EXHIBIT 3.1
LAKES ENTERTAINMENT, INC.
CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK
The undersigned, the duly elected and qualified President of Lakes
Entertainment, Inc., a Minnesota Corporation (the "Company"), subject to the
Minnesota Business Corporations Act, does hereby certify that the Board of
Directors of the Company at a duly held meeting of the Board of Directors on
February 8, 2006 and in accordance with Minnesota Statutes, Section 302A.401,
adopted the following resolution:
RESOLVED, that, pursuant to authority expressly granted to the Company's Board
of Directors by the provisions of the Company's Articles of Incorporation, as
amended, the Company's Board of Directors hereby creates and authorizes the
issuance of a series of shares of preferred stock, $0.01 par value per share, of
the Company, such series to be called "Series A Convertible Preferred Stock" and
hereby adopts the Certificate of Designation of Series A Convertible Preferred
Stock attached hereto as Exhibit A, and hereby affixes, the designation and
number of shares, along with the voting rights as are set forth in said
Certificate of Designation of Series A Convertible Preferred Stock attached
hereto as Exhibit A.
IN WITNESS WHEREOF, I have subscribed my name this 21st day of
February, 2006.
/S/ Timothy J. Cope
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Timothy J. Cope
President
EXHIBIT A
The designation of this series of preferred stock shall be "Series A Convertible
Preferred Stock" par value $0.01 per share (the "PREFERRED SHARES") of Lakes
Entertainment, Inc., a Minnesota corporation (the "COMPANY"). The number of
shares which shall constitute this Series shall be 7,500,000. Except as
otherwise defined herein, capitalized terms in this certificate of designations
of Preferred Shares of the Company (the "CERTIFICATE OF DESIGNATIONS") shall
have the meanings set forth in Section 18 of this Certificate of Designations.
A. The only powers, preferences, rights, restrictions, and other matters
relating to the Series A Convertible Preferred Stock are as follows:
1. CONVERSION OF PREFERRED SHARES.
(a) Mechanics of Conversion. Subject to the terms and conditions
hereof (including, without limitation, the limitations set forth in
Section 1(f)), if either the Warrants or Warrant Shares (as defined in
the Securities Purchase Agreement) of such Holder of Preferred Shares
are cancelled (in accordance with Section 16 of the Warrant) or
redeemed (the "CANCELLED WARRANT", and the shares of Common Stock of
the Company into which such Cancelled Warrant is exercisable (subject
to the satisfaction of the terms and conditions thereof), the
"CANCELLED WARRANT SHARES") by the Company pursuant to the application
of the terms and conditions of its Articles of Incorporation (as
defined in the Securities Purchase Agreement) or applicable law, rule
or regulation (the date of such event, the "CANCELLATION DATE"), all
Preferred Shares issued and outstanding pursuant to this Certificate
of Designations (including the Additional Preferred Shares (as defined
in the Securities Purchase Agreement) received by such Holder upon the
Cancellation Date in accordance with Section 4(o) of the Securities
Purchase Agreement) shall immediately become convertible into shares
of Common Stock of the Company (the "CONVERSION SHARES") on a one
Preferred Share per one Conversion Share basis. Preferred Shares may
be converted by any Holder on any day on or after the Cancellation
Date by (i) delivery of a written notice, in the form attached hereto
as Exhibit I (the "CONVERSION NOTICE"), of a Holder's election to
convert some or all of its Preferred Shares and (ii) (A) payment to
the Company of an amount equal to the applicable Conversion Price
multiplied by the number of Conversion Shares as to which such
Preferred Shares is being converted (the "AGGREGATE CONVERSION PRICE")
in cash or wire transfer of immediately available funds or (B) by
notifying the Company that such Preferred Shares are being converted
pursuant to a Cashless Conversion (as defined in Section 1(d)). A
Holder shall not be required to deliver an original Preferred Share
certificate in order to effect a conversion hereunder. Execution and
delivery of the Conversion Notice with respect to less than all of the
Conversion Shares shall have the same effect as cancellation of the
original Preferred Shares certificate and issuance of a new Preferred
Shares certificate evidencing the right to convert the remaining
number of Conversion Shares. On or before the second Business Day
following the date on which the Company has received each of the
Conversion Notice and the Aggregate Conversion Price (or notice of a
Cashless Conversion) (the "CONVERSION DELIVERY DOCUMENTS" and the date
the Company received the Conversion
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Delivery Documents, the "CONVERSION DELIVERY DOCUMENTS DATE"), the
Company shall transmit by facsimile an acknowledgment of confirmation
of receipt of the Conversion Delivery Documents to such Holder and the
Company's transfer agent (the "TRANSFER AGENT"). On or before the
third Business Day following the date on which the Company has
received all of the Conversion Delivery Documents (the "SHARE DELIVERY
DATE"), the Company shall (X) provided that the Transfer Agent is
participating in The Depository Trust Company ("DTC") Fast Automated
Securities Transfer Program, upon the request of such Holder, credit
such aggregate number of shares of Common Stock to which such Holder
is entitled pursuant to such conversion to such Holder's or its
designee's balance account with DTC through its Deposit Withdrawal
Agent Commission system, or (Y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program,
issue and dispatch by overnight courier to the address as specified in
the Conversion Notice, a certificate, registered in the Company's
share register in the name of such Holder or its designee, for the
number of shares of Common Stock to which such Holder is entitled
pursuant to such conversion. Upon delivery to the Company of the
properly executed and completed Conversion Delivery Documents, such
Holder shall be deemed for all corporate purposes to have become a
holder of record of the Conversion Shares with respect to which
Preferred Shares have been converted, irrespective of the date of
delivery of the certificates evidencing such Conversion Shares. If the
original Preferred Shares certificate is submitted in connection with
any conversion pursuant to this Section A.1(a) and the number of
Conversion Shares represented by the Preferred Shares certificate
submitted for conversion is greater than the number of Conversion
Shares being acquired upon an conversion, then the Company shall as
soon as practicable and in no event later than five Business Days
after any conversion and at its own expense, issue a new Preferred
Shares certificate representing the right to convert the number of
Preferred Shares convertible immediately prior to such conversion
under the Certificate of Designations, less (i) the number of
Preferred Shares converted upon such conversion plus (ii) any
Preferred Shares tendered pursuant to the cashless conversion
provisions of Section A.1(d). No fractional shares of Common Stock are
to be issued upon the conversion of Preferred Shares, but rather the
number of shares of Common Stock to be issued shall be rounded up to
the nearest whole number. The Company shall pay any and all taxes
which may be payable with respect to the issuance and delivery of
Conversion Shares upon conversion of Preferred Shares. NOTWITHSTANDING
ANY PROVISION OF THIS CERTIFICATE OF DESIGNATIONS TO THE CONTRARY, (i)
THE HOLDER PRO RATA ALLOCATION OF 500,000 PREFERRED SHARES (AS
ADJUSTED FOR STOCK SPLITS, STOCK DIVIDENDS, REVERSE STOCK SPLITS,
RECAPITALIZATIONS, RECLASSIFICATIONS AND SIMILAR EVENTS) SHALL NOT BE
CONVERTIBLE UNLESS A WPT 75% COLLATERAL EVENT HAS OCCURRED, (II) THE
HOLDER PRO RATA ALLOCATION OF 500,000 PREFERRED SHARES (AS ADJUSTED
FOR STOCK SPLITS, STOCK DIVIDENDS, REVERSE STOCK SPLITS,
RECAPITALIZATIONS, RECLASSIFICATIONS AND SIMILAR EVENTS) SHALL NOT BE
CONVERTIBLE UNLESS A WPT 50% COLLATERAL EVENT HAS OCCURRED, (III) THE
HOLDER PRO RATA ALLOCATION OF 457,751 PREFERRED SHARES (AS ADJUSTED
FOR STOCK SPLITS, STOCK DIVIDENDS, REVERSE STOCK SPLITS,
RECAPITALIZATIONS, RECLASSIFICATIONS AND SIMILAR EVENTS) SHALL NOT BE
CONVERTIBLE UNLESS A WPT 25% COLLATERAL EVENT HAS OCCURRED, (IV) THE
HOLDER PRO RATA ALLOCATION OF 500,000 PREFERRED SHARES (AS ADJUSTED
FOR STOCK SPLITS, STOCK DIVIDENDS, REVERSE STOCK SPLITS,
RECAPITALIZATIONS, RECLASSIFICATIONS AND SIMILAR EVENTS) SHALL NOT BE
CONVERTIBLE UNLESS A WPT LEGISLATION EVENT HAS OCCURRED AND (V) AS OF
ANY GIVEN DATE, ONLY SUCH NUMBER OF THE HOLDER PRO RATA ALLOCATION OF
THE OTHER 2,500,000 PREFERRED SHARES (AS ADJUSTED FOR STOCK SPLITS,
STOCK DIVIDENDS, REVERSE STOCK SPLITS, RECAPITALIZATIONS,
RECLASSIFICATIONS AND SIMILAR EVENTS) EQUAL TO (x) (I) (1) THE HOLDER
PRO RATA
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ALLOCATION OF 2,500,000 (AS ADJUSTED FOR STOCK SPLITS, STOCK
DIVIDENDS, REVERSE STOCK SPLITS, RECAPITALIZATIONS, RECLASSIFICATIONS
AND SIMILAR EVENTS) LESS (2) ANY CONVERSION SHARES RECEIVED UPON
CONVERSION OF PREFERRED SHARES PURSUANT TO THIS SECTION 1(a)(II) PRIOR
TO SUCH DATE (AS ADJUSTED FOR STOCK SPLITS, STOCK DIVIDENDS, REVERSE
STOCK SPLITS, RECAPITALIZATIONS, RECLASSIFICATIONS AND SIMILAR EVENTS)
MULTIPLIED BY (II) THE PRINCIPAL AMOUNT OF THE FINANCING FACILITY
DRAWN BY THE COMPANY ON OR PRIOR TO SUCH DATE, DIVIDED BY (y) THE
MAXIMUM PRINCIPAL AMOUNT OF THE FINANCING FACILITY, WHICH MAY BE DRAWN
BY THE COMPANY AS OF SUCH DATE OR ON OR PRIOR TO SUCH DATE HAS BEEN
DRAWN BY THE COMPANY (SUCH AMOUNT, THE "PRO RATA CONVERTIBLE AMOUNT")
SHALL BE CONVERTIBLE.
(b) Conversion Price. For purposes of issued and outstanding
Preferred Shares, "CONVERSION PRICE" means (i) with respect to any
Additional Preferred Shares, the purchase price paid by the Company to
a Holder pursuant to the redemption of the corresponding Warrant
Shares held by such Holder in accordance with the Articles of
Incorporation or (ii) with respect to all other Preferred Shares, the
Exercise Price of the Warrant held by such Holder as of the
Cancellation Date, as further adjusted in accordance herewith.
(c) Company's Failure to Timely Deliver Securities. If the
Company shall fail for any reason or for no reason to issue to a
Holder within three (3) Business Days of receipt of the Conversion
Delivery Documents, a certificate for the number of shares of Common
Stock to which such Holder is entitled and register such shares of
Common Stock on the Company's share register or to credit such
Holder's balance account with DTC for such number of shares of Common
Stock to which such Holder is entitled upon such Holder's conversion
of Preferred Shares, and if on or after such Business Day such Holder
purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by such Holder of
shares of Common Stock issuable upon such conversion that such Holder
anticipated receiving from the Company (a "BUY-IN"), then the Company
shall, within three (3) Business Days after such Holder's request and
in such Holder's discretion, either (i) pay cash to such Holder in an
amount equal to such Holder's total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so
purchased (the "BUY-IN PRICE"), at which point the Company's
obligation to deliver such certificate (and to issue such shares of
Common Stock) shall terminate, or (ii) promptly honor its obligation
to deliver to such Holder a certificate or certificates representing
such shares of Common Stock and pay cash to such Holder in an amount
equal to the excess (if any) of the Buy-In Price over the product of
(A) such number of shares of Common Stock, times (B) the Closing Bid
Price on the Conversion Delivery Documents Date.
(d) Cashless Conversion. Notwithstanding anything contained
herein to the contrary, if a Registration Statement (as defined in the
Registration Rights Agreement) covering the Conversion Shares that are
the subject of the Conversion Notice (the "UNAVAILABLE CONVERSION
SHARES") is not available for the resale of such Unavailable
Conversion Shares, a Holder may, in its sole discretion, convert some
or all of its Preferred Shares, in lieu of making the cash payment
otherwise contemplated to be made to the Company upon such conversion
in
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payment of the Aggregate Conversion Price, and elect instead to
receive upon such conversion the "Net Number" of shares of Common
Stock determined according to the following formula (a "CASHLESS
CONVERSION"):
Net Number = (A x B) - (A x C)
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B
For purposes of the foregoing formula:
A= the total number of Conversion Shares with respect to which
Preferred Shares are then being converted.
B= the Closing Sale Price of the shares of Common Stock (as
reported by Bloomberg) on the date immediately preceding the
date of the Conversion Notice.
C= the Conversion Price then in effect for the applicable
Conversion Shares at the time of such conversion.
(e) Disputes. In the case of a dispute as to the determination of
the Conversion Price or the arithmetic calculation of the Conversion
Shares, the Company shall promptly issue to such Holder the number of
Conversion Shares that are not disputed and resolve such dispute in
accordance with Section 12.
(f) (i) Limitations on Exercises; Beneficial Ownership. The
Company shall not effect the conversion of Preferred Shares, and a
Holder shall not have the right to conversion of Preferred Shares, to
the extent that after giving effect to such conversion, such Person
(together with such Person's affiliates) would beneficially own
(directly or indirectly through Conversion Shares or otherwise) in
excess of 4.99% (the "MAXIMUM PERCENTAGE") of the shares of Common
Stock outstanding immediately after giving effect to such conversion.
For purposes of the foregoing sentence, the aggregate number of shares
of Common Stock beneficially owned (directly or indirectly through
Conversion Shares or otherwise) by such Person and its affiliates
shall include the number of shares of Common Stock issuable upon
conversion of Preferred Shares with respect to which the determination
of such sentence is being made, but shall exclude shares of Common
Stock which would be issuable upon (i) conversion of the remaining,
unconverted portion of Preferred Shares beneficially owned by such
Person and its affiliates and (ii) conversion or exercise of the
unconverted or unexercised portion of any other securities of the
Company beneficially owned by such Person and its affiliates
(including, without limitation, any convertible notes or convertible
preferred stock or warrants) subject to a limitation on conversion or
exercise analogous to the limitation contained herein. Except as set
forth in the preceding sentence, for purposes of this subsection,
beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Certificate of Designations, in determining the number of
outstanding shares of Common Stock, a Holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) the Company's
most recent Form 10-K, Form 10-Q, Current Report on Form 8-K
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or other public filing with the Securities and Exchange Commission, as
the case may be, (2) a more recent public announcement by the Company
or (3) any other notice by the Company or the Transfer Agent setting
forth the number of shares of Common Stock outstanding. For any reason
at any time, upon the written or oral request of a Holder, the Company
shall within one Business Day confirm orally and in writing to such
Holder the number of shares of Common Stock then outstanding. In any
case, the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of
securities of the Company, including the Preferred Shares, by a Holder
and its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. By written notice to
the Company, a Holder may increase or decrease the Maximum Percentage
to any other percentage not in excess of 9.99% specified in such
notice; provided that (i) any such increase will not be effective
until the sixty-first (61st) day after such notice is delivered to the
Company, and (ii) any such increase or decrease will apply only to
such Holder and not to any other holder of Preferred Shares; provided,
that any such notice shall be deemed an agreement by such Holder to
provide the Gaming Authority information, respond to questions and
consent to the investigation, all as set forth in Article 8(A) of the
Articles of Incorporation (as defined in the Securities Purchase
Agreement).
(ii) Principal Market Regulation. At all times, irrespective of
whether the Company is listed on the Principal Market, the Company
shall not be obligated to issue any shares of Common Stock upon
conversion of Preferred Shares if the issuance of such shares of
Common Stock would exceed the aggregate number of shares of Common
Stock which the Company may issue upon conversion or exercise or
otherwise, as applicable, of the Preferred Shares without breaching
the rules or regulations of the Principal Market as if the Company
were regulated by such rules or regulations (the "EXCHANGE CAP"),
except that such limitation shall not apply in the event that the
Company (A) obtains the approval of its stockholders as required by
the applicable rules of the Principal Market for issuances of Common
Stock in excess of such amount or (B) obtains a written opinion from
outside counsel to the Company that such approval is not required,
which opinion shall be reasonably satisfactory to the Required
Holders. Until such approval or written opinion is obtained, no
purchaser of Preferred Shares pursuant to the Securities Purchase
Agreement (individually, a "PURCHASER" and collectively, the
"PURCHASERS") shall be issued in the aggregate, upon conversion or
exercise or otherwise, as applicable, of Preferred Shares, shares of
Common Stock in an amount greater than the product of the Exchange Cap
multiplied by a fraction, the numerator of which is the number of
Preferred Shares issued to such Purchaser pursuant to the Securities
Purchase Agreement on the Additional Closing Date (as defined in the
Securities Purchase Agreement) and the denominator of which is the
aggregate number of Preferred Shares issued to the Purchasers pursuant
to the Securities Purchase Agreement on the Additional Closing Date
(with respect to each Purchaser, the "EXCHANGE CAP ALLOCATION"). In
the event that any Purchaser shall sell or otherwise transfer any of
such Purchaser's Preferred Shares, the transferee, if a registered
Holder of such Preferred Shares, shall be allocated a pro rata portion
of such Purchaser's Exchange Cap Allocation, and the restrictions of
the prior sentence shall apply to such transferee with respect to the
portion of the Exchange Cap Allocation allocated to such transferee.
In the event that any Holder of Preferred Shares shall convert all of
such Holder's Preferred Shares into a number of shares of
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Common Stock which, in the aggregate, is less than such Holder's
Exchange Cap Allocation, then the difference between such Holder's
Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such Holder shall be allocated to the respective
Exchange Cap Allocations of the remaining registered Holders of
Preferred Shares on a pro rata basis in proportion to the aggregate
number of Preferred Shares then held by each such Holder. To the
extent required by the Principal Market, the provisions of the
Exchange Cap shall be modified to comply with the applicable rules and
regulations of the Principal Market, provided that any such changes
shall not, in such Holder's reasonable discretion, materially change
the terms of the transaction contemplated hereby.
Notwithstanding anything in Preferred Shares to the contrary, the
Company shall be entitled to treat the registered Holder of Preferred
Shares as such appears in its records, as the owner of Preferred
Shares for all purposes; provided that such records are kept current
using a reasonably satisfactory and customary method intended for such
purpose.
2. ADJUSTMENT OF CONVERSION PRICE AND NUMBER OF PREFERRED SHARES. The
Conversion Price and the number of Preferred Shares shall be adjusted from time
to time as follows:
(a) Adjustment upon Issuance of shares of Common Stock. If and
whenever on or after the Cancellation Date (i) the Company issues or sells,
or in accordance with this Section A.2 is deemed to have issued or sold,
any shares of Common Stock (including the issuance or sale of shares of
Common Stock owned or held by or for the account of the Company, but
excluding shares of Common Stock deemed to have been issued by the Company
in connection with any Excluded Securities for a consideration per share
(the "NEW ISSUANCE PRICE") less than a price (the "APPLICABLE PRICE") equal
to the Conversion Price in effect immediately prior to such issue or sale
or deemed issuance or sale (the foregoing a "DILUTIVE ISSUANCE"), then
immediately after such Dilutive Issuance the Conversion Price then in
effect shall be reduced to an amount equal to the New Issuance Price. Upon
each such adjustment of the Conversion Price hereunder, the Company will
issue an additional number of Preferred Shares resulting from the following
calculation to each Holder such that after such issuance the number of
Preferred Shares equals (x) the product of (i) the Common Stock Deemed
Outstanding immediately following such adjustment and Dilutive Issuance and
(ii) the number of Preferred Shares held by such Holder prior to such
adjustment and Dilutive Issuance, divided by (y) the Common Stock Deemed
Outstanding immediately prior to such adjustment and Dilutive Issuance. For
purposes of determining the adjusted Conversion Price under this Section
A.2(a), the following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants any
Options and the lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon
conversion, exercise or exchange of any Convertible Securities
issuable upon exercise of any such Option is less than the Applicable
Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option
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for such price per share. For purposes of this Section A.2(a)(i), the
"lowest price per share for which one share of Common Stock is
issuable upon exercise of such Options or upon exercise, conversion or
exchange of such Convertible Securities" shall be equal to the sum of
the lowest amounts of consideration (if any) received or receivable by
the Company with respect to any one share of Common Stock upon the
granting or sale of the Option, upon exercise of the Option and upon
exercise, conversion or exchange of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Conversion
Price or number of Preferred Shares shall be made upon the actual
issuance of such shares of Common Stock or of such Convertible
Securities upon the exercise of such Options or upon the actual
issuance of such shares of Common Stock upon exercise, conversion or
exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the lowest price per
share for which one share of Common Stock is issuable upon the
exercise, conversion or exchange thereof is less than the Applicable
Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the
time of the issuance or sale of such Convertible Securities for such
price per share. For the purposes of this Section A.2(a)(ii), the
"lowest price per share for which one share of Common Stock is
issuable upon the exercise, conversion or exchange" shall be equal to
the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to one share of Common Stock
upon the issuance or sale of the Convertible Security and upon
exercise, conversion or exchange of such Convertible Security. No
further adjustment of the Conversion Price or number of Preferred
Shares or Conversion Shares shall be made upon the actual issuance of
such shares of Common Stock upon exercise, conversion or exchange of
such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which
adjustment of Preferred Shares has been or is to be made pursuant to
other provisions of this Section A.2(a), no further adjustment of the
Conversion Price or number of Preferred Shares shall be made by reason
of such issue or sale.
(iii) Change in Option Price or Rate of Exercise. If the purchase
price provided for in any Options, the additional consideration, if
any, payable upon the issue, exercise, conversion or exchange of any
Convertible Securities, or the rate at which any Convertible
Securities are exercisable into or convertible or exchangeable for
shares of Common Stock increases or decreases at any time, the
Conversion Price and the number of Preferred Shares in effect at the
time of such increase or decrease shall be adjusted to the Conversion
Price and the number of Preferred Shares and Conversion Shares which
would have been in effect at such time had such
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Options or Convertible Securities provided for such increased or
decreased purchase price, additional consideration or increased or
decreased exercise rate, as the case may be, at the time initially
granted, issued or sold. For purposes of this Section A.2(a)(iii), if
the terms of any Option or Convertible Security that was outstanding
as of the date of issuance of a Conversion Share are increased or
decreased in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the shares of
Common Stock deemed issuable upon exercise, conversion or exchange
thereof shall be deemed to have been issued as of the date of such
increase or decrease. No adjustment pursuant to this Section A.2(a)
shall be made if such adjustment would result in an increase of the
Conversion Price then in effect or a decrease in the number of
Preferred Shares or Conversion Shares.
(iv) Calculation of Consideration Received. In case any Option is
issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a
consideration of $0.01. If any shares of Common Stock, Options or
Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be
deemed to be the net amount received by the Company therefor. If any
shares of Common Stock, Options or Convertible Securities are issued
or sold for a consideration other than cash, the amount of such
consideration received by the Company will be the fair value of such
consideration, except where such consideration consists of securities,
in which case the amount of consideration received by the Company will
be the Closing Sale Price of such security on the date of receipt. If
any shares of Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with
any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such
portion of the net assets and business of the non-surviving entity as
is attributable to such shares of Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration
other than cash or securities will be determined in good faith by the
Company's Board of Directors. If the Required Holders disagree with
such fair value determination they shall, within ten (10) days of
receipt of notice of such determination (the "VALUATION EVENT"),
provide notice of such disagreement and the fair value of such
consideration will be determined within five (5) Business Days after
the tenth day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Required
Holders. The determination of such appraiser shall be final and
binding upon all parties absent manifest error and the fees and
expenses of such appraiser shall be borne by the Company.
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(v) Record Date. If the Company takes a record of a holders of shares
of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in shares of Common Stock,
Options or in Convertible Securities or (B) to subscribe for or
purchase shares of Common Stock, Options or Convertible Securities,
then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription
or purchase, as the case may be.
(b) Adjustment upon Subdivision or Combination of shares of Common
Stock. If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock
into a greater number of shares, the Conversion Price in effect immediately
prior to such subdivision will be proportionately reduced and the number of
Preferred Shares will be proportionately increased. If the Company at any
time on or after the Subscription Date combines (by combination, reverse
stock split or otherwise) one or more classes of its outstanding shares of
Common Stock into a smaller number of shares, the Conversion Price in
effect immediately prior to such combination will be proportionately
increased and the number of Preferred Shares will be proportionately
decreased. Any adjustment under this Section A.2(b) shall become effective
at the close of business on the date the subdivision or combination becomes
effective.
(c) Other Events. If any event occurs of the type contemplated by the
provisions of this Section A.2 but not expressly provided for by such
provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity
features), then the Company's Board of Directors will make an appropriate
adjustment in the Conversion Price and the number of Preferred Shares so as
to protect the rights of a Holder; provided that no such adjustment
pursuant to this Section A.2(c) will increase the Conversion Price or
decrease the number of Preferred Shares as otherwise determined pursuant to
this Section A.2.
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3. RIGHTS UPON DISTRIBUTION OF ASSETS. If the Company shall declare or make
any dividend or other distribution of its assets (or rights to acquire its
assets) to holders of shares of Common Stock, by way of return of capital or
otherwise (including, without limitation, any distribution of cash, stock or
other securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (a "DISTRIBUTION"), at any time after the issuance of the
Preferred Shares, then, in each such case:
(a) any Conversion Price in effect immediately prior to the close of
business on the record date fixed for the determination of holders of
shares of Common Stock entitled to receive the Distribution shall be
reduced, effective as of the close of business on such record date, to a
price determined by multiplying such Conversion Price by a fraction of
which (i) the numerator shall be the Closing Bid Price of the shares of
Common Stock on the Trading Day immediately preceding such record date
minus the value of the Distribution (as determined in good faith by the
Company's Board of Directors) applicable to one share of Common Stock, and
(ii) the denominator shall be the Closing Bid Price of the shares of Common
Stock on the Trading Day immediately preceding such record date; and
(b) the number of Conversion Shares shall be increased to a number of
shares equal to the number of shares of Common Stock obtainable immediately
prior to the close of business on the record date fixed for the
determination of holders of shares of Common Stock entitled to receive the
Distribution multiplied by the reciprocal of the fraction set forth in the
immediately preceding paragraph (a).
4. PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.
(a) Purchase Rights. In addition to any adjustments pursuant to
Section A.2 above, if at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
shares of Common Stock (the "PURCHASE RIGHTS"), then such Holder will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such Holder could have acquired if such
Holder had held the number of shares of Common Stock acquirable upon
complete conversion of such Holder's Preferred Shares then held (without
regard to any limitations on the conversion of such Preferred Shares)
immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of shares of Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights.
(b) Fundamental Transactions. If the Company enters into or is party
to a Fundamental Transaction, then a Holder shall have the right to either
(A) purchase and receive upon the basis and upon the terms and conditions
herein specified and in lieu of the Conversion Shares immediately
theretofore issuable upon conversion of any Preferred Shares held by such
Holder, such shares of stock, securities or assets (including cash) as
would have been issuable or payable with respect to or in exchange for a
number of Conversion Shares equal to the number of Conversion Shares
immediately theretofore issuable upon conversion of the Preferred Shares
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held by such Holder, had such Fundamental Transaction not taken place or
(B) require the repurchase of the Preferred Shares held by such Holder for
a purchase price, payable in cash within five (5) Trading Days after such
request, equal to the Black Scholes Value of the remaining unconverted
portion of the Preferred Shares held by such Holder on the date of such
request. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity and such Holder to comply with the provisions of this
Section A.4(b). The provisions of this Section shall apply similarly and
equally to successive Fundamental Transactions and shall be applied without
regard to any limitations on the conversion of Preferred Shares.
5. NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Articles of Incorporation, Bylaws or
through any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Certificate of Designations, and will at all times in good faith carry
out all the provisions of this Certificate of Designations and take all action
as may be required to protect the rights of a Holder. Without limiting the
generality of the foregoing, the Company (i) shall not increase the par value of
any shares of Common Stock receivable upon the conversion of Preferred Shares
above the Conversion Price then in effect, (ii) shall take all such actions as
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock upon the
conversion of issued and outstanding Preferred Shares, and (iii) shall, so long
as any of Preferred Shares are outstanding, take all action necessary to reserve
and keep available out of its authorized and unissued shares of Common Stock,
solely for the purpose of effecting the conversion of Preferred Shares, 130% of
the number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of Preferred Shares then outstanding (without regard to
any limitations on conversion).
6. PREFERRED SHARE HOLDER NOT DEEMED A COMMON STOCKHOLDER. Except as
otherwise specifically provided herein, a Holder, solely in such Person's
capacity as a holder of Preferred Shares, shall not be entitled to vote or
receive dividends or be deemed a Holder of Common Stock of the Company for any
purpose, nor shall anything contained in this Certificate of Designations be
construed to confer upon a Holder, solely in such Person's capacity as a Holder
of Preferred Shares, any of the rights of a shareholder of the Company or any
right to vote, give or withhold consent to any corporate action (whether any
reorganization, issue of stock, reclassification of stock, consolidation,
merger, conveyance or otherwise) other than as provided under the Minnesota
Business Corporation Act, receive notice of meetings, receive dividends or
subscription rights, or otherwise, prior to the issuance to a Holder of the
Conversion Shares which such Person is then entitled to receive upon the due
conversion of Preferred Shares except as otherwise set forth in Section 16
herein. In addition, nothing contained in Preferred Shares shall be construed as
imposing any liabilities on a Holder to purchase any securities (upon conversion
of Preferred Shares or otherwise) or as a holder of Common Stock of the Company,
whether such liabilities are asserted by the Company or by creditors of the
Company. Notwithstanding this Section 6, the Company shall provide a Holder with
copies of the same notices and other information given to the holders of Common
Stock of the Company generally, contemporaneously with the giving thereof to
such shareholders.
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7. TRANSFER OF PREFERRED SHARES; PREFERRED SHARE REGISTER.
(a) A Holder may assign some or all of the Preferred Shares and the
accompanying rights hereunder held by such Holder without the consent of
the Company; provided that such assignment is in compliance with applicable
securities laws and the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (a) the name and
address of such transferee or assignee and (b) the number of Preferred
Shares transferred or assigned.
(b) The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to
the Holders), a register for the Preferred Shares, in which the Company
shall record the name and address of the persons in whose name the
Preferred Shares have been issued, as well as the name and address of each
transferee. The Company may treat the person in whose name any Preferred
Share is registered on the register as the owner and holder thereof for all
purposes, notwithstanding any notice to the contrary, but in all events
recognizing any properly made transfers.
8. NOTICES. Whenever notice is required to be given to Holders of Preferred
Shares, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement. The Company
shall provide a Holder with prompt written notice of all actions taken with
respect to issued and outstanding Preferred Shares, including in reasonable
detail a description of such action and the reason therefore. Without limiting
the generality of the foregoing, the Company will give written notice to a
Holder (i) as soon as practicable upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least ten days prior to the date on which the Company
closes its books or takes a record (A) with respect to any dividend or
distribution upon the shares of Common Stock, (B) with respect to any grants,
issuances or sales of any Options, Convertible Securities or rights to purchase
stock, warrants, securities or other property to holders of shares of Common
Stock or (C) for determining rights to vote with respect to any Fundamental
Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to a Holder.
9. AMENDMENT AND WAIVER. Except as otherwise provided herein, the
provisions of this Certificate of Designations may be amended (subject to the
terms and conditions of the Minnesota Business Corporation Act) and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the Required Holders; provided that no such action may increase the
conversion price of any Preferred Share or decrease the number of shares or
class of stock obtainable upon conversion of any Preferred Share without the
written consent of a Holder. No such amendment shall be effective to the extent
that it applies to less than all of the Holders of Preferred Shares then
outstanding.
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10. SEVERABILITY. If any provision of this Certificate of Designations or
the application thereof becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of the terms of
this Certificate of Designations will continue in full force and effect.
11. GOVERNING LAW. This Certificate of Designations shall be governed by
and construed and enforced in accordance with, and all questions concerning the
construction, validity, interpretation and performance of this Certificate of
Designations shall be governed by, the internal laws of the State of Minnesota,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of Minnesota or any other jurisdictions) that would cause
the application of the laws of any jurisdictions other than the State of
Minnesota.
12. CONSTRUCTION; HEADINGS. This Certificate of Designations shall be
deemed to be jointly drafted by the Company and all the Buyers (as defined in
the Securities Purchase Agreement) and shall not be construed against any person
as the drafter hereof. The headings of this Certificate of Designations are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Certificate of Designations.
13. DISPUTE RESOLUTION. In the case of a dispute as to the determination of
the Conversion Price or the arithmetic calculation of the Preferred Shares (in
accordance with Section A.2 or otherwise as set forth herein) or Conversion
Shares, the Company shall submit the disputed determinations or arithmetic
calculations via facsimile within two Business Days of receipt of the Conversion
Notice giving rise to such dispute, as the case may be, to a Holder. If a Holder
and the Company are unable to agree upon such determination or calculation of
the Conversion Price or the Preferred Shares or the Conversion Shares within
five Business Days of such disputed determination or arithmetic calculation
being submitted to such Holder, then the Company shall, within five Business
Days submit via facsimile (a) the disputed determination of the Conversion Price
to an independent, reputable investment bank selected by the Company and
approved by such Holder or (b) the disputed arithmetic calculation of the
Preferred Shares or Conversion Shares to the Company's independent, outside
accountant. The Company shall cause at its expense the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and a Holder of the results no later than ten Business
Days from the time it receives the disputed determinations or calculations. Such
investment bank's or accountant's determination or calculation, as the case may
be, shall be binding upon all parties absent demonstrable error.
14. REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The
remedies provided in this Certificate of Designations shall be cumulative and in
addition to all other remedies available under this Certificate of Designations
and the Securities Purchase Agreement, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit the right of a Holder right to pursue actual damages for any failure
by the Company to comply with the terms of this Certificate of Designations. The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Holder and that the remedy at law for any such breach may
be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened
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breach of this Certificate of Designations, a Holder of Preferred Shares shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
15. [Intentionally Omitted]
16. VOTING.
(a) The holders of a majority of the outstanding shares of Preferred
Shares shall, upon the continuing occurrence of an "Event of Default" as
defined in the Financing Agreement (as defined in the Securities Purchase
Agreement), be entitled to appoint a number of directors, determined in
accordance with Section A.16(b) below, to serve on the Company's Board of
Directors (the "SERIES A DIRECTORS"); provided, however, that (a) such
Series A Directors must meet the requirements of NASDAQ Marketplace Rule
4200(a)(15) as independent directors, and (b) if required, the consent and
approval of any federal, state, or other Gaming Authority has been obtained
with respect to such Series A Directors. Should any Series A Director be
found unsuitable by a Gaming Authority or should the Company have
reasonable ground to find that such Series A Director will be found
unsuitable, such Series A Director shall immediately resign and the Holders
of a majority of the then outstanding shares of Preferred Shares shall have
the right to appoint a suitable replacement.
(b) The number of Series A Directors permitted to be appointed
pursuant to these provisions shall be calculated, as of the date of any
appointment of Series A Directors hereunder (an "APPOINTMENT DATE"), by
multiplying the Series A Director Ratio (as defined below) by the total
number of members of the Company's Board of Directors (immediately after
the appointment of a Series A Director hereunder). In the event that the
number of Series A Directors calculated as provided hereunder is a
fractional amount, it will be rounded up to the nearest whole number if the
fraction is equal to or greater than 0.50 and down to the nearest whole
number if it is less than 0.50.
17. DISQUALIFICATION CLAIM; REDEMPTION.
(a) The Company shall take no action without reasonable justification,
either alone or together with any regulatory agency, that would impair a
Holder's right to lawfully hold Preferred Shares, Conversion Shares or any
other rights in connection with the Company. In the event the Company or
any of its officers, agents, employees or representatives are notified or
obtain knowledge from any source, including but not limited to a Gaming
Authority, that a Holder (or any of them) is or may be in danger of being
considered to be a Disqualified Holder (as defined in the Articles of
Incorporation) (solely as a result of the failure to obtain or the loss or
non-reinstatement of any material license or franchise from any Gaming
Authority held by the Company or any of its Subsidiaries (as defined in the
Securities Purchase Agreement) to conduct any material portion of the
business of the Company or any of its Subsidiaries, which license or
franchise is conditioned upon some or all of the holders of capital stock
of the Company meeting certain criteria) or the equivalent under any
provision of law, or for any other reason it is claimed by any Gaming
Authority that such Holder's Preferred Shares or Conversion Shares in the
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Company (or any warrants or other rights related to the issuance,
acquisition or holding of shares of capital stock in the Company) cannot be
issued to or held by such Holder, or will not be issued to or permitted to
be held by such Holder, based on any claim related to such Holder's
suitability for holding an interest in the Company under applicable gaming
laws (collectively and separately a "DISQUALIFICATION CLAIM", and the
occurrence of such Disqualified Claim, a "REGULATORY REDEMPTION EVENT"),
such Holder shall be immediately notified by the Company in writing of the
Disqualification Claim and provided with all information available to the
Company and any of its officers, agents, employees or representatives
(including but not limited to information acquired by Company's attorneys)
relating to the Disqualification Claim together with any documents related
thereto.
(b) Upon obtaining knowledge of the Disqualification Claim, and in
addition to its duty to disclose its information regarding such claim to
such Holder, the Company shall immediately investigate and conduct
reasonable due diligence in good faith with respect to such
Disqualification Claim and share with such Holder all information so
obtained. The Company shall not assert any attorney-client or work product
privilege in connection with such disclosure.
(c) The Company shall fully cooperate with such Holder in presenting
to any Gaming Authority or other governmental entity (including a tribal
governmental entity) that may be considering the Disqualification Claim all
evidence or other information available to it that would in any way support
such Holder's contention that the Disqualification Claim was without merit
or that requiring divesture of or a prohibition on such Holder's
participation in the Company, directly or indirectly, was unwarranted, or
that would reasonably assist such Holder in any other way in supporting its
contention.
(d) So long as such Holder challenges the Disqualification Claim in a
proceeding conducted in accordance with applicable law ("PROCEEDING"), and
until such challenge is finally resolved, including the exhaustion of all
appeals (including the availability of any extraordinary writs), and if a
Mandatory Redemption (as defined below) of the Preferred Shares or
Conversion Shares in question is required during the pendency of the
Proceeding, the Company shall be the only party acquiring the Preferred
Shares or Conversion Shares of the Disqualified Holder (the "HELD SHARES")
and shall continue holding such shares pending the final outcome of the
Proceeding. The Held Shares shall not be sold, transferred, assigned,
encumbered or diluted in any way. In the event of such Mandatory
Redemption, the Redemption Price shall be paid to such Holder without
prejudice to the recovery by the Holder of the Held Shares, if applicable.
(e) In the event it is finally determined in the Proceeding that such
Holder is required to divest himself or itself of such Preferred Shares or
Conversion Shares and such Mandatory Redemption has not yet occurred, the
Company shall effect such Mandatory Redemption in accordance with Section
A.17(g) and (h) below. In the event it is finally determined in the
Proceeding that such Holder should not have been required to divest himself
or itself of such Preferred Shares or Conversion Shares, the Company shall
cause the Company to return the Held Shares to such Holder.
-15-
(f) Any holding or transfer of the Held Shares shall be subject to
applicable laws, provided that the Company shall fully cooperate with a
Holder, if so entitled, in recovering the Held Shares.
(g) Mandatory Redemption. Upon the occurrence of a Regulatory
Redemption Event, if required by a Gaming Authority, the Company shall
redeem (a "MANDATORY REDEMPTION") all, but not less than all, of the
Preferred Shares and any Conversion Shares at a price per Preferred Share
or Conversion Share, as applicable, in cash equal to the Mandatory
Redemption Price (as defined below).
(h) Mechanics of Mandatory Redemption. At any time after a Regulatory
Redemption Event, the Company may redeem all of the outstanding Preferred
Shares and Conversion Shares of a Holder by delivering written notice
thereof via facsimile and overnight courier ("NOTICE OF MANDATORY
REDEMPTION") to the Holders thereof, which Notice of Mandatory Redemption
shall indicate the date of such redemption (the "MANDATORY REDEMPTION
DATE") and the applicable Mandatory Redemption Price (the date of such
Notice, the "NOTICE OF MANDATORY REDEMPTION DATE"). The Notice of Mandatory
Redemption shall state (i) the Trading Day selected for the Mandatory
Redemption in accordance with Section A.17(g), which Trading Day shall be
at least ten (10) Business Days but not more than sixty (60) Business Days
following the Notice of Mandatory Redemption Date (the "MANDATORY
REDEMPTION DATE"), (ii) the number of Preferred Shares of such Holder
subject to the Mandatory Redemption, and (ii) the aggregate Mandatory
Redemption Price of the Preferred Shares and Conversion Shares, as
applicable, subject to Mandatory Redemption from all of the Holders of the
Preferred Shares and Conversion Shares pursuant to this Section A.17 and
(iii) the aggregate Mandatory Redemption Price of the Preferred Shares and
Conversion Shares subject to Mandatory Redemption from such Holder pursuant
to this Section A.17.
18. REDEMPTION OPTION UPON PUT DATE.
(a) In addition to all other rights of the Holders contained herein,
at any time after the Cancellation Date, if a Registration Rights Default
occurs and is continuing (as defined in the Registration Rights Agreement)
(a "PUT DATE"), each Holder shall have the right, at such Holder's option,
to require the Company to redeem all or a portion of such Holder's
Preferred Shares (a "REDEMPTION AT OPTION OF HOLDER REQUEST") at a price
per Preferred Share equal to such amount with respect to any Preferred
Share equal to (x) the arithmetic average of the Closing Sale Prices of the
Common Stock during the ten (10) consecutive Trading Days prior to such
Redemption at Option of Holder Request less (y) the Conversion Price of
such Preferred Share (the "REDEMPTION AT OPTION OF HOLDER PRICE") .
(b) Mechanics of Redemption at Option of Buyer. At any time after the
Put Date, any Holder of Preferred Shares then outstanding may require the
Company to redeem up to all of such Holder's Preferred Shares by delivering
written notice thereof via facsimile and overnight courier ("NOTICE OF
REDEMPTION AT OPTION OF Holder") to the Company, which Notice of Redemption
at Option of Holder shall indicate the number of Preferred Shares that such
Holder is electing to redeem.
-16-
(c) Payment of Redemption at Option of Holder Price. Upon the
Company's receipt of a Notice(s) of Redemption at Option of Buyer from any
Holder, the Company shall within three (3) Business Days of such receipt
notify each other Holder by facsimile of the Company's receipt of such
notice(s). The Company shall deliver on the seventh (7th) Business Day
after the Company's receipt of the first Notice of Redemption at Option of
Holder the applicable Redemption at Option of Holder Price to all Holders
that deliver a Notice of Redemption at Option of Holder prior to the
seventh (7th) Business Day after the Company's receipt of the first Notice
of Redemption at Option of Holder (such date, the "REDEMPTION AT OPTION OF
HOLDER DATE"). If the Company is unable to redeem all of the Preferred
Shares submitted for redemption, the Company shall (i) redeem a pro rata
amount from each Holder providing a Notice of Redemption at Option of
Holder prior to the Redemption at Option of Holder Date based on the number
of Preferred Shares submitted for redemption by such Holder relative to the
total number of Preferred Shares submitted for redemption by all Holders
prior to the Redemption at Option of Holder Date and (ii) in addition to
any remedy such Holder may have under this Certificate of Designation and
the Securities Purchase Agreement, pay to each such Holder interest at the
rate of 1.5% per month (prorated for partial months) in respect of each
unredeemed Preferred Share until paid in full. The Holders and Company
agree that in the event of the Company's redemption of any Preferred Shares
under this Section A.17, the Holders' damages would be uncertain and
difficult to estimate because of the parties' inability to predict future
interest rates and the uncertainty of the availability of a suitable
substitute investment opportunity for the Holders. Accordingly, any
redemption premium due under this Section A.17 is intended by the parties
to be, and shall be deemed, a reasonable estimate of the Holders' actual
loss of its investment opportunity and not as a penalty.
(d) Void Redemption. In the event that the Company does not pay the
Redemption at Option of Holder Price within the time period set forth in
Section A.17(c), at any time thereafter and until the Company pays such
unpaid applicable Redemption at Option of Holder Price in full, a Holder
shall have the option to, in lieu of redemption, require the Company to
promptly return to such Holder any or all of the Preferred Shares that were
submitted for redemption by such Holder under this Section A.17 and for
which the applicable Redemption at Option of Holder Price (together with
any interest thereon) has not been paid, by sending written notice thereof
to the Company via facsimile (the "VOID OPTIONAL REDEMPTION NOTICE"). Upon
the Company's receipt of such Void Optional Redemption Notice, (i) the
Notice of Redemption at Option of Holder shall be null and void with
respect to those Preferred Shares subject to the Void Optional Redemption
Notice, (ii) the Company shall immediately return any Preferred Shares
subject to the Void Optional Redemption Notice, and (iii) the Conversion
Price of such returned Preferred Shares shall be adjusted to the lesser of
(A) the Conversion Price as in effect on the date on which the Void
Optional Redemption Notice is delivered to the Company and (B) the
arithmetic average of the Closing Sale Prices of the Common Stock during
the ten (10) consecutive Trading Days prior to the date on which the Void
Optional Redemption Notice is delivered to the Company.
(e) Miscellaneous. A Holder's delivery of a Void Optional Redemption
Notice and exercise of its rights following such notice shall not effect
the Company's obligations to make any payments which have accrued prior to
the date of such
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notice. In the event of a redemption pursuant to this Section A.17 of less
than all of the Preferred Shares represented by a particular Preferred
Shares Certificate, the Company shall promptly cause to be issued and
delivered to the Holder of such Preferred Shares a Preferred Shares
Certificate representing the remaining Preferred Shares which have not been
redeemed, if necessary.
19. TERMINATION. On the Expiration Date, any Preferred Shares remaining
outstanding hereunder shall be cancelled.
20. CERTAIN DEFINITIONS. Capitalized terms not otherwise defined herein
shall have the meaning as set forth in the Securities Purchase Agreement. For
purposes of this Certificate of Designations, the following terms shall have the
following meanings:
(a) "APPROVED STOCK PLAN" means any employee benefit plan which has
been approved by the Board of Directors of the Company, pursuant to which
the Company's securities may be issued to any employee, officer, director
or consultant for services provided to the Company.
(b) "AGGREGATE CONVERSION PRICE" has the meaning as set forth in
Section A.1(a).
(c) "BLACK SCHOLES VALUE" means the value of Preferred Shares based on
the Black and Scholes Option Pricing Model obtained from the "OV" function
on Bloomberg determined as of the day immediately following the public
announcement of the applicable Fundamental Transaction and reflecting (i) a
risk-free interest rate corresponding to the U.S. Treasury rate for a
period equal to the remaining term of Preferred Shares as of such date of
request and (ii) an expected volatility equal to the greater of 60% and the
100 day volatility obtained from the HVT function on Bloomberg.
(d) "BLOOMBERG" means Bloomberg Financial Markets.
(e) "BUSINESS DAY" means any day other than Saturday, Sunday or other
day on which commercial banks in The City of New York are authorized or
required by law to remain closed.
(f) "BUYER" shall have the meaning as set forth in the Securities
Purchase Agreement.
(g) "CANCELLATION DATE" has the meaning as set forth in Section
A.1(a).
(h) "CANCELLED WARRANT" has the meaning as set forth in Section
A.1(a).
(i) "CANCELLED WARRANT SHARES" has the meaning as set forth in Section
A.1(a).
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(j) "CERTIFICATE OF DESIGNATIONS" has the meaning as set forth in the
initial paragraph of Exhibit A.
(k) "CLOSING BID PRICE" and "CLOSING SALE PRICE" means, for any
security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported
by Bloomberg, or, if the Principal Market begins to operate on an extended
hours basis and does not designate the closing bid price or the closing
trade price, as the case may be, then the last bid price or last trade
price, respectively, of such security prior to 4:00:00 p.m., New York Time,
as reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last closing
bid price or last trade price, respectively, of such security on the
principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price or last trade price, respectively, of
such security in the over-the-counter market on the electronic bulletin
board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively,
of any market makers for such security as reported in the "pink sheets" by
Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the
Closing Bid Price or the Closing Sale Price cannot be calculated for a
security on a particular date on any of the foregoing bases, the Closing
Bid Price or the Closing Sale Price, as the case may be, of such security
on such date shall be the fair market value as mutually determined by the
Company and a Holder. If the Company and a Holder are unable to agree upon
the fair market value of such security, then such dispute shall be resolved
pursuant to Section 12. All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other
similar transaction during the applicable calculation period.
(l) "COMMON STOCK" means (i) the Company's shares of Common Stock,
$0.01 par value per share, and (ii) any share capital into which such
Common Stock shall have been changed or any share capital resulting from a
reclassification of such Common Stock.
(m) "COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the
number of shares of Common Stock actually outstanding at such time, plus
the number of shares of Common Stock deemed to be outstanding pursuant to
Sections A.2(a)(i) and A.2(a)(ii) hereof regardless of whether the Options
or Convertible Securities are actually convertible at such time, but
excluding any shares of Common Stock owned or held by or for the account of
the Company or issuable upon conversion of the Preferred Shares.
(n) "COMPANY" has the meaning as set forth in the initial paragraph of
Exhibit A.
(o) CONVERSION DELIVERY DOCUMENTS DATE" has the meaning as set forth
in Section A.1(a).
(p) "CONVERSION NOTICE" has the meaning as set forth in Section
A.1(a).
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(q) "CONVERSION SHARES" has the meaning as set forth in Section
A.1(a).
(r) "CONVERTIBLE SECURITIES" means any stock or securities (other than
Options) directly or indirectly convertible into or convertible or
exchangeable for shares of Common Stock.
(s) "ELIGIBLE MARKET" means the Principal Market, the American Stock
Exchange, The New York Stock Exchange, Inc., the Nasdaq Capital Market or
the NASD OTC Bulletin Board.
(t) "EXCLUDED SECURITIES" means any Common Stock issued or issuable:
(i) in connection with any Approved Stock Plan; (ii) upon conversion of
Preferred Shares; (iii) pursuant to a bona fide firm commitment
underwritten public offering with a nationally recognized underwriter which
generates gross proceeds to the Company in excess of either (A) $20,000,000
(other than an "at-the-market offering" as defined in Rule 415(a)(4) under
the 1933 Act and "equity lines") and at a purchase price of no less than
$6.00 per share (as adjusted for stock splits, stock dividends, reverse
stock splits, recapitalizations, reclassifications and similar events) or
(B) $30,000,000 (other than an "at-the-market offering" as defined in Rule
415(a)(4) under the 1933 Act and "equity lines") (each, an "EXCLUDED
OFFERING"); (iv) in connection with any acquisition by the Company, whether
through an acquisition of stock or a merger of any business, assets or
technologies the primary purpose of which is not to raise equity capital in
an amount not to exceed, in the aggregate 20% of the outstanding shares of
Common Stock in any calendar year; and (vi) upon conversion of any Options
or Convertible Securities which are outstanding on the day immediately
preceding the Issuance Date, provided that the terms of such Options or
Convertible Securities are not amended, modified or changed on or after the
Issuance Date.
(u) "EXPIRATION DATE" means the date seven years after the Issuance
Date (as defined in the Warrants) or, if such date falls on a day other
than a Business Day or on which trading does not take place on the
Principal Market (a "HOLIDAY"), the next date that is not a Holiday.
(v) "FAIR MARKET VALUE" means the closing sale price of the shares of
Common Stock (as reported by the Bloomberg Financial Markets) on the last
Trading Day immediately preceding the Appointment Date. In the event that a
closing sale price is not reported by the Bloomberg Financial Markets, the
Fair Market Value shall be as mutually determined by the Company's Board of
Directors and the Required Holders in good faith.
(w) "FINANCING AGREEMENT" shall have the meaning as set forth in the
Securities Purchase Agreement.
(x) "FINANCING FACILITY" shall have the meaning as set forth in the
Securities Purchase Agreement.
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(y) "FUNDAMENTAL TRANSACTION" means that the Company shall, directly
or indirectly, in one or more related transactions, (i) consolidate or
merge with or into (whether or not the Company is the surviving
corporation) another Person, or (ii) sell, assign, transfer, convey or
otherwise dispose of all or substantially all of the properties or assets
of the Company to another Person, or (iii) allow another Person to make a
purchase, tender or exchange offer that is accepted by a Holders of more
than the 50% of either the outstanding shares of Common Stock (not
including any shares of Common Stock held by the Person or Persons making
or party to, or associated or affiliated with the Persons making or party
to, such purchase, tender or exchange offer), or (iv) consummate a stock
purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more
than the 50% of the outstanding shares of Common Stock (not including any
shares of Common Stock held by the other Person or other Persons making or
party to, or associated or affiliated with the other Persons making or
party to, such stock purchase agreement or other business combination), or
(v) reorganize, recapitalize or reclassify its Common Stock.
(z) "GAMING AUTHORITY" means any of the "Gaming Authorities" as such
term is defined in the Articles of Incorporation of the Company in effect
as of the Subscription Date.
(aa) "HOLDER" means any holder of issued and outstanding Preferred
Shares.
(bb) "HOLDER PRO RATA ALLOCATION" means with respect to any number of
Conversion Shares, (x) such number of Conversion Shares multiplied by (y)
(i) the number of Preferred Shares held by such Holder on the Subscription
Date divided by (ii) 4,457,751.
(cc) "ISSUANCE DATE" means with respect to any Preferred Share, the
date of issuance of such Preferred Share by the Company.
(dd) "MANDATORY REDEMPTION" has the meaning as set forth in Section
A.17(g).
(ee) "MANDATORY REDEMPTION DATE" has the meaning as set forth in
Section A.17(h).
(ff) "MANDATORY REDEMPTION PRICE" means in the case of a Regulatory
Redemption Event, the sum of (i) with respect to Conversion Shares, the
arithmetic average of the Closing Sale Prices of the Common Stock during
the ten (10) consecutive Trading Days prior to such Notice of Mandatory
Redemption, (ii) solely with respect to Preferred Shares that are not
Additional Preferred Shares, the Black Scholes Value of the remaining
unconverted portion of Preferred Shares on the Notice of Mandatory
Redemption Date, and (iii) solely with respect to Additional Preferred
Shares, an amount, if greater than zero, equal to (x) the arithmetic
average of the Closing Sale Prices of the Common Stock during the ten (10)
consecutive Trading Days prior to such Notice of Mandatory Redemption less
(y) the Conversion Price of such Additional Preferred Shares.
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(gg) "NOTICE OF MANDATORY REDEMPTION " has the meaning as set forth in
Section A.17(h).
(hh) "NOTICE OF REDEMPTION AT OPTION OF HOLDER" has the meaning as set
forth in Section A.18(b).
(ii) "OPTIONS" means any rights, warrants or options to subscribe for
or purchase shares of Common Stock or Convertible Securities.
(jj) "PERSON" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity and a government or any department or agency
thereof.
(kk) "PREFERRED SHARES" has the meaning as set forth in the initial
paragraph of this Certificate of Designations.
(ll) "PRINCIPAL MARKET" means the NASDAQ National Market.
(mm) "PUT DATE" has the meaning as set forth in Section A.18(a).
(nn) "REDEMPTION AT OPTION OF HOLDER" has the meaning as set forth in
Section A.18(b).
(oo) " REDEMPTION AT OPTION OF HOLDER DATE" has the meaning as set
forth in Section A.18(c).
(pp) "REGISTRATION RIGHTS AGREEMENT" means that certain registration
rights agreement by and among the Company and the Buyers.
(qq) "REQUIRED HOLDERS" means a Holders of Preferred Shares
representing at least a majority of shares of Common Stock underlying
Preferred Shares then outstanding.
(rr) "SECURITIES PURCHASE AGREEMENT" means that certain Securities
Purchase Agreement, dated as of February __, 2006 (the "SUBSCRIPTION
DATE"), by and among the Company and the investors (the "BUYERS") referred
to therein.
(ss) "SERIES A DIRECTOR RATIO" means the quotient of the total amount
of the Loan (as defined in the Financing Agreement) then outstanding
divided by the Total Market Capitalization (as defined below) of the
Company.
(tt) "TOTAL MARKET CAPITALIZATION" means the sum of (a) the product of
the total number of outstanding shares of the Company's common stock par
value $0.01 per
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share ("COMMON STOCK") multiplied by the Fair Market Value (as defined
below) of one share of Common Stock plus (b) the total amount of the Loan
(as defined in the Financing Agreement) then outstanding.
(uu) "TRADING DAY" means any day on which the Common Stock are traded
on the Principal Market, or, if the Principal Market is not the principal
trading market for the Common Stock, then on the principal securities
exchange or securities market on which the Common Stock are then traded;
provided that "Trading Day" shall not include any day on which the Common
Stock are scheduled to trade on such exchange or market for less than 4.5
hours or any day that the Common Stock are suspended from trading during
the final hour of trading on such exchange or market (or if such exchange
or market does not designate in advance the closing time of trading on such
exchange or market, then during the hour ending at 4:00:00 p.m., New York
Time).
(vv) "VOID OPTIONAL REDEMPTION NOTICE" has the meaning as set forth in
Section A.18(d).
(ww) "WPT LEGISLATION EVENT" means the concurrent existence of the
following conditions: (i) any applicable federal, state, local
governmental, or tribal law or regulation (including laws or regulations of
any of their respective subdivisions or agencies) shall have been enacted
that could reasonably be expected to materially adversely affect any Loan
Party (as defined in the Financing Agreement) or World Poker (as defined in
the Financing Agreement), and (ii) the value of the Collateral (as defined
in the Financing Agreement) shall be less than 100% of the principal amount
of the Loan (as defined in the Securities Purchase Agreement) outstanding
under the Financing Agreement.
(xx) "WPT 25% COLLATERAL EVENT" means such date whereby the value of
the Collateral (as defined in the Financing Agreement) is less than or
equal to 25% of the principal amount of the Loan outstanding under the
Financing Agreement.
(yy) "WPT 50% COLLATERAL EVENT" means such date whereby the value of
the Collateral (as defined in the Financing Agreement) is less than or
equal to 50% of the principal amount of the Loan outstanding under the
Financing Agreement.
(zz) "WPT 75% COLLATERAL EVENT" means such date whereby the value of
the Collateral (as defined in the Financing Agreement) is less than or
equal to 75% of the principal amount of the Loan outstanding under the
Financing Agreement.
-23-
EXHIBIT I
TO BE EXECUTED BY THE REGISTERED HOLDER TO CONVERT
PREFERRED SHARES INTO COMMON STOCK
LAKES ENTERTAINMENT, INC.
The undersigned holder hereby elects to convert the attached Series A
Convertible Preferred Stock, par value $0.01 per share(s) (the "PREFERRED
SHARES") into _________________ of the shares of Common Stock ("CONVERSION
SHARES") of Lakes Entertainment, Inc., a Minnesota corporation (the "COMPANY").
Capitalized terms used herein and not otherwise defined shall have the
respective meanings set forth in the Certificate of Designations of such
Preferred Shares (the "CERTIFICATE OF DESIGNATIONS").
1. Form of Conversion Price. The Holder intends that payment of the
Conversion Price shall be made as:
________ a "Cash Conversion" with respect to __________ Conversion Shares;
-----------------
and/or
________ a "Cashless Conversion" with respect to __________ Conversion
--------------------
Shares.
2. Payment of Conversion Price. In the event that the holder has elected a
Cash Conversion with respect to some or all of the Conversion Shares to be
issued pursuant hereto, the holder shall pay the aggregate Conversion Price in
the sum of $___________________ to the Company in accordance with the terms of
the Certificate of Designations.
3. Delivery of Conversion Shares. The Company shall deliver to the holder
__________ Conversion Shares in accordance with the terms of the Certificate of
Designations.
Date: _______________ __, ______
________________________________
Name of Registered Holder
By:
__________________________
Name:
Title:
_________________________________
....Tax ID or SSN of Registered Holder
_________________________________
_________________________________
....Street Address of Registered Holder
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby
directs WELLS FARGO BANK, N.A. to issue the below indicated number of shares of
Common Stock of the Company to the recipient listed below and deliver the
certificate representing such shares to the address listed below in accordance
with the Transfer Agent Instructions dated February __, 2006 from the Company
and acknowledged and agreed to by WELLS FARGO BANK, N.A.
NAME, ADDRESS AND SOCIAL SECURITY OR TAX ID NO. NO. OF SHARES
- ----------------------------------------------- -------------
- ----------------------------------------- -------------
Name of Recipient
- -----------------------------------------
Street Address
- -----------------------------------------
City, State, Zip Code
Tax ID or SSN:
--------------------------
LAKES ENTERTAINMENT, INC.
By:
--------------------------------
Name:
Title:
B. Except as specifically provided above or as provided under the Minnesota
Business Corporation Act, the Preferred Shares shall have no other right,
preferences, privileges, or obligations.