Document:

exv10w4

 

Exhibit 10.4

WARRANT NO. PSP 2

To Purchase 50,000 Shares of Common Stock

of

SPECTRE GAMING, INC.

     This Warrant and the Securities issuable upon exercise of this Warrant
have not been registered under the Securities Act of 1933 (the “1933 Act”) or
under any state securities or “Blue Sky” laws (“Blue Sky Laws”). No transfer,
sale, assignment, pledge, hypothecation or other disposition of this Warrant or
the Securities issuable upon exercise of this Warrant or any interest therein
may be made except (a) pursuant to an effective registration statement under
the 1933 Act and any applicable Blue Sky Laws or (b) if the Corporation has
been furnished with an opinion of counsel for the holder, which opinion and
counsel shall be reasonably satisfactory to the Corporation, to the effect that
no registration is required because of the availability of an exemption from
registration under the 1933 Act and applicable Blue Sky laws.

     THIS CERTIFIES THAT, for good and valuable consideration Pandora Select
Partners L.P., a British Virgin Islands limited partnership (the “Holder”), or
the Holder’s registered assigns, is entitled to subscribe for and purchase from
Spectre Gaming, Inc., a Minnesota corporation (the “Corporation”), at any time
on or after September 10, 2004, to and including September 10, 2009 (subject to
the limitations provided in Section 10 below), 50,000 (fifty thousand) fully
paid and nonassessable shares of the Common Stock of the Corporation at a per
share exercise price that is equal to the lesser of (i) $3.00 or (ii) the
purchase price paid in connection with the first private placement of the
Corporation’s Common Stock for an aggregate consideration in excess of $1
million that is commenced on or after the date hereof and completed before
March 10, 2005 (the “Warrant Exercise Price”), subject to the anti-dilution and
price protection provisions of this Warrant. (For purposes of determining the
Warrant Exercise Price, it is assumed that any warrants issued by the Company
as part of such private placement will have no value.)

     The shares which may be acquired upon exercise of this Warrant are
referred to herein as the “Warrant Shares.” As used herein, the term “Holder”
means the Holder, any party who acquires all or a part of this Warrant as a
registered transferee of the Holder, or any record holder or holders of the
Warrant Shares issued upon exercise, whether in whole or in part, of the
Warrant. The term “Common Stock” means the common stock, $0.01 par value per
share, of the Corporation.

     This Warrant is subject to the following provisions, terms and conditions:

1. Exercise; Transferability.

     (a) The rights represented by this Warrant may be exercised by the Holder
hereof, in whole or in part (but not as to a fractional share of Common Stock),
by written notice of exercise (in the form attached hereto) delivered to the
Corporation at the principal office of the

 

 

Corporation prior to the expiration
of this Warrant and accompanied or preceded by the surrender
of this Warrant along with a check in payment of the Warrant Exercise Price for
such Warrant Shares.

     (b) Except as provided in Section 8 hereof, this Warrant may not be sold,
transferred, assigned, hypothecated or divided into two or more Warrants of
smaller denominations, nor may any Warrant Shares issued pursuant to exercise
of this Warrant be transferred. In no event may this Warrant be transferred
and divided (without any exercise hereof) into any denomination(s) of less than
100 Warrant Shares.

2. Exchange and Replacement. Subject to Sections 1 and 8 hereof, this Warrant
is exchangeable upon the surrender hereof by the Holder to the Corporation at
its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Corporation of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and, in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
it, and upon surrender and cancellation of this Warrant, if mutilated, the
Corporation will make and deliver a new Warrant of like tenor, in lieu of this
Warrant. This Warrant shall be promptly canceled by the Corporation upon the
surrender hereof in connection with any exchange or replacement. The
Corporation shall pay all expenses, taxes (other than stock transfer taxes),
and other charges payable in connection with the preparation, execution, and
delivery of Warrants pursuant to this Section 2.

3. Issuance of the Warrant Shares.

     (a) The Corporation agrees that the Warrant Shares shall be and are deemed
to be issued to the Holder as of the close of business on the date on which
this Warrant shall have been surrendered and the payment made for such Warrant
Shares as aforesaid. Subject to the provisions of paragraph (b) of this
Section 3, certificates for the Warrant Shares so purchased shall be delivered
to the Holder within a reasonable time after the rights represented by this
Warrant shall have been so exercised, and, unless this Warrant has expired, a
new Warrant representing the right to purchase the number of Warrant Shares, if
any, with respect to which this Warrant shall not then have been exercised
shall also be delivered to the Holder.

     (b) Notwithstanding the foregoing, however, the Corporation shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Except as described in Section 10, nothing herein shall obligate the
Corporation to effect registrations under federal or state securities laws. If
registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time as
either registrations become effective or exemptions are available, and the
Warrant

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shall then remain exercisable for a period of at least 30 calendar days
from the date the Corporation delivers to the Holder written notice of the
availability of such registrations or
exemptions. The Holder agrees to execute such documents and make such
representations, warranties and agreements as may be required solely to comply
with the exemptions relied upon by the Corporation, or the registrations made,
for the issuance of the Warrant Shares.

4. Covenants of the Corporation. The Corporation covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof. The Corporation further covenants and agrees that during the
period within which the rights represented by this Warrant may be exercised,
the Corporation will at all times have authorized and reserved for the purpose
of issue or transfer upon exercise of the subscription rights evidenced by this
Warrant a sufficient number of shares of Common Stock to provide for the
exercise of the rights represented by this Warrant.

5. Anti-dilution Adjustments. The provisions of this Warrant are subject to
adjustment as provided in this Section 5.

     (a) Stock Splits, Dividends and Combinations. The Warrant Exercise Price
shall be adjusted from time to time such that in case the Corporation shall
hereafter:

          (i) pay any dividends on any class of stock of the Corporation payable in
Common Stock or securities convertible into Common Stock;

          (ii) subdivide its then outstanding shares of Common Stock into a greater
number of shares; or

          (iii) combine outstanding shares of Common Stock, by reclassification or
otherwise;

then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (A) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (B) the total number of shares of Common Stock outstanding
immediately after such event (including in each case the maximum number of
shares of Common Stock issuable in respect of any securities convertible into
Common Stock), and the resulting quotient shall be the adjusted Warrant
Exercise Price per share. An adjustment made pursuant to this Subsection shall
become effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or reclassification. If, as a result of
an adjustment made pursuant to this Subsection, the Holder of any Warrant
thereafter surrendered for exercise shall become entitled to receive shares of
two or more classes of capital stock or shares of Common Stock and other
capital stock of the Corporation, the Board of Directors (whose determination
shall be

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conclusive) shall determine the allocation of the adjusted Warrant
Exercise Price between or among shares of such classes of capital stock or
shares of Common Stock and other capital stock. All calculations under this
Subsection shall be made to the nearest cent or to the nearest 1/100 of a
share, as the case may be. In the event that at any time as a result of an
adjustment made pursuant to this Subsection,
the holder of any Warrant thereafter surrendered for exercise shall become
entitled to receive any shares of the Corporation other than shares of Common
Stock, thereafter the Warrant Exercise Price of such other shares so receivable
upon exercise of any Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to Common Stock contained in this Section.

     (b) Mechanics of Adjustment for Stock Splits, Dividends and Combinations.
Upon each adjustment of the Warrant Exercise Price pursuant to Section 5(a)
above, the Holder of each Warrant shall thereafter (until another such
adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the
number of shares, calculated to the nearest full share, obtained by multiplying
the number of shares specified in such Warrant (as adjusted as a result of all
adjustments in the Warrant Exercise Price in effect prior to such adjustment)
by the Warrant Exercise Price in effect prior to such adjustment and dividing
the product so obtained by the adjusted Warrant Exercise Price.

     (c) Consolidations, Mergers and Reorganization Events. In case of any
consolidation or merger to which the Corporation is a party other than a merger
or consolidation in which the Corporation is the continuing corporation, or in
case of any sale or conveyance to another corporation of the property of the
Corporation 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
Corporation), there shall be no adjustment under Subsection (a) of this Section
5; but the Holder of each Warrant then outstanding shall have the right
thereafter to convert such Warrant into the kind and amount of shares of stock
and other securities and property which he would have owned or have been
entitled to receive immediately after such consolidation, merger, statutory
exchange, sale or conveyance had such Warrant been 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 any Holders of the Warrant,
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
on the exercise of the Warrant. The provisions of this Subsection shall
similarly apply to successive consolidations, mergers, statutory exchanges,
sales or conveyances.

     (d) Adjustments for Diluting Issues. In addition to the adjustments of
the Warrant Exercise Price provided above, the Warrant Exercise Price shall be
subjected to further adjustment from time to time as follows (the main
operative provision hereof is in Section 5(d)(iii) below):

          (i) Special Definitions:

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               (A) “Options” shall mean rights, options or warrants (other than as
excluded by Section 5(d)(i)(D) below) to subscribe for, purchase or otherwise
acquire either Common Stock or Convertible Securities (as defined herein).

               (B) “Original Issue Date” shall mean the date hereof.

               (C) “Convertible Securities” shall mean securities (other than as excluded
by (4) below) convertible, either directly or indirectly, into or exchangeable
for Common Stock.

               (D) “Additional Shares of Common Stock” shall mean all shares of Common
Stock issued (or, deemed to be issued) by the Corporation after the Original
Issue Date other than shares of Common Stock issued (or deemed to be issued):

                    1. to employees, consultants or directors pursuant to stock option, stock
grant, stock purchase or similar plans or arrangements approved by the
Corporation’s Board of Directors;

                    2. as a dividend or other distribution in connection with which an
adjustment to the Warrant Exercise Price is made;

                    3. in a merger, consolidation, acquisition or similar business combination
that is approved by the Corporation’s Board of Directors;

                    4. pursuant to credit, lease or other commercial financing arrangements
with parties not affiliated with the Corporation that are approved by the
Corporation’s Board of Directors;

                    5. in exchange for technology or other non-cash assets as approved by the
Corporation’s Board of Directors;

                    6. pursuant to any rights or agreements outstanding on the Original Issue
Date; or

                    7. if the Holder agrees in writing that such shares shall not constitute
Additional Shares of Common Stock.

          (ii) Deemed Issue of Additional Shares of Common Stock. Except as
otherwise provided in Section 5(d), in the event the Corporation at any time or
from time to time after the Original Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of any
holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such

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Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such record date shall have been fixed, as of the close of
business on such record date, provided that in any such case in which
Additional Shares of Common Stock are deemed to be issued:

               (A) no further adjustment in the Warrant Exercise Price shall be made upon
the subsequent issue of such Convertible Securities or shares of Common Stock
upon the exercise of such Options or conversion or exchange of such Convertible
Securities;

               (B) if such Options or Convertible Securities by their terms provide, with
the passage of time or otherwise, for any increase or decrease in the
consideration payable to the Company, or increase or decrease in the number of
shares of Common Stock issuable upon the exercise, conversion or exchange
thereof, the Warrant Exercise Price computed upon the original issue thereof or
upon the occurrence of a record date with respect thereto, and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease;

               (C) upon the expiration of any such Option or any rights of conversion or
exchange under such Convertible Securities which shall not have been exercised,
the Warrant Exercise Price computed upon the original issue thereof or upon
occurrence of a record date with respect thereto, and any subsequent
adjustments based thereon, shall, upon such expiration:

                    1. in the case of Convertible Securities or Options for Common Stock, be
recomputed as though the only Additional Shares of Common Stock issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, and the
consideration received therefor was the consideration actually received by the
Company for the issue of all such Options, whether or not exercised, plus the
consideration actually received by the Company upon such exercise, or for the
issue of all such Convertible Securities, whether or not converted or
exchanged, plus the additional consideration, if any, actually received by the
Company upon such conversion or exchange; and

                    2. in the case of Options for Convertible Securities, be recomputed as
though only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options and the
consideration received by the Company for the Additional Shares of Common Stock
deemed to have been then issued was the consideration actually received by the
Company for the issue of all such Options, whether or not exercised, plus the
consideration deemed to have been received by the Company upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised.

               (D) no readjustment pursuant to Section 5(d) shall have the effect of
increasing the Warrant Exercise Price to an amount which exceeds the Warrant
Exercise Price existing immediately prior to the original adjustment with
respect to the issuance of such Options or Convertible Securities, as adjusted
for any Additional Shares of Common Stock issued (or deemed to be issued)
between such original adjustment date and such readjustment date; and

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               (E) in the case of any Option or Convertible Security with respect to
which the maximum number of shares of Common Stock issuable upon exercise or
conversion or exchange thereof is not determinable, no adjustment to the
Warrant Exercise Price shall be made until such number becomes determinable.

          (iii) Adjustments for Issuance of Additional Shares of Common Stock. If
the Company, at any time after the issuance of this Warrant, shall issue any
Additional Shares of Common Stock (otherwise than as provided in the Sections
5(a) and 5(c) above) at a price per share less than the applicable Warrant
Exercise Price then in effect or without consideration, then the applicable
Warrant Exercise Price upon each such issuance shall be adjusted to that price
(rounded to the nearest cent) determined by multiplying the applicable Warrant
Exercise Price then in effect by a fraction, (i) the numerator of which shall
be equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to the issuance of such Additional Shares of Common Stock
plus (B) the number of shares of Common Stock (rounded to the nearest whole
share) which the aggregate consideration for the total number of such
Additional Shares of Common Stock so issued would purchase at a price per share
equal to the applicable Warrant Exercise Price then in effect, and (ii) the
denominator of which shall be equal to the number of shares of Common Stock
outstanding immediately after the issuance of such Additional Shares of Common
Stock.

               The provisions of this Section 5(d)(iii) shall not apply under any of the
circumstances for which an adjustment is provided in Sections 5(a), 5(b) or
5(c) above. No adjustment of the applicable Warrant Exercise Price shall be
made under this Section 5(d) upon the issuance of any Additional Shares of
Common Stock which are issued pursuant to any Options or Convertible Securities
if upon the issuance of such Options or Convertible Securities (x) any
adjustment shall have been made pursuant to Section 5(d)(ii) above or (y) no
adjustment was required pursuant to this Section 5(d)(iii). No adjustment of
the applicable Warrant Exercise Price shall be made under this Section
5(d)(iii) in an amount less than $.01 per share, but any such lesser adjustment
shall be carried forward and shall be made at the time and together with the
next subsequent adjustment, if any, which together with any adjustments so
carried forward shall amount to $.01 per share or more; provided, however,
that upon any adjustment of the applicable Warrant Exercise Price as a result
of any dividend or distribution payable in Common Stock or Convertible
Securities or the reclassification, subdivision or combination of Common Stock
into a greater or smaller number of shares, the foregoing figure of $.01 per
share (or such figure as last adjusted) shall be adjusted (to the nearest
one-half cent) in proportion to the adjustment in the applicable Warrant
Exercise Price.

          (iv) Determination of Consideration. For purposes of this Section 5(d),
the consideration received by the Corporation for any Additional Shares of
Common Stock issued (or deemed to be issued) shall be computed as follows:

               (A) Cash and Property. Such consideration shall:

                    (i) insofar as it consists of cash, be computed at the aggregate amount of
cash received by the Company;

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                    (ii) insofar as it consists of securities and the value of such securities
is not determinable by reference to a separate agreement, (A) if the securities
are then traded on a national securities exchange or the Nasdaq Stock Market
(or a similar national quotation system), then the value shall be computed
based on the average of the closing prices of
the securities on such exchange or system over the thirty (30)-day period
ending on the date of receipt by the Corporation, (B) if the securities are
actively traded over-the-counter, then the value shall be computed based on the
average of the closing bid prices over the thirty (30) day ending on the date
of receipt by the Corporation, and (C) if there is no active public market,
then the value shall be computed based on the fair market value thereof on the
date of receipt by the Corporation, as determined in good faith by the Board of
Directors;

                    (iii) insofar as it consists of property other than cash and securities,
be computed at the fair market value thereof at the time of such issuance, as
determined in good faith by the Board of Directors; and

                    (iv) if Additional Shares of Common Stock are issued (or deemed to be
issued) together with other shares or securities or other assets of the
Corporation for consideration which cover both, by the proportion of such
consideration so received, computed as provided in the immediately preceding
Sections 5(d)(iv)(A)(i), 5(d)(iv)(A)(ii) and 5(d)(iv)(A)(iii), as determined in
good faith by the Board of Directors.

               (B) Options and Convertible Securities. The consideration received by the
Corporation for Additional Shares of Common Stock deemed to have been issued
pursuant to Section 5(d) relating to Option and Convertible Securities, shall
be the sum of (x) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus (y) the minimum aggregate amount of additional consideration
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise of such Options or the conversion
or exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities.

     (e) Default. For purposes of a secured promissory note of this date (the
“Note”) issued by the Corporation to the original Holder hereof, this Warrant
is in default if the Corporation fails by February 1, 2005 (the “Registration
Deadline”) to obtain effectiveness under the 1933 Act and applicable state
securities laws of a registration statement for the benefit of the Holder under
the terms of a Registration Rights Agreement of this date covering all of the
Warrant Shares hereunder. Despite the foregoing, if the Holder consents (as
provided under the Registration Rights Agreement) to an extension of the
effective date of the Registration Statement beyond February 1, 2005, then the
Registration Deadline hereunder shall be extended by a like period.

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     (f) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Warrant Exercise Price or the number of Warrants covered
hereby pursuant to this Section 5 or pursuant to Section 6 below, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to the Holder a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of the Holder, furnish or cause to
be furnished to the Holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Warrant Exercise
Price at the time in effect, and (iii) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be received upon
the exercise of this Warrant.

6. Price Protection Adjustments. In addition to the adjustments provided
above, if at any time the closing price of the Corporation’s Common Stock as
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 Holder) is less than
$1.25 per share (the “Triggering Price”) for 30 or more consecutive trading
days, then the Holder may elect a special adjustment in the number of Warrant
Shares, and the Warrant Exercise Price, of this Warrant. The Holder may elect
the special adjustment at any time thereafter by giving written notice to the
Corporation. This Warrant will then represent the right to purchase 75% of the
number of Warrant Shares purchasable hereunder immediately prior to the
election (rounded up to the nearest whole share) at a new Warrant Exercise
Price of $1.25 per share. However, the Triggering Price and the new Warrant
Exercise Price shall be similarly adjusted for events that otherwise adjust the
Warrant Exercise Price as described in Section 5(a) above.

7. No Voting Rights. This Warrant shall not entitle the Holder to any voting
rights or other rights as a shareholder of the Corporation.

8. Notice of Transfer of Warrant or Resale of the Warrant Shares.

     (a) Subject to the sale, assignment, hypothecation or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Corporation before transferring this
Warrant or transferring any Warrant Shares of such Holder’s intention to do so,
describing briefly the manner of any proposed transfer. Promptly upon
receiving such written notice, the Corporation shall present copies thereof to
the Corporation’s counsel. If in the opinion of such counsel the proposed
transfer may be effected without registration or qualification (under any
federal or state securities laws), the Corporation, as promptly as practicable,
shall notify the Holder of such opinion, whereupon the Holder shall be entitled
to transfer this Warrant or to dispose of Warrant Shares received upon the
previous exercise of this Warrant, all in accordance with the terms of the
notice delivered by the Holder to the Corporation; provided that an appropriate
legend may be endorsed on this Warrant or the certificates for such Warrant
Shares respecting restrictions upon transfer thereof necessary or advisable in
the opinion of counsel and satisfactory to the Corporation to prevent further
transfers which would be in violation of Section 5 of the 1933 Act and
applicable state securities laws;

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and provided further that the prospective
transferee or purchaser shall execute such documents and make such
representations, warranties and agreements as may be required solely to comply
with the exemptions relied upon by the Corporation for the transfer or
disposition of the Warrant or Warrant Shares.

     (b) If, in the opinion of the Corporation’s counsel, the proposed transfer
or disposition of this Warrant or such Warrant Shares described in the written
notice given pursuant to this Section 8 may not be effected without
registration or qualification of this Warrant or such
Warrant Shares, the Corporation shall promptly give written notice thereof to
the Holder, and the Holder will limit its activities in respect to such
transfer or disposition as, in the opinion of such counsel, are permitted by
law.

9. Fractional Shares. Fractional shares shall not be issued upon the exercise
of this Warrant, but in any case where the holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Corporation shall, upon the exercise of this Warrant for
the largest number of whole shares then called for, pay a sum in cash equal to
the sum of (a) the excess, if any, of the Market Price of such fractional share
over the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the term
“Market Price” with respect to shares of Common Stock of any class or series
means the last reported sale price or, if none, the average of the last
reported closing bid and asked prices on any national or regional securities
exchange or quoted in the National Association of Securities Dealers, Inc.’s
Automated Quotations System (“Nasdaq”), or if not listed on a national or
regional securities exchange or quoted in Nasdaq, the average of the last
reported closing bid and asked prices as reported by Metro Data Corporation,
Inc. or the OTC Bulletin Board from quotations by market makers in such Common
Stock on the Minneapolis-St. Paul local over-the-counter market, or if no
quotations in such Common Stock are available, the fair market value of the
shares as determined in good faith by the Board of Directors of the
Corporation.

10. Registration Rights. Holder shall have registration rights for the shares
underlying its Warrants as described in the Registration Rights Agreement of
this same date.

11. Limitation of Exercise of this Warrant. Despite anything to the contrary
in this Warrant, the Holder may not exercise this Warrant during the time
period and to the extent that the shares of Common Stock that the Holder could
acquire upon the exercise hereof would cause Holder’s Beneficial Ownership (as
defined below) of the Corporation’s Common Stock to exceed 4.99%. These
limitations on the right to exercise this Warrant shall first reduce the
Holder’s Beneficial Ownership of the Corporation’s Common Stock before
limitation of the Holder’s conversion rights, or the Corporation’s right to
make payments in Common Stock, under the Note. The parties shall compute the
Holder’s “Beneficial Ownership” of Common Stock in accordance with U.S.
Securities and Exchange Commission Rule 13d-3. The Holder will, at the request
of the Corporation, from time to time, notify the Corporation of the Holder’s
computation of Holder’s Beneficial Ownership.

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     IN WITNESS WHEREOF, Spectre Gaming, Inc. has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated September
10, 2004.

	 	 	 	 	 
	 	 	SPECTRE GAMING, INC.
	 
	 	 	 	 
	

	 	By
	 	     /s/ Brian Niebur
	

	 	 	 	

	

	 	 	 	Brian D. Niebuhr
	

	 	 	 	     Chief Financial Officer

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EXERCISE FORM

(To Be Executed by the Registered Holder in Order to Exercise the Warrant)

To: Spectre Gaming, Inc.

The undersigned hereby irrevocably elects to exercise the attached Warrant to
purchase for cash,                                        of the shares issuable upon the exercise of
such Warrant, and requests that certificates for such shares (together with a
new Warrant to purchase the number of shares, if any, with respect to which
this Warrant is not exercised) shall be issued in the name of:

	 	 	 	 	 
	

	 	NAME:	 	 
	

	 	 	 	

	

	 	SOC. SEC. or	 	 
	

	 	TAX I.D. NO.	 	 
	

	 	 	 	

	

	 	ADDRESS:	 	 
	

	 	 	 	

	 

	

	 	 	 	

	 
	 	 	 	 
	Date:                   , 20                   .

	 	 	 	 
	

	 	 	 	
Signature *

	*	 	The signature on the Notice of Exercise of Warrant must correspond to
the name as written upon the face of the Warrant in every particular
without alteration or enlargement or any change whatsoever. When signing
on behalf of a corporation, partnership, trust or other entity, please
indicate your position(s) and title(s) with such entity.

 

 

ASSIGNMENT FORM

(To be Executed by the Registered Holder in Order to Transfer the Warrant)

To: Spectre Gaming, Inc.

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
unto                                       the right to purchase the securities of
Spectre Gaming, Inc. to which the within Warrant relates and appoints
                                      , attorney, to transfer said right on the books of
Spectre Gaming, Inc. with full power of substitution in the premises.

	 	 	 
	Dated:                                        20                   

	 	

	

	 	(Signature)
	 
	 	 
	

	 	Address:exv10w5

 

EXHIBIT 10.5

SECURED PROMISSORY NOTE

	 	 	 
	$750,000

	 	September 10, 2004

     FOR VALUE RECEIVED, the undersigned, SPECTRE GAMING, INC., a Minnesota
corporation (the “Maker”), hereby promises to pay to the order of Whitebox
Intermarket 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 Seven Hundred Fifty Thousand Dollars ($750,000), 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. The principal and interest hereof is payable as follows:

     (a) The principal amount of this Note shall be due and payable on the
earlier of (i) March 10, 2005 or (ii) when declared due and payable by the
Payee upon the occurrence of an event of default (as defined below in Section
4).

     (b) Commencing on October 10, 2004, and on the 10th day of each of the
following 5 months, Maker shall pay interest on the outstanding principal
amount of this Note.

3. Security. The full and timely payment of this Note, together with the
Maker’s obligations under a Purchase Agreement of this date between Maker,
Pandora Select Partners L.P. (“Pandora”) and Payee (the “Purchase Agreement”)
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 second priority security
interest subordinate only to the security interest granted pursuant to the
Security Agreement dated as of May 20, 2004, by and between the Maker and
Pandora.

4. 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:

     (a) The Maker shall fail to make any required payment of principal or
interest when due and payable, and such failure shall continue through ten 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 among Maker, Pandora and Payee or the Warrant being issued on the
date hereof by Maker to Payee,

 

 

and such failure shall continue through ten 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 Section 2 are of essence and that any failure to
timely pay all outstanding principal or unpaid accrued interest 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.

5. 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.

6. 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.

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

8. 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
	 	/s/ Brian Niebur
	

	 	 	
 
	

	 	 	 	Brian D. Niebur

   Chief Financial Officer

586542.2

-2-

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