Document:

Purchase Agreement

 Exhibit 10.34 
  
 EXECUTION COPY 

  
 PURCHASE AGREEMENT 
  
 among 
  
 NOVASTAR MORTGAGE, INC., 
  
 NOVASTAR FINANCIAL, INC., 
  
 NOVASTAR CAPITAL TRUST I, 
  
 MERRILL LYNCH INTERNATIONAL 
  
 and 
  
 TABERNA PREFERRED FUNDING I, LTD. 
  

  
 Dated as of March 15, 2005 
  

  

  

 PURCHASE AGREEMENT 
 ($ 50,000,000 Trust Preferred Securities) 
  
 THIS PURCHASE AGREEMENT, dated as of March 15, 2005 (this “Purchase Agreement”), is entered into among NovaStar Mortgage, Inc., a Virginia corporation (the “Company”), NovaStar
Financial, Inc., a Maryland corporation (the “Guarantor”), and NovaStar Capital Trust I, a Delaware statutory trust (the “Trust”, and together with the Company and the Guarantor, the “Sellers”), on
the one hand, and TABERNA Preferred Funding I, Ltd. or its assignee (“Taberna”) and Merrill Lynch International (“MLI” and, collectively with Taberna (the “Purchaser”), on the other hand.

  
 W I T N E S S E T H: 
  
 WHEREAS, the Sellers propose to issue and sell Fifty Thousand (50,000)
Floating Rate Preferred Securities of the Trust, having a stated liquidation amount of $1,000 per security, bearing a variable rate, reset quarterly, equal to LIBOR (as defined in the Indenture (as defined below)) plus 3.50% per annum (the
“Preferred Securities”); 
  
 WHEREAS, the entire
proceeds from the sale of the Preferred Securities will be combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the “Common Securities”), and will be used by the Trust to purchase
Fifty One Million Five Hundred Fifty Thousand Dollars ($51,550,000) in principal amount of the unsecured junior subordinated notes of the Company (the “Junior Subordinated Notes”); 
  
 WHEREAS, the Preferred Securities and the Common Securities for the Trust
will be issued pursuant to the Amended and Restated Trust Agreement (the “Trust Agreement”), dated as of the Closing Date, among the Company, as depositor, JPMorgan Chase Bank, National Association, a national banking association,
as property trustee (in such capacity, the “Property Trustee”), Chase Bank USA, National Association, a national banking association, as Delaware trustee (in such capacity, the “Delaware Trustee”), the
Administrative Trustees named therein (in such capacities, the “Administrative Trustees”) and the holders from time to time of undivided beneficial interests in the assets of the Trust; 
  
 WHEREAS, the Junior Subordinated Notes will be issued pursuant to a Junior
Subordinated Indenture, dated as of the Closing Date (the “Indenture”), between the Company and JPMorgan Chase Bank, National Association, a national banking association, as indenture trustee (in such capacity, the
“Indenture Trustee”); and 
  
 WHEREAS, the
Preferred Securities will be guaranteed on a subordinated basis by the Guarantor as to the payment of distributions, and as to payments on liquidation and redemption, to the extent set forth in the Parent Guarantee Agreement (the
“Guarantee”) between the Guarantor and JPMorgan Chase Bank, National Association, a national banking association, as guarantee trustee. 
  

 NOW, THEREFORE, in consideration of the mutual agreements and subject to the terms and conditions herein
set forth, the parties hereto agree as follows: 
  
 1. Definitions. The Preferred Securities, the Common Securities and the Junior Subordinated Notes are collectively referred to herein as the “Securities.” This Purchase Agreement, the Indenture, the Trust
Agreement, the Guarantee, and the Securities are collectively referred to herein as the “Operative Documents.” All other capitalized terms used but not defined in this Purchase Agreement shall have the respective meanings ascribed
thereto in the Indenture. 
  
 2. Purchase
and Sale of the Preferred Securities. 
  
 (a) The Trust agree to sell to the Purchaser, and the Purchaser agrees to purchase in the respective amounts set forth by their respective names on the signature page hereto from the Trust, the Preferred Securities for an amount (the
“Purchase Price”) equal to Fifty Million Dollars ($50,000,000). The Purchaser shall be responsible for the rating agency costs and expenses. The Trust shall use the Purchase Price, together with the proceeds from the sale of the
Common Securities, to purchase the Junior Subordinated Notes. 
  
 (b) Delivery or transfer of, and payment for, the Preferred Securities shall be made at 10:00 A.M. Chicago time (11:00 A.M. New York time), on March 15, 2005 or such later date (not later than April 14, 2005) as the
parties may designate (such date and time of delivery and payment for the Preferred Securities being herein called the “Closing Date”). The Preferred Securities shall be transferred and delivered to the Purchaser against the payment
of the Purchase Price to the Trust made by wire transfer in immediately available funds on the Closing Date to a U.S. account designated in writing by the Company at least two business days prior to the Closing Date. 
  
 (c) Delivery of the Preferred Securities shall be made at
such location, and in such names and denominations, as the Purchaser shall designate at least two business days in advance of the Closing Date. The Company and the Trust agree to have the Preferred Securities available for inspection and checking by
the Purchaser in Chicago, Illinois, not later than 1:00 P.M., Chicago time (2:00 P.M. New York time), on the business day prior to the Closing Date. The closing for the purchase and sale of the Preferred Securities shall occur at the offices of
Mayer, Brown, Rowe & Maw LLP, 190 South LaSalle Street, Chicago, Illinois 60603, or such other place as the parties hereto shall agree. 
  
 3. Conditions. The obligations of the parties under this Purchase Agreement are subject to the following conditions:

  
 (a) The representations and warranties
contained herein shall be accurate as of the date of delivery of the Preferred Securities. 
  
 (b) [Reserved]. 
  
 (c) Orrick, Herrington & Sutcliffe LLP, counsel for the Sellers (the “Company Counsel”), shall have delivered an
opinion, dated the Closing Date, addressed to the Purchaser 

  

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and JPMorgan Chase Bank, National Association, in form and substance satisfactory to the Purchaser; (ii) the Company shall have furnished to the Purchaser
the opinion of the Company’s General Counsel in form and substance satisfactory to the Purchaser; and (iii) Irvine Law Group, P.C., special tax counsel to the Guarantor shall have delivered an opinion in form and substance satisfactory to the
Purchaser. In rendering their opinion, the Company Counsel may rely as to factual matters upon certificates or other documents furnished by officers, directors and trustees of the Company, the Guarantor and the Trust and by government officials
(provided, however, that copies of any such certificates or documents are delivered to the Purchaser) and by and upon such other documents as such counsel may, in their reasonable opinion, deem appropriate as a basis for the Company Counsel’s
opinion. The Company Counsel may specify the jurisdictions in which they are admitted to practice and that they are not admitted to practice in any other jurisdiction and are not experts in the law of any other jurisdiction. Such Company Counsel
Opinion shall not state that they are to be governed or qualified by, or that they are otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991). 
  
 (d) The
Purchaser shall have been furnished the opinion of Mayer, Brown, Rowe & Maw LLP, special tax counsel for the Purchaser, dated the Closing Date, addressed to the Purchaser and JPMorgan Chase Bank, National Association, in substantially the form
set out in Annex B hereto. 
  
 (e) The
Purchaser shall have received the opinion of Richards, Layton & Finger, P.A., special Delaware counsel for the Delaware Trustee, dated the Closing Date, addressed to the Purchaser, JPMorgan Chase Bank, National Association, the Delaware Trustee
and the Company, in substantially the form set out in Annex C hereto. 
  
 (f) The Purchaser shall have received the opinion of Gardere Wynne Sewell LLP, special counsel for the Property Trustee and the Indenture Trustee, dated the Closing Date, addressed to the Purchaser, in substantially
the form set out in Annex D hereto. 
  
 (g) The Purchaser shall have received the opinion of Richards, Layton & Finger, P.A., special Delaware counsel for the Delaware Trustee, dated the Closing Date, addressed to the Purchaser and JPMorgan Chase Bank, National Association,
in substantially the form set out in Annex E hereto. 
  
 (h) The Company shall have furnished to the Purchaser a certificate of the Company, signed by the Chief Executive Officer, President or a Vice President, and Chief Financial Officer, Treasurer or Assistant Treasurer
of the Company, and the Trust shall have furnished to the Purchaser a certificate of the Trust, signed by an Administrative Trustee of the Trust, in each case dated the Closing Date, and, in the case of the Company, as to (i) and (ii) below and, in
the case of the Trust, as to (i) below. 
  
 (i)
the representations and warranties in this Purchase Agreement are true and correct on and as of the Closing Date with the same effect as if made on the Closing Date, and the Company and the Trust, as applicable, have complied with all the 

  

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agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; and 
  
 (ii) since October 31, 2004 (as defined below), there has
been no material adverse change in the condition (financial or other), earnings, business or assets of the Company and its subsidiaries taken as a whole, whether or not arising from transactions occurring in the ordinary course of business (a
“Material Adverse Change”). 
  
 (i) Subsequent to the execution of this Purchase Agreement, there shall not have been any change, or any development involving a prospective change, in or affecting the condition (financial or other), earnings, business or assets of the
Guarantor and its subsidiaries, taken as a whole whether or not occurring in the ordinary course of business, the effect of which is, in the Purchaser’s judgment, so material and adverse as to make it impractical or inadvisable to proceed with
the purchase of the Preferred Securities. 
  
 (j)
Prior to the Closing Date, the Company and the Trust shall have furnished to the Purchaser and its counsel such further information, certificates and documents as the Purchaser or its counsel may reasonably request. 
  
 If any of the conditions specified in this Section 3 shall not have
been fulfilled when and as provided in this Purchase Agreement, or if any of the opinions, certificates and documents mentioned above or elsewhere in this Purchase Agreement shall not be reasonably satisfactory in form and substance to the Purchaser
or its counsel, this Purchase Agreement and all the Purchaser’s obligations hereunder may be canceled at the Closing Date by the Purchaser. Notice of such cancellation shall be given to the Company, the Guarantor and the Trust in writing or by
telephone or facsimile confirmed in writing. 
  
 Each certificate
signed by any trustee of the Trust or any officer of the Company or the Guarantor and delivered to the Purchaser or the Purchaser’s counsel in connection with the Operative Documents and the transactions contemplated hereby and thereby shall be
deemed to be a representation and warranty of the Trust, the Guarantor and/or the Company, as the case may be, and not by such trustee or officer in any individual capacity. 
  
 4. Representations and Warranties of the Company, the Guarantor and the Trust. The Company,
the Guarantor and the Trust jointly and severally represent and warrant to, and agree with the Purchaser, as follows (provided that none of the following representations or warranties apply or relate to any acts or omissions by the Purchaser
or its Affiliates): 
  
 (a) None of the Company,
the Guarantor nor the Trust, nor any of their “Affiliates” (as defined in Rule 501(b) of Regulation D (“Regulation D”) under the Securities Act (as defined below)), nor any person acting on its or their behalf, has,
directly or indirectly, made offers or sales of any security, or solicited offers to buy any security, under circumstances that would require the registration of any of the Securities under the Securities Act of 1933, as amended (the
“Securities Act”). 
  

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 (b) None of the Company, the Guarantor nor the Trust, nor any of their Affiliates, nor
any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of any of the Securities. 
  
 (c) The Securities (i) are not and have not been listed on a
national securities exchange registered under section 6 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or quoted on a U.S. automated inter-dealer quotation system and (ii) are not of an open-end investment
company, unit investment trust or face-amount certificate company that are, or are required to be, registered under section 8 of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and the Securities
otherwise satisfy the eligibility requirements of Rule 144A(d)(3) promulgated pursuant to the Securities Act (“Rule 144A(d)(3)”). 
  
 (d) None of the Company, the Guarantor nor the Trust, nor any of their Affiliates, nor any person acting on its or their behalf, has
engaged, or will engage, in any “directed selling efforts” within the meaning of Regulation S under the Securities Act with respect to the Securities. 
  
 (e) None the Company, the Guarantor nor the Trust is, and, immediately following consummation of the
transactions contemplated hereby and the application of the net proceeds therefrom, will not be, an “investment company” or an entity “controlled” by an “investment company,” in each case within the meaning of section
3(a) of the Investment Company Act. 
  
 (f) None
the Company, the Guarantor nor the Trust has paid or agreed to pay to any person any compensation for soliciting another to purchase any of the Securities, except for the Preferred Securities Commission and/or the sales commission the Company has
agreed to pay to Cohen Bros. & Company (or to the Company’s introducing agent on behalf of Cohen Bros. & Company) pursuant to the letter agreement between the Company and Cohen Bros. & Company, dated March 2, 2005.

  
 (g) The Trust has been duly created and is
validly existing in good standing as a statutory trust under the Delaware Statutory Trust Act, 12 Del. C. §3801, et seq. (the “Statutory Trust Act”) with all requisite power and authority to own property and to
conduct the business it transacts and proposes to transact and to enter into and perform its obligations under the Operative Documents to which it is a party. The Trust is duly qualified to transact business as a foreign entity and is in good
standing in each jurisdiction in which such qualification is necessary, except where the failure to so qualify or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, business or assets of
the Trust, whether or not occurring in the ordinary course of business. The Trust is not a party to or otherwise bound by any agreement other than the Operative Documents and other agreements contemplated by the Operative Documents. The Trust is and
will be, under current law, classified for federal income tax purposes as a grantor trust and not as an association or publicly traded partnership taxable as a corporation. 
  

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 (h) The Trust Agreement has been duly authorized by the Company and, on the Closing Date
specified in Section 2(b), will have been duly executed and delivered by the Company and the Administrative Trustees of the Trust, and, assuming due authorization, execution and delivery by the Property Trustee and the Delaware Trustee, will
be a legal, valid and binding obligation of the Company and the Administrative Trustees, enforceable against them in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally
and to general principles of equity. Each of the Administrative Trustees of the Trust is an employee of the Company and has been duly authorized by the Company to execute and deliver the Trust Agreement. 
  
 (i) The Indenture has been duly authorized by the Company
and, on the Closing Date, will have been duly executed and delivered by the Company, and, assuming due authorization, execution and delivery by the Indenture Trustee, will be a legal, valid and binding obligation of the Company enforceable against
it in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity. 
  
 (j) The Preferred Securities and the Common Securities have been duly authorized by the Trust and, when
issued and delivered against payment therefor on the Closing Date in accordance with this Purchase Agreement, in the case of the Preferred Securities, and in accordance with the Common Securities Subscription Agreement, in the case of the Common
Securities, will be validly issued, fully paid and non-assessable and will represent undivided beneficial interests in the assets of the Trust entitled to the benefits of the Trust Agreement, enforceable against the Trust in accordance with their
terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity. The issuance of the Securities is not subject to any preemptive or other similar rights. On the
Closing Date, all of the issued and outstanding Common Securities will be directly owned by the Company free and clear of any pledge, security interest, claim, lien or other encumbrance of any kind (each, a “Lien”). 
  
 (k) The Junior Subordinated Notes have been duly authorized
by the Company and, on the Closing Date, will have been duly executed and delivered to the Indenture Trustee for authentication in accordance with the Indenture and, when authenticated in the manner provided for in the Indenture and delivered to the
Trust against payment therefor in accordance with the Junior Subordinated Note Purchase Agreement, will constitute legal, valid and binding obligations of the Company entitled to the benefits of the Indenture, enforceable against the Company in
accordance with their terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity. 
  
 (l) This Purchase Agreement has been duly authorized, executed and delivered by the Company and the Trust.

  
 (m) The Guarantee has been duly authorized by
the Guarantor and, on the Closing Date, will have been duly executed and delivered by the Guarantor, and, assuming due authorization, execution and delivery by the other parties thereto, will be a legal, valid and 

  

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binding obligation of the Guarantor enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws
affecting creditors’ rights generally and to general principles of equity. 
  
 (n) Neither the issue and sale of the Common Securities, the Preferred Securities or the Junior Subordinated Notes, nor the purchase of
the Junior Subordinated Notes by the Trust, nor the execution and delivery of and compliance with the Operative Documents by the Company, the Guarantor or the Trust, nor the consummation of the transactions contemplated herein or therein, (i) will
conflict with or constitute a violation or breach of the Trust Agreement or the charter or bylaws of the Company, the Guarantor or any subsidiary of the Company or the Guarantor or, to the Company’s or Guarantor’s knowledge, any applicable
law, statute, rule, regulation, judgment, order, writ or decree of any government, governmental authority, agency or instrumentality or court, domestic or foreign, having jurisdiction over the Trust or the Company or any of its subsidiaries or their
respective properties or assets (collectively, the “Governmental Entities”), (ii) will conflict with or constitute a violation or breach of, or a default or Repayment Event (as defined below) under, or result in the creation or
imposition of any Lien upon any property or assets of the Trust, the Guarantor, the Company or any of the their subsidiaries pursuant to, any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which (A)
the Trust, the Company, the Guarantor or any of their subsidiaries is a party or by which it or any of them may be bound, or (B) to which any of the property or assets of any of them is subject, or any judgment, order or decree of any court,
Governmental Entity or arbitrator, except, in the case of this clause (ii), for such conflicts, breaches, violations, defaults, Repayment Events (as defined below) or Liens which (X) would not, singly or in the aggregate, adversely affect the
consummation of the transactions contemplated by the Operative Documents and (Y) would not, singly or in the aggregate, have a material adverse effect on the condition (Financial or otherwise), earnings, business, liabilities and assets (taken as a
whole) or business prospects of the Company and its subsidiaries taken as a whole, or of the Guarantor and its subsidiaries taken as a whole, whether or not occurring in the ordinary course of business (a “Material Adverse Effect”)
or (iii) require the consent, approval, authorization or order of any court or Governmental Entity. As used herein, a “Repayment Event” means any event or condition which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Trust or the Company or any of its subsidiaries prior to its scheduled
maturity. 
  
 (o) The Company has been duly
incorporated and is validly existing as a corporation in good standing under the laws of Virginia, with all requisite corporate power and authority to own, lease and operate its properties and conduct the business it transacts and proposes to
transact, and is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature of its activities requires such qualification, except where the failure of the Company to be so qualified
would not, singly or in the aggregate, have a Material Adverse Effect. 
  
 (p) The Guarantor has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland, with all requisite corporate power and authority to own, lease and operate
its properties and to conduct the business it 

  

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transacts and proposes to transact, and is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where
the nature or its activities requires such qualification, except where the failure of the Guarantor to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect. 
  
 (q) Neither the Guarantor nor the Company has any
subsidiaries that are material to its business, financial condition or earnings other than those subsidiaries listed in Schedule 1 attached hereto (collectively, the “Significant Subsidiaries”). Each Significant Subsidiary
has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized, with all requisite corporate power and authority to own, lease and operate its properties
and conduct the business it transacts and proposes to transact. Each Significant Subsidiary is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature of its activities requires such
qualification, except where the failure to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect. 
  
 (r) Each of the Trust, the Company, the Guarantor and each of the their subsidiaries hold all necessary approvals, authorizations, orders,
licenses, consents, registrations, qualifications, certificates and permits (collectively, the “Governmental Licenses”) of and from Governmental Entities necessary to conduct their respective businesses as now being conducted, and
neither the Trust, the Company, the Guarantor nor any of the their subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Government License, except where the failure to be so licensed or approved
or the receipt of an unfavorable decision, ruling or finding, would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity or the failure
of such Governmental Licenses to be in full force and effect, would not, singly or in the aggregate, have a Material Adverse Effect; and the Company, the Guarantor and their subsidiaries are in compliance with all applicable laws, rules,
regulations, judgments, orders, decrees and consents, except where the failure to be in compliance would not, singly or in the aggregate, have a Material Adverse Effect. 
  
 (s) All of the issued and outstanding shares of capital stock of the Company and the Guarantor and each of
their subsidiaries are validly issued, fully paid and non-assessable; all of the issued and outstanding capital stock of each subsidiary of the Company and the Guarantor is owned by the Company or the Guarantor, as the case may be, directly or
through subsidiaries, free and clear of any Lien, claim or equitable right; and none of the issued and outstanding capital stock of the Company, the Guarantor or any subsidiary was issued in violation of any preemptive or similar rights arising by
operation of law, under the charter or bylaws of such entity or under any agreement to which the Company, the Guarantor or any of their subsidiaries is a party. 
  
 (t) Neither the Company, the Guarantor nor any of their subsidiaries is (i) in violation of its respective
charter or by-laws or similar organizational documents or (ii) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other
agreement or instrument to which the Company, the Guarantor or any such subsidiary is a party or by which it 

  

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or any of them may be bound or to which any of the property or assets of any of them is subject, except, in the case of clause (ii), where such violation or
default would not, singly or in the aggregate, have a Material Adverse Effect. 
  
 (u) There is no action, suit or proceeding before or by any Governmental Entity, arbitrator or court, domestic or foreign, now pending or,
to the knowledge of the Company, the Guarantor or the Trust after due inquiry, threatened against or affecting the Trust, the Guarantor or the Company or any of their subsidiaries, except for such actions, suits or proceedings that, if adversely
determined, would not, singly or in the aggregate, adversely affect the consummation of the transactions contemplated by the Operative Documents or have a Material Adverse Effect; and the aggregate of all pending legal or governmental proceedings to
which the Trust, the Guarantor or the Company or any of their subsidiaries is a party or of which any of their respective properties or assets is subject, including ordinary routine litigation incidental to the business, are not expected to result
in a Material Adverse Effect. 
  
 (v) The
accountants of the Company and the Guarantor who certified the Financial Statements (as defined below) are independent public accountants of the Company, the Guarantor and their subsidiaries within the meaning of the Securities Act, and the rules
and regulations of the Securities and Exchange Commission (the “Commission”) thereunder. 
  
 (w) The audited consolidated financial statements (including the notes thereto) and schedules of the Guarantor and its consolidated
subsidiaries for the fiscal year ended December 31, 2003 (the “Financial Statements”) and the interim unaudited consolidated financial statements of the Guarantor and its consolidated subsidiaries for the quarter ended September 30,
2004 (the “Interim Financial Statements”) provided to the Purchaser are the most recent available audited and unaudited consolidated financial statements of the Guarantor and its consolidated subsidiaries, respectively, and fairly
present in all material respects, in accordance with U.S. generally accepted accounting principles, the financial position of the Guarantor and its consolidated subsidiaries, and the results of operations and changes in financial condition as of the
dates and for the periods therein specified, subject, in the case of Interim Financial Statements, to year-end adjustments (which are expected to consist solely of normal recurring adjustments). Such consolidated financial statements and schedules
have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) consistently applied throughout the periods involved (except as otherwise noted therein). 
  
 (x) None of the Trust, the Company, the Guarantor nor any of
their subsidiaries has any material liability, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for taxes (and
there is no past or present fact, situation, circumstance, condition or other basis for any present or future action, suit, proceeding, hearing, charge, complaint, claim or demand against the Company, the Guarantor or their subsidiaries that could
give rise to any such liability), except for (i) liabilities set forth in the Financial Statements or the Interim Financial Statements and (ii) normal fluctuations in the amount of the liabilities referred to in clause (i) above occurring in the
ordinary course of business of the Trust, the Company, the Guarantor and all of their subsidiaries since the date of the most recent balance sheet included in such Financial Statements. 
  

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 (y) Since the respective dates of the Financial Statements and the Interim Financial
Statements, there has not been (A) any Material Adverse Change or (B) any dividend or distribution of any kind declared, paid or made by the Guarantor on any class of its capital stock other than regular quarterly dividends on the Guarantor’s
common stock and a special dividend of $1.25 per share to shareholders of record on December 31, 2004, paid on January 14, 2005. 
  
 (z) The documents of the Guarantor filed with the Commission in accordance with the Exchange Act, from and including the commencement of
the fiscal year covered by the Guarantor’s most recent Annual Report on Form 10-K, at the time they were or hereafter are filed by the Guarantor with the Commission (collectively, the “1934 Act Reports”), complied and will
comply in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder (the “1934 Act Regulations”), and, at the date of this Purchase Agreement and on the Closing Date,
do not and will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not
misleading; and other than such instruments, agreements, contracts and other documents as are filed as exhibits to the Guarantor’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q or Current Reports on Form 8-K, there are no
instruments, agreements, contracts or documents of a character described in Item 601 of Regulation S-K promulgated by the Commission to which the Guarantor or any of its subsidiaries is a party other than those which are not yet required to be
filed. The Guarantor is in compliance with all currently applicable requirements of the Exchange Act that were added by the Sarbanes-Oxley Act of 2002. 
  
 (aa) No labor dispute with the employees of the Company, the Guarantor or any of their subsidiaries exists or, to the knowledge of the
executive officers of the Company or the Guarantor, is imminent, except those which would not, singly or in the aggregate, have a Material Adverse Effect. 
  
 (bb) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Governmental
Entity, other than those that have been made or obtained, is necessary or required for the performance by the Trust, the Guarantor or the Company of their respective obligations under the Operative Documents, as applicable, or the consummation by
the Trust, the Guarantor and the Company of the transactions contemplated by the Operative Documents. 
  
 (cc) Each of the Trust, the Company, the Guarantor and each Significant Subsidiary of the Company and the Guarantor has good and
marketable title to all of its respective material real and personal properties, in each case free and clear of all Liens and defects, except for those that would not, singly or in the aggregate, have a Material Adverse Effect; and all of the leases
and subleases under which the Trust, the Company, the Guarantor or any Significant Subsidiary of the Company or the Guarantor holds properties are in full force and effect, except where the failure of such leases and subleases to be in full force
and effect would not, singly or in the aggregate, have a Material Adverse Effect, and none of the Trust, the Company, the Guarantor or any Significant Subsidiary of the Company or the Guarantor has any notice of any claim of any sort that has been
asserted by anyone adverse to the rights of the 

  

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Trust, the Company, the Guarantor or any significant subsidiary of the Company or the Guarantor under any such leases or subleases, or affecting or
questioning the rights of such entity to the continued possession of the leased or subleased premises under any such lease or sublease, except for such claims that would not, singly or in the aggregate, have a Material Adverse Effect. 
  
 (dd) [Reserved]. 
  
 (ee) Commencing with its taxable year ended December 31,
1996, the Guarantor has been, and upon the completion of the transactions contemplated hereby, the Guarantor will continue to be, organized and operated in conformity with the requirements for qualification and taxation as a real estate investment
trust (a “REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and the Guarantor’s proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code, and no actions have been taken (or not taken which are required to be taken) which would cause such qualification to be lost. The Guarantor expects to continue to be organized and
to operate in a manner so as to qualify as a REIT in the taxable year ending December 31, 2004 and succeeding taxable years. 
  
 (ff) The Company, the Guarantor and each of the Significant Subsidiaries have timely and duly filed all Tax Returns required to be filed
by them or has requested an extension thereof, and all such Tax Returns are true, correct and complete in all material respects. The Company, the Guarantor and each of the Significant Subsidiaries have timely and duly paid in full all material Taxes
required to be paid by them, except for any such Taxes that are currently being contested in good faith or would not have a Material Adverse Effect (whether or not such amounts are shown as due on any Tax Return). There are no federal, state, or
other Tax audits or deficiency assessments proposed or pending with respect to the Company, the Guarantor or any of the Significant Subsidiaries, and no such audits or assessments are threatened. As used herein, the terms “Tax” or
“Taxes” mean (i) all federal, state, local, and foreign taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax, or penalties applicable thereto,
imposed by any Governmental Entity, and (ii) all liabilities in respect of such amounts arising as a result of being a member of any affiliated, consolidated, combined, unitary or similar group, as a successor to another person or by contract. As
used herein, the term “Tax Returns” means all federal, state, local, and foreign Tax returns, declarations, statements, reports, schedules, forms, and information returns and any amendments thereto filed or required to be filed with
any Governmental Entity. 
  
 (gg) The Trust is
not subject to United States federal income tax with respect to income received or accrued on the Junior Subordinated Notes, interest payable by the Company on the Junior Subordinated Notes is deductible by the Company, in whole or in part, for
United States federal income tax purposes, and the Trust is not subject to more than a de minimis amount of other taxes, duties or other governmental charges. 
  
 (hh) The books, records and accounts of the Company, the Guarantor and its subsidiaries accurately and
fairly reflect, in reasonable detail, the transactions in, and dispositions of, the assets of, and the results of operations of, the Company, the Guarantor and their subsidiaries. Each of the Company, the Guarantor and each of their subsidiaries
maintains a 

  

 12 

 
system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with
management’s general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 
  
 (ii) The Company, the Guarantor and the Significant
Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts in all material respects as are customary in the businesses in which they are engaged or propose to engage after giving
effect to the transactions contemplated hereby. All policies of insurance and fidelity or surety bonds insuring the Company, the Guarantor or any of the Significant Subsidiaries or the Company’s, the Guarantor’s or Significant
Subsidiaries’ respective businesses, assets, employees, officers and directors are in full force and effect. 
  
 (jj) The Company, the Guarantor and their subsidiaries or, to the knowledge of the senior executive officers of the Company or the
Guarantor, any person acting on behalf of the Company, the Guarantor and their subsidiaries including, without limitation, any director, officer, agent or employee of the Company, the Guarantor or their subsidiaries has not, directly or indirectly,
while acting on behalf of the Company, the Guarantor and their subsidiaries (i) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (ii) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any other
unlawful payment. 
  
 (kk) The information
provided by the Company, the Guarantor and the Trust pursuant to this Purchase Agreement and the Operative Documents does not, as of the date hereof, and will not as of the Closing Date, contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 
  
 (ll) Except as would not, individually or in the aggregate, result in a Material Adverse Change, (i) the Company, the Guarantor and their
subsidiaries have been and are in compliance with applicable Environmental Laws (as defined below), (ii) none of the Company, the Guarantor any of their subsidiaries or otherwise disposed of Hazardous Materials (as defined below) on, to, in, under
or from the properties owned by it (“Properties”) or any other real properties previously owned, leased or operated by the Company, the Guarantor or any of their subsidiaries, (iii) neither the Company, the Guarantor nor any of
their subsidiaries intends to use the Properties or any subsequently acquired properties, other than in compliance with applicable Environmental Laws, (iv) neither the Company, the Guarantor nor any of their subsidiaries has received to the
knowledge of the senior executives of the Company or the Guarantor any notice of, or has any knowledge of any occurrence or circumstance which, with notice or passage of time or both, would give rise to a claim under or pursuant to any Environmental
Law with respect to the Properties, any other real properties previously owned, leased or operated by the 

  

 13 

 
Company, the Guarantor or any of their subsidiaries, or their respective assets or arising out of the conduct of the Company, the Guarantor or their
subsidiaries, and (v) no lien has been imposed on the Properties by any Governmental Entity in connection with the presence on or off such Property of any Hazardous Material. 
  
 As used herein, “Hazardous Material” shall include, without limitation, any flammable materials,
explosives, radioactive materials, hazardous materials, hazardous substances, hazardous wastes, toxic substances or related materials, asbestos, petroleum, petroleum products and any hazardous material as defined by any federal, state or local
environmental law, statute, ordinance, rule or regulation, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. §§ 9601-9675 (“CERCLA”),
the Hazardous Materials Transportation Act, as amended, 49 U.S.C. §§ 5101-5127, the Resource Conservation and Recovery Act, as amended, 42 U.S.C. §§ 6901-6992k, the Emergency Planning and Community Right-to-Know Act of 1986, 42
U.S.C. §§ 11001-11050, the Toxic Substances Control Act, 15 U.S.C. §§ 2601-2692, the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. §§ 136-136y, the Clean Air Act, 42 U.S.C. §§ 7401-7642, the
Clean Water Act (Federal Water Pollution Control Act), 33 U.S.C. §§ 1251-1387, the Safe Drinking Water Act, 42 U.S.C. §§ 300f-300j-26, and the Occupational Safety and Health Act, 29 U.S.C. §§ 651-678, and any analogous
state laws, as any of the above may be amended from time to time and in the regulations promulgated pursuant to each of the foregoing (including environmental statutes and laws not specifically defined herein) (individually, an
“Environmental Law” and collectively, the “Environmental Laws”) or by any Governmental Entity. 
  
 5. Representations and Warranties of the Purchaser. Each of Taberna and MLI, severally and not jointly, represents and
warrants to, and agrees with, the Company, the Guarantor and the Trust as follows: 
  
 (a) The Purchaser is aware that the Securities have not been and will not be registered under the Securities Act and may not be offered or
sold within the United States or to “U.S. persons” (as defined in Regulation S under the Securities Act) except in accordance with Rule 903 of Regulation S under the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act. 
  
 (b) The
Purchaser is an “accredited investor,” as such term is defined in Rule 501(a) of Regulation D under the Securities Act. 
  
 (c) Neither the Purchaser, nor any of the Purchaser’s affiliates, nor any person acting on the Purchaser’s or the
Purchaser’s Affiliate’s behalf has engaged, or will engage, in any form of “general solicitation or general advertising” (within the meaning of Regulation D under the Securities Act) in connection with any offer or sale of the
Preferred Securities. 
  
 (d) The Purchaser
understands and acknowledges that (i) no public market exists for any of the Securities and that it is unlikely that a public market will ever exist for the Securities, (ii) the Purchaser is purchasing the Securities for its own account, for
investment and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or other applicable securities laws, subject to any requirement of law that the 

  

 14 

 
disposition of its property be at all times within its control and subject to its ability to resell such Securities pursuant to an effective registration
statement under the Securities Act or pursuant to an exemption therefrom or in a transaction not subject thereto, and the Purchaser agrees to the legends and transfer restrictions applicable to the Securities, and (iii) the Purchaser has had the
opportunity to ask questions of, and receive answers and request additional information from, the Company, the Guarantor and is aware that it may be required to bear the economic risk of an investment in the Securities until the maturity thereof.

  
 (e) The Purchaser is a company with limited
liability duly incorporated, validly existing and in good standing under the laws of the jurisdiction of organization in which it is organized with all requisite (i) power and authority to execute, deliver and perform the Operative Documents to
which it is a party, to make the representations and warranties specified herein and therein and to consummate the transactions contemplated herein and (ii) right and power to purchase the Securities. 
  
 (f) This Purchase Agreement has been duly authorized,
executed and delivered by the Purchaser and no filing with, or authorization, approval, consent, license, order registration, qualification or decree of, any governmental body, agency or court having jurisdiction over the Purchaser, other than those
that have been made or obtained, is necessary or required for the performance by the Purchaser of its obligations under this Purchase Agreement or to consummate the transactions contemplated herein. 
  
 (g) The Purchaser is a “Qualified Purchaser” as
such term is defined in Section 2(a)(51) of the Investment Company Act. 
  
 6. Covenants and Agreements of the Company, the Guarantor and the Trust. The Company, the Guarantor and the Trust jointly and severally agree with the Purchaser as follows (provided that none of
the following covenants apply or relate to any acts of the Purchaser or its Affiliates): 
  
 (a) During the period from the date of this Agreement to the Closing Date, the Company and the Trust shall use commercially reasonable
efforts and take all action necessary or appropriate to cause their representations and warranties contained in Section 4 hereof to be true as of the Closing Date, after giving effect to the transactions contemplated by this Purchase
Agreement, as if made on and as of the Closing Date. 
  
 (b) The Company, the Guarantor and the Trust will arrange for the qualification of the Preferred Securities for sale under the state blue sky laws of such jurisdictions as the Purchaser may designate and will maintain such qualifications in
effect so long as required for the sale of the Preferred Securities. The Company, the Guarantor or the Trust, as the case may be, will promptly advise the Purchaser of the receipt by the Company, the Guarantor or the Trust, as the case may be, of
any notification with respect to the suspension of the qualification of the Preferred Securities for sale in any such jurisdiction or the initiation or threatening of any proceeding for such purpose. 
  
 (c) None of the Company, the Guarantor nor the Trust will,
nor will any of them permit any of its Affiliates to, nor will any of them permit any person acting on its or their 

  

 15 

 
behalf (other than the Purchaser) to, resell any Preferred Securities that have been acquired by any of them. 
  
 (d) None of the Company, the Guarantor nor the Trust will,
nor will either of them permit any of their Affiliates or any person acting on their behalf to, engage in any “directed selling efforts” within the meaning of Regulation S under the Securities Act with respect to the Securities.

  
 (e) None of the Company, the Guarantor nor
the Trust will, nor will either of them permit any of their Affiliates or any person acting on their behalf to, directly or indirectly, make offers or sales of any security, or solicit offers to buy any security, under circumstances that would
require the registration of any of the Securities under the Securities Act. 
  
 (f) None of the Company, the Guarantor nor the Trust will, nor will either of them permit any of its Affiliates or any person acting on their behalf to, engage in any form of “general solicitation or general
advertising” (within the meaning of Regulation D) in connection with any offer or sale of the any of the Securities. 
  
 (g) So long as any of the Securities are outstanding, (i) the Securities shall not be listed on a national securities exchange registered
under section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system and (ii) none of the Company, the Guarantor nor the Trust shall be an open-end investment company, unit investment trust or face-amount certificate
company that is, or is required to be, registered under section 8 of the Investment Company Act, and, the Securities shall otherwise satisfy the eligibility requirements of Rule 144A(d)(3). 
  
 Each of the Company, the Guarantor and the Trust shall furnish to (i) the holders, and
subsequent holders of the Preferred Securities, (ii) Cohen Bros. & Company (at 450 Park, 23rd Floor, New York,
NY 10022, or such other address as designated by Cohen Bros. & Company) and (iii) any beneficial owner of the Securities reasonably identified to the Company and the Trust (which identification may be made by either such beneficial owner or by
Cohen Bros. & Company), a duly completed and executed certificate in the form attached hereto as Annex F, including the financial statements referenced in such Annex, which certificate and financial statements shall be so furnished by the
Company, the Guarantor and the Trust not later than forty five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Company or the Guarantor and not later than ninety (90) days after the end of each fiscal
year of the Company or the Guarantor. 
  
 (h)
Each of the Company, the Guarantor and the Trust will, during any period in which it is not subject to and in compliance with section 13 or 15(d) of the Exchange Act, or it is not exempt from such reporting requirements pursuant to and in compliance
with Rule 12g3-2(b) under the Exchange Act, shall provide to each holder of the Securities and to each prospective purchaser (as designated by such holder) of the Securities, upon the request of such holder or prospective purchaser, any information
required to be provided by Rule 144A(d)(4) under the Securities Act. If the Company, the Guarantor and the Trust are required to register under the Exchange Act, such reports filed in compliance with Rule 12g3-2(b) shall be sufficient 

  

 16 

 
information as required above. This covenant is intended to be for the benefit of the Purchaser, the holders of the Securities, and the prospective
purchasers designated by the Purchaser and such holders, from time to time, of the Securities. 
  
 (i) None of the Company, the Guarantor nor the Trust will, until one hundred eighty (180) days following the Closing Date, without the
Purchaser’s prior written consent, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of, directly or indirectly, (i) any Preferred Securities or other securities substantially similar to the Preferred Securities
other than as contemplated by this Purchase Agreement or (ii) any other securities convertible into, or exercisable or exchangeable for, any Preferred Securities or other securities substantially similar to the Preferred Securities; provided,
for the avoidance of doubt, that no such consent shall be required (a) if such other securities have a different maturity date, interest rate and other terms than those of the Preferred Securities or (b) if, after giving effect to any such offer,
sale or option, the offer, sale or option of such other securities shall not result in the required registration of the sale of the Preferred Securities as contemplated herein. 
  
 (j) The Guarantor will use its best efforts to meet the requirements to qualify as a REIT under Sections 856
through 860 of the Code, effective for the taxable year ending December 31, 2004 (and each fiscal quarter of such year) and succeeding taxable years. 
  
 (k) None of the Company, the Guarantor nor the Trust will identify any of the Indemnified Parties (as defined below) in a press release or
any other public statement without the consent of such Indemnified Party, except as otherwise required by applicable laws. 
  
 7. Payment of Expenses. The Company, as depositor of the Trust, agrees to pay all costs and expenses incident to the
performance of the obligations of the Company and the Trust under this Purchase Agreement, whether or not the transactions contemplated herein are consummated or this Purchase Agreement is terminated, including all costs and expenses incident to (i)
the authorization, issuance, sale and delivery of the Preferred Securities and any taxes payable in connection therewith; (ii) the fees and expenses of qualifying the Preferred Securities under the securities laws of the several jurisdictions as
provided in Section 6(b); (iii) the fees and expenses of the counsel, the accountants and any other experts or advisors retained by the Company, the Guarantor or the Trust; (iv) the fees and all reasonable expenses of the Property Trustee,
the Delaware Trustee, the Indenture Trustee and any other trustee or paying agent appointed under the Operative Documents, including the fees and disbursements of counsel for such trustees, which fees shall not exceed a $2,000 acceptance fee, $3,500
for the fees and expenses of Richards, Layton & Finger, P.A., special Delaware counsel retained by the Delaware Trustee in connection with the Closing, and $4,000 in administrative fees annually; (v) $50,000 for the fees and expenses of Mayer,
Brown, Rowe & Maw LLP, special counsel retained by the Purchaser; and (vi) a due diligence fee in an amount equal to $12,500 ($5,000 paid upon execution of the Letter of Intent) payable to Cohen Bros. & Company. 
  
 If the sale of the Preferred Securities provided for in this
Purchase Agreement is not consummated because any condition set forth in Section 3 hereof to be satisfied by any of the Guarantor, the Company or the Trust is not satisfied, because this Purchase Agreement is terminated pursuant to Section
9 or because of any failure, refusal or inability on the part of the 

  

 17 

 
Guarantor, the Company or the Trust to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by
reason of a default by the Purchaser, the Guarantor or the Company will reimburse the Purchaser upon demand for all reasonable out-of-pocket expenses (including the fees and expenses of each of the Purchaser’s counsel specified in subparagraphs
(v) and (vi) of the immediately preceding paragraph) that shall have been incurred by the Purchaser in connection with the proposed purchase and sale of the Preferred Securities. Neither the Guarantor nor the Company shall not in any event be liable
to the Purchaser for the loss of anticipated profits from the transactions contemplated by this Purchase Agreement. 
  
 8. Indemnification. (a) Each of the Company, the Guarantor and the Trust agree jointly and severally to indemnify and hold
harmless the Purchaser, the Purchaser’s affiliates, Cohen Bros. & Company and Merrill Lynch & Co. (collectively, the “Indemnified Parties”), each person, if any, who controls any of the Indemnified Parties within the
meaning of the Securities Act, or the Exchange Act, and the Indemnified Parties’ respective directors, officers, employees and agents and each person who “controls” the Indemnified Parties within the meaning of either the Securities
Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation,
at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any information or
documents furnished or made available to the Purchaser by or on behalf of the Company or the Guarantor, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein
not misleading, (iii) the breach or alleged breach of any representation, warranty or agreement of either Seller contained herein or (iv) the execution and delivery by the Company, the Guarantor and/or the Trust of this Purchase Agreement or any of
the other Operative Documents and/or the consummation of the transactions contemplated hereby and thereby; provided, however, that none of the Guarantor, the Company or the Trust shall be liable to the extent that any such loss, claim, damage
or liability arises out of or is based on any statement, act or omission of any Indemnified Parties, and agrees to reimburse each such Indemnified Party, as incurred, for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which the Company, the Guarantor or the Trust may otherwise have. 
  
 (b) The Company agrees to indemnify the Trust against all
loss, liability, claim, damage and expense whatsoever due from the Trust under paragraph (a) above. 
  
 (c) Promptly after receipt by an Indemnified Party under this Section 8 of notice of the commencement of any action, such
Indemnified Party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, promptly notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the
indemnifying party (i) will not relieve the indemnifying party from liability under paragraph (a) above unless and to the extent that such failure results in the forfeiture by the indemnifying party of material rights and defenses and (ii) will not,
in any event, relieve the indemnifying party from any obligations to any Indemnified Party other than the indemnification obligation provided in 

  

 18 

 
paragraph (a) above. Purchaser shall be entitled to appoint counsel to represent the Indemnified Party in any action for which indemnification is sought. An
indemnifying party may participate at its own expense in the defense of any such action; provided, that counsel to the indemnifying party shall not (except with the consent of the Indemnified Party) also be counsel to the Indemnified Party.
In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all Indemnified Parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. An indemnifying party will not, without the prior written consent of the Indemnified Parties, settle or compromise or consent to the
entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Indemnified Parties are actual or potential parties to such claim,
action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of each Indemnified Party from all liability arising out of such claim, action, suit or proceeding. 
  
 9. Termination; Representations and Indemnities to
Survive. This Purchase Agreement shall be subject to termination in the absolute discretion of the Purchaser, by notice given to the Company, the Guarantor and the Trust prior to delivery of and payment for the Preferred Securities, if prior
to such time (i) a downgrading shall have occurred in the rating accorded the Company’s debt securities or preferred stock by any “nationally recognized statistical rating organization,” as that term is used by the Commission in Rule
15c3-1(c)(2)(vi)(F) under the Exchange Act, or such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of the Company’s debt securities or preferred stock, (ii)
the Trust shall be unable to sell and deliver to the Purchaser at least $50,000,000 stated liquidation value of Preferred Securities, (iii) a suspension or material limitation in trading in securities generally shall have occurred on the New York
Stock Exchange, (iv) a suspension or material limitation in trading in any of the Guarantor’s securities shall have occurred on the exchange or quotation system upon which the Guarantor’s securities are traded, if any, (v) a general
moratorium on commercial business activities shall have been declared either by federal or Missouri authorities or (vi) there shall have occurred any outbreak or escalation of hostilities, or declaration by the United States of a national emergency
or war or other calamity or crisis the effect of which on financial markets is such as to make it, in the Purchaser’s judgment, impracticable or inadvisable to proceed with the offering or delivery of the Preferred Securities. The respective
agreements, representations, warranties, indemnities and other statements of the Company, the Guarantor and the Trust or their respective officers or trustees and of the Purchaser set forth in or made pursuant to this Purchase Agreement will remain
in full force and effect, regardless of any investigation made by or on behalf of the Purchaser, the Company, the Guarantor or the Trust or any of the their respective officers, directors, trustees or controlling persons, and will survive delivery
of and payment for the Preferred Securities. The provisions of Sections 7 and 8 shall survive the termination or cancellation of this Purchase Agreement. 
  
 10. Amendments. This Purchase Agreement may not be modified, amended, altered or supplemented,
except upon the execution and delivery of a written agreement by each of the parties hereto. 
  

 19 

 11. Notices. All communications hereunder will be in writing and effective
only on receipt, and, if sent to the Purchaser, will be mailed, delivered by hand or courier or sent by facsimile and confirmed to the Purchaser c/o Cohen Bros. & Company, 450 Park, 23rd Floor, New York, NY 10022, Attention: Mitchell Kahn, Facsimile: (212) 735-1499; with a copy to Mayer, Brown, Rowe & Maw LLP, 190 South LaSalle Street,
Chicago, Illinois 60603, Attention: J. Paul Forrester, Facsimile: (312) 701-7711 or other address as the Purchaser shall designate for such purpose in a notice to the Company, the Guarantor and the Trust; and if sent to the Company, the Guarantor or
the Trust, will be mailed, delivered by hand or courier or sent by facsimile and confirmed to it at NovaStar Mortgage, Inc., 8140 Ward Parkway, Suite 300, Kansas City, MO 64114, Attention: Gregory S. Metz, Facsimile: (816) 627-5693.

  
 12. Successors and Assigns.
This Purchase Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing expressed or mentioned in this Purchase Agreement is intended or shall be construed to
give any person other than the parties hereto and the affiliates, directors, officers, employees, agents and controlling persons referred to in Section 8 hereof and their successors, assigns, heirs and legal representatives, any right or
obligation hereunder. None of the rights or obligations of the Company, the Guarantor or the Trust under this Purchase Agreement may be assigned, whether by operation of law or otherwise, without the Purchaser’s prior written consent. The
rights and obligations of the Purchaser under this Purchase Agreement may be assigned by the Purchaser without the Company’s, the Guarantor’s or the Trust’s consent; provided that the assignee assumes the obligations of the Purchaser
under this Purchase Agreement. 
  
 13.
Applicable Law. THIS PURCHASE AGREEMENT WILL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW (OTHER THAN SECTION 5-1401 OF THE GENERAL
OBLIGATIONS LAW). 
  
 14. Submission to
Jurisdiction. ANY LEGAL ACTION OR PROCEEDING BY OR AGAINST ANY PARTY HERETO OR WITH RESPECT TO OR ARISING OUT OF THIS PURCHASE AGREEMENT MAY BE BROUGHT IN OR REMOVED TO THE COURTS OF THE STATE OF NEW YORK, IN AND FOR THE COUNTY OF NEW YORK,
OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND DELIVERY OF THIS PURCHASE AGREEMENT, EACH PARTY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY,
GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS PURCHASE AGREEMENT. 
  
 15. Counterparts and Facsimile. This Purchase
Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. This Purchase
Agreement may be executed by any one or more of the parties hereto by facsimile. 
  

 20 

 IN WITNESS WHEREOF, this Purchase Agreement has been entered into as of the date first written above.

  

													
	 	 	 	 	 	 	 NOVASTAR MORTGAGE, INC.

						
	 	 	 	 	 	 	 	 	 By:
	 	 
	 	 	 	 	 	 	 	 	 	 	 Name:
	 	 Gregory S. Metz

	 	 	 	 	 	 	 	 	 	 	 Title:
	 	 Senior Vice President & Secretary

  

															
	 	 	 	 	 	 	 NOVASTAR CAPITAL TRUST I

				
	 	 	 	 	 	 	By: NOVASTAR MORTGAGE, INC., as Depositor
							
	 	 	 	 	 	 	 	 	 	 	 By:
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 Name:
	 	 Gregory S. Metz

	 	 	 	 	 	 	 	 	 	 	 	 	 Title:
	 	 Senior Vice President & Secretary

  

													
	 	 	 	 	 	 	 NOVASTAR FINANCIAL, INC.

						
	 	 	 	 	 	 	 	 	 By:
	 	 
	 	 	 	 	 	 	 	 	 	 	 Name:
	 	 Gregory S. Metz

	 	 	 	 	 	 	 	 	 	 	 Title:
	 	 

  

									
	 Amount of Preferred Securities being
 Purchased by: $25,000,000
	 	 	 	 TABERNA PREFERRED FUNDING I, LTD.

					
	 	 	 	 	 	 	By:	 	 
	 	 	 	 	 	 	 	 	 J. Paul Forrester, as Attorney-in-Fact

  

									
	 Amount of Preferred Securities being
 Purchased by: $25,000,000
	 	 	 	 MERRILL LYNCH INTERNATIONAL

					
	 	 	 	 	 	 	By:	 	 

  

 21 

 SCHEDULE 1 
  

List of Significant Subsidiaries 
  
 NovaStar Home Mortgage, Inc. 
  

 22 

 ANNEX A 
  
 [Reserved] 
  

 A-I-1 

 ANNEX B 
  
 Pursuant to Section 3(d) of the Purchase Agreement, Mayer, Brown, Rowe & Maw LLP, special tax counsel for the Purchaser, shall deliver an opinion to
the effect that: 
  
 (i) the Trust will be
classified for United States federal income tax purposes as a grantor trust and not as an association or a publicly traded partnership taxable as a corporation; and 
  
 (ii) for United States federal income tax purposes, the Junior Subordinated Notes will constitute
indebtedness of the Company. 
  
 In rendering such opinions, such
counsel may (A) state that its opinion is limited to the federal laws of the United States and (B) rely as to matters of fact, to the extent deemed proper, on certificates of responsible officers of the Company and public officials. 
  

 B-1 

 ANNEX C 
  
 Pursuant to Section 3(e) of the Purchase Agreement, Richards, Layton & Finger, P.A., special Delaware counsel for the Delaware Trustee, shall deliver
an opinion to the effect that: 
  
 (i) the Trust
has been duly created and is validly existing in good standing as a statutory trust under the Delaware Statutory Trust Act, and all filings required under the laws of the State of Delaware with respect to the creation and valid existence of the
Trust as a statutory trust have been made; 
  
 (ii) under the Delaware Statutory Trust Act and the Trust Agreement, the Trust has the trust power and authority (A) to own property and conduct its business, all as described in the Trust Agreement, (B) to execute and deliver, and to
perform its obligations under, each of the Purchase Agreement, the Common Securities Subscription Agreement, the Junior Subordinated Note Purchase Agreement and the Preferred Securities and the Common Securities and (C) to purchase and hold the
Junior Subordinated Notes; 
  
 (iii) under the
Delaware Statutory Trust Act, the certificate attached to the Trust Agreement as Exhibit C is an appropriate form of certificate to evidence ownership of the Preferred Securities; the Preferred Securities have been duly authorized by the
Trust Agreement and, when issued and delivered against payment of the consideration as set forth in the Purchase Agreement, the Preferred Securities will be validly issued and (subject to the qualifications set forth in this paragraph) fully paid
and nonassessable and will represent undivided beneficial interests in the assets of the Trust; the holders of the Preferred Securities will be entitled to the benefits of the Trust Agreement and, as beneficial owners of the Trust, will be entitled
to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware; and such counsel may note that the holders of the Preferred Securities may
be obligated, pursuant to the Trust Agreement, to (A) provide indemnity and/or security in connection with and pay taxes or governmental charges arising from transfers or exchanges of Preferred Securities certificates and the issuance of replacement
Preferred Securities certificates and (B) provide security or indemnity in connection with requests of or directions to the Property Trustee to exercise its rights and remedies under the Trust Agreement; 
  
 (iv) the Common Securities have been duly authorized by the
Trust Agreement and, when issued and delivered by the Trust to the Company against payment therefor as described in the Trust Agreement and the Common Securities Subscription Agreement, will be validly issued and fully paid and will represent
undivided beneficial interests in the assets of the Trust entitled to the benefits of the Trust Agreement; 
  
 (v) under the Delaware Statutory Trust Act and the Trust Agreement, the issuance of the Preferred Securities and the Common Securities is
not subject to preemptive or other similar rights; 
  

 C-1 

 (vi) under the Delaware Statutory Trust Act and the Trust Agreement, the execution and
delivery by the Trust of the Purchase Agreement, the Common Securities Subscription Agreement and the Junior Subordinated Note Purchase Agreement, and the performance by the Trust of its obligations thereunder, have been duly authorized by all
necessary trust action on the part of the Trust; 
  
 (vii) the Trust Agreement constitutes a legal, valid and binding obligation of the Company and the Trustees, and is enforceable against the Company and the Trustees, in accordance with its terms subject, as to enforcement, to the effect
upon the Trust Agreement of (i) bankruptcy, insolvency, moratorium, receivership, reorganization, liquidation, fraudulent conveyance or transfer and other similar laws relating to or affecting the rights and remedies of creditors generally, (ii)
principles of equity, including applicable law relating to fiduciary duties (regardless of whether considered and applied in a proceeding in equity or at law), and (iii) the effect of applicable public policy on the enforceability of provisions
relating to indemnification or contribution; 
  
 (viii) the issuance and sale by the Trust of the Preferred Securities and the Common Securities, the purchase by the Trust of the Junior Subordinated Notes, the execution, delivery and performance by the Trust of the Purchase Agreement, the
Common Securities Subscription Agreement and the Junior Subordinated Note Purchase Agreement, the consummation by the Trust of the transactions contemplated by the Purchase Agreement and compliance by the Trust with its obligations thereunder do not
violate (i) any of the provisions of the Certificate of Trust or the Amended and Restated Trust Agreement or (ii) any applicable Delaware law, rule or regulation; 
  
 (ix) no filing with, or authorization, approval, consent, license, order, registration, qualification or
decree of, any Delaware court or Delaware Governmental Entity or Delaware agency is necessary or required solely in connection with the issuance and sale by the Trust of the Common Securities or the Preferred Securities, the purchase by the Trust of
the Junior Subordinated Notes, the execution, delivery and performance by the Trust of the Purchase Agreement, the Common Securities Subscription Agreement and the Junior Subordinated Note Purchase Agreement, the consummation by the Trust of the
transactions contemplated by the Purchase Agreement and compliance by the Trust with its obligations thereunder; and 
  
 (x) the holders of the Preferred Securities (other than those holders who reside or are domiciled in the State of Delaware) will have no
liability for income taxes imposed by the State of Delaware solely as a result of their participation in the Trust and the Trust will not be liable for any income tax imposed by the State of Delaware. 
  
 In rendering such opinions, such counsel may (A) state that its opinion is
limited to the laws of the State of Delaware, (B) rely as to matters of fact, to the extent deemed proper, on certificates of responsible officers of the Company and public officials and (C) take customary assumptions and exceptions as to
enforceability and other matters. 
  

 C-2 

 ANNEX D 
  
 Pursuant to Section 3(f) of the Purchase Agreement, Gardere Wynne Sewell LLP, special counsel for the Property Trustee and the Indenture Trustee, shall
deliver an opinion to the effect that: 
  
 (i)
JPMorgan Chase Bank, National Association (the “Bank”) is a national banking association with trust powers, duly and validly existing under the laws of the United States of America, with corporate power and authority to execute, deliver
and perform its obligations under the Indenture and to authenticate and deliver the Securities, and is duly eligible and qualified to act as Trustee under the Indenture pursuant to Section 6.1 thereof and as Property Trustee under the Trust
Agreement pursuant to Section 8.2 thereof. (The Indenture and the Trust Agreement are each, an “Agreement” and together, the “Agreements”). 
  

(ii) Each Agreement has been duly authorized, executed and delivered by the Bank and constitutes the valid and binding obligation of
the Bank, enforceable against it in accordance with its terms except (A) as may be limited by bankruptcy, fraudulent conveyance, fraudulent transfer, insolvency, reorganization, liquidation, receivership, moratorium or other similar laws now or
hereafter in effect relating to creditors’ rights generally, and by general equitable principles, regardless of whether considered in a proceeding in equity or at law and (B) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 
  
 (iii) Neither the execution or delivery by the Bank of the Agreements, the authentication and delivery of the Preferred Securities (as
defined in the Trust Agreement) and junior subordinated notes (issued under the Indenture, and together with the Preferred Securities, the “Securities”) by the Trustee pursuant to the terms of the Agreements, nor the performance by the
Bank of its obligations under the Agreements (A) requires the consent or approval of, the giving of notice to or the registration or filing with, any governmental authority or agency under any existing law of the United States of America governing
the banking or trust powers of the Bank or (B) violates or conflicts with the Articles of Association or By-laws of the Bank or any law or regulation of the State of New York or the United States of America governing the banking or trust powers of
the Bank. 
  
 (iv) The Securities have been
authenticated and delivered by a duly authorized officer of the Bank. 
  
 In rendering such opinions, such counsel may (A) state that its opinion is limited to the laws of the State of New York and the laws of the United States of America, (B) rely as to matters of fact, to the extent
deemed proper, on certificates of responsible officers of JPMorgan Chase Bank, National Association, the Company and public officials, and (C) make customary assumptions and exceptions as to enforceability and other matters. 
  

 D-1 

 ANNEX E 
  
 Pursuant to Section 3(g) of the Purchase Agreement, Richards, Layton & Finger, P.A., counsel for the Delaware Trustee, shall deliver an opinion to the
effect that: 
  
 (i) Chase Bank USA, National
Association is duly formed and validly existing as a national banking association under the federal laws of the United States of America with trust powers and with its principal place of business in the State of Delaware; 
  
 (ii) Chase Bank USA, National Association has the corporate
power and authority to execute, deliver and perform its obligations under, and has taken all necessary corporate action to authorize the execution, delivery and performance of, the Trust Agreement and to consummate the transactions contemplated
thereby; 
  
 (iii) The Trust Agreement has been
duly authorized, executed and delivered by Chase Bank USA, National Association and constitutes a legal, valid and binding obligation of Chase Bank USA, National Association, and is enforceable against Chase Bank USA, National Association, in
accordance with its terms subject as to enforcement, to the effect upon the Trust Agreement of (i) applicable bankruptcy, insolvency, reorganization, moratorium, receivership, fraudulent conveyance or transfer and similar laws relating to or
affecting the rights and remedies of creditors generally, (ii) principles of equity, including applicable law relating to fiduciary duties (regardless of whether considered and applied in a proceeding in equity or at law), and (iii) the effect of
applicable public policy on the enforceability of provisions relating to indemnification or contribution; 
  
 (iv) The execution, delivery and performance by Chase Bank USA, National Association of the Trust Agreement do not conflict with or result
in a violation of (A) articles of association or by-laws of Chase Bank USA, National Association or (B) any law or regulation of the State of Delaware or the United States of America governing the trust powers of Chase Bank USA, National Association
or, to our knowledge, without independent investigation, of any indenture, mortgage, bank credit agreement, note or bond purchase agreement, long-term lease, license or other agreement or instrument to which Chase Bank USA, National Association is a
party or by which it is bound or, to our knowledge, without independent investigation, of any judgment or order applicable to Chase Bank USA, National Association; and 
  
 (v) No approval, authorization or other action by, or filing with, any Governmental Entity of the State of
Delaware or the United States of America governing the trust powers of Chase Bank USA, National Association is required 

  

 E-1 

 
in connection with the execution and delivery by Chase Bank USA, National Association of the Trust Agreement or the performance by Chase Bank USA, National
Association of its obligations thereunder, except for the filing of the Certificate of Trust with the Secretary of State of the State of Delaware, which Certificate of Trust has been filed with the Secretary of State of the State of Delaware.

  
 In rendering such opinions, such counsel may (A) state that
its opinion is limited to the laws of the State of Delaware and the federal laws of the United States governing the trust powers of Chase Bank USA, National Association, (B) rely as to matters of fact, to the extent deemed proper, on certificates of
responsible officers of the Company and public officials and (C) take customary assumptions and exceptions. 
  

 E-2 

 ANNEX F 
  
 OFFICER’S FINANCIAL CERTIFICATE 
  
 The undersigned, the [Chairman/Vice Chairman/Chief Executive Officer/President/Vice President/Chief FINANCIAL Officer/Treasurer/Assistant Treasurer],
hereby certifies, pursuant to Section 6(h) of the Purchase Agreement, dated as of March 15, 2005, among NovaStar Mortgage, Inc. (the “Company”), NovaStar Financial, Inc., NovaStar Capital Trust I (the “Trust”), on the one hand,
and TABERNA Preferred Funding I, Ltd. and Merrill Lynch International, on the other hand, that, as of [date], [20    ], the Company, if applicable, and its Subsidiary had the following ratios and balances: 
  
 As of [Quarterly/Annual Financial Date], 20     
  

					
		
	 Senior secured indebtedness for borrowed money (“Debt”)
	  	$	_____	 
		
	 Senior unsecured Debt
	  	$	_____	 
		
	 Subordinated Debt
	  	$	_____	 
		
	 Total Debt
	  	$	_____	 
		
	 Ratio of (x) senior secured and unsecured Debt to (y) total Debt
	  	 	_____	%

  

	*	A table describing the quarterly report calculation procedures is provided on page      

  
 [FOR FISCAL YEAR END: Attached hereto are the audited consolidated financial
statements (including the balance sheet, income statement and statement of cash flows, and notes thereto, together with the report of the independent accountants thereon) of the Company and its consolidated subsidiaries for the three years ended
[date], 20    ] 
  
 [FOR FISCAL QUARTER END:
Attached hereto are the unaudited consolidated and consolidating financial statements (including the balance sheet and income statement) of the Company and its consolidated subsidiaries.] 
  
 The financial statements fairly present in all material respects, in accordance with U.S. generally accepted accounting principles
(“GAAP”), the financial position of the Company and its consolidated subsidiaries, and the results of operations and changes in financial condition as of the date, and for the [     quarter interim] [annual]
period ended [date], 20    , and such financial statements have been prepared in accordance with GAAP consistently applied throughout the period involved (expect as otherwise noted therein). 
  

 F-1 

 ANNEX F 
  
 IN WITNESS WHEREOF, the undersigned has executed this Officer’s Financial Certificate as of this
             day of [                    ],
20[    ]. 
  

	
	NOVASTAR MORTGAGE, INC.

			
		
	 By:
	 	 
	 Name:
	 	 
	
	 NovaStar Mortgage, Inc.
 8140 Ward Parkway
 Suite 300
 Kansas City, MO 64114
 [Telephone Number]

  

 F-2 

 ANNEX F 
  
 Definitions for quarterly Officer’s Financial Certificate 
  

			
	 ITEM

	 	 Definition/Formula

  

 F-3Shareholders' Agmt Dated September 6, 2002

 EXHIBIT 4.02 
  
 ANNA’S LINEN COMPANY 
  
 Shareholders’ Agreement 
  
 September 6, 2002 

 TABLE OF CONTENTS 
  

							
	 	  	 	 	 	  	Page

	 1.
	  	Certain Definitions.	  	1
	 	  	1.1	 	“Affiliate”	  	1
	 	  	1.2	 	“Commission”	  	2
	 	  	1.3	 	“Conversion Stock”	  	2
	 	  	1.4	 	“Exchange Act”	  	2
	 	  	1.5	 	“Holder”	  	2
	 	  	1.6	 	“Original Issue Price”	  	2
	 	  	1.7	 	“Qualified Acquisition”	  	2
	 	  	1.8	 	“Qualified IPO”	  	3
	 	  	1.9	 	“Registrable Securities”	  	3
	 	  	1.10	 	“Register,” “Registered” and “Registration”	  	3
	 	  	1.11	 	“Registration Expenses”	  	3
	 	  	1.12	 	“Securities Act”	  	3
	 	  	1.13	 	“Selling Expenses”	  	3
			
	 2.
	  	Restrictions on Transfer; Compliance with Securities Act; Lock-Up Agreement.	  	3
	 	  	2.1	 	Restrictions on Transfer.	  	3
	 	  	2.2	 	Restrictive Legends.	  	4
	 	  	2.3	 	Right of First Refusal.	  	4
	 	  	2.4	 	Right of Co-Sale.	  	5
	 	  	2.5	 	Non-Exercise.	  	5
	 	  	2.6	 	Transfer of Shares.	  	6
	 	  	2.7	 	Put Option.	  	6
	 	  	2.8	 	New Issuances.	  	6
	 	  	2.9	 	Company Right of First Offer	  	8
			
	 3.
	  	Registration Rights.	  	9
	 	  	3.1	 	Demand Registration.	  	9
	 	  	3.2	 	Company Registration.	  	10
	 	  	3.3	 	Registration on Form S-3.	  	11
	 	  	3.4	 	Expenses of Registration.	  	12
	 	  	3.5	 	Registration Procedures.	  	12
	 	  	3.6	 	Indemnification.	  	14
	 	  	3.7	 	Information by Holder.	  	16
	 	  	3.8	 	Rule 144 Reporting.	  	16
	 	  	3.9	 	Transfer of Registration Rights.	  	17
	 	  	3.10	 	Termination of Registration Rights.	  	17
	 	  	3.11	 	Limitations on Subsequent Registration Rights.	  	17
	 	  	3.12	 	Lock-Up Agreement.	  	17
			
	 4.
	  	Covenants.	  	17
	 	  	4.1	 	Annual and Quarterly Financial Statements.	  	17

  

 i 

							
	 	  	4.2	 	Monthly Financial Statements.	  	18
	 	  	4.3	 	Related Party Transactions.	  	18
	 	  	4.4	 	Key Man Insurance	  	19
	 	  	4.5	 	Director and Officer Insurance	  	19
	 	  	4.6	 	The Series A Director.	  	19
			
	 5.
	  	Termination.	  	19
			
	 6.
	  	Miscellaneous.	  	20
	 	  	6.1	 	Governing Law. Consent to Jurisdiction. Waiver of Jury Trial.	  	20
	 	  	6.2	 	Notices.	  	20
	 	  	6.3	 	Assignment.	  	21
	 	  	6.4	 	Amendment.	  	21
	 	  	6.5	 	Severability.	  	21
	 	  	6.6	 	Attorney’s Fees.	  	22
	 	  	6.7	 	Legal Representation	  	22
	 	  	6.8	 	Counterparts.	  	22
	 	  	6.9	 	Entire Agreement.	  	22

  
  

 ii 

 SHAREHOLDERS’ AGREEMENT 
  
 This Shareholders’ Agreement (the “Agreement”) is made as of September 6, 2002 by and among
Anna’s Linen Company, a California corporation (the “Company”), Alan Gladstone (the “Founder”), Rosewood Capital III, L.P., a Delaware limited partnership (“Fund III”), Rosewood Capital IV,
L.P., a Delaware limited partnership (“Fund IV”), and Rosewood Capital IV Associates, L.P., a Delaware limited partnership (“Rosewood Associates” and together with Fund III and Fund IV, the
“Investors”). 
  
 RECITALS 
  
 WHEREAS, on August 14, 2002, the Company and the Investors entered into a
Series A Convertible Preferred Stock Purchase Agreement (the “Series A Purchase Agreement”) pursuant to which the Company will sell, and the Investors will purchase upon Closing (as defined in the Series A Purchase Agreement), in
the aggregate 364,000 shares of the Company’s Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Shares”); 
  
 WHEREAS, immediately following the issuance of the Series A Shares and the execution of this Agreement, the Company shall repurchase a total of 364,000
shares of the Company’s issued and outstanding common stock pursuant to the terms and conditions of binding repurchase agreements entered into between the Company and current holders of the Company’s common stock (the
“Repurchase”); 
  
 WHEREAS, each of the Company
and Founder wishes to provide further inducement to the Investors to purchase the Series A Shares of the Company by entering into this Agreement; 
  
 WHEREAS, it is a condition to the closing of the sale of the Series A Shares to the Investors pursuant to the Series A Purchase Agreement that the
Founder, the Investors and the Company enter into this Agreement; and 
  
 WHEREAS, as of the date hereof, the Founder owns 641,333 shares of Company Common Stock, par value $0.01 per share (“Common Stock”) (and together with any and all other shares of the capital stock of the Company now owned
or hereafter acquired by the Founder, the “Founder’s Shares”); 
  
 NOW THEREFORE, in consideration of the premises set forth above and for other good and valuable consideration, receipt of which is hereby acknowledged, the parties agree as follows: 
  
 1. Certain Definitions. 
  
 As used in this Agreement, the following terms shall have the following
respective meanings: 
  
 1.1 “Affiliate” shall
mean, with respect to any person, any person that directly or indirectly controls, is controlled by, or is under common control with such person. A person shall be deemed to control another person if the controlling person owns 10% or more of any
class of stock of the controlled person or possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the controlled person, whether through ownership of stock, by contract or otherwise.

  

 1 

 1.2 “Commission” shall mean the United States Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act. 
  
 1.3 “Conversion Stock” shall mean the shares of Common Stock issued or issuable upon conversion of the Series A Shares. 
  
 1.4 “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at the time. 
  
 1.5 “Holder” shall mean the holders of Registrable Securities, securities convertible into Registrable Securities and any person holding such securities to whom the rights under this Agreement have
been transferred in accordance with Section 3.9 hereof. 
  
 1.6
“Original Issue Price” shall mean $68.68 (as appropriately adjusted for any stock splits, stock dividends, combinations, reclassifications and other similar events occurring after the date hereof). 
  
 1.7 “Qualified Acquisition” shall mean any sale, lease,
assignment, transfer, or other conveyance of all or substantially all of the assets of the Company or any of its subsidiaries, or any consolidation or merger involving the Company or any of its subsidiaries, in which in excess of fifty percent (50%)
of the Company’s voting power is transferred, or any reclassification or other change of any stock, or any recapitalization of the Company or any transaction or series of transactions pursuant to which the holders of the outstanding voting
securities of the Company immediately prior to such transaction fail to hold equity securities representing a majority of the voting power of the Company or surviving entity immediately following such consolidation, merger or other transaction,
where such transaction results in total consideration paid to holders of Series A Shares greater than or equal to the lesser of (a) a 35% internal rate of return on such holder’s aggregate original investment in Series A Shares compounded
annually or (b) the sum per share of Series A Shares of (x) 200% of the Original Issue Price plus (y) a 12% annualized dividend on such amount accruing from the date at which the holder of Series A Shares would realize a price per share in an amount
equal to 200% of the Original Issue Price (assuming a 35% internal rate of return to the holders of Series A Shares until that date). 
  

 2 

 1.8 “Qualified IPO” shall mean a firm commitment underwritten public offering registered
under the Securities Act or any successor statute, in which (i) the public offering price per share of the Common Stock is at least 200% of the Original Issue Price and (ii) the aggregate gross proceeds to the Company and any selling stockholders of
the Company are not less than $35,000,000. 
  
 1.9
“Registrable Securities” shall mean (i) the Series A Shares, (ii) the Conversion Stock, (iii) any Common Stock issued or issuable in exchange for or in replacement of Series A Shares or other securities convertible into or
exercisable for the Series A Shares or the Conversion Stock upon any stock split, stock dividend, recapitalization, or similar event, (iv) any securities of the Company issued to the Investor pursuant to preemptive rights or rights of first refusal,
provided, however, that shares of Common Stock or other securities shall only be treated as Registrable Securities if and so long as (X) they have not been sold to or through a broker or dealer or underwriter in a public distribution or a public
securities transaction and (Y) the registration rights with respect to such securities have not terminated pursuant to Section 3.10. 
  
 1.10 “Register,” “Registered” and “Registration” refer to a registration effected by preparing and
filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. 
  
 1.11 “Registration Expenses” shall mean all expenses incurred by the Company in complying with Sections 3.1, 3.2 and 3.3 hereof,
including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, blue sky fees and expenses, legal and accounting fees, disbursements and expenses including reasonable fees and expenses of one counsel
to the selling Holders, provided, however, that the Registration Expenses shall not include the Selling Expenses. 
  
 1.12 “Securities Act” shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time. 
  
 1.13 “Selling Expenses” shall mean all underwriting discounts, selling commissions and the fees. 
  
 2. Restrictions on Transfer; Compliance with Securities Act; Lock-Up Agreement. 
  
 2.1 Restrictions on Transfer. 
  
 (a) No sale, assignment, transfer, pledge, hypothecation or other disposition of Founder’s Shares (each a
“Transfer”) by the Founder (other than permitted Transfers pursuant to Section 2.1(b) hereof) shall be valid, enforceable, or effective unless such Transfer is made in accordance with the terms and provisions of this Section 2.

  
 (b) The restrictions contained in this
Section 2 shall not apply with respect to any Transfer by the Founder to or among his Affiliates or to his spouse, parents, children or siblings and trusts, family partnership or similar estate planning vehicles for the benefit of such individual or
such individual’s spouse, parents, children or siblings, provided 

  

 3 

 
that, the transferees of such Founder’s Shares pursuant to this Section 2.1(b) shall have agreed in writing to be bound by the provisions of this
Agreement affecting the Founder’s Shares so transferred. 
  
 2.2 Restrictive Legends. 
  
 Each certificate
representing Founder’s Shares or any other securities issued in respect of such Founder’s Shares upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the
provisions below) be stamped or otherwise imprinted with legends in the following form (in addition to any legend required under applicable state securities laws): 
  
 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN CONDITIONS AND RESTRICTIONS AS TO TRANSFER UNDER THE TERMS
OF A SHAREHOLDERS’ AGREEMENT ENTERED INTO BY THIS CORPORATION AND CERTAIN OF ITS SHAREHOLDERS, A TRUE AND CORRECT COPY OF WHICH IS ON FILE AT THE OFFICES OF THE CORPORATION AND SAID SHARES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT IN STRICT ACCORDANCE WITH THE TERMS OF THAT AGREEMENT. A COPY OF SAID AGREEMENT WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF THIS CERTIFICATE UPON RECEIPT BY THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR
REGISTERED OFFICE OF A WRITTEN REQUEST OF THE HOLDER REQUESTING SUCH A COPY. 
  
 2.3 Right of First Refusal. 
  
 (a) Except as permitted under Section 2.1(b), in the event that the Founder desires to Transfer any Founder’s Shares to a third party, and the Founder has received a bona fide offer in writing from a third party
to buy any or all of the Founder’s Shares, the Founder shall first notify the Investors in writing of the proposed sale (a “Transfer Notice”). The Transfer Notice (which will be deemed effective as to all Investors when
delivered to the party identified in Section 6.2(a)) shall contain all material terms of the proposed Transfer, including, without limitation, the name and address of the prospective transferee, the purchase price and terms of payment, the date and
place of the proposed Transfer, and the number and description of shares proposed to be transferred by the Founder (such shares being the “Offered Shares”). 
  
 (b) The Investors shall have the option for a period of twenty (20) days after receipt of the Transfer
Notice to elect to purchase any or all of the Offered Shares at the same price and subject to the same material terms and conditions as described in the Transfer Notice (or terms and conditions as similar as reasonably possible). The Investors may
exercise such purchase option and thereby purchase any or all of the Offered Shares by notifying the Founder in writing before the expiration of such twenty (20) day period. If any Investor gives the Founder notice that such Investor or any of its

  

 4 

 
Affiliates desires to purchase any or all of the Offered Shares within the applicable timeframe, then payment for the Offered Shares shall be made by check
or wire transfer, against delivery of the Offered Shares to be purchased at a place agreed upon between the parties and at the time of the scheduled closing therefore, which shall be no later than the sixty (60) days after the receipt of the
Transfer Notice. 
  
 2.4 Right of Co-Sale. 
  
 To the extent the Investors do not exercise their rights of first refusal,
pursuant to Section 2.3 above, as to any Offered Shares proposed to be sold by the Founder, the Founder shall notify the Investors in writing of the proposed sale (the “Additional Transfer Notice”). The Additional Transfer Notice
shall briefly describe the Investors’ rights of co-sale with respect to the proposed Transfer. If any Investor notifies the Founder in writing within ten (10) days after receipt of the Additional Transfer Notice of its intent to participate in
such sale, such Investor shall have the right to participate in such sale of shares on the same terms and conditions as specified in the Additional Transfer Notice, provided, that the co-selling Investor, if any, may be required to convert
the required number of shares of Series A Shares into the corresponding number of shares of Common Stock prior to such sale. The Investors’ collective notice to the Founder shall indicate the number of shares of capital stock the Investors, in
the aggregate, wish to sell under their respective rights of co-sale. To the extent the Investors exercise any such right of co-sale in accordance with the terms and conditions set forth below, the number of shares of Common Stock that the Founder
may sell in the Transfer shall be correspondingly reduced. In the event that the Founder proposes to sell 25% or more of the Founder’s Shares to the purchaser as identified in the Additional Transfer Notice, the Investors shall be entitled to
sell all or such lesser portion of Investors’ Series A Shares or other Company capital stock as Investors may elect to the purchaser as indicated in the Additional Transfer Notice. If the Founder proposes to sell less than 25% of the
Founder’s Shares, the Investors may sell all or any part of that number of shares of Company capital stock equal to the product obtained by multiplying (i) the aggregate number of shares of Common Stock covered by the Additional Transfer Notice
by (ii) a fraction, the numerator of which shall be the number of shares of Common Stock (including Conversion Stock) owned by the Investors in the aggregate on the date of the Additional Transfer Notice and the denominator of which shall be the
total number of shares of Common Stock (including Conversion Stock) owned by the Investors and the Founder in the aggregate on the date of the Additional Transfer Notice. The Investors shall effect their participation in the sale by promptly
delivering to the Founder for transfer to the prospective purchaser one or more certificates, properly endorsed for transfer. To the extent that any prospective purchaser or purchasers refuses to purchase shares or other securities from the
Investors exercising their rights of co-sale hereunder, the Founder shall not sell to such prospective purchaser or purchasers any Founder’s Shares unless and until, simultaneously with such sale, the Founder purchases such shares or other
securities from the Investors for the same consideration and on the same terms and conditions as the proposed transfer described in the Additional Transfer Notice. 
  
 2.5 Non-Exercise. 
  
 If the Investors have not exercised any right of first refusal pursuant to Section 2.3 hereof or right of co-sale pursuant to Section 2.4 hereof with
respect to any Offered Shares, then 

  

 5 

 
the Founder shall be free to sell such Offered Shares to the prospective purchaser on the same terms and conditions as outlined in the Transfer Notice or
Additional Transfer Notice, as the case may be, and provided that in the event such Offered Shares are not sold within sixty (60) days of the date of the Transfer Notice or Additional Transfer Notice, as the case may be, they shall once again be
subject to the rights of first refusal and co-sale provided herein. 
  
 2.6 Transfer of Shares. 
  
 Notwithstanding the
foregoing, any attempt by the Founder to transfer shares of Company capital stock in violation of Section 2 hereof shall be void and the Company agrees it will not effect such a transfer nor will it treat any alleged transferee(s) as a shareholder
of the Company. 
  
 2.7 Put Option. 
  
 In the event that the Founder should sell any shares of Founder’s
Shares in contravention of the co-sale rights of the Investors under Section 2.4 (a “Prohibited Transfer”), the Investors, in addition to such other remedies as may be available at law, in equity or hereunder, shall have the put
option provided below, and the Founder shall be bound by the applicable provisions of such option. In the event of a Prohibited Transfer, the Investors shall have the right to sell to the Founder the type and number of shares of Company capital
stock equal to the number of shares that the Investors would have been entitled to transfer to the third-party transferee(s) under Section 2.4 hereof had the Prohibited Transfer been effected pursuant to and in compliance with the terms hereof. Such
sale shall be made on the following terms and conditions: 
  
 (a) The price per share at which the shares are to be sold to the Founder shall be equal to the price per share paid by the third-party transferee(s) to the Founder in the Prohibited Transfer. The Founder shall also
reimburse the Investors for any and all fees and expenses, including legal fees and expenses, incurred pursuant to the exercise or the attempted exercise of any rights of any of the Investors under Section 2.4 and this Section 2.7. 
  
 (b) In the case that the Investors shall exercise the put
option created hereby, the Investors shall deliver to the Founder the certificate or certificates representing the shares to be sold, duly endorsed for transfer, within ninety (90) days after the later of the dates on which such exercising party (i)
received notice of the Prohibited Transfer or (ii) otherwise became aware of the Prohibited Transfer. 
  
 (c) Upon receipt of the certificate or certificates for any shares to be sold by the Investors to the Founder shall, pursuant to this
Section 2.7, pay the aggregate purchase price therefore and the amount of reimbursable fees and expenses, as specified in Section 2.7(a), in cash or by other means acceptable to such parties. 
  
 2.8 New Issuances. 
  
 (a) The Company hereby grants to the Holders of at least
22,279 shares of Registrable Securities the right of first refusal (the “Right of First Refusal”) to purchase 

  

 6 

 
a pro rata share (rounded to the next lowest number) of all (or any part) of any “New Securities” (as defined in Section 2.8(b)) that the Company
may, from time to time, propose to sell and issue. Such pro rata share, for purposes of this Right of First Refusal, is the ratio of the number of shares of Registrable Securities (calculated on an as-converted basis) then owned by such Holders to
the total number of shares of Common Stock outstanding immediately prior to such issuance calculated on a fully diluted basis (i.e., as if all securities convertible into or exercisable for Common Stock had been fully converted into or exercised for
shares of Common Stock immediately prior to such issuances). This Right of First Refusal shall be subject to the following provisions: 
  
 (b) New Securities. “New Securities” shall mean any Common Stock or any preferred stock of the Company whether or
not authorized on the date hereof, and rights, options or warrants to purchase Common Stock or any preferred stock of the Company and equity securities of any type whatsoever that are, or may become, convertible or exchangeable into Common Stock or
preferred stock of the Company; provided, however, that “New Securities” shall not include the following: 
  
 (i) (A) shares of the Common Stock issued upon conversion of the Series A Shares and (B) any other securities issued in respect of the Series A Shares or
the Conversion Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event; 
  
 (ii) options to purchase 70,000 shares of Common Stock, in the aggregate, granted by the Company as appropriately adjusted for any subsequent stock
splits, stock dividends, combinations, reclassifications and similar events, and the shares of Common Stock issuable upon the exercise of any of such options; 
  

(iii) shares of Common Stock or any preferred stock issued in connection with any stock split, stock dividend or recapitalization by the Company;

  
 (iv) securities offered to the public pursuant to a
Qualified IPO or any other offering registered under the Securities Act that is approved by the holders of the majority of the then-outstanding Series A Shares; and 
  
 (v) shares of Company capital stock issued in a Qualified Acquisition or any other transaction approved by a majority of
the then-outstanding Series A Shares. 
  
 (c)
Notices. In the event that the Company proposes to undertake an issuance of New Securities, it shall give each Holder entitled to a Right of First Refusal as provided above written notice of its intention, describing the type of New
Securities, the price and the general terms upon which the Company proposes to issue the same, provided that, notice to a Holder who is an Investor which is delivered to the name and address identified in Section 6.2(a) will be deemed effective as
to each such Investor. Each such Holder shall have ten (10) days after receipt of such notice to agree to 

  

 7 

 
purchase up to its pro rata share of such New Securities at the price and upon the terms specified in the notice by giving written notice to the Company and
stating therein the quantity of New Securities to be purchased. Notwithstanding the terms set forth in the notice, each such Holder shall have the right to pay cash for New Securities offered in the Notice. If any such Holder fails to so agree in
writing within such ten (10) day period to purchase such Holder’s full pro rata share of an offering of New Securities (a “Nonpurchasing Holder”), then such Nonpurchasing Holder shall forfeit the right hereunder to purchase
that part of its pro rata share of such New Securities that it did not so agree to purchase and the Company shall promptly give each Holder (if any) who has timely agreed to purchase its full pro rata share of such offering of New Securities (a
“Purchasing Holder”) written notice of the failure of any Nonpurchasing Holder to purchase such Nonpurchasing Holder’s full pro rata share of such offering of New Securities (the “Overallotment Notice”). Each
Purchasing Holder shall have a right of overallotment such that such Purchasing Holder may agree to purchase a portion of the Nonpurchasing Holder’s unpurchased pro rata share of such offering on a pro rata basis according to the relative pro
rata shares of the Purchasing Holders at any time within five (5) business days after receiving the Overallotment Notice. 
  
 In the event the Company has not consummated the sale of the New Securities within one hundred twenty (120) days from the date of written
notice provided for in this Section 2.8(c), the Company shall not thereafter issue or sell any New Securities without first offering such New Securities to the Holders entitled to a Right of First Refusal in the manner provided above. 
  
 2.9 Company Right of First Offer 
  
 (a) If at any time, before the fifth anniversary of the date
hereof, a Investor desires to transfer any of its Series A Shares other than in an Investor Permitted Transfer, the Investor shall so inform the Company and the Founder in writing (the “First Offer Notice”) stating the number and
description of shares included in such proposed disposition (the “Investor Offered Shares”). For the purposes of this Section 2.9, “Investor Permitted Transfer” shall mean any Transfer to an Affiliate or
partner of the Investor (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Series A Shares or Conversion Stock by gift, will or intestate succession) or a partnership that is affiliated with the
transferring Investor. 
  
 (b) The Company shall
have the option for a period of 20 days after receipt of the First Offer Notice (the “Option Period”) to submit a written offer (the “Purchase Offer”) to such Investor to purchase all of the Investor Offered Shares.
If the Company does not choose to submit a Purchase Offer, the Founder shall have the option for the remainder of the Option Period to submit a Purchase Offer to purchase all of the Investor Offered Shares. Such Purchase Offer shall identify the
offered price per share for the Investor Offered Shares as well as any other material terms and conditions of such offer. 
  
 (c) The Investor shall be permitted to either accept or reject the Purchase Offer, provided that, if Investor rejects the Purchase Offer,
Investor shall have 120 days 

  

 8 

 
after receipt of the Purchase Offer to consummate the disposition of the Investor Offered Shares to any third party at a price per share higher than the
price per share reflected in the Purchase Offer (assuming substantially similar other terms and conditions, if any). If the Investor does not consummate such disposition pursuant to the terms of the preceding sentence, the provisions of this Section
2.9 shall again be in effect with respect to such Series A Shares. 
  
 3. Registration Rights. 
  
 3.1 Demand
Registration. 
  
 (a) Subject to the terms and
conditions hereof, at any time after one hundred eighty (180) days after the effective date of the Company’s initial public offering of its Common Stock, if the Company shall receive a written request from the Holders of at least twenty-five
percent (25%) of the Registrable Securities then outstanding that the Company effect any registration with respect to Registrable Securities then outstanding, the Company will (i) within thirty (30) days of the receipt by the Company of such notice,
give written notice of the proposed registration to all other Holders and (ii) as soon as practicable, but in no event later than ninety (90) days following the registration request use best efforts to effect such registration (including, without
limitation, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders
joining in such request as are specified in a written request received by the Company within thirty (30) days after receipt of such written notice from the Company. Notwithstanding the foregoing, the Company shall not be obligated to take any action
to effect any registration pursuant to this Section 3.1(a): 
  
 (i) If the requested registration would not have an aggregate offering price of all Registrable Securities sought to be registered by the Holders, of at least five million dollars ($5,000,000); 
  
 (ii) After the Company has effected two such registrations pursuant to this
Section 3.1(a), and such registrations have been declared or ordered effective; 
  
 (iii) During the period starting with the date sixty (60) days prior to the Company’s estimated date of filing of, and ending on the date one hundred eighty (180) days immediately following the effective date of,
any registration statement pertaining to a public offering of securities of the Company, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; 
  

 9 

 (iv) If the Holders are able to demand a registration on Form S-3 (or any successor form to Form S-3)
pursuant to Section 3.3 of this Agreement; or 
  
 (v) If the
Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration
statement to be filed in the near future. In such case, the Company’s obligation to register, qualify or comply under this Section 3.1(a) shall be deferred one or more times for a period not to exceed sixty (60) days in the aggregate in any
twelve-month period from the date of receipt of written request from the Holders. 
  
 (b) Underwriting. In the event that any Holders initiating a registration pursuant to Section 3.1(a) intend to distribute
Registrable Securities by means of an underwriting, they shall so advise the Company in their request and the Company shall so advise the other Holders as part of the notice given pursuant to Section 3.1(a). In such event, the right of any Holder to
registration pursuant to Section 3.1(a) shall be conditioned upon such Holder’s participation in the underwriting arrangements required by this Section 3.1, and the inclusion of such Holder’s Registrable Securities in the underwriting to
the extent requested shall be limited to the extent provided herein. 
  
 The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter of recognized
national standing selected for such underwriting by a majority of the Holders proposing to distribute their securities through such underwriting, but subject to the Company’s reasonable approval. If any Holder of Registrable Securities
disapproves of the terms of the underwriting, such Holder may elect to withdraw therefrom by written notice to the Company. 
  
 3.2 Company Registration. 
  
 (a) Notice of Registration. If at any time or from time to time after the effective date of a registration statement with respect
to an initial public offering of the Company’s Common Stock under the Securities Act, the Company shall determine to register any of its equity securities, either for its own account or the account of a security holder or holders, other than
(i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Rule 145 transaction, or (iii) a registration pursuant to Section 3.1 hereof, the Company will promptly give to each Holder written notice thereof
and include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within thirty (30)
days after receipt of such written notice from the Company, by any Holder. 
  
 (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice
given pursuant to Section 3.2(a). In such event 

  

 10 

 
the right of any Holder to registration pursuant to this Section 3.2 shall be conditioned upon such Holder’s participation in such underwriting and the
inclusion of Registrable Securities in the underwriting to the extent provided herein. 
  
 All Holders proposing to distribute their securities through such underwriting shall (together with the Company) enter into an
underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 3.2, if the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such offering to an amount no less than twenty-five percent (25%) of all shares to be included in such offering.
The Company shall so advise all Holders distributing their securities through such underwriting of such limitation and the number of shares of Registrable Securities, if any, that may be included in the registration and underwriting. Any Registrable
Securities that are included shall be allocated among all Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities requested by such Holders to be included in such registration. No Registrable Securities
excluded from the underwriting by reason of the underwriter’s marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of
shares allocated to any Holder or Holders to the nearest 100 shares. If any Holder or Holders disapprove of the terms of any such underwriting, such Holder or Holders may elect to withdraw therefrom by written notice to the Company. 
  
 (c) Right to Terminate Registration. The Company
shall have the right to terminate or withdraw any registration initiated by it under this Section 3.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 3.4 hereof. 
  
 3.3 Registration on Form S-3. 
  
 If the Company shall receive a written request from the Holders in writing that the Company file a registration statement on Form S-3 (or any successor
form to Form S-3), for a public offering of Registrable Securities, the Company shall use its best efforts to cause such Registrable Securities to be registered on such form for the offering and to cause such Registrable Securities to be qualified
in such jurisdictions as the Holder or Holders may reasonably request. The provisions of Section 3.1(b) shall be applicable to each registration initiated under this Section 3.3. Notwithstanding the foregoing, the Company shall not be obligated to
take any action pursuant to this Section 3.3: 
  
 (a) If the requested registration would not have an aggregate offering price of all Registrable Securities sought to be registered by the Holders of at least two million dollars ($2,000,000); 
  
 (b) If the Company is not a registrant entitled to use Form
S-3 to register the Registrable Securities for such an offering; 
  

 11 

 (c) Within six-months after the Company has effected a registration pursuant to this
Section 3.3, and such registration has been declared or ordered effective; 
  
 (d) During the period starting with the date sixty (60) days prior to the Company’s estimated date of filing of, and ending on the date one hundred eighty (180) days immediately following the effective date of,
any registration statement pertaining to a public offering of securities of the Company, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; 
  
 (e) If the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its Shareholders’ for a registration statement to be filed in the near
future. In such case, the Company’s obligation to register, qualify or comply under this Section 3.3 shall be deferred for a period not to exceed sixty (60) days in the aggregate during any twelve-month period from the date of receipt of
written request from the Holders; or 
  
 (f)
After the Company has effected five such registrations pursuant to this Section 3.3, and such registrations have been declared or ordered effective. 
  
 3.4 Expenses of Registration. 
  
 All Registration Expenses incurred in connection with registrations pursuant to Sections 3.1, 3.2 and 3.3 shall be borne by the Company. All Selling
Expenses relating to securities registered on behalf of the Holders shall be borne by the holders of the securities included in such registration pro rata among each other on the basis of the number of shares so registered; provided,
however, that the Company shall not be required to pay for the Registration Expenses of any registration proceeding begun pursuant to Sections 3.1 or 3.3 if the registration request is subsequently withdrawn at the request of the Holders
holding a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses) unless, in the case of a registration pursuant to Section 3.1, the Holders holding a majority of the Registrable
Securities to be registered agree to forfeit their right to a demand registration pursuant to Section 3.1, which forfeiture shall be binding on all Holders of Registrable Securities. 
  
 3.5 Registration Procedures. 
  
 In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 3, the Company will keep each Holder
advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. Subject to Section 3.4, the Company, at its expense, will: 
  
 (a) Prepare and file with the Commission a registration statement and use its best efforts to cause such
registration statement to become and remain effective for one hundred twenty (120) days, or less if the distribution described in the Registration Statement has been completed, provided, however, that the Company shall be entitled to postpone the
updating of the information in any registration statement (or documents or 

  

 12 

 
reports incorporated therein by reference) during any period not exceeding 60 consecutive days due to (i) the fact that the Company has material inside
information that the Company has concluded (with the advice of counsel) cannot be disclosed publicly; (ii) a material event, including but not limited to, a material acquisition or merger of the Company (or a subsidiary of the Company) or any other
material event outside the control of the Company (“Black-out Periods”); provided, further, that if any Black-out Periods occur, the period during which a registration statement must be kept effective and current pursuant to this
Section 3 shall be extended by a number of days equal to the aggregate number of days of all such Black-out Periods; 
  
 (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; 
  
 (c) Furnish to the Holders participating in such
registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request to
facilitate the public offering of such securities; 
  
 (d) Use best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company
shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; 
  
 (e) In the event of any underwritten public offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement; 
  
 (f) Furnish, at the request of a majority of the Holders
participating in the registration on the date that the securities being registered are delivered to the underwriters for sale, if requested by the Holders, (i) an opinion, dated as of such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters and selling shareholders and (ii) a letter dated as of such date, from the independent
certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in a underwritten public offering, addressed to the underwriters and selling shareholders; and

  
 (g) Notify each Holder of Registrable
Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue 

  

 13 

 
statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing. 
  
 3.6
Indemnification. 
  
 (a) The Company will
indemnify each Holder, each of its officers, directors, partners and each person controlling such Holder within the meaning of Section 15 of the Securities Act with respect to which registration, qualification or compliance has been effected
pursuant to this Section 3, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act or the Exchange Act or any other federal or state rule or
regulation applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers, directors, partners and each person controlling such Holder and each
such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided,
however, that the indemnity agreement contained in this subsection 3.6(a) shall not apply, nor shall the Company be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any
untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling person or underwriter
specifically for use therein. 
  
 (b) To the
extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, severally and not jointly, indemnify the Company,
each of its directors and officers, each underwriter, if any, of the Company’s securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act,
and each other Holder, each of its officers, directors, partners and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons 

  

 14 

 
for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in
each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of each Holder under this subsection 3.6(b)
shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of the shares sold by such Holder under such registration statement bears to the total public
offering price of all securities sold thereunder, but not to exceed the proceeds received by such Holder from the sale of Registrable Securities covered by such registration statement unless such liability resulted from willful misconduct by such
Holder. 
  
 (c) Each party entitled to
indemnification under this Section 3.6 (the “Indemnified Party”) shall give notice to the party required to provide indemnification (the “Indemnifying Party”) promptly after such Indemnified Party has actual
knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided, however, that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party’s expense, and provided
further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying
Party’s ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or separate and different defenses but shall bear the expense of such
defense nevertheless. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party (whose consent shall not be unreasonably withheld), consent to entry of any judgment or enter into
any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 
  
 (d) If the indemnification provided for paragraphs (a)
through (c) of this Section 3.6 is unavailable or insufficient to hold harmless an Indemnified Party under such paragraphs in respect of any losses, claims, damages or liabilities or actions in respect thereof referred to therein, then each
Indemnifying Party shall in lieu of indemnifying such Indemnified Party contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities or actions in such proportion as appropriate to
reflect the relative fault of the Company, on the one hand, and the Holder of such Registrable Securities, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or actions as well as
any other relevant equitable considerations, including the failure to give any notice under Section 3.6(c). The relative fault shall be determined by reference to, 

  

 15 

 
among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the
Holders of such Registrable Securities, on the other, and to the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and each of the Holders agrees that it
would not be just and equitable if contributions pursuant to this paragraph were determined by pro rata allocation (even if all of the Holders of such Registrable Securities were treated as one entity for such purpose) or by any other method of
allocation which did not take account of the equitable considerations referred to above in this paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, liabilities or action in respect thereof,
referred to above in this paragraph, shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this
paragraph, no Holder shall be required to contribute any amount in excess of the proceeds received by such Holder for the sale of Registrable Securities covered by such registration statement unless the liability resulting in such obligation to
contribute resulted from willful misconduct by such Holder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act), shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. 
  
 3.7 Information by Holder.

  
 Each Holder of Registrable Securities included in any
registration shall furnish to the Company such information regarding such Holder, the Registrable Securities held by such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be required
in connection with any registration, qualification or compliance referred to in this Section 3. 
  
 3.8 Rule 144 Reporting. 
  
 With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Series A
Shares or the Conversion Stock to the public without registration, after such time as a public market exists for the Common Stock, the Company agrees to use reasonable efforts to: 
  
 (a) make and keep public information available, as those terms are understood and defined in Rule 144 under
the Securities Act (“Rule 144”), at all times after the effective date that the Company becomes subject to the reporting requirements of the Exchange Act; 
  
 (b) use reasonable efforts to file with the Commission in a timely manner all reports and other documents
required of the Company under the Exchange Act (at any time after it has become subject to such reporting requirements); 
  
 (c) furnish to any Holder upon such Holder’s request, so long as such Holder owns any Series A Shares or any Conversion Stock, a
written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time beginning 

  

 16 

 
ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public),
and of the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other publicly filed reports of the Company as a Holder may reasonably
request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 
  
 3.9 Transfer of Registration Rights. 
  
 The rights to cause the Company to register securities granted Holders under Sections 3.1, 3.2 and 3.3 shall inure to the benefit of and be binding upon
the respective successors and assigns of the parties (including transferees of Registrable Securities). 
  
 3.10 Termination of Registration Rights. 
  
 The rights granted under this Section 3 shall terminate on the earlier to occur of the following: (i) the fifth anniversary of the consummation of the
initial underwritten public offering of the Company’s securities pursuant to a registration statement filed under the Securities Act, or (ii) as to a particular Holder, when such Holder is eligible to sell all of its Registrable Securities
within any ninety (90) day period in reliance on Rule 144 (excluding Rule 144A) or any similar rule or regulation hereafter adopted by the Commission. 
  
 3.11 Limitations on Subsequent Registration Rights. 
  
 The Company shall not enter into any agreement granting any holder or prospective holder of any securities of the Company registration rights on parity
with or superior to the rights granted to the Investors hereunder without the written consent of the Holders of a majority of the outstanding Registrable Securities. 
  
 3.12 Lock-Up Agreement. 
  
 Each holder of Series A Shares agrees that in connection with the initial public offering of any equity securities of the Company under the Securities Act
for the account of the Company, if so requested by the managing underwriter, such holder shall not sell or otherwise transfer any securities of the Company during the period commencing on the effective date of a registration statement of the Company
filed under the Securities Act and ending on the date specified by the Company and the managing underwriter, which period shall not exceed one hundred eighty (180) days. This Section 3.12 shall only be applicable to the holders of Series A Shares if
all officers and directors and greater than one percent (1%) shareholders of the Company enter into similar agreements. 
  
 4. Covenants. 
  
 4.1 Annual and Quarterly Financial Statements. 
  
 As long as any Investor is a holder of any Series A Shares, the Company shall provide the following documents to such Investors: 
  
 (a) As soon as practicable after the end of each fiscal
year, and in any event within ninety (90) days after the end of each such fiscal year, consolidated balance sheets of the Company and its subsidiaries as of the end of such fiscal year, consolidated statements of operations and consolidated
statements of cash flows and stockholders’ equity of the Company and its subsidiaries for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail and audited by independent public accountants selected by the Company; and 
  

 17 

 (b) As soon as practicable after the end of the first, second and third quarterly
accounting periods in each fiscal year of the Company and in any event within sixty (60) days thereafter, a consolidated balance sheet of the Company and its subsidiaries as of the end of each such quarterly period, and consolidated statements of
operations and consolidated statements of cash flows of the Company and its subsidiaries for such period and for the fiscal year to date, unaudited but prepared in accordance with generally accepted accounting principles (other than accompanying
notes), subject to changes resulting from year-end audit adjustments, in reasonable detail and signed by the principal financial or accounting officer of the Company. 
  
 4.2 Monthly Financial Statements. 
  

As long as the Investors are holders of at least 25% of the Series A Shares (including Conversion Stock) originally purchased by the Investors, the
Company shall provide to the Investors as soon as practicable after the end of each month and in any event within thirty (30) days thereafter, an unaudited consolidated balance sheet of the Company and its subsidiaries as of the end of each such
monthly period, and unaudited consolidated statements of operations and consolidated statements of cash flows of the Company and its subsidiaries for such period and for the fiscal year to date, prepared in accordance with generally accepted
accounting principles (other than accompanying notes), subject to changes resulting from year-end audit adjustments, in reasonable detail and signed by the principal financial or accounting officer of the Company. 
  
 4.3 Related Party Transactions. 
  
 The Company will not, directly or indirectly, enter into any transaction
with any Affiliate, except for the Repurchase and modifications of the employment agreement with Alan Gladstone approved by the Board, unless such transaction is on terms no more favorable to the Affiliate than could be obtained in a comparable
arms’ length transaction with an unrelated third party. For purposes of this paragraph, (i) “Affiliate” shall mean, with respect to any Person, any Person which directly or indirectly controls, is controlled by, or is under
common control with such Person; (ii) a Person shall be deemed to “control” another Person if the controlling Person owns 10% or more of any class of stock of the controlled Person or possesses, directly or indirectly, the power to
direct or cause the direction of the management and policies of the controlled Person, whether through ownership of stock, by contract or otherwise; and (iii) “Person” shall mean any natural person, corporation, firm, partnership,
association, government, governmental agency or other entity, whether acting in an individual, fiduciary or other capacity. 
  

 18 

 4.4 Key Man Insurance 
  
 The Company has obtained, as of the date hereof, or will obtain, as soon as practicable after the date hereof, a key-man
life insurance policy in the minimum amount of $5 million for the life of Alan Gladstone and shall use best efforts to keep such policy in place and effective. 
  

4.5 Director and Officer Insurance 
  
 The Company has obtained, as of the date hereof, or will obtain, as soon as practicable after the date hereof, a Director and Officer insurance policy in
the minimum amount of $5 million for liability of its directors on customary terms and shall use best efforts to keep such policy in place and effective. 
  
 4.6 The Series A Director. 
  
 If Barton Gurewitz is removed or resigns from the Board of Directors at any time, then the holders of the majority of the shares of Series A Preferred
Stock shall, in addition to the election of the Series A Director, have the right to designate an industry executive who is mutually agreeable to such holders and Alan Gladstone and who is not otherwise affiliated with the Company to fill the
vacancy so created, and the Company shall take all necessary and reasonable actions to have such nominee elected to the Board of Directors. In the event such designee is elected to the Board of Directors, Alan Gladstone (or a successor as President
of the Company), for so long as Alan Gladstone continues to hold greater than 25% of the outstanding capital stock of the Company, shall have the right to cause the Company to increase the size of the Board of Directors by one seat and designate a
representative of his choosing to fill such newly created vacancy. At any time at which the Company’s shareholders shall have the right to, or shall vote for, or consent in writing to the election of directors of the Company, then Alan
Gladstone and the holders of the majority of the then-outstanding Series A Preferred Stock shall vote all of the shares owned by them for, or consent in writing with respect to such shares in favor of, and use all of their powers as shareholders of
the Company to ensure that the provisions of this Section 4.6 are implemented. 
  
 5. Termination. 
  
 The
provisions of Sections 2 and 4 of this Agreement shall expire and be of no further force or effect immediately before the consummation of (i) an initial public offering registered under the Securities Act; or (ii) any sale, lease, assignment,
transfer, or other conveyance of all or substantially all of the assets of the Company or any of its subsidiaries, or any consolidation or merger involving the Company or any of its subsidiaries, in which in excess of fifty percent (50%) of the
Company ‘s voting power is transferred, or any reclassification or other change of any stock, or any recapitalization of the Company or any transaction or series of transactions pursuant to which the holders of the outstanding voting securities
of the Company immediately prior to such transaction fail to hold equity securities representing a majority of the voting power of the Company or surviving entity immediately following such consolidation, merger or other transaction. All other
provisions of this Agreement shall terminate with respect to a Holder of Registrable Securities at such time that such Holder no longer owns any Registrable Securities. 
  

 19 

 6. Miscellaneous. 
  
 6.1 Governing Law. Consent to Jurisdiction. Waiver of Jury Trial. 
  
 This Agreement shall be governed by and construed in accordance with the
laws of the State of California, without regard to principles of conflicts of laws. 
  
 6.2 Notices. 
  
 All notices and
other communications required or permitted hereunder shall be in writing and shall be delivered by facsimile, by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, as follows: 
  

	 	(a)	if to any Investor, to: 

  
 Rosewood Capital 
 One Maritime Plaza, Suite
1330 
 San Francisco, California 94111 
 Attention: Peter Breck 
 Facsimile: (415) 362-1192 
 Telephone: (415) 362-5526, 
  
 or such other address as shall be provided by Investors; 
  
 with a copy to: 
  
 Simpson Thacher & Bartlett

 3330 Hillview Ave. 
 Palo
Alto, California 94304 
 Attention: Richard Capelouto 
 Facsimile: (650) 251-5002 
 Telephone: (650) 251-5060 
  

	 	(b)	if to the Company, to: 

  
 Anna’s Linen Company 
 3550 Hyland
Avenue 
 Costa Mesa, California 92626 
 Attention: Alan Gladstone 
 Facsimile: (714) 850-9170 
 Telephone: (714) 850-0504, 
  
 or such other address as shall be provided by the Company; 
  

 20 

 with a copy to: 
  
 Miller & Holguin 
 1801 Century Park East 
 Seventh Floor 
 Los Angeles, California 90067 
 Attention: Dale Miller 
 Facsimile: (310) 557-2205 
 Telephone: (310)
556-1990 
  

	 	(c)	if to the Founder, to: 

  
 Alan Gladstone 
 c/o Anna’s Linen
Company 
 3550 Hyland Avenue 
 Costa Mesa, California 92626 
 Facsimile: (714) 850-9170 
 Telephone: (714) 850-0504 
  
 or such other address as shall be provided by the Founder. 
  
 Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered
personally, when confirmed if delivered by facsimile, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and
mailed as aforesaid. Notice or communication delivered to the addressee pursuant to Section 6.2(a) shall be deemed effective as to all Investors. 
  
 6.3 Assignment. 
  
 Subject to the conditions of transfer of shares hereunder, this Agreement shall be binding upon the Company, the Founder, the Investors and their
respective heirs, executors, administrators, assigns and legal representatives. 
  
 6.4 Amendment. 
  
 Except as
otherwise provided herein, additional parties may be added to this Agreement and this Agreement or any provision hereof may be amended, waived, or terminated by a written instrument signed by the Company, the Founder and the Holders of a majority of
the Registrable Securities. 
  
 6.5 Severability. 
  
 In the event one or more of the provisions of this Agreement should, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. 
  

 21 

 6.6 Attorney’s Fees. 
  
 In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such
dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all reasonable fees, costs and expenses of appeals. 
  
 6.7 Legal Representation 
  
 The Founder acknowledges that he has not been represented by Company counsel, Miller & Holguin, in connection with the negotiation of this Agreement
and that the Founder has been advised to seek the advice of independent legal counsel and has had ample opportunity to consult independent counsel with respect to this Agreement. 
  
 6.8 Counterparts. 
  
 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and
the same instrument. 
  
 6.9 Entire Agreement. 
  
 This Agreement contains the entire understanding of the parties hereto with
respect to the subject matter hereof, supersedes all other agreements between or among any of the parties with respect to the subject matter hereof. 
  

 22 

 IN WITNESS WHEREOF, the parties have executed this Agreement on the day, month and year first set forth
above. 
  

			
	“COMPANY”
	
	ANNA’S LINEN COMPANY
		
	By:	 	 /s/ Alan Gladstone

	Name:	 	Alan Gladstone
	Title:	 	President & CEO
		
	Address:	 	3550 Hyland Avenue
	 	 	Costa Mesa, California 92626
	
	“FOUNDER”
	
	 /s/ Alan Gladstone

	Alan Gladstone
		
	Address:	 	3550 Hyland Ave
	 	 	Costa Mesa, CA 92626
	
	“INVESTORS”
	
	ROSEWOOD CAPITAL III, L.P.
		
	By:	 	 /s/ Kyle Anderson

	Name:	 	Kyle Anderson
	Title:	 	Managing Director
		
	Address:	 	One Maritime Plaza, Suite 1330
	 	 	San Francisco, CA 94111
	
	ROSEWOOD CAPITAL IV, L.P.
		
	By:	 	 /s/ Kyle Anderson

	Name:	 	Kyle Anderson
	Title:	 	Managing Director
		
	Address:	 	One Maritime Plaza, Suite 1330
	 	 	San Francisco, CA 94111

			
	ROSEWOOD CAPITAL IV ASSOCIATES, L.P.
		
	By:	 	 /s/ Kyle Anderson

	Name:	 	Kyle Anderson
	Title:	 	Managing Director
		
	Address:	 	One Maritime Plaza, Suite 1330
	 	 	San Francisco, CA 94111

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