Document:

<PAGE>

                                                                    EXHIBIT 10.9

DISPUTES RELATING TO THIS AGREEMENT ARE REQUIRED TO BE SETTLED PURSUANT TO
CERTAIN DISPUTE RESOLUTION PROCEDURES AS PROVIDED IN ARTICLE 7 AND APPENDIX A OF
THIS AGREEMENT.

                              EMPLOYMENT AGREEMENT

      This Employment Agreement (this "Agreement") is entered into effective as
of the 13th day of May, 2003, between Richard Shore, Jr. ("Employee"), and Penn
Octane Corporation, a Delaware corporation (the "Company"), whose principal
executive offices are located in Palm Desert, California.

      WHEREAS, the Company desires to employ Employee, and Employee desires to
be employed by the Company, on terms hereinafter set forth;

      WHEREAS, Shore Capital LLC ("Shore Capital"), an entity wholly owned by
Employee, and Penn Octane Corporation are parties to a letter agreement dated
November 29, 2002 (the "Shore Agreement"); and

      WHEREAS, Shore Capital, Employee and the Company desire to terminate the
Shore Agreement and release and terminate their respective rights and
obligations thereunder as provided in this Agreement;

      NOW, THEREFORE, in consideration for the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

                                    ARTICLE 1
                                     DUTIES

      1.1 Employment. During the term of this Agreement, the Company agrees to
employ Employee in the capacity as President, and Employee accepts such
employment, on the terms and conditions set forth in this Agreement.

      1.2 Extent of Service. During the term of this Agreement, Employee shall
devote his full-time business time, energy and skill to the affairs of the
Company and its affiliated companies, including, without limitation, Rio Vista
Energy Partners L.P., a Delaware limited partnership to be formed by the Company
("Rio Vista"). The provisions of this Section 1.2 shall not prevent Employee
from making monetary investments in businesses so long as such business does not
directly compete with the Company, Rio Vista or any other entity controlled by
Rio Vista; provided, however, the foregoing shall not, in any event, prohibit
Employee from purchasing and holding as an investment not more than one percent
(1%) of any class of publicly-traded securities of any entity (other than the
Company or Rio Vista) which conducts a business in competition with the business
of the Company or Rio Vista or any entity controlled by Rio Vista, so long as
Employee does not participate in any way with the management, operation or
control of such entity.

<PAGE>

      1.3 Duties. Employee's duties hereunder shall include such duties as may
be prescribed from time to time by the Board. Employee shall also perform,
without additional compensation, such duties for the Company's affiliated
companies.

                                    ARTICLE 2
                               TERM OF EMPLOYMENT

      The term of this Agreement shall commence on the date hereof and continue
for a period of two years unless earlier terminated pursuant to Article 4
hereof.

                                    ARTICLE 3
                                  COMPENSATION

      3.1 Monthly Base Salary and Per Annum Payment. As compensation for
services rendered under this Agreement, Employee shall be entitled to receive
from the Company a monthly base salary (before standard deductions) equal to
$30,000, subject to periodic review and upward adjustment by the Board in its
sole discretion (downward adjustment shall not be permitted). Employee's monthly
base salary shall be payable at regular intervals (at least semi-monthly) in
accordance with the prevailing practice and policy of the Company.

      3.2 Stock Options. As additional compensation for services rendered under
this Agreement, Employee or his designees shall receive options (the "Options"),
exercisable after the date of the distribution of common units of Rio Vista to
the stockholders of the Company, to purchase 97,415 common units of Rio Vista at
a per unit exercise price of $8.47, to purchase 763,737 shares of common stock
of the Company at a per share exercise price of $1.14 and to purchase 25% of the
limited liability company interests of Rio Vista GP LLC, a Delaware limited
liability company to be formed by the Company as the general partner of Rio
Vista, at an exercise price equal to the pro rata portion of the tax basis
capital of Rio Vista immediately after the distribution of common units of Rio
Vista to the stockholders of the Company pursuant to the option agreements in
the forms attached hereto as Exhibit A, Exhibit B and Exhibit C, respectively
(collectively, the "Option Agreements").

      3.3 Benefits. Employee shall, in addition to the compensation provided for
herein, be entitled to the following additional benefits:

            (a) Medical, Health and Disability Benefits. Employee shall be
entitled to receive all medical, health and disability benefits that may, from
time to time, be provided by the Company to all employees of the Company as a
group.

            (b) Other Benefits. Employee shall also be entitled to receive any
other benefits that may, from time to time, be provided by the Company to all
employees of Company as a group.

            (c) Vacation. Employee shall be entitled to an annual vacation as
determined in accordance with the prevailing practice and policy of the Company.

            (d) Holidays. Employee shall be entitled to holidays in accordance
with the prevailing practice and policy of the Company.

                                       2
<PAGE>

            (e) Reimbursement of Expenses. The Company shall reimburse Employee
for all expenses reasonably incurred by Employee in conjunction with the
rendering of services at the Company's request, provided that such expenses are
incurred in accordance with the prevailing practice and policy of the Company
and are properly deductible by the Company for federal income tax purposes. As a
condition to such reimbursement, Employee shall submit an itemized accounting of
such expenses in reasonable detail, including receipts where required under
federal income tax laws.

                                    ARTICLE 4
                                   TERMINATION

      4.1 Termination by the Company Without Cause. Subject to the provisions of
this Article 4, this Agreement may be terminated by the Company without cause
upon 30 days prior written notice thereof given to Employee. In the event of
such termination, the Company shall pay Employee his monthly base salary
(subject to standard deductions) and per annum payment (subject to standard
deductions) through the remainder of the term of this Agreement and Employee
shall be entitled to continue to be covered under the Company's group health
insurance program pursuant to benefit continuation as prescribed in the COBRA.
Such COBRA benefits shall commence on the date of termination and the Company
shall pay, on Employee's behalf, any and all costs associated with extending
such group health benefits under COBRA for a period of 12 months following the
termination date. Payment or performance by the Company in accordance with this
Article 4 shall constitute Employee's full severance pay and the Company shall
have no further obligation to Employee arising out of such termination.

      4.2 Termination For Cause. This Agreement may be terminated by the Company
for "Cause" (as defined in Section 8.2 herein) upon written notice thereof given
by the Company to Employee. In the event of termination pursuant to this Section
4.2, the Company shall pay Employee his monthly base salary (subject to standard
deductions) earned pro rata to the date of such termination and the Company
shall have no further obligations to Employee hereunder.

      4.3 Termination Upon Death or Disability. In the event that Employee dies,
this Agreement shall terminate upon Employee's death. Likewise, if Employee
becomes unable to perform the essential functions of his duties hereunder, with
or without reasonable accommodation, on account of illness, disability or other
reason whatsoever for a period of more than 180 consecutive or nonconsecutive
days in any 12-month period, the Company may, upon notice to Employee, terminate
this Agreement. In the event of termination pursuant to this Section 4.3,
Employee (or his legal representatives) shall be entitled only to his monthly
base salary earned pro rata for services actually rendered prior to the date of
such termination; provided, however, to the extent to which Employee has
received short-term or long-term disability benefits under employee benefit
plans maintained from time to time by the Company, such benefits shall be
deducted from his monthly base salary.

      4.4 Voluntary Termination by Employee for Good Reason. Employee may at any
time voluntarily terminate his employment for "good reason" (as defined below)
upon 30 days prior written notice thereof to the Company. In such event, the
Company shall pay Employee his monthly base salary (subject to standard

                                       3
<PAGE>

deductions) and per annum payment (subject to standard deductions) through the
remainder of the term of this Agreement. For purposes of this Agreement, "good
reason" shall mean the occurrence of any of the following events:

            (a) Removal from the offices Employee holds on the date of this
Agreement or a material reduction in Employee's authority or responsibility, but
not including termination of Employee for "cause," as defined in Section 8.2
herein; or

            (b) The Company otherwise commits a material breach of this
Agreement.

      4.5 Termination by Employee. This Agreement may be terminated by Employee,
without cause, upon 30 days' prior written notice thereof given by Employee to
the Company. In the event of termination pursuant to this Section 4.5, the
Company shall pay Employee his monthly base salary (subject to standard
deductions) earned pro rata to the date of such termination and the Company
shall have no further obligations to Employee hereunder.

      4.6 Survival of Provisions. The covenants and provisions of Articles 5, 6
and 7 hereof shall survive any termination of this Agreement and continue for
the periods indicated, regardless of how such termination may be brought about.

      4.7 Options. Termination under this Article 4 shall affect the Options in
accordance with the provisions of the Option Agreements.

                                    ARTICLE 5
                 PROPRIETARY PROPERTY; CONFIDENTIAL INFORMATION

      5.1 Proprietary Property; Confidential Information. Employee acknowledges
that in and as a result of Employee's employment hereunder, Employee will be
making use of, acquiring and/or adding to Confidential Information. As a
material inducement to the Company to enter into this Agreement and to pay to
Employee the compensation and benefits stated herein, Employee covenants and
agrees that Employee shall not, at any time during or following the term of
Employee's employment, directly or indirectly, divulge or disclose for any
purpose whatsoever any Confidential Information or proprietary information of
the Company. Upon termination of this Agreement, regardless of how such
termination may be brought about, Employee shall deliver to the Company any and
all documents, instruments, notes, papers or other expressions or embodiments of
confidential information which are in Employee's possession or control.

      5.2 Publicity. During the term of this Agreement and for a period of ten
years thereafter, Employee shall not, directly or indirectly, originate or
participate in the origination of any publicity, news release or other public
announcements, written or oral, whether to the public press or otherwise,
relating to this Agreement, to any amendment hereto, to Employee's employment
hereunder or to the Company, without the prior written approval of the Company.

                                    ARTICLE 6

                             [INTENTIONALLY OMITTED]

                                       4
<PAGE>

                                    ARTICLE 7
                                   ARBITRATION

      Except for the provisions of Article 5 of this Agreement dealing with
proprietary property and confidential information, with respect to which the
Company expressly reserves the right to petition a court directly for injunctive
and other relief, any claim, dispute or controversy of any nature whatsoever,
including but not limited to tort claims or contract disputes between the
parties to this Agreement or their respective heirs, executors, administrators,
legal representatives, successors and assigns, as applicable, arising out of or
related to Employee's employment or the terms and conditions of this Agreement,
including the implementation, applicability or interpretation thereof, shall be
resolved in accordance with the dispute resolution procedures set forth in
Appendix A attached hereto and made a part hereof.

                                    ARTICLE 8
                                   DEFINITIONS

      8.1 "Board" shall mean the Board of Directors of the Company.

      8.2 "Cause" shall be exclusively limited to the following, as determined
by the Board in its sole judgment: (i) Employee breaches any material terms of
this Agreement; (ii) Employee is convicted of a felony; (iii) Employee fails,
after at least one warning, to perform duties assigned under this Agreement
(other than a failure due to death or physical or mental disability); (iv)
Employee intentionally engages in conduct which is demonstrably and materially
injurious to the Company; (v) Employee commits fraud or theft of personal or
Company property from Company premises; (vi) Employee falsifies Company
documents or records; (vii) Employee engages in acts of gross carelessness or
willful negligence to endanger life or property on Company premises; (viii)
Employee uses, distributes or is under the influence of illegal drugs, alcohol
or other intoxicant on Company premises; (ix) Employee possesses or stores hand
guns on Company premises; or (x) Employee intentionally violates state, federal
or local laws and regulations in the course and scope of his employment.

      8.3 "COBRA" means the Consolidated Omnibus Budget Reconciliation Act.

      8.4 "Confidential Information" means that information and proprietary
property belonging to the Company or its affiliates of a special and unique
nature and value relating to such matters as the Company's trade secrets,
systems, procedures manuals, financial data, confidential reports, business
strategies and list of customers.

                                    ARTICLE 9
                                  MISCELLANEOUS

      9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally,
mailed by certified mail (return receipt requested) or sent by an overnight
delivery service with tracking procedures or by facsimile to the parties at the
following addresses or at such other addresses as shall be specified by the
parties by like notice: If to Employee, at the address set forth below his name
on the signature page hereof; and if to the Company, at 77-530 Enfield Lane,
Building D, Palm Desert, California 92211, Attention: Chairman of the Board and
Chief Executive Officer.

                                       5
<PAGE>

      9.2 Equitable Relief. In the event of a breach or a threatened breach by
Employee of any of the provisions contained in Article 5 of this Agreement,
Employee acknowledges that the Company will suffer irreparable injury not fully
compensable by money damages and, therefore, will not have an adequate remedy
available at law. Accordingly, the Company shall be entitled to obtain such
injunctive relief or other equitable remedy from any court of competent
jurisdiction as may be necessary or appropriate to prevent or curtail any such
breach, threatened or actual. The foregoing shall be in addition to and without
prejudice to any other rights that the Company may have under this Agreement, at
law or in equity, including, without limitation, the right to sue for damages.

      9.3 No Rights in Contracts. Employee acknowledges and agrees that he or
she shall not have any rights in or to any contracts entered into with clients
or customers of the Company in connection with services provided by Employee
hereunder (including those in which Employee may be specifically named with the
Company), unless otherwise agreed to in writing by the Company.

      9.4 Assignment. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company. Employee's rights under this Agreement are not
assignable and any attempted assignment thereof shall be null and void.

      9.5 Governing Law. This Agreement shall be subject to and governed by the
laws of the State of Texas.

      9.6 Entire Agreement; Release; Amendments. This Agreement constitutes the
entire agreement between the parties and supersedes all other agreements between
the parties which may relate to the subject matter contained in this Agreement.
Without limiting the foregoing, the Shore Agreement is hereby terminated in its
entirety, the parties thereto hereby waive and release all of their respective
rights and obligations under the Shore Agreement, and Shore Capital LLC and
Employee hereby release the Company and its employees, directors and affiliates
from any and all claims arising under or related to the Shore Agreement. This
Agreement may not be amended or modified except by an agreement in writing which
refers to this Agreement and is signed by both parties.

      9.7 Headings. The headings of sections and subsections of this Agreement
are for convenience only and shall not in any way affect the interpretation of
any provision of this Agreement or of the Agreement itself.

      9.8 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. If any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.

      9.9 Waiver. The waiver by any party of a breach of any provision hereof
shall not be deemed to constitute the waiver of any prior or subsequent breach
of the same provision or any other provisions hereof. Further, the failure of
any party to insist upon strict adherence to any

                                       6
<PAGE>

term of this Agreement on one or more occasions shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement unless such party expressly waives
such provision pursuant to a written instrument which refers to this Agreement
and is signed by such party.

                         (Signatures on following page.)

                                       7
<PAGE>

      IN WITNESS WHEREOF, the parties have executed this Employment Agreement as
of the day and year first above written.

                                                  PENN OCTANE CORPORATION

                                                  By: /s/ Jerome B. Richter
                                                      --------------------------
                                                  Name: Jerome B. Richter
                                                  Title: Chief Executive Officer

                                                  EMPLOYEE:

                                                  /s/ Richard Shore, JR.
                                                  ------------------------------
                                                  Richard Shore, Jr.

                                                  Address: 12 Green Valley Dr.
                                                           Lafayette, CA 94549

ACCEPTED AND AGREED TO FOR
PURPOSES OF THE WAIVER AND
RELEASE UNDER SECTION 9.6:

SHORE CAPITAL LLC

By: /s/ Richard Shore, JR.
    -------------------------------
    Richard Shore, Jr., President

                                       8
<PAGE>

                                   APPENDIX A

                          DISPUTE RESOLUTION PROCEDURES

      Re: Employment Agreement effective May 13, 2003 (including any amendments,
the "Agreement"), between Penn Octane Corporation, a Delaware corporation (the
"Company"), and Richard Shore, Jr. ("Employee"). Unless otherwise defined in
this Appendix A, terms defined in the Agreement and used herein shall have the
meanings set forth therein.

      A. Negotiations. If any claim, dispute or controversy described in Article
7 of the Agreement (collectively, the "Dispute") arises, either party may, by
written notice to the party, have the Dispute referred to the persons designated
below for attempted resolution by good faith negotiations within 45 days after
such written notice is received. Such designated persons are as follows:

            1. Company. The Chairman of the Board and Chief Executive Officer or
his designee; and

            2. Employee. Employee or his designee.

Any settlement reached by the parties under this paragraph A shall not be
binding until reduced to writing and signed by both parties. When reduced to
writing, such settlement agreement shall supersede all other agreements, written
or oral, to the extent such agreements specifically pertain to the matters so
settled. If the above-designated persons are unable to resolve such dispute
within such 45-day period, either party may invoke the provisions of paragraph B
below.

      B. Arbitration. All Disputes shall be settled by negotiation among the
parties as described in paragraph A above or, if such negotiation is
unsuccessful, by binding arbitration in accordance with procedures set forth in
paragraphs C and D below.

      C. Notice. Notice of demand for binding arbitration by one party shall be
given in writing to the other party pursuant to the Agreement. In no event may a
notice of demand of any kind be filed more than one (1) year after the date the
Dispute is first asserted in writing to the other party pursuant to paragraph A
above, and if such demand is not timely filed, the Dispute referenced in the
notice given pursuant to paragraph A above shall be deemed released, waived,
barred and unenforceable for all time, and barred as if by statute of
limitations.

      D. Binding Arbitration. Upon filing of a notice of demand for binding
arbitration by either party, arbitration shall be commenced and conducted as
follows:

            1. Arbitrators. All Disputes and related matters in question shall
be referred to and decided and settled by a panel of three arbitrators, one
selected by the Company, one selected by Employee and the third selected by the
two arbitrators so selected. Selection of the arbitrators to be selected by the
Company and Employee shall be made within ten (10) business days after the date
of giving of a notice of demand for arbitration, and the two arbitrators so
appointed shall appoint the third within 10 business days following their
appointment.

<PAGE>

            2. Cost of Arbitration. The cost of arbitration proceedings,
including without limitation the arbitrators' compensation and expenses, hearing
room charges, court reporter transcript charges etc., shall be borne by the
parties equally or otherwise as the arbitrators may determine. The arbitrators
may award the prevailing party its reasonable attorneys' fees and costs incurred
in connection with the arbitration. The arbitrators are specifically instructed
to award attorneys' fees for instances of abuse in the discovery process.

            3. Location of Proceedings. The arbitration proceedings shall be
held in Houston, Texas, unless the parties agree otherwise.

            4. Pre-hearing Discovery. The parties shall have the right to
conduct and enforce pre-hearing discovery in accordance with the then current
Federal Rules of Civil Procedure, subject to these limitations:

                  (a) Each party may serve no more than one set of
interrogatories limited to 30 questions, including sub-parts;

                  (b) Each party may depose the other party's expert witnesses
who will be called to testify at the hearing, plus two fact witnesses without
regard to whether they will be called to testify (each party will be entitled to
a total of no more than 24 hours of deposition time of the other party's
witnesses), provided however, that the arbitrators may provide for additional
depositions upon showing of good cause; and

                  (c) Document discovery and other discovery shall be under the
control of and enforceable by the arbitrators.

            5. Discovery disputes. All discovery disputes shall be decided by
the arbitrators. The arbitrators are empowered;

                  (a) to issue subpoenas to compel pre-hearing document or
deposition discovery;

                  (b) to enforce the discovery rights and obligations of the
parties; and

                  (c) to otherwise to control the scheduling and conduct of the
proceedings.

Notwithstanding any contrary foregoing provisions, the arbitrators shall have
the power and authority to, and to the fullest extent practicable shall,
abbreviate arbitration discovery in a manner which is fair to all parties in
order to expedite the conclusion of each alternative dispute resolution
proceeding.

            6. Pre-hearing Conference. Within fifteen (15) days after selection
of the third arbitrator, or as soon thereafter as is mutually convenient to the
arbitrators, the arbitrators shall hold a pre-hearing conference to establish
schedules for completion of discovery, for exchange of exhibit and witness
lists, for arbitration briefs and for the hearing, and to decide procedural
matters and address all other questions that may be presented.

<PAGE>

            7. Hearing Procedures. The hearing shall be conducted to preserve
its privacy and to allow reasonable procedural due process. Rules of evidence
need not be strictly followed, and the hearing shall be streamlined as follows:

                  (a) Documents shall be self-authenticating, subject to valid
objection by the opposing party;

                  (b) Expert reports, witness biographies, depositions and
affidavits may be utilized, subject to the opponent's right of a live
cross-examination of the witness in person;

                  (c) Charts, graphs and summaries shall be utilized to present
voluminous data, provided (i) that the underlying data is made available to the
opposing party thirty (30) days prior to the hearing, and (ii) that the preparer
of each chart, graph or summary is available for explanation and live
cross-examination in person;

                  (d) The hearing should be held on consecutive business days
without interruption to the maximum extent practicable; and

                  (e) The arbitrators shall establish all other procedural rules
for the conduct of the arbitration in accordance with the rules of arbitration
of the Center for Public Resources.

            8. Governing Law. This arbitration provision shall be governed by,
and all rights and obligations specifically enforceable under and pursuant to,
the Federal Arbitration Act (9 U.S.C. Section 1, et seq.)

            9. Consolidation. No arbitration shall include, by consolidation,
joinder or in any other manner, any additional person not a party to the
Agreement, except by written consent of both parties containing a specific
reference to these provisions.

            10. Award. The arbitrators are empowered to render an award of
general compensatory damages and equitable relief (including, without
limitations, injunctive relief), but are not empowered to award exemplary,
special or punitive damages. The award rendered by the arbitrators (a) shall be
final, (b) shall not constitute a basis for collateral estoppel as to any issue
and (c) shall not be subject to vacation or modification.

            11. Confidentiality. The parties hereto will maintain the substance
of any proceedings hereunder in confidence and the arbitrators, prior to any
proceedings hereunder, will sign an agreement whereby the arbitrators agree to
keep the substance of any proceedings hereunder in confidence.

<PAGE>

                                    EXHIBIT A

                         RIO VISTA ENERGY PARTNERS L.P.

                                     OPTION

<PAGE>

                                    EXHIBIT B

                             PENN OCTANE CORPORATION

                                     OPTION

<PAGE>

                                    EXHIBIT C

                                RIO VISTA GP LLC

                                     OPTIONexv10w1

 

EXHIBIT 10.1

PURCHASE AGREEMENT

     THIS PURCHASE AGREEMENT (the “Agreement”) is entered into as of the 10th
day of September, 2004, by and among Spectre Gaming, Inc., a Minnesota
corporation (the “Company”), Pandora Select Partners L.P., a British Virgin
Islands limited partnership
(“Pandora”), and Whitebox Intermarket Partners
L.P., a British Virgin Islands limited Partnership (“Whitebox”) (Pandora and
Whitebox are individually referred to as the “Purchaser” and together as the
“Purchasers”).

R E C I T A L S:

     WHEREAS, in consideration of $750,000 and $750,000 (representing
$1,500,000 in the aggregate), the Company proposes to issue to each Purchaser,
and each Purchaser desires to severally (and not jointly) purchase, a
corresponding secured promissory note in the form attached as Exhibit A (each,
a “Note” and together, the “Notes”) and a warrant in the form of Exhibit B
(each, a “Warrant” and together, the “Warrants”) to purchase (subject to
certain adjustments) shares of the Company’s common stock, $0.01 par value (the
“Common Stock”).

     NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:

SECTION 1. AGREEMENT TO SELL AND PURCHASE

     1.1. Authorization of Transaction. On or prior to the closing of the
transactions contemplated in this Agreement (the “Closing”), the Company shall
have authorized the sale and issuance to each Purchaser of its respective Note,
the Warrant and the shares of Common Stock (the “Shares”) issuable upon
exercise of each such Warrant.

     1.2. Sale and Purchase. Subject to the terms and conditions hereof, at
the Closing, the Company hereby agrees to issue and sell to each Purchaser, and
each Purchaser severally agrees to purchase from the Company, such Purchaser’s
respective Note and the Warrant for an aggregate purchase price from all
Purchasers of $1,500,000 (the “Purchase Price”).

SECTION 2. CLOSING, DELIVERY AND PAYMENT

     2.1. Closing. The Closing shall take place at 10:00 a.m. on the date
hereof at the offices of the Purchaser’s legal counsel, Messerli & Kramer P.A.,
in Minneapolis, Minnesota, or at such other time or place as the Company and
the Purchasers may mutually agree (the “Closing Date”). At the Closing,
subject to the terms and conditions hereof, the Company will issue, sell and
deliver to each Purchaser its respective Note and Warrant, against payment by
each Purchaser of its allocable portion of the Purchase Price by certified
check or wire transfer of immediately available funds. At that time, the
Company shall also execute and deliver to the Purchasers the Registration
Rights Agreement in the form attached as Exhibit C (the “Registration Rights
Agreement”) and the Security Agreement in the form attached as Exhibit D (the
“Security Agreement”).

 

 

SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY

     The Company hereby makes the following representations and warranties to
each of the Purchasers as of the Closing Date and, as to the agreements
described in Section 3.16, covenants to so comply therewith from and after the
Closing Date so long as any portion of the Notes remain outstanding.

     3.1. Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Minnesota. The Company has no subsidiaries. The Company
has all requisite corporate power and authority to own and operate its
properties and assets, to execute and deliver this Agreement, the Notes, the
Warrants, the Registration Rights Agreement and the Security Agreement
(together, the “Transaction Documents”), to pledge certain of the Company’s
assets as described on the attached Exhibit E as security for the Notes (the
“Collateral”), to issue and sell the Shares upon exercise of the Warrants, to
carry out the provisions of the Transaction Documents, and to carry on its
business as presently conducted and as presently proposed to be conducted. The
Company is duly qualified and is authorized to do business and is in good
standing in each jurisdiction in which the nature of its activities and of its
properties (both owned and leased) makes such qualification necessary, except
for those jurisdictions in which failure to be so qualified would not have a
materially adverse effect on the Company or its business, taken as a whole.

     3.2. Capitalization. The Company is authorized to issue 100,000,000
shares of capital stock, of which 233,333 shares have been designated as Series
A Convertible Preferred Stock, par value $0.01 per share, and of which 206,667
shares are issued and outstanding, and 11,006,784 shares of Common Stock, par
value $0.01 per share, are issued and outstanding. Except as set forth on
Schedule 3.2 or in the Company’s quarterly, annual and periodic filings (the
“SEC Reports”) with the U.S. Securities and Exchange Commission (the
“Commission”), the Company has no outstanding options, warrants or other rights
to acquire any capital stock, or securities convertible or exchangeable for
capital stock or for securities themselves convertible or exchangeable for
capital stock (together, “Convertible Securities”). Except as set forth on
Schedule 3.2 or in the SEC Reports, the Company has no agreement or commitment
to sell or issue any shares of capital stock or Convertible Securities. All
issued and outstanding shares of the Company’s capital stock (i) have been duly
authorized and validly issued, (ii) are fully paid and nonassessable, (iii) are
free from any preemptive and cumulative voting rights and (iv) were issued
pursuant to an effective registration statement filed with the Commission and
applicable state securities authorities or pursuant to valid exemptions under
federal and state securities laws. Except as set forth on Schedule 3.2, there
are no outstanding rights of first refusal or proxy or shareholder agreements
of any kind relating to any of the Company’s securities to which the Company or
any of its executive officers and directors is a party or as to which the
Company otherwise has knowledge of. When issued in compliance with the
provisions of the Warrants (and upon payment as provided by the Warrant), the
Shares will be validly issued, fully paid and nonassessable, and will be free
of any liens or encumbrances; provided, however, that the Shares may be subject
to restrictions on transfer under state and/or federal securities laws as set
forth herein or as otherwise required by such laws at the time a transfer is
proposed.

-2-

 

     3.3. Authorization; Binding Obligations. All corporate action on the part
of the Company, its officers, directors and shareholders necessary for the
authorization of the Transaction Documents, the performance of all obligations
of the Company hereunder and thereunder at the Closing, including the pledge of
the Collateral as security for the Notes, and the authorization, sale, issuance
and delivery of the Shares upon exercise of the Warrants has been taken. The
Transaction Documents, when executed and delivered, will be valid and binding
obligations of the Company enforceable in accordance with their terms, except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application affecting enforcement of creditors’
rights, (ii) according to general principles of equity that restrict the
availability of equitable remedies and (iii) to the extent that the
enforceability of the indemnification provisions of the Registration Rights
Agreement may be limited by applicable laws. The sale of the Shares upon
exercise of the Warrant is not and will not be subject to any preemptive rights
or rights of first refusal.

     3.4. Financial Statements. The Company’s audited balance sheets at, and
the audited statements of operations, cash flows and changes in shareholders’
equity of the Company for the fiscal years ended, December 31, 2003 and 2002
and the Company’s unaudited balance sheet at, and the unaudited statements of
operations and cash flows of the Company for the six months ended June 30, 2004
(all of the foregoing together, the “Financial Statements,” with June 30, 2004
being the “Latest Statement Date” and the financial statements at and for the
six months ended June 30, 2004 being the “Latest Financial Statements”), as
contained in the SEC Reports, fairly present in all material respects the
financial position, results of operations, cash flows and changes in
shareholders’ equity of the Company as of the respective dates and for the
respective periods covered thereby in accordance with generally accepted
accounting principles consistently applied.

     3.5. Liabilities. Except as reflected in the Latest Financial Statements,
the Company has no material liabilities and, to the best of its knowledge, the
Company knows of no material contingent liabilities not disclosed in the Latest
Financial Statements or SEC Reports, except current liabilities incurred in the
ordinary course of business subsequent to the Latest Statement Date that have
not been, either in any individual case or in the aggregate, materially
adverse.

     3.6. Certain Agreements and Actions. Except as disclosed in the SEC
Reports, the Company has not (i) declared or paid any dividends, or authorized
or made any distribution upon or with respect to any class or series of its
capital stock, (ii) since the Latest Statement Date, incurred any indebtedness
for money borrowed or any other material liabilities out of the ordinary course
of business, (iii) made any loans or advances to any person, other than
ordinary advances for travel or entertainment expenses or (iv) sold, exchanged
or otherwise disposed of any of its assets or rights, other than in the
ordinary course of business.

     3.7. Obligations of or to Related Parties. Except as disclosed on
Schedule 3.7 or in the SEC Reports, there are no obligations of the Company to
officers, directors, shareholders, employees or consultants of the Company, or
to any members of their immediate families or other affiliates, other than (i)
for payment of salary for services rendered since the commencement of the
Company’s most recent payroll period, (ii) reimbursement for expenses

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reasonably incurred on behalf of the Company and (iii) for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by the Board
of Directors of the Company). Except as disclosed on Schedule 3.7 or in the
SEC Reports, none of the officers, directors, shareholders, employees or
consultants of the Company, or any members of their immediate families or other
affiliates, are indebted to the Company or have any direct or indirect
ownership interest in any firm, corporation or other entity with which the
Company is affiliated or with which the Company has a business relationship, or
any firm, corporation or other entity that competes with the Company. Except
as disclosed in the SEC Reports, no officer, director, shareholder, employee or
consultant of the Company, or, to the Company’s knowledge, any member of their
immediate families or other affiliates, is, directly or indirectly, interested
in or a party to any material contract with the Company. Except as disclosed
on Schedule 3.7 or in the SEC Reports, the Company is not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.

     3.8. Changes. Since the Latest Statement Date, and except as disclosed in
the SEC Reports, there has not been, to the Company’s knowledge, any event or
condition of any character that, either individually or cumulatively, has
materially and adversely affected the business, assets, liabilities, financial
condition, operations or prospects of the Company.

     3.9. Title to Properties and Assets; Liens. Except as set forth on
Schedule 3.9 or in the SEC Reports, the Company has good and marketable title
to its properties and assets, including the properties and assets reflected in
the Latest Financial Statements, and good title to its leasehold estates, in
each case subject to no mortgage, pledge, lien, lease, encumbrance or charge,
other than (i) those resulting from taxes that have not yet become delinquent,
(ii) minor liens and encumbrances that do not materially detract from the value
of the property subject thereto or materially impair the operations of the
Company and (iii) those that have otherwise arisen in the ordinary course of
business. All facilities, machinery, equipment, fixtures and other properties
owned, leased or used by the Company are in good operating condition and repair
and are reasonably fit and usable for the purposes for which they are being
used, reasonable wear and tear excepted.

     3.10. Patents and Trademarks. Except as set forth on Schedule 3.10 or in
the SEC Reports, the Company owns or licenses all patents, trademarks, service
marks, trade names, copyrights, trade secrets, information and other
proprietary rights and processes necessary for its business as now conducted
and as proposed to be conducted, without any known infringement of the rights
of others. The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature)
or other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with their duties to the Company or
that would conflict with the Company’s business as proposed to be conducted.
None of the execution or delivery of, or the performance of the transactions
contemplated by, the Transaction Documents, the pledge of the Collateral by the
Company to secure the Note, the carrying on of the Company’s business by the
employees of the Company nor the conduct of the Company’s business as currently
conducted or proposed will conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any employee is now obligated. The Company
does not believe it is or will be necessary to utilize any inventions, trade
secrets or

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proprietary information of any of its employees made prior to their employment
by the Company, except for inventions, trade secrets or proprietary information
that have been assigned to the Company.

     3.11. Compliance with Other Instruments. Except as disclosed in the SEC
Reports, the Company is not in violation or default of any term of its Articles
of Incorporation or Bylaws, or of any provision of any mortgage, indenture,
contract, agreement, instrument or contract to which it is party or by which it
is bound or of any judgment, decree, order, writ or, to its knowledge, any
statute, rule or regulation applicable to the Company that would materially and
adversely affect the business, assets, liabilities, financial condition,
operations or prospects of the Company. The execution and delivery of, and the
performance of and compliance with the transactions contemplated by, the
Transaction Documents, and the issuance and sale of the Shares upon exercise of
the Warrants, will not, with or without the passage of time or giving of
notice, result in any such material violation, or be in conflict with or
constitute a default under any such term, or result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.

     3.12. Litigation. Except as disclosed in the SEC Reports, there is no
action, suit, proceeding or investigation pending or, to the Company’s
knowledge, currently threatened against the Company that questions the validity
of this Agreement or the other agreements contemplated hereby or the right of
the Company to enter into any of such agreements, or to consummate the
transactions contemplated hereby or thereby. Except as disclosed in the SEC
Reports, there is no action, suit, proceeding or investigation or, to the
Company’s knowledge, currently threatened against the Company that might
result, either individually or in the aggregate, in any material adverse change
in the assets, condition, affairs or prospects of the Company, financial or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing. The foregoing
includes, without limitation, actions pending or threatened (or any basis
therefor known to the Company) involving the prior employment of any of the
employees of the Company, their use in connection with the Company’s business
of any information or techniques allegedly proprietary to any of their former
employers or their obligations under any agreements with prior employers.
Except as disclosed in the SEC Reports, the Company is not a party or subject
to the provisions of any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality.

     3.13. Tax Returns and Payments. The Company has timely filed all tax
returns (federal, state and local) required to be filed by it. All taxes shown
to be due and payable on such returns, any assessments imposed, and, to the
Company’s knowledge, all other taxes due and payable by the Company on or
before the Closing have been paid or will be paid prior to the time they become
delinquent. The Company has not been advised (i) that any of its returns,
federal, state or other, have been or are being audited as of the date hereof
or (ii) of any deficiency in assessment or proposed judgment to its federal,
state or other taxes. The Company has no knowledge of any liability of any tax
to be imposed upon the properties or assets of the Company as of the date of
this Agreement that is not adequately provided for.

-5-

 

     3.14. Employees. The Company has no collective bargaining agreements with
any of its employees. There is no labor union organizing activity pending or,
to the Company’s knowledge, threatened with respect to the Company. Except as
set forth on Schedule 3.14 or in the SEC Reports, no employee has any agreement
or contract, written or verbal, regarding his employment. Except as disclosed
on Schedule 3.14 or in the SEC Reports, the Company is not a party to or bound
by any currently effective employment contract, deferred compensation
arrangement, bonus plan, incentive plan, profit sharing plan, retirement
agreement or other employee compensation plan or agreement. To the Company’s
knowledge, no employee of the Company, nor any consultant with whom the Company
has contracted, is in violation of any material term of any employment
contract, proprietary information agreement or any other agreement relating to
the right of any such individual to be employed by, or to contract with, the
Company because of the nature of the business to be conducted by the Company;
and, to the Company’s knowledge, the continued employment by the Company of its
present employees, and the performance of the Company’s contracts with its
independent contractors, will not result in any such violation. The Company
has not received any notice alleging that any such violation has occurred.
Except as disclosed on Schedule 3.14 or in the SEC Reports, no employee of the
Company has been granted the right to continued employment by the Company or to
any material compensation following termination of employment with the Company.
The Company is not aware that any officer or key employee, or that any group
of key employees, intends to terminate their employment with the Company, nor
does the Company have a present intention to terminate the employment of any
officer, key employee or group of key employees.

     3.15. Registration Rights. Except as disclosed on Schedule 3.15 or
required pursuant to the Registration Rights Agreement, the Company is
presently not under any obligation, and has not granted any rights, to register
(as defined in the Registration Rights Agreement) any of the Company’s
presently outstanding securities or any of its securities that may hereafter be
issued.

     3.16.Compliance with Laws; Permits; Covenants Regarding Gaming Machines. Except as disclosed in the SEC Reports, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties that would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of, and the performance of the transactions contemplated by, the Transaction Documents, the pledge of the Collateral to secure the Notes or the issuance of the Shares upon exercise of the Warrants, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of the Company and the Company believes it can (and covenants to Purchasers that it will) obtain any similar authority for the conduct of its business as planned to be conducted (including as to the shipment of Gaming Machines, as defined below, in

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interstate commerce and as to entering into participation or revenue-sharing
arrangements with Tribes, as defined below).

     With respect to the Company’s sale or license to, or participation or
other revenue-sharing arrangements with, one or more unaffiliated Native
American tribal customers (the “Tribes”) of or regarding slot-machine games
(the “Gaming Machines”), and for so long as any portion of the Notes is
outstanding, the Company covenants and agrees as follows:

     (i) Each such Gaming Machine will be, and each such Gaming Machine’s
proposed operation and use by each of the Tribes will qualify it as, a Class
III game (within the meaning of the Indian Gaming Regulatory Act of 1998); and

     (ii) Prior to placing any Gaming Machine in service on a Tribe’s property,
the Company will:

          (A) use its best efforts to procure, contractually with such Tribe:

               (1) a written acknowledgement in form satisfactory to each Purchaser of
its security interest pursuant to the Security Agreement in (i) each such
Gaming Machine placed in service on the Tribal property and in which the
Company 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

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

          (B) deliver to Purchasers an opinion of the Company’s counsel (which may
be special counsel experienced in Tribal affairs), in form satisfactory to
Purchasers, that the Purchasers have, together, an enforceable second priority
security interest as described in subsection (ii)(A)(1) above and that the
Tribe has waived its sovereign immunity with respect to Purchaser’s enforcement
of Purchaser’s security interest as described above.

     Despite the above, the Company is not required to comply with subsection
(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.

     3.17. Environmental and Safety Laws. Except as disclosed in the SEC
Reports, the Company is not in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and
to the Company’s knowledge, no material expenditures are or will be required in
order to comply with any such existing statute, law or regulation. Without
limiting the foregoing, and except as disclosed in the SEC Reports:

     (a) with respect to any real property owned, leased or otherwise utilized
by the Company (“Real Property”), the Company is not or has not in the past
been in violation of any

-7-

 

Hazardous Substance Law which violation could reasonably be expected to result
in a material liability to the Company or its properties and assets;

     (b) the Company nor, to the knowledge of the Company, any third party has
used, Released, generated, manufactured, produced or stored, in, on, under, or
about any Real Property, or transported thereto or therefrom, any Hazardous
Substances that could reasonably be expected to subject the Company to material
liability, under any Hazardous Substance Law;

     (c) to the knowledge of the Company, there are no underground tanks,
whether operative or temporarily or permanently closed, located on any Real
Property that could reasonably be expected to subject the Company to material
liability under any Hazardous Substance Law;

     (d) there are no Hazardous Substances used, stored or present at, or on,
or to the knowledge of the Company that could reasonably be expected to migrate
onto any Real Property, except in compliance with Hazardous Substance Laws; and

     (e) to the knowledge of the Company, there neither is nor has been any
condition, circumstance, action, activity or event that could reasonably be
expected to be a material violation by the Company of any Hazardous Substance
Law, or to result in liability to the Company under any Hazardous Substance
Law.

     For purposes hereof, “Hazardous Substances” means (statutory acronyms and
abbreviations having the meaning given them in the definition below of
“Hazardous Substances Laws”) substances defined as “hazardous substances,”
“pollutants” or “contaminants” in Section 101 of the CERCLA; those substances
defined as “hazardous waste,” “hazardous materials” or “regulated substances”
by the RCRA; those substances designated as a “hazardous substance” pursuant to
Section 311 of the CWA; those substances defined as “hazardous materials” in
Section 103 of the HMTA; those substances regulated as a hazardous chemical
substance or mixture or as an imminently hazardous chemical substance or
mixture pursuant to Sections 6 or 7 of the TSCA; those substances defined as
“contaminants” by Section 1401 of the SDWA, if present in excess of permissible
levels; those substances regulated by the Oil Pollution Act; those substances
defined as a pesticide pursuant to Section 2(u) of the FIFRA; those substances
defined as a source, special nuclear or by-product material by Section 11 of
the AEA; those substances defined as “residual radioactive material” by Section
101 of the UMTRCA; those substances defined as “toxic materials” or “harmful
physical agents” pursuant to Section 6 of the OSHA; those substances defined as
hazardous wastes in 40 C.F.R. Part 261.3; those substances defined as hazardous
waste constituents in 40 C.F.R. Part 260.10, specifically including Appendix
VII and VIII of Subpart D of 40 C.F.R. Part 261; those substances designated as
hazardous substances in 40 C.F.R. Parts 116.4 and 302.4; those substances
defined as hazardous substances or hazardous materials in 49 C.F.R. Part 171.8;
those substances regulated as hazardous materials, hazardous substances, or
toxic substances in 40 C.F.R. Part 1910; any chemical, material, toxin,
pollutant, or waste regulated by or in any other Hazardous Substances Laws; and
in the regulations adopted and publications promulgated pursuant to said laws,
whether or not such regulations or publications are specifically referenced
herein.

-8-

 

     “Hazardous Substances Law” means any of:

     (i) the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended (42 U.S.C. Section 9601 et seq.) (“CERCLA”);

     (ii) the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et
seq.) (“Clean Water Act” or “CWA”);

     (iii) the Resource Conservation and Recovery Act (42 U.S.C. Section 6901
et seq.) (“RCRA”);

     (iv) the Atomic Energy Act of 1954 (42 U.S.C. Section 2011 et seq.)
(“AEA”);

     (v) the Clean Air Act (42 U.S.C. Section 7401 et seq.) (“CAA”);

     (vi) the Emergency Planning and Community Right to Know Act (42 U.S.C.
Section 11001 et seq.) (“EPCRA”);

     (vii) the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C.
Section 136 et seq.) (“FIFRA”);

     (viii) the Oil Pollution Act of 1990 (33 U.S.C.A. Section 2701 et seq.);

     (ix) the Safe Drinking Water Act (42 U.S.C. Sections 300f et seq.)
(“SDWA”);

     (x) the Surface Mining Control and Reclamation Act of 1974 (30 U.S.C.
Sections 1201 et seq.) (“SMCRA”);

     (xi) the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.)
(“TSCA”);

     (xii) the Hazardous Materials Transportation Act (49 U.S.C. Section 5101
et seq.) (“HMTA”);

     (xiii) the Uranium Mill Tailings Radiation Control Act of 1978 (42 U.S.C.
Section 7901 et seq.) (“UMTRCA”);

     (xiv) the Occupational Safety and Health Act (29 U.S.C. Section 651 et
seq.) (“OSHA”); and

     (xv) all other federal, state and local governmental rules which govern
Hazardous Substances, and the regulations adopted and publications promulgated
pursuant to all such foregoing laws.

     3.18. Offering Valid. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4, the offer, sale and
issuance of the Notes and the Warrants

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(and the Shares issuable upon exercise of the Warrants) will be exempt from the
registration requirements of the Securities Act of 1933, as amended (the
“Securities Act”), and will have been registered or qualified (or are exempt
from registration and qualification) under the registration, permit or
qualification requirements of the State of Minnesota.

     3.19. Full Disclosure. None of this Agreement, the Notes, the Warrants,
the Registration Rights Agreement, the Security Agreement or the SEC Reports
contain any untrue statement of a material fact nor, to the Company’s knowledge
and belief, omit to state a material fact necessary in order to make the
statements contained herein or therein not misleading. There are no facts that
(individually or in the aggregate) materially adversely affect the business,
assets, liabilities, financial condition or operations of the Company that have
not been set forth in the Agreement, the Notes, the Warrants, the Registration
Rights Agreement, the Security Agreement, the SEC Reports or in other documents
delivered to the Purchaser or its attorneys or agents in connection herewith.

     3.20. Insurance. The Company has fire and casualty insurance policies
with coverage customary for companies similarly situated to the Company.

     3.21. Investment Company Act. The Company is not, and will not use the
proceeds from the Notes in a manner so as to become, an “investment company,”
or a company “controlled” by an “investment company,” within the meaning of the
Investment Company Act of 1940, as amended.

     3.22. Security Interest in Collateral. Except for the security interest
granted to Pandora pursuant to the Security Agreement dated as of May 20, 2004
by and between the Company and Pandora, the Company owns the Collateral free
and clear of all claims, liens or encumbrances of any kind. Upon consummation
of the transactions as contemplated hereby, the Purchasers will have a second
priority security interest in the Collateral.

     3.23. NASDAQ Compliance. The Company’s Common Stock is registered
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and is listed on the Over-the-Counter Bulletin Board
administered by The Nasdaq Stock Market, Inc. (the “OTCBB”). The Company has
taken no action designed to, or likely to have the effect of, and the
transactions contemplated by this Agreement will not have the effect of,
terminating the registration of the Common Stock under the Exchange Act or
de-listing of the Common Stock from the OTCBB. The Company has not received
any notification that the Commission, the National Association of Securities
Dealers, Inc., the OTCBB or any other self-regulatory organizational body is
contemplating terminating such registration or listing. Without limiting the
foregoing, the Transaction Documents and the transactions contemplated by them
require no shareholder approval under the rules or interpretations of the
OTCBB.

     3.24. Reporting Status. The Company has filed in a timely manner all
documents that the Company was required to file under the Exchange Act during
the 12 months preceding the date of this Agreement, except that (i) the
Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002 was
filed on May 27, 2003 (88 days late) and (ii) the Company’s Quarterly Report on
Form 10-QSB for the quarter ended March 31, 2003 was filed on June 19,

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2003 (35 days late). The SEC Reports complied in all material respects
with the Commission’s requirements as of their respective filing dates, and the
information contained therein as of the date thereof did not contain an 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 light of the
circumstances under which they were made, not misleading. As of the date
hereof, the Company satisfies the eligibility requirements for the use of Form
SB-2 under the Securities Act of 1933, as amended.

     3.25. No Manipulation of Stock. Neither the Company, nor any of its
directors, officers or controlling persons, has taken or will, in violation of
applicable law, take, any action designed to or that might reasonably be
expected to cause or result in, or which has constituted, stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the securities issued or issuable in connection with the transactions
contemplated hereunder.

     3.26. Foreign Corrupt Practices; Sarbanes-Oxley.

     (a) Neither the Company, nor to the knowledge of the Company, any agent or
other person acting on behalf of the Company, has (i) directly or indirectly,
used any corrupt funds for unlawful contributions, gifts, entertainment or
other unlawful expenses related to foreign or domestic political activity, (ii)
made any unlawful payment to foreign or domestic government officials or
employees or to any foreign or domestic political parties or campaigns from
corporate funds, (iii) failed to disclose fully any contribution made by the
Company (or made by any person acting on its behalf of which the Company is
aware) which is in violation of law, or (iv) violated in any material respect
any provision of the Foreign Corrupt Practices Act of 1977, as amended.

     (b) The Company is in compliance in all material respects with all
provisions of the Sarbanes-Oxley Act of 2002 that are applicable to it as of
the Closing Date.

SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

     Each Purchaser hereby severally (but not jointly) represents and warrants
to the Company as of the Closing Date, and agrees, as follows:

     4.1. Investment Representations. The Purchaser understands that neither
the offer nor the sale of the Purchaser’s Note, the Warrant or the Shares has
been registered under the Securities Act. The Purchaser also understands that
the Purchaser’s Note and Warrant are being offered and sold pursuant to an
exemption from registration contained in the Securities Act based in part upon
the Purchaser’s representations contained in the Agreement. The Purchaser
hereby represents and warrants as follows:

     (a) Purchaser Bears Economic Risk. The Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. The Purchaser must bear the economic
risk of this investment indefinitely unless the Purchaser’s respective Note or
Warrant

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(or the Shares) are registered pursuant to the Securities Act, or an exemption
from registration is available. Except as contemplated by the Registration
Rights Agreement, the Purchaser has no present intention of selling or
otherwise transferring its respective Note, the Warrant or the Shares, or any
interest therein. The Purchaser also understands that there is no assurance
that any exemption from registration under the Securities Act will be available
and that, even if available, such exemption may not allow the Purchaser to
transfer all or any portion of its respective Note, the Warrant or the Shares
under the circumstances, in the amounts or at the times the Purchaser might
propose.

     (b) Acquisition for Own Account. Except as contemplated by the
Registration Rights Agreement, the Purchaser is acquiring its respective Note,
the Warrant and the Shares for the Purchaser’s own account for investment only,
and not with a view towards their public distribution.

     (c) Purchaser Can Protect Its Interest. The Purchaser represents that by
reason of its, or of its management’s, business or financial experience, the
Purchaser has the capacity to protect its own interests in connection with the
transactions contemplated in this Agreement, the Note, the Warrant and the
Registration Rights Agreement. Further, the Purchaser is aware of no
publication of any advertisement in connection with the transactions
contemplated in the Agreement.

     (d) Accredited Investor. The Purchaser represents that it is an
accredited investor within the meaning of Regulation D of the Securities Act.

     (e) Residence. The Purchaser represents that it is organized under the
laws of the British Virgin Islands and that its principal office is located in
the State of Minnesota.

     (f) Rule 144. The Purchaser acknowledges and agrees that its respective
Note and Warrant, and, if issued, the Shares, must be held indefinitely unless
they are subsequently registered under the Securities Act or an exemption from
such registration is available. The Purchaser has been advised or is aware of
the provisions of Rule 144 promulgated under the Securities Act, which permits
limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, among other things: the
availability of certain current public information about the Company, the
resale occurring not less than one year after a party has purchased and paid
for the security to be sold, the sale being through an unsolicited “broker’s
transaction” or in transactions directly with a market maker (as such term is
defined under the Securities Exchange Act of 1934, as amended) and the number
of shares being sold during any three-month period not exceeding specified
limitations.

     4.2. Transfer Restrictions. The Purchaser acknowledges and agrees that
its respective Note and Warrant and, if issued, the Shares, are subject to
restrictions on transfer and will bear restrictive legends.

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SECTION 5. CONDITIONS FOR CLOSING

     5.1. Conditions for the Company to Satisfy. The several obligations of
each Purchaser to purchase its respective Note and Warrant as contemplated by
this Agreement is subject to satisfaction of the following contingencies at or
prior to Closing:

     (a) The Company shall have obtained all third party consents required in
connection herewith, including consents to pledge the Collateral to the
Purchaser as security for the Note (excluding acknowledgements from Tribes as
contemplated by Section 3.16 above in connection with future sales, leases,
participation rights, revenue-sharing or other similar arrangements between the
Company and such Tribes relating to Gaming Machines placed in service on Tribal
property).

     (b) The Company shall have executed and delivered to the Purchaser at
Closing the Transaction Documents.

     (c) The Company shall have paid Whitebox Advisors, LLC a $45,000 cash
origination fee related to the transactions contemplated hereby.

     (d) Maslon Edelman Borman & Brand, LLP, legal counsel to the Company,
shall have delivered an opinion to the Purchasers with respect to the following
matters:

          (i) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota. The Company has all
requisite corporate power and authority to own and operate its properties and
assets, to execute and deliver the Transaction Documents, to pledge the
Collateral as security for the Notes, to issue and sell the Shares, to carry
out the provisions of the Transaction Documents and to carry on its business as
presently conducted and as presently proposed to be conducted. The Company has
no subsidiaries. The Company is duly qualified and is authorized to do
business and is in good standing in each jurisdiction in which the nature of
its activities and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which failure to be
so qualified would not have a materially adverse effect on the Company or its
business, taken as a whole.

          (ii) The Company is authorized to issue 100,000,000 shares of capital
stock, of which 233,333 shares have been designated as Series A Convertible
Preferred Stock, par value $0.01 per share, and of which 206,667 shares are
issued and outstanding, and 11,006,784 shares of Common Stock, par value $0.01
per share, to the firm’s knowledge, are issued and outstanding. To the firm’s
knowledge, the Company has no outstanding Convertible Securities or any
agreement or commitment to sell or issue any shares of capital stock or
Convertible Securities, except as described herein. All issued and outstanding
shares of the Company’s capital stock (a) have been duly authorized and validly
issued, (b) are fully paid and nonassessable, (c) are free from any preemptive
and cumulative voting rights and (d) were issued pursuant to an effective
registration statement filed with the Commission and applicable state
securities authorities or pursuant to valid exemptions under federal and state
securities laws. To the firm’s knowledge, there are no outstanding rights of
first refusal or proxy or shareholder

-13-

 

agreements of any kind relating to any of the Company’s securities to which the
Company or any of its executive officers and directors is a party. When issued
in compliance with the provisions of the Warrants (and upon payment as provided
by the Warrants), the Shares will be validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided,
however, that the Shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.

          (iii) All corporate action on the part of the Company, its officers,
directors and shareholders necessary for the authorization of the Transaction
Documents, the performance of all obligations of the Company under the
Transaction Documents at the Closing, including the pledge of the Collateral as
security for the Notes, and the authorization, sale, issuance and delivery of
the Shares upon exercise of the Warrants has been taken. The Transaction
Documents, when executed and delivered, will be valid and binding obligations
of the Company enforceable in accordance with their terms, except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights,
(b) according to general principles of equity that restrict the availability of
equitable remedies; and (c) to the extent that the enforceability of the
indemnification provisions of the Registration Rights Agreement may be limited
by applicable laws. The sale of the Shares upon exercise of the Warrants is
not and will not be subject to any preemptive rights or rights of first
refusal.

          (iv) The execution and delivery to the Purchasers of the Transaction
Documents does not violate or constitute a default under the Articles of
Incorporation or Bylaws, as amended, of the Company, or under any agreement
known to such firm to which the Company or the Subsidiaries is a party or by
which any of their respective properties or assets are bound.

          (v) To such firm’s knowledge, except as disclosed in the SEC Reports,
there is no action, suit, proceeding or investigation pending or currently
threatened against the Company, including any that questions the validity of
the Agreement or the other agreements contemplated thereby or the right of the
Company to enter into any of such agreements, or to consummate the transactions
contemplated thereby. To such firm’s knowledge, and except as disclosed in the
SEC Reports, the Company is not a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency
or instrumentality.

          (vi) Upon tender of the funds by the Purchasers to the Company as
contemplated by the Agreement and filing of a UCC Financing Statement covering
the Collateral, a security interest in the Collateral will attach in favor of
the Purchasers.

SECTION 6. MISCELLANEOUS

     6.1. Governing Law. This Agreement shall be governed by the laws of the
State of Minnesota as such laws are applied to agreements between Minnesota
residents entered into and performed entirely in Minnesota.

-14-

 

     6.2. Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the parties and the closing
of the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.

     6.3. Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Notes, the Warrants or the Shares from time
to time.

     6.4. Entire Agreement. The Transaction Documents and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and no party
shall be liable or bound to any other in any manner by any representations,
warranties, covenants and agreements except as specifically set forth herein
and therein.

     6.5. Severability. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

     6.6. Amendment and Waiver. This Agreement may be amended or modified, and
any provision hereunder may be waived, only upon the written consent of the
Company and the Purchasers.

     6.7. Notices. All notices, requests, consents, and other communications
hereunder shall be in writing and shall be deemed effectively given and
received when delivered in person or by national overnight courier service or
by certified or registered mail, return receipt requested, or by telecopier,
addressed as follows:

	(a)	 	if to the Company, at
	 
	 	 	Spectre Gaming, Inc.

800 Nicollet Mall, Suite 2690

Minneapolis, Minnesota 55402

Attention: Brian D. Niebur, Chief Financial Officer

Facsimile: (612) 338-7332

-15-

 

	 	 	with a copy to:
	 
	 	 	Maslon Edelman Borman & Brand, LLP

90 South Seventh Street, Suite 3300

Minneapolis, Minnesota 55402

Attention: William M. Mower, Esq.

Facsimile: (612) 642-8358

	 
	(b)	 	if to the Purchasers, in care of:
	 
	 	 	Whitebox Advisors, LLC

3033 Excelsior Boulevard, Suite 300

Minneapolis, Minnesota 55416

Attention: Jonathan Wood, Chief Financial Officer

Facsimile: (612) 253-6151
	 
	 	 	with a copy to:
	 
	 	 	Messerli & Kramer P.A.

150 South Fifth Street, Suite 1800

Minneapolis, Minnesota 55402

Attention: Jeffrey C. Robbins, Esq.

Facsimile: (612) 672-3777.

     6.8. Indemnification by the Company. The Company agrees to indemnify and
hold the Purchasers harmless against any loss, liability, damage or expense
(including reasonable legal fees and costs) that the Purchasers may suffer,
sustain or become subject to as a result of or in connection with the breach by
the Company of any representation, warranty, covenant or agreement of the
Company contained in this Agreement, the Notes, the Warrants, the Registration
Rights Agreement or the Security Agreement.

     6.9. Expenses. At Closing, the Company shall pay the Purchaser’s counsel,
Messerli & Kramer P.A., $5,000 for its legal fees and expenses in representing
the Purchasers in connection with the transactions contemplated hereby. In
addition, the Company agrees to pay or reimburse the Purchasers for their
reasonable legal fees and expenses that the Purchasers may incur after the date
hereof in connection with the review and approval of any opinion provided
pursuant to Section 3.16 above and the granting of any waiver with respect to,
the modification of any of the terms or provisions of, or the enforcement of
any of the Transaction Documents.

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

     6.11. Counterparts. This Agreement may be delivered via facsimile or
other means of electronic communication, and may be executed in counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.

-16-

 

     IN WITNESS WHEREOF, the parties hereto have hereunto affixed their
signatures.

	 	 	 	 	 	 	 
	Spectre Gaming, Inc.	 	Pandora Select Partners L.P.
	 
	 	 	 	 	 	 
	By

	 	/s/ Brian Niebur
	 	By
	 	[executed]
	

	 	
 
	 	 	 	
 
	

	 	Brian D. Niebur	 	 	 	 
	

	 	   Chief Financial Officer
	 	Its	 	

	 
	 	 	 	 	 	 
	 	 	 	 	Whitebox Intermarket Partners L.P.
	 
	 	 	 	 	 	 
	

	 	 	 	By
	 	[executed]
	

	 	 	 	 	 	
 
	

	 	 	 	Its	 	

-17-

 

Description of Collateral

     All assets (except as excluded in the last paragraph below) of Spectre
Gaming, Inc., a Minnesota corporation (the “Company”), including without
limitation, the following:

     Inventory: All inventory of the Company as that term is defined in the
Uniform Commercial Code, whether now owned or hereafter acquired or in which
the Company obtains rights, whether consisting of whole goods, spare parts or
components, supplies or materials whether acquired, held or furnished for sale,
for lease, for participation, revenue-sharing or other similar arrangements, or
under contracts or for manufacture or processing, and wherever located, to
include, without limitation, all slot-machine games now owned or hereafter
acquired by the Company;

     Equipment: All equipment of the Company, whether now owned or hereafter
acquired, including all present and future machinery, vehicles, furniture,
fixtures, office and recordkeeping equipment, parts, tools, supplies and all
other goods (except inventory) used or bought for use by the Company for any
business or enterprise and including specifically (without limitation) all
accessions thereto, all substitutions and replacements thereof, and all like or
similar property now owned or hereafter acquired by the Company, and all of
which is owned by the Company, and all deposits made on any such equipment;

     Deposit Accounts and Other Cash: All deposits and deposit accounts with
any bank, savings and loan association, credit union or like organization, and
all funds and amounts therein, and whether or not held in trust, or in custody
or safekeeping, or otherwise restricted or designated for a particular purpose,
and all other cash or marketable securities on hand, whether held in-vault or
otherwise;

     Receivables: Each and every right of the Company to the payment of money,
whether such right to payment now exists or hereafter arises, whether such
right to payment arises out of a sale, lease or other disposition of goods or
other property, out of a rendering of services, or of a loan, out of the
overpayment of taxes or other liabilities, or any other transaction or event,
whether such right to payment is created, generated or earned by the Company or
by some other person who subsequently transfers his, her or its interest to the
Company, whether such right to payment is or is not already earned by
performance, and howsoever such right to payment may be evidenced, together
with all other rights and interests (including all liens and other security
interests) which the Company may at any time have by law or agreement against
any account debtor or other person obligated to make such payment or against
any property of such account debtor or other persons including, but not limited
to, all present and future accounts, contract rights, chattel paper, bonds,
notes and other debt instruments, and rights to payment in the nature of
general intangibles; and to include, without limitation, each and every right
of the Company to the payment of money, whether such right to payment now
exists or hereafter arises, out of a sale, lease or other disposition of
Inventory or Equipment, including rights to payment on account of
participation, revenue-sharing or other similar arrangements relating to
Inventory or Equipment placed in service with third parties;

     General Intangibles: All general intangibles of the Company whether now
owned or

-18-

 

hereafter acquired, including (without limitation) all present and future
patents, patent applications, copyrights, trademarks, trade names, trade
secrets, customer or supplier lists and contracts, manuals, operating
instructions, permits, franchises, the right to use the Company’s name, the
Company’s internet domain names and address and the goodwill of the Company’s
business.

     Securities: All securities and other equity interests now owned or
hereafter acquired by the Company, including shares of capital stock of any
wholly owned or partially owned subsidiary of the Company.

     The Collateral shall include (i) all substitutes and replacements for and
proceeds of any and all of the foregoing property, and in the case of all
tangible Collateral, all accessions, accessories, attachments, parts, equipment
and repairs now or hereafter attached or affixed to or use in connection with
any such goods and (ii) all warehouse receipts, bills of lading and other
documents of title now or hereafter covering such goods.

     Despite the foregoing, the Collateral shall not include slot-machine games
(or any substitutes and replacements of them or any accessions, accessories,
attachments, parts, equipment and repairs attached or affixed to or used in
connection therewith) acquired by the Company after the date hereof 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; but the Collateral will include the Receivables related to such
slot-machine games and the proceeds therefrom.

-19-

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