Document:

EXHIBIT 4.2

 

NEITHER THESE SECURITIES NOR THE
SECURITIES FOR WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.  THESE SECURITIES AND THE SECURITIES ISSUABLE
UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

WELLS-GARDNER
ELECTRONICS CORPORATION

 

WARRANT

 

Warrant No. [ 
]          Dated:  September 20, 2004

 

Wells-Gardner Electronics Corporation, an Illinois
corporation (the “Company”), hereby certifies that, for value
received, [Name of Holder] or its registered assigns (the “Holder”), is entitled to
purchase from the Company up to a total of
[          ](1) shares of
common stock, $1 par value per share (the “Common Stock”), of the Company (each such
share, a “Warrant
Share” and all such shares, the “Warrant Shares”) at an
exercise price equal to $6.24 per share (as adjusted from time to time as
provided in Section 9, the “Exercise Price”), at any time and from time
to time from and after the six month anniversary of the date hereof and through
and including March 20, 2010 (the “Expiration Date”), and subject to the
following terms and conditions.  This
Warrant (this “Warrant”) is one of a series of similar warrants issued
pursuant to that certain Securities Purchase Agreement, dated as of the date
hereof, by and among the Company and the Purchasers identified therein (the “Purchase
Agreement”).  All such
warrants are referred to herein, collectively, as the “Warrants.”

 

Definitions. 
In addition to the terms defined elsewhere in this Warrant, capitalized
terms that are not otherwise defined herein have the meanings given to such
terms in the Purchase Agreement.

 

Registration of Warrant. 
The Company shall register this Warrant, upon records to be maintained
by the Company for that purpose (the “Warrant Register”), in the name of the
record Holder hereof from time to time. 
The Company may deem and treat the registered Holder of this Warrant as
the absolute owner hereof for the purpose of any exercise hereof or any
distribution to the Holder, and for all other purposes, absent actual notice to
the contrary.

 

(1)            40%
warrant coverage (as per term sheet).

 

 

Registration of Transfers. 
The Warrant Agent shall register the transfer of any portion of this
Warrant in the Warrant Register, upon surrender of this Warrant, with the Form
of Assignment attached hereto duly completed and signed, to the Transfer Agent
or to the Company at its address specified herein.  Upon any such registration or transfer, a new warrant to purchase
Common Stock, in substantially the form of this Warrant (any such new warrant,
a “New
Warrant”), evidencing the portion of this Warrant so transferred
shall be issued to the transferee and a New Warrant evidencing the remaining
portion of this Warrant not so transferred, if any, shall be issued to the
transferring Holder.  The acceptance of
the New Warrant by the transferee thereof shall be deemed the acceptance by
such transferee of all of the rights and obligations of a holder of a Warrant.

 

Exercise and Duration of
Warrants.

 

This Warrant shall be
exercisable by the registered Holder at any time and from time to time on or
after the six month anniversary of the date hereof to and including the
Expiration Date.  At 5:30 p.m., Chicago
time on the Expiration Date, the portion of this Warrant not exercised prior
thereto shall be and become void and of no value.  Notwithstanding anything to the contrary herein, the Expiration
Date shall be extended for each day following the Effective Date that the
Registration Statement is not effective.

 

A Holder may exercise
this Warrant by delivering to the Company (i) an exercise notice, in the form
attached hereto (the “Exercise Notice”), appropriately completed
and duly signed, and (ii) payment of the Exercise Price for the number of
Warrant Shares as to which this Warrant is being exercised (which may take the
form of a “cashless exercise” if so indicated in the Exercise Notice and if a
“cashless exercise” may occur at such time pursuant to this Section 10
below), and the date such items are delivered to the Company (as determined in
accordance with the notice provisions hereof) is an “Exercise Date.”  The Holder shall not be required to deliver
the original Warrant in order to effect an exercise hereunder.  Execution and delivery of the Exercise
Notice shall have the same effect as cancellation of the original Warrant and
issuance of a New Warrant evidencing the right to purchase the remaining number
of Warrant Shares.

 

Delivery of Warrant Shares.

 

Upon exercise of this
Warrant, the Company shall promptly (but in no event later than three Trading
Days after the Exercise Date) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or names
as the Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise, free of restrictive legends unless a registration statement
covering the resale of the Warrant Shares and naming the Holder as a selling
stockholder thereunder is not then effective and the Warrant Shares are not
freely transferable without volume restrictions pursuant to Rule 144 under the
Securities Act.  The Holder, or any
Person so designated by the Holder to receive Warrant Shares, shall be deemed
to have become holder of record of such Warrant Shares as of the Exercise
Date.  The Company shall, upon request
of the Holder, use its best efforts to deliver Warrant Shares hereunder
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions.

 

2

 

This Warrant is
exercisable, either in its entirety or, from time to time, for a portion of the
number of Warrant Shares.  Upon
surrender of this Warrant following one or more partial exercises, the Company
shall issue or cause to be issued, at its expense, a New Warrant evidencing the
right to purchase the remaining number of Warrant Shares.

 

In addition to any other
rights available to a Holder, if the Company fails to deliver to the Holder a
certificate representing Warrant Shares by the third Trading Day after the date
on which delivery of such certificate is required by this Warrant, and if after
such third Trading Day the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Warrant Shares that the Holder anticipated receiving from the
Company (a “Buy-In”), then the Company shall, within three Trading Days
after the Holder’s request and in the Holder’s discretion, either (i) pay cash
to the Holder in an amount equal to the Holder’s total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such certificate (and to issue such Common Stock) shall terminate, or
(ii) promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such Common Stock and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of (A)
such number of shares of Common Stock, times (B) the Closing Price on the date
of the event giving rise to the Company’s obligation to deliver such certificate.

 

The Company’s obligations
to issue and deliver Warrant Shares in accordance with the terms hereof are
absolute and unconditional, irrespective of any action or inaction by the
Holder to enforce the same, any waiver or consent with respect to any provision
hereof, the recovery of any judgment against any Person or any action to
enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other Person
of any obligation to the Company or any violation or alleged violation of law
by the Holder or any other Person, and irrespective of any other circumstance
which might otherwise limit such obligation of the Company to the Holder in
connection with the issuance of Warrant Shares.  Nothing herein shall limit a Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing
shares of Common Stock upon exercise of the Warrant as required pursuant to the
terms hereof.

 

Charges, Taxes and
Expenses.   Issuance and delivery of certificates for
shares of Common Stock upon exercise of this Warrant shall be made without
charge to the Holder for any issue or transfer tax, withholding tax, transfer
agent fee or other incidental tax or expense in respect of the issuance of such
certificates, all of which taxes and expenses shall be paid by the Company; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the registration of any
certificates for Warrant Shares or Warrants in a name other than that of the
Holder or an Affiliate thereof.  The
Holder shall be responsible for all other tax liability that may arise as a
result of holding or transferring this Warrant or receiving Warrant Shares upon
exercise hereof.

 

Replacement of Warrant. 
If this Warrant is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation hereof, or 

 

3

 

in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
customary and reasonable bond or indemnity, if requested.  Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable third-party costs as the Company may
prescribe.

 

Reservation of Warrant
Shares.  The Company covenants that it will at all
times reserve and keep available out of the aggregate of its authorized but unissued
and otherwise unreserved Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other
contingent purchase rights of persons other than the Holder (after giving
effect to the adjustments and restrictions of Section 9, if any).
The Company covenants that all Warrant Shares so issuable and deliverable
shall, upon issuance and the payment of the applicable Exercise Price in
accordance with the terms hereof, be duly and validly authorized, issued and
fully paid and nonassessable.  The
Company will take all such action as may be necessary to assure that such
shares of Common Stock may be issued as provided herein without violation of
any applicable law or regulation, or of any requirements of any securities
exchange or automated quotation system upon which the Common Stock may be
listed.

 

Certain Adjustments. 
The Exercise Price and number of Warrant Shares issuable upon exercise
of this Warrant are subject to adjustment from time to time as set forth in
this Section 9.

 

Stock Dividends and
Splits.  If the Company, at any time while this
Warrant is outstanding, (i) pays a stock dividend on its Common Stock or
otherwise makes a distribution on any class of capital stock that is payable in
shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into
a larger number of shares, or (iii) combines outstanding shares of Common Stock
into a smaller number of shares, then in each such case the Exercise Price
shall be multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding immediately before such event and of which
the denominator shall be the number of shares of Common Stock outstanding
immediately after such event.  Any
adjustment made pursuant to clause (i) of this paragraph shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such dividend or distribution, and any adjustment pursuant
to clause (ii) or (iii) of this paragraph shall become effective immediately
after the effective date of such subdivision or combination.

 

Pro Rata Distributions. 
If the Company, at any time while this Warrant is outstanding,
distributes to holders of Common Stock (i) evidence of its indebtedness, (ii)
any security (other than a distribution of Common Stock covered by the preceding
paragraph), (iii) rights or warrants to subscribe for or purchase any
security, or (iv) any other asset (in each case, “Distributed Property”), then
the Company shall promptly provide the Holder with notice of such Distributed
Property.

 

Fundamental Transactions. 
If, at any time while this Warrant is outstanding, (i) the Company
effects any merger or consolidation of the Company with or into another Person,
(ii) the Company effects any sale of all or substantially all of its assets in
one or a series of related transactions, (iii) any tender offer or exchange
offer (whether by the Company or another 

 

4

 

Person) is completed
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, cash or property, or (iv) the Company
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (other than as a result of a
subdivision or combination of shares of Common Stock covered by
Section 9(a) above) (in any such case, a “Fundamental Transaction”),
then the Holder shall have the right to receive, (i) upon exercise of this
Warrant prior to or in connection with the closing of the Fundamental
Transaction, the same amount and kind of securities, cash or property that is
received by holders of Common Stock or (ii) at the Holder’s request, any
successor to the Company or surviving entity in such Fundamental Transaction
shall issue to the Holder a new warrant entitling the Holder to acquire an
equity interest in the Company or surviving entity in an amount equal to the
Holder’s pro rata position in the Company prior to the transaction.  The aggregate Exercise Price for this
Warrant will not be affected by any such Fundamental Transaction, but the
Company shall apportion such aggregate Exercise Price in a reasonable manner
reflecting the relative value of Holder’s interest in the Company before the
Fundamental Transaction and Holder’s pro rata interest in the Company or
surviving entity after the Fundamental Transaction.  The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity to comply with the provisions of this paragraph (c) and
insuring that any replacement security will be adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

 

Subsequent Equity Sales.

 

If from the date hereof
through and including the two year anniversary of the Effective Date, the
Company or any Subsidiary issues additional shares of Common Stock or rights,
warrants, options or other securities or debt convertible, exercisable or
exchangeable for shares of Common Stock or otherwise entitling any Person to
acquire shares of Common Stock (collectively, “Common Stock Equivalents”) at
an effective net price to the Company per share of Common Stock (the “Effective
Price”) less than the Exercise Price (as adjusted hereunder to such
date), then the Exercise Price shall be reduced to equal the Effective Price.
If from the date hereof through and including the two year anniversary of the
Effective Date, the Company or any Subsidiary issues Common Stock or Common
Stock Equivalents at an Effective Price greater than the Exercise Price (as
adjusted hereunder to such date) but less than the average Closing Price over
the five Trading Days prior to such issuance (such average being the “Adjustment
Price”), then the Exercise Price shall be reduced to equal the
product of (A) the Exercise Price in effect immediately prior to such issuance
of shares of Common Stock or Common Stock Equivalents times (B) a fraction, the
numerator of which is the sum of (1) the number of shares of Common Stock
outstanding immediately prior to such issuance, plus (2) the number of shares
of Common Stock which the aggregate Effective Price of the shares of Common
Stock issued (or deemed to be issued) would purchase at the Adjustment Price,
and the denominator of which is the aggregate number of shares of Common Stock
outstanding or deemed to be outstanding immediately after such issuance.  For purposes of this paragraph, in
connection with any issuance of any Common Stock Equivalents, (A) the maximum
number of shares of Common Stock potentially issuable at any time upon
conversion, exercise or exchange of such Common Stock Equivalents (the “Deemed
Number”) shall be deemed to be outstanding upon issuance of such
Common Stock Equivalents, (B) the Effective Price applicable to such Common
Stock shall equal the minimum dollar value of consideration payable to the
Company to purchase such 

 

5

 

Common Stock Equivalents
and to convert, exercise or exchange them into Common Stock (net of any
discounts, fees, commissions and other expenses), divided by the Deemed Number,
and (C) no further adjustment shall be made to the Exercise Price upon the
actual issuance of Common Stock upon conversion, exercise or exchange of such
Common Stock Equivalents.

 

If from the date hereof
through and including the two year anniversary of the Effective Date, the
Company or any Subsidiary issues Common Stock Equivalents with an Effective
Price or a number of underlying shares that floats or resets or otherwise
varies or is subject to adjustment based (directly or indirectly) on market
prices of the Common Stock (a “Floating Price Security”), then for
purposes of applying the preceding paragraph in connection with any subsequent
exercise, the Effective Price will be determined separately on each Exercise
Date and will be deemed to equal the lowest Effective Price at which any holder
of such Floating Price Security is entitled to acquire Common Stock on such
Exercise Date (regardless of whether any such holder actually acquires any
shares on such date).

 

Number of Warrant Shares. 
Simultaneously with any adjustments to the Exercise Price pursuant to
paragraphs (a) or (d) of this Section, the number of Warrant Shares that may be
purchased upon exercise of this Warrant shall be increased proportionately, so
that after such adjustment the aggregate Exercise Price payable hereunder for
the increased number of Warrant Shares shall be the same as the aggregate
Exercise Price in effect immediately prior to such adjustment.

 

Calculations. 
All calculations under this Section 9 shall be made to the
nearest cent or the nearest 1/100th of a share, as applicable.  The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.

 

Notice of Adjustments. 
Upon the occurrence of each adjustment pursuant to this Section 9,
the Company at its expense will promptly compute such adjustment in accordance
with the terms of this Warrant and prepare a certificate setting forth such
adjustment, including a statement of the adjusted Exercise Price and adjusted
number or type of Warrant Shares or other securities issuable upon exercise of
this Warrant (as applicable), describing the transactions giving rise to such
adjustments and showing in detail the facts upon which such adjustment is
based.  Upon written request, the Company
will promptly deliver a copy of each such certificate to the Holder and to the
Company’s Transfer Agent.

 

Notice of Corporate
Events.  If the Company (i) declares a dividend or
any other distribution of cash, securities or other property in respect of its
Common Stock, including without limitation any granting of rights or warrants
to subscribe for or purchase any capital stock of the Company or any
Subsidiary, (ii) authorizes or approves, enters into any agreement
contemplating or solicits stockholder approval for any Fundamental Transaction
or (iii) authorizes the voluntary dissolution, liquidation or winding up of the
affairs of the Company, then the Company shall deliver to the Holder a notice
describing the material terms and conditions of such transaction, at least 10
calendar days prior to the applicable record or effective date on which a
Person would need to hold Common Stock in order to participate in or vote with
respect to such transaction, and the Company will take all steps reasonably
necessary in order to insure that the Holder is given the practical opportunity
to exercise this Warrant prior to such time so as to participate in or vote
with respect to such transaction; provided, however, that the failure to
deliver such notice 

 

6

 

or any defect therein shall not affect the validity of the corporate
action required to be described in such notice.

 

Payment of Exercise Price. 
The Holder shall pay the Exercise Price in immediately available funds;
provided, however, that following the Required Effectiveness Date, if the
Registration Statement is not effective at the time of exercise of this
Warrant, the Holder may satisfy its obligation to pay the Exercise Price
through a “cashless exercise,” in which event the Company shall issue to the
Holder the number of Warrant Shares determined as follows:

 

	
   

  	
   

  	
  X = Y [(A-B)/A]

  
	
  where:

  	
   

  	
   

  
	
   

  	
   

  	
  X = the number of
  Warrant Shares to be issued to the Holder.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Y = the number of
  Warrant Shares with respect to which this Warrant is being exercised.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  A = the average of the
  Closing Prices for the five Trading Days immediately prior to (but not
  including) the Exercise Date.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  B = the Exercise Price.

  

 

For purposes of
Rule 144 promulgated under the Securities Act, it is intended, understood and
acknowledged that the Warrant Shares issued in a cashless exercise transaction
shall be deemed to have been acquired by the Holder, and the holding period for
the Warrant Shares shall be deemed to have commenced, on the date this Warrant
was originally issued pursuant to the Purchase Agreement.

 

Limitation on Exercise.  Notwithstanding
anything to the contrary contained herein, the number of shares of Common Stock
that may be acquired by the Holder upon any exercise of this Warrant (or
otherwise in respect hereof) shall be limited to the extent necessary to insure
that, following such exercise (or other issuance), the total number of shares
of Common Stock then beneficially owned by such Holder and its Affiliates and
any other Persons whose beneficial ownership of Common Stock would be
aggregated with the Holder’s for purposes of Section 13(d) of the Exchange
Act, does not exceed 4.999% (the “Maximum Percentage”) of the total number of
issued and outstanding shares of Common Stock (including for such purpose the shares
of Common Stock issuable upon such exercise). 
For such purposes, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder. 
Each delivery of an Exercise Notice hereunder will constitute a
representation by the Holder that it has evaluated the limitation set forth in
this paragraph and determined that issuance of the full number of Warrant
Shares requested in such Exercise Notice is permitted under this paragraph.  The Company’s obligation to issue shares of
Common Stock in excess of the limitation referred to in this Section shall
be suspended (and shall not terminate or expire notwithstanding any contrary
provisions hereof) until such time, if any, as such shares of Common Stock may
be issued in compliance with such limitation, but in no event later than the
Expiration Date.  By written notice to
the Company, the Holder may waive the provisions of this Section or increase
or decrease the Maximum Percentage to any 

 

7

 

other percentage
specified in such notice, but (i) any such waiver or increase will not be
effective until the 61st day after such notice is delivered to the Company, and
(ii) any such waiver or increase or decrease will apply only to the Holder and
not to any other holder of Warrants.

 

(b)                                 Notwithstanding
anything to the contrary contained herein, if the Trading Market is the
American Stock Exchange or any other market or exchange with similar applicable
rules, then the maximum number of shares of Common Stock that the Company may
issue pursuant to the Transaction Documents at an effective purchase price less
than the Closing Price on the Trading Day immediately preceding the Closing
Date shall equal 19.99% of the outstanding shares of Common Stock immediately
preceding the Closing Date (the “Issuable Maximum”), unless the Company
obtains stockholder approval in accordance with the rules and regulations of
such Trading Market.  If, at the time
any Holder requests an exercise of any of the Warrants, the Actual Minimum
(excluding any shares issued or issuable at an effective purchase price in
excess of the Closing Price on the Trading Day immediately preceding the
Closing Date) exceeds the Issuable Maximum (and if the Company has not
previously obtained the required stockholder approval), then the Company shall
issue to the Holder requesting such exercise a number of shares of Common Stock
not exceeding such Holder’s pro-rata portion of the Issuable Maximum (based on
such Holder’s share (vis-à-vis other Holders) of the aggregate purchase price
paid under the Purchase Agreement and taking into account any Warrant Shares
previously issued to such Holder).  For
the purposes hereof, “Actual Minimum” shall mean, as of any date,
the maximum aggregate number of shares of Common Stock then issued or
potentially issuable in the future pursuant to the Transaction Documents,
including any Underlying Shares issuable upon exercise in full of all Warrants,
without giving effect to (x) any limits on the number of shares of Common Stock
that may be owned by a Holder at any one time, or (y) any additional Underlying
Shares that could be issuable as a result of any future possible adjustments
made under Section 9(d).

 

Fractional Shares. 
The Company shall not be required to issue or cause to be issued
fractional Warrant Shares on the exercise of this Warrant.  If any fraction of a Warrant Share would,
except for the provisions of this Section, be issuable upon exercise of this Warrant,
the number of Warrant Shares to be issued will be rounded down to the nearest
whole share and the balance shall be paid in cash.

 

Notices. 
Any and all notices or other communications or deliveries hereunder
(including without limitation any Exercise Notice) shall be in writing and
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section prior to 5:30 p.m. (Chicago
time) on a Trading Day, (ii) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Trading
Day or later than 5:30 p.m. (Chicago time) on any Trading Day, (iii) the
Trading Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom
such notice is required to be given. 
The address for such notices or communications shall be as set forth in
the Purchase Agreement.

 

Warrant Agent. 
The Company shall serve as warrant agent under this Warrant.  Upon 30 days’ notice to the Holder, the
Company may appoint a new warrant agent. 
Any corporation into which the Company or any new warrant agent may be
merged or any corporation resulting from 

 

8

 

any consolidation to
which the Company or any new warrant agent shall be a party or any corporation
to which the Company or any new warrant agent transfers substantially all of
its corporate trust or stockholders services business shall be a successor
warrant agent under this Warrant without any further act.  Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed (by first
class mail, postage prepaid) to the Holder at the Holder’s last address as
shown on the Warrant Register.

 

Miscellaneous.

 

Subject to the
restrictions on transfer set forth on the first page hereof, this Warrant may
be assigned by the Holder.  This Warrant
may not be assigned by the Company except to a successor in the event of a
Fundamental Transaction.  This Warrant
shall be binding on and inure to the benefit of the parties hereto and their
respective successors and assigns. 
Subject to the preceding sentence, nothing in this Warrant shall be
construed to give to any Person other than the Company and the Holder any legal
or equitable right, remedy or cause of action under this Warrant.  This Warrant may be amended only in writing
signed by the Company and the Holder and their successors and assigns.

 

The Company will not, by
amendment of its governing documents or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the Holder
against impairment.  Without limiting
the generality of the foregoing, the Company (i) will not increase the par
value of any Warrant Shares above the amount payable therefor on such exercise,
(ii) will take all such action as may be reasonably necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable Warrant Shares on the exercise of this Warrant, and (iii) will not
close its stockholder books or records in any manner which interferes with the
timely exercise of this Warrant.

 

GOVERNING LAW; VENUE;
WAIVER OF JURY TRIAL.  ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS WARRANT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
ILLINOIS.   EACH PARTY HEREBY
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS SITTING IN THE CITY OF CHICAGO, COUNTY OF COOK, FOR THE ADJUDICATION OF
ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION
CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE
ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM
THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT
SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. 
EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS
TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A
COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH
EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT
UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND
SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN
SHALL BE DEEMED TO 

 

9

 

LIMIT IN ANY WAY ANY
RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.  THE COMPANY AND HOLDER HEREBY WAIVE ALL
RIGHTS TO A TRIAL BY JURY.

 

The headings herein are
for convenience only, do not constitute a part of this Warrant and shall not be
deemed to limit or affect any of the provisions hereof.

 

In case any one or more
of the provisions of this Warrant shall be invalid or unenforceable in any
respect, the validity and enforceability of the remaining terms and provisions
of this Warrant shall not in any way be affected or impaired thereby and the parties
will attempt in good faith to agree upon a valid and enforceable provision
which shall be a commercially reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Warrant.

 

[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK,

SIGNATURE PAGE FOLLOWS]

 

10

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.

 

 

	
   

  	
  WELLS-GARDNER ELECTRONICS

  CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

11

 

FORM
OF EXERCISE NOTICE

 

(To be executed by the
Holder to exercise the right to purchase shares of Common Stock under the
foregoing Warrant)

To:  Wells-Gardner Electronics Corporation

The undersigned is the
Holder of Warrant No.
              
(the “Warrant”)
issued by Wells-Gardner Electronics Corporation, an Illinois corporation (the “Company”).  Capitalized terms used herein and not
otherwise defined have the respective meanings set forth in the Warrant.

The Warrant is currently
exercisable to purchase a total of
                            
Warrant Shares.

 

The undersigned Holder
hereby exercises its right to purchase
                                  
Warrant Shares pursuant to the Warrant.

 

The Holder intends that
payment of the Exercise Price shall be made as (check one):

 

                “Cash Exercise” under Section 10

 

                “Cashless Exercise” under
Section 10 (if permitted)

 

If the holder has elected
a Cash Exercise, the holder shall pay the sum of
$                        
to the Company in accordance with the terms of the Warrant.

 

Pursuant to this
exercise, the Company shall deliver to the Holder
                              
Warrant Shares in accordance with the terms of the Warrant.

 

Following this exercise,
the Warrant shall be exercisable to purchase a total of
                            
Warrant Shares.

 

 

	
  Dated: ,

  	
   

  	
   

  	
  Name of Holder:

  
	
   

  	
   

  
	
   

  	
  (Print)

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  (Signature must conform
  in all respects to name of holder as specified on the face of the Warrant)

  
								

 

12

 

FORM OF ASSIGNMENT

 

[To be completed and signed only upon transfer of
Warrant]

 

FOR VALUE RECEIVED, the undersigned hereby sells,
assigns and transfers unto
                                                                
the right represented by the within Warrant to purchase 
                        
shares of Common Stock of Wells-Gardner Electronics Corporation to which the
within Warrant relates and appoints
                                
attorney to transfer said right on the books of Wells-Gardner Electronics
Corporation with full power of substitution in the premises.

 

 

	
  Dated: ,

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (Signature must conform
  in all respects to name of holder as specified on the face of the Warrant)

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address of Transferee

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  In the presence of:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
						

 

13EXHIBIT 10.1

 

SECURITIES
PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”)
is dated as of September 20, 2004 by and among Wells-Gardner Electronics
Corporation, an Illinois corporation (the “Company”), CD Investment Partners, Ltd. (“CD”)
and EGI-NP Investments, LLC (“EGI” and together with CD, collectively being the
“Purchasers”).

 

WHEREAS, subject to the terms and conditions set
forth in this Agreement and pursuant to Section 4(2) of the Securities Act
of 1933, as amended (the “Securities Act”), the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as
more fully described in this Agreement.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual
covenants contained in this Agreement, and for other good and valuable
consideration the receipt and adequacy of which are hereby acknowledged, the
Company and each Purchaser, severally and not jointly, agree as follows:

 

DEFINITIONS

 

Definitions. 
In addition to the terms defined elsewhere in this Agreement, the
following terms have the meanings indicated:

 

“Affiliate” means any
Person that, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with a Person, as such
terms are used in and construed under Rule 144 under the Securities Act.

 

“Business Day” means any day other than
Saturday, Sunday or any other day on which commercial banks in The City of New
York or Chicago are authorized or required by law to remain closed, or with
respect to the Commission, is a day on which the Commission is closed.

 

“Closing” means the
closing of the purchase and sale of the Shares and the Warrants pursuant to Section 2.1.

 

“Closing
Date” means the date of the Closing.

 

“Closing
Price” means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or
quoted on an Eligible Market or any other national securities exchange, the closing
price per share of the Common Stock for such date (or the nearest preceding
date that is a Business Day if the Closing Date is not a Business Day) on the
primary Eligible Market or exchange on which the Common Stock is then listed or
quoted; (b) if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the closing bid price per share of the Common Stock for such
date (or the nearest preceding date) so quoted; (c) if prices for the
Common Stock are then reported in the “Pink Sheets” published by the National
Quotation Bureau Incorporated (or a similar organization or agency succeeding
to its function of reporting prices), the most recent closing bid price per
share of the Common 

 

1

 

Stock so reported; or
(d) in all other cases, the fair market value of a share of Common Stock
as determined by an independent appraiser selected in good faith by the
Company.

 

“Commission” means the
Securities and Exchange Commission.

 

“Common
Stock” means the common stock of the Company, par value $1 per share.

 

“Common Stock Equivalents” means,
collectively, Options and Convertible Securities.

 

“Company
Counsel” means Pedersen & Houpt, P.C., counsel to the
Company.

 

“Convertible Securities” means any stock or securities
(other than Options) convertible into or exercisable or exchangeable for Common
Stock.

 

“Effective
Date” means the date that the Registration Statement is first declared
effective by the Commission.

 

“Eligible
Market” means any of the New York Stock Exchange, the American Stock Exchange
or the NASDAQ National Market.

 

“Exchange
Act” means the Securities Exchange Act of 1934, as amended.

 

“Excluded
Stock” means the issuance of Common Stock (A) upon exercise or conversion of
any options or other securities described in Schedule 3.1(f)
(provided that such exercise or conversion occurs in accordance with the terms
thereof, without amendment or modification, and that the applicable exercise or
conversion price or ratio is described in such schedule) or otherwise pursuant
to any employee benefit plan described in Schedule 3.1(f) or which
is hereafter adopted by the Company and approved by its stockholders or (B) in
connection with any issuance of shares or grant of options to employees,
officers, directors or consultants of the Company pursuant to a stock option
plan or other incentive stock plan duly adopted by the Company’s board of
directors or in respect of the issuance of Common Stock upon exercise of any
such options.

 

“Filing
Date” means the 30th day after the Closing Date, or if the 30th
day after the Closing Date is not a Business Day for the Commission, then on
the next day thereafter that is a Business Day for the Commission.

 

“Lien” means any
lien, charge, claim, security interest, encumbrance, right of first refusal or
other restriction.

 

“Losses” means any and
all losses, claims, damages, liabilities, settlement costs and expenses,
including, without limitation, costs of preparation and reasonable attorneys’
fees.

 

“Market Value” means as to the Shares held
by a Purchaser on any Trading Day, the product of the Closing Price on such
Trading Day and the Shares then held by such Purchaser.

 

2

 

“Options” means any rights, warrants or
options to subscribe for or purchase Common Stock or Convertible Securities.

 

“Person” means any
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or any court or other federal,
state, local or other governmental authority or other entity of any kind.

 

“Proceeding” means an
action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.

 

“Prospectus” means the
prospectus included in the Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a prospectus filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by the
Registration Statement, and all other amendments and supplements to the
Prospectus including post effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.

 

“Purchasers’
Counsel” shall mean Greenberg Traurig, LLP.

 

“Registrable
Securities” means any Common Stock (including, the Shares and
Underlying Shares) issued or issuable to the Purchasers pursuant to the
Transaction Documents, together with any securities issued or issuable upon any
stock split, dividend or other distribution, recapitalization or similar event
with respect to the foregoing. The Purchasers acknowledge that the Company may
choose to include the Registrable Securities hereunder on a registration
statement with other similar securities.

 

“Registration
Statement” means each registration statement required to be
filed under Article VI, including (in each case) the Prospectus,
amendments and supplements to such registration statement or Prospectus,
including pre- and post-effective amendments, all exhibits thereto, and all
material incorporated by reference or deemed to be incorporated by reference in
such registration statement.

 

“Required
Effectiveness Date” means the 90th day after Closing Date; provided,
however, that (a) if the 90th day after the Closing Date is not a
Business Day for the Commission, then the Required Effectiveness Date shall be
the first day thereafter which is a Business Day for the Commission, or (b) in
the event the Registration Statement shall be reviewed by the Commission, the
Required Effectiveness Date shall be no later than the 120th day
following the Closing Date, unless the 120th day following the
Closing Date is not a Business Day for the Commission, in which case the
Required Effectiveness Date shall be no later than the first day thereafter
which is a Business Day for the Commission.

 

“Rule 144,”  “Rule 415,”
and “Rule
424” means Rule 144, Rule 415 and Rule 424, respectively,
promulgated by the Commission pursuant to the Securities Act, as such Rules may
be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such Rule.

 

“Securities” means the
Shares, the Warrants and the Underlying Shares.

 

3

 

“Shares” means an
aggregate of 221,240 shares of Common Stock, which are being issued and sold to
the Purchasers under this Agreement at the Closing.

 

“Subsidiary” means any
Person in which the Company, directly or indirectly, owns at least ten percent
(10%) of the capital stock or holds an equivalent equity or similar interest.

 

 “Trading Day” means for any such date,
the first of the following clauses to apply: (a) any day on which the Common
Stock is listed or quoted and traded on its primary Trading Market (or any
successor thereto), (b) if the Common Stock is not then listed or quoted and
traded on any Eligible Market, then a day on which trading occurs on the
American Stock Exchange (or any successor thereto), or (c) if trading ceases to
occur on the American Stock Exchange (or any successor thereto), any Business
Day.

 

“Trading
Market” means the American Stock Exchange or any other Eligible Market.

 

“Transaction
Documents” means this Agreement, the Warrants, the Transfer
Agent Instructions and any other documents or agreements executed in connection
with the transactions contemplated hereunder.

 

“Transfer Agent Instructions” means the
Irrevocable Transfer Agent Instructions, in the form of Exhibit D,
executed by the Company and delivered to and acknowledged in writing by the
Company’s transfer agent.

 

“Underlying
Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.

 

“Warrants” means,
collectively, the Common Stock purchase warrants issued and sold to the
Purchasers under this Agreement, in the form of Exhibit A, and any
warrants or replacement warrants issued upon exercise, transfer, exchange or
partial exchange of such warrants.

 

PURCHASE AND SALE

 

Closing. 
Subject to the terms and conditions set forth in this Agreement, at the
Closing the Company shall issue and sell to each Purchaser, and each Purchaser
shall, severally and not jointly, purchase from the Company, such number of
Shares and a Warrant to purchase such number of Underlying Shares, each as
indicated below such Purchaser’s name on the signature page of this Agreement,
for an aggregate purchase price to such Purchaser as indicated below such
Purchaser’s name on the signature page of this Agreement.  The Closing shall take place at the offices
of Company Counsel immediately following the execution hereof, or at such other
location or time as the parties may agree.

 

Closing Deliveries.

 

At the Closing, the
Company shall deliver or cause to be delivered to each Purchaser the following:

 

4

 

one or more stock
certificates, free and clear of all restrictive and other legends (except as
expressly provided in Section 4.1(b) hereof), evidencing such
number of Shares equal to the number of Shares indicated below such Purchaser’s
name on the signature page of this Agreement, registered in the name of such
Purchaser;

 

a Warrant, registered in
the name of such Purchaser, pursuant to which such Purchaser shall have the
right to acquire such number of Underlying Shares indicated below such
Purchaser’s name on the signature page of this Agreement, on the terms set
forth therein;

 

a legal opinion of
Company Counsel, in the form of Exhibit B, executed by such counsel and
delivered to the Purchasers; and

 

duly executed Transfer
Agent Instructions acknowledged by the Company’s transfer agent.

 

At the Closing, each
Purchaser shall deliver or cause to be delivered to the Company the purchase
price indicated below such Purchaser’s name on the signature page of this
Agreement, in United States dollars and in immediately available funds, by wire
transfer pursuant to the instructions set forth on Schedule 2.2(b).

 

REPRESENTATIONS AND WARRANTIES

 

Representations and
Warranties of the Company.  The Company hereby represents
and warrants to each of the Purchasers as follows:

 

Subsidiaries. 
The Company has no direct or indirect Subsidiaries other than those
listed in Schedule 3.1(a). 
Except as disclosed in Schedule 3.1(a), the Company owns,
directly or indirectly, all of the capital stock or comparable equity interests
of each Subsidiary free and clear of any Lien and all the issued and
outstanding shares of capital stock or comparable equity interest of each
Subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights.

 

Organization and
Qualification.  Each of the Company and the Subsidiaries is
an entity duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization (as applicable), with
the requisite power and authority to own and use its properties and assets and
to carry on its business as currently conducted.  Neither the Company nor any Subsidiary is in violation of any of
the provisions of its respective certificate or articles of incorporation,
bylaws or other organizational or charter documents.  Each of the Company and the Subsidiaries is duly qualified to do
business and is in good standing as a foreign corporation or other entity in
each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not, individually
or in the aggregate, (i) adversely affect the legality, validity or
enforceability of any Transaction Document, (ii) have or result in a material
adverse effect on the results of operations, assets, prospects, business or
condition (financial or otherwise) of the Company and the Subsidiaries, taken
as a whole on a consolidated basis, or (iii) adversely impair the Company’s
ability to perform fully on a timely basis its material obligations under any
of the Transaction Documents (any of (i), (ii) or (iii), a “Material Adverse Effect”).

 

Authorization;
Enforcement.  The Company has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction 

 

5

 

Documents and otherwise
to carry out its obligations hereunder and thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further consent or action is
required by the Company, its Board of Directors or its stockholders.  Each of the Transaction Documents has been
(or upon delivery will be) duly executed by the Company and is, or when
delivered in accordance with the terms hereof, will constitute, the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms.

 

No Conflicts. 
The execution, delivery and performance of the Transaction Documents by
the Company and the consummation by the Company of the transactions
contemplated hereby and thereby do not and will not (i) conflict with or
violate any provision of the Company’s or any Subsidiary’s certificate or
articles of incorporation, bylaws or other organizational or charter documents,
(ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or
other instrument (evidencing a Company or Subsidiary debt or otherwise) or
other understanding to which the Company or any Subsidiary is a party or by
which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal
and state securities laws and regulations and the rules and regulations of any
self-regulatory organization to which the Company or its securities are
subject), or by which any property or asset of the Company or a Subsidiary is
bound or affected.

 

Issuance of the
Securities.  The Securities (including the Underlying
Shares) are duly authorized and, when issued and paid for in accordance with
the Transaction Documents, will be duly authorized, validly issued, fully paid
and nonassessable, free and clear of all Liens and shall not be subject to
preemptive rights or similar rights of stockholders.  The Company has reserved from its duly authorized capital stock
the maximum number of shares of Common Stock issuable upon exercise of the
Warrants.

 

Capitalization. 
The number of shares and type of all authorized, issued and outstanding
capital stock, options and other securities of the Company (whether or not
presently convertible into or exercisable or exchangeable for shares of capital
stock of the Company) is set forth in Schedule 3.1(f). All
outstanding shares of capital stock are duly authorized, validly issued, fully
paid and nonassessable and have been issued in compliance with all applicable
securities laws. Except as disclosed in Schedule 3.1(f), there are
no outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire, any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares of
Common Stock. Except as disclosed in Schedule 3.1(f), there are no
anti-dilution or price adjustment provisions contained in any security issued
by the Company (or in any agreement providing rights to security holders) and
the issue and sale of the Securities (including the Underlying Shares) will not
obligate the Company to issue shares of Common Stock or other securities to any
Person and will not result in a right of any holder of Company securities to
adjust the exercise, conversion, exchange or reset price under such securities.
To the knowledge of the Company, except as specifically disclosed in Schedule 3.1(f),
no Person or 

 

6

 

group of related Persons
beneficially owns (as determined pursuant to Rule 13d-3 under the Exchange
Act), or has the right to acquire, by agreement with or by obligation binding
upon the Company, beneficial ownership of in excess of 5% of the outstanding
Common Stock, ignoring for such purposes any limitation on the number of shares
of Common Stock that may be owned at any single time.

 

SEC Reports; Financial
Statements.  The Company has filed all reports required
to be filed by it under the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the two years preceding the date
hereof (or such shorter period as the Company was required by law to file such
material) (the foregoing materials (together with any materials filed by the Company
under the Exchange Act, whether or not required) being collectively referred to
herein as the “SEC Reports” and, together with this Agreement and the
Schedules to this Agreement, the “Disclosure Materials”) on a timely basis
or has received a valid extension of such time of filing and has filed any such
SEC Reports prior to the expiration of any such extension.  The Company has delivered to each Purchaser
true, correct and complete copies of all SEC Reports filed within the 10 days
preceding the date hereof.  As of their
respective dates, the SEC Reports complied in all material respects with the
requirements of the Securities Act and the Exchange Act and the rules and
regulations of the Commission promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.  The
financial statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time of
filing.  Such financial statements have
been prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis during the periods involved (“GAAP”),
except as may be otherwise specified in such financial statements or the notes
thereto, and fairly present in all material respects the financial position of
the Company and its consolidated Subsidiaries as of and for the dates thereof
and the results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, immaterial, year-end
audit adjustments.  All material
agreements to which the Company or any Subsidiary is a party or to which the
property or assets of the Company or any Subsidiary are subject are included as
part of or specifically identified in the SEC Reports.

 

Material Changes. 
Since the date of the latest audited financial statements included
within the SEC Reports, except as specifically disclosed in the SEC Reports or
in Schedule 3.1(h), (i) there has been no event, occurrence or
development that, individually or in the aggregate, has had or that could
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities not required to be reflected in the Company’s
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting or the identity of its auditors, except as disclosed in its SEC
Reports, (iv) the Company has not declared or made any dividend or distribution
of cash or other property to its stockholders or purchased, redeemed or made
any agreements to purchase or redeem any shares of its capital stock, and (v)
the Company has not issued any equity securities to any officer, director or
Affiliate, except pursuant to existing Company stock-based plans.

 

Absence of Litigation. 
There is no action, suit, claim, proceeding, inquiry or investigation
before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its 

 

7

 

Subsidiaries that could,
individually or in the aggregate, have a Material Adverse Effect.  Schedule 3.1(i) contains a
complete list and summary description of any pending or, to the knowledge of
the Company, threatened proceeding against or affecting the Company or any of
its Subsidiaries, without regard to whether it would, individually or in the
aggregate, have a Material Adverse Effect.

 

Compliance. 
Neither the Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred that has not been waived that, with
notice or lapse of time or both, would result in a default by the Company or
any Subsidiary under), nor has the Company or any Subsidiary received notice of
a claim that it is in default under or that it is in violation of, any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound (whether
or not such default or violation has been waived), (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is or has been in
violation of any statute, rule or regulation of any governmental authority,
including without limitation all foreign, federal, state and local laws
relating to taxes, environmental protection, occupational health and safety,
product quality and safety and employment and labor matters, except in each
case as could not, individually or in the aggregate, have or result in a Material
Adverse Effect.

 

Title to Assets. Except as set forth on Schedule 3.1(k),
the Company and the Subsidiaries have good and marketable title in fee simple
to all real property owned by them that is material to the business of the
Company and the Subsidiaries and good and marketable title in all personal
property owned by them that is material to the business of the Company and the
Subsidiaries, in each case free and clear of all Liens, except for Liens as do
not materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company and the Subsidiaries. Any real property and facilities held under lease
by the Company and the Subsidiaries are held by them under valid, subsisting and
enforceable leases of which the Company and the Subsidiaries are in compliance.

 

Certain Fees. 
Except for the fees described in Schedule 3.1(l), all of
which are payable to registered broker-dealers, no brokerage or finder’s fees
or commissions are or will be payable by the Company to any broker, financial
advisor or consultant, finder, placement agent, investment banker, bank or
other Person with respect to the transactions contemplated by this Agreement,
and the Company has not taken any action that would cause any Purchaser to be
liable for any such fees or commissions.

 

Private Placement. 
To the best of the Company’s knowledge, neither the Company nor any
Person acting on the Company’s behalf has sold or offered to sell or solicited
any offer to buy the Securities by means of any form of general solicitation or
advertising.  Neither the Company nor
any of its Affiliates nor any Person acting on the Company’s behalf has,
directly or indirectly, at any time within the past six months, made any offer
or sale of any security or solicitation of any offer to buy any security under
circumstances that would (i) eliminate the availability of the exemption from
registration under Regulation D under the Securities Act in connection with the
offer and sale of the Securities as contemplated hereby or (ii) except as set
forth on Schedule 3.1(m), cause the offering of the Securities
pursuant to the Transaction Documents to be integrated with prior offerings by
the Company for purposes of any applicable law, regulation or stockholder
approval provisions, including, without limitation, under the rules and
regulations of any Trading Market.  The
Company is not, and is not an Affiliate of, an “investment company” within the
meaning of the Investment Company Act of 1940, as amended.  The Company is not a 

 

8

 

United States real
property holding corporation within the meaning of the Foreign Investment in
Real Property Tax Act of 1980.

 

Form S-3 Eligibility. The Company is eligible to register its
Common Stock for resale by the Purchasers using Form S-3 promulgated under the
Securities Act.

 

Listing and Maintenance
Requirements.  The Company has not, in the two years
preceding the date hereof, received notice (written or oral) from any Trading
Market on which the Common Stock is or has been listed or quoted to the effect
that the Company is not in compliance with the listing or maintenance
requirements of such Trading Market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in
compliance with all such listing and maintenance requirements.

 

Registration Rights. 
Except as described in Schedule 3.1(p), the Company has not
granted or agreed to grant to any Person any rights (including “piggy-back”
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority that have not been satisfied.

 

Application of Takeover
Protections.  There is no control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Company’s charter documents
or the laws of its state of incorporation that is or could become applicable to
any of the Purchasers as a result of the Purchasers and the Company fulfilling
their obligations or exercising their rights under the Transaction Documents,
including, without limitation, as a result of the Company’s issuance of the
Securities and the Purchasers’ ownership of the Securities.

 

Disclosure. 
The Company confirms that neither it nor any other Person acting on its
behalf has provided any of the Purchasers or their agents or counsel with any
information that constitutes or might constitute material, nonpublic
information.  The Company understands
and confirms that each of the Purchasers will rely on the foregoing
representations in effecting transactions in securities of the Company.  All disclosure materials provided to the
Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. 
No event or circumstance has occurred or information exists with respect
to the Company or any of its Subsidiaries or its or their business, properties,
prospects, operations or financial conditions, which, under applicable law,
rule or regulation, requires public disclosure or announcement by the Company
but which has not been so publicly announced or disclosed.  The Company acknowledges and agrees that no
Purchaser makes or has made (i) any representations or warranties with respect
to the transactions contemplated hereby other than those specifically set forth
in Section 3.2 or (ii) any statement, commitment or promise to the
Company or, to its knowledge, any of its representatives which is or was an
inducement to the Company to enter into this Agreement or otherwise.

 

Acknowledgment Regarding
Purchasers’ Purchase of the Securities.  The Company
acknowledges and agrees that each of the Purchasers is acting solely in the
capacity of an arm’s length purchaser with respect to the Company and to this
Agreement and the transactions contemplated hereby. The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to this 

 

9

 

Agreement and the
transactions contemplated hereby and any advice given by any Purchaser or any
of their respective representatives or agents in connection with this Agreement
and the transactions contemplated hereby is merely incidental to the
Purchasers’ purchase of the Securities. 
The Company further represents to each Purchaser that the Company’s
decision to enter into this Agreement has been based solely on the independent
evaluation of the transactions contemplated hereby by the Company and its
representatives.

 

Patents and Trademarks. 
Except as set forth in Schedule 3.1(t), the Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other similar rights that are necessary or material for use in
connection with their respective businesses as described in the SEC Reports and
which the failure to so have could have a Material Adverse Effect
(collectively, the “Intellectual Property Rights”). Neither the
Company nor any Subsidiary has received a written notice that the Intellectual
Property Rights used by the Company or any Subsidiary violates or infringes
upon the rights of any Person. To the knowledge of the Company, all such
Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.

 

Insurance. 
The Company and the Subsidiaries are insured by the insurers listed on Schedule 3.1(u)
against such losses and risks and in such amounts as are prudent and customary
in the businesses in which the Company and the Subsidiaries are engaged.  Neither the Company nor any Subsidiary has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business without a
significant increase in cost.

 

Regulatory Permits. 
The Company and the Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, local or
foreign regulatory authorities necessary to conduct their respective businesses
as described in the SEC Reports, except where the failure to possess such
permits could not, individually or in the aggregate, have or result in a
Material Adverse Effect (“Material Permits”), and neither the Company
nor any Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.

 

Transactions With
Affiliates and Employees.  Except as set forth in Schedule 3.1(w)
and/or in SEC Reports filed at least ten days prior to the date hereof, none of
the officers or directors of the Company and, to the knowledge of the Company,
none of the employees of the Company is presently a party to any transaction
with the Company or any Subsidiary (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner.

 

Solvency. The Company and each of its “significant
subsidiaries” (as that term is defined by Rule 1-02 of Regulation S-X
promulgated under the Securities Act) are, and immediately after the Closing
will be, Solvent. As used herein, the term “Solvent” means, with respect to a
particular date, that on such date, (i) the fair market value of the total
assets of each of the Company and its Subsidiaries exceeds their respective
total liabilities (including, without limitation, stated liabilities and
contingent liabilities), and (ii) the Company and each of its Subsidiaries is
currently able to discharge its debts as they come due or mature.  None of the 

 

10

 

Company nor any of its
“significant subsidiaries” has taken any steps, and does not currently expect to
take any steps, to seek protection pursuant to any bankruptcy, insolvency,
debtor relief, reorganization or similar law, nor does the Company have any
knowledge or reason to believe that creditors of the Company and its
Subsidiaries have initiated or intend to initiate involuntary bankruptcy or
similar proceedings.

 

Internal Accounting
Controls.  The Company and the Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or
specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.

 

(z)            Sarbanes-Oxley
Act. The Company is in compliance with applicable requirements of the
Sarbanes-Oxley Act of 2002 and applicable rules and regulations promulgated by
the Commission thereunder in effect as of the date of this Agreement,
except where such noncompliance could not be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect.

 

(aa)         Independent
Nature of the Purchasers. The Company acknowledges that the obligations of
the Purchasers under the Transaction Documents are several and not joint with
the obligations of any other third party purchasers of the Company’s
securities, and the Purchasers shall not be responsible in any way for the
performance of the obligations of any other third party purchasers of the
Company’s securities. Each of the Purchasers and the Company agree and
acknowledge that (i) the decision of the Purchasers to purchase Shares and
Warrants pursuant to this Agreement has been made (and the decision of the
Purchasers to purchase the Underlying Shares pursuant to the terms of the
Warrants will be made) by each of the Purchasers independently of any other
third party purchasers of the Company’s securities and (ii) no other third
party purchasers of the Company’s securities have acted as agent for the either
of the Purchasers in connection with the Purchasers making their investment
hereunder and that no such other third party purchasers will be acting as agent
of either of the Purchasers in connection with monitoring their investment
hereunder. Nothing contained herein or in any other Transaction Document or any
agreement of any such other third party purchaser, and no action taken by
either of the Purchasers pursuant hereto or any other third party purchaser
pursuant thereto, shall be deemed to constitute the Purchasers or any such
other third party purchasers as a partnership, an association, a joint venture
or any other kind of entity, or create a presumption that the Purchasers or any
such other third party purchasers are in any way acting in concert or as a
group with respect to any matters. Each of the Purchasers shall be entitled to
independently protect and enforce its rights, including, without limitation,
the rights arising out of this Agreement or out of any of the other Transaction
Documents, and it shall not be necessary for any such other third party
purchasers to be joined as an additional party in any proceeding for such
purpose. To the extent that any such other third party purchasers purchase the
same or similar securities as a Purchaser hereunder or on the same or similar
terms and conditions or pursuant to the same or similar documents, all such
matters are solely in the control of the Company, not the action or decision of
the Purchasers, and would be solely for the convenience of the Company and not
because it was required or requested to do so by either of the Purchasers or
any such other third party purchaser.

 

11

 

Representations and
Warranties of the Purchasers.  Each
Purchaser hereby, as to itself only and for no other Purchaser, represents and
warrants to the Company as follows:

 

Organization; Authority. 
Such Purchaser is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization with the
requisite power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. 
The purchase by such Purchaser of the Shares and the Warrants hereunder
has been duly authorized by all necessary action on the part of such
Purchaser.  This Agreement has been duly
executed and delivered by such Purchaser and constitutes the valid and binding
obligation of such Purchaser, enforceable against it in accordance with its
terms.

 

Investment Intent. 
Such Purchaser is acquiring the Securities as principal for investment
purposes only and not with a view to or for distributing or reselling such
Securities or any part thereof, without prejudice, however, to such Purchaser’s
right, subject to the provisions of this Agreement, at all times to sell or
otherwise dispose of all or any part of such Securities pursuant to an
effective registration statement under the Securities Act or under an exemption
from such registration and in compliance with applicable federal and state
securities laws.

 

Purchaser Status. 
At the time such Purchaser was offered the Shares and the Warrants, it
was, and at the date hereof it is, an “accredited investor” as defined in Rule
501(a) under the Securities Act.

 

Experience of such
Purchaser. Such
Purchaser, either alone or together with its representatives has such
knowledge, sophistication and experience in business and financial matters so
as to be capable of evaluating the merits and risks of the prospective
investment in the Securities, and has so evaluated the merits and risks of such
investment. Such Purchaser is able to bear the economic risk of an investment
in the Securities and, at the present time, is able to afford a complete loss
of such investment.

 

(e)           Certain Trading Limitations. 
Each Purchaser agrees that beginning on the date the Purchaser first
learned of this transaction, and continuing until the Closing Date, it has not
entered into any Short Sales. For purposes of this Section 3.2(e),
a “Short
Sale” by a Purchaser means a sale of Common Stock that is marked as
a short sale and that is executed at a time when such Purchaser has no
equivalent offsetting long position in the Common Stock.  For purposes of determining whether a
Purchaser has an equivalent offsetting long position in the Common Stock, all
Common Stock and all Common Stock that would be issuable upon conversion or
exercise in full of all Options then held by such Purchaser (assuming that such
Options were then fully convertible or exercisable, notwithstanding any
provisions to the contrary, and giving effect to any conversion or exercise
price adjustments scheduled to take effect in the future) shall be deemed to be
held long by such Purchaser.

 

(f)            Rule 144.  Such
Purchaser acknowledges that the Shares must be held indefinitely unless
subsequently registered for resale under the Securities Act or unless an
exemption from such registration is available. 
Such Purchaser is aware of the provisions of Rule 144 promulgated under
the Securities Act which permits limited resale of securities purchased in a
private placement, subject to the satisfaction of certain conditions,
including, among other things, the existence of a public market for the shares,
the availability of certain current public information about the Company, the
resale occurring not less than one year after a party has purchased and fully
paid for the security to be sold, the sale being effected through a “broker’s 

 

12

 

transaction” or in a transaction directly with a “market maker” and the
number of shares being sold during any three-month period not exceeding
specified limitations.

 

(g)           Access
to Information. Such Purchaser has had an opportunity to discuss the
Company’s business, management and financial affairs with its management.  It has also had an opportunity to ask
questions of officers of the Company. Such Purchaser understands that such
discussions, as well as any written information issued by the Company, did not
contain any material non-public information and were intended to describe
certain aspects of the Company’s business and prospects. SUCH PURCHASER
UNDERSTANDS THAT ITS INVESTMENT IN THE SHARES INVOLVES A HIGH DEGREE OF RISK.

 

(h)           No
Governmental Review. Such Purchaser understands that no United States
federal or state agency or any other government or governmental agency or
authority has passed upon or made any recommendation or endorsement of the
Shares.

 

(i)            Residency.
Such Purchaser is a resident of the jurisdiction set forth immediately below
such Purchaser’s name on the signature pages attached hereto.

 

(j)            Acknowledgment
Regarding 5% Ownership of Company’s Outstanding Common Stock. Such Purchaser
acknowledges and agrees that if at any point in time such Purchaser owns five
percent (5%) or more of the Company’s outstanding shares of Common Stock, then
said Purchaser may be subject to obligations, including the filing of
applicable documents, under the rules and regulations of (i) the Commission and
(ii) various gaming regulatory agencies.

 

OTHER AGREEMENTS OF THE PARTIES

 

Transfer Restrictions.

 

The Securities may only
be disposed of pursuant to an effective registration statement under the Securities
Act or pursuant to an available exemption from the registration requirements of
the Securities Act, and in compliance with any applicable state securities
laws.  In connection with any transfer
of any of the Securities other than pursuant to an effective registration
statement or to the Company or pursuant to Rule 144(k), except as otherwise set
forth herein, the Company may require the transferor to provide to the Company
an opinion of counsel selected by the transferor, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration under the Securities Act.  Notwithstanding the foregoing, the Company
hereby consents to and agrees to register on the books of the Company and with
its transfer agent, without any such legal opinion, any transfer of any of the
Securities by a Purchaser to an Affiliate of such Purchaser, provided that the
transferee certifies to the Company that it is an “accredited investor” as defined
in Rule 501(a) under the Securities Act.

 

The Purchasers agree to
the imprinting, so long as is required by this Section 4.1(b), of
the following legend on any certificate evidencing Securities:

 

13

 

[NEITHER] THESE
SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE]
HAVE [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS OR BLUE SKY LAWS. 
NOTWITHSTANDING THE FOREGOING, THESE SECURITIES [AND THE SECURITIES
ISSUABLE UPON EXERCISE OF THESE SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH
SECURITIES.

 

In addition, the
Purchasers acknowledge that each certificate for the Securities shall bear any
additional legend required by any other applicable domestic or foreign
securities or blue sky laws.

 

Certificates evidencing
the Securities shall not be required to contain such legend or any other legend
(i) while a Registration Statement covering the resale of the Securities is
effective under the Securities Act, or (ii) following any sale of the
Securities pursuant to Rule 144, or (iii) if the Securities are eligible for
sale under Rule 144(k), or (iv) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the Staff of the Commission).  The Company shall cause its counsel to issue
the legal opinion included in the Transfer Agent Instructions to the Company’s
transfer agent on the Effective Date.  Following
the Effective Date or at such earlier time as a legend is no longer required
for certain Securities, the Company will no later than three Trading Days
following the delivery by a Purchaser to the Company or the Company’s transfer
agent of a legended certificate representing such Securities, deliver or cause
to be delivered to such Purchaser a certificate representing such Securities
that is free from all restrictive and other legends.  The Company may not make any notation on its records or give instructions
to any transfer agent of the Company that enlarge the restrictions on transfer
set forth in this Section. The Company acknowledges and agrees that a Purchaser
may from time to time pledge or grant a security interest in some or all of the
Securities in connection with a bona fide margin agreement or other loan or
financing arrangement secured by the Securities and, if required under the
terms of such agreement, loan or arrangement, such Purchaser may transfer
pledged or secured Securities to the pledgees or secured parties.  Such a pledge or transfer would not be
subject to approval of the Company and no legal opinion of the pledgee, secured
party or pledgor shall be required in connection therewith.  Further, no notice shall be required of such
pledge.  At the appropriate Purchaser’s
expense, the Company will execute and deliver such reasonable documentation as
a pledgee or secured party of the Securities may reasonably request in
connection with a pledge or transfer of the Securities, including the
preparation and filing of any required prospectus supplement under Rule
424(b)(3) of the Securities Act or other applicable provision of the Securities
Act to appropriately amend the list of Selling Stockholders thereunder.

 

Furnishing of Information.  As long as any Purchaser owns any of the Securities, the Company
covenants to timely file (or obtain extensions in respect thereof and file
within the applicable 

 

14

 

grace period) all reports required to be filed by the Company after the
date hereof pursuant to the Exchange Act. 
Upon the request of any Purchaser, the Company shall deliver to such
Purchaser a written certification of a duly authorized officer as to whether it
has complied with the preceding sentence. As long as any Purchaser owns any of
the Securities, if the Company is not required to file reports pursuant to such
laws, it will prepare and furnish to the Purchasers and make publicly available
in accordance with paragraph (c) of Rule 144 such information as is required
for the Purchasers to sell the Securities under Rule 144.  The Company further covenants that it will
take such further action as either of the Purchasers may reasonably request to
satisfy the provisions of Rule 144 applicable to the issuer of securities
relating to transactions for the sale of securities pursuant to Rule 144.

 

Integration. The Company will not offer, sell or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in the Securities Act) in a manner that would cause the offer and sale
of the Shares to the Purchasers to fail to be entitled to the exemption from
registration afforded by Rule 506 of Regulation D and Section 4(2) of the
Securities Act or that would be integrated with the offer or sale of the
Securities for purposes of the rules and regulations of any Trading Market.

 

Reservation of Securities. 
The Company shall maintain a reserve from its duly authorized shares of
Common Stock for issuance pursuant to the Transaction Documents in such amount
as may be required to fulfill its obligations in full under the Transaction
Documents.  In the event that at any
time the then authorized shares of Common Stock are insufficient for the
Company to satisfy its obligations in full under the Transaction Documents, the
Company shall promptly take such actions as may be required to increase the
number of authorized shares.

 

Subsequent Placements.

 

From the date hereof
until the Effective Date, the Company will not, directly or indirectly, offer,
sell, grant any option to purchase, or otherwise dispose of (or agree to do any
of the foregoing) (or announce any offer, sale, grant of any option to purchase
or other disposition of) any of its or the Subsidiaries’ equity or equity
equivalent securities, including without limitation any debt, preferred stock
or other instrument or security that is, at any time during its life and under
any circumstances, convertible into or exchangeable or exercisable for Common
Stock or Common Stock Equivalents (any such offer, sale, grant, disposition or
announcement being referred to as a “Subsequent Placement”).

 

From the Effective Date
until 30 Trading Days after the Effective Date (the “Blockout Period”), the
Company will not, directly or indirectly, effect any Subsequent Placement,
except with regard to Excluded Stock.

 

The Blockout Period set
forth in Section 4.5(b) above shall be extended for the number of
Trading Days during such period in which (i) trading in the Common Stock is
suspended by any Trading Market, (ii) the Registration Statement is not
effective, or (iii) the prospectus included in the Registration Statement may
not be used by the Purchasers for the resale of Registrable Securities
thereunder.

 

From the date hereof
until the first anniversary of the Closing Date, the Company will not engage in
a Subsequent Placement in which the offer or sale price for its or the
Subsidiaries’ equity or equity equivalent securities is less than the price
paid for the Shares at Closing.

 

15

 

(e)           The
restrictions contained in paragraphs (b) and (d) of this Section 4.5
shall not apply to Excluded Stock.

 

Securities Laws
Disclosure; Publicity.  The Company shall, on or
before 7:30 a.m., Chicago time, on September 21, 2004, issue a press
release in the form attached hereto as Schedule 4.6.  On the Closing Date, the Company shall file
a Current Report on Form 8-K with the Commission (the “8-K Filing”)  describing
the terms of the transactions contemplated by the Transaction Documents and
including as exhibits to such Current Report on Form 8-K this Agreement and the
form of the Warrants, in the form required by the Exchange Act. Thereafter, the
Company shall timely file any filings and notices required by the Commission or
applicable law with respect to the transactions contemplated hereby and provide
copies thereof to the Purchasers promptly after filing.  Except with
respect to the 8-K Filing (a copy of which will be provided to the Purchasers
for their review as early as practicable prior to its filing), the  Company shall, at least two days prior to
the filing or dissemination of any disclosure required by this paragraph,
provide a copy thereof to the Purchasers for their review.  Notwithstanding the foregoing, the Company shall
not publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission or any regulatory agency or Trading
Market, without the prior written consent of such Purchaser, except to the
extent such disclosure (but not any disclosure as to the controlling Persons
thereof) is required by law or Trading Market regulations, in which case the
Company shall provide the Purchasers with prior notice of such disclosure.  The Company shall not, and shall cause each
of its Subsidiaries and its and each of their respective officers, directors,
employees and agents not to, provide any Purchaser with any material nonpublic
information regarding the Company or any of its Subsidiaries from and after the
filing of the 8-K Filing without the express prior written consent of such
Purchaser. In the event of a breach of the foregoing covenant by the Company,
any of its Subsidiaries, or any of its or their respective officers, directors,
employees and agents, the Company shall make a public disclosure, in the form
of a press release, public advertisement or otherwise, of such material
nonpublic information. No Purchaser shall have any liability to the Company,
its Subsidiaries, or any of its or their respective officers, directors,
employees, shareholders or agents for any such disclosure.  Subject to the foregoing, neither the
Company nor any Purchaser shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of any
Purchaser, to make any press release or other public disclosure with respect to
such transactions (i) in substantial conformity with the 8-K Filing and
contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided that in the case of clause (i) the Purchasers shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release). Each press release disseminated during
the 12 months preceding the date of this Agreement did not at the time of
release contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading.

 

Use of Proceeds. The Company shall use the net proceeds
from the sale of the Securities hereunder primarily for paying down the
Company’s bank debt.

 

Reimbursement. 
If any Purchaser and/or any of its Affiliates or any officer, director,
partner, controlling Person, member, manager, investment advisor, employee or
agent of a Purchaser or any of its Affiliates (each a “Related Person”) becomes
involved in any capacity in any Proceeding brought by or against any Person in
connection with or as a result of the transactions contemplated by the
Transaction Documents (except per the indemnification provisions set forth 

 

16

 

in Section 6.4
hereof), the Company will indemnify and hold harmless such Purchaser and each
Related Person for their reasonable legal and other expenses (including the
costs of any investigation, preparation and travel) and for any Losses incurred
in connection therewith which are determined by a court of competent
jurisdiction in a non-appealable order to have resulted from the gross
negligence, willful misconduct or fraud of the Company or its Affiliates.  In addition, the Company shall indemnify and
hold harmless each Purchaser and Related Person from and against any and all
Losses arising out of or relating to any breach by the Company of any
representation, warranty or covenant made by the Company in this Agreement or
any other Transaction Document, or any allegation by a third party that, if
true, would constitute such a breach. 
The conduct of any Proceedings for which indemnification is available
under this paragraph shall be governed by Section 6.4(c)
below.  Subject to Section 6.4
below, the indemnification obligations of the Company under this paragraph
shall be in addition to any liability that the Company may otherwise have and
shall be binding upon and inure to the benefit of any successors, assigns,
heirs and personal representatives of the Purchasers and any such Related
Persons.  The Company also agrees that
neither the Purchasers nor any Related Person shall have any liability to the
Company or any Person asserting claims on behalf of or in right of the Company
in connection with or as a result of the transactions contemplated by the
Transaction Documents, except to the extent that any Losses incurred by the
Company result from the gross negligence or willful misconduct of the
applicable Purchaser or Related Person in connection with such transactions. If
the Company breaches its obligations under any Transaction Document, then, in
addition to any other liabilities the Company may have under any Transaction
Document or applicable law, the Company shall pay or reimburse the Purchasers
on demand for all costs of collection and enforcement (including reasonable
attorneys fees and expenses).  Without
limiting the generality of the foregoing, the Company specifically agrees to
reimburse the Purchasers for all costs of enforcing the indemnification
obligations in this paragraph as determined by a court of competent
jurisdiction in a final judgment not subject to appeal or review.  Notwithstanding anything to the contrary
contained in this Section 4.8 to the contrary, this Section 4.8
shall not provide any Person with any additional remedy for any claim
provided by the provisions of Section 6.4 hereof.

 

CONDITIONS

 

Conditions Precedent to
the Obligations of the Purchasers.  The
obligation of each Purchaser to acquire the Securities at the Closing is
subject to the satisfaction or waiver by such Purchaser, at or before the
Closing, of each of the following conditions:

 

Representations
and Warranties.
The representations and warranties of the Company contained herein shall be
true and correct in all material respects as of the date when made and as of
the Closing as though made on and as of such date; and

 

Performance. 
The Company shall have performed, satisfied and complied in all material
respects with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by it at or prior to the
Closing.

 

Contemporaneous Offering. 
Simultaneously with or prior to the Closing, the Company shall have sold
securities (the “Contemporaneous Offering”) to third party purchasers, who are
not acting in concert with the Purchasers, for an aggregate of a minimum of
$3,500,000 and a 

 

17

 

maximum of $5,500,000.
The securities sold to any such third party purchasers shall be on, and have,
such terms and conditions as the Company shall determine in its sole
discretion.

 

Conditions Precedent to
the Obligations of the Company.  The
obligation of the Company to sell the Securities at the Closing is subject to
the satisfaction or waiver by the Company, at or before the Closing, of each of
the following conditions:

 

Representations and
Warranties.  The representations and warranties of the
Purchasers contained herein shall be true and correct in all material respects
as of the date when made and as of the Closing Date as though made on and as of
such date;

 

Performance. 
The Purchasers shall have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the
Purchasers at or prior to the Closing;

 

(c)           No
Injunction.  No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated, endorsed or threatened or be pending by or
before any governmental authority of competent jurisdiction which prohibits or
threatens to prohibit the consummation of any of the transactions contemplated
by this Agreement and the agreements attached as exhibits hereto;

 

(d)           Share
Price.  The Closing Price shall be
no less than $4.50/Share; and

 

(e)           Contemporaneous
Offering.  Simultaneously with or
prior to the Closing Date, the Company shall have sold securities to third
party purchasers, who are not acting in concert with the Purchasers, for an
aggregate of a minimum of $3,500,000 and a maximum of $5,500,000. The
securities sold to any such third party purchasers shall be on, and have, such
terms and conditions as the Company shall determine in its sole discretion.

 

REGISTRATION RIGHTS

 

Shelf Registration

 

As promptly as possible,
and in any event on or prior to the Filing Date, the Company shall prepare and
file with the Commission a “Shelf” Registration Statement covering the resale
of all Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415.  The Registration
Statement shall be on Form S-3 (except if the Company is not then eligible to
register for resale the Registrable Securities on Form S-3, in which case such
registration shall be on another appropriate form in accordance herewith as the
Purchasers may consent in writing) and shall contain (except if otherwise
directed by the Purchasers) the “Plan of Distribution” attached hereto as Exhibit
C.

 

The Company shall use
commercially reasonable efforts to cause the Registration Statement to be
declared effective by the Commission as promptly as possible after the filing
thereof, but in any event prior to the Required Effectiveness Date, and shall
use commercially reasonable efforts to keep the Registration Statement
continuously effective under the Securities Act until the earlier of (i) the
date when all Registrable Securities covered by such Registration Statement
have been resold either under the Registration Statement or pursuant to Rule
144, and (ii) the 

 

18

 

date on which all
Registrable Securities may be sold without restriction or limitation pursuant
to paragraph (k) of Rule 144 (“Effectiveness Period”).

 

The Company shall notify
each Purchaser in writing promptly (and in any event within one Trading Day)
after receiving notification from the Commission that the Registration
Statement has been declared effective.

 

Commencing upon the
occurrence of any Event (as defined below) and until the applicable Event is
cured, as partial relief for the damages suffered therefrom by the Purchasers
(which remedy shall not be exclusive of any other remedies available under this
Agreement, at law or in equity), the Company shall pay upon the occurrence of
such Event and on every monthly anniversary thereof to each Purchaser an amount
in cash, as damages and not as a penalty, equal to 1.5% of the greater of (i)
the aggregate purchase price paid by such Purchaser hereunder and (ii) the
Market Value of the Shares then outstanding, in each case, prorated for any
partial month.  The payments to which a
Purchaser shall be entitled pursuant to this Section 6.1(d) are
referred to herein as “Event Payments”.  Any Event Payments payable pursuant to the terms hereof shall
apply on a pro-rata basis for any portion of a month prior to the cure of an
Event. In the event the Company fails to make Event Payments in a timely
manner, such Event Payments shall bear interest at the rate of 1.5% per month
(prorated for partial months) until paid in full.

 

For such purposes, each
of the following shall constitute an “Event”:

 

the Registration
Statement is not filed on or prior to the Filing Date or is not declared
effective on or prior to the Required Effectiveness Date;

 

after the Effective Date,
the Commission issues a stop order which has the effect of suspending a
Purchaser’s right to sell Registrable Securities under the Registration
Statement (or a subsequent Registration Statement filed in replacement thereof)
and such suspension is not waived or lifted for five or more Trading Days
(whether or not consecutive);

 

after the Effective Date,
any Registrable Securities covered by such Registration Statement are not
listed on an Eligible Market;

 

the Common Stock is not
listed or quoted, or is suspended from trading, on an Eligible Market for a
period of three Trading Days (which need not be consecutive Trading Days) in
any twelve (12) month period; or

 

the Company fails to have
available a sufficient number of authorized but unissued and otherwise
unreserved shares of Common Stock available to issue Underlying Shares upon any
exercise of the Warrants or, at any time following the Effective Date, any
Shares or Underlying Shares are not listed on an Eligible Market.

 

Notwithstanding
the foregoing, no Event may be deemed to occur entitling a Purchaser to an
Event Payment or other relief if the Event occurs after a Purchaser has
disposed of all of its Registrable Securities.

 

The Company shall not,
prior to the Effective Date of the Registration Statement, prepare and file
with the Commission a registration statement relating to an offering for its
own account or the account of others under the Securities Act of any of its
equity securities.

 

19

 

Registration Procedures. 
(i) In connection with the Company’s registration obligations hereunder,
the Company shall:

 

Not less than three
Trading Days prior to the filing of a Registration Statement or any related
Prospectus or any amendment, or not less than one Trading Day for any
supplement thereto (including any document that would be incorporated or deemed
to be incorporated therein by reference), the Company shall (i) furnish to each
Purchaser copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of each such Purchaser for up to three Trading Days,
and (ii) cause its officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of respective counsel, to conduct a reasonable investigation
within the meaning of the Securities Act.

 

(i) Prepare and file with
the Commission such amendments, including post-effective amendments, to each
Registration Statement and the Prospectus used in connection therewith as may
be necessary to keep the Registration Statement continuously effective as to
the applicable Registrable Securities for the Effectiveness Period and prepare
and file with the Commission such additional Registration Statements in order
to register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented by
any required Prospectus supplement, and as so supplemented or amended to be
filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible,
and in any event within ten days, to any comments received from the Commission
with respect to the Registration Statement or any amendment thereto and as
promptly as reasonably possible provide the Purchasers true and complete copies
of all correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Purchasers thereof set forth in the Registration Statement as so amended or in
such Prospectus as so supplemented.

 

Notify the Purchasers and
Purchasers’ Counsel of the Registrable Securities to be sold as promptly as
reasonably possible, and (if requested by any such Person) confirm such notice
in writing no later than one Trading Day thereafter, of any of the following
events: (i) the Commission notifies the Company whether there will be a
“review” of any Registration Statement; (ii) the Commission comments in writing
on any Registration Statement (in which case the Company shall deliver to each
Purchaser a copy of such comments and of all written responses thereto); (iii)
any Registration Statement or any post-effective amendment is declared
effective; (iv) the Commission or any other Federal or state governmental
authority requests any amendment or supplement to any Registration Statement or
Prospectus or requests additional information related thereto; (v) the
Commission issues any stop order suspending the effectiveness of any
Registration Statement or initiates any Proceedings for that purpose; (vi) the
Company receives notice of any suspension of the qualification or exemption
from qualification of any Registrable Securities for sale in any jurisdiction,
or the initiation or threat of any Proceeding for such purpose; or (vii) the
financial statements included in any Registration Statement become ineligible
for inclusion therein or any statement made in any Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference is untrue in any material respect or any revision to a Registration
Statement, Prospectus or other document is required so that it will not contain
any untrue statement of a material fact or 

 

20

 

omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.

 

Use its best efforts to
avoid the issuance of or, if issued, obtain the withdrawal of (i) any order
suspending the effectiveness of any Registration Statement, or (ii) any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, as soon as possible.

 

Furnish to each Purchaser
and Purchasers’ Counsel, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.

 

Promptly deliver to each
Purchaser and Purchasers’ Counsel, without charge, as many copies of the
Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request.  The Company hereby consents to the use of
such Prospectus and each amendment or supplement thereto by each of the
Purchasers in connection with the offering and sale of the Registrable
Securities covered by such Prospectus and any amendment or supplement thereto.

 

 (i) In the time and manner required by each
Trading Market on which the Company’s shares are listed, prepare and file with
such Trading Market an additional shares listing application covering all of
the Registrable Securities; (ii) take all steps necessary to cause such
Registrable Securities to be approved for listing on each Trading Market on
which the Company’s shares are listed as soon as possible thereafter; (iii)
provide to the Purchasers evidence of such listing; and (iv) maintain the listing
of such Registrable Securities on such Trading Market or another Eligible
Market.

 

Prior to any public
offering of Registrable Securities, use commercially reasonable efforts to
register or qualify or cooperate with a selling Purchaser and such Purchaser’s
counsel in connection with the registration or qualification (or exemption from
such registration or qualification) of such Registrable Securities for offer
and sale under the securities or Blue Sky laws of such jurisdictions within the
United States as any Purchaser requests in writing, to keep each such
registration or qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things necessary or
advisable to enable the disposition in such jurisdictions of the Registrable
Securities covered by a Registration Statement.

 

Cooperate with the
Purchasers to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be delivered to a transferee pursuant to
a Registration Statement, which certificates shall be free, to the extent
permitted by this Agreement, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such Purchasers may request.

 

Upon the occurrence of
any event described in Section 6.2(c)(vii), as promptly as
reasonably possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an 

 

21

 

untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.

 

Cooperate with any
reasonable due diligence investigation undertaken by the Purchasers in
connection with the sale of Registrable Securities, including, without
limitation, by making available any documents and information; provided that
the Company will not deliver or make available to any Purchaser material,
nonpublic information unless such Purchaser specifically requests in advance to
receive material, nonpublic information in writing.

 

Comply with all
applicable rules and regulations of the Commission.

 

Registration Expenses. 
The Company shall pay (or reimburse the Purchasers for) all reasonable
fees and expenses incident to the performance of or compliance with this
Agreement by the Company, including without limitation (a) all registration and
filing fees and expenses, including without limitation those related to filings
with the Commission, any Trading Market and in connection with applicable state
securities or Blue Sky laws, (b) printing expenses (including without
limitation expenses of printing certificates for Registrable Securities and of
printing prospectuses requested by the Purchasers), (c) messenger, telephone
and delivery expenses, (d) fees and disbursements of counsel for the Company,
(e) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by this
Agreement, and (f) all listing fees to be paid by the Company to the Trading
Market.

 

Indemnification

 

Indemnification by the
Company.  The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless each Purchaser, the
officers, directors, partners, members, managers, agents, brokers (including
brokers who offer and sell Registrable Securities as principal as a result of a
pledge or any failure to perform under a margin call of Common Stock),
investment advisors, employees, representatives and agents of each of them,
each Person who controls any such Purchaser (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, partners, members, managers, agents, employees,
representatives and investment advisors of each such controlling Person, to the
fullest extent permitted by applicable law, from and against any and all
Losses, (as determined by a court of competent jurisdiction in a final judgment
not subject to appeal or review), arising out of or relating to any untrue or
alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in the light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that (i) such untrue statements, alleged untrue
statements, omissions or alleged omissions are based solely upon information
regarding such Purchaser furnished in writing to the Company by such Purchaser
or its authorized agent expressly for use therein, or to the extent that such
information relates to such Purchaser or such Purchaser’s proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Purchaser expressly for use in the Registration Statement,
such Prospectus or such form of Prospectus or in any amendment or supplement
thereto or (ii) in the case of an occurrence of an event of the type specified
in Section 6.2(c)(v)-(vii), the use by such Purchaser of an
outdated or defective Prospectus after the Company has notified such 

 

22

 

Purchaser in writing that
the Prospectus is outdated or defective and prior to the receipt by such
Purchaser of the Advice contemplated in Section 6.5.  The Company shall notify the Purchasers
promptly of the institution, threat or assertion of any Proceeding of which the
Company is aware in connection with the transactions contemplated by this
Agreement.  Notwithstanding the
foregoing, to the extent the Purchasers suffer any Losses pursuant to the
occurrence of an Event under Section 6.1(d), the Purchasers shall
only be entitled to make a claim under this Section 6.4 for Losses
not covered by the Event Payments.

 

Indemnification by
Purchasers. Each
Purchaser shall, severally and not jointly, indemnify and hold harmless the
Company, its directors, officers, agents and employees, each Person who
controls the Company (within the meaning of Section 15 of the Securities
Act and Section 20 of the Exchange Act), and the directors, officers,
agents or employees of such controlling Persons, to the fullest extent
permitted by applicable law, from and against all Losses (as determined by a
court of competent jurisdiction in a final judgment not subject to appeal or
review) arising solely out of any untrue statement of a material fact contained
in the Registration Statement, any Prospectus, or any form of prospectus, or in
any amendment or supplement thereto, or arising solely out of any omission of a
material fact required to be stated therein or necessary to make the statements
therein (in the case of any Prospectus or form of prospectus or supplement
thereto, in the light of the circumstances under which they were made) not
misleading to the extent, but only to the extent, that such untrue statement or
omission is contained in any information so furnished in writing by such
Purchaser or its authorized agent to the Company specifically for inclusion in
such Registration Statement or such Prospectus or to the extent that (i) such
untrue statements or omissions are based solely upon information regarding such
Purchaser furnished in writing to the Company by such Purchaser expressly for
use therein, or to the extent that such information relates to such Purchaser
or such Purchaser’s proposed method of distribution of Registrable Securities
and was reviewed and expressly approved in writing by such Purchaser or its
authorized agent expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
or (ii) in the case of an occurrence of an event of the type specified in Section 6.2(c)(v)-(vii),
the use by such Purchaser of an outdated or defective Prospectus after the
Company has notified such Purchaser in writing that the Prospectus is outdated
or defective and prior to the receipt by such Purchaser of the Advice
contemplated in Section 6.5. 
In no event shall the liability of any Purchaser hereunder be greater in
amount than the dollar amount of the net proceeds received by such Purchaser
upon the sale of the Registrable Securities giving rise to such indemnification
obligation.

 

Conduct of
Indemnification Proceedings. If any Proceeding shall be brought or asserted
against any Person entitled to indemnity hereunder (an “Indemnified Party”), such
Indemnified Party shall promptly notify the Person from whom indemnity is
sought (the “Indemnifying Party”) in writing, and the Indemnifying Party
shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to the Indemnified Party and the payment of all fees
and expenses incurred in connection with defense thereof; provided, that the
failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this
Agreement, except (and only) to the extent that it shall be finally determined
by a court of competent jurisdiction (which determination is not subject to
appeal or further review) that such failure shall have proximately and
materially adversely prejudiced the Indemnifying Party.

 

An
Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless:  (i) the Indemnifying Party 

 

23

 

has agreed in writing to pay such fees and expenses; or (ii) the
Indemnifying Party shall have failed promptly to assume the defense of such
Proceeding and to employ counsel reasonably satisfactory to such Indemnified
Party in any such Proceeding; or (iii) the named parties to any such Proceeding
(including any impleaded parties) include both such Indemnified Party and the
Indemnifying Party, and such Indemnified Party shall have been advised in writing
by counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in which
case, if such Indemnified Party notifies the Indemnifying Party in writing that
it elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense thereof
and such counsel shall be at the expense of the Indemnifying Party).  The Indemnifying Party shall not be liable
for any settlement of any such Proceeding effected without its written consent,
which consent shall not be unreasonably withheld or delayed.  No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party
from all liability on claims that are the subject matter of such Proceeding.

 

All
fees and expenses of the Indemnified Party (including reasonable fees and
expenses to the extent incurred in connection with investigating or preparing
to defend such Proceeding in a manner not inconsistent with this Section) the
reimbursement of which is the responsibility of the Indemnifying Party
hereunder, shall be paid to the Indemnified Party, promptly after it is
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review that such Indemnified Party is entitled to indemnification
hereunder.

 

Contribution. 
If a claim for indemnification under Section 6.4(a) or (b)
is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable
considerations.  The relative fault of
such Indemnifying Party and Indemnified Party shall be determined by reference
to, among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of
a material fact, has been taken or made by, or relates to information supplied
by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission.  The
amount paid or payable by a party as a result of any Losses shall be deemed to
include, subject to the limitations set forth in Section 6.4(c),
any reasonable attorneys’ or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have
been indemnified for such fees or expenses if the indemnification provided for
in this Section was available to such party in accordance with its terms.

 

The
parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 6.4(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding
paragraph.  Notwithstanding the
provisions of this Section 6.4(d), no Purchaser shall be required
to contribute, in the aggregate, any amount in excess of the amount by which
the proceeds actually received by such Purchaser from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Purchaser has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission.  No Person guilty of fraudulent
misrepresentation (within the meaning of 

 

24

 

Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.

 

The
indemnity and contribution agreements contained in this Section are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.

 

Dispositions. 
Each Purchaser agrees that it will comply with the prospectus delivery
requirements of the Securities Act as applicable to it in connection with sales
of Registrable Securities pursuant to the Registration Statement.  Each Purchaser further agrees that, upon
receipt of a notice from the Company of the occurrence of any event of the kind
described in Sections 6.2(c)(v), (vi) or (vii), such
Purchaser will discontinue disposition of such Registrable Securities under the
Registration Statement until such Purchaser’s receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated by Section 6.2(j),
or until it is advised in writing (the “Advice”) by the Company that the use of
the applicable Prospectus may be resumed, and, in either case, has received
copies of any additional or supplemental filings that are incorporated or
deemed to be incorporated by reference in such Prospectus or Registration
Statement.  The Company may provide appropriate
stop orders to enforce the provisions of this paragraph.

 

No Piggyback on
Registrations.
Except as set forth on Schedule 6.6, neither the Company nor any of
its security holders (other than the Purchasers in such capacity pursuant
hereto) may include securities of the Company in the Registration Statement
other than the Registrable Securities, and the Company shall not after the date
hereof enter into any agreement providing any such right to any of its security
holders.

 

Piggy-Back Registrations. 
If at any time during the Effectiveness Period there is not an effective
Registration Statement covering all of the Registrable Securities which then
remain unused and the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Purchaser written notice of
such determination and if, within fifteen days after receipt of such notice,
any such Purchaser shall so request in writing, the Company shall include in
such registration statement all or any part of such Registrable Securities such
Purchaser requests to be registered.

 

MISCELLANEOUS

 

Termination. This Agreement may be terminated by the
Company or any Purchaser, by written notice to the other parties, if the
Closing has not been consummated by the third Trading Day following the date of
this Agreement; provided that no such termination will affect the right of any
party to sue for any breach by the other party (or parties).

 

Fees and Expenses. 
Except as expressly set forth in the Transaction Documents to the
contrary, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement.  The
Company shall pay all transfer agent fees, stamp taxes and other taxes and
duties levied in connection with the issuance of the Securities.

 

25

 

Entire Agreement. 
The Transaction Documents, together with the Exhibits and Schedules
thereto, contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters, which the parties acknowledge
have been merged into such documents, exhibits and schedules.  At or after the Closing, and without further
consideration, the parties will execute and deliver to each other such further
documents as may be reasonably requested in order to give practical effect to
the intention of the parties under the Transaction Documents.

 

Notices.  Any and all notices or other communications or deliveries required
or permitted to be provided hereunder shall be in writing and shall be deemed
given and effective on the earliest of (a) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section 7.4 prior to 5:30 p.m. (Chicago time) on
a Trading Day, (b) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section on a day that is not a Trading Day or later than
5:30 p.m. (Chicago time) on any Trading Day, (c) the Trading Day following the
date of deposit with a nationally recognized overnight courier service, or (d)
upon actual receipt by the party to whom such notice is required to be given.
The addresses and facsimile numbers for such notices and communications are
those set forth on the signature page hereto, or such other address or
facsimile number as may be designated in writing hereafter, in the same manner,
by the Company or a Purchaser.

 

Amendments; Waivers. 
No provision of this Agreement may be waived or amended except in a
written instrument signed, in the case of an amendment, by the Company and each
of the Purchasers or, in the case of a waiver, by the party against whom
enforcement of any such waiver is sought. 
No waiver of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in the
future or a waiver of any subsequent default or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right.

 

Construction. 
The headings herein are for convenience only, do not constitute a part
of this Agreement and shall not be deemed to limit or affect any of the
provisions hereof.  The language used in
this Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied
against any party.

 

Successors and Assigns. 
This Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns.  The Company may not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Purchasers. Any
Purchaser may assign its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any of the Securities, provided such transferee
agrees in writing to be bound, with respect to the transferred Securities, by
the provisions hereof that apply to the Purchasers.  Notwithstanding anything to the contrary herein, the Securities
may be assigned to any Person in connection with a bona fide margin account or
other loan or financing arrangement secured by such Securities.

 

No Third-Party
Beneficiaries.  This Agreement is intended for the benefit
of the parties hereto and their respective successors and permitted assigns and
is not for the benefit of, nor may any provision hereof be enforced by, any
other Person, except that each Related Person is an intended third party
beneficiary of Section 4.8 and each Indemnified Party is an
intended third 

 

26

 

party beneficiary of Section 6.4
and (in each case) may enforce the provisions of such Sections directly against
the parties with obligations thereunder.

 

Governing Law; Venue;
Waiver Of Jury Trial.  ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
ILLINOIS. THE COMPANY AND PURCHASERS HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF CHICAGO,
COUNTY OF COOK FOR THE ADJUDICATION OF ANY DISPUTE BROUGHT BY THE COMPANY OR
ANY PURCHASER HEREUNDER, IN CONNECTION HEREWITH OR WITH ANY TRANSACTION
CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE
ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVE,
AND AGREE NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING BROUGHT BY THE
COMPANY OR ANY PURCHASER, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE
JURISDICTION OF ANY SUCH COURT, OR THAT SUCH SUIT, ACTION OR PROCEEDING IS
IMPROPER.  EACH PARTY HEREBY IRREVOCABLY
WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY
SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR
CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY
AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT
SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF.  NOTHING CONTAINED HEREIN SHALL
BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER
PERMITTED BY LAW.  THE COMPANY AND
PURCHASERS HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY.

 

Survival. 
The representations, warranties, agreements and covenants contained
herein shall survive the Closing and the delivery and/or exercise of the
Securities, as applicable.

 

Execution. 
This Agreement may be executed in two or more counterparts, all of which
when taken together shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each party and delivered
to the other party, it being understood that both parties need not sign the
same counterpart.  In the event that any
signature is delivered by facsimile transmission, such signature shall create a
valid and binding obligation of the party executing (or on whose behalf such
signature is executed) with the same force and effect as if such facsimile
signature page were an original thereof.

 

Severability. 
If any provision of this Agreement is held to be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Agreement shall not in any way be affected or
impaired thereby and the parties will attempt to agree upon a valid and
enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

 

Rescission and Withdrawal
Right.  Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction
Documents, whenever any Purchaser exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its
related obligations within the periods therein provided, then such Purchaser
may rescind or withdraw, in its sole discretion from time to time upon written
notice 

 

27

 

to the Company, any
relevant notice, demand or election in whole or in part without prejudice to
its future actions and rights.

 

Replacement of Securities. 
If any certificate or instrument evidencing any of the Securities is
mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued
in exchange and substitution for and upon cancellation thereof, or in lieu of
and substitution therefor, a new certificate or instrument, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft
or destruction and customary and reasonable indemnity, if requested.  The applicants for a new certificate or
instrument under such circumstances shall also pay any reasonable third-party
costs associated with the issuance of such replacement Securities.

 

Remedies. 
In addition to being entitled to exercise all rights provided herein or
granted by law, including recovery of damages, each of the Purchasers and the
Company will be entitled to specific performance under the Transaction
Documents.  The parties agree that
monetary damages may not be adequate compensation for any loss incurred by
reason of any breach of obligations described in the foregoing sentence and
hereby agree to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate and agree to
waive any requirement that any Purchaser post a bond or other security in
connection with any such proceeding seeking specific performance.

 

Payment Set Aside. 
To the extent that the Company makes a payment or payments to any
Purchaser hereunder or pursuant to the Warrants, or any Purchaser enforces or
exercises its rights hereunder or thereunder, and such payment or payments or
the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company by a trustee, receiver or any other Person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or equitable cause of action), then to the extent of
any such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such payment
had not been made or such enforcement or setoff had not occurred.

 

Adjustments in Share
Numbers and Prices.  In the event of any stock split,
subdivision, dividend or distribution payable in shares of Common Stock (or
other securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly shares of Common Stock), combination or other
similar recapitalization or event occurring after the date hereof, each
reference in any Transaction Document to a number of shares or a price per
share shall be amended to appropriately account for such event.

 

Independent Nature of the
Purchasers’ Obligations and Rights.  The
obligations of the Purchasers under the Transaction Documents are several and
not joint with the obligations of any other third party purchaser of the
Company’s securities, and the Purchasers shall not be responsible in any way
for the performance of the obligations of any other third party purchaser.  Each of the Purchasers and the Company agree
and acknowledge that (i) the decision of the Purchasers to purchase the
Securities pursuant to this Agreement has been made by the Purchasers
independently of any other third party purchasers of the Company’s securities
and (ii) no other third party purchasers of the Company’s securities have acted
as agent for either of the Purchasers in connection with the Purchasers making
their investment hereunder and that no such other third party purchasers will
be acting as agent of either of the Purchasers in connection with monitoring
its investment hereunder. Nothing contained herein or in any Transaction
Document or any agreement of any such other third party purchaser, and no
action taken by 

 

28

 

either of the Purchasers
pursuant hereto or any other third party purchaser pursuant thereto, shall be
deemed to constitute either of the Purchasers or any other third party
purchasers as a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Purchasers and any other third
party purchaser are in any way acting in concert or as a group with respect to
any matters. Each of the Purchasers shall be entitled to independently protect
and enforce its rights, including without limitation, the rights arising out of
the Transaction Documents, and it shall not be necessary for any other third
party purchaser to be joined as an additional party in any proceeding for such
purpose. The Purchasers represent that they have been represented by legal counsel
in their review and negotiation of this Agreement and the other Transaction
Documents. To the extent that any such other third party purchasers purchase
the same or similar securities as the Purchasers hereunder or on the same or
similar terms and conditions or pursuant to the same or similar documents, all
such matters are solely in the control of the Company, not the action or
decision of the Purchasers, and would be solely for the convenience of the
Company and not because it was required or requested to do so by the Purchasers
or any such other third party purchaser.

 

[SIGNATURE PAGES TO FOLLOW]

 

29

 

IN WITNESS WHEREOF, the parties hereto have caused
this Securities Purchase Agreement to be duly executed by their respective
authorized signatories as of the date first indicated above.

 

	
   

  	
  WELLS-GARDNER ELECTRONICS CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
  Address for Notice:

  
	
   

  	
  9500 West 55th
  Street, Suite A

  
	
   

  	
  McCook, Illinois

  
	
   

  	
  Facsimile No.: (708) 290-2200

  
	
   

  	
  Telephone No.: (708)
  290-2100

  
	
   

  	
  Attn:  George Toma

  
	
  With a copy to:

  	
  Pedersen & Houpt

  
	
   

  	
  161 North Clark Street,
  Suite 3100

  
	
   

  	
  Chicago, IL 60601

  
	
   

  	
  Facsimile No.: (312)
  641-6895

  
	
   

  	
  Telephone No.: (312)
  641-6888

  
	
   

  	
  Attn:  Susan Hermann, Esq.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CD INVESTMENT PARTNERS, LTD.

  
	
   

  	
   

  
	
   

  	
  By:  CD Capital Management LLC

  
	
   

  	
  Its:  Investment Advisor

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  John D. Ziegelman,
  President

  	
   

  
	
   

  	
   

  
	
   

  	
  Aggregate Purchase
  Price: $500,002.40

  
	
   

  	
  Number of Shares:
  110,620

  
	
   

  	
  Underlying Shares
  subject to

  
	
   

  	
  Warrants: 44,248

  
	
   

  	
   

  
	
   

  	
  State of Principal
  Place of Business:  Cayman Islands

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
  c/o CD Capital
  Management LLC

  
	
   

  	
  Two North Riverside
  Plaza, Suite 600

  
	
   

  	
  Chicago, Illinois 60606

  
	
   

  	
  Facsimile No.: (312)
  559-1288

  
	
   

  	
  Telephone No.: (312)
  466-3239

  
	
   

  	
  Attn: John D. Ziegelman

  
	
  With a copy to:

  	
  Greenberg Traurig, LLP

  
						

 

30

 

	
   

  	
  77 W. Wacker Drive,
  Suite 2500

  
	
   

  	
  Chicago, IL 60601

  
	
   

  	
  Facsimile No.: (312)
  456-8435

  
	
   

  	
  Telephone No.: (312)
  456-8400

  
	
   

  	
  Attn: Peter H.
  Lieberman and Todd A. Mazur

  
	
   

  	
  EGI-NP INVESTMENTS, LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
  Aggregate Purchase
  Price: $500,002.40

  
	
   

  	
  Number of Shares:
  110,620

  
	
   

  	
  Underlying Shares
  subject to

  
	
   

  	
  Warrants: 44,248

  
	
   

  	
   

  
	
   

  	
  State of Principal
  Place of Business:  Illinois

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
  Two North Riverside
  Plaza

  
	
   

  	
  Chicago, Illinois 60606

  
	
   

  	
  Facsimile No.: (312)
  559-1288

  
	
   

  	
  Telephone No.: (312)
  466-3842

  
	
   

  	
  Attn: Bill Tinkler

  
	
   

  	
   

  
	
  With a copy to:

  	
  Greenberg Traurig, LLP

  
	
   

  	
  77 W. Wacker Drive,
  Suite 2500

  
	
   

  	
  Chicago, IL 60601

  
	
   

  	
  Facsimile No.: (312)
  456-8435

  
	
   

  	
  Telephone No.: (312)
  456-8400

  
	
   

  	
  Attn: Peter H.
  Lieberman and Todd A. Mazur

  

 

31

 

Exhibits:

A             Form of Warrant

B             Opinion of Company Counsel

C             Plan of Distribution

D             Transfer Agent Instructions

 

Schedules:

 

2.2(b)      Wire Transfer Instructions

3.1(a)      Subsidiaries

3.1(f)       Capitalization

3.1(h)      Material Changes

3.1(i)       Litigation

3.1(k)      Title to Assets

3.1(l)       Fees

3.1(m)     Private Placement

3.1(p)      Registration Rights

3.1(t)       Intellectual Property Rights

3.1(u)      Insurance

3.1(w)     Transactions with Affiliates and Employees

4.6           Form of Press Release

6.6           Piggyback Registration

 

32

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