all purposes.

 

9.                                       Section 
Headings.  The various section headings
are inserted for convenience of reference only and shall not affect the meaning
or interpretation of this Agreement or any section hereof.

 

10.                                 Calendar
Days/Close of Business. Unless the context so requires, all periods
terminating on a given day, period of days or date shall terminate on the close
of business on that day or date and references to “days” shall refer to
calendar days.

 

11.                                 Severability.
In the event that any of the provisions, or portions thereof, of this Agreement
are held to be unenforceable or invalid by any court of competent jurisdiction,
the validity and enforceability of the remaining provisions or portions
thereof, shall not be affected thereby.

 

9

 

12.                                 Attorneys’  Fees. In the event that any party shall
bring an action or arbitration in connection with the performance, breach or
interpretation hereof, then the prevailing party in such action as determined
by the court or other body having jurisdiction shall be entitled to recover
from the losing party in such action, as determined by the court or other body
having jurisdiction, all reasonable costs and expenses of litigation or
arbitration, including reasonable attorneys’ fees, court costs, costs of investigation
and other costs reasonably related to such proceeding, in such amounts as may
be determined in the discretion of the court or other body having jurisdiction.

 

IN WITNESS
WHEREOF, this Agreement is executed as of the day and year first above written.

 

	
   

  	
  BANK:

  	
  MONTEREY COUNTY BANK

  
	
   

  	
   

  
	
   

  	
   

  	
  By: 

  	
  /s/Bruce N.
  Warner

  	
   

  
	
   

  	
   

  	
   

  	
  Bruce
  Warner

  	
   

  
	
   

  	
   

  	
   

  	
  Executive
  Vice President and

  
	
   

  	
   

  	
   

  	
  Chief
  Operating Officer

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE:

  	
  /s/Charles T. Chrietzberg, Jr.

  	
   

  
	
   

  	
   

  	
  CHARLES T. CHRIETZBERG, JR.

  	
   

  
							

 

10

 

EXHIBIT D-4

 

CALCULATION OF BONUS

 

The ROA and ROE Bonuses shall be based on the Bank’s pretax return on
average assets and beginning equity using the following amounts.

 

	
  ROA

  	
   

  	
  ROA BONUS

  	
   

  	
  ROE

  	
   

  	
  ROE BONUS

  	
   

  
	
  1.1%

  	
   

  	
  $

  	
  10,000

  	
   

  	
  11%

  	
   

  	
  $

  	
  10,000

  	
   

  
	
  1.2%

  	
   

  	
  $

  	
  20,000

  	
   

  	
  12%

  	
   

  	
  $

  	
  20,000

  	
   

  
	
  1.3%

  	
   

  	
  $

  	
  30,000

  	
   

  	
  13%

  	
   

  	
  $

  	
  30,000

  	
   

  
	
  1.4%

  	
   

  	
  $

  	
  40,000

  	
   

  	
  14%

  	
   

  	
  $

  	
  40,000

  	
   

  
	
  1.5%

  	
   

  	
  $

  	
  50,000

  	
   

  	
  15%

  	
   

  	
  $

  	
  50,000

  	
   

  
	
  1.6%

  	
   

  	
  $

  	
  60,000

  	
   

  	
  16%

  	
   

  	
  $

  	
  60,000

  	
   

  
	
  1.7%

  	
   

  	
  $

  	
  70,000

  	
   

  	
  17%

  	
   

  	
  $

  	
  70,000

  	
   

  
	
  1.8%

  	
   

  	
  $

  	
  80,000

  	
   

  	
  18%

  	
   

  	
  $

  	
  80,000

  	
   

  
	
  1.9%

  	
   

  	
  $

  	
  90,000

  	
   

  	
  19%

  	
   

  	
  $

  	
  90,000

  	
   

  
	
  2.0%

  	
   

  	
  $

  	
  100,000

  	
   

  	
  20%

  	
   

  	
  $

  	
  100,000

  	
   

  
	
  2.1%

  	
   

  	
  $

  	
  110,000

  	
   

  	
  21%

  	
   

  	
  $

  	
  110,000

  	
   

  
	
  2.2%

  	
   

  	
  $

  	
  120,000

  	
   

  	
  22%

  	
   

  	
  $

  	
  120,000

  	
   

  
	
  2.3%

  	
   

  	
  $

  	
  130,000

  	
   

  	
  23%

  	
   

  	
  $

  	
  130,000

  	
   

  
	
  2.4%

  	
   

  	
  $

  	
  140,000

  	
   

  	
  24%

  	
   

  	
  $

  	
  140,000

  	
   

  
	
  2.5%

  	
   

  	
  $

  	
  150,000

  	
   

  	
  25%

  	
   

  	
  $

  	
  150,000

  	
   

  
	
  2.6%

  	
   

  	
  $

  	
  160,000

  	
   

  	
  26%

  	
   

  	
  $

  	
  160,000

  	
   

  
	
  2.7%

  	
   

  	
  $

  	
  170,000

  	
   

  	
  27%

  	
   

  	
  $

  	
  170,000

  	
   

  
	
  2.8%

  	
   

  	
  $

  	
  180,000

  	
   

  	
  28%

  	
   

  	
  $

  	
  180,000

  	
   

  
	
  2.9%

  	
   

  	
  $

  	
  190,000

  	
   

  	
  29%

  	
   

  	
  $

  	
  190,000

  	
   

  
	
  3.0%

  	
   

  	
  $

  	
  200,000

  	
   

  	
  30%

  	
   

  	
  $

  	
  200,000

  	
   

  
	
  3.1%

  	
   

  	
  $

  	
  210,000

  	
   

  	
  31%

  	
   

  	
  $

  	
  210,000

  	
   

  
	
  3.2%

  	
   

  	
  $

  	
  220,000

  	
   

  	
  32%

  	
   

  	
  $

  	
  220,000

  	
   

  
	
  3.3%

  	
   

  	
  $

  	
  230,000

  	
   

  	
  33%

  	
   

  	
  $

  	
  230,000

  	
   

  
	
  3.4%

  	
   

  	
  $

  	
  240,000

  	
   

  	
  34%

  	
   

  	
  $

  	
  240,000

  	
   

  
	
  3.5%

  	
   

  	
  $

  	
  250,000

  	
   

  	
  35%

  	
   

  	
  $

  	
  250,000

  	
   

  

 

MAXIMUM COMBINED — $250,000, or $490,000
minus non—bonus salary excluding compensation, if any, for vacation not taken)
for the year. The return’s shall be calculated before deduction for any annual
performance bonuses, but after deduction for commissions and bonuses paid on a
monthly basis.

 

11Exhibit 10.1

 

EXECUTION COPY

 

 

 

SECURITIES PURCHASE AGREEMENT

 

Dated as of March 23, 2005

 

among

 

Yucaipa Corporate Initiatives
Fund I, L.P.

 

Yucaipa American Alliance Fund I,
L.P.

 

Yucaipa American Alliance
(Parallel) Fund I, L.P

 

The Yucaipa Companies LLC (As
Investors’ Representative)

 

and

 

Pathmark Stores, Inc.

 

 

 

 

TABLE
OF CONTENTS

 

	
  ARTICLE I

  	
   

  
	
   

  	
   

  
	
  DEFINITIONS

  	
   

  
	
   

  	
   

  
	
  SECTION 1.01. Definitions

  	
   

  
	
   

  	
   

  
	
  ARTICLE II

  	
   

  
	
   

  	
   

  
	
  PURCHASE
  AND SALE

  	
   

  
	
   

  	
   

  
	
  SECTION 2.01. Purchase and Sale of the
  Purchased Securities

  	
   

  
	
   

  	
   

  
	
  SECTION 2.02. Purchase Price

  	
   

  
	
   

  	
   

  
	
  SECTION 2.03. Closing

  	
   

  
	
   

  	
   

  
	
  SECTION 2.04. Closing Deliveries by
  the Company

  	
   

  
	
   

  	
   

  
	
  SECTION 2.05. Closing Deliveries by
  the Investors

  	
   

  
	
   

  	
   

  
	
  ARTICLE III

  	
   

  
	
   

  	
   

  
	
  REPRESENTATIONS AND WARRANTIES OF THE
  COMPANY

  	
   

  
	
   

  	
   

  
	
  SECTION 3.01. Organization and
  Qualification; Subsidiaries

  	
   

  
	
   

  	
   

  
	
  SECTION 3.02. Certificate of
  Incorporation and By-laws

  	
   

  
	
   

  	
   

  
	
  SECTION 3.03. Capitalization

  	
   

  
	
   

  	
   

  
	
  SECTION 3.04. Authority

  	
   

  
	
   

  	
   

  
	
  SECTION 3.05. No Conflict; Required
  Filings and Consents

  	
   

  
	
   

  	
   

  
	
  SECTION 3.06. Permits; Compliance

  	
   

  
	
   

  	
   

  
	
  SECTION 3.07. SEC Filings; Financial
  Statements

  	
   

  
	
   

  	
   

  
	
  SECTION 3.08. Absence of Certain
  Changes or Events

  	
   

  
	
   

  	
   

  
	
  SECTION 3.09. Absence of Litigation

  	
   

  
	
   

  	
   

  
	
  SECTION 3.10. Employee Benefit Plans

  	
   

  
	
   

  	
   

  
	
  SECTION 3.11. Labor Matters

  	
   

  
	
   

  	
   

  
	
  SECTION 3.12. Proxy Statement

  	
   

  

 

i

 

	
  SECTION 3.13. Property and Leases

  	
   

  
	
   

  	
   

  
	
  SECTION 3.14. Intellectual Property

  	
   

  
	
   

  	
   

  
	
  SECTION 3.15. Taxes

  	
   

  
	
   

  	
   

  
	
  SECTION 3.16. Environmental Matters

  	
   

  
	
   

  	
   

  
	
  SECTION 3.17. Contracts; Debt
  Instruments

  	
   

  
	
   

  	
   

  
	
  SECTION 3.18. Related Party
  Transactions

  	
   

  
	
   

  	
   

  
	
  SECTION 3.19. Insurance

  	
   

  
	
   

  	
   

  
	
  SECTION 3.20. Controls

  	
   

  
	
   

  	
   

  
	
  SECTION 3.21. Private Offering

  	
   

  
	
   

  	
   

  
	
  SECTION 3.22. Vote Required

  	
   

  
	
   

  	
   

  
	
  SECTION 3.23. Section 203 of the
  DGCL; Takeover Statute

  	
   

  
	
   

  	
   

  
	
  SECTION 3.24. Fairness Opinion

  	
   

  
	
   

  	
   

  
	
  SECTION 3.25. Brokers

  	
   

  
	
   

  	
   

  
	
  ARTICLE IV

  	
   

  
	
   

  	
   

  
	
  REPRESENTATIONS AND WARRANTIES OF INVESTORS

  	
   

  
	
   

  	
   

  
	
  SECTION 4.01. Organization

  	
   

  
	
   

  	
   

  
	
  SECTION 4.02. Authority

  	
   

  
	
   

  	
   

  
	
  SECTION 4.03. No Conflict; Required
  Filings and Consents

  	
   

  
	
   

  	
   

  
	
  SECTION 4.04. Investment Purpose

  	
   

  
	
   

  	
   

  
	
  SECTION 4.05. Status of Shares;
  Limitations on Transfer and Other Restrictions

  	
   

  
	
   

  	
   

  
	
  SECTION 4.06. Sophistication and
  Financial Condition of the Investors

  	
   

  
	
   

  	
   

  
	
  SECTION 4.07. Available Funds

  	
   

  
	
   

  	
   

  
	
  SECTION 4.08. Proxy Statement

  	
   

  
	
   

  	
   

  
	
  SECTION 4.09. Ownership of Company
  Capital Stock

  	
   

  
	
   

  	
   

  
	
  SECTION 4.10. Brokers

  	
   

  

 

ii

 

	
  ARTICLE V

  	
   

  
	
   

  	
   

  
	
  CONDUCT OF BUSINESS PENDING THE CLOSING

  	
   

  
	
   

  	
   

  
	
  SECTION 5.01. Conduct of Business by
  the Company Pending the Closing

  	
   

  
	
   

  	
   

  
	
  SECTION 5.02. No Contrary Agreements
  or Actions

  	
   

  
	
   

  	
   

  
	
  ARTICLE VI

  	
   

  
	
   

  	
   

  
	
  ADDITIONAL AGREEMENTS

  	
   

  
	
   

  	
   

  
	
  SECTION 6.01. Stockholders’ Meeting

  	
   

  
	
   

  	
   

  
	
  SECTION 6.02. Proxy Statement; Other
  SEC Filings

  	
   

  
	
   

  	
   

  
	
  SECTION 6.03. Access to Information;
  Confidentiality

  	
   

  
	
   

  	
   

  
	
  SECTION 6.04. No Solicitation of
  Transactions

  	
   

  
	
   

  	
   

  
	
  SECTION 6.05. Further Action;
  Reasonable Best Efforts; Consents; Filings

  	
   

  
	
   

  	
   

  
	
  SECTION 6.06. Public Announcements

  	
   

  
	
   

  	
   

  
	
  SECTION 6.07. Credit Agreement

  	
   

  
	
   

  	
   

  
	
  SECTION 6.08. Board Representation

  	
   

  
	
   

  	
   

  
	
  SECTION 6.09. Cooperation

  	
   

  
	
   

  	
   

  
	
  SECTION 6.10. Certain Notices

  	
   

  
	
   

  	
   

  
	
  SECTION 6.11. Investors’
  Representative

  	
   

  
	
   

  	
   

  
	
  ARTICLE VII

  	
   

  
	
   

  	
   

  
	
  CONDITIONS

  	
   

  
	
   

  	
   

  
	
  SECTION 7.01. Conditions to the
  Obligations of Each Party

  	
   

  
	
   

  	
   

  
	
  SECTION 7.02. Conditions to the
  Obligations of the Investors

  	
   

  
	
   

  	
   

  
	
  SECTION 7.03. Conditions to the
  Obligations of the Company

  	
   

  
	
   

  	
   

  
	
  ARTICLE VIII

  	
   

  
	
   

  	
   

  
	
  TERMINATION, AMENDMENT and WAIVER

  	
   

  
	
   

  	
   

  
	
  SECTION 8.01. Termination

  	
   

  

 

iii

 

	
  SECTION 8.02. Effect of Termination

  	
   

  
	
   

  	
   

  
	
  SECTION 8.03. Fees and Expenses

  	
   

  
	
   

  	
   

  
	
  SECTION 8.04. Amendment

  	
   

  
	
   

  	
   

  
	
  SECTION 8.05. Waiver

  	
   

  
	
   

  	
   

  
	
  ARTICLE IX

  	
   

  
	
   

  	
   

  
	
  GENERAL PROVISIONS

  	
   

  
	
   

  	
   

  
	
  SECTION 9.01. Survival of
  Representations and Warranties; Indemnification

  	
   

  
	
   

  	
   

  
	
  SECTION 9.02. Notices

  	
   

  
	
   

  	
   

  
	
  SECTION 9.03. Severability

  	
   

  
	
   

  	
   

  
	
  SECTION 9.04. Entire Agreement;
  Assignment

  	
   

  
	
   

  	
   

  
	
  SECTION 9.05. Parties in Interest

  	
   

  
	
   

  	
   

  
	
  SECTION 9.06. Specific Performance

  	
   

  
	
   

  	
   

  
	
  SECTION 9.07. Governing Law

  	
   

  
	
   

  	
   

  
	
  SECTION 9.08. Waiver of Jury Trial

  	
   

  
	
   

  	
   

  
	
  SECTION 9.09. Attorneys’ Fees

  	
   

  
	
   

  	
   

  
	
  SECTION 9.10. Headings

  	
   

  
	
   

  	
   

  
	
  SECTION 9.11. Counterparts

  	
   

  
	
   

  	
   

  
	
  EXHIBITS

  	
   

  
	
   

  	
   

  
	
  Exhibit A

  	
  Investor Warrant Agreement

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit B

  	
  Management Agreement

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit C

  	
  Registration Rights Agreement

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit D

  	
  Stockholders Agreement

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit E

  	
  Form of Opinion of Counsel to Company

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit F

  	
  Form of Opinion of Counsel to
  Investors

  	
   

  

 

iv

 

	
  SCHEDULE I   Investor Unit Allocation

  	
   

  

 

v

 

SECURITIES PURCHASE AGREEMENT, dated as of March 23,
2005 (this “Agreement”), between Yucaipa Corporate Initiatives Fund I,
L.P., a Delaware limited partnership (“YCI”), Yucaipa American Alliance
Fund I, L.P., a Delaware limited partnership (“YAAF”), Yucaipa American
Alliance (Parallel) Fund I, L.P., a Delaware limited partnership (“YAAF
Parallel” and, together with YCI and YAAF, the “Investors”, The
Yucaipa Companies LLC, a Delaware limited liability company (“Investors’
Representative”) (which is a party to this Agreement solely with respect to
Section 6.11 hereof), and Pathmark Stores, Inc., a Delaware
corporation (the “Company”).

 

RECITALS

 

WHEREAS, the Company desires to sell to the Investors,
and the Investors desire to purchase from the Company, pursuant to the terms
and conditions set forth in this Agreement, an aggregate of 20,000,000
investment units (“Units”), which consist in the aggregate of (i) 20,000,000
shares (the “Shares”) of the common stock, par value $0.01 per share, of
the Company (the “Company Common Stock”), (ii) 10,060,000 Series A
warrants (the “Series A Investor Warrants”), the terms of which
shall be governed by a warrant agreement between the Company and the Investors
in the form attached hereto as Exhibit A (the “Investor Warrant
Agreement”), to purchase additional shares of Company Common Stock and (iii) 15,046,350
Series B warrants (the “Series B Investor Warrants”; together
with the Series A Investor Warrants, the “Investor Warrants”), the
terms of which shall also be governed by the Investor Warrant Agreement, to purchase
additional shares of Company Common Stock (the Units, the Shares and the
Investor Warrants are collectively referred to herein as the “Purchased
Securities”);

 

WHEREAS, each one Unit will consist of one Share,
0.503 Series A Investor Warrants, and 0.7523175 Series B Investor
Warrants;

 

WHEREAS, concurrently with execution of this Agreement
the Company will enter into a management agreement with the Investors’
Representative in the form attached hereto as Exhibit B (the “Management
Agreement”), and concurrently with the closing of the sale and purchase of
the Purchased Securities contemplated by this Agreement, the Company will enter
into (i) the Investor Warrant Agreement, (ii) a registration rights
agreement with the Investors with respect to the Shares and shares of Company
Common Stock issuable upon exercise of the Investor Warrants, in the form
attached hereto as Exhibit C (the “Registration Rights Agreement”)
and (iii) a stockholders’ agreement with the Investors, in the form
attached hereto as Exhibit D (the “Stockholders Agreement”).

 

AGREEMENT

 

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

 

1

 

ARTICLE I

DEFINITIONS

 

SECTION 1.01.  Definitions.

 

(a)                                  For
purposes of this Agreement:

 

“Acquisition Proposal” means any proposal or
offer from any person relating to any direct or indirect (i) sale, lease
or other disposition directly or indirectly by merger, consolidation, business
combination, share exchange, joint venture or otherwise of assets of the
Company or any Subsidiary representing 20% or more of the consolidated assets
of the Company and its Subsidiaries (other than sales of inventory in the
ordinary course of business and consistent with past practice); (ii) issuance,
sale or other disposition, directly or indirectly (including, without
limitation, by way of merger, consolidation, business combination, share
exchange, joint venture or any similar transaction), of securities (or options,
rights or warrants to purchase, or securities convertible into or exchangeable
for, such securities) representing 20% or more of any class of equity securities
of the Company; (iii) tender offer or exchange offer as defined pursuant
to the Exchange Act that, if consummated, would result in any person
beneficially owning 20% or more of any class or series (or the voting power of
any class or series) of equity securities of the Company or any other
transaction in which any person shall acquire beneficial ownership or the right
to acquire beneficial ownership, of 20% or more of any class or series (or the
voting power of any class or series) of equity securities; (iv) merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving the Company, or any Subsidiary representing
20% or more of the consolidated assets of the Company and its Subsidiaries; or (v) combination
of the foregoing (in each case, other than the Transactions).

 

“affiliate” of a specified person means a
person who, directly or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
person.

 

“Ancillary Agreements” means the Investor
Warrant Agreement, the Registration Rights Agreement, the Management Agreement
and the Stockholders Agreement.

 

“beneficial owner” (and related terms such as “beneficially
owned” or “beneficial ownership”) has the meaning ascribed to such
term under Rule 13d-3 of the Exchange Act.

 

“By-Laws” means the Amended and Restated
By-Laws of the Company effective April 16, 2004.

 

“business day” means any day on which the
principal offices of the SEC in Washington, D.C. are open to accept filings,
or, in the case of determining a date when any payment is due, any day on which
banks are not required or authorized to close in New York City.

 

“Board” means the Board of Directors of the
Company.

 

2

 

“Certificate of Incorporation” means the
Amended and Restated Certificate of the Company, dated as of September 19,
2000.

 

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

 

“contracts” means any agreement, contract,
lease, power of attorney, note, loan, evidence of indebtedness, purchase order,
letter of credit, settlement agreement, franchise agreement, undertaking,
covenant not to compete, employment agreement, license agreement, instrument,
obligation, commitment, understanding, policy which constitutes an executory
obligation, purchase and sales order, quotation which constitutes an executory
commitment, and other executory commitments to which a person is a party or to
which any of the assets of such person are subject, whether oral or written,
express or implied.

 

“control” (including the terms “controlled
by” and “under common control with”) means the possession, directly
or indirectly, or as trustee or executor, of the power to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting securities, as trustee or executor, by contract, credit
arrangement or otherwise; including, without limitation, the ownership,
directly or indirectly, of securities having the power to elect a majority of
the board of directors or similar body governing the affairs of such person.

 

“Data Site Index” means the index at Section 1.01(a)(1) of
the Disclosure Schedule listing those items in the Electronic Data
Room.

 

“DGCL” means the General Corporation Law of the
State of Delaware.

 

“Electronic Data Room” means those documents
included on an Internet site as of the date hereof, which has been made
available to the Investors.

 

“Environmental Laws” means any United States
federal, state, local or foreign Laws in existence on the date hereof relating
to pollution or the protection, investigation or restoration of the
environment or human health due to exposure to Hazardous Substances.

 

“Equity Interest” means any share, capital stock,
partnership, member or similar interest in any person, and any option, warrant,
right or security (including, without limitation, debt securities) convertible,
exchangeable or exercisable therefor.

 

“Expenses” includes all reasonable and
documented out-of-pocket costs, fees and expenses (including, without
limitation, all fees and expenses of counsel, accountants, investment bankers,
experts and consultants to a party hereto and its affiliates) incurred by a
party or on its behalf in connection with or related to the authorization,
preparation, negotiation and execution of this Agreement and the Ancillary
Agreements and the performance of the Transactions contemplated by this
Agreement, including, without limitation, all expenses incurred to obtain all consents,
approvals and authorizations of any third party with respect to the
Transactions.

 

3

 

“Hazardous Substances” means (i) those
substances defined in or regulated under the following federal statutes and
their state counterparts, as each may be amended from time to time, and all
regulations thereunder:  the Hazardous
Materials Transportation Act, the Solid Waste Disposal Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Water Act, the Safe Drinking Water
Act, the Atomic Energy Act, the Toxic Substances Control Act, the Federal
Insecticide, Fungicide, and Rodenticide Act, the Occupational Health and Safety
Act, and the Clean Air Act; (ii) petroleum and petroleum products,
including crude oil and any fractions thereof; (iii) natural gas,
synthetic gas, and any mixtures thereof; (iv) polychlorinated biphenyls,
asbestos and radon; and (v) any substance, material, or waste defined as
toxic or hazardous or as a pollutant or contaminant, or regulated by any
Governmental Authority pursuant to any Environmental Law.

 

“Intellectual Property” means United States and
non-United States (a) inventions and discoveries (whether or not patentable
and whether or not reduced to practice), improvements thereto, and patents,
patent applications, invention disclosures, and other rights of invention,
worldwide, including without limitation any reissues, divisions, continuations
and continuations-in-part, provisionals, reexamined patents or other
applications or patents claiming the benefit of the filing date of any such
application or patent; (b) trademarks, service marks, trade names, trade
dress, logos, Internet domain names, product names and slogans, including any
common law rights, registrations, and applications for registration for any of
the foregoing, and the goodwill associated with all of the foregoing,
worldwide; (c) copyrightable works, all rights in copyrights, including
moral rights, copyrights, website content, packaging design and art work, and
other rights of authorship and exploitation, and any applications,
registrations and renewals in connection therewith, worldwide; (d) confidential
and proprietary information, including without limitation, customer and
supplier lists and related information, pricing and cost information, business
and marketing plans, research and development, advertising statistics, any
other financial, marketing and business data, technical data, databases, specifications,
designs, drawings, methods, schematics and know-how (collectively, “Trade
Secrets”); (e) to the extent not covered by subsections (a) through
(d), above, software and website content; (f) all claims, causes of action
and rights to sue for past, present and future infringement, misappropriation
or unconsented use of any of the Intellectual Property, the right to file
applications and obtain registrations, and all products, proceeds and revenues
arising from or relating to any and all of the foregoing, throughout the world;
and (g) the rights to use the names and likenesses of natural persons and
any other proprietary, intellectual property and other rights relating to any
or all of the foregoing anywhere in the world.

 

“knowledge of the Company” means the actual
knowledge of the executive officers of the Company and those individuals
identified on Section 1.01(a)(2) of the Disclosure Schedule,
in each case, after reasonable inquiry.

 

“Liens” means any charge, mortgage, pledge,
deed of trust, hypothecation, right of others, claim, security interest,
encumbrance, burden, title defect, title retention agreement, lease, sublease,
license, occupancy agreement, easement, covenant, condition, 

 

4

 

encroachment, voting trust agreement, interest, option, right of first
offer, negotiation or refusal, proxy, lien or other similar restrictions or
limitations.

 

“Material Adverse Effect” means any event,
circumstance, change or effect that, 
either individually or combined with all other events, circumstances,
changes or effects, (i) has or would have a material adverse effect on the
business, operations, assets, liabilities (including contingent liabilities),
financial condition or results of operations of the Company and the
Subsidiaries, taken as a whole or (ii) materially impairs or would
materially impair the ability of the Company to consummate the Transactions and
perform its other obligations under this Agreement; provided,
however, that “Material Adverse Effect”
shall not include any event, circumstance, change or effect arising out of or
attributable to (i) any decrease in the market price of the shares of the
Company Common Stock (but not any event, circumstance, change or effect
underlying such decrease to the extent that such event, circumstance, change or
effect would otherwise constitute a Material Adverse Effect), (ii) any
events, circumstances, changes or effects that affect the supermarket business
generally and that do not disproportionately impact the Company and its
Subsidiaries, (iii) any changes in the securities markets generally that
do not disproportionately impact the Company and its Subsidiaries, (iv) any
changes in general economic, legal, regulatory or political conditions in the
geographic regions in which the Company and its Subsidiaries operate that do
not disproportionately impact the Company and its Subsidiaries.

 

“Other Filings” means all filings made by, or
required to be made by, the Company with the SEC other than the Proxy Statement.

 

“Permitted Liens” means (i) liens for
current Taxes not yet due and payable and Liens for Taxes being contested in
good faith through proper proceedings (for which contested Taxes adequate
reserves have been made), (ii) inchoate mechanics’ and materialmen’s liens
for construction in progress, and, (iii) such (A) inchoate workmen’s,
repairmen’s, warehousemen’s and carriers’ liens arising in the ordinary course
of business of the Company or any Subsidiary consistent with past practice, and
(B) zoning restrictions, survey exceptions, utility easements, rights of
way and similar Liens that are typical for the applicable property type and
locality (excluding, in each case, any mortgages or other Liens securing
borrowed money) which do not materially interfere with the current use of such
Owned Real Property or Leased Real Property and (iv) mortgages provided
pursuant to the Credit Agreement.

 

“person” includes, without limitation, an
individual, corporation, partnership, limited partnership, limited liability company,
syndicate, person (including, without limitation, a “person” or “group” each
within the meaning of Section 13(d)(3) of the Exchange Act), trust,
association or entity or government, political subdivision, agency or
instrumentality of a government.

 

“Release” shall have the meaning given to such
term in the United States
Comprehensive Environmental Response, Compensation and Liability Act, 42 USC Section 9601
et seq.

 

5

 

“subsidiary” or “subsidiaries” of the
Company, the Investors or any other person means an affiliate controlled by
such person, directly or indirectly, through one or more intermediaries.

 

“Superior Proposal” means a bona fide
Acquisition Proposal concerning the sale of 50% or more of the consolidated
assets of the Company or any issuance, sale, disposition, tender offer,
exchange offer, acquisition of ownership or other transfer of 50% or more of
the voting power of the Company made by any person (other than an Investor and
its affiliates) which was not solicited by the Company, any Subsidiary, any
directors, officers, employees, accountants, consultants, legal counsel,
advisors, agents or other representatives of the Company or any Subsidiary or
any other affiliates and which, in the good faith judgment of the Board (taking
into account the various legal, financial and regulatory aspects of the
proposal (including whether or not such a proposal is subject to a financing
contingency), and the identity of the person making the proposal) (i) if
accepted, is reasonably expected to be consummated and, if applicable,
financed, and  (ii) if consummated
would, based upon the advice of the Company’s financial advisor, result in a
transaction that is more favorable to the Company and to the Company’s
stockholders, from a financial point of view, than the Transactions
contemplated by this Agreement (as the same may be proposed by the Investors to
be amended pursuant to Section 8.01(e)).

 

“Tax Returns” means any return, report or other
form filed with or submitted to, or required to be filed with or submitted to,
any Governmental Authority in respect of Taxes.

 

“Taxes” means any and all taxes, fees, levies,
duties, tariffs, imposts and other similar charges of any kind (together with
any and all interest, penalties, additions to tax and additional amounts
imposed with respect thereto) imposed by any Governmental Authority or taxing
authority, including, without limitation: 
taxes or other charges on or with respect to income, franchise, windfall
or other profits, gross receipts, property (real or personal), sales, use,
capital stock, payroll, employment, occupation, severance, disability, premium,
environmental (including taxes under Code Section 59A), social security,
workers’ compensation, estimated, unemployment compensation or net worth;
alternative or add-on minimum; taxes or other charges in the nature of excise,
withholding, ad valorem, stamp, transfer, value-added or gains taxes; license,
registration and documentation fees; and customers’ duties, tariffs and similar
charges.

 

“Transactions” shall mean execution and
delivery of this Agreement and the Ancillary Agreements, the purchase and sale
of the Purchased Securities as contemplated by this Agreement, the issuance of
the Purchased Securities by the Company, and the performance of the obligations
contemplated by this Agreement and the Ancillary Agreements.

 

“2000 Warrant Agreement” means the Warrant
Agreement dated as of September 19, 2000, between the Company and
ChaseMellon Shareholder Services, LLC.

 

6

 

“2000 Warrants” means the warrants issued by
the Company pursuant to the Warrant Agreement.

 

(b)                                 The
following terms have the meaning set forth in the Sections set forth below:

 

	
  Defined Term

  	
   

  	
  Location
  of Definition

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Action

  	
   

  	
   

  	
  § 3.09

  	
   

  
	
  Agreement

  	
   

  	
   

  	
  Preamble

  	
   

  
	
  Blue Sky Laws

  	
   

  	
   

  	
  § 3.05(b)

  	
   

  
	
  Claim Notice

  	
   

  	
   

  	
  § 9.01(e)

  	
   

  
	
  Code

  	
   

  	
   

  	
  § 3.10(a)

  	
   

  
	
  Closing

  	
   

  	
   

  	
  § 2.03

  	
   

  
	
  Company

  	
   

  	
   

  	
  Preamble

  	
   

  
	
  Company Common Stock

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  Company Material Contract

  	
   

  	
   

  	
  § 3.17

  	
   

  
	
  Company Options

  	
   

  	
   

  	
  § 3.03(a)

  	
   

  
	
  Company Preferred Stock

  	
   

  	
   

  	
  § 3.03(a)

  	
   

  
	
  Company Recommendation

  	
   

  	
   

  	
  § 6.04(d)

  	
   

  
	
  Company Stock Option Plans

  	
   

  	
   

  	
  § 3.03(a)

  	
   

  
	
  Confidentiality Agreement

  	
   

  	
   

  	
  § 6.03(b)

  	
   

  
	
  Continuing Independent Directors

  	
   

  	
   

  	
  § 6.08(b)

  	
   

  
	
  Credit Agreement

  	
   

  	
   

  	
  § 6.07

  	
   

  
	
  Disclosure Schedule

  	
   

  	
   

  	
  Article III

  	
   

  
	
  Dispute Notice

  	
   

  	
   

  	
  § 9.01(h)

  	
   

  
	
  ERISA

  	
   

  	
   

  	
  § 3.10(a)

  	
   

  
	
  Exchange Act

  	
   

  	
   

  	
  § 3.05(b)

  	
   

  
	
  GAAP

  	
   

  	
   

  	
  § 3.07(b)

  	
   

  
	
  Governmental Authority

  	
   

  	
   

  	
  § 3.05(b)

  	
   

  
	
  HSR Act

  	
   

  	
   

  	
  § 3.05(b)

  	
   

  
	
  Indemnified Party

  	
   

  	
   

  	
  § 9.01(e)

  	
   

  
	
  Indemnifying Party

  	
   

  	
   

  	
  § 9.01(e)

  	
   

  
	
  Indemnity Notice

  	
   

  	
   

  	
  § 9.01(h)

  	
   

  
	
  Investors

  	
   

  	
   

  	
  Preamble

  	
   

  
	
  Investor Director Designees

  	
   

  	
   

  	
  § 6.08(a)

  	
   

  
	
  Investors’ Representative

  	
   

  	
   

  	
  Preamble

  	
   

  
	
  Investor Warrant Agreement

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  Investor Warrants

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  IRS

  	
   

  	
   

  	
  § 3.10(a)

  	
   

  
	
  Law

  	
   

  	
   

  	
  § 3.05(a)

  	
   

  
	
  Leased Real Property

  	
   

  	
   

  	
  § 3.13(a)

  	
   

  
	
  Losses

  	
   

  	
   

  	
  § 9.01(b)

  	
   

  
	
  Management Agreement

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  Multiemployer Plan

  	
   

  	
   

  	
  § 3.10(a)

  	
   

  
	
  Nasdaq

  	
   

  	
   

  	
  § 3.05(b)

  	
   

  
	
  New Independent Directors

  	
   

  	
   

  	
  § 6.08(c)

  	
   

  
	
  Open Years

  	
   

  	
   

  	
  § 3.15(c)

  	
   

  

 

7

 

	
  Owned Real Property

  	
   

  	
   

  	
  § 3.13(a)

  	
   

  
	
  Permits

  	
   

  	
   

  	
  § 3.06

  	
   

  
	
  PBGC

  	
   

  	
   

  	
  § 3.10(d)

  	
   

  
	
  Plan

  	
   

  	
   

  	
  § 3.10(a)

  	
   

  
	
  Proxy Statement

  	
   

  	
   

  	
  § 3.05(b)

  	
   

  
	
  Purchase Price

  	
   

  	
   

  	
  § 2.02

  	
   

  
	
  Purchased Securities

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  Registered IP

  	
   

  	
   

  	
  § 3.14(a)

  	
   

  
	
  Registration Rights Agreement

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  SEC

  	
   

  	
   

  	
  § 3.05(b)

  	
   

  
	
  SEC Reports

  	
   

  	
   

  	
  § 3.07(a)

  	
   

  
	
  Securities Act

  	
   

  	
   

  	
  § 3.07(a)

  	
   

  
	
  Series A Investor Warrant

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  Series B Investor Warrant

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  Shares

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  SOX

  	
   

  	
   

  	
  § 3.20

  	
   

  
	
  Stockholders Agreement

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  Stockholder Approval

  	
   

  	
   

  	
  § 6.01

  	
   

  
	
  Stockholders’ Meeting

  	
   

  	
   

  	
  § 6.01

  	
   

  
	
  Subsidiary

  	
   

  	
   

  	
  § 3.01(a)

  	
   

  
	
  Tenant Leases

  	
   

  	
   

  	
  § 3.13(a)

  	
   

  
	
  Termination Date

  	
   

  	
   

  	
  § 8.01

  	
   

  
	
  Third Party Claim

  	
   

  	
   

  	
  § 9.01(e)

  	
   

  
	
  Title IV Plan

  	
   

  	
   

  	
  § 3.10(d)

  	
   

  
	
  Units

  	
   

  	
   

  	
  Recitals

  	
   

  
	
  Warrant Shares

  	
   

  	
   

  	
  § 4.04

  	
   

  
	
  YAAF

  	
   

  	
   

  	
  Preamble

  	
   

  
	
  YAAF Parallel

  	
   

  	
   

  	
  Preamble

  	
   

  
	
  YCI

  	
   

  	
   

  	
  Preamble

  	
   

  

 

ARTICLE II

PURCHASE AND SALE

 

SECTION 2.01.  Purchase and Sale of the Purchased
Securities.  Upon the terms and
subject to the conditions of this Agreement, at the Closing, the Company shall
issue to Investors, and Investors shall purchase, accept and acquire from the
Company, that number of Units set forth opposite their respective names on Schedule I
hereto.

 

SECTION 2.02.  Purchase Price.   The purchase price for each Unit shall be
$7.50, or $150.0 million in the aggregate (the “Purchase Price”).

 

SECTION 2.03.  Closing.  Unless this Agreement shall have been
terminated in accordance with Section 8.01, and subject to the
satisfaction or waiver of the conditions set forth in Article VII, the
closing of the issuance, purchase and sale of the Units (the “Closing”)
will take place at 11:00 a.m., New York time, on the second business day
after the satisfaction or waiver of the conditions set forth in Article VII
(other than those that by their terms are to be 

 

8

 

satisfied or waived at the
Closing), at the offices of Shearman & Sterling LLP, 599 Lexington
Avenue, New York, New York 10022, unless another time, date or place is agreed
to in writing by Investors and the Company.

 

SECTION 2.04.  Closing Deliveries by the Company.  At the Closing, the Company shall deliver or
cause to be delivered to the Investors:

 

(a)                                  duly executed certificates
evidencing the Shares, the Series A Warrants, and the Series B
Warrants, registered in the name of the Investors (it being understood that any
fractional Warrants shall be rounded to the nearest whole Warrant);

 

(b)                                 executed counterparts of each
Ancillary Agreement (other than the Management Agreement) to which the Company
is a party;

 

(c)                                  a receipt for the Purchase Price;
and

 

(d)                                 the documents, instruments,
writings and payments contemplated or required to be delivered by the Company
at the Closing pursuant to Section 7.02.

 

SECTION 2.05.  Closing Deliveries by the Investors.  At the Closing, the Investors shall deliver
to the Company:

 

(a)                                  the Purchase Price by wire
transfer in immediately available funds to an account specified by the Company
in writing no less than three business days prior to the Closing;

 

(b)                                 executed counterparts of each
Ancillary Agreement (other than the Management Agreement) to which any Investor
is a party; and

 

(c)                                  the documents, instruments and
writings contemplated or required to be delivered by the Investors at the
Closing pursuant to Section 7.03.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES
OF THE COMPANY

 

As an inducement to the Investors to enter into this
Agreement, except as set forth in the Disclosure Schedule, which identifies
exceptions by specific Section references (it being understood that the
listing or setting forth of any matter in one Section shall be deemed to
be a listing or setting forth in another Section if such matter is
disclosed in such a way as to make its relevance to the information called for
by such other Section reasonably apparent on its face), dated as of the date
hereof delivered by the Company to the Investors (the “Disclosure Schedule”),
the Company hereby represents and warrants to the Investors that:

 

SECTION 3.01.  Organization and Qualification;
Subsidiaries.

 

(a)                                  Each
of the Company and each subsidiary of the Company (each, a “Subsidiary”)
is an entity duly organized, validly existing and in good standing under the
Laws of the jurisdiction of its incorporation or organization and has the
requisite corporate or other 

 

9

 

power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted.  The Company and each Subsidiary is duly
qualified or licensed as a foreign corporation or other entity to do business,
and is in good standing, in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its business makes
such qualification, licensing or good standing necessary, except for such
failures to be so qualified or licensed and in good standing that would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

 

(b)                                 A
true and complete list of each Subsidiary, together with the jurisdiction of
incorporation of each Subsidiary and the percentage of the outstanding capital
stock of each Subsidiary owned by the Company and each other Subsidiary, is set
forth in Section 3.01(b) of the Disclosure Schedule.  The Company does not directly or indirectly
own any Equity Interest, or any interest convertible into or exchangeable or
exercisable for any Equity Interest in, any person.

 

SECTION 3.02.  Certificate of Incorporation and By-laws.  The Company has heretofore made available to
the Investors in the Electronic Data Room a complete and correct copy of
the Certificate of Incorporation and the By-laws or equivalent organizational
documents, each as amended to date, of the Company and each Subsidiary.  Such Certificates of Incorporation, By-laws
or equivalent organizational documents of each Subsidiary are in full force and
effect.   As of the date hereof, such
Certificate of Incorporation and By-laws of the Company are in full force and
effect and, as of the Closing, the Certificate of Incorporation and the
Restated By-laws shall be in full force and effect.  Neither the Company nor any Subsidiary is in
violation of any of the provisions of its Certificate of Incorporation, By-laws
or equivalent organizational documents. 
True and complete copies of all minute books of the Company and each Subsidiary
containing minutes for the five-year period preceding the date of this
Agreement have been made available by the Company to the Investors in the
Electronic Data Room, except that minutes relating to the Board’s review of
strategic alternatives for the Company have been redacted.

 

SECTION 3.03.  Capitalization.

 

(a)                                  The
authorized capital stock of the Company consists of 100,000,000 shares of
Company Common Stock and 5,000,000 shares of preferred stock, par value $0.01
per share (the “Company Preferred Stock”).  As of March 21, 2005, (i) 30,099,510
shares of Company Common Stock (other than treasury shares) were issued and
outstanding, all of which were validly issued, fully paid, nonassessable and
free of preemptive rights, (ii) 28,318 shares of Company Common Stock were
held in the treasury of the Company and (iii) no shares of Company Common
Stock were held by the Subsidiaries.  As
of March 21, 2005, 5,476,685 shares of Company Common Stock were
issuable (and such number was reserved for issuance) upon exercise of
outstanding employee stock options or stock incentive rights granted pursuant
to the Pathmark Stores, Inc. 2000 Employee Equity Plan and the 2000
Non-Employee Directors’ Plan, in each case as amended through the date of this
Agreement (collectively, the “Company Stock Option Plans”), and
5,294,118 shares of Company Common Stock were issuable upon exercise of the
2000 Warrant Agreement.  As of the date
hereof, no shares of Company Preferred Stock are issued and outstanding.  Except as set forth in this Section 3.03
and Section 3.10, there are no options, warrants or other rights,
agreements, arrangements or commitments of any character to which the Company
or any Subsidiary is a party or by which the Company or any 

 

10

 

Subsidiary is bound relating to the issued or unissued capital stock or
other Equity Interests of the Company or any Subsidiary, or securities
convertible into or exchangeable for such capital stock or other Equity
Interests, or obligating the Company or any Subsidiary to issue or sell any
shares of its capital stock or other Equity Interests, or securities
convertible into or exchangeable for such capital stock of, or other Equity
Interests in, the Company or any Subsidiary. 
Since March 21, 2005 the Company has not issued any shares of its
capital stock, or securities convertible into or exchangeable for such capital
stock or other Equity Interests, other than those shares of capital stock
reserved for issuance as set forth in this Section 3.03 or in Section 3.03(a) of
the Disclosure Schedule.  Set forth
in Section 3.03(a) of the Disclosure Schedule is a true
and complete list, as of March 21, 2005, of the prices at which
outstanding options issued under the Company Stock Option Plans (the “Company
Options”) may be exercised under the applicable Company Stock Option Plan,
the number of Company Options outstanding at each such price and the vesting schedule of
the Company Options for each “executive officer” of the Company (within the
meaning of such term under Section 16 of the Exchange Act).  None of the Company Options are “incentive
stock options” within the meaning of Section 422 of the Code.  All shares of Company Common Stock subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable. 
There are no outstanding contractual obligations of the Company or any
Subsidiary (A) restricting the transfer of, (B) affecting the voting
rights of, (C) requiring the repurchase, redemption or disposition of, or
containing any right of first refusal with respect to, (D) requiring the
registration for sale of, or (E) granting any preemptive or antidilutive
right with respect to, any shares of Company Common Stock or any capital stock
of, or other Equity Interests in, the Company or any Subsidiary.  There are no outstanding contractual
obligations of the Company or any Subsidiary to provide funds to, or make any
investment (in the form of a loan, capital contribution or otherwise) in, any
Subsidiary or any other person, other than guarantees by the Company of any
indebtedness or other obligations of any wholly-owned Subsidiary.  Each outstanding share of capital stock of,
or other Equity Interest in, each Subsidiary is duly authorized, validly
issued, and, if applicable, fully paid and, in the case of corporations,
nonassessable (except for any corporation incorporated in the State of New
York) and free of preemptive rights, and is owned, beneficially and of record,
by the Company or another Subsidiary free and clear of all security interests,
liens, claims, pledges, options, rights of first refusal, agreements,
limitations on the Company’s or such other Subsidiary’s voting rights, charges
and other encumbrances of any nature whatsoever.

 

(b)                                 The
Shares, when issued, paid for and delivered in accordance with the terms of
this Agreement, and the shares of Company Common Stock to be issued pursuant to
the Investor Warrants, will be duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights.

 

SECTION 3.04.  Authority.  The Company has all necessary power and
authority to execute and deliver this Agreement and the Ancillary Agreements to
which it is a party, to perform its obligations hereunder and thereunder and to
consummate the Transactions.  The Company’s
execution and delivery of this Agreement and the Ancillary Agreements to which
it is a party and the consummation by the Company of the Transactions have been
duly and validly authorized by all necessary corporate action and no other
corporate proceedings on the part of the Company are necessary to authorize
this Agreement or the Ancillary Agreements to which the Company is a party, to
consummate the Transactions (other than with respect to the issuance of the
Purchased Securities, the approval of a majority of the votes cast at the
Stockholders’ 

 

11

 

Meeting).  The Board has approved this Agreement, each
Ancillary Agreement and the issuance of the Purchased Securities and has
directed that the Transactions be submitted to the Company’s stockholders for
approval at a meeting of such stockholders. 
This Agreement and the Management Agreement have been, and at the
Closing each of other Ancillary Agreements to which it is a party will be, duly
authorized and validly executed and delivered by the Company and, assuming the
due authorization, execution and delivery by the Investors, this Agreement and
the Management Agreement constitute, and at the Closing each of the other
Ancillary Agreements to which the Company is a party will constitute, a legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms.

 

SECTION 3.05.  No Conflict; Required Filings and Consents.

 

(a)                                  The
execution and delivery by the Company of this Agreement and the Ancillary
Agreements to which it is a party do not, and the performance of its
obligations hereunder and thereunder will not, (i) conflict with or
violate the Certificate of Incorporation or By-laws or equivalent
organizational documents of the Company or any Subsidiary, (ii) assuming
that all consents, approvals, authorizations and other actions described in subsection (b) have
been obtained and all filings and obligations described in subsection (b) have
been made, conflict with or violate any foreign or domestic statute, law,
ordinance, regulation, rule, code, executive order, injunction, judgment,
decree or other order (“Law”) applicable to the Company or any
Subsidiary or by which any property or asset of the Company or any Subsidiary
is bound or affected, or (iii) require any consent or approval under,
result in any breach of or constitute a default (or an event which, with notice
or lapse of time or both, would become a default) under, or give to others any
right of termination, amendment, acceleration or cancellation of, or give to
others a right to require any payment to be made under, or result in the
creation of a lien or other encumbrance on any property or asset of the Company
or any Subsidiary pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation,
except, with respect to clauses (ii) and (iii), for any such conflicts,
violations, breaches, defaults or other occurrences which would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

 

(b)                                 The
execution and delivery by the Company of this Agreement and the Ancillary
Agreements to which it is a party do not, and the performance of its
obligations hereunder and thereunder will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any United
States federal, state, county or local or any foreign government, governmental,
Tax, regulatory or administrative authority, agency, instrumentality or
commission or any court, tribunal, or judicial or arbitral body (a “Governmental
Authority”), except (i) for (A) applicable requirements, if any,
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the “Exchange Act”), state
securities or “blue sky” laws (“Blue Sky Laws”), (B) the pre-merger
notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the “HSR Act”), (C) the filing with the
Securities and Exchange Commission (the “SEC”) of a proxy statement
relating to the issuance of the Purchased Securities to be sent to the Company’s
stockholders (as amended or supplemented from time to time, the “Proxy
Statement”), and (D) any filings required under the rules and
regulations of the Nasdaq Stock Market (“Nasdaq”), and (ii) where
the failure to obtain such consents, approvals, authorizations or permits, or
to make such filings or notifications, would not, individually or in the
aggregate, reasonably be expected to (1) prevent or materially delay
consummation of the Transactions, (2) otherwise prevent or 

 

12

 

materially delay performance by the Company of any of its material
obligations under this Agreement or any Ancillary Agreement, or (3) have a
Material Adverse Effect.

 

SECTION 3.06.  Permits; Compliance.  Each of the Company and the Subsidiaries is
in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exceptions, consents, certificates, approvals and orders
of any Governmental Authority necessary for each of the Company or the
Subsidiaries to own, lease and operate its properties or to carry on its
business as it is now being conducted and substantially as described in the
Company’s SEC Reports filed prior to the date hereof (the “Permits”),
and all such Permits are valid, and in full force and effect, except where the
failure to have, or the suspension or cancellation of, or failure to be valid
or in full force and effect of, any of the Permits would not, individually or
in the aggregate, reasonably be expected to (A) prevent or materially
delay consummation of the Transactions, (B) otherwise prevent or
materially delay performance by the Company of any of its material obligations
under this Agreement or any Ancillary Agreement or (C) have a Material
Adverse Effect.  As of the date hereof,
no suspension or cancellation of any of the Permits is pending or, to the
knowledge of the Company, threatened, except where the failure to have, or the
suspension or cancellation of, any of the Permits would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.  Neither the Company nor any Subsidiary is in
conflict with, or in default, breach or violation of, (i) any Law
applicable to the Company or any Subsidiary or by which any property or asset
of the Company or any Subsidiary is bound or affected, or (ii) any
Permits, except for any such conflicts, defaults or violations that would not,
individually or in the aggregate, reasonably be expected to (A) prevent or
materially delay consummation of the Transactions, (B) otherwise prevent
or materially delay performance by the Company of any of its material
obligations under this Agreement or any Ancillary Agreement or (C) have a
Material Adverse Effect.  Since the
enactment of SOX, the Company and each of its officers and directors have been
and are in compliance in all material respects with (A) the applicable
provisions of SOX and the related rules and regulations promulgated
thereunder and under the Exchange Act and (B) the applicable listing and
corporate governance rules and regulations of the Nasdaq.

 

SECTION 3.07.  SEC Filings; Financial Statements.

 

(a)                                  The
Company has timely filed all forms, reports and documents (including all
exhibits) required to be filed by it with the SEC since February 1, 2002
(the “SEC Reports”).  The SEC
Reports (i) were prepared in accordance with the requirements of the
Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder (the “Securities Act”) or the Exchange Act, as
the case may be, and the rules and regulations promulgated thereunder, and
(ii) did not at the time they were filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.  No Subsidiary is required to file any form,
report or other document with the SEC. 
As of the date hereof, the Company is eligible to register securities on
Form S-3 of the Securities Act.

 

(b)                                 Each
of the consolidated financial statements (including, in each case, any notes
thereto) contained in the SEC Reports was prepared in accordance with United
States generally accepted accounting principles (“GAAP”) applied on a
consistent basis throughout the periods indicated (except as may be indicated
in the notes thereto) and the Company’s books and records, and each fairly
presented the consolidated financial position, results of operations and 

 

13

 

cash flows of the Company and its consolidated Subsidiaries as at the
respective dates thereof and for the respective periods indicated therein
except as otherwise noted therein (subject, in the case of unaudited
statements, to normal year-end adjustments which individually or in the
aggregate did not have, and would not reasonably be expected to have, a
Material Adverse Effect).  The books and
records of the Company and each Subsidiary have been, and are being, maintained
in accordance with applicable legal and accounting requirements in all material
respects.

 

(c)                                  Except
as and to the extent set forth on the consolidated balance sheet of the Company
and the consolidated Subsidiaries as of January 31, 2004 included in the
Company Form 10-K for the year ended January 31, 2004,
including the notes thereto, none of the Company or any consolidated Subsidiary
has any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise), except for liabilities or obligations incurred since January 31,
2004 that would not, individually or in the aggregate, reasonably be expected
to (A) prevent or materially delay consummation of the Transactions, (B) otherwise
prevent or materially delay performance by the Company of any of its material
obligations under this Agreement or any Ancillary Agreement or (C) have a
Material Adverse Effect.

 

(d)                                 The
Company has previously made available to the Investors in the Electronic Data Room a
complete and correct copy of any amendment or modification which has not yet
been filed with the SEC to any agreement, document or other instrument which
previously had been filed by the Company with the SEC pursuant to the
Securities Act or the Exchange Act.

 

(e)                                  As
of the date hereof, neither the Company nor, to the knowledge of the Company,
any of the Company’s or any Subsidiary’s employees, is the subject of any
formal or informal investigation by the SEC, and, to the knowledge of the
Company, no such investigation has been threatened or fact exists which would
reasonably be expected to result in the institution of any such
investigation.  Written correspondence
(other than any transmittal letter or other correspondence that does not address
substantively any comments or questions from, or ongoing discussions with, the
SEC), with the SEC since February 1, 2002 until the date hereof has been
made available to the Investors in the Electronic Data Room.  The audit committee of the Board has
established “whistleblower” procedures that meet the requirements of Exchange
Act Rule 10A-3, and has made available to the Investors in the
Electronic Data Room true, complete and correct copies of such
procedures.  Neither the Company nor any
Subsidiary has received any “complaints” (within the meaning of Exchange Act Rule 10A-3)
in respect of any accounting, internal accounting controls or auditing
matters.  To the knowledge of the
Company, no complaints seeking relief under Section 806 of SOX have been
filed with the United States Secretary of Labor and no employee has threatened
to file any such complaint.

 

(f)                                    The
Company has made available to the Investors in the Electronic Data Room true
and complete copies of (i) any written communications or presentations,
however transmitted, delivered to the Board or the Audit Committee of the Board
or the Company’s external auditor that discusses any potential material
weakness or potential significant deficiency in the Company’s or any Subsidiary’s
disclosure controls and procedures or internal control over financial reporting
or the Company’s compliance, or ability to timely comply, with Section 404
of SOX,  (ii) formal documentation
of their internal controls over financial reporting, in each case as in effect
as of January 31, 2005, (iii) all notices received from its external
auditor prior to the date hereof of any significant deficiencies or material
weaknesses in the Company’s internal 

 

14

 

control over financial reporting since January 31, 2004 and any
other management letter or similar correspondence from any independent auditor
of the Company or any of its Subsidiaries received since January 31, 2003
and prior to the date hereof.

 

SECTION 3.08.  Absence of Certain Changes or Events.  Except as set forth in the SEC Reports filed
with the SEC prior to the date of this Agreement or as expressly contemplated
by this Agreement, since January 31, 2004 through the date hereof, each of
the Company and the Subsidiaries has conducted its business in the ordinary
course consistent with past practice and, since such date through the date
hereof, (i) there has not occurred any Material Adverse Effect or an event
or development that would, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect or any event or development
that would, individually or in the aggregate, reasonably be expected to prevent
or materially delay the performance of this Agreement or any Ancillary
Agreement by the Company and (ii) the Company and the Subsidiaries have
not (A) issued, sold, pledged, disposed, granted or encumbered any shares
of any class of capital stock or other Equity Interests in or of the Company or
any Subsidiary, (B) sold, pledged, disposed, transferred, leased,
licensed, guaranteed or encumbered any material property or assets of the
Company or any Subsidiary, except in the ordinary course of business consistent
with past practice, (C) acquired (including, without limitation, by
merger, consolidation, or acquisition of stock or assets or any other business
combination) any corporation, partnership, other business organization or any
division thereof, (D) except for borrowings under the Credit Agreement or
borrowings under the predecessor credit facility, incurred any indebtedness for
borrowed money which, individually or together with all such other indebtedness, exceeds $2 million, (E) granted any security interest
in any of their material assets except for such security interests as would
constitute a Permitted Lien, (F) made or authorized any capital
expenditure or purchase of fixed assets other than in the ordinary course of
business, (G) increased the compensation or benefits payable to or to
become payable to its directors, officers or employees, except for increases in
accordance with past practices in salaries or wages of employees of the Company
or any Subsidiary which are not across-the-board increases, or granted any
rights to severance or termination pay to, or entered into any employment or
severance agreement with, any director, officer or other employee (other than
severance for employees other than officers, in accordance with past practice,
in connection with such employee’s termination of employment with the Company)
of the Company or any Subsidiary, or taken any affirmative action to amend or
waive any performance or vesting criteria or accelerate vesting, exercisability
or funding under any Plan, (H) made or changed any material election in
respect of Taxes, adopted or changed any material accounting method in respect
of Taxes or settled or compromised any material claim, notice, audit report or
assessment in respect of Taxes, (I) made any material change, other than
changes required by GAAP or in the ordinary course of business, with respect to
accounting policies or procedures of the Company or any of its Subsidiaries,
(J) pre-paid any long-term debt or paid, discharged or satisfied any claims,
liabilities or obligations (absolute, accrued, contingent or otherwise), except
for such payments, discharges or satisfaction of claims as were in the ordinary
course of business consistent with past practice,  or (K) written up, written down or written
off the book value of any material assets, or a material amount of any other
assets, other than in the ordinary course of business or except as required by
GAAP.

 

SECTION 3.09.  Absence of Litigation.  Except as disclosed in the SEC Reports filed
prior to the date of this Agreement, there is no litigation, suit, claim,
action, formal complaint, prosecution, indictment, formal investigation,
arbitration or proceeding (whether 

 

15

 

civil, criminal or
administrative, an “Action”) pending or, to the knowledge of the
Company, threatened against the Company or any Subsidiary, or any property or
asset of the Company or any Subsidiary, or, to the knowledge of the Company,
for which the Company or any Subsidiary is obligated to indemnify a third
party, before any Governmental Authority that (i) has had or would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect or (ii) challenges the validity or propriety or seeks to
materially delay or prevent the consummation of the Transactions and which is
reasonably expected to be adversely determined against the Company.  Neither the Company nor any Subsidiary nor
any property or asset of the Company or any Subsidiary is subject to any order
of, consent decree, settlement agreement or similar written agreement with, any
Governmental Authority, or any order, writ, judgment, injunction, decree,
ruling, determination or award of any Governmental Authority that would,
individually or in the aggregate, reasonably be expected to (A) prevent or
materially delay consummation of the Transactions, (B) otherwise prevent
or materially delay performance by the Company of any of its material
obligations under this Agreement or any Ancillary Agreement or (C) result
in a Material Adverse Effect.

 

SECTION 3.10.  Employee Benefit Plans.

 

(a)           Section 3.10(a)(i) of
the Disclosure Schedule lists (i) all employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended (“ERISA”)) and all bonus, incentive, stock
option, stock purchase, restricted stock, phantom stock, or other stock-based
compensation, deferred compensation, retiree medical or life insurance,
supplemental executive retirement, severance or other benefit plans, programs,
trusts or arrangements, and all employment, termination, severance,
compensation or other contracts or agreements, to which the Company or any of
its affiliates is a party, or which are sponsored by the Company or any of its
affiliates for the benefit of any employee, officer or director of the Company
or any Subsidiary, and (ii) any material contracts, arrangements,
agreements, policies, practices or understandings between the Company or any of
its affiliates and any employee of the Company or of any Subsidiary, including,
without limitation, any contracts, arrangements or understandings or change in
control arrangements relating to a sale of the Company (collectively, the “Plans”).  Section 3.10(a)(ii) of
the Disclosure Schedule lists
each “multiemployer plan” (as defined in Section 3(37) or 4001(a)(3) of
ERISA) in which any employee of the Company or any Subsidiary participates (the
“Multiemployer Plans”).  All
Plans are in writing and the Company has made available to the Investors in the
Electronic Data Room true, correct and complete copies of (i) such
Plans, (ii) the most recent annual report (Form 5500) filed with the
Internal Revenue Service (the “IRS”), if any, with respect to any Plan and, to the extent in the Company’s possession,
any Multiemployer Plan, (iii) the most recent summary plan
description for each Plan for which a summary plan description is available or
is required by applicable Law, (iv) the most recent actuarial report or
valuation, if any, relating to a Plan and, to the extent in the Company’s possession, any Multiemployer Plan, and
(v) the most recent determination letter, if any, issued by the IRS with
respect to any Plan that is intended to qualify under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the “Code”).

 

(b)                                 Each Plan has been operated and
administered in all material respects in accordance with its terms and the
requirements of all applicable Laws, including, without limitation, ERISA and
the Code.  As of the date hereof, no
action, claim or proceeding is pending or, to the knowledge of the Company,
threatened with respect to any Plan (other than claims for benefits in the
ordinary course) that would result in any material liability to the 

 

16

 

Company and, to
the knowledge of the Company, no fact or event exists that would give rise to
any such action, claim or proceeding.

 

(c)                                  Each
Plan that is intended to be qualified under Section 401(a) of the
Code has timely received a favorable determination letter from the IRS and each
trust established in connection with any Plan which is intended to be exempt
from federal income taxation under Section 501(a) of the Code has
received a determination letter from the IRS that it is so exempt, and, to the
knowledge of the Company, no fact or event has occurred since the date of such
determination letter or letters from the IRS that would reasonably be expected
to adversely affect the qualified status of any such Plan or the exempt status
of any such trust.

 

(d)                                 With
respect to any Plan which is an “employee pension benefit plan” as defined in Section 3(2) of
ERISA and which is subject to Part 3 of Title I or to Title IV of ERISA (a
“Title IV Plan”): (i) there is no lien under Section 412(n) of
the Code by reason of an accumulated funding deficiency, whether or not waived,
under Section 412 of the Code; (ii) no liability (other than
liability for premiums) to the Pension Benefit Guaranty Corporation (“PBGC”)
has been incurred and all premiums required to be paid to the PBGC have been
paid by or on behalf of such Title IV Plan; (iii) the assets of each Title IV Plan equal or exceed the benefit liabilities
of such Title IV Plan determined on a termination basis; and (iv) as
of the date hereof, the Company has received no actual notice from the PBGC
that an event or condition exists which (A) would constitute grounds for
termination of such Title IV Plan by the PBGC or (B) has caused a partial
termination of such Title IV Plan.

 

(e)                                  None
of the Plans provides medical, health or life insurance or any other
welfare-type benefits for current or future retired or terminated employees of
the Company or its Subsidiaries or their spouses of dependents (other than in
accordance with Part 6 of Title I of ERISA or Code Section 4980B).

 

(f)                                    The
Transactions contemplated hereby will not entitle any employee, officer or
director of the Company and its Subsidiaries to any amount (whether in cash or
property) that would be received under any Plan, or increase the amount of or
accelerate the time of payment of vesting thereof.

 

(g)                                 No amount or acceleration referred to in subsection (f) above
(whether or not disclosed on Section 3.10(f) of the Disclosure
Schedule) would (i) be characterized as an “excess parachute payment” (as
defined in Section 280G(b)(1) of the Code) or (ii) not be
deductible under Section 162(a)(1) or 404 of the Code.

 

(h)                                 As of the date hereof, (i) all of the
options issued under the Company Stock Option Plans are either (A) unvested
or (B) were issued at no less than fair market value and (ii) no
shares of restricted Common Stock issued by the Company provide for a
deferral opportunity beyond vesting.

 

SECTION 3.11.  Labor Matters  (i) Neither the Company nor any
Subsidiary is a party to any collective bargaining agreement or other labor
union contract applicable to persons employed by the Company or any Subsidiary,
nor, to the knowledge of the Company as of the date hereof, are there any
activities or proceedings of any labor union to organize any such employees;
and (ii) neither the Company nor any Subsidiary has materially breached or

 

17

 

otherwise failed to comply with
any material provision of any such agreement or contract, and, to the knowledge
of the Company as of the date hereof, there are no material grievances
outstanding against the Company or any Subsidiary under such agreement or
contract.  Except as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect, (i) there are no controversies pending or, to the
knowledge of the Company, threatened between the Company or any Subsidiary and
any of their respective employees; and (ii) there is no organized strike,
slowdown, work stoppage or lockout by or with respect to any employees of
the Company or any Subsidiary.

 

SECTION 3.12.  Proxy Statement.  The Proxy Statement shall not, at the date
the Proxy Statement (or any amendment or supplement thereto) is first mailed to
stockholders of the Company and at the time of the Stockholders’ Meeting, as
the case may be, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading except that no representation or warranty is made by the
Company with respect to any information supplied by the Investors for inclusion
in the Proxy Statement.  The Proxy
Statement, and any amendments or supplements thereto, when filed by the Company
with the SEC, or when distributed or otherwise disseminated to the Company’s
stockholders, as applicable, shall comply as to form in all material respects
with the requirements of the Exchange Act the rules and regulations
thereunder and other applicable Laws.

 

SECTION 3.13.  Property and Leases.

 

(a)                                  As
of the date hereof, Section 3.13 of the Disclosure Schedule contains
a true, correct and complete list of (i) all real property owned by the
Company or its Subsidiaries (“Owned Real Property”), (ii) all
leases, subleases or other occupancy agreements relating to all real property
that any of the Company or its Subsidiaries owns, leases or subleases or
otherwise has any right, title or interest in or to and sets forth the Company
or applicable Subsidiary that leases, subleases or otherwise has an interest in
same (the property demised thereunder herein referred to as the “Leased Real
Property”) and (iii) with respect to each of the Owned Real Properties
and Leased Real Properties, all existing leases, subleases, licenses or other
occupancy agreements to which the Company or any of its Subsidiaries is a party
as landlord or lessor thereunder or by which the Company or any of its
Subsidiaries is bound as landlord or lessor thereunder, and all amendments,
modifications, extensions and supplements thereto (collectively, the “Tenant
Leases”), regardless of whether the terms thereof have commenced.  Section 3.13 of the Disclosure Schedule briefly
describes the current use or non-use, as the case may be, of such Owned Real
Property and Leased Real Property, and neither the Company nor any of its
Subsidiaries has any interest in any other real property.

 

(b)                                 Except
as would not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect, (i) each of the Company and its Subsidiaries is
the record owner of, and has good and marketable fee title to (including all
improvements located thereon) the Owned Real Property, and valid and
enforceable leasehold interests in all Leased Real Property and (ii) none
of the Owned Real Property or Leased Real Property is subject to any Liens
(other than Permitted Liens) or any other easements, rights of way, licenses,
grants, building or use restrictions, exceptions, reservations, limitations or
other impediments.  There are no options
or rights to purchase or lease all or any part of the Owned Real Property or
any interest therein of any other person other than as set forth in the Tenant
Leases.  No person other 

 

18

 

than the Company or a Subsidiary leases, has a tenancy or otherwise
occupies, or has the right to occupy or use, the Owned Real Property and Leased
Real Property other than pursuant to a Tenant Lease.

 

(c)                                  With
respect to each Leased Real Property and Tenant Lease, except as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect:  (i) such lease or
sublease is legal, valid, binding, enforceable and in full force and effect; (ii) there
exists no default under any such lease or sublease by the Company or any
Subsidiary which has not been cured, and, to the knowledge of the Company,
there has not occurred any event that (with the lapse of time or the giving of
notice or both) would constitute, and no party to any such lease has given the
Company or any Subsidiary written notice of or made a claim with respect to, a
default on the part of the Company or any of its Subsidiaries under any such
lease or sublease; (iii) to the knowledge of the Company, no party (other
than the Company or any Subsidiary) is in default, and there has not occurred
any event that (with the lapse of time or giving of notice or both) would
constitute a default by any such party under any such lease or sublease; (iv) all
leasing, brokerage, finder and other similar fees and commissions that are due
and payable by the Company or any of its Subsidiaries with respect to such
leases and subleases have been paid in full; and (v) a true, correct and
complete copy of each such lease and sublease (including any renewal notices
delivered thereunder) and any guaranty given with respect thereto has been
furnished or made available to the Investors in the Electronic Data Room.

 

(d)                                 Except
in each case as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect, all Owned Real Property and Leased
Real Property is in good and usable condition, subject to normal wear and tear
and normal industry practice with respect to maintenance, and has such rights
of egress and ingress, and such easements, rights of way and grants, as are
necessary to allow such real property to be operated, and the business of the
Company and each of its Subsidiaries conducted with respect thereto to be
conducted, as now operated and conducted. 
Except in each case as would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect, to the Company’s
knowledge, no improvement on any Owned Real Property or any Leased Real
Property encroaches on an adjacent property owner’s property, and no property
owner’s property encroaches on any Owned Real Property or Leased Real
Property.  The Owned Real Property and
Leased Real Property are all of the material real property assets which are
used in or necessary to the continued conduct of the Company’s business as it
is currently operated.

 

(e)                                  Except
in each case as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect, (i) neither the Company nor
any of its Subsidiaries, with respect to the Owned Real Property and the Leased
Real Property, has violated (or will violate with notice or the passing of time
or both) any zoning, subdivision or building Law applicable thereto, including
all applicable health, fire and safety Laws, ordinances and administrative
regulations; and (ii) neither the Company nor any of its Subsidiaries has
violated (or will violate with notice or the passing of time or both) any
covenants, conditions or restrictions contained in any easement, restrictive
covenant or other similar instrument or agreement affecting the Owned Real
Property or Leased Real Property.  As of
the date hereof, except as provided in the Electronic Data Room, neither the
Company nor any Subsidiary has received from any Governmental Authority or any
other person any written notice of any current or potential material violation
of or material noncompliance with any of the matters set forth in clauses (i) and
(ii) of the immediately preceding sentence.

 

19

 

(f)                                    Except
as would not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect, there is no pending or, to the knowledge of the
Company, threatened condemnation or eminent domain proceeding or changes in
zoning affecting the Owned Real Property or Leased Real Property that would
adversely affect the use, operation, maintenance, enjoyment or value thereof in
any material respect.

 

SECTION 3.14.  Intellectual Property.

 

(a)                                  Section 3.14(a) of
the Disclosure Schedule lists all of the (i) registered
trademarks and service marks and applications therefor, (ii) registered
copyrights and applications therefor, (iii) issued patents and patent
applications, and (iv) domain names, in each case, that are owned by the
Company or any Subsidiary and are material to the conduct of the business of
the Company and the Subsidiaries (collectively, the “Registered IP”).

 

(b)                                 Except
as would not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect:

 

(i)  The Company and the Subsidiaries
have used reasonable measures to protect the proprietary nature of the trade
secrets and confidential information that they own or use.

 

(ii)  The Company or the Subsidiaries
own all right, title and interest in and to, or has the valid right to use,
free and clear of all Liens (other than Permitted Liens and encumbrances
arising pursuant to license agreements), the Intellectual Property necessary
for or used in the conduct of their business.

 

(iii)  The conduct of the Company and
the Subsidiaries, and the conduct of the business of the Company and the Subsidiaries
as currently conducted, do not conflict with, infringe upon, misappropriate,
violate or interfere with the Intellectual Property rights of any third party.

 

(iv)  To the knowledge of the Company,
no third party is infringing upon any Intellectual Property owned by the
Company or any Subsidiary.

 

(v)  The Company and the Subsidiaries
have taken commercially reasonable measures to maintain and protect the
Registered IP.

 

(c)                                  The
execution and delivery by the Company of this Agreement and the Ancillary
Agreements to which it is a party do not, and the performance of its
obligations hereunder and thereunder will not, adversely affect the validity
of, or the Company or the Subsidiaries rights in, any Registered IP, or any
other Intellectual Property (other than, in the case of other Intellectual
Property, which would not reasonably be expected to have a Material Adverse
Effect).

 

SECTION 3.15.  Taxes.

 

(a)                                  Filing
of Tax Returns.  Each of the Company
and the Subsidiaries has timely filed with the appropriate taxing authority all
Tax Returns required to be filed through the date hereof (after giving effect
to any filing extension properly granted by a Governmental 

 

20

 

Authority having authority to do so or otherwise permitted by
applicable Law) subject to such exceptions as would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.  All such Tax Returns are complete and accurate
in all material respects.  All Taxes due
and owing by any of the Company and the Subsidiaries on or before the date
hereof (whether or not shown on any Tax Return) have been paid subject to such
exceptions as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. 
No claim has ever been made in writing by a Governmental Authority in a
jurisdiction where any of the Company and the Subsidiaries does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction, except
for such claims as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

 

(b)                                 Reserves
for Taxes.  The unpaid Taxes of the
Company and the Subsidiaries (i) did not, as of the dates of the financial
statements contained in the SEC Reports filed with the SEC prior to the date of
the Agreement, exceed the reserve for Tax liability (excluding any reserve for
deferred Taxes established to reflect timing differences between book and Tax
income) included in the balance sheets contained in such financial statements,
and (ii) will not exceed that reserve as adjusted for operations and
transactions through the Closing Date in accordance with the past custom and
practice of the Company and the Subsidiaries in filing their Tax Returns,
subject to such exceptions as would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.  Since the date of the most recent financial
statement contained in the SEC Reports filed with the SEC prior to the date of
this Agreement, neither the Company nor any of the Subsidiaries has incurred
any liability for Taxes outside the ordinary course of business or otherwise
inconsistent with past custom and practice subject to such exceptions as would
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

 

(c)                                  Claims
and Provisions of Tax Returns.  No
deficiencies for Taxes against any of the Company and the Subsidiaries have
been claimed or assessed in writing by a Governmental Authority, subject to
such exceptions as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. 
There are no pending or, to the knowledge of any of the Company or the
Subsidiaries, threatened audits, assessments or other Actions for or relating
to any liability in respect of Taxes of any of the Company and the
Subsidiaries, and there are no matters under discussion with any Governmental
Authority, or known to any of the Company and the Subsidiaries, with respect to
Taxes that are likely to result in any additional liability for Taxes with
respect to any of the Company and the Subsidiaries subject to such exceptions
as would not, individually or in the aggregate, reasonably be expected to have
an Material Adverse Effect. The Company has delivered or made available to the
Investors in the Electronic Data Room complete and accurate copies of all
federal income and material state income Tax Returns of each of the Company and
the Subsidiaries and their predecessors for the ended years for which the
applicable statute of limitations has not yet expired taking into account any
extensions thereof (the “Open Years”) and complete and accurate copies
of all examination reports and statements of deficiencies assessed against or
agreed to by any of the Company and the Subsidiaries or any predecessors during
the applicable Open Years. The Company has delivered or made available to the
Investors complete and accurate copies of local and other material Tax Returns
of each of the Company and the Subsidiaries and their predecessors for the Open
Years and complete and accurate copies of all examination reports and
statements of deficiencies assessed against or agreed to by any of the Company
and the Subsidiaries or any predecessors during the applicable Open Years.  None of 

 

21

 

the Company, any of the Subsidiaries or any of their respective
predecessors has waived any statute of limitations in respect of Taxes or
agreed to any extension of time with respect to a Tax assessment or deficiency
(other than as a result of a valid extension of time to file a Tax Return).

 

(d)                                 Liens.  There are no Liens for Taxes other than
Permitted Liens on any assets of the Company or the Subsidiaries.

 

(e)                                  Tax
Sharing Agreements.  Other than
customary contractual provisions in financing and commercial agreements entered
into in the ordinary course of business consistent with past practice, there
are no Tax sharing agreements or similar arrangements (including indemnity
arrangements) with respect to or involving any of the Company and the
Subsidiaries other than agreements solely between the Company and the
Subsidiaries, and, after the Closing Date, none of the Company and the
Subsidiaries shall be bound by any such Tax sharing agreements or similar
arrangements or have any liability thereunder for amounts due in respect of
periods prior to the Closing Date.

 

(f)                                    Other
Entity Liability.  None of the
Company and the Subsidiaries has been a member of an affiliated group filing a
consolidated federal income Tax Return (other than a group the common parent of
which is the Company).  None of the
Company and the Subsidiaries has any liability for the Taxes of any Person (other
than Taxes of the Company and the Subsidiaries) (i) under Treasury
Regulation Section 1.1502-6 (or any similar provision of state or
local law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise,
except, in the case of clauses (ii), (iii) and (iv), pursuant to customary
contractual provisions in financing and commercial agreements entered into in
the ordinary course of business consistent with past practice.

 

(g)                                 Withholding
Taxes.  Each of the Company and the
Subsidiaries has withheld and paid all Taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder or other third party.

 

(h)                                 Spin-Offs.  Neither the Company nor any of the
Subsidiaries has distributed the stock of any corporation in a transaction
satisfying the requirements of Section 355 of the Code since April 16,
1997, and neither the stock of the Company nor the stock of any of the
Subsidiaries has been distributed in a transaction satisfying the requirements
of Section 355 of the Code since April 16, 1997.

 

(i)                                     Tax
Shelters.  Neither the Company nor
any of the Subsidiaries has entered into any transaction identified as a “listed
transaction” for purposes of Treasury Regulations Sections 1.6011-4(b)(2) or
301.6111-2(b)(2).

 

(j)                                     Ownership
Changes.  Neither the Company nor any
Subsidiary has undergone any ownership change in 2004 or any prior taxable
years that would cause an annual limitation on the utilization of its net
operating losses pursuant to Section 382 of the Code, subject to such
exceptions as would not materially decrease the amount of its net operating
losses utilized in such prior taxable years.

 

SECTION 3.16.  Environmental Matters.  Except as set forth in the SEC Reports filed
with the SEC prior to the date of this Agreement, or as would not, individually
or in the 

 

22

 

aggregate, reasonably be
expected to have a Material Adverse Effect: 
(i) neither the Company nor any Subsidiary is in violation of, and
is not subject to any liability with respect to,  any Environmental Law; (ii) there has
not been a Release of any Hazardous Substances at any properties owned or
operated by the Company or any Subsidiary; (iii) to the knowledge of the
Company, neither the Company nor any Subsidiary is liable for any off-site
Releases of Hazardous Substances; (iv) the Company and its Subsidiaries
have all permits, licenses and other authorizations required for their current
operations under any Environmental Law and are in compliance with all such
permits, licenses and authorizations; (v) none of the Company or, to the
knowledge of the Company, any Subsidiary has received any written notice,
demand, letter, claim or request for information alleging that the Company, any
Subsidiary, any property owned or operated by the Company or any Subsidiary, or
any of their current operations is in violation of, or liable under, any
Environmental Law; (vi) none of the Company or any  Subsidiary (A) has entered into or
agreed to any consent decree or order or is subject to any judgment, decree or
judicial order relating to compliance with Environmental Laws, any permits,
licenses or authorizations under Environmental Laws, or the investigation,
remediation or removal of Hazardous Substances and, to the knowledge of the
Company, no investigation, litigation or other proceeding is pending or
threatened with respect thereto, or (B) is an indemnitor in connection
with any claim asserted in writing by any third-party indemnitee for any
liability under any Environmental Law or relating to any Hazardous Substances;
and (vii) to the knowledge of the Company, the execution and delivery by
the Company of this Agreement and the Ancillary Agreements to which it is a
party, and the performance of its obligations hereunder, does not require any
action with regard to, any property owned or operated by the Company or any
Subsidiary, pursuant to any so called property transfer law, including the New
Jersey Industrial Site Recovery Act.

 

SECTION 3.17.  Contracts; Debt Instruments.  Except as filed as exhibits to the SEC
Reports prior to the date of this Agreement, none of the Company or any
Subsidiary are a party to or bound by any contract:

 

(i) which contains any non-compete provisions
with respect to any line of business or any or geographic area with respect to
the Company, any Subsidiary or any of the Company’s current or future
affiliates, or restricts the conduct of any line of business by the Company,
any Subsidiary or any of the Company’s current or future affiliates or any
geographic area in which the Company, any Subsidiary or any of the Company’s
current or future affiliates may conduct business, in each case in any material
respect,

 

(ii) which would prohibit or materially delay the
consummation of the Transactions,

 

(iii) which, as of the date hereof, is a “material
contract” (as such term is defined in Item 601(b)(10) of Regulation S-K
of the SEC), or

 

(iv) which, as of the date hereof,

 

(A) involves
aggregate annual expenditures or other payments in excess of $2.0 million,
except (1) those contracts cancelable (without material penalty, cost or
other liability) within ninety (90) days and (2) purchase orders for
inventory entered into in the ordinary course of business consistent with past
practice,

 

23

 

(B) contain minimum
purchase conditions or requirements or other terms that restrict or limit the
purchasing relationships of the Company or any Subsidiary, except (1) those
contracts cancelable (without material penalty, cost or other liability) within
ninety (90) days and (2) purchase orders for inventory entered into in the
ordinary course of business consistent with past practice, or

 

(C) is a license to
or from the Company or any Subsidiary relating to any material Intellectual
Property,

 

except,
in the case of each of (A) through (C) above, for such contracts as
are disclosed in Section 7 of the Data Site Index.

 

Each contract of the type described above in this Section 3.17,
whether or not filed as an exhibit to any SEC Report, disclosed on Section 7
of the Data Site Index or otherwise set forth in Section 3.17 of the
Disclosure Schedule, is referred to herein as a “Company Material Contract.”  Each Company Material Contract is valid and
binding on the Company and each Subsidiary party thereto and, to the Company’s
knowledge, each other party thereto, and in full force and effect, and the
Company and each Subsidiary has in all material respects performed all
obligations required to be performed by it to the date hereof under each
Company Material Contract and, to the Company’s knowledge, each other party to
each Company Material Contract has in all material respects performed all
obligations required to be performed by it under such Company Material
Contract, except as would not, individually or in the aggregate, reasonably be
expected to (1) prevent or materially delay consummation of the
Transactions, (2) otherwise prevent or materially delay performance by the
Company of any of its material obligations under this Agreement or any
Ancillary Agreement or (3) result in a Material Adverse Effect.  None of the Company or any Subsidiary knows
of, or has received notice of, any violation or default under (or any condition
which with the passage of time or the giving of notice would cause such a
violation of or default under) any Company Material Contract or any other
contract to which it is a party or by which it or any of its properties or
assets is bound, except for violations or defaults that would not, individually
or in the aggregate, reasonably be expected to (1) prevent or materially
delay consummation of the Transactions, (2) otherwise prevent or
materially delay performance by the Company of any of its material obligations
under this Agreement or any Ancillary Agreement or (3) result in a
Material Adverse Effect.

 

SECTION 3.18.  Related Party Transactions.  Neither the Company nor any Subsidiary is a
party to any agreement or arrangement with or for the benefit of any person
who, to the Company’s knowledge, based on a review of Schedule 13Ds and Schedule 13Gs
filed under the Exchange Act, is a holder of 5% or more of the outstanding
equity securities of the Company or any officer, director, partner or affiliate
of any such person.

 

SECTION 3.19.  Insurance.  The Company and the Subsidiaries maintain,
with reputable insurers or through self-insurance, insurance in such amounts,
including deductible arrangements, and of such a character as is customary for
companies engaged in the same or similar business.  All policies of title, fire, liability,
casualty, business interruption, workers’ compensation and other forms of
insurance including, but not limited to, directors and officers insurance, held
by the Company and its Subsidiaries as of the date hereof, are in full force
and effect in accordance with their terms. 
Neither the Company nor any of its Subsidiaries is in 

 

24

 

default under any provisions of
any such policy of insurance and neither the Company nor any of its
Subsidiaries has received notice of cancellation of any such insurance.

 

SECTION 3.20.  Controls. The Company has established
and maintains, to the extent required by Rule 13a-15 of the Exchange
Act, (i) a system of internal control over financial reporting that is
sufficient to ensure that (A) transactions are executed in accordance with
management’s general or specific authorizations, (B) transactions are
recorded as necessary to permit preparation of financial statements in
accordance with GAAP and to maintain asset accountability, (C) access to
assets is permitted only in accordance with management’s general or specific
authorization,  (D) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences, and (E) records
are maintained that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the Company’s and its Subsidiaries’ assets,
and (ii) a system of disclosure controls and procedures (as defined in the
Exchange Act) that is sufficient to ensure that all material information
required to be disclosed by the Company in the SEC Reports is recorded,
processed, summarized and reported, within the time periods specified in the rules and
forms of the SEC, including, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the SEC Reports is accumulated and communicated to the Company’s management, as
appropriate to allow timely decisions regarding required disclosure.  The Company has disclosed, and will continue
to disclose, based on its most recent evaluation, to the Company’s external
auditors, the Audit Committee of the Board and to the Investors (i) any
potential significant deficiencies and potential material weaknesses in the
design or operation of its or its Subsidiaries’ systems of internal control
over financial reporting which are reasonably expected to adversely affect in
any material respect the Company’s or any of its Subsidiaries’ ability to
record, process, summarize and report financial information and (ii) any
fraud or allegation of fraud, whether or not material, that involves management
or other employees who have a significant role in the Company’s or any
Subsidiary’s internal controls over financial reporting.  Except as disclosed in the Company’s SEC
Reports filed on or prior to the date hereof, there have been no changes in the
Company’s disclosure controls and procedures or internal control over financial
reporting.  The Company is currently
implementing such programs and is taking such steps as it believes are
necessary to effect compliance (not later than the relevant statutory and
regulatory deadline therefor) with all applicable provisions of Section 404
of the Sarbanes-Oxley Act of 2002 (“SOX”).  To the knowledge of the Company, as of the
date hereof, there is no reason to believe that the Company’s external auditors
and its chief executive officer and chief financial officer will not be able to
give, without qualification, the certifications and attestations required
pursuant to the rules and regulations adopted pursuant to Section 404
of SOX, in the Company’s Form 10-K for fiscal 2004.

 

SECTION 3.21.  Private Offering.  None of the Company, any of the Subsidiaries,
nor anyone acting on their behalf, has offered or sold or will offer or sell
any securities, or has taken or will take any other action, which would
reasonably be expected to subject the offer, issuance or sale of the Purchased
Securities, as contemplated hereby, to the registration provisions of the
Securities Act.

 

SECTION 3.22.  Vote Required.  The affirmative vote of a majority of the
votes cast at the Stockholders’ Meeting is the only vote of the holders of any
class or series of capital 

 

25

 

stock or other Equity Interests
of the Company necessary to approve the issuance of the Purchased Securities.

 

SECTION 3.23.  Section 203 of the DGCL; Takeover
Statute.  The Board of Directors has
taken all actions necessary or advisable to ensure that Section 203 of the
Delaware General Corporation Law does not apply to any of the Transactions
contemplated by this Agreement or the Ancillary Agreements (including, but not
limited to, the purchase of the Units hereunder and any exercise of the
Investor Warrants).  The execution,
delivery and performance of this Agreement and the Ancillary Agreements will
not cause to be applicable to the Company any “fair price,” “moratorium,” “control
share acquisition” or other similar antitakeover statute or regulation enacted
under state or federal laws.

 

SECTION 3.24.  Fairness Opinion.  The Board of Directors has received the
opinion of Dresdner Kleinwort Wasserstein Securities LLC, financial advisor to
the Board of Directors, to the effect that, as of the date of such opinion, the
Purchase Price to be received by the Company in exchange for the issuance and
sale of the Purchased Securities is fair, from a financial point of view, to
the Company.

 

SECTION 3.25.  Brokers.  No broker, finder or investment banker (other
than Dresdner Kleinwort Wasserstein Securities LLC) is entitled to any
brokerage, finder’s or other fee or commission in connection with the
Transactions based upon arrangements made by or on behalf of the Company.  The Company has heretofore made available to
the Investors in the Electronic Data Room a true and complete copy of all
agreements between the Company and Dresdner Kleinwort Wasserstein pursuant to
which such firm would be entitled to any payment relating to the Transactions
or any other transaction contemplated by this Agreement or any Ancillary
Agreement.

 

ARTICLE IV

 

REPRESENTATIONS
AND WARRANTIES OF INVESTORS

 

As an inducement to the Company to enter into this
Agreement, each Investor hereby represents and warrants to the Company that:

 

SECTION 4.01.  Organization.  Such Investor and the Investors’
Representative is a limited liability company or partnership, as applicable,
duly organized, validly existing and in good standing under the Laws of the
State of Delaware.

 

SECTION 4.02.  Authority.  Such Investor and the Investors’
Representative has all necessary power and authority to execute and deliver
this Agreement and the Ancillary Agreements to which it is a party, to perform
its obligations hereunder and thereunder and to consummate the
Transactions.  Such Investor’s and the
Investors’ Representative’s execution and delivery of this Agreement and the
Ancillary Agreements to which it is a party and the consummation by it of the Transactions
have been duly and validly authorized by all necessary limited liability
company or partnership action, and no other limited liability company or
partnership proceedings on the part of such Investor or the Investors’
Representative are necessary to authorize this Agreement or the Ancillary
Agreements to which it is a party or to consummate the Transactions.  This Agreement has been, and at the Closing
each of the

 

26

 

 

 

Ancillary Agreements to which such Investor and the
Investors’ Representative is a party will be, duly and validly executed and
delivered by it and, assuming due authorization, execution and delivery by the
Company and, in the case of the Ancillary Agreements, any other party thereto,
this Agreement constitutes, and at the Closing each of the Ancillary Agreements
to which such Investor is a party will constitute, a legal, valid and binding
obligation of such Investor and the Investors’ Representative enforceable
against it in accordance with its terms.

 

SECTION 4.03.  No Conflict; Required Filings and Consents.

 

(a)                                  The
execution and delivery by such Investor of this Agreement and the Ancillary
Agreements to which it is a party do not, and the performance of its
obligations hereunder and thereunder will not, (i) conflict with or
violate its organizational documents, (ii) assuming that all consents,
approvals, authorizations and other actions described in subsection (b) have
been obtained and all filings and obligations described in subsection (b) have
been made, conflict with or violate any Law applicable to it or by which any of
its properties or assets is bound or affected, or (iii) result in any
breach of, or constitute a default (or an event which, with notice or lapse of
time or both, would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any of its properties or assets
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which it is a
party or by which it or any of its properties or assets is bound or affected,
except, with respect to clauses (ii) and (iii), for any such conflicts,
violations, breaches, defaults or other occurrences which would not,
individually or in the aggregate, reasonably be expected to (1) prevent or
materially delay consummation of the Transactions, (2) otherwise prevent or
materially delay its performance of any of its material obligations under this
Agreement or any Ancillary Agreement, or (3) have a material adverse
effect on such Investor.

 

(b)                                 The
execution and delivery by such Investor of this Agreement and the Ancillary
Agreements to which it is a party do not, and the performance of its
obligations hereunder and thereunder will not, require any consent, approval,
authorization or permit of, or filing with, or notification to, any
Governmental Authority, except (i) for (A) applicable requirements,
if any, of the Exchange Act, Blue Sky Laws, (B) the pre-merger
notification requirements of the HSR Act, (C) the filing with the SEC of
the Proxy Statement, and (D) any filings required under the rules and
regulations of Nasdaq, and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not, individually or in the aggregate, reasonably be expected to (1) prevent
or materially delay consummation of the Transactions, (2) otherwise
prevent or materially delay its performance of any of its material obligations
under this Agreement or any Ancillary Agreement, or (3) have a material
adverse effect on such Investor.

 

SECTION 4.04.  Investment Purpose.  Such Investor is acquiring the Purchased
Securities for its own account solely for the purpose of investment and not
with a view to, or for resale in connection with, any distribution of the
Purchased Securities, the shares of Company Common Stock issuable upon exercise
of the Investor Warrants (the “Warrant Shares”) or any interest therein.

 

SECTION 4.05.  Status of Shares;
Limitations on Transfer and Other Restrictions.  Such Investor acknowledges and understands
that (i) the Purchased Securities and the Warrant 

 

27

 

Shares have not been and
will not be registered under the Securities Act or any under any state
securities laws (other than in accordance with the Registration Rights
Agreement) and are being offered and sold in reliance upon federal and state
exemptions for transactions not involving any public offering, (ii) that
such exemption depends in part upon, and such Purchased Securities and Warrant
Shares are being sold in reliance on, the representations and warranties set
forth in this Article IV, (iii) it must bear the economic risk of its
investment in the Purchased Securities for an indefinite period of time because
the Purchased Securities and the Warrant Shares must be held indefinitely
unless subsequently registered under the Securities Act and applicable state
securities laws or unless an exemption from such registration is available, (iv) the
Purchased Securities will be subject to certain restrictions on transfer and
voting, as set forth in the Stockholders Agreement, and (v) a restrictive
legend in the form set forth in Section 5.03 of the Stockholders Agreement
shall be placed on all certificates evidencing the Purchased Securities and the
Warrant Shares.

 

SECTION 4.06.  Sophistication and Financial
Condition of the Investors.  Such
Investor is an “accredited investor” as defined in Rule 501 of Regulation
D promulgated under the Securities Act, a sophisticated investor and, by virtue
of its business or financial experience, is capable of evaluating the merits
and risks of the investment in the Purchased Securities.  Such Investor has been provided an
opportunity to ask questions of and receive answers from representatives of the
Company concerning the terms and conditions of this Agreement and the purchase
of the Purchased Securities contemplated hereby.

 

SECTION 4.07.  Available Funds.  Such Investor has, or will have on or prior
to the Closing, sufficient funds in its possession to permit it to acquire and
pay for the Purchased Securities to be purchased by it and to perform its
obligations under this Agreement.

 

SECTION 4.08.  Proxy Statement.  None of the information supplied by such Investor
in writing for inclusion in the Proxy Statement shall, at the date the Proxy
Statement (or any amendment or supplement thereto) is first mailed to
stockholders of the Company and at the time of the Stockholders’ Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.

 

SECTION 4.09.  Ownership of Company
Capital Stock.  As of the date
of this Agreement, the Investors and their affiliates, taken together, are the
beneficial owners of no more than one hundred shares of capital stock of the
Company.

 

SECTION 4.10.  Brokers.  No broker, finder or investment banker is
entitled to any brokerage, finder’s or other fee or
commission in connection with the Transactions based upon arrangements made by
or on behalf of such Investor.

 

ARTICLE V

CONDUCT OF BUSINESS PENDING
THE CLOSING

 

SECTION 5.01.  Conduct of
Business by the Company Pending the Closing.  The Company agrees that, between the date of
this Agreement and the Closing, except as set forth in Section 5.01 of
the Disclosure Schedule or as contemplated by any other provision of
this 

 

28

 

Agreement, except as
provided below, the businesses of the Company and the Subsidiaries shall be
conducted in, and the Company and the Subsidiaries shall not take any action
except in, the ordinary course of business consistent with past practice; and
the Company shall use its reasonable efforts to preserve substantially intact
the business organization of the Company and the Subsidiaries, to keep
available the services of the current officers, employees and consultants of
the Company and the Subsidiaries and to preserve the current relationships of
the Company and the Subsidiaries with customers, suppliers and other persons
with which the Company or any Subsidiary has significant business
relations.  Except as contemplated by
this Agreement and Section 5.01 of the Disclosure Schedule, neither
the Company nor any Subsidiary shall, between the date of this Agreement and
the Closing, directly or indirectly, do, or propose to do, any of the following
without the prior written consent of the Investors:

 

(a)                                  amend or otherwise change its
Certificate of Incorporation or By-laws or equivalent organizational documents;

 

(b)                                 (1) issue, sell, pledge,
dispose of, grant, encumber, or authorize the issuance, sale, pledge,
disposition, grant or encumbrance of, any shares of any class of capital stock
or other Equity Interests in or of the Company or any Subsidiary, or any
options, warrants, convertible securities or other rights of any kind to
acquire any shares of such capital stock or other Equity Interests, or any
other ownership interest (including, without limitation, any phantom interest
or other interest represented by contract), of the Company or any Subsidiary
(except for the issuance of shares of Company Common Stock issuable pursuant to
the Company Stock Option Plans or the 2000 Warrant Agreement) or (2) sell,
pledge, dispose of, transfer, lease, license, guarantee or encumber, or
authorize the sale, pledge, disposition, transfer, lease, license, guarantee or
encumbrance of, any material property or assets of the Company or any
Subsidiary, except (A) pursuant to existing contracts or commitments or
the sale or purchase of goods in the ordinary course of business consistent
with past practice, (B) for sales, transfers, leases, licenses, mortgages,
pledges, dispositions or encumbrances in the ordinary course of business
consistent with past practice that, in the case of the Owned Real Property and
Leased Real Property, are in an amount not to exceed $3,000,000 in the
aggregate and (C)(i) the payment of any dividend or the making of any
other distributions by any Subsidiary to the Company or another Subsidiary, (ii) the
payment by any Subsidiary of any indebtedness owed to the Company, (iii) the
making of any loans by, or advances from, any Subsidiary to the Company, or (iv) the
transfer by any Subsidiary of any of its property or assets to the Company;

 

(c)                                  declare, set aside, make or pay
any dividend or other distribution (except by a wholly-owned Subsidiary to the
Company or to another wholly-owned Subsidiary of the Company), payable in cash,
stock, property or otherwise, with respect to any of its capital stock or enter
into any agreement with respect to the voting of its capital stock;

 

(d)                                 reclassify, combine, split, subdivide or
redeem, or purchase or otherwise acquire, directly or indirectly, any of its
capital stock or other Equity Interests;

 

(e)                                  (1) acquire (including,
without limitation, by merger, consolidation, or acquisition of stock or assets
or any other business combination) any corporation, partnership, other business
organization or any division thereof; (2) except for 

 

29

 

borrowings in the ordinary course of business
under the Credit Agreement, incur any indebtedness for borrowed money or issue
any debt securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations of any person, or make
any loans or advances, or grant any security interest in any of its assets
except in the ordinary course of business; (3) (A) terminate, cancel
or request or agree to any material change in any Company Material Contract
other than in the ordinary course of business consistent with past practice, or
(B) enter into any material contract or agreement other than in the
ordinary course of business consistent with past practice, except, in each
case, for any contract that is terminable without penalty upon not more than 90
days notice, (4) make or authorize any capital expenditure or purchases of
fixed assets other than as set forth on the capital expenditure plan attached
in Section 5.01(e)(4) of the Disclosure Schedule; or (5) enter
into or amend any contract, agreement, commitment or arrangement with respect
to any matter set forth in this Section 5.01(e);

 

(f)                                    except as may be required by
contractual commitments or corporate policies with respect to severance or termination
pay in existence on the date of this Agreement as disclosed in Section 3.10
of the Disclosure Schedule, (1) increase the compensation payable to or to
become payable to its directors, officers or employees, except for increases in
accordance with past practices in salaries or wages of employees of the Company
or any Subsidiary which are not across-the-board increases, (2) grant any
rights to severance or termination pay to, or enter into any employment or
severance agreement with, any director, officer or other employee of the
Company or any Subsidiary, or establish, adopt, enter into or amend any
collective bargaining, bonus, profit-sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, agreement, trust, fund,
policy or arrangement for the benefit of any director, officer or employee,
except to the extent required by applicable Law or the terms of a collective
bargaining agreement in existence on the date of this Agreement, or (3) take
any affirmative action to amend or waive any performance or vesting criteria or
accelerate vesting, exercisability or funding under any Plan;

 

(g)                                 (1) make or change any
material election in respect of Taxes, (2) adopt or change any material
accounting method in respect of Taxes, (3) enter into any Tax allocation
agreement, Tax-sharing agreement, Tax indemnity agreement or closing agreement,
(4) settle or compromise any material claim, notice, audit report or
assessment in respect of Taxes, or (5) surrender any right to claim a
refund of Taxes;

 

(h)                                 take any action, other than actions
required by GAAP or in the ordinary course of business, with respect to
accounting policies or procedures;

 

(i)                                     (1) pre-pay any long-term debt,
except in the ordinary course of business in an amount not to exceed $2.0
million in the aggregate for the Company and the Subsidiaries taken as a whole,
or pay, discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, contingent or otherwise), except in the ordinary course of business
consistent with past practice, (2) accelerate or delay collection of notes
or accounts receivable in advance of or beyond their regular due dates, except
in the ordinary course of business consistent with past practice, (3) delay
or accelerate payment of any account payable in advance of its due date, except
in the ordinary course of business consistent 

 

30

 

with past practice, or (4) vary
the Company’s or any Subsidiary’s inventory practices in any material respect
from its past practices;

 

(j)                                     waive, release, assign, settle
or compromise any material claims, litigation or arbitration to which the
Company or any of its Subsidiaries is a party; which waiver, release,
assignment, settlement or compromise involves the payment of amounts, or
assumptions of liabilities, by the Company or any of its Subsidiaries of an
amount in excess of $2,000,000, or which results in material restrictions on
the use of any material Owned Real Property or material Leased Real Property or
otherwise enjoins or restricts the Company from conducting the business as
currently conducted in any material respect;

 

(k)                                  adopt, or propose to adopt, or
maintain any shareholders’ rights plan, “poison pill” or other similar plan or
agreement, unless the Investors are exempted from the provisions of such
shareholders’ rights plan, “poison pill,” or other similar plan or agreement

 

(l)                                     except in accordance with Section 6.04(a),
modify, amend, terminate, or release or assign any material rights or claims
with respect to any confidentiality or standstill agreement;

 

(m)                               write up, write down or write
off the book value of any material assets, individually or in the aggregate,
for the Company and the Subsidiaries taken as a whole, other than in the
ordinary course of business consistent with past practice or except as required
by GAAP applied on a consistent basis throughout such period;

 

(n)                                 to the extent required or
applicable, take any action to exempt or make not subject to (1) the
provisions of Section 203 of the DGCL or (2) any other state takeover
law or state law that purports to limit or restrict business combinations or
the ability to acquire or vote shares, any person (other than the Investors or
any of their affiliates) or any action taken thereby, which person or action
would have otherwise been subject to the restrictive provisions thereof and not
exempt therefrom; or

 

(o)                                 announce an intention, enter into any
agreement or otherwise make a commitment, to do any of the foregoing.

 

SECTION 5.02.  No Contrary Agreements or Actions.  The Company shall not, and shall cause its
Subsidiaries not to, enter into any letter of intent, agreement in principle,
acquisition agreement, contract or other similar agreement concerning any
transaction that constitutes an Acquisition Proposal (other than the
Transactions contemplated by this Agreement). 
The Company shall, and shall cause its Subsidiaries to, fully enforce
against all persons (except the Investors and their affiliates) any
confidentiality or standstill agreement to which the Company or any of its
Subsidiaries is a party; provided, however
that the Company may waive any such standstill agreement to the extent
necessary for such person to be able to make a non-public proposal to the Board
for consideration in accordance with Section 6.04.

 

31

 

ARTICLE VI

ADDITIONAL AGREEMENTS

 

SECTION 6.01.  Stockholders’ Meeting.  The Company, acting through the Board, shall,
in accordance with applicable Law and the Company’s Certificate of
Incorporation and By-laws, (a) duly call, give notice of, convene and hold
a special meeting of its stockholders as promptly as practicable after the date
of this Agreement for the purpose of considering, taking action on, and voting
on the issuance of the Purchased Securities (the “Stockholders’ Meeting”),
(b) the Company shall submit the issuance of the Purchased Securities to a
vote of the Company’s stockholders and (c) subject to Section 6.04(d),
(i) include in the Proxy Statement the recommendation of the Board that
the stockholders of the Company approve the issuance of the Purchased
Securities (such approval by the Company’s stockholders, the “Stockholder
Approval”) and (ii) use all reasonable efforts to obtain the
Stockholder Approval, including, without limitation, postponing or adjourning
the Stockholders’ Meeting to obtain a quorum or to solicit additional proxies
or calling, giving notice of, convening and holding additional Stockholders’
Meetings.  At the Stockholders’ Meeting,
no matters shall be noticed or submitted to the stockholders other than the
issuance of the Purchased Securities or a proposal to adjourn or postpone the
meeting, including for purposes of soliciting additional proxies in favor of
the approval of the issuance of the Purchased Securities.  The Company shall call, give notice of,
convene and hold the Stockholders’ Meeting and submit the issuance of the
Purchased Securities to a vote of the Company’s Stockholders, regardless of the
commencement, disclosure, announcement or submission to it of any Acquisition
Proposal (whether or not a Superior Proposal), any furnishing of information,
discussions or negotiations with respect thereto, or any decision or action by
the Board to change, withhold or withdraw its recommendation in respect of the
issuance of the Purchased Securities. 
The Company shall not submit to the vote of its stockholders any
Acquisition Proposal (whether or not a Superior Proposal).

 

SECTION 6.02.  Proxy Statement; Other
SEC Filings.  As promptly as
practicable after the date of this Agreement, the Company shall file a
preliminary Proxy Statement with the SEC under the Exchange Act, and shall use
its reasonable best efforts to have the Proxy Statement cleared by the
SEC.  In addition, the Company shall
prepare and file with the SEC any Other Filings as and when required or
requested by the SEC.  The Investors and
the Company shall cooperate with each other in the preparation of the Proxy
Statement and any Other Filings, and the Company shall promptly notify the
Investors of the receipt of any comments of the SEC with respect to the Proxy
Statement or any Other Filings and of any requests by the SEC for any amendment
or supplement thereto or for additional information and shall provide to the
Investors copies of all correspondence between the Company or any
representative of the Company and the SEC. 
The Company shall give the Investors and their counsel the opportunity
to review the Proxy Statement and any Other Filings for a reasonable time prior
to their being filed with the SEC and shall give the Investors and their
counsel the opportunity to review all amendments and supplements to the Proxy
Statement and all responses to requests for additional information and replies
to comments for a reasonable time prior to their being filed with, or sent to,
the SEC.  The Company shall in good faith
consider the Investors’ comments on any such documents.  Each of the Company and each Investor agrees to use its reasonable best efforts, after
consultation with the other parties hereto, to respond promptly to all such
comments of and requests by the SEC and the Company agrees to use its
reasonable best efforts to cause the Proxy Statement and all required
amendments and supplements thereto to be 

 

32

 

mailed
to the holders of shares of Company Common Stock entitled to vote at the
Stockholders’ Meeting at the earliest practicable time.  If at any time prior to the Closing, any
event or circumstance relating to the Company or any Subsidiary, or their
respective officers or directors, should be discovered by the Company which
should be set forth in an amendment or a supplement to the Proxy Statement or
any Other Filing, the Company shall promptly inform the Investors.  All documents that the Company is responsible
for filing in connection with the transactions contemplated herein will comply
as to form and substance in all material respects with the applicable
requirements of the Exchange Act, the rules and regulations thereunder and
other applicable Laws.

 

SECTION 6.03.  Access to Information;
Confidentiality.

 

(a)                                  From
the date hereof to the Closing and in compliance with applicable Laws, the
Company shall, and shall cause the Subsidiaries and the officers, directors,
employees, auditors and agents of the Company and the Subsidiaries to, afford
the officers, employees, accountants, counsel, investment bankers and other
agents of the Investors reasonable access at all reasonable times to the
officers, employees, agents, properties, offices and other facilities, books
and records of the Company and each Subsidiary, and shall furnish the Investors
with such financial, operating and other data and information as the Investors,
through their officers, employees or agents, may reasonably request.

 

(b)                                 All
information obtained by the Investors pursuant to this Section 6.03 shall
be kept confidential in accordance with the confidentiality agreement, dated as
of January 7, 2005 (the “Confidentiality Agreement”), between an affiliate
of the Investors and the Company.

 

(c)                                  No
investigation pursuant to this Section 6.03 shall affect any
representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto.

 

SECTION 6.04.  No Solicitation of Transactions.

 

(a)                                  None
of the Company or any Subsidiary shall, directly or indirectly, take (and the
Company shall not authorize or permit any directors, officers, employees,
accountants, consultants, legal counsel, advisors, agents or other
representatives of the Company or any Subsidiary or, to the extent within the
Company’s control, other affiliates to take) any action to (i) encourage
(including, without limitation, by way of furnishing non-public information),
solicit, initiate or facilitate any Acquisition Proposal, (ii)  enter into
any agreement with respect to any Acquisition Proposal or enter into any
agreement, arrangement or understanding requiring it to abandon, terminate or
fail to consummate the issuance of the Purchased Securities or any other
transaction contemplated by this Agreement or (iii) participate in any way
in discussions or negotiations with, or furnish any information to, any person
in connection with, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or would reasonably be expected to
lead to, any Acquisition Proposal, except as permitted by Section 6.04(c).  The Company shall take all action necessary
to ensure that the directors, officers, employees, accountants, consultants,
legal counsel, advisors, agents and other representatives of the Company or any
Subsidiary and, to the extent within the Company’s control, other affiliates,
do not take or do any of the actions referenced in the immediately foregoing
sentence.  Upon execution of this
Agreement, the Company shall cease immediately and cause to be terminated 

 

33

 

any
and all existing discussions or negotiations with any parties conducted
heretofore with respect to an Acquisition Proposal and promptly request that
all confidential information with respect thereto furnished on behalf of the
Company be returned.

 

(b)                                 The
Company shall, as promptly as practicable (and in no event later than one
business day after receipt thereof), advise the Investors of any Acquisition
Proposal, potential Acquisition Proposal, or any inquiry received by it
relating to any potential Acquisition Proposal (including, without limitation,
any Acquisition Proposal that constitutes a Superior Proposal) and of the
material terms of any proposal or inquiry, including, but not limited to, the
identity of the person and its affiliates making the same, that it may receive
in respect of any such Acquisition Proposal, potential Acquisition Proposal, or
inquiry, or of any information requested from it or of any negotiations or
discussions being sought to be initiated with it, shall furnish to the
Investors a copy of any such proposal or inquiry, if it is in writing, or a reasonably
accurate written summary of any such proposal or inquiry, if it is not in
writing, and shall keep the Investors informed on a reasonably prompt basis
with respect to any developments with respect to the foregoing.

 

(c)                                  If
the Company receives an Acquisition Proposal which was not solicited in
violation of Section 6.04(a) and (i) which constitutes a
Superior Proposal or (ii) which the Board in its good faith judgment
concludes proposes consideration that is more favorable to the Company and its
stockholders than the Transactions contemplated by this Agreement and which would
reasonably be expected to result in a Superior Proposal in all other respects,
then the Company shall promptly provide the Investors written notice that
complies with the requirements of Section 6.04(b).  Once the Investors have received such notice,
the Company may then, in response to an Acquisition Proposal which meets the
criteria of the preceding sentence, (x) furnish information with respect to the
Company and the Subsidiaries to the person making such Acquisition Proposal
pursuant to a customary confidentiality agreement, the benefits of the terms of
which are no more favorable to the other party to such confidentiality
agreement than those in place with the Investors and (y) participate in
discussions with respect to such Acquisition Proposal, but only if, in each
case, after consultation with outside counsel, the Board determines in good
faith that to fail to participate in such discussions or negotiations, furnish such
information or take such other actions would constitute a breach of the Board’s
fiduciary obligations under applicable Law.

 

(d)                                 Neither
the Board nor any committee thereof shall (i) withdraw or modify, or
propose publicly to withdraw or modify, in a manner adverse to the Investors,
the approval or recommendation by the Board or such committee of the issuance
of the Purchased Securities (the “Company Recommendation”) and the
matters to be considered at the Stockholders’ Meeting or (ii) other than
the Transactions contemplated by this Agreement, approve or recommend, or
propose publicly to approve or recommend, any Acquisition Proposal.  Nothing contained in this Section 6.04(d) shall
prohibit the Company (x) from taking and disclosing to its stockholders a
position contemplated by Rule 14d-9 or Rule 14e-2(a) promulgated
under the Exchange Act if the Board determines, in good faith, after
consultation with outside counsel, it would otherwise constitute a breach of
its fiduciary duty to stockholders to not take and disclose such position or
(y) in the event that a Superior Proposal is made and the Board determines in
good faith, after consultation with outside counsel, that it would otherwise
constitute a breach of its fiduciary duty to stockholders, from withdrawing or
modifying its recommendation of the Transactions contemplated by this Agreement
no earlier than three business days following the day of delivery 

 

34

 

of
written notice to the Investors of its intention to do so.  Notwithstanding any actions that may be taken
pursuant to this Section 6.04, the Company shall in all events comply with
the provisions of Section 6.01.

 

SECTION 6.05.  Further Action;
Reasonable Best Efforts; Consents; Filings.

 

(a)                                  Upon
the terms and subject to the conditions hereof, each of the parties hereto
shall use its reasonable best efforts to (i) take, or cause to be taken,
all appropriate action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable Laws to consummate and make effective the
Transactions, (ii) obtain from any Governmental Authorities any consents,
licenses, permits, waivers, approvals, authorizations or orders required to be
obtained or made by the Investors or the Company or any of their respective
Subsidiaries, or to avoid any action or proceeding by any Governmental
Authority (including, without limitation, those in connection with the HSR
Act), in connection with the authorization, execution and delivery of this
Agreement and each Ancillary Agreement and the consummation of the Transactions
contemplated herein and therein, including, without limitation, the
Transactions, and (iii) make promptly its respective filings, and
thereafter make any other submissions, required under (x) the Exchange Act, and
any other applicable federal or state securities Laws, (y) the HSR Act (in
respect of which the parties will file a Notification and Report Form as
soon as practicable but in no event later than ten (10) days after the
date of this Agreement) and (z) any other applicable Law; provided, however, that the Investors and
the Company shall cooperate with each other in connection with the making of
all such filings, including providing copies of all such documents to the
non-filing party and its advisors prior to filing and, if requested, to accept
all reasonable additions, deletions or changes suggested in connection
therewith.

 

(b)                                 The
parties hereto shall cooperate and assist one another in connection with all actions
to be taken pursuant to Section 6.05(a), including the preparation and
making of the filings referred to therein and, if requested, amending or
furnishing additional information thereunder, including, subject to applicable
Law and the Confidentiality Agreement, providing copies of all related
documents to the non-filing party and their advisors prior to filing, and to
the extent practicable none of the parties will file any such document or have
any communication with any Governmental Authority without prior consultation
with the other parties.  Each party shall
keep the others apprised of the content and status of any communications with,
and communications from, any Governmental Authority with respect to the Transactions.  To the extent practicable and permitted by a
Governmental Authority, each party hereto shall permit representatives of the
other party to participate in meetings (whether by telephone or in person) with
such Governmental Authority.

 

(c)                                  Each
of the parties hereto agrees to cooperate and use its reasonable best efforts
to defend through litigation on the merits any Action, including any
administrative or judicial Action, asserted by any party in order to avoid the
entry of, or to have vacated, lifted, reversed, terminated or overturned any
decree, judgment, injunction or other order (whether temporary, preliminary or
permanent) that in whole or in part restricts, prevents or prohibits
consummation of the Transactions by August 31, 2005, including, without
limitation, by vigorously pursuing all available avenues of administrative and
judicial appeal.

 

35

 

(d)                                 Notwithstanding
any other provision of this Agreement to the contrary, the Investors agree to
take promptly any and all steps necessary to avoid or eliminate each and every
impediment under any antitrust or trade regulation Law that may be asserted by
any Governmental Authority or any other person with respect to the Transactions
so as to enable the parties to consummate the Transactions by August 31,
2005, including, without limitation, proposing, negotiating and committing to
and/or effecting, by consent decree, hold separate order, or otherwise, the
sale, divestiture or disposition of such assets or businesses of the Investors
or the Company (including assets or businesses of a subsidiary of any Investor
or the Company) as are required to be divested, or entering into such other
arrangements as are required in order to avoid the entry of, or to effect the
dissolution of, any decree, judgment, injunction (whether temporary,
preliminary or permanent) or other order in any suit or proceeding, which would
otherwise have the effect of preventing, restricting, restraining or
prohibiting the consummation of the Transactions by August 31, 2005.

 

(e)                                  From
the date of this Agreement through the Closing, no Investor shall, nor shall it
cause its affiliates to enter into any letter of intent (whether binding or
non-binding), contract or other commitment of any kind relating to the
acquisition by such Investor or such affiliate of any voting interest in any
business related to the retail food or drug business, the effect of which would
reasonably be expected to delay or prevent the consummation of the
Transactions.

 

(f)                                    The
Company, the Subsidiaries and the Investors shall give any notices to third
parties, and use all reasonable efforts to obtain any third party consents, (i) necessary,
proper or advisable to consummate the Transactions contemplated in this
Agreement and each Ancillary Agreement or (ii) required to be disclosed in
the Disclosure Schedule.  In the event
that either party shall fail to obtain any third party consent described in the
first sentence of this Section 6.05(f), such party shall use all
reasonable efforts, and shall take any such actions reasonably requested by the
other party hereto, to minimize any adverse effect upon the Company, the
Subsidiaries and the Investors, and their respective businesses resulting, or
which would reasonably be expected to result after the Closing, from the
failure to obtain such consent.

 

(g)                                 From
the date of this Agreement until the Closing, the Company shall promptly notify
the Investors in writing of any pending or, to the knowledge of the Company,
threatened Action by any Governmental Authority or any other person (i) challenging
or seeking material damages in connection with the Transactions or (ii) seeking
to restrain or prohibit the consummation of the Transactions, which in either
case would, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect prior to or after the Closing.

 

SECTION 6.06.  Public Announcements.  The Investors and the Company agree that no
public release or announcement concerning the Transactions shall be issued by
either party without the prior consent of the other party (which consent shall
not be unreasonably withheld), except as such release or announcement may be
required by Law or the rules or regulations of Nasdaq, in which case the
party required to make the release or announcement shall use its best efforts
to allow the other party reasonable time to comment on such release or
announcement in advance of such issuance.

 

SECTION 6.07.  Credit Agreement.  The Company shall use its reasonable best efforts to
obtain from the required lenders under the Company’s $250.0 million Amended and

 

36

 

Restated Credit Agreement dated as of October 1,
2004, as in effect on the date of this Agreement (the “Credit Agreement”)
a permanent waiver or amendment of the applicable provisions of Section 2.12 and Article VII and any other applicable provisions of such Credit Agreement in
order to permit the Company to retain the proceeds from the sale of the
Purchased Securities (including any proceeds from the exercise of the Investor
Warrants) and apply them for general corporate purposes and to permit the consummation
of the Transactions and the performance by the Company of its obligations under
this Agreement and the Ancillary Agreements. The Company shall also use its
reasonable best efforts to obtain from such required lenders the amendments
contemplated on Section 6.07 of the Disclosure Schedule and
such other amendments to the Credit
Agreement as the Company and the Investors shall mutually agree.

 

SECTION 6.08.  Board Representation.

 

(a)                                  Within
15 business days after the execution of this Agreement, the Investors shall
notify the Board in writing of the names of five individuals (which may include
one or more members of senior management of the Company) that the Investors
designate as the individuals who shall be appointed to the Board immediately
after the Closing (it being understood that YAAF and YAAF Parallel each shall
have the right to designate one such person, and that Investors collectively
shall designate the other three such persons). 
Prior to the mailing to Company Stockholders of the Proxy Statement, the
Investors shall have the right to revise their list of five individuals, and the
individuals so designated (the “Investor Director Designees”) shall be
disclosed in the Proxy Statement, and such individuals shall consent to serve
if appointed.  The Board shall have the
right to consent to the Investor Director Designees designated by the Investors
prior to the Closing, which consent shall not be unreasonably withheld.

 

(b)                                 Within
15 business days after execution of this Agreement, the Board shall notify the
Investors in writing of the names of up to six individuals who are independent
directors of the Company as of the date of this Agreement and who the Board
designates as the directors who intend to remain as members of the Board
following the Closing.  Prior to the
mailing to the Company Stockholders of the Proxy Statement, the Board shall
have the right to revise or supplement its list of up to six individuals, and
the individuals so designated (the “Continuing Independent Directors”)
shall be disclosed in the Proxy Statement, and such individuals shall consent
to continue to serve as directors following the Closing.

 

(c)                                  In
the event that, at any time prior to the mailing to the Company Stockholders of
the Proxy Statement, the number of named Continuing Independent Directors shall
be less than six, the Board and the Nominating Committee of the Board shall use
all reasonable efforts to recruit additional individuals who meet the
requirements of Section 2.01(a)(ii) of the Stockholders Agreement and
who shall consent to serve as independent directors of the Company after the
Closing (the “New Independent Directors”), provided, however, that immediately prior to the Closing, the aggregate number
of named Continuing Independent Directors and New Independent Directors may be either
less than or equal to six.  The Investors
shall have the right to consent to the New Independent Directors designated by
the Board prior to the Closing, which consent shall not be unreasonably
withheld.

 

37

 

(d)                                 Immediately
prior to the Closing, the Company and the Board shall take all actions
necessary to (i) increase the authorized number of directors to eleven, (ii) cause
those directors of the Company who are not Continuing Independent Directors to
resign from the Board, and (iii) effective as the Closing, appoint the Investor
Director Designees and the New Independent Directors as directors of the
Company.

 

SECTION 6.09.  Cooperation.  The Company and the Investors shall
coordinate and cooperate in connection with (i) the preparation of the
Proxy Statement and any Other Filings, (ii) determining whether any action
by or in respect of, or filing with, any Governmental Authority is required, or
any actions, consents, approvals or waivers are required to be obtained from
parties to any Company Material Contracts, in connection with the consummation
of the Transactions and (iii) seeking any such actions, consents,
approvals or waivers or making any such filings, furnishing information
required in connection therewith or with the Proxy Statement or any Other
Filings and timely seeking to obtain any such actions, consents, approvals or
waivers.

 

SECTION 6.10.  Certain Notices.  From and after the date of this Agreement
until the Closing, each party shall promptly notify the other party of (i) the
occurrence of any material adverse effect with respect to it, (ii) the
occurrence, or non-occurrence, of any event or any breach or misrepresentation
that would reasonably be expected to cause any condition to the obligations of
such party to effect the Transactions not to be satisfied or (iii) the
failure of such party to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it pursuant to this Agreement or
any Ancillary Agreement that would reasonably be expected to result in any
condition to the obligations of such party to effect the Transactions not to be
satisfied; provided, however,
that the delivery of any notice pursuant to this Section 6.10 shall not
cure any breach of any representation or warranty requiring disclosure of such
matter prior to the date of this Agreement or otherwise limit or affect the
remedies available hereunder to the party receiving such notice.

 

SECTION 6.11.  Investors’
Representative.  Except for
the rights of YAAF and YAAF Parallel to designate persons to be appointed to
the Board pursuant to Section 6.08 hereof, which rights shall be exercised
only by YAAF and YAAF Parallel as set forth in Section 6.08, the parties
acknowledge and agree that The Yucaipa Companies LLC shall be the designated
representative of the Investors, or Investors’ Representative, with the authority
to make all decisions and determinations and to take all actions (including
giving consents and waivers or agreeing to any amendments to this Agreement or
to the termination hereof) required or permitted hereunder on behalf of the Investors,
and any such action, decision or determination so made or taken shall be deemed
the action, decision or determination of the Investors, and any notice,
document, certificate or information required to be given to any Investor shall
be deemed so given if given to the Investors’ Representative.

 

38

 

ARTICLE VII

CONDITIONS

 

SECTION 7.01.  Conditions to the
Obligations of Each Party. 
The obligations of each party to effect the Transactions shall be
subject to the satisfaction or waiver, at or prior to the Closing, of the
following conditions:

 

(a)                                  Stockholder Approval.  The issuance of the Purchased Securities
shall have been approved and adopted by the requisite affirmative vote of the
stockholders of the Company in accordance with the DGCL, the Certificate of Incorporation
of the Company and Nasdaq Rule 4350(i)(D);

 

(b)                                 No Order.  No Governmental Authority in the United
States shall have enacted, issued, promulgated, enforced or entered any Law
(whether temporary, preliminary or permanent) which is then in effect and has
the effect of making the Transactions illegal or otherwise restricting,
preventing or prohibiting consummation of the Transactions;

 

(c)                                  HSR Act.  Any waiting period (and any extension
thereof) applicable to the consummation of the Transactions under the HSR Act
shall have expired or been terminated; and

 

(d)                                 Court Proceedings.  No Action shall be pending or threatened
before any Governmental Authority wherein an unfavorable injunction, judgment,
order, decree, ruling or charge would reasonably be expected to (A) (1) prevent
consummation of any of the Transactions contemplated by this Agreement or any
Ancillary Agreement, (2) cause any of the Transactions contemplated by
this Agreement or any Ancillary Agreement to be rescinded following
consummation thereof, (3) materially adversely affect the rights and
powers of the Investors to own the Purchased Securities, and exercise all of their
rights as stockholders of the Company and as parties to the Ancillary Agreements,
and in each case, no such injunction, judgment, order, decree, ruling or charge
shall be in effect or (B) cause or require the payment by the Company (including
as the result of the acceleration, or other obligation to repay prior to
scheduled maturity, any indebtedness) or, to the extent such Action relates to
the Company or the Transactions contemplated by this Agreement or any Ancillary
Agreement, the Investors, of damages, fines or other penalties or awards that
would, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect; provided, however
that, in each case, any such threatened Action would reasonably be expected to
be adversely determined against the Company, the Investors or their respective
affiliates.

 

SECTION 7.02.  Conditions to the
Obligations of the Investors. 
The obligations of the Investors to consummate the Transactions are
subject to the satisfaction or waiver of the following additional conditions:

 

(a)                                  Representations and Warranties.  Each of the representations and warranties of
the Company contained in this Agreement and each Ancillary Agreement that are
qualified by materiality or Material Adverse Effect shall be true and correct
as of the date 

 

39

 

hereof and as of the Closing as though made
on and as of the Closing (except that those representations and warranties
which address matters only as of a particular date need only be true and
correct as of such date), and all representations and warranties which are not
so qualified shall be true and correct in all material respects (except that
those representations and warranties which address matters only as of a
particular date need only remain true and correct in all material respects as
of such date).

 

(b)                                 Agreements and Covenants.  Each of the Company and each Subsidiary shall
have performed, in all material respects, all obligations and complied with, in
all material respects, its agreements and covenants to be performed or complied
with by it under this Agreement and the Ancillary Agreements to which it is a
party on or prior to the Closing.

 

(c)                                  Officer Certificate.  The Company shall have delivered to the
Investors a certificate, dated the date of the Closing, signed by the President
of the Company, certifying as to the satisfaction of the conditions specified
in Sections 7.02(a), (b), (d), and (g).

 

(d)                                 Material Adverse Effect.  No Material Adverse Effect shall have occurred
since the date of this Agreement.

 

(e)                                  Ancillary Agreements.  Each of the Ancillary Agreements to which the
Company is a party shall have been duly executed and delivered by the Company,

 

(f)                                    Payments Under
Management Agreement.  All amounts owing from the Company to the
Investors’ Representative at the Closing pursuant to the Management Agreement
shall have been paid or provision for such payment shall have been made in form
and substance that is satisfactory to the Investors.

 

(g)                                 Credit Agreement.  The waivers and amendments in respect of the
Credit Agreement referred to in the first sentence of Section 6.07 shall
have been obtained in form and substance reasonably satisfactory to the Investors.  Immediately prior to the Closing, the Company’s
“Excess Availability” (as defined in the Credit Agreement) under the Credit
Agreement, minus the amount of any Expenses (including amounts payable to the
Investors’ Representative under the Management Agreement) that are unpaid
immediately prior to the Closing, shall be at least $20.0 million.

 

(h)                                 Board Representation.  The Investor Director Designees shall have
been duly appointed, effective concurrently with the Closing, to the Board and
to all applicable committees of the Board in accordance with the provisions of
this Agreement and the Stockholders Agreement and the resignation of all directors who are neither Investor Director Designees
nor Continuing Independent Directors shall have become effective.

 

(i)                                     Opinion of Counsel.  A favorable opinion of Shearman &
Sterling LLP, counsel to the Company, dated as of the Closing Date, covering
the matters attached hereto as Exhibit E-1 shall have been delivered
to the Investors, and a favorable opinion of other counsel to the Company,
dated as of the Closing Date, covering the matters attached hereto as Exhibit E-2
shall have been delivered to the Investors.

 

40

 

(j)                                     Certified Resolutions.  Certified copies of resolutions duly adopted
by the Board and stockholders of the Company authorizing the execution,
delivery and performance of this Agreement, the Ancillary Agreements to which
it is a party and the Transactions.

 

(k)                                  Incumbency Certificate.  A certificate of the Secretary of the
Company, as to the incumbency of the officer(s) (who shall not be such
Secretary) executing this Agreement, the Ancillary Agreements to which the
Company is a party and the other instruments, documents, certificates and
agreements contemplated hereby or thereby.

 

(l)                                     Good Standings. A short form certificate of
good standing of each of the Company and each Subsidiary, certified by the
Secretary of State or Clerk of the State Corporation Commission of each state
or commonwealth in which it is incorporated or organized or qualified to do
business, in each case as of a date not more than two business days prior to
the Closing.

 

(m)                               Consents and Approvals. 
 All consents, approvals and
authorizations of any person with respect to the Transactions set forth on Section 7.02(m)
of the Disclosure Schedule shall have been obtained (and a copy
delivered to the Investors).

 

SECTION 7.03.  Conditions to the
Obligations of the Company. 
The obligations of the Company to consummate the Transactions are subject
to the satisfaction or waiver of the following additional conditions:

 

(a)                                  Representations and Warranties.  Each of the representations and warranties of
each Investor contained in this Agreement and each Ancillary Agreement that are
qualified by materiality or material adverse effect shall be true and correct
as of the date hereof and as of the Closing as though made on and as of the
Closing (except that those representations and warranties which address matters
only as of a particular date need only be true and correct as of such date),
and all representations and warranties which are not so qualified shall be true
and correct in all material respects (except that those representations and
warranties which address matters only as of a particular date need only remain
true and correct in all material respects as of such date).

 

(b)                                 Agreements and Covenants.  The Investors shall have performed, in all
material respects, all obligations or complied with, in all material respects,
all agreements and covenants to be performed or complied with by it under this
Agreement on or prior to the Closing.

 

(c)                                  Officer Certificate.  Each Investor shall have delivered to the
Company a certificate, dated the date of the Closing, signed by the President
or any Vice President of such Investor, certifying as to the satisfaction of
the conditions specified in Sections 7.03(a) and 7.03(b).

 

(d)                                 Ancillary Agreements.  Each of the Ancillary Agreements to which any
Investor is a party shall have been duly executed and delivered by such Investor.

 

41

 

(e)                                  Opinion of Counsel.  A favorable opinion of counsel to the
Investors, dated as of the Closing Date, covering the matters attached hereto
as Exhibit F shall have been delivered to the Company.

 

ARTICLE VIII

TERMINATION, AMENDMENT AND
WAIVER

 

SECTION 8.01.  Termination.  This Agreement may be terminated and the Transactions
may be abandoned at any time prior to the Closing, whether or not the
Stockholder Approval has been obtained (the date of any such termination, the “Termination
Date”):

 

(a)                                  By mutual written consent of the
Investors and the Company (the Company’s consent being duly authorized by the
Board); or

 

(b)                                 By either the Investors or the
Company if (i) the Closing shall not have occurred on or before August 31,
2005; provided, however,
that the right to terminate this Agreement under this Section 8.01(b) shall
not be available to any party whose failure to fulfill any obligation under
this Agreement has been the cause of, or resulted in, the failure of the
Closing to occur on or before such date or (ii) any Governmental Authority
in the United States shall have enacted, issued, promulgated, enforced or
entered any order, decree, judgment, injunction or ruling which is then in
effect and is final and nonappealable and has the effect of making consummation
of the Transactions illegal or otherwise preventing or prohibiting consummation
of the Transactions; provided, however
that the party seeking to terminate this Agreement shall have fulfilled its
obligations pursuant to Section 6.05 of this Agreement to lift such
injunction, order, decree or ruling; or

 

(c)                                  By the Investors or the Company
if the Stockholder Approval is not obtained at the Stockholders’ Meeting;

 

(d)                                 By the Investors if (i) the
Board shall have withdrawn, or adversely modified, or failed within three
business days after the Investors request to reconfirm the Company
Recommendation (or determined to do so), (ii) the Board shall have
determined to recommend to the stockholders of the Company that they approve an
Acquisition Proposal other than that contemplated by this Agreement or shall
have determined to accept a Superior Proposal, (iii) a tender offer or
exchange offer that, if successful, would result in any person or group
becoming a beneficial owner of 20% or more of the outstanding shares of any
class or series (or the voting power of any class or series) of equity
securities of the Company, is commenced (other than by an Investor or an
affiliate of an Investor) and the Board fails within ten days after such
commencement to recommend that the stockholders of the Company not tender their
shares in such tender or exchange offer or (iv) for any reason the Company
fails to call or hold the Stockholders’ Meeting by August 26, 2005;

 

42

 

(e)                                  By the Company, if the Board
determines to accept a Superior Proposal, but only after the Company, (i) holds
the Stockholders’ Meeting and has failed to obtain the Stockholder Approval
required for the consummation of the Transactions, (ii) provides the Investors
with not less than three business days advance written notice of its
determination to accept such Superior Proposal (including all material terms
thereof) and within such three business day period has in good faith
negotiated, and has caused its, directors, officers, financial and legal
advisors to negotiate with the Investors to make such adjustments to the terms
and conditions of this Agreement such that such Acquisition Proposal would no
longer constitute a Superior Proposal, and (ii) fulfills its obligations
under Section 8.03 hereof immediately prior to (and as a pre-condition to)
such termination, provided, however that the
Company’s right to terminate this Agreement under this Section 8.01(e) shall
not be available if the Company is then in breach of Section 6.04, until
such time as such breach shall have been cured;

 

(f)                                    By the Investors, if since the
date of this Agreement, there shall have been any event, development or change
of circumstance that constitutes, has had or would reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect and such
Material Adverse Effect is not cured within 20 days after the Company receives
written notice thereof from the Investors; or

 

(g)                                 By the Investors, if (i) the
Company shall have breached any representation, covenant or agreement set forth
in this Agreement, (ii) such breach or misrepresentation is not cured
within 20 days after the Company receives written notice thereof from the
Investors and (iii) such breach or misrepresentation would cause the
conditions set forth in Section 7.02(a) or Section 7.02(b) not
to be satisfied.

 

(h)                                 By the Company, if (i) any Investor
shall have breached any representation, covenant or agreement set forth in this
Agreement, (ii) such breach or misrepresentation is not cured within 20
days after any such Investor receives written notice thereof from the Company
and (iii) such breach or misrepresentation would cause the conditions set
forth in Section 7.03(a) or Section 7.03(b) not to be
satisfied.

 

SECTION 8.02.  Effect of Termination.  In the event of the termination of this
Agreement pursuant to Section 8.01, this Agreement shall forthwith become
void, and there shall be no liability or obligation on the part of any party
hereto, except (i) with respect to Article VIII and Article IX,
which shall survive any such termination and remain in full force and effect
and (ii) with respect to any liabilities or damages incurred or suffered
by a party as a result of the material breach by the other party of any of its
representations, warranties, covenants or other agreements set forth in this
Agreement or any Ancillary Agreement.

 

SECTION 8.03.  Fees and Expenses.

 

(a)                                  Expenses.  Except as set forth in this Section 8.03
or as provided in the Management Agreement, all Expenses incurred in connection
with this Agreement and the Transactions shall be paid by the party incurring
such Expenses, whether or not the Transactions are consummated, provided, however that the Company shall
pay all of the Expenses related to printing, filing and mailing the Proxy
Statement and all SEC and other regulatory filing fees incurred.  The Investors and the Company agree that if
this 

 

43

 

Agreement is terminated pursuant to Sections 8.01(b),
8.01(c), 8.01(d) or 8.01(e), then the Company
shall pay the Investors an amount equal to the sum of the Investors’ Expenses
up to an amount equal to $2 million. 
Payment of Expenses pursuant to this Section 8.03 shall be made not
later than two business days after delivery, from time to time, to the Company
of notice of demand for payment and a documented itemization setting forth in
reasonable detail the Expenses of the Investors.

 

(b)                                 Termination Fee.  In addition to any payment required by the
foregoing provisions of this Section 8.03:

 

(i)                                     in the event that
this Agreement is terminated pursuant to Section 8.01(d) or Section 8.01(e),
then the Company shall pay to the Investors immediately prior to such
termination, in the case of a termination by the Company, or within two
business days thereafter, in the case of a termination by the Investors, a
termination fee of $6.5 million,

 

(ii)                                  in the event that
this Agreement is terminated pursuant to Section 8.01(c) and within
12 months of the termination of this Agreement, the Company or any Subsidiary enters
into an agreement concerning a transaction that constitutes an Acquisition
Proposal, or otherwise consummates an Acquisition Proposal, then immediately
prior to (and as a pre-condition to) entering into any such agreement or
consummating such transaction, the Company shall pay the Investors a
termination fee of $6.5 million; and

 

(iii)                               in the event that this
Agreement is terminated pursuant to Section 8.01(b)(i) and within 12
months of the termination of this Agreement, the Company or any Subsidiary enters
into an agreement concerning a transaction that constitutes an Acquisition
Proposal, or otherwise consummates an Acquisition Proposal, then immediately
prior to (and as a pre-condition to) entering into any such agreement or
consummating such transaction, the Company shall pay the Investors a
termination fee of $6.5 million.

 

(c)                                  Payments.  All payments under this Section 8.3
shall be made by wire transfer of immediately available funds (in U.S. dollars)
to an account designated in writing by the Investors.

 

(d)                                 Costs of Enforcement.  The Company acknowledges that the agreements
contained in this Section 8.03 are an integral part of the Transactions
contemplated by this Agreement.  In the
event that the Company shall fail to pay any amounts required by this Section 8.03
when due, the Company shall reimburse the Investors for all reasonable fees and
expenses incurred by the Investors and their affiliates (including fees and
expenses of counsel) in connection with the collection under and enforcement of
this Section 8.03.

 

SECTION 8.04.  Amendment.  This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the Closing; provided, however, that, after the Stockholder Approval is obtained,
no amendment may become effective that would by Law require approval of the
stockholders of the Company, 

 

44

 

without
approval of such stockholders.  This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.

 

SECTION 8.05.  Waiver.  At any time prior to the Closing, any party
hereto may (i) extend the time for the performance of any obligation or
other act of any other party hereto, (ii) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any agreement or condition
contained herein.  Any such extension or
waiver shall be valid if set forth in an instrument in writing signed by the
party or parties to be bound thereby.

 

ARTICLE IX

 

GENERAL
PROVISIONS

 

SECTION 9.01.  Survival of
Representations and Warranties; Indemnification.

 

(a)                                  All
representations and warranties contained in this Agreement shall be deemed made
at the Closing as if made at such time and shall survive the Closing for 18
months, except that (i) with respect to claims asserted pursuant to this Section 9.01
before the expiration of the applicable representation or warranty, such claims
shall survive until the date they are finally liquidated or otherwise resolved,
(ii) Section 3.15 shall survive until 30 days after the end of the
applicable statute of limitations and (iii) Section 3.01, 3.02, 3.03,
3.04, 3.05(a)(i) shall survive indefinitely.  A claim shall be made or commenced hereunder
by the Indemnified Party delivering to the Indemnifying Party a written notice
specifying in reasonable detail the nature of the claim, the amount claimed (if
known or reasonably estimable), and the factual basis for the claim.

 

(b)                                 The
Company agrees to indemnify and hold harmless each Investor, its partners,
affiliates, officers, directors, employees and duly authorized agents and each
of their affiliates and each other person controlling any Investor or any of
its affiliates within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act and any partner of any of them from
and against all losses, claims, damages, diminution in value of the Purchased
Securities, expenses (including reasonable counsel fees and disbursements) or
liabilities (“Losses”) which are related to or arise out of (1) any
breach by the Company of any of its representations or warranties in this
Agreement and (2) failure to perform any of the covenants or agreements
made by the Company in this Agreement. The term “Losses” as used in this Section 9.01
is not limited to matters asserted by third parties against an Indemnified
Party, but includes Losses incurred or sustained by an Indemnified Party in the
absence of third party claims, and shall be net of any Tax benefit available to
the Indemnified Party.

 

(c)                                  The
Investors agree to indemnify and hold harmless each Company, its Subsidiaries
and each of their respective officers, directors, employees, duly authorized
agents and affiliates from and against all Losses which are related to or arise
out of (1) any breach by any Investor of any of its representations or
warranties in this Agreement and (2) failure to perform any of the
covenants or agreements made by the Investors in this Agreement.

 

(d)                                 Notwithstanding
anything to the contrary contained in this Agreement: (i) an Indemnifying
Party shall not be liable for any claim for indemnification pursuant to this

 

45

 

Section 9.01 with respect
to any breach of any representation or warranty, unless and until the aggregate
amount of indemnifiable Losses which may be recovered from the Indemnifying
Party equals or exceeds $2.5 million, after which the Indemnifying Party shall
be liable only for those Losses in excess of $2.5 million; (ii) no Losses
may be claimed under Section 9.01 by any Indemnified Party or shall be
included in calculating the aggregate Losses set forth in clause (i) above
other than Losses in excess of $50,000 resulting from any single claim or
aggregated claims arising out of the same facts, events or circumstances; (iii) with
respect to any breach of any representation or warranty, the maximum amount of
indemnifiable Losses which may be recovered from an Indemnifying Party arising
out of or resulting from the causes set forth in Section 9.01 shall be an
amount equal to the Purchase Price; and (iv) neither party hereto shall
have any liability under any provision of this Agreement or any Ancillary
Agreement for any punitive damages.

 

(e)                                  A
party claiming indemnification under this Agreement (an “Indemnified Party”)
with respect to any claims asserted against the Indemnified Party by a third
party (“Third Party Claim”) that would give rise to a right of indemnification
under this Agreement shall promptly (i) notify the party from whom
indemnification is sought (the “Indemnifying Party”) of the Third Party
Claim, and (ii) transmit to the Indemnifying Party a written notice (“Claim
Notice”) describing in reasonable detail the nature of the Third Party
Claim, a copy of all papers served with respect to such claim (if any), and the
basis of the Indemnified Party’s request for indemnification under this
Agreement.  Failure to provide such Claim
Notice shall not affect the right of the Indemnified Party’s indemnification
hereunder, except to the extent the Indemnifying Party demonstrates actual and
material prejudice as a result of such failure. The Indemnifying Party shall
have the right to defend the Indemnified Party against such Third Party Claim
provided that such Indemnifying Party has acknowledged in writing its
obligation to fully indemnify the Indemnified Party with respect to such Third
Party Claim pursuant to this Section 9.01.

 

(f)                                    If
the Indemnifying Party notifies the Indemnified Party that the Indemnifying
Party elects to assume the defense of the Third Party Claim, then the
Indemnifying Party shall have the right to defend such Third Party Claim with
counsel selected by the Indemnifying Party, who is reasonably acceptable to the
Indemnified Party, by all appropriate proceedings, which proceedings shall be
prosecuted reasonably diligently by the Indemnifying Party to a final
conclusion or settled at the discretion of the Indemnifying Party in accordance
with this Section 9.01(d). The Indemnifying Party shall have full control
of such defense and proceedings, including, any compromise or settlement
thereof, provided, however that
the Indemnifying Party shall not consent to the entry of a judgment or enter into
any settlement with respect to the matter (i) which does not contain a
complete release of the Indemnified Party, contains a finding of responsibility
or liability on the part of the Indemnified Party or the violation of any
applicable legal requirement, provides any material sanction or material
restriction upon the conduct of any business by the Indemnified Party, or
provides for any relief other than monetary damages which are paid in full by
the Indemnifying Party, or (ii) without the prior written consent of the
Indemnified Party, which consent shall not be unreasonably conditioned,
withheld or delayed.  If requested by the
Indemnifying Party, the Indemnified Party agrees, at the sole cost and expense
of the Indemnifying Party, to cooperate with the Indemnifying Party and its
counsel in contesting any Third Party Claim which the Indemnifying Party elects
to contest, including the making of any related counterclaim against the Person
asserting the Third Party Claim or any cross complaint against any person.  The Indemnified Party may participate in, but
not control, any defense or settlement of any Third Party Claim controlled by
the Indemnifying Party pursuant to 

 

46

 

this Section 9.01, and the
Indemnified Party shall bear its own costs and expenses with respect to such
participation; provided, however, if in the opinion of counsel of
the Indemnified Party there is a reasonable likelihood of a conflict of
interest between the Indemnifying Party and the Indemnified Party, the
Indemnifying Party shall bear the reasonable costs and expenses of one counsel
to the Indemnified Party in connection with such defense. Notwithstanding the
foregoing, the Indemnifying Party shall not be entitled to assume the defense
of any Third Party Claim if the Third Party Claim seeks an order, injunction or
other equitable relief or relief for other than money damages against the
Indemnified Party that the Indemnified Party reasonably determines, after
conferring with its outside counsel, cannot be separated from any related claim
for money damages.

 

(g)                                 If
the Indemnifying Party fails to notify the Indemnified Party within the thirty
(30) days after receipt of any Claim Notice that the Indemnifying Party elects
to defend the Indemnified Party pursuant to Section 9.01(f), or if the
Indemnifying Party elects to defend the Indemnified Party pursuant to Section 9.01(f) but
fails to reasonably diligently defend or settle the Third Party Claim, then the
Indemnified Party shall have the right to defend the Third Party Claim by all
appropriate proceedings, which proceedings shall be promptly and vigorously
defended by the Indemnified Party to a final conclusion or settled (with the
reasonable costs and expenses of such defense borne by the Indemnifying Party).
 The Indemnified Party shall have full
control of such defense and proceedings; provided,
however, that the Indemnified
Party may not enter into any compromise or settlement of such Third Party Claim
if indemnification is to be sought hereunder, without the Indemnifying Party’s
consent, which shall not be unreasonably withheld or delayed.  The Indemnifying Party may participate in,
but not control, any defense or settlement controlled by the Indemnified Party
pursuant to this Section 9.01(g), and the Indemnifying Party shall bear
its own costs and expenses with respect to such participation.

 

(h)                                 In
the event any Indemnified Party should have a claim against any Indemnifying
Party hereunder which does not involve a Third Party Claim, the Indemnified
Party shall promptly transmit to the Indemnifying Party a written notice (the “Indemnity
Notice”) describing in reasonable detail the nature of the claim, the
Indemnified Party’s best estimate of the amount of Losses attributable to such
claim and the basis of the Indemnified Party’s request for indemnification
under this Agreement.  If the
Indemnifying Party does not notify the Indemnified Party within thirty (30)
days from its receipt of the Indemnity Notice that the Indemnifying Party disputes
such claim (the “Dispute Notice”), the Indemnifying Party shall be
deemed to have accepted and agreed with such claim. If the Indemnifying Party
has disputed such claim, the Indemnifying Party and the Indemnified Party shall
proceed in good faith to negotiate a resolution to such dispute.  If the Indemnifying Party and the Indemnified
Party cannot resolve such dispute in thirty (30) days after delivery of the
Dispute Notice, such dispute shall be resolved by litigation in an appropriate
court of competent jurisdiction.

 

(i)                                     The
parties agree to treat all indemnification payments made under this Section 9.01
or otherwise under this Agreement as an adjustment to the Purchase Price or as
capital contributions for Tax purposes.

 

SECTION 9.02.  Notices.  All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in person, by
telecopy, by a recognized overnight courier service or by registered or
certified mail (postage prepaid, return receipt requested) to the 

 

47

 

respective
parties at the following addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 9.02):

 

if
to the Investors:

 

c/o
The Yucaipa Companies LLC

9130 W. Sunset Boulevard

Los Angeles, California 90069

Attention: 
Robert P. Bermingham

 

with
a copy to:

 

Latham & Watkins LLP

633 West Fifth Street, Suite 4000

Los Angeles, California 90071

Telecopy No.:  (213) 891-8763

Attention:  Thomas C. Sadler

 

if
to the Company:

 

Pathmark Stores, Inc. 

200 Milik Street

Carteret, New Jersey 07008

Attention:  Marc A. Strassler

 

with
a copy to:

 

Shearman & Sterling LLP

599 Lexington Avenue

New York, New York 10022

Telecopy No.:  (212) 848-7179

Attention:  W. Jeffrey Lawrence

 

SECTION 9.03.  Severability.  If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the Transactions contemplated hereby is not affected in any
manner materially adverse to any party. 
Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that
the Transactions contemplated hereby be consummated as originally contemplated
to the fullest extent possible.

 

SECTION 9.04.  Entire Agreement;
Assignment.  This Agreement
and the Ancillary Agreements constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede,
except as set forth in Section 6.03(b), all prior agreements and
undertakings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof and thereof.  This Agreement shall not be assigned by
operation of law or otherwise; provided, however, that each Investor may assign its right, title 

 

48

 

and
interest under this Agreement to one or more subsidiaries, or to any
corporation, partnership or limited liability company that is an affiliate of
such Investor; provided, further, that no such assignment shall
relieve any such Investor of any of its obligations hereunder.

 

SECTION 9.05.  Parties in Interest.  This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.

 

SECTION 9.06.  Specific Performance.  The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement were not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.

 

SECTION 9.07.  Governing Law.  This Agreement shall be governed by, and
construed in accordance with, the Laws of the State of New York.  All actions and proceedings arising out of or
relating to this Agreement shall be heard and determined exclusively in any New
York state or federal court, in each case sitting in the Borough of
Manhattan.  The parties hereto hereby (a) submit
to the exclusive jurisdiction of any New York state or federal court, in each
case sitting in the Borough of Manhattan, for the purpose of any Action arising
out of or relating to this Agreement brought by any party hereto, and (b) irrevocably
waive, and agree not to assert by way of motion, defense, or otherwise, in any
such Action, any claim that it is not subject personally to the jurisdiction of
the above-named courts, that its property is exempt or immune from attachment or
execution, that the Action is brought in an inconvenient forum, that the venue
of the Action is improper, or that this Agreement or the Transactions
contemplated hereby may not be enforced in or by any of the above-named courts.

 

SECTION 9.08.  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 Agreement or the Transactions contemplated
hereby.  Each of the parties hereto (a) certifies
that no representative, agent or attorney of any other party has represented,
expressly or otherwise, that such other party would not, in the event of
litigation, seek to enforce that foregoing waiver and (b) acknowledges
that it and the other parties hereto have been induced to enter into this
Agreement and the Transactions contemplated hereby, as applicable, by, among
other things, the mutual waivers and certifications in this Section 9.08.

 

SECTION 9.09.  Attorneys’ Fees.  If any legal action is brought by reason of
any breach of any covenant, condition or agreement of the parties in this
Agreement or the Ancillary Agreements, the prevailing party shall be entitled
to recover from the other party to the action all costs and expenses of suit,
including attorneys’ fees.

 

SECTION 9.10.  Headings.  The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.

 

SECTION 9.11.  Counterparts.  This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties 

 

49

 

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.

 

50

 

IN WITNESS WHEREOF, the Investors, the Company and the
Investors’ Representative (solely for the purposes of Section 6.11 of this
Agreement) have caused this Agreement to be executed as of the date first
written above by their respective officers thereunto duly authorized.

 

	
   

  	
  YUCAIPA
  CORPORATE INITIATIVES

  
	
   

  	
  FUND
  I, L.P.

  
	
   

  	
   

  
	
   

  	
  By:
  Yucaipa Corporate Initiatives Fund I, LLC

  
	
   

  	
  Its:
  General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Robert
  P. Bermingham

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Robert
  P. Bermingham

  
	
   

  	
   

  	
  Title:

  	
  Vice
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  YUCAIPA
  AMERICAN ALLIANCE

  
	
   

  	
  FUND
  I, L.P.

  
	
   

  	
   

  
	
   

  	
  By:
  Yucaipa American Alliance Fund I, LLC

  
	
   

  	
  Its:
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert
  P. Bermingham

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Robert
  P. Bermingham

  
	
   

  	
   

  	
  Title:

  	
  Vice
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  YUCAIPA
  AMERICAN ALLIANCE

  
	
   

  	
  (PARALLEL)
  FUND I, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:
  Yucaipa American Alliance Fund I, LLC

  
	
   

  	
  Its:
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert
  P. Bermingham

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Robert
  P. Bermingham

  
	
   

  	
   

  	
  Title:

  	
  Vice
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Solely
  for the Purpose of Section 6.11 of this Agreement

  
	
   

  	
   

  	
   

  
	
   

  	
  THE
  YUCAIPA COMPANIES LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert
  P. Bermingham

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Robert
  P. Bermingham

  
	
   

  	
   

  	
  Title:

  	
  Vice
  President

  
								

 

S-1

Securities Purchase Agreement

 

 

	
   

  	
  PATHMARK
  STORES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/
  Frank Vitrano

  	
   

  
	
   

  	
   

  	
  Name:
  

  	
  Frank
  Vitrano

  
	
   

  	
   

  	
  Title:

  	
  President
  and Chief Financial Officer

  
					

 

S-2

Securities Purchase Agreement

 

 

EXHIBIT E-1

MATTERS TO BE COVERED IN OPINION OF
SHEARMAN & STERLING LLP

TO BE DELIVERED TO INVESTORS

 

Terms
defined in the Securities Purchase Agreement are used herein as therein
defined, except that for purposes hereof the following terms have the meanings
set forth below:

 

 “DGCL”
means the General Corporation of the State of Delaware.

 

“Governing Documents” means the certificate of
incorporation and bylaws of the Company.

 

“Material Agreements” means (i) the Credit
Agreement, as amended or waived prior to the Closing, and (ii) the
Indenture dated as of January 29, 2002 among the Company, the Subsidiary
Guarantors and Wells Fargo Bank Minnesota, National Association as Trustee, as
amended by the First Supplemental Indenture thereto.

 

“Transaction Documents” means, collectively,
the Securities Purchase Agreement, the Warrant Agreement, Registration Rights
Agreement, the Stockholders Agreement, and the Management Agreement.

 

1.                                       The
Company has been duly organized and is validly existing and in good standing
under the laws of the State of Delaware. 
The Company has the requisite corporate power and authority to enter
into the Transaction Documents and perform its obligations thereunder.

 

2.                                       The
execution, delivery and performance of each Transaction Document have been duly
authorized by all necessary corporate action of the Company, and each such
Transaction Document has been duly executed and delivered by the Company.

 

3.                                       Each
of the Transaction Documents (other than the Stockholders Agreement) constitutes
a legally valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.

 

4.                                       The
Shares and the Investor Warrants have been duly authorized by all necessary
corporate action of the Company and, when issued to and paid for by you in
accordance with the terms of the Securities Purchase Agreement, will be validly
issued, fully paid and non-assessable and free of preemptive rights arising
under the Governing Documents or the DGCL. 
The shares of Company Common Stock issuable upon exercise of each of the
Investor Warrants have been duly reserved and, if issued to the Investors on
the date hereof in compliance with the provisions of the Governing Documents,
would be validly issued, fully paid and nonassessable and free of preemptive
rights arising from the Governing Documents and the DGCL.

 

5.                                       Assuming
the truthfulness of the representations of the Investors and the Company set
forth in the Securities Purchase Agreement, the Units, upon issuance and
delivery 

 

E-1-1

 

and payment therefor in
the manner described in the Securities Purchase Agreement, will be issued in a
transaction exempt from the registration requirements of the Securities Act and
the shares of Company Common Stock issuable upon the exercise of the Investor
Warrants, if issued and delivered to the Investors on the date hereof in
accordance with the terms of the Governing Documents, would also be exempt from
the registration requirements of the Securities Act.

 

6.                                       The
execution and delivery of each Transaction Document by the Company and the
performance by the Company of its obligations thereunder on the date hereof do
not:

 

i.                  conflict with or violate the
Certificate of Incorporation or By-laws of the Company,

 

ii.               conflict with or violate any federal law or the DGCL
applicable to the Company or any Subsidiary or by which any property or asset
of the Company or any Subsidiary is bound or affected,

 

iii.            require
any consent or approval under, result in any breach of or constitute a default
(or an event which, with notice or lapse of time or both, would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or give to others a right to require any
payment to be made under, or result in the creation of a lien or other
encumbrance on any property or asset of the Company or any Subsidiary pursuant
to, the Material Agreements; or

 

iv.           require any consent, approval, authorization or permit of,
or filing with or notification to, any federal or Delaware (with respect to
matters governed by the DGCL) Governmental Authority.

 

E-1-2

 

EXHIBIT E-2

 

MATTERS TO BE COVERED IN OPINION OF COUNSEL
TO COMPANY

TO BE DELIVERED TO INVESTORS

 

Terms
defined in the Securities Purchase Agreement are used herein as therein
defined, except that for purposes hereof the following terms have the meanings
set forth below:

 

“Court
Orders” means court and governmental orders, writs, judgments and decrees
identified to us by a senior officer of the Company as the only governmental
orders, writs, judgments and decrees applicable to the Company, which are
identified on Schedule A hereto.

 

“DGCL” means the General Corporation of the
State of Delaware.

 

“Governing Documents” means the certificate of
incorporation and bylaws of the Company.

 

“Material Agreements” means (i) First
Amended and Restated Supply Agreement among the Company, Plainbridge, Inc.
and C&S Wholesale Grocers, Inc. dated as of January 29, 1998., (ii) Services
Agreement between the Company and International Business Machines dated February 1,
2005, (iii) Prime Vendor Agreement dated March 1, 2003 by and between
the Company and AmerisourceBergen Drug Corporation and (iv) Trucking
Agreement between the Company and Grocery Haulers, Inc. dated September 15,
1997.

 

“Transaction Documents” means, collectively,
the Securities Purchase Agreement, the Warrant Agreement, Registration Rights
Agreement and the Management Agreement.

 

1.                                       The
execution and delivery of each Transaction Document by the Company and the
performance by the Company of its obligations thereunder on the date hereof do
not:

 

i.                  conflict
with or violate any material New York, New Jersey, Delaware, Pennsylvania Law
applicable to the Company or any Subsidiary or by which any property or asset
of the Company or any Subsidiary is bound or affected,

 

ii.               require
any consent or approval under, result in any breach of or constitute a default
(or an event which, with notice or lapse of time or both, would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or give to others a right to require any
payment to be made under, or result in the creation of a lien or other
encumbrance on any property or asset of the Company or any Subsidiary pursuant
to, any Material Agreement; or

 

iii.            require any material consent, approval, authorization or
permit of, or filing with or notification to, any New York, New Jersey,
Pennsylvania or Delaware Governmental Authority.

 

E-2-1

 

EXHIBIT F

MATTERS TO BE COVERED IN OPINION OF
COUNSEL TO INVESTORS

TO BE DELIVERED TO THE COMPANY

 

Terms
defined in the Securities Purchase Agreement are used herein as therein
defined, except that for purposes hereof the following terms have the meanings
set forth below:

 

“DLLCA” means the Limited Liability Company Act
of the State of Delaware.

 

“DRULPA” means the Delaware Revised Uniform
Limited Partnership Act.

 

“Governing Documents” means (i) in the
case of Investors’ Representative, the certificate of formation and the limited
liability company agreement of the Investor’s Representative and (ii) in
the case of each Investor, the certificate of limited partnership and the
limited partnership agreement or other similar operating agreement of such
Investor.

 

“Transaction Documents” means, collectively,
the Securities Purchase Agreement, the Warrant Agreement, the Registration
Rights Agreement, the Stockholders Agreement and the Management Agreement.

 

1.                                       Each
of the Investors and the Investors’ Representative has been duly formed and
validly existing and in good standing under the laws of the State of
Delaware.  Each of the Investors has the requisite
limited partnership power and authority, and the Investors’ Representative has
the requisite limited liability company power and authority, to enter into the
Transaction Documents to which it is a party and perform its obligations
thereunder.

 

2.                                       The
execution, delivery and performance of each Transaction Document to which each
of the Investors and the Investors’ Representative, respectively, is a party have
been duly authorized by all necessary limited partnership action of each
Investor and all necessary limited liability company action of the Investors’
Representative, and each such Transaction Document has been duly executed and
delivered by each Investor and the Investors’ Representative.

 

3.                                       Each
of the Transaction Documents (other than the Stockholders Agreement and the
Management Agreement) constitutes a legally valid and binding obligation of
each Investor, enforceable against such Investor in accordance with its terms.

 

4.                                       Each
of the Purchase Agreement and the Management Agreement constitutes a legally
valid and binding obligation of the Investors’ Representative, enforceable
against the Investors’ Representative in accordance with its terms.

 

5.                                       The
execution and delivery by the Investors and the Investors’ Representative of
each Transaction Document to which it is a party, and the performance by each
Investor and the Investors’ Representative of its obligations thereunder on the
date hereof do not:

 

i.                  conflict with or violate the Governing
Documents of such Investor or the Investors’ Representative,

 

F-1

 

ii.               conflict with or violate any federal law
or the DLLCA or DRULPA applicable to such Investor or the Investors’
Representative or by which any property or asset of such Investor or the
Investors’ Representative is bound or affected; or

 

iii.            require any consent, approval, authorization or permit of,
or filing with or notification to, any federal or Delaware (with respect to
matters governed by the DLLCA or DRULPA) Governmental Authority.

 

F-2

 

SCHEDULE I

 

	
  Name of Investor

  	
   

  	
  Number of Units

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Yucaipa Corporate Initiatives Fund I, L.P.

  	
   

  	
  11,294,200

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Yucaipa American Alliance Fund I, L.P.

  	
   

  	
  6,403,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Yucaipa American Alliance (Parallel) Fund I, L.P.

  	
   

  	
  2,302,800

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  20,000,000

  	
   

  

 

Schedule I

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