-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RVF9+Cqs5RkXHe4Avz9RyRJYLIeiqRUGT11dpTUl6sceghXbh1rKKV/JVfn7g665 xJu5iqwOQpRVbYnbKb1g6w== 0000827187-01-500030.txt : 20010815 0000827187-01-500030.hdr.sgml : 20010815 ACCESSION NUMBER: 0000827187-01-500030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SELECT COMFORT CORP CENTRAL INDEX KEY: 0000827187 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 410157886 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25121 FILM NUMBER: 1713341 BUSINESS ADDRESS: STREET 1: 6105 TRENTON LANE NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55344 BUSINESS PHONE: 7635517000 10-Q 1 a2001_2ndqtr-10q.txt 2001 SECOND QUARTER 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 COMMISSION FILE NO. 0-25121 -------------------- SELECT COMFORT CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 41-1597886 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6105 TRENTON LANE NORTH MINNEAPOLIS, MINNESOTA 55442 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (763) 551-7000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of June 30, 2001, 18,126,265 shares of Common Stock of the Registrant were outstanding. SELECT COMFORT CORPORATION AND SUBSIDIARIES INDEX PAGE NO. --------- PART I: FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets June 30, 2001 and December 30, 2000................................. 3 Consolidated Statements of Operations for the Three Months and Six Months ended June 30, 2001 and July 1, 2000...................................... 4 Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and July 1, 2000.................................................... 5 Notes to Consolidated Financial Statements.......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 14 PART II: OTHER INFORMATION Item 1. Legal Proceedings................................................. 15 Item 2. Changes in Securities and Use of Proceeds......................... 15 Item 3. Defaults Upon Senior Securities................................... 15 Item 4. Submission of Matters to a Vote of Security Holders............... 15 Item 5. Other Information................................................. 16 Item 6. Exhibits and Reports on Form 8-K.................................. 16 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SELECT COMFORT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) JUNE 30, DECEMBER 30, ASSETS 2001 2000 ------------- ------------- Current assets: Cash and cash equivalents $ 8,848 $ 1,498 Marketable securities - 3,950 Accounts receivable, net of allowance for doubtful accounts of $260, and $264, respectively 2,106 2,693 Inventories (note 2) 8,953 11,083 Prepaid expenses 5,297 4,741 ------------- ------------- Total current assets 25,204 23,965 Property and equipment, net 34,207 37,063 Other assets 3,558 3,644 ------------- ------------- Total assets $ 62,969 $ 64,672 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 29 $ 38 Accounts payable 19,014 17,271 Accruals: Sales returns 4,618 5,284 Compensation, taxes and benefits 5,934 6,238 Other 6,609 7,565 ------------- ------------- Total current liabilities 36,204 36,396 Long-term debt, less current maturities (note 3) 12,466 2,322 Accrued warranty costs 5,725 5,745 Other liabilities 4,006 3,609 ------------- ------------- Total liabilities 58,401 48,072 ------------- ------------- Shareholders' equity: Undesignated preferred stock; 5,000,000 shares authorized, no shares issued and outstanding - - Common stock, $.01 par value; 95,000,000 shares authorized, 18,126,265 and 17,962,689 shares issued and outstanding, 181 180 respectively Additional paid-in capital 80,777 79,452 Accumulated deficit (76,390) (63,032) ------------- ------------- Total shareholders' equity 4,568 16,600 ------------- ------------- Total liabilities and shareholders' equity $ 62,969 $ 64,672 ============= =============
See accompanying notes to consolidated financial statements. 3 SELECT COMFORT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED ------------------------ ------------------------ JUNE 30, JULY 1, JUNE 30, JULY 1, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net sales $ 62,742 $ 61,787 $128,198 $137,946 Cost of sales 22,428 21,886 46,039 49,032 ----------- ----------- ----------- ----------- Gross margin 40,314 39,901 82,159 88,914 ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing 37,394 38,543 81,568 83,816 General and administrative 5,954 6,712 12,967 15,232 Store closings and asset impairments 142 37 488 37 ----------- ----------- ----------- ----------- Total operating expenses 43,490 45,292 95,023 99,085 ----------- ----------- ----------- ----------- Operating loss (3,176) (5,391) (12,864) (10,171) ----------- ----------- ----------- ----------- Other income (expense): Interest income 40 309 115 684 Interest expense (254) (2) (352) (4) Equity in loss of affiliate - (246) - (428) Other, net (140) (5) (142) (48) ----------- ----------- ----------- ----------- Other income (expense), net (354) 56 (379) 204 ----------- ----------- ----------- ----------- Loss before income taxes (3,530) (5,335) (13,243) (9,967) Income tax expense (benefit) - (1,870) 115 (3,504) ----------- ----------- ----------- ----------- Net loss $ (3,530) $ (3,465) $(13,358) $ (6,463) =========== =========== =========== =========== Net loss per share (note 4) - basic and diluted $ (0.19) $ (0.19) $ (0.74) $ (0.36) =========== =========== =========== =========== Weighted average shares - basic and diluted 18,119 17,818 18,087 17,786 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 SELECT COMFORT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED ------------------------ JUNE 30, JULY 1, 2001 2000 ----------- ----------- Cash flows from operating activities: Net loss $(13,358) $ (6,463) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 4,994 4,514 Loss on disposal of assets 496 178 Deferred tax assets - (3,583) Change in operating assets and liabilities: Accounts receivable, net 681 569 Inventories 2,130 (1,795) Prepaid expenses 90 49 Income taxes - 2,227 Accounts payable 1,743 1,063 Accrued sales returns (666) (562) Accrued warranty costs (25) 1,006 Accrued compensation, taxes and benefits (304) (485) Other accrued liabilities (863) 153 Other assets (75) 447 Other liabilities 397 426 ----------- ----------- Net cash used in operating activities (4,760) (2,256) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (2,367) (7,589) Sales of marketable securities 3,950 10,696 ----------- ----------- Net cash provided by investing activities 1,583 3,107 ----------- ----------- Cash flows from financing activities: Principal payments on debt (18) - Proceeds from issuance of common stock 191 404 Net proceeds from issuance of long-term debt 10,354 - ----------- ----------- Net cash provided by financing activities 10,527 404 ----------- ----------- Increase in cash and cash equivalents 7,350 1,255 Cash and cash equivalents, at beginning of period 1,498 7,441 ----------- ----------- Cash and cash equivalents, at end of period $ 8,848 $ 8,696 =========== =========== See accompanying notes to consolidated financial statements. 5 SELECT COMFORT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements for the three months and six months ended June 30, 2001 and July 1, 2000 of Select Comfort Corporation and subsidiaries ("Select Comfort" or the "Company"), have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 2001 and December 30, 2000 and the results of operations and cash flow for the periods presented. The consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern. The Company's continuation as a going concern is dependent, among other things, upon obtaining positive cash flow from operations or upon its ability to raise additional working capital. Certain prior year financial statement amounts have been reclassified to conform to the current year presentation. In particular, accrued warranty costs have been divided between current liabilities and long-term liabilities. The resulting respective accrued warranty cost balances are based on the expected timing of when warranty claims will be satisfied. The warranty claims expected to be satisfied within the following twelve month period have been included in other current liabilities. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company's most recent audited consolidated financial statements and related notes included in the Company's Annual Report to Shareholders and its Form 10-K for the fiscal year ended December 30, 2000. Operating results for the Company on a quarterly basis may not be indicative of operating results for the full year. During July 2001 the Financial Accounting Standards Board issued statement SFAS 142 "Goodwill and Other Intangible Assets." Statement 142 replaces the requirement to amortize goodwill and intangible assets with indefinite lives with a requirement for an annual impairment test. The Company must adopt SFAS 142 at the beginning of fiscal 2002. The Company is analyzing the impact of SFAS 142, but it is not expected to have a material impact on the Company's consolidated financial statements. (2) INVENTORIES Inventories consist of the following (in thousands): JUNE 30, DECEMBER 30, 2001 2000 ------------- ------------- Raw materials $3,250 $ 5,507 Work in progress 49 60 Finished goods 5,654 5,516 ------------- ------------- $8,953 $11,083 ============= ============= 6 SELECT COMFORT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) LONG-TERM DEBT In June 2001, the Company issued $11 million in principal amount of its senior secured notes ("the Notes") in a private placement. The Notes have a five-year maturity, bear interest at 8% per annum payable annually in cash and are convertible into shares of the Company's common stock at the rate of $1.00 per share. The Notes are secured by a first lien on substantially all of the Company's assets. In addition, the holders of the Notes received warrants to purchase 4.4 million shares of the Company's common stock for $1.00 per share. The warrants have a five-year term. The Note conversion price and warrant exercise price are subject to certain anti-dilution protections, including a reset of the warrant and conversion prices if the average closing price of the Company's common stock price for the 10 trading days ending on October 31, 2001 is below $1.00. The net proceeds from these Notes approximated $10.4 million after deduction of placement fees and expenses. The warrants were valued at $1.1 million and have been recorded as debt discount to be amortized as interest expense over the 5-year note term. (4) NET LOSS PER COMMON SHARE The following computations reconcile net loss with net loss per common share-basic and diluted (in thousands, except per share amounts). THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------- ------------------------------- NET PER SHARE NET PER JUNE 30, 2001 LOSS SHARES AMOUNT LOSS SHARES SHARE ------------- ---------- --------- --------- ---------- --------- ---------- BASIC AND DILUTED EPS Net loss attributable to common shareholders $(3,530) 18,119 $(0.19) $(13,358) 18,087 $(0.74) ========== ========= ========== ========== ========= ========== JULY 1, 2000 ------------ BASIC AND DILUTED EPS Net loss attributable to common shareholders $(3,465) 17,818 $(0.19) $(6,463) 17,786 $(0.36) ========== ========= ========== ========== ========= ==========
(5) LITIGATION The Company and certain of its former officers and directors have been named as defendants in a class action lawsuit filed on June 1, 1999, on behalf of Company shareholders in U.S. District Court in Minnesota. The named plaintiffs, who purport to act on behalf of a class of purchasers of the Company's common stock during the period from December 4, 1998 to June 7, 1999, charge the defendants with violations of federal securities laws. The suit alleges that the Company and the named directors and officers failed to disclose or misrepresented certain information concerning the Company during the class period. The complaint does not specify an amount of damages claimed. The Company believes that the complaint is without merit and intends to vigorously defend the claims. The Company and the individual defendants brought a motion to dismiss all claims on November 10, 1999. The motion was heard by a magistrate judge on December 21, 1999. On January 27, 2000, the magistrate recommended that the claims based on Section 11 of the federal securities laws be dismissed. The magistrate recommended that the motion to dismiss be denied with respect to the claims based on Rule 10b-5 of the federal securities laws. In February 2000, both the plaintiffs and the defendants formally objected to the magistrate's recommendation. The objection was made to the United States District Court in Minnesota. On May 12, 2000, the United States District Court in Minnesota adopted the recommendation of the magistrate and denied the defendants' motion to dismiss the Rule 10b-5 claims. The Court also adopted the recommendation of the magistrate and dismissed the plaintiff's Section 11 claims without prejudice and with leave to amend. On March 31, 2000, the Company and certain of its former officers and directors were named as defendants in a class action lawsuit filed on behalf of the Company's shareholders in U.S. District Court in Minnesota asserting identical factual allegations as the consolidated complaint described above. The suit alleges claims based on Sections 11 and 12(a)(2) of the federal securities laws. The complaint does not specify an amount of damages claimed. The Company believes this complaint is without merit and intends to vigorously defend the claims. The above two class actions were consolidated by the United States District Court Magistrate on July 24, 2000. 7 On January 30, 2001, the plaintiffs made a motion to certify a class. The class certification motion is pending. Discovery has begun. The Company is a party to other various claims, legal actions, sales tax disputes, and other complaints arising in the ordinary course of business. In the opinion of management, any losses that may occur from these other matters are adequately covered by insurance or are provided for in the consolidated financial statements and the ultimate outcome of these other matters will not have a material effect on the consolidated financial position or results of operations of the Company. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED HEREIN. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY THOSE THAT ARE NOT HISTORICAL IN NATURE, PARTICULARLY THOSE THAT USE TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "ANTICIPATES," "CONTEMPLATES," "ESTIMATES," "BELIEVES," "PLANS," "PROJECTS," "PREDICTS," "POTENTIAL" OR "CONTINUE" OR THE NEGATIVE OF THESE OR SIMILAR TERMS. THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S HISTORICAL EXPERIENCE AND ITS PRESENT EXPECTATIONS OR PROJECTIONS. IMPORTANT FACTORS KNOWN TO SELECT COMFORT THAT COULD CAUSE SUCH MATERIAL DIFFERENCES ARE IDENTIFIED AND DISCUSSED IN PART I, ITEM 1 OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000, WHICH DISCUSSION IS INCORPORATED HEREIN BY REFERENCE. THESE IMPORTANT FACTORS INCLUDE: o THE ABILITY OF THE COMPANY TO MAINTAIN SUFFICIENT LEVELS OF WORKING CAPITAL TO SUPPORT OPERATING NEEDS AND GROWTH INITIATIVES. o THE COMPANY'S ABILITY TO CREATE PRODUCT AND BRAND NAME AWARENESS. o THE EFFICIENCY AND EFFECTIVENESS OF THE COMPANY'S MARKETING AND ADVERTISING. o THE ABILITY OF THE COMPANY TO INCREASE SALES VOLUMES THROUGH ITS EXISTING DISTRIBUTION CHANNELS. o THE ABILITY OF THE COMPANY TO EFFICIENTLY AND EFFECTIVELY PURSUE NEW CHANNELS OF DISTRIBUTION. o THE PERFORMANCE OF THE COMPANY'S EXISTING AND NEW STORES. o THE ABILITY OF THE COMPANY TO CONTINUE TO ATTRACT AND RETAIN KEY PERSONNEL, INCLUDING QUALIFIED SALES PROFESSIONALS. o THE ABILITY OF THE COMPANY TO REALIZE THE BENEFITS OF COST SAVING INITIATIVES. o THE LEVELS OF CONSUMER ACCEPTANCE OF THE COMPANY'S PRODUCT LINES. o THE ABILITY OF THE COMPANY TO CONTINUOUSLY IMPROVE ITS EXISTING PRODUCT LINES AND INTRODUCE NEW PRODUCTS. o THE ABILITY OF THE COMPANY TO EFFICIENTLY IMPLEMENT NATIONWIDE HOME DELIVERY AND ASSEMBLY. o ECONOMIC TRENDS AND CONSUMER CONFIDENCE. o INDUSTRY COMPETITION. o THE RISKS AND UNCERTAINTIES DETAILED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SEC, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND OTHER PERIODIC REPORTS FILED WITH THE SEC. OVERVIEW Select Comfort is the leading manufacturer and retailer of adjustable-firmness air beds, which are clinically proven to improve sleep and relieve back pain. The company's mission is to improve people's lives by providing a better night's sleep. From product design to global manufacturing, Select Comfort is vertically integrated with dedicated customer service and its own selling channels including direct phone, e-commerce, and company-owned retail stores. We value our direct contact with our customers because it fosters continuous improvement and innovation. For 2001, our goal is to return to profitability, driven by the following strategic priorities: o Rightsizing our cost structure, o Building consumer awareness, o Improving our sales conversion effectiveness, o Expanding profitable distribution, and o Improving product quality, innovation and service levels. BUSINESS STRUCTURE SALES DISTRIBUTION/POINTS OF SALE Our growth strategies are focused on building brand awareness for our products and increasing the number of points of sale at which consumers can purchase our products. We currently sell through four sales channels. We began selling through our direct marketing call center in 1991, through our company-owned retail stores in 1992, over the internet in 1999 and through wholesale opportunities in 2000. 9 The proportion of our total net sales, by dollar volume, from each of these channels is as follows: Three Months Ended Six Months Ended -------------------- ------------------- 6/30/01 7/01/00 6/30/01 7/01/00 --------- --------- --------- --------- Stores 75% 78% 78% 76% Direct Call Center 15% 19% 15% 21% E-commerce 3% 3% 3% 3% Wholesale 7% - 4% - Our company-owned retail store locations are summarized as follows: Three Months Ended Six Months Ended -------------------- ------------------- 6/30/01 7/01/00 6/30/01 7/01/00 --------- --------- --------- --------- Beginning of period 326 342 333 341 Opened 3 6 5 11 Closed (2) (15) (11) (19) --------- --------- --------- --------- End of period 327 333 327 333 Our company-owned stores include leased space within 24 Bed, Bath & Beyond stores as of June 30, 2001. In addition to our company-owned stores, internally managed call center and web site, our adjustable-firmness beds and sleep-related products are sold wholesale to an independent furniture retailer with three retail stores and over the QVC shopping network. Sales volumes to date in the wholesale channels have been driven primarily by the number and size of QVC shows. We do not have plans to open or close a significant number of company-owned stores in the near future. We are evaluating the relative economic benefits of selling through our own stores versus wholesale distribution through independently owned furniture/mattress retailers and are considering the initiation of larger-scale wholesale tests in specific markets. MARKETING DRIVERS We utilize advertising, sales promotions and public relations efforts to build consumer awareness of our brand, products and the locations of our points of sale. Advertising spending is summarized as follows (in 000's): Three Months Ended Six Months Ended -------------------- ------------------- 6/30/01 7/01/00 6/30/01 7/01/00 --------- --------- --------- --------- Advertising $6,999 $6,306 $17,429 $15,540 Future advertising expenditures will depend on the effectiveness and efficiency of the advertising in creating awareness of our products and brand name, generating consumer inquiries and driving consumer traffic to our points of sale. We have begun to, and expect to continue to, spend an increasing percentage of our marketing budget on advertising designed to attract consumers to retail stores. We anticipate that full year advertising spend levels in 2001 will be slightly lower than in 2000, reflecting the re-apportionment of media dollars to a test campaign. In addition to the factors noted above, sales results are influenced by a variety of factors, including general economic conditions and consumer confidence, levels of retail mall traffic, the maturation of our store base, the timing and effectiveness of promotional events and advertising expenditures, the timing and success of new product introductions and product line extensions, the quality and tenure of store-level managers and sales professionals, and the amount of competitive activity. Our business is also subject to some seasonal influences, with lower sales levels in the second quarter and heavier concentrations of sales during the fourth quarter holiday season due to increased mall traffic. Comparable store sales decreased for the three months ended June 30, 2001 and July 1, 2000 by 3.6% and 4.0%, respectively. Comparable store sales decreased for the six months ended June 30, 2001 and July 1, 2000 by 5.2% and 1.9%, respectively. 10 OPERATING STRUCTURE A substantial portion of operating expenses is related to sales and marketing expenses, including costs associated with operating existing stores, advertising expenditures, supporting our store infrastructure and opening new stores. These costs are relatively fixed in nature, and spending cannot be adjusted quickly in response to shortfalls in customer inquiries or net sales. We believe historical operating losses have been primarily the result of an aggressive retail store opening strategy, significant marketing, advertising and product development expenditures, and the development of a substantial corporate infrastructure to support future growth. In 2000 we began to implement initiatives designed to bring our cost structure in line with our sales volumes with the ultimate objective of making our core bed business profitable at sales volumes equal to those achieved in year 2000. To date we have implemented programs designed to reduce our total annual fixed and variable costs by $35 million, reducing our sales breakeven point by 17%. These cost reduction measures have included: o Closing one of three manufacturing plants, one of two call centers and consolidating two administrative offices, o Closing over 30 under-performing stores, o Reducing overall staffing, including approximately 20% of field sales support and approximately 12% of administrative staffing, o Discontinuing our catalog sales channel and deferring roll out of our sofa sleeper product, o Restructuring our promotional programs and developing more efficient programs to utilize in-store signage and customer fulfillment materials, and o Developing a program to resell returned products to targeted markets. We believe we have taken steps that can return us to profitability in the second half of 2001. However, there can be no assurance that we will be able to achieve or sustain sales levels or expense levels that will enable us to achieve or sustain profitability in the future, on a quarterly or annual basis. Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in comparable store sales, the timing, amount and effectiveness of advertising expenditures, any changes in return rates, the timing of new store openings and related expenses, net sales contributed by new stores, competitive factors, any disruptions in third-party delivery services and general economic conditions and consumer confidence. Furthermore, a substantial portion of net sales is often realized in the last month of a quarter with such net sales frequently concentrated in the last weeks or days of a quarter, due in part to our promotional schedule. As a result, we may be unable to adjust spending in a timely manner and our business, financial condition and operating results may be materially adversely affected. Our historical results of operations may not be indicative of the results that may be achieved for any future fiscal period. At June 30, 2001, we had net operating loss carryforwards ("NOLs") for federal income tax purposes of approximately $44.3 million expiring between the years 2003 and 2021. We expect that approximately $1.4 million of these NOLs will expire unutilized due to an Internal Revenue Code (IRC) Section 382 limitation resulting from a prior ownership change. FISCAL 2001 - SECOND QUARTER RESULTS Net sales during the second quarter of 2001 were $62.7 million, or 1.5% higher than the prior year. Higher sales volumes were net of two contrasting factors: o An increase in sales volumes associated primarily with QVC shows, partially offset by o Slowing economic conditions reflected in consumer confidence measures and lower volumes of mall traffic and direct-marketing response. 11 Operating losses for the second quarter of 2001 totaled $3.2 million as compared to operating losses of $5.4 million for the second quarter of 2000. The improvement in profitability is a direct result of successful execution of cost restructuring efforts. Specific cost reductions have included: o Lower return rates, contributing $600,000 to gross margins, o Sales of refurbished return product, contributing $600,000 to gross margins, o Reductions of general and administrative expenses of $800,000, and o Restructuring of promotional programs and sales support to maintain product and operating margins. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the Company's results of operations expressed as percentages of net sales. Percentage amounts may not total due to rounding. THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ------------------ JUNE 30, JULY 1, JUNE 30, JULY 1, 2001 2000 2001 2000 -------- -------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 35.7 35.4 35.9 35.5 -------- -------- -------- -------- Gross margin 64.3 64.6 64.1 64.5 -------- -------- -------- -------- Operating expenses: Sales and marketing 59.6 62.4 63.6 60.8 General and administrative 9.5 10.9 10.1 11.0 Store closings/impairments 0.2 0.1 0.4 0.0 -------- -------- -------- -------- Total operating expenses 69.3 73.3 74.1 71.8 -------- -------- -------- -------- Operating loss (5.1) (8.7) (10.0) (7.4) Other income (expense), net (0.6) 0.1 (0.3) 0.1 -------- -------- -------- -------- Loss before income taxes (5.6) (8.6) (10.3) (7.2) Income tax expense (benefit) 0.0 (3.0) 0.1 (2.5) -------- -------- -------- -------- Net loss (5.6)% (5.6)% (10.4)% (4.7)% ======== ======== ======== ======== COMPARISON OF THREE MONTHS ENDED JUNE 30, 2001 WITH THREE MONTHS ENDED JULY 1, 2000 NET SALES Net sales increased 1.5% to $62.7 million for the three months ended June 30, 2001 from $61.8 million for the three months ended July 1, 2000, due primarily to an increase in mattress unit sales with no significant change in the average mattress selling price, although slightly higher retail selling prices have been offset by lower wholesale price points. The increase in net sales was due primarily to a $4.6 million increase from the Company's wholesale channel, offset by (i) a $2.2 million decrease in direct marketing sales, (ii) a $1.3 million decrease in company-owned retail store sales, comprised primarily of a decrease in comparable store sales of $1.6 million, and (iii) a $0.1 million decrease in net sales from the Company's e-commerce channel. GROSS MARGIN Gross margin decreased to 64.3% for the three months ended June 30, 2001 from 64.6% for the three months ended July 1, 2000 primarily due to increased sales in the wholesale channel, which contribute lower gross margin percentages than retail sales channels, partially offset by higher gross margin percentages in retail sales channels, due primarily to decreases in discounts associated with promotional offerings. SALES AND MARKETING Sales and marketing expenses decreased 3.0% to $37.4 million for the three months ended June 30, 2001 from $38.5 million for the three months ended July 1, 2000, and decreased as a percentage of net sales to 59.6% from 62.4% for the comparable prior-year period. The decrease in the dollar amount of sales and marketing expenses was primarily due to decreases in selling expenses associated with lower retail sales volumes and fewer stores, partially offset by increases in media and media production expense. Sales and marketing expenses decreased as a percentage of net sales 12 primarily due to decreased compensation, occupancy and other selling expenses, partially offset by increased media and media production expenses. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased 10.4% to $6.0 million for the three months ended June 30, 2001 from $6.7 million for the three months ended July 1, 2000. The decrease in general and administrative expenses was primarily due to staffing reductions and reduced occupancy expense resulting from the consolidation of our two corporate offices. OTHER INCOME (EXPENSE), NET Other income decreased $410,000 to approximately $354,000 in other expense for the three months ended June 30, 2001 from $56,000 in other income for the three months ended July 1, 2000. The decrease is primarily due to interest expense associated with the $11 million in long-term debt and lower cash levels affecting interest income in 2001. INCOME TAX EXPENSE (BENEFIT) Income tax expense increased $1.9 million to $0 for the three months ended June 30, 2001 from a $1.9 million benefit for the three months ended July 1, 2000 due to not recognizing an income tax benefit from operating losses in the three months ended June 30, 2001. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2001 WITH SIX MONTHS ENDED JULY 1, 2000 NET SALES Net sales decreased 7.0% to $128.2 million for the six months ended June 30, 2001 from $137.9 million for the six months ended July 1, 2000, due primarily to a decrease in mattress unit sales with no significant change in the average mattress selling price, although slightly higher retail selling prices have been offset by lower wholesale price points. The decrease in net sales was due primarily to (i) a $9.9 million decrease in direct marketing sales, (ii) a $4.6 million decrease from company-owned retail store sales, comprised primarily of a decrease in comparable store sales of $5.1 million and a decrease of $2.1 million from the elimination of our roadshow distribution channel partially offset by a net increase of $2.6 million from non-comparable stores and (iii) a $0.8 million decrease in net sales from the Company's e-commerce channel, offset by an increase of $5.7 million in net sales from the Company's wholesale channel. GROSS MARGIN Gross margin decreased to 64.1% for the six months ended June 30, 2001 from 64.5% for the six months ended July 1, 2000 primarily due to increased sales in the wholesale channel, which contribute lower gross margin percentages than retail sales channels, partially offset by higher gross margin percentages in retail sales channels, due primarily to decreases in discounts associated with promotional offerings. SALES AND MARKETING Sales and marketing expenses decreased 2.7% to $81.6 million for the six months ended June 30, 2001 from $83.8 million for the six months ended July 1, 2000, and increased as a percentage of net sales to 63.6% from 60.8% for the comparable prior-year period. The decrease in the dollar amount of sales and marketing expenses was primarily due to decreases in selling expenses associated with lower retail sales volumes and fewer stores, partially offset by increases in media and media production expense. Sales and marketing expenses increased as a percentage of net sales primarily due to increased media and media production expense. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased 14.5% to $13.0 million for the six months ended June 30, 2001 from $15.2 million for the six months ended July 1, 2000. The decrease in general and administrative expenses was primarily due to staffing reductions and reduced occupancy expense resulting from the consolidation of our two corporate offices and severance costs associated with a reduction in force in 2000. OTHER INCOME (EXPENSE), NET Other income decreased $583,000 to approximately $379,000 in other expense for the six months ended June 30, 2001 from $204,000 in other income for the six months ended July 1, 2000. The decrease is due to interest expense associated with the $11 million in financing that closed in June 2001 and lower cash levels affecting interest income in 2001. 13 INCOME TAX EXPENSE (BENEFIT) Income tax expense increased $3.6 million to $115,000 for the six months ended June 30, 2001 from a $3.5 million benefit for the six months ended July 1, 2000 due to not recognizing an income tax benefit from operating losses in the three months ended June 30, 2001. LIQUIDITY AND CAPITAL RESOURCES Our primary source of liquidity has been the sale of equity securities. Our most recent source of capital resources has been from the completion of our $11.0 million convertible debt offering in June 2001. We completed our initial public offering in December 1998, resulting in net proceeds of $44.6 million, which have been used for (i) the repayment of $15.0 million of debt, (ii) capital expenditures related to expansion of retail stores, manufacturing capabilities and development of information technology systems, (iii) the repurchase of 1,220,000 shares of Company common stock for $12.7 million and (iv) working capital needs. Net cash used in operating activities for the six months ended June 30, 2001 was approximately $4.8 million and consisted primarily of the net loss adjusted for non-cash expenses, partially offset by decreases in inventories and increases in accounts payable. Net cash used in operating activities for the six months ended July 1, 2000 was approximately $2.3 million and consisted primarily of the net loss adjusted for non-cash expenses and increases in inventory partially offset by increases in accounts payable and receipt of an income tax refund. Net cash provided by investing activities was approximately $1.6 million for the six months ended June 30, 2001 and $3.1 million for the six months ended July 1, 2000. Investing activities consisted primarily of purchases of property and equipment for new retail stores and information technology system development costs in 2001 and purchases of property and equipment for new retail stores, information technology systems and manufacturing facilities in 2000. In 2001 we liquidated $4.0 million of marketable securities to support continuing operations, while in 2000 we liquidated $10.7 million. Net cash provided by financing activities was approximately $10.5 million for the six months ended June 30, 2001 which consisted primarily of net proceeds from issuance of long-term debt and $404,000 for the six months ended July 1, 2000 from the issuance of common stock. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments. The counterparties to the agreements consist of government agencies and various major corporations of high credit standing. The Company does not believe there is significant risk of non-performance by these counterparties because the Company limits the amount of credit exposure to any one financial institution and any one type of investment. The Company had negative working capital of approximately $11.0 million at June 30, 2001, and $12.4 million at December 30, 2000. The Company has incurred negative cash flows and has incurred pretax losses from operations of $13.2 million for the six months ended June 30, 2001 and $26.0 million for the year ended December 30, 2000. Based on these factors, among others, the Company's auditors have included an emphasis paragraph in their opinion regarding the Company's fiscal 2000 financial statements to express substantial doubt about the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent, among other things, upon obtaining positive cash flow from operations and upon its ability to generate or obtain additional working capital. Our ability to return to profitability and positive cash flow, to meet our short term and long term working capital needs, and to generate or obtain additional working capital are dependent, in large part, on our ability to improve sales trends, which will be impacted by the length and severity of the current economic downturn. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 14 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Select Comfort and certain former officers and directors were named as defendants in a class action lawsuit initially filed on June 1, 1999 on behalf of shareholders in U.S. District Court in Minnesota. The named plaintiffs, who purport to act on behalf of a class of purchasers of our common stock during the period from December 4, 1998 to June 7, 1999, charge the defendants with violations of federal securities laws. The suit alleges that we and the named directors and officers failed to disclose or misrepresented certain information concerning our business during the class period. The complaint does not specify an amount of damages claimed. We believe that the complaint is without merit and intend to vigorously defend the claims. The Company and the individual defendants brought a motion to dismiss all claims on November 10, 1999. The motion was heard by a magistrate judge on December 21, 1999. On January 27, 2000, the magistrate recommended that the claims based on Section 11 of the federal securities laws be dismissed. The magistrate recommended that the motion to dismiss be denied with respect to the claims based on Rule 10b-5 of the federal securities laws. In February 2000, both the plaintiffs and the defendants formally objected to the magistrate's recommendation. The objection was made to the United States District Court in Minnesota. On May 12, 2000, the United States District Court in Minnesota adopted the recommendation of the magistrate and denied the defendants' motion to dismiss the Rule 10b-5 claims. The Court also adopted the recommendation of the magistrate and dismissed the plaintiff's Section 11 claims without prejudice and with leave to amend. On March 31, 2000, the Company and certain of its former officers and directors were named as defendants in a class action lawsuit filed on behalf of the Company's shareholders in U.S. District Court in Minnesota asserting identical factual allegations as the consolidated complaint described above. The suit alleges claims based on Sections 11 and 12(a)(2) of the federal securities laws. The complaint does not specify an amount of damages claimed. The Company believes this complaint is without merit and intends to vigorously defend the claims. The above two class actions were consolidated by the United States District Court Magistrate on July 24, 2000. On January 30, 2001, the plaintiffs made a motion to certify a class. The class certification motion is pending. Discovery has begun. We have agreed to indemnify the individual defendants and to advance reasonable expenses of defense of the litigation to the individual defendants under applicable Minnesota corporate law. To date, we have paid an aggregate of $3,891 to the law firm of Briggs & Morgan on behalf of defendant H. Robert Hawthorne. We are involved in other various claims, legal actions, sales tax disputes, and other complaints arising in the ordinary course of business. In the opinion of management, any losses that may occur from these other matters are adequately covered by insurance or are provided for in the consolidated financial statements and the ultimate outcome of these other matters will not have a material effect on the consolidated financial position or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 15 ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. EXHIBIT NUMBER DESCRIPTION 10.1 Note Purchase Agreement dated as of June 1, 2001 by and among Select Comfort Corporation and the Purchasers named therein. 10.2 Form of Note issued under the Note Purchase Agreement. 10.3 Form of Warrant issued under the Note Purchase Agreement. 10.4 Security Agreement dated June 6, 2001 executed by Select Comfort Corporation in favor of St. Paul Venture Capital VI, LLC. 10.5 Pledge Agreement dated June 6, 2001 executed by Select Comfort Corporation in favor of St. Paul Venture Capital VI, LLC. 10.6 Patent and Trademark Security Agreement dated June 6, 2001 executed by Select Comfort Corporation in favor of St. Paul Venture Capital VI, LLC. 10.7 Registration Rights Agreement dated June 6, 2001 by and among Select Comfort Corporation and the securityholders named therein. 10.8 Select Comfort Corporation 1997 Stock Incentive Plan, as amended and restated through May 1, 2001. (b) REPORTS ON FORM 8-K During the quarter ended June 30, 2001, the Company filed three Current Reports on Form 8-K. The Reports consisted of the following: (i) Current Report filed April 16, 2001, announcing the filing of Form 10-K and final audited results for the fourth quarter and year ended December 30, 2000. (ii) Current Report filed April 24, 2001, announcing comments on unaudited results for the first quarter ended March 31, 2001. (iii)Current Report filed June 6, 2001, announcing securing of commitments for financing. (iv) Current Report filed July 12, 2001, announcing comments on unaudited results for the second quarter ended June 30, 2001. 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SELECT COMFORT CORPORATION /s/ William R. McLaughlin ---------------------------------------------- August 14, 2001 William R. McLaughlin President and Chief Executive Officer (principal executive officer) /s/ James C. Raabe ---------------------------------------------- James C. Raabe Chief Financial Officer (principal financial and accounting officer) 17 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION LOCATION - -------------- ------------------------------------ ----------------------------- 10.1 Note Purchase Agreement dated as of Filed herewith electronically June 1, 2001 by and among Select Comfort Corporation and the Purchasers named therein 10.2 Form of Note issued under the Note Filed herewith electronically Purchase Agreement 10.3 Form of Warrant issued under the Filed herewith electronically Note Purchase Agreement 10.4 Security Agreement dated June 6, Filed herewith electronically 2001 executed by Select Comfort Corporation in favor of St. Paul Venture Capital VI, LLC 10.5 Pledge Agreement dated June 6, 2001 Filed herewith electronically executed by Select Comfort Corporation in favor of St. Paul Venture Capital VI, LLC 10.6 Patent and Trademark Security Filed herewith electronically Agreement dated June 6, 2001 executed by Select Comfort Corporation in favor of St. Paul Venture Capital VI, LLC 10.7 Registration Rights Agreement dated Filed herewith electronically June 6, 2001 by and among Select Comfort Corporation and the securityholders named therein 10.8 Select Comfort Corporation 1997 Filed herewith electronically Stock Incentive Plan, as amended and restated through May 1, 2001
18 EX-10 3 e10-1_notegreement.txt NOTE PURCHASE AGREEMENT - JUNE 1, 2001 EXHIBIT 10.1 SELECT COMFORT CORPORATION NOTE PURCHASE AGREEMENT June 1, 2001 To Each of the Persons Named in Schedule 1 to this Agreement (collectively, the "Purchasers" and individually, a "Purchaser") Ladies and Gentlemen: In consideration of the agreement of the Purchasers to purchase the Notes and the Warrants (as hereinafter defined), as provided for herein, the undersigned, Select Comfort Corporation, a Minnesota corporation (the "Company"), hereby agrees with each of the Purchasers as follows: 1. AUTHORIZATION OF SECURITIES. The Company proposes to authorize, issue and sell an aggregate of up to $11,000,000 principal amount of its senior secured convertible notes, to be in substantially the form set forth as Exhibit 1 to this Agreement. The term "Notes", as used herein, shall mean the senior secured convertible notes to be delivered pursuant to this Agreement and all notes of the Company issued in exchange or substitution therefor. The Notes shall be convertible into shares of the Company's Common Stock (as hereinafter defined) (such shares of Common Stock into which the Notes are convertible, together with all stock or other securities issued in exchange or substitution therefor, or in a stock split or reclassification thereof, or as a stock dividend or other distribution thereon, or otherwise in respect thereof, being hereinafter sometimes referred to as the "Conversion Stock"), initially at the rate of one share of Conversion Stock for each $1.00 of outstanding principal amount of the Notes (subject to adjustment as provided in the Notes). The Notes shall be guarantied by each Subsidiary (as hereinafter defined) of the Company pursuant to a Guaranty, to be substantially in the form set forth as Exhibit 2 to this Agreement (as amended, modified or supplemented from time to time, the "Guaranty"), and shall be secured (i) by substantially all of the personal property of the Company pursuant to a Security Agreement-Parent, to be substantially in the form set forth as Exhibit 3 to this Agreement (as amended, modified or supplemented from time to time, the "Parent Security Agreement"), and a Patent and Trademark Security Agreement-Parent, to be in substantially the form set forth as Exhibit 4 to this Agreement (as amended, modified or supplemented from time to time, the "Parent Patent and Trademark Security Agreement"), (ii) by substantially all of the personal property of each Subsidiary pursuant to a Security Agreement-Subsidiaries, to be substantially in the form set forth as Exhibit 5 to this Agreement (as amended, modified or supplemented from time to time, the "Subsidiary Security Agreement"), and (iii) by all of the capital stock of each Subsidiary pursuant to a Pledge Agreement, to be substantially in the form set forth as Exhibit 6 to this Agreement (as amended, modified or supplemented from time to time, the "Pledge Agreement"). The Company also proposes to authorize, issue and sell to the Purchasers warrants to purchase an aggregate of up to 4,400,000 shares of Common Stock at an initial exercise price of $1.00 per share (subject to adjustment as provided in such warrants), such warrants to be substantially in the form of Exhibit 7 hereto. The term "Warrants", as used herein, shall mean the warrants to be delivered pursuant to this Agreement and all warrants issued in exchange or substitution therefor; and the term "Warrant Stock", as used herein, shall mean the shares of Common Stock issuable upon exercise of the Warrants, together with all stock or other securities issued in exchange or substitution therefor, or in a stock split or reclassification thereof, or as a stock dividend or other distribution thereon, or otherwise in respect thereof. 2. SALE AND PURCHASE OF SECURITIES. Subject to the terms and conditions hereof, the Company agrees to sell to each Purchaser, and each Purchaser agrees to purchase from the Company, the aggregate principal amount of Notes and Warrants to purchase the number of shares of Warrant Stock set forth opposite such Purchaser's name in Schedule 1 hereto, at the purchase price set forth opposite such Purchaser's name in Schedule 1 hereto. The parties hereto agree that of such purchase price, $.01 per share of Warrant Stock covered by the Warrants shall be allocated to the purchase of the Warrants. 3. CLOSING. (a) The closing of the sale to, and purchase by, the Purchasers of the Notes and the Warrants (the "Closing") shall occur at the offices of Faegre & Benson LLP, 2200 Wells Fargo Center, 90 South Seventh Street, Minneapolis, Minnesota, at the hour of 9:00 A.M., Minneapolis time, on the first business day to occur after satisfaction or waiver of all conditions set forth in Section 7 hereof, or on such other day or at such other time or place as the Purchasers and the Company shall mutually agree. The date on which the Closing shall occur is herein called the "Closing Date". (b) At the Closing, the Company will deliver to each Purchaser the Notes and the Warrants being purchased by such Purchaser, registered in its name as stated in Schedule 1 hereto (or in the name of its nominee as may be specified to the Company at least 24 hours prior to the Closing Date), against payment by such Purchaser of the purchase price therefor by check, wire transfer of funds and/or, in the case of St. Paul Venture Capital VI, LLC ("St. Paul"), conversion in full of the principal balance of and accrued and unpaid interest on that certain Demand Note of the Company dated May 1, 2001 payable to the order of such Purchaser in the original principal amount of $2,000,000 (the "Demand Note"). (c) Each of the Purchasers acknowledges and agrees that during the period commencing with the Closing Date and ending two weeks after the Closing Date the Company may sell an additional aggregate principal amount of senior secured convertible notes, not to exceed the difference between $12,000,000 and the aggregate principal amount of the Notes issued at the Closing, and additional warrants to purchase an additional number of shares of Common Stock, not to exceed the difference between 4,800,000 and the number of shares of Warrant Stock issuable upon exercise of the Warrants issued at the Closing, to additional purchasers who qualify as accredited investors within the meaning of Rule 501 under the Securities Act (as hereinafter defined) on the same terms as the sale of the Notes and the Warrants to the Purchasers at the Closing, upon execution of counterparts of this Agreement by -2- such additional purchasers who shall thereupon become bound by and entitled to the benefits of this Agreement. Such additional purchasers shall, by executing counterparts of this Agreement, become Purchasers for all purposes of this Agreement and the Collateral Documents (as hereinafter defined), and Schedule 1 hereto shall be deemed to be appropriately amended. The senior secured convertible notes of the Company thus sold to such additional purchasers, together with all notes of the Company issued in exchange or substitution therefor, shall be deemed to be Notes as such term is defined in this Agreement and the Collateral Documents, and the warrants of the Company thus sold to such additional purchasers, together with all warrants issued in substitution or exchange therefor, shall be deemed to be Warrants as that term is defined in this Agreement. The sale of such additional securities may be subject to such conditions as are consistent with those set forth in Section 7 hereof and are agreed to among the Company and such additional purchasers. Each of the Purchasers also acknowledges and agrees that such additional purchasers, upon execution by them of counterparts of the Registration Rights Agreement (as hereinafter defined), shall become Note Holders as that term is defined in the Registration Rights Agreement and shall be bound by and entitled to the benefits of the Registration Right Agreement. The senior secured convertible notes of the Company thus sold to such additional purchasers, together with all notes of the Company issued in exchange or substitution therefor, shall be deemed to be Convertible Notes as such term is defined in the Registration Rights Agreement, and the warrants of the Company thus sold to such additional purchasers, together with all warrants issued in substitution or exchange therefor, shall be deemed to be Note Holder Warrants as that term is defined in the Registration Rights Agreement. 4. RESTRICTION ON TRANSFER OF SECURITIES. 4.1 RESTRICTIONS. The Notes and the Conversion Stock, and the Warrants and the Warrant Stock, are transferable only pursuant to (a) a public offering registered under the Securiities Act of 1933, as amended (the "Securities Act"), (b) Rule 144 (or any similar rule then in effect) adopted under the Securities Act ("Rule 144"), if such Rule is available, and (c) subject to the conditions elsewhere specified in this Section 4, any other legally available means of transfer; provided, however, that the transferee of such securities agrees in writing to be bound by the terms of this Agreement unless such securities will not, immediately following such transfer, constitute Purchased Securities (as hereinafter defined). 4.2 LEGEND. (a) Each Note and each of the Warrants shall be endorsed with the following legend: "The securities evidenced hereby may not be transferred without (i) the opinion of counsel reasonably satisfactory to the Company that such transfer may be lawfully made without registration under the Federal Securities Act of 1933 and all applicable state securities laws or (ii) such registration." Upon the conversion of any Notes or upon the exercise of any Warrant, unless the Company receives an opinion of counsel from the holder of such a security reasonably satisfactory to the Company to the effect that a sale, transfer, assignment, pledge or distribution of the Conversion -3- Stock or Warrant Stock issuable upon such conversion or exercise may be made without registration, or unless such Conversion Stock or Warrant Stock is being disposed of pursuant to registration under the Securities Act and any applicable state act, the same legend shall be endorsed on the certificate evidencing such Conversion Stock or Warrant Stock. (b) The aforesaid legend shall be removed with respect to securities held for at least two years (including, with respect to the Conversion Stock and any Warrant Stock issued upon the exercise of the Conversion Right described in paragraph 12 of the Warrants, the period during which the related converted Notes or Warrants had been held) by a person who has not been an affiliate of the Company (as defined in Rule 144) during the three months preceding the request for removal of such legend. The foregoing legend removal requirement is based on Rule 144(k) under the Securities Act as currently in force, and assumes that such Rule (or a successor thereto) in substantially its current form shall be in effect at the time of any such request for legend removal. (c) A stop transfer order shall be placed with the Company's transfer agent preventing transfer of any of the securities referred to in paragraph (a) above pending compliance with the conditions set forth in any such legend (except as otherwise provided in this Section 4.2). 4.3 REMOVAL OF LEGEND. Any legend endorsed on a certificate or instrument evidencing a security pursuant to Section 4.2 hereof shall be removed, and the Company shall issue a certificate or instrument without such legend to the holder of such security, (a) in accordance with Section 4.2(b) hereof, (b) if such security is being disposed of pursuant to registration under the Securities Act and any applicable state acts or pursuant to Rule 144, or (c) if such holder provides the Company with an opinion of counsel reasonably satisfactory to the Company to the effect that a sale, transfer, assignment, offer, pledge or distribution for value of such security may be made without registration and that such legend is not required to satisfy the applicable exemption from registration. 4.4 REGISTER OF SECURITIES. The Company or its duly appointed agent shall maintain a separate register for the Notes and the Warrants in which it shall register the issuance and transfer of all Notes and Warrants. All transfers of Notes and Warrants shall be recorded on the register maintained by the Company or its agent, and the Company shall be entitled to regard the registered holder of such securities as the actual owner of the securities so registered until the Company or its agent is required to record a transfer of such securities on its register. The Company or its agent shall be required to record any such transfer when it receives (a) the security to be transferred duly and properly endorsed by the registered holder thereof or by its attorney duly authorized in writing, and (b) the opinion of counsel referred to in Sections 4.2 and 4.3 hereof or evidence of compliance with the registration provisions referred to in those Sections. 5. REPRESENTATIONS AND WARRANTIES BY COMPANY. The Company represents and warrants to the Purchasers that: 5.1 ORGANIZATION, STANDING, ETC. Each of the Company and the Subsidiaries (as hereinafter defined) is a corporation duly organized, validly existing and in good standing -4- under the laws of the State of Minnesota, and has the requisite corporate power and authority to own its properties and to carry on its business as it is now being conducted. The Company has the requisite corporate power and authority to issue the Notes and the Conversion Stock, and the Warrants and the Warrant Stock, and to otherwise execute, deliver and perform its obligations under the Transaction Documents (as hereinafter defined) to which it is or will be a party. Each of the Subsidiaries has the requisite corporate power and authority to execute, deliver and perform its obligations under each of the Transaction Documents to which it will be a party. The copies of the Articles of Incorporation and Bylaws of each of the Company and the Subsidiaries delivered to the Purchasers or their agents prior to the execution of this Agreement are true and complete copies of the duly and legally adopted Articles of Incorporation and Bylaws of such person in effect as of the date of this Agreement. The Company does not have any direct or indirect equity interest in any firm, corporation, partnership, limited liability company, joint venture association or other business organization other than Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select Comfort SC Corporation, Direct Call Centers, Inc. and selectcomfort.com corporation, all of the outstanding equity interests and rights to acquire equity interest of which are directly or indirectly owned, of record and beneficially, by the Company, free and clear of all pledges, liens, charges, security interests, restrictions and encumbrances (except for restrictions on transfer thereof other than in compliance with federal and state securities laws). 5.2 QUALIFICATION. Each of the Company and the Subsidiaries is duly qualified or licensed as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or of its properties owned or leased makes such qualification or licensing necessary and failure to be so qualified or licensed would, individually or in the aggregate, (a) have a material adverse effect on the business, assets, condition (financial or otherwise), operations or results of operations of the Company and the Subsidiaries, taken as a whole, (b) have a material adverse effect on the legality, validity or enforceability of any of the Transaction Documents, or (c) materially and adversely impair the ability of any of the Company or the Subsidiaries to fully perform on a timely basis its obligations under the Transactions Documents to which it is or will be a party (collectively or individually, any of clause (a), (b) or (c) being referred to in this Agreement as a "Material Adverse Effect"). 5.3 CORPORATE ACTS AND PROCEEDINGS. Each of the Transaction Documents to which the Company is or will be a party has been duly authorized by all necessary corporate action on behalf of the Company, and has been or at the Closing will be duly executed and delivered by authorized officers of the Company, and all corporate action necessary to the authorization, creation, issuance and delivery of the Notes and the Conversion Stock, and the Warrants and the Warrant Stock, has been taken on the part of the Company. Each of the Transaction Documents to which any Subsidiary will be a party has been duly authorized by all necessary corporate action on behalf of such Subsidiary, and at the Closing will be duly executed and delivered by authorized officers of such Subsidiary. This Agreement is, and each of the other Transaction Documents to which the Company will be a party when executed and delivered pursuant to the terms of this Agreement will be, a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance or transfer, reorganization or other similar laws affecting the enforcement of -5- creditors' rights generally and by general principles of equity. Each of the Transaction Documents to which a Subsidiary will be a party when executed and delivered pursuant to the terms of this Agreement will be a valid and binding agreement of such Subsidiary enforceable against such Subsidiary in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance or transfer, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. 5.4 NO CONFLICTS. None of the execution, delivery or performance by any of the Company or the Subsidiaries of the Transaction Documents to which it is or will be a party, nor the consummation by any of the Company or the Subsidiaries of the transactions contemplated thereby, (a) will conflict with, or, with or without the giving of notice or passage of time, or both, result in any breach of, or constitute a default under, or result in the imposition of any lien or encumbrance upon any asset or property of any of the Company or the Subsidiaries pursuant to, any applicable law, administrative regulation or judgment, order or decree of any court or governmental body, or any agreement or other instrument to which any of the Company or the Subsidiaries is a party or by which any of them or any of their properties, assets or rights is bound or affected (except that the Company will be required, pursuant to the terms of the Revolving Credit Program Agreement (as hereinafter defined) to fund the Reserve Account (as hereinafter defined) with up to $750,000 of the net proceeds received by the Company from the sale of the Notes and Warrants and to grant Conseco Bank, Inc. a security interest therein), or (b) will violate the Articles of Incorporation or Bylaws of any of the Company or the Subsidiaries. 5.5 CONVERSION STOCK; WARRANTS AND WARRANT STOCK. The Warrants, when issued and paid for pursuant to the terms of this Agreement, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Section 4 hereof. The shares of Conversion Stock and Warrant Stock issuable upon conversion of the Notes or exercise of the Warrants have been reserved for issuance based upon the initial Conversion Price or Purchase Price (each as hereinafter defined), as the case may be, and, when issued upon conversion of the Notes or exercise of the Warrants in accordance with the terms thereof, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Section 4 hereof. The Warrants to be delivered by the Company hereunder, and the certificates representing the Conversion Stock and Warrant Stock to be delivered upon the conversion of the Notes or exercise of the Warrants, will be genuine, and the Company has no knowledge of any fact which would impair the validity thereof. 5.6 CAPITAL STOCK. The authorized capital stock of the Company consists of (a) 95,000,000 shares of common stock, par value $.01 per share, of which 18,126,265 shares are issued and outstanding and 23,120,964 shares are reserved for issuance, and (b) 5,000,000 shares of preferred stock, par value $.01 per share (all of which are undesignated as to class or series), of which no shares are issued and outstanding or reserved for issuance. All of the outstanding shares of capital stock of the Company were duly authorized and validly issued and are fully paid and nonassessable. There are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, Convertible Securities (as hereinafter defined) or other agreements or -6- arrangements of any character or nature whatever, except as otherwise disclosed in Section 5.6 of the Disclosure Schedule of the Company dated the date hereof (the "Disclosure Schedule"), a copy of which has been delivered to the Purchasers, or as contemplated by this Agreement, under which the Company is or may be obligated to issue capital stock or other securities of any kind representing an ownership interest or contingent ownership interest in the Company. Neither the offer nor the issuance or sale of the Notes or the Conversion Stock, or the Warrants or the Warrant Stock, constitutes an event, under any anti-dilution provisions of any securities issued or issuable by the Company or any agreements with respect to the issuance of securities by the Company, which will either increase the number of shares issuable pursuant to such provisions or decrease the consideration per share to be received by the Company pursuant to such provisions, except as otherwise disclosed in Section 5.6 of the Disclosure Schedule. No holder of any security of the Company is entitled to any preemptive or similar rights to purchase securities from the Company; provided, however, that nothing in this Section 5.6 shall affect, alter or diminish any rights granted to the holders of the Purchased Securities in this Agreement. All outstanding securities of the Company have been issued in compliance in all material respects with an exemption or exemptions from the registration and prospectus delivery requirements of the Securities Act and from the registration and qualification requirements of all applicable state securities laws, or in compliance with such requirements. 5.7 SECURITIES LAWS. Based in part upon the representations and warranties contained in Section 6 hereof, no consent, authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of any of the Transaction Documents or the offer, issuance, sale or delivery of the Notes or the Warrants or the offer of the Conversion Stock or the Warrant Stock other than the filing of a Form D with the Securities Exchange Commission (the "SEC") and the filing of any notification required by any state securities laws, which filings have been or will be effected on a timely basis. The Company has not, directly or through an agent, offered the Notes or the Conversion Stock, or the Warrants or the Warrant Stock, or any similar securities for sale to, or solicited any offers to acquire such securities from, persons other than the Purchasers and other accredited investors. Under the circumstances contemplated hereby, the offer, issuance, sale and delivery of the Notes and the Warrants and the offer of the Conversion Stock and the Warrant Stock will not under current laws and regulations require compliance with the registration or prospectus delivery requirements of the Securities Act or with the registration or qualification requirements of any applicable state securities laws. 5.8 SEC REPORTS; FINANCIAL STATEMENTS. (a) The Company has made available to each of the Purchasers, if requested, in the form filed with the SEC (including without limitation exhibits and annexes thereto), its (i) Annual Report on Form 10-K for each of the fiscal years ended January 1, 1999, December 31, 1999 and December 30, 2000, (ii) all proxy statements relating to the Company's meetings of shareholders (whether annual or special) held since January 2, 1999, and (iii) all other reports, registration statements and other filings (including all amendments to previously filed documents) filed by the Company with the SEC since January 2, 1999 (all such reports, proxy statements, registration statements and filings being collectively called the "SEC Reports" and individually called a "SEC Report"). As of their respective dates, the SEC Reports (including any documents incorporated by reference therein) did not contain any untrue -7- statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, and each SEC Report at the time of its filing complied as to form in all material respects with all applicable requirements of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the SEC. Except as disclosed in Section 5.8 of the Disclosure Schedule, since January 2, 1999, the Company has filed in a timely manner (after giving effect to appropriate extensions) all reports that it was required to file with the SEC under the Exchange Act and the rules and regulations of the SEC. (b) The consolidated financial statements contained in the SEC Reports were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited interim financial statements, as may be permitted by the SEC on Form 10-Q under the Exchange Act) and fairly present, in all material respects, the consolidated financial position of the Company and the Subsidiaries as at the respective dates thereof and the consolidated results of operations and consolidated cash flows of the Company and the Subsidiaries for the respective periods indicated, subject, in the case of interim financial statements, to normal year-end adjustments. (c) But for the late filing described in Section 5.8 of the Disclosure Schedule, the Company would be currently eligible to register with the SEC securities for resale in a secondary offering under Form S-3 (as hereinafter defined). 5.9 NO CHANGES. Except for the transactions contemplated by this Agreement and as disclosed in Section 5.9 of the Disclosure Schedule or in the SEC Reports filed prior to the date of this Agreement, since December 30, 2000 there has been no material adverse change in the business, assets, condition (financial or otherwise), operations or results of operations of the Company and the Subsidiaries, taken as a whole, and neither the Company nor any Subsidiary has: (a) incurred any material debts, obligations or liabilities, absolute, accrued or contingent and whether due or to become due, except current liabilities incurred in the ordinary course of business and the debt evidenced by the Demand Note; (b) paid any material obligation or liability other than, or discharged or satisfied any material liens or encumbrances other than those securing, current liabilities, in each case in the ordinary course of business; (c) declared or made any payment or distribution to its shareholders as such, or purchased or redeemed any of its shares of capital stock or other securities, or obligated itself to do so; (d) mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its material assets, tangible or intangible, except for Permitted Liens (as hereinafter defined) arising in the ordinary course of business and liens securing the Demand Note; (e) sold, transferred or leased any of its material assets, except for sales of inventory and obsolete or worn-out equipment in the ordinary course of business; (f) cancelled or compromised any material debt or claim, or waived or released any right of material value; (g) suffered any physical damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting, individually or in the aggregate, the business, assets, condition (financial or otherwise), operations or results of operations of the Company and the Subsidiaries, taken as a whole; (h) entered into any material transaction other than in the ordinary course of business; (i) encountered any material labor difficulties or labor union organizing activities; (j) issued or sold any shares of capital stock or -8- other securities (other than shares of Common Stock issued upon the exercise or conversion of options, warrants or convertible securities outstanding on December 30, 2000 or granted thereafter and disclosed on Schedule 5.9 hereto) or granted any options, warrants, convertible securities or other purchase rights with respect thereto; (k) made any acquisition or disposition of any material assets or become involved in any other material transaction, other than for fair value in the ordinary course of business; (l) increased substantially any compensation or benefits payable to any officers, directors or employees of the Company or any Subsidiary other than consistent with past practices; or (m) agreed to do any of the foregoing. 5.10 TAX RETURNS AND AUDITS. All required federal and material state, local and foreign tax returns or appropriate extension requests of each of the Company and the Subsidiaries have been filed, all such returns are accurate and complete in all material respects, and all federal and material state, local and foreign taxes required to be paid with respect to such returns, and all additional material assessments due or claimed to be due by the Company or any Subsidiary, have been paid or due provision for the payment thereof has been made, except as disclosed in Section 5.10 of the Disclosure Schedule. Except as disclosed in Section 5.10 of the Disclosure Schedule, neither the Company nor any Subsidiary has received notice of any tax deficiency proposed or assessed against it that remains unresolved, or has executed any waiver of any statute of limitations on the assessment or collection of any tax. Except as disclosed in Section 5.10 of the Disclosure Schedule, none of the tax returns of any of the Company or the Subsidiaries are, to the knowledge of the Company, the subject of pending audits by governmental authorities. Neither the Company nor any Subsidiary has any material tax liabilities except those reflected in the most recent consolidated balance sheet included in the SEC Reports filed prior to the date of this Agreement and those incurred in the ordinary course of business since the date of such balance sheet. 5.11 TITLE TO PROPERTIES AND ENCUMBRANCES. Each of the Company and the Subsidiaries has good and marketable title to all its owned properties and assets, including without limitation the properties and assets reflected in the most recent consolidated balance sheet included in the SEC Reports filed prior to the date of this Agreement, except for property disposed of in the ordinary course of business since the date of such balance sheet, which properties and assets are not subject to any mortgage, pledge, lease, lien, charge, security interest or encumbrance, except Permitted Liens and liens securing the Demand Note. The plant, offices and equipment owned and leased by each of the Company and the Subsidiaries have been kept in good condition and repair (ordinary wear and tear excepted), and neither the Company nor any Subsidiary has been threatened with any material action or proceeding under any building or zoning ordinance, law or regulation. 5.12 LITIGATION; GOVERNMENTAL PROCEEDINGS. There are no legal actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened against any of the Company or the Subsidiaries, or their respective properties, assets or business, (a) that seek to enjoin or otherwise challenge the consummation of the transactions contemplated by this Agreement, or (b) except as described in the SEC Reports filed prior to the date of this Agreement or as set forth in Section 5.12 of the Disclosure Schedule, that, if decided adversely to the Company or such Subsidiary, could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. Neither -9- the Company nor any Subsidiary is in default in any material respect with respect to any judgment, order or decree of any court or any governmental agency or instrumentality. 5.13 COMPLIANCE WITH APPLICABLE LAWS AND OTHER INSTRUMENTS. The business and operations of each of the Company and its Subsidiaries have been and are being conducted in accordance with all applicable laws, rules and regulations of all governmental authorities, except to the extent noncompliance therewith has not had and would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. Neither the Company nor any Subsidiary is in violation of its Articles of Incorporation or its Bylaws. 5.14 PATENTS AND OTHER INTANGIBLE RIGHTS. Except as set forth in Section 5.14 of the Disclosure Schedule, each of the Company and the Subsidiaries (a) owns or has the right to use and enforce (which right is exclusive in the case of any patents), free and clear of all liens, claims and restrictions (other than Permitted Liens and liens securing the Demand Note), all material patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing used in the conduct of its business as now conducted, (b) is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset with respect to the use thereof or in connection with the conduct of its business or otherwise (except pursuant to a written license or other agreement included or incorporated by reference in any SEC Reports filed prior to the date of this Agreement, and except as set forth in Section 5.14 of the Disclosure Schedule), (c) owns or has the unrestricted right to use all material trade secrets, know-how, inventions, designs, processes, computer programs and technical data necessary to the development, operation and sale of all products and services presently sold by it (and has no reason to believe that it will not own or have the unrestricted right to use all material trade secrets, know-how, inventions, designs, processes, computer programs and technical data necessary to the development, operation and sale of all products and services, if any, presently proposed to be sold by it), free and clear of any liens, rights or claims of others (other than Permitted Liens and liens securing the Demand Notes), and (d) is not using any material confidential information or trade secrets of others (except pursuant to a written license or other agreement included or incorporated by reference in any SEC Reports filed prior to the date of this Agreement). Neither the Company nor any Subsidiary is infringing in any material respect upon any right or claimed right of any person under or with respect to any patents, trademarks, service marks, trade names, copyrights, licenses or rights with respect to the foregoing, nor has the Company or any Subsidiary received any notice with respect thereto. To the knowledge of the Company, no person is infringing upon any right or claimed right of the Company or any Subsidiary under or with respect to any patents, trademarks, service marks, trade names, copyrights, licenses or rights with respect to the foregoing, except for infringements that have not had and would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. 5.15 CONTRACTS. All "material contracts" (as such term is defined in Item 601(b)(10) of Regulation S-K promulgated by the SEC) to be performed in whole or in part by the Company or any of the Subsidiaries after the date of this Agreement ("Material Contracts") have been included or incorporated by reference in the SEC Reports filed prior to the date of this Agreement. Each Material Contract is in full force and effect and enforceable according to its terms (except as the enforceability thereof may be limited by bankruptcy, -10- insolvency, moratorium, fraudulent conveyance or transfer, reorganization or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity). None of the Company or any Subsidiary or, to the knowledge of the Company, any other party is in breach in any material respect of or in default in any material respect under any of the Material Contracts. 5.16 INSURANCE COVERAGE. There are in full force policies of insurance issued by insurers of recognized responsibility insuring each of the Company and the Subsidiaries, and their respective properties and business, against such losses and risks and in such amounts as in the Company's best judgment, after advice from its insurance broker, are acceptable for the nature and extent of the business of the Company and the Subsidiaries and the resources of the Company and the Subsidiaries. Neither the Company nor any Subsidiary is in default in any material respect under any material provision contained in any insurance policy, or has failed to give any notice or present any material existing claims it has under any insurance policies in a timely fashion. 5.17 NO BROKERS OR FINDERS. No person, firm or corporation has or will have, as a result of any act or omission of any of the Company or the Subsidiaries, any right, interest or valid claim against or upon any of the Company, the Subsidiaries or the Purchasers for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement, except as disclosed in Section 5.17 of the Disclosure Schedule. The Company will indemnify and hold harmless each Purchaser against any and all liability with respect to any such commission, fee or other compensation (including without limitation those arising under the arrangements described in Section 5.17 of the Disclosure Schedule) which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement. 5.18 CONFLICTS OF INTEREST. Except as disclosed in the SEC Reports filed prior to the date of this Agreement, no officer or director of any of the Company or the Subsidiaries, or any person who is known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock (as determined in accordance with Rule 13d-3 under the Exchange Act), or any affiliate of any such person (other than St. Paul or any affiliate of St. Paul), has any direct or indirect interest (a) in any entity which does business with any of the Company or the Subsidiaries, or (b) in any property, asset or right which is used by any of the Company or the Subsidiaries in the conduct of its business, or (c) in any contractual relationship with any of the Company or the Subsidiaries other than as an employee. For the purpose of this Section 5.18, there shall be disregarded any interest which arises solely from the ownership of less than a 1% equity interest in a corporation whose stock is regularly traded on any national securities exchange or in the over-the-counter market. 5.19 LICENSES. Each of the Company and the Subsidiaries possesses from the appropriate agency, commission, board and government body and authority, whether federal, state, local or foreign, all licenses, permits, authorizations, approvals, franchises and rights which are necessary for it to engage in the business currently conducted by it and which, if not possessed by the Company or such Subsidiary, would be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. The Company has no knowledge that would lead it to believe that either it or any of the Subsidiaries will not be able to obtain all -11- licenses, permits, authorizations, approvals, franchises and rights that may be required for any business the Company or any Subsidiary presently proposes to conduct if the failure to obtain the same would be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. 5.20 REGISTRATION RIGHTS. Other than under (a) this Agreement, (b) that certain Amended and Restated Registration Rights Agreement dated as of December 28, 1995, as heretofore amended, among the Company and certain of its shareholders (as heretofore amended, the "Existing Registration Rights Agreement"), a true and correct copy of which has been delivered to the Purchasers, and (c) the Existing GE Warrant (as hereinafter defined), a true and correct copy of which has been delivered to the Purchasers, the Company has not agreed to register any of its authorized or outstanding securities under the Securities Act. 5.21 EMPLOYEE BENEFITS. (a) With respect to each employee benefit plan (as such term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) maintained by the Company or an "ERISA Affiliate" (as defined below) or to which the Company or an ERISA Affiliate contributes or is under any obligation to contribute (an "Employee Benefit Plan"): (i) such plan has been administered and operated in compliance with its terms and the applicable requirements of ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), except with respect to matters that, individually or in the aggregate, could not be reasonably expected to result in material liability; (ii) no event has occurred and there exists no circumstance under which the Company or any ERISA Affiliate could be reasonably expected to incur material liability under ERISA or the Code (other than for contributions or benefits paid or payable in the ordinary course of operation of such plan); (iii) there are no actions, suits or claims pending or, to the knowledge of the Company, threatened with respect to any Employee Benefit Plan or against the assets or a fiduciary of any Employee Benefit Plan (other than routine claims for benefits in the ordinary course); (iv) no "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) which is not covered by an applicable exemption and which could be reasonably expected to result in material liability has occurred; (v) no "reportable event" (as defined in Section 4043 of ERISA) has occurred; (vi) all material contributions and premiums due have been paid on a timely basis; and (vii) all material contributions made under any Employee Benefit Plan intended to be tax deductible meet the requirements for deductibility under the Code. As used herein, the term "ERISA Affiliate" refers to any organization that is (x) a member of a "controlled group" of which the Company is a member or (y) under "common control" with the Company within the meaning of, respectively, Sections 414(b) and (c) of the Code. (b) Each Employee Benefit Plan that is intended to qualify under Section 401(a) of the Code has received a favorable letter of determination from the Internal Revenue Service that it so qualifies and that its related trust is exempt from taxation under Section 501(a) of the Code. No event has occurred that will or could reasonably be expected to give rise to disqualification or loss of tax-exempt status of any such Employee Benefit Plan or trust under Section 401(a) or 501(a) of the Code. -12- (c) No Employee Benefit Plan is a "defined benefit plan" within the meaning of Section 3(35) of ERISA. Neither the Company nor any Subsidiary has at any time been a party to or contributed to any "multiemployer plan" within the meaning of Section 3(37) of ERISA or any "multiple employer plan" within the meaning of Section 413 of the Code (each, a "Multiemployer Plan"). (d) Neither the approval or execution of this Agreement nor the consummation of the transactions contemplated by this Agreement will (i) entitle any officer, director or employee of or consultant to the Company or any Subsidiary to severance pay, or (ii) accelerate the time of payment or vesting of, or increase the amount of, compensation due to any such person. 5.22 ENVIRONMENTAL AND SAFETY LAWS. (a) Neither the Company nor any Subsidiary is, in any material respect, in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and no material expenditures are, or are reasonably anticipated to be, required in order for the Company or any Subsidiary to comply with any such existing statute, law or regulation. (b) Except as disclosed in Section 5.22 of the Disclosure Schedule, during the period that the Company or a Subsidiary has owned or leased any facility and, to the knowledge of the Company, in the case of any currently owned or leased facility, at all times prior thereto, (i) there have been no material disposals, releases or threatened releases of Hazardous Materials (as defined below) by any of the Company or the Subsidiaries or, to the knowledge of the Company, any other person on, from or under such facility, and (ii) other than normal office products and cleaning supplies, there has not been used, generated, manufactured or stored on, under or about such facility or transported to or from such facility by the Company or any Subsidiary or, to the knowledge of the Company, any other person, any Hazardous Materials. (c) There is no pending or, to the knowledge of the Company, threatened claim, litigation or administrative agency proceeding against any of the Company or the Subsidiaries arising out of circumstances that form the basis of or are alleged to form the basis of, nor has the Company or any of the Subsidiaries received written notice from any governmental entity that alleges, violation in any material respect of any material applicable statute, law or regulation relating to the environment or occupational health and safety. (d) For purposes of this Agreement, (i) the terms "disposal," "release" and "threatened release" shall have the definitions assigned thereto by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et. seq. as amended ("CERCLA"), and (ii) "Hazardous Materials" shall mean any hazardous or toxic substance, material or waste, which is regulated under, or defined as a "hazardous substance," "pollutant," "contaminant," "toxic chemical," "hazardous material," "toxic substance" or "hazardous chemical" under (A) CERCLA; (B) the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Section 11001, et. seq.; (C) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et. seq.; (D) the Toxic Substance Control Act, 15 U.S.C. Section 2601, et. seq.; (E) the Occupational Safety and Health Act of 1970, 29 U.S.C. -13- Section 651, et. seq.; (F) regulations promulgated under any of the above statutes; or (G) any applicable state or local statute, ordinance, rule or regulation that has a scope or purpose similar to those statutes identified above. 5.23 EMPLOYEES. To the Company's knowledge, no executive officer of the Company, and no employee of the Company or any Subsidiary whose annual compensation is in excess of $100,000, has any plans to terminate his or her employment with the Company or such Subsidiary. Neither the Company nor any Subsidiary is involved in any material labor dispute nor, to the knowledge of the Company, is any such dispute threatened. Neither the Company nor any Subsidiary is a party to or bound by any collective bargaining agreement. Each of the Company and the Subsidiaries has complied in all material respects with all laws relating to the employment of labor, including without limitation provisions relating to wages, hours, equal opportunity, collective bargaining and payment of Social Security and other taxes, and neither the Company nor any Subsidiary has encountered any material labor difficulties. 5.24 ABSENCE OF RESTRICTIVE AGREEMENTS. To the knowledge of the Company, no employee of the Company or any Subsidiary is subject to any secrecy or non-competition agreement or any agreement or restriction of any kind that would impede in any material respect the ability of such employee to carry out fully all activities of such employee in furtherance of the business of the Company and the Subsidiaries. To the best of the Company's knowledge, no employer or former employer of any employee of the Company or any Subsidiary has any claim of any kind whatsoever in respect of any of the rights described in Section 5.14 hereof. 5.25 INVESTMENT COMPANY. Neither the Company nor any Subsidiary is, or will be as a result of consummation of the transactions contemplated by this Agreement, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5.26 LISTING AND MAINTENANCE REQUIREMENTS. Except as disclosed in Section 5.26 of the Disclosure Schedule, the Company has not, since the inclusion of its Common Stock for listing on the NASDAQ National Market, received written notice from such market to the effect that the Company is not in compliance with the listing or maintenance requirements of such market. 5.27 DISCLOSURE. The Company has not knowingly withheld from the Purchasers any material facts relating to the business, assets, condition (financial or otherwise), operations or results of operations of any of the Company or the Subsidiaries. No representation or warranty in this Agreement or in any certificate, schedule, statement or other document furnished or to be furnished to any Purchaser pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading. 6. REPRESENTATIONS AND WARRANTIES OF PURCHASERS. Each of the Purchasers severally represents and warrants for itself that: -14- 6.1 INVESTMENT INTENT. The Notes and the Warrants being acquired by such Purchaser hereunder are being purchased, and the Conversion Stock and the Warrant Stock acquired by such Purchaser upon conversion of such Notes or exercise of such Warrants will be acquired, for such Purchaser's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act. Such Purchaser understands that the Notes and the Conversion Stock, and the Warrants and the Warrant Stock, have not been registered under the Securities Act or any applicable state laws by reason of their issuance or contemplated issuance in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act and such laws, and that the reliance of the Company and others upon this exemption is predicated in part upon this representation and warranty. Such Purchaser further understands that the Notes and Conversion Stock, and the Warrants and the Warrant Stock, may not be transferred or resold without (a) registration under the Securities Act and any applicable state securities laws, or (b) an exemption from the registration requirements of the Securities Act and applicable state securities laws. Such Purchaser understands that any sales of securities pursuant to Rule 144 may only be made in full compliance with the provisions of Rule 144, and that it may not sell any securities pursuant to Rule 144 prior to the expiration of a one-year period after such Purchaser has acquired the securities. 6.2 LOCATION OF PRINCIPAL OFFICE AND QUALIFICATION AS ACCREDITED INVESTOR. The state in which such Purchaser's principal office (or domicile, if such Purchaser is an individual) is located is set forth in such Purchaser's address in Schedule 1 hereto. Unless otherwise indicated on such Purchaser's Certification attached to this Agreement, such Purchaser qualifies as an accredited investor within the meaning of Rule 501 under the Securities Act for the reasons specified on such Certification. Such Purchaser has such knowledge and experience in financial and business matters that such Purchaser is capable of evaluating the merits and risks of the investment to be made hereunder by such Purchaser. Such Purchaser has and has had access to all of the Company's material books and records and access to the Company's executive officers has been provided to such Purchaser or to such Purchaser's qualified agents. 6.3 ACTS AND PROCEEDINGS. Each of the Transaction Documents to which such Purchaser is or will be a party has been duly authorized by all necessary action on the part of such Purchaser and has been or at the Closing will be duly executed and delivered by such Purchaser. This Agreement is, and each of the other Transaction Documents to which such Purchaser will be a party when executed and delivered pursuant to the terms of this Agreement will be, a valid and binding agreement of such Purchaser enforceable against such Purchaser in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance or transfer, reorganization or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity. 6.4 NO BROKERS OR FINDERS. No person, firm or corporation has or will have, as a result of any act or omission by such Purchaser, any right, interest or valid claim against the Company or any Subsidiary for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. Such Purchaser will indemnify and hold harmless each of the Company and the Subsidiaries against any and all liability with respect to any such commission, fee or other compensation -15- which may be payable or determined to be payable as a result of the actions of such Purchaser in connection with the transactions contemplated by this Agreement. 7. CONDITIONS OF EACH PURCHASER'S OBLIGATION. The obligation to purchase and pay for the Notes and the Warrants which each Purchaser has agreed to purchase at the Closing is subject to the fulfillment prior to or at the Closing of the following conditions. In the event that any such condition is not fulfilled to the satisfaction of each Purchaser, or in the event that any of the Purchasers does not proceed with the purchase of the number of Notes or Warrants it has committed to purchase, then no Purchaser shall be obligated to proceed with the purchase of such Notes or Warrants. 7.1 REPRESENTATIONS. The representations and warranties of the Company under this Agreement shall be true in all material respects as of the date of this Agreement and as of the Closing Date with the same effect as though made on and as of the Closing Date. 7.2 COMPLIANCE WITH AGREEMENT. The Company shall have performed and complied in all material respects with all agreements or conditions required by this Agreement to be performed and complied with by it prior to or as of the Closing. 7.3 CERTIFICATE OF OFFICERS. The Company shall have delivered to the Purchasers a certificate, dated the Closing Date, executed by the chief executive officer and chief financial officer of the Company on behalf of the Company and certifying to the satisfaction of the conditions specified in Sections 7.1, 7.2 and 7.5 hereof. 7.4 OPINION OF COMPANY'S COUNSEL. The Company shall have delivered to each of the Purchasers opinions of Oppenheimer Wolff & Donnelly LLP and of Mark Kimball, each dated the Closing Date, in substantially the forms set forth as, respectively, Exhibits 8 and 9 hereto. 7.5 NO EVENT OF DEFAULT. There shall exist at the time of Closing no condition or event which, immediately after the Closing, would, with or without notice or lapse of time, or both, constitute an Event of Default (as hereinafter defined). 7.6 FAIRNESS OPINION. The Company shall have received an opinion from Duff & Phelps, LLC that the issuance and sale of the Notes and Warrants on the terms provided for in this Agreement are fair to the shareholders of the Company from a financial point of view. 7.7 SUPPORTING DOCUMENTS. The Purchasers shall have received the following: (a) a copy of resolutions of the Board of Directors of each of the Company and the Subsidiaries, evidencing compliance with the requirements of Section 302A.255, Subdivision 1(c) of the Minnesota Business Corporation Act and otherwise in form and substance reasonably satisfactory to the Purchasers, authorizing and approving the transactions contemplated by this Agreement, all such resolutions to be certified by the Secretary of such entity; (b) a certificate of the Secretary of each of the Company and the Subsidiaries certifying the names, titles and signatures of the officers of such entity authorized to execute the -16- Transaction Documents to which such entity is or will be a party and further certifying that the Articles of Incorporation and By-Laws of such entity delivered to the Purchasers prior to the date hereof have been validly adopted, are in full force and effect, and have not been amended or modified; (c) good standing certificates for each of the Company and the Subsidiaries issued by the Secretary of State of the State of Minnesota, and, if such entity is qualified to do business therein as a foreign corporation, the Secretaries of State of the States of South Carolina and Utah, as of a date no more than 15 days prior to the Closing Date; and (d) such additional supporting documentation and other information with respect to the transactions contemplated hereby as any of the Purchasers may reasonably request. 7.8 LIEN SEARCHES. The Purchasers shall have received Uniform Commercial Code, judgment and tax lien searches from the Secretary of State of the State of Minnesota and appropriate officials of such other states and/or counties as any of the Purchasers may reasonably request at least ten days prior to the Closing Date, as of a date no more than 15 days prior to the Closing Date, certified by a reporting service satisfactory to the Purchasers and disclosing no liens, charges, security interests or encumbrances on the assets of the Company or any of its Subsidiaries other than Permitted Liens or liens securing the Demand Note. 7.9 COLLATERAL DOCUMENTS. The Purchasers shall have received the Parent Security Agreement, the Parent Patent and Trademark Security Agreement and the Pledge Agreement duly executed by the Company, and the Guaranty and the Subsidiary Security Agreement duly executed by each Subsidiary. 7.10 ACTIONS TO PERFECT LIENS. The Purchasers shall have received all certificates, documents and instruments, in form and substance reasonably satisfactory to them, including without limitation duly executed financing statements on Form UCC-1 and the stock certificates evidencing all of the outstanding capital stock of each Subsidiary accompanied by undated stock powers duly executed in blank, necessary or, in the opinion of any of the Purchasers, desirable to perfect the liens created by any of the Security Agreements (as hereinafter defined). 7.11 INSURANCE. The Purchasers shall have received standard lenders' loss payable endorsements in favor of the Purchasers with respect to insurance policies or other instruments or documents evidencing insurance coverage on the properties of the Company and its Subsidiaries in compliance with Section 8.16 hereof and the terms of the Parent Security Agreement and Subsidiary Security Agreement, and standard endorsements to all liability insurance policies of the Company or any of its Subsidiaries naming the Purchasers as additional insureds thereunder. 7.12 LISTING. Listing and trading of the Common Stock on the NASDAQ National Market shall not have been suspended. 7.13 REGISTRATION RIGHTS AGREEMENT. The Company shall have delivered to the Purchasers a Registration Rights Agreement, in substantially the form set forth as Exhibit 10 -17- hereto (the "Registration Rights Agreement"), duly executed by the Company and each of the other parties thereto (other than the Purchasers) who is an affiliate of the Company or whose execution thereof is necessary to effectively block the exercise of registration rights under the Existing Registration Rights Agreement. 7.14 CANCELLATION OF EXISTING GE WARRANT. The Company shall have delivered to the Purchasers evidence reasonably satisfactory to the Purchasers that the Series A Warrant dated effective March 31, 1998 to initially purchase 1,309,583 shares of Common Stock at an initial exercise price of $8.82 per share (the "Existing GE Warrant") has been cancelled in exchange for a new warrant to initially purchase 135,000 shares of Common Stock at an initial exercise price of $1.00 per share (the "New GE Warrant"), which New GE Warrant shall be in substantially the form of the Existing GE Warrant except that such New GE Warrant shall modify the registration rights contained in the Existing GE Warrant so that they do not conflict with the exercise by the Purchasers of any of their rights under the Registration Rights Agreement. 8. AFFIRMATIVE COVENANTS. The Company covenants and agrees that, as long as any of the Notes remain outstanding and, in the case of Sections 8.6, 8.9, 8.10, 8.11 and 8.12, as long as any of the Notes or Conversion Stock, or any of the Warrants or Warrant Stock, remain outstanding: 8.1 CORPORATE EXISTENCE. The Company will maintain and cause each Subsidiary to maintain its corporate existence in good standing (except that the corporate existence and good standing of any Subsidiary may be terminated pursuant to a merger permitted under Section 9.2 hereof) and comply in all material respects with all applicable laws and regulations of the United States or of any state or states thereof or of any political subdivision thereof and of any governmental authority. 8.2 BOOKS OF ACCOUNT AND RESERVES. The Company will, and will cause each of its Subsidiaries to, keep books of record and account in which full, true and correct entries are made of all of its and their respective dealings, business and affairs, in accordance with generally accepted accounting principles. The Company will employ certified public accountants of nationally recognized standing selected by the Board of Directors of the Company (the "Board of Directors") who are "independent" within the meaning of the accounting regulations of the SEC, and have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the consolidated financial statements of the Company and its Subsidiaries as will satisfy the requirements of the SEC in effect at such time with respect to certificates and opinions of accountants. 8.3 FURNISHING OF FINANCIAL STATEMENTS AND INFORMATION. Upon request, the Company will make available to each holder of a Purchased Security: (a) as soon as practicable, but in any event within 45 days after the close of each fiscal quarter, unaudited consolidated balance sheets of the Company and its Subsidiaries as of the end of such fiscal quarter, together with related unaudited consolidated statements of operations and cash flows for such fiscal quarter, setting forth in comparative form figures for -18- the corresponding fiscal quarter of the previous year, all in reasonable detail and certified by an authorized accounting officer of the Company; (b) as soon as practicable, but in any event within 90 days after the end of each fiscal year, a consolidated balance sheet of the Company and its Subsidiaries, as of the end of such fiscal year, together with the related consolidated statements of operations, stockholders' equity and cash flow for such fiscal year, setting forth in comparative form figures for the previous fiscal year, all in reasonable detail and duly certified by the Company's independent certified public accountants, which accountants shall have given the Company an opinion, unqualified as to the scope of the audit, regarding such statements; (c) concurrently with the delivery in each year of the financial statements referred to in paragraph (b) of this Section 8.3, a statement and report signed by the independent certified public accountants who certified such financial statements to the effect that they have read this Agreement and that in the course of the audit of the consolidated financial statements of the Company they became aware of no condition or event which constituted an Event of Default or which, after notice or lapse of time, or both, would constitute an Event of Default, or if such accountants did become aware of any such condition or event, specifying the nature and period of existence thereof; (d) promptly upon transmission thereof, copies of all reports, proxy statements, registration statements and notifications filed by it with the SEC pursuant to any act administered by the SEC or furnished to shareholders of the Company or to any national securities exchange or market; and (e) with reasonable promptness, such other financial data relating to the business, affairs and financial condition of any of the Company and the Subsidiaries as is available to the Company and as from time to time any holder of a Purchased Security may reasonably request. 8.4 INSPECTION. The Company will permit each holder of a Purchased Security and any of its partners, officers or employees, or any outside representatives designated by such holder and reasonably satisfactory to the Company, to visit and inspect at such holder's expense any of the properties of the Company or its Subsidiaries, including their books and records (and to make photocopies thereof or make extracts therefrom), and to discuss their affairs, finances, and accounts with their officers, lawyers and accountants, except with respect to trade secrets and similar confidential information, all to such reasonable extent and at such reasonable times and intervals as such holder may reasonably request. Except as otherwise required by laws or regulations applicable to such holder, each holder of a Purchased Security shall maintain, and shall require its representatives to maintain, all information obtained pursuant to this Section 8.4 or any other provision of this Agreement or the other Transaction Documents on a confidential basis. 8.5 PREPARATION AND APPROVAL OF BUDGETS. At least one month prior to the beginning of each fiscal year of the Company, the Company shall prepare and submit to its Board of Directors, for its review and approval, an annual plan for such year, which shall include monthly capital and operating expense budgets, cash flow statements and profit and loss -19- projections itemized in such detail as the Board of Directors may reasonably request. Each annual plan shall be modified as often as is necessary in the judgment of the Board of Directors to reflect changes required as a result of operating results and other events that occur, or may be reasonably expected to occur, during the year covered by the annual plan, and copies of each such modification shall be submitted to the Board of Directors. The Company will, simultaneously with the submission thereof to the Board of Directors, deliver a copy of each such annual plan and modification thereof to each holder of a Purchased Security. 8.6 REPLACEMENT OF NOTES OR WARRANTS OR CERTIFICATES REPRESENTING CONVERSION STOCK OR WARRANT STOCK. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Notes or Warrants or certificates representing Conversion Stock or Warrant Stock and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of the Notes or Warrants or certificates representing Conversion Stock or Warrant Stock, as the case may be, the Company will issue new Notes or Warrants or certificates representing Conversion Stock or Warrant Stock, as the case may be, of like tenor, in lieu of such lost, stolen, destroyed or mutilated Notes or Warrants or certificates representing Conversion Stock or Warrant Stock, as the case may be. 8.7 EXCHANGE OF NOTES. The Company will at any time, at the Company's expense (except for any transfer tax payable), at the written request of the holder of a Note and upon surrender of such Note for such purpose, issue a new Note or Notes in exchange therefor in the denomination of $50,000, or any multiple thereof specified by such holder, in an aggregate principal amount equal to the then unpaid principal amount of the Note surrendered and substantially in the form of Exhibit 1 to this Agreement with appropriate insertions and variations. 8.8 APPLICATION OF PROCEEDS. The net proceeds received by the Company from the sale of the Notes and Warrants shall be used substantially for working capital purposes, to prepay any portion of the Demand Note which is not converted by St. Paul at the Closing in payment of the purchase price hereunder for its Notes and Warrants, and to fund up to $750,000 of the Reserve Account. Pending use of the proceeds in the business, they shall be invested in accordance with the Company's investment policy in effect on the date hereof, a true and correct copy of which has been delivered to the Purchasers. 8.9 REPORTS UNDER THE EXCHANGE ACT. With a view to making available to the holders of the Purchased Securities the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit such a holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to use all commercially reasonable efforts to: (a) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; (b) take such action as is necessary to enable the holders of the Purchased Securities to utilize Form S-3 for the sale of the Purchased Securities (as defined in the Registration Rights Agreement) as contemplated by the Registration Rights Agreement; -20- (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (d) furnish promptly to any holder of Purchased Securities, upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, or that it qualifies as a registrant whose securities may be resold in a secondary offering pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly reports of the Company and such other reports and documents so filed by the Company, (iii) all press releases and other statements made available by the Company to the public concerning material developments related to the Company or any of its Subsidiaries, and (iv) such other information as may be reasonably requested in availing any such holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or under such form. 8.10 RULE 144A. (a) The Company agrees that, upon the request of any holder of Purchased Securities, or any prospective purchaser of Purchased Securities, the Company shall promptly provide (but in any case within 15 days of a request) to such holder or potential purchaser the following information: (a) a brief statement of the nature of the business of the Company and its Subsidiaries and the products and services they offer; (b) the Company's most recent consolidated balance sheets and profit and loss and retained earnings statements, and similar financial statements for such part of the two preceding fiscal years prior to such request as the Company has been in operation (which financial information shall be audited, to the extent reasonably available); and (c) such other information about the Company, its Subsidiaries and their business, financial condition and results of operations as the requesting person shall request in order to comply with Rule 144A promulgated under the Securities Act and the antifraud provisions of the federal and state securities laws. (b) The Company hereby represents and warrants to any such requesting person that the information provided by the Company pursuant to this Section 8.10 will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 8.11 LISTING. The Company shall, as promptly as practicable after the Closing, secure the listing of all Conversion Stock and Warrant Stock upon each securities exchange and automated quotation system (including the NASDAQ National Market), if any, upon which shares of Common Stock of the Company are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Stock and Warrant Stock. The Company shall use all commercially reasonable efforts to maintain the Common Stock's listing on either the NASDAQ National Market, a national securities exchange or other national market or interdealer quotation system (including without limitation the NASDAQ SmallCap Market and the OTC Bulletin Board). The Company shall promptly offer to provide the holders of the Purchased Securities copies of any notice it receives from the NASDAQ National Market or any securities exchange or other market or interdealer quotation system regarding the continued eligibility of the Common Stock for listing -21- on such market, securities exchange or system, provided that the Company shall not be required to offer to provide, or to provide, such notices if the Company reasonably determines that such notices contain material non-public information. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 8.11. 8.12 RIGHTS TO PURCHASE ADDITIONAL SECURITIES. (a) If the Company should decide to issue and sell additional shares of any capital stock of the Company or any options, warrants or other rights to subscribe for or to purchase any capital stock of the Company or any securities convertible into capital stock of the Company, other than (i) shares of Common Stock sold to the public pursuant to a registration statement filed under the Securities Act, if such offering is underwritten on a firm commitment basis by an underwriter, or group of underwriters represented by an underwriter or underwriters, which is a member of the New York Stock Exchange, (ii) options to purchase Common Stock or awards of Common Stock granted to employees or directors of the Company or to consultants to the Company or to the Company's employee stock purchase plan, as approved from time to time by the Board of Directors or a committee thereof, and shares of Common Stock issued upon the exercise of such options, (iii) shares of Common Stock issued upon the exercise of options, warrants or Convertible Securities outstanding at the Closing that were approved by the Board of Directors or a committee thereof (including without limitation the New GE Warrant), (iv) shares of Common Stock issued upon conversion of the Notes or exercise of the Warrants, (v) shares of Common Stock issued in a stock split or reclassification of, or as a stock dividend or other distribution on, then outstanding shares of Common Stock, (vi) shares of Common Stock issued in connection with any bona fide business acquisition by the Company or any Subsidiary which has been approved by the Board of Directors and is permitted by the terms of this Agreement, and (vii) shares of Common Stock, or options or warrants to purchase shares of Common Stock, issued to vendors or lessors of the Company or any Subsidiary, or shares of Common Stock issued upon the exercise of such options or warrants, provided that the issuance of such shares, options or warrants has been approved by the Board of Directors and is for other than primarily equity financing purposes, and further provided that the sum of the number of shares of Common Stock issued pursuant to this clause (vii) (other than upon the exercise of options or warrants), plus the number of shares of Common Stock subject to options or warrants issued pursuant to this clause (vii), in any 12-month period shall not exceed one percent of the shares of Common Stock outstanding on the date of this Agreement (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected) (all such capital stock, warrants, securities convertible into capital stock and other rights, other than securities referred to in clauses (i), (ii), (iii), (iv), (v), (vi) and (vii) above, being hereinafter sometimes collectively referred to as "Additional Securities"), the Company shall first offer to sell to each holder of Purchased Securities, upon the same terms and conditions as the Company is proposing to issue and sell such Additional Securities to others, such holder's pro rata share (as defined below) of such Additional Securities. Such offer shall be made by written notice given to each such holder and specifying therein the amount of the Additional Securities being offered, the purchase price and other terms of such offer. Each such holder shall have a period of 15 days from and after the date of receipt by it of such notice within which to accept such offer. If a holder of Purchased Securities elects to accept such offer in whole or in part, such holder shall so accept by written notice to the Company given within such 15-day period. If a holder of Purchased Securities fails to accept such offer in whole or in part within such 15-day period, any -22- of such Additional Securities not purchased by such holder pursuant to such offer may be offered for sale to others by the Company for a period of 120 days from the last day of such 15-day period, but only on the same terms and conditions as set forth in the initial offer to such holder, free and clear of the restrictions imposed by this Section 8.12. (b) For purposes of the previous paragraph, a holder's "pro rata share" is the number of shares of Additional Securities (rounded to the nearest whole share) as is equal to the product of (i)(A) the number of shares of Common Stock issued, or issuable upon the exercise or conversion of rights, options, warrants or Convertible Securities without the payment of any additional cash consideration or with the payment of a nominal cash consideration, as the case may be (collectively, "Fully Paid Securities"), to such holder immediately prior to the issuance of the Additional Securities being offered divided by (B) the total number of Fully Paid Securities issued or issuable by the Company immediately prior to the issuance of the Additional Securities, multiplied by (ii)(A) if so approved by the affirmative vote of the holders of a Majority in Interest of the Purchased Securities, that portion of the offering of Additional Securities that remains after considering binding commitments to purchase that have been received from persons other than the holders of the Purchased Securities, or (B) if not so approved, the entire offering of Additional Securities. (c) The rights of a holder of Purchased Securities under this Section 8.12 to acquire a pro rata share of any Additional Securities (i) may be assigned in whole or in part by such holder to any of its affiliates, and (ii) shall terminate at the close of business on the fifth anniversary of the Closing Date. 8.13 EMPLOYEE BENEFIT PLANS. The Company will maintain and cause each ERISA Affiliate to maintain each Employee Benefit Plan in compliance in all material respects with all applicable requirements of ERISA and of the Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Code, and will not and not permit any of the ERISA Affiliates to (a) engage in any transaction in connection with which the Company or any of the ERISA Affiliates would be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, in either case in an amount exceeding $100,000, (b) fail to make full payment when due of all amounts which, under the provisions of any Employee Benefit Plan, the Company or any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency (as such term is defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect to any Employee Benefit Plan in an aggregate amount exceeding $100,000, or (c) fail to make any payments in an aggregate amount exceeding $100,000 to any Multiemployer Plan that the Company or any of the ERISA Affiliates may be required to make under any agreement relating to such Multiemployer Plan or any law pertaining thereto. 8.14 INSURANCE. The Company will, and will cause each Subsidiary to, obtain and maintain in force such property damage, public liability, business interruption, worker's compensation, indemnity bonds and other types of insurance as the Company's executive officers, after consultation with an accredited insurance broker, shall determine to be necessary or appropriate to protect the Company and its Subsidiaries from the insurable hazards or risks associated with the conduct of the business of the Company and its Subsidiaries. The Company's executive officers shall periodically report to the Board of Directors on the status of -23- such insurance coverage. All insurance shall be maintained in at least such amounts and to such extent as shall be determined to be reasonable by the Board of Directors; and all such insurance shall be effected and maintained in force under a policy or policies issued by insurers of recognized responsibility, except that the Company or any Subsidiary may effect worker's compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance which is in accord with applicable laws. 8.15 PAYMENT OF TAXES, ETC. The Company will, and will cause each Subsidiary to, pay and discharge promptly, or cause to be paid and discharged promptly, when due and payable, all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or upon any of its properties, as well as all material claims of any kind (including claims for labor, material and supplies) which, if unpaid, might by law become a lien or charge upon its property; provided, however, that neither the Company nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof is being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and adequate reserves have been established therefor in accordance with generally accepted accounting principles. 8.16 LANDLORD'S WAIVERS. The Company shall use all commercially reasonable efforts to obtain and deliver to each of the Purchasers as promptly as practicable after the Closing a landlord's waiver, in the form approved by counsel for the Purchasers prior to the Closing or such other form as any of the Purchasers shall reasonably request, duly executed by each of the landlords of the facilities operated by the Company and its Subsidiaries other than the landlords of retail stores. 8.17 SHAREHOLDER APPROVAL. The Company shall use all commercially reasonable efforts to obtain as promptly as is practical after the Closing approval of the shareholders of the Company, by the vote specified under Section 4350(i) of the National Association of Securities Dealers Manual & Notice to Members, of those terms of the Notes which, pursuant to the provisions of the Notes, are fully effective only upon receipt of such approval. 9. NEGATIVE COVENANTS. Without the approval of the holders of a Majority in Interest of the Purchased Securities, the Company will not and will not permit any Subsidiary to, as long as any of the Notes remain outstanding and, in the case of Section 9.4, as long as any of the Notes or Conversion Stock, or any of the Warrants or Warrant Stock, remain outstanding until such securities cease to be Purchased Securities: 9.1 SALES OF ASSETS. Sell, lease, license on an exclusive basis or otherwise dispose of any of the assets of the Company and its Subsidiaries, provided that (a) until the revocation by the holder or holders of at least 67% of the aggregate principal amount of the Notes then outstanding, which may be effected upon the occurrence and during the continuance of any Event of Default, the Company and the Subsidiaries may sell inventory and obsolete or worn-out equipment in the ordinary course of business, (b) any Subsidiary may sell, lease, license or otherwise dispose of all or a substantial part of its assets to the Company or another wholly-owned Subsidiary, (c) the Company or any Subsidiary may dispose of cash in the -24- payment of its obligations, and (d) so long as no Event of Default, or condition or event which, after notice or lapse of time, or both, would constitute an Event of Default, shall then exist, the Company or any Subsidiary may sell, lease, license or otherwise dispose of assets if (i) the net book value of such assets, when added to the net book value of all other assets disposed of by the Company or any Subsidiary pursuant to this clause (d) within the immediately preceding 36-month period, does not exceed ten percent of the consolidated net book value of the assets of the Company determined as of the end of the most recently completed fiscal quarter, and (ii) such assets, together with all other assets disposed of by the Company or any Subsidiary pursuant to this clause (d) within the immediately preceding 36-month period, have not contributed more than ten percent of consolidated net earnings of the Company for any of the three most recently completed fiscal years. Upon any sale of assets permitted under clause (d) of this Section 9.1, or upon any sale of obsolete or worn-out equipment permitted under clause (a) of this Section 9.1, the Purchasers shall, at the expense of the Company, execute such documents and take such actions as the Company or the Collateral Agent (as hereinafter defined) shall reasonably request to release, or to authorize the release of, the liens on such assets securing the Notes. 9.2 FUNDAMENTAL CHANGES. Wind-up, liquidate or dissolve, or consolidate with or merge into any other person, or permit any other person to consolidate with or merge into the Company or any Subsidiary, or enter into a plan of exchange with any other person, or otherwise acquire all or substantially all of the assets of any other business operation (or any division thereof), provided that any wholly-owned Subsidiary may be merged into the Company if the Company is the surviving corporation or with another wholly-owed Subsidiary. 9.3 DIVIDENDS ON OR REDEMPTION OF CAPITAL STOCK. Declare or pay any dividend or make any other distribution on any shares of its capital stock, or purchase, redeem or otherwise acquire for any consideration, or set aside a sinking fund or other fund for the redemption or repurchase of, any shares of its capital stock or any warrants, rights or options to purchase shares of its capital stock (collectively, "Restricted Payments"), provided that (a) any Subsidiary may make Restricted Payments to the Company or any other wholly-owned Subsidiary, (b) the Company may issue shares of its Common Stock as dividends on its issued and outstanding Common Stock, and (c) so long as there exists no Event of Default or any event or condition which, with notice or lapse of time, or both, would constitute an Event of Default, the Company may redeem shares of its capital stock pursuant to employment agreements with its employees which are approved by the Company's Board of Directors. 9.4 FUTURE REGISTRATION RIGHTS. Except pursuant to the Registration Rights Agreement, the Existing Registration Rights Agreement and the GE Warrant, and except to the extent subordinated to the registration rights of the holders of the Purchased Securities under the Registration Rights Agreement, agree with the holders of any securities issued or to be issued by the Company to register such securities under the Securities Act or grant any incidental registration rights. 9.5 INDEBTEDNESS. Borrow money, issue evidences of indebtedness or create, assume or suffer to exist indebtedness in addition to the Notes (including without limitation as indebtedness capitalized lease obligations), except (a) indebtedness incurred in connection with the acquisition of machinery and equipment, which indebtedness is secured by conditional sales -25- contracts, title retention agreements, capitalized leases or other purchase money security interests, provided that the indebtedness secured by any such security interest shall not exceed the fair market value of the machinery or equipment acquired subject thereto and such security interest shall not encumber any property of the Company or any Subsidiary other than the machinery or equipment acquired subject thereto (or the refinancing of any such indebtedness, provided that no such refinancing shall increase the outstanding principal amount of such indebtedness and any replacement lien given to secure such refinancing shall be limited to the machinery and equipment securing such indebtedness), (b) existing indebtedness described in Section 9.5 of the Disclosure Schedule (provided that all such indebtedness shall be repaid in accordance with its terms with no extension, renewal or other modification), (c) indebtedness of the Company to banks or other financial institutions, provided that the aggregate principal amount of such indebtedness outstanding at any time shall not exceed $5,000,000 ("Bank Debt"), (d) unsecured indebtedness of the Company which is subordinated in right of payment to the Notes pursuant to terms and conditions reasonably satisfactory to St. Paul, provided that the aggregate principal amount of such indebtedness outstanding at any time shall not exceed $100,000, (e) indebtedness of wholly-owned Subsidiaries which arises out of loans or advances permitted by Section 9.8(a), (f) guarantees of indebtedness permitted by Section 9.7, (g) obligations of the Company under the Revolving Credit Program Agreement, and (h) indebtedness or liabilities, other than Indebtedness for Borrowed Money (as hereinafter defined), incurred or arising in the ordinary course of business. Upon the incurrence by the Company of any Bank Debt, each of the holders of the Notes shall execute and deliver agreements, in form and substance reasonably satisfactory to St. Paul, subordinating the Notes in right of payment to such Bank Debt and subordinating the liens on the assets of the Company and its Subsidiaries securing the Notes to the liens on such assets securing the Bank Debt. 9.6 LIENS. Create, assume, or suffer to exist any mortgage, pledge, lease, lien, charge, security interest or encumbrance upon any of its assets in addition to the liens securing the Notes, except (a) liens securing indebtedness permitted by Section 9.5(a), (b) the senior interest of Conseco Bank, Inc. in the Reserve Account (the "Reserve Account"), as defined in the Revolving Credit Program Agreement dated May 17, 1999, as amended as of February 20, 2001 and April 13, 2001, between the Company and Conseco Bank, Inc. (the "Revolving Credit Program Agreement"), a complete copy of which has been furnished to the Purchasers, securing certain obligations of the Company to Conseco Bank, Inc. under the Revolving Credit Program Agreement, provided that the value of the cash, funds and other deposits in the Reserve Account shall not exceed $1,000,000 at any given time, (c) liens for taxes and assessments or governmental charges or levies not at the time due or which are being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and for which adequate reserves have been established in accordance with generally accepted accounting principles, (d) liens in respect of pledges or deposits under worker's compensation laws or similar legislation, (e) carriers', warehousemen's, mechanics', laborers', materialmen's, landlord's and similar statutory liens securing obligations incurred in the ordinary course of business which are not yet due or which are being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and for which adequate reserves have been established in accordance with generally accepted accounting principles, (f) encumbrances on real property in the nature of zoning restrictions, easements, rights of way, encroachments, restrictive covenants and other similar rights or restrictions, whether or not of record, on the use of real property, -26- which encumbrances were not incurred in connection with the borrowing of money or the obtaining of advances or credits and do not in the aggregate materially detract from the value of the property subject thereto or materially impair the use thereof in the operation of the business of the Company or any Subsidiary, (g) liens securing the Bank Debt, (h) existing liens described in Section 9.6 of the Disclosure Schedule (provided that all of the obligations secured by such liens shall be repaid in accordance with their terms with no extension, renewal or other modification), (i) licenses, sublicenses, leases or subleases granted by any of the Company or its Subsidiaries to other persons in the ordinary course of business that do not materially interfere with the conduct of the business of any of the Company or its Subsidiaries, and (j) liens arising out of the existence of judgments or awards in respect of which any of the Company or its Subsidiaries shall in good faith be prosecuting an appeal or proceedings for review and in respect of which there shall have been secured a subsisting stay of execution pending such appeal or proceedings, provided that the aggregate amount of all cash and the fair market value of all other property subject to such liens does not at any time exceed $250,000 (all of the foregoing being herein called "Permitted Liens"). 9.7 GUARANTEES. Guarantee, endorse or otherwise become contingently liable for the obligations, securities or dividends of any person other than the Company or any of its wholly-owned Subsidiaries, except pursuant to the Revolving Credit Program Agreement, and except that the Company and any Subsidiary may endorse negotiable instruments for collection in the ordinary course of business. 9.8 LOANS AND INVESTMENTS. Make loans or advances to any person (including without limitation to any officer, director or shareholder of the Company or any Subsidiary), or purchase or invest in the stock or obligations of, or make capital contribution to, any person, except (a) loans and advances to wholly-owned Subsidiaries which are parties to the Guaranty and the Subsidiary Security Agreement, provided such loans and advances are general obligations of such Subsidiaries which are not subordinated to any other obligations of such Subsidiaries, (b) advances to suppliers and employees made in the ordinary course of business, (c) accounts receivable arising from the ordinary conduct of the business of the Company or any Subsidiary (including those acquired from Conseco Bank, Inc. under the Revolving Credit Program Agreement), (d) cash and cash equivalents (determined in accordance with generally accepted accounting principles consistent with those applied in connection with the preparation of the Company's consolidated financial statements), (e) existing investments described in Section 9.8 of the Disclosure Schedule, provided that any additional investments made with respect thereto shall be permitted only if independently allowed under any of the other clauses of this Section 9.8, (f) investments in any newly created, wholly-owned subsidiaries provided that the aggregate of all such investments does not exceed $50,000, and (g) investments (including debt obligations) received in connection with a bankruptcy or reorganization of a supplier or customer of the Company or any of its Subsidiaries and in good faith settlement of delinquent obligations of, or other disputes with, such customer or supplier arising in the ordinary course of business. 9.9 CHANGE IN NATURE OF BUSINESS. Make any material change in the nature of its business as carried on at the date of this Agreement. -27- 9.10 MODIFICATION OF ORGANIZATIONAL DOCUMENTS. Amend, modify or otherwise change its Articles of Incorporation or By-Laws (or similar organizational documents), including without limitation by the filing of a certificate of designation, in any way that would have an adverse impact on any of the Purchased Securities. 9.11 OPERATIONS PENDING RECEIPT OF SHAREHOLDER APPROVAL. Until the receipt of the shareholder approval described in Section 8.17 hereof, take any action (including without limitation the issuance of any shares of Common Stock or any options, warrants or other rights to purchase Common Stock or any Convertible Securities) if such action would have resulted, had such shareholder approval been theretofore obtained, in any adjustment to the conversion price of the Notes or the number of shares of Common Stock issuable upon conversion of the Notes which is, pursuant to the terms of the Notes, either ineffective or only partially effective until receipt of such shareholder approval. 9.12 ISSUANCE OF PARTICIPATING PREFERRED. So long as any of the Warrants remain outstanding, issue any capital stock of any class preferred as to dividends or as to the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up, unless the rights of the holders thereof shall be limited to a fixed sum or percentage of par, liquidation or redemption value in respect of participation in dividends and in the distribution of such assets. 10. THE NOTES AND WARRANTS. 10.1 STOCK FULLY PAID; RESERVATION OF SHARES. The Company covenants and agrees that all Conversion Stock and Warrant Stock that may be issued upon conversion of the Notes or exercise of the Warrants will be, upon issuance in accordance with the terms of the Notes or Warrants, as the case may be, fully paid and nonassessable, and that the issuance thereof shall not give rise to any preemptive rights on the part of any person or entity. The Company further covenants and agrees that the Company will at all times have authorized and reserved a sufficient number of shares of its Common Stock for the purpose of issue upon the conversion of the Notes and exercise of the Warrants. 10.2 NO PREPAYMENT WITHOUT CONSENT. The Notes shall be prepayable only with the prior written consent of the holders of at least 67% of the aggregate principal amount of the Notes outstanding immediately prior to such prepayment. All accrued and unpaid interest on any principal amount being prepaid with such consent shall be paid at the time of such prepayment. 10.3 PRO RATA PAYMENTS. All payments and prepayments of principal of and interest on the Notes, and all proceeds recovered under the Guaranty or upon any foreclosure, sale or other disposition of or realization in any manner upon all or any part of the collateral under any of the Security Agreements, shall, after deducting all reasonable and documented expenses of collection (including without limitation reasonable attorneys' fees and disbursements), be shared by the holders of the Notes pro rata in accordance with the respective unpaid principal amounts thereof and accrued and unpaid lawful interest thereon. 10.4 SENIOR DEBT. The principal of and interest on the Notes, and all other obligations of the Company under this Agreement or any of the other Transaction Documents, -28- shall constitute "Senior Debt" for purposes of the Convertible Subordinated Debenture of the Company payable to St. Paul Venture Capital V, LLC dated November 10, 2000 in the original principal amount of $4,000,000. 11. REGISTRATION OF SECURITIES. The holders of the Purchased Securities shall be entitled to the registration rights provided in the Registration Rights Agreement. 12. DEFAULT. 12.1 EVENTS OF DEFAULT. Each of the following events shall be an event of default (an "Event of Default") for purposes of this Agreement: (a) if default shall be made in the punctual payment of interest on the Notes, and such default shall have continued for a period of seven days after written notice thereof to the Company by the holder of any of the Notes; or (b) if default shall be made in the punctual payment of the principal of the Notes, or any installment thereof; or (c) if the Company or any Significant Subsidiary (as hereinafter defined) becomes insolvent, or admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of creditors, or ceases doing business as a going concern, or the Company or any Significant Subsidiary applies for or consents to the appointment of a trustee or receiver for the Company or any Significant Subsidiary, or for the major part of the property of either; or (d) if a trustee or receiver is appointed for the Company or any Significant Subsidiary or for the major part of the property of either and the order of such appointment is not discharged, vacated or stayed within 60 days after such appointment; or (e) if an order for relief shall be entered in any federal bankruptcy proceeding in which the Company or any Significant Subsidiary is the debtor; or if bankruptcy, reorganization, arrangement, insolvency, or liquidation proceedings, or other proceedings for relief under any bankruptcy or similar law or laws for the relief of debtors, are instituted by or against the Company or any Significant Subsidiary and, if instituted against the Company or any Significant Subsidiary, are consented to or, if contested by the Company or such Significant Subsidiary, are not dismissed by the adverse parties or by an order, decree or judgment within 60 days after such institution; or (f) if any judgment, writ or warrant of attachment or of any similar process in an amount in excess of $250,000 shall be entered or filed against the Company or any Significant Subsidiary or against any of the property or assets of either and remains unpaid, unvacated, unbonded or unstayed for a period of 30 days; or (g) if the Company, any Significant Subsidiary or any ERISA Affiliate shall have made a complete or partial withdrawal from a Multiemployer Plan and, as a result of such complete or partial withdrawal, the Company, any Significant Subsidiary or any ERISA Affiliate incurs a withdrawal liability in an annual amount exceeding $100,000; or a Multiemployer Plan -29- enters reorganization under Section 4241 of ERISA and, as a result thereof, the Company's, any Significant Subsidiary's or any ERISA Affiliate's contribution requirement with respect to such Multiemployer Plan increases by an annual amount exceeding $100,000; or (h) if the Company or any Significant Subsidiary shall default in any material respect in the due and punctual performance of any covenant or agreement in any note, bond, indenture, loan agreement, note agreement, mortgage, security agreement or other instrument evidencing or related to Indebtedness for Borrowed Money, and such default shall continue for more than the period of notice and/or grace, if any, therein specified and shall not have been waived; or (i) (i) if any representation or warranty made by the Company in this Agreement shall prove to have been untrue or incorrect in any material respect as of the date of this Agreement or as of the Closing Date, or (ii) if any representation or warranty made by any of the Subsidiaries in the Guaranty shall prove to have been untrue or incorrect in any material respect as of the date of the Guaranty, or (iii) if any report, certificate, financial statement, financial schedule or other instrument prepared or purported to be prepared by the Company or any officer of the Company and furnished or delivered under or pursuant to this Agreement on or after the Closing Date (or any statement made therein) shall prove to be untrue or incorrect in any material respect as of the date it was made, furnished or delivered; or (j) if default shall be made in the due and punctual performance or observance of any covenant or agreement contained in Section 9 of this Agreement; or (k) if default shall be made in the due and punctual performance or observance of any other covenant or agreement contained in this Agreement, in the Guaranty or in the Registration Rights Agreement, and such default shall have continued for a period of 15 days after written notice thereof to the Company by any holder of a Note; or (l) if there shall occur any other Event of Default under and as defined in any of the Security Agreements; or (m) if a Change in Control (as hereinafter defined) shall have occurred. 12.2 REMEDIES UPON EVENTS OF DEFAULT. Upon the occurrence of an Event of Default as herein defined, and so long as such Event of Default continues unremedied, then the holders of at least 67% of the aggregate principal amount of the Notes then outstanding shall be entitled by notice to declare the principal of and any accrued interest on the Notes to be immediately due and payable, and thereupon the Notes, including both principal and interest, shall become immediately due and payable (provided, however, that, when any Event of Default described in Section 12.1(c), (d) or (e) hereof has occurred, the Notes shall immediately become due and payable without presentment, demand or notice of any kind). 12.3 NOTICE OF DEFAULTS. When, to its knowledge, any Event of Default has occurred or exists, the Company agrees to give written notice within three business days of such Event of Default to the holders of all outstanding Purchased Securities. If the holder of any Purchased Securities shall give any notice or take any other actions in respect of a claimed Event -30- of Default, the Company will forthwith give written notice thereof to all other holders of Purchased Securities at the time outstanding, describing such notice or action and the nature of the claimed Event of Default. 12.4 REMEDIES CUMULATIVE. No right, power or remedy conferred upon any holder of Purchased Securities shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy, whether conferred hereby or by any such security or now or hereafter available at law or in equity or by statute or otherwise. 12.5 REMEDIES NOT WAIVED. No course of dealing between the Company and any Purchaser or the holder of any Purchased Securities, and no delay in exercising any right, power or remedy conferred hereby or by any such security or now or hereafter existing at law or in equity or by statute or otherwise, shall operate as a waiver of or otherwise prejudice any such right, power or remedy. 12.6 EQUITABLE REMEDIES. The parties agree that money damages or other remedies at law may not be a sufficient or adequate remedy for any breach or violation of, or default under, this Agreement by them and that, in addition to all other remedies available to them, each of them shall be entitled, to the fullest extent permitted by law, to an injunction restraining such breach, violation or default or threatened breach, violation or default and to any other equitable relief, including without limitation specific performance, without bond or other security being required. 13. DEFINITIONS. Unless the context otherwise requires, the terms defined in this Section 13 shall have the meanings herein specified for all purposes of this Agreement, applicable to both the singular and plural forms of any of the terms herein defined. All accounting terms defined below shall, except as otherwise expressly provided, be determined by reference to the Company's books of account and in conformity with generally accepted accounting principles as applied to such books of account in the opinion of the independent certified public accountants selected by the Board of Directors as required under the provisions of Section 8.2 hereof. 13.1 "Additional Shares of Common Stock" shall mean all shares of Common Stock of the Company issued by the Company on or after the Closing Date, except the Conversion Stock and the Warrant Stock. 13.2 "Change in Control" shall mean the occurrence of any of the following: (a) the first day on which a majority of the members of the Board of Directors are not Continuing Directors (as hereinafter defined), (b) the consummation of any transaction (including without limitation any stock sale, merger, consolidation or statutory share exchange) the result of which is that any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than St. Paul or any of its affiliates is the beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of 30% or more of the voting power of the outstanding voting stock of the Company, (c) the sale or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any individual or entity other than the Company or any of its wholly-owned Subsidiaries, or (d) the adoption of a plan relating to the complete liquidation or dissolution of -31- the Company. For purposes of this provision, "Continuing Directors" means any member of the Board of Directors who (x) was a member of the Board of Directors on the date of this Agreement, or (y) was nominated for election or elected or appointed to the Board of Directors by the Board of Directors at a time when a majority of the members of the Board of Directors consisted of Continuing Directors. 13.3 "Collateral Agent" shall mean St. Paul, in its capacity as agent for the holders of the Notes as provided under Section 14 hereof, or any successor agent. 13.4 "Collateral Agent-Related Person" shall mean the Collateral Agent, each of its affiliates, and each of the officers, directors, employees, agents and attorneys-in-fact of the Collateral Agent or any of its affiliates. 13.5 "Common Stock" shall mean the Company's authorized common shares, any additional common shares which may be authorized in the future by the Company, and any stock into which such common shares may hereafter be changed, and shall also include stock of the Company of any other class which is not preferred as to dividends or as to distributions of assets on liquidation, dissolution or winding up of the Company over any other class of stock of the Company, and which is not subject to redemption. 13.6 "Conversion Price" shall mean such price at which the Notes are convertible into Common Stock. 13.7 "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock. 13.8 "Indebtedness for Borrowed Money" shall include only indebtedness of the Company and its Subsidiaries incurred as the result of a direct borrowing of money and shall not include any other indebtedness including, but not limited to, indebtedness incurred with respect to trade accounts. 13.9 "Majority in Interest of the Purchased Securities" shall mean at least 67% of the aggregate principal amount of the Notes outstanding at the time of calculation and at least 67% of the sum of (a) the number of shares of Conversion Stock outstanding at the time of calculation, plus (b) the number of shares of Warrant Stock for which Warrants outstanding at the time of calculation could then be exercised, plus (c) the number of shares of Warrant Stock outstanding at the time of calculation. 13.10 "Purchase Price" shall mean such price at which the Warrants are exercisable for Common Stock. 13.11 "Purchased Securities" shall mean the Notes, the Conversion Stock, the Warrants and the Warrant Stock (other than any shares of Conversion Stock or Warrant Stock that have been theretofore registered under the Securities Act and sold or that have been theretofore sold in an open market transaction pursuant to Rule 144). -32- 13.12 "Security Agreements" shall mean the Parent Security Agreement, the Parent Patent and Trademark Security Agreement, the Subsidiary Security Agreement, the Pledge Agreement and any other collateral security agreements hereafter entered into by any of the Company or the Subsidiaries as security for the Notes or the Guaranty. 13.13 "Significant Subsidiary" shall mean any Subsidiary which constitutes a significant subsidiary within the meaning of Rule 1-02(w) of Regulation S-X promulgated by the SEC. 13.14 "Subsidiary" shall mean any corporation, association or other business entity more than a majority (by number of votes) of the voting stock or other voting equity interests of which is owned or controlled, directly or indirectly, by the Company or by one or more of its Subsidiaries or both. 13.15 "Transaction Documents" shall mean this Agreement, the Notes, the Warrants, the Guaranty, the Security Agreements and the Registration Rights Agreement. 14. COLLATERAL AGENT. 14.1 APPOINTMENT AND AUTHORIZATION OF COLLATERAL AGENT. Each holder of a Note hereby irrevocably (subject to Section 14.09 hereof) appoints, designates and authorizes the Collateral Agent as its agent to take such actions on its behalf under or in respect of any of the Guaranty or the Security Agreements (collectively, the "Collateral Documents") and to exercise such powers and perform such duties on its behalf as are expressly delegated to the Collateral Agent by the terms of any of the Collateral Documents, together with such powers as are reasonably incidental thereto. The Collateral Agent hereby accepts such appointment. Notwithstanding any provision to the contrary contained elsewhere herein, the Collateral Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Collateral Agent have or be deemed to have any fiduciary relationship with any holder of a Note, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Collateral Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" herein with reference to the Collateral Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. 14.2 DELEGATION OF DUTIES. The Collateral Agent may execute any of its duties under this Section 14 or under any of the Collateral Documents by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel and other consultants or experts concerning all matters pertaining to such duties. The Collateral Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct of the Collateral Agent in such selection. 14.3 LIABILITY OF COLLATERAL AGENT. No Collateral Agent-Related Person shall be (a) liable for any action taken or omitted to be taken by the Collateral Agent under this Section 14 or under or in connection with any of the Collateral Documents (except for its own gross -33- negligence or willful misconduct in connection with its duties expressly set forth herein), or (b) responsible in any manner to any holder of a Note for any recital, statement, representation or warranty made by the Company or any of the Subsidiaries, or any officer thereof, contained in any of the Transaction Documents, or in any certificate, report, statement or other document referred to or provided for in, or received by the Collateral Agent or any other holder of a Note under or in connection with, any of the Transaction Documents, or for the validity, effectiveness, genuineness, enforceability or sufficiency of any of the Transaction Documents, or for any failure of the Company or any of the Subsidiaries to perform its obligations under any of the Transaction Documents. No Collateral Agent-Related Person shall be under any obligation to any holder of a Note to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, any of the Transaction Documents, or to inspect the properties, books or records of the Company or any of the Subsidiaries. 14.4 RELIANCE BY COLLATERAL AGENT. The Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper person or persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Collateral Agent. The Collateral Agent shall be fully justified in failing or refusing to take any action under or in connection with any of the Collateral Documents unless it shall first receive such advice or concurrence of the holder or holders of at least 67% of the aggregate principal amount of the Notes then outstanding (the "Required Note Holders") as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the holders of the Notes against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Collateral Agent shall in all cases be fully protected in acting, or in refraining from acting, under or in connection with any of the Collateral Documents in accordance with a request or consent of the Required Note Holders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the holders of the Notes. Where this Section 14 expressly permits or prohibits an action unless the Required Lenders otherwise determine, the Collateral Agent shall, and in all other instances, the Collateral Agent may, but shall not be required to, initiate any solicitation for the consent or a vote of the holders of the Notes. 14.5 NOTICE OF DEFAULT. The Collateral Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default or any event or condition which, with notice or lapse of time, or both, would constitute an Event of Default (a "Default"), unless the Collateral Agent shall have received written notice from a holder of a Note or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." The Collateral Agent shall take such action under any of the Collateral Documents with respect to such Default or Event of Default as may be directed by the Required Note Holders; provided, however, that unless and until the Collateral Agent has received any such direction, the Collateral Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Required Note Holders. -34- 14.6 CREDIT DECISION; DISCLOSURE OF INFORMATION BY COLLATERAL AGENT. Each holder of a Note acknowledges that no Collateral Agent-Related Person has made any representation or warranty to it, and that no act by the Collateral Agent hereinafter taken, including any consent to and acceptance of any assignment or review of the affairs of the Company or any of the Subsidiaries, shall be deemed to constitute any representation or warranty by any Collateral Agent-Related Person to any holder of a Note as to any matter, including whether Collateral Agent-Related Persons have disclosed material information in their possession. Each holder of a Note represents to the Collateral Agent that it has, independently and without reliance upon any Collateral Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and the Subsidiaries, and all applicable regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company. Each holder of a Note also represents that it will, independently and without reliance upon any Collateral Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under the Transaction Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and the Subsidiaries. The Collateral Agent shall not have any duty or responsibility to provide any holder of a Note with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company or any of the Subsidiaries which may come into the possession of any Collateral Agent-Related Person. 14.7 INDEMNIFICATION OF COLLATERAL AGENT. Each holder of a Note shall indemnify and hold harmless upon demand each Collateral Agent-Related Person (to the extent not reimbursed by or on behalf of the Company or any of the Subsidiaries and without limiting the obligation of the Company or any of the Subsidiaries to do so), pro rata according to such holder's share of the aggregate principal amount of the Notes then outstanding, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (collectively, "Losses") which may be imposed on or incurred by such Collateral Agent-Related Person in any way relating to or arising out of this Section 14 or any of the Collateral Documents or any action taken or omitted by the Collateral Agent under this Section 14 or any of the Collateral Documents; provided, however, that no holder of any Note shall be liable for the payment to any Collateral Agent-Related Person of any portion of any such Losses to the extent resulting from such Collateral Agent-Related Person's gross negligence or willful misconduct; provided, further, however, that no action taken in accordance with the directions of the Required Note Holders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section 14.7. The undertaking in this Section 14.7 shall survive the payment of the principal of and interest on the Notes and all other obligations guarantied or secured by any of the Collateral Documents and the resignation or replacement of the Collateral Agent. 14.8 COLLATERAL AGENT IN ITS INDIVIDUAL CAPACITY. The Collateral Agent and its affiliates may make loans to, acquire equity interests in and generally engage in any kind of business with any of the Company or the Subsidiaries as though the Collateral Agent were not the Collateral Agent hereunder and without notice to or consent of the holders of the Notes. In -35- addition, the holders of the Notes are aware that certain affiliates of the Collateral Agent have existing business relationships with the Company and the Subsidiaries, including relationships arising out of the ownership by such affiliates of significant debt and equity interests in the Company and the service on the Board of Directors of the Company of a representative of such affiliates. The holders of the Notes acknowledge that, pursuant to such activities and relationships, the Collateral Agent or its affiliates may receive information regarding the Company or any of the Subsidiaries (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Collateral Agent shall be under no obligation to provide such information to them. With respect to its Note, the Collateral Agent shall have the same rights and powers under any of the Transaction Documents as any other holder of a Note and may exercise such rights and powers as though it were not the Collateral Agent, and references in this Section 14 and elsewhere in the Transaction Documents to a holder or holders of Notes include the Collateral Agent in its individual capacity. 14.9 SUCCESSOR COLLATERAL AGENT. The Collateral Agent may resign as Collateral Agent upon 30 days' notice to the other holders of the Notes. If the Collateral Agent resigns under this Agreement, the Required Note Holders shall appoint from among the holders of the Notes a successor Collateral Agent for the holders of the Notes which successor Collateral Agent shall be consented to by the Company at all times other than during the existence of an Event of Default (which consent of the Company shall not be unreasonably withheld or delayed). If no successor Collateral Agent is appointed prior to the effective date of the resignation of the Collateral Agent, the Collateral Agent may appoint, after consulting with the other holders of the Notes and the Company, a successor Collateral Agent from among the holders of the Notes. Upon the acceptance of its appointment as successor Collateral Agent hereunder, such successor Collateral Agent shall succeed to all the rights, powers and duties of the retiring Collateral Agent and the term "Collateral Agent" shall mean such successor Collateral Agent and the retiring Collateral Agent's appointment, powers and duties as Collateral Agent shall be terminated. After any retiring Collateral Agent's resignation hereunder as Collateral Agent, the provisions of this Section 14 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Collateral Agent under this Agreement. If no successor Collateral Agent has accepted appointment as Collateral Agent by the date which is 30 days following a retiring Collateral Agent's notice of resignation, the retiring Collateral Agent's resignation shall nevertheless thereupon become effective and the holders of the Notes shall perform all of the duties of the Collateral Agent hereunder until such time, if any, as the Required Note Holders appoint a successor agent as provided for above. 15. CONSENTS; WAIVERS AND AMENDMENTS. Except as otherwise specifically provided herein, in each case in which approval of the holders of Purchased Securities is required by the terms of this Agreement, such requirement shall be satisfied by a vote or the written consent of the holders of at least a Majority in Interest of the Purchased Securities. With the written consent of the holders of at least a Majority in Interest of the Purchased Securities, the obligations of the Company under this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), and with the same approval the Company may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of any supplemental agreement or modifying in any manner the rights and obligations of the holders of the Purchased Securities and of the Company; provided, however, that no such waiver or supplemental agreement shall -36- (a) amend the basic terms of the Notes as to any holder of each Note so affected who does not consent thereto, or (b) reduce the aforesaid percentage of Purchased Securities, the holders of which are required to consent to any waiver or supplemental agreement, without the consent of all of the holders of Purchased Securities whose rights would be affected by such reduction, or (c) amend the basic terms of the Warrants as to any holder of each Warrant so effected who does not consent thereto. Written notice of any such waiver, consent or agreement of amendment, modification or supplement shall be given to the holders of the Purchased Securities who have not previously consented thereto in writing. 16. CHANGES, WAIVERS, ETC. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing in a manner consistent with the requirements set forth in Section 15. 17. PAYMENT OF FEES AND EXPENSES OF PURCHASERS. Upon the consummation of the sale of Notes and Warrants anticipated by this Agreement or upon failure by the Company to consummate such sale, the Company will pay the expenses incurred by the Purchasers in connection with the transactions herein contemplated and the expenses incurred by St. Paul in connection with the Company's negotiation of unconsummated financing arrangements prior to the date hereof, including without limitation the reasonable fees and disbursements of Faegre & Benson LLP for their services as special counsel to St. Paul in connection with the transactions herein contemplated and as special counsel to St. Paul in connection with such unconsummated financing arrangements. The Company will also pay (a) all expenses incurred by the holders of Purchased Securities (including without limitation reasonable attorneys' fees and disbursements) with respect to any amendments or waivers requested by the Company (whether or not the same become effective) under or in respect of this Agreement or the agreements contemplated hereby, and (b) all expenses incurred by the holders of Purchased Securities (including without limitation reasonable attorneys' fees and disbursements), whether or not litigation is commenced, with respect to the protection or enforcement of the rights granted under this Agreement or the agreements contemplated hereby. 18. UNDERSTANDING AMONG PURCHASERS. The determination by each of the Purchasers to purchase Notes and Warrants pursuant to this Agreement has been made by such Purchaser independent of the other Purchasers, and independent of any statements or opinions as to the advisability of such purchase or as to the properties, business, prospects, operations, results of operations or condition (financial or otherwise) of the Company or any Subsidiary which may have been made or given by the other Purchasers or by any agent or employee of the other Purchasers. In addition, it is acknowledged by each of the Purchasers that the other Purchasers have not acted as such Purchaser's agent in connection with making its investment hereunder and that the other Purchasers will not be acting as such Purchaser's agent in connection with monitoring such Purchaser's investment hereunder. 19. NOTICES. All notices, demands, requests and other communications given to or made upon a party pursuant to this Agreement shall be in writing and shall be mailed (by certified mail, postage prepaid and return receipt requested), sent by overnight courier, telecopied or hand delivered to such party: -37- (a) in the case of any Purchaser, at the address of such Purchaser specified on Schedule 1 hereto or at such other address as such Purchaser may specify by written notice to the Company, or (b) in the case of any other holder of Purchased Securities, at the address of such holder shown on the books of the Company or at such other address as such holder may specify by written notice to the Company, or (c) in the case of the Company, at the address specified below its signature at the end of this Agreement or at such other address as the Company may specify by written notice to the holders of the Purchased Securities. All such notices, demands, requests and communications shall be effective and deemed to have been given and received (i) if sent by certified mail, postage prepaid and return receipt requested, when received or three business days after mailing, whichever first occurs, (ii) if sent by overnight courier, one business day after delivery to such courier, (iii) if telecopied, when transmitted and a confirmation is received, provided the same is on a business day and, if not, on the next business day, or (iv) if hand delivered, upon delivery, provided that the same is on a business day and, if not, on the next business day. 20. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All representations and warranties contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by the Purchasers or on their behalf, and the sale and purchase of the Notes and the Warrants and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant hereto or in connection with or contemplation of the transactions herein contemplated (other than legal opinions) shall constitute representations and warranties by the Company hereunder. 21. PARTIES IN INTEREST. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders at the time of any of the Purchased Securities. 22. HEADINGS. The headings of the Sections and paragraphs of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. 23. CHOICE OF LAW. It is the intention of the parties that the substantive laws of Minnesota shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties. 24. COUNTERPARTS. This Agreement may be executed concurrently 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. 25. CONSTRUCTION. In this Agreement and the other Transaction Documents, except as otherwise expressly provided: -38- (a) the term "business day" shall mean every day other than a Saturday, Sunday or a day which is a statutory holiday under the laws of the United States or the State of Minnesota; (b) the term "person" shall mean an individual, a partnership, a limited liability company, a joint venture, a corporation, a trust, an unincorporated association, and a government or any department or agency thereof; and (c) the term "affiliate" shall have the meaning ascribed thereto in Rule 405 under the Securities Act. 26. CONSENT TO JURISDICTION; WAIVER OF TRIAL BY JURY. THE COMPANY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS TO WHICH THE COMPANY IS A PARTY SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF HENNEPIN, STATE OF MINNESOTA OR, AT THE SOLE OPTION OF ANY HOLDER OF PURCHASED SECURITIES, IN ANY OTHER COURT IN WHICH SUCH HOLDER SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY AND PERSONAL JURISDICTION OVER THE COMPANY. THE COMPANY WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 26, AND THE COMPANY WAIVE ITS RIGHT TO TRIAL BY JURY. If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the undersigned, whereupon this letter shall become a binding contract among you and the undersigned. Very truly yours, SELECT COMFORT CORPORATION By: /s/ Mark A. Kimball ------------------------------------------- Name: Mark A. Kimball ----------------------------------------- Title: Senior Vice President ---------------------------------------- Address: 6105 Trenton Lane North Suite 100 Minneapolis, Minnesota 55442 Attention: Chief Financial Officer Fax No.: (763) 551-6888 -39- The foregoing Agreement is hereby accepted as of the date first above written. ST. PAUL VENTURE CAPITAL VI, LLC By: SPVC MANAGEMENT VI, LLC Its: Managing Member By: /s/ Patrick A. Hopf -------------------------------------------- Name: Patrick A. Hopf -------------------------------------- Title: Managing Director ------------------------------------- Address: 10400 Viking Drive Suite 500 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 PRINTWARE, INC. By: /s/ Mark Eisenschenk -------------------------------------------- Name: Mark Eisenschenk Its: Chief Financial Officer Address: 1270 Eagan Industrial Road St. Paul, MN 55121 Telephone No.: 651-456-1400 Fax No.: 651-454-3684 /s/ Gary S. Kohler ----------------------------------------------- Gary S. Kohler Address: 3033 Excelsior Boulevard, Suite 300 Minneapolis, MN 55416 Telephone No.: 612-253-6027 Fax No.: -------------------------- /s/ Andrew J. Redleaf ----------------------------------------------- Andrew J. Redleaf Address: 3033 Excelsior Boulevard, Suite 300 Minneapolis, MN 55416 Telephone No.: 612-253-6027 Fax No.: -------------------------- -40- LIBERTY DIVERSIFIED By: /s/ David Lenzen -------------------------------------------- Its: Executive Vice President ------------------------------------------- Address: 5600 North Highway 169 Minneapolis, MN 55428 Telephone No.: 763-536-6600 Fax No.: 763-536-6685 STANDARD FUSEE CORPORATION By: /s/ C.Jay McLaughlin -------------------------------------------- Its: President and CEO ------------------------------------------- Address: 28320 St. Michael's Road P.O. Box 1047 Easton, MN 21601 Telephone No.: 1-800-637-7807 Fax No.: 410-822-7759 /s/ K.H. Walker ----------------------------------------------- K.H. Walker Address: 15 East 26th Street 12th Floor New York, NY 10010 Telephone No.: 212-683-2626 ext. 22 Fax No.: 212-683-6840 /s/ Thomas J. Albani ----------------------------------------------- Thomas J. Albani Address: 39 Wanoma Way Nantucket, MA 02554 Telephone No.: 508-257-4620 Fax No.: 508-257-4172 -41- /s/ Ervin R. Shames ----------------------------------------------- Ervin R. Shames Address: 35 Mollbrook Drive Wilton, CT 06897 Telephone No.: 203-762-1205 (home) Telephone No.: 203-762-0298 (office) Fax No.: 203-762-9408 /s/ Jean-Michel Valette ----------------------------------------------- Jean-Michel Valette Address: 28 Maple Avenue Kentfield, CA 94905 Telephone No.: 415-456-0432 (home) Telephone No.: 425-456-2850 (office) Fax No.: 415-456-0487 BFSUS SPECIAL OPPORTUNITIES TRUST PLC By: /s/ Russell Cleveland -------------------------------------------- Its: Director ------------------------------------------- Address: Renaissance Capital Group, Inc. 8080 North Central Expressway Suite 210-LB 59 Dallas, TX 75206 Telephone No.: 214-891-8294 Fax No.: 214-891-8291 RENAISSANCE US GROWTH & INCOME TRUST PLC By: /s/ Russell Cleveland -------------------------------------------- Its: Director ------------------------------------------- Address: Renaissance Capital Group, Inc. 8080 North Central Expressway Suite 210-LB 59 Dallas, TX 75206 Telephone No.: 214-891-8294 Fax No.: 214-891-8291 -42- BAYSTAR CAPITAL, L.P. By: /s/ Michael A. Roth -------------------------------------------- Its: Managing Director ------------------------------------------- Address: 1500 West Market Street, Suite 200 Mequon, WI 53092 Telephone No.: 262-240-3115 Fax No.: 262-240-3215 BAYSTAR INTERNATIONAL, LTD. By: /s/ Michael A. Roth -------------------------------------------- Its: Managing Director ------------------------------------------- Address: 1500 West Market Street, Suite 200 Mequon, WI 53092 Telephone No.: 262-240-3115 Fax No.: 262-240-3215 -43- SCHEDULE 1 SCHEDULE 1 - ------------------------------ -------------------- -------------------- -------------------- NAMES AND ADDRESSES OF ORIGINAL PRINCIPAL NUMBER OF SHARES PURCHASE PRICE PURCHASERS AMOUNT OF NOTES OF WARRANT STOCK - ------------------------------ -------------------- -------------------- -------------------- St. Paul Venture Capital VI, $4,100,000 1,640,000 $4,100,000 LLC 10400 Viking Drive Suite 550 Eden Prairie, MN 55344 Attention: Lisa Corbin Fax No.: (952) 995-7475 - ------------------------------ -------------------- -------------------- -------------------- Printware, Inc. $1,500,000 600,000 $1,500,000 c/o Mark Eisenschenk, CFO 1270 Eagan Industrial Road St. Paul, MN 55121 - ------------------------------ -------------------- -------------------- -------------------- Gary S. Kohler $100,000 40,000 $100,000 3033 Excelsior Boulevard Suite 300 Minneapolis, MN 55416 - ------------------------------ -------------------- -------------------- -------------------- Andrew J. Redleaf $100,000 40,000 $100,000 3033 Excelsior Boulevard Suite 300 Minneapolis, MN 55416 - ------------------------------ -------------------- -------------------- -------------------- Liberty Diversified $1,000,000 400,000 $1,000,000 5600 North Highway 169 Minneapolis, MN 55428 Attn: David Lenzen and Mike Fitterman, CFO - ------------------------------ -------------------- -------------------- -------------------- Standard Fusee Corporation $1,000,000 400,000 $1,000,000 28320 St. Michaels Road PO Box 1047 Easton, MD 21601 - ------------------------------ -------------------- -------------------- -------------------- K. H. Walker $50,000 20,000 $50,000 15 East 26th Street 12th Floor New York, NY 10010 - ------------------------------ -------------------- -------------------- -------------------- Thomas J. Albani $50,000 20,000 $50,000 Summer Address: Mail: 39 Wanoma Way P.O. Box 855 Siasconset, MA 02564 Overnight: 39 Wanoma Way Nantucket, MA 02554 - ------------------------------ -------------------- -------------------- -------------------- Ervin R. Shames $50,000 20,000 $50,000 35 Mollbrook Drive Wilton, CT 06897 - ------------------------------ -------------------- -------------------- -------------------- Jean-Michel Valette $50,000 20,000 $50,000 28 Maple Avenue Kentfield, CA 94905 - ------------------------------ -------------------- -------------------- -------------------- BFSUS Special Opportunities $500,000 200,000 $500,000 Trust PLC 8080 North Central Expressway Suite 210-LB 59 Dallas, TX 75206 - ------------------------------ -------------------- -------------------- -------------------- Renaissance Capital Growth & $500,000 200,000 $500,000 Income Fund III, Inc. 8080 North Central Expressway Suite 210-LB 59 Dallas, TX 75206 - ------------------------------ -------------------- -------------------- -------------------- BayStar Capital, L.P. $1,500,000 600,000 $1,500,000 1500 West Market Street Suite 200 Mequon, WI 53092 - ------------------------------ -------------------- -------------------- -------------------- BayStar International, Ltd. $500,000 200,000 $500,000 1500 West Market Street Suite 200 Mequon, WI 53092 - ------------------------------ -------------------- -------------------- -------------------- TOTAL $11,000,000 4,400,000 $11,000,000 - ------------------------------ -------------------- -------------------- --------------------
-2- EX-10 4 e10-2_formofnote.txt FORM OF NOTE EXHIBIT 10.2 SELECT COMFORT CORPORATION FORM OF SENIOR SECURED CONVERTIBLE NOTE R-1 $_____________ June 6, 2001 For Value Received the undersigned Select Comfort Corporation, a Minnesota corporation (hereinafter called the "Company"), hereby promises to pay to _____________________________, or registered assigns (the "Holder"), at its principal office in the City of Eden Prairie, Minnesota, the principal sum of ______________ Dollars ($_________) on the fifth anniversary of the date hereof, and to pay interest at such place on the unpaid principal hereof from the date hereof at the rate of 8% per annum (computed on the basis of a 360-day year, 30-day month) annually on each anniversary of the date hereof, commencing June 6, 2002, until the principal hereof shall have been paid in full. The principal of and interest on this Note shall be paid in lawful money of the United States. Notwithstanding the foregoing, upon the occurrence and during the continuance of an Event of Default under and as defined in the Agreement referred to below, the rate per annum at which interest shall accrue on the unpaid principal amount of this Note shall increase by 3%. This Note has been issued under the terms and provisions of a Note Purchase Agreement (as amended, modified or supplemented from time to time, the "Agreement"), dated June 1, 2001, among the Company and the Purchasers named in Schedule 1 thereto and is entitled to the benefits thereof. All capitalized terms which are used but not otherwise defined in this Note shall have the respective means ascribed thereto in the Agreement. As provided in the Agreement, this Note is guaranteed by each of the Subsidiaries of the Company pursuant to the Guaranty and is secured by substantially all of the personal property of the Company and its Subsidiaries pursuant to the Security Agreements. Upon the occurrence of any one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid on this Note, including accrued interest, may be declared to be or shall become immediately due and payable as provided in the Agreement. This Note is subject to the following additional provisions, terms and conditions: 1. NO PREPAYMENT. This Note may be prepaid only with the prior written consent of the holders of at least 67% of the aggregate principal amount of the Notes outstanding immediately prior to such prepayment, as provided in Section 10 of the Agreement. Nothing herein or in said section shall affect in any way the right of the Holder to convert any portion of the principal of this Note at any time and from time to time prior to its prepayment in accordance with paragraph 2 hereof. 2. CONVERSION RIGHTS. (a) The principal of this Note is convertible in whole or in part at any time prior to its payment at the option of the Holder into fully paid and nonassessable shares of Common Stock (as hereinafter defined) at an initial conversion price of $1.00 per share (subject to adjustment as hereinafter provided). (b) In order to exercise the conversion privilege, the Holder shall surrender this Note to the Company at its principal office, accompanied by written notice to the Company that the Holder elects to convert the principal of this Note or a part thereof. The principal of this Note or the part thereof to be converted shall be deemed to have been converted as of the close of business on the day of surrender of this Note for conversion in accordance with the foregoing provisions, and at such time the rights of the Holder, as such, in respect of the part of the principal of this Note to be converted shall cease and the Holder shall be treated for all purposes as the record holder of the Common Stock issuable upon conversion. As promptly as practicable (but in no event more than three business days) after such conversion, the Company (i) shall issue a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with, in the event the principal of this Note is being converted in part only, a new Note representing the principal amount hereof which shall not have been converted bearing interest from the date to which interest on such unconverted principal amount has been paid under the Note surrendered, and (ii) shall pay to the Holder all unpaid interest accrued to the conversion date on the principal amount of this Note or part thereof which shall have been converted. (c) The above provisions are, however, subject to the following: (i) The conversion price shall, from and after the date of issuance of this Note, be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the conversion price, the Holder shall thereafter be entitled to receive the number of shares obtained by multiplying the conversion price in effect immediately prior to such adjustment by the number of shares issuable pursuant to conversion immediately prior to such adjustment, and dividing the product thereof by the conversion price resulting from such adjustment. (ii) Except for (A) the grant of options to purchase Common Stock to employees or directors of the Company, consultants to the Company, or the Company's employee stock purchase plan, as approved from time to time by the Board of Directors of the Company or a committee thereof, and the issuance of shares of Common Stock pursuant to the exercise of such options, and (B) the issuance of shares of Common Stock pursuant to the exercise of options or warrants outstanding prior to the original issuance of this Note that were approved by the Board of Directors or a committee thereof, if and whenever the Company shall issue or sell any shares of its Common Stock for a consideration 2 per share less than the conversion price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the conversion price shall be reduced to such lesser price. No such adjustment of the conversion price, however, shall be made in an amount less than 2% of the conversion price in effect on the date of such adjustment, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any such adjustment so carried forward, shall be an amount equal to or greater than 2% of the conversion price then in effect. In addition, if the market price (determined in the manner provided under clause (xi) of this paragraph 2(c)) as of the close of business on October 31, 2001 is below the conversion price in effect immediately prior to such time, then, at such time, the conversion price shall be reduced to such market price. Notwithstanding the foregoing provisions of this clause (ii), until the receipt of approval by the shareholders of the Company, by the vote required under Section 4350(i) of the National Association of Securities Dealers Manual & Notice to Members, of such provisions, any adjustment of the conversion price pursuant to such provisions shall be made only to the extent such adjustment would not result in the reduction of the conversion price to an amount less than $0.74. Any adjustment that would have otherwise been made pursuant to the foregoing provisions of this clause (ii) but for the provisions of the immediately preceding sentence, will be made retroactively immediately upon the receipt of the shareholder approval specified in the immediately preceding sentence. (iii) For the purposes of paragraph (ii), the following provisions (A) to (E), inclusive, shall also be applicable: (A) In case at any time the Company shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (1) Common Stock or (2) any obligations or any shares of stock of the Company which are convertible into or exchangeable for Common Stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (aa) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of 3 additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (bb) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the conversion price in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in clause (vi) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (B) In case the Company shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (aa) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (bb) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the conversion price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (1) except as provided in clause (vi) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock upon 4 conversion or exchange of such Convertible Securities, and (2) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the conversion price have been or are to be made pursuant to other provisions of this clause (iii), no further adjustment of the conversion price shall be made by reason of such issue or sale. (C) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the Company in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined by the Board of Directors of the Company, without deducting therefrom of any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed by the Company in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined by the Board of Directors of the Company of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine to be attributable to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any other corporation, the Company shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or 5 securities of the other corporation, and if any such calculation results in adjustment of the conversion price, the determination of the number of shares of Common Stock issuable upon conversion immediately prior to such merger, conversion or sale, for purposes of clause (vii) below, shall be made after giving effect to such adjustment of the conversion price. (D) In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities, or (2) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such rights of subscription or purchase, as the case may be. (E) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this clause (iii). (iv) In case the Company shall (A) declare a dividend upon the Common Stock payable in Common Stock (other than a dividend declared to effect a subdivision of the outstanding shares of Common Stock, as described in clause (v) below) or Convertible Securities, or in any rights or options to purchase Common Stock or Convertible Securities, or (B) declare any other dividend or make any other distribution upon the Common Stock payable otherwise than out of earnings or earned surplus, then thereafter the Holder upon the conversion hereof will be entitled to receive the number of shares of Common Stock to which the Holder shall be entitled upon such conversion, and, in addition and without further payment therefor, each dividend described in subclause (A) above and each dividend or distribution described in subclause (B) above which the Holder would have received by way of dividends or distributions if, continuously since the Holder became the record holder of this Note, the Holder (1) had been the record holder of the number of shares of Common Stock then received, and (2) had retained all dividends or distributions in stock or securities (including Common Stock or Convertible Securities, and any rights or options to purchase any Common Stock or Convertible Securities) payable in respect of such Common Stock or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Stock. For the purposes of the foregoing, a dividend or 6 distribution other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend or distribution as determined by the Board of Directors of the Company. (v) In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the conversion price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the conversion price in effect immediately prior to such combination shall be proportionately increased. (vi) If (A) the purchase price provided for in any right or option referred to in clause (iii)(A) above, or (B) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (iii)(A) or (iii)(B) above, or (C) the rate at which any Convertible Securities referred to in clause (iii)(A) or (iii)(B) above are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the conversion price then in effect shall forthwith be increased or decreased to such conversion price which would have obtained had the adjustments made upon the issuance of such rights, options or Convertible Securities been made upon the basis of (1) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (2) the issuance at the time of such change of any such options, rights or Convertible Securities then still outstanding for the consideration, if any, received by the Company therefor and to be received on the basis of such changed price; and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the conversion price then in effect hereunder shall forthwith be increased to such conversion price which would have obtained had the adjustments made upon the issuance of such rights or options or Convertible Securities been made upon the basis of the issuance of the shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. If the purchase price provided for in any such right or option referred to in clause (iii)(A) above or the rate at which any Convertible Securities referred to in clause (iii)(A) or (iii)(B) above are convertible into or exchangeable for Common Stock shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the conversion price then in effect hereunder shall forthwith be 7 decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such right, option or Convertible Securities been made upon the basis of the issuance of (and the total consideration received for) the shares of Common Stock delivered as aforesaid. (vii) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the Holder shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Note and in lieu of or in addition to (as the case may be) the shares of the Common Stock of the Company immediately theretofore receivable upon conversion hereof, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore receivable upon conversion hereof, and in any such case appropriate provision shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof (including without limitation provisions for adjustments of the conversion price and of the number of shares issuable upon the conversion of this Note) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the conversion hereof. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation or entity (if other than the Company) resulting from such consolidation or merger or the corporation or entity purchasing such assets shall assume, by written instrument executed and mailed (by certified mail, postage prepaid and return receipt requested) to the Holder at its address for notices under the Agreement, the obligation to deliver to the Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to receive. (viii) Upon any adjustment of the conversion price, then and in each such case the Company shall give written notice thereof to the Holder, which notice shall state the conversion price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of this Note, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (ix) In case any time: 8 (A) the Company shall declare any cash dividend on its Common Stock at a rate in excess of the rate of the last cash dividend theretofore paid; (B) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (C) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (D) there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or entity; or (E) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall give written notice to the Holder of the date on which (1) the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (2) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. (x) If any event occurs as to which in the opinion of the Board of Directors of the Company the other provisions of this paragraph 2(c) are not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid. (xi) No fractional shares of Common Stock shall be issued upon the conversion of this Note, but, instead of any fraction of a share which would otherwise be issuable, the Company shall pay a cash adjustment in respect of 9 such fraction in an amount equal to the same fraction of the market price per share of Common Stock as of the close of business on the effective date of such conversion. "Market price" for purposes of this clause (xi) (and for purposes of clause (ii) of this paragraph 2(c)) shall mean, if the Common Stock is traded on a securities exchange or on The NASDAQ Stock Market, the closing sales price of the Common Stock on such exchange or market, or, if the Common Stock is otherwise traded in the over-the-counter market, the closing bid price, in each case averaged over a period of ten consecutive trading days ending on the date as of which "market price" is being determined. If at any time the Common Stock is not traded on an exchange or The NASDAQ Stock Market, or otherwise traded in the over-the-counter market, the "market price" shall be deemed to be the higher of (i) the book value thereof as determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of the Company as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made, or (ii) the fair value thereof determined in good faith by the Board of Directors of the Company as of a date which is within 15 days of the date as of which the determination is to be made. (xii) As used in this paragraph 2 and paragraph 3 hereof, the term "Common Stock" shall mean and include the Company's presently authorized Common Stock and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon conversion of this Note shall include shares designated as Common Stock of the Company on the date of original issue of this Note or, in the case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in clause (vii) above. 3. MANDATORY CONVERSION. In the event the holders of at least 67% of the aggregate principal amount of the Notes then outstanding consent in writing to the mandatory conversion of all of the Notes (which consent shall specify the date, which shall be no more than 30 days after the date such consent is given, as of which such conversion shall be effective), all of the principal of this Note shall automatically be converted into shares of Common Stock, without any act by the Company or the Holder, effective as of the close of business on the date specified for such conversion in such consent. In addition, if, for a period of at least ten out of 20 consecutive trading days occurring after the first anniversary of this Note, the Common Stock is traded on a national securities exchange or the NASDAQ National Market and the closing sales price of the Common Stock on such exchange or market equals or exceeds four times the initial conversion price of this Note (as adjusted for stock splits, stock dividends, recapitalizations and the like occurring after the original issue of this Note), then all of the principal of this Note shall automatically be converted into shares of Common Stock, without any act by the Company or the Holder, effective as of the close of business on the last of such 10 ten trading days. Upon any such automatic conversion, the Holder shall be entitled to receive the full number of shares of Common Stock into which this Note could be converted if the Holder had exercised its conversion right at the effective time of such automatic conversion. As promptly as practicable (but in no event more than three business days) after any such automatic conversion, the Company (i) shall notify the Holder in writing of such conversion, which notice shall specify the effective time of such conversion and, in reasonable detail, the circumstances triggering such conversion, and (ii) shall pay to the Holder all unpaid interest accrued to the conversion date on this Note, whereupon the Holder shall promptly surrender this Note in exchange for appropriate stock certificates representing shares of Common Stock of the Company. 4. MISCELLANEOUS. (a) This Note shall be governed by the laws of the State of Minnesota, without giving effect to principles of conflicts of law thereof. (b) The Company hereby waives demand, presentment, protest, notice of non-payment, dishonor and notice of dishonor, except to the extent expressly required by the Agreement. (c) All notices hereunder shall be in writing and shall be given in the manner and with the effect provided in the Agreement. (d) The Company shall pay all reasonable costs of collection, including without limitation reasonable attorneys' fees and disbursements, in the event this Note is not paid when due. SELECT COMFORT CORPORATION By: ---------------------------------------- Name: Mark A. Kimball Title: Senior Vice President RESTRICTION ON TRANSFER The security evidenced hereby may not be transferred without (i) the opinion of counsel satisfactory to the Company that such transfer may lawfully be made without registration under the Federal Securities Act of 1933 and all applicable state securities laws or (ii) such registration. 11 EX-10 5 e10-3_formofwarrant.txt FORM OF WARRANT EXHIBIT 10.3 FORM OF WARRANT TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF SELECT COMFORT CORPORATION R-1 THIS CERTIFIES THAT, for value received, __________________ (herein called "Purchaser"), or registered assigns, is entitled to subscribe for and purchase from Select Comfort Corporation, a corporation organized and existing under the laws of the State of Minnesota (herein called the "Company"), at the price specified below (subject to adjustment as noted below) at any time from and after the date hereof to and including the fifth anniversary of the date hereof, _____________ (________) fully paid and nonassessable shares of the Company's Common Stock (subject to adjustment as noted below). This Warrant has been issued in connection with the purchase from the Company by Purchaser, pursuant to a Note Purchase Agreement dated June 1, 2001 among the Company and the Purchasers named in Schedule 1 thereto, as such Schedule 1 is amended or deemed amended from time to time in accordance with the terms of the Note Purchase Agreement (the "Purchase Agreement"), of one of several Senior Secured Convertible Notes of the Company payable to such Purchasers, or registered assigns, in the aggregate original principal amount of up to $12,000,000 (together with any note or notes issued in exchange or substitution therefor, collectively, the "Notes"). The warrant purchase price (subject to adjustment as noted below) shall be $1.00 per share. This Warrant is subject to the following provisions, terms and conditions: 1. The rights represented by this Warrant may be exercised by the holder hereof, in whole or in part, by the surrender of this Warrant (properly endorsed if required, and with the Subscription Form attached hereto, or a reasonable facsimile, duly completed and executed) at the principal office of the Company and upon payment to the Company by check of the purchase price for the shares to be purchased upon such exercise. The Company agrees that the shares so purchased shall be and are deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. Subject to the provisions of the next succeeding paragraph, certificates for the shares of stock so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding ten days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the holder hereof within such time. 2. Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for shares of stock upon exercise of this Warrant except in accordance with the provisions, and subject to the limitations, of paragraph 7 hereof and the restrictive legend under the heading "Restriction on Transfer" below. 3. The Company covenants and agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 4. The above provisions are, however, subject to the following: (a) The warrant purchase price shall, from and after the date of issuance of this Warrant, be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the warrant purchase price, the holder of this Warrant shall thereafter be entitled to purchase, at the warrant purchase price resulting from such adjustment, the number of shares obtained by multiplying the warrant purchase price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the warrant purchase price resulting from such adjustment. (b) If and whenever the conversion price of the Notes is increased or reduced pursuant to the provisions of paragraph 2(c) thereof, then, effective simultaneously with such adjustment, the warrant purchase price shall be increased or reduced, as the case may be, to equal the conversion price of the Notes in effect immediately after such adjustment. For purposes hereof, the Notes shall be treated as if they have remained outstanding during the entire period from and after the issuance of this Warrant to and including the expiration or earlier exercise in full of this Warrant, regardless of whether the Notes shall have been paid or converted in full at any time during such period. (c) In case the Company shall (i) declare a dividend upon the Common Stock payable in Common Stock (other than a dividend declared to effect a subdivision of the outstanding shares of Common Stock, as described in paragraph 2(c)(v) of the Notes) or Convertible Securities, or in any rights or options to purchase Common Stock or Convertible Securities, or (ii) declare any other dividend or make any other distribution upon the Common Stock payable otherwise than out of earnings or earned surplus, then thereafter the holder of this Warrant upon the exercise hereof will be entitled to receive the number of shares of Common Stock to which such holder shall be entitled upon such exercise, and, in addition and without further payment therefor, each dividend described in clause (i) above and each dividend or distribution described in clause (ii) above which such holder would have received by way of dividends or distributions if continuously since such holder became the record 2 holder of this Warrant such holder (i) had been the record holder of the number of shares of Common Stock then received, and (ii) had retained all dividends or distributions in stock or securities (including Common Stock or Convertible Securities, and any rights or options to purchase any Common Stock or Convertible Securities) payable in respect of such Common Stock or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Stock. For the purposes of the foregoing, a dividend or distribution other than in cash shall be considered payable out of earnings or earned surplus only to the extent that such earnings or earned surplus are charged an amount equal to the fair value of such dividend or distribution as determined by the Board of Directors of the Company. (d) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of or in addition to (as the case may be) the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby (but after giving effect to any adjustment to such number of shares resulting from such reorganization, reclassification, consolidation, merger or sale), and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the warrant purchase price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation or entity (if other than the Company) resulting from such consolidation or merger or the corporation or entity purchasing such assets shall assume, by written instrument executed and mailed (by certified mail, postage prepaid and return receipt requested) to the registered holder hereof at its address for notices under the Purchase Agreement, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. (e) Upon any adjustment of the warrant purchase price, then and in each such case the Company shall give written notice thereof to the registered holder of this Warrant, which notice shall state the warrant purchase price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this 3 Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (f) In case any time: (1) the Company shall declare any cash dividend on its Common Stock at a rate in excess of the rate of the last cash dividend theretofore paid; (2) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (3) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (4) there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or entity; or (5) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall give written notice to the registered holder of this Warrant of the date on which (aa) the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (bb) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. (g) If any event occurs as to which in the opinion of the Board of Directors of the Company the other provisions of this paragraph 4 are not strictly applicable or if strictly applicable would not fairly protect the purchase rights of the holder of this Warrant or of Common Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such purchase rights as aforesaid. (h) No fractional shares of Common Stock shall be issued upon the exercise of this Warrant, but, instead of any fraction of a share which would otherwise be issuable, the Company shall pay a cash adjustment (which may be effected as a reduction of the amount to 4 be paid by the holder hereof upon such exercise) in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock as of the close of business on the effective date of such exercise. "Market price" for purposes of this paragraph 4(h) (and for purposes of paragraph 11(c) hereof) shall mean, if the Common Stock is traded on a securities exchange or on The NASDAQ Stock Market, the closing sales price of the Common Stock on such exchange or market, or, if the Common Stock is otherwise traded in the over-the-counter market, the closing bid price, in each case averaged over a period of ten consecutive trading days ending on the date as of which "market price" is being determined. If at any time the Common Stock is not traded on an exchange or The NASDAQ Stock Market, or otherwise traded in the over-the-counter market, the "market price" shall be deemed to be the higher of (i) the book value thereof as determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of the Company as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made, or (ii) the fair value thereof determined in good faith by the Board of Directors of the Company as of a date which is within 15 days of the date as of which the determination is to be made. 5. As used herein, the term "Common Stock" shall mean and include the Company's presently authorized Common Stock and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company; provided, however, that the shares purchasable pursuant to this Warrant shall include shares designated as Common Stock of the Company on the date of original issue of this Warrant or, in the case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in paragraph 4(d) above. 6. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company. 7. The holder of this Warrant, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Common Stock issuable or issued upon the exercise hereof of such holder's intention to do so, describing briefly the manner of any proposed transfer of this Warrant or such holder's intention as to the disposition to be made of shares of Common Stock issuable or issued upon the exercise hereof. Unless there is then in effect a registration statement under the Securities Act of 1933 and all applicable state securities laws covering such transfer or disposition, such holder shall also provide the Company with a written opinion of counsel reasonably satisfactory to the Company to the effect that the proposed transfer of this Warrant or disposition of shares may be effected without registration or qualification (under any federal or state law) of this Warrant or the shares of Common Stock issuable or issued upon the exercise hereof. Upon receipt of such written notice and, if required, opinion by the Company, such holder shall be entitled to transfer this Warrant, or to exercise this Warrant in accordance with its terms and dispose of the shares received upon such exercise or to dispose of shares of Common Stock received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered 5 by such holder to the Company, provided that an appropriate legend respecting the aforesaid restrictions on transfer and disposition may be endorsed on this Warrant or the certificates for such shares. 8. Subject to the provisions of paragraph 7 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, at the principal office of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that the bearer of this Warrant, when properly endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered holder hereof as the owner for all purposes. 9. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. 10. The holder of this Warrant and of the Common Stock issuable or issued upon the exercise hereof shall be entitled to the registration rights set forth in the Registration Rights Agreement entered into pursuant to the Purchase Agreement. 11. (a) In addition to and without limiting the rights of the holder of this Warrant under the terms of this Warrant, the holder of this Warrant shall have the right (the "Conversion Right") to convert this Warrant or any portion thereof into shares of Common Stock as provided in this paragraph 11 at any time or from time to time prior to its expiration. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the holder of this Warrant, without payment by the holder of any exercise price or any cash or other consideration, that number of shares of Common Stock equal to the quotient obtained by dividing the Net Value (as hereinafter defined) of the Converted Warrant Shares by the fair market value (as defined in paragraph (c) below) of a single share of Common Stock, determined in each case as of the close of business on the Conversion Date (as hereinafter defined). The "Net Value" of the Converted Warrant Shares shall be determined by subtracting the aggregate warrant purchase price of the Converted Warrant Shares from the aggregate fair market value of the Converted Warrant Shares. Notwithstanding anything in this paragraph 11 to the contrary, the Conversion Right cannot be exercised with respect to a number of Converted Warrant Shares having a Net Value below $100. No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company 6 shall pay to the holder of this Warrant an amount in cash equal to the fair market value of the resulting fractional share. (b) The Conversion Right may be exercised by the holder of this Warrant by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in paragraph (a) above as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), but not later than the expiration date of this Warrant. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right, together with a check in payment of any fractional share and, in the case of a partial exercise, a new warrant evidencing the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder of this Warrant within 15 days following the Conversion Date. (c) For purposes of this paragraph 11, the "fair market value" of a share of Common Stock as of a particular date shall be its "market price" as of such date, calculated as described in paragraph 4(h) hereof. 12. All questions concerning this Warrant will be governed and interpreted and enforced in accordance with the internal law of the State of Minnesota. All notices hereunder shall be in writing and shall be given in the manner and with the effect provided in the Purchase Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated as of June 6, 2001. SELECT COMFORT CORPORATION By: ---------------------------------------- Name: Mark A. Kimball Title: Senior Vice President 7 RESTRICTION ON TRANSFER The securities evidenced hereby may not be transferred without (i) the opinion of counsel reasonably satisfactory to the Company that such transfer may be lawfully made without registration under the Federal Securities Act of 1933 and all applicable state securities laws or (ii) such registration. 8 FORM OF ASSIGNMENT (To Be Signed Only Upon Assignment) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto __________________________________________________ this Warrant, and appoints __________________________________________________ to transfer this Warrant on the books of the Company with the full power of substitution in the premises. Dated: In the presence of: ----------------------------- (Signature must conform in all respects to the name of the holder as specified on the face of this Warrant without alteration, enlargement or any change whatsoever, and the signature must be guaranteed in the usual manner) 9 SUBSCRIPTION FORM To be Executed by the Holder of this Warrant if such Holder Desires to Exercise this Warrant in Whole or in Part: To: Select Comfort Corporation (the "Company") The undersigned __________________________, whose social security number or federal employer identification number is ___________________________, hereby irrevocably elects to exercise the right of purchase represented by this Warrant for, and to purchase thereunder, _________ shares of the Common Stock provided for therein and tenders payment herewith to the order of the Company in the amount of $_______, such payment being made as provided in Section 1 of this Warrant. The undersigned requests that certificates for such shares of Common Stock be issued as follows: Name: ------------------------------------------------------------------- Address: ------------------------------------------------------------------- Deliver to: ------------------------------------------------------------------- Address: ------------------------------------------------------------------- and, if such number of shares of Common Stock shall not be all the shares of Common Stock purchasable hereunder, that a new Warrant for the balance remaining of the shares of Common Stock purchasable under this Warrant be registered in the name of, and delivered to, the undersigned at the address stated above. Dated: Signature____________________________ Note: The signature on this Subscription Form must correspond with the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatever. 10 EX-10 6 e10-4_securityagreement.txt SECURITY AGREEMENT - JUNE 6, 2001 EXHIBIT 10.4 SECURITY AGREEMENT - PARENT AGREEMENT made as of this 6th day of June, 2001, by Select Comfort Corporation, a Minnesota corporation (hereinafter called "Debtor"), in favor of St. Paul Venture Capital VI, LLC, a Delaware limited liability company, as agent for the holders of the Notes referred to below (the "Secured Party"). In order to secure the payment of the principal of and interest on the Senior Secured Convertible Notes of Debtor payable to the Purchasers named in Schedule 1 of the Note Purchase Agreement referred to below, as such Schedule 1 is amended or deemed amended from time to time in accordance with the terms of the Note Purchase Agreement (the "Purchasers"), or registered assigns, in the aggregate original principal amount of up to $12,000,000 (which notes, together with any notes issued in substitution or exchange therefor, are herein collectively called the "Notes"), issued pursuant to the terms of that certain Note Purchase Agreement dated the date hereof among Debtor and the Purchasers (as amended, modified or supplemented from time to time, the "Note Purchase Agreement"), and to secure the payment and performance of each and every other debt, liability and obligation of every type and description which Debtor or any of its Subsidiaries (as defined in the Note Purchase Agreement) may now or at any time hereafter owe to the holders of the Notes, or any of them, under this Agreement, the Note Purchase Agreement or any of the other Transaction Documents (as defined in the Note Purchase Agreement), whether such debt, liability or obligation now exists or is hereafter created or incurred and whether such debt, liability or obligation is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several (the principal of and interest on the Notes, together with all such other debts, liabilities and obligations, being herein collectively called the "Obligations"), the parties hereto hereby agree as follows: 1. SECURITY INTEREST AND COLLATERAL. In order to secure the payment and performance of the Obligations, Debtor hereby grants Secured Party a Security Interest (herein called the "Security Interest") in the following property (herein called the "Collateral"): (a) INVENTORY AND SUPPLIES: All inventory and supplies of Debtor, whether now owned or hereafter acquired and wherever located; (b) EQUIPMENT: All equipment of Debtor, whether now owned or hereafter acquired and wherever located, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and record keeping equipment, parts and tools; (c) ACCOUNTS, CONTRACT RIGHTS AND OTHER RIGHTS TO PAYMENT: Each and every right of Debtor to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property by Debtor, out of a rendering of services by Debtor, out of a loan by Debtor, out of an overpayment of taxes or other liabilities of Debtor, or otherwise arises under any contract or agreement, whether such right to payment is or is not already earned by performance, and howsoever such right may be evidenced, together with all other rights and interests (including all liens and security interests) which Debtor may at any time have by law or agreement against any account debtor or other obligor obligated to make any of the aforementioned payments or against any of the property of such account debtor or other obligor; all including but not limited to all present and future instruments, chattel papers, accounts, contract rights, loans, obligations receivable and tax refunds of Debtor; (d) INVESTMENT PROPERTY: All investment property of Debtor, whether now owned or hereafter acquired, including but not limited to all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund shares, money market shares and U.S. government securities; and (e) GENERAL INTANGIBLES: All general intangibles of Debtor, whether now owned or hereafter acquired, including but not limited to all applications for patents, patents, copyrights, copyright rights, trademarks, trade secrets, goodwill, trade names, customers lists, permits and franchises, and the right to use Debtor's name; together with all substitutions and replacements for any of the foregoing property and all products and proceeds of any and all of the foregoing property and, in the case of all tangible Collateral, together with (i) all accessories, attachments, parts, equipment, accessions and repairs now or hereafter attached or affixed to or used in connection with any such Collateral, and (ii) all warehouse receipts, bills of lading and other documents of title now or hereafter covering any such Collateral. 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and agrees that: (a) Debtor is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, and this Agreement has been duly and validly authorized by all necessary corporate action on the part of Debtor. -2- (b) The Collateral will be used primarily for business purposes. (c) Debtor's chief place of business is located at the address shown on Appendix A. Debtor's records concerning its accounts and contract rights are kept at such address. Debtor's federal employer identification number is correctly set forth on Appendix A. (d) Debtor will not change its name or its chief place of business without at least 30 days' prior written notice to the Secured Party. 3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor further represents, warrants and agrees that: (a) Debtor has (or will have at the time Debtor acquires rights in Collateral hereafter arising) and will maintain absolute title to each item of Collateral free and clear of all security interests, liens and encumbrances, except the Security Interest and Permitted Liens (as defined in the Note Purchase Agreement). Debtor will defend the Collateral against all claims or demands of all persons other than Secured Party and any holders of Permitted Liens. From and after the date of this Agreement, Debtor will not sell, encumber or otherwise dispose of the Collateral or any interest therein, except as permitted under the Note Purchase Agreement. (b) As of the date of this Agreement, the tangible Collateral is located only in the states set forth on Appendix A. Without the consent of Secured Party, Debtor will not permit any tangible Collateral to be located in any state (and, if a county filing is required, in any county) in which a financing statement covering such Collateral is required to be, but has not in fact been, filed. (c) Debtor will not, except in the ordinary course of business and so long as no Event of Default under Section 6 shall have occurred and be continuing, agree to any modification, amendment or cancellation of any right to payment or any instrument, document, chattel paper or other agreement constituting or evidencing Collateral without the prior written consent of the Secured Party, and will not subordinate any such right of payment to claims of other creditors of the account debtor or other obligor obligated with respect thereto. (d) Debtor will (i) keep all tangible Collateral in good repair, working order and condition, normal depreciation excepted, and will, from time to time, replace any worn, broken or defective parts thereof; (ii) promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral (unless the amount, applicability or validity thereof is being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and adequate reserves have been established therefor in accordance with generally accepted accounting principles) or upon or against the creation, -3- perfection or continuance of the Security Interest; (iii) keep all Collateral free and clear of all security interests, liens and encumbrances except the Security Interest and Permitted Liens; (iv) keep accurate and complete records pertaining to the Collateral and pertaining to Debtor's business and financial condition and submit to Secured Party such periodic reports concerning the Collateral and Debtor's business and financial condition as Secured Party may from time to time reasonably request; (v) promptly notify Secured Party of any loss of or material damage to any material Collateral or of any material adverse change, known to Debtor, in the prospect of payment of any material sums due on or under any instrument, chattel paper, account or contract right constituting Collateral; (vi) if Secured Party at any time so requests (whether the request is made before or after the occurrence of any Event of Default under Section 6), promptly deliver to Secured Party any instrument, document or chattel paper constituting Collateral, duly endorsed or assigned by Debtor to Secured Party; (vii) at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft and such other risks and in such amounts as the Secured Party may reasonably request, with any loss payable to Secured Party to the extent of its interests; (viii) from time to time execute such financing statements or other documents or instruments as Secured Party may reasonably deem required to be filed in order to perfect the Security Interest, and, if any Collateral consists of motor vehicles, execute such documents as may be required to have the Security Interest properly noted on the certificate of title, and, if any Collateral consists of investment property, execute such control agreements, and take such commercially reasonable measures to cause any applicable securities issuer or intermediary with respect to such investment property to execute such control agreements, as Secured Party may reasonably require to obtain control over such investment property or, in the absence of such control agreements, transfer such investment property to the Secured Party; (ix) pay when due or reimburse Secured Party on demand for all costs of collection of any of the Obligations and all other expenses (including in each case all reasonable attorneys' fees and disbursements) incurred by Secured Party in connection with the creation, perfection, satisfaction or enforcement of the Security Interest or the execution, creation, continuance or enforcement of this Agreement or any or all of the Obligations; (x) execute, deliver or endorse any and all instruments, documents, assignments, security agreements and other agreements and writings which Secured Party may at any time reasonably request in order to secure, protect, perfect or enforce the Security Interest and Secured Party's rights under this Agreement; and (xi) protect, defend and maintain all patents, copyrights, copyright rights, trademarks, trade secrets, trade names and similar intangibles constituting Collateral to the extent reasonably advisable for Debtor's business. If Debtor at any time fails to perform or observe any agreement contained in this Section 3(d), and if such failure shall continue for a period of ten calendar days after Secured Party gives Debtor written notice thereof (or, in the case of the agreements contained in clauses (vii) and (viii) of this Section 3(d), immediately upon the occurrence of -4- such failure, without notice or lapse of time), Secured Party may (but need not) perform or observe such agreement on behalf and in the name, place and stead of Debtor (or, at Secured Party's option, in Secured Party's own name) and may (but need not) take any and all other actions which Secured Party may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations under contracts or agreements with account debtors or other obligors, the procurement and maintenance of insurance, the execution of financing statements, the execution or endorsement of other instruments and the procurement of repairs, transportation or insurance); and, except to the extent that the effect of such payment would be to render any loan or forebearance of money usurious or otherwise illegal under any applicable law, Debtor shall thereupon pay to the Secured Party on demand, the amount of all moneys expended and all costs and expenses (including reasonable attorney's fees and disbursements) incurred by Secured Party in connection with or as a result of its performing or observing such agreements or taking such actions, together with interest thereon from the date expended or incurred by Secured Party at the highest rate then applicable to any of the Obligations or the highest rate permitted by law, whichever is less. To facilitate the performance or observance by Secured Party of such agreements of Debtor, Debtor hereby irrevocably appoints (which appointment is coupled with an interest) Secured Party, or its delegate, as the attorney-in-fact of Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of Debtor, any and all instruments, documents, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by Debtor under this Section 3 to the extent Secured Party has the right to perform or observe such agreements as provided in this Section 3. 4. COLLECTION RIGHTS OF SECURED PARTY. Whether or not Secured Party exercises its rights under Section 7 of this Agreement, Secured Party may at any time after the occurrence and during the continuance of an Event of Default under Section 6, notify any account debtor, or any other person obligated to pay any amount due on or in respect of any Collateral that such right to payment has been assigned or transferred to Secured Party for security and shall be paid directly to Secured Party, subject to the prior rights, if any, of holders of Permitted Liens. If the Secured Party so requests at any time after the occurrence and during the continuance of an Event of Default, Debtor will so notify such account debtors and other obligors in writing and will indicate on all invoices to such account debtors or other obligors that the amount due therefrom is payable directly to Secured Party, if the obligations of such holders of Permitted Liens, if any, have been satisfied. At any time after Secured Party or Debtor gives such notice to an account debtor or other obligor, Secured Party may (but need not), in its own name or in Debtor's name, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment of any such account debtor or other obligor. -5- 5. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as additional security for the payment of the Obligations, any and all moneys (including but not limited to proceeds of insurance and refunds of unearned premiums) due or to become due under, and all rights of Debtor under or with respect to, any and all policies of insurance covering the Collateral, and Debtor hereby directs the issuer of any such policy to pay any such moneys directly to Secured Party. Both before (in the case of any claim in excess of $100,000) and after (in the case of any claim, regardless of amount) the occurrence of an Event of Default, Secured Party may (but need not) in its own name or in Debtor's name, execute and deliver proofs of claim, receive all such moneys, endorse checks and other instruments representing payment of such moneys, and adjust, litigate, compromise or release any claim against the issuer of any such policy. In the event that any tangible Collateral with an aggregate replacement cost of not more than $150,000 is damaged by an insured casualty, and no Event of Default under Section 6 shall have occurred and be continuing, the insurance proceeds shall be applied to the repair and restoration of such property in such manner and on such conditions as the Secured Party may reasonably require. 6. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an Event of Default: (a) default shall be made in the performance or observance of any of the terms, covenants or conditions of this Agreement and such default shall continue for a period of 15 days after written notice thereof shall have been given by Secured Party to Debtor; or (b) any representation or warranty contained in this Agreement proves to be false in any material respect as of the time this Agreement was made; or (c) any holder of a Permitted Lien seeks to enforce its lien against any portion of the Collateral; or (d) there shall occur any other Event of Default under and as defined in the Note Purchase Agreement. 7. REMEDIES AFTER EVENT OF DEFAULT. Upon the occurrence of an Event of Default under Section 6 and at any time during the continuance thereof, Secured Party may, at its option, exercise any one or more of the following rights or remedies: (a) exercise and enforce any or all rights and remedies available after default to a secured party under the Uniform Commercial Code, including but not limited to the right to take possession of any Collateral, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which Debtor hereby expressly waives); the right to sell, lease or otherwise dispose of any or all of the Collateral; and the right to require Debtor to assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties; it being expressly understood and agreed that if notice to Debtor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 8) at least ten calendar days prior to the date of intended disposition or other action; and (b) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against the Collateral, against Debtor or against any other person or property. Debtor hereby grants Secured Party a non-exclusive, worldwide and royalty free license to use or otherwise exploit all patents, copyrights, copyright rights, trademarks, trade secrets, trade names and similar intangibles that Secured Party deems necessary or appropriate to the disposition of any Collateral. -6- 8. MISCELLANEOUS. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, Debtor is entitled to any surplus and shall remain liable for any deficiency. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Secured Party. A waiver signed by Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor under this Agreement shall be in writing and shall be given in the manner and with the effect provided in the Note Purchase Agreement. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if Secured Party exercises reasonable care in physically safekeeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to preserve any rights Debtor may have against prior parties, to realize on the Collateral at all or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective successors and assigns (including without limitation any successor Collateral Agent under and as defined in the Note Purchase Agreement), and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of Secured Party's acceptance thereof. Except to the extent otherwise required by law, this Agreement shall be governed by the internal laws of the State of Minnesota and, unless the context otherwise requires, all terms used herein which are defined in any of Articles 1, 8 and 9 of the Uniform Commercial Code, as in effect in said state (including but not limited to the terms "inventory", "equipment", "instrument", "document of title", "chattel paper", "account", "contract right", "account debtor", "general intangible", "investment property", "security", "security entitlement", "securities account", "commodity contract" and "commodity account"), shall have the meanings therein stated. The Secured Party may execute this Agreement if appropriate for the purpose of filing, but the failure of the Secured Party to execute this Agreement shall not affect or impair the validity or effectiveness of this Agreement. A carbon, photographic or other reproduction of this Agreement or of any financing statement signed by the Debtor shall have the same force and effect as the original for all purposes of a financing statement. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. 9. OTHER PERSONAL PROPERTY. Unless at the time Secured Party takes possession of any tangible Collateral, or within seven days thereafter, Debtor gives written notice to Secured -7- Party of the existence of any goods, papers or other property of Debtor, not affixed to or constituting a part of such Collateral, but which are located or found upon or within such Collateral, describing such property, Secured Party shall not be responsible or liable to Debtor for any action taken or omitted by or on behalf of Secured Party with respect to such property without actual knowledge of the existence of any such property or without actual knowledge that it was located or to be found upon or within such Collateral. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SELECT COMFORT CORPORATION By: /s/ MARK A. KIMBALL ---------------------------------------- Name: MARK A. KIMBALL ---------------------------------- Title: SENIOR VICE PRESIDENT ---------------------------------- -8- APPENDIX A Appendix to Security Agreement Debtor's Chief Place of Business: 6105 Trenton Lane North Suite 100 Minneapolis, Minnesota 55442 Debtor's Federal Employer Identification Number: 41-1597886 States in Which Tangible Collateral is Located: Minnesota Utah EX-10 7 e10-5_pledgeagreement.txt PLEDGE AGREEMENT - JUNE 6, 2001 EXHIBIT 10.5 PLEDGE AGREEMENT This Agreement is made as of the 6th day of June, 2001 by Select Comfort Corporation, a Minnesota corporation (the "Debtor"), in favor of St. Paul Venture Capital VI, LLC, a Delaware limited liability company, as agent for the holders of the Notes referred to below (the "Secured Party"). WHEREAS, the Debtor and the Purchasers named in Schedule 1 to the Note Purchase Agreement referred to below, as such Schedule 1 is amended or deemed amended from time to time in accordance with the terms of the Note Purchase Agreement (the "Purchasers"), have entered into a Note Purchase Agreement dated the date hereof (as amended, modified or supplemented from time to time, the "Note Purchase Agreement") pursuant to which the Purchasers have purchased or will purchase from the Debtor those certain Senior Secured Convertible Notes of the Debtor payable to the Purchasers, or their registered assigns, in the aggregate original principal amount of up to $12,000,000 (together with any note or notes issued in exchange or substitution therefor, collectively, the "Notes"). WHEREAS, pursuant to the terms of the Note Purchase Agreement, the Debtor is required to pledge to the Secured Party, as security for the Notes, all of the capital stock of each Subsidiary (as defined in the Note Purchase Agreement) by executing and delivering to the Secured Party this Agreement. ACCORDINGLY, in consideration of the mutual covenants contained in the Note Purchase Agreement and herein, the parties hereby agree as follows: 1. DEFINITIONS. All terms defined in the Note Purchase Agreement that are not otherwise defined herein shall have the meanings given them in the Note Purchase Agreement. In addition, the following terms have the meanings set forth below: "Collateral" means the Stock, all dividends and other rights to payment on account of the Stock, whether such payments represent profits, capital gains, returns of contributed capital, or otherwise, and all other money and property distributed to the Debtor from a Subsidiary, however characterized, together with all proceeds thereof. "Event of Default" has the meaning specified in Section 5. "Obligations" means (i) the principal of and interest on the Notes, and (ii) each and every other debt, liability and obligation of every type and description which the Debtor may now or at any time hereafter owe to the holders of the Notes, or any of them, under this Agreement, the Note Purchase Agreement or any of the other Transaction Documents, whether such debt, liability or obligation now exists or is hereafter created or incurred and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several. "Security Interest" has the meaning specified in Section 2. "Specified Shares" means the shares of capital stock identified in Exhibit A hereto, said shares being presently evidenced by the certificates listed therein. "Stock" means any share of capital stock of any Subsidiary now or hereafter owned by the Debtor, including but not limited to the Specified Shares, together with all stock or other securities issued in exchange or substitution therefor or otherwise in respect thereof. 2. SECURITY INTEREST. The Debtor hereby grants the Secured Party a security interest (the "Security Interest") in the Collateral to secure payment of the Obligations. 3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Debtor hereby represents, warrants and agrees as follows: (a) TITLE. The Debtor (i) has absolute title to each item of Collateral in existence on the date hereof, including but not limited to the Specified Shares, free and clear of all security interests, liens and encumbrances, except the Security Interest and Permitted Liens, (ii) will have, at the time the Debtor acquires any rights in Collateral hereafter arising, absolute title to each such item of Collateral free and clear of all security interests, liens and encumbrances, except the Security Interest and Permitted Liens, (iii) will keep all Collateral free and clear of all security interests, liens and encumbrances, except the Security Interest and Permitted Liens, and (iv) will defend the Collateral against all claims or demands of all persons other than the Secured Party and any holders of Permitted Liens. The Debtor will not sell or otherwise dispose of the Collateral or any interest therein, except as otherwise permitted by the Note Purchase Agreement, without the prior written consent of the Secured Party. (b) CHIEF EXECUTIVE OFFICE; IDENTIFICATION NUMBER. The Debtor's chief executive office is located at the address set forth on Exhibit A hereto. The Debtor's federal employer identification number is correctly set forth on Exhibit A hereto. (c) CHANGES IN NAME OR LOCATION. The Debtor will not change its name or the location of its chief place of business without at least 30 days' prior written notice to the Secured Party. (d) STOCK. The Specified Shares are duly authorized, validly issued and outstanding, fully paid and nonassessable. The Specified Shares constitute all of the issued and outstanding shares of capital stock of each of the Subsidiaries. There are no outstanding options, warrants or other rights to acquire capital stock of any -2- Subsidiary or securities convertible into capital stock of any Subsidiary. The Debtor agrees that it will not permit any Subsidiary to issue any of its capital stock to any person other than the Debtor or to issue any options, warrants or other rights to acquire its capital stock or securities convertible into its capital stock. (e) MISCELLANEOUS COVENANTS. The Debtor will: (i) promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral (unless the amount, applicability or validity thereof is being contested in good faith by appropriate proceedings promptly initiated and diligently conducted and adequate reserves have been established therefor in accordance with generally accepted accounting principles) or upon or against the creation, perfection or continuance of the Security Interest; (ii) promptly deliver to the Secured Party any certificate or instrument constituting or evidencing Collateral, duly endorsed or assigned in blank by the Debtor; (iii)from time to time execute such financing statements as the Secured Party may reasonably require in order to perfect the Security Interest and, if Collateral consists of investment property not constituting certified securities, execute any control agreements, and take such commercially reasonable measures to cause any applicable securities issuer or intermediary to execute such control agreements, as the Secured Party may reasonably require to obtain control over such investment property (or, in the absence of such control agreements, transfer such investment property to the Secured Party); (iv) pay when due or reimburse the Secured Party on demand for all costs of collection of any of the Obligations and all other expenses (including in each case all reasonable attorneys' fees and disbursements) incurred by the Secured Party in connection with the creation, perfection, satisfaction, protection, defense or enforcement of the Security Interest or the creation, continuance, protection, defense or enforcement of this Agreement or any or all of the Obligations; and (v) execute, deliver or endorse any and all instruments, documents, assignments, security agreements, proxies and other agreements and writings which the Secured Party may at any time reasonably request in order to secure, protect, perfect or enforce the Security Interest and the Secured Party's rights under this Agreement (including without limitation all voting and other rights with respect to the Collateral that the Secured Party may be entitled to exercise under clause (b) of Section 6). -3- (f) SECURED PARTY'S RIGHT TO TAKE ACTION. If the Debtor at any time fails to perform or observe any agreement contained in Section 3(a) or 3(e), and if such failure continues for a period of ten calendar days after Secured Party gives the Debtor written notice thereof (or, in the case of the agreements contained in clause (iii) of Section 3(e), immediately upon the occurrence of such failure, without notice or lapse of time), Secured Party may (but need not) perform or observe such agreement on behalf and in the name, place and stead of the Debtor (or, at Secured Party's option, in Secured Party's own name) and may (but need not) take any and all other actions which Secured Party may reasonably deem necessary to cure or correct such failure (including without limitation the payment of taxes, the satisfaction of security interests, liens, or encumbrances, the execution of financing statements and the execution or endorsement of instruments); and, except to the extent that the effect of such payment would be to render any loan or forbearance of money usurious or otherwise illegal under any applicable law, the Debtor shall thereupon pay the Secured Party on demand the amount of all moneys expended and all costs and expenses (including reasonable attorneys' fees and disbursements) incurred by Secured Party in connection with or as a result of its performing or observing such agreements or taking such actions, together with interest thereon from the date expended or incurred by Secured Party at the highest rate then applicable to any of the Obligations or the highest rate permitted by law, whichever is less. To facilitate the performance or observance by the Secured Party of the agreements of the Debtor contained in this Section 3 or in Section 4, the Debtor hereby irrevocably appoints (which appointment is coupled with an interest) Secured Party, or its delegate, as the attorney-in-fact of the Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of the Debtor, any and all instruments, documents, financing statements, and other agreements and writings required to be obtained, executed, delivered or endorsed by the Debtor under this Section 3 or under Section 4 to the extent Secured Party has the right to perform or observe such agreements as provided in this Section 3 or in Section 4. 4. RIGHTS OF SECURED PARTY. At any time after the occurrence and during the continuance of an Event of Default, the Secured Party may (a) notify the issuer of any Stock to make payments and other distributions thereon directly to the Secured Party, (b) receive all proceeds of the Stock, and (c) hold any increase or profits received from the Stock as additional security for the Obligations (except that any money received from the Collateral may, at the option of the Secured Party, be applied to reduction of the Obligations in such order of application as the Secured Party may determine or be remitted to the Debtor). The Debtor hereby irrevocably authorizes and directs each issuer of any Stock to remit any and all money, distributions and other property described in this Section 4 directly to the Secured Party in the Secured Party's name alone. Such remittances shall continue to be made to the Secured Party until the Secured Party otherwise notifies the applicable issuer in writing. To the extent that such remittances are made directly to the Secured Party, the remitting issuer shall have no further liability to the Debtor for the same. -4- 5. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an event of default under this Agreement (herein called an "Event of Default"): (a) default shall be made in the performance or observance of any of the terms, covenants or conditions of this Agreement and such default shall continue for a period of 15 days after written notice thereof shall have been given by Secured Party to the Debtor; or (b) any representation or warranty contained in this Agreement proves to be false in any material respect as of the time this Agreement was made; or (c) there shall occur any other Event of Default under and as defined in the Note Purchase Agreement. 6. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default and at any time during the continuance thereof, the Secured Party may, at its option, exercise any one or more of the following rights and remedies: (a) exercise all voting and other rights with respect to the Collateral; (b) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including but not limited to the right to take possession of any Collateral, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Debtor hereby expressly waives), and the right to sell, lease or otherwise dispose of any or all of the Collateral, and if notice to the Debtor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 8) at least ten calendar days prior to the date of intended disposition or other action; and (c) exercise or enforce any or all other rights or remedies available to the Secured Party by law or agreement against the Collateral, against the Debtor or against any other person or property. 7. WAIVER OF CERTAIN CLAIMS. The Debtor acknowledges that because of present or future circumstances, a question may arise under the Securities Act with respect to any disposition of the Collateral permitted hereunder. The Debtor understands that compliance with the Securities Act may very strictly limit the course of conduct of the Secured Party if the Secured Party was to attempt to dispose of all or any portion of the Collateral and may also limit the extent to which or the manner in which any subsequent transferee of the Collateral or any portion thereof may dispose of the same. There may be other legal restrictions or limitations affecting the Secured Party in any attempt to dispose of all or any portion of the Collateral under applicable Blue Sky or other securities laws or similar laws analogous in purpose or effect. The Secured Party may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such Collateral for their own account for investment only and not to engage in a distribution or resale thereof in violation of the Securities Act. The Debtor agrees that the Secured Party shall not incur any liability, and any liability of the Debtor for any deficiency shall not be impaired, as a result of the sale of the Collateral or any portion thereof at any such private sale in a manner that is commercially reasonable. The Debtor hereby waives any claims against the Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Secured Party shall accept the first offer received and does not offer any portion of the Collateral to more than one possible purchaser. The Debtor further agrees -5- that the Secured Party has no obligation to delay sale of any Collateral for the period of time necessary to permit the issuer of such Collateral to qualify or register such Collateral for public sale under the Securities Act and applicable Blue Sky laws, even if said issuer would agree to do so. Without limiting the generality of the foregoing, the provisions of this Section 7 would apply if, for example, the Secured Party was to place all or any portion of the Collateral for private placement by an investment banking firm, or if such investment banking firm purchased all or any portion of the Collateral for its own account, or if the Secured Party placed all or any portion of the Collateral privately with a purchaser or purchasers. 8. NOTICE. All notices and other communications hereunder shall be in writing and shall be given in the manner and with the effect provided in the Note Purchase Agreement. 9. MISCELLANEOUS. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Debtor is entitled to any surplus and shall remain liable for any deficiency. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Secured Party. A waiver signed by the Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of the Secured Party's rights or remedies. All rights and remedies of the Secured Party shall be cumulative and may be exercised singularly or concurrently, at the Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. The Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if the Secured Party exercises reasonable care in physically safekeeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Secured Party need not otherwise preserve, protect, insure or care for any Collateral. The Secured Party shall not be obligated to preserve any rights the Debtor may have against prior parties, to exercise at all or in any particular manner any voting or other rights which may be available with respect to any Collateral, to realize on the Collateral at all or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. This Agreement shall be binding upon and inure to the benefit of the Debtor and the Secured Party and their respective successors and assigns (including without limitation any successor Collateral Agent under and as defined in the Note Purchase Agreement) and shall take effect when signed by the Debtor and delivered to the Secured Party, and the Debtor waives notice of the Secured Party's acceptance hereof. Except to the extent otherwise required by law, this Agreement shall be governed by the internal law of the State of Minnesota and, unless the context otherwise requires, all terms used herein which are defined in Articles 1, 8 or 9 of the Uniform Commercial Code, as in effect in said state, shall have the meanings therein stated. The Secured Party may execute this Agreement if appropriate for the purpose of filing, but the failure of the Secured Party to execute this Agreement shall not affect or impair the validity or effectiveness of this Agreement. A carbon, photographic or other reproduction of -6- this Agreement or of any financing statement signed by the Debtor shall have the same force and effect as the original for all purposes of a financing statement. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. IN WITNESS WHEREOF, the Debtor has executed this Agreement as of the date and year first above written. SELECT COMFORT CORPORATION By: /s/ MARK A. KIMBALL ---------------------------------------- Name: Mark A. Kimball Title: Senior Vice President -7- EXHIBIT A SPECIFIED SHARES: CORPORATION NUMBER OF SHARES CERTIFICATE NUMBER Select Comfort Retail Corporation 100,000 2 Select Comfort Direct Corporation 100,000 1 Select Comfort SC Corporation 1,000 1 Direct Call Centers, Inc. 1,000 1 selectcomfort.com corporation 1,000 1 DEBTOR'S CHIEF PLACE OF BUSINESS: 6105 Trenton Lane North Suite 100 Minneapolis, Minnesota 55442 DEBTOR'S FEDERAL EMPLOYER IDENTIFICATION NUMBER: 41-1597886 EX-10 8 e10-6_patentandtrademark.txt PATENT/TRADEMARK SECURITY AGREEMENT - JUNE 6, 2001 EXHIBIT 10.6 PATENT AND TRADEMARK SECURITY AGREEMENT - PARENT AGREEMENT made as of this 6th day of June, 2001, by Select Comfort Corporation, a Minnesota corporation (hereinafter called "Debtor"), in favor of St. Paul Venture Capital VI, LLC, a Delaware limited liability company, as collateral agent for the holders of the Notes referred to below (the "Secured Party"). In order to secure the payment of the principal of and interest on the Senior Secured Convertible Notes of Debtor payable to the Purchasers named in Schedule 1 of the Note Purchase Agreement referred to below, as such Schedule 1 is amended or deemed amended from time to time in accordance with the terms of the Note Purchase Agreement (the "Purchasers"), or registered assigns, in the aggregate original principal amount of up to $12,000,000 (which notes, together with any notes issued in substitution or exchange therefor, are herein collectively called the "Notes"), issued pursuant to the terms of that certain Note Purchase Agreement dated the date hereof among Debtor and the Purchasers (as amended, modified or supplemented from time to time, the "Note Purchase Agreement"), and to secure the payment and performance of each and every other debt, liability and obligation of every type and description which Debtor or any of its Subsidiaries (as defined in the Note Purchase Agreement) may now or at any time hereafter owe to the holders of the Notes, or any of them, under this Agreement, that certain Security Agreement-Parent dated as of the date hereof by Debtor in favor of the Secured Party (the "Security Agreement"), the Note Purchase Agreement or any of the other Transaction Documents (as defined in the Note Purchase Agreement), whether such debt, liability or obligation now exists or is hereafter created or incurred and whether such debt, liability or obligation is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several (the principal of and interest on the Notes, together with all such other debts, liabilities and obligations, being herein collectively called the "Obligations"), the Debtor has granted the Secured Party a security interest in substantially all of its personal property (including without limitation all of its general intangibles) pursuant to the Security Agreement; As a further condition to entering into the Note Purchase Agreement and the Security Agreement, the Secured Party has required the execution and delivery of this Agreement by the Debtor. ACCORDINGLY, in consideration of the mutual covenants contained in the Note Purchase Agreement, the Security Agreement and herein, the parties hereby agree as follows: 1. DEFINITIONS. All terms defined in the recitals hereto, in the Security Agreement or in Note Purchase Agreement that are not otherwise defined herein shall have the meanings given to them therein. In addition, the following terms have the meanings set forth below: "Patents" means all of the Debtor's right, title and interest in and to: (i) patents or applications for patents, (ii) licenses, fees or royalties with respect to each, (iii) the right to sue for past, present and future infringement and damages therefor, (iv) and licenses thereunder, all as presently existing or hereafter arising or acquired, including without limitation the patents listed on Exhibit A. "Trademarks" means all of the Debtor's right, title and interest in and to: (i) trademarks, service marks, collective membership marks, registrations and applications for registration for each, and the respective goodwill associated with each, (ii) licenses, fees or royalties with respect to each, (iii) the right to sue for past, present and future infringement, dilution and damages therefor, (iv) and licenses thereunder, all as presently existing or hereafter arising or acquired, including, without limitation, the marks listed on Exhibit B. 2. GRANT OF SECURITY INTEREST. The Debtor hereby irrevocably pledges and assigns to, and grants the Secured Party a security interest (the "Security Interest") in, with power of sale to the extent permitted by law, the Patents and the Trademarks to secure payment and performance of the Obligations. As is set forth in greater detail in the Security Agreement, the Security Interest in the Trademarks is coupled with a security interest in substantially all of the assets (other than real property) of the Debtor. 3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Debtor represents, warrants and agrees that: (a) EXISTENCE; AUTHORITY. Debtor is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, and this Agreement has been duly and validly authorized by all necessary corporate action on the part of Debtor. (b) PATENTS. Exhibit A accurately lists all Patents owned or controlled by the Debtor as of the date hereof, or to which the Debtor has a right as of the date hereof to have assigned to it, and accurately reflects the existence and status of applications and letters patent pertaining to the Patents as of the date hereof. If after the date hereof the Debtor owns, controls or has a right to have assigned to it any Patents not listed on Exhibit A, or if Exhibit A ceases to accurately reflect the existence and status of applications and letters patent pertaining to the Patents, then the Debtor shall within 60 days provide written notice to the Secured Party with a replacement Exhibit A, which upon acceptance by the Secured Party shall become part of this Agreement. (c) TRADEMARKS. Exhibit B accurately lists all Trademarks owned or controlled by the Debtor as of the date hereof and accurately reflects the existence and status of Trademarks and all applications and registrations pertaining thereto as of the date hereof; provided, however, that Exhibit B need not list common law marks (i.e., Trademarks for which there are no applications or registrations) which are not -2- material to the Debtor's or Subsidiaries' business(es). If after the date hereof the Debtor owns or controls any Trademarks not listed on Exhibit B (other than common law marks which are not material to the Debtor's or Subsidiaries' business(es)), or if Exhibit B ceases to accurately reflect the existence and status of applications and registrations pertaining to the Trademarks, then the Debtor shall promptly provide written notice to the Secured Party with a replacement Exhibit B, which upon acceptance by the Secured Party shall become part of this Agreement. (d) SUBSIDIARIES. As of the date hereof, no Subsidiary owns, controls, or has a right to have assigned to it any items that would, if such item were owned by the Debtor, constitute Patents or Trademarks. If after the date hereof any Subsidiary owns, controls, or has a right to have assigned to it any such items, then the Debtor shall promptly either: (i) cause such Subsidiary to assign all of its rights in such item(s) to the Debtor; or (ii) notify the Secured Party of such item(s) and cause such Subsidiary to execute and deliver to the Secured Party a patent and trademark security agreement substantially in the form of this Agreement. (e) TITLE. To the best of the Debtor's knowledge, the Debtor has absolute title to each Patent and each Trademark listed on Exhibits A and B, free and clear of all security interests, liens and encumbrances, except the Security Interest and Permitted Liens (as defined in the Note Purchase Agreement) and except as initially disclosed on the relevant exhibit (i.e., replacement exhibits may include exceptions only for newly acquired Patents and Trademarks, not for Patents and Trademarks which were listed on a prior version of the exhibits). The Debtor: (i) will have, at the time the Debtor acquires any rights in Patents or Trademarks hereafter arising, absolute title to each such Patent or Trademark free and clear of all security interests, liens and encumbrances, except the Security Interest and Permitted Liens, and (ii) will keep all Patents and Trademarks free and clear of all security interests, liens and encumbrances, except the Security Interest and Permitted Liens. (f) NO SALE. The Debtor will not sell, encumber or otherwise dispose of the Patents or Trademarks, or any interest therein, without the prior written consent of the Secured Party. (g) DEFENSE. The Debtor will at its own expense, and using its commercially reasonable efforts, protect and defend the Patents and Trademarks against all claims or demands of all persons other than the Secured Party and any holders of Permitted Liens. (h) MAINTENANCE. The Debtor will at its own expense maintain the Patents and the Trademarks to the extent reasonably advisable in its business including, but not limited to, filing all applications to obtain letters patent or trademark registrations and all affidavits, maintenance fees, annuities, and renewals possible with respect to letters patent, trademark registrations and applications therefor. The Debtor covenants that it will not abandon nor fail to pay any maintenance fee or annuity due -3- and payable on any Patent or Trademark, nor fail to file any required affidavit or renewal in support thereof, without first providing the Secured Party: (i) sufficient written notice, of at least 30 days, to allow the Secured Party to timely pay any such maintenance fees or annuities which may become due on any of said Patents or Trademarks, or to file any affidavit or renewal with respect thereto, and (ii) a separate written power of attorney or other authorization to pay such maintenance fees or annuities, or to file such affidavit or renewal, should such be necessary or desirable. (i) SECURED PARTY'S RIGHT TO TAKE ACTION. If the Debtor fails to perform or observe any of its covenants or agreements set forth in this Section 3, and if such failure continues for a period of 10 days after the Secured Party gives the Debtor written notice thereof (or, in the case of the agreements contained in subsection (h), immediately upon the occurrence of such failure, without notice or lapse of time), or if the Debtor notifies the Secured Party that it intends to abandon a Patent or Trademark, the Secured Party may (but need not) perform or observe such covenant or agreement or take steps to prevent said intended abandonment on behalf and in the name, place and stead of the Debtor (or, at the Secured Party's option, in the Secured Party's own name) and may (but need not) take any and all other actions which the Secured Party may reasonably deem necessary to cure or correct such failure or prevent said intended abandonment. (j) COSTS AND EXPENSES. Except to the extent that the effect of such payment would be to render any loan or forbearance of money usurious or otherwise illegal under any applicable law, the Debtor shall pay the Secured Party on demand the amount of all moneys expended and all costs and expenses (including reasonable attorneys' fees and disbursements) incurred by the Secured Party in connection with or as a result of the Secured Party's taking action under subsection (i) or exercising its rights under Section 6, together with interest thereon from the date expended or incurred by the Secured Party at the highest rate then applicable to any of the Obligations. (k) POWER OF ATTORNEY. To facilitate the Secured Party's taking action under subsection (i) and exercising its rights under Section 6, the Debtor hereby irrevocably appoints (which appointment is coupled with an interest) the Secured Party, or its delegate, as the attorney-in-fact of the Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of the Debtor, any and all instruments, documents, applications, and other agreements and writings required to be obtained, executed, delivered or endorsed by the Debtor under this Section 3, or necessary for the Secured Party, after the occurrence and during the continuance of an Event of Default, to enforce or use the Patents or Trademarks or to grant or issue any exclusive or non-exclusive license under the Patents or Trademarks to any third party, or to sell, assign, transfer, pledge, encumber or otherwise transfer title in or dispose of the Patents or Trademarks to any third party. The Debtor hereby ratifies all that such attorney shall lawfully do or cause -4- to be done by virtue hereof. The power of attorney granted herein shall terminate upon final and indefeasible payment and performance of all Obligations. 4. DEBTOR'S USE OF THE PATENTS AND TRADEMARKS. The Debtor shall be permitted to control and manage the Patents and Trademarks, including the right to exclude others from making, using or selling items covered by the Patents and Trademarks and any licenses thereunder, in the same manner and with the same effect as if this Agreement had not been entered into, so long as no Event of Default occurs and remains uncured. 5. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"): (a) an Event of Default, as defined in the Note Purchase Agreement or the Security Agreement, shall occur; (b) the Debtor shall fail promptly to observe or perform any covenant or agreement herein binding on it and such failure shall continue for a period of 15 days after written notice thereof shall have been given by the Secured Party to the Debtor; or (c) any of the representations or warranties contained in Section 3 shall prove to have been incorrect in any material respect when made. 6. REMEDIES. Upon the occurrence of an Event of Default and at any time during the continuance thereof, the Secured Party may, at its option, take any or all of the following actions: (a) exercise any or all remedies available under the Security Agreement; (b) sell, assign, transfer, pledge, encumber or otherwise dispose of the Patents and Trademarks; or (c) enforce the Patents and Trademarks and any licenses thereunder, and if the Secured Party shall commence any suit for such enforcement, the Debtor shall, at the request of the Secured Party, do any and all lawful acts and execute any and all proper documents required by the Secured Party in aid of such enforcement. 7. MISCELLANEOUS. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Secured Party. A waiver signed by the Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of the Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor under this Agreement shall be given in the manner and with the effect provided in the Note Purchase Agreement. The Secured Party shall not be obligated to preserve any rights Debtor may have against prior parties, to realize on the Patents and the Trademarks at all or in any particular manner or order, or to apply any cash proceeds of Patents and the Trademarks in any particular order of application. This -5- Agreement shall be binding upon and inure to the benefit of Debtor and the Secured Party and their respective successors and assigns (including without limitation any successor Collateral Agent under and as defined in the Note Purchase Agreement), and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of the Secured Party's acceptance thereof. Except to the extent otherwise required by law, this Agreement shall be governed by the internal laws of the State of Minnesota. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. The Secured Party may execute this Agreement if appropriate for the purpose of filing, but the failure of the Secured Party to execute this Agreement shall not affect or impair the validity or effectiveness of this Agreement. A carbon, photographic or other reproduction of this Agreement or of any financing statement signed by the Debtor shall have the same force and effect as the original for all purposes of a financing statement. -6- IN WITNESS WHEREOF, the Debtor has executed this Agreement as of the day and year first above written. SELECT COMFORT CORPORATION By: /s/ MARK A. KIMBALL ---------------------------------------- Name: MARK A. KIMBALL ---------------------------------- Title: SENIOR VICE PRESIDENT --------------------------------- STATE OF MINNESOTA ) ) COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 6th day of June, 2001, by Mark A. Kimball, the Senior Vice President of Select Comfort Corporation, a Minnesota corporation, on behalf of the corporation. /s/ SHARON STUCKMAYER ---------------------------------------- -7- EX-10 9 e10-7_registrationrights.txt REGISTRATION RIGHTS AGREEMENT - JUNE 6, 2001 EXHIBIT 10.7 SELECT COMFORT CORPORATION REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement is made this 6th day of June, 2001 among Select Comfort Corporation, a Minnesota corporation (the "COMPANY"), each of the Note Holders (as defined below), each of the Old Warrant Holders set forth on SCHEDULE A, each of the Old Preferred Shareholders set forth on Schedule B, and Martinson & Company, Ltd. ("M&C") (this "AGREEMENT"). WHEREAS, the Company is entering into a Note Purchase Agreement pursuant to which it will issue up to $12 million principal amount of senior secured convertible notes (together with any notes of the Company issued in exchange or substitution therefor, the "Convertible Notes"), and warrants to purchase up to 4,800,000 shares (together with any warrants of the Company issued in exchange or substitution therefor, the "Note Holder Warrants") of the Company's common stock, par value $0.01 per share (the "Common Stock"), to certain investors (the "Note Holders"); and the Company entered into that certain Letter Agreement dated April 3, 2001 with its placement agent, M&C to grant M&C a warrant to purchase approximately 353,438 shares of Common Stock (the "M&C Warrant"); and WHEREAS, as in connection with the issuance of the Convertible Notes and the Note Holder Warrants, the Company has agreed to grant the Note Holders certain registration rights with respect to such Convertible Notes and Note Holder Warrants, and the Company has agreed to grant M&C certain registration rights pursuant to the terms and conditions of this Agreement; and WHEREAS, as a condition to purchasing the Convertible Notes and Note Holder Warrants, the Note Holders have required the Company to include as parties to this Agreement the Old Warrant Holders and Old Preferred Shareholders to coordinate the relative priorities of the registration rights of the Old Warrant Holders, the Note Holders and the Old Preferred Shareholders, all as more fully set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company, the Note Holders, the Old Warrant Holders and the Old Preferred Shareholders mutually agree as follows: 1. REGISTRATION OF SECURITIES. 1.1 REQUIRED REGISTRATION. (a) If the Company shall receive a written request therefor from either (i) the holder or holders of at least 40% of the New Registrable Securities or (ii) the holder or holders of at least 67% of the Old Registrable Securities, the Company shall prepare and file a registration statement under the Securities Act covering the Registrable Securities which are the subject of such request and shall use all commercially reasonable efforts to cause such registration statement to become effective. In addition, upon the receipt of such request, the Company shall promptly give written notice to all other holders of New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) that such registration is to be effected. The Company shall include in such registration statement such New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) for which it has received written requests to register by such other holders within 30 days after the delivery of the Company's written notice to such other holders. (b) The Company's obligation to register New Registrable Securities and Old Registrable Securities under this Section 1.1 shall, however, be subject to the following limitations: (a) the Company shall be obligated to prepare, file and use its commercially reasonable efforts to cause to become effective pursuant to this Section 1.1 only two registration statements on Form S-1 or any successor form promulgated by the SEC ("Form S-1") at the initiation of holders of New Registrable Securities and only two registration statements on Form S-1 at the initiation of holders of Old Registrable Securities (provided, however, that a demand for registration shall not count as a registration under this clause (a) if either (i) the registration statement filed with respect to such registration is not declared effective by the SEC for reasons other than the holders not proceeding with such registration, or (ii) each holder requesting registration of Registrable Securities under this Section 1.1 does not register and sell at least 90% of the Registrable Securities it has requested be registered in such registration for reasons other than its voluntary decision not to do so); (b) if the Company is required to use Form S-1, the Company shall not be obligated to prepare, file or use its commercially reasonable efforts to cause to become effective a registration statement pursuant to this Section 1.1 unless at least 20% of the New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) are included in such registration statement and the anticipated aggregate offering price to the public of such Registrable Securities to be registered is at least $5,000,000; (c) the Company shall be obligated to prepare, file and use its commercially reasonable efforts to cause to become effective pursuant to this Section 1.1 only two registration statements on Form S-3 or any successor form promulgated by the SEC ("Form S-3") at the initiation of holders of New Registrable Securities and only two registration statements on Form S-3 at the initiation of holders of Old Registrable Securities in any twelve-month period (provided, however, that a demand for registration shall not count as a registration under this clause (c) if either (i) the registration statement filed with respect to such registration is not declared effective by the SEC for reasons other than the holders not proceeding with such registration, or (ii) each holder requesting registration of Registrable Securities under this Section 1.1 does not register and sell at least 90% of the Registrable Securities it has requested be registered in such registration for reasons other than its voluntary decision not to do so); (d) if the Company meets the requirements for using Form S-3, the Company shall not be obligated to prepare, file or use its commercially reasonable efforts to cause to become effective a registration statement pursuant to this Section 1.1 unless the anticipated aggregate offering price to the public of the New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) to be registered is at least $500,000; and (e) the Company shall not be obligated to effect any registration pursuant to this Section 1.1 at the initiation of holders of the New Registrable Securities prior to the first anniversary of the date of this Agreement. Notwithstanding anything to the contrary stated in this Section 1.1, in the event the holders of at least 67% of the New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) for which registration has been requested pursuant to this Section 1.1 determine for any reason not to proceed with such registration at any time before a registration 2 statement has been declared effective by the SEC, and such registration statement, if theretofore filed with the SEC, is withdrawn with respect to the Registrable Securities covered thereby, and the holders of such New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) agree to bear their own expenses incurred in connection therewith and to reimburse the Company for the expenses incurred by it attributable to the registration of such Registrable Securities, then the holders of such New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) shall not be deemed to have exercised their right to require the Company to register Registrable Securities pursuant to this Section 1.1. (c) Notwithstanding anything to the contrary stated in this Section 1.1, if the Company, within 30 days after any written request for registration is received by it pursuant to this Section 1.1, shall furnish to the holders of the New Registrable Securities or the Old Registrable Securities (whichever shall have initiated such registration) for which registration has been requested under this Section 1.1 a certificate signed by the chief executive officer of the Company stating that the Company, pursuant to an action approved by its Board of Directors, already has a present plan to commence preparation of a registration statement and to file the same within 90 days, the Company shall have the right to defer the preparation and filing of a registration statement pursuant to this Section 1.1 for a period ending not later than 90 days after the date such certificate is so furnished. (d) Without the written consent of the holders of at least 67% of the New Registrable Securities or 67% of the Old Registrable Securities (whichever shall have initiated such registration) for which registration has been requested pursuant to this Section 1.1, neither the Company nor any other holder of securities of the Company may include securities in such registration if in the good faith judgment of the managing underwriter of such public offering the inclusion of such securities would interfere with the successful marketing of the New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) or require the exclusion of any portion of the New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) to be registered. (e) If an offering covered by a request for registration under this Section 1.1 is underwritten in whole or in part and the managing underwriter of such public offering furnishes a written opinion that the total number of New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) proposed to be sold in such offering exceeds the maximum number of New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) (as specified in such opinion) which can be marketed at a price reasonably related to the then current market value of such Registrable Securities and without materially and adversely affecting such offering, then the number of New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) to be sold by each prospective seller shall be reduced pro rata, to the extent necessary. Those New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) which are thus excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. 3 (f) The Company will not be obligated to cause any registration statement to become effective under this Section 1.1 at any time if, in the good faith judgment of the Company, there is a material development relating to the condition (financial or other) of the Company that has not been disclosed to the general public and an officer of the Company certifies to the holders of the New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) that a resolution has been adopted by the Company's Board of Directors, after consultation with counsel, recognizing such development and concluding that under such circumstances it would be in the Company's best interest not to file such registration statement; provided that the aggregate period of delay under this Section 1.1(f), when combined with the aggregate period of any suspension under Section 3 hereof, may not exceed, in any twelve-month period, more than 90 days unless the holders of at least 67% of the New Registrable Securities or Old Registrable Securities (whichever shall have initiated such registration) for which registration has been requested under this Section 1.1 consent in writing to a longer delay of up to an additional 90 days. 1.2 INCIDENTAL REGISTRATION. (a) Each time the Company shall determine to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for cash of any of its securities by it or any of its security holders (other than a registration statement on a form that does not permit the inclusion of shares by its security holders, but including a registration statement being prepaid and filed at the request of holders of Registrable Securities pursuant to Section 1.1 hereof), the Company will give written notice of its determination to all holders of Registrable Securities (other than any such holders who have been afforded the opportunity to include all of their Registrable Securities in such registration statement pursuant to the exercise of demand registration rights under Section 1.1 hereof). Upon the written request of a holder of any Registrable Securities given within 30 days after receipt of any such notice from the Company, the Company will, except as hereinafter provided, cause all such Registrable Securities, the holders of which have so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Registrable Securities to be so registered; provided, however, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any such registration initiated by it; provided further, however, that if the Company determines not to proceed with a registration after the registration statement has been filed with the SEC and the Company's decision not to proceed is primarily based upon the anticipated public offering price of the securities to be sold by the Company, the Company shall promptly complete the registration for the benefit of those selling security holders who wish to proceed with a public offering of their securities and who bear all expenses in excess of $40,000 incurred by the Company as the result of such registration after the Company has decided not to proceed. (b) If any registration pursuant to this Section 1.2 shall be underwritten in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this Section 1.2 be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. (c) If an offering covered by a request for registration under this Section 1.2 is underwritten in whole or in part and the managing underwriter of such offering furnishes a 4 written opinion that the total number of securities proposed to be sold in such offering exceeds the maximum number of securities (as specified in such opinion) which can be marketed at a price reasonably related to the then current market value of such securities and without materially and adversely affecting such offering, then the number of securities to be sold by each prospective seller (including the Company) in the offering shall be reduced as follows: first, the number of securities proposed to be registered by persons other than the Company having no registration rights shall be reduced, pro rata, to zero, if necessary; second, the number of securities proposed to be registered by the Company (if the Company is not the initiator of the registration) shall be reduced to zero, if necessary; third, the number of Registrable Securities and other securities having similar incidental registration rights proposed to be registered pursuant to this Section 1.2 or pursuant to the exercise of such similar registration rights shall be reduced, pro rata, to zero, if necessary; and fourth, the number of securities proposed to be registered by the Company (if the Company is the initiator of the registration) or by any other persons requesting such registration pursuant to the exercise of demand registration rights (if the Company is not the initiator of the registration), including without limitation holders of Registrable Securities requesting such registration pursuant to the exercise of demand registration rights under Section 1.1 hereof, shall be reduced, pro rata. Those Registrable Securities which are thus excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. 2. REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions of Section 1.1 or 1.2 hereof to effect the registration of Registrable Securities under the Securities Act, the Company will: (a) prepare and file with the SEC a registration statement with respect to such securities, and use all commercially reasonable efforts to cause such registration statement to become and remain effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine months; (b) prepare and file with the SEC such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed nine months; (c) furnish to the security 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 security holders or underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use all commercially reasonable efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating holders may reasonably request in writing within 20 days following the original filing of such registration statement, except that the Company shall not for 5 any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) notify the security holders participating in such registration, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (f) notify such holders promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for additional information; (g) prepare and file with the SEC, promptly upon the request of any such holder, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such holder (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of securities by such holder; (h) prepare and promptly file with the SEC and promptly notify such holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an 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 in which they were made, not misleading; (i) advise such holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the SEC suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (j) not file any amendment or supplement to such registration statement or prospectus to which a majority in interest of such holders shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any liabilities under any applicable federal or state law and such filing will not violate applicable law; and (k) at the request of any such holder, furnish: (i) an opinion, dated as of the closing date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request; and (ii) letters dated as of the effective date of the registration statement and as of the closing date, from the independent certified public accountants of the Company, addressed to the underwriters, if any, 6 and to the holder or holders making such request, covering such matters as such underwriters and holder or holders may reasonably request. 3. SUSPENSION OF RESALES. The Company shall be entitled to suspend the use of the prospectus forming the part of any registration statement which has theretofore become effective at any time if, in the good faith judgment of the Company, there is a material development relating to the condition (financial or other) of the Company that has not been disclosed to the general public and the Chief Executive Officer and Chief Financial Officer of the Company certifies in writing to the holders of the Registrable Securities included in such registration statement and not previously sold thereunder that, after consultation with counsel, such officers have reasonably concluded that under such circumstances it would be in the Company's best interest to suspend the use of such prospectus; provided that the aggregate period of suspension under this Section 3, when combined with the aggregate period of any delay under Section 1.1(f) hereof, may not exceed, in any twelve-month period, more than 90 days unless the holders of at least 67% of the Registrable Securities included in such registration statement and not previously sold thereunder consent in writing to a longer suspension of up to an additional 90 days. Each holder of Registrable Securities included in any such registration statement and not previously sold thereunder agrees that upon its receipt of such written certification, it shall immediately discontinue the sale of any Registrable Securities pursuant to such registration statement until such holder has received copies of the supplemented or amended prospectus referred to in Section 2(h) hereof or until such holder is advised in writing that the use of the prospectus forming a part of such registration statement may be resumed and has received copies of any additional or supplemental filings that are incorporated by reference in such prospectus (provided that in no event shall any such holder be precluded hereby from the sale of any Registrable Securities pursuant to such registration statement for longer than the period that the Company is permitted to suspend the use of the prospectus forming a part of such registration statement as provided above). In addition, each such holder agrees that it will either (i) destroy any prospectuses, other than permanent file copies, then in such holder's possession which have been replaced by the Company with more recently dated prospectuses or (ii) deliver to the Company all copies, other than permanent file copies, then in such holder's possession of the prospectus covering such Registrable Securities that was current at the time of receipt of the aforesaid written certification. 4. PROVISION BY HOLDERS OF CERTAIN INFORMATION IN CONNECTION WITH REGISTRATION Statement. No holder may include any of its Registrable Securities in a registration statement pursuant to this Agreement unless and until such holder furnishes to the Company in writing, within 20 days after receipt of a request therefor, the information specified in Item 507 or 508, as applicable, of Regulation S-K promulgated under the Securities Act for use in connection with such registration statement or the prospectus or preliminary prospectus included therein. Each selling holder agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Company by such holder not materially misleading. 5. EXPENSES. With respect to each registration requested pursuant to Section 1.1 hereof (except as otherwise provided in such Section with respect to registrations voluntarily terminated at the request of the requesting security holders) and with respect to each inclusion of Registrable Securities in a registration statement pursuant to Section 1.2 hereof (except as 7 otherwise provided in Section 1.2 with respect to registrations initiated by the Company but with respect to which the Company has determined not to proceed), the Company shall bear the following fees, costs and expenses: all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or selling security holders are required to bear such fees and disbursements), fees and disbursements of one special counsel for the selling security holders, all internal Company expenses, all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified, and the premiums and other costs of policies of insurance against liability (if any) arising out of such public offering. Any other fees and disbursements of counsel and accountants for the selling security holders, and all underwriting discounts and commissions and transfer taxes relating to the shares included in the offering by the selling security holders, and any other expenses incurred by the selling security holders not expressly included above, shall be borne by the selling security holders. 6. INDEMNIFICATION. In the event that any Registrable Securities are included in a registration statement under Section 1.1 or 1.2 hereof: (a) The Company will indemnify and hold harmless each holder of Registrable Securities which are included in a registration statement pursuant to the provisions of Section 1, its directors and officers, and any underwriter (as defined in the Securities Act) for such holder and each person, if any, who controls such holder or such underwriter within the meaning of the Securities Act, from and against, and will reimburse such holder and each such director, officer, underwriter and controlling person with respect to, any and all loss, damage, liability, cost and expense to which such holder or any such director, officer, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the 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; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in reliance upon and in strict conformity with information furnished by such holder, director, officer, underwriter or controlling person in writing specifically for use in the preparation thereof. (b) Each holder of Registrable Securities which are included in a registration pursuant to the provisions of Section 1 will indemnify and hold harmless the Company, its directors and officers, any underwriter (as defined in the Securities Act) for the Company and each person, if any, who controls the Company or such underwriter within the meaning of the Securities Act, from and against, and will reimburse the Company and each such director, officer, underwriter and controlling person with respect to, any and all loss, damage, liability, cost or expense to which the Company or any such director, officer, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue or alleged untrue statement of 8 any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the 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, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by such holder specifically for use in the preparation thereof; provided, however, that the obligations of any such holder under this Section 6(b) shall be limited to an amount equal to the proceeds to such holder of the Registrable Securities sold by it in the offering, unless such loss, damage, liability, cost or expense resulted from such holder's intentionally fraudulent misconduct. (c) Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (a) or (b) of this Section 6 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), promptly notify the indemnifying party of the commencement thereof (provided that failure to give such prompt notice shall not limit the indemnification obligations of the indemnifying party hereunder except to the extent that the delay in giving, or failure to give, such notice has an adverse effect on the ability of the indemnifying party to defend against the action, and provided further that the failure to give such prompt notice shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than hereunder). In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel satisfactory to such indemnified party; provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, or if there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. 7. EXCEPTIONS TO REGISTRATION OBLIGATIONS. Notwithstanding anything to the contrary stated in this Agreement, the Company shall not be obligated to honor a request from any holder of Registrable Securities to register all or any portion thereof if the Registrable Securities held by such holder and requested to be included in a registration statement pursuant to this Agreement 9 are otherwise eligible for immediate sale by such holder under Rule 144(k) (or any similar rule then in effect) promulgated under the Securities Act. 8. COVENANT NOT TO EXERCISE REGISTRATION RIGHTS UNDER OLD REGISTRATION STATEMENT. Each of the holders of the Old Registrable Securities agrees on behalf of itself and any future assignees or transferees not to exercise any registration rights under the Amended and Restated Registration Rights Agreement dated as of December 28, 1995, as amended. 9. DEFINITIONS. Each of the capitalized terms used herein shall have the meaning given to such terms as defined elsewhere in this Agreement or as set forth below: (a) "New Registrable Securities" shall mean (i) any shares of Common Stock which have been issued or are issuable upon the conversion of the Convertible Notes, (ii) any shares of Common Stock which have been issued or are issuable upon exercise of the Note Holder Warrants and the M&C Warrant, and (iii) any shares of Common Stock issued in exchange or substitution for, or in a stock split or reclassification of, or as a stock dividend or other distribution on, or otherwise in respect of, any New Registrable Securities (other than any such shares that have been theretofore registered under the Securities Act and sold or that have been theretofore sold in an open market transaction pursuant to Rule 144 promulgated under the Securities Act). Nothing in this Agreement shall be deemed to require the Company to register any Convertible Notes or Note Holder Warrants, it being understood that the registration rights granted by Section 1 hereof relate only to shares of Common Stock. (b) "Old Convertible Notes" shall mean the Convertible Subordinated Debenture in the principal amount of $4 million, dated November 10, 2000, payable to St. Paul Venture Capital VI, LLC on November 10, 2005. (c) "Old Registrable Securities" shall mean (i) any shares of Common Stock which have been issued or are issuable upon the exercise of the Old Warrants, (ii) any shares of Common Stock which have been issued upon the conversion of the Old Preferred Stock, (iii) any shares of Common Stock that have been issued or are issuable upon conversion of the Old Convertible Notes, and (iv) any shares of Common Stock issued in exchange or substitution for, or in a stock split or reclassification of, or as a stock dividend or other distribution on, or otherwise in respect of, any Old Registrable Securities (other than any such shares that have been theretofore registered under the Securities Act and sold or that have been theretofore sold in an open market transaction pursuant to Rule 144 promulgated under the Securities Act). Nothing in this Agreement shall be deemed to require the Company to register any Old Warrants or Old Convertible Notes, it being understood that the registration rights granted by Section 1 hereof relate only to shares of Common Stock. (d) "Registrable Securities" shall mean the New Registrable Securities and the Old Registrable Securities. (e) "Old Preferred Shareholders" shall mean the holders of the shares of Common Stock issued upon conversion of the various series of convertible preferred stock of the Company heretofore issued and converted in full who are affiliates of the Company as of the date 10 of this Agreement, who are St. Paul Fire and Marine Insurance Co., Patrick A. Hopf and Consumer Venture Partners II, L.P. (f) "Old Preferred Stock" shall mean shares of Common Stock issued upon conversion of the various series of convertible preferred stock of the Company heretofore issued and converted in full held by the Old Preferred Shareholders as set forth on Schedule B. (g) "Old Warrants" shall mean the Warrant Agreements as set forth on Schedule A. (h) "Old Warrant Holders" shall mean the holders of the Old Warrants as set forth on Schedule A. (i) "SEC" shall mean the Securities and Exchange Commission. (j) "Securities Act" shall mean the Securities Act of 1933, as amended. 10. NOTICE. All notices, demands, requests and other communications given to or made upon a party pursuant to this Agreement shall be in writing and shall be mailed (by certified mail, postage prepaid and return receipt requested), sent by overnight courier, telecopied or hand delivered to such party: (a) in the case of any holder of Registrable Securities, at the address of such holder specified below its signature at the end of this Agreement or at such other address as such holder may specify by written notice to the Company, or (b) in the case of the Company, at the address specified below its signature at the end of this Agreement or at such other address as the Company may specify by written notice to the holders of Registrable Securities. All such notices, demands, requests and communications shall be effective and deemed to have been given and received (i) if sent by certified mail, postage prepaid and return receipt requested, when received or three business days after mailing, whichever first occurs, (ii) if sent by overnight courier, one business day after delivery to such courier, (iii) if telecopied, when transmitted and a confirmation is received, provided the same is on a business day and, if not, on the next business day, or (iv) if hand delivered, upon delivery, provided that the same is on a business day and, if not, on the next business day. 11. CHANGES, WAIVERS, ETC. This Agreement may be amended or modified only by a written instrument executed by (i) the Company, (ii) the holders of at least 67% of the Old Registrable Securities and (iii) the holders of at least 67% of the New Registrable Securities. 12. PARTIES IN INTEREST. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not. 11 13. CHOICE OF LAW. The internal laws of Minnesota shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 14. COUNTERPARTS. This Agreement may be executed concurrently 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. This Agreement shall be enforceable against, and binding upon, each party that duly executes and delivers this Agreement, regardless of whether any other party executes this Agreement. 15. SEVERABILITY. Should any one or more of the provisions of this Agreement or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement, shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. 16. FORCE OF AMENDMENT. As to all parties hereto, this Agreement shall supercede all other registration rights agreements to which any of the parties hereto and the Company are also parties. Each of the parties hereto agrees that it shall not approve, authorize, ratify or otherwise consent or agree to the exercise of any registration rights under any other agreement to which the Company is a party. IN WITNESS WHEREOF, the each of the undersigned has caused this Agreement to be executed by its duly authorized representative. SELECT COMFORT CORPORATION, a Minnesota corporation By: /s/ MARK A. KIMBALL -------------------------------------------- Its: SENIOR VICE PRESIDENT ------------------------------------------ NOTE HOLDERS: ST. PAUL VENTURE CAPITAL VI, LLC By: SPVC MANAGEMENT VI, LLC Its: Managing Member By: /s/ PATRICK A. HOPF -------------------------------------------- Name: PATRICK A. HOPF ------------------------------------- Title: MANAGING DIRECTOR ------------------------------------ Address: 10400 Viking Drive Suite 500 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 12 PRINTWARE, INC. By: /s/ MARK EISENSCHENK -------------------------------------------- Name: Mark Eisenschenk Its: Chief Financial Officer Address: 1270 Eagan Industrial Road St. Paul, MN 55121 Telephone No.: 651-456-1400 Fax No.: 651-454-3684 /s/ GARY S. KOHLER ----------------------------------------------- Gary S. Kohler Address: 3033 Excelsior Boulevard, Suite 300 Minneapolis, MN 55416 Telephone No.: 612-253-6027 Fax No.: -------------------------- /s/ ANDREW J. REDLEAF ----------------------------------------------- Andrew J. Redleaf Address: 3033 Excelsior Boulevard, Suite 300 Minneapolis, MN 55416 Telephone No.: 612-253-6027 Fax No.: -------------------------- LIBERTY DIVERSIFIED By: /s/ DAVID LENZEN -------------------------------------------- Its: EXECUTIVE VICE PRESIDENT ------------------------------------------- Address: 5600 North Highway 169 Minneapolis, MN 55428 Telephone No.: 763-536-6600 Fax No.: 763-536-6685 13 STANDARD FUSEE CORPORATION By: /s/ C. JAY MCLAUGHLIN -------------------------------------------- Its: PRESIDENT AND CEO ------------------------------------------- Address: 28320 St. Michael's Road P.O. Box 1047 Easton, MN 21601 Telephone No.: 1-800-637-7807 Fax No.: 410-822-7759 /s/ K.H. WALKER ----------------------------------------------- K .H. Walker Address: 15 East 26th Street 12th Floor New York, NY 10010 Telephone No.: 212-683-2626 ext. 22 Fax No.: 212-683-6840 /s/ THOMAS J. ALBANI ----------------------------------------------- Thomas J. Albani Address: 39 Wanoma Way Nantucket, MA 02554 Telephone No.: 508-257-4620 Fax No.: 508-257-4172 /s/ ERVIN R. SHAMES ----------------------------------------------- Ervin R. Shames Address: 35 Mollbrook Drive Wilton, CT 06897 Telephone No.: 203-762-1205 (home) Telephone No.: 203-762-0298 (office) Fax No.: 203-762-9408 /s/ JEAN-MICHEL VALETTE ----------------------------------------------- Jean-Michel Valette Address: 28 Maple Avenue Kentfield, CA 94905 Telephone No.: 415-456-0432 (home) Telephone No.: 425-456-2850 (office) Fax No.: 415-456-0487 14 BFSUS SPECIAL OPPORTUNITIES TRUST PLC By: /s/ RUSSELL CLEVELAND -------------------------------------------- Its: DIRECTOR ------------------------------------------- Address: Attn: Robert C. Pearson, Sr. V.P. Renaissance Capital Group, Inc. 8080 North Central Expressway Suite 210-LB 59 Dallas, TX 75206 Telephone No.: 214-891-8294 Fax No.: 214-891-8291 RENAISSANCE US GROWTH & INCOME TRUST PLC By: /s/ RUSSELL CLEVELAND -------------------------------------------- Its: DIRECTOR ------------------------------------------- Address: Attn: Robert C. Pearson, Sr. V.P. Renaissance Capital Group, Inc. 8080 North Central Expressway Suite 210-LB 59 Dallas, TX 75206 Telephone No.: 214-891-8294 Fax No.: 214-891-8291 BAYSTAR CAPITAL, L.P. By: /s/ MICHAEL A. ROTH -------------------------------------------- Its: MANAGING DIRECTOR ------------------------------------------- Address: 1500 West Market Street, Suite 200 Mequon, WI 53092 Telephone No.: 262-240-3115 Fax No.: 262-240-3215 15 BAYSTAR INTERNATIONAL, LTD. By: /s/ MICHAEL A. ROTH -------------------------------------------- Its: MANAGING DIRECTOR ------------------------------------------- Address: 1500 West Market Street, Suite 200 Mequon, WI 53092 Telephone No.: 262-240-3115 Fax No.: 262-240-3215 OLD PREFERRED SHAREHOLDERS: CONSUMER VENTURE PARTNERS II, L.P., a Delaware Limited Partnership By: Consumer Venture Associates II, L.P., Its: General Partner By: /s/ CHRISTOPHER P. KIRCHEN -------------------------------------------- Its: General Partner Address: 3 Pickwick Plaza Greenwich, Connecticut 06830 ST. PAUL FIRE AND MARINE INSURANCE CO., a Minnesota corporation By: /s/ PATRICK A HOPF -------------------------------------------- Name: PATRICK A. HOPF ------------------------------------- Title: AUTHORIZED REPRESENTATIVE ------------------------------------ Address: c/o St. Paul Venture Capital 10400 Viking Drive, Suite 550 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 /s/ PATRICK A. HOPF ----------------------------------------------- Patrick A. Hopf Address: St. Paul Venture Capital 10400 Viking Drive Suite 550 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 16 ST. PAUL VENTURE CAPITAL IV, LLC By: /s/ PATRICK A. HOPF ------------------------------------------- Its: MANAGING MEMBER ------------------------------------------- Address: 10400 Viking Drive Suite 550 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 CHERRY TREE VENTURES IV LIMITED PARTNERSHIP By: /s/ GORDON STOFER -------------------------------------------- Its: GENERAL PARTNER ------------------------------------------- Address: 7601 France Avenue S., #150 Edina, MN 55435 NORWEST EQUITY PARTNERS IV, a Minnesota Limited Partnership By: Itasca Partners Its: General Partner By: /s/ JOHN P. WHALEY -------------------------------------------- Its: Partner NORWEST EQUITY PARTNERS V, a Minnesota Limited Partnership By: Itasca Partners V Its: General Partner By: /s/ JOHN P. WHALEY -------------------------------------------- Its: Partner KCB BV, L.P. a California Limited Partnership By: KCB BV, INC. Its: General Partner By: ------------------------------------------- Harvey G. Knell, President 17 OLD WARRANT HOLDERS: ST. PAUL VENTURE CAPITAL IV, LLC By: /s/ PATRICK A. HOPF -------------------------------------------- Its: MANAGING MEMBER ------------------------------------------- Address: 10400 Viking Drive Suite 550 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 APEX INVESTMENT FUND, L.P. By: Apex Management Partnership, its General Partner By: /s/ GEORGE MIDDLEMAS -------------------------------------------- Its: GENERAL PARTNER ------------------------------------------- Address: 225 West Washington Street Suite 1450 Chicago, IL 60606 Telephone No.: 312-857-2800 Fax No.: 312-857-1800 Theodore H. Ashford Address: Ashford Capital Management 3801 Kennett Pike Building B, Suite 107 Wilmington, DE 19807 Telephone No.: 302-655-1750 Fax No.: 302-655-8690 BAYVIEW INVESTORS, LTD. By: -------------------------------------------- Its: ------------------------------------------- Address: c/o Robertson Stephens & Co. 555 California Street, Suite 2600 San Francisco, CA 94104 Attn: Jennifer Sherrill Telephone No.: 415-676-2618 Fax No.: 415-676-2990 18 ALEX BROWN & SONS EMPLOYEES VENTURE FUND LP By: -------------------------------------------- Its: ------------------------------------------- Address: Mail Stop 22 1 South Street, Suite 2150 Baltimore, MD 21202-3204 Telephone No.: -------------------- Fax No.: -------------------------- /s/ EVERETT V. COX ----------------------------------------------- Everett V. Cox Address: c/o St. Paul Venture Capital 10400 Viking Drive Suite 550 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 ----------------------------------------------- Lynn Elliott Address: c/o Aramco P. O. Box 10572 Dhahrab, Saudi Arabia 31311 Telephone No.: -------------------- Fax No.: -------------------------- /s/ MICHAEL B. GORMAN ----------------------------------------------- Michael B. Gorman Address: c/o St. Paul Venture Capital 10400 Viking Drive Suite 550 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 19 GROSSMAN INVESTMENTS By: -------------------------------------------- Its: ------------------------------------------- Address: 4670 Norwest Center 90 South Seventh Street Minneapolis, MN 55402-3903 Telephone No.: -------------------- Fax No.: -------------------------- H & Q LONDON VENTURES By: -------------------------------------------- Its: ------------------------------------------- Address: One Bush Street San Francisco, CA 94104-4425 Telephone No.: 415-439-3440 Fax No.: -------------------------- H & Q SELECT COMFORT INVESTORS L.P. By: -------------------------------------------- Its: ------------------------------------------- Address: One Bush Street San Francisco, CA 94104 Telephone No.: 415-439-3440 Fax No.: -------------------------- ----------------------------------------------- Doug Hickman Address: c/o T. Rowe Price 100 East Pratt Street Baltimore, MD 21202-1009 Telephone No.: Fax No.: 410-296-9699 20 /s/ PATRICK A. HOPF ----------------------------------------------- Patrick A. Hopf Address: St. Paul Venture Capital 10400 Viking Drive Suite 550 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 /s/ BRIAN D. JACOBS ----------------------------------------------- Brian D. Jacobs Address: 1800 Elmwood Road Hillsborough, CA 94010-6363 Telephone No.: 650-596-3685 Fax No.: 650-596-5711 /s/ TERRAL JORDAN ----------------------------------------------- Terral Jordan Address: c/o T. Rowe Price 100 East Pratt Street Baltimore, MD 21202-1009 Telephone No.: Fax No.: 410-345-6853 ----------------------------------------------- Erwin A. Kelen Address: Kelen Ventures 5500 Wayzata Blvd. Suite 1045 Golden Valley, MN 55416-1241 Telephone No.: -------------------- Fax No.: -------------------------- MACKE LIMITED PARTNERSHIP By: -------------------------------------------- Its: ------------------------------------------- Address: 2001 Union Street, Suite 320 San Francisco, CA 94123 Telephone No.: -------------------- Fax No.: -------------------------- 21 MONTGOMERY ASSOCIATES 1992, L.P. By: -------------------------------------------- Its: ------------------------------------------- Address: 600 Montgomery Street San Francisco, CA 94111 Telephone No.: -------------------- Fax No.: -------------------------- MVP II AFFILIATES FUND, L.P. By: -------------------------------------------- Its: ------------------------------------------- Address: Corporate 500 Centre, Suite 450 520 Lake Cook Road Deerfield, IL 60015 Telephone No.: 847-940-1700 Fax No.: 847-940-1724 MARQUETTE VENTURE PARTNERS II L.P. By: -------------------------------------------- Its: ------------------------------------------- Address: Corporate 500 Centre, Suite 450 520 Lake Cook Road Deerfield, IL 60015 Telephone No.: 847-940-1700 Fax No.: 847-940-1724 ----------------------------------------------- Sharon Pearson Address: c/o Morgan Stanley & Co. 1585 Broadway 31st Floor New York, NY 10036 Telephone No.: 212-761-4000 Fax No.: 212-761-0086 22 THE PRODUCTIVITY FUND II, L.P. By: /s/ BRET MAXWELL -------------------------------------------- Its: ------------------------------------------- Address: 225 West Washington Street Suite 1450 Attn: Bret Maxwell Chicago, IL 60606 Telephone No.: 312-857-2800 Fax No.: 312-857-1800 PAINE WEBBER INCORPORATED, CUSTODIAN OF FRED W. REESE DECEDENT IRA By: /s/ JAMES A. FLANEGAN -------------------------------------------- Its: ------------------------------------------- Address: c/o James Flanegan 15440 Thorntree Run Alpharetta, GA 30201 Telephone No.: 770-663-8229 Fax No.: /s/ JOHN A. ROLLWAGEN ----------------------------------------------- John A. Rollwagen Address: 2322 W. Lake of the Isles Pkwy Minneapolis, MN 55405 Telephone No.: 612-381-0032 Fax No.: -------------------------- ----------------------------------------------- Dewey K. Shay Address: 50 Hawthorne Road New York, NY 11968 Telephone No.: Fax No.: 23 ----------------------------------------------- Barbara E. Shronts Address: St. Paul Venture Capital 10400 Viking Drive Suite 550 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 ST. PAUL FIRE AND MARINE INSURANCE CO., a Minnesota corporation By: /s/ PATRICK A. HOPF -------------------------------------------- Name: PATRICK A. HOPF ------------------------------------- Title: AUTHORIZED REPRESENTATIVE ------------------------------------ Address: c/o St. Paul Venture Capital 10400 Viking Drive, Suite 550 Eden Prairie, MN 55344 Telephone No.: 952-995-7474 Fax No.: 952-995-7475 MARTINSON & COMPANY, LTD. By: -------------------------------------------- Its: ------------------------------------------- Address: ------------------------------------ Attn: Thomas Martinson Telephone No.: 952-473-4133 Fax No.: 952-473-4613 24 EX-10 10 e10-8_1997stockplan.txt 1997 STOCK INCENTIVE PLAN EXHIBIT 10.8 SELECT COMFORT CORPORATION 1997 STOCK INCENTIVE PLAN (As Amended and Restated through May 1, 2001) 1. PURPOSE OF PLAN. The purpose of the Select Comfort Corporation 1997 Stock Incentive Plan (the "Plan") is to advance the interests of Select Comfort Corporation (the "Company") and its shareholders by enabling the Company and its Subsidiaries to attract and retain persons of ability to perform services for the Company and its Subsidiaries by providing an incentive to such individuals through equity participation in the Company and by rewarding such individuals who contribute to the achievement by the Company of its economic objectives. 2. DEFINITIONS. The following terms will have the meanings set forth below, unless the context clearly otherwise requires: 2.1 "BOARD" means the Board of Directors of the Company. 2.2 "BROKER EXERCISE NOTICE" means a written notice pursuant to which a Participant, upon exercise of an Option, irrevocably instructs a broker or dealer to sell a sufficient number of shares or loan a sufficient amount of money to pay all or a portion of the exercise price of the Option and/or any related withholding tax obligations and remit such sums to the Company and directs the Company to deliver stock certificates to be issued upon such exercise directly to such broker or dealer. 2.3 "CHANGE IN CONTROL" means an event described in Section 13.1 of the Plan. 2.4 "CODE" means the Internal Revenue Code of 1986, as amended. 2.5 "COMMITTEE" means the group of individuals administering the Plan, as provided in Section 3 of the Plan. 2.6 "COMMON STOCK" means the common stock of the Company, $0.01 par value, or the number and kind of shares of stock or other securities into which such common stock may be changed in accordance with Section 4.3 of the Plan. 2.7 "DISABILITY" means the disability of the Participant such as would entitle the Participant to receive disability income benefits pursuant to the long-term disability plan of the Company or Subsidiary then covering the Participant or, if no such plan exists or is applicable to the Participant, the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code. 2.8 "ELIGIBLE RECIPIENTS" means all employees of the Company or any Subsidiary and any non-employee directors, consultants and independent contractors of the Company or any Subsidiary. 2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2.10 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any date (or, if no shares were traded or quoted on such date, as of the next preceding date on which there was such a trade or quote) (a) the mean between the reported high and low sale prices of the Common Stock if the Common Stock is listed, admitted to unlisted trading privileges or reported on any foreign or national securities exchange or on the Nasdaq National Market or an equivalent foreign market on which sale prices are reported; (b) if the Common Stock is not so listed, admitted to unlisted trading privileges or reported, the closing bid price as reported by the Nasdaq SmallCap Market, OTC Bulletin Board or the National Quotation Bureau, Inc. or other comparable service; or (c) if the Common Stock is not so listed or reported, such price as the Committee determines in good faith in the exercise of its reasonable discretion. If determined by the Committee, such determination will be final, conclusive and binding for all purposes and on all persons, including, without limitation, the Company, the shareholders of the Company, the Participants and their respective successors-in-interest. No member of the Committee will be liable for any determination regarding the fair market value of the Common Stock that is made in good faith. 2.11 "INCENTIVE AWARD" means an Option, Stock Appreciation Right, Restricted Stock Award, Performance Unit or Stock Bonus granted to an Eligible Recipient pursuant to the Plan. 2.12 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that qualifies as an "incentive stock option" within the meaning of Section 422 of the Code. 2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not qualify as an Incentive Stock Option. 2.14 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock Option. 2.15 "PARTICIPANT" means an Eligible Recipient who receives one or more Incentive Awards under the Plan. 2.16 "PERFORMANCE UNIT" means a right granted to an Eligible Recipient pursuant to Section 9 of the Plan to receive a payment from the Company, in the form of stock, cash or a combination of both, upon the achievement of established employment, service, performance or other goals. 2.17 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock or Preferred Stock that are already owned by the Participant or, with respect to any Incentive Award, that are to be issued upon the grant, exercise or vesting of such Incentive Award. 2 2.18 "RESTRICTED STOCK AWARD" means an award of Common Stock granted to an Eligible Recipient pursuant to Section 8 of the Plan that is subject to the restrictions on transferability and the risk of forfeiture imposed by the provisions of such Section 8. 2.19 "RETIREMENT" means termination of employment or service pursuant to and in accordance with the regular (or, if approved by the Board for purposes of the Plan, early) retirement/pension plan or practice of the Company or Subsidiary then covering the Participant, provided that if the Participant is not covered by any such plan or practice, the Participant will be deemed to be covered by the Company's plan or practice for purposes of this determination. 2.20 "SECURITIES ACT" means the Securities Act of 1933, as amended. 2.21 "STOCK APPRECIATION RIGHT" means a right granted to an Eligible Recipient pursuant to Section 7 of the Plan to receive a payment from the Company, in the form of stock, cash or a combination of both, equal to the difference between the Fair Market Value of one or more shares of Common Stock and the exercise price of such shares under the terms of such Stock Appreciation Right. 2.22 "STOCK BONUS" means an award of Common Stock granted to an Eligible Recipient pursuant to Section 10 of the Plan. 2.23 "SUBSIDIARY" means any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant equity interest, as determined by the Committee. 2.24 "TAX DATE" means the date any withholding tax obligation arises under the Code or other applicable tax statute for a Participant with respect to an Incentive Award. 3. PLAN ADMINISTRATION. 3.1 THE COMMITTEE. The Plan will be administered by the Board or by a committee of the Board. So long as the Company has a class of its equity securities registered under Section 12 of the Exchange Act, any committee administering the Plan will consist solely of two or more members of the Board who are "non-employee directors" within the meaning of Rule 16b-3 under the Exchange Act and, if the Board so determines in its sole discretion, who are "outside directors" within the meaning of Section 162(m) of the Code. Such a committee, if established, will act by majority approval of the members (but may also take action with the written consent of a majority of the members of such committee), and a majority of the members of such a committee will constitute a quorum. As used in the Plan, "Committee" will refer to the Board or to such a committee, if established. To the extent consistent with corporate law, the Committee may delegate to any officers of the Company the duties, power and authority of the Committee under the Plan pursuant to such conditions or limitations as the Committee may establish; provided, however, that only the Committee may exercise such duties, power and authority with respect to Eligible Recipients who are subject to Section 16 of the Exchange Act. The Committee may exercise its duties, power and authority under the Plan in its sole and absolute discretion without the consent of any Participant or other party, unless the Plan specifically provides otherwise. Each determination, interpretation or other action made or taken by the Committee pursuant to the provisions of the Plan will be conclusive and binding for all purposes 3 and on all persons, and no member of the Committee will be liable for any action or determination made in good faith with respect to the Plan or any Incentive Award granted under the Plan. 3.2 AUTHORITY OF THE COMMITTEE. (a) In accordance with and subject to the provisions of the Plan, the Committee will have the authority to determine all provisions of Incentive Awards as the Committee may deem necessary or desirable and as consistent with the terms of the Plan, including, without limitation, the following: (i) the Eligible Recipients to be selected as Participants; (ii) the nature and extent of the Incentive Awards to be made to each Participant (including the number of shares of Common Stock to be subject to each Incentive Award, any exercise price, the manner in which Incentive Awards will vest or become exercisable and whether Incentive Awards will be granted in tandem with other Incentive Awards) and the form of written agreement, if any, evidencing such Incentive Award; (iii) the time or times when Incentive Awards will be granted; (iv) the duration of each Incentive Award; and (v) the restrictions and other conditions to which the payment or vesting of Incentive Awards may be subject. In addition, the Committee will have the authority under the Plan in its sole discretion to pay the economic value of any Incentive Award in the form of cash, Common Stock or any combination of both. (b) The Committee will have the authority under the Plan to amend or modify the terms of any outstanding Incentive Award in any manner, including, without limitation, the authority to modify the number of shares or other terms and conditions of an Incentive Award, extend the term of an Incentive Award, accelerate the exercisability or vesting or otherwise terminate any restrictions relating to an Incentive Award, accept the surrender of any outstanding Incentive Award or, to the extent not previously exercised or vested, authorize the grant of new Incentive Awards in substitution for surrendered Incentive Awards; provided, however that the amended or modified terms are permitted by the Plan as then in effect and that any Participant adversely affected by such amended or modified terms has consented to such amendment or modification. No amendment or modification to an Incentive Award, however, whether pursuant to this Section 3.2 or any other provisions of the Plan, will be deemed to be a re-grant of such Incentive Award for purposes of this Plan. (c) In the event of (i) any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, extraordinary dividend or divestiture (including a spin-off) or any other change in corporate structure or shares, (ii) any purchase, acquisition, sale or disposition of a significant amount of assets or a significant business, (iii) any change in accounting principles or practices, or (iv) any other similar change, in each case with respect to the Company or any other entity whose performance is relevant to the grant or vesting of an Incentive Award, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) may, without the consent of any affected Participant, amend or modify the vesting criteria of any outstanding Incentive Award that is based in whole or in part on the financial performance of the Company (or any Subsidiary or division thereof) or such other entity 4 so as equitably to reflect such event, with the desired result that the criteria for evaluating such financial performance of the Company or such other entity will be substantially the same (in the sole discretion of the Committee or the board of directors of the surviving corporation) following such event as prior to such event; provided, however, that the amended or modified terms are permitted by the Plan as then in effect. 4. SHARES AVAILABLE FOR ISSUANCE. 4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as provided in Section 4.3 of the Plan, the maximum number of shares of Common Stock that will be available for issuance under the Plan will be 6,500,000 shares of Common Stock. Notwithstanding any other provisions of the Plan to the contrary, no participant in the Plan may be granted any Options, or Stock Appreciation Rights, or any other Incentive Awards with a value based solely on an increase in the value of the Common Stock after the date of grant, relating to more than 600,000 shares of Common Stock in the aggregate in any fiscal year of the Company (subject to adjustment as provided in Section 4.3 of the Plan). 4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are issued under the Plan or that are subject to outstanding Incentive Awards will be applied to reduce the maximum number of shares of Common Stock remaining available for issuance under the Plan. Any shares of Common Stock that are subject to an Incentive Award that lapses, expires, is forfeited or for any reason is terminated unexercised or unvested and any shares of Common Stock that are subject to an Incentive Award that is settled or paid in cash or any form other than shares of Common Stock will automatically again become available for issuance under the Plan. Any shares of Common Stock that constitute the forfeited portion of a Restricted Stock Award, however, will not become available for further issuance under the Plan. 4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off) or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) will make appropriate adjustment (which determination will be conclusive) as to the number and kind of securities or other property (including cash) available for issuance or payment under the Plan and, in order to prevent dilution or enlargement of the rights of Participants, (a) the number and kind of securities or other property (including cash) subject to outstanding Options, and (b) the exercise price of outstanding Options. 5. PARTICIPATION. Participants in the Plan will be those Eligible Recipients who, in the judgment of the Committee, have contributed, are contributing or are expected to contribute to the achievement of economic objectives of the Company or its Subsidiaries. Eligible Recipients may be granted from time to time one or more Incentive Awards, singly or in combination or in tandem with other Incentive Awards, as may be determined by the Committee in its sole discretion. Incentive Awards will be deemed to be granted as of the date specified in the grant resolution of the Committee, which date will be the date of any related agreement with the Participant. 5 6. OPTIONS. 6.1 GRANT. An Eligible Recipient may be granted one or more Options under the Plan, and such Options will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may designate whether an Option is to be considered an Incentive Stock Option or a Non-Statutory Stock Option. To the extent that any Incentive Stock Option granted under the Plan ceases for any reason to qualify as an "incentive stock option" for purposes of Section 422 of the Code, such Incentive Stock Option will continue to be outstanding for purposes of the Plan but will thereafter be deemed to be a Non-Statutory Stock Option. 6.2 EXERCISE PRICE. The per share price to be paid by a Participant upon exercise of an Option will be determined by the Committee in its discretion at the time of the Option grant; provided, however, that (a) such price will not be less than 100% of the Fair Market Value of one share of Common Stock on the date of grant with respect to an Incentive Stock Option (110% of the Fair Market Value if, at the time the Incentive Stock Option is granted, the Participant owns, directly or indirectly, more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company), and (b) such price will not be less than 85% of the Fair Market Value of one share of Common Stock on the date of grant with respect to a Non-Statutory Stock Option. 6.3 EXERCISABILITY AND DURATION. An Option will become exercisable at such times and in such installments as may be determined by the Committee in its sole discretion at the time of grant; provided, however, that no Option may be exercisable after 10 years from its date of grant. 6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the shares to be purchased upon exercise of an Option will be paid entirely in cash (including check, bank draft or money order); provided, however, that the Committee, in its sole discretion and upon terms and conditions established by the Committee, may allow such payments to be made, in whole or in part, by tender of a Broker Exercise Notice, Previously Acquired Shares, a promissory note (on terms acceptable to the Committee in its sole discretion) or by a combination of such methods. 6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant in whole or in part from time to time, subject to the conditions contained in the Plan and in the agreement evidencing such Option, by delivery in person, by facsimile or electronic transmission or through the mail of written notice of exercise to the Company (Attention: Chief Financial Officer) at its principal executive office in Minneapolis, Minnesota and by paying in full the total exercise price for the shares of Common Stock to be purchased in accordance with Section 6.4 of the Plan. 6.6 AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS. To the extent that the aggregate Fair Market Value (determined as of the date an Incentive Stock Option is granted) of the shares of Common Stock with respect to which incentive stock options (within the meaning of Section 422 of the Code) are exercisable for the first time by a Participant during any calendar year (under the Plan and any other incentive stock option plans of the Company or any subsidiary or parent corporation of the Company (within the meaning of the Code)) exceeds $100,000 (or such other amount as may be prescribed by the Code from time to time), such excess Options will be treated as Non-Statutory Stock Options. The determination will be made 6 by taking incentive stock options into account in the order in which they were granted. If such excess only applies to a portion of an Incentive Stock Option, the Committee, in its discretion, will designate which shares will be treated as shares to be acquired upon exercise of an Incentive Stock Option. 7. STOCK APPRECIATION RIGHTS. 7.1 GRANT. An Eligible Recipient may be granted one or more Stock Appreciation Rights under the Plan, and such Stock Appreciation Rights will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. 7.2 EXERCISE PRICE. The exercise price of a Stock Appreciation Right will be determined by the Committee, in its discretion, at the date of grant but may not be less than 100% of the Fair Market Value of one share of Common Stock on the date of grant. 7.3 EXERCISABILITY AND DURATION. A Stock Appreciation Right will become exercisable at such time and in such installments as may be determined by the Committee in its sole discretion at the time of grant; provided, however, that no Stock Appreciation Right may be exercisable after 10 years from its date of grant. A Stock Appreciation Right will be exercised by giving notice in the same manner as for Options, as set forth in Section 6.5 of the Plan. 8. RESTRICTED STOCK AWARDS. 8.1 GRANT. An Eligible Recipient may be granted one or more Restricted Stock Awards under the Plan, and such Restricted Stock Awards will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Restricted Stock Awards as it deems appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or a Subsidiary for a certain period or that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain performance goals or criteria. 8.2 RIGHTS AS A STOCKHOLDER; TRANSFERABILITY. Except as provided in Sections 8.1, 8.3 and 14.3 of the Plan, a Participant will have all voting, dividend, liquidation and other rights with respect to shares of Common Stock issued to the Participant as a Restricted Stock Award under this Section 8 upon the Participant becoming the holder of record of such shares as if such Participant were a holder of record of shares of unrestricted Common Stock. 8.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines otherwise in its sole discretion (either in the agreement evidencing the Restricted Stock Award at the time of grant or at any time after the grant of the Restricted Stock Award), any dividends or distributions (including regular quarterly cash dividends) paid with respect to shares of Common Stock subject to the unvested portion of a Restricted Stock Award will be subject to the same restrictions as the shares to which such dividends or distributions relate. In the event the Committee determines not to pay such dividends or distributions currently, the Committee will determine in its sole discretion whether any interest will be paid on such dividends or distributions. In addition, the Committee in its sole discretion may require such dividends and distributions to be reinvested 7 (and in such case the Participants consent to such reinvestment) in shares of Common Stock that will be subject to the same restrictions as the shares to which such dividends or distributions relate. 8.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred to in this Section 8, the Committee may place a legend on the stock certificates referring to such restrictions and may require the Participant, until the restrictions have lapsed, to keep the stock certificates, together with duly endorsed stock powers, in the custody of the Company or its transfer agent or to maintain evidence of stock ownership, together with duly endorsed stock powers, in a certificateless book-entry stock account with the Company's transfer agent. 9. PERFORMANCE UNITS. An Eligible Recipient may be granted one or more Performance Units under the Plan, and such Performance Units will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Performance Units as it deems appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or any Subsidiary for a certain period or that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain performance goals or criteria. The Committee will have the sole discretion to determine the form in which payment of the economic value of vested Performance Units will be made to the Participant (i.e., cash, Common Stock or any combination thereof) or to consent to or disapprove the election by the Participant of the form of such payment. 10. STOCK BONUSES. An Eligible Recipient may be granted one or more Stock Bonuses under the Plan, and such Stock Bonuses will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee. The Participant will have all voting, dividend, liquidation and other rights with respect to the shares of Common Stock issued to a Participant as a Stock Bonus under this Section 10 upon the Participant becoming the holder of record of such shares; provided, however, that the Committee may impose such restrictions on the assignment or transfer of a Stock Bonus as it deems appropriate. 11. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. 11.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. Unless otherwise provided by the Committee in its sole discretion in the agreement evidencing an Incentive Award, in the event a Participant's employment or other service with the Company and all Subsidiaries is terminated by reason of death, Disability or Retirement: (a) All outstanding Options and Stock Appreciation Rights then held by the Participant that are currently exercisable by the Participant as of the time of such termination will remain exercisable for a period of one year after such termination (but in no event after the expiration date of any such Option or Stock Appreciation Right); and 8 (b) All Restricted Stock Awards, Performance Units and Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Restricted Stock Awards, Performance Units or Stock Bonuses. 11.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT. (a) Unless otherwise provided by the Committee in its sole discretion in the agreement evidencing an Incentive Award, in the event a Participant's employment or other service is terminated with the Company and all Subsidiaries for any reason other than death, Disability or Retirement, or a Participant is in the employ or service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Participant continues in the employ or service of the Company or another Subsidiary), all rights of the Participant under the Plan and any agreements evidencing an Incentive Award will immediately terminate without notice of any kind, and no Options or Stock Appreciation Rights then held by the Participant will thereafter be exercisable, all Restricted Stock Awards then held by the Participant that have not vested will be terminated and forfeited, and all Performance Units and Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units or Stock Bonuses; provided, however, that if such termination is due to any reason other than termination by the Company or any Subsidiary for "cause," all outstanding Options or Stock Appreciation Rights then held by such Participant that are currently exercisable by the Participant as of the time of such termination will remain exercisable for a period of three months after such termination (but in no event after the expiration date of any such Option or Stock Appreciation Right). (b) For purposes of this Section 11.2, "cause" (as determined by the Committee) will be as defined in any employment or other agreement or policy applicable to the Participant or, if no such agreement or policy exists, will mean (i) dishonesty, fraud, misrepresentation, embezzlement or deliberate injury or attempted injury, in each case related to the Company or any Subsidiary, (ii) any unlawful or criminal activity of a serious nature, (iii) any intentional and deliberate breach of a duty or duties that, individually or in the aggregate, are material in relation to the Participant's overall duties, or (iv) any material breach of any employment, service, confidentiality or non-compete agreement entered into with the Company or any Subsidiary. 11.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other provisions of this Section 11, upon a Participant's termination of employment or other service with the Company and all Subsidiaries, the Committee may, in its sole discretion (which may be exercised at any time on or after the date of grant, including following such termination), cause Options and Stock Appreciation Rights (or any part thereof) then held by such Participant to become or continue to become exercisable and/or remain exercisable following such termination of employment or service and Restricted Stock Awards, Performance Units and Stock Bonuses then held by such Participant to vest and/or continue to vest or become free of transfer restrictions, as the case may be, following such termination of employment or service, in each case in the 9 manner determined by the Committee; provided, however, that no Option or Stock Appreciation Right may remain exercisable beyond its expiration date. 11.4 BREACH OF CONFIDENTIALITY OR NONCOMPETE AGREEMENTS. Notwithstanding anything in the Plan to the contrary, in the event that a Participant materially breaches the terms of any confidentiality or non-compete agreement entered into with the Company or any Subsidiary, whether such breach occurs before or after termination of such Participant's employment or other service with the Company or any Subsidiary, the Committee in its sole discretion may immediately terminate all rights of the Participant under the Plan and any agreements evidencing an Incentive Award then held by the Participant without notice of any kind. 11.5 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the Committee otherwise determines in its sole discretion, a Participant's employment or other service will, for purposes of the Plan, be deemed to have terminated on the date recorded on the personnel or other records of the Company or the Subsidiary for which the Participant provides employment or other service, as determined by the Committee in its sole discretion based upon such records. 12. PAYMENT OF WITHHOLDING TAXES. 12.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct from future wages of the Participant (or from other amounts that may be due and owing to the Participant from the Company or a Subsidiary), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all foreign, federal, state and local withholding and employment-related tax requirements attributable to an Incentive Award, including, without limitation, the grant, exercise or vesting of, or payment of dividends with respect to, an Incentive Award or a disqualifying disposition of stock received upon exercise of an Incentive Stock Option, or (b) require the Participant promptly to remit the amount of such withholding to the Company before taking any action, including issuing any shares of Common Stock, with respect to an Incentive Award. 12.2 SPECIAL RULES. The Committee may, in its sole discretion and upon terms and conditions established by the Committee, permit or require a Participant to satisfy, in whole or in part, any withholding or employment-related tax obligation described in Section 12.1 of the Plan by electing to tender Previously Acquired Shares, a Broker Exercise Notice or a promissory note (on terms acceptable to the Committee in its sole discretion), or by a combination of such methods. 13. CHANGE IN CONTROL. 13.1 CHANGE IN CONTROL. For purposes of this Section 13, a "Change in Control" of the Company shall mean (a) the sale, lease, exchange or other transfer of all or substantially all of the assets of the Company (in one transaction or in a series of related transactions) to a corporation that is not controlled by the Company, (b) the approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company, or (c) a change in control of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the effective date of the Plan, pursuant to Section 13 or 15(d) of the Exchange Act, 10 whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred at such time as (x) any Person, other than any Person who owns any shares of Common Stock on the effective date of the Plan, becomes after the effective date of the Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly, of 50% or more of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors or (y) individuals who constitute the Board of Directors on the effective date of the Plan cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors comprising the Board of Directors on the effective date of the Plan (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (y) and the following sentence, considered as though such person were a member of the Board of Directors on the effective date of the Plan. Notwithstanding anything in the foregoing to the contrary, solely for purposes of any Incentive Award issued and outstanding prior to July 27, 1999, no Change in Control shall be deemed to have occurred for purposes of this Section 13 by virtue of any transaction which shall have been approved by the affirmative vote of at least a majority of the members of the Board of Directors on the effective date of the Plan. The foregoing sentence shall not apply to Incentive Awards granted on or after July 27, 1999. 13.2 ACCELERATION OF VESTING. Without limiting the authority of the Committee under Sections 3.2 and 4.3 of the Plan, if a Change in Control of the Company occurs, then, unless otherwise provided by the Committee in its sole discretion either in the agreement evidencing an Incentive Award at the time of grant or at any time after the grant of an Incentive Award, (a) all outstanding Options and Stock Appreciation Rights will become immediately exercisable in full and will remain exercisable for the remainder of their terms, regardless of whether the Participant to whom such Options or Stock Appreciation Rights have been granted remains in the employ or service of the Company or any Subsidiary; (b) all outstanding Restricted Stock Awards will become immediately fully vested and non-forfeitable; and (c) all outstanding Performance Units and Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units or Stock Bonuses. 13.3 CASH PAYMENT FOR OPTIONS. If a Change in Control of the Company occurs, then the Committee, if approved by the Committee in its sole discretion either in an agreement evidencing an Incentive Award at the time of grant or at any time after the grant of an Incentive Award, and without the consent of any Participant effected thereby, may determine that some or all Participants holding outstanding Options will receive, with respect to some or all of the shares of Common Stock subject to such Options, as of the effective date of any such Change in Control of the Company, cash in an amount equal to the excess of the Fair Market Value of such shares immediately prior to the effective date of such Change in Control of the Company over the exercise price per share of such Options. 13.4 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in Section 13.2 or 13.3 of the Plan to the contrary, if, with respect to a Participant, the acceleration of the vesting of an Incentive Award as provided in Section 13.2 or the payment of cash in 11 exchange for all or part of an Incentive Award as provided in Section 13.3 (which acceleration or payment could be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code), together with any other "payments" that such Participant has the right to receive from the Company or any corporation that is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then the "payments" to such Participant pursuant to Section 13.2 or 13.3 of the Plan will be reduced to the largest amount as will result in no portion of such "payments" being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that if a Participant is subject to a separate agreement with the Company or a Subsidiary that expressly addresses the potential application of Sections 280G or 4999 of the Code (including, without limitation, that "payments" under such agreement or otherwise will be reduced, that such "payments" will not be reduced or that the Participant will have the discretion to determine which "payments" will be reduced), then this Section 13.4 will not apply, and any "payments" to a Participant pursuant to Section 13.2 or 13.3 of the Plan will be treated as "payments" arising under such separate agreement. 14. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY. 14.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or limit in any way the right of the Company or any Subsidiary to terminate the employment or service of any Eligible Recipient or Participant at any time, nor confer upon any Eligible Recipient or Participant any right to continue in the employ or service of the Company or any Subsidiary. 14.2 RIGHTS AS A SHAREHOLDER. As a holder of Incentive Awards (other than Restricted Stock Awards and Stock Bonuses), a Participant will have no rights as a stockholder unless and until such Incentive Awards are exercised for, or paid in the form of, shares of Common Stock and the Participant becomes the holder of record of such shares. Except as otherwise provided in the Plan, no adjustment will be made for dividends or distributions with respect to such Incentive Awards as to which there is a record date preceding the date the Participant becomes the holder of record of such shares, except as the Committee may determine in its discretion. 14.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the laws of descent and distribution or as otherwise expressly permitted by the Plan, unless approved by the Committee in its sole discretion, no right or interest of any Participant in an Incentive Award prior to the exercise or vesting of such Incentive Award will be assignable or transferable, or subjected to any lien, during the lifetime of the Participant, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise. A Participant will, however, be entitled to designate a beneficiary to receive an Incentive Award upon such Participant's death, and in the event of a Participant's death, payment of any amounts due under the Plan will be made to, and exercise of any Options (to the extent permitted pursuant to Section 11 of the Plan) may be made by, the Participant's legal representatives, heirs and legatees. 14.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended to modify or rescind any previously approved compensation plans or programs of the Company or create any limitations on the power or authority of the Board to adopt such additional or other compensation arrangements as the Board may deem necessary or desirable. 12 15. SECURITIES LAW AND OTHER RESTRICTIONS. Notwithstanding any other provision of the Plan or any agreements entered into pursuant to the Plan, the Company will not be required to issue any shares of Common Stock under this Plan, and a Participant may not sell, assign, transfer or otherwise dispose of shares of Common Stock issued pursuant to Incentive Awards granted under the Plan, unless (a) there is in effect with respect to such shares a registration statement under the Securities Act and any applicable state or foreign securities laws or an exemption from such registration under the Securities Act and applicable state or foreign securities laws, and (b) there has been obtained any other consent, approval or permit from any other regulatory body which the Committee, in its sole discretion, deems necessary or advisable. The Company may condition such issuance, sale or transfer upon the receipt of any representations or agreements from the parties involved, and the placement of any legends on certificates representing shares of Common Stock, as may be deemed necessary or advisable by the Company in order to comply with such securities law or other restrictions. 16. PLAN AMENDMENT, MODIFICATION AND TERMINATION. The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time in such respects as the Board may deem advisable in order that Incentive Awards under the Plan will conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no amendments to the Plan will be effective without approval of the shareholders of the Company if stockholder approval of the amendment is then required pursuant to Section 422 of the Code or the rules of any stock exchange or Nasdaq or similar regulatory body. No termination, suspension or amendment of the Plan may adversely affect any outstanding Incentive Award without the consent of the affected Participant; provided, however, that this sentence will not impair the right of the Committee to take whatever action it deems appropriate under Sections 3.2, 4.3 and 13 of the Plan. 17. EFFECTIVE DATE AND DURATION OF THE PLAN. The Plan is effective as of March 28, 1997. The Plan will terminate at midnight on March 28, 2007, and may be terminated prior to such time to by Board action, and no Incentive Award will be granted after such termination. Incentive Awards outstanding upon termination of the Plan may continue to be exercised, or become free of restrictions, in accordance with their terms. 18. MISCELLANEOUS. 18.1 GOVERNING LAW. The validity, construction, interpretation, administration and effect of the Plan and any rules, regulations and actions relating to the Plan will be governed by and construed exclusively in accordance with the laws of the State of Minnesota, notwithstanding the conflicts of laws principles of any jurisdictions. 18.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to the benefit of the successors and permitted assigns of the Company and the Participants. 13 -----END PRIVACY-ENHANCED MESSAGE-----