exv10w2



 






EXHIBIT 10.2




SECURED CONVERTIBLE PROMISSORY NOTE




	 	 	 
	$1,100,000

	 	May 20, 2004







     FOR VALUE RECEIVED, the undersigned, SPECTRE GAMING, INC., a Minnesota
corporation (the “Maker”), hereby promises to pay to the order of Pandora
Select Partners L.P., a British Virgin Islands limited partnership, or its
assigns (the “Payee”), at such place as the Payee may designate in writing, the
principal sum of One Million One Hundred Thousand Dollars ($1,100,000), under
the terms set forth herein.


1. Interest. The unpaid principal balance hereof from time to time outstanding
shall bear interest from the date hereof at the rate of ten percent (10%) per
annum.



2. Payment and Election to Extend Note Term. The principal and interest hereof
is payable as follows:




     (a) Payments of $9,166.67 in cash of interest only are payable in arrears
on June 20, July 20 and August 20, 2004; and



     (b) Commencing on September 20, 2004, and on the 20th day of each of the
following 14 months, Maker shall pay amortized principal and interest on this
Note of $78,316.87 (the “Monthly Scheduled Payment”).



     (c) If on or before August 20, 2004, Maker has sold or leased to, or
granted participation, revenue-sharing or other similar rights to, one or more
unaffiliated Native American tribal customers (the “Tribes”) an aggregate
minimum of 130 Class III slot-machine games (the “Gaming Machines”), Maker may
elect to amend the payment schedules of subsections (a) and (b) above, as
follows:




     (i) To elect the amended payment schedules, Maker must notify Payee in
writing of such election on or before August 20, 2004.




     (ii) If Maker has made a timely election, payments of $9,166,67 in cash of
interest only are payable in arrears on September 20, October 20 and November
20, 2004 in lieu of the otherwise scheduled principal and interest payments
provided by subsection (b) above.




     (iii) If Maker has made a timely election, the Monthly Scheduled Payment
of amortized principal and interest on this Note will instead be $66,062.79,
will commence on December 20, 2004, rather than on September 20, 2004, and will
also be due on the 20th day of each of the following 17 months.




     (iv) In determining Maker’s eligibility to make the election provided by
this subsection (c), Gaming Machines are considered sold or leased (or
participation, revenue-sharing



 









 







or other similar rights shall have been granted) only if, as of the
Maker’s declared date of sale or lease, or commencement date of participation,
revenue-sharing or other similar rights, Maker can properly recognize revenue
from such sale, or begin to recognize revenue from such lease or participation,
revenue-sharing or other similar rights, in accordance with generally accepted
accounting principles and U.S. Securities and Exchange Commission regulations.



3. Optional Payment in Stock.



     (a) In lieu of making a cash payment under subsections 2(b) or 2(c)(iii)
above, Maker may pay the Monthly Scheduled Payment, or any portion thereof, but
only to the extent permitted by this subsection (a), by the issuance of shares
of its $0.01 par value common stock (the “Common Stock”), the per-share value
of which is computed as provided in Subsection (b) below. Despite the
foregoing, the number of shares of Common Stock which may be issued to pay all
or any portion of a particular Monthly Scheduled Payment may not exceed the
lesser of (i) 10% of the aggregate number of traded shares of Common Stock
reported on the NASDAQ System (or if not then traded on the NASDAQ System, on
the OTC Bulletin Board as reported by bigcharts.com, or if this service is
discontinued, such other reporting service acceptable to Payee) for the 30
trading days immediately preceding such Monthly Scheduled Payment due or (ii)
the greatest number of shares of Common Stock which, when added to the number
of shares of Common Stock “Beneficially Owned” (within the meaning set forth in
subsection (d) below) by Payee, would not cause Payee to Beneficially Own more
than 4.99% of the Maker’s outstanding Common Stock. In computing under this
subsection (a) the aggregate number of traded shares during any time period,
the Maker shall exclude (i) shares sold by or for the account or at the
direction of the Maker, officers or directors of Maker or any members of their
immediate families or any affiliates of Maker and (ii) shares determined solely
by Payee (for which Payee shall so inform the Maker in writing) to represent
unlawful or potentially unlawful sales. Maker may pay the Monthly Scheduled
Payment, or any portion thereof, by the issuance of Common Stock only if, at
the time of such payment, Maker has in effect a registration statement on Form
S-2 or SB-2 with the SEC and applicable state securities laws covering the
original issuance of such shares by the Maker or the resale of such shares by
the Payee (the “Registration Statement”).



     (b) The per-share value of the Common Stock as of a specified Scheduled
Monthly Payment date for the purposes of this Section 3 is 90% (rounded to the
nearest $.01) of the average (rounded to the nearest $.01) of the high closing
bid prices of Maker’s Common Stock on the NASDAQ System (or if not then traded
on the NASDAQ System, then on the OTC Bulletin Board as reported by
bigcharts.com, or if this service is discontinued, such other reporting service
acceptable to Payee) for the 30 trading days immediately preceding the
particular Scheduled Monthly Payment date.



     (c) Payment by Common Stock shall be deemed to be made by Maker by giving
written notice to the Payee of the number of shares being issued in such
payment, and the Maker’s calculation of the per-share market value under
subsection (b) above; provided that



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certificates representing those shares are delivered to Payee within 20
days of the due date of the Scheduled Monthly Payment.



4. Conversion.



     (a) At any time while any portion of the principal or interest of this
Note is outstanding (including during the notice period prior to any optional
cash prepayment by the Maker), the Payee may give the Maker written notice of
its intention to convert all or any portion of the outstanding principal and/or
accrued but unpaid interest on this Note into shares of the Maker’s Common
Stock based on $2.50 per share (the “Conversion Rate”). Upon receipt of the
Payee’s notice, the Maker shall immediately cause certificates representing
these shares to be delivered to Payee within 20 days of, and Payment shall be
deemed to have been made on, the date of such notice.



     (b) The Conversion Rate shall be adjusted proportionally for any
subsequent stock dividend or split, stock combination or other similar
recapitalization, reclassification or reorganization of or affecting Maker’s
Common Stock. In case of any consolidation or merger to which the Maker is a
party other than a merger or consolidation in which the Maker is the continuing
corporation, or in case of any sale or conveyance to another corporation of the
property of the Maker as an entirety or substantially as an entirety, or in the
case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Maker), then instead of receiving shares of Maker’s Common
Stock, Payee shall have the right thereafter to receive the kind and amount of
shares of stock and other securities and property which the Payee would have
owned or have been entitled to receive immediately after such consolidation,
merger, statutory exchange, sale or conveyance had the same portion of this
Note been paid or converted immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale or conveyance and, in any such
case, if necessary, appropriate adjustment shall be made in the application of
the provisions set forth in this Section with respect to the rights and
interests thereafter of the Payee, to the end that the provisions set forth in
this Section shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock and other securities and
property thereafter deliverable in connection with this Note. The provisions
of this subsection shall similarly apply to successive consolidations, mergers,
statutory exchanges, sales or conveyances.



     (c) Despite anything above to the contrary, the Payee may not convert this
Note into Common Stock under this Section 4 during the time period and to the
extent that the shares of Maker’s Common Stock that the Payee could acquire
upon the conversion would cause Payee’s Beneficial Ownership of Maker’s Common
Stock to exceed 4.99% of Maker’s outstanding Common Stock; provided, however,
that the limitations on the right to exercise a warrant for 200,000 shares of
Common Stock being issued to Payee in connection with this Note (the
“Warrant”), as provided by such Warrant, shall first reduce Payee’s Beneficial
Ownership of Maker’s Common Stock before limitation of Payee’s conversion
rights hereunder; and provided further, that the limitation of Payee’s
conversion rights hereunder shall first reduce Payee’s



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Beneficial Ownership before limiting the number of shares that Maker may
issue to Payee as payment hereunder pursuant to Section 3(a) above. The Payee
will, at the request of Maker, from time to time, notify Maker of Payee’s
computation of Payee’s Beneficial Ownership. The parties shall compute Payee’s
“Beneficial Ownership” of Maker’s Common Stock in accordance with U.S.
Securities and Exchange Commission (“SEC”) Rule 13d-3.



     (d) If (but only if) the Common Stock shall be listed for trading on the
NASDAQ System during the term of this Note, then, unless the Maker shall have
obtained the approval of its voting shareholders to such issuance in accordance
with the rules of NASDAQ or such other stock market with which the Maker shall
be required to comply (but only to the extent required thereby), the Maker
shall not issue shares of Common Stock upon conversion of the Note or in
payment of interest on the Note, which when added to the number of shares of
Common Stock previously issued by Maker (i) upon conversion of the Note, (ii)
upon exercise of the Warrant and (iii) in payment of interest on the Note,
would equal or exceed 20% of the number of shares of the Maker’s Common Stock
which were issued and outstanding on the date of issuance (the “Maximum
Issuance Amount”). In the event that a properly executed conversion notice is
received by the Maker which would require the Maker to issue shares of Common
Stock equal to or in excess of the Maximum Issuance Amount, the Maker shall
honor such conversion request by (i) converting the Note into the number of
shares of Common Stock stated in the conversion notice but not in excess of the
Maximum Issuance Amount, and (ii) redeeming the number of shares of Common
Stock stated in the conversion notice equal to or in excess of the Maximum
Issuance Amount in cash at a price equal to the then-current fair market value
(i.e., the closing bid price of Maker’s Common Stock on the NASDAQ System, or
if not then traded on the NASDAQ System, then on the OTC Bulletin Board as
reported by bigcharts.com, or if this service is discontinued, such other
reporting service acceptable to Payee) on the date of redemption. In the event
that the Maker shall elect to pay interest on this Note in shares of Common
Stock which would require the Maker to issue shares of Common Stock equal to or
in excess of the Maximum Issuance Amount, the Maker shall pay interest in
shares of Common Stock equal to one share less than an amount which would
result in the Maker issuing shares equal to the Maximum Issuance Amount, and
the balance of the interest payment in cash.


5. Contingent Additional Interest. In the event that Maker fails by the
“Registration Deadline” (as that term is defined in Section 5(e) of a Warrant
of this date being issued by Maker to Payee) to obtain effectiveness under the
Securities Act of 1933, as amended, and applicable state securities laws of the
Registration Statement as required by the terms of a Registration Rights
Agreement of this date between Maker and Payee covering all of the shares of
Common Stock issuable as payment under or upon conversion of this Note or upon
exercise of the Warrant, then for each full month thereafter (prorated for
partial months) that this failure continues (the “Failure Term”), Maker shall
pay in arrears in cash, with the next otherwise Scheduled Monthly Payment under
Sections 2 or 3(a) above (or if the last Scheduled Monthly Payment has been
made, then on the same day of each succeeding month), additional interest (the
“Contingent Additional Interest”) equal to the greater of $1,000 or 1% of the
outstanding principal balance on this Note as of the last day of the prior
month. Despite the foregoing, if the


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Payee consents (as provided under the Registration Rights Agreement) to an
extension of the effective date of the Registration Statement beyond the
original Registration Deadline, then the Registration Deadline hereunder shall
be extended by a like period.



6. Security. The full and timely payment of this Note (together with the
Maker’s obligations under a Purchase Agreement of this date between Maker and
Payee) shall be secured by a Security Agreement of this date (the “Security
Agreement”) covering all of Maker’s assets, including all Gaming Machines now
owned or hereafter acquired and all receivables related thereto and products
and proceeds thereof, but excluding Gaming Machines (but not the receivables
related thereto) hereafter acquired over which the Company grants a purchase
money security interest to an unaffiliated third party lender of the Company in
connection with the original acquisition thereof. The security interest
granted under the Security Agreement shall be a first priority security
interest subordinate to no other secured rights.



7. Optional and Mandatory Prepayments. The Maker may prepay this Note, in
whole or in part, and in cash, without penalty by Maker upon fifteen days
written notice to Payee. In addition, Maker is required to prepay a portion of
this Note, in cash, as follows:




     (a) Maker must prepay the Note portion described in subsection (b) below
if Maker sells or leases on account, or enters into a participation,
revenue-sharing or other similar arrangement with a Tribe regarding, a Gaming
Machine placed in service on Tribal property, and if




     (i) prior to placing any Gaming Machine in service on a Tribe’s property,
Maker fails to procure, contractually with such Tribe:




     (A) a written acknowledgement in form satisfactory to Payee of Payee’s
security interest pursuant to the Security Agreement in (i) each such Gaming
Machine placed in service on the Tribal property and in which Maker retains an
ownership or other proprietary interest as seller or lessor or under a
participation, revenue-sharing or other similar arrangement and (ii) any
accounts receivable relating to any such Gaming Machine’s sale, lease,
participation or revenue-sharing or other similar arrangement and




     (B) a written confirmation of such Tribe’s limited waiver of its sovereign
immunity with respect to the enforcement of Payee’s security interest; or




     (ii) prior to placing any Gaming Machine in service on a Tribe’s property,
Maker fails to deliver to Payee an opinion of Maker’s counsel (which may be
special counsel experienced in Tribal affairs), in form satisfactory to Maker,
that the Payee has an enforceable first priority security interest as described
in subsection (i)(A) above and that the Tribe has waived its sovereign immunity
with respect to Payee’s enforcement of Payee’s security interest as described
above; or



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     (iii) at any time, Maker or Payee receives any communication from a Tribe
with respect to a Gaming Machine that, if given to Maker by the Tribe, would
require Maker to provide notice to Payee as set forth in Section 4.5 of the
Security Agreement and/or Maker provides any such notice to Payee, and the
Tribe does not repudiate its communication in writing within 10 days after its
receipt by Maker or Payee.


Despite the above, the Company is not required to comply with subsections (i)
or (ii) above for an aggregate of six Gaming Machines placed in service at any
particular time across all Tribal properties so long as the Company has placed
such Gaming Machines in service solely for the purpose of limited testing.
Gaming Machines in service on Tribal property as to which a violation of
subsections (i), (ii) or (iii) exists are referred to below as “Default Gaming
Machines.”




     (b) The mandatory prepayment amount required by subsection (a) above is
the sum of




     (i) as of the date of required prepayment, that portion (the “Default
Fraction”) of interest accrued, but unpaid, on this Note which (x) Maker’s
acquisition cost of the Default Gaming Machines bear to (y) Maker’s acquisition
cost of all Gaming Machines in service on Tribal property of any Tribe pursuant
to a sale or lease on account or a participation, revenue-sharing or other
similar arrangement and




     (ii) as of the date of required prepayment, the Default Fraction of the
then outstanding principal of this Note.



     (c) The date of required prepayment is ten days after the earlier to occur
of an event described in subsections (a)(i), (ii) or (iii) above.



     In all cases, prepayments shall be applied first to accrued but unpaid
interest and then to principal.


8. Default. The occurrence of any one or more of the following events shall
constitute an event of default, upon which Payee may declare the entire
principal amount of this Note, together with all accrued but unpaid interest,
to be immediately due and payable in cash (despite provisions otherwise for
payment with Common Stock):




     (a) The Maker shall fail to make any required payment of principal or
interest (including Contingent Additional Interest and any required prepayment
under Section 7 above) when due, and in its proper form (i.e., in cash, in
stock or by a combination thereof), and such failure shall continue through
five days after Payee gives written notice of such failure to Maker.



     (b) The Maker shall be in material default of any term or provision of the
Purchase Agreement, the Security Agreement, the Registration Rights Agreement
of this date between



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Maker and Payee or the Warrant being issued on the date hereof by Maker to
Payee, and such failure shall continue through five days after Payee gives
written notice of such default to Maker.



     (c) The Maker shall become insolvent or any bankruptcy, reorganization,
debt arrangement or other proceeding under any bankruptcy or insolvency law
shall be instituted by or against the Maker.



     Without limiting the above, the Maker acknowledges that payments on the
various scheduled due dates in Sections 2 and 3(c), and prepayments as required
by Section 7, are of essence and that any failure to timely pay any installment
of principal or interest (whether as permitted by cash, with stock or by a
combination thereof and within any permitted grace period above) permits Payee
to declare this Note immediately due in cash in its entirety without any prior
notice of any kind to Maker, except for the specific notices provided above.


9. Applicable Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THE NOTE
SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT
GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF.



10. Waivers. The Maker hereby waives presentment for payment, notice of
dishonor, protest and notice of payment and all other notices of any kind in
connection with the enforcement of this Note.



11. No Setoffs. The Maker shall pay principal and interest under the Note
without any deduction for any setoff or counterclaim.



12. Costs of Collection. If this Note is not paid when due, the Maker shall
pay Payee’s reasonable costs of collection, including reasonable attorney’s
fees.



	 	 	 	 	 
	 	SPECTRE GAMING, INC.





By

Russell Mix, President and

Chief Executive Officer

 	 
	 	 	 
	 	 	 
	 	 	 
	 





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