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 September 25, 2004

Commission File Number 000-22012

WINMARK CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Minnesota	41-1622691
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

4200 Dahlberg Drive, Suite 100
Golden Valley, MN 55422-4837

(Address of Principal Executive Offices, Zip Code)

Registrant’s Telephone Number, Including Area Code 763-520-8500

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, and (2) has been subject to such filing requirements for the past 90 days.

Yes:     ý No:     o

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.

Yes:     o No:     ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, no par value, 5,964,796 shares outstanding as of November 3, 2004

WINMARK CORPORATION

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	CONDENSED BALANCE SHEETS: September 25, 2004 and December 27, 2003
	CONDENSED STATEMENTS OF OPERATIONS: Three Months Ended September 25, 2004 and September 27, 2003 Nine Months Ended September 25, 2004 and September 27, 2003
	CONDENSED STATEMENTS OF CASH FLOWS: Nine Months Ended September 25, 2004 and September 27, 2003
	NOTES TO CONDENSED FINANCIAL STATEMENTS
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
	Items 1 through 5 have been omitted since all items are inapplicable or answers negative.
Item 6.	Exhibits and Reports on Form 8-K

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PART I.FINANCIAL INFORMATION

Item 1.Financial Statements

WINMARK CORPORATION

CONDENSED BALANCE SHEETS

(unaudited)

	September 25, 2004		December 27, 2003
ASSETS
Current Assets:
Cash and cash equivalents	$	8,179,500	$	4,153,300
Marketable securities	1,431,900		2,343,500
Receivables, less allowance for doubtful accounts of $246,200 and $291,200	2,113,400		2,341,300
Inventories	407,300		528,600
Prepaid expenses and other	306,000		305,800
Deferred income taxes	602,100		602,100
Total current assets	13,040,200		10,274,600
Net investment in leasing operations	634,700		—
Long-term investments and marketable securities	9,004,800		7,783,800
Long-term notes receivables, net	40,000		62,400
Property and equipment, net	300,100		202,200
Other assets, net	640,400		602,600
Deferred income taxes	233,800		233,800
	$	23,894,000	$	19,159,400
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,369,500	$	1,491,400
Accrued liabilities	1,201,200		1,544,500
Current deferred revenue	682,700		604,400
Total current liabilities	3,253,400		3,640,300
Long-term deferred revenue	205,800		113,900
Shareholders’ Equity:
Common stock, no par, 10,000,000 shares authorized, 5,948,657 and 5,671,596 shares issued and outstanding	5,044,200		2,996,300
Other comprehensive income	24,300		144,500
Retained earnings	15,366,300		12,264,400
Total shareholders’ equity	20,434,800		15,405,200
	$	23,894,000	$	19,159,400

The accompanying notes are an integral part of these financial statements

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WINMARK CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 25, 2004			September 27, 2003			September 25, 2004			September 27, 2003
REVENUE:
Royalties	$	4,087,000		$	3,946,200		$	12,719,700		$	12,116,800
Merchandise sales	1,996,600			3,570,400			6,914,100			10,601,700
Franchise fees	300,900			300,300			693,600			570,300
Other	151,400			150,900			432,700			461,700
Total revenue	6,535,900			7,967,800			20,760,100			23,750,500
COST OF MERCHANDISE SOLD	1,615,800			2,799,000			5,724,500			8,447,800
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES	3,237,900			3,402,800			10,002,900			10,756,100
Income from operations	1,682,200			1,766,000			5,032,700			4,546,600
LOSS FROM EQUITY INVESTMENT	(40,700		)	(64,100		)	(123,100		)	(64,100		)
GAIN ON SALE OF MARKETABLE SECURITIES	—			38,000			173,800			153,300
INTEREST AND OTHER INCOME	50,600			70,100			153,600			217,800
Income before income taxes	1,692,100			1,810,000			5,237,000			4,853,600
PROVISION FOR INCOME TAXES	(676,800		)	(705,900		)	(2,135,100		)	(1,870,900		)
NET INCOME	$	1,015,300		$	1,104,100		$	3,101,900		$	2,982,700
EARNINGS PER SHARE – BASIC	$	.17		$	.20		$	.53		$	.53
WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC	5,942,139			5,650,096			5,841,486			5,662,762
EARNINGS PER SHARE – DILUTED	$	.15		$	.17		$	.48		$	.48
WEIGHTED AVERAGE SHARES OUTSTANDING – DILUTED	6,564,937			6,359,966			6,476,050			6,269,001

The accompanying notes are an integral part of these financial statements

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WINMARK CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 25, 2004			September 27, 2003
OPERATING ACTIVITIES:
Net income	$	3,101,900		$	2,982,700
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	88,800			166,300
Compensation expense related to granting of stock options	263,800			141,600
Gain on sale of marketable securities	(173,800		)	(153,300		)
Deferred gain on building sale	(90,100		)	(137,400		)
Tax benefit on exercised options	336,600			321,600
Change in operating assets and liabilities:
Receivables	250,300			207,900
Inventories	121,300			93,600
Prepaid expenses and other	(200		)	371,600
Deferred income taxes	—			34,900
Accounts payable	(121,900		)	(49,800		)
Accrued liabilities	(271,500		)	(369,700		)
Deferred revenue	260,300			197,800
Net cash provided by operating activities	3,765,500			3,807,800
INVESTING ACTIVITIES:
Purchase of marketable securities and investments, net of proceeds	(327,600		)	(4,133,300		)
Purchase of property and equipment, net	(199,000		)	(52,200		)
Additions to other assets	(39,900		)	(45,700		)
Proceeds from sale of property and equipment	14,400			—
Net investment in leasing operations	(634,700		)	—
Net cash used for investing activities	(1,186,800		)	(4,231,200		)
FINANCING ACTIVITIES:
Repurchase of common stock	(5,000		)	(1,875,000		)
Proceeds from stock option exercises	1,452,500			575,300
Net cash provided by (used for) financing activities	1,447,500			(1,299,700		)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	4,026,200			(1,723,100		)
Cash and cash equivalents, beginning of period	4,153,300			4,730,000
Cash and cash equivalents, end of period	$	8,179,500		$	3,006,900
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	—		$	—
Cash paid for income taxes	$	1,917,000		$	1,001,000

The accompanying notes are an integral part of these financial statements

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WINMARK CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

1.Management’s Interim Financial Statement Representation:

The accompanying condensed financial statements have been prepared by Winmark Corporation and subsidiaries (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  The information in the condensed financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements.  Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.

Revenues and operating results for the three month period and nine month period ended September 25, 2004 are not necessarily indicative of the results to be expected for the full year.

Long-Term Investments

The Company has an investment in Tomsten, Inc. (“Tomsten”), the parent company of “Archiver’s” retail chain.  Archiver’s is a retail concept created to help people preserve and enjoy their photographs.  Archiver’s stores feature a wide variety of photo-safe products, including photo albums, scrapbooks and scrapbook supplies, frames, rubber stamps and photo storage and organization products.  The Company has invested a total of $7.5 million in the purchase of common stock of Tomsten.  Such amount was paid in three equal installments of $2 million on July 30, 2002, February 1, 2003 and August 1, 2003, and an additional $1.5 million on March 8, 2004.  The Company’s investment currently represents 19% of the outstanding common stock of Tomsten and is accounted for by the cost method.  The Company has entered into a voting agreement with Tomsten appointing officers of Tomsten as the Company’s proxy with the right to vote the Tomsten shares held by the Company consistent with the two largest shareholders of Tomsten (or in case of their disagreement, consistent with a majority of the remaining shareholders) as long as the Company owns such shares.  No officers or directors of the Company serve as officers or directors of Tomsten. 

On July 1, 2003, the Company made a $1 million equity investment in eFrame, LLC (“eFrame”).  On November 21, 2003, the Company made an additional $500,000 investment in eFrame.  Based in Omaha, Nebraska, eFrame provides out-sourced information technology services to customers that lower their costs and increase their operating efficiencies.  The investment represents 27.2% of the outstanding units of membership interests in eFrame.  The investment is recorded using the equity method of accounting, whereby the Company’s share of income or loss is included in the statement of operations and increase or decrease the carrying value of the investment.  During the third quarter and first nine months of 2004, the Company recorded a $40,700 and $123,100 loss, respectively, on the investment.

Net Investment in Leasing Operations

The Company has direct financing lease receivables which become due over the next three years.

Comprehensive Income (Loss)

The Company reports comprehensive income/(loss) in accordance with Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”).  SFAS No. 130 establishes standards for reporting in the financial statements all changes in equity during a period.  For

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the Company, comprehensive income/(loss) consists of unrealized holding gains and losses from investments classified as “available-for-sale.” 

Comprehensive income and the components of other comprehensive income were as follows:

	Three Months Ended					Nine Months Ended
	September 25, 2004		September 27, 2003			September 25, 2004			September 27, 2003
Net income	$	1,015,300	$	1,104,100		$	3,101,900		$	2,982,700
Other comprehensive income (loss)	22,800		(38,500		)	(120,200		)	46,400
Total comprehensive income	$	1,038,100	$	1,065,600		$	2,981,700		$	3,029,100

Accounting for Stock-Based Compensation

The Company adopted in 2002 the fair value method recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (Statement No. 123) using the prospective method as provided by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”  Historically, the Company had applied the intrinsic value method permitted under Statement 123, as defined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, in accounting for our stock-based compensation plans.  Accordingly, no compensation cost has been recognized for our stock option plans prior to 2002.  Compensation expense of $91,600 and $263,800 relating to the vested portion of the fair value of stock options granted subsequent to adoption of the fair value method has been expensed to “Selling, General and Administration Expenses” in the three months and nine months ended September 25, 2004, respectively.

For the options granted prior to fiscal 2002, the Company accounts for the stock option plans under Accounting Principles Board (APB) Opinion No. 25, and accordingly, no compensation expense relating to the granting of these options has been recognized in the Statement of Operations.  Had compensation cost for these plans been determined consistent with SFAS No. 123 “Accounting for Stock-Based Compensations” (SFAS 123), the Company’s pro forma net income and net income per common share would have changed to the following pro forma amounts:

	Three Months Ended						Nine Months Ended
	September 25, 2004			September 27, 2003			September 25, 2004			September 27, 2003
Net income as reported	$	1,015,300		$	1,104,100		$	3,101,900		$	2,982,700
Add: stock-based employee compensation expenses included in reported net income, net of related tax effects.	57,300			24,300			165,100			88,900
Deduct: total stock-based employee compensation expense determined under fair value based method of all awards, net of related tax effects.	(104,900		)	(217,100		)	(307,900		)	(667,300		)
Pro forma net income	$	967,700		$	911,300		$	2,959,100		$	2,404,300
Net income per common share:
Basic – as reported	$	.17		$	.20		$	.53		$	.53
Basic – pro forma	$	.16		$	.16		$	.51		$	.42
Diluted – as reported	$	.15		$	.17		$	.48		$	.48
Diluted – pro forma	$	.15		$	.14		$	.46		$	.38

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In accordance with SFAS 123, the fair value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

Year Granted	Option Fair Value	Risk Free Interest Rate	Expected Life (Years)	Expected Volatility	Dividend Yield
2004	$10.88	3.97%	5	46.1%	none
2003	10.12	3.76	7	49.7	none
2002	5.86 / 5.91	3.59 / 3.63	7	55.2 / 55.0	none

As of September 25, 2004, the Company had a total of 947,890 stock options and warrants outstanding with an average price of $7.69, of which 536,640 were exercisable as of September 25, 2004.

Reclassification

Certain amounts in the September 27, 2003 financial statements have been reclassified to conform with the September 25, 2004 presentation.  These reclassifications have no effect on net income or shareholders’ equity as previously reported.

2.Organization and Business:

The Company offers licenses to operate retail stores using the service marks Play it Again Sports^Ò, Once Upon A Child^Ò, Music Go Round^Ò and Plato’s Closet^Ò.  In addition, the Company sells inventory to its Play It Again Sports^Ò franchisees through its buying group and operates retail stores.  The Company has a 52/53-week year which ends on the last Saturday in December.  In the second quarter of 2004, the Company commenced an equipment leasing operation.

3.Earnings Per Share:

The Company calculates earnings per share in accordance with SFAS No. 128 by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Earnings Per Share - Basic.  The Company calculates Earnings Per Share - Diluted by dividing net income by the weighted average number of shares of common stock and dilutive stock equivalents from the exercise of stock options and warrants using the treasury stock method.  The weighted average diluted outstanding shares is computed by adding the weighted average basic shares outstanding with the dilutive effect of 622,798 and 709,870 stock options and warrants for the three months ended and 634,564 and 606,239 for the nine months ended September 25, 2004 and September 27, 2003, respectively.

4.     Other Commitments and Contingencies:

In addition to the operating lease obligations disclosed in footnote 10 of the Company’s Form 10-K for the year ended December 27, 2003, the Company has remained a guarantor on Company-owned retail stores that have been either sold or closed.  These leases have various expiration dates through 2006.  The Company believes it has adequate reserves for any future liability.

5.Subsequent Events:

On September 30, 2004, Winmark Corporation established a 364-day $15.0 million line of credit with LaSalle Bank National Association.  The line of credit will be used for financing growth in the Company’s leasing business and for general corporate purposes.  The Company has not yet drawn any funds from the line of credit.

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On October 8, 2004, the Company agreed to make a $2.0 million equity investment in Commercial Credit Group, Inc., a newly formed equipment leasing company specializing in construction, transportation and waste management equipment.  At closing, the Company paid $1.5 million for approximately 26.5% of the outstanding equity of Commercial Credit Group.  The Company will make the remaining $500,000 of such investment within 24 months and, at such time, will own approximately 28% of the outstanding equity of Commercial Credit Group.

On October 13, 2004, Winmark Corporation made a commitment to lend $2.0 million to BridgeFunds Limited at an annual rate of 12% pursuant to several senior subordinated promissory notes.  BridgeFunds Limited advances funds to claimants involved in civil litigation to cover litigation expenses.  The proceeds of the loans will be used to fund these advances.  On October 13, 2004, Winmark Corporation funded $500,000 of such $2.0 million commitment; BridgeFunds can draw down the remaining $1.5 million when they meet specific business milestones.  In addition, Winmark Corporation has received a warrant to purchase 20% of the equity of BridgeFunds on a fully diluted basis.

Item 2:   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

Overview

As of September 25, 2004, we had 787 franchised retail stores operating under the following brands:  Play it Again Sports^Ò, Once Upon a Child^Ò, Plato’s Closet^Ò and Music Go Round^Ò.  Management tracks closely the following criteria to evaluate current business operations and future prospects: royalties, franchise fees, leasing activity, selling, general and administrative expenses, franchise store openings and closings and franchise renewals.

Our most profitable sources of revenue are royalties earned from our franchise partners and franchise fees for new store openings and transfers.

	Nine Months Ended
	September 25, 2004		September 27, 2003
Royalties	$	12,719,700	$	12,116,800
Franchise fees	$	693,600	$	570,300

During the first nine months of 2004, our royalties increased $602,900 or 5.0% compared to the first nine months of 2003.  This was partly due to a strengthening economic environment.  Franchise fees grew 21.6% compared to the same period last year and primarily reflect new store openings in all brands.  To date, revenue generated from the Company’s leasing activities has been immaterial to the Company’s financial results.

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Management monitors several non-financial factors in evaluating the current business operations and future prospects including franchise store openings and closings and franchise renewals.  The following is a summary of our franchising store activity for the nine months ended September 25, 2004:

						NINE MONTHS ENDED 9/25/04
	TOTAL 12/27/03	OPENED/ PURCHASED	CLOSED/ SOLD		TOTAL 9/25/04	AVAILABLE FOR RENEWAL	COMPLETED RENEWALS
Play It Again Sports®
Franchised Stores - US and Canada	427	6	(20	)	413	32	26
Once Upon A Child®
Franchised Stores - US and Canada	211	5	(7	)	209	32	32
Plato’s Closet®
Franchised Stores	106	18	(1	)	123	0	0
Music Go Round®
Franchised Stores	40	4	(2	)	42	0	0
Total	784	33	(30	)	787	64	58

Renewal activity is a key focus area for management.  Our franchisees sign 10-year agreements with us.  The renewal of existing franchise agreements as they approach their expiration is an indicator that management monitors to determine the health of our business and the preservation of future royalties.  During the nine months ended September 25, 2004, the Company renewed 58 franchise agreements of the 64 franchise agreements that were available for renewal.

The profitability of our business is dependent in part on management’s ability to control selling, general and administrative expenses.  The major components of selling, general and administrative expenses include salaries, wages and benefits, advertising, travel, rent and administrative costs.  Selling, general and administrative expenses decreased during the first nine months of 2004 primarily due to selling a total of five Company-owned stores in the fourth quarter of 2003 and the first quarter of 2004 and the elimination of related salary and rent expenses, partially offset by start-up costs associated with leasing activity.

	Nine Months Ended
	September 25, 2004		September 27, 2003
Selling, general and administrative expenses	$	10,002,900	$	10,756,100

Our ability to grow our profits is dependent on our ability to effectively support our franchise partners to produce higher revenues, open new stores, realize opportunities relating to leasing activities of Winmark Business Solutions and Winmark Capital Corporation while controlling our selling, general and administrative expenses.

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Results of Operations

The following table sets forth for the periods indicated, certain income statement items as a percentage of total revenue:

	Three Months Ended				Nine Months Ended
	September 25, 2004		September 27, 2003		September 25, 2004		September 27, 2003
Revenue:
Royalties	62.5	%	49.5	%	61.3	%	51.0	%
Merchandise sales	30.6		44.8		33.3		44.6
Franchise fees	4.6		3.8		3.3		2.4
Other	2.3		1.9		2.1		2.0
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of merchandise sold	24.7		35.1		27.6		35.6
Selling, general and administrative expenses	49.6		42.7		48.2		45.3
Income from operations	25.7		22.2		24.2		19.1
Loss from equity investment	(0.6	)	(0.8	)	(0.6	)	(0.3	)
Gain on sale of marketable securities	0.0		0.4		0.9		0.7
Interest and other income	0.8		0.9		0.7		0.9
Income before income taxes	25.9		22.7		25.2		20.4
Provision for income taxes	(10.4	)	(8.9	)	(10.3	)	(7.9	)
Net income	15.5	%	13.8	%	14.9	%	12.5	%

Comparison of Three Months Ended September 25, 2004 to
Three Months Ended September 27, 2003

Revenues

Revenues for the quarter ended September 25, 2004 totaled $6.5 million compared to $8.0 million for the comparable period in 2003, a decrease of 18.0%.

Royalties increased to $4.1 million for the third quarter of 2004 from $3.9 million for the same period in 2003, a 3.6% increase.  The increase is primarily due to higher franchisee retail sales.

Merchandise sales include the sale of product to franchisees either through the Play it Again Sports^Ò buying group or through our Computer Support Center (“Direct Franchisee Sales”) and retail sales at the Company-owned stores.  For the third quarter of 2004 and 2003, they were as follows:

	2004		2003
Direct Franchisee Sales	$	1,367,300	$	2,142,600
Retail Sales	629,300		1,427,800
	$	1,996,600	$	3,570,400

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Direct Franchisee Sales revenues decreased $775,300, or 36.2%, for the quarter ended September 25, 2004 compared to the third quarter last year.  This is a result of management’s strategic decision to have Play it Again Sports^Ò franchisees purchase merchandise directly from vendors and having 24 fewer Play it Again Sports^Ò  stores open than one year ago.  The Play It Again Sports^Ò buying group has not historically contributed significantly to the Company’s net income.  Retail store sales decreased $798,500 or 55.9%, for the quarter ended September 25, 2004 compared to the third quarter last year.  The revenue decline was primarily due to selling two Company-owned Music Go Round^Ò Stores in the fourth quarter of 2003 and selling three additional Company-owned Music Go Round^Ò Stores in the first quarter of 2004.

Cost of Merchandise Sold

Cost of merchandise sold includes the cost of merchandise sold through the Play it Again Sports^Ò  buying group, or through our Computer Support Center (“Direct Franchisee Sales”) and at Company-owned retail stores.  Direct Franchisee Sales cost of merchandise sold as a percentage of the Direct Franchisee Sales revenue and cost of merchandise sold at Company-owned stores as a percentage of Company-owned store retail revenue, respectively, for the third quarter of 2004 and 2003 were as follows:

	2004		2003
Direct Franchisee Sales	95.7	%	96.6	%
Retail	48.8	%	51.0	%

The 2.2 percentage point decrease in retail cost of goods sold is primarily due to selling five Company-owned Music Go Round^Ò stores within the last year.  Since Music Go Round^Ò stores have a higher cost of goods sold than the other brands of Company-owned stores, the mix of sales by brand and related cost of goods sold has improved.

Selling, General and Administrative

The $164,900, or 4.8%, decrease in selling, general and administrative expenses in the quarter ended September 25, 2004 compared to the third quarter of 2003 is primarily due to selling a total of five Company-owned Stores in the fourth quarter of 2003 and first quarter of 2004 and the elimination of related salary and rent expenses, partially offset by start up costs associated with leasing activity.

Loss from Equity Investment

During the third quarter of 2004, the Company recorded a $40,700 loss from our investment in eFrame.  This represents our pro rata share of eFrame losses for the period.  As of September 25, 2004, the Company owned 27.2% of the outstanding membership interests of eFrame.

Gain on Sale of Marketable Securities

During the third quarter of 2004, the Company had a no gain or loss on the sale of marketable securities compared to a $38,800 gain in 2003. 

Interest and Other Income

During the third quarter of 2004, the Company had interest and other income of $50,600 compared to $70,100 of interest and other income in the third quarter of 2003.  This decrease reflects a movement in the Company’s investment portfolio to a greater mix of lower interest earning investments such as money market securities.

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Income Taxes

The provision for income taxes was calculated at an effective rate of 40.0% and 39.0% for the third quarter of 2004 and 2003, respectively.  The higher effective tax rate in 2004 compared to 2003 reflects a change in estimate of the effective annual rate for 2004 and a higher amount of non-deductible expenses.

Comparison of Nine Months Ended September 25, 2004 to
Nine Months Ended September 27, 2003

Revenues

Revenues for the nine months ended September 25, 2004 were $20.8 million compared to $23.8 million for the comparable period in 2003, a decrease of 12.6%.

Royalties increased to $12.7 million for the first nine months of 2004 from $12.1 million for the same period of 2003, a 5.0% increase.  The increase is due to higher franchisee retail sales.

Merchandise sales include the sale of product to franchisees either through the Play it Again Sports^Ò buying group or through our Computer Support Center (“Direct Franchisee Sales”) and retail sales at the Company-owned stores.  For the first nine months of 2004 and 2003, they were as follows:

	2004		2003
Direct Franchisee Sales	$	4,975,000	$	6,627,700
Retail Sales	1,939,100		3,974,000
	$	6,914,100	$	10,601,700

Direct Franchisee Sales revenues decreased $1,652,700, or 24.9%, for the nine months ended September 25, 2004 compared to the same period last year.  This is a result of management’s strategic decision to have more Play it Again Sports^Ò  franchisees purchase merchandise directly from vendors and having 24 fewer stores open than one year ago.  Retail store sales decreased $2,034,900, or 51.2%, for the nine months ended September 25, 2004 compared to the same period last year.  The revenue decline was primarily due to selling two Company-owned Music Go Round^Ò Stores in the fourth quarter of 2003 and selling three additional Company-owned Music Go Round^Ò Stores in the first quarter of 2004.

Franchise fees increased to $693,600 for the first nine months of 2004 compared to $570,300 for the first nine months of 2003.  The increase is due to opening thirty-three stores in the first nine months of 2004 compared to twenty-nine in the same period of 2003.

Cost of Merchandise Sold

Cost of merchandise sold includes the cost of merchandise sold through the Play it Again Sports^Ò  buying group, or through our Computer Support Center (“Direct Franchisee Sales”) and at Company-owned retail stores.  Direct Franchisee Sales cost of merchandise sold as a percentage of the Direct Franchisee Sales revenue and cost of merchandise sold at Company-owned stores as a percentage of Company-owned retail store revenue, respectively, for the first nine months of 2004 and 2003 were as follows:

	2004		2003
Direct Franchisee Sales	95.5	%	96.1	%
Retail	50.3	%	52.2	%

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The 1.9 percentage point decrease in retail cost of goods sold is primarily due to selling five Company-owned Music Go Round^Ò stores within the last year.  Since Music Go Round^Ò stores have a higher cost of goods sold than the other brands of Company-owned stores, the mix of sales by brand and related cost of goods sold has improved.

Selling, General and Administrative

The $753,200, or 7.0%, decrease in selling, general and administrative expenses in the first nine months ended September 25, 2004 compared to the first nine months of 2003 is primarily due to selling a total of five Company-owned Stores in the fourth quarter of 2003 and first quarter of 2004 and the elimination of related salary and rent expenses, partially offset by start up costs associated with leasing activity.

Loss from Equity Investment

For the nine months ended September 25, 2004, the Company recorded a $123,100 loss from our investment in eFrame, LLC.  This represents our pro rata share of eFrame losses for the period.  As of September 25, 2004, the Company owned 27.2% of the outstanding membership interests of eFrame.

Gain on Sale of Marketable Securities

During the first nine months of 2004, the Company had a gain on the sale of marketable securities of $173,800 compared to $153,300 in 2003. 

Interest and Other Income

During the first nine months of 2004, the Company had interest and other income of $153,600 compared to $217,800 of interest and other income in the first nine months of 2003.  This decrease reflects a movement in the Company’s investment portfolio to a greater mix of lower interest earning investments such as money market securities.

Income Taxes

The provision for income taxes was calculated at an effective rate of 40.8% and 38.5% for the first nine months of 2004 and 2003, respectively.  The increase is the result of a state tax liability relating to prior years that was settled during the first quarter of 2004 and a higher amount of non-deductible expenses.

Liquidity and Capital Resources

The Company’s primary sources of liquidity have historically been cash flow from operations and credit agreement borrowings.  The components of the income statement that affect the liquidity of the Company include the following non-cash items: depreciation and amortization, compensation expense related to granting of stock options and deferred gain on sale of building.  The most significant component of the balance sheet that affects liquidity is in the other category under Long-Term Investments.  The Company ended the third quarter of 2004 with $9.6 million in cash and current marketable securities and a current ratio (current assets divided by current liabilities) of 4.0 to 1.0 compared to $5.2 million in cash and marketable securities and a current ratio of 2.4 to 1.0 at the end of the third quarter of 2003.

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Ongoing operating activities provided cash of $3.8 million for the first nine months of 2004 and 2003.  Components of the cash provided by operating assets and liabilities for the first nine months of 2004 include a $250,300 decrease in accounts receivable as a result of lower buying group activity.  Inventory provided cash of $121,300 as a result of a selling three Company-owned Music Go Round^Ò stores.  Deferred franchise fee revenue provided cash of $260,300, mainly due to increased deposits on future store openings. Components of cash utilized by operating assets and liabilities include a $121,900 decrease in accounts payable mainly due to a decrease in buying group activity and a $271,500 decrease in accrued liabilities primarily due to lower bonus/profit sharing and salary accruals compared with

year-end 2003.

Investing activities used $1.2 million of cash during the first nine months of 2004 compared to $4.2 million for the same period last year, primarily due to the purchase of investments in both periods, including the Company’s additional $1.5 million equity investment in Tomsten, Inc., the parent company of Archiver’s.

Financing activities provided $1.4 million of cash during the first nine months of 2004 compared to using $1.3 million in the first nine months of 2003.  The first nine months of 2004 consists of amounts received on the exercise of stock options.  The first nine months of 2003 included $1.9 million used to repurchase 200,000 shares of Company common stock, offset by $575,300 received from the exercise of stock options.  As of September 25, 2004, the Company has the authorization to repurchase up to an additional 230,023 shares.

As of September 25, 2004, the company had no material outstanding commitments for capital expenditures.

The Company believes that cash generated from future operations and cash and investments on hand, will be adequate to meet the Company’s current obligations including the investments in Commercial Credit Group, Inc. and BridgeFunds Limited, and operating needs.  The Company has and intends to continue using a portion of its cash on hand as well as its bank line of credit to fund the start up of its leasing operations.

Critical Accounting Policies

We prepare the consolidated financial statements of Winmark Corporation and subsidiaries in conformity with accounting principles generally accepted in the United States of America.  As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based on information available.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented.  There can be no assurance that actual results will not differ from these estimates.  The following critical accounting policies that we believe are most important to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

The Company collects royalties from each franchise based on a percentage of retail store gross sales.  The Company recognizes royalties as revenue when earned.  At the end of each accounting period, estimates of royalty amounts due are made based on historical sales information.  If there are significant changes in the estimates of franchise sales our revenue would be impacted.

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The Company collects franchise fees when franchise agreements are signed and recognizes the franchise fees as revenue when the store is opened, which is when the Company has performed substantially all initial services required by the franchise agreement.  Franchise fees collected from franchisees but not yet recognized as income, are recorded as deferred revenue in the liability section of our balance sheet.  Merchandise sales through the buying group are recognized when the product has been shipped.  Revenue from sales at our Company-owned stores are recognized at the time of the merchandise sale.

Allowance for doubtful accounts

We must make estimates of the uncollectability of our accounts and notes receivables.  We base the adequacy of the allowance on historical bad debts, current economic trends and specific analysis of each franchisee’s payment trends and credit worthiness.  If any of the above noted items would be significantly different than estimates, our results could be different.

Inventory Reserve

The Company values its inventory at the lower of cost, as determined by the average weighted cost method, or market.  We make estimates to establish our inventory reserve.  We base the adequacy of our reserve on detailed analysis of existing inventory, the age of the inventory and current trends.  If any of the above noted items would be significantly different than estimates, the results could be different.

Factors That May Affect Future Results

The statements contained in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not strictly historical fact, including without limitation, our statement that we will have adequate capital to meet our current and contingent obligations and operating needs are forward looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act.  Such statements are based on management’s current expectations as of the date of this Report, but involve risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by such forward looking statements.

Item 3:Quantitative and Qualitative Disclosures About Market Risk

Approximately $0.8 million of our investments at September 25, 2004 were invested in fixed income securities and $6.6 million of cash and cash equivalents in money market mutual funds, which are subject to the effects of market fluctuations in interest rates.  A one percent change in interest rates may have a significant impact on the fair value of our fixed income investments.

Item 4:Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.OTHER INFORMATION

Items 1 – 5:

Not applicable.

Item 6:   Exhibits

Exhibits

See Exhibit Index following signature page.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	WINMARK CORPORATION
Date: November 9, 2004	By:	/s/   John L. Morgan
	John L. Morgan
	Chairman of the Board and Chief Executive Officer
Date: November 9, 2004	By:	/s/   Brett D. Heffes
	Brett D. Heffes
	Chief Financial Officer and Treasurer

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EXHIBIT INDEX

WINMARK CORPORATION

FORM 10-Q FOR QUARTER ENDED SEPTEMBER 25, 2004

Exhibit No.	Description
Exhibit 10.1 –	Credit Agreement with LaSalle Bank National Association dated September 30, 2004
Exhibit 10.2 –	Stock Purchase Agreement with Commercial Credit Group, Inc. dated September 22, 2004
Exhibit 10.3 –	Securities Purchase Agreement with BridgeFunds Limited dated October 13, 2004
Exhibit 31.1 –	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 –	Certification of Chief Financial Officer and Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 –	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 –	Certification of Chief Financial Officer and Treasurer under Section 906 of the Sarbanes-Oxley Act of 2002

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EX-10.1

Exhibit 10.1

364-DAY REVOLVING CREDIT AGREEMENT

dated as of September 30, 2004

among

WINMARK CORPORATION,
as the Company and a Loan Party

THE SUBSIDIARIES OF THE COMPANY,

as Loan Parties,

and

LASALLE BANK NATIONAL ASSOCIATION,
as Lender

SECTION 1	DEFINITIONS.
1.1	Definitions
1.2	Other Interpretive Provisions
SECTION 2	COMMITMENTS OF THE LENDER; BORROWING, CONVERSION AND LETTER OF CREDIT PROCEDURES.
2.1	Commitments
	2.1.1	Loan Commitment
	2.1.2	L/C Commitment
2.2	Loan Procedures.
	2.2.1	Various Types of Loans
	2.2.2	Borrowing Procedures.
	2.2.3	Conversion and Continuation Procedures.
2.3	Letter of Credit Procedures.
	2.3.1	L/C Applications
	2.3.2	Reimbursement Obligations.
2.4	Certain Conditions
SECTION 3	EVIDENCING OF LOANS.
3.1	Notes
3.2	Recordkeeping
SECTION 4	INTEREST.
4.1	Interest Rates
4.2	Interest Payment Dates
4.3	Setting and Notice of LIBOR Rates
4.4	Computation of Interest
SECTION 5	FEES.
5.1	Letter of Credit Fees.
5.2	Lender’s Fees
SECTION 6	REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT; PREPAYMENTS.
6.1	Prepayments.
	6.1.1	Voluntary Prepayments
	6.1.2	Mandatory Prepayments
	6.1.3	Manner of Prepayments
6.2	Repayments
SECTION 7	MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES.
7.1	Making of Payments
7.2	Application of Certain Payments
7.3	Due Date Extension
7.4	Setoff

7.5	Taxes.
SECTION 8	INCREASED COSTS; SPECIAL PROVISIONS FOR LIBOR LOANS.
8.1	Increased Costs.
8.2	Basis for Determining Interest Rate Inadequate or Unfair
8.3	Changes in Law Rendering LIBOR Loans Unlawful
8.4	Funding Losses
8.5	Right of the Lender to Fund through Other Offices
8.6	Discretion of the Lender as to Manner of Funding
8.7	Mitigation of Circumstances
8.8	Conclusiveness of Statements; Survival of Provisions
SECTION 9	REPRESENTATIONS AND WARRANTIES.
9.1	Organization
9.2	Authorization; No Conflict
9.3	Validity and Binding Nature
9.4	Financial Condition
9.5	No Material Adverse Change
9.6	Litigation and Contingent Liabilities
9.7	Ownership of Properties; Liens
9.8	Equity Ownership; Subsidiaries
9.9	Pension Plans.
9.10	Investment Company Act
9.11	Public Utility Holding Company Act
9.12	Regulation U
9.13	Taxes; Tax Shelter Registration.
9.14	Solvency, etc.
9.15	Environmental Matters
9.16	Insurance
9.17	Real Property
9.18	Information
9.19	Intellectual Property
9.20	Burdensome Obligations
9.21	Labor Matters
9.22	No Default
9.23	Accounts
9.24	Anti-Terrorism Law Compliance
SECTION 10	AFFIRMATIVE COVENANTS.
10.1	Reports, Certificates and Other Information
	10.1.1	Annual Report
	10.1.2	Monthly Reports
	10.1.3	Quarterly Reports
	10.1.4	Compliance Certificates
	10.1.5	Reports to the SEC and to Shareholders
	10.1.6	Notice of Default, Litigation and ERISA Matters

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	10.1.7	Borrowing Base Certificates
	10.1.8	Management Reports
	10.1.9	Subordinated Debt Notices
	10.1.10	Other Information
10.2	Books, Records and Inspections
10.3	Maintenance of Property; Insurance.
10.4	Compliance with Laws; Payment of Taxes and Liabilities
10.5	Maintenance of Existence, etc.
10.6	Use of Proceeds
10.7	Employee Benefit Plans.
10.8	Environmental Matters
10.9	Tax Shelter Registration
10.10	Further Assurances
10.11	Cash Management Systems
SECTION 11	NEGATIVE COVENANTS
11.1	Debt
11.2	Liens
11.3	Operating Leases
11.4	Restricted Payments
11.5	Mergers, Consolidations, Sales
11.6	Modification of Organizational Documents
11.7	Affiliate Transactions
11.8	Unconditional Purchase Obligations
11.9	Inconsistent Agreements
11.10	Business Activities
11.11	Restriction of Amendments to Certain Documents
11.12	Fiscal Year
11.13	Tangible Net Worth
11.14	Control Agreements
SECTION 12	EFFECTIVENESS; CONDITIONS OF LENDING, ETC.
12.1	Initial Credit Extension
	12.1.1	Note
	12.1.2	Authorization Documents
	12.1.3	Consents, etc.
	12.1.4	Security Documents
	12.1.5	Financing Statements
	12.1.6	Opinions of Counsel
	12.1.7	Insurance
	12.1.8	Payment of Fees
	12.1.9	Search Results; Lien Terminations
	12.1.10	Filings, Registrations and Recordings
	12.1.11	Borrowing Base Certificate
	12.1.12	Closing Certificate
	12.1.13	Other

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12.2	Conditions
	12.2.1	Compliance with Warranties, No Default, etc.
	12.2.2	Confirmatory Certificate
SECTION 13	EVENTS OF DEFAULT AND THEIR EFFECT.
13.1	Events of Default
	13.1.1	Non-Payment of the Loans, etc.
	13.1.2	Non-Payment of Other Debt
	13.1.3	Other Material Obligations
	13.1.4	Bankruptcy, Insolvency, etc.
	13.1.5	Non-Compliance with Loan Documents
	13.1.6	Representations; Warranties
	13.1.7	Pension Plans
	13.1.8	Judgments
	13.1.9	Invalidity of Collateral Documents, etc.
	13.1.10	Invalidity of Subordination Provisions, etc.
	13.1.11	Change of Control
	13.1.12	Material Adverse Effect
13.2	Effect of Event of Default
SECTION 14	THE LOAN PARTIES.
14.1	Appointment of the Company
14.2	Relationship Among the Loan Parties.
SECTION 15	GENERAL.
15.1	Waiver; Amendments
15.2	Confirmations
15.3	Notices
15.4	Computations
15.5	Costs, Expenses and Taxes
15.6	Assignments; Participations.
15.7	GOVERNING LAW
15.8	Confidentiality
15.9	Severability
15.10	Nature of Remedies
15.11	Entire Agreement
15.12	Counterparts
15.13	Successors and Assigns
15.14	Captions
15.15	INDEMNIFICATION BY THE LOAN PARTIES
15.16	Nonliability of Lender
15.17	FORUM SELECTION AND CONSENT TO JURISDICTION
15.18	WAIVER OF JURY TRIAL

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SCHEDULES
SCHEDULE 9.6	Litigation and Contingent Liabilities
SCHEDULE 9.7	Ownership of Properties; Liens
SCHEDULE 9.8	Subsidiaries
SCHEDULE 9.17	Real Property
SCHEDULE 9.23	Accounts
SCHEDULE 11.7	Affiliate Transactions
EXHIBITS
EXHIBIT A	Form of Note
EXHIBIT B	Form of Compliance Certificate
EXHIBIT C	Form of Borrowing Base Certificate
EXHIBIT D	Form of Master Letter of Credit Agreement
EXHIBIT E	Form of Notice of Borrowing
EXHIBIT F	Form of Notice of Conversion/Continuation
EXHIBIT G	Form of Security Agreement
EXHIBIT H	Form of Pledge Agreement

364-DAY REVOLVING CREDIT AGREEMENT

THIS 364-DAY REVOLVING CREDIT AGREEMENT dated as of September 30, 2004 (this “Agreement”) is entered into among WINMARK CORPORATION(the “Company”), the Subsidiaries of the Company that are or may from time to time become parties hereto (together with the Company and their respective successors and assigns, the “Loan Parties”) and LASALLE BANK NATIONAL ASSOCIATION (in its individual capacity, “LaSalle”), as the Lender.

The Lender has agreed to make available to the Company a 364-day revolving credit facility (which includes letters of credit) upon the terms and conditions set forth herein.

In consideration of the mutual agreements herein contained, the parties hereto agree as follows:

DEFINITIONS.

Definitions.  When used herein the following terms shall have the following meanings:

“Account”:  As defined in the UCC.

“Acquisition”:  Any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of all or substantially all of any business or division of a Person, (b) the acquisition of all or any portion of the Capital Securities of any Person, (c) a merger or consolidation or any other combination with another Person (other than a Person that is already a Subsidiary), or (d) any other Investment in a Person; provided, however, that an Investment in publicly-traded securities of a Person shall not constitute an Acquisition so long as such Investment does not result in (i) the acquisition of all or substantially all of the assets or Capital Securities of such Person, or (ii) a merger, consolidation or other combination with such Person.

“Affected Loan”:  As defined in Section 8.3.

“Affiliate”:  With respect to any Person, (a) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (b) any officer or director of such Person and (c) with respect to the Lender, any entity administered or managed by the Lender or an Affiliate or investment advisor thereof and which is engaged in making, purchasing, holding or otherwise investing in commercial loans.  A Person shall be deemed to be “controlled by” any other Person if such Person possesses, directly or indirectly, power to vote 5% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and

policies of such Person whether by contract or otherwise.  Unless expressly stated otherwise herein, the Lender shall not be deemed an Affiliate of any Loan Party.

“Agreement”:  As defined in the Preamble.

“Applicable Margin”:  For any day, a rate per annum of (i) for LIBOR Loans, 2.00% or (ii) for Base Rate Loans, 0.00%.

“Asset Disposition”:  The sale, lease, assignment or other transfer for value (each, a “Disposition”) by any Loan Party to any Person (other than a Loan Party) of any asset or right of such Loan Party (including, the loss, destruction or damage of any thereof or any actual or threatened (in writing to any Loan Party) condemnation, confiscation, requisition, seizure or taking thereof) other than (a) the Disposition of any asset which is to be replaced, and is in fact replaced, within 30 days with another asset performing the same or a similar function and (b) the sale or lease of inventory in the ordinary course of business.

“Attorney Costs”:  With respect to any Person, all reasonable fees and charges of any counsel to such Person, the reasonable allocable cost of internal legal services of such Person, all reasonable disbursements of such internal counsel and all court costs and similar legal expenses.

“Bank Product Agreements”:  Those certain cash management service agreements entered into from time to time between any Loan Party and the Lender or its Affiliates in connection with any of the Bank Products.

“Bank Product Obligations”:  All obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by the Loan Parties to the Lender or its Affiliates pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that a Loan Party is obligated to reimburse to the Lender as a result of the Lender purchasing participations or executing indemnities or reimbursement obligations with respect to the Bank Products provided to the Loan Parties pursuant to the Bank Product Agreements.

“Bank Products”:  Any service or facility extended to any Loan Party by the Lender or its Affiliates including:  (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH Transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) Hedging Agreements.

“Base Rate”:  At any time the greater of (a) the Federal Funds Rate plus 0.5% and (b) the Prime Rate.

“Base Rate Loan”:  Any Loan which bears interest at or by reference to the Base Rate.

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“Borrowing Base”:  As of the end of any month, an amount equal to EBITDA for the twelve consecutive months ended or most recently ended on such month times two (2).

“Borrowing Base Certificate”:  A certificate substantially in the form of Exhibit C.

“BSA”:  As defined in Section 10.4.

“Business Day”:  Any day on which LaSalle is open for commercial banking business in Minneapolis, Minnesota and Chicago, Illinois and, in the case of a Business Day which relates to a LIBOR Loan, on which dealings are carried on in the London interbank eurodollar market.

“Capital Expenditures”:  All expenditures which, in accordance with GAAP, would be required to be capitalized and shown on the consolidated balance sheet of the Company, including expenditures in respect of Capital Leases, but excluding expenditures made in connection with the replacement, substitution or restoration of assets to the extent financed (a) from insurance proceeds (or other similar recoveries) paid on account of the loss of or damage to the assets being replaced or restored or (b) with awards of compensation arising from the taking by eminent domain or condemnation of the assets being replaced.

“Capital Lease”:  With respect to any Person, any lease of (or other agreement conveying the right to use) any real or personal property by such Person that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such Person.

“Capital Securities”:  With respect to any Person, all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person’s capital, whether now outstanding or issued or acquired after the Closing Date, including common shares, preferred shares, membership interests in a limited liability company, limited or general partnership interests in a partnership or any other equivalent of such ownership interest.

“Cash Collateralize”:  To deliver cash collateral to the Lender, to be held as cash collateral for outstanding Letters of Credit, pursuant to documentation satisfactory to the Lender.  Derivatives of such term have corresponding meanings.

“Change of Control”:  The occurrence of any of the following events: (a) any Person or two or more Persons acting in concert acquiring beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Capital Securities of the Company representing 50% or more of the combined voting power of all Capital Securities of the Company entitled to vote in the election of directors; (b) any Person or two or more Persons acting in concert acquiring by contract or otherwise, or entering into a contract or arrangement which upon consummation will result in its or their acquisition of, control over Capital Securities of the Company representing 50% or more of the combined voting power of all Capital Securities of the Company entitled to vote in the election of directors; or (c) the Company shall cease to, directly or indirectly, own and control 100% of each class of the outstanding Capital Securities of each Subsidiary.

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“Closing Date”:  As defined in Section 12.1.

“Code”:  The Internal Revenue Code of 1986.

“Collateral Access Agreement”:  An agreement in form and substance reasonably satisfactory to the Lender pursuant to which a mortgagee or lessor of real property on which collateral is stored or otherwise located, or a warehouseman, processor or other bailee of Inventory or other property owned by any Loan Party, acknowledges the Liens of the Lender and waives any Liens held by such Person on such property, and, in the case of any such agreement with a mortgagee or lessor, permits the Lender reasonable access to and use of such real property following the occurrence and during the continuance of an Event of Default to assemble, complete and sell any collateral stored or otherwise located thereon.

“Collateral Documents”:  Collectively, the Security Agreement, the Pledge Agreement, each Collateral Access Agreement, each UCC-1 financing statement, each Control Agreement and any other agreement or instrument pursuant to which the Company, any other Loan Party or any other Person grants or purports to grant collateral to the Lender or otherwise relates to such collateral.

“Commitment”:  The Lender’s commitment to make Loans, and to issue Letters of Credit, under this Agreement, as reduced from time to time pursuant to Section 6.1.  The initial amount of the Lender’s commitment to make Loans is $15,000,000; provided that not more than $10,000,000 of such amount is available for the leasing operations of the Loan Parties.

“Company”:  As defined in the Preamble.

“Compliance Certificate”:  A Compliance Certificate in substantially the form of Exhibit B.

“Contingent Liability”:  With respect to any Person, each obligation and liability of such Person and all such obligations and liabilities of such Person incurred pursuant to any agreement, undertaking or arrangement by which such Person:  (a) guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, dividend, obligation or other liability of any other Person in any manner (other than by endorsement of instruments in the course of collection), including any indebtedness, dividend or other obligation which may be issued or incurred at some future time; (b) guarantees the payment of dividends or other distributions upon the Capital Securities of any other Person; (c) undertakes or agrees (whether contingently or otherwise):  (i) to purchase, repurchase, or otherwise acquire any indebtedness, obligation or liability of any other Person or any or any property or assets constituting security therefor, (ii) to advance or provide funds for the payment or discharge of any indebtedness, obligation or liability of any other Person (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, working capital or other financial condition of any other Person, or (iii) to make payment to any other Person other

4

than for value received; (d) agrees to lease property or to purchase securities, property or services from such other Person with the purpose or intent of assuring the owner of such indebtedness or obligation of the ability of such other Person to make payment of the indebtedness or obligation; (e) to induce the issuance of, or in connection with the issuance of, any letter of credit for the benefit of such other Person; or (f) undertakes or agrees otherwise to assure a creditor against loss.  The amount of any Contingent Liability shall (subject to any limitation set forth herein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the indebtedness, obligation or other liability guaranteed or supported thereby.

“Control Agreement”:  An account control agreement, in form and substance satisfactory to the Lender, among the Lender, the applicable Loan Party and the depository or securities intermediary for any deposit, checking or brokerage account opened or maintained by a Loan Party.

“Controlled Group”:  All members of a controlled group of corporations, all members of a controlled group of trades or businesses (whether or not incorporated) under common control and all members of an affiliated service group which, together with the Company or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.

“Debt”:  With respect to any Person, without duplication, (a) all indebtedness of such Person, (b) all borrowed money of such Person, whether or not evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person as lessee under Capital Leases which have been or should be recorded as liabilities on a balance sheet of such Person in accordance with GAAP, not including obligations of a Loan Party under non-recourse discounted leases, (d) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (e) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person; provided that if such Person has not assumed or otherwise become liable for such indebtedness, such indebtedness shall be measured at the fair market value of such property securing such indebtedness at the time of determination, (f) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn), bankers’ acceptances and similar obligations issued for the account of such Person (including the Letters of Credit), (g) all Hedging Obligations of such Person, (h) all Contingent Liabilities of such Person and (i) all Debt of any partnership of which such Person is a general partner.

“Dollar” and the sign “$”:  Lawful money of the United States of America.

“EBITDA”:  For any period, the Borrowers’ “Income from Operations” (as set forth on the Borrowers’ consolidated income statement) plus depreciation, plus amortization, plus compensation expense related to the granting of stock options.

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“Environmental Claims”:  All claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment.

“Environmental Laws”:  All present or future federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative or judicial orders, consent agreements, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case relating to any matter arising out of or relating to public health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, emission, release, threatened release, control or cleanup of any Hazardous Substance.

“ERISA”:  The Employee Retirement Income Security Act of 1974.

“Event of Default”:  Any of the events described in Section 13.1.

“Excluded Taxes”:  Taxes based upon, or measured by, the Lender’s (or a branch of the Lender’s) overall net income, overall net receipts, or overall net profits (including franchise taxes imposed in lieu of such taxes), but only to the extent such taxes are imposed by a taxing authority (a) in a jurisdiction in which the Lender is organized, (b) in a jurisdiction which the Lender’s principal office is located, or (c) in a jurisdiction in which the Lender’s lending office (or branch) in respect of which payments under this Agreement are made is located.

“Federal Funds Rate”:  For any day, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Lender from three Federal funds brokers of recognized standing selected by the Lender.  The Lender’s determination of such rate shall be binding and conclusive absent manifest error.

“Fiscal Quarter”:  A fiscal quarter of a Fiscal Year.

“Fiscal Year”:  The fiscal year of the Company and its Subsidiaries, which period shall be the 12-month period ending on the last Saturday of each year.  References to a Fiscal Year with a number corresponding to any calendar year (e.g., “Fiscal Year 2003”) refer to the Fiscal Year ending on the last Saturdayof such calendar year.

“FRB”:  The Board of Governors of the Federal Reserve System or any successor thereto.

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“Funded Debt”:  As to any Person, all Debt of such Person that matures more than one year from the date of its creation (or is renewable or extendible, at the option of such Person, to a date more than one year from such date).

“GAAP”:  Generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession) and the Securities and Exchange Commission, which are applicable to the circumstances as of the date of determination.

“Group”:  As defined in Section 2.2.1.

“Hazardous Substances”:  (a) Any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, dielectric fluid containing levels of polychlorinated biphenyls, radon gas and mold; (b) any chemicals, materials, pollutant or substances defined as or included in the definition of “hazardous substances”, “hazardous waste”, “hazardous materials”, “extremely hazardous substances”, “restricted hazardous waste”, “toxic substances”, “toxic pollutants”, “contaminants”, “pollutants” or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance, the exposure to, or release of which is prohibited, limited or regulated by any governmental authority or for which any duty or standard of care is imposed pursuant to, any Environmental Law.

“Hedging Agreement”:  Any interest rate, currency or commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices.

“Hedging Obligation”:  With respect to any Person, any liability of such Person under any Hedging Agreement.  The amount of any Person’s obligation in respect of any Hedging Obligation shall be deemed to be the incremental obligation that would be reflected in the financial statements of such Person in accordance with GAAP.

“Indemnified Liabilities”:  As defined in Section 15.16.

“Interest Expense”:  For any period, the consolidated interest expense of the Company and its Subsidiaries for such period (including all imputed interest on Capital Leases).

“Interest Period”:  As to any LIBOR Loan, the period commencing on the date such Loan is borrowed or continued as, or converted into, a LIBOR Loan and ending on the date one, two or three months thereafter as selected by the Company pursuant to Section 2.2.2 or 2.2.3, as the case may be; provided that:

(a)if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business

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Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day;

(b)any Interest Period that begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall end on the last Business Day of the calendar month at the end of such Interest Period; and

(c)the Company may not select any Interest Period for a Loan which would extend beyond the scheduled Termination Date.

“Inventory”:  As defined in the Security Agreement.

“Investment”:  With respect to any Person, any investment in another Person, whether by acquisition of any Capital Security, by making any loan or advance, or by making an Acquisition.

“LaSalle”:  As defined in the Preamble.

“L/C Application”:  With respect to any request for the issuance of a Letter of Credit, a letter of credit application in the form being used by the Lender at the time of such request for the type of letter of credit requested.

“L/C Fee Rate”:  A rate per annum of 2%.

“Lender”:  LaSalle.  In addition to the foregoing, for the purpose of identifying the Persons entitled to share in the Collateral and the proceeds thereof under, and in accordance with the provisions of, this Agreement and the Collateral Documents, the term “Lender” shall include Affiliates of a Lender providing a Bank Product.

“Lender Party”:  As defined in Section 15.15.

“Letter of Credit”:  As defined in Section 2.1.2.

“LIBOR Loan”:  Any Loan which bears interest at a rate determined by reference to the LIBOR Rate.

“LIBOR Office”:  The office or offices of the Lender which shall be making or maintaining the LIBOR Loans.  A LIBOR Office may be, at the option of the Lender, either a domestic or foreign office.

“LIBOR Rate”:  A rate of interest equal to (a) the per annum rate of interest at which United States dollar deposits in an amount comparable to the amount of the relevant LIBOR Loan and for a period equal to the relevant Interest Period are offered in the London Interbank Eurodollar market at 11:00 A.M. (London time) two (2) Business Days prior to the commencement of such Interest Period, as displayed in the Bloomberg Financial Markets system

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(or other authoritative source selected by the Lender in its sole discretion) or, if the Bloomberg Financial Markets system or another authoritative source is not available, as the LIBOR Rate is otherwise determined by the Lender in its sole and absolute discretion, divided by (b) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), such rate to remain fixed for such Interest Period.  The Lender’s determination of the LIBOR Rate shall be conclusive, absent manifest error.

“Lien”:  With respect to any Person, any interest granted by such Person in any real or personal property, asset or other right owned or being purchased or acquired by such Person (including an interest in respect of a Capital Lease) which secures payment or performance of any obligation and shall include any mortgage, lien, encumbrance, title retention lien, charge or other security interest of any kind, whether arising by contract, as a matter of law, by judicial process or otherwise.

“Loan Availability”:  The lesser of (i) the Commitment and (ii) the Borrowing Base.

“Loan Documents”:  This Agreement, the Note, the Letters of Credit, the Master Letter of Credit Agreement, the L/C Applications, the Collateral Documents, the Subordination Agreements and all documents, instruments and agreements delivered in connection with the foregoing.

“Loan Party”:  The Company and each Subsidiary.

“Loan or Loans”:  As defined in Section 2.1.1.

“Margin Stock”:  Any “margin stock” as defined in Regulation U.

“Master Letter of Credit Agreement”:  At any time, with respect to the issuance of Letters of Credit, a master letter of credit agreement or reimbursement agreement in the form of Exhibit D, or successor form designated by the Lender.

“Material Adverse Effect”:  (a) A material adverse change in, or a material adverse effect upon, the financial condition, operations, assets, business, properties or prospects of the Loan Parties taken as a whole, (b) a material impairment of the ability of any Loan Party to perform any of the Obligations under any Loan Document or (c) a material adverse effect upon any substantial portion of the collateral under the Collateral Documents or upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document.

“Multiemployer Pension Plan”:  A multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Company or any other member of the Controlled Group may have any liability.

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“Note”:  A promissory note in the form of Exhibit A.

“Notice of Borrowing”:  As defined in Section 2.2.2.

“Notice of Conversion/Continuation”:  As defined in Section 2.2.3.

“Obligations”:  All obligations (monetary (including post-petition interest, allowed or not) or otherwise) of any Loan Party under this Agreement and any other Loan Document including Attorney Costs and any reimbursement obligations of each Loan Party in respect of Letters of Credit and surety bonds, all Hedging Obligations permitted hereunder which are owed to the Lender or its Affiliates, and all Bank Products Obligations, all in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due.

“OFAC”:  As defined in Section 9.24.

“Operating Lease”:  Any lease of (or other agreement conveying the right to use) any real or personal property by any Loan Party, as lessee, other than any Capital Lease.

“Outstandings”:  At any time, the sum of (a) the aggregate principal amount of all outstanding Loans, plus (b) the Stated Amount of all Letters of Credit.

“PBGC”:  The Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA.

“Pension Plan”:  A “pension plan”, as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA or the minimum funding standards of ERISA (other than a Multiemployer Pension Plan), and as to which the Company or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA.

“Person”:  Any natural person, corporation, partnership, trust, limited liability company, association, governmental authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity.

“Pledge Agreement”:  A Pledge Agreement in the form of Exhibit H executed and delivered by the Company.

“Prime Rate”:  For any day, the rate of interest in effect for such day as publicly announced from time to time by the Lender as its prime rate (whether or not such rate is actually charged by the Lender), which is not intended to be the Lender’s lowest or most favorable rate of interest at any one time.  Any change in the Prime Rate announced by the Lender shall take effect

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at the opening of business on the day specified in the public announcement of such change; provided that the Lender shall not be obligated to give notice of any change in the Prime Rate.

“Regulation D”:  Regulation D of the FRB.

“Regulation U”:  Regulation U of the FRB.

“Reportable Event”:  A reportable event as defined in Section 4043 of ERISA and the regulations issued thereunder as to which the PBGC has not waived the notification requirement of Section 4043(a), or the failure of a Pension Plan to meet the minimum funding standards of Section 412 of the Code (without regard to whether the Pension Plan is a plan described in Section 4021(a)(2) of ERISA) or under Section 302 of ERISA.

“SEC”:  The Securities and Exchange Commission or any other governmental authority succeeding to any of the principal functions thereof.

“Security Agreement”:  A Security Agreement in the form of Exhibit G executed and delivered by the Loan Parties.

“Senior Debt”:  All Debt of the Company and its Subsidiaries other than Subordinated Debt.

“Senior Officer”:  With respect to any Loan Party, any of the chief executive officer, the chief financial officer, the chief operating officer or the treasurer of such Loan Party.

“Stated Amount”:  With respect to any Letter of Credit at any date of determination, (a) the maximum aggregate amount available for drawing thereunder under any and all circumstances plus (b) the aggregate amount of all unreimbursed payments and disbursements under such Letter of Credit.

“Subordinated Debt”:  Any unsecured Debt of the Company which has subordination terms, covenants, pricing and other terms which have been approved in writing by the Lender.

“Subordinated Debt Documents”:  All documents and instruments relating to the Subordinated Debt and all amendments and modifications thereof approved by the Lender.

“Subordination Agreements”:  All subordination agreements executed by a holder of Subordinated Debt in favor of the Lender from time to time after the Closing Date.

“Subsidiary”:  With respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person owns, directly or indirectly, such number of outstanding Capital Securities as have more than 50% of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity.  Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of the Company.

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“Tangible Net Worth”:  As of any date of determination, the sum of the amounts set forth on the balance sheet of the Company and the Subsidiaries as total shareholder equity of the Company and the Subsidiaries, plus any Subordinated Debt, minus the book value of all intangible assets of the Company and the Subsidiaries (including all such items as goodwill, trade names, service marks, copyrights, patents, licenses, deferred items, unamortized debt discount, prepaid expenses and any other items deemed intangible by the Lender), minus Investments in non-public companies net of cash dividends received in respect of such Investments.

“Taxes”:  Any and all present and future taxes, duties, levies, imposts, deductions, assessments, charges or withholdings, and any and all liabilities (including interest and penalties and other additions to taxes) with respect to the foregoing, but excluding Excluded Taxes.

“Termination Date”:  The earlier to occur of (a) September 29, 2005 or (b) such other date on which the Commitment terminates pursuant to Section 13.

“Termination Event”:  With respect to a Pension Plan that is subject to Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of Company or any other member of the Controlled Group from such Pension Plan during a plan year in which Company or any other member of the Controlled Group was a “substantial employer” as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA, (c) the termination of such Pension Plan, the filing of a notice of intent to terminate the Pension Plan or the treatment of an amendment of such Pension Plan as a termination under Section 4041 of ERISA, (d) the institution by the PBGC of proceedings to terminate such Pension Plan or (e) any event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or appointment of a trustee to administer, such Pension Plan.

“Total Plan Liability”:  At any time, the present value of all vested and unvested accrued benefits under all Pension Plans, determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.

“type”:  As defined in Section 2.2.1.

“UCC”:  As defined in the Security Agreement.

“Unfunded Liability”:  The amount (if any) by which the present value of all vested and unvested accrued benefits under all Pension Plans exceeds the fair market value of all assets allocable to those benefits, all determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.

“Unmatured Event of Default”:  Any event that, if it continues uncured, will, with lapse of time or notice or both, constitute an Event of Default.

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“Wholly-Owned Subsidiary”:  As to any Person, a Subsidiary all of the Capital Securities of which (except directors’ qualifying Capital Securities) are at the time directly or indirectly owned by such Person and/or another Wholly-Owned Subsidiary of such Person.

Other Interpretive Provisions.

(a)The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.

(b)Section, Annex, Schedule and Exhibit references are to this Agreement unless otherwise specified.

(c)The term “including” is not limiting and means “including without limitation.”

(d)In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including.”

(e)Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.

(f)This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters.  All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms.

(g)This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Company, the Lender and the other parties thereto and are the products of all parties.  Accordingly, they shall not be construed against the Lender merely because of the Lender’s involvement in their preparation.

COMMITMENTS OF THE LENDER; BORROWING, CONVERSION AND LETTER OF CREDIT PROCEDURES.

Commitments.  On and subject to the terms and conditions of this Agreement, the Lender agrees to make loans to, and to issue letters of credit for the account of, the Loan Parties, jointly or severally, as follows:

Loan Commitment.  The Lender agrees to make loans on a revolving basis (“Loans”) from time to time until the Termination Date in the amounts as the Company may request from the Lender; provided that (i) the Outstandings will not at any time exceed Loan Availability and (ii) the Outstandings with respect to the leasing operations of the Loan Parties will not at any time exceed $10,000,000.

L/C Commitment.  Subject to Section 2.3.1, the Lender agrees to issue letters of credit, in each case containing such terms and conditions as are permitted by this Agreement and are reasonably satisfactory to the Issuing Lender (each, a “Letter of Credit”), at the request of and for the account of the Company from time to time before the scheduled Termination Date; provided that (a) the aggregate Stated Amount of all Letters of Credit shall not at

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any time exceed $500,000 and (b) the Outstandings shall not at any time exceed Loan Availability.

Loan Procedures.

Various Types of Loans.  Each Loan shall be divided into tranches which are either a Base Rate Loan or a LIBOR Loan (each a “type” of Loan), as the Company shall specify in the related notice of borrowing or conversion pursuant to Section 2.2.2 or 2.2.3.  LIBOR Loans having the same Interest Period are sometimes called a “Group” or, collectively, “Groups”.  Base Rate Loans and LIBOR Loans may be outstanding at the same time, provided that not more than ten (10) different Groups of LIBOR Loans shall be outstanding at any one time.

Borrowing Procedures.The Company shall give written notice (each such written notice, a “Notice of Borrowing”) substantially in the form of Exhibit E or telephonic notice (followed immediately by a Notice of Borrowing) to the Lender of each proposed borrowing not later than (a) in the case of a Base Rate borrowing, 11:00 A.M., Minneapolis time, on the proposed date of such borrowing, and (b) in the case of a LIBOR borrowing, 11:00 A.M., Minneapolis time, at least two Business Days prior to the proposed date of such borrowing.  Each such notice shall be effective upon receipt by the Lender, shall be irrevocable, and shall specify the date, amount and type of borrowing and, in the case of a LIBOR borrowing, the initial Interest Period therefor.  So long as the Lender has not received written notice that the conditions precedent set forth in Section 11 with respect to such borrowing have not been satisfied, the Lender shall pay over to the Company, in immediately available funds the amount of the proposed borrowing on the requested borrowing date.  Each borrowing shall be on a Business Day.  Each Base Rate borrowing shall be in an aggregate amount of at least $100,000 or a higher integral multiple of $100,000, and each LIBOR borrowing shall be in an aggregate amount of at least $100,000 or a higher integral multiple of $100,000.

Conversion and Continuation Procedures.Subject to Section 2.2.1, the Company may, upon irrevocable written notice to the Lender in accordance with clause (b) below:

elect, as of any Business Day, to convert any Loans (or any part thereof in an aggregate amount not less than $100,000 or a higher integral multiple of $100,000) into Loans of the other type; or

elect, as of the last day of the applicable Interest Period, to continue any LIBOR Loans having Interest Periods expiring on such day (or any part thereof in an aggregate amount not less than $100,000 or a higher integral multiple of $100,000) for a new Interest Period;

provided that after giving effect to any prepayment, conversion or continuation, the aggregate principal amount of each Group of LIBOR Loans shall be at least $100,000 or a higher integral multiple of $100,000.

The Company shall give written notice (each such written notice, a “Notice of Conversion/Continuation”) substantially in the form of Exhibit F or telephonic notice (followed immediately by a Notice of Conversion/Continuation) to the Lender of each proposed

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conversion or continuation not later than (i) in the case of conversion into Base Rate Loans, 11:00 A.M., Minneapolis time, on the proposed date of such conversion and (ii) in the case of conversion into or continuation of LIBOR Loans, 11:00 A.M., Minneapolis time, at least two Business Days prior to the proposed date of such conversion or continuation, specifying in each case:

the proposed date of conversion or continuation;

the aggregate amount of Loans to be converted or continued;

the type of Loans resulting from the proposed conversion or continuation; and

in the case of conversion into, or continuation of, LIBOR Loans, the duration of the requested Interest Period therefor.

If upon the expiration of any Interest Period applicable to LIBOR Loans, the Company has failed to select timely a new Interest Period to be applicable to such LIBOR Loans, the Company shall be deemed to have elected to convert such LIBOR Loans into Base Rate Loans effective on the last day of such Interest Period.

Any conversion of a LIBOR Loan on a day other than the last day of an Interest Period therefor shall be subject to Section 8.4.

Letter of Credit Procedures.

L/C Applications.  The Loan Parties shall execute and deliver to the Lender the Master Letter of Credit Agreement from time to time in effect.  The Company shall give notice to the Lender of the proposed issuance of each Letter of Credit on a Business Day which is at least three Business Days (or such lesser number of days as the Lender shall agree in any particular instance in its sole discretion) prior to the proposed date of issuance of such Letter of Credit.  Each such notice shall be accompanied by an L/C Application, duly executed by the Company and in all respects satisfactory to the Lender, together with such other documentation as the Lender may request in support thereof, it being understood that each L/C Application shall specify, among other things, the date on which the proposed Letter of Credit is to be issued, the expiration date of such Letter of Credit (which shall not be later than the earlier of thirty (30) days prior to (i) one year after the date of issuance thereof and (ii) the scheduled Termination Date (unless such Letter of Credit is Cash Collateralized) provided, a Letter of Credit with an expiration date of one year may provide for renewal thereof in additional one-year periods, subject to the preceding clause (ii)) and whether such Letter of Credit is to be transferable in whole or in part.  So long as the Lender has not received written notice that the conditions precedent set forth in Section 12 with respect to the issuance of such Letter of Credit have not been satisfied, the Lender shall issue such Letter of Credit on the requested issuance date.  In the event of any inconsistency between the terms of the Master Letter of Credit Agreement, any L/C Application and the terms of this Agreement, the terms of this Agreement shall control.

Reimbursement Obligations.

Each Loan Party hereby unconditionally and irrevocably agrees to reimburse the Lender for each payment or disbursement made by the Lender under any Letter of Credit honoring any demand for payment made by the beneficiary thereunder, in each case on the date that such payment or disbursement is made.  Any amount not reimbursed on the date of such payment

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or disbursement shall bear interest from the date of such payment or disbursement to the date that the Lender is reimbursed by the Company therefor, payable on demand, at a rate per annum equal to the Base Rate from time to time in effect plus the Base Rate Margin from time to time in effect plus, beginning on the third Business Day after receipt of notice from the Issuing Lender of such payment or disbursement, 2%.  The Lender shall notify the Company whenever any demand for payment is made under any Letter of Credit by the beneficiary thereunder; provided that the failure of the Lender to so notify the Company shall not affect the rights of the Lender in any manner whatsoever.

The Loan Parties’ reimbursement obligations hereunder shall be irrevocable and unconditional under all circumstances, including (a) any lack of validity or enforceability of any Letter of Credit, this Agreement or any other Loan Document, (b) the existence of any claim, set-off, defense or other right which any Loan Party may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Lender or any other Person, whether in connection with any Letter of Credit, this Agreement, any other Loan Document, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between any Loan Party and the beneficiary named in any Letter of Credit), (c) the validity, sufficiency or genuineness of any document which the Lender has determined complies on its face with the terms of the applicable Letter of Credit, even if such document should later prove to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein shall have been untrue or inaccurate in any respect, or (d) the surrender or impairment of any security for the performance or observance of any of the terms hereof.

Certain Conditions.  Notwithstanding any other provision of this Agreement, the Lender shall not have an obligation to make any Loan, or to permit the continuation of or any conversion into any LIBOR Loan, or to issue any Letter of Credit, if an Event of Default or Unmatured Event of Default exists.

EVIDENCING OF LOANS.

Notes.  The Loans shall be evidenced by a Note, with appropriate insertions, payable to the order of the Lender in a face principal amount equal to the Commitment.

Recordkeeping.  The Lender shall record in its records, the date and amount of each Loan made by the Lender, each repayment or conversion thereof and, in the case of each LIBOR Loan, the dates on which each Interest Period for such Loan shall begin and end.  The aggregate unpaid principal amount so recorded shall be rebuttably presumptive evidence of the principal amount of the Loans owing and unpaid.  The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the Obligations of the Loan Parties hereunder or under any Note to repay the principal amount of the Loans hereunder, together with all interest accruing thereon.

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INTEREST.

Interest Rates.  The Loan Parties, jointly and severally, promise to pay interest on the unpaid principal amount of each Loan for the period commencing on the date of such Loan until such Loan is paid in full as follows:

at all times while such Loan is a Base Rate Loan, at a rate per annum equal to the sum of the Base Rate from time to time in effect plus the Applicable Margin; and

at all times while such Loan is a LIBOR Loan, at a rate per annum equal to the sum of the LIBOR Rate applicable to each Interest Period for such Loan plus the Applicable Margin;

provided that at any time an Event of Default exists, unless the Lender otherwise consents, the interest rate applicable to each Loan shall be increased by 2% (and, in the case of Obligations not bearing interest, such Obligations shall bear interest at the Base Rate plus 2%), provided further that such increase may thereafter be rescinded by the Lender.  Notwithstanding the foregoing, upon the occurrence of an Event of Default under Section 13.1.1 or 13.1.4, such increase shall occur automatically.

Interest Payment Dates.  Accrued interest on each Base Rate Loan shall be payable in arrears on the first day of each calendar month and at maturity.  Accrued interest on each LIBOR Loan shall be payable on the last day of each Interest Period relating to such Loan, upon a prepayment of such Loan, and at maturity.  After maturity, and at any time an Event of Default exists, accrued interest on all Loans shall be payable on demand.

Setting and Notice of LIBOR Rates.  The applicable LIBOR Rate for each Interest Period shall be determined by the Lender, and notice thereof shall be given by the Lender promptly to the Company.  Each determination of the applicable LIBOR Rate by the Lender shall be conclusive and binding upon the parties hereto, in the absence of demonstrable error.  The Lender shall, upon written request of the Company, deliver to the Company a statement showing the computations used by the Lender in determining any applicable LIBOR Rate hereunder.

Computation of Interest.  Interest shall be computed for the actual number of days elapsed on the basis of a year of 360 days.  The applicable interest rate for each Base Rate Loan shall change simultaneously with each change in the Base Rate.

FEES.

Letter of Credit Fees.

(a)The Loan Parties, jointly and severally, agree to pay to the Lender a letter of credit fee for each Letter of Credit equal to the L/C Fee Rate of the Stated Amount of such Letter of Credit (computed for the actual number of days elapsed on the basis of a year of 360 days); provided that, unless the Lender otherwise consents, the rate applicable to each Letter of Credit shall be increased by 2% at any time that an Event of Default exists.  Such letter of credit fee shall be payable in arrears on the first day of each calendar month and on the Termination Date (or such later date on which such Letter of Credit expires or is terminated) for the period from the date of the issuance of each Letter of Credit (or the last day on which the letter of credit fee was paid with respect thereto) to the date such payment is due or, if earlier, the date on which such Letter of Credit expired or was terminated.

(b)In addition, with respect to each Letter of Credit, the Company agrees to pay to the Lender such fees and expenses as the Lender customarily requires in connection with the issuance,

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negotiation, processing and/or administration of letters of credit in similar situations and (ii) a letter of credit fronting fee in the amount and at the times agreed to by the Company and the Lender.

Lender’s Fees.  The Loan Parties, jointly and severally, agree to pay to the Lender such fees and expenses as are mutually agreed to from time to time by the Company and the Lender, including the fees required to be paid in accordance with Section 15.5.

REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT; PREPAYMENTS.

Prepayments.

Voluntary Prepayments.  The Loan Parties may from time to time prepay the Loans in whole or in part; provided that the Company shall give the Lender notice thereof not later than 11:00 A.M., Minneapolis time, on the day of such prepayment (which shall be a Business Day), specifying the Loans to be prepaid and the date and amount of prepayment.

Mandatory Prepayments.  If on any day the Outstandings exceed the Borrowing Base, the Loan Parties shall immediately prepay the Loans and/or Cash Collateralize the outstanding Letters of Credit, or do a combination of the foregoing, in an amount sufficient to eliminate such excess.

Manner of Prepayments.  Each voluntary partial prepayment shall be in a principal amount of $25,000 or a higher integral multiple of $5,000.  Any partial prepayment of a Group of LIBOR Loans shall be subject to the proviso to Section 2.2.3(a).  Any prepayment of a LIBOR Loan on a day other than the last day of an Interest Period therefor shall include interest on the principal amount being repaid and shall be subject to Section 8.4.  Except as otherwise provided by this Agreement, all principal payments in respect of the Loans shall be applied first, to repay outstanding Base Rate Loans and then to repay outstanding LIBOR Rate Loans in direct order of Interest Period maturities.

Repayments.  The Loans shall be paid in full and the Commitment shall terminate on the Termination Date.

MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES.

Making of Payments.  All payments of principal or interest on the Note, and of all fees, shall be made by the Company to the Lender in immediately available funds at the office specified by the Lender not later than noon, Minneapolis time, on the date due; and funds received after that hour shall be deemed to have been received by the Lender on the following Business Day.  All payments under Section 8.1 shall be made by the Company directly to the Lender without setoff, counterclaim or other defense.

Application of Certain Payments.  So long as no Unmatured Event of Default or Event of Default has occurred and is continuing, (a) payments matching specific scheduled payments then due shall be applied to those scheduled payments and (b) voluntary and mandatory prepayments shall be applied as set forth in Sections 6.2 and 6.3.  After the occurrence and during the continuance of an Unmatured Event of Default or Event of Default, all amounts collected or received by the

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Lender as proceeds from the sale of, or other realization upon, all or any part of the collateral shall be applied as the Lender shall determine in its discretion.

Due Date Extension.  If any payment of principal or interest with respect to any of the Loans, or of any fees, falls due on a day which is not a Business Day, then such due date shall be extended to the immediately following Business Day (unless, in the case of a LIBOR Loan, such immediately following Business Day is the first Business Day of a calendar month, in which case such due date shall be the immediately preceding Business Day) and, in the case of principal, additional interest shall accrue and be payable for the period of any such extension.

Setoff.  Each Loan Party agrees that the Lender has all rights of set-off and bankers’ lien provided by applicable law, and in addition thereto, each Loan Party agrees that at any time any Event of Default exists, the Lender may apply to the payment of any Obligations of the Loan Parties hereunder, whether or not then due, any and all balances, credits, deposits, accounts or moneys of any Loan Party then or thereafter with the Lender.

Taxes.

(a)All payments made by any Loan Party hereunder or under any Loan Documents shall be made without setoff, counterclaim, or other defense.  To the extent permitted by applicable law, all payments hereunder or under the Loan Documents (including any payment of principal, interest, or fees) to, or for the benefit, of any person shall be made by the Loan Parties free and clear of and without deduction or withholding for, or account of, any Taxes now or hereinafter imposed by any taxing authority.

(b)If a Loan Party makes any payment hereunder or under any Loan Document in respect of which it is required by applicable law to deduct or withhold any Taxes, such Loan Party shall increase the payment hereunder or under any such Loan Document such that after the reduction for the amount of Taxes withheld (and any taxes withheld or imposed with respect to the additional payments required under this Section 7.5(b)), the amount paid to the Lender equals the amount that was payable hereunder or under any such Loan Document without regard to this Section 7.5(b).  To the extent a Loan Party withholds any Taxes on payments hereunder or under any Loan Document, such Loan Party shall pay the full amount deducted to the relevant taxing authority within the time allowed for payment under applicable law and shall deliver to the Lender within 30 days after it has made payment to such authority a receipt issued by such authority (or other evidence satisfactory to the Lender) evidencing the payment of all amounts so required to be deducted or withheld from such payment.

(c)If the Lender is required by law to make any payments of any Taxes on or in relation to any amounts received or receivable hereunder or under any other Loan Document, or any Tax is assessed against the Lender with respect to amounts received or receivable hereunder or under any other Loan Document, the Loan Parties, jointly and severally, will indemnify such person against (i) such Tax (and any reasonable counsel fees and expenses associated with such Tax) and (ii) any taxes imposed as a result of the receipt of the payment under this Section 7.5(c).  A certificate prepared in good faith as to the amount of such payment by the Lender shall, absent manifest error, be final, conclusive, and binding on all parties.

INCREASED COSTS; SPECIAL PROVISIONS FOR LIBOR LOANS.

Increased Costs.

(a)If, after the date hereof, the adoption of, or any change in, any applicable law, rule or regulation, or any change in the interpretation or administration of any applicable law, rule or regulation

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by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency:  (i) shall impose, modify or deem applicable any reserve (including any reserve imposed by the FRB, but excluding any reserve included in the determination of the LIBOR Rate pursuant to Section 4), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by the Lender; or (ii) shall impose on the Lender any other condition affecting its LIBOR Loans, its Note or its obligation to make LIBOR Loans; and the result of anything described in clauses (i) and (ii) above is to increase the cost to (or to impose a cost on) the Lender (or any LIBOR Office of the Lender) of making or maintaining any LIBOR Loan, or to reduce the amount of any sum received or receivable by the Lender (or its LIBOR Office) under this Agreement or under its Note with respect thereto, then upon demand by the Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, the Loan Parties shall pay to the Lender such additional amount as will compensate the Lender for such increased cost or such reduction, so long as such amounts have accrued on or after the day which is 180 days prior to the date on which the Lender first made demand therefor.

(b)If the Lender shall reasonably determine that any change in, or the adoption or phase-in of, any applicable law, rule or regulation regarding capital adequacy of the Lender, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or the compliance by the Lender or any Person controlling the Lender with any request or directive regarding capital adequacy of the Lender (whether or not having the force of law) by any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Lender’s or such controlling Person’s capital as a consequence of the Lender’s obligations hereunder or under any Letter of Credit to a level below that which the Lender or such controlling Person could have achieved but for such change, adoption, phase-in or compliance (taking into consideration the Lender’s or such controlling Person’s policies with respect to capital adequacy of the Lender) by an amount deemed by the Lender or such controlling Person to be material, then from time to time, upon demand by the Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail), the Loan Parties shall pay to the Lender such additional amount as will compensate the Lender or such controlling Person for such reduction so long as such amounts have accrued on or after the day which is 180 days prior to the date on which the Lender first made demand therefor.

Basis for Determining Interest Rate Inadequate or Unfair.  If:

the Lender reasonably determines (which determination shall be binding and conclusive on the Loan Parties) that by reason of circumstances affecting the interbank LIBOR market adequate and reasonable means do not exist for ascertaining the applicable LIBOR Rate; or the Lender reasonably determines that the LIBOR Rate will not adequately and fairly reflect the cost to the Lender of maintaining or funding LIBOR Loans for such Interest Period (taking into account any amount to which the Lender may be entitled under Section 8.1) or that the making or funding of LIBOR Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of the Lender materially affects such Loans;

then the Lender shall promptly notify the Company thereof and, so long as such circumstances shall continue, (i) the Lender shall be under no obligation to make or convert any Base Rate

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Loans into LIBOR Loans and (ii) on the last day of the current Interest Period for each LIBOR Loan, such Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan.

Changes in Law Rendering LIBOR Loans Unlawful.  If any change in, or the adoption of any new, law or regulation, or any change in the interpretation of any applicable law or regulation by any governmental or other regulatory body charged with the administration thereof, should make it (or in the good faith judgment of the Lender cause a substantial question as to whether it is) unlawful for the Lender to make, maintain or fund LIBOR Loans, then the Lender shall promptly notify the Company and, so long as such circumstances shall continue, (a) the Lender shall have no obligation to make or convert any Base Rate Loan into a LIBOR Loan and (b) on the last day of the current Interest Period for each LIBOR Loan of the Lender (or, in any event, on such earlier date as may be required by the relevant law, regulation or interpretation), such LIBOR Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan.  Each Base Rate Loan made by the Lender which, but for the circumstances described in the foregoing sentence, would be a LIBOR Loan (an “Affected Loan”) shall remain outstanding for the period corresponding to the Group of LIBOR Loans of which such Affected Loan would be a part absent such circumstances.

Funding Losses.  The Loan Parties hereby agree that upon demand by the Lender (which demand shall be accompanied by a statement setting forth the basis for the amount being claimed), the Loan Parties will indemnify the Lender against any net loss or expense which the Lender may sustain or incur (including any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund or maintain any LIBOR Loan), as reasonably determined by the Lender, as a result of (a) any payment, prepayment or conversion of any LIBOR Loan of the Lender on a date other than the last day of an Interest Period for such Loan (including any conversion pursuant to Section 8.3) or (b) any failure of the Company or another Loan Party to borrow, convert or continue any Loan on a date specified therefor in a notice of borrowing, conversion or continuation pursuant to this Agreement.  For this purpose, all notices to the Lender pursuant to this Agreement shall be deemed to be irrevocable.

Right of the Lender to Fund through Other Offices.  The Lender may, if it so elects, fulfill its commitment as to any LIBOR Loan by causing a foreign branch or Affiliate of the Lender to make such Loan; provided that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by the Lender and the obligation of the Company to repay such Loan shall nevertheless be to the Lender and shall be deemed held by it, to the extent of such Loan, for the account of such branch or Affiliate.

Discretion of the Lender as to Manner of Funding.  Notwithstanding any provision of this Agreement to the contrary, the Lender shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if the Lender had actually funded and maintained each LIBOR Loan during each Interest Period for such Loan through the

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purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the LIBOR Rate for such Interest Period.

Mitigation of Circumstances.  The Lender shall promptly notify the Company of any event of which it has knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in the Lender’s sole judgment, otherwise disadvantageous to the Lender) to mitigate or avoid, (i) any obligation by the Loan Parties to pay any amount pursuant to Section 7.6 or 8.1 or (ii) the occurrence of any circumstances described in Section 8.2 or 8.3 (and, if the Lender has given notice of any such event described in clause (i) or (ii) above and thereafter such event ceases to exist, the Lender shall promptly so notify the Company).  Without limiting the foregoing, the Lender will designate a different funding office if such designation will avoid (or reduce the cost to the Loan Parties of) any event described in clause (i) or (ii) above and such designation will not, in the Lender’s sole judgment, be otherwise disadvantageous to the Lender.

Conclusiveness of Statements; Survival of Provisions.  Determinations and statements of the Lender pursuant to Section 8.1, 8.2, 8.3 or 8.4 shall be conclusive absent demonstrable error.  The Lender may use reasonable averaging and attribution methods in determining compensation under Sections 8.1 and 8.4, and the provisions of such Sections shall survive repayment of the Obligations, cancellation of the Note, expiration or termination of the Letters of Credit and termination of this Agreement.

REPRESENTATIONS AND WARRANTIES.

To induce the Lender to enter into this Agreement and to induce the Lender to make Loans and issue Letters of Credit hereunder, each Loan Party represents and warrants to the Lender that:

Organization.  Each Loan Party is validly existing and in good standing under the laws of its jurisdiction of organization; and each Loan Party is duly qualified to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify would not have a Material Adverse Effect.

Authorization; No Conflict.  Each Loan Party is duly authorized to execute and deliver each Loan Document to which it is a party, is duly authorized to borrow monies hereunder and is duly authorized to perform its Obligations under each Loan Document to which it is a party.  The execution, delivery and performance by each Loan Party of each Loan Document to which it is a party, and the borrowings by the Loan Parties hereunder, do not and will not (a) require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (b) conflict with (i) any provision of law, (ii) the charter, by-laws or other organizational documents of any Loan Party or (iii) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon any Loan Party or any of their respective properties or (c) require, or result in, the

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creation or imposition of any Lien on any asset of any Loan Party (other than Liens in favor of the Lender created pursuant to the Collateral Documents).

Validity and Binding Nature.  Each of this Agreement and each other Loan Document to which any Loan Party is a party is the legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors’ rights generally and to general principles of equity.

Financial Condition.  The audited consolidated financial statements of the Company and its Subsidiaries as at December 27, 2003 and the unaudited consolidated financial statements of the Company and the Subsidiaries as at June 26, 2004 copies of each of which have been delivered to the Lender, were prepared in accordance with GAAP (subject, in the case of such unaudited statements, to the absence of footnotes and to normal year-end adjustments) and present fairly the consolidated financial condition of the Company and its Subsidiaries as at such dates and the results of their operations for the periods then ended.

No Material Adverse Change.  Since December 27, 2003there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Loan Parties taken as a whole.

Litigation and Contingent Liabilities.  No litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is pending or, to the knowledge of any Loan Party, threatened against any Loan Party which might reasonably be expected to have a Material Adverse Effect, except as set forth in Schedule 9.6.  Other than any liability incident to such litigation or proceedings, no Loan Party has any material contingent liabilities not listed on Schedule 9.6 or permitted by Section 11.1.

Ownership of Properties; Liens.  Each Loan Party owns good and, in the case of real property,  marketable title to all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like) except as permitted by Section 11.2 and listed in Schedule 9.7.

Equity Ownership; Subsidiaries.  All issued and outstanding Capital Securities of each Loan Party are duly authorized and validly issued, fully paid, non-assessable, and free and clear of all Liens other than those in favor of the Lender, and such securities were issued in compliance with all applicable state and federal laws concerning the issuance of securities.  As of the Closing Date, the Company has no Subsidiaries other than those specifically disclosed in part (a) of Schedule 9.8 and no Loan Party has material Investments in any other corporation or entity other than those specifically disclosed in part (b) of Schedule 9.8.  As of the Closing Date, each Subsidiary is a Wholly-Owned Subsidiary and all of the issued and outstanding Capital Securities of each Wholly-Owned Subsidiary is, directly or indirectly, owned by the Company.

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Pension Plans.

(a)The Unfunded Liability of all Pension Plans does not in the aggregate exceed twenty percent of the Total Plan Liability for all such Pension Plans.  Each Pension Plan complies in all material respects with all applicable requirements of law and regulations.  No contribution failure under Section 412 of the Code, Section 302 of ERISA or the terms of any Pension Plan has occurred with respect to any Pension Plan, sufficient to give rise to a Lien under Section 302(f) of ERISA, or otherwise to have a Material Adverse Effect.  There are no pending or, to the knowledge of any Loan Party, threatened, claims, actions, investigations or lawsuits against any Pension Plan, any fiduciary of any Pension Plan, or the Company or any other member of the Controlled Group with respect to a Pension Plan or a Multiemployer Pension Plan which could reasonably be expected to have a Material Adverse Effect.  Neither the Company nor any other member of the Controlled Group has engaged in any prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) in connection with any Pension Plan or Multiemployer Pension Plan which would subject that Person to any material liability.  Within the past five years, neither the Company nor any other member of the Controlled Group has engaged in a transaction which resulted in a Pension Plan with an Unfunded Liability being transferred out of the Controlled Group, which could reasonably be expected to have a Material Adverse Effect.  No Termination Event has occurred or is reasonably expected to occur with respect to any Pension Plan, which could reasonably be expected to have a Material Adverse Effect.

(b)All contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by the Company or any other member of the Controlled Group under the terms of the plan or of any collective bargaining agreement or by applicable law; neither the Company nor any other member of the Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan or received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, could result in a withdrawal or partial withdrawal from any such plan; and neither the Company nor any other member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent.

Investment Company Act.  No Loan Party is an “investment company” or a company “controlled” by an “investment company” or a “subsidiary” of an “investment company,” within the meaning of the Investment Company Act of 1940.

Public Utility Holding Company Act.  No Loan Party is a “holding company”, or a “subsidiary company” of a “holding company,” or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding company,” within the meaning of the Public Utility Holding Company Act of 1935.

Regulation U.  No Loan Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock.

Taxes; Tax Shelter Registration.

(a)Each Loan Party has timely filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges due and payable with respect to such return, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books.  The Loan Parties have made adequate reserves on their books and records in accordance with

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GAAP for all taxes that have accrued but which are not yet due and payable.  No Loan Party has participated in any transaction that relates to a year of the taxpayer (which is still open under the applicable statute of limitations) which is a “reportable transaction” within the meaning of Treasury Regulation section 1.6011-4(b)(2) (irrespective of the date when the transaction was entered into).

(b)No Loan Party intends to treat any of the transactions contemplated by any Loan Document as being a “reportable transaction” within the meaning of Treasury Regulation Section 1.6011-4.

Solvency, etc.On the Closing Date, and immediately prior to and after giving effect to the issuance of each Letter of Credit and each borrowing hereunder and the use of the proceeds thereof, with respect to each Loan Party, individually, (a) the fair value of its assets is greater than the amount of its liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated, (b) the present fair saleable value of its assets is not less than the amount that will be required to pay the probable liability on its debts as they become absolute and matured, (c) it is able to realize upon its assets and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business, (d) it does not intend to, and does not believe that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature and (e) it is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which its property would constitute unreasonably small capital.

Environmental Matters.  The on-going operations of each Loan Party comply in all respects with all Environmental Laws, except such non-compliance which could not (if enforced in accordance with applicable law) reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect.  Each Loan Party has obtained, and maintained in good standing, all licenses, permits, authorizations, registrations and other approvals required under any Environmental Law and required for their respective ordinary course operations, and for their reasonably anticipated future operations, and each Loan Party is in compliance with all terms and conditions thereof, except where the failure to do so could not reasonably be expected to result in material liability to any Loan Party and could not reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect.  No Loan Party or any of its properties or operations is subject to, or reasonably anticipates the issuance of, any written order from or agreement with any Federal, state or local governmental authority, nor subject to any judicial or docketed administrative or other proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Substance.  There are no Hazardous Substances or other conditions or circumstances existing with respect to any property, arising from operations prior to the Closing Date, or relating to any waste disposal, of any Loan Party that would reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect.  No Loan Party has any underground storage tanks that are not properly registered or permitted under applicable Environmental Laws or that at any time have released, leaked, disposed of or otherwise discharged Hazardous Substances.

Insurance.  Each Loan Party and its properties are insured with financially sound and reputable insurance companies which are not Affiliates of the Loan Parties, in such amounts, with such

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deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where such Loan Parties operate.

Real Property.  Set forth on Schedule 9.17 is a complete and accurate list, as of the Closing Date, of the address of all real property owned or leased by any Loan Party, together with, in the case of leased property, the name and mailing address of the lessor of such property.

Information.  All information heretofore or contemporaneously herewith furnished in writing by any Loan Party to the Lender for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of any Loan Party to the Lender pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by the Lender that any projections and forecasts provided by any Loan Party are based on good faith estimates and assumptions believed by such Loan Party to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results).

Intellectual Property.  Each Loan Party owns and possesses or has a license or other right to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights and copyrights as are necessary for the conduct of the businesses of the Loan Parties, without any infringement upon rights of others which could reasonably be expected to have a Material Adverse Effect.

Burdensome Obligations.  No Loan Party is a party to any agreement or contract or subject to any restriction contained in its organizational documents which could reasonably be expected to have a Material Adverse Effect.

Labor Matters.  No Loan Party is subject to any labor or collective bargaining agreement.  There are no existing or threatened strikes, lockouts or other labor disputes involving any Loan Party that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect.  Hours worked by and payment made to employees of the Loan Parties are not in violation of the Fair Labor Standards Act or any other applicable law, rule or regulation dealing with such matters.

No Default.  No Event of Default or Unmatured Event of Default exists or would result from the incurrence by any Loan Party of any Debt hereunder or under any other Loan Document.

Accounts.  No Loan Party maintains any deposit, checking, brokerage or similar account with any bank, savings association, financial institution or similar financial intermediary, other than those identified on Schedule 9.23.

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Anti-Terrorism Law Compliance.  None of the Loan Parties is subject to or in violation of any law, regulation or list of any government agency including, without limitation, the U.S. Office of Foreign Asset Control (“OFAC”) list, Executive Order 13224 or the USA Patriot Act) that prohibits or limits the conduct of business with or receiving of funds, goods or services to or for the benefit of certain Persons specified therein or that prohibits or limits any Bank from making any Advance or extension of credit to any Loan Party or from otherwise conducting business with any Loan Party.

AFFIRMATIVE COVENANTS.

Until the expiration or termination of the Commitment and thereafter until all Obligations hereunder and under the other Loan Documents are paid in full and all Letters of Credit have been terminated, each Loan Party agrees that, unless at any time the Lender shall otherwise expressly consent in writing, it will:

Reports, Certificates and Other Information.  Furnish to the Lender:

Annual Report.  Promptly when available and in any event within ninety (90) days after the end of each Fiscal Year (a) a copy of the annual audit report of the Company and its Subsidiaries for such Fiscal Year, including therein consolidated balance sheets and consolidated statements of income or operations, shareholder’s equity and cash flows of the Company and its Subsidiaries as at the end of such Fiscal Year, together with a written opinion from independent auditors of national standing selected by the Company and reasonably acceptable to the Lender that (A) such consolidated financial statements present fairly, in all material respects, the financial position for the periods indicated in conformity with GAAP and (B) in making the examination necessary for the signing of such annual audit report, nothing came to the attention of such auditors that caused them to believe that the Company was not in compliance with any provision of Section 11.1, 11.3, 11.4 or 11.13 of this Agreement; (b) a comparison with the budget for such Fiscal Year and a comparison with the previous Fiscal Year, certified by a Senior Officer of the Company; and (c) statements of forecasted consolidated income for the Company and its Subsidiaries for each Fiscal Quarter in the current Fiscal Year and a forecasted consolidated balance sheet of the Company and its Subsidiaries as at the end of such Fiscal Year, together with supporting assumptions, all in reasonable detail and scope satisfactory to the Lender and certified by a Senior Officer of the Company.

Monthly Reports.  Promptly when available and in any event within thirty (30) days after the end of each month, consolidated balance sheets of the Company and its Subsidiaries as of the end of such month, together with consolidated statements of income or operations for such month, together with a comparison with the corresponding period of the previous Fiscal Year and for the statements of income a comparison with the budget for such period of the current Fiscal Year, certified by a Senior Officer of the Company.

Quarterly Reports.  Promptly when available and in any event within forty-five (45) days after the end of each quarter, consolidated balance sheets of the Company and its Subsidiaries

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as of the end of such quarter, together with consolidated statements of income or operations for such quarter, and a consolidated statement of cash flows for the period beginning with the first day of such Fiscal Year and ending on the last day of such quarter, together with a comparison with the corresponding period of the previous Fiscal Year and for the statements of income a comparison with the budget for such period of the current Fiscal Year, certified by a Senior Officer of the Company.

Compliance Certificates.  Contemporaneously with the furnishing of a copy of each annual audit report pursuant to Section 10.1.1 and each set of monthly statements pursuant to Section 10.1.2, a duly completed compliance certificate in the form of Exhibit B, with appropriate insertions, dated the date of such annual report or such monthly statements and signed by a Senior Officer of the Company, containing (i) a computation of each of the financial ratio set forth in Section 11.14 and to the effect that such officer has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it and (ii) a written statement of the Company’s management setting forth a discussion of the Company’s financial condition, changes in financial condition and results of operations.

Reports to the SEC and to Shareholders.  Promptly upon the filing or sending thereof, copies of all regular, periodic or special reports of any Loan Party filed with the SEC; copies of all registration statements of any Loan Party filed with the SEC (other than on Form S-8); and copies of all proxy statements or other communications made to security holders generally.

Notice of Default, Litigation and ERISA Matters.  Promptly upon becoming aware of any of the following, written notice describing the same and the steps being taken by the Company or the Subsidiary affected thereby with respect thereto:

the occurrence of an Event of Default or an Unmatured Event of Default;

any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Company to the Lender which has been instituted or, to the knowledge of any Loan Party, is threatened against any Loan Party or to which any of the properties of any thereof is subject which might reasonably be expected to have a Material Adverse Effect;

the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan, or the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Company furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any material liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan), or any material increase in the contingent liability of the

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Company with respect to any post-retirement welfare benefit plan or other employee benefit plan of the Company or another member of the Controlled Group, or any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent;

any cancellation or material change in any insurance maintained by any Loan Party; or

any other event (including (i) any violation of any Environmental Law or the assertion of any Environmental Claim or (ii) the enactment or effectiveness of any law, rule or regulation) which might reasonably be expected to have a Material Adverse Effect.

Borrowing Base Certificates.  Within thirty (30) days of the end of each month, a Borrowing Base Certificate dated as of the end of such month and executed by a Senior Officer of the Company on behalf of the Company (provided that (a) the Company may deliver a Borrowing Base Certificate more frequently if it chooses and (b) at any time an Event of Default exists, the Lender may require the Company to deliver Borrowing Base Certificates more frequently).

Management Reports.  Promptly upon receipt thereof, copies of all detailed financial and management reports submitted to the Company by independent auditors in connection with each annual or interim audit made by such auditors of the books of the Company.

Subordinated Debt Notices.  Promptly following receipt, copies of any notices (including notices of default or acceleration) received from any holder or trustee of, under or with respect to any Subordinated Debt.

Other Information.  Promptly from time to time, such other information concerning the Loan Parties as the Lender may reasonably request.

Books, Records and Inspections.  Keep, and cause each other Loan Party to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP; implement and maintain a cash management system reasonably acceptable to the Lender; permit, and cause each other Loan Party to permit, the Lender or any representative thereof to inspect the properties and operations of the Loan Parties; and permit, and cause each other Loan Party to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists), the Lender or any representative thereof to visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors (and the Company hereby authorizes such independent auditors to discuss such financial matters with the Lender or any representative thereof), and to examine (and, at the expense of the Loan Parties, photocopy extracts from) any of its books or other records; and permit, and cause each other Loan Party to permit, the Lender and its representatives to inspect the Inventory and other tangible assets of the Loan Parties, to perform appraisals of the equipment of the Loan Parties, and to inspect, audit, check and make copies of and extracts from the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to Inventory, Accounts and any other collateral.

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All such inspections or audits by the Lender shall be at the Company’s expense, provided that so long as no Event of Default or Unmatured Event of Default exists, the Company shall not be required to reimburse the Lender for inspections or audits more frequently than once each Fiscal Year.

Maintenance of Property; Insurance.

(a)Keep, and cause each other Loan Party to keep, all property useful and necessary in the business of the Loan Parties in good working order and condition, ordinary wear and tear excepted.

(b)Maintain, and cause each other Loan Party to maintain, with responsible insurance companies, such insurance coverage as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated; and, upon request of the Lender, furnish to the Lender a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Loan Parties.  The Company shall cause each issuer of an insurance policy to provide the Lender with an endorsement (i) showing the Lender as loss payee with respect to each policy of property or casualty insurance and naming the Lender as an additional insured with respect to each policy of liability insurance, (ii) providing that 30 days’ notice will be given to the Lender prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy and (iii) reasonably acceptable in all other respects to the Lender.

Compliance with Laws; Payment of Taxes and Liabilities.  (1)  Comply, and cause each other Loan Party to comply, in all material respects with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect; (b) without limiting clause (a) above, ensure, and cause each other Loan Party to ensure, that no person who owns a controlling interest in or otherwise controls a Loan Party is or shall be (i) listed on the Specially Designated Nationals and Blocked Person List maintained by the OFAC, Department of the Treasury, and/or any other similar lists maintained by OFAC pursuant to any authorizing statute, Executive Order or regulation or (ii) a person designated under Section 1(b), (c) or (d) of Executive Order No. 13224 (September 23, 2001), any related enabling legislation or any other similar Executive Orders, (c) without limiting clause (a) above, comply, and cause each other Loan Party to comply, with all applicable Bank Secrecy Act (“BSA”) and anti-money laundering laws and regulations and (d) pay, and cause each other Loan Party to pay, prior to delinquency, all taxes and other governmental charges against it or any collateral, as well as claims of any kind which, if unpaid, could become a Lien on any of its property; provided that the foregoing shall not require any Loan Party to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP and, in the case of a claim which could become a Lien on any collateral, such contest proceedings shall stay the foreclosure of such Lien or the sale of any portion of the collateral to satisfy such claim.

Maintenance of Existence, etc.  Maintain and preserve, and (subject to Section 11.5) cause each other Loan Party to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization and (b) its qualification to do business and good standing in each jurisdiction where the nature of its business makes such qualification necessary (other than such jurisdictions

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in which the failure to be qualified or in good standing could not reasonably be expected to have a Material Adverse Effect).

Use of Proceeds.  Use the proceeds of the Loans and the Letters of Credit solely for working capital purposes, for Acquisitions permitted by Section 11.5, for Capital Expenditures and for other general business purposes; and not use or permit (i) the Outstandings with respect to the leasing operations of the Loan Parties to exceed $10,000,000, or (ii) any proceeds of any Loan to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of “purchasing or carrying” any Margin Stock.

Employee Benefit Plans.

(a)Maintain, and cause each other member of the Controlled Group to maintain, each Pension Plan in substantial compliance with all applicable requirements of law and regulations.

(b)Make, and cause each other member of the Controlled Group to make, on a timely basis, all required contributions to any Multiemployer Pension Plan.

(c)Not, and not permit any other member of the Controlled Group to (i) seek a waiver of the minimum funding standards of ERISA, (ii) terminate or withdraw from any Pension Plan or Multiemployer Pension Plan or (iii) take any other action with respect to any Pension Plan that would reasonably be expected to entitle the PBGC to terminate, impose liability in respect of, or cause a trustee to be appointed to administer, any Pension Plan, unless the actions or events described in clauses (i), (ii) and (iii) individually or in the aggregate would not have a Material Adverse Effect.

Environmental Matters.  If any release or threatened release or other disposal of Hazardous Substances shall occur or shall have occurred on any real property or any other assets of any Loan Party, the Company or the applicable Loan Party shall cause the prompt containment and removal of such Hazardous Substances and the remediation of such real property or other assets as necessary to comply with all Environmental Laws and to preserve the value of such real property or other assets.  Without limiting the generality of the foregoing, each Loan Party shall comply with any Federal or state judicial or administrative order requiring the performance at any real property of any Loan Party of activities in response to the release or threatened release of a Hazardous Substance.  To the extent that the transportation of Hazardous Substances is permitted by this Agreement, the Company shall, and shall cause its Subsidiaries to, dispose of such Hazardous Substances, or of any other wastes, only at licensed disposal facilities operating in compliance with Environmental Laws.

Tax Shelter Registration.  Notify the Lender of any action (or the intention to take an action) inconsistent with the representation in Section 9.13(b).  If the Company so notifies the Lender, the Company acknowledges and agrees that the Lender may treat the transactions contemplated hereby (or any single transaction contemplated hereby) as part of a transaction that is subject to Treasury Regulation Section 301.6112-1, and the Lender, as applicable, may maintain the lists and other regulations required by such Treasury Regulation.  To the extent the Lender determines to maintain such list, each Loan Party shall cooperate with the Lender in obtaining the information required under such Treasury Regulation.  Within 10 days after notifying the Lender under this Section 10.9, the Company shall deliver to the Lender a duly completed copy of IRS Form 8886 or any successor form.

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Further Assurances.  Take such actions as are necessary or as the Lender may reasonably request from time to time to ensure that the Obligations of each Loan Party under the Loan Documents are secured by substantially all of the assets of the Loan Parties (including, upon the acquisition or creation thereof, any Subsidiary acquired or created after the Closing Date), in each case as the Lender may determine, including the execution and delivery of guaranties, security agreements, pledge agreements, mortgages, deeds of trust, financing statements and other documents, and the filing or recording of any of the foregoing and the delivery of certificated securities and other collateral with respect to which perfection is obtained by possession.

Cash Management Systems.  The Loan Parties shall provide to the Lender all documents and other information relating to the Loan Parties’ cash management system (including all deposit, checking, or brokerage accounts opened or maintained by a Loan Party) as requested from time to time by the Lender, and such cash management systems shall be reasonably acceptable to the Lender.

NEGATIVE COVENANTS

Until the expiration or termination of the Commitment and thereafter until all Obligations hereunder and under the other Loan Documents are paid in full and all Letters of Credit have been terminated, each Loan Party agrees that, unless at any time the Lender shall otherwise expressly consent in writing, it will:

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Debt.  Not, and not permit any other Loan Party to, incur, assume or suffer to exist any Debt, except:

Obligations under this Agreement and the other Loan Documents;

Debt secured by Liens permitted by Section 11.2(d), and extensions, renewals and refinancings thereof; provided that the aggregate amount of all such Debt at any time outstanding shall not exceed $500,000;

Debt of the Company to any domestic Wholly-Owned Subsidiary or Debt of any domestic Wholly-Owned Subsidiary to the Company or another domestic Wholly-Owned Subsidiary; provided that such Debt shall be subordinated to the Obligations of the Loan Parties hereunder in a manner reasonably satisfactory to the Lender;

Subordinated Debt;

Hedging Obligations incurred in favor of the Lender or an Affiliate thereof for bona fide hedging purposes and not for speculation;

Contingent Liabilities arising with respect to customary indemnification obligations in favor of sellers in connection with Acquisitions permitted under Section 11.5 and purchasers in connection with dispositions permitted under Section 11.5;

other unsecured Debt, in addition to the Debt listed above, in an aggregate outstanding amount not at any time exceeding $250,000;

Accounts payable and trade debt arising in the ordinary course of the Loan Parties’ business; and

Any non-recourse obligation of a Loan Party arising from a discounting transaction in the ordinary course of business.

Liens.  Not, and not permit any other Loan Party to, create or permit to exist any Lien on any of its real or personal properties, assets or rights of whatsoever nature (whether now owned or hereafter acquired), except:

Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves;

Liens arising in the ordinary course of business (such as (i) Liens of carriers, warehousemen, mechanics and materialmen and other similar Liens imposed by law, (ii) Liens in the form of deposits or pledges incurred in connection with worker’s compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA), and (iii) Liens created in the ordinary course of business arising from non-recourse discounting transactions including (without limitation) liens against (A) the particular lease, (B) all equipment subject to such lease, (C) all lease collateral for such lease, (D) all warranty and other rights a Loan Party may have with respect to such lease and the related equipment against the manufacturers of such equipment and against the sellers and assignors from whom such Loan Party may have acquired such lease and such equipment, (E) proceeds from any and all of the foregoing.  Upon the written request of the Borrower, the Lender agrees to execute a subordination agreement in form and substance satisfactory to the Lender in connection with liens pursuant to Section 11.2(b)(iii);

Liens arising in the ordinary course of business in an amount of not more than $25,000;

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subject to the limitation set forth in Section 11.1(b), (i) Liens arising in connection with Capital Leases (and attaching only to the property being leased), (ii) Liens existing on property at the time of the acquisition thereof by any Loan Party (and not created in contemplation of such acquisition) and (iii) Liens that constitute purchase money security interests on any property securing debt incurred for the purpose of financing all or any part of the cost of acquiring such property, provided that any such Lien attaches to such property within 60 days of the acquisition thereof and attaches solely to the property so acquired;

attachments, appeal bonds, judgments and other similar Liens, for sums not exceeding $250,000 arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings;

easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of any Loan Party; and

Liens arising under the Loan Documents.

Operating Leases.  Not permit the aggregate amount of all rental payments under Operating Leases made (or scheduled to be made) by the Loan Parties (on a consolidated basis) to exceed $1,000,000in any Fiscal Year.

Restricted Payments.  Not, and not permit any other Loan Party to, (a) make any distribution to any holders of its Capital Securities, (b) purchase or redeem any of its Capital Securities, (c) pay any management fees or similar fees to any of its equityholders or any Affiliate thereof, (d) make any redemption, prepayment, defeasance, repurchase or any other payment in respect of any Subordinated Debt or (e) set aside funds for any of the foregoing.  Notwithstanding the foregoing, (i) any Subsidiary may pay dividends or make other distributions to the Company or to a domestic Wholly-Owned Subsidiary; (ii) the Company may purchase or redeem any of its Capital Securities so long as after giving effect to such purchase or redemption the Company will remain in compliance with Section 11.14, as certified by the Company in form and substance satisfactory to the Lender; (iii) the Company may make regularly scheduled payments of interest in respect of Subordinated Debt to the extent permitted under the subordination provisions thereof, and (iv) the Company may grant stock options pursuant to a plan approved by the Shareholders of the Company.

Mergers, Consolidations, Sales.  Not, and not permit any other Loan Party to, (a) be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any Capital Securities of any class of, or any partnership or joint venture interest in, any other Person, (b) sell, transfer, convey or lease all or any substantial part of its assets or Capital Securities (including the sale of Capital Securities of any Subsidiary) except for sales of inventory in the ordinary course of business, or (c) sell or assign with or without recourse any receivables, except for (i) any such merger, consolidation, sale, transfer, conveyance, lease or assignment of or by any Wholly-Owned Subsidiary into the Company or into any other domestic Wholly-Owned Subsidiary; (ii) any such purchase or other acquisition by the Company or any domestic Wholly-Owned Subsidiary of the assets or Capital Securities of any Wholly-Owned Subsidiary; (iii) sales and dispositions of assets for at least fair market value (as determined by

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the Board of Directors of the Company) so long as the net book value of all assets sold or otherwise disposed of in any Fiscal Year does not exceed 10% of the net book value of the consolidated assets of the Loan Parties as of the last day of the preceding Fiscal Year; (iv) the discounting of non-recourse leases in the ordinary course of business, and (v) any Acquisition by the Company or any domestic Wholly-Owned Subsidiary where:

(A) the business or division acquired are for use, or the Person acquired or invested in is engaged, in a business engaged in by a Loan Party on the Closing Date;

(B) immediately before and after giving effect to such Acquisition, no Event of Default or Unmatured Event of Default shall exist;

(C) the aggregate consideration to be paid by the Loan Parties (including any Debt assumed or issued in connection therewith, the amount thereof to be calculated in accordance with GAAP) in connection with such Acquisition (or any series of related Acquisitions) is less than $10,000,000 individually and the aggregate consideration for all Acquisitions by the Loan Parties since the Closing Date does not exceed $10,000,000;

(D) immediately after giving effect to such Acquisition, the Company is in pro forma compliance with all the financial ratios and restrictions set forth in Section 11.14 and Loan Availability minus Outstandings is greater than or equal to $3,000,000;

(E) in the case of the Acquisition of any Person, the Board of Directors of such Person has approved such Acquisition;

(F) reasonably prior to such Acquisition, the Lender shall have received complete executed or conformed copies of each material document, instrument and agreement to be executed in connection with such Acquisition together with all lien search reports and lien release letters and other documents as the Lender may require to evidence the termination of Liens on the assets or business to be acquired if applicable;

(G) not less than ten (10) Business Days prior to such Acquisition, the Lender shall have received an acquisition summary with respect to the Person and/or business or division to be acquired or invested in, such summary to include a reasonably detailed description thereof (including financial information) and operating results (including financial statements for the most recent 12 month period for which they are available and as otherwise available), the terms and conditions, including economic terms, of the proposed Acquisition, and the Company’s calculation of pro forma EBITDA relating thereto;

(H) consents have been obtained in favor of the Lender to the collateral assignment of rights and indemnities under the related acquisition documents and opinions of counsel for the Loan Parties and (if delivered to the Loan Party) the selling party in favor of the Lender have been delivered; and

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(I) the provisions of Section 10.10 have been satisfied.

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Modification of Organizational Documents.  Not permit the charter, by-laws or other organizational documents of any Loan Party to be amended or modified in any way which could reasonably be expected to materially adversely affect the interests of the Lender.

Affiliate Transactions.  Not, and not permit any other Loan Party to, enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its other Affiliates (other than the Loan Parties) which is on terms which are less favorable than are obtainable from any Person which is not one of its Affiliate, except for those listed on Schedule 11.7.

Unconditional Purchase Obligations.  Not, and not permit any other Loan Party to, enter into or be a party to any contract for the purchase of materials, supplies or other property or services if such contract requires that payment be made by it regardless of whether delivery is ever made of such materials, supplies or other property or services.

Inconsistent Agreements.  Not, and not permit any other Loan Party to, enter into any agreement containing any provision which would (a) be violated or breached by any borrowing by a Loan Party hereunder or by the performance by any Loan Party of any of its Obligations hereunder or under any other Loan Document, (b) prohibit any Loan Party from granting to the Lender, a Lien on any of its assets or (c) create or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make other distributions to the Company or any other Subsidiary, or pay any Debt owed to the Company or any other Subsidiary, (ii) make loans or advances to any Loan Party or (iii) transfer any of its assets or properties to any Loan Party, other than (A) customary restrictions and conditions contained in agreements relating to the sale of all or a substantial part of the assets of any Subsidiary pending such sale, provided that such restrictions and conditions apply only to the Subsidiary to be sold and such sale is permitted hereunder, (B) restrictions or conditions imposed by any agreement relating to purchase money Debt, Capital Leases and other secured Debt permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Debt and (C) customary provisions in leases and other contracts restricting the assignment thereof.

Business Activities.  Not, and not permit any other Loan Party to, engage in any line of business other than the businesses engaged in and businesses reasonably related thereto.

Restriction of Amendments to Certain Documents.  Not amend or otherwise modify, or waive any rights under,

Fiscal Year.  Not change its Fiscal Year.

Tangible Net Worth.  Not permit the Tangible Net Worth of the Company and the Subsidiaries at any time to be less than Five Million Dollars ($5,000,000).

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Control Agreements.  Not fail to deliver to the Lender within thirty (30) days after the Lender’s request, a Control Agreement for any deposit, checking or brokerage account opened or maintained by a Loan Party.

EFFECTIVENESS; CONDITIONS OF LENDING, ETC.

The obligation of the Lender to make the Loans and to issue Letters of Credit is subject to the following conditions precedent:

Initial Credit Extension.  The obligation of the Lender to make the initial Loans and the obligation of the Lender to issue the initial Letter of Credit (whichever first occurs) is, in addition to the conditions precedent specified in Section 12.2, subject to the condition precedent that the Lender shall have received all of the following, each duly executed and dated the Closing Date (or such earlier date as shall be satisfactory to the Lender), in form and substance satisfactory to the Lender (and the date on which all such conditions precedent have been satisfied or waived in writing by the Lender is called the “Closing Date”):

Note.  A Note duly executed by the Loan Parties.

Authorization Documents.  For each Loan Party, such Person’s (a) charter (or similar formation document), certified by the appropriate governmental authority; (b) good standing certificates in its state of incorporation (or formation) and in each other state requested by the Lender; (c) bylaws (or similar governing document); (d) resolutions of its board of directors (or similar governing body) approving and authorizing such Person’s execution, delivery and performance of the Loan Documents to which it is party and the transactions contemplated thereby; and (e) signature and incumbency certificates of its officers executing any of the Loan Documents (it being understood that the Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein), all certified by its secretary or an assistant secretary (or similar officer) as being in full force and effect without modification.

Consents, etc.  Certified copies of all documents evidencing any necessary corporate or partnership action, consents and governmental approvals (if any) required for the execution, delivery and performance by the Loan Parties of the documents referred to in this Section 12.

Security Documents.  A counterpart of the Security Agreement executed by each Loan Party, a counterpart of the Pledge Agreement executed by the Company, and a counterpart of a Control Agreement for each account identified by the Lender, executed by the applicable Loan Party and the depository or financial intermediary, in each case together with all instruments, transfer powers and other items required to be delivered in connection therewith.

Financing Statements.  UCC-1 financing statements relating to the Collateral (as defined in the Security Agreement) and the Capital Securities pledged pursuant to the Pledge

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Agreement, completed and, if required, executed by each Loan Party, for filing in each jurisdiction reasonably requested by the Lender.

Opinions of Counsel.  Opinions of counsel for each Loan Party, including local counsel reasonably requested by the Lender.

Insurance.  Evidence of the existence of insurance required to be maintained pursuant to Section 10.3(b), together with evidence that the Lender has been named as a lender’s loss payee and an additional insured on all related insurance policies.

Payment of Fees.  Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with all Attorney Costs of the Lender to the extent invoiced prior to the Closing Date, plus such additional amounts of Attorney Costs as shall constitute the Lender’s reasonable estimate of Attorney Costs incurred or to be incurred by the Lender through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Lender).

Search Results; Lien Terminations.  Certified copies of Uniform Commercial Code search reports and pending suit judgments and tax lien search reports dated a date reasonably near to the Closing Date, listing all effective financing statements, suits, judgments or tax liens which name any Loan Party (under their present names and any previous names) as debtors, together with copies of any such financing statements, suits, judgments and tax liens.

Filings, Registrations and Recordings.  The Lender shall have received each document (including Uniform Commercial Code financing statements) required by the Collateral Documents or under law or reasonably requested by the Lender to be filed, registered or recorded in order to create in favor of the Lender, a perfected Lien on the collateral described therein, prior to any other Liens (subject only to Liens permitted pursuant to Section 11.2), in proper form for filing, registration or recording.

Borrowing Base Certificate.  A Borrowing Base Certificate dated as of the Closing Date.

Closing Certificate.  A certificate executed by an officer of the Company on behalf of the Company certifying the matters set forth in Section 12.2.1 as of the Closing Date.

Other.  Such other documents as the Lender may reasonably request.

Conditions.  The obligation (a) of the Lender to make each Loan and (b) of the Lender to issue each Letter of Credit is subject to the following further conditions precedent that:

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Compliance with Warranties, No Default, etc.  Both before and after giving effect to any borrowing and the issuance of any Letter of Credit, the following statements shall be true and correct:

the representations and warranties of each Loan Party set forth in this Agreement and the other Loan Documents shall be true and correct in all respects with the same effect as if then made (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); and no Event of Default or Unmatured Event of Default shall have then occurred and be continuing.

Confirmatory Certificate.  If requested by the Lender, the Lender shall have received a certificate dated the date of such requested Loan or Letter of Credit and signed by a duly authorized representative of the Company as to the matters set out in Section 12.2.1 (it being understood that each request by the Company for the making of a Loan or the issuance of a Letter of Credit shall be deemed to constitute a representation and warranty by the Company that the conditions precedent set forth in Section 12.2.1 will be satisfied at the time of the making of such Loan or the issuance of such Letter of Credit), together with such other documents as the Lender may reasonably request in support thereof.

EVENTS OF DEFAULT AND THEIR EFFECT.

Events of Default.  Each of the following shall constitute an Event of Default under this Agreement:

Non-Payment of the Loans, etc.  Default in the payment when due of the principal of any Loan; or default, and continuance thereof for five days, in the payment when due of any interest, fee, reimbursement obligation with respect to any Letter of Credit or other amount payable by the Loan Parties hereunder or under any other Loan Document.

Non-Payment of Other Debt.  Any default shall occur under the terms applicable to any Debt of any Loan Party in an aggregate amount (for all such Debt so affected and including undrawn committed or available amounts and amounts owing to all creditors under any combined or syndicated credit arrangement) exceeding $250,000 and such default shall (a) consist of the failure to pay such Debt when due, whether by acceleration or otherwise, or (b) accelerate the maturity of such Debt or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Debt to become due and payable (or require any Loan Party to purchase or redeem such Debt or post cash collateral in respect thereof) prior to its expressed maturity.

Other Material Obligations.  Default in the payment when due, or in the performance or observance of, any material obligation of, or condition agreed to by, any Loan Party with respect to any material purchase or lease of goods or services where such default, singly or in the aggregate with all other such defaults, might reasonably be expected to have a Material Adverse Effect.

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Bankruptcy, Insolvency, etc.  Any Loan Party becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or any Loan Party applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for such Loan Party or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for any Loan Party or for a substantial part of the property of any thereof and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in respect of any Loan Party, and if such case or proceeding is not commenced by such Loan Party, it is consented to or acquiesced in by such Loan Party, or remains for 60 days undismissed; or any Loan Party takes any action to authorize, or in furtherance of, any of the foregoing.

Non-Compliance with Loan Documents.  (a) Failure by any Loan Party to comply with or to perform any covenant set forth in Section 10.1.5, 10.3(b), 10.5, or 10.9 or Section 11; or (b) failure by any Loan Party to comply with or to perform any other provision of this Agreement or any other Loan Document (and not constituting an Event of Default under any other provision of this Section 13) and continuance of such failure described in this clause (b) for 30 days.

Representations; Warranties.  Any representation or warranty made by any Loan Party herein or any other Loan Document is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by any Loan Party to the Lender in connection herewith is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified.

Pension Plans.  (a) Any Person institutes steps to terminate a Pension Plan if as a result of such termination the Company or any member of the Controlled Group could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $250,000; (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; (c) the Unfunded Liability exceeds twenty percent of the Total Plan Liability, or (d) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Pension Plans as a result of such withdrawal (including any outstanding withdrawal liability that the Company or any member of the Controlled Group have incurred on the date of such withdrawal) exceeds $250,000.

Judgments.  Final judgments which exceed an aggregate of $250,000 shall be rendered against any Loan Party and shall not have been paid, discharged or vacated or had execution thereof stayed pending appeal within 30 days after entry or filing of such judgments.

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Invalidity of Collateral Documents, etc.  Any Collateral Document shall cease to be in full force and effect; or any Loan Party (or any Person by, through or on behalf of any Loan Party) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document.

Invalidity of Subordination Provisions, etc.  Any subordination provision in any document or instrument governing Subordinated Debt, or any subordination provision in any guaranty by any Subsidiary of any Subordinated Debt, shall cease to be in full force and effect, or any Loan Party or any other Person (including the holder of any applicable Subordinated Debt) shall contest in any manner the validity, binding nature or enforceability of any such provision.

Change of Control.  A Change of Control shall occur.

Material Adverse Effect. The occurrence of any event having a Material Adverse Effect.

Effect of Event of Default.  If any Event of Default described in Section 13.1.4 shall occur in respect of the Company, the Commitment shall immediately terminate and the Loans and all other Obligations hereunder shall become immediately due and payable and the Loan Parties shall become immediately obligated to Cash Collateralize all Letters of Credit, all without presentment, demand, protest or notice of any kind; and, if any other Event of Default shall occur and be continuing, the Lender may declare the Commitment to be terminated in whole or in part and/or declare all or any part of the Loans and all other Obligations hereunder to be due and payable and/or demand that the Loan Parties immediately Cash Collateralize all or any Letters of Credit, whereupon the Commitment shall immediately terminate (or be reduced, as applicable) and/or the Loans and other Obligations hereunder shall become immediately due and payable (in whole or in part, as applicable) and/or the Loan Parties shall immediately become obligated to Cash Collateralize the Letters of Credit (all or any, as applicable), all without presentment, demand, protest or notice of any kind.  The Lender shall promptly advise the Company of any such declaration, but failure to do so shall not impair the effect of such declaration.  Any cash collateral delivered hereunder shall be held by the Lender (without liability for interest thereon) and applied to the Obligations arising in connection with any drawing under a Letter of Credit.  After the expiration or termination of all Letters of Credit, such cash collateral shall be applied by the Lender to any remaining Obligations hereunder and any excess shall be delivered to the Company for the benefit of the Loan Parties or as a court of competent jurisdiction may elect.

THE LOAN PARTIES.

Appointment of the Company.  Each Loan Party hereby appoints and authorizes the Company to take such action as its agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Company by the terms thereof, together with such power that are reasonably incidental thereto, and the Company hereby accepts such appointment.

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Relationship Among the Loan Parties.

JOINT AND SEVERAL LIABILITY.  EACH LOAN PARTY AGREES THAT IT IS LIABLE, JOINTLY AND SEVERALLY WITH EACH OTHER LOAN PARTY, FOR THE PAYMENT OF ALL OBLIGATIONS OF THE LOAN PARTIES UNDER THIS AGREEMENT AND EACH OTHER LOAN DOCUMENT, AND THAT THE LENDER CAN ENFORCE SUCH OBLIGATIONS AGAINST ANY OR ALL LOAN PARTIES, IN THE LENDER’S SOLE AND UNLIMITED DISCRETION.

Waivers of Defenses.  The obligations of the Loan Parties hereunder shall not be released, in whole or in part, by any action or thing which might, but for this provision of this Agreement, be deemed a legal or equitable discharge of a surety or guarantor, other than irrevocable payment and performance in full of the Obligations (except for contingent indemnity and other contingent Obligations not yet due and payable) at a time after any obligation of the Lender hereunder to make the Loans and to issue Letters of Credit shall have expired or been terminated and all outstanding Letters of Credit shall have expired or the liability of the Lender thereon shall have otherwise been discharged.  The purpose and intent of this Agreement is that the Obligations constitute the direct and primary obligations of each Loan Party and that the covenants, agreements and all obligations of each Loan Party hereunder be absolute, unconditional and irrevocable.  Each Loan Party shall be and remain liable for any deficiency remaining after foreclosure of any mortgage, deed of trust or security agreement securing all or any part of the Obligations, whether or not the liability of any other Person for such deficiency is discharged pursuant to statute, judicial decision or otherwise.

Other Transactions.  The Lender is expressly authorized to exchange, surrender or release with or without consideration any or all collateral and security which may at any time be placed with it by the Loan Parties or by any other Person on behalf of the Loan Parties, or to forward or deliver any or all such collateral and security directly to the Loan Parties for collection and remittance or for credit.  No invalidity, irregularity or unenforceability of any security for the Obligations or other recourse with respect thereto shall affect, impair or be a defense to the Loan Parties’ obligations under this Agreement or any other Loan Document. The liabilities of each Loan Party hereunder shall not be affected or impaired by any failure, delay, neglect or omission on the part of the Lender to realize upon any of the Obligations of any other Loan Party to the Lender, or upon any collateral or security for any or all of the Obligations, nor by the taking by the Lender of (or the failure to take) any guaranty or guaranties to secure the Obligations, nor by the taking by the Lender of (or the failure to take or the failure to perfect its security interest in or other lien on) collateral or security of any kind.  No act or omission of the Lender, whether or not such action or failure to act varies or increases the risk of, or affects the rights or remedies of a Loan Party, shall affect or impair the obligations of the Loan Parties hereunder.

Actions Not Required.  Each Loan Party, to the extent permitted by applicable law, hereby waives any and all right to cause a marshaling of the assets of any other Loan Party or any other action by any court or other governmental body with respect thereto or to cause the Lender to proceed against any security for the Obligations or any other recourse which the Lender may have with respect thereto and further waives any

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and all requirements that the Lender institute any action or proceeding at law or in equity, or obtain any judgment, against any other Loan Party or any other Person, or with respect to any collateral security for the Obligations, as a condition precedent to making demand on or bringing an action or obtaining and/or enforcing a judgment against, such Loan Party under this Agreement or any other Loan Document.

No Subrogation.  Notwithstanding any payment or payments made by any Loan Party hereunder or any setoff or application of funds of any Loan Party by the Lender, such Loan Party shall not be entitled to be subrogated to any of the rights of the Lender against any other Loan Party or any other guarantor or any collateral security or guaranty or right of offset held by the Lender for the payment of the Obligations, nor shall such Loan Party seek or be entitled to seek any contribution or reimbursement from any other Loan Party or any other guarantor in respect of payments made by such Loan Party hereunder, until all amounts owing to the Lender by the Loan Parties on account of the Obligations are irrevocably paid in full.  If any amount shall be paid to a Loan Party on account of such subrogation rights at any time when all of the Obligations shall not have been irrevocably paid in full, such amount shall be held by that Loan Party in trust for the Lender, segregated from other funds of that Loan Party, and shall, forthwith upon receipt by the Loan Party, be turned over to the Lender in the exact form received by the Loan Party (duly indorsed by the Loan Party to the Lender, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Lender may determine.

Application of Payments.  Any and all payments upon the Obligations made by the Loan Parties or by any other Person, and/or the proceeds of any or all collateral or security for any of the Obligations, may be applied by the Lender on such items of the Obligations as the Lender may elect.

Recovery of Payment.  If any payment received by the Lender and applied to the Obligations is subsequently set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of a Loan Party or any other obligor), the Obligations to which such payment was applied shall, to the extent permitted by applicable law, be deemed to have continued in existence, notwithstanding such application, and each Loan Party shall be jointly and severally liable for such Obligations as fully as if such application had never been made.  References in this Agreement to amounts “irrevocably paid” or to “irrevocable payment” refer to payments that cannot be set aside, recovered, rescinded or required to be returned for any reason.

Loan Parties’ Financial Condition.  Each Loan Party is familiar with the financial condition of the other Loan Parties, and each Loan Party has executed and delivered this Agreement based on that Loan Party’s own judgment and not in reliance upon any statement or representation of the Lender.  The Lender shall have no obligation to provide any Loan Party with any advice whatsoever or to inform any Loan Party at any time of the Lender’s actions, evaluations or conclusions on the financial condition or any other matter concerning the Loan Parties.

Bankruptcy of the Loan Parties.  Each Loan Party expressly agrees that, to the extent permitted by applicable law, the liabilities and obligations of that Loan Party

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under this Agreement shall not in any way be impaired or otherwise affected by the institution by or against any other Loan Party or any other Person of any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or any other similar proceedings for relief under any bankruptcy law or similar law for the relief of debtors and that any discharge of any of the Obligations pursuant to any such bankruptcy or similar law or other law shall not diminish, discharge or otherwise affect in any way the obligations of that Loan Party under this Agreement or any other Loan Document, and that upon the institution of any of the above actions, such obligations shall be enforceable against that Loan Party.

Limitation; Insolvency Laws.  As used in this Section 14.2(j): (a) the term “Applicable Insolvency Laws” means the laws of the United States of America or of any State, province, nation or other governmental unit relating to bankruptcy, reorganization, arrangement, adjustment of debts, relief of debtors, dissolution, insolvency, fraudulent transfers or conveyances or other similar laws (including, without limitation, 11 U. S. C. §547, §548, §550 and other “avoidance” provisions of Title 11 of the United Stated Code) as applicable in any proceeding in which the validity and/or enforceability of this Agreement against any Loan Party, or any Specified Lien is in issue; and (b) “Specified Lien” means any security interest, mortgage, lien or encumbrance granted by any Loan Party securing the Obligations, in whole or in part.  Notwithstanding any other provision of this Agreement, if, in any proceeding, a court of competent jurisdiction determines that with respect to any Loan party, this Agreement or any other Loan Document or any Specified Lien would, but for the operation of this Section, be subject to avoidance and/or recovery or be unenforceable by reason of Applicable Insolvency Laws, this Agreement and each such Specified Lien shall be valid and enforceable against such Loan Party, only to the maximum extent that would not cause this Agreement, such other Loan Document or such Specified Lien to be subject to avoidance, recovery or unenforceability.  To the extent that any payment to, or realization by, the Lender on the Obligations exceeds the limitations of this Section and is otherwise subject to avoidance and recovery in any such proceeding, the amount subject to avoidance shall in all events be limited to the amount by which such actual payment or realization exceeds such limitation, and this Agreement and such other Loan Document as limited shall in all events remain in full force and effect and be fully enforceable against such Loan Party.  This Section is intended solely to reserve the rights of the Lender hereunder against each Loan Party, in such proceeding to the maximum extent permitted by Applicable Insolvency Laws and neither the Loan Parties, any guarantor of the Obligations nor any other Person shall have any right, claim or defense under this Section that would not otherwise be available under Applicable Insolvency Laws in such proceeding.

GENERAL.

Waiver; Amendments.  No delay on the part of the Lender in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy.  No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the other Loan Documents shall in any event be effective

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unless the same shall be in writing and acknowledged by the Lender, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

Confirmations.  Each Loan Party and the Lender agree from time to time, upon written request received by it from the other, to confirm to the other in writing the aggregate unpaid principal amount of the Loans then outstanding under the Note.

Notices.  Except as otherwise provided in Sections 2.2.2 and 2.2.3, all notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown on the signature page or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose.  Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received.  For purposes of Sections 2.2.2 and 2.2.3, the Lender shall be entitled to rely on telephonic instructions from any person that the Lender in good faith believes is an authorized officer or employee of the Company, and the Company shall hold the Lender harmless from any loss, cost or expense resulting from any such reliance.

Computations.  Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with GAAP, consistently applied; provided that if the Company notifies the Lender that the Company (or any other Loan Party) wishes to amend any covenant in Section 10 (or any related definition) to eliminate or to take into account the effect of any change in GAAP on the operation of such covenant (or if the Lender notifies the Company that the Lender wishes to amend Section 10 (or any related definition) for such purpose), then the Loan Parties’ compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant (or related definition) is amended in a manner satisfactory to the Company and the Lender.

Costs, Expenses and Taxes.  The Loan Parties agree to pay on demand all reasonable out-of-pocket costs and expenses of the Lender (including Attorney Costs and any Taxes) in connection with the preparation, execution, delivery and administration (including perfection and protection of any collateral, if applicable) of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendment, supplement or waiver to any Loan Document), whether or not the transactions contemplated hereby or thereby shall be consummated, and all reasonable out-of-pocket costs and expenses (including Attorney Costs and any Taxes) incurred by the Lender after an Event of Default in connection with the collection of the Obligations or the enforcement of this Agreement the other Loan Documents or any such other documents or during any workout, restructuring or negotiations in respect thereof.  In addition, the Company agrees to

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pay, and to save the Lender harmless from all liability for, any fees of the Company’s auditors in connection with any reasonable exercise by the Lender of its rights pursuant to Section 10.2.  All Obligations provided for in this Section 15.5 shall survive repayment of the Loans, cancellation of the Note, expiration or termination of the Letters of Credit and termination of this Agreement.

Assignments; Participations.

(a)The Lender may at any time assign to one or more Persons all or any portion of the Lender’s Loans and Commitments, with the prior written consent of the Company (which consent (i) shall be required only so long as no Event of Default exists, (ii) shall not be unreasonably withheld or delayed and (iii) shall not be required for an assignment by a Lender to a Lender or an Affiliate of a Lender).  Any such assignment shall be in a minimum aggregate amount equal to $5,000,000 or, if less, the remaining Commitment and Loans held by the Lender.  The Company shall be deemed to have granted its consent to any assignment requiring its consent hereunder unless the Company has expressly objected to such assignment within three Business Days after notice thereof.

(b)The Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of the Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release the Lender from any of its obligations hereunder or substitute any such pledgee or assignee for the Lender as a party hereto.

(c)The Lender may at any time sell to one or more Persons participating interests in its Loans, Commitments or other interests hereunder.  In the event of a sale by the Lender of a participating interest, (i) the Lender’s obligations hereunder shall remain unchanged for all purposes, (ii) the Company shall continue to deal solely and directly with the Lender in connection with the Lender’s rights and obligations hereunder and (iii) all amounts payable by the Company shall be determined as if the Lender had not sold such participation and shall be paid directly to the Lender.  No Participant shall have any direct or indirect voting rights hereunder.  The Company agrees that if amounts outstanding under this Agreement are due and payable (as a result of acceleration or otherwise), each participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement and with respect to any Letter of Credit to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement; provided that such right of set-off shall be subject to the obligation of each participant to share with the Lender, and the Lender agrees to share with each participant.  The Company also agrees that each participant shall be entitled to the benefits of Section 7.5 or 8 as if it were a Lender (provided that on the date of the participation no participant shall be entitled to any greater compensation pursuant to Section 7.5 or 8 than would have been paid to the Lender on such date if no participation had been sold.

GOVERNING LAW.  THIS AGREEMENT AND EACH NOTE SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.

Confidentiality.  The Lender agrees to use commercially reasonable efforts (equivalent to the efforts the Lender applies to maintain the confidentiality of its own confidential information) to maintain as confidential all information provided to it by any Loan Party and designated as confidential, except that the Lender may disclose such information (a) to Persons employed or engaged by the

47

Lender in evaluating, approving, structuring or administering the Loans and the Commitment; (b) to any assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 15.8 (and any such assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) above); (c) as required or requested by any federal or state regulatory authority or examiner, or any insurance industry association, or as reasonably believed by the Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, on the advice of the Lender’s counsel, is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any litigation to which the Lender is a party; (f) to any nationally recognized rating agency that requires access to information about the Lender’s investment portfolio in connection with ratings issued with respect to the Lender; (g) to any Affiliate of the Lender who may provide Bank Products to the Loan Parties; or (h) that ceases to be confidential through no fault of the Lender.  Notwithstanding the foregoing, the Company consents to the publication by the Lender of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement, and the Lender reserves the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements.  Notwithstanding anything in this Agreement or any other Loan Document to the contrary, any information with respect to the “tax treatment” or “tax structure” (in each case, within the meaning of Treasury Regulation Section 1.6011-4) of the transactions contemplated hereby shall not be confidential and the Lender and other parties hereto may disclose without limitation of any kind any information that is provided to the Lender with respect to the “tax treatment” or “tax structure” (in each case, within the meaning of Treasury Regulation Section 1.6011-4); provided, that to the extent any Loan Document contains information that relates to the “tax treatment” or “tax structure” and contains other information, this paragraph shall only apply to the information regarding the “tax treatment” or “tax structure.”

Severability.  Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.  All obligations of the Loan Parties and rights of the Lender expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law.

Nature of Remedies.  All Obligations of the Loan Parties and rights of the Lender expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law.  No failure to exercise and no delay in exercising, on the part of the Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

Entire Agreement.  This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the parties hereto and supersedes all prior or

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contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof (except as relates to the fees described in Section 5.3) and any prior arrangements made with respect to the payment by the Loan Parties of (or any indemnification for) any fees, costs or expenses payable to or incurred (or to be incurred) by or on behalf of the Lender.

Counterparts.  This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement.  Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof.  Electronic records of executed Loan Documents maintained by the Lender shall deemed to be originals.

Successors and Assigns.  This Agreement shall be binding upon each Loan Party and the Lender and their respective successors and assigns, and shall inure to the benefit of each Loan Party and the Lender and the successors and assigns of the Lender.  No other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents.  No Loan Party may assign or transfer any of its rights or Obligations under this Agreement without the prior written consent of the Lender.

Captions.  Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement.

INDEMNIFICATION BY THE LOAN PARTIES.  IN CONSIDERATION OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT BY THE LENDER AND THE AGREEMENT TO EXTEND THE COMMITMENT PROVIDED HEREUNDER, EACH LOAN PARTY HEREBY AGREES TO INDEMNIFY, EXONERATE AND HOLD THE LENDER AND EACH OF THE OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES AND AGENTS OF THE LENDER (EACH A “LENDER PARTY”) FREE AND HARMLESS FROM AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, LOSSES, LIABILITIES, DAMAGES AND EXPENSES, INCLUDING ATTORNEY COSTS (COLLECTIVELY, THE “INDEMNIFIED LIABILITIES”), INCURRED BY THE LENDER PARTIES OR ANY OF THEM AS A RESULT OF, OR ARISING OUT OF, OR RELATING TO (A) ANY TENDER OFFER, MERGER, PURCHASE OF CAPITAL SECURITIES, PURCHASE OF ASSETS OR OTHER SIMILAR TRANSACTION FINANCED OR PROPOSED TO BE FINANCED IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, WITH THE PROCEEDS OF ANY OF THE LOANS, (B) THE USE, HANDLING, RELEASE, EMISSION, DISCHARGE, TRANSPORTATION, STORAGE, TREATMENT OR DISPOSAL OF ANY HAZARDOUS SUBSTANCE AT ANY PROPERTY OWNED OR LEASED BY ANY LOAN PARTY, (C) ANY VIOLATION OF ANY ENVIRONMENTAL LAWS WITH RESPECT TO CONDITIONS AT ANY PROPERTY OWNED OR LEASED BY ANY LOAN PARTY OR THE OPERATIONS CONDUCTED THEREON, (D) THE

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INVESTIGATION, CLEANUP OR REMEDIATION OF OFFSITE LOCATIONS AT WHICH ANY LOAN PARTY OR THEIR RESPECTIVE PREDECESSORS ARE ALLEGED TO HAVE DIRECTLY OR INDIRECTLY DISPOSED OF HAZARDOUS SUBSTANCES OR (E) THE EXECUTION, DELIVERY, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BY ANY OF THE LENDER PARTIES, EXCEPT FOR ANY SUCH INDEMNIFIED LIABILITIES ARISING ON ACCOUNT OF THE APPLICABLE LENDER PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS DETERMINED BY A FINAL, NONAPPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION.  IF AND TO THE EXTENT THAT THE FOREGOING UNDERTAKING MAY BE UNENFORCEABLE FOR ANY REASON, EACH LOAN PARTY HEREBY AGREES TO MAKE THE MAXIMUM CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW.  ALL OBLIGATIONS PROVIDED FOR IN THIS SECTION 15.15 SHALL SURVIVE REPAYMENT OF THE LOANS, CANCELLATION OF THE NOTE, EXPIRATION OR TERMINATION OF THE LETTERS OF CREDIT, ANY FORECLOSURE UNDER, OR ANY MODIFICATION, RELEASE OR DISCHARGE OF, ANY OR ALL OF THE COLLATERAL DOCUMENTS AND TERMINATION OF THIS AGREEMENT.

Nonliability of Lender.  The relationship between the Loan Parties on the one hand and the Lender on the other hand shall be solely that of Loan Parties and lender.  The Lender has no fiduciary relationship with or duty to any Loan Party arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Loan Parties, on the one hand, and the Lender, on the other hand, in connection herewith or therewith is solely that of debtor and creditor.  The Lender does not undertake any responsibility to any Loan Party to review or inform any Loan Party of any matter in connection with any phase of any Loan Party’s business or operations.  Each Loan Party agrees, on behalf of itself and each other Loan Party, that the Lender shall have no liability to any Loan Party (whether sounding in tort, contract or otherwise) for losses suffered by any Loan Party in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought.  NO LENDER PARTY SHALL HAVE ANY LIABILITY WITH RESPECT TO, AND EACH OTHER LOAN PARTY HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE).  Each Loan Party acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party.  No joint venture is created hereby or by the other Loan

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Documents or otherwise exists by virtue of the transactions contemplated hereby among the Loan Parties and the Lender.

FORUM SELECTION AND CONSENT TO JURISDICTION.  ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF MINNESOTA OR IN THE UNITED STATES DISTRICT COURT SITTING IN MINNEAPOLIS, MINNESOTA; PROVIDED THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION.  EACH LOAN PARTY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF MINNESOTA AND OF THE UNITED STATES COURT SITTING IN HENNEPIN COUNTY, MINNESOTA FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE.  EACH LOAN PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF MINNESOTA.  EACH LOAN PARTY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

WAIVER OF JURY TRIAL.  EACH LOAN PARTY AND THE LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

[The next page is the signature page.]

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The parties hereto have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the date first set forth above.

WINMARK CORPORATION
By:	/s/  Brett D. Heffes
Name:		Brett D. Heffes
Title:			Chief Financial Officer and Treasurer
WINMARK BUSINESS SOLUTIONS, INC.
By:	/s/  Brett D. Heffes
Name:		Brett D. Heffes
Title:			Chief Financial Officer and Treasurer
WINMARK CAPITAL CORPORATION
By:	/s/  Brett D. Heffes
Name:		Brett D. Heffes
Title:			Chief Financial Officer and Treasurer
GROW BIZ GAMES, INC.
By:	/s/  Mark T. Hooley
Name:		Mark T. Hooley
Title:			Vice President and General Counsel

Address for Notices:

c/o Winmark Corporation

4200 Dahlberg Drive Suite 100

Minneapolis, MN 55422

Attention: Mark Hooley,

Vice President and General Counsel

Telephone:  (763) 520-8500

Fax:  (763) 520-8410

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LASALLE BANK NATIONAL ASSOCIATION
By:	/s/  F. Ward Nixon
Name:		F. Ward Nixon
Title:		Senior Vice President and Regional Manager

Notices of Borrowing , Conversion, Continuation and Letter of Credit Issuance

50 South Sixth Street

Minneapolis, MN 55402

Attention:  Amy Hafenbrack

Telephone: (612) 752-9880

Facsimile:  (612) 752-9881

All Other Notices

50 South Sixth Street

Minneapolis, MN 55402

Attention:  F. Ward Nixon

Christina Miller

Telephone: (612) 752-9889

Facsimile:  (612) 752-9881

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EX-10.2

Exhibit 10.2

SERIES A-1 PREFERRED STOCK PURCHASE AGREEMENT

THIS SERIES A-1 PREFERRED STOCK PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of September 22, 2004, by and among Commercial Credit Group Inc., a Delaware corporation (the “Company”), and each of those entities, severally and not jointly, whose names are set forth on the Schedule of Investors attached hereto as Schedule A (which entities are hereinafter collectively referred to as the “Investors” and each individually as an “Investor”).

R E C I T A L S

WHEREAS, the Company has authorized the offer and sale of up to an aggregate of Sixty Thousand (60,000) shares (collectively, the “Shares”) of its Series A-1 Preferred Stock, par value $.00001 per share (the “Series A-1 Preferred Stock”) for a total purchase price of Six Million Dollars ($6,000,000);

WHEREAS, the Investors desire to purchase the Shares on the terms and conditions set forth herein; and

WHEREAS, the Company desires to issue and sell the Shares to the Investors on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.  Agreement to Sell and Purchase the Shares.

1.1  Authorization of Shares.  The Company has authorized (a) the sale, issuance and delivery of the Shares to the Investors and (b) the issuance and delivery of the shares of the Company’s Common Stock, par value $.00001 per share (“Common Stock”), issuable upon conversion of the Shares (collectively, the “Conversion Shares”).  The Shares and the Conversion Shares shall have the rights, preferences, privileges and restrictions set forth in the Amended and Restated Certificate of Incorporation of the Company, in the form attached hereto as Exhibit A (the “Restated Charter”), which Restated Charter shall be filed with the Secretary of State of the State of Delaware prior to the Initial Closing (as defined in Section 2.1).

1.2  Sale and Purchase.

(a)  Initial Closing.  Subject to the terms and conditions of this Agreement, at the Initial Closing, the Company will sell, issue and deliver to each Investor, severally and not jointly, and each Investor will purchase from the Company, severally and not jointly, the number of Shares set forth opposite such Investor’s name on Schedule A under the heading “Initial Closing Shares” (the “Initial Closing Shares”) at a purchase price of $100.00 per Share.

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(b)  Subsequent Closings.  Subject to the terms and conditions of this Agreement, at one or more Subsequent Closings (as defined in Section 2.2), the Company will sell, issue and deliver to each Investor, severally and not jointly, and each Investor will purchase from the Company, severally and not jointly, up to the number of Shares set forth opposite each Investor’s name on Schedule A under the heading “Subsequent Closing Shares” (the “Subsequent Closing Shares”) at a purchase price of $100.00 per Share.

1.3  Use of Proceeds.  The Company will use the proceeds from the sale of the Series A-1 Preferred Stock to the Investors and the proceeds from the sale of shares of its Series A-2 Preferred Stock (the “Series A-2 Preferred Stock”) to Daniel J. McDonough, Kevin T. McGinn, W.J. Mattocks and Richard W. Radom (collectively, the “Founders”) pursuant to that certain Series A-2 Stock Purchase Agreement to be entered into among the Company and the Founders prior to or concurrently with the Initial Closing (the “Founders Purchase Agreement”) for (a) expenses related to the Initial Closing and the completion of the Senior Debt Facility (as hereinafter defined), as more fully set forth on Schedule 1.3(a); (b) start-up expenses in an amount not to exceed One Hundred and Fifteen Thousand Dollars ($115,000) as detailed in the Company’s business plan attached hereto as Schedule 1.3(b) (the “Business Plan”); (c) reasonable and customary expenses related to the Subsequent Closings; (d) working capital and loan and leasing activities in accordance with the Business Plan; or (e) as otherwise may be approved by the Board of Directors of the Company (the “Board”); provided, however, notwithstanding the foregoing, in no event shall any such proceeds be used to reduce indebtedness or make payments to any affiliate or stockholder of the Company other than in ordinary arm’s length transactions that have been approved by the Board.

2.  Initial Closing, Delivery and Payment.

2.1  Initial Closing.  The initial closing of the sale and purchase of the Shares under this Agreement (the “Initial Closing”) shall take place as soon as possible after the execution and delivery hereof at a time and place that is mutually convenient to the Company and the Investors (the date of the Initial Closing is sometimes hereinafter referred to as the “Closing Date”).  In lieu of convening in person for the purpose of conducting the Initial Closing, the Company and the Investors may mutually agree to effect the execution and delivery of this Agreement, the Related Agreements (as defined in Section 3.1) and any other documents required to complete the Initial Closing by means of an exchange of facsimile signatures with original copies to follow by overnight courier service.   Notwithstanding anything contained herein to the contrary, the purchase price for the Initial Closing Shares allocated to Envest II LLC (“Envest”) may be paid at any time within thirty (30) days after the date hereof (assuming that the Initial Closing occurs prior to such date); provided, however, the Company shall not deliver to Envest certificates for such Initial Closing Shares until such purchase price has been paid.  Envest recognizes and acknowledges that the other Investors and the Company are relying on the aforesaid covenant and agreement by Envest in connection with their decision to complete the Initial Closing hereunder.  As security for the duties and obligations of Envest to acquire its Initial Closing Shares in accordance with the provisions of this Section 2.1, Envest shall, concurrently with the Initial Closing, deposit the sum of Two Hundred Thousand Dollars ($200,000) (the “Envest Escrow”) into escrow with the Company, which Envest Escrow shall (i) be applied on account of the purchase price due from Envest in respect of the Initial Closing Shares acquired by Envest pursuant hereto and (ii) be forfeited to the Company in the event that Envest fails to acquire the

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Initial Closing Shares in accordance with the provisions of this Section 2.1 and such failure is not attributable to any breach by the Company of its duties and obligations hereunder, all of which shall be set forth in a letter agreement by and between Envest and the Company that is reasonably satisfactory to the parties thereto.

2.2  Subsequent Closings.  At any time within twenty-four (24) months after the Initial Closing, upon a determination of the need for additional funding by the Board of Directors of the Company, the Company may give no less than twenty (20) days’ notice to the Investors (a “Funding Notice”) of the time and place of one or more closings at which the Company shall sell, and the Investors shall purchase, on terms and conditions contained in this Agreement, the Subsequent Closing Shares.  The Funding Notice shall set forth: (i) the number of Subsequent Closing Shares to be purchased by each Investor and the aggregate purchase price payable by each Investor (it being understood that each Investor shall be required to purchase its pro-rata share of such Subsequent Closing Shares); (ii) the wire transfer instructions for the Company to which the purchase price for the Subsequent Closing Shares shall be delivered by the Investors; (iii) a certificate from an authorized officer of the Company to the effect that the conditions precedent set forth in Section 5.3 hereof have been satisfied, other than the conditions set forth in Section 5.3(f) (which shall be satisfied concurrently with or as soon as possible after the purchase price has been paid in respect of the Subsequent Closing Shares); and (iv) the manner in which the proceeds of the sale of the Subsequent Closing Shares being purchased will be used by the Company (which shall be in accordance with Section 1.3 hereof).  The dates of the purchase and sale of the Subsequent Closing Shares are collectively referred to in this Agreement as the “Subsequent Closing Dates” and the closing or closings as the “Subsequent Closings.”

2.3  Delivery and Payment.  At the Initial Closing and each of the Subsequent Closings, subject to the terms and conditions of this Agreement, the Company will deliver to each Investor a certificate representing the number of Shares to be purchased by such Investor at the Initial Closing or Subsequent Closing, as appropriate, against payment of the purchase price therefor by wire transfer of immediately available funds to an account designated in writing by the Company not less than two (2) business days prior to the Initial Closing or Subsequent Closing, as appropriate.

3.  Representations and Warranties.  The Company represents and warrants to each Investor as of the date hereof and as of the Closing Date and each of the Subsequent Closing Dates that the statements contained in this Section 3 are true and correct, except as set forth in the Schedule of Exceptions attached to this Agreement (it being agreed that the Company may amend the Schedule of Exceptions as of the Closing Date and each of the Subsequent Closing Dates to reflect matters arising between the date hereof or the Subsequent Closing Date, as appropriate, and each of the Subsequent Closing Dates).  The Schedule of Exceptions shall be arranged in numbered paragraphs and each exception shall be deemed to qualify the specific numbered section of this Agreement which is referenced in the applicable exception.

3.1  Organization, Good Standing and Qualification.

(a)  The Company is a corporation duly organized, validly existing and in good standing under the Laws (as defined in Section 3.15) of the State of Delaware.  The Company has all requisite corporate power and authority to own and operate its properties and assets, to

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execute and deliver this Agreement, the Investor Rights Agreement in the form attached hereto as Exhibit B (the “Investor Rights Agreement”) and the Stockholders’ Agreement in the form attached hereto as Exhibit C (the “Stockholders’ Agreement,” and together with the Investor Rights Agreement, the “Related Agreements”), to issue and sell the Shares and the Conversion Shares, to carry out the provisions of this Agreement and the Related Agreements and to carry on its business as currently conducted and as proposed to be conducted.  The Company is duly qualified and in good standing in the State of North Carolina and in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a Material Adverse Effect on the Company.  For purposes of this Agreement, the phrase “Material Adverse Effect” shall mean any material adverse change in or effect (financial or other) on the Company’s business, results of operations, assets, liabilities, prospects or financial condition.

(b)  The Company will not, as of the Initial Closing or any Subsequent Closing, be in violation or default of any term of its Restated Charter or Bylaws.  The execution, delivery, and performance of this Agreement and the Related Agreements by the Company, and the sale, issuance and delivery of the Shares pursuant hereto and of the issuance and delivery of the Conversion Shares pursuant to the Restated Charter, will not, with or without the passage of time or giving of notice, result in any such violation, or be in conflict with or constitute a default under its Restated Charter or Bylaws.

(c)  The minute books of the Company provided to counsel for the Investors and made available for inspection and copying by each Investor contain a complete summary of all meetings of directors and stockholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all material respects.

3.2  Subsidiaries.  The Company does not own or control any equity security or other interest of any other corporation, limited partnership or other business entity.  The Company is not a participant in any joint venture, partnership or similar arrangement.

3.3  Capitalization.

(a)  The authorized capital stock of the Company as of the Initial Closing consist of (i) one million  (1,000,000) shares of Common Stock, one hundred thirty-four thousand fifty (134,050) shares of which are issued and outstanding, and (ii) Seventy-One Thousand Four Hundred and Ninety-Four (71,494) shares of Preferred Stock, of which Sixty Thousand (60,000) will be designated Series A-1 Preferred Stock and Eleven Thousand Four Hundred and Ninety-Four (11,494) will be designated as Series A-2 Preferred Stock. Immediately prior to the Initial Closing, there will be no shares of Series A-1 Preferred Stock or shares of Series A-2 Preferred Stock issued and outstanding.  Schedule 3.3(a) sets forth the issued and outstanding shares of Common Stock and Preferred Stock immediately following the Initial Closing, including all Common Stock issued and outstanding on as-converted, fully-diluted basis, assuming the purchase and sale of all of the Initial Closing Shares hereunder and the purchase and sale of the Series A-2 Preferred Stock under the Founders’ Purchase Agreement. Such capitalization table identifies by name and number of securities owned, each stockholder and other holder of the Company’s outstanding securities and convertible securities.

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(b)  Under the Company’s Equity Compensation Plan (the “Plan”), which Plan shall be established after the Initial Closing pursuant to the provisions of Section 5.4(b) hereof, Forty-Four Thousand Six Hundred and Eighty-Four (44,684) shares of Common Stock are available for issuance as of the Closing Date, of which no shares of Common Stock are issued as restricted stock or are subject to options granted and outstanding as of the Closing Date.  No employee, officer, director or consultant has options or any other securities that provide for accelerated vesting upon a “Change of Control Transaction” (as defined in the Restated Charter) or termination of employment or service or any other event, except for those vesting or similar provisions contained in those certain Buy-Sell Agreements (collectively, the “Buy-Sell Agreement”) to be entered into on or before the Initial Closing by and between the Company and each of the Founders.

(c)  Other than the shares reserved for issuance under the Plan, and except as may be issued pursuant to this Agreement, the Related Agreements and under the Founders’ Purchase Agreement, there are no outstanding options, warrants, rights (including conversion or preemptive rights, rights of first refusal and phantom stock rights), proxy, voting, transfer restriction or stockholder agreements, or agreements of any kind for the purchase or acquisition from the Company of any of its securities.  No person or entity has any right to acquire any securities of the Company or any option or warrant to acquire any securities of the Company based on any broker, finder or investment banking type relationship with or with respect to the Company.

(d)  Except as required pursuant to the Investor Rights Agreement, the Company is not under any obligation, and has not granted any rights, to “register” (as defined in the Investor Rights Agreement) any of the Company’s presently outstanding securities or any of its securities that may hereafter be issued.  Except as contemplated in the Stockholders’ Agreement or the Buy-Sell Agreement, no stockholder of the Company has entered into any agreement with respect to the voting or transfer of equity securities of the Company.

(e)  All issued and outstanding shares of the Company’s Common Stock (i) have been duly authorized and validly issued and are fully paid and nonassessable and (ii) were issued in accordance with all applicable securities Laws, including, without limitation, the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), and applicable state securities Laws (such state securities Laws, together with the Securities Act, the “Acts”) or pursuant to an exemption from such registration requirements.

(f)  The rights, preferences and privileges of the Shares will be as stated in the Restated Charter.  The Conversion Shares, with respect to issued and outstanding Shares, have been duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the Restated Charter, the Shares and the Conversion Shares will be (i) validly issued, fully paid and nonassessable (ii) issued in compliance with applicable federal and state securities Laws and (iii) except as set forth in the Related Agreements, will be free of any mortgage, pledge, lien, conditional sale agreement, security agreement, encumbrance or other charge (collectively, “Liens”); provided, however, that the Shares and the Conversion Shares may be subject to restrictions on transfer under state and/or federal securities Laws.

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3.4  Authorization; Binding Obligations.  All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization of this Agreement and the Related Agreements, the performance of all obligations of the Company hereunder and thereunder at the Initial Closing and Subsequent Closings and the authorization, sale, issuance and delivery of the Shares pursuant hereto and the issuance and delivery of the Conversion Shares pursuant to the Restated Charter has been taken.  This Agreement has been, and the Related Agreements will be, when executed and delivered at the Initial Closing, duly executed and delivered by the Company and constitute or, in the case of the Related Agreement, will constitute, valid and binding obligations of the Company enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other Laws of general application affecting enforcement of creditors’ rights, (b) as limited by general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions in the Investor Rights Agreement may be limited by applicable Laws.

3.5  Financial Statements.

(a)  The Company has delivered to the Investors financial projections and pro forma financial statements describe on Schedule 3.5 (collectively, the “Projections”).  The Projections were prepared in good faith and are based on the Company’s experience in the industry and on assumptions of fact and opinion as to future events which the Company, on the date of issuance of the Projections and on the date hereof, made in good faith and believes to be reasonable; provided, however, the representation and warranty made in this Section 3.5(a) shall not constitute a guarantee or warranty that the Company will achieve any of the financial results projected in the Projections.

(b)  All financial statements required to be delivered to the Investors under the Related Agreements prior to the Initial Closing or any Subsequent Closing (collectively, the “Financial Statements”), shall be complete and correct in all material respects and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods indicated (with the exception of footnotes that may be required by GAAP).  The Financial Statements shall fairly present, in all material respects, the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments, none of which will be material in amount.  All other information required to be delivered to the Investors prior to any Subsequent Closing under the Related Agreements shall be complete and accurate in all material respects.

3.6  Liabilities.  Except as (a) disclosed on, or reflected or reserved against in, the Financial Statements; (b) current liabilities incurred in the ordinary course of the Company’s business since the date of the most recent Financial Statements or (c) performance obligations under agreements to which the Company is a party incurred in the ordinary course of the Company’s business and not required under GAAP to be reflected in the financial statements of the Company which, in the cases of paragraphs (a) and (b), individually and in the aggregate will not have a Material Adverse Effect, the Company does not have and is not subject to any liability or obligation of any nature, whether accrued, absolute, contingent, or otherwise, asserted or unasserted, known or unknown (including, without limitation, liabilities as guarantor or

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otherwise with respect to obligations of others, or liabilities for taxes due or then accrued or to become due).

3.7  Agreements.

(a)  Schedule 3.7(a) sets forth a list of agreements, understandings, arrangements or other commitments, written or oral, to which the Company is a party or by which it is bound, (i) that are terminable without the consent of the Company and that, if terminated, would have a Material Adverse Effect on the Company, or (ii) that involve or may involve (A) obligations (contingent or otherwise) of the Company, or payments to the Company, in each case in excess of $5,000, or (B) the license of any Intellectual Property (as defined below) by the Company to any third party or by a third party to the Company (other than off the shelf shrink wrap licenses), (C) provisions restricting or affecting the development, manufacture or distribution of the Company’s products or services, (D) indemnification by the Company with respect to infringement of proprietary rights or (E) any other agreement, understanding or instrument to which the Company is a party or by which it is bound that is material to the Company (the items described in (i) and (ii) above, collectively, the “Material Contracts”).  The Material Contracts are in full force and effect and are valid, binding and enforceable in accordance with their terms.  The Company has furnished to the Investors complete and correct copies of all such Material Contracts.

(b)  The Company is not and has never been a party to, as a contractor or subcontractor, and is not making and has never made, any bid or proposal with respect to, any government contract.

(c)  Neither the Company nor, to the best of the Company’s knowledge, any other party is in material violation or default under any Material Contract and no event has occurred which with notice, lapse of time or both would constitute a violation default thereunder. The execution, delivery, and performance of this Agreement and the Related Agreements by the Company, and the sale, issuance and delivery of the Shares pursuant hereto and of the issuance and delivery of the Conversion Shares pursuant to the Restated Charter, will not, with or without the passage of time or giving of notice, result in any such violation, or be in conflict with or constitute a default under any Material Contract.

(d)  Schedule 3.7(d) sets forth a list of all agreements, understandings, arrangements or other commitments, written or oral, made by any Founder which (i) are for the benefit of the Company, (ii) obligate the Company in any way or (iii) otherwise affect the business of the Company (collectively, the “Founder Agreements”).  The Founders have assigned all Founder Agreements (and their right, title and interest thereunder) to the Company. All such assignments of the Founder Agreements are enforceable, binding and in full effect.  The Founder Agreements are binding and enforceable by the Company according to their respective terms.

3.8  Obligations to Related Parties.  Except as set forth in (i) the Buy-Sell Agreement, (ii) the four (4) separate Employment Agreements to be entered into on or before the Initial Closing between the Company and each of the Founders (collectively, the “Founders’ Employment Agreements”), and (iii) the Related Agreements, the Company has no obligations to

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executive officers, directors, stockholders or employees of the Company other than for standard employee benefits made generally available to all employees.  Except as set forth on Schedule 3.8, none of the executive officers, directors or stockholders of the Company, or any members of their immediate families, are indebted to the Company or, to the best of the Company’s knowledge, have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than one percent of such company) which may compete with the Company.  No executive officer or director or member of their immediate families or, to the best of the Company’s knowledge, any stockholder, is, directly or indirectly, interested in any Material Contract with the Company.  The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation.  For purposes of this Agreement, the phrases “knowledge of the Company” or “to the best of the Company’s knowledge” or words of similar import, mean the knowledge of any director, officer, or Founder of the Company, including facts of which directors, officers, and/or Founders, in the reasonably prudent exercise of their duties, should be aware.

3.9  Changes.  Since the later of the date on the Projectionsor the date of any audited Financial Statements delivered to the Investors, there has not been:

(a)  Any event that has had or could reasonably be expected to have a Material Adverse Effect on the Company;

(b)  Any resignation or termination of any executive officer, key employee or group of employees of the Company, except as approved by the Board;

(c)  Any damage, destruction or loss, whether or not covered by insurance, with respect to the properties and assets of the Company;

(d)  Any waiver or compromise by the Company of a valuable right or of a material debt owed to it in excess of $25,000, except as approved by the Board;

(e)  Any loans made by the Company to any stockholder, employee, executive officer or director of the Company, other than advances made in the ordinary course of business;

(f)  Any material change in any compensation arrangement or agreement with any employee, executive officer, director or stockholder, except as approved by the Board;

(g)  Any declaration or payment of any dividend or other distribution of the assets of the Company;

(h)  Any labor organization activity related to the Company;

(i)  Any debt for borrowed money incurred, assumed or guaranteed by the Company, except (i) those for immaterial amounts and for current liabilities incurred in the ordinary course of business, (ii) under the Senior Debt Facility, or (iii) amounts approved by the Board;

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(j)  Any sale, mortgage, pledge, transfer, lease or other assignment of any Intellectual Property (as defined in Section 3.11(i)) owned by the Company, other than licenses of the Company’s software and products on a non-exclusive basis in the ordinary course of business;

(k)  Any material change in any Material Contract, except as approved by the Board;

(l)  Any sale, mortgage, pledge, transfer, lease or other assignment of any of its tangible assets outside of the ordinary course of business, except as approved by the Board;

(m)  Any capital expenditure in excess of $25,000, except as approved by the Board; or

(n)  Any arrangement or commitment by the Company to do any of the acts described in subsection (a) through (m) above, except as approved by the Board.

3.10  Real and Personal Property.

(a)  Real Property.  The Company does not own any real property.  All of the real property leased by the Company (the “Leased Real Property”) is identified in Schedule 3.10(a).  The schedule of Leased Real Property set forth in Schedule 3.10(a) is a complete, accurate, and correct list of the Company’s Leased Real Property.  Each of the leases for the Leased Real Property set forth in Schedule 3.10(a) is in full force and effect and has not been modified, amended, or altered, in writing or otherwise.  Neither the Company nor, to the best of the Company’s knowledge, any other party thereto is in default under any of said leases, nor has any event occurred which, with the giving of notice or the passage of time, or both, would give rise to a default.

(b)  Personal Property.  The Company has good title (or valid leasehold estates in the case of leased property and assets) to all of its personal property and assets and all such personal property and assets are in good working condition.  None of such personal property or assets is subject to any Lien, except as set forth on Schedule 3.10(b) (the “Permitted Liens”).  The Financial Statement reflect all personal property and assets of the Company (other than assets disposed of in the ordinary course of business since the date of the Financial Statements), and such properties and assets are sufficient for the Company to conduct the business of the Company as currently conducted and as proposed to be conducted.

3.11  Intellectual Property.

(a)  The Company owns, or is licensed or otherwise possesses enforceable rights to use, all Intellectual Property (as defined below) used in or necessary for the conduct of its business as currently conducted and as proposed to be conducted.  There are no claims or demands pending by any other person pertaining to any of such Intellectual Property nor, to the best of the Company’s knowledge, is there a claim or demand threatened, and no proceedings have been instituted or, to the best of the Company’s knowledge, threatened which challenge the rights of the Company with respect to such Intellectual Property.

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(b)  With respect to Intellectual Property that is owned by the Company, all such Intellectual Property is owned free and clear of Liens, other than Permitted Liens. All patents, patent applications, trademarks, trademark applications, trademark registrations, service marks, service work applications, service mark registrations, and registered copyrights which are owned by the Company are listed in Schedule 3.11(b).  All such patents, patent applications, trademarks, trademark registrations, trademark applications, and registered copyrights have been duly registered in, filed in or issued by the United States Patent and Trademark Office, the United States Register of Copyrights, or the corresponding offices of other jurisdictions as identified on Schedule 3.11(b), and have been properly maintained and renewed in accordance with all applicable provisions of Law and administrative regulations of the United States and each such jurisdiction.

(c)  All licenses or other agreements under which the Company is granted rights in Intellectual Property of any third person are listed in Schedule 3.11(c).  All such licenses or other agreements are in full force and effect, there is no default by the Company or, to the best of the Company’s knowledge, by any other party thereto, and all of the rights of the Company thereunder are freely transferable without restriction or royalty of any kind (including, without limitation, to any successor-in-interest as a result of a merger, consolidation, asset sale or similar transaction resulting in a change of control).  The licensors under said licenses and other agreements have and, at the time of the grant of such licenses or agreements, had all requisite power and authority to grant the rights purported to be conferred thereby.  The execution, delivery, and performance of this Agreement and the Related Agreements by the Company, and the sale, issuance and delivery of the Shares pursuant hereto and of the issuance and delivery of the Conversion Shares pursuant to the Restated Charter, will not, with or without the passage of time or giving of notice, impair or otherwise affect the rights of the Company under any such license or agreement.

(d)  All licenses or other agreements under which the Company has granted rights to others in its Intellectual Property are listed in Schedule 3.11(d).  All such licenses or other agreements are in full force and effect, there is no default by the Company or, to the best of the Company’s knowledge, by any other party thereto, and all of the rights of the Company thereunder are freely transferable without restriction or royalty of any kind (including, without limitation, to any successor-in-interest as a result of a merger, consolidation, asset sale or similar transaction resulting in a change of control). The execution, delivery, and performance of this Agreement and the Related Agreements by the Company, and the sale, issuance and delivery of the Shares pursuant hereto and of the issuance and delivery of the Conversion Shares pursuant to the Restated Charter, will not, with or without the passage of time or giving of notice, impair or otherwise affect the rights of the Company under any such license or agreement.

(e)  The Company has taken all commercially reasonable measures required to establish and preserve its ownership of all Intellectual Property developed by, or on behalf of, the Company.  The Company has required all current and former employees and all consultants and independent contractors having access to, or who were involved in the development of, any of the Intellectual Property owned or developed by the Company, to execute enforceable agreements that provide valid written assignment of all inventions and developments conceived or created by them in the course of their employment or services, and all such persons are in compliance with such agreements.  The Company has no knowledge of any infringement by

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others of any of its Intellectual Property.  The Company does not believe it is or will be necessary to use any inventions of any of its employees (or persons it intends to hire) made prior to their employment by the Company.  All current and former employees and all consultants and independent contractors hired by the Company having access to confidential or proprietary information of the Company have agreed to maintain the confidentiality of all confidential and proprietary information of the Company and of any information of third parties received by the Company under an obligation of confidentiality.

(f)  To the best of the Company’s knowledge, the Company has not infringed, does not infringe and, by conducting its business as currently conducted or as proposed to be conducted, will not infringe, in any material respect, or unlawfully or wrongfully use the Intellectual Property of any third person.  No proceeding charging the Company with infringement of any Intellectual Property of any third person has been filed or, to the best of the Company’s knowledge, is threatened to be filed, except as set forth on Schedule 3.11(f).  There exists no unexpired patent or, to the best of the Company’s knowledge, patent application which includes claims that would be infringed by or otherwise adversely affect the products, activities, or business of the Company as currently conducted or as proposed to be conducted.

(g)  The Company is not making unauthorized use of any confidential information or trade secrets of any person, including without limitation, any former employer of any past or present employee of the Company.  Except as set forth on Schedule 3.11(g), neither the Company nor any employee of the Company is obligated under any duty or agreement (including any license, confidentiality agreement, covenant or commitment of any nature), or subject to any judgment, decree or order of any court or administrative agency, that would interfere in any manner with the use of their best efforts to promote the interests of the Company or that would conflict with the Company’s business as now conducted or proposed to be conducted.  To the best of the Company’s knowledge, no employee or consultant is in violation of any proprietary information or assignment of inventions agreement, or in any such similar agreement, with any former employer or contractor, and the carrying on of the Company’s business and the conduct of the Company’s business as proposed will not conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, such agreements.

(h)  Schedule 3.11(h) sets forth a list of all licenses or other agreements under which any Founder is granted rights in Intellectual Property which (i) are for the benefit of the Company, (ii) obligate the Company in any way or (iii) otherwise affect the business of the Company (collectively, the “Founder Intellectual Property Agreements”).  The Founders have assigned all Founder Intellectual Property Agreements (and all right, title and interest thereunder) to the Company.  All such assignments of the Founder Intellectual Property Agreements are enforceable, binding and in full effect.  The Founder Intellectual Property Agreements are binding and enforceable by the Company according to their respective terms.

(i)  As used in this Agreement, the term “Intellectual Property” means (i) inventions (whether or not patentable), trade secrets, technical data, databases, customer lists, designs, tools, methods, processes, technology, ideas, know how and other confidential or proprietary information and materials; (ii) trade marks and service marks (whether or not registered), applications for trade marks and service marks, trade names, logos, trade dress and

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other proprietary indicia and all goodwill associated therewith; (iii) documentation, advertising copy, marketing materials, specifications, mask works, drawings, graphics, databases, recordings and other works of authorship, whether or not protected by copyright; (iv) source code, object code, data and operating files, user manuals, documentation, flow charts, algorithms, compilers, development tools, maintenance records and other materials related to computer programs; (v) internet web-sites and domain names; and (vi) all forms of legal rights and protections that may be obtained for, or may pertain to, the Intellectual Property set forth in clauses (i) through (v) in any country of the world, including, without limitation, all letters patent, patent applications, provisional patents, design patents, PCT filings and other rights to inventions or designs, all registered and unregistered copyrights in both published and unpublished works, trade secret rights, mask works, moral rights or other literary property or authors rights, rights regarding trademarks and other proprietary indicia, and all applications, registrations, issuances, divisions, continuations, renewals, reissuances and extensions of the foregoing.

3.12  Litigation.  Except as set forth on Schedule 3.12, (a) there is no litigation, arbitration, mediation or proceeding or investigation pending or, to the best of the Company’s knowledge, threatened against the Company or affecting any of its properties or assets or against any officer, director, or Founder of the Company in his or her capacity as an officer, director or employee of the Company, or which may call into question the validity or hinder the enforceability of this Agreement or any Related Agreement or the transactions contemplated hereby and thereby, (b) to the best of the Company’s knowledge, there has not occurred any event nor does there exist any condition on the basis of which any such litigation, arbitration, mediation proceeding or investigation might be properly instituted or commenced, (c) the Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality and (d) there is no action or suit by the Company pending or, to the best of the Company’s knowledge, threatened against others.

3.13  Tax Returns and Payments.  The Company has filed on a timely basis all tax returns and reports as and when required by Law. Such tax returns and reports correctly and completely reflect the Company’s liability for taxes and all other information required to be reported thereon.  The Company has paid all taxes and other assessments due to be paid before the Initial Closing. The Company has adequately provided for, in its books of account and related records, liability for all unpaid taxes, being current taxes not yet due and payable. The Company has not been advised that any of its returns, federal, state or other, has been or is being audited, or of any deficiency in assessment in its federal, state or other taxes.  All taxes and other assessments and levies which the Company is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities when required.

3.14  Employees and Consultants.

(a)  Except as approved by the Board after the Initial Closing, the Company does not maintain or contribute to any employee benefit plan, pension plan, stock option, bonus or incentive plan, severance pay policy or agreement, deferred compensation agreement, or any similar plan or agreement (an “Employee Benefit Plan”).  No other corporation, trade, or business exists which would be treated together with the Company as a single “employer” under the provisions of Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended (the “Code”).  Each Employee Benefit Plan has been and is currently administered in

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compliance with its constituent documents and all reporting, disclosure and other requirements of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Code and any other Law applicable to such Employee Benefit Plan. There are no unfunded obligations of the Company under any retirement, pension, profit-sharing, deferred compensation plan or similar program, and any employee contributions withheld from payroll have been timely and fully contributed to the appropriate Employee Benefit Plan as required under applicable Law. The Company is not required to make any payments or contributions to any Employee Benefit Plan pursuant to any collective bargaining agreement or any applicable labor relations Law.  The Company has never maintained or contributed to any Employee Benefit Plan providing or promising any health or other nonpension benefits to terminated employees (other than continuation coverage, at the maximum applicable premium permitted to be charged by the Company, required under Section 4980B of the Code, or Section 601 of the ERISA).

(b)  Schedule 3.14(b) sets forth a list of (i) all salaried employees of the Company, together with each such employee’s position, date of employment, salary, and any other compensation payable to such employee (including, without limitation, compensation payable pursuant to bonus, deferred compensation or commission arrangements), and (ii) each contract, commitment, arrangement, or understanding, whether oral or written, relating to the employment of, or the performance of services by, any employee, consultant, or independent contractor.  The Company is not delinquent in payments to any of its employees or consultants for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it to the date hereof or amounts required to be reimbursed to such employees or consultants.  The Company is in compliance, in all material respects, with all applicable Laws, agreements, orders, and consent decrees respecting labor, employment, immigration, fair employment practices, terms and conditions of employment, and wages and hours.  The Company has no collective bargaining agreements with any of its employees.  There is no labor union organizing activity pending or, to the best of the Company’s knowledge, threatened with respect to the Company.  There are no charges of employment discrimination or unfair labor practices or any strikes, slowdowns, stoppages of work, or any other concerted interference with normal operations, pending or, to the best of the Company’s knowledge, threatened against or involving the Company.

(c)  To the best of the Company’s knowledge, no employee of the Company, nor any consultant with whom the Company has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company because of the nature of the business conducted by the Company; and to the best of the Company’s knowledge after due inquiry, the continued employment by the Company of its present employees, and the performance of the Company’s contracts with its independent contractors, will not result in any such violation.  Except as set forth on Schedule 3.14(c), the Company has not received notice alleging that any such violation has occurred.  Except as set forth on Schedule 3.14(c), no employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company.  To the best of the Company’s knowledge, no executive officer, Key Employee or group of employees intends to terminate his, her or their employment with the Company, nor does the Company have a present intention to terminate the employment of any executive officer, Key Employee or group of employees.

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3.15  Compliance with Laws; Authorizations.

(a)  The Company has complied in all material respects with each, and is not in violation of, any law, statute, regulation, rule, ordinance or order (“Laws”), including environmental Laws, to which the Company or its business, operations, employees, assets or properties are or have been subject.  No event has occurred or circumstances exist that (with or without the passage of time or the giving of notice) may result in a material violation of, conflict with or failure on the part of the Company to comply with, any Law.  The Company has not received notice regarding any violation of, conflict with, or failure to comply with, any Law. The execution, delivery, and performance of this Agreement and the Related Agreements by the Company, and the sale, issuance and delivery of the Shares pursuant hereto and of the issuance and delivery of the Conversion Shares pursuant to the Restated Charter, will not, with or without the passage of time or giving of notice, result in any such violation, or be in conflict with or constitute a default under any Law.

(b)  The Company owns, holds, possesses or lawfully uses in the operation of its business all franchises, licenses, permits and registrations (“Authorizations”) which are required or otherwise necessary for it to conduct its business as currently conducted or as proposed to be conducted or for the ownership and use of the assets owned or used by the Company in the conduct of its business, free and clear of all Liens, other than Permitted Liens.  Such Authorizations are valid and in full force and effect and none of such Authorizations will be terminated or impaired or become terminable as a result of the transactions contemplated by this Agreement or the Related Agreements.  All Authorizations are listed in Schedule 3.15(b).  No event has occurred or circumstances exist that, with or without the passage of time or the giving of notice, may result in a violation of, conflict with, failure on the part of the Company to comply with the terms of, or the revocation, withdrawal, termination, cancellation, suspension or modification of any Authorization.  The Company has not received notice regarding any violation of, conflict with, failure to comply with the terms of, or any revocation, withdrawal, termination, cancellation, suspension or modification of, any Authorization.  The Company is not in default and has not received notice of any claim of default, with respect to any Authorization.

3.16  Offering Valid.  Assuming the accuracy of the representations and warranties of the Investors contained in Section 4.2 hereof, the offer, sale, issuance and delivery of the Shares and the Conversion Shares will be exempt from the registration requirements of the Securities Act, and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities Laws.

3.17  Insurance.  The Company has insurance policies with respect to its business and properties, on both a per occurrence and an aggregate basis, as are customarily carried by persons engaged in the same or similar businesses as the Company.  There is no default by the Company, or to the best of the Company’s knowledge, by any insurance carrier of such policies, or event which could give rise to a default under any such policy.

3.18  Real Property Holding Company.  The Company is not a United States real property holding company within the meaning of Section 897(c)(2) of the Code.

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3.19  Qualified Small Business Stock.  The Series A-1 Preferred Stock sold hereunder constitutes “qualified small business stock” as defined in Section 1202(c) of the Code. The Company shall use diligent efforts to comply with the reporting requirements of Section 1202(d)(1)(C) of the Code and any related regulations promulgated thereby.  In addition, within a reasonable time (which shall not exceed thirty (30) days after any Investor delivers to the Company a written request therefor), the Company shall deliver to such Investor a written statement informing the Investor whether, to the best of the Company’s knowledge, such Investor’s interest in the Company constitutes “qualified small business stock” as defined in Section 1202(c) of the Code.  The Company’s obligation to furnish a written statement pursuant to this Section 3.19 shall continue notwithstanding the fact that a class of the Company’s securities may be traded on an established securities market.  As of the Closing Date, the Company is a “qualified small business” within the meaning of Section 1202(d) of the Code, meets the “active business requirement” of Section 1202(e) of the Code and has made no “significant redemptions” within the meaning of Section 1202(c)(3)(B) of the Code.

3.20  Investment Company Act.  The Company is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended nor is the Company directly or indirectly controlled by or acting on behalf of any person which is an “investment company.”

3.21  Disclosure.  The representations and warranties made or contained in this Agreement and the schedules and exhibits hereto, and the certificates executed or delivered in connection herewith, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be stated therein or necessary in order to make such representations and warranties not misleading in light of the circumstances in which they were made or delivered.  There have been no events or transactions, or facts or information which have not been disclosed herein or in a schedule hereto which have or could reasonably be expected to have a Material Adverse Effect.

4.  Representations and Warranties of Investors.  Each Investor, severally as to itself and not jointly, hereby represents and warrants to the Company as of the date hereof and as of the Closing Date and each Subsequent Closing Date that the statements contained in this Section 4 are true and correct as follows.

4.1  Requisite Power and Authority.  Such Investor has all necessary power and authority to execute and deliver this Agreement and the Related Agreements and to carry out their provisions.  All action on such Investor’s part required for the execution and delivery of this Agreement and the Related Agreements has been taken.  Upon their execution and delivery, this Agreement and the Related Agreements will be duly executed and delivered by such Investor and constitute valid and binding obligations of such Investor, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other Laws of general application affecting enforcement of creditors’ rights, (b) as limited by general principles of equity that restrict the availability of equitable remedies and (c) to the extent that the enforceability of the indemnification provisions of the Investor Rights Agreement may be limited by applicable Laws.

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4.2  Investment Representations.  Such Investor is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act. Such Investor is purchasing the Shares and Conversion Shares for its own account, for investment purposes only and has no current arrangements or understandings for the resale or distribution to others and will only resell such Shares and Conversion Shares any part thereof pursuant to a registration or an available exemption under applicable Law.  Such Investor acknowledges that the offer and sale of the Shares and Conversion Shares have not been registered under the Securities Act or the securities Laws of any state or other jurisdiction, and that the Shares and Conversion Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act, and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state Laws or an exemption from such registration is available.  Such Investor understands and agrees that the Shares and the Conversion Shares will bear a legend substantially similar to the legend set forth below in addition to any other legend that may be required by applicable Law, the Restated Charter, the Bylaws, and the Related Agreements, as the same may be amended from time to time, or by any agreement between the Company and such Investor:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, OR (B) IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS.

4.3  No Conflicts.  The execution, delivery and performance by such Investor of this Agreement and each Related Agreement and the transactions contemplated thereby does not and will not (a) conflict with, violate or result in any default under the organizational documents of the Investor,  (b) with or without the giving of notice or the lapse of time, or both, result in any violation or breach of, or constitute a default under, or result in any right to accelerate or result in the creation of any Liens pursuant to, or right of termination under, any material contract to which such Investor is a party or by which such Investor or any of its property is bound, or (c) conflict with or violate any requirement of Law to which such Investor is subject, which could reasonably be expected to have a material adverse effect upon such Investor’s ability to perform its duties and obligations under this Agreement and the Related Agreements.

4.4  Consents.  The execution, delivery and performance by such Investor of this Agreement and the Related Agreements and the consummation of the transactions contemplated thereby do not and will not require the consent or approval of, or notice to, or other action of any Governmental Authority or other third party, which consent or approval, as appropriate, has not been obtained.

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4.5  Litigation.  There is no litigation, arbitration, mediation or proceeding or investigation pending or, to the knowledge of each Investor, threatened against such Investor or affecting any of its properties or assets or against any officer, director, or employee of such Investor in his or her capacity as an officer, director or employee of the Investor, that could reasonably be expected to have a material adverse effect upon such Investor’s ability to perform its duties and obligations under this Agreement and the Related Agreements or which may call into question the validity or hinder the enforceability of this Agreement or any Related Agreement or the transactions contemplated hereby and thereby; nor has there occurred any event nor does there exist any condition on the basis of which any such litigation, arbitration, mediation proceeding or investigation might be properly instituted or commenced. Such Investor is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality could reasonably be expected to have a material adverse effect upon such Investor’s ability to perform its duties and obligations under this Agreement and the Related Agreements. There is no action or suit by such Investor pending or, to such Investor’s knowledge, threatened against others could reasonably be expected to have a material adverse effect upon such Investor’s ability to perform its duties and obligations under this Agreement and the Related Agreements.

4.6  Broker’s, Finder’s or Similar Fees.  There are no brokerage commissions, finder’s fees or similar fees or commissions payable in connection with the transactions contemplated hereby, or by any other Related Agreements to which such Investor is a party, based on any agreement, arrangement or understanding with such Investor or any action taken by such Investor.

4.7  Residence.  If such Investor is an individual, then the Investor resides in the state or province identified in the address of such Investor on the signature pages hereof; if such Investor is a partnership, corporation, limited liability company or other entity, then the office or offices of such Investor in which its principal place of business is located is the address or addresses of such Investor set forth on the signature pages hereof.

5.  Conditions to Closings; Post-Closing Covenants.

5.1  Conditions to Obligations of the Investors for Initial Closing.  Each Investor’s obligation to purchase the Initial Shares at the Initial Closing is subject to the satisfaction or waiver, on or prior to the Closing Date, of the following conditions:

(a)  Representations and Warranties.  The representations and warranties made by the Company in Section 3 hereof shall be true and correct as of the Closing Date as if they had been made on and as of the Closing Date.

(b)  Performance of Obligations.  The Company shall have performed all obligations required herein to be performed by it on or prior to the Initial Closing.

(c)  Compliance Certificate.  The Company shall have delivered to the Investors a Compliance Certificate, executed by the President of the Company, dated as of the Closing Date, to the effect that the conditions specified in subsections (a) and (b) of this Section 5.1 have been satisfied.

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(d)  No Material Adverse Change.  There shall have been no event that has had, or could be reasonably expected to have, a Material Adverse Effect on the Company.

(e)  Regulatory Approvals.  All authorizations, approvals and permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required to be obtained on or prior to the Initial Closing in connection with the issuance of and sale of the Shares pursuant to this Agreement shall have been duly obtained and shall be effective as of the Initial Closing.

(f)  Secretary’s Certificate; Corporate Documents.  The Investors shall have received from the Secretary of the Company a certificate having attached thereto: (i) the Restated Charter as in effect at the time of the Initial Closing (and evidence of the filing thereof with the Secretary of State of the State of Delaware), (ii) the Company’s Bylaws as in effect at the time of the Initial Closing, (iii) resolutions approved by the Board of Directors authorizing the transactions contemplated hereby, (iv) resolutions approved by the Company’s stockholders authorizing the filing of the Restated Charter, and (v) good standing certificates with respect to the Company from the applicable authority(ies) in Delaware and any other jurisdiction in which the Company is qualified to do business, dated a recent date before the Initial Closing.

(g)  Investor Rights Agreement.  The Investor Rights Agreement shall have been executed and delivered by the Company and the other parties thereto.

(h)  Stockholders’ Agreement.  The Stockholders’ Agreement shall have been executed and delivered by the Company and the Founders.

(i)  Buy-Sell Agreements.  A Buy-Sell Agreement shall have been executed and delivered by the Company and each Founder and shall be in the form of Exhibit D-1 through Exhibit D-4 attached hereto, as appropriate.

(j)  Board of Directors.  Upon the Initial Closing, the authorized size of the Board shall be four (4), and the Board shall consist of Daniel J. McDonough, David Apple, Kevin Wilson, and John Morgan, with a fifth member to be appointed thereto after the Initial Closing in accordance with the Stockholders’ Agreement.

(k)  Legal Opinion.  The Investors shall have received from legal counsel to the Company an opinion addressed to them, which is reasonably satisfactory, in form and substance, to the Investors.

(l)  Founders’ Employment Agreements.  The Founders’ Employment Agreements shall have been executed and delivered by the Company and the Founders and shall be satisfactory, in form and substance, to the Investors.

(m)  Senior Debt Facility.  The Company and Wells Fargo Foothill, Inc.  (in its capacity as arranger and administrative agent, “Wells Fargo”; the lender or lenders with respect to which Wells Fargo serves as administrative agent, the “Senior Lender”) shall have executed and delivered to one another loan documents (collectively, the “Senior Loan Documents”) satisfactory to the Investors pertaining to a revolving credit facility being made available by the Senior Lender to the Company in the maximum amount of Twenty Million Dollars

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($20,000,000) (the “Senior Debt Facility”) pursuant to the provisions of the Senior Loan Documents.

(n)  Purchase of Series A-2 Preferred Stock.  The Founders shall have purchased the Series A-2 Preferred Stock as provided in the Founders Purchase Agreement and the Founders Purchase Agreement shall be reasonably satisfactory, in form and substance, to the Investors.

(o)  Key Man Life Insurance.  The Company shall have obtained and delivered to the Investors a copy of a key man life insurance policy on the life of Daniel J. McDonough in the amount of $3,000,000 with the proceeds payable to the Company.

(p)  McDonough Indemnity.  The McDonough Indemnity shall be reasonably satisfactory, in form and substance, to the Investors.

(q)  Initial Closing.  The Initial Closing shall have occurred by October 15, 2004.

5.2  Conditions to Obligations of the Company for the Initial Closing and Subsequent Closings.  The Company’s obligation to issue and sell the Shares at the Initial Closing and the Subsequent Closings, as applicable, is subject to the satisfaction or waiver, on or prior to the Closing Date and each of the Subsequent Closing Dates, as applicable, of the following conditions:

(a)  Representations and Warranties.  The representations and warranties made by the Investors in Section 4 hereof shall be true and correct as of the Closing Date and each of the Subsequent Closing Dates, as applicable, with the same force and effect as if they had been made on and as of the Closing Date and each of the Subsequent Closing Dates, as applicable.

(b)  Performance of Obligations.  Such Investors shall have performed all obligations required herein to be performed by such Investors on or prior to the Initial Closing and the Subsequent Closings, as applicable.

(c)  Regulatory Approvals.  All authorizations, approvals and permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required to be obtained on or prior to the Initial Closing and the Subsequent Closings, as applicable, in connection with the issuance of and sale of the Shares being acquired pursuant to this Agreement shall have been duly obtained and shall be effective as of the Initial Closing and the Subsequent Closings, as applicable.

(d)  Stockholders’ Agreement.  The Stockholders’ Agreement shall have been executed and delivered by the Investors.

(e)  McDonough Indemnity.  The Company shall have executed and delivered to and in favor of Daniel J. McDonough (“McDonough”) an agreement (the “McDonough Indemnity”) under which it shall indemnify, defend and hold McDonough harmless from all loss, expenses, damages, and claims arising under any validity (or similar) agreement executed and

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delivered by McDonough in favor of the Senior Lender, with such exceptions thereto and exclusions therefrom as may be mutually satisfactory to McDonough and the Company.

5.3  Conditions to Obligations of the Investors for Subsequent Closings.  Each Investor’s obligation to purchase Subsequent Closing Shares at the Subsequent Closing applicable thereto is subject to the satisfaction or waiver, on or prior to the applicable Subsequent Closing Date, of the following conditions:

(a)  Funding Notice.  The Company shall have executed and delivered a Funding Notice to the Investors, together with the officer’s certificate required thereby, which officer’s certificate shall include reasonably satisfactory evidence that a Funding Event (as defined below) has occurred.

(b)  Funding Event.  Either: (i) the proceeds from the sale of the Subsequent Closing Shares shall be required by the Company to (A) satisfy a leverage ratio or similar financial covenant imposed by the Senior Lender under the Senior Loan Documents or (B) cure or prevent a payment or other default under the Senior Loan Documents, provided that the Senior Lender has agreed to continue to provide the Company with credit availability under the Senior Debt Facility and (if applicable) waive the default under the Senior Loan Documents in the case of a Funding Event described in this clause (i); or (ii) the Board shall have determined that it requires the capital resulting from the sale of the Subsequent Closing Shares (in either case, a “Funding Event”).

(c)  Legal Investment.  The sale and issuance of the Subsequent Closing Shares to be purchased at the Subsequent Closing shall be legally permitted by all laws and regulations to which Investors and the Company are subject.

(d)  Performance of Obligations.  The Company shall have performed, in all material respects, all obligations required herein to be performed by the Company on or prior to the Subsequent Closing.

(e)  Consents, Permits and Waivers.  The Company shall have obtained any and all consent, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Subsequent Closing (except for such as may be properly obtained following the Subsequent Closing).

(f)   Delivery of Certificates.  The Investors shall have received from the Company certificates evidencing the Subsequent Closing Shares to be issued and sold to the Investors as of the Subsequent Closing and registered in the name of each Investor, against delivery to the Company by each Investor of a wire transfer in the amount of the purchase price for the Subsequent Closing Shares purchased by each such Investor at the Subsequent Closing.

(g)  Initial Closing.  The Initial Closing shall have occurred.

5.4  Certain Post-Closing Covenants.  The Company covenants and agrees as to take the following actions after the Initial Closing:

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(a)  Confidentiality and Related Agreements.  The Company shall require all future employees and consultants having access to, or who are, were or will be involved in the development of, any of the Intellectual Property owned or developed (or to be developed) by the Company, to execute agreements under which such employees and consultants (i) agree to maintain the confidentiality of all confidential and proprietary information of the Company and (ii) provide assignments of all inventions and developments conceived or created by them in the course of their employment or services, which form of agreement shall be approved by the Board.  The agreements required to be executed pursuant to this Section 5.4(a) shall be executed concurrently with the employment or engagement, as appropriate, of the employee or consultant by the Company.

(b)  Adoption of Plan.  The Company shall formulate and adopt the Plan as soon as practicable after the Initial Closing with the approval of the Board.

6.  Miscellaneous.

6.1  Governing Law.  This Agreement shall be governed, construed and interpreted in accordance with the Laws of the State of Delaware, without giving effect to principles of conflicts of Law or choice of Law that would cause the substantive Laws of any other jurisdiction to apply.  The Company irrevocably submits and consents to the jurisdiction of any Delaware state court or federal court sitting in Delaware over any action or proceeding arising out of or relating to the Agreement or the other Related Agreements, and the Company hereby irrevocably agrees that all claims in respect of any such action or proceeding may be heard and determined in such courts.

6.2  Survival; Indemnification of Investors.

(a)  The representations, warranties, covenants and agreements made in this Agreement, the Schedule of Exceptions, any Related Agreement or any other agreement, certificate, document or instrument furnished pursuant hereto shall survive any investigation made by any Investor and the closing of the transactions contemplated hereby and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company, as appropriate.

(b)  The Company hereby agrees to hold harmless and indemnify the Investors, the Investors’ direct and indirect subsidiaries, affiliated entities and corporations, and each of their partners, executive officers, directors, employees, stockholders, agents and representatives (collectively, referred to as the “Investor Indemnitees”) against any and all damages, liabilities, losses, costs and expenses (including reasonable attorneys’ fees and expenses), whether or not arising out of third-party claims, based upon, or arising out of, or relating to, (i) any inaccuracy in, or any breach by the Company of, any representation or warranty contained in this Agreement, the Schedule of Exceptions, any Related Agreement or any other agreement, certificate, document or instrument furnished pursuant hereto, or (ii) any breach of any covenant or agreement by the Company contained in this Agreement, the Schedule of Exceptions, any Related Agreement or any other agreement, certificate, document or instrument furnished pursuant hereto (collectively, the “Indemnifiable Claims”) ; provided that the Company shall not be liable under this Section 6.2  to an Investor Indemnitee for: (i) any amount paid in settlement

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of claims without the Company’s prior written consent (which consent shall not be unreasonably withheld); (ii) to the extent that it is judicially determined that such Indemnifiable Claims resulted from the willful misconduct or gross negligence of such Investor Indemnitee; or (iii) to the extent that it is determined that such Indemnifiable Claims resulted from the material breach by such Investor Indemnitee of any representation, warranty, covenant or other agreement of such Investor Indemnitee contained in this Agreement or any Related Agreement or any other contract to which it is a party; provided, that if an Investor Indemnitee is reimbursed hereunder for any expenses, such reimbursement of expenses shall be refunded to the extent it is judicially determined that the Indemnifiable Claim in question resulted from (i) the willful misconduct or gross negligence of such Investor Indemnitee or (ii) the material breach by such Investor Indemnitee of any representation, warranty, covenant or other agreement of such Investor Indemnitee contained in this Agreement or the Related Agreements.

(c)  The Company shall reimburse, promptly following request therefor, all reasonable expenses incurred by an Investor Indemnitee in connection with any Indemnifiable Claim, including, without limitation, any threatened, pending or completed action, suit, arbitration, investigation or other proceeding arising out of, or relating to, any Indemnifiable Claim.

(d)  Each Investor Indemnitee under this Section 6.2 will, promptly after the receipt of notice of the commencement of any action, investigation, claim or other proceeding against such Investor Indemnitee in respect of which indemnity may be sought from the Company under this Section 6.2, notify the Company in writing of the commencement thereof. The failure by any Investor Indemnitee to so notify the Company of any such action shall not relieve the Company from any liability which it may have to such Investor Indemnitee unless, and only to the extent that, such omission results in the Company’s forfeiture of substantive rights or defenses or the Company is otherwise irrevocably prejudiced in defending such proceeding. In case any such action, claim or other proceeding shall be brought against any Investor Indemnitee and it shall notify the Company of the commencement thereof, the Company shall be entitled to assume the defense thereof at its own expense, with counsel reasonably satisfactory to the Investor Indemnitee; provided that any Investor Indemnitee may, at its own expense, retain separate counsel to participate in such defense.  The Company agrees that it will not, without the prior written consent of the holders holding at least a majority of the issued and outstanding Shares, settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated hereby (if any Investor Indemnitee is a party thereto or has been actually threatened to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of the Investors and each other Investor Indemnitee from all liability arising or that may arise out of such claim, action or proceeding.  The Company shall not be liable for any settlement of any claim, action or proceeding effected against an Investor Indemnitee without the prior written consent of the Company.

(e)  The rights to indemnification set forth in this Section 6.2 are in addition to, and not in limitation of, all rights and remedies to which the Investors may be entitled. All remedies, either under this Agreement, the Related Agreements, the Restated Charter, by Law, or otherwise afforded to any party, shall be cumulative and not alternative.

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6.3  Amendment and Waiver.  Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by the written consent of (a) the Company, and (b) Investors owning not less than 66 2/3% of the shares of Common Stock issued or issuable upon conversion of the Series A-1 Preferred Stock owned (or subscribed for) by all Investors (the “Required Investors”). Any amendment or waiver effected in accordance with this Section 6.3 shall be binding upon the Company and each Investor, and their respective successors and assigns. For purposes of this Section 6.3, any reference to “66 2/3% of the shares of Common Stock issued or issuable upon conversion of Series A-1 Preferred Stock” shall exclude all shares of Common Stock issuable upon payment of Accruing Dividends, assuming for purposes of this calculation that all Accruing Dividends are paid in cash in lieu of the issuance of Common Stock.  The term “Accruing Dividends” shall have the meanings given to such term in the Restated Charter, as the same may be amended and/or restated from time to time.

6.4  Entire Agreement.  This Agreement, the exhibits and schedules hereto, and the Related Agreements delivered pursuant hereto constitute the entire agreement among the parties relative to the specific subject matter hereof and thereof.

6.5  Notices.  All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex, facsimile or electronic mail if sent during normal business hours of the recipient, if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) the next business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt.  All communications shall be sent to the Company at the address or facsimile number set forth on its signature page hereto and to each Investor at the address or facsimile number set forth on Schedule A hereto or at such other address as the Company or each Investor may designate by ten (10) days’ advance written notice to the other parties hereto.

6.6  Severability.  In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

6.7  Expenses.  Each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of the Agreement; provided, however, that, if the Initial Closing occurs, the Company shall, at the Initial Closing, reimburse to the Investors, an amount not to exceed Seventy-Five Thousand Dollars ($75,000), for fees and expenses incurred in connection with this transaction.

6.8  Broker’s Fees.  The Company shall be solely responsible for the payment of all broker fees to Anderson LeNeave & Co. and Kropschot Financial Services.  Each party represents and warrants that other than Anderson LeNeave & Co. and Kropschot Financial Services, no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party is or will be entitled to any broker’s or finder’s fee or any other commission directly or indirectly in connection with the transactions contemplated herein.  The

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Company agrees to indemnify each Investor against any fee or commission payable by such Investor for which the Company is responsible, and each Investor agrees to indemnify the Company against any fee or commission payable by the Company for which such Investor is responsible.

6.9  Exculpation Among Investors.  Each Investor acknowledges that it is not relying upon any person, firm, or corporation, other than the Company and its executive officers and directors, in making its investment or decision to invest in the Company.  Each Investor agrees that no Investor nor the respective controlling persons, executive officers, directors, partners, agents, or employees of any Investor shall be liable to any other Investor for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the Shares and Conversion Shares.

6.10  Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

6.11  Successors and Assigns.  The provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto.

6.12  Titles and Subtitles.  The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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[SERIES A-1 PREFERRED STOCK PURCHASE AGREEMENT]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof.

COMMERCIAL CREDIT GROUP INC.
By:	/s/ Daniel J. McDonough
Name:		Daniel J. McDonough
Title:		President and Chief Executive Officer
Address:
212 South Tryon Street
Suite 1400
Charlotte, NC 28281
Attention: Mr. Daniel J. McDonough
Telephone:
Facsimile:

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WINMARK CORPORATION
By:	/s/ John Morgan
Name:		John Morgan
Title:		Authorized Officer
Address:
4200 Dahlberg Drive, Suite 100
Minneapolis, MN 55422-4837
Attention:			Mr. John Morgan
Telephone:				(763) 520-8404
Facsimile:				(763) 520-8410

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List of Exhibits

Exhibit A	-	Amended and Restated Certificate of Incorporation
Exhibit B	-	Investor Rights Agreement
Exhibit C	-	Stockholders’ Agreement
Exhibit D	-	Buy-Sell Agreements

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EX-10.3

Exhibit 10.3

EXECUTION COPY

SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of October 13, 2004, by and between Winmark Corporation, a Minnesota corporation (the “Purchaser”), and BridgeFunds Limited, a Nevada corporation (the “Company”).  As used herein, the parties hereto are hereinafter sometimes referred to collectively as the “Parties” and each as a “Party”.

WHEREAS, the Company wishes to issue and sell to the Purchaser a warrant to purchase an aggregate of Two Hundred Fifty Six Thousand Seven Hundred Forty One (256,741) shares of the common stock, par value $0.01 per share (the “Common Stock”), of the Company (such warrant, the “Warrant”), such Warrant to have the terms, and to be subject to the conditions, set forth in the form of Warrant annexed hereto as Exhibit A;

WHEREAS, the Company wishes to issue and sell to the Purchaser senior subordinated promissory notes having an aggregate face value of Two Million Dollars ($2,000,000.00) (such senior subordinated promissory notes, the “Notes”), each such Note to have the terms, and to be subject to the conditions, set forth in the form of Note annexed hereto as Exhibit B; and

WHEREAS, the Purchaser wishes to purchase from the Company, and the Company desires to issue and sell to the Purchaser, the Warrant and all of the Notes (collectively, the Warrant and the Notes are hereinafter sometimes referred to as the “Securities”) on the terms and subject to the conditions set forth in this Agreement (such purchase is hereinafter referred to as the “Securities Purchase”).

NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound hereby, do mutually agree as follows:

ARTICLE 1

PURCHASE AND SALE OF SECURITIES

1.1Purchase and Sale of Warrant and Initial Note.  Subject to the terms and conditions contained herein, at the Initial Closing (as defined herein), the Company agrees to issue and sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Company, (a) the Warrant and (b) a Note having an aggregate face value of Five Hundred Thousand Dollars ($500,000.00) (the “Initial Note”).

1.2 Purchase and Sale of Second Note, Third Note and Fourth Note.

(a)If, during the period from the date hereof through April 13, 2006, the Company shall have provided the Purchaser with evidence reasonably satisfactory to the Purchaser that the Company has originated, in the aggregate, Three Hundred Fifty Thousand Dollars ($350,000.00) of Customer Claimant Funding (the “Second Funding Threshold”), then as soon as practicable after the Company’s provision of such evidence to the Purchaser, at a closing to occur subsequent to the Initial Closing (an “Additional Closing”), and subject to the terms and conditions contained herein, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, a Note having an aggregate face value of Five Hundred Thousand Dollars ($500,000.00) (the “Second Note”).

(b)If, during the period from the date hereof through April 13, 2006, the Company shall have provided the Purchaser with evidence reasonably satisfactory to the Purchaser that the Company has originated, in the aggregate, Eight Hundred Fifty Thousand Dollars ($850,000.00) of Customer Claimant Funding (the “Third Funding Threshold”), then as soon as practicable after the Company’s provision of such evidence to the Purchaser, at an Additional Closing, and subject to the terms and conditions contained herein, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, a Note having an aggregate face value of Five Hundred Thousand Dollars ($500,000.00) (the “Third Note”).

(c)If, during the period from the date hereof through April 13, 2006, the Company shall have provided the Purchaser with evidence reasonably satisfactory to the Purchaser that the Company has originated, in the aggregate, One Million Three Hundred Fifty Thousand Dollars ($1,350,000.00) of Customer Claimant Funding (the “Fourth Funding Threshold”), then as soon as practicable after the Company’s provision of such evidence to the Purchaser, at an Additional Closing, and subject to the terms and conditions contained herein, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, a Note having an aggregate face value of Five Hundred Thousand Dollars ($500,000.00) (the “Fourth Note”).

1.3Definitions.  As used herein, the following terms shall have the following respective meanings:

(a)“Agreement” means this agreement, including all Exhibits and Schedules hereto, as it may be amended, modified or supplemented from time to time in accordance with its terms.

(b)“Applicable Law” means, with respect to any Person, any and all provisions of any constitution, treaty, statute, law, regulation, ordinance, code, rule, judgment, rule of common law, order, judgment, ruling, decree, award, injunction, consent, concession, grant, franchise, license, agreement, directive, guideline, policy, requirement, or other governmental restriction or any similar form of decision of, or determination by, or any interpretation or administration of any of the foregoing by, any Governmental Authority, as in effect at the relevant time, as applicable to such Person or its Subsidiaries or their respective assets.

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(c)“Board of Directors” means the board of directors of the Company.

(d)“Business Day” means any day other than a Saturday, Sunday or other day on which banking institutions are authorized or required to be closed in the State of Minnesota.

(e)“Claim Proceeds Purchase Agreement” means any agreement entered into between the Company and any customer of the Company (who is a claimant in one or more litigation matters) pursuant to which (a) the Company purchases from such customer an interest in a portion of the claim proceeds relating to such customer’s litigation matters in exchange for a specified amount (the “Claim Proceeds Purchase Price”) advanced by the Company to such customer and (b) such customer agrees to pay to the Company, under certain circumstances, from any claim proceeds realized by such customer, an amount equivalent to (i) the Claim Proceeds Purchase Price plus (ii) an additional amount or amounts specified in such agreement.

(f)“Consent” means any consent, approval, license, permit, franchise, concession, agreement, waiver, grant, privilege, immunity, exemption, order or authorization of, or registration, certification, qualification, designation, declaration, publication or filing with, or report, registration, notice or notification to, any Governmental Authority or any other Person.

(g)“Customer Claimant Funding” means the aggregate amount of funds advanced by the Company to its customers pursuant to all Claim Proceeds Purchase Agreements that are entered into since the Initial Closing Date.

(h)“Employee Options” means any options that (i) are issued to employees, officers or directors of, or consultants to, the Company, pursuant to the Employee Option Plan, and (ii) are exercisable for shares of Common Stock.

(i)“Employee Option Plan” means the BridgeFunds Limited 2004 Stock Option Plan, as authorized and approved by the Board of Directors of the Company effective as of April 1, 2004.

(j)“Encumbrance” means any lien, encumbrance, hypothecation, right of others, proxy, voting trust or similar arrangement, pledge, security interest, collateral security agreement, attachment in aid of execution, limitation on voting rights, limitation on rights of ownership, claim, charge, mortgage, pledge, objection, title defect, title retention agreement, option, restrictive covenant, easement, deed of trust, right-of-way, encroachment, use restriction, restriction on transfer, right of first refusal, right of first offer or any comparable interest or right voluntarily incurred or arising by operation of law, of any nature whatsoever, and includes, without limitation, any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof.

(k)“Executive Committee” means the executive committee of the Board of Directors.

(l)“GAAP” means generally accepted U.S. accounting principles, applied on a basis consistent with the basis on which the Company’s financial statements have been prepared.

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(m)“Governmental Authority” means any local, state, federal or supranational entity exercising executive, legislative, judicial, regulatory or administrative functions, power or authority of, or pertaining to, government, or any arbitrator, arbitral tribunal, panel or body or self regulatory organization or any subdivision thereof having jurisdiction.

(n)“Intellectual Property” means patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, proprietary information and other intellectual property.

(o)“knowledge of the Company,” the “Company’s knowledge” or any other similar qualification in this agreement means the knowledge and belief, after reasonable inquiry, of A. Mark Berlin, Jr., Richard T. Ostlund, and/or Scott H. Anderson.

(p)“Legal Opinion” means the opinion of Lionel, Sawyer & Collins, special counsel to the Company, to be dated as of even date herewith, in the form attached hereto as Exhibit C.

(q)“Materially Adverse Effect” on any Person means any materially adverse effect on the assets, liabilities, financial condition, operating results, customer, employee or supplier relations, business (as currently conducted), business condition or financing arrangements of such Person (taken as a whole on a consolidated basis with its consolidated subsidiaries, if any) or on the ability of such Person to perform the transactions contemplated hereby to be performed by such Person.

(r)“Materially Adverse Change” with respect to any Person means any materially adverse change in the assets, liabilities, financial condition, operating results, customer, employee or supplier relations, business (as currently conducted), business condition or financing arrangements of such Person (taken as a whole on a consolidated basis with its consolidated subsidiaries, if any) or in the ability of such Person to perform the transactions contemplated hereby to be performed by such Person.

(s)“Person” means any individual, corporation, partnership, limited liability company, joint venture, business trust, association or other business entity of any type or nature or any governmental authority.

(t)“Related Documents” means the Warrant, the Notes and the Stockholder Agreement

(u)“Securities Act” means the Securities Act of 1933, as amended.

(v)“Stockholder Agreement” means that certain Stockholder Agreement by and among the Company and certain other Persons, such Stockholder Agreement to have the terms, and to be subject to the conditions, set forth in the form of Stockholder Agreement annexed hereto as Exhibit D.

(w)“Subsidiary” means any corporation or other entity in which the company owns, directly or indirectly, a majority of the capital stock or other equity interest or the financial

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results of which are consolidated with the financial results of the company in accordance with GAAP.

(x)“Warrant Shares” means the 256,741 shares of Common Stock issuable upon exercise of the Warrant.

ARTICLE 2

CLOSINGS; CLOSING DELIVERIES

2.1Closings.  The initial closing of the transactions contemplated hereby (the “Initial Closing”) shall take place simultaneously with the execution and delivery of this Agreement, at the offices of Mayer, Brown, Rowe & Maw LLP, 190 South LaSalle Street, Chicago, Illinois 60603.  The date on which the Initial Closing occurs is called the “Initial Closing Date”.  Each Additional Closing shall take place at the offices of Mayer, Brown, Rowe & Maw LLP, 190 South LaSalle Street, Chicago, Illinois 60603, as soon as practicable after the satisfaction of the closing conditions for such Additional Closing, in each case, at such time as shall be agreed upon by the Parties.  The date on which each Additional Closing occurs is called an “Additional Closing Date”.

2.2Initial Closing.  At the Initial Closing:

(a)the Company shall issue and deliver to the Purchaser (i) a warrant certificate representing the Warrant, duly registered in the name of the Purchaser or its nominee and (ii) the Initial Note, duly registered in the name of the Purchaser or its nominee, against payment by the Purchaser of Five Hundred Thousand Dollars ($500,000.00) as the purchase price therefor (such amount to be delivered by the Purchaser by wire transfer to such account of the Company as has been designated in writing by the Company);

(b)the Company shall execute and deliver to the Purchaser the Stockholder Agreement (as executed by each of the Persons contemplated to be a party thereto); and

(c)the Company shall cause to be delivered to the Purchaser a duly executed copy of the Legal Opinion.

2.3Additional Closings.

(a)The obligations of the Purchaser to purchase the Second Note, the Third Note and the Fourth Note at each Additional Closing are subject to satisfaction (or written waiver) at or prior to such Additional Closing of the following conditions:

(i)The Company shall have provided the Purchaser with evidence reasonably satisfactory to the Purchaser of the occurrence of the Second Funding Threshold, the Third Funding Threshold or the Fourth Funding Threshold (as applicable).

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(ii)The representations and warranties of the Company contained in Article 4 of this Agreement (as supplemented and amended in accordance with Section 6.5(c)) shall be accurate, true and correct on and as of the Additional Closing Date, and the events or circumstances underlying the need for such supplements or amendments shall not have a Material Adverse Effect on the Company.

(iii)All acts or covenants required hereunder to be performed by the Company at or prior to the Additional Closing shall have been fully performed by it in all material respects.

(iv)The Company shall have provided the Purchaser sufficient opportunity to ask questions and receive answers from the officers of the Company regarding the Securities, the Company and its business, prospects and financial condition, for purposes of Purchaser providing the representation and warranty contained in Section 3.5 hereof.

(v)The Company shall have delivered to the Purchaser a certificate of the Company dated as of the Additional Closing Date, executed by a duly authorized officer of the Company, certifying as to the satisfaction of the conditions set forth in Sections 2.3(a)(i), 2.3(a)(ii), 2.3(a)(iii) and 2.3(a)(iv).

(b)The obligations of the Company to issue the Second Note, the Third Note and the Fourth Note at each Additional Closing are subject to satisfaction (or written waiver) at or prior to such Additional Closing of the following conditions:

(i)The representations and warranties of the Purchaser contained in Article 3 of this Agreement, subject however to Section 2.3(a)(iv), shall be accurate, true and correct in all material respects at and as of the Additional Closing Date.

(ii)All acts or covenants required hereunder to be performed by the Purchaser at or prior to the Additional Closing shall have been fully performed by it in all material respects.

(iii)The Purchaser shall have delivered to the Company a certificate of the Purchaser dated as of the Additional Closing Date, executed by a duly authorized officer of the Purchaser, certifying as to the satisfaction of the conditions set forth in Sections 2.3(b)(i) and 2.3(b)(ii).

(c)At each Additional Closing, the Company shall issue and deliver to the Purchaser the Second Note, the Third Note or the Fourth Note (as applicable), in each case, duly registered in the name of the Purchaser or its nominee, against payment by the Purchaser of Five Hundred Thousand Dollars ($500,000.00) as the purchase price therefor (such amount to be delivered by the Purchaser by wire transfer to such account of the Company as has been designated in writing by the Company).

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2.4Further Assurances.  The Purchaser, on the one hand, and the Company, on the other hand, shall use all reasonable efforts to take all such other actions as may be necessary or desirable to carry out the purposes of this Agreement.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

As an inducement to the Company to enter into this Agreement and the Stockholder Agreement, the Purchaser hereby represents and warrants to the Company as follows:

3.1Organization and Qualification.  The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota.

3.2Authorization.  The Purchaser has the requisite power and authority and has taken all required corporation action necessary to permit it to execute and deliver this Agreement and the Warrant and to carry out its obligations hereunder and thereunder The execution and delivery of this Agreement and the Warrant by the Purchaser and the consummation by the Purchaser of the transactions contemplated hereby and thereby to be performed by it have been duly authorized by all necessary corporate action on the part of the Purchaser, and no other corporate proceedings on the part of the Purchaser are necessary to authorize this Agreement, the Warrant or any of such transactions.  Each of this Agreement and the Warrant has been duly executed and delivered by the Purchaser and constitutes a legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws relating to the enforcement of creditors’ rights generally or by general principles of equity, regardless of whether such enforceability is considered at law or in equity.

3.3No Conflict.  The execution, delivery and performance of this Agreement and the Warrant by the Purchaser is not a breach or violation of, and does not conflict with or constitute, with or without the passage of time or the giving of notice (or both), a default under, its Articles of Incorporation or its Bylaws.

3.4Accredited Purchaser.  The Purchaser is an “Accredited Investor” as defined in  Regulation D under the Securities Act because the Purchaser is a corporation, not formed for the specific purpose of acquiring the Securities, having total assets in excess of $5,000,000, whose purchase is directed by a “Sophisticated Person” (as defined in Regulation D under the Securities Act) who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment.

3.5Opportunity for Review of Company Information.  The Purchaser acknowledges that it has had the opportunity to ask questions of and receive answers from officers of the Company regarding the Securities, the Company and its business, prospects and financial condition.

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3.6Investment Intent.  The Purchaser is acquiring the Securities for purposes of investment only, for its own account and with no intention of distributing any portion thereof in violation of applicable federal or state securities laws.

3.7Legend.  The Purchaser acknowledges and agrees that the Company is authorized to imprint on all certificates and instruments evidencing the Securities and on any certificates or instruments issued in replacement or exchange for those Securities, and agrees to comply with any legend provided in any of the Related Documents to be imprinted on such certificates and instruments.  At the request of the holder of any certificate or instrument evidencing any of the Securities or any certificate or instrument issued in replacement or exchange for any certificate or instrument evidencing any of the Securities, the foregoing legend shall be removed by the Company from such certificate or instrument if the Securities evidenced thereby have been registered under the Securities Act or have become eligible for resale pursuant to Rule 144(k) under the Securities Act.

3.8Experience; Financial Condition.  The Purchaser has such experience in investing in securities of private companies, and has such knowledge and experience in financial and business matters, that it is capable of evaluating the merits and risks of acquisition of the Securities and protecting its own interests in connection therewith, and of making an informed investment decision with respect thereto.  The Purchaser’s financial condition is such that it is able to bear the risk of holding the Securities for an indefinite period of time and the risk of loss of the Purchaser’s entire investment in the Securities.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

As an inducement to the Purchaser to enter into and perform this Agreement, the Company represents and warrants to the Purchaser as follows:

4.1Organization and Qualification.  The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and has the requisite corporate power and authority, and has all necessary governmental approvals, to own or lease and operate its properties and to carry on its business as it is currently conducted (exclusive, however, of any such governmental approval the absence of which would not, and could not reasonably be anticipated to, have a Materially Adverse Effect on the Company).  The Company has made available to the Purchaser true, correct and complete copies of the Articles of Incorporation and Bylaws of the Company, including all amendments, restatements and other modifications thereto or thereof, as in effect immediately prior to the execution and delivery of this Agreement.  Except as set forth on Schedule 4.1, the Company is duly licensed or qualified or qualified as a foreign corporation in every jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires such qualification (exclusive, however, of any such license or qualification the absence of which would not, and could not reasonably be anticipated to, have a Materially Adverse Effect on the Company).

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4.2Authorization; Issuance of Warrant Shares.

(a)The Company has the requisite power and authority and has taken all required corporation action necessary to permit it to execute and deliver this Agreement and the Related Documents and to carry out its obligations hereunder and thereunder.  The execution and delivery of this Agreement and the Related Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby to be performed by it have been duly authorized by all necessary corporate action on the part of the Company, and no other corporate proceedings on the part of the Company are necessary to authorize any of this Agreement and the Related Documents or any of such transactions.  Each of this Agreement, the  Warrant, the Initial Note and the Stockholder Agreement has been duly executed by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws relating to the enforcement of creditors’ rights generally or by general principles of equity, regardless of whether such enforceability is considered at law or in equity.  Each of the Second Note, the Third Note and the Fourth Note will be duly executed by the Company in accordance with the terms of this Agreement, and at such time of such execution, each such Note will constitute a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws relating to the enforcement of creditors’ rights generally or by general principles of equity, regardless of whether such enforceability is considered at law or in equity.

(b)The Warrant Shares have been duly reserved for issuance upon exercise of the Warrant and, when so issued, will be duly authorized, validly issued and outstanding, fully paid and nonassessable shares of Common Stock.

4.3No Conflict.  The execution, delivery and performance of this Agreement and the Related Documents by the Company does not or will not (as applicable) violate (a) any provision of the Articles of Incorporation or Bylaws of the Company or (b) any Applicable Law, regulation, order, judgment or decree, or result in the breach of or constitute a default (or an event which, with notice or lapse of time or both would constitute a default) under any agreement, instrument or understanding to which the Company is a party, except, in the case of Section 4.3(b), for any breaches or defaults that would not, and could not reasonably be anticipated to, have a Materially Adverse Effect on the Company.

4.4Capitalization.

(a)As of the Initial Closing Date, the authorized capital stock of the Company consists of 5,000,000 shares of Common Stock, of which (i) 931,500 shares of Common Stock are issued and outstanding (all of which issued and outstanding shares of Common Stock are held of record by the Persons and in the amounts set forth on Schedule 4.4(a)), (ii) 150,000 shares of Common Stock are reserved for issuance upon exercise of Employee Options, and (iii) the Warrant Shares are reserved for issuance upon exercise of the Warrant.

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(b)As of the Initial Closing Date, Employee Options exercisable for 95,464 shares of Common Stock have been issued by the Company (all of which Employee Options are held of record by the Persons and in the amounts set forth on Schedule 4.4(b)).

(c)As of the Initial Closing Date, all of the outstanding shares of Common Stock are validly issued, fully paid and nonassesable.

(d)Except as set forth on Schedule 4.4(d), as of the Initial Closing Date, except as contemplated by this Agreement and each of the Related Documents, (i) the Company has not issued or granted (or agreed or otherwise committed to issue or grant), and there are not otherwise outstanding, any shares of Common Stock or other securities issued by the Company and (ii) there are no existing options, warrants, conversion privileges or other rights, agreements, arrangements or commitments obligating the Company to issue or sell any shares of Common Stock or other securities to be issued by the Company or securities or obligations of any kind exercisable for, convertible into or exchangeable for any shares of Common Stock or other securities to be issued by the Company.

4.5Compliance With Securities Laws.

(a)As of the Initial Closing Date, all of the outstanding shares of Common Stock and other securities of the Company have been issued in accordance with the registration or qualification provisions of the Securities Act and any relevant state securities laws, or pursuant to valid exemptions therefrom.

(b)Subject to the accuracy of the Purchaser’s representations contained herein, the offer, sale and issuance of the Warrant and the Notes hereunder and the issuance and delivery of any of the Warrant Shares upon exercise of the Warrant, when exercised in accordance with the terms of such Warrant, do not and will not (as applicable) require registration under the Securities Act or any state securities laws.

4.6Voting Agreement.  Except for the Stockholder Agreement and as set forth on Schedule 4.6, the Company is not a party or otherwise subject to any agreement or understanding, and to the Company’s knowledge, there is no agreement or understanding between any Persons, that affects or relates to the voting or transfer of shares of the capital stock of the Company.

4.7Subsidiaries.  Except as set forth on Schedule 4.7, (a) the Company does not have any Subsidiary nor does it own or control, directly or indirectly, any interest in any other Person, and (b) the Company is not a participant in any joint venture, partnership or similar arrangement. 

4.8Financial Statements; Undisclosed Liabilities.

(a)Schedule 4.8 sets forth a true and complete copy of (i) the unaudited balance sheet of the Company, dated as of September 30, 2004 (the “Balance Sheet”), (ii) the unaudited statement of profit and loss of the Company for the period from January 1, 2004 through September 30, 2004 (the “Income Statement”) and (iii) the unaudited statement of cash flows of the Company for the period from January 1, 2004 through September 30, 2004 (the

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“Cash Flow Statement” and, together with the Balance Sheet and the Income Statement, the “Financial Statements”).  The Financial Statements present fairly in all material respects the financial condition of the Company as of September 30, 2004 and the results of operations and cash flows of the Company for the period covered thereby, subject to normal year-end accounting adjustments and the absence of footnote disclosure.  Except as set forth on Schedule 4.8, the Financial Statements were prepared in accordance with GAAP.

(b)Except as set forth on the Balance Sheet (including any notes thereto), the Company has no liabilities or obligations other than liabilities or obligations incurred by the Company after September 30, 2004 in the ordinary course of its business.

4.9No Materially Adverse Changes.  Since September 30, 2004, except as set forth on Schedule 4.9, (a) to the Company’s knowledge, there has not been any Materially Adverse Change with respect to the Company and (b) the Company has not declared or paid any dividend or authorized or made any other distribution upon or with respect to any of the shares of Common Stock or any other securities of the Company.

4.10Litigation.  Except as set forth on Schedule 4.10, there are no actions, suits, proceedings or orders, at law or in equity, pending or (to the Company’s knowledge) threatened against the Company, and, to the Company’s knowledge, there are no investigations pending or threatened against the Company before or by any Governmental Authority.

4.11Operating Consents.  Except as set forth on Schedule 4.11, to the Company’s knowledge, the Company has all Consents, whether issued or granted by any Governmental Authority or other Person, necessary for the conduct of its business as currently conducted (such Consents, collectively, the “Operating Consents”), excluding those Consents the failure of which to have would not, and could not reasonably be anticipated to, have a Materially Adverse Effect on the Company.  Except as set forth on Schedule 4.11, the Company is not in default under any of the Operating Consents, except for those defaults which would not, and could not reasonably be anticipated to, have a Materially Adverse Effect on the Company.

4.12Certain Violations or Defaults of Governing Documents of the Company.  The Company is not in violation or default of any provision of its Articles of Incorporation or its Bylaws.

4.13Owned Real Property.  Except as set forth on Schedule 4.13, the Company does not own any real property.

4.14Real Property Leases.  Set forth on Schedule 4.14 is a list of all agreements pursuant to which real property is leased to the Company.  Except as set forth on Schedule 4.14, there exists no event of default (nor any event which with notice or lapse of time would constitute an event of default) with respect to any such agreement by the Company, except for those defaults which would not, and could not reasonably be anticipated to, have a Materially Adverse Effect on the Company.  Except as set forth on Schedule 4.14, each such agreement is in full force and effect and is enforceable against the applicable lessor in accordance with its terms.

4.15Agreements; Actions.

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(a)Set forth on Schedule 4.15(a) is a list of each written agreement to which the Company is a party or is otherwise bound as of the Initial Closing Date:

(i)constituting a Claim Proceeds Purchase Agreement;

(ii)under which it has created, incurred, assumed, or guaranteed (or may create, incur, assume, or guarantee) indebtedness for borrowed money or capitalized lease obligations involving more than $50,000 or pursuant to which a lien is or may be imposed on any of the assets of the Company (other than in the ordinary course of business of the Company); and

(iii) for the making of any loan or advance of funds by the Company to any Person (other than Claim Proceeds Purchase Agreements and ordinary advances to employees for travel expenses).

(b)Prior to entering into any Claim Proceeds Purchase Agreement with any Person whose primary place of residence or business is located in a state (the “Applicable State”) in which there are no Persons with which the Company had previously entered into a Claim Proceeds Purchase Agreement, the Company (i) consulted with legal counsel (which may or may not be licensed to practice in the Applicable State) with respect to the validity and enforceability of Claim Proceeds Purchase Agreements under the Applicable Law of the Applicable State and (ii) on the basis of such legal consultations, among other factors, attempted in good faith to make a considered business judgment with respect to the advisability of entering into such Claim Proceeds Purchase Agreement.

(c)Except as set forth on Schedule 4.15(c), the Company has not: (i) received any written claims from any Persons asserting that any Claim Proceeds Purchase Agreement is not valid or enforceable under Applicable Law; or (ii) otherwise received any written notice which is in turn validated by legal counsel of any change in Applicable Law of any state or of any change in the interpretation or application of Applicable Law of any state with respect to the enforceability of any Claim Proceeds Purchase Agreement in such state (other than, in the case of each of clauses (i) and (ii), any such written claims or changes in Applicable Law of any state or any change in the interpretation or application of Applicable Law of any state that have not, and could not reasonably anticipated to, have a Materially Adverse Effect on the Company.

4.16Related Party Transactions.  Except as set forth on Schedule 4.16, and except for employment agreements and director indemnification agreements, (a) the Company has not entered into any agreement, arrangement or transaction with (i) any employee, officer, director or stockholder of the Company (each such Person, for purposes of this Section 4.16, an “Affiliate”), (ii) any member of the immediate family of any such Affiliate or (iii) any Person in which such Affiliate has any direct or indirect ownership interest, and (b) none of the Affiliates owns any property or right, tangible or intangible, which is used in the Company’s business.

4.17Employee Benefit Plans.  Except as set forth in Schedule 4.17, the Company does not have any employee benefit plan as defined in the Employee Retirement Income Security Act of 1974, as amended.

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4.18Taxes.  Except as set forth on Schedule 4.18, (a) the Company has prepared and filed all tax returns required to be filed by it, which tax returns are true, correct and complete, (b) the Company has paid or made provision for the payment of all taxes that are due or claimed to be due from it by any Governmental Authority, (c) there are no liens for taxes upon any assets, tangible or intangible, of the Company, (d) there are no pending claims, disputes or questions related to, or claims for, taxes of the Company and (e) the Company has not granted any extension of the period of limitation applicable to any claim for Taxes.

4.19Employment and Labor Matters.

(a)Schedule 4.19(a) sets forth a list of all directors, officers and employees of the Company as of the Initial Closing Date.

(b)Except as set forth on Schedule 4.19(b), (i) the Company is not bound by or subject to (and none of the assets or properties of the Company is bound by or subject to) any contract, commitment or arrangement with any labor union, and no labor union has requested or has sought to represent any of the employees, representatives or agents of the Company, and (ii) there is no strike or other labor dispute involving the Company pending, or to the Company’s knowledge, threatened, which would have, or could reasonably be anticipated to have, a Materially Adverse Effect on the Company, nor to the Company’s knowledge is there any labor organization activity involving the employees of the Company.

4.20Title to Property and Assets.  Except as set forth on Schedule 4.20, the Company owns its property and assets free and clear of any and all Encumbrances, except Encumbrances that have arisen in the ordinary course of business and do not materially impair the Company’s ownership or use of such property or assets.

4.21Insurance.  Set forth on Schedule 4.21 is a complete list and full and fair description (inclusive of the amount of coverage and deductibles or co-insurance) of each and all of the insurance policies maintained by, or for the benefit of, the Company.

4.22Regulation U.  None of the activities or operations of the Company are subject to any provisions of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221).

4.23Investment Company Act.  The Company is not required to be registered as an investment company under the Investment Company Act of 1940, as amended, or the regulations promulgated thereunder.

4.24Disclosure.  The representations and warranties made or contained in this Agreement, and the certificates executed or delivered in connection herewith, are accurate and do not omit any fact required to be stated therein or necessary in order to make such representations, warranties or certificates not misleading in light of the circumstances in which they were made or delivered.

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ARTICLE 5

EXPENSES, TAXES AND OTHER MATTERS

5.1Expenses.  If the Securities Purchase shall be consummated, the Company shall promptly reimburse the Purchaser’s out-of-pocket expenses (including legal fees), incurred in connection with the negotiation, documentation and execution of this Agreement and the other agreements, documents and instruments contemplated hereby and the performance of the transactions contemplated hereby and thereby, up to a maximum of Fifteen Thousand Dollars ($15,000.00).  Except as provided in the preceding sentence, each of the Purchaser and the Company shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby.

5.2Taxes Arising from Securities Purchase.  The Purchaser, on the one hand, and the Company, on the other hand, shall equally bear the cost of all sales, transfer and other similar taxes that result from or are occasioned by the Securities Purchase.

5.3Notification of Certain Matters.  Each Party shall give prompt written notice to the other of any material failure of such Party, or any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by him/her/it hereunder.  Company shall give immediate notice to the Purchaser of (and shall promptly provide the Purchaser with copies of all relevant material related to): (i) any claims known to the Company from any Persons asserting that any Claim Proceeds Purchase Agreement is not valid and enforceable under Applicable Law; or (ii) any notice or information known to the Company concerning a change in the Applicable Law or a change in the interpretation or application of Applicable Law that would have a Material Adverse Effect on the Company.

5.4Certain Additional Covenants.  At any time during which the Purchaser owns any outstanding Notes or the Warrant:

(a)Prior to entering into any Claim Proceeds Purchase Agreement with any Person whose primary place of residence or business is located in a state in which there are no Persons with which the Company had previously entered into a Claim Proceeds Purchase Agreement, the Company shall (i) consult with legal counsel (which may or may not be licensed to practice in the Applicable State) with respect to the validity and enforceability of Claim Proceeds Purchase Agreements under the Applicable Law of the Applicable State and (ii) on the basis of such legal consultations, among other factors, attempt in good faith to make a considered business judgment with respect to the advisability of entering into such Claim Proceeds Purchase Agreement.

(b)The Company shall cause to be done all things necessary to maintain, preserve and renew its corporate existence and all material licenses, authorizations and permits necessary to the conduct of its business.

(c)The Company shall apply for and continue in force adequate insurance covering risks of such types and in such amounts as are customary for corporations of similar size engaged in similar lines of business.

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(d)The Company shall pay and discharge, when due and payable, all taxes, assessments and governmental charges imposed upon its properties or upon the income or profits therefrom (in each case before the same becomes delinquent and before penalties accrue thereon) unless the same is being contested in good faith and by appropriate proceedings and adequate reserves (as determined in accordance with GAAP, consistently applied) have been established on its books with respect thereto.

(e)The Company shall pay and discharge, when due and payable, all interest and principal amounts payable under the Notes and any other indebtedness of the Company (in each case before the same becomes delinquent and before penalties accrue thereon), subject to the terms and conditions of the Notes and such other indebtedness, unless the same is being contested in good faith and by appropriate proceedings and adequate reserves (as determined in accordance with GAAP, consistently applied) have been established on its books with respect thereto.

5.5Attendance at Board Meetings, Executive Committee Meetings and Stockholder Meetings.  At any time during which the Purchaser owns any outstanding Notes or the Warrant, the Purchaser shall have the right to designate one of its directors, officers or other representatives to (a) attend all meetings of the Board of Directors, the Executive Committee and the stockholders of the Company, in each case in a nonvoting observer capacity, (b) receive notice of such meetings and (c) receive the information provided by the Company to the Board of Directors, the Executive Committee and the stockholders of the Company for such meetings (as applicable).  If, at any time, the Purchaser owns neither any outstanding Notes nor the Warrant, all of the Purchaser’s rights and entitlements set forth in this Section 5.5 shall thereafter expire.

5.6Designation of Director.  At any time during which the Purchaser owns any outstanding Notes or the Warrant, the Purchaser shall have the right, at its option, by providing written notice to the Chief Executive Officer of the Company, to designate one member of the Board of Directors.  If the Purchaser exercises such right in accordance with the previous sentence, then the Person designated by the Purchaser shall be elected as a member of the Board of Directors in accordance with the terms of (i) this Section 5.6 and (ii) Section 2.1 of the Stockholder Agreement.

(a)Subject to Section 5.6(c), any director designated by the Purchaser pursuant to this Section 5.6 shall be removed from the Board of Directors, with or without cause, at the written request of the Purchaser, and, subject to Section 78.335 of the Nevada General Corporation Law, under no other circumstances.

(b)Subject to Section 5.6(c), if any director designated by the Purchaser pursuant to this Section 5.6 for any reason ceases to serve on the Board of Directors during his or her term of office, the resulting vacancy on the Board of Directors shall be filled by an individual designated by the Purchaser.

(c)If, at any time, the Purchaser owns neither any outstanding Notes nor the Warrant, the Purchaser shall become ineligible to designate or remove an individual to or from a directorship of the Company pursuant to this Section 5.6, and all rights and entitlements

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hereunder to designate or remove an individual to or from such directorship shall thereafter expire.  Notwithstanding any of the foregoing, if, at any time, the Purchaser owns neither any outstanding Notes nor the Warrant, and an individual designated by the Purchaser pursuant to this Section 5.6 is then serving as a director of the Company, such individual shall hold office as director until his or her successor is elected and qualified in accordance with the Bylaws of the Company or until his or her earlier resignation or removal in accordance with the Bylaws of the Company.

5.7Information Rights.

(a)Financial Statements.

(i)Monthly Financial Statements.  Within thirty (30) days of the end of each month, the Company shall deliver to the Purchaser an unaudited balance sheet, an unaudited profit and loss statement and an unaudited statement of cash flows for and as of the end of such month, each prepared in accordance with GAAP, except that no notes need to be attached to such statements and year-end audit adjustments do not need to be made.

(ii)Quarterly Financial Statements.  Within sixty (60) days of the end of each of the first three fiscal quarters, the Company shall deliver to the Purchaser an unaudited balance sheet, an unaudited profit or loss statement and an unaudited statement of cash flows for and as of the end of such fiscal quarter, each prepared in accordance with GAAP, except that no notes need to be attached to such statements and year-end audit adjustments do not need to be made.

(iii)Annual Financial Statements.  Within ninety (90) days of the end of each fiscal year, the Company shall deliver to the Purchaser an audited balance sheet, an audited profit or loss statement and an audited statement of cash flows for and as of the end of such fiscal year, each prepared in accordance with GAAP.

(b)Inspection and Copying of Records.  Upon reasonable written request by the Purchaser, the Purchaser shall have the right during normal business hours to inspect and copy such Company documents (at the expense of the Purchaser) as have been reasonably requested; provided, however, that nothing herein shall obligate the Company to take any actions that would unreasonably interrupt the normal course of the Company’s business.

(c)Expiration of Purchaser’s Information Rights.  If, at any time, the Purchaser owns neither any outstanding Notes nor the Warrant, all of the Purchaser’s rights and entitlements set forth in Sections 5.7(a) and 5.7(b) shall thereafter expire.

5.8Stockholder Agreement.

(a)The Purchaser covenants that, if at any time the Purchaser exercises the Warrant, in whole or in part, to purchase any shares of Common Stock, then the Purchaser shall, prior to or simultaneously with such exercise, execute and deliver to the Company and each Stockholder (as defined in the Stockholder Agreement) a counterpart of the Stockholder

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Agreement, in form and substance reasonably agreeable to the Company, pursuant to which the Purchaser agrees to be bound by, and to comply with, all provisions of the Stockholder Agreement as a Stockholder.

(b)Each Party agrees that, if at any time the Purchaser exercises the Warrant, in whole or in part, for LLC Interests of the LLC (as such terms are defined in the Warrant), as contemplated by the provisions of Section 1(b)(ii) of the Warrant, then the LLC Interests issued to the Purchaser in connection with such exercise shall be subject to the same rights and obligations set forth in the Stockholder Agreement as if such LLC Interests were equivalent to that number of shares of Common Stock that otherwise would have been issued to the Purchaser upon such exercise of such Warrant.

5.9Confidentiality.

(a)Each Party agrees that, except with the prior written permission of the other Party, it shall at all times keep confidential, and not divulge, furnish or make accessible to anyone (other than its counsel, accountants and other representatives with a need to know), or use to establish or conduct any business or operations in competition with the business of the other Party, any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other Party to which such Party has been or shall become privy by reason of this Agreement or discussions or negotiations relating to this Agreement or any actions taken by a Party in compliance with the terms and conditions of this Agreement (such confidential information, knowledge or data, whether communicated in writing or orally, is hereinafter sometimes referred to as “Confidential Information,” and all documents containing any such confidential information, knowledge or data is hereinafter sometimes referred to as “Confidential Documents”), and upon request, the Party that has received Confidential Information from the other Party will return to the Party providing the same all Confidential Documents (and all copies thereof) in its possession, or will certify to such providing Party that all such Confidential Documents not returned have been destroyed.  Confidential Information shall not include any information, knowledge or data that a Party can demonstrate: (i) was already in such Party’s possession prior to negotiations related to this Agreement or the transactions contemplated hereby; (ii) is or becomes publicly and openly known or otherwise in the public domain through no fault of such Party; (iii) is received by such Party in a nonconfidential manner from a third party having the right to disclose such information or (iv) is required to be disclosed in order for the Purchaser to comply with any federal securities or other Applicable Laws.  Notwithstanding anything else contained herein to the contrary, the provisions of this Section 5.9 shall survive any termination of this Agreement.

(b)Notwithstanding any other provision of this Agreement, it is understood and agreed that the remedy of indemnity payments pursuant to Article 6 and other remedies at law would be inadequate in the case of any breach of the covenants contained in this Section 5.9.  Accordingly, each Party shall be entitled, without limiting its other remedies and without the necessity of proving actual damages or posting any bond, to equitable relief, including the remedy of specific performance or injunction, with respect to any breach or threatened breach of such covenants and each Party consents to the entry thereof.

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ARTICLE 6

INDEMNITIES

6.1Survival of Representations and Warranties.  All representations and warranties made by the Purchaser or the Company in this Agreement shall survive the Initial Closing and each Additional Closing until such time as the Purchaser no longer owns any outstanding Notes.  For purposes of this Article 6, all representations and warranties of the Parties set forth in this Agreement shall be deemed to have been made by such Parties exclusively on and as of the Initial Closing Date and (as supplemented and amended in accordance with Section 6.5(c)) on and as of each Additional Closing Date.

6.2Company to Indemnify.  Subject to the limitations in this Article 6, the Company, agrees to indemnify and hold harmless the Purchaser and its directors, officers, employees and agents from and against all claims, losses, liabilities and expenses, including reasonable counsel fees and expenses (collectively referred to as “Losses”) which may be suffered or incurred by any of them as a result of a breach of (a) any representation or warranty of the Company contained in this Agreement or (b) any covenant of the Company contained in this Agreement.

6.3Purchaser to Indemnify.  Subject to the limitations in this Article 6, the Purchaser hereby agrees to indemnify and hold harmless the Company and its directors, officers, employees and agents from and against all Losses which may be suffered or incurred by any of them as a result of a breach of (a) any representation or warranty of the Purchaser contained in this Agreement or (b) any covenant of the Purchaser contained in this Agreement.

6.4Claims.  As promptly as is reasonably practicable after becoming aware of a claim for indemnification under this Agreement, the indemnified Party shall give notice to the indemnifying Party of such claim, which notice shall specify the facts alleged to constitute the basis for such claim, the representations, warranties, covenants and obligations alleged to have been breached and the amount that the indemnified Party seeks hereunder from the indemnifying Party, together with such information as may be necessary for the indemnifying Party to determine that the limitations in Section 6.5 have been satisfied or do not apply; provided, however, that the failure of the indemnified Party to give such notice shall not relieve the indemnifying Party of its obligations under this Article 6 except to the extent (if any) that the indemnifying Party shall have been prejudiced thereby.

6.5Certain Limitations.

(a)Basket.  Neither the Company, considered as a Party on one hand, nor the Purchaser, considered as a Party on the other hand, shall be required to indemnify the other such Party (or any related indemnified Persons) for any Losses relating to any matter subject to indemnification under this Article 6 unless, and only to the extent that, such Losses exceed, in the aggregate, Fifty Thousand Dollars ($50,000) (the “Basket Amount”).

(b)Inapplicability of Basket.  Notwithstanding anything else contained herein to the contrary, the Basket Amount shall not apply to any breach of this Agreement constituting fraud, any intentional misstatement, any breach referred to in clause (b) of Section 6.2 above, any breach referred to in clause (b) of Section 6.3 above or any breach of any of the Related Documents.

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(c)Schedules and Additional Closings.  The Company shall, from time to time prior to or at each Additional Closing, by notice in accordance with the terms of this Agreement, supplement or amend any Schedule hereto in order to correct any matters which would constitute a breach of any representation, warranty, covenant or obligation contained herein.

(d)Surrender of Notes.  If the Company is obligated to indemnify the Purchaser for any Losses in accordance with the terms and conditions of this Article 6, then upon the payment of such Losses by the Company to the Purchaser, the Purchaser shall surrender to the Company a Note or Notes representing an aggregate principal amount that is equivalent to the amount of such Losses, it being understood that:

(i)the Initial Note shall be surrendered prior to the Second Note, the Second Note shall be surrendered prior to the Third Note and the Third Note shall be surrendered prior to the Fourth Note;

(ii)if the amount of such Losses is lesser than the aggregate face value  of the surrendered Notes, then upon the surrender of any such Note, the Company shall issue to or on the order of the Purchaser a replacement note having an aggregate face value that is equivalent to the remaining principal amount on such Note that has not been surrendered by the Purchaser; and

(iii) the surrender of Notes pursuant to this Section 6.5(f) shall not be deemed to constitute an optional prepayment subject to the terms of Section 5.1 of such Notes.

(e)No Speculative, Incidental, etc. Damages.  In no event shall either Party have any liability under this Agreement or otherwise in connection with the transactions contemplated hereby for any special, speculative, incidental, punitive, indirect or consequential damages or for lost profits.

6.6Exclusive Remedy.  The sole and exclusive remedy at law of each of the Parties in any cause of action based thereon against the other Party for any inaccuracy, misrepresentation or default in, or breach of, any of the representations, warranties, covenants or other agreements given or made by either Party in this Agreement shall be as set forth in this Article 6 and in Section 5.9.  To the extent either Party or any of its affiliates has any Losses (a) for which it may assert any other right to indemnification, contribution or recovery from the other Party (whether under this Agreement or under any common law theory or any statute or other Applicable Law, or otherwise) and (b) that have resulted from any inaccuracy, misrepresentation or default in, or breach of, any of the representations, warranties, covenants or other agreements given or made by the other Party in this Agreement, such Party hereby waives, releases and agrees not to assert such right, and such Party agrees to cause each of its affiliates to waive, release and agree not to assert such right, regardless of the theory upon which any claim may be based, including contract, equity, tort, fraud, warranty, strict liability or any other theory of liability except to the extent such claims are based upon actual fraud.

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6.7Subrogation.  Upon making any payment to an indemnified Party in respect of any Loss, the indemnifying Party will, to the extent of such payment, be subrogated to all rights of the indemnified Party against any third party in respect of the Losses to which such payment relates.  Such indemnified Party and indemnifying Party will execute upon request all instruments reasonably necessary to evidence or further perfect such subrogation rights.

6.8Insurance.  To the extent the amount of any Losses has been reduced as a consequence of any insurance proceeds actually received, either Party’s entitlement to recover such Losses hereunder shall be reduced accordingly.

ARTICLE 7

GENERAL PROVISIONS

7.1Public Statements.

(a)The Purchaser may be required to make, and on occasion not to make, disclosures under the federal securities laws and other Applicable Laws.  Accordingly, the Company shall not make any public announcement or statement that mentions by name or otherwise identifies the Purchaser with respect to the Securities Purchase, this Agreement, any related transaction or any other subject without the approval of the Purchaser.  The Company agrees to cooperate with the Purchaser and its legal counsel in preparing any public announcement or statement that, in the sole discretion of the Purchaser or its counsel, is required to be made under Applicable Law.

(b)Neither the Purchaser nor any of its affiliates shall make any public announcement or statement that mentions by name or otherwise identifies the Company with respect to the Securities Purchase, this Agreement, any related transaction or any other subject without the approval of the Company, which approval shall not be unreasonably withheld; provided, however, that the Purchaser shall be entitled to make any public announcement, statement or disclosure that, in the sole opinion of the Purchaser or its legal counsel, is required under any federal securities laws or other Applicable Laws.

7.2Notices.  All notices and other communications required or provided for hereunder shall be in writing and shall be sufficiently given if made by hand delivery, by telecopier, by recognized overnight courier service or by registered or certified mail (postage prepaid and return receipt requested) to the intended Party at the following applicable address (or at such other address for a Party as shall be specified by it by like notice given by such Party to the other Party):

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If to the Purchaser:	Winmark Corporation 4200 Dahlberg Drive Suite 100 Minneapolis, Minnesota 55422-4837 Facsimile: (763) 520-8410
With a copy to:	Lindquist & Vennum P.L.L.P. 4200 IDS Center, 80 South 8th Street Minneapolis, Minnesota 55402-2205 Attn: Jonathan R. Flora, Esq. Facsimile: (612) 371-3207
If to the Company:	BridgeFunds Limited 13911 Ridgedale Drive Suite 110 Minnetonka, MN 55305 Facsimile: (952) 417-0039
With a copy to:	Mayer, Brown, Rowe & Maw LLP 190 South LaSalle Street Chicago, IL 60603 Attn: James J. Junewicz, Esq. Facsimile: (312) 706-8157

All such notices and other communications shall be deemed to have been received: when delivered by hand, if personally delivered; three (3) Business Days after being deposited in the mail, postage prepaid, if delivered by mail; the next Business Day, if sent by recognized overnight courier service; and when receipt acknowledged, if telecopied; provided, however, notice to a Party’s attorney shall not constitute notice to such Party.

7.3Interpretation.  The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement or any provision hereof.  References in this Agreement to Sections and Articles (or any other subdivision) refer, unless otherwise stated, to sections and articles (or any other subdivision) of this Agreement.  When used in this Agreement, words such as “herein,” “hereinafter,” “hereof,” “hereto,” “hereby” and “hereunder,” and words of like import, unless the context requires otherwise, refer to this Agreement as a whole, and not to any particular Section, Article or other subdivision hereof.  As used in this Agreement, the masculine, feminine and neuter genders shall be deemed to include the others if the context requires, and if the context requires, the use of the singular shall include the plural and vice versa.  This Agreement is the product of mutual negotiations by the Parties and their counsels; and no Party shall be deemed the draftsperson of this Agreement or any provision hereof or to have provided same.  Accordingly, in the event of any inconsistency or ambiguity of any provision of this Agreement, such inconsistency or ambiguity shall not be interpreted against either Party.

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7.4Severability.  The provisions of this Agreement shall be deemed severable, and the invalidity or unenforceability of any term or provision hereof or thereof shall not affect the validity or enforceability of this Agreement or any of the other terms or provisions hereof.  In the event any term or provision hereof shall be determined to be invalid or unenforceable as applied to any situation or circumstance or in any jurisdiction, such invalidity or unenforceability shall not apply or extend to any other situation or circumstance or in any other jurisdiction or affect the validity or enforceability of any other term or provision.  It is the Parties’ intent that this Agreement and each term and provision hereof be enforceable in accordance with its terms and to the fullest extent permitted by Applicable Law.  Accordingly, to the extent any term or provision of this Agreement shall be determined or deemed to be invalid or unenforceable, such provision shall be deemed amended or modified to the minimum extent necessary to make such provision, as so amended or modified, valid and enforceable.

7.5Integration.  This Agreement is  intended by the Parties as a final expression of their agreement, and is intended to be a complete and exclusive statement of the agreement and understanding of the Parties, in respect of the subject matter contained herein, constitutes the entire agreement of the Parties with respect to the subject matter hereof and supersedes, and merges herein, all prior and contemporaneous negotiations, discussions, representations, understandings and agreements among the Parties, whether oral or written, with respect to such subject matter.

7.6Assignment and Lack of Third Party Beneficiaries.  This Agreement and the rights, duties and obligations hereunder may not be assigned or delegated by either Party without the prior written consent of the other Party; provided, however, that the Purchaser may assign its rights under this Agreement to any wholly owned subsidiary of the Purchaser without the Company’s prior written consent.  Any purported assignment or delegation of rights, duties or obligations hereunder made without the prior written consent of the other Party shall be null and void and of no force or effect.  This Agreement and the provisions hereof shall be binding upon and enforceable against each of the Parties and its successors and assigns and shall inure to the benefit of and be enforceable by each of the Parties and its successors and permitted assigns.  Except as expressly provided for in this Agreement, this Agreement is not intended to confer any rights or benefits on any Persons other than the Parties and their respective successors and permitted assigns.

7.7Amendment and Waiver. This Agreement may be amended, modified or supplemented only to the extent expressly set forth in a writing that is signed by the Party to be charged therewith and that sets forth therein that its purpose is to amend, modify or supplement this Agreement or some term, condition or provision hereof.  No waiver of any term, condition or provision of this Agreement or of any breach or violation of this Agreement or any provision hereof shall be effective except to the extent expressly set forth in a writing that is signed by the Party to be charged therewith.  Without limiting the generality of the foregoing, no failure to object or otherwise act, and no conduct (including, without limitation, any failure or delay in enforcing this Agreement or any provision hereof or any acceptance or retention of payment) or course of conduct or dealing, by either Party shall be deemed (a) to constitute a waiver by such Party of the breach or violation of this Agreement or of any provision hereof by the other Party or (b) to have caused or reflected any amendment or other modification of this Agreement or of

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any term or provision hereof.  Any waiver may be made in advance or after the right waived has arisen or the breach or default waived has occurred, and any waiver may be conditional.  No waiver of any breach or violation of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach or violation thereof nor of any other agreement or provision herein contained.  No waiver or extension of time for performance of any obligation or act shall be deemed a waiver or extension of the time for performance of any other obligation or act.

7.8Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument.

7.9Governing Law; Waiver of Jury Trial; Consent to Jurisdiction.  Each of the parties expressly waives its right to a jury trial with respect to any suit, litigation or other judicial proceeding regarding this Agreement or any dispute hereunder or relating hereto.  This Agreement shall be governed by, interpreted under and construed in accordance with the internal laws of the State of Nevada applicable to contracts executed and to be performed wholly within that State without giving effect to the choice or conflict of laws principles or provisions thereof.  Each of the Parties agrees that any dispute under or with respect to this Agreement shall be determined before the state or federal courts situated in Minneapolis, Minnesota, which courts shall have exclusive jurisdiction over and with respect to any such dispute, and each of the Parties hereby irrevocably submits to the jurisdiction of such courts.  Each Party hereby agrees not to raise any defense or objection, under the theory of forum non conveniens or otherwise, with respect to the jurisdiction of any such court.  In addition to such other method as may be available under Applicable Law, each Party agrees that any summons, complaint or other papers or process in connection with any such dispute may be served on it in the same manner in which a Notice may be given to it pursuant to Section 7.2 above.

[SIGNATURE PAGE FOLLOWS]

23

IN WITNESS WHEREOF, each of the Parties has caused this Securities Purchase Agreement to be executed on the date first written above by its respective officer or other representative thereunder duly authorized.

WINMARK CORPORATION
By:	/s/  Mark Hooley
		Name:	Mark Hooley
		Title:	Vice President and General Counsel
BRIDGEFUNDS LIMITED
By:	/s/  A. Mark Berlin, Jr.
		Name:	A. Mark Berlin, Jr.
		Title:	President and Chief Executive Officer

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John L. Morgan, Chief Executive Officer, certify that:

1.I have reviewed this report on Form 10-Q of Winmark Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 9, 2004	Signature:	/s/ John L. Morgan
			Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brett D. Heffes, Chief Financial Officer and Treasurer, certify that:

1.I have reviewed this report on Form 10-Q of Winmark Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 9, 2004	Signature:	/s/  Brett D. Heffes
			Chief Financial Officer and Treasurer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Winmark Corporation (the “Company”) on Form 10-Q for the quarter ended September 25, 2004 as filed with the Securities and Exchange Commission (the “Report”), I, John L. Morgan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to Winmark Corporation and will be retained by Winmark Corporation and furnished to the Securities and Exchange Commission upon request.

Dated: November 9, 2004
	/s/ John L. Morgan
		Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Winmark Corporation (the “Company”) on Form 10-Q for the quarter ended September 25, 2004 as filed with the Securities and Exchange Commission (the “Report “), I, Brett D. Heffes, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to Winmark Corporation and will be retained by Winmark Corporation and furnished to the Securities and Exchange Commission upon request.

Dated: November 9, 2004
	/s/  Brett D. Heffes
		Chief Financial Officer and Treasurer