Document:

exv10w2

 

EXHIBIT 10.2

SECURED CONVERTIBLE PROMISSORY NOTE

	 	 	 
	$1,100,000

	 	May 20, 2004

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

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

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

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

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

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

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

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

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

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

 

 

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

3. Optional Payment in Stock.

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

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

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

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

4. Conversion.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	 	 	 	 	 
	 	SPECTRE GAMING, INC.

By

Russell Mix, President and

Chief Executive Officer

 	 
	 	 	 
	 	 	 
	 	 	 
	 

7exv10w3

 

EXHIBIT 10.3

REGISTRATION RIGHTS AGREEMENT

     THIS REGISTRATION RIGHTS AGREEMENT (the “Agreement") is entered into as of
May 20, 2004, by and among Spectre Gaming, Inc., a Minnesota corporation (the
“Company"), and Pandora Select Partners L.P., a British Virgin Islands limited
partnership (the “Investor").

R E C I T A L S :

     WHEREAS, the Company has entered into that certain Purchase Agreement,
dated as of the date hereof (the “Purchase Agreement") with the Investor
pursuant to which the Company has agreed to issue and sell to the Investor a
secured convertible promissory note (the “Note”) and a warrant (the “Warrant”)
to purchase shares of the Company’s Common Stock, $0.01 par value per share
(the “Common Stock”);

     WHEREAS, the Company may make certain principal and interest payments on
the Note by issuance of additional shares of its Common Stock;

     WHEREAS, the Company has agreed to grant certain registration rights with
respect to the shares of the Company’s Common Stock issuable as payments under
the Note, upon conversion of the Note or upon exercise of the Warrant;

     NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties, intending to be legally bound, hereby agree as follows:

ARTICLE 1

DEFINITIONS

     As used herein, the following terms shall have the following respective
meanings:

1.1 “Commission” shall mean the U.S. Securities and Exchange Commission or any
other successor federal agency at the time administering the Securities Act.

1.2 “Common Stock” shall mean the Company’s common stock, $0.01 par value per
share.

1.3 “Exchange Act” shall mean the Securities and Exchange Act of 1934, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.

1.4 “Holders” shall mean and include the Investor and any transferee thereof
who holds Registrable Securities of record.

 

 

1.5 “Register,” “registered” and “registration” refer to a registration
effected by preparing and filing with the Commission a registration statement
in compliance with the Securities Act, and the declaration or ordering by the
Commission of the effectiveness of such registration statement.

1.6 “Registrable Securities” means any and all shares of Common Stock: (i)
issued or issuable as payments under the Note, upon conversion of the Note or
upon exercise of the Warrant or (ii) issued or issuable with respect to the
Common Stock upon any stock split, stock dividend, recapitalization,
reclassification, merger, consolidation or other similar event; excluding in
all cases, however, Registrable Securities sold by a Holder to the public
pursuant to a registered offering or pursuant to Rule 144 promulgated under the
Securities Act or sold in a private transaction in which the Holder’s
registration rights under this Agreement are not assigned.

1.7 “Registration Expenses” shall mean all expenses incurred by the Company in
complying with Articles 2 and 3 hereof, including, without limitation, all
registration, qualification and Commission, National Association of Securities
Dealers, Inc., stock exchange and other filing fees, printing expenses, escrow
fees, fees and disbursements of legal counsel for the Company, blue sky fees
and expenses, and the expense of any special audits incident to or required by
any such registration (but excluding the compensation of regular employees of
the Company, which shall be paid in any event by the Company).

1.8 “Securities Act” shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.

1.9 “Selling Expenses” shall mean all underwriting fees, discounts, selling
commissions and stock transfer taxes applicable to the Registrable Securities
registered by the Holders and the fees and expenses of any special counsel
engaged by the Holders.

1.10 “Underwriter” shall mean (whether or not the term is capitalized) a
broker-dealer engaged by the Company to distribute Registrable Securities as
principal or agent.

1.11 “Underwriting” or “Underwritten” shall mean (whether or not the term is
capitalized) a method of publicly distributing securities through an
Underwriter.

ARTICLE 2

REQUIRED REGISTRATION

2.1 Required Registration. Not later than November 3, 2004 (unless a majority
in interest of the Holders request a delay of the Company for up to an
additional 90 days in writing and in such case, upon expiration of this
requested delaying period), the Company will prepare and file

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with the Commission a registration statement under the Securities Act
(currently expected to be on Form S-2 or SB-2) covering all of the Registrable
Securities and use its best efforts to obtain the effectiveness of such
registration as soon as practicable as would permit or facilitate the original
issuance or subsequent resale and distribution of all of such Registrable
Securities. The Company’s failure to obtain effectiveness of this registration
statement by February 1, 2005 (subject to an extension of such date to
correspond to a filing date extension, if any, granted by the Holders above,
and subject to delays incurred by any Holder’s failure to comply with the
provisions of Section 5(b) below) will commence the running of the first
“Failure Term” as defined in Section 5 of the Note and will also constitute an
event of default under this Agreement.

2.2 Underwriting.

     (a) The resale distribution of the Registrable Securities covered by the
registration statement referred to in Section 2.1 above shall be effected by
means of the method of distribution selected by the Holders holding a majority
of the Registrable Securities covered by such registration. The Holders
holding a majority of the Registrable Securities may also change the resale
distribution method from time to time (subject to amendment of the registration
statement as required to describe such changes). If such distribution is
effected by means of an underwriting, the right of any Holder to registration
pursuant to this Article 2 shall be conditioned upon such Holder’s
participation in such underwriting and the inclusion of such Holder’s
Registrable Securities in the underwriting to the extent provided herein.

     (b) If such distribution is effected by means of an underwriting, the
Company (together with all Holders proposing to distribute their securities
through such underwriting) shall enter into an underwriting agreement in
customary form with a managing underwriter of nationally recognized standing
selected for such underwriting by a majority in interest of the Holders and
approved by the Company, which approval shall not be unreasonably withheld.

     (c) If any Holder disapproves of the terms of the underwriting, such
person may elect to withdraw therefrom by written notice to the Company, the
managing underwriter and the other Holders. The Registrable Securities and/or
other securities so withdrawn shall also be withdrawn from registration.

2.3 Inclusion of Shares by the Company. If the resale distribution of
Registrable Securities is being effected by means of an underwriting and if the
managing underwriter will not limit the number of Registrable Securities to be
underwritten, the Company may include securities for its own account or for the
account of others in such registration if the managing underwriter so agrees.
The inclusion of such shares shall be on the same terms as the registration of
shares held by the Holders. In the event that the underwriters exclude some of
the securities to be registered, the securities to be sold for the account of
the Company and any other holders shall be excluded in their entirety prior to
the exclusion of any Registrable Securities.

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ARTICLE 3

COMPANY REGISTRATION

3.1 Notice of Registration to Holders. If at any time or from time to time
commencing after the date hereof, the Company shall determine to register any
of its securities, either for its own account or the account of a security
holder or holders, other than (i) a registration relating solely to employee
benefit plans on Form S-8 (or any successor form) or (ii) a registration
relating solely to a Commission Rule 145 transaction on Form S-4 (or any
successor form), the Company will:

     (a) promptly give to each Holder written notice thereof and

     (b) include in such registration (and any related qualification under blue
sky laws or other compliance), and in any underwriting involved therein, all
the Registrable Securities specified in a written request or requests, made
within 30 days after receipt of such written notice from the Company described
in Section 3.1(a), by any Holder or Holders, but only to the extent that (i) if
the proposed registration under this Article 3 is not an underwritten offering,
the original issuance or resale distribution of such Registrable Securities is
not already covered by an effective registration statement under Article 2
above or (ii) if the proposed registration under this Article 3 is an
underwritten offering, such Registrable Securities are not then being offered
in a separate underwritten offering under Article 2 above.

3.2 Underwriting. If the registration of which the Company gives notice is for
an offering involving an underwriting, the Company shall so advise the Holders
as a part of the written notice given pursuant to Section 3.1(a). In such
event, the right of any Holder to registration pursuant to this Article 3 shall
be conditioned upon such Holder’s participation in such underwriting and the
inclusion of such Holder’s Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company) enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company.

     (a) Notwithstanding any other provision of this Article 3, if the managing
underwriter determines that marketing factors require a limitation of the
number of shares to be underwritten, the underwriter may exclude some or all
Registrable Securities from such registration and underwriting. The Company
shall so advise all Holders of Registrable Securities, and the number of shares
of Common Stock to be included in such registration shall be allocated as
follows: first, for the account of the Company, all shares of Common Stock
proposed to be sold by the Company; and second, for the account of the Holders
and any other shareholders of the Company participating in such registration,
the number of shares of Common Stock requested to be included in the
registration by the Holders and such other shareholders in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities that
are proposed to be offered and sold by the Holders and such other shareholders
of Registrable Securities at the time of filing the registration statement. No
Registrable Securities excluded from the underwriting in

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this Article 3 by reason of the underwriters’ marketing limitation shall
be included in such registration.

     (b) The Company shall so advise all Holders and the other holders
distributing their securities through such underwriting of any such limitation,
and the number of shares of Registrable Securities held by Holders that may be
included in the registration. If any Holder disapproves of the terms of any
such underwriting, such Holder may elect to withdraw therefrom by written
notice to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, but
the Holder shall continue to be bound by the terms hereof.

     (c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Article 3 prior to the effectiveness of
such registration, whether or not a Holder has elected to include Registrable
Securities in such registration.

ARTICLE 4

EXPENSES OF REGISTRATION

     All Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Articles 2 and 3 hereof shall be borne
by the Company. All Selling Expenses relating to Registrable Securities
registered by the Holders shall be borne by the Holders of such Registrable
Securities pro rata on the basis of the number of shares so registered.

ARTICLE 5

REGISTRATION PROCEDURES

     (a) In the case of each registration effected by the Company pursuant to
this Agreement, the Company will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof. The Company
agrees to use its best efforts to effect or cause such registration to permit
the sale of the Registrable Securities covered thereby by the Holders thereof
in accordance with the intended method or methods of distribution thereof
described in such registration statement. In connection with any registration
of any Registrable Securities, the Company shall, as soon as reasonably
possible:

     (i) prepare and file with the Commission a registration statement
with respect to such Registrable Securities and use its efforts to cause
such registration statement filed to become effective;

     (ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus included
therein as may be necessary to effect and maintain the effectiveness of
such registration statement as may be required by the applicable rules
and regulations of the Commission and the instructions applicable to the
form of such registration statement (provided, however, that the Company
shall not

5

 

be obliged to maintain the effectiveness of the registration
statement described in Article 2 longer than through the earlier of (A)
seven years from the date hereof or, if earlier, the second anniversary
of the date on which the last of the Registrable Securities are issued or
issuable as payment under the Note or upon exercise of the Warrant, (B)
the date on which the Holder may sell all Registrable Securities then
held by the Holder, or which may become issuable as payment under the
Note or upon exercise of the Warrant, without restriction by the volume
limitations of Rule 144(e) of the Securities Act or (C) such time as all
Registrable Securities held by such Holder, or which may become issuable
as payment under the Note or upon exercise of the Warrant, have been sold
pursuant to a registration statement), and furnish to the holders of the
Registrable Securities covered thereby copies of any such supplement or
amendment prior to this being used and/or filed with the Commission;

     (iii) promptly notify the Holders of Registrable Securities to be
included in a registration statement hereunder, the sales or placement
agent, if any, therefor and the managing underwriter of the securities
being sold, and confirm such advice in writing, (A) when such
registration statement or the prospectus included therein or any
prospectus amendment or supplement or post-effective amendment has been
filed, and, with respect to such registration statement or any
post-effective amendment, when the same has become effective, (B) of the
issuance by the Commission of any stop order suspending the effectiveness
of such registration statement or the initiation of any proceedings for
that purpose, (C) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose or (D) if, to the Company’s knowledge,
it shall be the case, at any time when a prospectus is required to be
delivered under the Securities Act, that such registration statement or
prospectus, or any document incorporated by reference in any of the
foregoing, contains an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances
then existing;

     (iv) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of such registration statement or any
post-effective amendment thereto or of any order suspending or preventing
the use of any related prospectus or suspending the qualification of any
Registrable Securities included in such registration statement for sale
in any jurisdiction at the earliest practicable date;

     (v) furnish to each Holder of Registrable Securities to be included
in such registration statement hereunder, each placement or sales agent,
if any, therefor and each underwriter, if any, thereof a conformed copy
of such registration statement, each such amendment and supplement
thereto (in each case excluding all exhibits and documents incorporated
by reference) and such number of copies of the registration statement
(excluding exhibits thereto and documents incorporated by reference
therein unless

6

 

specifically so requested by such holder, agent or underwriter, as
the case may be) of the prospectus included in such registration
statement (including each preliminary prospectus and any summary
prospectus), in conformity with the requirements of the Securities Act,
as such Holder, agent, if any, and underwriter, if any, may reasonably
request in order to facilitate the disposition of the Registrable
Securities owned by such Holder sold by such agent or underwritten by
such underwriter and to permit such Holder, agent and underwriter to
satisfy the prospectus delivery requirements of the Securities Act;

     (vi) use its best efforts to (A) register or qualify the Registrable
Securities to be included in such registration statement under such other
securities laws or blue sky laws of such states of the United States or
the District of Columbia to be designated by the Holders of a majority of
such Registrable Securities participating in such registration and each
placement or sales agent, if any, therefor and underwriter, if any,
thereof, as any Holder and each underwriter, if any, of the securities
being sold shall reasonably request (provided, that the Company shall not
be required to use its best efforts to register or qualify the
Registrable Securities in more than 10 such jurisdictions unless the
expenses thereof are borne by the Holders requesting such efforts), (B)
keep such registrations or qualifications in effect and comply with such
laws so as to permit, as to a registration statement filed under Article
2 above, the continuance of offers, sales and dealings therein in such
jurisdictions for the same period after the initial effective date of the
registration statement filed under the Securities Act as described in
Section 5(a)(ii) above or, as to a registration statement filed under
Article 3 above, for a period of 90 days after the effective date of the
registration statement, or if underwritten, as long as may be necessary
to enable the underwriter to complete its distribution of the Registrable
Securities pursuant to such registration statement and (C) take any and
all such actions as may be reasonably necessary or advisable to enable
such Holder, agent, if any, and underwriter to consummate the disposition
in such jurisdictions of such Registrable Securities; provided, however,
that in order to fulfill the foregoing obligations under this Section
5(a)(vi), the Company shall not (unless otherwise required to do so in
any jurisdiction) be required to (1) qualify generally to do business as
a foreign company or a broker-dealer, (2) execute a general consent to
service of process or (3) subject itself to taxation; and

     (vii) furnish, at the request of a majority of the Holders
participating in the registration, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities
are being sold through underwriters, or, if such securities are not being
sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (i) an opinion, dated
as of such date, of the counsel representing the Company for the purposes
of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities and (ii) a letter dated
as of such date, from the independent

7

 

certified public accountants of the Company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and if permitted by
applicable accounting standards, to the Holders requesting registration
of Registrable Securities.

     (b) The Company may require each Holder of Registrable Securities as to
which any registration is being effected to furnish to the Company such
information regarding such Holder and such Holder’s method of distribution of
such Registrable Securities as the Company may from time to time reasonably
request in writing. Each such Holder agrees to notify the Company as promptly
as practicable of any inaccuracy or change in information previously furnished
by such Holder to the Company or of the occurrence of any event in either case
as a result of which any prospectus relating to such registration contains or
would contain an untrue statement of a material fact regarding such Holder or
the distribution of such Registrable Securities or omits to state any material
fact regarding such Holder or the distribution of such Registrable Securities
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and promptly to furnish
to the Company any additional information required to correct and update any
previously furnished information or required so that such prospectus shall not
contain, with respect to such Holder or the distribution of such Registrable
Securities, an untrue statement or a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing.

     (c) Each of the Holders will comply with the provisions of the Securities
Act with respect to disposition of the Registrable Securities to be included in
any registration statement filed by the Company.

ARTICLE 6

INDEMNIFICATION

6.1 The Company will indemnify each Holder, each of its officers, directors and
partners, and such Holder’s legal counsel and independent accountants, if any,
and each person controlling any such persons within the meaning of Section 15
of the Securities Act, with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls any underwriter within the meaning of
Section 15 of the Securities Act, against all expenses, claims, losses, damages
and liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document, or any amendment or supplement thereof, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not

8

 

misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act or any state securities laws applicable to
the Company and relating to action or inaction by the Company in connection
with any such registration, qualification or compliance, and will reimburse
each such Holder, each of its officers, directors and partners and such
Holder’s legal counsel and independent accountants, and each person controlling
any such persons, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with written information furnished to the Company by such Holder,
officers, directors, partners, legal counsel, accountants, underwriter or
controlling persons, and expressly intended for use in such registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereof.

6.2 Each Holder will, if Registrable Securities held by such Holder are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers and its legal counsel and independent accountants, each underwriter,
if any, of the Company’s securities covered by such a registration statement,
each person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, and each other such Holder, each of its
officers, directors, partners, legal counsel and independent accountants, if
any, and each person controlling such Holder within the meaning of Section 15
of the Securities Act, against all expenses, claims, losses, damages and
liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Company, such Holders, such directors, officers, partners, legal
counsel, independent accountants, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action, in
each case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular, other document or
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Holder and expressly intended for
use in such registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereof; provided, however, that the
obligations of each Holder hereunder shall be limited to an amount equal to the
proceeds to such Holder of Registrable Securities sold as contemplated herein.

9

 

6.3 Each party entitled to indemnification under this Section 6 (the
“Indemnified Party") shall give notice to the party required to provide
indemnification (the “Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld). The Indemnified Party may participate in such
defense at such party’s expense; provided, however, that the Indemnifying
Party shall bear the expense of such defense of the Indemnified Party if
representation of both parties by the same counsel would be inappropriate due
to actual or potential conflicts of interest. The failure of any Indemnified
Party to give notice as provided herein shall not relieve the Indemnifying
Party of its obligations under this Agreement, unless such failure is
prejudicial to the ability of the Indemnifying Party to defend the action. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of such claim or
litigation.

6.4 If the indemnification provided for in Section 6.1 or 6.2 is unavailable or
insufficient to hold harmless an Indemnified Party, then each Indemnifying
Party shall contribute to the amount paid or payable by such Indemnified Party
as a result of the expenses, claims, losses, damages or liabilities (or actions
or proceedings in respect thereof) referred to in Section 6.1 or 6.2, in such
proportion as is appropriate to reflect the relative fault of the Company on
the one hand and the sellers of Registrable Securities on the other hand in
connection with statements or omissions which resulted in such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) or
expenses, as well as any other relevant equitable considerations. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the sellers of Registrable Securities and the parties’ relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company and the Holders agree that it
would not be just and equitable if contributions pursuant to this Section 6.4
were to be determined by pro rata allocation (even if all Sellers of
Registrable Securities were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the first sentence of this Section 6.4. The
amount paid by an Indemnified Party as a result of the expenses, claims,
losses, damages or liabilities (or actions or proceedings in respect thereof)
referred to in the first sentence of this Section 6.4 shall be deemed to
include any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any claim, action or
proceeding which is the subject of this Section 6.4. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The obligations of sellers of
Registrable Securities

10

 

to contribute pursuant to this Section 6.4 shall be several in proportion to
the respective amount of Registrable Securities sold by them pursuant to a
registration statement.

ARTICLE 7

RULE 144 REPORTING

     With a view to making available the benefits of certain rules and
regulations of the Commission which may at any time permit the sale of
securities of the Company to the public without registration, the Company
agrees to use its best efforts to:

7.1 Make and keep public information available as those terms are understood
and defined in Rule 144 under the Securities Act, at all times after the date
hereof; and

7.2 File with the Commission in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act.

ARTICLE 8

TRANSFER OF REGISTRATION RIGHTS

     The rights to cause the Company to register Registrable Securities under
this Agreement may be assigned by a Holder to Whitebox Advisors, LLC
(“Whitebox") or to a transferee or assignee of Registrable Securities that (i)
is a subsidiary, parent or affiliated entity, general partner or limited
partner, member or retired partner or member of a Holder or of Whitebox, (ii)
is an affiliated fund, a follow-on fund or predecessor fund of a Holder or a
related fund or of Whitebox, (iii) is a Holder’s family member or trust for the
benefit of an individual Holder or (iv) acquires at least 50,000 shares of
Registrable Securities (as adjusted for stock splits, stock dividends, stock
combinations, reclassifications, recapitalizations, mergers, consolidations or
other similar events); provided, however, (A) the transferor shall, within ten
days before such transfer, furnish to the Company written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned and (B) such transferee shall
agree in writing to be subject to all restrictions set forth in this Agreement.
In each case, such rights may only be transferred together with the underlying
Registrable Securities in a transfer permitted by the Securities Act and
applicable state securities laws. Any such transferee or assignee shall be
deemed a Holder hereunder.

     ARTICLE 9
LIMITATIONS ON REGISTRATION RIGHTS GRANTED TO OTHER SECURITIES

     From and after the date of this Agreement, the Company shall not without
the prior written consent of the holders of a majority of the Registrable
Securities then outstanding, enter into any agreement with any holder or
prospective holder of any securities of the Company providing for the grant to
such holder of registration rights superior to those granted herein.

11

 

ARTICLE 10

MISCELLANEOUS

10.1 Governing Law. The laws of the state of Minnesota shall govern the
interpretation, validity and performance of the terms of this agreement,
regardless of the law that might be applied under principles of conflicts of
law.

10.2 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.

10.3 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof.

10.4 Termination. The obligations of the Company to register Registrable
Securities under this Agreement shall terminate on the tenth anniversary of the
date of this Agreement. In addition, the right of any Holder to request
inclusion in any registration under Article 3 shall terminate on the date
hereafter when (i) such Holder (together with its affiliates, partners, members
and former partners and members) holds less than 1% of the Company’s
outstanding Common Stock and (ii) all Registrable Securities held by or
issuable to such Holder (and its affiliates, partners, members and former
partners and members) as payment under the Note or upon exercise of the Warrant
may be sold under Rule 144 during any 90 day period.

10.5 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

12

 

	 	 	 	 	 
	

	 	 	 	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 Investor, 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

     (c) if to any other Holder, to the address reflected on the records of the
Company, or such other address or addresses as shall have been furnished in
writing by such party to the Company and to the other parties to this
Agreement.

10.6 Severability. The invalidity, illegality or unenforceability of one or
more of the provisions of this Agreement in any jurisdiction shall not affect
the validity, legality or enforceability of the remainder of this Agreement in
such jurisdiction or the validity, legality or enforceability of this
Agreement, including any such provision, in any other jurisdiction, it being
intended that all rights and obligations of the parties hereunder shall be
enforceable to the fullest extent permitted by law.

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

[continued on next page]

13

 

10.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
constitute one instrument.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective duly authorized officers or
representatives as of the date first written above.

	 	 	 	 	 
	 	SPECTRE GAMING, INC.

By 

Russell Mix, President and

Chief Executive Officer

 	 
	 	 	 
	 	 	 
	 	 	 
	 

	 	 	 	 	 
	 	PANDORA SELECT PARTNERS L.P.

By 

Its 

 	 
	 	 	 
	 	 	 
	 	 	 
	 

14

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