**Exhibit 10.1**

 

**AGREEMENT AND PLAN OF MERGER**

 

THIS AGREEMENT AND PLAN OF MERGER, dated as of April 14, 2004(this “Agreement”), is entered into by and among PDS Gaming Corporation, aMinnesota corporation (the “Company”), PDS Holding Co., LLC, a Nevada limitedliability company (“Parent”), and PDS Acquisition Sub, LLC, a Nevada limitedliability company of which Parent is the sole member (“Merger Sub”).

 

**RECITALS**

 

A.                                   TheBoard of Directors of the Company, and the respective Managers and Members ofeach of Parent and Merger Sub, have approved, adopted and, together with thecurrently constituted Special Committee of the Board of Directors of theCompany (the “Special Committee”), deem it advisable to consummate, the mergerof Merger Sub with and into the Company (the “Merger”), upon the terms andsubject to the conditions set forth in this Agreement and in accordance withthe applicable provisions of the Minnesota Business Corporation Act (“MBCA”)and Chapter 92A of the Nevada Revised Statutes (“NRS”), whereby, interalia, each issued and outstanding share of the common stock of theCompany, $0.01 par value per share (the “Company Common Stock”), other than theExcluded Shares (as defined in Section 1.5(a) hereof and employedconsistently throughout this Agreement) and the Dissenting Shares (as definedin Section 1.6(a) hereof and employed consistently throughout thisAgreement), will be converted into the right to receive the MergerConsideration (as defined in Section 1.5(a) hereof and employed consistentlythroughout this Agreement).

 

B.                                     Pursuantto Section 92A.150 of the NRS, the Merger must be approved by thosemembers of Merger Sub owning a majority of the interests in the current profitsof Merger Sub owned by all of the members of Merger Sub.  Pursuant to subdivision 2 ofSection 302A.613 of the MBCA, the Merger must be approved by the holdersof a majority of the issued and outstanding shares of Company CommonStock.  The parties hereto have agreedto consummate the Merger only if it receives the approval of (i) theholders of a majority of the issued and outstanding shares of Company CommonStock and (ii) the holders of a majority of the issued andoutstanding shares of Company Common Stock other than the Excluded Shares(collectively, the “Two-Tiered Shareholder Approval”).

 

C.                                     Parent,Merger Sub and the Company desire to make certain representations, warranties,covenants and agreements in connection with the Merger and also to prescribevarious conditions to the consummation of the Merger.

 

In consideration of the foregoing and the representations, warranties,covenants and agreements contained in this Agreement, the parties hereby agreeas follows:

 

# **ARTICLE 1THE MERGER**

# ** **

Section 1.1                                      The Merger.  At the Effective Time (as defined inSection 1.2 hereof and employed consistently throughout this Agreement),and in accordance with,

 

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and subject to, the terms and conditions of this Agreement and theapplicable provisions of the MBCA and Chapter 92A of the NRS, Merger Sub willbe merged with and into the Company, the separate legal existence of Merger Subwill thereupon cease, and the Company shall be the surviving organization inthe Merger (as such, sometimes hereinafter referred to as the “SurvivingCorporation”).  At the Effective Time,the Merger will have the other effects provided for in the applicableprovisions of the MBCA and Chapter 92A of the NRS.  Without limiting the generality of the foregoing and subjectthereto, at the Effective Time, all the property, rights, privileges, powers,immunities and franchises of the Company and Merger Sub will vest in theSurviving Corporation, and all debts, liabilities, obligations and duties ofthe Company and Merger Sub will become the debts, liabilities, obligations andduties of the Surviving Corporation.

 

Section 1.2                                      Effective Timeof the Merger.  Promptly followingthe receipt of the Two-Tiered Shareholder Approval of the Merger and thesatisfaction or waiver of all other conditions precedent to the consummation ofthe Merger set forth in Article 6 of this Agreement, the Company andMerger Sub shall execute in the manner required by the MBCA and deliver forfiling to the Secretary of State of the State of Minnesota, and shall executein the manner required by Chapter 92A of the NRS and deliver for filing to theSecretary of State of the State of Nevada, articles of merger with respect tothe Merger (the “Articles of Merger”). The Merger will become effective upon the filing of (i) theArticles of Merger with the Minnesota Secretary of State, in accordance withSection 302A.641 of the MBCA, and (ii) the filing of the Articles ofMerger with the Nevada Secretary of State, in accordance withSection 92A.240 of the NRS.  Theterm “Effective Time “ shall mean the date and time when the Merger becomeseffective.

 

Section 1.3                                      Articles ofIncorporation and Bylaws of the Surviving Corporation.  The Articles of Incorporation and Bylaws ofthe Company as in effect immediately prior to the Effective Time will be theArticles of Incorporation and Bylaws of the Surviving Corporation, untilamended in accordance with the laws of the State of Minnesota and theapplicable provisions of such Articles of Incorporation and Bylaws,respectively.

 

Section 1.4                                      Board ofDirectors and Officers of the Surviving Corporation.  At the Effective Time, the Board ofDirectors of the Surviving Corporation shall consist of the following threepersons:  Johan P. Finley, Lona M. B.Finley and Peter D. Cleary, each of such directors to hold office, subject to theapplicable provisions of the Articles of Incorporation and Bylaws of theSurviving Corporation, until the expiration of the term for which such directorwas elected and until his or her successor is elected and has qualified or asotherwise provided in the Articles of Incorporation or Bylaws of the SurvivingCorporation.  The officers of theCompany immediately prior to the Effective Time will be the officers of theSurviving Corporation until their respective successors are chosen and havequalified or as otherwise provided in the Bylaws of the Surviving Corporation.

 

Section 1.5                                      Conversion ofOwnership Interests.  The manner andbasis of converting the issued and outstanding shares of Company Common Stockand the issued

 

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and outstanding units of limited liability company membership interestin Merger Sub shall be as follows:

 

### (a)                                  At the EffectiveTime, each share of Company Common Stock that is issued and outstandingimmediately prior to the Effective Time, other than (i) Dissenting Sharesand (ii) shares of Company Common Stock (“Excluded Shares”) held of record byParent or Merger Sub immediately prior to the Effective Time, will, by virtueof the Merger and without any action on the part of the Company, the holderthereof or any other person, be converted entirely into and represent solelythe right to receive, as provided in Section 1.8 hereof, (i) as of theEffective Time, an amount in cash equal to $1.25 (the “Initial MergerConsideration”), and (ii) a nontransferable, deferred payment right consistingof the right to receive, without interest thereon, an amount in cash equal to$0.50 on each of the first three anniversaries of the date when the Mergerbecomes effective, subject to the right of the Surviving Corporation, in itssole discretion, to prepay all, but not less than all, of the amounts thenoutstanding under all such nontransferable, deferred payment rights, net of apresent value discount, as follows: if said prepayment is made anytime (A) onor prior to the first such anniversary, the Surviving Corporation shall pay incash with respect to such right the amount of $1.36; (B) after the first suchanniversary, but on or prior to the second such anniversary, the SurvivingCorporation shall pay in cash with respect to each such right, in addition tothe $0.50 payable on the first such anniversary, the amount of $0.93; and (C)after the second such anniversary, but prior to the third such anniversary, theSurviving Corporation shall pay in cash with respect to each such right, in additionto the $0.50 payable on each of the first and second such anniversaries, theamount of $0.50 (the “Residual Merger Consideration”; together with the InitialMerger Consideration, the “Merger Consideration”), in each case, prorated forfractional shares, if any.  Any paymentmade pursuant to this Section 1.5(a) and Section 1.8 hereof will bemade net of applicable withholding taxes to the extent such withholding isrequired by law.  Notwithstanding theforegoing, if between the date of this Agreement and the Effective Time, theissued and outstanding shares of Company Common Stock shall have been changedinto a different number of shares or a different class, by reason of any stockdividend, subdivision, reclassification, recapitalization, split, combinationor exchange of such shares, the Merger Consideration will be correspondinglyadjusted on a per share basis to reflect such stock dividend, subdivision,reclassification, recapitalization, split, combination or exchange of shares.

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### (b)                                 At the Effective Time,each issued and outstanding share of Company Common Stock that is held ofrecord by Parent or Merger Sub immediately prior to the Effective Time, shallcontinue to exist from and after the Effective Time as an issued andoutstanding share of the Common Stock, $0.01 par value per share, of theSurviving Corporation (“Surviving Corporation Common Stock”), with all therights, privileges, franchises, immunities and other attributes andcharacteristics under the MBCA appertaining thereto as appertained theretoimmediately prior to the Effective Time, all of which shares of SurvivingCorporation Common Stock will constitute the only issued and outstanding sharesof capital stock of the Surviving Corporation immediately after the EffectiveTime (other than the 100 shares referenced in Section 1.5(c) hereof).

 

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### (c)                                  At the EffectiveTime, all units of limited liability company membership interest in Merger Subthat are issued and outstanding immediately prior to the Effective Time will,by virtue of the Merger and without any action on the part of the holderthereof, Merger Sub or any other person, be converted into and become the rightto receive, in the aggregate, 100 newly issued shares of Surviving CorporationCommon Stock.  From and after theEffective Time, each outstanding certificate of interest, if any, representingsuch units will be deemed for all purposes to evidence ownership of theproportional quotum of such newly issued shares of Surviving Corporation CommonStock; the holder of any such units, whether or not so certificated, shall beentitled, from and after the Effective Time, to receive from the SurvivingCorporation a duly executed stock certificate or certificates evidencing theholder’s ownership of the corresponding number of newly issued shares ofSurviving Corporation Common Stock, determined in accordance with theprovisions of this Section 1.5(c), provided that, the SurvivingCorporation shall be required to deliver such a stock certificate orcertificates to the holder of any such units as formerly were so certificatedonly upon delivery by said holder to the Surviving Corporation of all of thecertificates of interest evidencing the holder’s ownership of such units.

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Section 1.6                                      Dissenters’Rights.

 

### (a)                                  NotwithstandingSection 1.5 hereof, shares of Company Common Stock issued and outstandingimmediately prior to the Effective Time, if any, which are held of record orbeneficially owned by a person who has properly exercised and preserved andperfected dissenters’ rights with respect to such shares pursuant to Sections302A.471 and 302A.473 of the MBCA and has not withdrawn or lost such rights(“Dissenting Shares”), will not be converted into or represent the right toreceive the Merger Consideration for such shares, but instead will be treatedin accordance with the provisions of Sections 302A.471 and 302A.473 of the MBCAunless and until such person effectively withdraws or loses such person’s rightto payment under Section 302A.473 of the MBCA (through failure to preserveor protect such right, or otherwise). If, after the Effective Time, any such person shall effectively withdrawor lose such right (through failure to preserve or protect such right, orotherwise), then each such Dissenting Share held of record or beneficiallyowned by such person will thereupon be treated as if it had been converted, atthe Effective Time, into the right to receive the Merger Consideration, withoutinterest.

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### (b)                                 Each person holding ofrecord or beneficially owning Dissenting Shares who becomes entitled, pursuantto the provisions of Sections 302A.471 and 302A.473 of the MBCA, to payment ofthe fair value of such Dissenting Shares shall receive payment therefor (plusinterest determined in accordance with Section 302A.473 of the MBCA) fromthe Surviving Corporation, and/or from the Disbursing Agent referred to inSection 1.8 hereof on behalf of the Surviving Corporation, pursuant tosuch provisions.

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### (c)                                  The Company shallgive Parent prompt notice upon receipt by the Company at any time prior to theEffective Time of any notice of intent to demand the fair value of any sharesof Company Common Stock under Section 302A.473 of the

 

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### MBCA, and any withdrawal of any such notice of intent to demand suchfair value.  The Company agrees that itwill not, except with the prior written consent of Parent, negotiate,voluntarily make any payment with respect to, or settle or offer to settle, anysuch demand at any time prior to the Effective Time.

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Section 1.7                                      Stock Options.  The Company will, promptly on or after thedate of this Agreement, take all such actions as it is permitted or required totake under the terms of its stock option plans to cancel, prior to the EffectiveTime, all outstanding options (collectively, the “Stock Options” and,individually, a “Stock Option”) to purchase shares of Company Common Stockheretofore granted under any employee or nonemployee director stock option planby the Company, and to pay, promptly, and in any event within ten days, afterthe date the Merger is effective, in cancellation of each such Stock Option(whether or not such Stock Option is then exercisable) to the optionee cash inthe amount, if any, by which $2.61 exceeds the per share exercise price of suchStock Option, multiplied by the number of shares of Company Common Stock thensubject to such Stock Option (the “Stock Option Settlement Amount”), butsubject to all required tax withholdings by the Company.  Each holder of a then outstanding StockOption that the Company does not have a right to cancel pursuant to the termsof the applicable stock option plan or agreement (if any), upon execution of acancellation agreement (a “Stock Option Cancellation Agreement”) with theCompany, which the Company shall use reasonable efforts to obtain from eachsuch holder prior to or promptly after the consummation of the Merger, shallhave the right to receive in cancellation of such Stock Option (whether or notsuch Stock Option is then exercisable) a cash payment from the Companypromptly, and in any event within ten days, after the later of the consummationof the Merger or the execution of a Stock Option Cancellation Agreement, in anamount equal to the Stock Option Settlement Amount, without interest, butsubject to all required tax withholdings by the Company.  Each Stock Option that is subject to a StockOption Cancellation Agreement shall be canceled upon payment to the optionee ofthe Stock Option Settlement Amount for such Stock Option.  The Company hereby represents to Parent andMerger Sub that the Committee appointed pursuant to Section 2 of each ofthe Company’s 1993 Stock Option Plan and 2002 Stock Option Plan (collectively, the“Stock Option Plans”) has determined that the Merger is an Event as defined inSection 8 of each such Plan.

 

Section 1.8                                      Payment ForShares.

 

(a)                                  Priorto the Effective Time, Parent will designate Wells Fargo Bank or any other bankor trust company located in the United States having capital and surplusexceeding $500,000,000 that is reasonably satisfactory to the Company (the“Disbursing Agent”) to receive cash in an amount equal to the product of (i)the number of shares of Company Common Stock issued and outstanding immediatelyprior to the Effective Time (other than the Excluded Shares), and (ii) theamount of the Initial Merger Consideration (such amount being hereinafterreferred to as the “Exchange Fund”).

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### (b)                                 (i)                                     At the Closing (asdefined in Section 2.1 hereof, and employed consistently throughout thisAgreement), Merger Sub shall irrevocably deposit with the Disbursing Agent thefull amount of the Exchange Fund.  At orbefore the

 

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Effective Time, Parent will deliver irrevocable written instructions tothe Disbursing Agent in form and substance reasonably satisfactory to theCompany to make, out of the Exchange Fund, the payments of the Initial MergerConsideration in accordance with Section 1.8(c) hereof.  Such irrevocable instructions may authorizethe Disbursing Agent to invest amounts in the Exchange Fund as Parent directs,provided that all such investments shall be in obligations of or guaranteed bythe United States of America, in commercial paper obligations receiving thehighest rating from either Moody’s Investors Service, Inc. or Standard &Poor’s Corporation, or in certificates of deposit, bank repurchase agreementsor bankers’ acceptances issued by commercial banks with capital and surplusexceeding $500,000,000 (collectively, “Permitted Investments”); provided,however, that the maturities of Permitted Investments will be such as to permitthe Disbursing Agent to make prompt payments to persons entitled theretopursuant to this Section 1.8.  TheExchange Fund will not be used for any other purpose except as expresslyprovided in this Agreement.  Any netprofit resulting from, or interest or income produced by, the PermittedInvestments will remain in the Exchange Fund. Parent and the Surviving Corporation jointly and severally agree tocause the Exchange Fund to be promptly replenished to the extent of any netlosses incurred as a result of the Permitted Investments.

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(ii)                                  Inaddition, if after the Effective Time any person holding of record orbeneficially owning Dissenting Shares shall become entitled to receive paymentfor such Dissenting Shares pursuant to Sections 302A.471 and 302A.473 of theMBCA, Parent will deliver irrevocable written instructions to the DisbursingAgent to pay either to such person or to the Surviving Corporation the amountto which such person is entitled pursuant thereto, provided that the paymentfrom the Exchange Fund with respect to any Dissenting Share will not exceed theInitial Merger Consideration, and provided further that such instructions will,if sums are to be paid to the Surviving Corporation, be accompanied by acertificate of the Surviving Corporation that any sums so paid will be remittedby the Surviving Corporation to the shareholder or beneficial owner entitledthereto in accordance with Section 302A.473 of the MBCA.

 

(iii)                               Anyamount remaining in the Exchange Fund one year after the Closing Date may berefunded to the Surviving Corporation, at its option; provided, however, thatParent and the Surviving Corporation (subject to applicable abandoned property,escheat and similar laws) will jointly and severally continue to be liable forany payments required to be made thereafter to holders of Dissenting Sharespursuant to Section 1.5(a) hereof or Section 302A.473 of the MBCA.

 

(c)                                  Assoon as practicable after the Effective Time, the Disbursing Agent will mail toeach holder of record of a stock certificate or certificates which, immediatelyprior to the Effective Time, represented issued and outstanding shares ofCompany Common Stock (other than Dissenting Shares and Excluded Shares) aletter of transmittal in form reasonably acceptable to the SurvivingCorporation (a “Letter of Transmittal”), for execution and return by suchholder to the Disbursing Agent, accompanied by instructions for use ineffecting the surrender of such stock certificate or certificates in exchangefor (i) the Initial Merger Consideration for each of such holder’s issued andoutstanding shares of Company Common Stock pursuant to Section 1.5(a)

 

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hereof, and (ii) a Certificate of Deferred Payment Right evidencing theholder’s right pursuant to Section 1.5(a) hereof to receive the ResidualMerger Consideration with respect to each such share from the SurvivingCorporation, in the form prepared by the Company and delivered to theDisbursing Agent (each, a “DPR Certificate”). The Disbursing Agent, as soon as reasonably practicable followingreceipt of any such stock certificate or certificates together with a dulyexecuted Letter of Transmittal and any other items specified in the Letter ofTransmittal, will pay by cashier’s check of the Disbursing Agent to theperson(s) entitled thereto (subject to any required withholding of taxes by theSurviving Corporation) the amount (rounded up or down to the nearest whole$.01, for which purpose $.005 shall be rounded up to the nearest whole $.01)resulting from multiplying (A) the number of shares of Company Common Stockrepresented by the stock certificate or certificates so surrendered (includingfractional shares) by (B) the amount of the Initial Merger Consideration, andwill deliver to the holder concurrently with such cashier’s check theapplicable DPR Certificate addressed to such holder and executed by theSurviving Corporation.  No interest willbe paid or accrued on the cash payable upon the surrender of any such stockcertificate or certificates.

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### (d)                                 In the event any suchstock certificate or certificates shall have been lost, stolen or destroyed,upon the making of an affidavit of that fact by the person claiming such stockcertificate or certificates to have been lost, stolen or destroyed, the amountto which such person would have been entitled under Section 1.8(c) hereofbut for failure to deliver such stock certificate or certificates to theDisbursing Agent will nevertheless be paid to such person; provided, however,that the Surviving Corporation may, in its sole discretion and as a conditionprecedent to such payment, require such person to give the Surviving Corporationa written indemnity agreement in form and substance reasonably satisfactory tothe Surviving Corporation and, if reasonably deemed advisable by the SurvivingCorporation, a bond in such sum as it may reasonably determine as indemnityagainst any claim that may be had against the Surviving Corporation or Parentwith respect to the stock certificate or certificates alleged to have beenlost, stolen or destroyed.

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Section 1.9                                      No FurtherRights or Transfers.  At theEffective Time, all shares of Company Common Stock issued and outstandingimmediately prior to the Effective Time, other than the Excluded Shares, willbe canceled and cease to exist eoinstante, and each holder of astock certificate or certificates that represented shares of Company CommonStock issued and outstanding immediately prior to the Effective Time (otherthan the Excluded Shares) will cease to have any rights as a shareholder of theCompany with respect to the shares of Company Common Stock represented by suchstock certificate or certificates, except for (i) the right to surrender suchstock certificate or certificates in exchange for the payment of the InitialMerger Consideration as provided pursuant to Section 1.5(a) hereof and theissuance and delivery to such holder of a DPR Certificate obliging theSurviving Corporation to pay to such holder the Residual Merger Considerationwith respect to all such shares or, (ii) the right to preserve and perfect suchholder’s right to receive payment for such holder’s shares pursuant to Section 302A.473of the MBCA and Section 1.6 hereof if such holder has validly exercisedand not withdrawn or lost such right. No transfer of shares of Company Common Stock issued

 

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and outstanding immediately prior to the Effective Time will be made onthe stock transfer books of the Surviving Corporation in connection with theMerger.

 

Section 1.10                                Additional Actions.  If, at any time after the Effective Time,the Surviving Corporation shall consider or be advised that any deeds, bills ofsale, assignments, assurances or any other actions or things are necessary ordesirable to vest, perfect or confirm of record or otherwise in the SurvivingCorporation its right, title or interest in, to or under any of the rights,properties or assets of Merger Sub or the Company or otherwise to effectuatethe purposes of this Agreement, the officers and directors of the SurvivingCorporation shall be authorized to execute and deliver, in the name and onbehalf of Merger Sub or the Company, all such deeds, bills of sale, assignmentsand assurances and to take and do, in the name and on behalf of Merger Sub orthe Company, all such other actions and things as may be necessary or desirableto vest, perfect or confirm any and all right, title and interest in, to andunder such rights, properties or assets in the Surviving Corporation orotherwise to effectuate the purposes of this Agreement.

 

# **ARTICLE 2THE CLOSING**

# ** **

Section 2.1                                      Generally.  Subject to the provisions of Articles 6 and 7hereof, the closing (the “Closing”) of the transactions contemplated herebywill occur on August 27, 2004, or at such other time and date as theCompany and Parent may mutually agree upon (the “Closing Date”).  The Closing will be held at the offices of theCompany located at 6171 McLeod Drive, Las Vegas, Nevada, or at such otherplace as the Company and Parent may mutually agree.

 

Section 2.2                                      Deliveries atthe Closing.  Subject to theprovisions of Articles 6 and 7 hereof, at the Closing:

 

### (a)                                  The Company andMerger Sub will cause the Articles of Merger to be filed as provided inSection 1.2 hereof and will take any and all other lawful actions and doany and all other lawful things necessary or desirable to cause the Merger tobecome effective; and

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### (b)                                 Subject to the rightof the Surviving Corporation to receive a refund of amounts remaining in theExchange Fund one year after the Closing Date under Section 1.8 hereof,Merger Sub will irrevocably deposit with the Disbursing Agent the full amount ofthe Exchange Fund.

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# **ARTICLE 3REPRESENTATIONS AND WARRANTIES OF THE COMPANY**

# ** **

Except as set forth on the Company Disclosure Schedule appended tothis Agreement (the “Company Disclosure Schedule”), the Company herebyrepresents and warrants to Parent and Merger Sub as follows:

 

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Section 3.1                                      Organizationand Qualification; Subsidiaries.

 

### (a)                                  Each of the Companyand its subsidiaries is duly organized, validly existing and in good standingunder the laws of the jurisdiction of its incorporation or organization and hasall requisite corporate power and authority to own, lease and operate itsproperties and to carry on its businesses as now being conducted.  The Company has heretofore delivered toParent accurate and complete copies of the Articles of Incorporation and Bylaws(or similar governing documents), as currently in effect, of the Company andeach of its subsidiaries.  Neither theCompany nor any of its subsidiaries is in violation of its Articles ofIncorporation or Bylaws (or similar governing documents).

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### (b)                                 Each of the Companyand its subsidiaries is duly qualified or licensed and in good standing to dobusiness in each jurisdiction in which the property owned, leased or operatedby it or the nature of the business conducted by it makes such qualification orlicensing necessary, except in such jurisdictions where the failure to be soduly qualified or licensed and in good standing would not reasonably beexpected to have a Company Material Adverse Effect.  The term “Company Material Adverse Effect” shall, for thepurposes of this Agreement, mean any change or effect that, individually or inthe aggregate, is or is reasonably likely to be materially adverse to thebusiness, assets, operations, results of operations, prospects or financialcondition of the Company and its subsidiaries, taken as a whole, other than anychanges or effects arising out of (i) general economic conditions, (ii) thefinancial markets or (iii) the entering into or the public disclosure of thisAgreement or the transactions contemplated hereby.

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Section 3.2                                      Capitalizationof the Company and its Subsidiaries.  

 

### (a)                                  The authorizedcapital stock of the Company consists of (i) 2,000,000 shares of preferredstock, $0.01 par value per share, none of which are issued and outstanding asof the date hereof; and (ii) 20,000,000 shares of common stock, $0.01 par valueper share, 3,812,222 of which are issued and outstanding as of the datehereof.  All of the outstanding sharesof Company Common Stock have been validly issued and are fully paid,nonassessable and free of preemptive rights. Except as set forth supra or as set forth in Section 3.2 ofthe Company Disclosure Schedule, as of the date hereof, there are outstanding(i) no shares of capital stock or other voting securities of the Company, (ii)no securities of the Company convertible into or exchangeable for shares ofcapital stock or voting securities of the Company, (iii) no options, warrantsor other rights to acquire from the Company and, no obligations of the Companyto issue, any capital stock, voting securities or securities convertible intoor exchangeable for capital stock or voting securities of the Company and (iv)no equity equivalent interests in the ownership or earnings of the Company orits subsidiaries (collectively “Company Securities”).  Section 3.2 of the Company DisclosureSchedule identifies, as of the date hereof, the holder of each outstandingStock Option issued pursuant to the Stock Option Plans, the number of shares ofCompany Common Stock issuable upon the exercise of each such Stock Option andthe exercise price and expiration date thereof and, except as set forth inSection 3.2 of the Company Disclosure Schedule, no options currentlyoutstanding have been granted other than pursuant to the Stock OptionPlans.  As of the date hereof, except asset forth in Section 3.2 of the Company Disclosure Schedule, there

 

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### are no outstanding obligations of the Company or its subsidiaries torepurchase, redeem or otherwise acquire any shares of Company Common Stock orCompany Securities.  Except as set forthin Section 3.2 of the Company Disclosure Schedule, there are noshareholder agreements, voting trusts or other agreements or understandings towhich the Company is a party or by which it is bound relating to the voting orregistration of any shares of capital stock of the Company.

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### (b)                                 Except as set forth inSection 3.2 of the Company Disclosure Schedule, all of the outstanding capitalstock of the Company’s subsidiaries is owned by the Company, or one of itssubsidiaries, directly or indirectly, free and clear of any Lien (as defined infra)or any restriction on the right to vote or sell the same (except as may beprovided as a matter of law).  All ofthe outstanding shares of capital stock of the Company’s subsidiaries are dulyauthorized, validly issued, fully paid and nonassessable, and were issued freeof preemptive rights in compliance with applicable corporate and securitieslaws.  There are no securities of theCompany’s subsidiaries convertible into or exchangeable for, no options,warrants or other rights to acquire from the Company or its subsidiaries and noother contract, understanding, arrangement or obligation (whether or notcontingent) providing for the issuance, purchase or sale, directly orindirectly, by the Company or any of its subsidiaries of, any capital stock orother ownership interests in or any other securities of any subsidiary of theCompany.  There are no outstandingcontractual obligations of the Company’s subsidiaries to repurchase, redeem orotherwise acquire any outstanding shares of capital stock or other ownershipinterests in any subsidiary of the Company. For purposes of this Agreement, “Lien” means, with respect to any asset(including, without limitation, any security), any mortgage, lien, pledge,charge, security interest or encumbrance of any kind in respect of such asset.

 

### (c)                                  The Company CommonStock constitutes the only class of equity securities of the Company or itssubsidiaries registered or required to be registered under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).

 

Section 3.3                                      AuthorityRelative to this Agreement; Enforceability.  The Company has all necessary corporate power and authority toexecute and deliver this Agreement and to consummate the transactionscontemplated hereby.  The execution anddelivery of this Agreement by the Company and the consummation by the Companyof the transactions contemplated hereby have been unanimously recommended bythe Special Committee and duly and validly authorized by a unanimous vote ofthe Board of Directors of the Company, and no other corporate proceedings onthe part of the Company or its subsidiaries are necessary to authorize thisAgreement or to consummate the transactions contemplated hereby, except theobtaining of the Two-Tiered Shareholder Approval of (i) this Agreement,and (ii) the Merger (collectively, the “Merger Voting Items”).  The Special Committee is composedexclusively of directors that have no employment or other pecuniaryrelationship with the Company, other than in their capacity as members of itsBoard of Directors or any committee thereof. This Agreement has been duly and validly executed and delivered by theCompany and, assuming due authorization, execution and delivery by each ofParent and Merger Sub, constitutes a valid, legal and binding agreement of theCompany enforceable against the Company in accordance with its terms, exceptthat (i) such enforcement may be subject

 

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to applicable bankruptcy, insolvency, reorganization, moratorium orother similar laws, now or hereafter in effect, affecting creditors’ rightsgenerally, and (ii) the remedy of specific performance and injunctive and otherforms of equitable relief may be subject to equitable defenses and to thediscretion of the court before which any proceeding therefor may be brought.

 

Section 3.4                                      SEC Reports;Financial Statements.  The Companyhas filed all required forms, reports and documents with the Securities andExchange Commission (the “SEC”) for the periods beginning on or afterJanuary 1, 1999 (such filings, along with any other filings made by theCompany with the SEC pursuant to the Securities Act (as defined infra)or the Exchange Act are hereinafter referred to as “Company SEC Reports”), eachof which has complied in all material respects with all applicable requirementsof the Securities Act of 1933, as amended (the “Securities Act”), and theExchange Act, each as in effect on the dates such forms, reports and documentswere filed.  None of such Company SECReports contained when filed any untrue statement of a material fact or omittedto state a material fact required to be stated or incorporated by referencetherein or necessary in order to make the statements therein, in light of thecircumstances under which they were made, not misleading.  The consolidated financial statements of theCompany included in the Company SEC Reports have been prepared in accordancewith U.S. generally accepted accounting principles (“GAAP”) applied on aconsistent basis (except as may be indicated in the notes thereto), and fairlyand accurately present in all material respects the consolidated financialposition of the Company and its consolidated subsidiaries as of the datesthereof and their consolidated results of operations and changes in financialposition for the periods then ended, except, in the case of unaudited interimfinancial statements, for normal year-end audit adjustments and the fact thatcertain information and notes have been condensed or omitted in accordance withthe applicable rules of the SEC.  TheCompany has no material liabilities, whether accrued, absolute, fixed or contingent,which are required by GAAP to be reflected or reserved against or otherwisedisclosed in the Company’s financial statements, except as reflected orreserved against or otherwise disclosed in the financial statements of theCompany contained in the Company SEC Reports or which have arisen in theordinary course of the Company’s business since the date of the latest of suchreports, and except for any such liabilities that would not have a CompanyMaterial Adverse Effect.

 

Section 3.5                                      InformationSupplied.  None of the informationcontained in or incorporated by reference in the proxy statement (the “ProxyStatement”) relating to the meeting of the shareholders of the Company to becalled pursuant to Section 5.3(c) hereof (including all adjournments thereof,the “Shareholders Meeting”) will, at the date the definitive Proxy Statement ismailed to shareholders of the Company or (as amended or supplemented) at thetime of the Shareholders Meeting (and, if adjourned, at the time of eachadjourned meeting), contain any untrue statement of a material fact or omit tostate any material fact required to be stated therein or necessary in order tomake the statements therein, in light of the circumstances under which theywere made, not misleading, except that no representation or warranty is made bythe Company with respect to statements made or incorporated by reference

 

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therein based on written information supplied by Parent or Merger Subfor inclusion or incorporation by reference therein.  The Proxy Statement insofar as it relates to the ShareholdersMeeting will comply as to form in all material respects with the provisions ofthe Exchange Act and the rules and regulations thereunder.

 

Section 3.6                                      Consents andApprovals; No Violations.

 

### (a)                                  Except as set forthin Section 3.6 of the Company Disclosure Schedule with respect to thegaming industry regulatory agencies referenced therein, and except for filings,permits, authorizations, consents and approvals as required under, and otherapplicable requirements of, the Exchange Act and state securities or blue skylaws, and the filing of the Articles of Merger as required by the MBCA andChapter 92A of the NRS, no filing with or notice to, and no permit, authorization,consent or approval of, any court, arbitrator or tribunal, or administrative,regulatory or other governmental body, agency or authority, foreign or domestic(a “Governmental Entity”), is necessary for the execution and delivery by theCompany of this Agreement or the consummation by the Company of thetransactions contemplated hereby.

###  

### (b)                                 Except as set forth inSection 3.6 of the Company Disclosure Schedule, neither the execution,delivery and performance of this Agreement by the Company nor the consummationby the Company of the transactions contemplated hereby will (i) conflict withor result in any breach of any provision of the respective Articles ofIncorporation or Bylaws (or similar governing documents) of the Company or anyof its subsidiaries, (ii) result in a violation or breach of, or constitute(with or without due notice or lapse of time or both) a default (or give riseto any right of termination, amendment, cancellation, acceleration or Lien)under, any of the terms, conditions or provisions of any material note, bond,mortgage, indenture, lease, license, contract, agreement or other instrument orobligation to which the Company or any of its subsidiaries is a party, or bywhich any of them or any of their respective properties or assets may be boundor (iii) violate any order, writ, injunction, decree, law, statute, rule orregulation applicable to the Company or any of its subsidiaries or any of theirrespective properties or assets, except in the case of (ii) or (iii), forviolations, breaches or defaults that would not have a Company Material AdverseEffect.

###  

Section 3.7                                      Absence ofChanges.  Except as set forth inSection 3.7 of the Company Disclosure Schedule, since December 31,2003, there has not been:  (i) anyevents, changes or effects with respect to the Company or its subsidiaries thatwould reasonably be expected to have a Company Material Adverse Effect or thatare outside the ordinary course of the Company’s business; (ii) anydeclaration, payment or setting aside for payment of any dividend (except tothe Company or any subsidiary wholly-owned by the Company) or otherdistribution by the Company or any of its subsidiaries, or any redemption,purchase or other acquisition, by the Company or any of its subsidiaries, ofany shares of capital stock or securities of the Company or any subsidiary ofthe Company; (iii) any return of any capital or other distribution of assets toshareholders of the Company or any subsidiary of the Company (except to theCompany or any subsidiary wholly-owned by the Company); (iv) any acquisition(by merger, consolidation, acquisition of stock or assets or otherwise), by theCompany or any of its subsidiaries of any person or business; (v) any materialchange by the Company to its

 

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accounting policies, practices, or methods; (vi) any amendment to theArticles of Incorporation or Bylaws or other organizational documents of theCompany or any of its subsidiaries; (vii) any sale or transfer by the Companyof any material portion of its assets or of any material asset, except in theordinary course of its business and consistent with past practice; (viii) anypledge by the Company or any of its subsidiaries of any of its assets orsubjection of any of its assets to any Lien, except in the ordinary course ofbusiness and consistent with past practice; (ix) any commencement or settlementof material legal proceedings by the Company or any of its subsidiaries; (x)any action taken by a Governmental Entity which affects, in any materialrespect, the business of the Company, except, in the case of each of theforegoing clauses (i) through (x), as expressly contemplated by this Agreementor as disclosed in the Company SEC Reports.

 

Section 3.8                                      Litigation.  Except as set forth in Section 3.8 ofthe Company Disclosure Schedule, there is no suit, claim, action, proceeding orinvestigation pending or, to the knowledge of the Company, threatened, againstthe Company or any of its subsidiaries or any of their respective properties orassets before any Governmental Entity or otherwise.  Except as set forth in Section 3.8 of the Company DisclosureSchedule, none of the Company or its subsidiaries is subject to any outstandingorder, writ, injunction or decree of any Governmental Entity that wouldreasonably be expected to have a Company Material Adverse Effect or wouldreasonably be expected to prevent or materially delay the consummation of thetransactions contemplated hereby.

 

Section 3.9                                      Compliancewith Applicable Law.  Except as setforth in Section 3.9 of the Company Disclosure Schedule, the Company andits subsidiaries hold all material permits, licenses, findings of suitability,authorizations, variances, exemptions, orders and approvals as required fromall Governmental Entities, and have filed all material required notifications,registrations and listings with all Governmental Entities, all of which are infull force and effect (the “Company Permits”), except for failures to hold suchpermits, licenses, findings of suitability, authorizations, variances,exemptions, orders and approvals and failures to have filed such notifications,registrations and listings, which would not reasonably be expected to have aCompany Material Adverse Effect.  TheCompany and its subsidiaries are in compliance in all material respects withthe terms of the Company Permits.  TheCompany has not received any notice from any Governmental Entity that thebusinesses of the Company and its subsidiaries are being conducted in violationof any law, ordinance or regulation of any Governmental Entity, except forviolations or possible violations which are not material to the Company’sbusiness.  To the knowledge of theCompany, no investigation or review by any Governmental Entity with respect to thebusinesses of the Company or its subsidiaries is pending or threatened nor hasany Governmental Entity indicated to the Company an intention to conduct thesame.

 

Section 3.10                                Brokers.  Other than The Seidler Companies, Inc.(“TSC”), the financial advisor retained by the Company in connection with thetransactions contemplated by this Agreement, no broker, finder or investmentbanker is entitled to any brokerage, finder’s or other fee or commission inconnection with the transactions contemplated by this Agreement based uponarrangements made by or on behalf of the Company.

 

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Section 3.11                                Taxes.

 

(a)                                  Forpurposes of this Agreement, a “Tax” or, collectively, “Taxes” means any and allfederal, state, local and foreign taxes, assessments and other governmentalcharges, duties, impositions and liabilities, including, without limitation,gross receipts, income, profits, sales, use, occupation, value added, advalorem, transfer, gains, franchise, withholding, payroll, recapture,employment, excise, unemployment insurance, social security, business license,business organization, stamp, environmental and property taxes, together withall interest, penalties and additions imposed with respect to such amounts.  For purposes of this Agreement, “Taxes” alsoincludes any obligations under any agreements or arrangements with any otherperson with respect to Taxes of such other person (including pursuant toU.S.  Treasury Regulations§ 1.1502-6 or comparable provisions of state, local or foreign Tax law)and including any liability for Taxes of any predecessor entity.

###  

### (b)                                 The Company and eachof its subsidiaries have (i) filed all federal, state, local and foreign Taxreturns and reports required to be filed by them prior to the date of thisAgreement (taking into account all applicable extensions), (ii) paid or accruedall Taxes due and payable, and (iii) paid or accrued all Taxes for which anotice of assessment or collection has been received (other than amounts beingcontested in good faith by appropriate proceedings), except, in the case ofclauses (i), (ii) and (iii), for any such filings, payments or accruals that donot have, and are not reasonably likely to have, individually or in theaggregate, a Company Material Adverse Effect. There are no audits pending or known by the Company to be contemplatedwith respect to the Company’s Tax returns as of the date of thisAgreement.  Neither the Internal RevenueService nor any other taxing authority has asserted any claim for Taxes, or tothe knowledge of the Company, is threatening to assert any claims for Taxes,which claims, individually or in the aggregate, are reasonably likely to have aCompany Material Adverse Effect.  The Companyand each of its subsidiaries have withheld or collected and paid over to theappropriate governmental authorities (or are properly holding for such payment)all Taxes required by law to be withheld or collected, except for amounts thatdo not have, or are not reasonably likely to have, individually or in theaggregate, a Company Material Adverse Effect. Neither the Company nor any of its subsidiaries has made an electionunder Section 341(f) of the Internal Revenue Code of 1986, as amended (the“Code”), except for any such elections that are not reasonably likely to have,individually or in the aggregate, a Company Material Adverse Effect.  There are no Liens for Taxes upon the assetsof the Company or any of its subsidiaries (other than Liens for Taxes that arenot yet due or that are being contested in good faith by appropriateproceedings), except for Liens that do not have, and are not reasonably likelyto have, individually or in the aggregate, a Company Material AdverseEffect.  No extension of a statute oflimitations relating to any Taxes is in effect with respect to the Company andits subsidiaries as of the date of this Agreement.

###  

### (c)                                  Neither the Companynor any of its subsidiaries has been a member of an affiliated group ofcorporations filing a consolidated federal income Tax return (or a group ofcorporations filing a consolidated, combined or unitary income Tax return undercomparable provisions of state, local or foreign tax law) for any taxable

 

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### period, other than a group the common parent of which was the Companyor any subsidiary of the Company.

###  

### (d)                                 Neither the Companynor any of its subsidiaries has any obligation except with respect to theCompany and its subsidiaries under any agreement or arrangement with any otherperson with respect to Taxes of such other person (including pursuant to U.S.Treasury Regulations § 1.1502-6 or comparable provisions of state, localor foreign tax law), including with respect to any liability for Taxes of anypredecessor entity, except for obligations that do not have, and are notreasonably likely to have, individually or in the aggregate, a Company MaterialAdverse Effect.

###  

### (e)                                  Neither the Companynor any of its subsidiaries has been a United States real property holdingcorporation within the meaning of Section 897(c)(2) of the Code during theapplicable period specified in Section 897(c)(1)(A)(ii) of the Code.

###  

Section 3.12                                Required ShareholderVote.  The Two-Tiered ShareholderApproval is the only approval by the Company’s shareholders required underapplicable law, including, without limitation, the MBCA, for the adoption andapproval of the Merger Voting Items.

 

Section 3.13                                No ExistingDiscussions.  As of the date of thisAgreement, neither the Company nor any of its affiliates is engaged, directlyor indirectly, in any discussions or negotiations with any party (other thanParent or Merger Sub) with respect to a Takeover Proposal (as defined inSection 5.2(a) hereof).

 

# **ARTICLE 4REPRESENTATIONS AND WARRANTIES OFPARENT AND MERGER SUB**

# ** **

Except as set forth on the Parent Disclosure Schedule appended tothis Agreement (the “Parent Disclosure Schedule”), Parent and Merger Sub,jointly and severally, hereby represent and warrant to the Company as follows:

 

Section 4.1                                      Organization.

 

### (a)                                  Each of Parent andMerger Sub is duly organized, validly existing and in good standing as alimited liability company under the laws of the State of Nevada and has allrequisite power and authority to own, lease and operate its properties and tocarry on its business as now being conducted. Each of Parent and Merger Sub has heretofore delivered to the Companyaccurate and complete copies of its Articles of Organization and OperatingAgreement (if any) as currently in effect.

###  

### (b)                                 Each of Parent andMerger Sub is duly qualified or licensed and in good standing to do business ineach jurisdiction in which the property owned, leased or operated by it or thenature of the business conducted by it makes such qualification or licensingnecessary, except in such jurisdictions where the failure to be so dulyqualified or licensed and in good standing would not have a Parent MaterialAdverse Effect.  The term “ParentMaterial Adverse Effect” shall, for the purposes of this Agreement, mean

 

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### any change or effect that, individually or in the aggregate, is or isreasonably likely to be materially adverse to the business, assets, operations,results of operations, prospects or financial condition of Parent and MergerSub, taken as a whole, other than any changes or effects arising out of (i)general economic conditions, (ii) the financial markets or (iii) theentering into or the public disclosure of this Agreement or the transactionscontemplated hereby.

###  

Section 4.2                                      AuthorityRelative to this Agreement; Enforceability.  Each of Parent and Merger Sub has all necessary power andauthority as a limited liability company to execute and deliver this Agreementand to consummate the transactions contemplated hereby.  The execution and delivery of this Agreementby each of Parent and Merger Sub and the consummation by each of Parent andMerger Sub of the transactions contemplated hereby have been duly and validlyauthorized by the unanimous vote of its respective managers and members and noother limited liability company proceedings on the part of either Parent orMerger Sub are necessary to authorize this Agreement or to consummate thetransactions contemplated hereby.  ThisAgreement has been duly and validly executed and delivered by Parent and MergerSub and, assuming due authorization, execution and delivery by the Company,constitutes the valid, legal and binding agreement of each of Parent and MergerSub enforceable against each of Parent and Merger Sub in accordance with its terms,except that (i) such enforcement may be subject to applicable bankruptcy,insolvency, reorganization, moratorium or other similar laws, now or hereafterin effect, affecting creditors’ rights generally, and (ii) the remedy ofspecific performance and injunctive and other forms of equitable relief may besubject to equitable defenses and to the discretion of the court before whichany proceeding therefor may be brought.

 

Section 4.3                                      InformationSupplied.  None of the informationsupplied by Parent or Merger Sub in writing for inclusion in the ProxyStatement will, at the time that the definitive Proxy Statement is mailed tothe shareholders of the Company or (as amended or supplemented) at the time ofthe Shareholders Meeting (and, if adjourned, at the time of each adjournedmeeting), contain any untrue statement of a material fact or omit to state anymaterial fact required to be stated therein or necessary in order to make thestatements therein, in light of the circumstances under which they were made,not misleading.

 

Section 4.4                                      Consents andApprovals; No Violations.

 

### (a)                                  Except as set forthin Section 4.4 of the Parent Disclosure Schedule with respect to thegaming industry regulatory agencies referenced therein, and except for suchfilings, permits, authorizations, consents and approvals as may be requiredunder, and other applicable requirements of, the Exchange Act and statesecurities or blue sky laws, and the filing of the Articles of Merger asrequired by the MBCA and Chapter 92A of the NRS, no filing with or notice to,and no permit, authorization, consent or approval of, any Governmental Entityis necessary for the execution and delivery by either of Parent or Merger Subof this Agreement or the consummation by either of Parent or Merger Sub of thetransactions contemplated hereby, except where the failure to obtain 

 

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such permits, authorizations, consents or approvals or to make suchfilings or give such notices would not have a Parent Material Adverse Effect.

###  

### (b)                                 Neither the execution,delivery and performance of this Agreement by either Parent or Merger Sub northe consummation by either Parent or Merger Sub of the transactionscontemplated hereby will (i) conflict with or result in any breach of anyprovision of the respective Articles of Organization or Operating Agreement (ifany) of either Parent or Merger Sub, (ii) result in a violation or breach of,or constitute (with or without due notice or lapse of time or both) a default(or give rise to any right of termination, amendment, cancellation oracceleration or Lien) under, any of the terms, conditions or provisions of anymaterial note, bond, mortgage, indenture, lease, license, contract, agreementor other instrument or obligation to which either Parent or Merger Sub is aparty or by which either of them or any of their respective properties orassets may be bound, or (iii) violate any order, writ, injunction, decree, law,statute, rule or regulation applicable to either of Parent or Merger Sub or anyof their respective properties or assets, except, in the case of (ii) or (iii),for violations, breaches or defaults that would not have a Parent MaterialAdverse Effect.

###  

Section 4.5                                      Financing.  Parent has received a written financing commitment,a copy of which has previously been delivered to the Company, in the amount of$5.5 million from Cochran Road, LLC (the “Financing Commitment”), and shallhave sufficient funds available to pay the Initial Merger Consideration as ofthe Effective Time.  As of the EffectiveTime, Merger Sub shall, as the result of one or more capital contributions madeto it by Parent, have liquid assets and net worth in an amount equal to notless than the amount of the Exchange Fund.

 

Section 4.6                                      No Litigation.  There is no suit, claim, action, proceedingor investigation pending or, to the knowledge of either Parent or Merger Sub,threatened, against either Parent or Merger Sub or any of their properties orassets before any Governmental Entity or otherwise which would reasonably beexpected to have a Parent Material Adverse Effect or would reasonably beexpected to prevent or materially delay the consummation of the transactionscontemplated by this Agreement.  NeitherParent nor Merger Sub is subject to any outstanding order, writ, injunction ordecree of any Governmental Entity that could reasonably be expected to have aParent Material Adverse Effect or would reasonably be expected to prevent ormaterially delay the consummation of the transactions contemplated hereby.

 

Section 4.7                                      Brokers.  Other than Libra Securities, LLC, no broker,finder or investment banker is entitled to any brokerage, finder’s or other feeor commission in connection with the transactions contemplated by thisAgreement based upon arrangements made by or on behalf of either Parent orMerger Sub.

 

Section 4.8                                      BeneficialOwnership of Shares.  Except as setforth in Section 4.8 of the Parent Disclosure Schedule andSection 3.2 of the Company Disclosure Schedule, as of the date hereof,none of Parent, Merger Sub, Johan P. Finley, Lona M. B. Finley andPeter D. Cleary or any of their respective affiliates beneficially owns(as defined in Rule 13d-3 promulgated under the Exchange Act) any outstandingshares of Company

 

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Common Stock, or any securities convertible into or exchangeable forshares of Company Common Stock.

 

Section 4.9                                      Ownership ofParent and Merger Sub; Holding of Excluded Shares.  As of the date hereof, Parent is the soleowner of all of the issued and outstanding equity interests in Merger Sub, andThe Finley Family Trust, dated July 10, 2001, of which Johan P. Finley andLona M.B. Finley are the sole settlors, beneficiaries and trustees (the“Trust”), is the owner of 25%, and Johan P. Finley is the owner of 75%, of theissued and outstanding equity interests in Parent.  From and after the date hereof and prior to the Closing, Parentwill be the sole holder of an equity interest in Merger Sub, and no personother than Johan P. Finley, the Trust and Peter D. Cleary will hold an equityinterest in Parent, or rights convertible into or exchangeable for an equityinterest in Parent (other than Jess M. Ravich, with respect to a debtinstrument to be issued to him by Johan P. Finley that is exchangeable intoequity interests in Parent owned by Mr. Finley upon the satisfaction of certainconditions, including, without limitation, the obtaining by Mr. Ravich of allrequired approvals from applicable gaming regulatory authorities).  Prior to the Closing, Johan P. Finley andLona M. B. Finley shall have transferred to Parent all of the issued andoutstanding shares of Company Common Stock beneficially owned or held of recordby them on the date of this Agreement, other than 60,200 shares of CompanyCommon Stock held of record by them in the capacity of custodian or trustee fortheir minor children.

 

Section 4.10                                No Prior Activitiesof Merger Sub.  Except forobligations incurred in connection with its formation, organization andfinancing or the negotiation and documentation of this Agreement and thedocuments referenced herein and the consummation of the transactionscontemplated hereby, Merger Sub has neither incurred any obligation orliability nor engaged in any business or activity of any type or kindwhatsoever or entered into any agreement or arrangement with any other person.

 

# **ARTICLE 5COVENANTS**

# ** **

Section 5.1                                      Conduct ofBusiness.  

 

### (a)                                  Conduct ofBusiness by the Company.  Except asexpressly set forth in this Agreement or as consented to in writing by Parent,during the period from the date of this Agreement to the Effective Time, oruntil the earlier termination of this Agreement pursuant to the terms ofArticle 7 hereof, the Company shall use, and shall cause its subsidiariesto use, reasonable commercial efforts to carry on their respective businessesin the usual, regular and ordinary course, consistent with past practice and incompliance in all material respects with all applicable laws and regulations,and to preserve their current relationships with customers, vendors andlenders.

###  

### (b)                                 Negative Covenants.  Without limiting the generality of theforegoing, and except as expressly set forth in this Agreement or as consentedto in writing by Parent (which consent shall not be unreasonably withheld ordelayed), between the date of this Agreement and the Effective Time, or untilthe earlier

 

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### termination of this Agreement pursuant to the terms of Article 7hereof, the Company shall not, and shall not permit any of its subsidiaries to:

###  

#### (i)                                     amend its Articlesof Incorporation or Bylaws (or other similar governing instruments);

####  

#### (ii)                                  authorize forissuance, issue, sell, deliver or agree or commit to issue, sell or deliver(whether through the issuance or granting of options, warrants, commitments,subscriptions, rights to purchase or otherwise) any stock of any class or anyother securities or equity equivalents (including, without limitation, anystock options or stock appreciation rights), except for the issuance and saleof shares of Company Common Stock pursuant to options previously granted;

####  

#### (iii)                               split, combine orreclassify any shares of its capital stock, declare, set aside or pay anydividend or other distribution (whether in cash, stock or property or anycombination thereof) in respect of its capital stock, make any other actual,constructive or deemed distribution in respect of its capital stock orotherwise make any payments to shareholders in their capacity as such, orredeem or otherwise acquire any of its securities or any securities of any ofits subsidiaries;

####  

#### (iv)                              adopt a plan of completeor partial liquidation, dissolution, merger, consolidation, restructuring,recapitalization or other reorganization of the Company or any of itssubsidiaries (other than with respect to the Merger);

####  

#### (v)                                 alter, through merger,liquidation, reorganization, restructuring or any other fashion, the corporatestructure or ownership of any subsidiary, except that the Company may establishone or more subsidiary companies to facilitate financing in the ordinary courseof business;

####  

#### (vi)                              (A) incur or assume anylong-term or short-term debt (including, without limitation, obligations underconditional sale or title retention agreements, obligations assumed as deferredpurchase price, capitalized lease obligations, obligations under swap orhedging agreements, performance bonds or letters of credit) or issue any debtsecurities, except in the ordinary course of business consistent with pastpractice;  (B) assume, guarantee,endorse or otherwise become liable or responsible (whether directly,contingently or otherwise) for the obligations of any other person, except inthe ordinary course of business consistent with past practice;  (C) other than in the ordinary course ofbusiness consistent with past practice, make any loans, advances or capitalcontributions to or investments in any other person (including, withoutlimitation, subsidiaries of the Company and employees and customers of theCompany);  (D) pledge or otherwiseencumber shares of capital stock of the Company or its subsidiaries;  (E) mortgage or pledge any of its materialassets, tangible or intangible, or create any material Lien thereupon (otherthan tax Liens for taxes not yet due), other than in the ordinary course ofbusiness consistent with past practice; or (F) forgive any material debts owingto the Company or its subsidiaries;

 

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#### (vii)                           except as set forth inSection 5.1 of the Company Disclosure Schedule or as may be requiredby law, enter into, adopt, amend (except for immaterial or ministerial matters)or terminate any bonus, profit sharing, compensation, severance, termination,stock option, stock appreciation right, restricted stock, performance unit,stock equivalent, stock purchase, pension, retirement, deferred compensation,employment, severance or other employee benefit agreement, trust, plan, fund orother arrangement for the benefit or welfare of any director, officer or employeein any manner, or increase in any manner the compensation or fringe benefits ofany director, officer or employee, or pay any benefit not required by any planand arrangement as in effect as of the date hereof (including, withoutlimitation, the granting of stock appreciation rights or performance units);provided, however, that this paragraph shall not prevent the Company or itssubsidiaries from entering into or terminating and settling employmentagreements, severance agreements or other compensation arrangements withemployees in the ordinary course of business and consistent with past practice;

####  

#### (viii)                        except as set forth in Section 5.1 ofthe Company Disclosure Schedule, acquire, sell, lease or dispose of anymaterial amount of assets in any single transaction or series of relatedtransactions, other than in the ordinary course of business consistent withpast practice;

####  

#### (ix)                                except as may be required as a result of achange in law or in GAAP, change any of the accounting principles or practicesused by it;

####  

#### (x)                                   except as set forth in Section 5.1 ofthe Company Disclosure Schedule, (A) acquire or agree to acquire (by merger,consolidation or acquisition of stock or assets) any corporation, partnershipor other business organization or division thereof or any equity interesttherein; (B) enter into any contract or agreement, other than in the ordinarycourse of business consistent with past practice, that would be material to theCompany and its subsidiaries, taken as a whole; or (C)  authorize any new capital expenditure orexpenditures, other than in the ordinary course of business consistent withpast practice, provided that none of the foregoing shall limit any capitalexpenditure required pursuant to existing contracts;

####  

#### (xi)                                settle or compromise any pending orthreatened suit, action or claim (A) that relates to the transactionscontemplated hereby or (B) the settlement or compromise of which would resultin payments by the Company and its subsidiaries in the aggregate of $1,000,000or more;

####  

#### (xii)                             adopt a shareholder rights plan or anysimilar plan or instrument or take any similar action that would have theeffect of impairing or delaying the consummation of the Merger;

####  

#### (xiii)                          pay, discharge, or satisfy any materialclaim, liability, or obligation (absolute, accrued, asserted or unasserted,contingent or otherwise), other than in the ordinary course of businessconsistent with past practice, or fail to pay or otherwise

 

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#### satisfy(except if being contested in good faith) any material accounts payable,liabilities, or obligations when due and payable;

####  

#### (xiv)                         pay or incur any obligation to pay any feerelating to the Merger to a broker, finder or investment banker, other thanTSC; or

####  

#### (xv)                            agree in writing or otherwise to take any of the actions described inthis Section 5.1(b).

####  

Section 5.2                                      OtherPotential Acquirors.  

 

### (a)                                  During the periodcommencing with the date of this Agreement and ending with the Effective Timeor earlier termination of this Agreement in accordance with the provisions ofArticle 7 hereof, the Company shall not, and shall not permit any of itssubsidiaries to, nor authorize or permit any officer, director or employee of,or any investment banker, attorney or other advisor or representative of, theCompany or any of its subsidiaries (“Representatives”) to, directly orindirectly:  (i) solicit, initiate,or encourage the submission of, any Takeover Proposal (as defined infra)or any inquiries with respect thereto, or take any other action to facilitatethe making of, or that reasonably may be expected to lead to the making of, anyTakeover Proposal, (ii) engage in negotiations or discussions with, or furnishany information or data to, or afford access to the properties, books or recordsof the Company or its subsidiaries to, any third party relating to an actual orpotential Takeover Proposal, or (iii) enter into any agreement with respect toany Takeover Proposal or recommend any Takeover Proposal.  For purposes of this Agreement, “TakeoverProposal” means any written proposal or offer (whether or not delivered to theCompany’s shareholders generally) for a merger, consolidation,recapitalization, liquidation, dissolution or similar transaction, purchase ofsubstantial assets, tender offer or other business combination involving theCompany or any of its subsidiaries, other than the transactions contemplated bythis Agreement, or any proposal or offer to acquire in any manner, directly orindirectly, a substantial equity interest in, or a substantial portion of theassets or business of, the Company or any of its subsidiaries, other thanpursuant to the transactions contemplated by this Agreement.

###  

### (b)                                 Notwithstandinganything to the contrary contained in Section 5.2(a) hereof or otherwisein this Agreement, and so long as the Company is otherwise in compliance withthe provisions of Section 5.2(a) hereof, if the Company and its Board ofDirectors or the Special Committee prior to the Shareholders Meeting determinein good faith after discussion with their respective counsel that a specificunsolicited Takeover Proposal would likely result in a Superior Proposal (asdefined in Section 5.2(d) hereof), and the Board of Directors or theSpecial Committee determines in good faith that the failure to participate indiscussions or negotiations with or to furnish information to the PotentialAcquiror (as defined infra), would be inconsistent with the Board ofDirectors’ fiduciary duties to the Company’s shareholders under applicable law,then the Company and its Board of Directors or Special Committee:  (i) may participate in discussions ornegotiations (including, as a part thereof, making any counterproposal theydeem appropriate) with and furnish information to any third party making suchTakeover Proposal (a “Potential Acquiror”), and (ii) may take and disclose tothe Company’s

 

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shareholders a position with respect to any tender or exchange offer bya third party in connection with such Takeover Proposal, and amend or withdrawsuch position, pursuant to the requirements of Rules 14d-9 and 14e-2promulgated under the Exchange Act.

###  

### (c)                                  Any non-publicinformation furnished by the Company to a Potential Acquiror pursuant toSection 5.2(b) hereof shall be furnished pursuant to a confidentialityagreement in form and substance reasonably acceptable to the Company.

###  

### (d)                                 Neither the Board ofDirectors of the Company nor the Special Committee shall approve or recommend,or propose to approve or recommend, or enter into any agreement (other than aconfidentiality agreement meeting the requirements of paragraph (c) supra)with respect to, any Takeover Proposal unless the Board and the SpecialCommittee determine in good faith, after receiving advice from their financialadvisor(s), that such Takeover Proposal would, if completed in accordance withits terms, result in a Superior Proposal. For purposes of this Agreement, “Superior Proposal” means a writtenTakeover Proposal made by a third party: (i) which the Board of Directors of the Company and the SpecialCommittee determine, based on such matters as they reasonably deem pertinent,including, without limitation, the likelihood of consummation, the relevanttrading markets, and the liquidity of any securities offered in connection withthe Takeover Proposal, is superior as compared with the Merger from a financialpoint of view, and (ii) with respect to which, if the Takeover Proposal (x) issubject to a financing condition or (y) involves consideration that is notentirely cash or does not permit shareholders to receive the payment of theoffered consideration in respect of all shares at the same time (unless thereis a cash payment at closing of at least $2.61 per share), the Company’s Boardof Directors and the Special Committee have been furnished with the writtenopinion of the financial advisor to the Special Committee that (in the case ofclause (x)) the Takeover Proposal is readily financeable and (in the case ofclause (y)) the Takeover Proposal provides a higher value per share, from afinancial point of view, than the consideration per share to be paid to theCompany’s shareholders pursuant to the Merger. Notwithstanding anything to the contrary in this Section 5.2, noTakeover Proposal otherwise satisfying the criteria of a Superior Proposalshall be deemed to be a Superior Proposal if the Potential Acquiror or, in thecase of an entity, any of its owners or key executives (collectively,“Unlicensed Persons”), does not possess, at the time said Takeover Proposal ismade to the Company, all required regulatory licenses and approvals, including,without limitation, gaming industry licenses and approvals from all gamingregulators in all jurisdictions in which the Company and/or its affiliates thenconduct business, necessary in order for said Potential Acquiror to lawfullyconduct a business similar to that then conducted by the Company in each suchjurisdiction, unless the Special Committee affirmatively determines, prior tothe Company’s entering into any agreement (other than a confidentialityagreement meeting the requirements of paragraph (c) supra) with thePotential Acquiror with respect to said Takeover Proposal, that it issignificantly more probable than not that all such applicable licenses andapprovals will be obtained by all of the Unlicensed Persons prior toSeptember 1, 2004.

###  

### (e)                                  Except as provided inthis Section 5.2, neither the Board of Directors of the Company, nor theSpecial Committee, shall (x) withdraw or modify, or

 

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### propose to withdraw or modify, in a manner adverse to Parent or MergerSub, the Board of Directors’ approval or recommendation of the Merger or thisAgreement, (y) approve any letter of intent, agreement in principle,acquisition agreement or similar agreement (other than a confidentialityagreement in connection with a potential Superior Proposal which is enteredinto by the Company in accordance with Section 5.2(c) hereof) relating toany Takeover Proposal, or (z) approve or recommend, or propose to approve orrecommend, any Takeover Proposal. Notwithstanding the foregoing or anything else to the contrary containedin this Agreement, in response to a Superior Proposal which was not solicitedon or subsequent to the date of this Agreement by the Company, any of itssubsidiaries or any of the Representatives, and which did not otherwise resultfrom a breach of Section 5.2(a) hereof, the Board of Directors of theCompany may, subject to the immediately following two sentences, terminate thisAgreement pursuant to and subject to the terms of Section 7.1(g) hereofand, concurrently with such termination, cause the Company to enter into anagreement with a Potential Acquiror with respect to a Superior Proposal (a“Superior Proposal Agreement”), but only if the Board of Directors of theCompany determines, after consultation with its counsel, that failure toterminate this Agreement and accept the Superior Proposal would be inconsistentwith the fiduciary duties of the members of such Board of Directors to theCompany’s shareholders under applicable law. Such actions may be taken by the Company’s Board of Directors only if ithas delivered to Parent prior to or on the date of the Shareholders Meetingwritten notice of the intent of the Company’s Board of Directors to take theactions referred to in the preceding sentence, together with a copy of therelated Superior Proposal Agreement and a description of any terms of theTakeover Proposal not contained therein. The Company’s Board of Directors shall not terminate this Agreement andenter into a Superior Proposal Agreement pursuant to this Section 5.2(e)until the end of the third business day following delivery of such notice toParent, after which, the Company’s Board of Directors, taking into account suchmatters as they deem pertinent (including, without limitation, the likelihoodof consummation, the relevant trading markets, and the liquidity of anysecurities offered in connection with the Takeover Proposal, as well as anyindications from Parent that it will make an alternative proposal), may proceedwith such Superior Proposal and enter into a Superior Proposal Agreement withthe Potential Acquiror in connection therewith.

###  

### (f)                                    The Companypromptly, and in any event within 48 hours, shall advise Parent orally and inwriting of the submission of any Takeover Proposal, the identity of the personmaking any such Takeover Proposal and the material terms of any such TakeoverProposal; provided, however, that Parent shall not interfere with the Company,the Board of Directors of the Company or the Special Committee with respect toany such Takeover Proposal (including any deliberations related to any suchTakeover Proposal or any matter related thereto).  The Company shall keep Parent fully informed of the status andmaterial terms of any such Takeover Proposal.

###  

Section 5.3                                      Preparation ofProxy Statement; Shareholders Meeting.  

 

### (a)                                  As promptly asreasonably practicable after the execution of this Agreement, the Company shallfile the Proxy Statement with the SEC. The Company shall obtain and furnish the information required to beincluded in the Proxy Statement 

 

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and shall respond promptly to any comments made by the SEC with respectto the preliminary Proxy Statement and cause the definitive Proxy Statement andform of proxy to be mailed to the Company’s shareholders at the earliestpracticable date, subject to the provisions of Section 5.3(c) hereof.  Parent shall be responsible for preparingthe first draft of the Proxy Statement and delivering it to the Company notlater than April 25, 2004, shall otherwise cooperate in the preparation ofthe Proxy Statement and shall furnish the Company with all information relatingto it and Merger Sub for inclusion in the Proxy Statement as the Company mayreasonably request.  The Company agrees,as to information with respect to the Company, its officers, directors,shareholders and subsidiaries contained in the Proxy Statement, and Parentagrees, as to information with respect to Parent and Merger Sub and theirmanagers, members and officers contained in the Proxy Statement, that suchinformation, at the date the definitive Proxy Statement is mailed to theshareholders of the Company and (as amended or supplemented) at the time of theShareholders Meeting (and, if adjourned, at the time of each adjournedmeeting), will not be false or misleading with respect to any material fact, oromit to state any material fact required to be stated therein or necessary tomake the statements therein, in light of the circumstances in which they weremade, not misleading.  Parent and itscounsel shall be given the opportunity to review the Proxy Statement and allamendments and supplements thereto prior to their being filed with the SEC, andthe Company shall not make any such filing without consulting with Parent andincluding such modifications as Parent reasonably requests.  The Company will advise Parent, promptlyafter it receives notice thereof, of the time when the Proxy Statement has beencleared by the SEC or any request by the SEC for an amendment of the ProxyStatement or comments from the SEC thereon and proposed responses thereto orrequests by the SEC for additional information, and Company shall timelyfurnish copies thereof to Parent.  TheCompany, on the one hand, and Parent, on the other hand, agree to promptlycorrect any information provided by said party for use in the Proxy Statement,if and to the extent that it shall have become materially false or misleading,and the Company further agrees to take all steps reasonably necessary to causethe Proxy Statement as so corrected to be filed promptly with the SEC and touse all reasonable efforts to cause the definitive Proxy Statement to bedisseminated to the Company’s shareholders, in each case, as and to the extentrequired by applicable laws, rules and regulations.

###  

### (b)                                 Parent and itsaffiliates (to the extent required by law) shall prepare, together with theCompany, a Rule 13E-3 Transaction Statement on Schedule 13E-3 (togetherwith all supplements and amendments thereto, the “Schedule 13E-3”) withrespect to the transactions contemplated by this Agreement, and shall cause theSchedule 13E-3 to be filed with the SEC concurrently with the filing ofthe Proxy Statement.  The Company shallpromptly furnish to Parent all information concerning the Company as mayreasonably be requested by Parent in connection with the preparation of theSchedule 13E-3.  The Company shallpromptly supplement, update and correct any information provided by it for usein the Schedule 13E-3, if and to the extent that such information is orshall have become incomplete, false or misleading.  In any such event, Parent shall take all reasonable stepsnecessary to cause the Schedule 13E-3 as so supplemented, updated orcorrected to be filed with the SEC and Parent and Company shall take allreasonable steps to cause same to be disseminated to the holders of CompanyCommon Stock, in each case, as and to the extent required by applicable

 

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federal securities laws.  TheCompany and its counsel shall be given an opportunity to review and comment onthe Schedule 13E-3 and each supplement, amendment or response to commentsby the staff of the SEC with respect thereto prior to its being filed with ordelivered to the SEC and Parent shall consider any such comments in goodfaith.  Parent agrees to provide theCompany and its counsel with copies of any comments that Parent or its counselmay receive from the staff of the SEC concerning the Schedule 13E-3promptly after receipt thereof.

###  

### (c)                                  As soon as reasonablypracticable following the clearance of comments from the staff of the SECregarding the Proxy Statement, the Company shall call and hold the ShareholdersMeeting, which shall be the Company’s Annual Shareholders Meeting for 2004, forthe purpose of obtaining the Two-Tiered Shareholder Approval of the MergerVoting Items, and transacting such other Company business as is appropriate forthe Company’s 2004 Annual Shareholders Meeting.  The notice of the Shareholders Meeting mailed to the Company’sshareholders shall be accompanied by a copy of the definitive Proxy Statement,and shall be mailed to the Company’s shareholders not less than twenty daysprior to the date of the Shareholders Meeting. The Company, through its Board of Directors, shall recommend to itsshareholders approval of the Merger Voting Items, provided, however, that theCompany’s Board of Directors may withdraw, modify or amend its recommendationif it shall determine in the reasonable and customary exercise of its fiduciaryduties to the Company’s shareholders under applicable law that suchrecommendation should not be made. After the delivery to the Company’s shareholders of copies of thedefinitive Proxy Statement, the Company shall use its reasonable best effortsto solicit proxies from its shareholders in connection with the ShareholdersMeeting, and otherwise to secure the vote or consent of its shareholders infavor of each of the Merger Voting Items, in each case, conformably withapplicable laws, rules and regulations, unless the Company’s Board of Directorsshall determine in good faith, in the reasonable and customary exercise of itsfiduciary duties to the Company’s shareholders under applicable law, that suchsolicitation should not be made.  In theevent that the Shareholders Meeting is adjourned one or more times, referencesin this paragraph and elsewhere in this Agreement to “the Shareholders Meeting”shall be deemed to apply, mutatismutandis, to each adjournedmeeting.

###  

Section 5.4                                      Access toInformation; Confidentiality.  Uponrequest by Parent and permission granted by the Company, which shall not beunreasonably withheld or delayed, the Company shall, and shall cause itssubsidiaries to, afford Parent and its lenders and other investors, and theofficers, employees, managers, accountants, counsel, financial advisors andother representatives of Parent and its lenders and other investors, reasonableaccess, during normal business hours during the period prior to the EffectiveTime, and in a manner reasonably designed to minimize disruption to theoperations of the Company and its subsidiaries, to all their respectivepersonnel, properties, books, contracts, agreements, commitments, Tax returnsand records and, during such period, the Company shall, and shall cause each ofits subsidiaries to, furnish promptly to Parent (a) a copy of each report,schedule, registration statement and other document filed by it during suchperiod pursuant to the requirements of federal or state securities laws and(b) all other information concerning its business, properties andpersonnel as Parent may reasonably request. Except as required by law, Parent will hold, and will cause its

 

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lenders and other investors and their respective officers, employees,managers, accountants, counsel, financial advisers and other representativesand affiliates to hold, as confidential any such information disclosed by theCompany or its subsidiaries pursuant to this Section 5.4 as isnon-public.  Such access shall beterminated upon termination of this Agreement in accordance with the provisionsof Article 7 hereof.

 

Section 5.5                                      ReasonableEfforts; Notification.  

 

### (a)                                  Each of the Companyand Parent agrees (and shall cause their respective subsidiaries) to usereasonable efforts to take, or cause to be taken, all actions, and to do, orcause to be done, and to assist and cooperate with the other parties in doing,all things necessary, proper or advisable to consummate the transactionscontemplated by this Agreement, including, without limitation: (i) the securingof all Governmental Approvals (as defined in Section 5.12 hereof) inaccordance with the provisions of Section 5.12 hereof, (ii) the obtainingof all necessary actions or nonactions, licenses, consents, approvals orwaivers from third parties other than Governmental Entities, (iii) theexecution and delivery of any additional instruments necessary to consummatethe transactions contemplated by, and to fully effectuate the purposes of, thisAgreement and (iv) the defending of any lawsuits or other legal proceedings,judicial or administrative, challenging this Agreement or the consummation ofthe transactions contemplated hereby, including the exerting of all reasonableefforts necessary to lift, rescind or mitigate the effect of any injunction orrestraining order or other order adversely affecting the ability of any partyhereto to consummate the transactions contemplated hereby.  Parent hereby agrees to use its commerciallyreasonable best efforts to complete the financing contemplated by, and onsubstantially the terms set forth in, the Financing Commitment.  In the event that such financing is orbecomes unavailable, Parent shall exert reasonable efforts to obtainalternative financing on substantially the same terms set forth in theFinancing Commitment or on other commercially reasonable terms.

###  

### (b)                                 The Company shall giveprompt written notice to Parent, and Parent shall give prompt written notice tothe Company, of (i) any representation or warranty made by it contained in thisAgreement becoming untrue or inaccurate in any Material Respect (as defined inSection 8.3(c) hereof and employed consistently throughout thisAgreement), (ii) the failure by it to comply with or satisfy in any MaterialRespect any covenant, condition or agreement to be complied with or satisfiedby it under this Agreement, or (iii) the occurrence of an event or eventswhich, individually or in the aggregate, is reasonably likely to have a CompanyMaterial Adverse Effect, or Parent Material Adverse Effect, as applicable.  The Company shall give prompt written noticeto Parent (i) of the commencement of, or, to the extent the Company hasknowledge thereof, the threat of, any litigation involving or affecting theCompany or any subsidiary, or any of their respective properties or assets, or,to the Company’s knowledge, any employee, agent, director or officer of theCompany or any subsidiary, in his or her capacity as such, which, if pending onthe date hereof, would have been required to have been disclosed by the Companyin or pursuant to this Agreement and (ii) of any material development inconnection with any litigation disclosed by the Company in or pursuant to thisAgreement or in the Company SEC Reports. Each of Parent and the Company hereby represents that, as of the datehereof, it does not have any actual knowledge of a breach of

 

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###  

the representations and warranties being made by such other party in orpursuant to this Agreement.

 

Section 5.6                                      Stock Options.  Each Stock Option outstanding pursuant tothe Stock Option Plans or otherwise, whether or not then exercisable, shall becanceled as of the Effective Time and thereafter only entitle the holderthereof, upon surrender thereof, to receive the amount specified inSection 1.7 hereof, which cancellation shall be in accordance with the termsof the Stock Option and the applicable Stock Option Plan.  Prior to the Effective Time, the Companyshall mail to each person who is a holder of outstanding Stock Options grantedpursuant to the Stock Option Plans or otherwise a letter in a form reasonablyacceptable to Parent which describes the treatment of and payment for suchoptions pursuant to Section 1.7 hereof and this Section 5.6 andprovides instructions for use by the optionee in obtaining payment for suchoptions hereunder.

 

Section 5.7                                      TakeoverStatutes; Inconsistent Actions.  Ifany “fair price,” “moratorium,” “control share,” “business combination,”“shareholder protection” or similar or other anti-takeover statute orregulation (including, without limitation, Sections 302A.671, 302A.673 and302A.675 of the MBCA) shall become applicable to the Merger or any of the othertransactions contemplated hereby, as impediments to the consummation thereof,the Company and the Board of Directors of the Company shall grant suchapprovals and use their reasonable best efforts to take all such actions sothat the Merger and the other transactions contemplated hereby may beconsummated on the terms contemplated hereby and otherwise eliminate to theextent practicable the effects of such statute or regulation on the Merger andthe other transactions contemplated hereby.

 

Section 5.8                                      Indemnification;Exculpation.

 

### (a)                                  All rights toindemnification, expense advancement and exculpation existing in favor of anypresent or former director or officer of the Company or any of its subsidiaries(each, an “Indemnified Person”), as provided in the Articles of Incorporation,Bylaws or similar organizational documents of the Company or any of itssubsidiaries or by law as in effect on the date hereof, will survive the Mergerfor a period of four (4) years after the Effective Time (or, in the event anyrelevant claim is asserted or made within such four-year period, until finaldisposition of such claim) with respect to matters occurring at or prior to theEffective Time (including actions with respect to the consummation of thetransactions contemplated by this Agreement), and no action taken by theSurviving Corporation or any other person during such period will be deemed todiminish the obligations of the Surviving Corporation set forth in thisSection 5.8(a).  Parent herebyguarantees the payment and performance of the Surviving Corporation’sobligations set forth in this Section 5.8(a).  Each Indemnified Person is intended to be a third partybeneficiary of this Section 5.8(a) and may specifically enforce itsterms.  This Section 5.8(a) shallnot limit or otherwise adversely affect any rights any Indemnified Person mayhave under any separate agreement with the Company or under the Company’sArticles of Incorporation or Bylaws.

###  

### (b)                                 The obligations ofParent and the Surviving Corporation contained in this Section 5.8 shallbe binding on the respective successors and assigns of Parent and

 

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### the Surviving Corporation.  IfParent, the Surviving Corporation or any of their successors or assigns (i)consolidates with or merges into any other person and shall not be thecontinuing or surviving corporation or organization of such consolidation ormerger or (ii) transfers all or substantially all of its properties and assetsto any person, then, and in each such case, proper provision shall be made sothat the successors and assigns of Parent or the Surviving Corporation, as thecase may be, shall assume the obligations set forth in this Section 5.8.

###  

Section 5.9                                      Fees andExpenses.  Except as expresslyprovided in Section 7.5 and Section 8.12 hereof, whether or not theMerger is consummated, all costs and expenses incurred in connection with thisAgreement and the transactions contemplated hereby shall be paid by the partyincurring such expenses.  The Companyshall not pay any such costs and expenses as may be incurred by any individualshareholder of the Company in his, her or its capacity as such.

 

Section 5.10                                Public Announcements.  Parent and Merger Sub, on the one hand, andthe Company, on the other hand, will not issue any press release or otherpublic statements with respect to the transactions contemplated by thisAgreement, including the Merger, without first obtaining the prior consent ofthe other party; provided, however, that in the event of any press release thatmay be required by applicable law, court process, or by obligations pursuant toany listing agreement with the NASDAQ SmallCap Market, the parties will exertreasonable best efforts to consult with each other before issuing, and toprovide each other an advance opportunity to review and comment upon, any suchpress release or other public statement.

 

Section 5.11                                Officer and DirectorInsurance.  Prior to the EffectiveTime, the Company shall procure appropriate “tail insurance coverage” to coverthe Company’s current officers and directors for claims based on conductoccurring prior to the Effective Time, but made after such time, which coverageshall be substantially similar to the officer and director liability coveragecurrently maintained by the Company. The Surviving Corporation shall maintain such coverage for a period ofnot less than four (4) years following the Effective Date or, in the event suchcoverage is not available for such four-year period, such maximum lesser periodas is available, but not for less than three years.  The Surviving Corporation shall take no action that would lead tothe termination or modification of such coverage prior to the expiration ofsuch tail period.  Notwithstanding theforegoing, in the event that the aggregate amount of the annual premiums forthe coverage otherwise required pursuant to this Section 5.11 exceeds 175%of the amount of the annual premium paid as of the date hereof by the Companyfor such coverage or equivalent coverage, the Surviving Corporation shall useall reasonable efforts to maintain the most advantageous policies of tailinsurance coverage obtainable for annual premiums equal in aggregate to no morethan 175% of the amount of the annual premium paid as of the date hereof by theCompany for such coverage.

 

Section 5.12                                GovernmentalApprovals.  Each of Parent and theCompany shall exert reasonable efforts to promptly prepare and file allnecessary documentation to effect all applications, notices, petitions andfilings, in order to obtain as promptly as practicable all permits,registrations, licenses, findings of suitability, consents, variances,

 

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exemptions, orders, approvals and authorizations of all GovernmentalEntities which are necessary or advisable to consummate the transactionscontemplated by this Agreement (the “Governmental Approvals”), and shall fileinitial applications and documents related to all such Governmental Approvalswithin such time as is necessary for such Governmental Approvals to be grantedon or before the Closing Date, and shall act reasonably and promptly thereafterin responding to additional requests made by the applicable GovernmentalEntities in connection therewith.

 

Section 5.13                                Voting Agreement.  Parent hereby agrees that at theShareholders Meeting, and at any other meeting of the Company’s shareholders,however called, and in any action by consent of the shareholders of theCompany, occurring prior to the Effective Time, it shall, and shall cause itsaffiliates that own any Company Common Stock to, vote, (i) in favor of theMerger Voting Items, and (ii) against any proposal for any recapitalization,merger, sale of assets or other business combination between the Company andany person or entity, other than the Merger, or any action or agreement thatwould result in the breach of any covenant, representation or warranty or anyother obligation or agreement of the Company under this Agreement, or whichwould result in any of the conditions to the Company’s obligations under thisAgreement not being fulfilled, provided that, notwithstanding the foregoing,Parent and its affiliates that own any Company Common Stock shall be entitledto vote in favor of a Superior Proposal.

 

Section 5.14                                Indemnification byCompany.  The Company shallindemnify Parent and Merger Sub, and each of their current and former managers,members, officers, directors, employees, agents and representatives(individually, an “Indemnitee,” and, collectively, the “Indemnitees”), to thefullest extent permitted by applicable law, but only with respect to any actualout-of-pocket costs or expenses, including judgment awards and amounts paid insettlement, incurred by an Indemnitee directly in connection with the defenseof any claim asserted against an Indemnitee which is directly based on anallegation that an Indemnitee has induced or acted in concert with the Companyor any of its directors to act contrary to or in violation of any duty underapplicable law, to which the Company and any of its directors are subject, tothe extent, but only to the extent, such allegation directly relates to thenegotiation, execution, delivery or performance of this Agreement by theparties hereto (an “Indemnifiable Matter”). Promptly after receipt by an Indemnitee of notice of the assertion ofany claim or the commencement of any action against such Indemnitee in respectto which indemnity or reimbursement may be sought under this Section 5.14(an “Assertion”), such Indemnitee shall notify the Company in writing of theAssertion, but the failure to so notify shall not relieve the Company of anyliability it may have to such Indemnitee hereunder except to the extent thatsuch failure shall have actually prejudiced the Company in defending againstsuch Assertion.  In the event thatfollowing receipt of notice from the Indemnitee, the Company notifies theIndemnitee that the Company desires to defend the Indemnitee against suchAssertion, the Company shall have the right to defend the Indemnitee byappropriate proceedings and shall have the sole power to direct and controlsuch defense.  If any Indemnitee desiresto participate in any such defense it may do so at its sole cost and expense;provided that if the defendants in any such action shall include the Companyand/or its officers or directors as well as an Indemnitee and such Indemniteeshall have received the written advice of counsel that there exist defensesavailable to

 

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such Indemnitee that are materially different from those available tothe Company and/or such officers or directors, the Indemnitee shall have theright to select one separate counsel (and one local counsel in suchjurisdictions as are necessary) reasonably acceptable to the Company toparticipate in the defense of such action on its behalf, at the expense of theCompany.  If any Indemnitee retains suchcounsel, then, to the extent permitted by law, the Company shall periodicallyadvance to such Indemnitee its reasonable legal and other out-of-pocketexpenses relating to the Indemnifiable Matter (including the reasonable cost ofany investigation and preparation incurred in connection therewith).  No Indemnitee shall settle any Assertionwithout the prior written consent of the Company (which consent shall not beunreasonably withheld or delayed), nor shall the Company settle any Assertionin which an Indemnitee is named as a defendant without either (i) the writtenconsent of all Indemnitees against whom such Assertion was made (which consentsshall not be unreasonably withheld or delayed), or (ii) obtaining anunconditional general release from the party making the Assertion for allIndemnitees as a condition of such settlement. The provisions of this Section 5.14 are intended for the benefitof, and shall be enforceable by, the respective Indemnitees.

 

Section 5.15                                Retention of ProxySolicitation Firm.  The Companyhereby agrees to retain, promptly after the filing of the preliminary ProxyStatement with the SEC, Integrated Corporate Relations, Inc., or a nationalproxy solicitation/shareholder relations firm of comparable stature, to assistthe Company in the solicitation of proxies to be voted at the ShareholdersMeeting.

 

# **ARTICLE 6CONDITIONS PRECEDENT**

 

Section 6.1                                      Conditions toEach Party’s Obligations to Effect the Merger.  The respective obligation of each party hereto to effect theMerger is subject to the satisfaction or waiver on or prior to the Closing Dateof the following conditions:

 

### (a)                                  ShareholderApproval.  The Two-TieredShareholder Approval shall have been obtained with respect to each of theMerger Voting Items.

###  

### (b)                                 No Injunctions orRestraints.  No litigation broughtby a Governmental Entity shall be pending, and no litigation shall bethreatened by any Governmental Entity, which seeks to enjoin or prohibit theconsummation of the Merger, and no temporary restraining order, preliminary orpermanent injunction or other order issued by any court of competentjurisdiction or other legal restraint or prohibition preventing theconsummation of the Merger shall be in effect.

###  

### (c)                                  Consents andApprovals.  All licenses, permits,consents, approvals, waivers, findings of suitability, authorizations,qualifications and orders of, and all declarations, registrations and filingswith, all Governmental Entities and other third parties as are required inconnection with the Merger and the consummation of the transactionscontemplated hereby, including, without limitation, the Governmental Approvals,shall have been obtained or made, as applicable, by the Company or Parent andshall be in full force and effect.

 

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Section 6.2                                      AdditionalConditions to Obligations of Parent and Merger Sub.  The obligations of Parent and Merger Sub toeffect the Merger and to consummate the other transactions contemplated herebyare also subject to the following conditions, any of which may be waived in thesole and absolute discretion of Parent:

 

### (a)                                  Representationsand Warranties.  The representationsand warranties of the Company set forth in this Agreement shall be true andcorrect in all Material Respects as of the date of this Agreement, and shall betrue and correct in all Material Respects as of the Closing Date as though madeon and as of the Closing Date (provided that those representations andwarranties which address matters only as of a particular date shall remain trueand correct in all Material Respects as of such date), and Parent shall havereceived a certificate of an executive officer of the Company to that effect.

###  

### (b)                                 Agreements andCovenants.  The Company shall haveperformed or complied in all Material Respects with all agreements andcovenants required by this Agreement to be performed or complied with by it onor prior to the Closing Date, and Parent shall have received a certificate ofan executive officer of the Company to that effect.

###  

### (c)                                  Certificates andOther Deliveries.  The Company shallhave delivered, or caused to be delivered, to Parent (i) a certificate of goodstanding from the Secretary of State of the State of Minnesota and ofcomparable authority in other jurisdictions in which the Company and itssubsidiaries are incorporated or qualified to do business stating that each isa validly existing corporation in good standing therein; (ii) duly adoptedresolutions of the Board of Directors of the Company and the Special Committeeunanimously approving the execution, delivery and performance by the Company ofthis Agreement and the instruments contemplated hereby, certified by theSecretary of the Company; (iii) a report of the inspector(s) of election of theShareholder Meeting certifying that each of the Merger Voting Items has been approvedby the Two-Tiered Shareholder Approval and (iv) a true and complete copy of theArticles of Incorporation or comparable governing instruments, as amended, ofthe Company and its subsidiaries certified by the Secretary of State of thestate of incorporation or comparable authority in other jurisdictions, and atrue and complete copy of the Bylaws or comparable governing instruments, asamended, of the Company and its subsidiaries certified by the Secretary of theCompany and its subsidiaries, as applicable.

###  

### (d)                                 No Company MaterialAdverse Effect.  From the date ofthis Agreement through and including the Effective Time, no event or eventsshall have occurred which, individually or in the aggregate, have a CompanyMaterial Adverse Effect.

###  

### (e)                                  Dissenting Shares.  Written notices of intent to demand the fairvalue of their shares of Company Common Stock, pursuant toSection 302A.473 of the MBCA, shall not have been filed with the Companyfor more than five percent (5%) of the shares of Company Common Stockoutstanding on the date of the Shareholder Meeting.

 

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Section 6.3                                      AdditionalConditions to Obligations of the Company. The obligations of the Company to effect the Merger and to consummatethe other transactions contemplated hereby are also subject to the followingconditions, any of which may be waived in the sole and absolute discretion ofthe Company:

 

### (a)                                  Representationsand Warranties.  The representationsand warranties of Parent and Merger Sub set forth in this Agreement shall betrue and correct in all Material Respects as of the date of this Agreement, andshall be true and correct in all Material Respects as of the Closing Date asthough made on and as of the Closing Date (provided that those representationsand warranties which address matters only as of a particular date shall remaintrue and correct in all Material Respects as of such date), and the Companyshall have received a certificate of the Manager of Parent to that effect.

###  

### (b)                                 Agreements andCovenants.  Parent and Merger Subshall have performed or complied in all Material Respects with all agreementsand covenants required by this Agreement to be performed or complied with bythem on or prior to the Closing Date, and the Company shall have received acertificate of the Manager of Parent to that effect.

###  

### (c)                                  Opinion ofFinancial Advisor.  The SpecialCommittee shall have received an opinion of TSC to the effect that, as of thedate of execution of this Agreement, the Merger Consideration to be received bythe Company’s shareholders (other than the holders of the Excluded Shares) isfair to such shareholders from a financial point of view.

###  

# **ARTICLE 7TERMINATION, AMENDMENT AND WAIVER**

# ** **

Section 7.1                                      Termination.  This Agreement may be terminated at any timeprior to the Effective Time, whether before or after the Shareholders Meeting:

 

### (a)                                  by mutual writtenconsent of the Company and Parent, if the Board of Directors of the Company andthe Manager of Parent so determine for any reason;

###  

### (b)                                 by Parent (providedthat neither Parent nor Merger Sub is then in Material Breach (as defined infrain this Section 7.1 and employed consistently throughout this Agreement)of any representation, warranty, covenant or agreement contained herein), upona Material Breach of any representation, warranty, covenant or agreement on thepart of the Company set forth in this Agreement, continuing (except in the caseof the covenants of the Company in Section 5.2(a) hereof, for which nocure period shall be permitted) for thirty (30) days following notice to theCompany by Parent of such Material Breach and of a nature such that theconditions set forth in Section 6.2(a) or 6.2(b), as the case may be,would be incapable of being satisfied by the then scheduled Outside Date (asdefined infra in this Section 7.1 and employed consistentlythroughout this Agreement);

###  

### (c)                                  by the Company(provided that the Company is not then in Material Breach of anyrepresentation, warranty, covenant or agreement contained

 

32

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### herein), upon a Material Breach of any representation, warranty,covenant or agreement on the part of either Parent or Merger Sub set forth inthis Agreement, continuing (except for the representations and warranties ofParent and Merger Sub contained in Section 4.5 hereof, for which no cureperiod shall be permitted) for thirty (30) days following notice to Parent byCompany of such Material Breach and of a nature such that the conditions setforth in Section 6.3(a) or Section 6.3(b), as the case may be, wouldbe incapable of being satisfied by the then scheduled Outside Date;

###  

### (d)                                 by either Parent orthe Company, if any Governmental Entity shall have issued an order, decree orruling or taken any other action permanently enjoining, restraining orotherwise prohibiting the consummation of the Merger and such order, decree orruling or other action shall have become final and nonappealable;

###  

### (e)                                  by either Parent orthe Company, if the Merger shall not have occurred by October 31, 2004(including as may be extended pursuant to the provisions of thissubsection (e), the “Outside Date”), unless the failure to consummate theMerger is the result of a breach of any covenant or agreement set forth in thisAgreement or a Material Breach of any representation or warranty set forth inthis Agreement by the party seeking to terminate this Agreement, provided thateither Parent or the Company may extend the Outside Date, but no more thanthree times in the aggregate, and each time by no more than one month, but inno event beyond January 31, 2005, by providing written notice of suchextension to the other party between three (3) and five (5) business days priorto the next scheduled Outside Date, if (i) the Merger shall not have been consummatedby such date because the requisite Governmental Approvals required underSection 6.1(c) of this Agreement have not been obtained and are stillbeing pursued, and (ii) the party requesting such extension has satisfied allthe conditions to Closing required to be satisfied by it and has not violatedany of its obligations under this Agreement in a manner that was the cause ofor resulted in the failure of the Merger to occur on or before the OutsideDate; upon any such extension, the right of Parent or the Company to terminatethis Agreement pursuant to this paragraph (e) shall be suspended until the nextscheduled Outside Date;

###  

### (f)                                    by Parent, if theBoard of Directors of the Company (i) withdraws or modifies adversely itsrecommendation of the Merger following the receipt by the Company of a TakeoverProposal, or (ii) recommends a Takeover Proposal to the Company’s shareholders,provided that any disclosure that the Board of Directors of the Company iscompelled to make with respect to the receipt of a Takeover Proposal in orderto comply with its fiduciary duties or the requirements of Rules 14d-9 or 14e-2promulgated under the Exchange Act shall not constitute the withdrawal or anadverse modification of such Board’s recommendation, so long as the Company hasotherwise complied in all Material Respects with Section 5.2 hereof;

###  

### (g)                                 by the Company, if, asthe result of a Superior Proposal, the Board of Directors of the Companydetermines, in its good faith judgment and in the exercise of its fiduciaryduties to the Company’s shareholders under applicable law, that the failure toterminate this Agreement and accept such Superior Proposal would beinconsistent

 

33

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### with such fiduciary duties, and the Company has otherwise complied inall material respects with Section 5.2 hereof; or

###  

### (h)                                 by Parent, if prior tothe Shareholders Meeting, any other person (including a syndicate or group asdescribed in Section 13(d)(3) of the Exchange Act) acquires more than 20%of the issued and outstanding shares of Company Common Stock at an averagevalue per share in excess of $2.61.

###  

For purposes of Sections 7.1(b), (c) and (e) hereof, “Material Breach”shall mean, with respect to any representation, warranty, covenant or agreementcontained herein, a breach or violation thereof in any Material Respect.

 

Section 7.2                                      Effect ofTermination.  In the event oftermination of this Agreement by either the Company or Parent as provided inSection 7.1, this Agreement shall forthwith become void and have noeffect, without any liability or obligation on the part of Parent, Merger Subor the Company or their respective officers, directors or managers, except asset forth in the penultimate sentence of Section 5.4, Section 5.9,Section 5.14, Section 7.5 and Article 8, all of which shallsurvive such termination, and except to the extent that such terminationresults from the willful breach by a party of any of its representations,warranties, covenants or agreements set forth in this Agreement.

 

Section 7.3                                      Amendment.  This Agreement may be amended by the partiesat any time before or after approval hereof by the shareholders of the Company;provided, however, that after such shareholder approval there shall not be madeany amendment that by law requires further approval by the shareholders of theCompany without the further approval of such shareholders.  This Agreement may not be amended except byan instrument in writing signed on behalf of each of the parties.

 

Section 7.4                                      Extension;Waiver.  At any time prior to theEffective Time, a party may, subject to the provisions of Section 7.3hereof, (a) extend the time for or waive the performance of any of theobligations or other acts of the other parties, (b) waive any inaccuracies in therepresentations and warranties of the other parties contained in this Agreementor in any document delivered pursuant to this Agreement or (c) waive compliancewith any of the agreements or conditions contained in this Agreement.  Any agreement on the part of a party to anysuch extension or waiver shall be valid only if set forth in an instrument inwriting, signed on behalf of such party. The failure of any party to this Agreement to assert any of its rightsunder this Agreement or otherwise shall not constitute a waiver of thoserights.

 

Section 7.5                                      TerminationFee; Expense Reimbursement.

 

### (a)                                  The Company agreesthat in order to compensate Parent and Merger Sub for the direct andsubstantial damages suffered by them in the event of termination of thisAgreement under certain circumstances, which damages cannot be determined withreasonable certainty, the Company shall pay to Parent a termination fee on thefollowing terms and conditions (the “Termination Fee”):  (i) if this Agreement is terminated by theCompany pursuant to Section 7.1(g), or by Parent pursuant toSection 7.1(f)

 

34

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### or Section 7.1(h), the Company shall pay to Parent, concurrentlywith such termination, a Termination Fee in an amount equal to the sum of (x)$500,000 and (y) the amount of Parent’s and Merger Sub’s reasonableprofessional and advisory fees and other out-of-pocket expenses incurred inconnection with the transactions contemplated by this Agreement and thefinancing thereof, and not previously paid by the Company as contemplated bySection 8.12 hereof; and (ii) if this Agreement is terminated by eitherthe Company or Parent pursuant to any other clause of Section 7.1, theCompany shall pay to Parent, concurrently with such termination, a TerminationFee equal to the amount, up to an aggregate maximum of $500,000, of Parent’sand Merger Sub’s reasonable professional and advisory fees and otherout-of-pocket expenses incurred in connection with the transactionscontemplated by this Agreement and the financing thereof, and not previouslypaid by the Company as contemplated by Section 8.12 hereof.

###  

### (b)                                 All payments underthis Section 7.5 shall be made by wire transfer of immediately availablefunds to an account designated by Parent to the Company.

###  

### (c)                                  The Companyacknowledges that the agreements contained in this Section 7.5 are anintegral part of the transactions contemplated by this Agreement, and thatwithout these agreements Parent and Merger Sub would not enter into this Agreement.  Accordingly, if the Company fails topromptly pay to Parent any amounts owing pursuant to this Section 7.5 whendue, the Company shall in addition thereto pay to Parent all costs and expenses(including fees and disbursements of counsel) incurred in collecting suchamounts, together with interest on such amounts (or any unpaid portion thereof)from the date such payment was required to be made until the date such paymentis received by Parent at the prime rate as in effect from time to time during suchperiod as published in the Wall Street Journal.  Payment of the Termination Fee described in this Section 7.5shall constitute the sole and exclusive remedy of Parent and Merger Sub againstthe Company for any damages suffered or incurred by either of them inconnection with a termination of this Agreement, except for a termination dueto the Company’s willful breach of its obligations under this Agreement.  It is specifically agreed by all the partieshereto that the amount to be paid to Parent pursuant to this Section 7.5represents reasonable liquidated damages and is not a penalty.

###  

# **ARTICLE 8GENERAL PROVISIONS**

# ** **

Section 8.1                                      Nonsurvival ofRepresentations and Warranties. Except as provided in Section 7.2 hereof in connection with thetermination of this Agreement, none of the representations, warranties,covenants and agreements contained in this Agreement or in any instrumentdelivered pursuant to this Agreement shall survive the termination of thisAgreement or the Effective Time, as applicable.  Notwithstanding the foregoing, this Section 8.1 shall notlimit any covenant or agreement of the parties which by its terms contemplatesperformance after the Effective Time.

 

Section 8.2                                      Notices.  All notices, requests, claims, demands andother communications under this Agreement shall be in writing and shall bedeemed given if delivered personally, sent by overnight courier (with proof ofdelivery) or transmitted by

 

35

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facsimile (with machine confirmation) to the parties addressed asfollows (or at such other address for a party as shall be specified by likenotice), effective, respectively, on (i) the date of personal delivery, (ii)the date so delivered by overnight courier, or (iii) the date so transmitted byfacsimile:

 

### (a)                                  if to Parent orMerger Sub, to:

###  

PDS Holding Co.6171 McLeod DriveLas Vegas, Nevada  89120-4048Attention:  Johan P. FinleyFacsimile:  (702) 740-8696

 

with a copy to:

 

Bryan Cave LLP120 Broadway, Suite 300Santa Monica, CA 90401-2386Facsimile:  (310) 576-2200Attention:  Brian A. Sullivan, Esq.

 

### (b)                                 if to the Company, to:

###  

PDS Gaming Corporation6171 McLeod DriveLas Vegas, Nevada 89120-4048Attention:  Chairman, Special Committeeof the Board of DirectorsFacsimile:  (702) 740-8696

 

with a copy to:

 

Dorsey & Whitney LLP50 South Sixth Street, Suite 1500Minneapolis, Minnesota 55402-1498Attention:  Jack Kramer, Esq.Facsimile:  (612) 340-2868

 

Section 8.3                                      Definitions.  For purposes of this Agreement:

 

### (a)                                  an “affiliate” of anyperson means another person that, directly or indirectly, through one or moreintermediaries, controls, is controlled by, or is under common control with,such first person;

###  

### (b)                                 “knowledge” meansactual awareness of a fact, event, circumstance or occurrence, or suchawareness thereof as would be reasonable to impute to an executive officer of acomparable company with comparable responsibilities by virtue of suchresponsibilities, by any of the executive officers of the Company or Parent, asthe case may be;

 

36

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### (c)                                  “Material Respect”shall mean (i) when used in connection with a representation, warranty,covenant, agreement or condition to be complied with or satisfied by theCompany or Parent or Merger Sub, as the case may be, that is qualified bymateriality or by Company Material Adverse Effect or Parent Material AdverseEffect, as the case may be, any respect (taking into account suchqualifications as to materiality or Company Material Adverse Effect or ParentMaterial Adverse Effect, as the case may be); and (ii) when used inconnection with a representation, warranty, covenant, agreement or condition tobe complied with or satisfied by the Company or Parent or Merger Sub, as thecase may be, which is not so qualified by materiality or by Company MaterialAdverse Effect or Parent Material Adverse Effect, as the case may be, anymaterial respect;

###  

### (d)                                 “person” means anindividual, corporation, partnership, limited liability company, joint venture,association, trust, unincorporated organization or other entity; and

###  

### (e)                                  a person is a“subsidiary,” with respect to any other person, if the second person owns,directly or indirectly, an amount of the voting securities or other votinginterests of the first person which is sufficient to elect at least a majorityof the first person’s board of directors or other governing body or, if thereare no such voting interests, more than 50% of the equity interests of thefirst person.

###  

Section 8.4                                      Interpretation.  When a reference is made in this Agreementto a Section or Schedule, such reference shall be to a Section of, ora Schedule to, this Agreement unless otherwise indicated.  The headings contained in this Agreement arefor reference purposes only and shall not affect in any way the meaning orinterpretation of this Agreement. Whenever the words “include,” “includes” and “including” are used inthis Agreement, they shall be deemed to be followed by the words “withoutlimitation.”  The use in this Agreementof the masculine, feminine or neuter gender, or the singular or plural number,shall not limit the scope of any provision of this Agreement.  In the event that any party hereto effects,after the date hereof, a change in its form of legal organization, including,without limitation, the Parent Conversion (as defined in Section 8.8hereof), each reference herein to said party shall be deemed to refer asapplicable to said party in each of its successive forms of legal organization,and each reference herein to the governing body (or members thereof), anownership class or a specific officership of said party shall, if literallyinapposite at any point in time as the result of a change in said party’s formof legal organization after the date hereof (as so changed, the “Successor”),be deemed to refer, as applicable, to the governing body (or members thereof),ownership class or specific officership of the Successor most nearlycorresponding to the referenced governing body, ownership class or specificofficership of said party.

 

Section 8.5                                      Counterparts;Facsimile Delivery.  This Agreementmay be executed in one or more counterparts, all of which shall be consideredone and the same Agreement, and shall become effective when one or morecounterparts have been signed by each of the parties and delivered personallyor by facsimile to the other parties.

 

37

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Section 8.6                                      EntireAgreement; No Third-Party Beneficiaries. This Agreement, including the Company Disclosure Schedule and theParent Disclosure Schedule, constitutes the entire agreement, and supersedesall prior agreements and understandings, both written and oral, among theparties with respect to the subject matter of this Agreement and, except forthe provisions of Article 1 and Sections 5.6, 5.8, 5.11 and 5.14, are notintended to confer upon any person other than the parties hereto any rights orremedies hereunder.

 

Section 8.7                                      Governing Law.  This Agreement shall be governed by, andconstrued and enforced in accordance with, the laws of the State of Nevada,regardless of the laws that might otherwise govern under applicable principlesof conflict of laws thereof.

 

Section 8.8                                      Assignment;Corporate Conversion of Parent. Neither this Agreement nor any of the rights, interests or obligationsunder this Agreement shall be assigned, in whole or in part, by operation oflaw or otherwise, by any of the parties without the prior written consent ofthe other parties; provided that, without any such consent, (i) Parent or MergerSub may assign its rights under this Agreement to a wholly-owned direct orindirect subsidiary of Parent or Merger Sub, so long as the assignor remainsliable for all obligations of the assignor and such wholly-owned direct orindirect subsidiary of assignor under this Agreement, and (ii) Parent mayeffect a conversion from a Nevada limited liability company to a Nevadacorporation pursuant to Section 92A.105 of the NRS.  The Company acknowledges that it has beenadvised by Parent that Parent intends to effect such a conversion from a Nevadalimited liability company to a Nevada corporation prior to the Closing Date(the “Parent Conversion”).  Subject tothe forepart of this Section 8.8, this Agreement will be binding upon,inure to the benefit of, and be enforceable by, the parties and theirrespective successors and assigns.

 

Section 8.9                                      Enforcement.  The parties agree that irreparable damagewould occur in the event that any of the provisions of this Agreement were notperformed in accordance with their specific terms or were otherwisebreached.  It is accordingly agreed thatthe parties shall be entitled to an injunction or injunctions to preventbreaches of this Agreement and to enforce specifically the terms and provisionsof this Agreement in any court of the United States located in the District ofNevada or in any Nevada state court located in the County of Clark, this beingin addition to any other remedy to which they may be entitled at law or inequity.  In addition, each of theparties hereto (a) consents to submit itself to the personal jurisdiction ofany federal court located in the District of Nevada or any Nevada state courtin the event any dispute between or among the parties arises out of thisAgreement or any of the transactions contemplated by this Agreement,(b) agrees that it will not attempt to deny or defeat such personaljurisdiction by motion or other request for leave from any such court, and (c)agrees that it will not bring any action relating to this Agreement or any ofthe transactions contemplated by this Agreement in any court other than afederal or state court sitting in the State of Nevada.

 

Section 8.10                                Personal Liability.  This Agreement shall not create or be deemedto create or permit any personal liability or obligation on the part of anydirect or indirect shareholder of the Company or member of Parent or MergerSub, or any officer, director,

 

38

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employee, partner, manager, agent, representative, trustee or investorof any party hereto or any affiliate thereof.

 

Section 8.11                                Severability.  If any term or provision of this Agreementor the application thereof to any party or set of circumstances shall in anyjurisdiction and to any extent, be finally held invalid or unenforceable, suchterm or provision shall only be ineffective as to such jurisdiction, and onlyto the extent of such invalidity or unenforceability, without invalidating orrendering unenforceable any other terms or provisions of this Agreement orunder any other circumstances, and the parties shall then negotiate in goodfaith a substitute term or provision which comes as close as possible to theinvalidated or unenforceable term or provision, and which puts each party in aposition as nearly comparable as possible to the position it would have been inbut for the finding of invalidity or unenforceability, while remaining validand enforceable.

 

Section 8.12                                Periodic Payment ofExpenses.  At the request of Parentmade from time to time, the Company shall pay to or on behalf of Parent andMerger Sub the amount of the reasonable professional and advisory fees andother out-of-pocket expenses incurred by Parent and Merger Sub in connectionwith the transactions contemplated by this Agreement and the financing thereof,subject to the limitations set forth in Section 7.5(a)(ii) hereof, as andwhen such expenses are incurred, promptly after submission to the SpecialCommittee of documentation suitably evidencing the nature and amount of suchexpenses.

 

**[RESTOF PAGE INTENTIONALLY LEFT BLANK]**

 

39

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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused thisAgreement and Plan of Merger to be signed by their respective representativesthereunto duly authorized, all as of the date first written above.

 
|   | “COMPANY”                |
|--------|------------------------------------|
|   |                               |
|   | PDS GAMING CORPORATION,            |
|   | a Minnesota corporation            |
|   |                               |
|   |                               |
|   | By:                                |   | /s/ James L. Morrell |
|   |                               | James L. Morrell |
|   |                               | Chairman, Special Committee of the Board of Directors |
|   |                               |
|   | “PARENT”                 |
|   |                               |
|   | PDS HOLDING CO., LLC,              |
|   | a Nevada limited liability company |
|   |                               |
|   |                               |
|   | By:                                |   | /s/ Johan P. Finley |
|   |                               | Johan P. Finley |
|   |                               | Manager |
|   |                               |
|   | “MERGER SUB”             |
|   |                               |
|   | PDS ACQUISITION SUB, LLC           |
|   | a Nevada limited liability company |
|   |                               |
|   |                               |
|   | By:                                |   | /s/ Johan P. Finley |
|   |                               | Johan P. Finley |
|   |                               | Manager |

 

40

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**AGREEMENT AND PLAN OF MERGER**

 

**COMPANY DISCLOSURE SCHEDULE**

 

**SECTION 3.2**

 

*See* subjoined listof outstanding Stock Options issued pursuant to the Stock Option Plans, whichis current as of the date of the Agreement and Plan of Merger.

 

*See***Section 4.8of the**ParentDisclosure Schedule for additional information concerning stockoptions of certain beneficial owners.

 

**PDS GAMING CORPORATION**

**STOCK OPTION PLAN SUMMARY**

**Period Ended 4/13/04**

 
| **Grant  Date** |   | **Expiration  Date** |   | **Holder of  Stock Option** |   | **Type** |   | **Price Per  Share** |   | **Unexercised  Options** |       |
|-----------------|--------|----------------------|--------|-----------------------------|--------|----------|--------|----------------------|--------|--------------------------|------------|
|            |   |                 |   |                        |   |     |   |                 |   |                     |       |
| 4/26/94         |   | 04/26/04             |   | JOEL KOONCE                 |   | NQ       |   | $                    | 5.00   |                     | **10,000** |   |
| 9/7/95          |   | 09/07/05             |   | PETER CLEARY                |   | NQ       |   | $                    | 2.50   |                     | **50,000** |   |
| 11/1/95         |   | 11/01/05             |   | PETER CLEARY                |   | NQ       |   | $                    | 1.63   |                     | **4,000**  |   |
| 11/1/95         |   | 11/01/05             |   | LONA FINLEY                 |   | NQ       |   | $                    | 1.79   |                     | **7,500**  |   |
| 3/5/1996        |   | 03/05/06             |   | JAMES MORRELL               |   | NQ       |   | $                    | 2.50   |                     | **10,000** |   |
| 8/4/1997        |   | 08/04/07             |   | JAMES LLOYD                 |   | ISO      |   | $                    | 4.38   |                     | **1,000**  |   |
| 11/3/1997       |   | 11/03/07             |   | TIMOTHY JONES               |   | ISO      |   | $                    | 7.63   |                     | **1,000**  |   |
| 12/8/1997       |   | 12/08/07             |   | ROMEO LAUGUICO              |   | ISO      |   | $                    | 7.75   |                     | **1,000**  |   |
| 1/19/1998       |   | 01/19/08             |   | BETTY ANDERSON              |   | ISO      |   | $                    | 6.25   |                     | **1,000**  |   |
| 2/2/1998        |   | 02/02/08             |   | WILLIE APOSTOL              |   | ISO      |   | $                    | 5.88   |                     | **1,000**  |   |
| 2/9/1998        |   | 02/09/08             |   | JESUS BONALES               |   | ISO      |   | $                    | 6.88   |                     | **1,000**  |   |
| 2/16/1998       |   | 02/16/08             |   | TIMOTHY JONES               |   | ISO      |   | $                    | 6.75   |                     | **500**    |   |
| 3/23/1998       |   | 03/23/08             |   | DANIEL GALLARDO             |   | ISO      |   | $                    | 7.75   |                     | **1,000**  |   |
| 5/14/1998       |   | 05/14/08             |   | PETER CLEARY                |   | ISO      |   | $                    | 9.13   |                     | **15,000** |   |
| 5/14/1998       |   | 05/14/08             |   | JOEL KOONCE                 |   | NQ       |   | $                    | 9.13   |                     | **5,000**  |   |
| 5/14/1998       |   | 05/14/08             |   | JIM MORRELL                 |   | NQ       |   | $                    | 9.13   |                     | **5,000**  |   |
| 9/8/1998        |   | 09/08/08             |   | JOYCE BELVEAL               |   | ISO      |   | $                    | 5.50   |                     | **1,000**  |   |
| 2/1/1999        |   | 02/01/09             |   | JOHAN FINLEY                |   | ISO      |   | $                    | 2.89   |                     | **25,000** |   |
| 2/1/1999        |   | 02/01/09             |   | PATRENA RAMEY               |   | ISO      |   | $                    | 2.63   |                     | **6,000**  |   |
| 5/14/1999       |   | 05/14/09             |   | JOEL KOONCE                 |   | NQ       |   | $                    | 2.94   |                     | **5,000**  |   |
| 5/14/1999       |   | 05/14/09             |   | JIM MORRELL                 |   | NQ       |   | $                    | 2.94   |                     | **5,000**  |   |
| 6/30/1999       |   | 06/30/09             |   | PETER CLEARY                |   | NQ       |   | $                    | 4.37   |                     | **25,000** |   |
| 6/30/1999       |   | 06/30/09             |   | PETER CLEARY                |   | ISO      |   | $                    | 4.37   |                     | **50,000** |   |
| 8/4/1999        |   | 08/04/09             |   | MELISSA SWEITZER            |   | ISO      |   | $                    | 4.63   |                     | **2,000**  |   |
| 11/22/1999      |   | 11/22/09             |   | TONDA MCKEAN                |   | ISO      |   | $                    | 1.63   |                     | **1,000**  |   |
| 2/1/2000        |   | 02/01/10             |   | JOHAN FINLEY                |   | ISO      |   | $                    | 1.75   |                     | **25,000** |   |
| 4/10/2000       |   | 04/10/10             |   | GINA GARNER                 |   | ISO      |   | $                    | 1.41   |                     | **6,000**  |   |
| 5/12/2000       |   | 05/12/10             |   | JAMES MORRELL               |   | NQ       |   | $                    | 1.34   |                     | **5,000**  |   |
| 5/12/2000       |   | 05/12/10             |   | JOEL KOONCE                 |   | NQ       |   | $                    | 1.34   |                     | **5,000**  |   |
| 6/29/2000       |   | 06/29/10             |   | PATRICK CRUZEN              |   | NQ       |   | $                    | 1.22   |                     | **10,000** |   |
| 9/5/2000        |   | 09/05/10             |   | EVELYN MURPHY               |   | ISO      |   | $                    | 1.69   |                     | **2,000**  |   |
| 11/20/2000      |   | 11/20/10             |   | STAN BANKS                  |   | ISO      |   | $                    | 2.00   |                     | **10,000** |   |
| 2/1/2001        |   | 02/01/11             |   | JOHAN FINLEY                |   | ISO      |   | $                    | 2.13   |                     | **25,000** |   |
| 2/14/2001       |   | 02/14/11             |   | DENNIS SIZEMORE             |   | ISO      |   | $                    | 2.06   |                     | **10,000** |   |
| 2/19/2001       |   | 02/19/11             |   | LESLIE BROWNING             |   | ISO      |   | $                    | 1.88   |                     | **2,000**  |   |
| 5/11/2001       |   | 05/11/11             |   | JOEL KOONCE                 |   | NQ       |   | $                    | 3.85   |                     | **5,000**  |   |

 

1

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| **Grant  Date** |   | **Expiration  Date** |   | **Holder of  Stock Option** |   | **Type** |   | **Price Per  Share** |   | **Unexercised  Options** |       |
|-----------------|--------|----------------------|--------|-----------------------------|--------|----------|--------|----------------------|--------|--------------------------|------------|
|            |   |                 |   |                        |   |     |   |                 |   |                     |       |
| 5/11/2001       |   | 05/11/11             |   | JAMES MORRELL               |   | NQ       |   | $                    | 3.85   |                     | **5,000**  |   |
| 5/11/2001       |   | 05/11/11             |   | PATRICK CRUZEN              |   | NQ       |   | $                    | 3.85   |                     | **5,000**  |   |
| 5/30/2001       |   | 05/30/11             |   | CLAUDIA K. CORMIER          |   | ISO      |   | $                    | 3.35   |                     | **15,000** |   |
| 7/16/2001       |   | 07/16/11             |   | SIMON BURGESS               |   | ISO      |   | $                    | 3.65   |                     | **7,800**  |   |
| 8/1/2001        |   | 08/01/11             |   | RICK LAMAN                  |   | ISO      |   | $                    | 3.15   |                     | **40,000** |   |
| 9/10/2001       |   | 09/10/11             |   | MIGUEL G. GARCIA            |   | ISO      |   | $                    | 4.11   |                     | **1,000**  |   |
| 12/17/2001      |   | 12/17/11             |   | TINA HELJULA                |   | ISO      |   | $                    | 2.75   |                     | **2,000**  |   |
| 2/1/2002        |   | 02/01/12             |   | JOHAN FINLEY                |   | ISO      |   | $                    | 4.60   |                     | **25,000** |   |
| 2/28/2002       |   | 02/28/12             |   | LONA FINLEY                 |   | ISO      |   | $                    | 4.16   |                     | **7,500**  |   |
| 2/28/2002       |   | 02/28/12             |   | PETER CLEARY                |   | ISO      |   | $                    | 3.78   |                     | **10,000** |   |
| 5/10/2002       |   | 05/10/12             |   | JAMES MORRELL               |   | NQ       |   | $                    | 1.75   |                     | **5,000**  |   |
| 5/10/2002       |   | 05/10/12             |   | JOEL KOONCE                 |   | NQ       |   | $                    | 1.75   |                     | **5,000**  |   |
| 5/10/2002       |   | 05/10/12             |   | PATRICK CRUZEN              |   | NQ       |   | $                    | 1.75   |                     | **5,000**  |   |
| 5/29/2002       |   | 05/29/12             |   | MELISSA SWEITZER            |   | ISO      |   | $                    | 1.82   |                     | **4,000**  |   |
| 6/6/2002        |   | 06/06/12             |   | TIM JONES                   |   | ISO      |   | $                    | 1.20   |                     | **1,200**  |   |
| 6/6/2002        |   | 06/06/12             |   | JIM LLOYD                   |   | ISO      |   | $                    | 1.20   |                     | **1,000**  |   |
| 6/6/2002        |   | 06/06/12             |   | ROMEO LAUGUICO              |   | ISO      |   | $                    | 1.20   |                     | **1,000**  |   |
| 6/6/2002        |   | 06/06/12             |   | MIGUEL G. GARCIA            |   | ISO      |   | $                    | 1.20   |                     | **1,000**  |   |
| 12/16/2002      |   | 12/16/12             |   | JEFF WILLIAMSON             |   | ISO      |   | $                    | 1.51   |                     | **2,500**  |   |
| 12/29/2003      |   | 12/29/13             |   | JAMES MORRELL               |   | NQ       |   | $                    | 1.93   |                     | **5,000**  |   |
| 12/29/2003      |   | 12/29/13             |   | JOEL KOONCE                 |   | NQ       |   | $                    | 1.93   |                     | **5,000**  |   |
| 12/29/2003      |   | 12/29/13             |   | PATRICK CRUZEN              |   | NQ       |   | $                    | 1.93   |                     | **5,000**  |   |
|            |   |                 |   |                        |   |     |   |                 |   | **498,000**              |       |

 

2

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**AGREEMENT AND PLAN OF MERGER**

 

**COMPANY DISCLOSURE SCHEDULE**

 

**SECTION 3.6**

 

Gaming Industry Regulatory Agencies

 

Barona Gaming Commission

Cabazon Band of Mission Indians Gaming Commission

California Gambling Control Commission

Colorado Division of Gaming

Cherokee Tribal Gaming Commission

Department of Justice, U.S. (Johnson Act Registration Only)

Dry Creek Gaming Commission

Hopland Gaming Commission

Illinois Gaming Board

Indiana Gaming Commission

Iowa Racing and Gaming Commission

Middletown Rancheria Gaming Commission

Minnesota Department of Public Safety

Mississippi Gaming Commission

Nevada State Gaming Control Board and Nevada Gaming Commission

New Jersey Division of Gaming Enforcement and Casino Control Commission

New Mexico Gaming Control Board

Paskenta Band of Nomlaki Indians

Picayune Rancheria Tribal Gaming Commission

Pueblo of Sandia Gaming Commission

Sac & Fox Tribe of the Mississippi in Iowa Gaming Commission

 

*See*Section 3.9 of the**Company Disclosure Schedule foradditional information.

 

3

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**AGREEMENT AND PLAN OF MERGER**

 

**COMPANY DISCLOSURE SCHEDULE**

 

**SECTION 3.7**

 

Nothing to disclose.

 

4

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**AGREEMENT AND PLAN OF MERGER**

 

**COMPANY DISCLOSURE SCHEDULE**

 

**SECTION 3.8**

 

Nothing to disclose.

 

5

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**AGREEMENT AND PLAN OF MERGER**

 

**COMPANY DISCLOSURE SCHEDULE**

 

**SECTION 3.9**

 

The Company has filed in the normal course an application with the ColoradoDivision of Gaming to renew its Limited Gaming License/Mfg.Distributor Type2, which expires on May 20, 2004 unless renewed.   Documents and other information will be provided in connectionwith the transactions contemplated by the Agreement and Plan of Merger (the“Going Private Transaction”), including a request for approval of change ofownership.  That request will bereviewed as part of the license renewal process.

 

The Company has filed in the normal course an application with the MississippiGamingCommission to renew the Manufacturer/Distributor License heldby PDS Gaming Corporation-Mississippi, which expires on November 20, 2004unless renewed.  That application hasbeen supplemented with an application for approval of the Going PrivateTransaction.  The Mississippi GamingCommission’s approval of the Going Private Transaction is required before theGoing Private Transaction can be consummated and will be integral to thelicense renewal process.

 

The Company has filed an application with the Nevada State GamingControl Board for approval of the Going Private Transaction.  Approval by the Nevada gaming authorities isrequired before the Going Private Transaction can be consummated.

 

The Company has filed in the normal course an application with the NewJersey CasinoControl Commission to renew its Casino ServiceIndustry License.  That filingeffectively continues the license until the renewal has been determined.  If the renewal application had not been filed,the license would have expired on October 31, 2004.  The substance of the Going PrivateTransaction will be reviewed as part of the license renewal process.

 

6

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**AGREEMENT AND PLAN OF MERGER**

 

**COMPANY DISCLOSURE SCHEDULE**

 

**SECTION 5.1**

 

Nothing to disclose.

 

7

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**AGREEMENT AND PLAN OF MERGER**

 

**PARENT DISCLOSURE SCHEDULE**

 

**SECTION 4.4**

 

Gaming Industry Regulatory Agencies

 

Barona Gaming Commission

Cabazon Band of Mission Indians Gaming Commission

California Gambling Control Commission

Colorado Division of Gaming

Cherokee Tribal Gaming Commission

Department of Justice, U.S. (Johnson Act Registration Only)

Dry Creek Gaming Commission

Hopland Gaming Commission

Illinois Gaming Board

Indiana Gaming Commission

Iowa Racing and Gaming Commission

Middletown Rancheria Gaming Commission

Minnesota Department of Public Safety

Mississippi Gaming Commission

Nevada State Gaming Control Board and Nevada Gaming Commission

New Jersey Division of Gaming Enforcement and Casino Control Commission

New Mexico Gaming Control Board

Paskenta Band of Nomlaki Indians

Picayune Rancheria Tribal Gaming Commission

Pueblo of Sandia Gaming Commission

Sac & Fox Tribe of the Mississippi in Iowa Gaming Commission

 

*See*Sections 3.6 and 3.9 of the CompanyDisclosure Schedule for related information.

 

1

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**AGREEMENT AND PLAN OF MERGER**

 

**PARENT DISCLOSURE SCHEDULE**

 

**SECTION 4.8**

 

*See***Section 3.2of the Company Disclosure Schedule for additional informationconcerning stock options held by the following individuals.

 

Johan P. Finley

 

Mr. Finley beneficially owns 954,786 shares of Common Stock.  That number includes 11,200 shares held asco-trustee for a minor child also claimed by Mr. Finley’s spouse, Lona M.B.Finley, as co-trustee.  It also includes50,000 shares of Common Stock issuable to Mr. Finley upon exercise of optionsthat are currently exercisable or that will become exercisable within 60 daysof March 5, 2004.  It does notinclude the shares held by Lona M.B. Finley, as shown below.

 

Lona M.B. Finley

 

Mrs. Finley beneficially owns 278,786 shares of Common Stock.  That number includes 49,000 shares held byMrs. Finley as custodian for her minor children and 11,200 held as co-trusteefor a minor child also claimed by her spouse, Johan Finley.  It also includes 10,500 shares of CommonStock issuable to Mrs. Finley upon exercise of options that are currentlyexercisable or that will become exercisable within 60 days of March 5,2004.  It does not include the sharesheld by Johan Finley, as shown above.

 

Peter D. Cleary

 

Mr. Cleary beneficially owns 151,207 shares of Common Stock.  That number includes 133,000 shares ofCommon Stock issuable to Mr. Cleary upon exercise of options that are currentlyexercisable or that will become exercisable within 60 days of March 5,2004.

 

2

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