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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
AMENDMENT NO. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
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SILICON GAMING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0357939
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
2800 WEST BAYSHORE ROAD, PALO ALTO, CA 94303
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
415-842-9000
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS TO BE SO REGISTERED:
NOT APPLICABLE
NAME OF EACH EXCHANGE ON WHICH EACH CLASS IS TO BE REGISTERED:
NOT APPLICABLE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
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SILICON GAMING, INC.
I. INFORMATION INCLUDED IN FORM 10
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ITEM FORM 10 ITEM CAPTION LOCATION
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<C> <S> <C>
1. BUSINESS...................................................... 1
2. FINANCIAL INFORMATION......................................... 21
3. PROPERTIES.................................................... 25
4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 25
5. DIRECTORS AND EXECUTIVE OFFICERS.............................. 27
6. EXECUTIVE COMPENSATION........................................ 29
7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 33
8. LEGAL PROCEEDINGS............................................. 34
9. MARKET PRICE OF AND DIVIDENDS................................. 34
10. RECENT SALES OF UNREGISTERED SECURITIES....................... 35
11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED....... 35
12. INDEMNIFICATION OF DIRECTORS AND OFFICERS..................... 38
13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 39
14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS................. 39
15. FINANCIAL STATEMENTS AND EXHIBITS............................. 39
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ITEM 1.
BUSINESS
GENERAL
Silicon Gaming, Inc. ("SGI" or the "Company") is engaged in the development
of interactive gaming devices for use in casinos and other gaming
establishments in the United States and worldwide. The Company's products
utilize advanced computer and video multimedia technologies, using state-of-
the-art off-the-shelf components, to offer a gaming experience that the
Company believes is beyond the capability of current-generation slot machines
and video gaming devices. To date, the Company has generated no revenue and
has had no sales. On May 30, 1996, the Company filed a registration statement
on Form S-1 with respect to an initial public offering of its Common Stock in
which it is seeking to raise approximately $35 million.
The Company was incorporated in California on July 27, 1993. The Company's
principal executive offices are located at 2800 West Bayshore Road, Palo Alto,
California 94303 and its telephone number is 415-842-9000.
STRATEGY
The Company believes that the gaming experience offered by the current
generation of gaming machines is somewhat constrained because existing
machines do not take full advantage of the technology existing in fields such
as microprocessor control, multimedia display or even game concept and design.
Today's products are "hardware-dominant" and the Company believes that
software, to the extent it exists, is relatively ancillary.
As such, SGI's business strategy is to address and exploit the perceived
shortcomings of existing gaming machines by creating and selling gaming
devices based on easily upgradable software which will not be controlled by
limiting hardware. Such gaming machines are expected to have a multi-game
format for continuous play, full interactivity, advanced play levels, play-
stoppage entertainment and high quality video, graphics and sound. In
addition, SGI's machines are expected to be reconfigurable.
SGI's goal is to become one of the leading suppliers of gaming machines by
developing, manufacturing and distributing a gaming device utilizing
technology that will not limit the implementation of new games. Management
hopes that SGI's game platform will increase the entertainment value for the
slot customer and thereby expand the market to new slot players, as well as
increase the average length of play and frequency of play. The Company intends
to pursue existing casinos for replacement sales, as well as becoming part of
the original floor plan of newly-constructed casinos.
The SGI product is a game platform which is expected to support the
reconfiguration of games and product enhancements. This basic architecture
allows for the creation of games which are expected to appeal to today's
market, and supports new features intended to attract meaningful play by the
significant 35-and-under segment of the slot market, many of whom grew up in
an era of computers and sophisticated video games and who the Company believes
are not as engaged by traditional spinning-reel slots. Through the use of
advanced multi-media, communications/network and interactive technologies, the
SGI platform is ultimately intended to support a menu of game options and on-
line tournament competitions, as well as on-line advertising opportunities and
a host of characters to assist with instruction and support, all designed to
create what the Company hopes will be the next generation interactive slot
machine.
GAMING MACHINE MARKET
North American Markets. Demand for new slot machines has been driven by new
casino openings as well as replacements of existing machines as casino
operators have attempted to maximize revenues and profits by having the most
popular machines on the casino floor. According to a May 1995 gaming industry
report by Salomon Brothers, the number of installed slot machines in North
America is projected to grow from approximately 350,000 units currently to
almost 450,000 units by December 2000. During this time period, while the
installed base is projected to grow by roughly 100,000 machines, the total
shipments are expected to be approximately 420,000 machines due to an
increasing demand for replacement of aging gaming machines. It is
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this extensive installed base, combined with the projected growing replacement
demand and the ever-increasing importance of slot machines themselves as a
source of casino revenues which management believes creates an attractive
market opportunity for SGI.
International Markets The market for slot machines outside of North America
is relatively small with the exception of Australia, and is generally
difficult to forecast. In addition, international markets have often been the
outlet for sales of used machines rather than new ones. As a result, in
assessing SGI's market penetration, management has only considered the slot
machine markets in North America. While SGI intends to take advantage of
certain opportunities in international markets, the Company intends to
aggressively pursue international markets only after successfully establishing
itself in North America.
COMPETITION
The current slot machine market is highly competitive and is dominated by a
small number of manufacturers, all of whom have significantly greater
financial and other resources than the Company. The Company believes that the
principal competitive factors in this market are manufacturing efficiency,
distribution, name and product recognition, price and product development. The
principal competitors in the slot machine market are International Game
Technology ("IGT") and Bally Gaming International, Inc. ("Bally"). Additional
competitors or potential competitors include WMS Industries Inc., Video
Lottery Consultants, Aristocrat Leisure Industries, Universal Distributing,
Sigma Games and Casino Data Systems. In addition, Sega Enterprises Ltd.
("Sega"), a leading manufacturer of home video games and arcade games, has
recently announced its plans to develop and manufacture gaming machines and
announced that it will apply for manufacturing and distribution licenses in
Nevada in 1996. There can be no assurance that other companies in the video
game or multimedia market will not successfully enter the market for video
slot machines, nor can there be any assurance that the manufacturers of
traditional slot machines will not develop products that are superior to, or
that achieve greater market acceptance, than the Company's products. In
general, the Company's existing competitors, as well as many potential new
competitors, have significantly greater financial and technical resources than
the Company, as well as more established customer bases and distribution
channels, which may allow them to move rapidly into the Company's market and
acquire significant market share. Increased competition is likely to result in
price reductions, reduced operating margins and loss of market share, any of
which could materially and adversely affect the Company's business, operating
results or financial condition.
SALES AND MARKETING
SGI's sales and marketing strategy is to generate product sales by
highlighting the potential for increased win per machine and profitability
that SGI believes could be generated by its products and by positioning itself
as a partner with casino operators. SGI will attempt to develop close working
relationships with the casino operators, utilizing SGI's marketing
representatives as consultants to the casino operators on methods to increase
slot machine profitability through the use of SGI's products. SGI anticipates
that games may be co-developed with casino operators whose input into the game
development process will build a sense of ownership and familiarity with SGI's
products. Additionally, SGI believes that by customizing its system for the
casino operators with features such as play-stoppage and promotional
entertainment, SGI will have an opportunity to further enhance the operators'
acceptance of SGI's products. SGI recognizes the important role that casino
operations personnel play in establishing market acceptance for new machines
and thus will target this group with products, sample game platforms and
training with SGI's products. SGI's marketing strategy also targets casino
players and will focus on developing brand recognition for SGI's games, which
the Company believes will be accomplished through the development of
proprietary games that are intended to deliver greater entertainment value for
the gambling dollar.
PRODUCT DEVELOPMENT
SGI has attempted to focus its product development efforts on innovative
games that induce longer, more frequent periods of play within both existing
and new segments of the gaming market. The Company's research
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and development expenditures during the period from inception through March
31, 1994, the year ended March 31, 1995, the nine months ended December 31,
1995 and the three months ended March 31, 1996 were $79,000, $1,539,000,
$3,137,000 and $1,595,000, respectively. For at least the next 18 months,
research and development efforts, which will be critical to the Company's
success, are expected to focus on developing a suite of games to run on the
Company's hardware platform. At May 15, 1996, the Company had 36 full-time
employees engaged in research and development activities. The Company expects
this number to increase substantially over the next 18 months.
Hardware Development
The hardware platform being engineered by SGI seeks to take advantage of
readily available, state-of-the-art computer, communications/network and
multi-media technologies to create a proprietary, multi-purpose game platform
that the Company believes will offer superior resolution, color palettes,
graphics, animation and sound effects.
SGI believes that much of the hardware presented to the player by
traditional slot machines consists of wasted space, such as cabinet details,
that does not contribute to the game play experience. SGI's hardware will
offer a significantly greater amount of functionality in the same amount of
space. To make the entire interface part of the game, SGI has used a 26-inch
diagonal touchscreen video monitor (the largest commercially available
touchscreen), vertically-oriented. The machine is expected to be powered by a
sophisticated electronic system that includes an Intel 133-Mhz Pentium
microprocessor, custom designed hardware and software which present a
proprietary combination of graphics, animation and video, a 4-gigabyte hard
disk drive with data authentication schemes (for which a U.S. patent
application is on file) and a random number generator algorithm that has been
developed in collaboration with a leading industry expert.
The footprint of the Company's machines is expected to be similar to that of
existing gaming machines which allow the Company's machines to replace
currently installed units on a one-for-one basis without any reconfiguring of
the casino floor layout.
In particular, the hardware features that SGI intends to utilize include:
. Extra large play field--A 23" x 19" picture tube to convey additional
game animation and award amounts, without borrowing space from the game's
proposition.
. Data Authentication--Because SGI's games are software resident, the
Company has developed a data authentication scheme which management
believes is designed to insure the integrity of the system and the game
applications.
. User Interface--To accommodate new game types and features, SGI has
developed a user-friendly interface that management believes makes the
multi-game platform relatively simple to use.
. Random Number Generator--At the heart of any computer-driven gaming
device is an algorithm that generates random numbers which determine the
outcome of every proposition.
Game Development
SGI has undertaken an effort to develop game software that will realize the
full potential of its hardware platform. SGI recognizes the importance of a
focused effort in developing games for its platform. In addition, as part of
its effort to develop popular games for its platform, the Company has sought
out an understanding of customer needs in the casino industry from casino slot
machine operators, actual and potential gaming players and other sources.
The Company believes the typical gaming experience is comprised of four
distinct phases: initial attraction, initial play, extended play and
completion. Within each of these phases, certain factors determine whether the
player advances from one phase to the next, with the goal being that the
customer advances to extended play and remains as long as possible. By
understanding these factors, SGI is seeking to develop an optimal gaming
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experience which will induce longer and more frequent periods of play and
hence an increase in the total amount wagered by the slot player.
To increase the likelihood of initial player attraction, SGI intends to
develop products with high visual appeal. The game imagery is intended to be
compelling and dynamic and the machine's cabinet is designed to be attractive.
SGI believes these elements will encourage the customer to begin play. Whether
play will be extended will depend in large part on the game's ease of use and
the frequency of jackpots during the initial period. SGI's user interface and
on-line help system are expected to insure ease of use, and all of SGI's games
are expected to be configurable in a range of hold percentages and hit
frequencies. Once the player commits to extended play, any interruption in
play, such as a fill, malfunction or request for change service, becomes an
opportunity to end the session and should therefore be avoided. The Company
believes that the SGI machine will minimize the sense of interruption by
offering customized non-wagering forms of entertainment whenever a machine
goes down. Management believes that this will keep the player engaged in the
experience.
SGI is seeking to develop a variety of specific games which management
believes will appeal to both the gaming machine market and its end consumers.
Currently, the Company is engaged in the development of traditional gaming
machines such as animated reel slots and video poker. The Company's initial
game under development, Fort Knox, involves an adventure in which the player
enters Fort Knox's main vault and spins giant combination reels, while having
the opportunity not only to win money by matching symbols with those on the
play table, but to collect an additional jackpot by matching numbers on a
bonus combination. Fort Knox is nearing completion, and SGI is also in the
process of creating gaming machine versions of popular table games such as
Blackjack, Roulette and Poker. These games are expected to be released at
various times during the fourth quarter of 1996 and the first quarter of 1997,
with an initial suite of six gaming options expected to be released in the
fourth quarter of 1996.
MANUFACTURING
After receipt of regulatory approval and licensing with respect to its
gaming platform, the Company intends to manufacture products in-house or
contract product assembly to a licensed manufacturer. All of the Company's
initial manufacturing will be performed at the Palo Alto facility, where the
Company intends to invest approximately $750,000 in leasehold improvements and
manufacturing equipment. The Company believes that the manufacturing process
will consist primarily of assembly of components obtained from third-party
suppliers and testing software systems and applications.
PROPRIETARY RIGHTS AND LICENSES
The Company's computer programs and technical know-how are both novel and
proprietary, and management believes that they can best be protected by use of
technical devices to protect the computer programs and by enforcement of
contracts and covenants not to compete with certain employees and others with
respect to the use of the Company's proprietary information and trade secrets.
The Company has registered copyrights with respect to various aspects of its
games, and has filed several U.S. patent applications for protection of
certain technology it has created or licensed. These patent applications cover
various aspects of the gaming machine hardware and software. No assurance can
be given that the pending applications will be granted, nor can there be any
assurance that the patents will not be infringed or that others will not
develop technology that does not violate such patents. See "Certain
Considerations--Limited Protection of Intellectual Property Rights; Risk of
Litigation."
SGI has developed a proprietary method of authentication for disk drive-
based gaming machines, for which it has submitted a patent application. Since
modern gaming technology requires the handling and processing of large amounts
of on-line data, establishing a method for storing and retrieving data that
meets the approval of the regulatory authorities while meeting adequate
standards of internal performance requires use of a comprehensive
authentication system to assure both the casino operator and requisite gaming
authorities that the software is an exact copy of what was generated by SGI
and approved by such gaming authorities.
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In addition, SGI owns exclusive rights to the algorithm for its random
number generator, the key component of the Company's gaming machines which
determines the outcome of each proposition. SGI's algorithm, which may have
uses outside the gaming industry, was developed by Dr. Evangelos A. Yfantis, a
professor of Computer Science at the University of Nevada, Las Vegas.
PLAN OF OPERATION THROUGH DECEMBER 31, 1996
During the remainder of the current year, the Company plans to begin its
transition from a development stage company and commence manufacturing and
sales operations. On May 30, 1996, the Company filed a registration statement
on Form S-1 with respect to an initial public offering of its Common Stock in
which it is seeking to raise approximately $35 million. The Company will be
required to obtain a license from any jurisdiction in which it sells gaming
devices. See "Gaming Regulation and Licensing." The Company applied for such a
license in the State of Nevada in August 1995 and hopes to receive such a
license in June 1996. The Company applied for similar licenses in the States
of Colorado and Mississippi, the investigations for which are currently
proceeding. The Company intends to apply for similar licenses in New Jersey,
Minnesota and Missouri.
The Company intends to increase its product development efforts which will
be focused primarily on game development. For the rest of the year, the
Company plans to increase the number of full-time employees engaged in
research and development to approximately 45 from the December 31, 1995 level
of 19.
After the Company becomes licensed to sell its products in any of the
jurisdictions in which it currently has applications, it plans to commence
manufacturing and sales operations. Manufacturing is expected to take place at
the Company's Palo Alto, California facility. During the next year, the
Company plans to hire approximately 12 manufacturing personnel, 14 sales and
marketing personnel and 6 administrative personnel, provided the Company is
successful in its licensing efforts.
The licensing process in Nevada and other jurisdictions is subject to the
discretion of state gaming control agencies, and there can be no assurance
that the Company will be successful in obtaining a license in Nevada or
elsewhere. The failure to obtain such a license will prevent the Company from
proceeding with the other components of its plan of operation as currently
conceived. Moreover, even if the Company does successfully obtain a license to
sell its products, there can be no assurance that the Company will be
successful in building its manufacturing or sales infrastructure or that its
products will gain broad acceptance in the casino market. See "Certain
Considerations--Regulatory Approval," "--Anticipated Financing; Capital
Requirements" and "--Management of Growth."
EMPLOYEES
As of May 15, 1996, the Company had 60 full-time employees, including 36 in
product development. The Company also retains independent contractors to
provide certain services, primarily in connection with its product development
activities. The Company and its full-time employees are not subject to any
collective bargaining agreements and the Company believes that its relations
with its employees are good. From time to time the Company has retained actors
and/or "voice over" talent to perform in certain of the Company's products,
and expects to continue this practice in the future. The Company's future
success depends in large part on its ability to attract and retain management
and other key personnel. See "Certain Considerations--Dependence on Key
Personnel."
FACILITIES
In February 1996, the Company moved from its facilities in Saratoga,
California to a 28,000 square foot leased facility in Palo Alto, California
consisting of 17,000 square feet of office space and 11,000 square feet of
manufacturing space. The Company intends to lease a facility in Las Vegas
during the third quarter of 1996 as it begins to build its sales and support
organization.
GAMING REGULATION AND LICENSING
General Regulation of Shareholders of Publicly Traded Corporations. In most
jurisdictions, any beneficial owner of the Company's Common Stock is subject
on a discretionary basis to being required to file applications
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with gaming regulatory authorities, be investigated and found suitable or
qualified as such. In addition, shareholders whose holdings of Common Stock
exceed certain designated percentages are subject to certain reporting and
qualification requirements imposed by state and federal gaming regulators and,
any shareholder, if found to be unsuitable, may be required to immediately
dispose of its holdings of Common Stock. See "--Nevada Regulatory Matters,"
"--Missouri Regulatory Matters," "--Colorado Regulatory Matters," "--New
Jersey Regulatory Matters," and "--Mississippi Regulatory Matters."
Nevada Regulatory Matters. The Company must obtain a registration, license,
approval or finding of suitability, and equipment approval in all
jurisdictions before it can offer gaming devices for sale to licensed gaming
operations within those jurisdictions. The licensing process usually involves
the licensing or approval of certain officers, directors, and shareholders of
the corporation, and approval of the specific products that the Company wants
to offer for sale. In many jurisdictions, including the State of Nevada, every
shareholder of a private corporation that manufactures and distributes gaming
devices must complete an application, undergo an extensive background and
financial investigation, and be approved by the Nevada Gaming Commission (the
"Nevada Commission") upon the recommendation of the Nevada State Gaming
Control Board (the "Nevada Board"). Given the number of current shareholders
in SGI and the time and expense associated with receiving these approvals,
this is not a viable licensing structure for SGI. In most jurisdictions,
including Nevada, certain shareholders of publicly-traded corporations that
have been registered with or licensed by the applicable gaming authorities are
not necessarily required to file applications, undergo investigation, or
receive approvals to be shareholders. SGI will apply in all gaming
jurisdictions as a publicly-traded corporation and will seek approval to
become registered or licensed as a publicly-traded corporation in all gaming
jurisdictions. In order to facilitate the corporate licensing process, SGI has
filed the appropriate documentation with the Nevada Board to become a
"publicly-traded corporation" as defined in the Nevada Gaming Control Act.
There can be no assurance that SGI will be successful in becoming a "publicly-
traded corporation." SGI has chosen the State of Nevada as the first
jurisdiction in which to seek registration as a publicly-traded corporation
and licensure of Silicon Gaming Nevada, Inc. ("SGI-Nevada"), a wholly-owned
subsidiary of SGI formed in February 1996 as a manufacturer, distributor and
operator of a slot machine route.
The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada, the manufacture and distribution
of associated equipment for use in Nevada, and the ownership and operation of
slot machine routes in Nevada are subject to: (i) the Nevada Gaming Control
Act and the regulations promulgated thereunder (collectively, "Nevada Act");
and (ii) various local ordinances and regulations. Such activities are subject
to the licensing and regulatory control of the Nevada Commission, the Nevada
Board, and various local, city and county regulatory agencies (collectively
referred to as the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of pubic policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from have a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming
Authorities; (v) the prevention of cheating and fraudulent practices; and (vi)
to provide a source of state and local revenues through taxation and licensing
fees. Change in such laws, regulations and procedures could have an adverse
effect on the Company's operations.
The Company will be required to be registered by the Nevada Commission as a
publicly-traded corporation (a "Registered Corporation") and SGI-Nevada must
be licensed as a manufacturer, distributor and operator of a slot machine
route. Such gaming licenses require the periodic payment of fees and taxes and
are not transferable.
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As a Registered Corporation, the Company will be required periodically to
submit detailed financial and operating reports to the Nevada Commission and
furnish any other information which the Nevada Commission may require. No
person may become a shareholder of, or receive any profit from SGI-Nevada
without first obtaining licenses and approvals from the Nevada Gaming
Authority. The Company and SGI-Nevada have filed applications with the Nevada
Gaming Authorities to obtain the various registrations, approvals, permits and
licenses in order to engage in manufacturing, distribution and slot route
activities in Nevada.
All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada Commission before distribution or exposure for play. The approval
process for gaming devices includes rigorous testing by the Nevada Board, a
field trial and a determination as to whether the gaming device meets strict
technical standards that are set forth in the regulations of the Nevada
Commission. Associated equipment must be administratively approved by the
Chairman of the Nevada Board before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered
Corporation or its subsidiaries in order to determine whether such individual
is suitable or should be licensed as a business associate of a gaming
licensee. Officers, directors and certain key employees of the Company and
SGI-Nevada are required to file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability
is comparable to licensing, and both require submission of detailed personal
and financial information followed by a thorough investigation. The applicant
for licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application
for a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position. SGI has submitted
the applications of its Chief Executive Officer, Chief Financial Officer and
required directors and shareholders to the Nevada Gaming Authorities. SGI-
Nevada has submitted the application of its sole officer and director to the
Nevada Gaming Authorities.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with SGI or SGI-Nevada, the Company would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Company or SGI-Nevada to terminate the employment of any person who
refuses to file appropriate applications. Determination of suitability or of
questions pertaining to licensing are not subject to judicial review in
Nevada.
The Company and SGI-Nevada will be required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by the Company
will be required to be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company or
SGI-Nevada, the registration and gaming licenses it holds could be limited,
conditioned, suspended or revoked, subject to compliance with certain
statutory and regulatory procedures. In addition, the Company, SGI-Nevada and
the persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Limitation, conditioning or suspension of any gaming license could (and
revocation of any gaming license would) materially adversely affect the
Company's gaming operations.
Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability determined as a
beneficial holder of the Registered Corporation's voting securities if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities
in conducting any such investigation.
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The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply
to the Nevada Commission for a finding of suitability within thirty days after
the Chairman of the Nevada Board mails the written notice requiring such
filing. Under certain circumstances, an "institutional investor," as defined
in the Nevada Act, which acquires more than 10% but not more than 15%, of the
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor
holds the voting securities for investment purposes only. An institutional
investor shall not be deemed to hold voting securities for investment purposes
unless the voting securities were acquired and are held in the ordinary course
of business as an institutional investor and not for the purpose of causing,
directly or indirectly, the election of a majority of the members of the board
of directors of the Registered Corporation, any change in the Registered
Corporation's corporate charter, bylaws, management, policies or operations of
the Registered Corporation, or any of its gaming affiliates, or any other
action which the Nevada Commission finds to be inconsistent with holding the
Registered Corporation's voting securities for investment purposes only.
Activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include: (i) voting on all matters
voted on by shareholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust,
it must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any shareholder found unsuitable and
who holds, directly or indirectly, any beneficial ownership of the common
stock beyond such period of time as may be prescribed by the Nevada Commission
may be guilty of a criminal offense. The Company will be subject to
disciplinary action if, after it receives notice that a person is unsuitable
to be a shareholder or to have any other relationship with the Company or SGI-
Nevada, the Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities including, if necessary,
the immediate purchase of said voting securities for cash at fair market
value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the
Nevada Commission, it: (i) pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii) recognizes any voting right by
such unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form; or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company will be required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for
finding the record holder unsuitable. The Company will also be required to
render maximum assistance in determining the identity of the beneficial owner.
The Nevada Commission has the power to require the stock certificates of the
Company to bear a legend indicating that the securities are subject to the
Nevada Act. However, it is unknown whether the Nevada Commission will impose
such a requirement on the Company.
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After becoming a Registered Corporation, the Company may not make a public
offering of its securities, such as an IPO, without the prior approval of the
Nevada Commission if the securities or proceeds therefrom are intended to be
used to construct, acquire or finance gaming facilities in Nevada, or to
retire or extend obligations incurred for such purposes. Approval of a public
offering, if given, does not constitute a finding, recommendation or approval
by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of
the prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting
agreements, or any act or conduct by a person whereby he obtains control, may
not occur without the prior approval of the Nevada Commission. Entities
seeking to acquire control of a Registered Corporation must satisfy the Nevada
Board and the Nevada Commission in a variety of stringent standards prior to
assuming control of such Registered Corporation. The Nevada Commission may
also require controlling shareholders, officers, directors and other persons
having a material relationship or involvement with the entity proposing to
acquire control, to be investigated and licensed as part of the approval
process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a
regulatory scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada's
policy to: (i) assure the financial stability of corporate gaming licensees
and their affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form; and (iii) promote a neutral environment for
the orderly governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before the Registered
Corporation can make exceptional repurchases of voting securities above the
current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of
a plan of recapitalization proposed by the Registered Corporation's Board of
Directors in response to a tender offer made directly to the Registered
Corporation's shareholders for the purposes of acquiring control of the
Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable
either monthly, quarterly or annually and are based upon either: (i) a
percentage of the gross revenues received; or (ii) the number of gaming
devices operated. Annual fees are also payable to the State of Nevada for
renewal of licenses as a manufacturer, distributor and operator of a slot
machine route.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside
of Nevada, is required to deposit with the Nevada Board, and thereafter
maintain, a revolving fund in the amount of $10,000 to pay the expenses of
investigation by the Nevada Board of their participation in such foreign
gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Nevada Commission if
they knowingly violate any laws of the foreign jurisdiction pertaining to the
foreign gaming operation, fail to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of Nevada
gaming operations, engage in activities that are harmful to the state of
Nevada or its ability to collect gaming taxes and fees, or employ a person in
the foreign operation who has been denied a license or finding of suitability
in Nevada on the ground of personal unsuitability.
In the future, SGI intends to seek the necessary registrations, licenses,
approvals, and findings of suitability for the Company, its products and its
personnel in other jurisdictions throughout the world. However, there can be
no assurances that such registrations, licenses, approvals or findings of
suitability will be obtained. Many other
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jurisdictions in which the Company wishes to do business require various
licenses, permits, and approvals in connection with the manufacture and/or
distribution of gaming devices, typically involving restrictions similar in
most respects to those of Nevada.
Missouri Regulatory Matters. Gaming was originally authorized in the state
of Missouri in November 1992. On April 29, 1993, new legislation (the
"Missouri Act") was enacted which replaced the 1992 legislation. In January
1994 the Missouri Supreme Court handed down a decision which held that the
operation of certain games of chance such as traditional slot machines was
prohibited by the constitution of the state of Missouri. On November 8, 1994,
the people of Missouri voted in favor of an amendment to the Missouri
constitution to allow slot machine gaming in the state. The Missouri Act
provides for the licensing and regulation of excursion gambling boat
operations on the Mississippi and Missouri Rivers in the state of Missouri and
the licensing and regulation of persons who distribute gaming equipment and
supplies to gaming licensees. An excursion gambling boat is a boat, ferry or
other floating facility on which gaming is allowed. The Missouri Act limits
the loss per individual on each excursion to $500, but does not otherwise
limit the amount which may be wagered on any bet or the amount of space in the
vessel which may be utilized for gaming.
The Missouri Act is to be implemented and enforced by a five-member Missouri
Commission. The Missouri Commission is empowered to issue such number of
riverboat gaming licenses as it determines to be appropriate. A gaming license
cannot be granted to any gaming operator unless the voters in such operator's
"home dock" city or county have authorized gaming activities on gaming
riverboats.
On September 1, 1993, the Missouri Commission adopted rules and regulations
(the "Missouri Regulations") governing the licensing, operation and
administration of riverboat gaming in the state of Missouri and the form of
application for such licensure. The Missouri Regulations generally provide for
four types of licenses--a Class A owner's license; a Class B operator's
license; a supplier's license; and an occupational license. The Company and
its subsidiary, Silicon Gaming-Missouri, Inc. ("SGI-Missouri") currently are
preparing an application for a supplier's license. There can be no assurance
that the Company or SGI-Missouri will be licensed. In addition, the Missouri
Regulations remain subject to amendment and interpretation, and may further
limit or otherwise adversely affect the Company and its Missouri gaming
operations.
Directors and certain officers and key persons of the Company and SGI-
Missouri must file personal disclosure forms with the gaming license
application and must be found suitable by the Missouri Commission. Further,
the Missouri Regulations require that all employees of SGI-Missouri who are
involved in gaming operations and who are employed on the licensed premises
must file applications for and receive Missouri gaming occupational licenses.
The Missouri regulations require disclosure by the Company and SGI-Missouri of
any person or entity holding any direct or indirect ownership interest in SGI-
Missouri. SGI-Missouri is also required to disclose the names of the holders
of all of the Company's and SGI-Missouri's debt including a description of the
nature and terms of such debt. The Missouri Commission may, in its sole
discretion, request additional information with respect to such holders.
Missouri suppliers' gaming licenses must be renewed annually for a fee of
$5,000 or such greater amount as may be determined by the Commission.
Under Missouri law, gaming licenses are not transferable, and under the
Missouri Regulations the transfer of (i) any ownership interest in a privately
held business entity or (ii) a 5% or greater interest in a publicly traded
company directly or indirectly holding a Missouri gaming license is prohibited
without the approval of the Missouri Commission. Further, without the prior
approval of the Missouri Commission, the Missouri Regulations prohibit
withdrawals of capital, loans, advances or distribution of any assets in
excess of 5% of accumulated earnings by a license holder to anyone with an
ownership interest in the license holder.
The Missouri Regulations specifically provide that any action of the
Missouri Commission shall not indicate or suggest that the Missouri Commission
has considered or passed in any way on the marketability of the applicant or
licensee's securities, or on any other matter, other than the applicant or
licensee's suitability for licensure under Missouri law. A Missouri gaming
license holder can be disciplined in Missouri for gaming related acts
occurring in another jurisdiction which results in disciplinary action in the
other jurisdiction.
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The Missouri Commission has broad powers to require additional disclosure by
an applicant during the processing of a gaming application, to deny gaming
licensure and to administratively fine or suspend or revoke a gaming license
for failure to comply with or for violation of the Missouri Act or Missouri
Regulations.
Colorado Regulatory Matters. The State of Colorado created the Division of
Gaming (the "Division") within the Department of Revenue to license,
implement, regulate and supervise the conduct of limited gaming. The Director
of the Division, under the supervision of a five-member Colorado Commission,
has been granted broad power to ensure compliance with the Colorado
Regulations. The Director may inspect, without notice, impound or remove any
gaming device. He may examine and copy any licensee's records, may investigate
the background and conduct of licensees and their employees, and may bring
disciplinary actions against licensees and their employees. He also may
conduct detailed background investigations of persons who loan money to the
Company.
The Colorado Commission is empowered to issue five types of gaming and
gaming-related licenses. The failure or inability of the Company, the Colorado
subsidiary, or others associated with the Company or the Colorado subsidiary
to obtain or maintain necessary gaming licenses will have a material adverse
affect on the operations of the Company. All persons employed by the Company
and the Colorado subsidiary and involved, directly or indirectly, in gaming
operations in Colorado also are required to obtain a Colorado gaming license.
All licenses must be renewed annually.
In addition, pursuant to the Colorado Regulations, no manufacturer or
distributor of slot machines may have an interest in any casino operator,
allow any of its officers to have such an interest, employ any person if such
person is employed by a casino operator, or allow any casino operator or
person with a substantial interest therein to have an interest in a
manufacturer's or distributor's business. The Commission has ruled that a
person does not have a "substantial interest" if it directly or indirectly has
less than a five percent (5%) interest of such voting securities of a
licensee. Some Division Staff informally have interpreted the Regulations to
prohibit a casino operator from having any interest in a slot machine
manufacturer or distributor.
Under the Colorado Regulations, any person or entity having any direct or
indirect interest in a gaming licensee or an applicant for a gaming license,
including, but not limited to, the Company and shareholders of the Company,
may be required to supply the Colorado Commission with substantial
information, including, but not limited to, background information, source of
funding information, a sworn statement that such person or entity is not
holding his interest for any other party, and fingerprints. Such information,
investigation and licensing as an "associated person" automatically will be
required of all persons (other than certain institutional investors discussed
below) which directly or indirectly own ten percent (10%) or more of a direct
or indirect legal, beneficial or voting interest in the Colorado subsidiary,
through their ownership in the Company. Such persons must report their
interest and file appropriate applications within 45 days after acquiring such
interest. Persons directly or indirectly having a five percent (5%) or more
interest (but less than 10%) in the Colorado Subsidiary, through their
ownership in the Company, must report their interest to the Colorado
Commission within ten (10) days after acquiring such interest and may be
required to provide additional information and to be found suitable. If
certain institutional investors provide certain information to the Colorado
Commission, such investors, at the Colorado Commission's discretion, may be
permitted to own up to 14.99% of the Colorado Subsidiary, through their
ownership in the Company, before being required to found suitable. All
licensing and investigation fees will have to be paid for by the person in
question. The associated person investigation fee currently is $48.00 per
hour.
The Colorado Commission also has the right to request information from any
person directly or indirectly interested in, or employed by, a licensee, and
to investigate the moral character, honesty, integrity, prior activities,
criminal record, reputation, habits and associations of (i) all persons
licensed pursuant to the Colorado Limited Gaming Act, (ii) all officers,
directors and shareholders of a licensed privately held corporation, (iii) all
officers, directors and shareholders holding either a five percent (5%) or
greater interest or a controlling interest in a licensed publicly traded
corporation, (iv) all general partners and all limited partners of a licensed
partnership, (v) all persons which have a relationship similar to that of an
officer, director or shareholder of a
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corporation (such as members and managers of a limited liability company),
(vi) all persons supplying financing or loaning money to any licensee
connected with the establishment or operation of limited gaming, and (vii) all
persons having a contract, lease or ongoing financial or business arrangement
with any licensee, where such contract, lease or arrangement relates to
limited gaming operations, equipment, devices or premises.
In addition, under the Colorado Regulations, every person who is a party to
a "gaming contract" with an applicant for a license, or with a licensee, upon
the request of the Colorado Commission or the Director, promptly must provide
to the Colorado Commission or Director all information which may be requested
concerning financial history, financial holdings, real and personal property
ownership, interests in other companies, criminal history, personal history
and associations, character, reputation in the community, and all other
information which might be relevant to a determination whether a person would
be suitable to be licensed by the Colorado Commission. Failure to provide all
information requested constitutes sufficient grounds for the Director or the
Colorado Commission to require a licensee or applicant to terminate its
"gaming contract" (as defined below) with any person who failed to provide the
information requested. In addition, the Director or the Colorado Commission
may require changes in "gaming contracts" before an application is approved or
participation in the contract is allowed. A "gaming contract" is defined as an
agreement in which a person does business with or on the premises of a
licensed entity.
An application for licensure or suitability may be denied for any cause
deemed reasonably by the Colorado Commission or the Director, as appropriate.
Specifically, the Colorado Commission and the Director must deny a license to
any applicant who (i) fails to prove by clear and convincing evidence that the
applicant is qualified, (ii) fails to provide information and documentation
requested; (iii) fails to reveal any fact material to qualification, or
supplies information which is untrue or misleading as to a material fact
pertaining to qualification; (iv) has been, or has any director, officer,
general partner, shareholder, limited partner or other person who has a
financial or equity interest in the applicant who has been, convicted of
certain crimes, including the service of a sentence upon conviction of a
felony in a correctional facility, city or county jail, or community
correctional facility or under the state board of parole or any probation
department within ten years prior to the date of the application, gambling-
related offenses, theft by deception or crimes involving fraud or
misrepresentation, is under current prosecution for such crimes (during the
pendency of which license determination may be deferred), is a career offender
or a member or associate of a career offender cartel, or is a professional
gambler; or (v) has refused to cooperate with any state or federal body
investigating organized crime, official corruption or gaming offenses.
If the Colorado Commission determines that a person or entity is unsuitable
to own interests in the Company, then the Company or the Colorado Subsidiary
may be sanctioned, which may include the loss by the Company or the Colorado
Subsidiary of their respective approvals and licenses.
The Colorado Commission does not need to approve in advance a public
offering of securities, but rather requires a filing of notice and additional
documents with regard to such public offering prior to such public offering.
Under the regulations, the Colorado Commission may, in its discretion, require
additional information and prior approval of such public offering.
In addition, the Colorado Regulations prohibit a licensee or affiliated
company thereof, such as the Company, from paying dividends, interest or other
remuneration to any unsuitable person, or recognizing the exercise of any
voting rights by any unsuitable person. Further, the Company may repurchase
the shares of anyone found unsuitable at the lesser of the cash equivalent to
the original investment in the Company or the current market price. Further,
the regulations require anyone with a material involvement with a licensee,
including a director or officer of a holding company, such as the Company, to
file for a finding of suitability if required by the Colorado Commission.
In addition to its authority to deny an application for a license or
suitability, the Colorado Commission has jurisdiction to disapprove a change
in corporate position of a licensee and may have such authority with respect
to any entity which is required to be found suitable by the Colorado
Commission. The Colorado Commission
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has the power to require the Company and the Colorado Subsidiary to suspend or
dismiss managers, officers, directors and other key employees or sever
relationships with other persons who refuse to file appropriate applications
or whom the authorities find unsuitable to act in such capacities, and may
have such power with respect to any entity which is required to be found
suitable.
A person or entity may not sell, lease, purchase, convey or acquire a
controlling interest in the Company without the prior approval of the Colorado
Commission. The Company may not sell any interest in the Colorado Subsidiary
without the prior approval of the Colorado Commission.
Limited gaming facilities in Colorado must not exceed certain gaming square
footage limits as a total of each floor and the full building. Casinos in
Colorado may operate only between 8:00 a.m. and 2:00 a.m., and may permit only
individuals 21 years or older to gamble in the casino. The law permits slot
machines, blackjack and poker, with a maximum single bet of $5.00. Casinos may
not provide credit to its gaming patrons.
The Colorado Constitution permits a gaming tax of up to 40% on adjusted
gross gaming proceeds. The Colorado Commission has set a gaming tax rate of 2%
on adjusted gross gaming proceeds of up to and including $2 million, 8% over
$2 million and including $4 million, 15% over $4 million up to and including
$5 million and 18% on adjusted gross gaming proceeds in excess of $5 million.
The Colorado Commission also has imposed an annual device fee of $75 per
gaming device. The Colorado Commission may revise the gaming tax rate and
device fee from time to time. Central City, Black Hawk and Cripple Creek each
have imposed annual device fees of approximately $1,000 per gaming device and
may revise the same from time to time.
Colorado has certain unique regulatory laws which, if adversely interpreted
or not modified, may limit or adversely affect the ability of the Company to
enter in, or compete within, the Colorado market. First, as noted, gaming in
Colorado constitutionally is limited to slot machines, blackjack and poker.
Although no manufacturer or distributor has attempted to distribute the
Company's type of interactive game, it should be included within the
definition of "slot machine." In preliminary discussions, Division personnel
have stated that the device likely is a "slot machine," although neither the
Division nor the Commission have formally ruled on the issue and will not do
so until the game is submitted to the Division for approval.
Second, Colorado constitutionally limits the maximum single bet to $5.00.
Colorado statutes define a bet to be an amount placed as a wager in a game of
chance. If the Company's product permits multiple rounds of betting at $5.00
per round, it would be unclear whether Colorado would permit such betting. If
Colorado does not permit multiple round bets in excess of $5.00, then the
Company would need to adjust its machines to limit the total bets to $5.00,
including all rounds.
Third, Commission Regulations define the requirements of slot machines,
including limitations on the ability to alter the slot machine's program and
the internal requirements of the slot machine itself. The Company's proposed
machines do not comply with existing Regulations. Although the Company intends
to seek a change in the Commission's Regulations, there can be no assurance
that such changes will be made. If the Regulations are not changed, then the
Company will need to modify its machines to conform to Colorado requirements.
Even as so modified, the Company's machines must be approved by the Division
as meeting existing Regulations and there is no assurance that the Company
will receive such approval or will receive such approval in a timely basis.
New Jersey Regulatory Matters. Casino gaming in New Jersey is regulated by
the New Jersey Casino Control Act, N.J.S.A. 5:12-1 et seq., and regulations
promulgated thereunder (the "NJCCA"). The NJCCA created the New Jersey Casino
Control Commission ("NJCCC"), which is authorized to decide all license
applications and other matters and to promulgate regulations, and created the
New Jersey Division of Gaming Enforcement (the "NJDGE"), which is authorized
to investigate all license applications, make recommendations to the NJCCC,
and prosecute violations of the NJCCA. Under the NJCCA, any enterprise
providing goods or services to a casino must register with or be licensed by
the NJCCC.
Business enterprises providing goods or services directly related to casino
gaming or simulcast wagering must be licensed as a gaming related Casino
Service Industry ("CSI") prior to conducting business with New
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Jersey casino licensees or must have filed a complete application for CSI
licensure with the NJCCC and received the permission of the NJCCC for each
business transaction.
A CSI license application consists of a Business Entity Disclosure Form for
the applicant and each of its holding companies and Personal History
Disclosure Forms for each individual required to be found qualified. The
application fee consists of a non-refundable deposit of $5,000 and an
obligation to pay an additional $5,000 if the processing of the application
requires more than 1,000 but less than 2,000 hours and a further $5,000 if the
processing of the application exceeds 2,000 hours. The same fee structure
applies to any renewal application.
In connection with a license application, the NJDGE conducts an
investigation of the Company to determine its suitability for licensure. In
order for the requisite CSI license to be issued by the NJCCC to the Company
and maintained, the Company's officers, directors and key employees and all
beneficial owners of more than five percent (5%) of the Company's Common Stock
must be found qualified by the NJCCC. In order to be found qualified, the
Company, its officers, directors, key employees and five percent (5%)
shareholders must demonstrate by clear and convincing evidence their good
character, honesty and integrity, their financial stability, integrity and
responsibility and their business ability. Any other stock holder or other
person associated with the Company whom the NJCCC deems appropriate, in its
discretion, is also required to be qualified. If a person is required to and
fails to submit to qualification or submits to qualification and is found
disqualified by the NJCCC, the NJCCC may prohibit casinos in New Jersey from
doing business with the Company.
However, "institutional investors" (as defined in the NJCCC) may be granted
a waiver of the requirement to be found qualified by the NJCCC. An
institutional investor includes any retirement fund administered by a public
agency for the exclusive benefit of federal, state or local public employees,
investment company registered under the Investment Company Act of 1940,
collective investment trust organized by banks under Part Nine of the Rules of
the Comptroller of the Currency, closed end investment trust, chartered or
licensed life insurance company or property and casualty insurance company,
banking and other chartered or licensed lending institution, and investment
advisor registered under The Investment Advisors Act of 1940. In the
discretion of the NJCCC, a waiver of qualification may be granted to such
institutional investors provided the securities are owned for investment
purposes only and the institutional investor certifies that it has no
intention of influencing or affecting the affairs of the issuer or its holding
companies.
After 30 days following the filing of a CSI license application with the
NJCCC, the Company may seek permission from the NJCCC to conduct certain
business transactions with a New Jersey casino. Such "transactional waivers"
will only be granted in the absence of an objection by the NJDGE. Such
approvals are granted for a maximum term of six (6) months subject to renewal.
A CSI license is issued for an initial period of two (2) years and is
thereafter renewable for four (4) year periods. There is no guarantee that the
Company will be granted an initial license or that, following the issuance of
an initial CSI license or any renewal thereof, the Company will continue to be
granted renewals of the license. Additionally, upon application of the NJDGE,
the NJCCC may at any time review any license issued by it and determine to
suspend, revoke or place conditions on such license.
In addition to the required licensure from the NJCCC, the gaming equipment
manufactured, distributed or sold by the Company to New Jersey casinos is
subject to a technical examination by the NJDGE and approval by the NJCCC for,
at a minimum, quality, design, integrity, fairness, honesty and suitability.
The approval process includes the submission of a model of the machine to the
NJDGE for testing, examination and analysis and for comparison with
documentation of the schematics, block diagram, circuit analysis and written
explanation of the method of operation, odds determination and all other
pertinent information. The model remains in the custody of the NJDGE unless
otherwise directed by the NJCCC. All costs of such testing, examination and
analysis are borne by the Company. As part of this approval process, the NJCCC
may require that the manufacturer of any component of the gaming equipment
which the NJCCC, in its discretion, determines is essential to the gaming
operation of the device submit to licensing. Such components would include the
computer control circuitry which causes or allows the device to operate as a
gambling device. The failure or
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refusal of such a manufacturer to submit to licensing or the denial of a
license by the NJCCC to such manufacturer would result in the inability of the
Company to distribute and market that gambling device to New Jersey casinos.
Prior to a decision by the NJCCC to approve a particular model of machine, it
may require up to 60 days trial period to test the machine in a licensed
casino. During the trial period, the manufacturer or distributor of the
machine shall not be entitled to receive revenue of any kind whatsoever. Once
a model is approved by the NJCCC, all machines of that model placed in
operation in licensed casinos shall operate in conformity with the model
tested by the NJDGE. Any changes in the design, function or operation of the
machine are subject to prior approval by the NJCCC in consultation with the
NJDGE.
Mississippi Regulatory Matters. The manufacture, sale and distribution of
gaming devices for use or play in Mississippi are subject to the Mississippi
Gaming Control Act and the regulations promulgated thereunder (collectively,
the "Mississippi Act"). Such activities are subject to the licensing and
regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission") and the Mississippi State Tax Commission (collectively referred
to as the "Mississippi Gaming Authorities"). Although not identical, the
Mississippi Act is similar to the Nevada Gaming Control Act and regulations
promulgated thereunder.
The Company intends to apply for registration by the Mississippi Commission
as a publicly traded corporation (a "Registered Corporation") and holding
company of Silicon Gaming-Mississippi, Inc. (collectively referred to as the
"Mississippi Subsidiary"). If SGI becomes a Registered Corporation or the
Mississippi Subsidiary becomes licensed, each is required periodically to
submit detailed financial and operating reports to the Mississippi Commission
and furnish any other information which the Mississippi Commission may
require. The Company and the Mississippi Subsidiary have applied to the Gaming
Authorities for the various registrations, approvals, permits and licenses in
order to engage in manufacturing, distribution and gaming activities as
presently conducted in Mississippi. Such licenses, registrations and approvals
are not transferable, are initially issued for a two-year period and must be
renewed periodically thereafter.
Similar to Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, the Company or the Mississippi Subsidiary, including record
or beneficial holders of any of the voting securities of the Company, holders
of debt obligations, and officers, directors and employees of the Company and
the Mississippi Subsidiary. If registered and licensed, the Company and the
Mississippi Subsidiary are required to maintain a current stock ledger in
Mississippi which may be examined by the Mississippi Commission at any time.
The Company believes that all required findings of suitability currently
required have been applied for or obtained. Any applicant for a finding of
suitability must pay all investigative fees and costs of the Mississippi
Commission in connection with such an investigation.
The Mississippi Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission and such person may be required to
be found suitable. The Mississippi Act requires that beneficial owners of more
than 10% of a Registered Corporation's voting securities apply to the
Mississippi Commission for a finding of suitability. the Mississippi
Commission has generally exercised its discretion to require a finding of
suitability of any beneficial owner of more than 5% of a Registered
Corporation's common stock. Under certain circumstances, an "institutional
investor," as defined by Mississippi Commission policy, which acquires more
than 5%, but not more than 10%, of the Registered Corporation's voting
securities may apply to the Mississippi Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only.
The Company may not make a public offering of its securities without the
approval of the Mississippi Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for such purposes.
Once licensed, if it were determined that the Mississippi Act was violated
by the Mississippi Subsidiary, the licenses it holds could be limited,
condition, suspended or revoked, subject to compliance with certain statutory
and regulatory procedures, which action, if taken, could materially adversely
affect the Company's manufacturing and distribution.
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Federal Regulation. The Federal Gambling Devices Act of 1962 (the "Federal
Act") makes it unlawful, in general, for a person to manufacture, deliver, or
receive gaming machines, gaming machine type devices and components across
state lines or to operate gaming machines unless that person has first
registered with the Attorney General of the United States. The Company is
required to register and renew its registration annually. The Company has
complied with such registration requirements. In addition, various record
keeping equipment identification requirements are imposed by the Federal Act.
Violation of the Federal Act may result in seizure and forfeiture of the
equipment, as well as other penalties.
Native American Gaming. Gaming on Native American lands, including the terms
and conditions under which gaming equipment can be sold or leased to Native
American tribes, is or may be subject to regulation under the laws of the
tribes, the laws of the host state, the Indian Gaming Regulatory Act of 1988
("IGRA"), which is administered by the National Indian Gaming Commission (the
"NIGC") and the Secretary of the U.S. Department of the Interior (the
"Secretary"), and also may be subject to the provisions of certain statutes
relating to contracts with Native American tribes, which are administered by
the Secretary. As a precondition to gaming involving gaming machines, IGRA
requires that the tribe and the state have entered into a written agreement (a
"tribal-state company") that specifically authorizes such gaming, and that has
been approved by the Secretary, with notice of such approval published in the
Federal Register. Tribal-state compacts vary from state to state. Many require
that equipment suppliers meet ongoing registration and licensing requirements
of the state and/or the tribe and some impose background check requirements on
the officers, directors, and shareholders of gaming equipment suppliers. Under
IGRA, tribes are required to regulate all commercial gaming under ordinances
approved by the NIGC. Such ordinances may impose standards and technical
requirements on gaming hardware and software, and may impose registration,
licensing and background check requirements on gaming equipment suppliers and
their officers, directors, and shareholders.
Application of Future or Additional Regulatory Requirements. In the future,
the Company intends to seek the necessary registrations, licenses, approvals
and findings of suitability for the Company, its products and its personnel in
other jurisdictions throughout the world where significant sales are
anticipated to be made. However, there can be no assurance that such
registrations, licenses, approvals or findings of suitability will be obtained
and will not be revoked, suspended or conditioned or that the Company will be
able to obtain the necessary approvals for its future products as they are
developed in a timely manner, or at all. If a registration, license, approval
or finding of suitability is required by a regulatory authority and the
Company fails to seek or does not receive the necessary registration, license,
approval or finding of suitability, the Company may be prohibited from selling
its products for use in the respective jurisdiction or may be required to sell
its products through other licensed entities at a reduced profit to the
Company.
CERTAIN CONSIDERATIONS
Single Product; Risk of Technical Errors; Uncertain Market Acceptance. The
Company's success will depend on the success of a single product. The
Company's gaming platform is in the final stages of development and has not
been licensed for manufacture, distribution or sale in any jurisdiction, sold
to any gaming operator or installed in any casino or other gaming
establishment. The Company's gaming platform has not been beta tested because
such testing requires prior regulatory approval of the platform in the test
jurisdiction. Therefore, there can be no assurance that a substantial
technical difficulty with, or an undetected error in, the Company's software
or hardware will not arise, possibly resulting in unanticipated costs,
production delays or delays in product licensing.
To achieve commercial success, the Company's gaming platform must be
accepted both by casino operators and by gaming patrons. Because acceptance of
the platform by casino operators will ultimately depend on win per machine,
the Company believes that its ultimate success will depend on player
acceptance. The Company has performed only limited market studies to support
its belief that its platform design will be perceived by slot players as an
improvement in slot machine design, and there can be no assurance that its
gaming platform will be accepted by casino patrons. Player preferences are
highly subjective, vary substantially among geographic and demographic markets
and are subject to unpredictable change. Because the Company's gaming platform
16
<PAGE>
contains features not found on traditional slot machines, it may not appeal to
the player for whom familiarity and predictability are an important
consideration. As a new and relatively small entrant in a market dominated by
larger companies, the Company believes that its success will require that its
gaming platform demonstrate superior, as opposed to merely comparable, win per
machine when compared to traditional slot machines and other gaming platforms
offered by more established competitors. Although several casinos in Las Vegas
have agreed to install and evaluate the Company's gaming platform, any
purchases of gaming platforms by such casinos, or others that may conduct
similar evaluations in the future, will be subject to the superior performance
of the platform on the casino floor. If the Company's gaming platform does not
perform well in its initial evaluations, the Company's business, financial
condition and results of operation would be materially and adversely affected,
and investors would be exposed to the loss of their entire investment.
Regulatory Approval. The Company will be required to obtain the necessary
licenses, approvals, findings of suitability, and product approvals in all
jurisdictions in which it intends to distribute its products. The licensing
and approval processes can involve extensive investigation into the Company
and its officers, directors, employees, principal shareholders, and product,
and can require significant expenditures of time and resources by the Company.
The Company has applied for the requisite corporate and individual approvals
in Nevada, Mississippi and Colorado and intends to file for the requisite
approvals in Missouri and New Jersey and in other jurisdictions wherein its
products can be legally sold. The Company has not yet submitted its product
for approval in any jurisdiction. The Company has not yet obtained licensing
approval in any jurisdiction with respect to any of its proposed operations or
products and there can be no assurance that the Company will receive such
approvals. The regulations relating to company and product licensing are
subject to change, and other jurisdictions, including the federal government,
may elect to regulate or tax gaming activities. The Company cannot predict the
nature of any such changes or their impact on the Company.
The Company intends to store its game software and Machine Management System
on a writeable internal hard disk drive that will enhance data storage and
facilitate upgrades to game software. Current technical standards in Nevada
prohibit the storage of software affecting game outcome in a medium that can
be altered through the circuitry or programming of the gaming device.
Accordingly, implementation of the Company's current platform design will
require a modification to the applicable technical standard or any similar
regulations of any other jurisdictions where the Company intends to sell its
machine. Although the Company believes that the Nevada gaming authorities may
modify the technical standard in the near future in a manner that will permit
the implementation of the Company's current design, there can be no assurance
that such modification will occur in the near future or at all, or that a
similar modification will be made to the regulations of any other
jurisdiction. Moreover, any such modification will be subject to
administrative procedures in Nevada that allow for comment by certain parties
currently licensed under Nevada gaming regulations. Thus, certain existing or
potential competitors of the Company could object to modifications to the
technical standard that may be necessary to permit the Company to implement
its current design. There can be no assurance that such objection will not
affect the outcome of this administrative procedure in a manner that would
prevent the Company's implementation of its current platform design. The
Company believes that it can alter its product to comply with existing
regulations by disabling the writeability feature of its hard drive in a
manner that could not be changed without violating the integrity of the
machine. Although this alternative would limit the machine's ability to store
substantial quantities of game history data during play and the ease of
software upgrades, the Company does not believe that this alternative would
affect actual play characteristics of the Company's games or the operation of
the Machine Management System. Notwithstanding the foregoing, there can be no
assurance that the existing technical standard in Nevada would be interpreted
in a manner that would permit the Company to comply by making such
modification.
Any beneficial holder of the Company's Common Stock may be subject to
investigation by any gaming authority in any jurisdiction in which the Company
does business if such authorities have reason to believe that such ownership
may be inconsistent with the gaming policies of that jurisdiction. Persons who
acquire beneficial ownership of more than certain designated percentages of
the Common Stock may be subject to certain reporting and qualification
procedures. In addition, changes in control of the Company and certain other
corporate
17
<PAGE>
transactions may not be effected without the prior approval of gaming
authorities in other jurisdictions in which the Company plans to do business.
Such provisions could adversely affect the marketability of the Common Stock
or prevent certain corporate transactions, including mergers or other business
combinations. See "Gaming Regulation and Licensing."
Development Stage Company; Expectation of Losses; Negative Cash Flows. The
Company was founded in July 1993 and, as a development stage company, has not
yet generated revenues from the sale of its products. The Company does not
expect to generate revenues in 1996. As of March 31, 1996, the Company had
cumulative net losses since inception of $8.3 million, and the Company expects
to continue to incur substantial losses and negative cash flow at least
through mid-1998. There can be no assurance that the Company will become
profitable or cash flow positive at any time in the future. The likelihood of
the success of the Company must be considered in light of the expenses,
difficulties, complications and delays frequently encountered in connection
with the formation of a new business and the competitive and regulatory
environment in which the Company must operate. In particular, the Company's
operations to date have focused primarily on product development, and the
Company has little or no experience in the areas of manufacturing, sales,
product distribution or customer support. It is not possible to estimate
future operating expenses and revenues based upon historical operating
performance. Operating results will depend, in part, on matters over which the
Company has no control, including, without limitation, general economic
conditions, gaming regulations and taxes, the ability of the Company to obtain
the licenses necessary to conduct its business, competition, the actual number
of orders for its products and the availability of talented personnel.
Competition. The gaming machine industry is characterized by intense
competition, which is based on, among other things, a device's ability to
generate win per machine through product appeal to players, knowledge of
customer requirements such as ease of use, ease of service, support and
training, distribution, name recognition and price. In recent years, the
gaming machine market has been dominated by IGT which, according to industry
sources, captured approximately 70% of the market in 1995. Because of its
extensive market presence, distribution capacity, player acceptance and
financial, technological and other resources, IGT represents formidable
competition. Several other companies, including Bally Gaming International,
Inc., are established in or seeking to enter the gaming machine business.
Companies in historically unrelated industries, such as Sega Enterprises Ltd.
("Sega"), have technological resources that could offer them a competitive
advantage in developing multimedia-based gaming machines. Sega currently
offers gaming machines to a limited number of markets and has announced plans
to apply for manufacturing and distribution licenses in Nevada. In general,
the Company's existing competitors, as well as many potential new competitors,
have significantly greater financial and technical resources than the Company,
as well as more established customer bases and distribution channels, which
may allow them to move rapidly into the Company's market and acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could materially and adversely affect the Company's business, operating
results or financial condition. Furthermore, any success the Company might
have may benefit existing competitors and induce new competitors to enter the
market. There can be no assurance that the Company will be a successful
competitor in the gaming machine industry. See "Competition."
Management of Growth. Execution of the Company's plan of operation will
require significant growth. The Company's current plans for growth will place
a significant strain on the Company's financial, managerial and other
resources. The Company's ability to manage its growth effectively will require
it to continue to improve its operational, financial and management
information systems and to attract, motivate and train key employees. If the
Company's executives are unable to manage growth effectively, the Company's
business, operating results and financial condition would be materially and
adversely affected.
Dependence on Key Personnel. The operations of the Company depend to a great
extent on the management efforts of its officers and other key personnel and
on the ability to attract new key personnel and retain existing key personnel
in the future. Competition is intense for highly skilled product development
employees in particular, and there can be no assurance that the Company will
be successful in attracting and retaining such personnel, or that it can avoid
increased costs in order to do so. In addition, the Company's officers
18
<PAGE>
and key employees are not bound by noncompetition agreements that extend
beyond their employment at the Company, and there can be no assurance that
employees will not leave the Company or compete against the Company. The
Company's failure to attract additional qualified employees or to retain the
services of key personnel could have a material adverse effect on the
Company's operating results and financial condition. The Company currently
maintains a "key-man" life insurance policy in the amount of $3 million on the
life of Andrew S. Pascal, the Company's Executive Vice President--Marketing
and Game Development. See "Item 5. Directors and Executive Officers."
Limited Protection of Intellectual Property Rights; Risk of Litigation. The
Company regards its products as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws and employee and
third-party nondisclosure agreements to protect its proprietary rights.
Defense of intellectual property rights can be difficult and costly, and there
can be no assurance that the Company will be able effectively to protect its
technology from misappropriation by competitors. In addition, the protections
offered by trademark, copyright and trade secret laws would not prevent a
competitor from designing games having appearance and functionality that
closely resembles the Company's games. At present, the Company's principal
proprietary technology consists of its game authentication algorithm, which
inhibits the ability of any person to tamper with the game software resident
in its products, and its random number generator algorithm, which determines
the outcome of each gaming proposition. While the Company believes that these
algorithms are unique at present, the algorithms are not patented, and there
can be no assurance that a competitor of the Company will not succeed in
developing an authentication algorithm or a random number generator algorithm
that performs as well as or better than the Company's. Although the Company
has applied for a U.S. patent with respect to its authentication algorithm,
there can be no assurance that such patent will be issued, or, if issued, that
such patent will not be successfully challenged in subsequent litigation.
As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. The Company
may also become subject to infringement claims, with or without merit, that
are brought by competitors who are motivated by a desire to disrupt the
Company's business. Although the Company is not currently aware of any claim
that it is infringing any intellectual property rights, there can be no
assurance that the Company will not face claims, with or without merit, in the
future. Any such claims or litigation could be costly and could result in a
diversion of management's attention, which could have a material adverse
effect on the Company's business and financial condition. Any settlement of
such claims or adverse determinations in such litigation could also have a
material adverse effect on the Company's business and financial condition.
Rapidly Changing Technology. The Company's products utilize hardware
components that have been developed primarily for the personal computer and
multimedia industries. These industries are characterized by rapid
technological change and product enhancements. The Company's ability to remain
competitive and retain any technological lead may depend in part upon its
ability to continually develop new slot machine games that take full advantage
of the technological possibilities of state-of-the-art hardware. Should any
current or potential competitor of the Company succeed in developing a
competing software-based gaming platform, such competitor could be in a
position to outperform the Company in its ability to exploit developments in
microprocessor, video technology or other multimedia technology. The emergence
of a suite of slot machine games that is superior to the Company's in any
respect could substantially diminish the Company's product sales and thereby
have a material adverse effect on the Company's operating results.
Capital Requirements. The Company believes that the net proceeds of this
offering, combined with cash on hand, will be sufficient to fund its capital
and operating requirements until the Company is capable of generating positive
cash flow from operations. No assurance can be given, however, that the
Company will not be required to seek additional financing to fund its
operations prior to such time. In that event, there can be no assurance that
the Company will be able to obtain such financing, or that, if it is able to
obtain such financing, it will be able to do so on satisfactory terms or on a
timely basis. If additional funds are raised through the issuance of equity,
convertible debt or similar securities, the percentage of ownership of the
Company's shareholders will be reduced, shareholders may experience additional
dilution, and such securities may have rights or preferences
19
<PAGE>
senior to those of the Common Stock. Moreover, if adequate funds were not
available to satisfy the Company's short-term or long-term capital
requirements, the Company would be required to limit its operations
significantly. The Company's capital requirements will depend on many factors,
including, but not limited to, the rate at which the Company can introduce its
products, the market acceptance and competitive position of such products, the
response of competitors to the products and the ability of the Company, its
management and its products to satisfy the licensing requirements in various
jurisdiction. See "Item 2. Financial Information--Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and
Capital Resources."
Limited Manufacturing Experience. In order for the Company to be successful,
its products must be manufactured to meet high quality standards in commercial
quantities at competitive prices. Although the Company has produced small
quantities of prototype devices for testing, design and licensing purposes, it
has never attempted to manufacture its product in commercial quantities. The
transition to commercial manufacturing of the Company's product, either by the
Company or by a contract manufacturer, will involve various risks and
uncertainties including unforeseen costs or assembly difficulties and the
possibility that anticipated efficiencies or economies of scale will fail to
materialize. A failure by the Company to successfully manage this transition
would have a material adverse affect on the Company's business, operating
results or financial condition. See "Manufacturing."
Dependence on Single-Source Suppliers. The Company currently obtains a
number of its system's components from single-source suppliers. There can be
no assurance that the Company would be able to procure, substitute or produce
such components in the event that these single sources were unable to supply
these components. The failure or delay by any supplier to furnish the Company
with any such components would have a material adverse effect on the Company's
business, financial condition and results of operation. See "Product
Development."
Control by Existing Stockholders. The Company's employees, officers and
directors and their affiliates beneficially own or control approximately 50.9%
of the outstanding shares of Common Stock. Each group will have the ability to
exert significant influence over and control the election of the Company's
Board of Directors and determine corporate actions requiring stockholder
approval. See "Item 4. Security Ownership of Certain Beneficial Owners and
Management."
No Dividends. The Company has not paid any cash dividends in the past and
does not expect to do so in the foreseeable future.
20
<PAGE>
ITEM 2.
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE
INCEPTION YEAR NINE MONTHS THREE MONTHS ENDED FROM INCEPTION
(JULY 27, 1993) ENDED ENDED ------------------ (JULY 27, 1993)
THROUGH MARCH 31, DECEMBER 31, JUNE 30, MARCH 31, THROUGH
MARCH 31, 1994 1995 1995(1) 1995 1996 MARCH 31, 1996
--------------- --------- ------------ -------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Expenses:
Research and
development............ $ 79 $ 1,539 $ 3,137 $ 584 $ 1,595 $ 6,350
Selling, general and
administrative......... 61 312 922 168 742 2,037
----- ------- ------- ------ ------- -------
Loss from operations.... (140) (1,851) (4,059) (752) (2,337) (8,387)
Interest income
(expense).............. -- (15) 85 17 1 71
----- ------- ------- ------ ------- -------
Net loss................ $(140) $(1,866) $(3,974) $ (735) $(2,336) $(8,316)
===== ======= ======= ====== ======= =======
Pro forma net loss per
share (unaudited)(2)... $ (0.33) $(0.06) $ (0.18)
======= ====== =======
Shares used in
computation
(unaudited)............ 12,034 11,500 13,204
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------
MARCH 31, MARCH 31, DECEMBER 31, PRO
1994 1995 1995(1) ACTUAL FORMA(3)
--------- --------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents....... $ 36 $ 241 $ 2,399 $ 7,657 $14,866
Working capital
(deficiency).............. (169) (1,253) 2,027 7,154 14,363
Total assets............... 67 486 3,486 9,130 16,339
Long-term debt............. -- -- 272 706 706
Redeemable convertible
preferred stock........... -- 967 8,496 15,996 6,455
Deficit accumulated during
the development stage..... (140) (2,006) (5,980) (8,316) (8,316)
Total shareholders' equity
(deficiency).............. (138) (2,003) (5,946) (8,277) 8,473
</TABLE>
- --------
(1) Effective April 1, 1995, the Company changed its fiscal year end from
March 31 to December 31.
(2) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used in
the computation of pro forma net loss per share.
(3) The pro forma balance sheet data gives effect to the April and May 1996
sales of 1,542,000 shares of Series C Redeemable Preferred Stock, the
subsequent conversion of 1,998,332 shares of Series A and 4,386,141 shares
of Series B Redeemable Preferred Stock on a one-for-one basis into Series
A1 and Series B1 Redeemable Preferred Stock, respectively, and the
conversion upon completion of the Company's proposed initial public
offering of all outstanding shares of Redeemable Preferred Stock, other
than Series A1 and Series B1 Redeemable Preferred Stock, into 5,292,524
shares of Common Stock.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company was incorporated on July 27, 1993 to design, develop,
manufacture, distribute, and market interactive gaming devices that implement
advanced multimedia technologies using state-of-the-art off-the-shelf
components. Since its formation, the Company has been in the development
stage, and its principal activities have consisted of assembling a technical,
marketing and executive staff, developing its gaming platform, raising
capital, and initiating applications for regulatory approvals in Nevada and
other jurisdictions to manufacture, distribute and sell its gaming devices. To
date, the Company has generated no revenue and has had negative cash flow. On
May 30, 1996, the Company filed a registration statement on Form S-1 with
respect to an initial public offering of its Common Stock in which it is
seeking to raise approximately $35 million.
Effective April 1, 1995, the Company changed its fiscal year end from March
31 to December 31. Accordingly, the period ended December 31, 1995 is a nine-
month period.
The Company expects its first commercial product to be submitted for
licensing approval and approved for shipment in one or more jurisdictions in
late 1996. Subject to such approval, the Company expects to commence
production of commercial products and customer product evaluations in the
fourth quarter of 1996, although the Company does not expect to generate
revenue from such activities in 1996. As is industry practice, gaming devices
are typically installed on a trial basis on casino floors for a period of 30
to 90 days before a sales decision by the customer. In 1997, the Company
intends to transition from the development stage. Future revenue, profits, and
cash flows will depend on market acceptance of the Company's products, the
ability of such products to generate higher revenues for casinos as compared
to competitive products, and the technical performance of the Company's
products. Additionally, among other things, the Company must continue to
attract, retain and motivate qualified personnel and meet all the initial and
ongoing licensing requirements in key jurisdictions. See "Item 1. Business--
Certain Considerations."
RESULTS OF OPERATIONS
The Company is in the development stage and has not generated any revenue to
date. As of March 31, 1996, the Company had net losses since inception of
$8,316,000. To date, the Company has focused its resources on product
development, including system hardware and software, and game concept
development and software coding. The Company expects to complete development
of the initial version of its gaming device and begin production in the third
quarter of 1996. In addition to continuing and increasing expenditures in
research and development, the Company will need to incur significant expenses
and other costs associated with manufacturing. In 1996, units will be
manufactured solely for test and engineering, continued game development,
licensing approval, regulatory field trials and customer evaluations. The
Company does not expect any product sales in 1996 and therefore expects to
generate no revenue in 1996.
Amounts from inception (July 27, 1993) through March 31, 1994, the year
ended March 31, 1995, the nine month period ended December 31, 1995, and the
three month periods ended June 30, 1995 and March 31, 1996 may not be
comparable due to the different duration of the periods and the Company's
change in fiscal year. The Company believes that operating expenses will
increase in the future as the Company continues to develop its product and
emerges from the development stage to begin commercial operations, including
manufacturing, marketing and sales.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses include payroll and related costs
of employees engaged in ongoing design and development activities, fees to
outside contractors, prototype development expenses, overhead costs, equipment
depreciation and supplies. To date, the Company has expensed all costs
associated with the research, design and development of its products. See Note
1 of Notes to Consolidated Financial
22
<PAGE>
Statements. R&D expenses were $79,000, $1,539,000, $3,137,000 and $1,595,000
for the period from inception through March 31, 1994, the year ended March 31,
1995, the nine month period ended December 31, 1995, and the three month
period ended March 31, 1996, respectively. Increases over the periods have
resulted from the incremental hiring of personnel, increased usage of
engineering consultants and fees to acquire outside technologies. The Company
believes that a significant level of R&D expenses is required due to the
technical nature of the product and the elaborate requirements of the game
development process. Accordingly, the Company anticipates devoting substantial
resources, including additional personnel, to R&D and that these costs will
continue to increase in absolute dollars in future periods.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses include payroll and
related costs for administrative and executive personnel, overhead costs,
legal and associated costs, corporate and product licensing costs in various
jurisdictions and fees for professional services. SG&A expenses were $61,000,
$312,000, $922,000 and $742,000 for the period from inception through March
31, 1994, the year ended March 31, 1995, the nine month period ended December
31, 1995, and the three month period ended March 31, 1996, respectively.
Increases over the periods result from the incremental hiring of personnel and
expenses associated with applying for corporate and product licensing in
various jurisdictions. SG&A expenses are expected to increase substantially in
absolute dollars as the Company invests in sales and marketing activities to
launch its products and in administrative personnel to support its growing
infrastructure and comply with regulatory requirements.
INCOME TAXES
As of March 31, 1996, the Company had net operating loss carryforwards of
approximately $8,100,000 for federal purposes and $1,700,000 for state
purposes. These loss carryforwards will expire beginning in 2000, if not
utilized. The Company also has R&D credit carryforwards of approximately
$100,000 for federal purposes and $50,000 for state purposes as of March 31,
1996, which expire beginning in 2000. A valuation allowance has been recorded
for these deferred tax assets as a result of uncertainties regarding the
realization of these assets due to the lack of earnings history of the
Company. Due to changes in ownership, as defined by Section 382 of the
Internal Revenue Code, resulting from the sale of Series B and Series C
Redeemable Preferred Stock and the Common Stock to be offered in the Company's
proposed initial public offering, the annual deductibility of a substantial
portion of the federal net operating loss and tax carryforwards will be
limited. See Note 8 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through the
private placements of Redeemable Preferred Stock and loans from shareholders
which were subsequently converted to Redeemable Preferred Stock. As of March
31, 1996, the amounts raised in the private placements of Redeemable Preferred
Stock, net of issuance costs, totaled approximately $16.0 million. As of
March 31, 1996, the Company had $7.7 million of cash on hand to fund
operations. In addition, the Company raised $7.2 million, net of issuance
costs, through additional sales of Redeemable Preferred Stock in April and May
1996. See Note 10 of Notes to Consolidated Financial Statements. Adjusted for
these sales as of March 31, 1996, the Company's pro forma cash on hand would
have been $14.9 million.
The Company's operating activities used cash of $75,000, $1,696,000,
$3,731,000 and $2,145,000 for the period from inception through March 31,
1994, the year ended March 31, 1995, the nine-month period ended December 31,
1995 and the three-month period ended March 31, 1996, respectively. Cash used
in operating activities primarily reflected net losses, partially offset by
depreciation and amortization and changes to working capital.
From inception through March 31, 1996, the Company has acquired a total of
approximately $1.5 million in fixed assets, primarily computer equipment. The
Company has a $1.0 million lease line to finance the acquisition of fixed
assets, which has been fully drawn upon as of the date hereof.
23
<PAGE>
The Company believes that its cash on hand, together with the net anticipated
proceeds from its initial public offering, will be sufficient to meet its
anticipated cash needs for working capital, capital expenditures and business
expansion through the middle of 1998. However, the Company may need to raise
additional funds to finance more rapid expansion, to develop its products, to
respond to competitive pressures or to acquire complementary products,
businesses or technologies. No assurance can be given that additional financing
will be available or that, if available, it will be available on terms
acceptable to the Company or its shareholders. If adequate funds are not
available to satisfy either the short-term or long-term capital requirements,
the Company may be required to limit its operations significantly. The
Company's capital requirements will depend on many factors, including, but not
limited to, the rate at which the Company can introduce its products, the
market acceptance and competitive position of such products, the response of
competitors to the Company's products, and the ability of the Company to
satisfy the jurisdictional licensing requirements for its officers, directors
and products. See "Item 1. Business--Certain Considerations."
24
<PAGE>
ITEM 3.
PROPERTIES
See "Item 1. Business--Facilities"
ITEM 4.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding common stock (the "Common Stock") as of
May 29, 1996 by (i) each person who is known by the Company to own more than
5% of the Company's Stock, (ii) each executive officer named in the tables
under "Executive Compensation," (iii) each director of the Company, and (iv)
all executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SERIES A SHARES OF SERIES B SHARES OF SERIES C
COMMON STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED(1) OWNED(1) OWNED(1) OWNED(1)
-------------- ------------------ ------------------ ------------------
SHAREHOLDER AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- --------- ---- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert M. Fell(2)....... 1,700,000 15.9 -- -- -- -- -- --
15260 Ventura Blvd.,
Suite 300
Sherman Oaks, CA 91403
David S. Morse(3)....... 990,000 9.3 -- -- -- -- -- --
P.O. Box 7119
Incline Village, NV
89450
SMALLCAP World Fund,
Inc.................... 640,000 6.0 -- -- -- -- 640,000 20.4
c/o Capital Research
and Management Company
333 South Hope Street
Los Angeles, CA 90071
Technology Partners Fund
V, L.P.(4) ............ 613,334 5.7 335,000 33.4 145,000 12.6 133,334 4.2
William Hart(4)
1550 Tiburon Blvd.,
Suite A
Belvedere, CA 94920
Benchmark Capital Man-
agement LLC(5)......... 613,333 5.7 -- -- 480,001 41.8 133,332 4.2
Kevin R. Harvey(5)
2480 Sand Hill Road,
Suite 200
Menlo Park, CA 94025
Kleiner Perkins Caufield
& Byers(6)............. 613,334 5.7 -- -- 480,000 41.8 133,334 4.2
2750 Sand Hill Road
Menlo Park, CA 94025
Donald J. Massaro....... 625,000 5.9 -- -- -- -- -- --
Andrew S. Pascal........ 325,000 3.0 -- -- -- -- -- --
Allan E. Alcorn......... 125,000 1.2 -- -- -- -- -- --
All current directors
and executive officers
as a group
(11 persons)(7)........ 5,441,667 50.9 335,000 33.4 625,001 54.4 266,666 8.5
</TABLE>
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Because the Preferred Stock votes
together with the Common Stock on most matters, in computing the number of
shares of Common Stock beneficially owned by a person and the percentage
ownership of that person, all shares of Common Stock issuable upon
conversion of outstanding Preferred Stock are deemed outstanding.
25
<PAGE>
The information set forth in this table does not include among shares
beneficially owned or outstanding shares of the Company's Series A1 and
Series B1 Preferred Stock ("Nonvoting Preferred"), which has no voting
rights and is convertible into shares of Common Stock only upon 75 days'
prior notice to the Company. See "Item 11. Description of Registrant's
Securities to be Registered." Unless otherwise indicated in the footnotes
below, the persons and entities named in the table have sole voting and
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.
(2) Consists of shares held by Mr. Fell as trustee of the Robert M. Fell
Living Trust, Dated 6/14/95.
(3) Includes 50,000 shares held by Mr. Morse's children.
(4) Shares of Common Stock beneficially owned consist of shares issuable upon
conversion of Preferred Stock. Mr. Hart, a director of the Company, is a
General Partner of TPW Management V, L.P. ("TPW") the general partner of
Technology Partners Fund V, L.P. ("Technology Partners"), and may be
deemed to share voting or investment power with respect to these shares.
The other general partners of TPW are John Ardell and Roger Quy. Each of
Messrs. Hart, Ardell and Quy disclaims beneficial ownership of these
shares except to the extent of his proportionate interest therein.
Excludes 2,958,510 shares of Common Stock issuable upon conversion of
Nonvoting Preferred. Assuming conversion of all outstanding shares of
Nonvoting Preferred, Technology Partners would be the beneficial owner of
20.9% of the Company's outstanding Common Stock.
(5) These shares of Common Stock consist of 599,424 shares held by Benchmark
Capital Partners, L.P. and 13,909 shares held by Benchmark Founders' Fund,
L.P. Mr. Harvey, a director of the Company, is a member of Benchmark
Capital Management LLC ("BCM"), the general partner of each of these
entities, and may be deemed to share voting or investment power with
respect to shares held by such entities. The other members of BCM are
Andrew Rachleff, Robert Kagle, Bruce Dunlevie and Val Vaden. Each of
Messrs. Harvey, Rachleff, Kagle, Dunlevie and Vaden disclaims beneficial
ownership of these shares except to the extent of his proportionate
interest therein. Excludes 1,712,981 shares of Common Stock issuable upon
conversion of Nonvoting Preferred. Assuming conversion of all outstanding
shares of Nonvoting Preferred, BCM would be the beneficial owner of 13.6%
of the Company's outstanding Common Stock.
(6) Shares of Common Stock beneficially owned consist of shares issuable upon
conversion of Preferred Stock. These shares of Common Stock consist of
597,200 shares held by Kleiner Perkins Caufield & Byers VII, 12,800 shares
held by KPCB VII Founders Fund and 3,334 shares held by KPCB Information
Sciences Zaibatsu Fund II. Excludes 1,712,982 shares of Common Stock
issuable upon conversion of Nonvoting Preferred. Assuming conversion of
all outstanding shares of Nonvoting Preferred, Kleiner Perkins Caufield &
Byers' would be the beneficial owner of 13.6% of the Company's outstanding
Common Stock.
(7) Includes 613,334 shares held by Technology Partners and 613,333 shares
beneficially owned by BCM. Messrs. Hart and Harvey may be deemed to share
voting or investment power with respect to shares owned by Technology
Partners and BCM, respectively, but disclaim beneficial ownership of such
shares except to the extent of their proportionate interest therein. See
footnotes (4) and (5) above. Excludes 2,958,510 shares and 1,712,981
shares of Nonvoting Preferred beneficially owned by Technology Partners
and BCM, respectively. Assuming conversion of all outstanding shares of
Nonvoting Preferred, this group would be deemed to be the beneficial owner
of 59.3% of the Company's outstanding Common Stock.
26
<PAGE>
ITEM 5.
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald J. Massaro....................... 52 President, Chief Executive Officer
and Director
Andrew S. Pascal........................ 30 Executive Vice President--Marketing
and Games Development
Allan E. Alcorn......................... 48 Senior Vice President--Chief
Technical Officer
Thomas E. Carlson....................... 42 Vice President--Chief Financial
Officer
Karen M. Katz........................... 30 Vice President--Sales and Support
Paul D. Mathews......................... 31 Director of Government Affairs
H. Paul Kurth........................... 59 Vice President--Manufacturing
David S. Morse(1)....................... 53 Chairman of the Board of Directors
Robert M. Fell(2)....................... 53 Director
William Hart(2)......................... 55 Director
Kevin R. Harvey(1)...................... 31 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Donald J. Massaro has served as a director of the Company since May 1995 and
its President and Chief Executive Officer since June 1995. Mr. Massaro has
over 20 years of general management experience and has been a director and/or
chairman of the board of directors for a number of public and private Silicon
Valley based technology companies. Prior to joining SGI, Mr. Massaro was
Executive Vice President and General Manager of Worldwide Sales and Marketing
for Conner Peripherals Inc. ("Conner"), a disk drive manufacturer, from July
1994 to May 1995. From January 1990 to June 1994, Mr. Massaro was President
and Chief Executive Officer of Sjoberg Industries ("Sjoberg"), and Inversion
Development Corporation ("Inversion"), manufacturers of environmental
products. Sjoberg filed for protection under federal bankruptcy statutes in
December 1992 and was acquired by Inversion in March 1993. Prior thereto, he
served as President and Chief Executive Officer of Metaphor Computer Systems
("Metaphor"), a company he co-founded in 1982 to develop and manufacture
client-server based management information systems. Mr. Massaro's other prior
experience includes positions as Corporate Vice President and President of
Xerox Corporation's Office Products Division and President and Chief Executive
Officer of Shugart Associates, a computer peripherals company he co-founded in
1972.
Andrew S. Pascal has over 10 years of gaming industry experience with an
emphasis in slot marketing, slot merchandising and slot operations. He joined
SGI in October 1994 from Mirage Resorts, Incorporated ("Mirage"), where he
worked from June 1985 to October 1994. Mr. Pascal held the position of
Director of Slot Operations and Marketing at The Mirage Hotel and Casino,
managing a division consisting of 350 employees and annual revenues in excess
of $110 million. Mr. Pascal served on Mirage's eight-member Operating
Committee, which set operating policy and established the strategic direction
for Mirage and its 7,300 employees, from September 1992 to October 1994. Prior
to the opening of The Mirage Hotel and Casino, Mr. Pascal served as the
Director of Slot Marketing for the Golden Nugget Casino-Hotel.
Allan E. Alcorn joined SGI in November 1993 from Digital F/X, Inc., a
developer of professional video equipment, where from December 1991 to October
1993 he was Vice President of Development responsible for designing and
developing video authoring tools for broadcast and industrial markets. From
1986 to 1991, Mr. Alcorn was a Fellow at Apple Computer, Inc. ("Apple"), where
he was responsible for investigating new personal computer technologies. Prior
to joining Apple, he was a founder and Vice President of Research and
Development for Atari, Inc. ("Atari"), where he designed and built PONG, the
first commercially successful video game.
27
<PAGE>
Thomas E. Carlson joined SGI in May 1995 from Conner, where from November
1994 to February 1995 he held the position of Worldwide Research and
Development and Launch Manufacturing Controller. From January 1991 to October
1994 he was Chief Financial Officer of Sjoberg and Inversion. Sjoberg filed
for protection under federal bankruptcy laws in December 1992 and was
ultimately acquired by Inversion in March 1993. From 1984 to 1990 Mr. Carlson
held various positions at Metaphor, including Director of Financial Planning
and Corporate Controller.
Karen M. Katz joined SGI in July 1995 from Conner, where from August 1994 to
July 1995 she held the position of Director of Strategic Programs and was
responsible for developing and implementing the programs and systems for
managing its $2.5 billion disk drive and tape drive businesses. Prior to her
promotion to Director of Strategic Programs, from July 1993 to July 1994 Ms.
Katz served as Conner's Director of Corporate Sales and was responsible for
the global sales management of the Sun Microsystems, Inc. and Digital
Equipment Corporation accounts. Prior to joining Conner, Ms. Katz was a member
of the technical staff for AT&T Bell Laboratories.
Paul D. Mathews joined SGI November 1995 from Casino Data Systems, a
designer and manufacturer of casino management information systems and gaming
devices, where from March 1995 to November 1995 he was Director of Regulatory
Compliance responsible for corporate and product licensing in all gaming
jurisdictions. Prior to joining Casino Data Systems, Mr. Mathews spent five
years with the Nevada State Gaming Control Board in the Corporate Securities
and Investigation Divisions.
H. Paul Kurth joined SGI in November 1995 from Edge Diagnostic Systems, a
manufacturer of computerized automotive diagnostic systems, where he was the
founder and Vice President of Operations responsible for product design,
fabrication and manufacturing from January 1988 to June 1993. Prior to joining
Edge Diagnostic Systems, Mr. Kurth founded Vertex Peripherals, a manufacturer
of high-performance, high-capacity disk drives.
David S. Morse is a founder of the Company and has served as Chairman of the
Board of Directors since its inception. Mr. Morse also currently serves in the
same capacity for LBE Technologies, Inc., a company he founded to develop
virtual reality based auto racing simulations. Mr. Morse is a founder and has
served as Chief Executive Officer of Crystal Dynamics, Inc., an interactive
video game developer and publisher, from July 1992 to June 1993 and from
December 1994 to May 1995. Mr. Morse was founder, President and Chief
Executive Officer of New Technologies Group, Inc. ("NTG"), the company which
developed the original video game technology employed in games developed by
The 3DO Company ("3DO"). NTG was one of the founding partners of 3DO and was
subsequently acquired by 3DO. Mr. Morse served with NTG from July 1989 to June
1993. Prior to founding NTG, Mr. Morse was Chairman of Epyx, Inc. ("Epyx"), a
video game developer, where he led the development of the Lynx portable game
platform, now marketed by Atari. Epyx filed for protection under federal
bankruptcy statutes in October 1989. Mr. Morse was also the founder, President
and Chief Executive Officer of Amiga Computer, Inc., prior to its acquisition
by Commodore Business Machines, Inc. in 1984. Mr. Morse was a founding general
partner of Interactive Partners, a firm specializing in the creation of
interactive media companies.
Robert M. Fell has served as a director of the Company since its inception.
Mr. Fell is also a founding General Partner of Interactive Partners. Mr. Fell
has also served as the Chairman, President and Chief Executive Officer of
Archon Capital Partners, a merchant banking firm from June 1994 to the
present. Since 1978, Mr. Fell has also served as President and Chief Executive
Officer of Fell & Company, Inc., and since 1982 as General Partner of Fell &
Nicholson Technology Resources, both management consulting firms. Mr. Fell is
also a director of Premiere Radio Networks, Inc., a radio programming
syndicator, and several private companies.
William Hart has served as a director of the Company since May 1994. In
addition, Mr. Hart is a general partner of Technology Partners, a venture
capital investment firm founded by Mr. Hart in 1980, which currently manages
$100 million in funds for early stage venture capital investments. Prior to
founding Technology Partners, Mr. Hart held positions with Cresap, McCormick
and Paget, a management consulting firm, and with
28
<PAGE>
IBM Corporation. Mr. Hart serves as a director of Cellnet Data Systems, Inc.,
Mobex Communications, Inc., Qualix Group Inc., and Trimble Navigation Ltd.
Kevin R. Harvey has served as a director of the Company since August 1995.
In addition, Mr. Harvey is a General Partner of Benchmark Capital Management
LLC ("Benchmark"), a Silicon Valley venture capital firm founded by Mr. Harvey
in February 1995 which currently manages a $90 million fund. Prior to joining
Benchmark, Mr. Harvey served as the General Manager of the Approach Database
Division of Lotus Development Corporation ("Lotus") from July 1993 to January
1995. He was also the founder and Chief Executive Officer of two software
companies, StyleWare Inc., which was sold to Claris Corporation in July 1988,
and Approach Software Corporation, where Mr. Harvey served as Chief Executive
Officer from August 1990 to July 1993, when it was sold to Lotus.
ITEM 6.
EXECUTIVE COMPENSATION
This section discusses compensation earned by certain executive officers of
the Company during the Company's last full fiscal year. Because of a change in
the Company's fiscal year-end, the last full fiscal year covered the nine-
month period from April 1 through December 31, 1995. Where appropriate,
supplemental information is provided concerning compensation earned during the
entire 1995 calendar year.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
received for services rendered to the Company during the fiscal year ended
December 31, 1995, by the Chief Executive Officer of the Company and each of
the two other most highly compensated executive officers whose total salary
for calendar year 1995 exceeded $100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ------------------
SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) OPTIONS GRANTED(2) COMPENSATION(3)
--------------------------- ------------ ------------------ ---------------
<S> <C> <C> <C>
Donald J. Massaro(4).......... $139,262 625,000 $913
President and Chief Executive
Officer
Andrew S. Pascal ............. $ 93,750(5) 75,000 $991
Executive Vice President--
Marketing and Game
Development
Allan E. Alcorn .............. $ 93,750(5) 25,000 $991
Senior Vice President--Chief
Technical Officer
</TABLE>
- --------
(1) Salary amounts include all compensation deferred under the Company's
401(k) Plan.
(2) Also represents options granted during calendar year 1995.
(3) Represents life insurance premiums paid by the Company for the benefit of
the Named Executive Officer during calendar year 1995.
(4) Mr. Massaro became an executive officer of the Company in June 1995. Mr.
Massaro's compensation reflects an annual salary of $250,000. No
individual served as Chief Executive Officer or acted in a similar
capacity prior to June 1995. Before Mr. Massaro assumed that role, the
duties of the Company's Chief Executive Officer were performed by
Interactive Partners, a partnership of which Directors Robert M. Fell and
David S. Morse, founders of the Company, are general partners. See
"Certain Transactions."
(5) The salary earned by the Named Executive Officer during calendar year 1995
was $125,000.
29
<PAGE>
OPTION GRANTS
The following table provides information concerning grants of options to
purchase the Company's Common Stock made to each of the Named Executive
Officers during the year ended December 31, 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(4)
GRANTED EMPLOYEES PRICE PER EXPIRATION -----------------------
NAME (1)(2) IN 1995 SHARE(3) DATE 5% 10%
---- ---------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Massaro....... 425,000 26.82% $0.07 06/27/05 $ 18,710 $ 47,414
200,000 12.62% $0.11 10/23/05 $ 13,836 $ 35,062
Andrew S. Pascal........ 25,000 1.58% $0.07 06/27/05 $ 1,101 $ 2,789
50,000 3.16% $0.11 12/11/05 $ 3,459 $ 8,766
Allan E. Alcorn......... 25,000 1.58% $0.07 06/27/05 $ 1,101 $ 2,789
</TABLE>
- --------
(1) All options granted in 1995 were granted under the Company's 1994 Stock
Option Plan. The Board of Directors has discretion, subject to plan
limits, to modify the terms of outstanding options and to reprice the
options. See "Stock Plans--1994 Stock Option Plan."
(2) Each option is fully exercisable from the time of grant, subject to the
Company's right to repurchase any unvested shares at the original exercise
price in the event of the optionee's termination. Shares vest at the rate
of 25% after one year and then 1/48 of the total number of shares each
month thereafter.
(3) The exercise price per share of options granted represented the fair
market value of the underlying shares of Common Stock on the dates the
respective options were granted as determined by the Board of Directors.
The Company's Common Stock was not traded publicly at the time of the
option grants to the Named Executive Officers.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock Price.
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information regarding unexercised
stock options held by each of the Named Executive Officers as of December 31,
1995:
1995 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 (#) DECEMBER 31, 1995(1)
SHARES ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED(2) EXERCISABLE(3) UNEXERCISABLE EXERCISABLE(3) UNEXERCISABLE
---- --------------- ----------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Massaro....... 425,000 $17,000 200,000 -- $8,000 --
Andrew S. Pascal........ 275,000 $11,000 50,000 -- $2,000 --
Allan E. Alcorn......... 125,000 $ 5,000 0 -- -- --
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1995, as determined by the Company's Board of
Directors, minus the aggregate exercise price.
(2) All options exercised had exercise prices of $0.07 per share. At the time
of exercise of each option, the fair market value of the Company's Common
Stock, as determined in good faith by the Board of Directors, was $0.11
per share.
(3) All options are fully exercisable, subject to the Company's right to
repurchase any unvested shares at the original exercise price in the event
of the optionee's termination. Shares vest in accordance with the vesting
provisions described above in Note 2 to the table entitled "Option Grants
in 1995."
30
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement dated May 25 1995, with
Donald Massaro that provides for Mr. Massaro to be employed as the Company's
President and Chief Executive Officer. The agreement entitles Mr. Massaro to a
salary of $20,833.33 per month and an option to purchase 425,000 of Common
Stock under the Plan. Under the agreement, Mr. Massaro has agreed to serve on
the Board of Directors while serving as CEO and to resign from the Board at
such time as his employment is terminated. The Company has also agreed to make
two loans to Mr. Massaro of up to $75,000 per year for living expenses,
secured by any Common Stock of the Company owned by him. The agreement is
subject to termination at will by either party.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee prior to December 12,
1995. Thus, all decisions concerning executive compensation in 1995 were made
by the entire Board, of which Mr. Massaro is a member. Mr. Massaro abstained
from all discussions concerning his own compensation during 1995. The
Compensation Committee currently consists of Robert M. Fell and Kevin R.
Harvey. The Company has entered into certain transactions with Mr. Fell and
with entities affiliated with Messrs. Fell and Harvey. See "Item 7. Certain
Relationships and Related Transactions."
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as members
of the Board of Directors, although they are reimbursed for their out-of-
pocket expenses incurred in attending Board and committee meetings. In April
1995, Madeline Canepa, who was a director of the Company at the time, was
granted an option to purchase 50,000 shares of Common Stock of the Company
under the Company's 1994 Stock Option Plan (the "1994 Option Plan") at an
exercise price of $0.07 per share. The option has a term of 10 years and vests
at the rate of one-quarter of the shares one year after the date of grant and
1/48 of the shares each month thereafter. The option is fully exercisable,
subject to the Company's right to repurchase unvested shares at the original
exercise price upon termination of Ms. Canepa's status as a director or
consultant. Ms. Canepa resigned as a director in May 1996 but is continuing to
render consulting services to the Company. The Company has adopted the 1996
Outside Directors Stock Option Plan, which provides for formula-based grants
of options to non-employee directors. See "--Stock Plans."
STOCK PLANS
1994 STOCK OPTION PLAN
The Silicon Gaming, Inc. 1994 Stock Option Plan (the "1994 Option Plan") was
adopted by the Board of Directors and approved by the shareholders of the
Company on May 3, 1994. The 1994 Option Plan provides for the grant of
incentive stock options ("ISOs") within the meaning of section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and for nonstatutory
stock options.
Currently, a maximum of 3,085,000 shares of the authorized but unissued
Common Stock of the Company may be issued upon the exercise of options granted
pursuant to the 1994 Option Plan. The Company has amended the 1994 Option
Plan, subject to the effectiveness of the Company's proposed initial public
offering (the "IPO"), to increase the maximum number of shares issuable
thereunder by 1,215,000 to an aggregate of 4,300,000 and to increase this
amount automatically, on the first day of each fiscal year of the Company
beginning on and after January 1, 1998, by a number of shares equal to 4% of
the number of shares of the Company's Common Stock issued and outstanding on
the last day of the preceding fiscal year. However, without further
shareholder approval, no more than 4,300,000 shares may be available
cumulatively for issuance upon the exercise of ISOs (the "ISO Share Limit").
The Company has also amended the 1994 Option Plan, subject to the
effectiveness of the IPO, to permit the issuance of reacquired shares as well
previously unissued shares. In the event of any stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or
similar change in the capital structure of the Company, appropriate
adjustments will be made to the shares subject to the 1994 Option Plan, to
outstanding options and the ISO Share Limit. To the extent any outstanding
option under the 1994
31
<PAGE>
Option Plan expires or terminates prior to exercise in full or if shares issued
upon exercise of an option are repurchased by the Company, the shares of Common
Stock for which such option is not exercised or the repurchased shares are
returned to the 1994 Option Plan and become available for future grant.
Currently, all employees, directors and consultants of the Company or of any
present or future parent or subsidiary corporations of the Company are eligible
to participate in the 1994 Option Plan. The Company has amended the 1994 Option
Plan, subject to the effectiveness of the IPO, to provide that a director may
not be granted an option under the 1994 Option Plan unless he or she is also an
employee of the Company or a parent or subsidiary corporation of the Company.
Any person eligible under the 1994 Option Plan may be granted a nonstatutory
option. However, only employees may be granted ISOs.
Terms and Conditions of ISOs. The exercise price per share of an ISO must
equal at least the fair market value of a share of the Company's Common Stock
on the date of grant, or 110% of the fair market value in the case of an ISO
granted to a person who at the time of grant owns stock possessing more than
10% of the total combined voting power of all classes of stock of the Company
or any parent or subsidiary corporation of the Company (a "10% Shareholder").
The maximum term of ISOs granted under the 1994 Option Plan (other than ISOs
granted to 10% Shareholders) is ten years. An ISO granted to a 10% Shareholder
may not have a term longer than five years.
Terms and Conditions of Nonstatutory Stock Options. The exercise price per
share of a nonstatutory stock option must equal at least 85% of the fair market
value of a share of the Common Stock on the date of grant. Currently, the
exercise price of any option granted to a 10% Shareholder must be at least 110%
of the fair market value of a share of the Company's Common Stock on the date
of grant. As the 1994 Option Plan is proposed to be amended, this requirement
will apply only in the case of ISOs, as required under section 422 of the Code.
Currently, the maximum term of any nonstatutory stock option granted under the
1994 Option Plan is ten years. As proposed to be amended, the 1994 Option Plan
will authorize the Board to grant nonstatutory stock options having a term in
excess of ten years.
Terms and Conditions of Options Generally. Generally, the exercise price of
an option granted under the 1994 Option Plan may be paid in cash, by check, or
in cash equivalent, by tender of shares of the Company's Common Stock owned by
the optionee having a fair market value not less than the exercise price, by
the assignment of the proceeds of a sale of some or all of the shares of Common
Stock being acquired upon the exercise of the option, by means of a full
recourse promissory note, or by any combination of the foregoing. As proposed
to be amended, the 1994 Option Plan will permit payment of the exercise price
by means of an assignment of loan proceeds as well as sale proceeds, to
eliminate the requirement that a promissory note delivered to pay the exercise
price be a full recourse note and to permit the payment of the exercise price
by any lawful method approved by the Board. The Board may nevertheless restrict
the forms of payment permitted in connection with any option grant. Generally,
options granted under the 1994 Option Plan are exercisable on and after the
date of grant, subject to the right of the Company to reacquire at the
optionee's exercise price any unvested shares held by the optionee upon
termination of employment or service with the Company or if the optionee
attempts to transfer any unvested shares. Shares subject to options generally
vest in installments over four years, subject to the optionee's continued
employment or service. Options are nontransferable by the optionee other than
by will or by the laws of descent and distribution and are exercisable during
the optionee's lifetime only by the optionee.
Option agreements entered into under the 1994 Option Plan prior to the IPO
generally provide that the Company will have a right of first refusal,
exercisable within a specified period of time, to repurchase from the optionee
on the same terms and at the same price offered by a third party all of the
optionee's vested shares for which such third party has made a bona fide offer.
Such rights of first refusal will terminate upon the effectiveness of the IPO.
In the event of a change of control of the Company, the Board may arrange for
the acquiring or successor corporation to assume or substitute new options for
the options outstanding under the 1994 Option Plan. To the extent that the
options outstanding under the 1994 Option Plan are not assumed, substituted
for, or exercised prior to such event, they will terminate. The standard forms
of option agreement have been amended, subject to
32
<PAGE>
the effectiveness of the IPO, to provide that if an optionee's service is
involuntarily or constructively terminated within 12 months after a change in
control (other than for cause, or as a result of death or disability), all
shares subject to his or her option will become fully vested, unless the
acceleration of vesting would make unavailable "pooling of interests"
accounting treatment in connection with the change of control.
Unless sooner terminated, no options may be granted under the 1994 Option
Plan after May 3, 2004. Subject to the effectiveness of the IPO, the Company
has amended the 1994 Option Plan to provide that the term limit will not apply
to the grant of nonstatutory stock options and that ISOs may be granted on or
before May 28, 2006, which term will automatically be extended for 10 years
each time that the shareholders approve an increase in the share reserve of
the 1994 Option Plan. The Board may terminate or amend the 1994 Option Plan at
any time, but, without shareholder approval, the Board may not amend the 1994
Option Plan to increase the total number of shares of Common Stock reserved
for issuance thereunder, change the class of persons eligible to receive ISOs,
or expand the class of persons eligible to receive nonstatutory stock options.
1996 OUTSIDE DIRECTORS STOCK OPTION PLAN
On May 28, 1996, the Board of Directors adopted the 1996 Outside Directors
Stock Option Plan (the "Directors Plan"), subject to the effectiveness of the
IPO. The shareholders of the Company approved the Directors Plan on June 12,
1996. A total of 300,000 shares of Common Stock have been reserved for
issuance under the Directors Plan. The Directors Plan provides for the
automatic grant of nonstatutory stock options to directors of the Company who
are not employees of the Company ("Outside Directors"). On the effective date
of the IPO, each Outside Director will automatically be granted an option to
purchase 22,500 shares of Common Stock. Thereafter, each new Outside Director
elected after the effective date of the IPO will automatically be granted on
the date of his or her initial election an option to purchase 22,500 shares of
Common Stock. In addition, each Outside Director that has served on the Board
for at least six months will thereafter be granted automatically an option to
purchase 7,500 shares of Common Stock at each annual meeting of shareholders
after which such Outside Director continues to serve in that capacity. The
exercise price per share of options granted under the Directors Plan will be
equal to the fair market value of a share of Common Stock on the date of
grant. Shares subject to an option granted under the Directors Plan will vest
over three years. Options granted under the Directors Plan must be exercised
within ten years from the date of grant.
1996 EMPLOYEE STOCK PURCHASE PLAN
On May 28, 1996, the Board of Directors adopted the 1996 Employee Stock
Purchase Plan (the "Purchase Plan"), which was approved by shareholders on
June 12, 1996. A total of 450,000 shares of Common Stock have been reserved
for issuance under the Purchase Plan, none of which have yet been issued. The
Purchase Plan permits eligible employees to purchase Common Stock at a
discount, but only through accumulated payroll deductions, during staggered
24-month offering periods beginning every six months. Each offering period
will be divided into four consecutive six-month purchase periods, and
participants will purchase shares on the last day of each purchase period. The
price at which shares are purchased under the Purchase Plan is equal to 85% of
the fair market value of a share of Common Stock on the first day of the
offering period or the last day of the purchase period, whichever is lower.
ITEM 7.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1993, Robert M. Fell, a director of the Company, and Davis S.
Morse, Chairman of the Board of Directors of the Company, purchased 1,000,000
shares of Common Stock each for an aggregate consideration of $2,000.
In May 1994, Technology Partners Fund V, L.P. ("Technology Partners"), of
which William Hart, a director of the Company, is Managing Partner, purchased
666,666 shares of Series A Preferred Stock of the Company for an aggregate
consideration of $499,999.
33
<PAGE>
In December 1994, January 1995 and March 1995, Technology Partners loaned
the Company the sums of $300,000, $500,000 and $450,000, respectively. The
loans bore interest at 10% per annum. In June 1995, Technology Partners
canceled this indebtedness, along with warrants for 125,000 shares of the
Company's Common Stock at $0.07 per share, in exchange for 1,666,666 shares of
Series A Preferred Stock issued by the Company.
In March 1995, May 1995 and June 1995, Technology Partners loaned the
Company the sums of $50,000, $200,000 and $300,000. The loans bore interest at
10% per annum. All principal and interest under these loans was converted to
Series B Preferred Stock in August 1995.
In August 1995, Kleiner Perkins Caufield & Byers VII and related entities
purchased 2,192,982 shares of Series B Preferred Stock of the Company for an
aggregate consideration of $2,499,999, Technology Partners purchased 1,105,178
shares of Series B Preferred Stock for an aggregate consideration of
$1,259,902 (including cancellation of indebtedness) and Benchmark Capital
Partners, L.P. and related entities purchased 2,192,982 shares of Series B
Preferred Stock for an aggregate consideration of $2,499,999.
In March 1996, Kleiner Perkins Caufield & Byers VII and related entities
purchased 133,334 shares of Series C Preferred Stock of the Company for an
aggregate consideration of $666,670, Technology Partners purchased 133,334
shares of Series C Preferred Stock for an aggregate consideration of $666,670
and Benchmark Capital Partners, L.P. and related entities purchased 133,332
shares of Series C Preferred Stock for an aggregate consideration of $666,660.
The Company has entered into an employment agreement with Donald Massaro,
its President and CEO. See "Executive Compensation--Employment Agreements."
From November 1993 through June 1995, Interactive Partners, a partnership of
which Robert M. Fell and David S. Morse are general partners, provided
management services and administrative support. For the period from November
1993 through March 31, 1994, the year ended March 31, 1995 and the nine-month
period ended December 31, 1995, the Company paid Interactive Partners
approximately $30,000, $166,000 and $23,000, respectively, in exchange for
such services.
During the period from November 1993 through June 1995 Morse & Co., of which
Mr. Morse is an executive officer, administered the Company's payroll and also
paid the Company's rent, utility and other expenses, for which it was
reimbursed by the Company. For the period from November 1993 through March 31,
1994, the year ended March 31, 1995, and the nine-month period ended December
31, 1995, payroll and other expenses, including rent, utilities and travel,
amounting to $106,000, $467,000 and $71,100, respectively, were paid on behalf
of the Company.
The Company believes that all transactions between the Company and its
officers, directors, principal shareholders or their affiliates have been on
terms no less favorable to the Company than could be obtained from
unaffiliated parties.
ITEM 8.
LEGAL PROCEEDINGS
Inapplicable
ITEM 9.
MARKET PRICE OF AND DIVIDENDS
ON REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Inapplicable
34
<PAGE>
ITEM 10.
RECENT SALES OF UNREGISTERED SECURITIES
(a) Since inception (July 27, 1993), the Registrant has sold and issued the
following unregistered securities:
(1) In September 1993, the Registrant issued 3,000,000 shares of Common
Stock to its founders for aggregate cash consideration of $3,000.
(2) In May 1994, the Registrant issued 1,299,998 shares of Series A
Preferred Stock to sophisticated investors for aggregate cash consideration
of $974,999.
(3) In October 1994, the Registrant issued 50,000 shares of Series A
Preferred Stock to a member of the Company's Board of Directors in exchange
for a promissory note in the principal amount of $37,500.
(4) In June 1995, the Registrant issued 1,666,666 shares of Series A
Preferred Stock to Technology Partners in exchange for cancellation of
$1,250,000 in indebtedness and termination of warrants to purchase 125,000
shares of Common Stock at $0.07 per share.
(5) In August 1995, the Registrant issued 5,535,000 shares of Series B
Preferred Stock to sophisticated investors for aggregate consideration of
$6,309,900, of which $5,500,000 was paid in cash and $809,900 represented
cancellation of indebtedness.
(6) In October 1995, in connection with an equipment lease, the
Registrant issued to Lighthouse Capital Partners, L.P. warrants to purchase
61,404 shares of Series B Preferred Stock at an exercise price of $1.14 per
share.
(7) In March, April and May 1996, the Registrant issued 3,142,000 shares
of Series C Preferred Stock to sophisticated investors for aggregate
consideration of $15,710,000, of which $15,460,000 was paid in cash and
$250,000 represented a fully paid-up software license. In connection with
these transactions, the Registrant issued warrants (the "1996 Warrants") to
purchase an aggregate of 350,000 shares of Common Stock to certain
financial advisors in partial consideration for services rendered by such
advisors in the transaction. Of these, 1996 Warrants to purchase 150,000
shares have an exercise price of $5.00 per share and expire in March 2001.
1996 Warrants to purchase 200,000 shares will have an exercise price equal
to (i) the offering price of the Registrant's Common Stock in an initial
public offering, or (ii) if, prior to an initial public offering or
December 31, 1996, the Registrant is acquired through a merger with an
entity whose Common Stock is publicly traded (a "Merger"), the average
trading price of the shares of the surviving entity during as specified
period following such Merger, or (iii) if neither an initial public
offering nor a Merger occurs prior to December 31, 1996, $5.00 per share.
Such warrant will expire five years from the date when the exercise price
becomes fixed.
(8) From July 27, 1993, to December 31, 1995, the Registrant issued
options to purchase an aggregate of 2,254,500 shares of Common Stock under
the Option Plan, of which options to purchase 1,074,333 shares have been
exercised.
(b) The issuances of securities described in Item 10(a)(1) through (6) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as transactions by an issuer not involving
any public offering. The issuances of securities described in Item 10(a)(7)
were deemed to be exempt from registration under the Securities Act in
reliance on Rule 506 of Regulation D promulgated thereunder. The issuances of
securities described in Item 10(a)(8) were deemed to be exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation.
ITEM 11.
DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
SGI has authorized capital of 25,000,000 shares of Common Stock, par value
$0.001 per share, and 20,417,802 shares of Preferred Stock, par value $0.001
per share.
35
<PAGE>
COMMON STOCK
As of May 29, 1996, there were 5,388,183 shares of Common Stock outstanding
and held of record by approximately 74 shareholders. The Company's Third
Amended and Restated Articles of Incorporation (the "Restated Articles")
provide that holders of Common Stock are entitled to one vote for each share
on all matters submitted to a vote of shareholders, subject to the special
voting rights of holders of Series A, Series B and Series C Preferred Stock as
to certain matters, as discussed below. The holders of Common Stock are
entitled to receive such cash dividends, if any, as may be declared by the
Board of Directors out of legally available funds, subject to dividend
preferences of Preferred Stock, as discussed below. Upon liquidation,
dissolution or winding up of the Company, after payment of all debts and
liabilities and after payment of the liquidation preferences described below
of all shares of Preferred Stock then outstanding, the holders of the Common
Stock will be entitled to all assets that are legally available for
distribution. The disposition of all or substantially all of the Company's
assets, or a merger or consolidation of the Company after which the
shareholders of the Company immediately prior to such merger or consolidation
possess less than 50% equity ownership of the combined entity will be treated
as a liquidation, dissolution or winding up of the Company for such purpose.
All outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
As of May 29, 1996, there were authorized 2,999,997 shares of Series A
Preferred Stock, of which 1,001,665 shares were issued and outstanding,
2,997,997 shares of Series A1 Preferred Stock, of which 1,998,332 shares were
outstanding, 5,596,404 shares of Series B Preferred Stock, of which 1,448,859
shares were issued and outstanding, 5,596,404 shares of Series B1 Preferred
Stock, of which 4,386,141 shares were outstanding and 3,225,000 shares of
Series C Preferred Stock, of which 3,142,000 shares were issued and
outstanding. All outstanding shares of Preferred Stock are fully paid and
nonassessable. The Company's Series A, Series A1, Series B, Series B1 and
Series C Preferred Stock have the following rights and preferences:
Voting. In general, the holders of Series A, Series B and Series C Preferred
Stock are entitled to vote together with the holders of Common Stock on all
matters presented to shareholders, with each holder of a share of Series A,
Series B or Series C Preferred Stock entitled to one vote for each share of
Common Stock into which such share of Series A, Series B or Series C Preferred
Stock is then convertible. In addition, one member of the Board of Directors
is subject to election and removal by the holders of Series A Preferred Stock
voting as a separate class, and two members of the Board of Directors are
subject to election and removal by the holders of Series B Preferred Stock
voting as a separate class; all remaining members of the Board of Directors
are subject to election and removal by the holders of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Common Stock,
voting together as a single class. In addition, the Restated Articles prohibit
the Company from taking any of the following actions without the vote or
written consent of a majority of the outstanding shares of Series A, Series B
and Series C Preferred Stock, voting together as a class: (i) the issuance of
any security senior to or on a parity with any series of Preferred Stock as to
any rights or preferences; (ii) the amendment of the Company's Articles of
Incorporation or Bylaws; (iii) any sale of all or substantially all of the
Company's assets or any merger or consolidation involving the Company; (iv)
the payment or declaration of any dividend or distribution on the Common
Stock; (v) any redemption or repurchase of shares except as provided in the
Company's Articles of Incorporation or at cost from employees, consultants and
others upon termination of services to the Company; or (vi) an increase in the
size of the Board of Directors to a number greater than eight. In addition,
the Restated Articles prohibit the Company from adversely altering or changing
the rights, preferences or privileges of the Series C Preferred Stock without
first obtaining the approval of a majority of the then outstanding shares of
Series C Preferred Stock. Except as required by law, the Series A1 and Series
B1 Preferred Stock have no voting rights.
Conversion. Each share of Series A or Series B Preferred Stock is
convertible at any time at the option of the holder into one share of Series
A1 or Series B1 Preferred Stock, respectively, or one share of Common Stock,
subject to certain antidilution adjustments described below. Each share of
Series A1 or Series B1 Preferred Stock, in turn, is convertible at the option
of the holder, upon at least 75 days' prior written notice to the Company,
into
36
<PAGE>
one share of Common Stock, subject to certain antidilution adjustments
described below. Each share of Series C Preferred Stock is convertible at the
option of the holder into one share of Common Stock, subject to certain
antidilution adjustments described below. In addition, all shares of Series A,
Series B and Series C Preferred Stock will automatically be converted into
Common Stock upon consummation of a firm commitment underwritten public
offering with an aggregate offering price of at least $20,000,000 and a per
share price equal to or greater than $6.00. The number of shares of Common
Stock into which each share of Preferred Stock may be converted is equal to
the ratio of the original purchase price of such share of Preferred Stock to
the "conversion price" of such share (which is initially equal to the original
purchase price). The conversion price of each share is subject to adjustment
in proportion to any stock split, reverse stock split or similar event and is
also subject to downward adjustment pursuant to a weighted-average formula in
the event the Company effects a financing transaction in which it sells Common
Stock or equivalents at a price per share less than such conversion price as
then in effect.
Dividend Preference. The holders of Preferred Stock are entitled to receive
in any fiscal year, when and if declared by the Board of Directors, out of any
assets then legally available therefor, non-cumulative dividends at the rate
of $0.075 per share of Series A or Series A1 Preferred Stock and $0.114 per
share of Series B or Series B1 Preferred Stock and $0.50 per share of Series C
Preferred Stock, as adjusted for any consolidations, combinations, stock
distributions, stock dividends, stock splits or similar events, before any
dividends may be paid to the holders of Common Stock in such fiscal year.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, the assets and
funds of the corporation available for distribution to shareholders shall be
distributed first to the holders of Preferred Stock at the rate of $0.75 per
share of Series A or Series A1 Preferred Stock, $1.14 per share of Series B or
Series B1 Preferred Stock and $5.00 per share of Series C Preferred Stock,
plus all declared but unpaid dividends, then ratably to the holders of Common
Stock. In the event the assets to be distributed are insufficient to satisfy
the foregoing preferences, such assets will be distributed pro rata on the
basis of the total preference amount to which each shareholder is entitled.
The merger or consolidation of the Company into or with another corporation in
which the shareholders of the Company shall own less than 50% of the voting
securities of the surviving corporation, or the sale, transfer or other
disposition (but not including a transfer or disposition by pledge or mortgage
to a bona fide lender) of all or substantially all of the assets of the
Company, shall be deemed to be a liquidation, dissolution or winding up of the
Company.
Redemption. The Preferred Stock is redeemable in three equal installments at
the option of the holders of a majority of the outstanding Preferred Stock,
beginning any time on or after February 28, 2002, at a price equal to the
original purchase price of each share of Preferred Stock plus an amount equal
to all declared but unpaid dividends.
WARRANTS
On October 31, 1995, the Company issued warrants to purchase 61,404 shares
of Series B Preferred Stock (the "1995 Warrants") to an equipment lessor. All
of the 1995 Warrants remained outstanding as of May 29, 1996. The 1995
Warrants have an exercise price of $1.14 per share and expire on October 31,
2002.
On March 21, 1996 the Company issued warrants (the "1996 Warrants") to
certain financial advisors in connection with its Series C Preferred Stock
financing. As of May 29, 1996, a portion of the 1996 Warrants was exercisable
for 150,000 shares of Common Stock at $5.00 per share. An additional portion
of the 1996 Warrants will become exercisable for 200,000 shares of Common
Stock when the exercise price is established. See "Item 10. Recent Sales of
Unregistered Securities."
REGISTRATION RIGHTS AND OTHER CONTRACTUAL RIGHTS
The Company has granted to the holders (the "Holders") of Preferred Stock,
the 1995 Warrants, and the 1996 Warrants certain rights with respect to the
registration of the shares of Common Stock issuable upon
37
<PAGE>
conversion of such Preferred Stock or exercise of such warrants ("Registrable
Shares") under the Securities Act of 1933, as amended (the "Securities Act").
Holders of at least 30% of the Registrable Shares then outstanding shall have
the right, at any time after the earlier of six months after the effective date
of the registration statement filed in connection with the Company's initial
public offering or May 6, 1999, to require the Company, on not more than two
occasions, to file a registration statement covering such Registrable Shares,
provided that such registration cover at least 30% of the aggregate number of
Registrable Shares then outstanding or that such Registrable Shares have an
aggregate offering price of at least $5,000,000. In addition, the Holders of an
aggregate of at least 30% of the Registrable Shares not already registered may
require the Company to file a registration statement on Form S-3 covering such
Registrable Shares, at any time when the Company is entitled to use such form,
provided that such Registrable Shares have an aggregate offering price of at
least $500,000, and provided, further, that the Company shall not be required
to file such a registration statement more than twice in any 12-month period.
Any requested registration also shall be subject to the Company's right to
defer the registration under certain circumstances. Finally, in the event the
Company proposes to register any of its securities under the Securities Act for
its own account or for the account of other security holders, the Holders are
entitled to notice of such registration and to include their Registrable Shares
in such registration at the Company's expense, subject to marketing and other
limitations, provided that after the Company's initial public offering the
underwriters shall not reduce the number of Registrable Shares included in such
registration to fewer than 20% of all shares included in such registration
without the prior consent of at least a majority of the Holders who have
requested their shares to be included in such registration and underwriting.
The holders of Preferred Stock and Warrants to purchase Preferred Stock (the
"Preferred Holders") also have certain rights of first refusal to purchase
equity securities offered by the Company and rights of co-sale with respect to
sales of Common Stock by certain principal holders of Common Stock ("Principal
Shareholders"). In the event the Company offers equity securities for sale in a
transaction not registered under the Securities Act, other than to employees,
directors or consultants, in connection with a corporate acquisition or subject
to certain other exceptions, each Preferred Holder shall have the right to
purchase such equity securities pro rata based on the percentage of Common
Stock and Preferred Stock of the Company held by such Preferred Holder. In the
event any Principal Shareholder proposes to sell shares of Common Stock to a
third party in a transaction not registered under the Securities Act, then each
Preferred Holder shall have the right to participate in the transaction by
selling shares of Common Stock to such third party. The number of shares that
the Principal Holder and each participating Preferred Holder will be permitted
to sell shall be allocated pro rata based on the number of shares of Common
Stock held by each person or issuable upon conversion of shares of Preferred
Stock held by such person. The foregoing right of first refusal and right of
co-sale shall terminate upon the Company's initial public offering.
ITEM 12.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Articles eliminate the personal liability of the Company's
directors for monetary damage to the fullest extent permitted by California
law. In addition, the Company's Restated Articles and Bylaws authorize
indemnification of all officers, directors and agents to the fullest extent
allowed under applicable law.
38
<PAGE>
ITEM 13.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
See the Financial Statements included herein.
SUPPLEMENTARY FINANCIAL DATA
Inapplicable
ITEM 14.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
In November 1995, the Company engaged Deloitte & Touche LLP ("Deloitte") as
its independent auditor and dismissed its former auditor, Coopers & Lybrand
L.L.P. ("Coopers"). The decision to change auditors was approved by the
Company's Board of Directors. Since the Company's inception, there has been no
auditors' report on the Company's financial statements containing an adverse
opinion or disclaimer of opinion or that was qualified or modified as to
uncertainty, audit scope or accounting principles. During such period, there
were no disagreements with Coopers on any matter of accounting principles or
practices, financial statements disclosure or auditing scope or procedure,
which disagreements, if not resolved to Coopers' satisfaction, would have
caused it to make reference to the subject matter of the disagreements in
connection with its report. Further, during this period, there were no events
of the type required to be reported pursuant to Item 304(a)(1)(v) of
Regulation S-K. During the period from inception through November 1, 1995, the
Company did not consult Deloitte on items that involved either the Company's
accounting principles or the form of audit opinion or concerned the subject
matter of a disagreement or reportable event with the former auditor.
ITEM 15.
FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
The Financial Statements are set forth in the Index to Financial Statements.
SCHEDULES
No Schedules are included herein, as the required information is either not
applicable or is contained in the Financial Statements included herein.
EXHIBITS
The exhibits are as set forth in the Exhibit Index.
39
<PAGE>
EXHIBIT INDEX
(a) The following exhibits are filed with this Form 10.
<TABLE>
<S> <C>
3.1(1) Third Amended and Restated Articles of Incorporation of the Company, as amended.
3.2 Bylaws of the Company.
7.1(2) Opinion re liquidation preference.
10.1(2) Amended and Restated 1994 Stock Option Plan.
10.2 Lease Agreement dated September 14, 1995 between the Company and
Demmon Family Partnership.
10.3 Founders Stock Purchase Agreements dated September 14, 1993 between the Company and
Robert N. Fell and David S. Morse, respectively.
10.4 Series A Preferred Stock Purchase Agreement dated as of May 12, 1994.
10.5 Series B Preferred Stock Purchase Agreement dated as of August 10, 1995.
10.6(1) Series C Preferred Stock Purchase Agreement dated as of March 21, 1996, as amended
May 29, 1996
10.7 Second Amended and Restated Rights Agreement dated as of March 21, 1996.
10.8 Master Equipment Lease Agreement dated October 6, 1995 between the Company and
Lighthouse Capital Partners, L.P.
10.9 Letter agreement dated December 8, 1994 between the Company and
IDEO Product Development providing for product development.
10.10 Side Letter Agreement dated March 21, 1996 between the Company and
the Interpublic Group of Companies, Inc.
10.11 Side Letter Agreement dated March 21, 1996 between the Company and Station Casinos, Inc.
10.12 ASIC Design and Development Agreement dated January 1995 between the Company and
RAVIcad, Inc.
10.13 License Agreement dated February 6, 1995 between the Company and RAVlcad, Inc.
10.14 ASIC Design and Development Agreement dated February 15, 1995 between the Company
and RAVlcad, Inc.
10.15 OEM Master License Agreement dated April 17, 1996 between the Company and
RSA Data Security, Inc.
10.16 Agreement dated March 26, 1996 between the Company and MICROID Research.
10.17 Management Services Agreement by and between the Company and Interactive Partners.
10.18(1) Employment Agreement dated May 25, 1995, by and between the Registrant and Donald J. Massaro.
10.19(2) 1996 Employee Stock Purchase Plan.
10.20(2) 1996 Outside Directors Stock Option Plan.
11.1 Statement of Computation of Loss Per Share.
16.1 Letter re change in certifying accountant.
21.1 Subsidiaries of the registrant.
27(2) Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to identically numbered exhibit to Registrant's
Registration Statement on Form S-1 (No. 333-4793) filed with the
Commission on May 30, 1996.
(2) Filed herewith. Except as otherwise indicated, all other exhibits have
been previously filed.
40
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1994, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
PALO ALTO, STATE OF CALIFORNIA, ON JUNE 13, 1996.
Silicon Gaming, Inc.
/s/ Donald J. Massaro
By: _________________________________
DONALD J. MASSARO
President and Chief Executive
Officer
41
<PAGE>
SILICON GAMING, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Shareholders' Deficiency..................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Silicon Gaming, Inc.:
We have audited the accompanying balance sheets of Silicon Gaming, Inc. (a
development stage company) as of March 31, 1995 and December 31, 1995, and the
related statements of operations, shareholders' deficiency and cash flows for
the period from inception (July 27, 1993) through March 31, 1994, the year
ended March 31, 1995 and the nine months ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Silicon Gaming, Inc. at March 31, 1995 and
December 31, 1995, and the results of its operations and its cash flows for
the periods stated above in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
San Jose, California February 9, 1996 (June 12 as to Note 10)
F-2
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, 1996
MARCH 31, DECEMBER 31, ------------------
1995 1995 ACTUAL PRO FORMA
--------- ------------ ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents............... $ 241 $ 2,399 $ 7,657 $14,866
Prepaids and other................. 28 292 202 202
------- ------- ------- -------
Total current assets............. 269 2,691 7,859 15,068
PROPERTY AND EQUIPMENT, Net.......... 211 734 1,217 1,217
OTHER ASSETS, Net.................... 6 61 54 54
------- ------- ------- -------
TOTAL................................ $ 486 $ 3,486 $ 9,130 $16,339
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable................... $ 37 $ 365 $ 430 $ 430
Payable to related party........... 37 5 -- --
Accrued liabilities................ 148 239 134 134
Current portion of capital lease
obligations....................... -- 55 141 141
Notes payable to shareholders...... 1,300 -- -- --
------- ------- ------- -------
Total current liabilities........ 1,522 664 705 705
------- ------- ------- -------
CAPITAL LEASE OBLIGATIONS............ -- 272 706 706
------- ------- ------- -------
COMMITMENTS (Notes 4 and 5)
REDEEMABLE CONVERTIBLE PREFERRED
STOCK--
20,192,802 shares authorized;
shares outstanding: March 31,
1995--1,349,998; December 31,
1995--8,534,997; March 31, 1996--
10,134,997;
March 31, 1996 pro forma--
6,384,473......................... 967 8,496 15,996 6,455
------- ------- ------- -------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common stock, $.001 par value;
25,000,000 shares authorized;
shares outstanding: March 31,
1995--3,000,000; December 31,
1995--4,106,983;
March 31, 1996--5,386,933; March
31, 1996
pro forma--10,679,457............. 3 109 233 16,983
Notes receivable from
shareholders...................... -- (75) (194) (194)
Deficit accumulated during the
development stage................. (2,006) (5,980) (8,316) (8,316)
------- ------- ------- -------
Total shareholders' equity
(deficiency).................... (2,003) (5,946) (8,277) 8,473
------- ------- ------- -------
TOTAL................................ $ 486 $ 3,486 $ 9,130 $16,339
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM FROM
INCEPTION INCEPTION
(JULY 27, THREE MONTHS (JULY 27,
1993) YEAR NINE MONTHS ENDED 1993)
THROUGH ENDED ENDED ----------------------- THROUGH
MARCH 31, MARCH 31, DECEMBER 31, JUNE 30, MARCH 31, MARCH 31,
1994 1995 1995 1995 1996 1996
----------- --------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
Research and
development.......... $ 79 $1,539 $3,137 $ 584 $1,595 $6,350
Selling, general and
administrative....... 61 312 922 168 742 2,037
---- ------ ------ ------ ------ ------
Loss from
operations......... 140 1,851 4,059 752 2,337 8,387
Interest income....... -- (7) (85) (17) (13) (105)
Interest expense...... -- 22 -- 12 34
---- ------ ------ ------ ------ ------
NET LOSS................ $140 $1,866 $3,974 $ 735 $2,336 $8,316
==== ====== ====== ====== ====== ======
PRO FORMA NET LOSS PER
COMMON SHARE
(unaudited)............ $ (.33) $ (.06) $ (.18)
====== ====== ======
SHARES USED IN COMPUTING
PRO FORMA PER SHARE
DATA (unaudited)....... 12,034 11,500 13,204
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
PERIOD FROM INCEPTION (JULY 27, 1993) THROUGH MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEFICIT
NOTE ACCUMULATED
COMMON STOCK RECEIVABLE DURING THE
---------------- FROM DEVELOPMENT
SHARES AMOUNT SHAREHOLDERS STAGE TOTAL
--------- ------ ------------ ----------- -------
<S> <C> <C> <C> <C> <C>
September 1993--Sale of
common stock to founders at
$.001 per share ........... 3,000,000 $ 3 $ (1) $ 2
Net loss.................... $ (140) (140)
--------- ---- ----- ------- -------
BALANCES, March 31, 1994.... 3,000,000 3 (1) (140) (138)
Collection of notes
receivable................. 1 1
Net loss.................... (1,866) (1,866)
--------- ---- ----- ------- -------
BALANCES, March 31, 1995.... 3,000,000 3 -- (2,006) (2,003)
Options exercised during the
year for cash and notes
receivable................. 1,074,333 77 (75) 2
Common stock issued to
employees and vendors for
services at $.18 per
share...................... 32,650 4 4
Warrants issued to vendors.. -- 25 25
Net loss.................... (3,974) (3,974)
--------- ---- ----- ------- -------
BALANCES, December 31,
1995....................... 4,106,983 109 (75) (5,980) (5,946)
Options exercised for cash
and notes receivable*...... 1,267,750 122 (119) 3
Common stock issued to
vendors for services at
$.25 per share*............ 12,200 2 2
Net loss*................... (2,336) (2,336)
--------- ---- ----- ------- -------
BALANCES, March 31, 1996*... 5,386,933 $233 $(194) $(8,316) $(8,277)
========= ==== ===== ======= =======
</TABLE>
- --------
* Unaudited
See notes to consolidated financial statements.
F-5
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM FROM
INCEPTION INCEPTION
(JULY 27, THREE MONTHS (JULY 27,
1993) YEAR NINE MONTHS ENDED 1993)
THROUGH ENDED ENDED ----------------------- THROUGH
MARCH 31, MARCH 31, DECEMBER 31, JUNE 30, MARCH 31, MARCH 31,
1994 1995 1995 1995 1996 1996
----------- --------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $(140) $(1,866) $(3,974) $ (735) $(2,336) $(8,316)
Reconciliation to net
cash used in
operating activities:
Depreciation and
amortization......... 1 47 136 26 105 289
Deferred rent......... -- -- -- -- 32 32
Common stock issued
for services......... -- -- 4 -- 2 6
Accrued interest
exchanged for
preferred stock...... -- -- 10 -- -- 10
Changes in assets and
liabilities:
Prepaids and other... -- (28) (264) (1) 90 (202)
Other assets, net.... (5) (2) (30) 2 7 (30)
Accounts payable..... 10 27 328 218 65 430
Payable to related
party............... 43 (6) (32) (37) (5) --
Accrued liabilities.. 16 132 91 (125) (105) 134
----- ------- ------- ------ ------- -------
Net cash used in
operating
activities......... (75) (1,696) (3,731) (652) (2,145) (7,647)
----- ------- ------- ------ ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES--
Acquisition of
property and
equipment............ (27) (231) (659) (55) (586) (1,503)
----- ------- ------- ------ ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Sale of redeemable
convertible preferred
stock, net of
issuance costs....... -- 967 5,457 -- 7,499 13,923
Sale of common stock,
net of notes
receivable........... 2 -- 2 2 2 6
Collection of note
receivable........... -- 1 12 13 13
Proceeds from notes
payable to
shareholders......... 136 1,300 750 500 2,186
Payment on notes
payable to
shareholders......... -- (136) -- -- (136)
Proceeds from
sale/leaseback of
property and
equipment............ -- -- 333 -- 508 841
Repayment of capital
lease obligation..... -- -- (6) -- (20) (26)
----- ------- ------- ------ ------- -------
Net cash provided by
financing
activities......... 138 2,132 6,548 515 7,989 16,807
----- ------- ------- ------ ------- -------
NET INCREASE (DECREASE)
IN CASH AND
EQUIVALENTS........... 36 205 2,158 (192) 5,258 7,657
CASH AND EQUIVALENTS:
Beginning of period... -- 36 241 241 2,399 --
----- ------- ------- ------ ------- -------
End of period......... $ 36 $ 241 $ 2,399 $ 49 $ 7,657 $ 7,657
===== ======= ======= ====== ======= =======
SUPPLEMENTARY
DISCLOSURES OF CASH
FLOW INFORMATION--
Cash paid during the
period for interest.. $ -- $ 1 $ 11 $ -- $ -- $ 12
===== ======= ======= ====== ======= =======
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common and
preferred stock for
note receivable...... $ 1 $ 25 $ 75 $ -- $ 119 $ 220
===== ======= ======= ====== ======= =======
Cancellation of
preferred stock and
related noted
receivable........... $ -- $ -- $ 12 $ 12 $ -- $ 12
===== ======= ======= ====== ======= =======
Conversion of note
payable to
shareholder to
preferred stock...... $ -- $ -- $ 2,050 $1,250 $ -- $ 2,050
===== ======= ======= ====== ======= =======
Issuance of common
warrants............. $ -- $ -- $ 25 $ -- $ -- $ 25
===== ======= ======= ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996, FOR THE THREE-MONTH PERIODS
ENDED JUNE 30, 1995 AND MARCH 31, 1996, AND CUMULATIVE IS UNAUDITED.)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business--Silicon Gaming, Inc. (the Company) was incorporated on July 27,
1993 to develop and market innovative gaming devices through the use of
advanced multimedia and interactive technologies.
As of December 31, 1995, the Company was a development stage company.
Successful completion of the Company's development program and, ultimately,
the attainment of profitable operations is dependent upon future events,
including obtaining adequate financing to fulfill its development activities,
obtaining regulatory approval of its products, and achieving a level of sales
adequate to support the Company's cost structure.
Fiscal Year End--Effective April 1, 1995, the Company changed its fiscal
year end to December 31 from March 31. Accordingly, the period ended December
31, 1995 is a nine-month period.
Consolidation--The consolidated financial statements include the Company and
its wholly owned subsidiaries (formed in February 1996) after elimination of
intercompany accounts and transactions.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives of three to five years.
Research and Development Expenses--Research and development expenses are
charged to operations as incurred. In connection with the Company's product
development efforts, it develops software applications which are integral to
the operation of the product. The costs to develop such software have not been
capitalized as the Company believes its current software development
process is essentially completed concurrent with the establishment of
technological feasibility and/or development of the related hardware.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach for financial reporting
of income taxes.
Pro Forma Net Loss Per Share--In connection with the filing by the Company
of a Registration Statement with the Securities and Exchange Commission (SEC)
for a proposed offering of Common Stock (See Note 10), certain shares of
Redeemable Preferred Stock will automatically convert to 5,292,524 shares of
Common Stock. During the twelve-month period prior to the filing of this
Registration Statement, the Company has sold Redeemable Convertible Preferred
Stock and issued options and warrants to purchase Preferred and Common stock
at prices less than the initial filing price. Accordingly, the Company has
included pro forma net loss per share information as it believes this
information is the most meaningful under the circumstances. Pro forma net loss
per share is presented for the most recent fiscal year and interim period and
is based on (i) the weighted average number of shares of Common Stock
outstanding; (ii) the weighted average number of shares of
F-7
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Redeemable Convertible Preferred Stock issued more than one year prior to the
filing date on an as-converted basis and (iii) all Redeemable Convertible
Preferred Stock issued, Common Stock issued and options and warrants to
purchase shares of Common and Preferred Stock granted during the twelve-month
period preceding the filing date which, under the Rules and Regulations of the
SEC, must be considered outstanding (using the treasury stock method at the
assumed offering price) for all periods presented.
Pro Forma Balance Sheet--The pro forma balance sheet gives effect to the
April and May 1996 sale of 1,542,000 shares of Series C Redeemable Preferred
Stock for cash and other consideration, the subsequent conversion of 1,998,332
shares of Series A and 4,386,141 shares of Series B Redeemable Preferred Stock
on a one-for-one basis into Series A-1 and Series B-1 Redeemable Preferred
Stock, respectively, and the conversion upon the completion of the offering of
all outstanding shares of Redeemable Preferred Stock, other than Series A-1 and
Series B-1 Redeemable Preferred Stock, into 5,292,524 shares of Common Stock.
Recently Issued Accounting Standard--In October 1995, the Financial
Accounting Standards Board issued Statement No. 123, "Accounting for Stock-
Based Compensation." The new standard defines a fair value method of accounting
for stock options and other equity instruments, such as stock purchase plans.
Under this method, compensation cost is measured based on the fair value of the
stock award when granted and is recognized as an expense over the service
period, which is usually the vesting period. This standard will be effective
for the Company beginning in 1996, and requires measurement of awards made
beginning in 1995. The new standard permits companies to continue to account
for equity transactions with employees under existing accounting rules, but
requires disclosure in a note to the financial statements of the pro forma net
income and earnings per share as if the company had applied the new method of
accounting. The Company intends to follow these disclosure requirements for its
employee stock plans. As a result, adoption of the new standard will not impact
reported earnings or earnings per share, and will have no effect on the
Company's cash flows.
Interim Financial Statements (Unaudited)--The accompanying balance sheet as
of March 31, 1996, statement of shareholders' deficiency for the three-month
period ended March 31, 1996, and the statements of operations and cash flows
for the three-month periods ended June 30, 1995, March 31, 1996, and cumulative
are unaudited. In the opinion of management, these financial statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments and accruals,
necessary for the fair presentation of the financial position and operating
results as of such date and for such periods. The information disclosed in
these notes to financial statements related to these periods is unaudited.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1995 1995 1996
--------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and fixtures.. $ 37 $ 57 $ 230
Office equipment........ 52 79 95
Computer equipment...... 169 781 1,099
Leasehold improvements.. -- -- 76
---- ----- ------
258 917 1,500
Accumulated depreciation
and amortization....... (47) (183) (283)
---- ----- ------
$211 $ 734 $1,217
==== ===== ======
</TABLE>
F-8
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. NOTES PAYABLE TO SHAREHOLDER
At March 31, 1995, the Company had $1,300,000 of notes payable to
shareholders which bore interest at 10% per annum with principal and interest
due in fiscal 1996. In conjunction with obtaining the notes, the Company
issued a warrant to purchase 125,000 shares of its common stock for $0.07 per
share. In June 1995, $1,250,000 of the notes payable were converted to Series
A redeemable convertible preferred stock and the warrant was canceled. Between
April and August 1995, the Company borrowed an additional $750,000 from
existing shareholders, evidenced by notes payable bearing interest at 10% with
principal and interest payable on demand. In August 1995, the remaining
$800,000 notes payable and $10,000 of accrued interest were converted to
Series B redeemable convertible preferred stock.
4. COMMITMENTS
As of December 31, 1995, the Company had entered into two agreements to
license patented core technologies and product development services essential
to the development and production of the Company's product. In connection with
these agreements, upon meeting certain product development milestones (as
defined), the Company is obligated to pay license and development fees
totaling $770,000, of which $140,000 and $560,000 had been paid and $35,000
and $57,000 was included in accrued liabilities as of March 31, 1995 and
December 31, 1995, respectively. These costs have been expensed as incurred.
5. LEASES
In October 1995, the Company obtained a lease line of credit to acquire up
to $1,000,000 of equipment under capital leases with a term of 48 months. The
Company granted the leasing company a warrant to purchase 61,404 shares of its
Series B preferred stock at a price of $1.14 per share; such warrant expires
in the year 2002 and may be net-exercised by the holder. The estimated fair
value of the warrant, $25,000, has been recorded as a deferred financing cost
in other assets, and will be amortized over the term of the related leases. In
December 1995, the Company entered into a sale/leaseback arrangement under
this lease line for equipment with an original cost of $333,000; no gain or
loss was recorded on this transaction. In addition, $508,000 of equipment was
subject to sale/leaseback arrangements in the three-month period ended March
31, 1996.
In September 1995, the Company entered into a lease agreement for new
facilities which it expects to occupy in February 1996. The lease expires in
2006 and requires the Company to incur at least $175,000 for net leasehold
improvements in the first three years of occupancy. The Company has found a
sublessee for its current facility.
F-9
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum operating and capital lease commitments at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASE
--------- -------
(IN THOUSANDS)
<S> <C> <C>
1996....................................................... $ 304 $ 84
1997....................................................... 299 101
1998....................................................... 299 112
1999....................................................... 422 103
2000....................................................... 445 --
Thereafter................................................. 2,575 --
------ ----
Total minimum lease payments............................... $4,344 400
======
Amount representing interest............................... (73)
----
Present value of lease payments............................ 327
Current portion............................................ (55)
----
Long-term portion.......................................... $272
====
</TABLE>
Total rent expense (including prorated common area maintenance charges and
utilities) for the period from inception through March 31, 1994, the year ended
March 31, 1995, the nine-month period ended December 31, 1995 and the three-
month period ended March 31, 1996 was $4,000, $49,000, $58,000 and $117,000,
respectively.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock consists of:
<TABLE>
<CAPTION>
AMOUNT, NET
OF NOTES
DESIGNATED OUTSTANDING RECEIVABLE
---------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Series A:
Issued May 1994 at $.75 per share for
cash.................................. 2,999,997 1,299,998 $ 967
Issued October 1994 at $.75 for notes.. 50,000 --
---------- -------
Balances, March 31, 1995................. 1,349,998 967
Cancellation of shares and note in June
1995.................................. (16,667) --
Collection of notes receivable......... 12
Conversion of notes payable at $.75 per
share in June 1995.................... 1,666,666 1,250
---------- -------
Balance, Series A........................ 2,999,997 2,229
Series A-1, designated and unissued...... 2,999,997 -- --
Series B--
Issued August 1995 at $1.14 per share
for cash and conversion of $800,000
notes payable and related accrued
interest.............................. 5,596,404 5,535,000 6,267
Series B-1, designated and unissued...... 5,596,404 -- --
---------- -------
Balances, December 31, 1995.............. 8,534,997 8,496
Series C (see Note 10)--
Issued March 1996 at $5.00 per share
for cash.............................. 3,000,000 1,600,000 7,500
---------- ---------- -------
Balances, March 31, 1996................. 20,192,802 10,134,997 $15,996
========== ========== =======
</TABLE>
F-10
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant terms of the Series A and B redeemable convertible preferred
stock are as follows:
. Each share of Series A and B preferred stock is convertible into 0.6667
shares of common stock (subject to adjustment for anti-dilution) at the
election of the holder. Such conversion shall be automatic in the event
of an initial public offering of stock meeting certain criteria.
. Each share of Series A and B preferred stock is convertible at any time
into one share of Series A-1 and B-1, respectively, at the option of the
holder.
. Each share of Series A and Series B preferred stock has voting rights
equivalent to the number of shares of common stock into which it is
convertible. Series A-1 and B-1 have no voting rights except as required
by law.
. At any time after August 2000, the holders of a majority of the then
outstanding shares of preferred stock may require the Company to redeem
for cash the preferred shares outstanding over a three-year period at a
per share purchase price equal to the original issue price (subject to
certain anti-dilution adjustments) plus all declared but unpaid dividends
on such shares. The Company shall redeem the shares of preferred stock
ratably from the preferred shareholders of record on that date.
. Dividends may be declared at the discretion of the Board of Directors and
are noncumulative. To the extent declared, dividends of $0.075 per share
for Series A and A-1 and $0.114 per share for Series B and B-1 must be
paid prior to any dividends on common stock. No dividends have been
declared through December 31, 1995.
. In the event of liquidation, dissolution or winding up of the Company,
the preferred shareholders shall receive the initial issue price per
share plus all declared but unpaid dividends. If the assets and funds to
be distributed are insufficient to permit full payment, then the funds
shall be distributed on a pro rata basis. Upon completion of this
distribution, the holders of the common stock will receive a pro rata
distribution of any remaining assets of the Company.
. Holders of the preferred stock have certain registration rights.
7. COMMON STOCK
Common stock was reserved for issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
Conversion of outstanding redeemable convertible
preferred stock.................................. 8,534,997 10,134,997
Issuable under stock purchase warrants (see Notes
5 and 10)........................................ 61,404 411,404
Stock Option Plan................................. 2,010,667 742,917
---------- ----------
10,607,068 11,289,318
========== ==========
</TABLE>
Stock Option Plan
Under the 1994 Stock Option Plan (the Plan), the Company may grant incentive
or nonstatutory stock options. Up to 3,085,000 shares of common stock have
been authorized for issuance under the Plan. The Plan allows the Company to
grant incentive stock options and nonstatutory stock options to key employees,
directors and consultants at not less than the fair market value at the date
of grant as determined by the Board of Directors. Nonstatutory options may be
granted at prices ranging from 85% to 110% of fair market value at the date of
grant. The options generally expire five to ten years from the date of grant.
Incentive stock options and nonstatutory options normally vest at a rate of
25% on the one year anniversary of the grant date and 1/48 per month
thereafter. During the nine-month period ended December 31, 1995, employees
exercised options in
F-11
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exchange for notes payable to the Company of $75,000. Of the 693,333 exercised
shares, 562,536 shares were not vested at December 31, 1995. (As of March 31,
1996, of the 1,043,703 exercised shares, 925,750 shares were not vested.) To
the extent employees exercise unvested options, the Company may repurchase
unvested shares at the original purchase price upon termination of employment.
Details of option activity under the Plan are as follows:
<TABLE>
<CAPTION>
NUMBER
OF EXERCISE
SHARES PRICE TOTAL
---------- ----------- ---------
<S> <C> <C> <C>
Granted...................................... 610,000 $0.07 $ 42,700
---------- ---------
Outstanding March 31, 1995................... 610,000 $0.07 42,700
Granted...................................... 1,644,500 $0.07-$0.11 141,255
Exercised.................................... (1,074,333) $0.07-$0.11 (77,203)
Canceled..................................... (91,667) $0.07 (6,417)
---------- ---------
Outstanding, December 31, 1995............... 1,088,500 $0.07-$0.11 100,335
Granted...................................... 267,000 $0.11-$1.00 51,620
Exercised.................................... (1,267,750) $0.07-$0.11 (122,353)
Canceled..................................... (6,000) $0.07-$0.11 (477)
---------- ---------
Outstanding, March 31, 1996.................. 81,750 $0.07-$1.00 $ 29,125
========== =========
</TABLE>
No stock options were granted during the period ended March 31, 1994.
At December 31, 1995, 200,529 options were exercisable and 922,967 shares
were available for future grant. At March 31, 1996, 661,167 shares were
available for future grant.
8. INCOME TAXES
The Company has had losses since inception and therefore has not provided
for income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss and tax credit carryforwards. Significant components of the Company's
deferred income tax assets as of March 31, 1995 and December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1995
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Net deferred tax assets:
Net operating losses................................... $778 $2,031
Research and development credits....................... 112 150
Capitalized research and development costs............. 81 428
Accruals deductible in different periods............... 24 (183)
Depreciation and amortization.......................... (1) 53
---- ------
994 2,479
Valuation allowance...................................... (994) (2,479)
---- ------
Total.................................................... $-- $ --
==== ======
</TABLE>
F-12
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future tax returns, the Company has fully reserved
its net deferred tax assets as of March 31, 1995 and December 31, 1995,
respectively.
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $5,800,000 and $1,000,000 for federal and state income tax
purposes, respectively ($8,100,000 and $1,700,000, respectively as of March
31, 1996). These carryforwards begin to expire in 2000. The net operating loss
carryforwards available for state tax purposes are substantially less than for
federal tax purposes, primarily because research and development costs have
been capitalized for state income tax purposes.
The Company also has research and development credit carryforwards of
approximately $100,000 and $50,000 available to offset future federal and
state income taxes, respectively, as of December 31, 1995 and March 31, 1996.
These carryforwards begin expiring in 2000.
Section 382 of the Internal Revenue Code and the applicable California law
impose annual limitations on the use of net operating loss and tax credit
carryforwards if there is a change in ownership, as defined, within any three-
year period. As a result of certain stock offerings, approximately $3,500,000
of federal net operating loss carryforwards are limited to an annual deduction
of approximately $650,000, until utilized or expired.
9. RELATED PARTIES
For the period from inception through March 31, 1994, the year ended March
31, 1995 and the nine-month period ended December 31, 1995, the Company paid
approximately $30,000, $166,000 and $23,000, respectively, to a partnership in
which a founder is a partner in exchange for management services and
administrative support. Additionally, for the period inception through March
31, 1994, the year ended March 31, 1995, and the nine-month period ended
December 31, 1995, payroll and other expenses, including rent, utilities and
travel, amounting to $106,000, $467,000 and $71,000, respectively, were paid
on behalf of the Company by affiliated companies and were subsequently
reimbursed by the Company.
10. SUBSEQUENT EVENTS
In March 1996, the Company restated its articles of incorporation to
increase the number of authorized common shares to 25,000,000 shares, to
increase the number of authorized preferred shares to 20,192,802 and to
designate 3,000,000 shares of preferred stock as Series C preferred stock.
Each share of Series C preferred stock is convertible into 0.6667 shares of
common stock at the election of the holder (subject to anti-dilution
adjustment) and will automatically convert upon an initial public offering of
stock meeting certain criteria, has voting rights equal to the number of
shares of common stock into which it is convertible, is entitled to a non-
cumulative dividend of $0.50 per share to the extent declared by the Board of
Directors, and has a liquidation preference consistent with, and ranking
equally with all outstanding preferred stock. The Company also has the right
up to March 1, 1997 to repurchase all of the shares of Series C preferred
stock held by any stockholder for the original issuance price in order to
facilitate the Company's attempt to obtain a gaming license in any
jurisdiction. In addition, the date upon which all classes of preferred
stockholders may require the Company to redeem their outstanding shares was
extended to February 28, 2002.
On March 22, 1996, the Company sold 1,600,000 shares of Series C redeemable
convertible preferred stock for cash consideration of $8,000,000. The Company
incurred issuance costs of approximately $500,000 and issued to the placement
agent warrants to purchase shares of common stock--150,000 shares at $5.00 per
share and 200,000 shares at a per share price equal to the Company's initial
public offering price if it occurs prior to December 31, 1996, or $5.00 if
such offering has not occurred as of that date. The warrants expire in April
2001.
F-13
<PAGE>
SILICON GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During April 1996, holders of 1,998,332 Series A redeemable convertible
shares converted their shares into Series A1 Redeemable Preferred Stock, and
holders of 4,386,141 Series B redeemable preferred stock converted their
shares into Series B1 Redeemable Preferred Stock.
In May 1996, the Board of Directors of the Company approved an increase in
the number of authorized shares of preferred stock to 20,417,802 and the
designated number of shares of Series C redeemable convertible preferred stock
to 3,225,000. During April and May 1996, the Company sold an additional
1,492,000 shares of Series C redeemable convertible preferred stock for cash
consideration of $7,460,000, issued 50,000 shares of Series C redeemable
convertible preferred stock for other consideration of $250,000 and incurred
an additional $500,000 of issuance costs.
On May 28, 1996, the Board of Directors adopted the following, subject to
shareholder approval (received on June 12, 1996):
. An increase in the number of shares of authorized shares of Common Stock
to 50,000,000.
. An increase in the number of shares reserved under the 1994 Stock Option
Plan to 4,300,000.
. The 1996 Employee Stock Purchase Plan and reserved 450,000 shares of
Common Stock for sale to employees at a price no less than 85% of the
lower of fair market value at the beginning of the 24-month offering
period or the end of each six-month purchase period.
. The 1996 Outside Directors Stock Option Plan and reserved 300,000 shares
of Common Stock for grants of options to each outside directors to
purchase 22,500 shares of Common Stock at fair market value as of the
grant date, as well as additional option grants for 7,500 shares to be
issued in each subsequent year.
On May 30, 1996, the Company filed a Registration Statement with the SEC for
the sale of 3,500,000 shares of Common Stock (excluding the underwriters'
over-allotment option for an additional 525,000 shares). Upon the
effectiveness of this offering:
. All outstanding shares of Redeemable Preferred Stock, other than Series
A1 and B1 Nonvoting Redeemable Preferred Stock, will convert to 5,292,524
shares of Common Stock.
. The number of authorized shares of Preferred Stock will be reduced to
6,884,473.
. All shares of Common Stock outstanding immediately prior to the offerings
will be subject to a three-for-two reverse split. No adjustment has been
made in these financial statements to reflect this split.
F-14
<PAGE>
[LETTERHEAD OF GRAY CARY WARE & FREIDENRICH]
June 12, 1996
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: SILICON GAMING, INC.
REGISTRATION STATEMENT ON FORM 10
REGISTRATION NO. 0-28294
Ladies and Gentlemen:
As counsel to Silicon Gaming, Inc., a California corporation (the
"Company"), we are rendering this opinion in connection with the filing of the
above-referenced Registration Statement (the "Registration Statement"). The
Company currently has outstanding shares of its Series A, Series A1, Series B,
Series B1 and Series C Preferred Stock ("Preferred Stock"), the holders of which
are entitled to certain distributions upon liquidation of the Company in
preference to the holders of other shares of capital stock of the Company (the
"Liquidation Preference") as set forth in the Company's Third Amended and
Restated Articles of Incorporation, as amended (the "Articles"). In connection
with the filing of the Registration Statement, the Company has requested that we
provide you with the opinions required under Item 601(b)(7) of Regulation S-K
regarding restrictions upon the Company's ability to pay dividends by reason of
the Liquidation Preference and the availability to holders of Preferred Stock of
any remedy in the event of an unlawful dividend.
We have examined all instruments, documents, and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies. When we state our
opinion "as a matter of law," we are opining as to the legal meaning of the
language of applicable statutes, as and to the extent interpreted by reported
cases addressing such statutes; we are not opining to the effect that there are
no facts and circumstances which could give rise to a new and different
interpretation of law which is contrary to such legal meaning as it currently
exists or as to equitable remedies, in which a court would
<PAGE>
GRAY CARY WARE & FREIDENRICH
June 12, 1996
Page 2
consider issues such as fairness or good faith, notwithstanding the absence of
remedies explicitly authorized by statute.
Item 601(b)(7) of Regulation S-K requires the filing of an opinion of
counsel as to (1) whether there are any "restrictions upon surplus" by reason of
any excess of any liquidation preference over the par value of the shares that
are entitled to such liquidation preference and (2) any remedies available to
shareholders "before or after payment of any dividend that would reduce surplus
to an amount less than the amount of such excess." Although the Preferred Stock
has par value, California law does not recognize the concepts of "par value" and
"surplus" as affecting a corporation's authority to pay dividends. Rather,
Section 500 of the California General Corporation Law (the "Corporation Law")
generally permits the payment of a dividend based either on (i) the
corporation's retained earnings or (ii) the excess of the corporation's assets
over its liabilities and the excess of its current assets over its current
liabilities.
Notwithstanding Section 500, a corporation that has outstanding shares that
are entitled to a liquidation preference is restricted in the payment of
dividends or other distributions pursuant to Section 502 of the Corporation Law.
Section 502 states that "neither a corporation nor any of its subsidiaries shall
make any distribution to the corporation's shareholders on any shares of its
stock of any class or series that are junior to outstanding shares of any other
class or series with respect to distribution of assets on liquidation if, after
giving effect thereto, the excess of its assets (exclusive of goodwill,
capitalized research and development expenses and deferred charges) over its
liabilities (not including deferred taxes, deferred income and other deferred
credits) would be less than the liquidation preference of all shares having a
preference on liquidation over the class or series to which the distribution is
made." Accordingly, if and when the Company is permitted under the Corporation
Law to pay a dividend on shares of its Common Stock, the assets out of which
such dividend could be paid will be reduced by the amount of the Liquidation
Preference that is payable to the holders of shares of Preferred Stock that are
outstanding at the time the dividend is to be paid.
Under Section 506(a) of the Corporation Law, any shareholder who receives
an improper distribution with knowledge of facts indicating the impropriety of
such dividend is liable to the Company for the amount of the distribution
received. Under Section 506(b), upon payment of such improper distribution, any
holder of Preferred Stock is entitled to bring suit in the name of the Company
against any or all shareholders that may be liable under Section 506(a).
Under Section 166 of the Corporation Law, a "distribution" to shareholders
includes a repurchase of shares for cash or property. The Articles provide,
however,
<PAGE>
GRAY CARY WARE & FREIDENRICH
June 12, 1996
Page 3
that each holder of Preferred Stock shall be deemed to have consented, for
purposes of Sections 502 and 506 of the Corporation Law, to distributions made
by the Company "in connection with the repurchase of shares of Common Stock
issued to or held by employees, directors or consultants upon termination of
their employment or services pursuant to agreements providing for such
repurchase." Such consent to repurchases is referred to herein as the
"Repurchase Consent."
Based on the foregoing, we are of the opinion that, solely as a matter of
law under the Corporation Law as in effect on the date hereof:
1. Should any shares of Preferred Stock remain outstanding at such time as
the Company has sufficient retained earnings or a sufficient excess of assets
over liabilities to pay a dividend on its capital stock, the existence of the
Liquidation Preference will directly reduce the amount of assets available to
the Company for the payment of dividends on its Common Stock other than
distributions authorized by the Repurchase Consent.
2. In the event of any payment by the Company of a dividend on its Common
Stock after which the excess of the Company's assets (exclusive of goodwill,
capitalized research and development expenses and deferred charges) over its
liabilities (not including deferred taxes, deferred income and other deferred
credits) would be less than the aggregate Liquidation Preference applicable to
shares of Preferred Stock then outstanding, other than a distribution authorized
by the Repurchase Consent, any holder of Common Stock who receives such dividend
with knowledge of facts indicating its impropriety would be liable to the
Company for the amount of the dividend received by such shareholder, and any
holder of Preferred Stock would be entitled to sue any and all such holders of
Common Stock in the name of the Company.
We render the foregoing opinion as members of the Bar of the State of
California and express no opinion as to any law of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich
GRAY CARY WARE & FREIDENRICH
A Professional Corporation
<PAGE>
EXHIBIT 10.1
SILICON GAMING, INC.
AMENDED AND RESTATED
1994 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The Silicon Gaming, Inc. 1994 Stock Option Plan was
initially established as of May 3, 1994 (the "INITIAL PLAN"). The Initial Plan
is hereby amended and restated in its entirety as the Silicon Gaming, Inc.
Amended and Restated 1994 Stock Option Plan (the "PLAN") effective as of
__________, 1996 (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Participating Company Group and its shareholders by providing an incentive to
attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed. However, all Incentive Stock Options shall
be granted, if at all, within ten (10) years from the earlier of the date the
Plan is adopted by the Board or the date the Plan is duly approved by the
shareholders of the Company. Notwithstanding the foregoing, if the maximum
number of shares of Stock issuable pursuant to the Plan as provided in Section
4.1 has been increased at any time, all Incentive Stock Options shall be
granted, if at all, no later than the last day preceding the tenth (10th)
anniversary of the earlier of (a) the date on which the latest such increase in
the maximum number of shares of Stock issuable under the Plan was approved by
the shareholders of the Company or (b) the date such amendment was adopted by
the Board.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one or
more Committees have been appointed by the Board to administer the Plan, "Board"
also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended, and
any applicable regulations promulgated thereunder.
1
<PAGE>
(c) "COMMITTEE" means the Compensation Committee or other committee of
the Board duly appointed to administer the Plan and having such powers as shall
be specified by the Board. Unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to amend or terminate
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law.
(d) "COMPANY" means Silicon Gaming, Inc., a California corporation,
or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor, engaged by a
Participating Company to render services other than as an Employee or a
Director.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee (including an
officer or a Director who is also treated as an employee) in the records of a
Participating Company; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of a share of
stock or other property as determined by the Board, in its sole discretion, or
by the Company, in its sole discretion, if such determination is expressly
allocated to the Company herein.
(j) "INCENTIVE STOCK OPTION" means an Option intended to be (as set
forth in the Option Agreement) and which qualifies as an incentive stock option
within the meaning of Section 422(b) of the Code.
(k) "INSIDER" means an officer or a Director of the Company or any
other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(l) "NONSTATUTORY STOCK OPTION" means an Option not intended to be (as
set forth in the Option Agreement) or which does not qualify as an Incentive
Stock Option.
(m) "OPTION" means a right to purchase Stock (subject to adjustment as
provided in Section 4.2) pursuant to the terms and conditions of the Plan. An
Option may be either an Incentive Stock Option or a Nonstatutory Stock Option.
(n) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee setting forth the terms, conditions and restrictions of the
Option granted to the Optionee and any shares acquired upon the exercise
thereof.
2
<PAGE>
(o) "OPTIONEE" means a person who has been granted one or more
Options.
(p) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(q) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(r) "PARTICIPATING COMPANY GROUP" means, at any point in time, all
corporations collectively which are then Participating Companies.
(s) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as amended
from time to time, or any successor rule or regulation.
(t) "SECTION 162(M)" means Section 162(m) of the Code, as amended by
the Revenue Reconciliation Act of 1993 (P.L. 103-66).
(u) "STOCK" means the common stock of the Company, as adjusted from
time to time in accordance with Section 4.2.
(v) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.
(w) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the time an
Option is granted to the Optionee, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
--------------
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3
<PAGE>
3.2 POWERS OF THE BOARD. In addition to any other powers set forth in
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at which,
Options shall be granted and the number of shares of Stock to be subject to each
Option;
(b) to designate Options as Incentive Stock Options or Nonstatutory
Stock Options;
(c) to determine the Fair Market Value of shares of Stock or other
property;
(d) to determine the terms, conditions and restrictions applicable to
each Option (which need not be identical) and any shares acquired upon the
exercise thereof, including, without limitation, (i) the exercise price of the
Option, (ii) the method of payment for shares purchased upon the exercise of the
Option, (iii) the method for satisfaction of any tax withholding obligation
arising in connection with the Option or such shares, including by the
withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of employment or service
with the Participating Company Group on any of the foregoing, and (vii) all
other terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option in
substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the exercisability of any
Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee's termination of
employment or service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and policies
relating to the Plan, or to adopt supplements to, or alternative versions of,
the Plan, including, without limitation, as the Board deems necessary or
desirable to comply with the laws of, or to accommodate the tax policy or custom
of, foreign jurisdictions whose citizens may be granted Options; and
(i) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
4
<PAGE>
3.3 DISINTERESTED ADMINISTRATION. With respect to participation by
Insiders in the Plan, at any time that any class of equity security of the
Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall
be administered in compliance with the "disinterested administration"
requirements of Rule 16b-3, if any.
3.4 COMMITTEE COMPLYING WITH SECTION 162(M). If a Participating Company
is a "publicly held corporation" within the meaning of Section 162(m), the Board
may establish a Committee of "outside directors" within the meaning of Section
162(m) to approve the grant of any Option which might reasonably be anticipated
to result in the payment of employee remuneration that would otherwise exceed
the limit on employee remuneration deductible for income tax purposes pursuant
to Section 162(m).
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Two Million Eight Hundred Sixty-Six
Thousand Six Hundred Sixty-Seven (2,866,667), increased on the first day of each
fiscal year of the Company beginning on and after March 31, 1997 by a number of
shares equal to four percent (4%) of the number of shares of Stock issued and
outstanding on the last day of the preceding fiscal year, and shall consist of
authorized but unissued or reacquired shares of Stock or any combination
thereof. Notwithstanding the foregoing, except as adjusted pursuant to Section
4.2, in no event shall more than Two Million Eight Hundred Sixty-Six Thousand
Six Hundred Sixty-Seven (2,866,667) shares of Stock be cumulatively available
for issuance pursuant to the exercise of Incentive Stock Options (the "ISO SHARE
ISSUANCE LIMIT"). If any outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number and class of shares subject
to the Plan and to any outstanding Options, in the ISO Share Issuance Limit set
forth in Section 4.1, and in the exercise price per share of any outstanding
Options. If a majority of the shares which are of the same class as the shares
that are subject to outstanding Options are exchanged for, converted into, or
otherwise become (whether or not pursuant to an Ownership Change Event, as
defined in Section 8.1) shares of another corporation (the "NEW SHARES"), the
Board may unilaterally amend the outstanding Options to provide that such
Options are exercisable for New Shares. In the event of any such amendment, the
number of shares subject to, and the exercise price per share of, the
outstanding Options shall be adjusted in a fair and equitable manner as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded up or down to the nearest whole number, as determined by the
Board, and in no event may the exercise price of any Option be decreased to an
amount less than the par value, if any, of the stock subject to the Option. The
adjustments determined by the Board pursuant to this Section 4.2 shall be final,
binding and conclusive.
5
<PAGE>
5. ELIGIBILITY AND OPTION LIMITATIONS.
----------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees" shall include prospective Employees to whom Options are granted in
connection with written offers of employment with the Participating Company
Group, and "Consultants" shall include prospective Consultants to whom Options
are granted in connection with written offers of engagement with the
Participating Company Group. Notwithstanding the foregoing, no Director of the
Company who is not also an Employee may be granted an Option at any time that
any class of equity security of the Company is registered pursuant to Section 12
of the Exchange Act. Eligible persons may be granted more than one (1) Option.
5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on the
effective date of the grant of an Option to such person may be granted only a
Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
5.3 FAIR MARKET VALUE LIMITATION. To the extent that the aggregate Fair
Market Value of stock with respect to which options designated as Incentive
Stock Options are exercisable by an Optionee for the first time during any
calendar year (under all stock option plans of the Participating Company Group,
including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.3, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of stock shall be determined as of the time the option
with respect to such stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.3, such different
limitation shall be deemed incorporated herein effective as of the date and with
respect to such Options as required or permitted by such amendment to the Code.
If an Option is treated as an Incentive Stock Option in part and as a
Nonstatutory Stock Option in part by reason of the limitation set forth in this
Section 5.3, the Optionee may designate which portion of such Option the
Optionee is exercising and may request that separate certificates representing
each such portion be issued upon the exercise of the Option. In the absence of
such designation, the Optionee shall be deemed to have exercised the Incentive
Stock Option portion of the Option first.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option
-------------------------------
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock
6
<PAGE>
Option shall be not less than eighty-five percent (85%) of the Fair Market Value
of a share of Stock on the effective date of grant of the Option and (c) no
Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an
exercise price per share less than one hundred ten percent (110%) of the Fair
Market Value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner qualifying under the
provisions of Section 424(a) of the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Incentive Stock Option shall be exercisable after the expiration of
ten (10) years after the effective date of grant of such Option, (b) no
Incentive Stock Option granted to a Ten Percent Owner Optionee shall be
exercisable after the expiration of five (5) years after the effective date of
grant of such Option, and (c) no Option granted to a prospective Employee or
prospective Consultant may become exercisable prior to the date on which such
person commences service with a Participating Company.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided
below, payment of the exercise price for the number of shares of Stock being
purchased pursuant to any Option shall be made (i) in cash, by check, or cash
equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by
adoption of or by amendment to the standard forms of Option Agreement described
in Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option may not
be exercised by tender to the Company of shares of Stock to the extent such
tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
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<PAGE>
(c) CASHLESS EXERCISE. The Company reserves, at any and all times,
the right, in the Company's sole and absolute discretion, to establish, decline
to approve or terminate any program or procedures for the exercise of Options by
means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted
if the exercise of an Option using a promissory note would be a violation of any
law. Any permitted promissory note shall be on such terms as the Board shall
determine at the time the Option is granted. The Board shall have the authority
to permit or require the Optionee to secure any promissory note used to exercise
an Option with the shares of Stock acquired upon the exercise of the Option or
with other collateral acceptable to the Company. Unless otherwise provided by
the Board, if the Company at any time is subject to the regulations promulgated
by the Board of Governors of the Federal Reserve System or any other
governmental entity affecting the extension of credit in connection with the
Company's securities, any promissory note shall comply with such applicable
regulations, and the Optionee shall pay the unpaid principal and accrued
interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
7. STANDARD FORMS OF OPTION AGREEMENT.
----------------------------------
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board at
the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Immediately Exercisable Incentive Stock Option Agreement adopted
by the Board concurrently with its adoption of the Plan and as amended from time
to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the Board
at the time the Option is granted, an Option designated as a "Nonstatutory Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Immediately Exercisable Nonstatutory Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
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7.3 STANDARD TERM OF OPTIONS. Except as otherwise provided in Section
6.2 or by the Board in the grant of an Option, any Incentive Stock Option
granted hereunder shall have a term of ten (10) years from the effective date of
grant of the Option.
7.4 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement are not
inconsistent with the terms of the Plan. Such authority shall include, but not
by way of limitation, the authority to grant Options which are not immediately
exercisable.
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if
any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
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8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. Any Options which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the Transfer of Control nor exercised as of the date of the Transfer of
Control shall terminate and cease to be outstanding effective as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the outstanding Options immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Transfer of Control
is the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the
outstanding Options shall not terminate unless the Board otherwise provides in
its sole discretion.
9. PROVISION OF INFORMATION. Each Optionee shall be given access to
------------------------
information concerning the Company equivalent to that information generally made
available to the Company's common shareholders.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an
-----------------------------
Option shall be exercisable only by the Optionee or the Optionee's guardian or
legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. INDEMNIFICATION. In addition to such other rights of indemnification as
---------------
they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
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<PAGE>
12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the
--------------------------------
Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
shareholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no expansion in the class of persons
eligible to receive Nonstatutory Stock Options. In any event, no termination or
amendment of the Plan may adversely affect any then outstanding Option or any
unexercised portion thereof, without the consent of the Optionee, unless such
termination or amendment is required to enable an Option designated as an
Incentive Stock Option to qualify as an Incentive Stock Option or is necessary
to comply with any applicable law or government regulation.
13. CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING OPTIONS. Any other
------------------------------------------------------
provision of the Plan to the contrary notwithstanding, the terms of the Initial
Plan shall remain in effect and apply to all Options granted pursuant to the
Initial Plan.
11
<PAGE>
SILICON GAMING, INC.
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT (the "OPTION
AGREEMENT") is made and entered into as of ___________, 199_, by and between
Silicon Gaming, Inc. and ___________________________ (the "OPTIONEE").
The Company has granted to the Optionee an option to purchase certain shares
of Stock, upon the terms and conditions set forth in this Option Agreement (the
"OPTION").
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means ________________________ , 199_.
(b) "NUMBER OF OPTION SHARES" means ___________________ shares of
Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ ____________ per share of Stock, as
adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the Date of Option Grant.
(e) "INITIAL VESTING DATE" means the date occurring one (1) year
after (check one):
___ the Date of Option Grant.
___ __________________ , 199_, the date the Optionee's
Service commenced.
(f) "VESTED RATIO" means, on any relevant date, the ratio determined
as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
</TABLE>
1
<PAGE>
Vested Ratio
------------
On Initial Vesting Date, 1/4
provided the Optionee's Service
is continuous from the Date of
Option Grant until the Initial
Vesting Date
Plus
----
For each full month of the 1/48
Optionee's continuous Service
from the Initial Vesting Date
until the Vested Ratio equals
1/1, an additional
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "BOARD" means the Board of Directors of the Company. If one or
more Committees have been appointed by the Board to administer the Plan, "Board"
shall also mean such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as amended, and
any applicable regulations promulgated thereunder.
(j) "COMMITTEE" means the Compensation Committee or other committee of
the Board duly appointed to administer the Plan and having such powers as shall
be specified by the Board. Unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board
granted in the Plan, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(k) "COMPANY" means Silicon Gaming, Inc., a California
corporation, or any successor corporation thereto.
(l) "CONSULTANT" means any person, including an advisor, engaged by a
Participating Company to render services other than as an Employee or a
Director.
(m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(n) "DISABILITY" means the inability of the Optionee, in the opinion
of a qualified physician acceptable to the Company, to perform the major duties
of the Optionee's position with the Participating Company Group because of the
sickness or injury of the Optionee.
(o) "EMPLOYEE" means any person treated as an employee (including an
officer or a Director who is also treated as an employee) in the records of a
Participating
2
<PAGE>
Company; provided, however, that neither service as a Director nor payment of a
director's fee shall be sufficient to constitute employment for this purpose.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(q) "FAIR MARKET VALUE" means, as of any date, the value of a share of
stock or other property as determined by the Board, in its sole discretion, or
by the Company, in its sole discretion, if such determination is expressly
allocated to the Company herein.
(r) "INSIDER" means an officer or a Director of the Company or any
other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(s) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(t) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(u) "PARTICIPATING COMPANY GROUP" means, at any point in time, all
corporations collectively which are then Participating Companies.
(v) "PLAN" means the Silicon Gaming, Inc. Amended and Restated
1994 Stock Option Plan.
(w) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as amended
from time to time, or any successor rule or regulation.
(x) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(y) "SERVICE" means the Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its sole discretion, shall determine whether the Optionee's Service
has terminated and the effective date of such termination. (NOTE: If the Option
is exercised more than three (3) months after the date on which the Optionee
ceased to be an Employee (other than by reason of death or a permanent and total
disability as defined in Section 22(e)(3) of the Code), the Option will be
treated as a nonstatutory stock option and not as an incentive stock option to
the extent required by Section 422 of the Code.)
(z) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
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<PAGE>
(aa) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX CONSEQUENCES.
----------------
2.1 TAX STATUS OF OPTION. This Option is intended to be an incentive
stock option within the meaning of Section 422(b) of the Code (an "INCENTIVE
STOCK OPTION"), but the Company does not represent or warrant that this Option
qualifies as such. The Optionee should consult with the Optionee's own tax
advisor regarding the tax effects of this Option and the requirements necessary
to obtain favorable income tax treatment under Section 422 of the Code,
including, but not limited to, holding period requirements. (NOTE: If the
aggregate Exercise Price of the Option (that is, the Exercise Price multiplied
by the Number of Option Shares) plus the aggregate exercise price of any other
Incentive Stock Options held by the Optionee (whether granted pursuant to the
Plan or any other stock option plan of the Participating Company Group) is
greater than One Hundred Thousand Dollars ($100,000), the Optionee should
contact the Chief Financial Officer of the Company to ascertain whether the
entire Option qualifies as an Incentive Stock Option.)
2.2 ELECTION UNDER SECTION 83(B) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of
forfeiture if, for example, (a) they are unvested and are subject to a right of
the Company to repurchase such shares at the Optionee's original purchase price
if the Optionee's Service terminates, (b) the Optionee is an Insider and
exercises the Option within six (6) months of the Date of Option Grant (if a
class of equity security of the Company is registered under Section 12 of the
Exchange Act), or (c) the Optionee is subject to a restriction on transfer to
comply with "Pooling-of-Interests Accounting" rules. Failure to file an election
under Section 83(b), if appropriate, may result in adverse tax consequences to
the Optionee. The Optionee acknowledges that the Optionee has been advised to
consult with a tax advisor prior to the exercise of the Option regarding the tax
consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER
SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE
PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES
THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S SOLE
RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE
TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
4
<PAGE>
3. ADMINISTRATION. All questions of interpretation concerning this
--------------
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the Number
of Option Shares less the number of shares previously acquired upon exercise of
the Option, subject to the Optionee's agreement that any shares purchased upon
exercise are subject to the Company's repurchase rights set forth in Section 11.
Notwithstanding the foregoing, except as provided in Section 4.1(b), the
aggregate Fair Market Value of the shares of Stock with respect to which the
Optionee may exercise the Option for the first time during any calendar year,
when added to the aggregate Fair Market Value of the shares subject to any other
options designated as Incentive Stock Options granted to the Optionee under all
stock option plans of the Participating Company Group prior to the Date of
Option Grant with respect to which such options are exercisable for the first
time during the same calendar year, shall not exceed One Hundred Thousand
Dollars ($100,000). For purposes of the preceding sentence, options designated
as Incentive Stock Options shall be taken into account in the order in which
they were granted, and the Fair Market Value of shares of stock shall be
determined as of the time the option with respect to such shares is granted.
Such limitation on exercise shall be referred to in this Option Agreement as the
"ISO EXERCISE LIMITATION." If Section 422 of the Code is amended to provide for
a different limitation from that set forth in this Section 4.1(a), the ISO
Exercise Limitation shall be deemed amended effective as of the date required or
permitted by such amendment to the Code. The ISO Exercise Limitation shall
terminate upon the earlier of (i) the Optionee's termination of Service, (ii)
the day immediately prior to the effective date of a Transfer of Control in
which the Option is not assumed or substituted for by the Acquiring Corporation
as provided in Section 8, or (iii) the day ten (10) days prior to the Option
Expiration Date. Upon such termination of the ISO Exercise Limitation, the
Option shall be deemed a nonstatutory stock option to the extent of the number
of shares subject to the Option which would otherwise exceed the ISO Exercise
Limitation.
(b) Notwithstanding any other provision of this Option Agreement, if
compliance with the ISO Exercise Limitation as set forth in Section 4.1(a) will
result in the exercisability of any Vested Shares (as defined in Section 11.2)
being delayed more than thirty (30) days beyond the date such shares become
Vested Shares (the "VESTING DATE"), the Option shall be deemed to be two (2)
options. The first option shall be for the maximum portion of the Number of
Option Shares that can comply with the ISO Exercise Limitation without causing
the Option to be unexercisable in the aggregate as to Vested Shares on the
Vesting Date for such shares. The second option, which shall not be treated as
an Incentive Stock Option as
5
<PAGE>
described in section 422(b) of the Code, shall be for the balance of the Number
of Option Shares; that is, those such shares which, on the respective Vesting
Date for such shares, would be unexercisable if included in the first option and
thereby made subject to the ISO Exercise Limitation. Shares treated as subject
to the second option shall be exercisable on the same terms and at the same time
as set forth in this Option Agreement; provided, however, that (i) the second
sentence of Section 4.1(a) shall not apply to the second option and (ii) each
such share shall become a Vested Share on the Vesting Date on which such share
must first be allocated to the second option pursuant to the preceding sentence.
Unless the Optionee specifically elects to the contrary in the Optionee's
written notice of exercise, the first option shall be deemed to be exercised
first to the maximum possible extent and then the second option shall be deemed
to be exercised.
(c) In addition to the foregoing, in the event that the adoption of
the Plan or any amendment of the Plan is subject to the approval of the
Company's shareholders in order for the Plan or the grant of the Option to
comply with the requirements of Rule 16b-3, the Option shall not be exercisable
prior to such shareholder approval if the Optionee is an Insider, unless the
Board, in its sole discretion, approves the exercise of the Option prior to such
shareholder approval.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased and
(ii) an executed copy, if required herein, of the then current forms of escrow
and security agreement referenced below. The Option shall be deemed to be
exercised upon receipt by the Company of such written notice, the aggregate
Exercise Price, and, if required by the Company, such executed agreements.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided
below, payment of the aggregate Exercise Price for the number of shares of Stock
for which the Option is being exercised shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by
the Optionee having a Fair Market Value (as determined by the Company without
regard to any restrictions on transferability applicable to such stock by reason
of federal or state securities laws or agreements with an underwriter for the
Company) not less than the aggregate Exercise Price, (iii) by means of a
Cashless Exercise, as defined in Section 4.3(c), (iv) by the Optionee's
promissory note for the aggregate Exercise Price, or (v) by any combination of
the foregoing.
6
<PAGE>
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option may
not be exercised by tender to the Company of shares of Stock to the extent such
tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment in
a form acceptable to the Company of the proceeds of a sale or loan with respect
to some or all of the shares of Stock acquired upon the exercise of the Option
pursuant to a program or procedure approved by the Company (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System). The Company reserves, at any and all times, the right, in the
Company's sole and absolute discretion, to decline to approve or terminate any
such program or procedure.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be permitted
if an exercise of the Option using a promissory note would be a violation of any
law. Unless otherwise specified by the Board at the time the Option is granted,
the promissory note permitted in clause (iv) of Section 4.3(a) shall be a full
recourse note in a form satisfactory to the Company, with principal payable four
(4) years after the date the Option is exercised. Interest on the principal
balance of the promissory note shall be payable in annual installments at the
minimum interest rate necessary to avoid imputed interest pursuant to all
applicable sections of the Code. Such recourse promissory note shall be secured
by the shares of Stock acquired pursuant to the then current form of security
agreement as approved by the Company. At any time the Company is subject to the
regulations promulgated by the Board of Governors of the Federal Reserve System
or any other governmental entity affecting the extension of credit in connection
with the Company's securities, any promissory note shall comply with such
applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations. Except as the Company in its sole discretion shall determine, the
Optionee shall pay the unpaid principal balance of the promissory note and any
accrued interest thereon upon termination of the Optionee's Service with the
Participating Company Group for any reason, with or without cause.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is
7
<PAGE>
vested, and the Company shall have no obligation to issue a certificate for such
shares or release such shares from any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should
be directed to the Chief Financial Officer of the Company. The inability of the
Company to obtain from any regulatory body having jurisdiction the authority, if
any, deemed by the Company's legal counsel to be necessary to the lawful
issuance and sale of any shares subject to the Option shall relieve the Company
of any liability in respect of the failure to issue or sell such shares as to
which such requisite authority shall not have been obtained. As a condition to
the exercise of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7,
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<PAGE>
or (c) a Transfer of Control to the extent provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of six (6) months after the date on which the Optionee's Service terminated, but
in any event no later than the Option Expiration Date. (NOTE: If the Option is
exercised more than three (3) months after the date on which the Optionee's
Service as an Employee terminated as a result of a Disability other than a
permanent and total disability as defined in Section 22(e)(3) of the Code, the
Option will be treated as a nonstatutory stock option and not as an Incentive
Stock Option to the extent required by Section 422 of the Code.)
(b) DEATH. If the Optionee's Service with the Participating Company
Group is terminated because of the death of the Optionee, the Option, to the
extent unexercised and exercisable on the date on which the Optionee's Service
terminated, may be exercised by the Optionee's legal representative or other
person who acquired the right to exercise the Option by reason of the Optionee's
death at any time prior to the expiration of six (6) months after the date on
which the Optionee's Service terminated, but in any event no later than the
Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within thirty (30) days
after the Optionee's termination of Service other than upon "Termination For
Cause".
(c) TERMINATION AFTER TRANSFER OF CONTROL. If the Optionee's Service
with the Participating Company Group is terminated because of a Termination
After Transfer of Control (as defined below), (i) the Option, to the extent
unexercised and exercisable on the date on which the Optionee's Service
terminated, may be exercised by the Optionee (or the Optionee's guardian or
legal representative) at any time prior to the expiration of six (6) months
after the date on which the Optionee's Service terminated, but in any event no
later than the Option Expiration Date, and (ii) the Vested Ratio shall be deemed
to be 1/1 as of the date on which the Optionee's Service terminated.
Notwithstanding the foregoing, no acceleration of vesting pursuant to this
Section 7.1(c) shall occur if such acceleration of vesting would make "pooling
of interests" accounting treatment unavailable in connection with the Transfer
of Control (as defined below), as determined by the Board. The Company makes no
representation as to the tax consequences if the Option is exercised more than
three (3) months after the date on which the Optionee's Service as an Employee
terminated. The Optionee should consult with the Optionee's own tax advisor as
to the tax consequences to the Optionee of any such delayed exercise.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with the
Participating Company Group terminates for any reason, except Disability, death,
or Termination After Transfer of Control, the Option, to the extent unexercised
and exercisable by the Optionee on the date on which the Optionee's Service
terminated, may be exercised by the
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<PAGE>
Optionee within thirty (30) days (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
7.2 CERTAIN DEFINITIONS.
(a) "TERMINATION AFTER TRANSFER OF CONTROL" shall mean either of the
following events occurring within twelve (12) months after a Transfer of Control
(as defined in Section 8.1(b) below):
(i) termination by the Participating Company Group of the Optionee's
Service with the Participating Company Group for any reason other than a
Termination For Cause; or
(ii) the Optionee's resignation from Service with the Participating
Company Group within a reasonable period of time following any Constructive
Termination (as defined below).
Notwithstanding any provision herein to the contrary, Termination After Transfer
of Control shall not include any termination of the Optionee's Service with the
Participating Company Group which (1) is a Termination For Cause; (2) is a
result of the Optionee's death or Disability; (3) is a result of the Optionee's
voluntary termination of Service other than upon Constructive Termination (as
defined below); or (4) occurs prior to the effectiveness of a Transfer of
Control.
(b) "TERMINATION FOR CAUSE" shall mean termination by the
Participating Company Group of the Optionee's Service with the Participating
Company Group for any of the following reasons: (i) theft, dishonesty, or
falsification of any Participating Company records; (ii) improper use or
disclosure of a Participating Company's confidential or proprietary information;
(iii) any action by the Optionee which has a detrimental effect on a
Participating Company's reputation or business; (iv) the Optionee's failure or
inability to perform any reasonable assigned duties after written notice from
the Participating Company Group of, and a reasonable opportunity to cure, such
failure or inability; (v) any material breach by the Optionee of any employment
agreement between the Optionee and the Participating Company Group, which breach
is not cured pursuant to the terms of such agreement; or (vi) the Optionee's
conviction of any criminal act which impairs the Optionee's ability to perform
his or her duties with the Participating Company Group.
(c) "CONSTRUCTIVE TERMINATION" shall mean any one or more of the
following:
(i) without the Optionee's express written consent, the assignment to
the Optionee of any duties, or any limitation of the Optionee's
responsibilities, substantially inconsistent with the Optionee's positions,
duties, responsibilities and status with the Participating Company Group
immediately prior to the date of the Transfer of Control;
(ii) without the Optionee's express written consent, the relocation of
the principal place of the Optionee's employment to a location that is
more than
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<PAGE>
fifty (50) miles from the Optionee's principal place of employment immediately
prior to the date of the Transfer of Control, or the imposition of travel
requirements substantially more demanding of the Optionee than such travel
requirements existing immediately prior to the date of the Transfer of Control;
(iii) any failure by the Participating Company Group to pay, or any
material reduction by the Participating Company Group of, (1) the Optionee's
base salary in effect immediately prior to the date of the Transfer of Control
(unless reductions comparable in amount and duration are concurrently made for
all other employees of the Participating Company Group with responsibilities,
organizational level and title comparable to the Optionee's), or (2) the
Optionee's bonus compensation, if any, in effect immediately prior to the date
of the Transfer of Control (subject to applicable performance requirements with
respect to the actual amount of bonus compensation earned by the Optionee); or
(iv) any failure by the Participating Company Group to (1) continue to
provide the Optionee with the opportunity to participate, on terms no less
favorable than those in effect for the benefit of any employee group which
customarily includes a person holding the employment position or a comparable
position with the Participating Company Group then held by the Optionee, in any
benefit or compensation plans and programs, including, but not limited to, the
Participating Company Group's life, disability, health, dental, medical,
savings, profit sharing, stock purchase and retirement plans, if any, in which
the Optionee was participating immediately prior to the date of the Transfer of
Control, or their equivalent, or (2) provide the Optionee with all other fringe
benefits (or their equivalent) from time to time in effect for the benefit of
any employee group which customarily includes a person holding the employment
position or a comparable position with the Participating Company Group then held
by the Optionee.
7.3 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11. Except as the Company and the Optionee otherwise
agree, exercise of the Option pursuant to Section 7.1 following termination of
the Optionee's Service may not be made by delivery of a promissory note as
provided in Section 4.3(a).
7.4 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date. The Company makes no representation as
to the tax consequences of any such delayed exercise. The Optionee should
consult with the Optionee's own tax advisor as to the tax consequences to the
Optionee of any such delayed exercise.
7.5 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b)
11
<PAGE>
of the Exchange Act, the Option shall remain exercisable until the earliest to
occur of (i) the tenth (10th) day following the date on which a sale of such
shares by the Optionee would no longer be subject to such suit, (ii) the one
hundred and ninetieth (190th) day after the Optionee's termination of Service,
or (iii) the Option Expiration Date. The Company makes no representation as to
the tax consequences of any such delayed exercise. The Optionee should consult
with the Optionee's own tax advisors as to the tax consequences to the Optionee
of any such delayed exercise.
7.6 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Optionee's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Optionee's right to return to Service with the Participating Company Group
remains guaranteed by statute or contract. Notwithstanding the foregoing,
unless otherwise designated by the Company (or required by law), a leave of
absence shall not be treated as Service for purposes of determining the
Optionee's Vested Ratio.
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if
any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the
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<PAGE>
case may be, either directly or through one or more subsidiary corporations. The
Board shall have the right to determine whether multiple sales or exchanges of
the voting stock of the Company or multiple Ownership Change Events are related,
and its determination shall be final, binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. The Option shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate unless
the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded up or down to the nearest whole number, as determined by the Board,
and in no event may the Exercise Price be decreased to an amount less than the
par value, if any, of the stock subject to the Option. The adjustments
determined by the Board pursuant to this Section 9 shall be final, binding and
conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall
-----------------------------------------------
have no rights as a shareholder with respect to any shares covered by the Option
until the date of the issuance of a certificate for the shares for which the
Option has been exercised (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
13
<PAGE>
provided in Section 9. Nothing in this Option Agreement shall confer upon the
Optionee any right to continue in the Service of a Participating Company or
interfere in any way with any right of the Participating Company Group to
terminate the Optionee's Service as an Employee or Consultant, as the case may
be, at any time.
11. UNVESTED SHARE REPURCHASE OPTION.
--------------------------------
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Company Group is terminated for any
reason or no reason, with or without cause, or if the Optionee, the Optionee's
legal representative, or other holder of shares acquired upon exercise of the
Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of
(other than pursuant to an Ownership Change Event) any shares acquired upon
exercise of the Option which exceed the Vested Shares as defined in Section 11.2
below (the "UNVESTED SHARES"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this Section 11 (the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "VESTED SHARES"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
SHARES" shall mean the number of shares of Stock acquired upon exercise of the
Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice delivered
personally or forwarded by first class mail to the Optionee within sixty (60)
days after (a) termination of the Optionee's Service (or exercise of the Option,
if later) or (b) the Company has received notice of the attempted disposition of
Unvested Shares. If the Company fails to give notice within such sixty (60) day
period, the Unvested Share Repurchase Option shall terminate unless the Company
and the Optionee have extended the time for the exercise of the Unvested Share
Repurchase Option. The Unvested Share Repurchase Option must be exercised, if
at all, for all of the Unvested Shares, except as the Company and the Optionee
otherwise agree.
11.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The
purchase price per share being repurchased by the Company shall be an amount
equal to the Optionee's original cost per share, as adjusted pursuant to Section
9 (the "REPURCHASE PRICE"). The Company shall pay the aggregate Repurchase
Price to the Optionee in cash within thirty (30) days after the date of personal
delivery or mailing of the written notice of the Company's exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation
of any indebtedness of the Optionee to any Participating Company shall be
treated as payment to the Optionee in cash to the extent of the unpaid principal
and any accrued interest canceled. The shares being repurchased shall be
delivered to the Company by the Optionee at the same time as the delivery of the
Repurchase Price to the Optionee.
11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company
shall have the right to assign the Unvested Share Repurchase Option at any time,
14
<PAGE>
whether or not such option is then exercisable, to one or more persons as may be
selected by the Company.
11.6 OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership
Change Event, any and all new, substituted or additional securities or other
property to which the Optionee is entitled by reason of the Optionee's ownership
of Unvested Shares shall be immediately subject to the Unvested Share Repurchase
Option and included in the terms "Stock" and "Unvested Shares" for all purposes
of the Unvested Share Repurchase Option with the same force and effect as the
Unvested Shares immediately prior to the Ownership Change Event. While the
aggregate Repurchase Price shall remain the same after such Ownership Change
Event, the Repurchase Price per Unvested Share upon exercise of the Unvested
Share Repurchase Option following such Ownership Change Event shall be adjusted
as appropriate. For purposes of determining the Vested Ratio following an
Ownership Change Event, credited Service shall include all Service with any
corporation which is a Participating Company at the time the Service is
rendered, whether or not such corporation is a Participating Company both before
and after the Ownership Change Event.
12. ESCROW.
------
12.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Unvested Share Repurchase Option or securing any promissory note will be
available for repurchase, the Company may require the Optionee to deposit the
certificate evidencing the shares which the Optionee purchases upon exercise of
the Option with an escrow agent designated by the Company under the terms and
conditions of escrow and security agreements approved by the Company. If the
Company does not require such deposit as a condition of exercise of the Option,
the Company reserves the right at any time to require the Optionee to so deposit
the certificate in escrow. Upon the occurrence of an Ownership Change Event or
a change, as described in Section 9, in the character or amount of any of the
outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, any and all new, substituted or additional
securities or other property to which the Optionee is entitled by reason of the
Optionee's ownership of shares of Stock acquired upon exercise of the Option
that remain, following such Ownership Change Event or change described in
Section 9, subject to the Unvested Share Repurchase Option or any security
interest held by the Company shall be immediately subject to the escrow to the
same extent as such shares of Stock immediately before such event. The Company
shall bear the expenses of the escrow.
12.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the
expiration of the Unvested Share Repurchase Option and after full repayment of
any promissory note secured by the shares or other property in escrow, but not
more frequently than twice each calendar year, the escrow agent shall deliver to
the Optionee the shares and any other property no longer subject to such
restriction and no longer securing any promissory note.
12.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share Repurchase Option, the notices required to be given to the Optionee shall
be given to the escrow agent, and any payment required to be given to the
Optionee shall be given to the escrow agent. Within thirty (30) days after
payment by the Company, the escrow agent shall deliver the shares and any other
15
<PAGE>
property which the Company has purchased to the Company and shall deliver the
payment received from the Company to the Optionee.
13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to
-----------------------------------------------
time, there is any stock dividend, stock split or other change, as described in
Section 9, in the character or amount of any of the outstanding stock of the
corporation the stock of which is subject to the provisions of this Option
Agreement, then in such event any and all new, substituted or additional
securities to which the Optionee is entitled by reason of the Optionee's
ownership of the shares acquired upon exercise of the Option shall be
immediately subject to the Unvested Share Repurchase Option and any security
interest held by the Company with the same force and effect as the shares
subject to the Unvested Share Repurchase Option and such security interest
immediately before such event.
14. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall
----------------------------------------------
dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Option Agreement. In addition, the Optionee shall
promptly notify the Chief Financial Officer of the Company if the Optionee
disposes of any of the shares acquired pursuant to the Option within one (1)
year after the date the Optionee exercises all or part of the Option or within
two (2) years after the Date of Option Grant. Until such time as the Optionee
disposes of such shares in a manner consistent with the provisions of this
Option Agreement, unless otherwise expressly authorized by the Company, the
Optionee shall hold all shares acquired pursuant to the Option in the Optionee's
name (and not in the name of any nominee) for the one-year period immediately
after the exercise of the Option and the two-year period immediately after Date
of Option Grant. At any time during the one-year or two-year periods set forth
above, the Company may place a legend on any certificate representing shares
acquired pursuant to the Option requesting the transfer agent for the Company's
stock to notify the Company of any such transfers. The obligation of the
Optionee to notify the Company of any such transfer shall continue
notwithstanding that a legend has been placed on the certificate pursuant to the
preceding sentence.
15. LEGENDS. The Company may at any time place legends referencing the
-------
Unvested Share Repurchase Option and any applicable federal, state or foreign
securities law restrictions on all certificates representing shares of stock
subject to the provisions of this Option Agreement. The Optionee shall, at the
request of the Company, promptly present to the Company any and all certificates
representing shares acquired pursuant to the Option in the possession of the
Optionee in order to carry out the provisions of this Section.
16. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
17. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Option at any time; provided, however, that except as provided in Section
8.2 in connection with a Transfer of Control, no such termination or amendment
may adversely affect the Option or any unexercised portion hereof without the
consent of the Optionee unless such termination or amendment is necessary to
comply with any applicable law or government
16
<PAGE>
regulation or is required to enable the Option to qualify as an Incentive Stock
Option. No amendment or addition to this Option Agreement shall be effective
unless in writing.
18. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Option Agreement shall survive any
exercise of the Option and shall remain in full force and effect.
19. APPLICABLE LAW. This Option Agreement shall be governed by the laws
--------------
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
SILICON GAMING, INC.
By:
Title:
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in Section 11, and hereby accepts the Option subject to all of
the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
OPTIONEE
Date:
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EXHIBIT 10.19
SILICON GAMING, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The Silicon Gaming, Inc. 1996 Employee Stock
Purchase Plan (the "PLAN") is hereby established effective as of May 28, 1996
(the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan to provide Eligible Employees of
the Participating Company Group with an opportunity to acquire a proprietary
interest in the Company through the purchase of Stock. The Company intends that
the Plan shall qualify as an "employee stock purchase plan" under Section 423 of
the Code (including any amendments or replacements of such section), and the
Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued. However, all Purchase
Rights shall be granted, if at all, within ten (10) years from the Effective
Date.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Any term not expressly defined in the Plan but defined
for purposes of Section 423 of the Code shall have the same definition herein.
Whenever used herein, the following terms shall have their respective meanings
set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one or
more Committees have been appointed by the Board to administer the Plan, "Board"
also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended, and
any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
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(d) "COMPANY" means Silicon Gaming, Inc., a California corporation,
or any successor corporation thereto.
(e) "COMPENSATION" means, with respect to an Offering Period under the
Plan, all amounts paid in cash in the forms of base salary, commissions,
overtime, bonuses, annual awards, other incentive payments, shift premiums, and
all other compensation paid in cash during such Offering Period before deduction
for any contributions to any plan maintained by a Participating Company and
described in Section 401(k) or Section 125 of the Code. Compensation shall not
include reimbursements of expenses, allowances, long-term disability, workers'
compensation or any amount deemed received without the actual transfer of cash
or any amounts directly or indirectly paid pursuant to the Plan or any other
stock purchase or stock option plan.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements
set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means any person treated as an employee (including an
officer or a director who is also treated as an employee) in the records of a
Participating Company and for purposes of Section 423 of the Code; provided,
however, that neither service as a director nor payment of a director's fee
shall be sufficient to constitute employment for purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, if there is then a
public market for the Stock, the closing price of a share of Stock (or the mean
of the closing bid and asked prices of a share of Stock if the Stock is so
reported instead) as reported on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") System, the NASDAQ National Market System or such
other national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date, or such other appropriate day as shall
be determined by the Board, in its sole discretion. If there is then no public
market for the Stock, the Fair Market Value on any relevant date shall be as
determined by the Board without regard to any restriction other than a
restriction which, by its terms, will never lapse.
(j) "OFFERING" means an offering of Stock as provided in Section 6.
(k) "OFFERING DATE" means, for any Offering Period, the first day of
such Offering Period.
(l) "OFFERING PERIOD" means a period determined in accordance with
Section 6.1.
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(m) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(n) "PARTICIPANT" means an Eligible Employee participating in the
Plan.
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation which the Board determines should be
included in the Plan. The Board shall have the sole and absolute discretion to
determine from time to time what Parent Corporations or Subsidiary Corporations
shall be Participating Companies.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time, the
Company and all other corporations collectively which are then Participating
Companies.
(q) "PURCHASE DATE" means, for any Purchase Period, the last day of
such Purchase Period.
(r) "PURCHASE PERIOD" means a period determined in accordance with
Section 6.2.
(s) "PURCHASE PRICE" means the price at which a share of Stock may be
purchased pursuant to the Plan, as determined in accordance with Section 9.
(t) "PURCHASE RIGHT" means an option pursuant to the Plan to purchase
such shares of Stock as provided in Section 8 which may or may not be exercised
at the end of an Offering Period. Such option arises from the right of a
Participant to withdraw such Participant's accumulated payroll deductions (if
any) and terminate participation in the Plan or any Offering therein at any time
during a Purchase Period.
(u) "STOCK" means the common stock of the Company, as adjusted from
time to time in accordance with Section 4.2.
(v) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION. The Plan shall be administered by the Board, including
--------------
any duly appointed Committee of the Board. All questions of interpretation of
the Plan or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or such
Purchase Right. Subject to the provisions of the Plan, the Board shall
determine all of the relevant terms and conditions of Purchase Rights granted
pursuant to the Plan; provided, however, that all Participants granted Purchase
Rights pursuant
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to the Plan shall have the same rights and privileges within the meaning of
Section 423(b)(5) of the Code. All expenses incurred in connection with the
administration of the Plan shall be paid by the Company.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be three hundred thousand (300,000) and shall
consist of authorized but unissued or reacquired shares of the Stock, or any
combination thereof. If an outstanding Purchase Right for any reason expires or
is terminated or canceled, the shares of Stock allocable to the unexercised
portion of such Purchase Right shall again be available for issuance under the
Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company, or
in the event of any merger (including a merger effected for the purpose of
changing the Company's domicile), sale of assets or other reorganization in
which the Company is a party, appropriate adjustments shall be made in the
number and class of shares subject to the Plan, to the Per Offering Share Limit
set forth in Section 8.1 and to each Purchase Right and in the Purchase Price.
5. ELIGIBILITY.
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5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Any Employee of a Participating
Company is eligible to participate in the Plan except Employees who own or hold
options to purchase or who, as a result of participation in the Plan, would own
or hold options to purchase, stock of the Company or of any Parent Corporation
or Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation
within the meaning of Section 423(b)(3) of the Code.
5.2 LEASED EMPLOYEES EXCLUDED. Notwithstanding anything herein to the
contrary, any individual performing services for a Participating Company solely
through a leasing agency or employment agency shall not be deemed an "Employee"
of such Participating Company.
6. OFFERINGS.
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6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan
shall be implemented by sequential Offerings of approximately twenty-four (24)
months duration (an "OFFERING PERIOD"); provided, however that the first
Offering Period shall commence on June __, 1996, and end on July 31, 1998 (the
"INITIAL OFFERING PERIOD"). Subsequent Offerings shall commence on the first
day of February and August of each year and end on the last day of the second
January and July, respectively, occurring thereafter. Notwithstanding the
foregoing, the Board may establish a different term for one or more Offerings or
different commencing or ending dates for such Offerings; provided, however, that
no Offering may exceed a term of twenty-seven (27) months. An Employee who
becomes an Eligible Employee after an Offering
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Period has commenced shall not be eligible to participate in such Offering but
may participate in any subsequent Offering provided such Employee is still an
Eligible Employee as of the commencement of any such subsequent Offering.
Eligible Employees may not participate in more than one Offering at a time. In
the event the first or last day of an Offering Period is not a business day, the
Company shall specify the business day that will be deemed the first or last
day, as the case may be, of the Offering Period.
6.2 PURCHASE PERIODS. Each Offering Period shall consist of four (4)
consecutive purchase periods of approximately six (6) months duration
(individually, a "PURCHASE PERIOD"). The Purchase Period commencing on the
Offering Date of the Initial Offering Period shall end on January 31, 1997. A
Purchase Period commencing on February 1 shall end on the next July 31. A
Purchase Period commencing on August 1 shall end on the next following January
31. Notwithstanding the foregoing, the Board may establish a different term for
one or more Purchase Periods or different commencing or ending dates for such
Purchase Periods. In the event the first or last day of a Purchase Period is
not a business day, the Company shall specify the business day that will be
deemed the first or last day, as the case may be, of the Purchase Period.
6.3 GOVERNMENTAL APPROVAL; SHAREHOLDER APPROVAL. Notwithstanding any
other provision of the Plan to the contrary, any Purchase Right granted pursuant
to the Plan shall be subject to (a) obtaining all necessary governmental
approvals or qualifications of the sale or issuance of the Purchase Rights or
the shares of Stock and (b) obtaining shareholder approval of the Plan.
Notwithstanding the foregoing, shareholder approval shall not be necessary in
order to grant any Purchase Right granted in the Plan's Initial Offering Period;
provided, however, that the exercise of any such Purchase Right shall be subject
to obtaining shareholder approval of the Plan.
7. PARTICIPATION IN THE PLAN.
-------------------------
7.1 INITIAL PARTICIPATION. An Eligible Employee shall become a
Participant on the first Offering Date after satisfying the eligibility
requirements of Section 5 and delivering to the Company's payroll office or
other office designated by the Company not later than the close of business for
such office on the last business day before such Offering Date (the
"SUBSCRIPTION DATE") a subscription agreement indicating the Employee's election
to participate in the Plan and authorizing payroll deductions. An Eligible
Employee who does not deliver a subscription agreement to the Company's payroll
or other designated office on or before the Subscription Date shall not
participate in the Plan for that Offering Period or for any subsequent Offering
Period unless such Employee subsequently enrolls in the Plan by filing a
subscription agreement with the Company by the Subscription Date for such
subsequent Offering Period. The Company may, from time to time, change the
Subscription Date as deemed advisable by the Company in its sole discretion for
proper administration of the Plan.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
until such time as such Participant (a) ceases to be an Eligible Employee, (b)
withdraws from the Plan pursuant to Section 13.2 or (c) terminates employment as
provided in Section 14. If a Participant automatically may participate in a
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subsequent Offering Period pursuant to this Section 7.2, then the Participant is
not required to file any additional subscription agreement for such subsequent
Offering Period in order to continue participation in the Plan. However, a
Participant may file a subscription agreement with respect to a subsequent
Offering Period if the Participant desires to change any of the Participant's
elections contained in the Participant's then effective subscription agreement.
8. RIGHT TO PURCHASE SHARES.
------------------------
8.1 PURCHASE RIGHT. Except as set forth below, during an Offering
Period each Participant in such Offering Period shall have a Purchase Right
consisting of the right to purchase that number of whole shares of Stock arrived
at by dividing Fifty Thousand Dollars ($50,000) by the Fair Market Value of a
share of Stock on the Offering Date of such Offering Period; provided, however,
that such number shall not exceed five thousand (5,000) shares (the "PER
OFFERING SHARE LIMIT"). Shares of Stock may only be purchased through a
Participant's payroll deductions pursuant to Section 10.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the
foregoing, if the Board shall establish an Offering Period of less than twenty-
three and one-half (23 1/2) months or more than twenty-four and one-half (24
1/2) months in duration, (a) the dollar amount in Section 8.1 shall be
determined by multiplying $2,083.33 by the number of months in the Offering
Period and rounding to the nearest whole dollar, and (b) the Per Offering Share
Limit shall be determined by multiplying 208.33 shares by the number of months
in the Offering Period and rounding to the nearest whole share. For purposes of
the preceding sentence, fractional months shall be rounded to the nearest whole
month.
9. PURCHASE PRICE. The Purchase Price at which each share of Stock may be
--------------
acquired in a given Offering Period pursuant to the exercise of all or any
portion of a Purchase Right granted under the Plan shall be set by the Board;
provided, however, that the Purchase Price shall not be less than eighty-five
percent (85%) of the lesser of (a) the Fair Market Value of a share of Stock on
the Offering Date of the Offering Period, or (b) the Fair Market Value of a
share of Stock on the Purchase Date of the Offering Period. Unless otherwise
provided by the Board prior to the commencement of an Offering Period, the
Purchase Price for that Offering Period shall be eighty-five percent (85%) of
the lesser of (a) the Fair Market Value of a share of Stock on the Offering Date
of the Offering Period, or (b) the Fair Market Value of a share of Stock on the
Purchase Date of the Offering Period.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION. Shares of
--------------------------------------------------------
Stock which are acquired pursuant to the exercise of all or any portion of a
Purchase Right for an Offering Period may be paid for only by means of payroll
deductions from the Participant's Compensation accumulated during the Offering
Period. Except as set forth below, the amount of Compensation to be deducted
from a Participant's Compensation during each pay period shall be determined by
the Participant's subscription agreement.
10.1 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
in the Plan.
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10.2 LIMITATIONS ON PAYROLL DEDUCTIONS. The amount of payroll deductions
with respect to the Plan for any Participant during any pay period shall be in
one percent (1%) increments not to exceed ten percent (10%) of the Participant's
Compensation for such pay period. Notwithstanding the foregoing, the Board may
change the limits on payroll deductions effective as of a future Offering Date,
as determined by the Board. Amounts deducted from Compensation shall be reduced
by any amounts contributed by the Participant and applied to the purchase of
Company stock pursuant to any other employee stock purchase plan qualifying
under Section 423 of the Code.
10.3 ELECTION TO DECREASE OR STOP PAYROLL DEDUCTIONS. During an Offering
Period, a Participant may elect to decrease the amount deducted or stop
deductions from his or her Compensation by filing an amended subscription
agreement with the Company on or before the "Change Notice Date." The "CHANGE
NOTICE DATE" shall initially be the seventh (7th) day prior to the end of the
first pay period for which such election is to be effective; however, the
Company may change such Change Notice Date from time to time. A Participant may
not elect to increase the amount deducted from the Participant's Compensation
during an Offering Period.
10.4 PARTICIPANT ACCOUNTS. Individual Plan accounts shall be maintained
for each Participant. All payroll deductions from a Participant's Compensation
shall be credited to such account and shall be deposited with the general funds
of the Company. All payroll deductions received or held by the Company may be
used by the Company for any corporate purpose.
10.5 NO INTEREST PAID. Interest shall not be paid on sums deducted from
a Participant's Compensation pursuant to the Plan.
10.6 COMPANY ESTABLISHED PROCEDURES. The Company may, from time to time,
establish or change (a) a minimum required payroll deduction amount for
participation in an Offering, (b) limitations on the frequency or number of
changes in the rate of payroll deduction during an Offering, (c) an exchange
ratio applicable to amounts withheld in a currency other than U.S. dollars, (d)
payroll deduction in excess of or less than the amount designated by a
Participant in order to adjust for delays or mistakes in the Company's
processing of subscription agreements, (e) the date(s) and manner by which the
Fair Market Value of a share of Stock is determined for purposes of
administration of the Plan, or (f) such other limitations or procedures as
deemed advisable by the Company in the Company's sole discretion which are
consistent with the Plan and in accordance with the requirements of Section 423
of the Code.
11. PURCHASE OF SHARES.
------------------
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an Offering
Period, each Participant who has not withdrawn from the Offering or whose
participation in the Offering has not terminated on or before such Purchase Date
shall automatically acquire pursuant to the exercise of the Participant's
Purchase Right the number of whole shares of Stock arrived at by dividing the
total amount of the Participant's accumulated payroll deductions for the
Purchase Period by the Purchase Price; provided, however, in no event shall the
number of
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shares purchased by the Participant during an Offering Period exceed the number
of shares subject to the Participant's Purchase Right. No shares of Stock shall
be purchased on a Purchase Date on behalf of a Participant whose participation
in the Offering or the Plan has terminated on or before such Purchase Date.
11.2 RETURN OF CASH BALANCE. Any cash balance remaining in the
Participant's Plan account shall be refunded to the Participant as soon as
practicable after the Purchase Date. In the event the cash to be returned to a
Participant pursuant to the preceding sentence is an amount less than the amount
necessary to purchase a whole share of Stock, the Company may establish
procedures whereby such cash is maintained in the Participant's Plan account and
applied toward the purchase of shares of Stock in the subsequent Purchase Period
or Offering Period.
11.3 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.4 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which such Purchase Right relates shall expire immediately upon the end of such
Offering Period.
12. LIMITATIONS ON PURCHASE OF SHARES; RIGHTS AS A SHAREHOLDER.
----------------------------------------------------------
12.1 FAIR MARKET VALUE LIMITATION. Notwithstanding any other
provision of the Plan, no Participant shall be entitled to purchase shares of
Stock under the Plan (or any other employee stock purchase plan which is
intended to meet the requirements of Section 423 of the Code sponsored by the
Company or a Parent Corporation or Subsidiary Corporation at a rate which
exceeds $25,000 in Fair Market Value, which Fair Market Value is determined for
shares purchased during a given Offering Period as of the Offering Date for such
Offering Period (or such other limit as may be imposed by the Code), for each
calendar year in which the Participant participates in the Plan (or any other
employee stock purchase plan described in this sentence).
12.2 PRO RATA ALLOCATION. In the event the number of shares of Stock
which might be purchased by all Participants in the Plan exceeds the number of
shares of Stock available in the Plan, the Company shall make a pro rata
allocation of the remaining shares in as uniform a manner as shall be
practicable and as the Company shall determine to be equitable.
12.3 RIGHTS AS A SHAREHOLDER AND EMPLOYEE. A Participant shall have
no rights as a shareholder by virtue of the Participant's participation in the
Plan until the date of the issuance of a stock certificate for the shares of
Stock being purchased pursuant to the exercise of the Participant's Purchase
Right. No adjustment shall be made for cash dividends or distributions or other
rights for which the record date is prior to the date such stock certificate is
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issued. Nothing herein shall confer upon a Participant any right to continue in
the employ of the Participating Company Group or interfere in any way with any
right of the Participating Company Group to terminate the Participant's
employment at any time.
13. WITHDRAWAL.
----------
13.1 WITHDRAWAL FROM AN OFFERING. A Participant may withdraw from an
Offering by signing and delivering to the Company's payroll or other designated
office a written notice of withdrawal on a form provided by the Company for such
purpose. Such withdrawal may be elected at any time prior to the end of an
Offering Period; provided, however, if a Participant withdraws after the
Purchase Date for a Purchase Period of an Offering, the withdrawal shall not
affect shares of Stock acquired by the Participant in such Purchase Period.
Unless otherwise indicated, withdrawal from an Offering shall not result in a
withdrawal from the Plan or any succeeding Offering therein. By withdrawing
from an Offering effective as of the close of a given Purchase Date, a
Participant may have shares of Stock purchased on such Purchase Date and
immediately commence participation in the new Offering commencing immediately
after such Purchase Date. A Participant is prohibited from again participating
in an Offering at any time following withdrawal from such Offering. The Company
may impose, from time to time, a requirement that the notice of withdrawal be on
file with the Company's payroll office or other designated office for a
reasonable period prior to the effectiveness of the Participant's withdrawal
from an Offering.
13.2 WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the
Plan by signing and delivering to the Company's payroll office or other
designated office a written notice of withdrawal on a form provided by the
Company for such purpose. Withdrawals made after a Purchase Date shall not
affect shares of Stock acquired by the Participant on such Purchase Date. In
the event a Participant voluntarily elects to withdraw from the Plan, the
Participant may not resume participation in the Plan during the same Offering
Period, but may participate in any subsequent Offering under the Plan by again
satisfying the requirements of Sections 5 and 7.1. The Company may impose, from
time to time, a requirement that the notice of withdrawal be on file with the
Company's payroll office or other designated office for a reasonable period
prior to the effectiveness of the Participant's withdrawal from the Plan.
13.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's withdrawal
from an Offering or the Plan pursuant to Sections 13.1 or 13.2, respectively,
the Participant's accumulated payroll deductions which have not been applied
toward the purchase of shares of Stock shall be returned as soon as practicable
after the withdrawal, without the payment of any interest, to the Participant,
and the Participant's interest in the Offering or the Plan, as applicable, shall
terminate. Such accumulated payroll deductions may not be applied to any other
Offering under the Plan.
13.4 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair Market Value
of a share of Stock on a Purchase Date of an Offering (other than the final
Purchase Date of such Offering) is less than the Fair Market Value of a share of
Stock on the Offering Date for such Offering, then every Participant shall
automatically (a) be withdrawn from such Offering at the close of such Purchase
Date and after the acquisition of shares of Stock for such Purchase
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Period and (b) be enrolled in the Offering commencing on the first business day
subsequent to such Purchase Period. A Participant may elect not to be
automatically withdrawn from an Offering Period pursuant to this Section 13.4 by
delivering to the Company not later than the close of business on the last day
before the Purchase Date a written notice indicating such election.
13.5 WAIVER OF WITHDRAWAL RIGHT. The Company may, from time to time,
establish a procedure pursuant to which a Participant may elect, at least six
(6) months prior to a Purchase Date, to have all payroll deductions accumulated
in his or her Plan account as of such Purchase Date applied to purchase shares
of Stock under the Plan, and (a) to waive his or her right to withdraw from the
Offering or the Plan and (b) to waive his or her right to increase, decrease, or
cease payroll deductions under the Plan from his or her Compensation during the
Purchase Period ending on such Purchase Date. Such election shall be made in
writing on a form provided by the Company for such purpose and must be delivered
to the Company not later than the close of business on the day preceding the
date which is six (6) months before the Purchase Date for which such election is
to first be effective.
14. TERMINATION OF EMPLOYMENT OR ELIGIBILITY. Termination of a
----------------------------------------
Participant's employment with a Participating Company for any reason, including
retirement, disability or death or the failure of a Participant to remain an
Eligible Employee, shall terminate the Participant's participation in the Plan
immediately. In such event, the payroll deductions credited to the
Participant's Plan account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the Participant's
death, to the Participant's legal representative, and all of the Participant's
rights under the Plan shall terminate. Interest shall not be paid on sums
returned to a Participant pursuant to this Section 14. A Participant whose
participation has been so terminated may again become eligible to participate in
the Plan by again satisfying the requirements of Sections 5 and 7.1.
15. TRANSFER OF CONTROL.
-------------------
15.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if
any of the following occurs with respect to the Company: (i) the direct or
indirect sale or exchange in a single or series of related transactions by the
shareholders of the Company of more than fifty percent (50%) of the voting stock
of the Company; (ii) a merger or consolidation in which the Company a party;
(iii) the sale, exchange, or transfer of all or substantially all of the assets
of the Company; or (iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be.
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For purposes of the preceding sentence, indirect beneficial ownership shall
include, without limitation, an interest resulting from ownership of the voting
stock of one or more corporations which, as a result of the Transaction, own the
Company or the Transferee Corporation(s), as the case may be, either directly or
through one or more subsidiary corporations. The Board shall have the right to
determine whether multiple sales or exchanges of the voting stock of the Company
or multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
15.2 EFFECT OF TRANSFER OF CONTROL ON PURCHASE RIGHTS. In the event
of a Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the Company's rights and obligations under the Plan or
substitute substantially equivalent Purchase Rights for stock of the Acquiring
Corporation. If the Acquiring Corporation elects not to assume or substitute
for the outstanding Purchase Rights, the Board may, in its sole discretion and
notwithstanding any other provision herein to the contrary, adjust the Purchase
Date of the then current Purchase Period to a date on or before the date of the
Transfer of Control, but shall not adjust the number of shares of Stock subject
to any Purchase Right. All Purchase Rights which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control shall terminate
and cease to be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, if the corporation the stock of which is subject
to the outstanding Purchase Rights immediately prior to an Ownership Change
Event described in Section 15.1(a)(i) constituting a Transfer of Control is the
surviving or continuing corporation and immediately after such Ownership Change
Event less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that are
members of an affiliated group within the meaning of section 1504(a) of the Code
without regard to the provisions of section 1504(b) of the Code, the outstanding
Purchase Rights shall not terminate unless the Board otherwise provides in its
sole discretion.
16. NONTRANSFERABILITY OF PURCHASE RIGHTS. A Purchase Right may not be
-------------------------------------
transferred in any manner otherwise than by will or the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant. The Company, in its absolute discretion, may impose
such restrictions on the transferability of the shares purchasable upon the
exercise of a Purchase Right as it deems appropriate and any such restriction
shall be set forth in the respective subscription agreement and may be referred
to on the certificates evidencing such shares.
17. REPORTS. Each Participant who exercised all or part of his or her
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Purchase Right for a Purchase Period shall receive, as soon as practicable after
the Purchase Date of such Purchase Period, a report of such Participant's Plan
account setting forth the total payroll deductions accumulated, the number of
shares of Stock purchased, the Purchase Price for such shares, the date of
purchase and the remaining cash balance to be refunded or retained in the
Participant's Plan account pursuant to Section 11.2, if any. At least annually,
copies of the Company's balance sheet and income statement for the just
completed fiscal year shall be made available to each Participant. The Company
shall not be required to provide such information to persons whose duties in
connection with the Company assure them access to equivalent information.
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18. RESTRICTION ON ISSUANCE OF SHARES. The issuance of shares under the
---------------------------------
Plan shall be subject to compliance with all applicable requirements of foreign,
federal or state law with respect to such securities. A Purchase Right may not
be exercised if the issuance of shares upon such exercise would constitute a
violation of any applicable foreign, federal or state securities laws or other
law or regulations. In addition, no Purchase Right may be exercised unless (a) a
registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
19. LEGENDS. The Company may at any time place legends or other
-------
identifying symbols referencing any applicable foreign, federal or state
securities law restrictions or any provision convenient in the administration of
the Plan on some or all of the certificates representing shares of Stock issued
under the Plan. The Participant shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to a Purchase Right in the possession of the Participant in order to
carry out the provisions of this Section. Unless otherwise specified by the
Company, legends placed on such certificates may include but shall not be
limited to the following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF MADE ON OR BEFORE ______________, 19__. THE REGISTERED
HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER'S
NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE."
20. NOTIFICATION OF SALE OF SHARES. The Company may require the
------------------------------
Participant to give the Company prompt notice of any disposition of shares
acquired by exercise of a Purchase Right within two years from the date of
granting such Purchase Right or one year from the date of exercise of such
Purchase Right. The Company may require that until such time as a Participant
disposes of shares acquired upon exercise of a Purchase Right, the Participant
shall hold all such shares in the Participant's name (and not in the name of any
nominee) until the lapse of the time periods with respect to such Purchase Right
referred to in the preceding
12
<PAGE>
sentence. The Company may direct that the certificates evidencing shares
acquired by exercise of a Purchase Right refer to such requirement to give
prompt notice of disposition.
21. AMENDMENT OR TERMINATION OF THE PLAN. The Board may at any time amend
------------------------------------
or terminate the Plan, except that (a) such termination shall not affect
Purchase Rights previously granted under the Plan, except as permitted under the
Plan, and (b) no amendment may adversely affect a Purchase Right previously
granted under the Plan (except to the extent permitted by the Plan or as may be
necessary to qualify the Plan as an employee stock purchase plan pursuant to
Section 423 of the Code or to obtain qualification or registration of the shares
of Stock under applicable foreign, federal or state securities laws). In
addition, an amendment to the Plan must be approved by the shareholders of the
Company within twelve (12) months of the adoption of such amendment if such
amendment would authorize the sale of more shares than are authorized for
issuance under the Plan or would change the definition of the corporations that
may be designated by the Board as Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing Silicon Gaming, Inc. 1996 Employee Stock Purchase Plan was duly
adopted by the Board of Directors of the Company on May 28, 1996.
-------------------------------------------
Secretary
13
<PAGE>
EXHIBIT 10.20
SILICON GAMING, INC.
1996 OUTSIDE DIRECTORS STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The Silicon Gaming, Inc. 1996 Outside Directors
Stock Option Plan (the "PLAN") is hereby established effective as of the
effective date of the initial registration by the Company of its Stock under
Section 12 of the Exchange Act (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract and retain highly qualified persons to serve as Outside Directors of
the Company and by creating additional incentive for Outside Directors to
promote the growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means Silicon Gaming, Inc., a California
corporation, or any successor corporation thereto.
1
<PAGE>
(e) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(f) "DIRECTOR" means a member of the Board or the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee (including
an officer or a Director who is also treated as an employee) in the records of a
Participating Company; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, if there is then a
public market for the Stock, the closing price of the Stock (or the mean of the
closing bid and asked prices of the Stock if the Stock is so reported instead)
as reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") System, the NASDAQ National Market System or such other
national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date. If there is then no public market for
the Stock, the Fair Market Value on any relevant date shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.
(j) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan.
(k) "OPTIONEE" means a person who has been granted one or more
Options.
(l) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee.
(m) "OUTSIDE DIRECTOR" means a Director of the Company who is not
an Employee.
(n) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
2
<PAGE>
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(q) "RULE 16B-3" means Rule 16b-3 as promulgated under the
Exchange Act, as amended from time to time, or any successor rule or regulation.
(r) "SERVICE" means the Optionee's service with the Participating
Company Group, whether in the capacity of an Employee, a Director or a
Consultant. The Optionee's Service shall not be deemed to have terminated merely
because of a change in the capacity in which the Optionee renders Service to the
Participating Company Group or a change in the Participating Company for which
the Optionee renders such Service, provided that there is no interruption or
termination of the Optionee's Service. The Optionee's Service shall be deemed to
have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.
(s) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(t) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
--------------
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
3.2 LIMITATIONS ON AUTHORITY OF THE BOARD. Notwithstanding any other
provision herein to the contrary, the Board shall have no authority, discretion,
or power to select the Outside Directors who will receive Options, to set the
exercise price of the Options, to determine the number of shares of Stock to be
subject to an Option or the time at which an Option shall be granted, to
establish the duration of an Option, or to alter any other terms or conditions
specified in the Plan, except in the sense of administering the Plan subject to
the provisions of the Plan.
3
<PAGE>
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two hundred thousand (200,000) and shall
consist of authorized but unissued shares or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number and class of shares subject
to the Plan, to the "Initial Option" and "Annual Option" (as defined in Section
6.1), and to any outstanding Options, and in the exercise price of any
outstanding Options. If a majority of the shares which are of the same class as
the shares that are subject to outstanding Options are exchanged for, converted
into, or otherwise become (whether or not pursuant to an "Ownership Change
Event" as defined in Section 8.1) shares of another corporation (the "NEW
SHARES"), the Board may unilaterally amend the outstanding Options to provide
that such Options are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the exercise price of, the
outstanding Options shall be adjusted in a fair and equitable manner as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole number, and in no event may the
exercise price of any Option be decreased to an amount less than the par value,
if any, of the stock subject to the Option.
5. ELIGIBILITY AND TYPE OF OPTIONS.
-------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. An Option shall be granted only to
a person who, at the time of grant, is an Outside Director.
5.2 OPTIONS AUTHORIZED. Options shall be nonstatutory stock options;
that is, options which are not treated as incentive stock options within the
meaning of Section 422(b) of the Code.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option
-------------------------------
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 AUTOMATIC GRANT OF OPTIONS. Subject to execution by an Outside
Director of the appropriate Option Agreement, Options shall be granted
automatically and without further action of the Board, as follows:
4
<PAGE>
(a) INITIAL OPTION. Each person who (i) is an Outside Director
on the Effective Date, or (ii) first becomes an Outside Director after the
Effective Date shall be granted an Option to purchase fifteen thousand (15,000)
shares of Stock on the Effective Date or the date he or she first becomes an
Outside Director, respectively (an "INITIAL OPTION"). Notwithstanding anything
herein to the contrary, an Initial Option shall not be granted to a Director of
the Company who previously did not qualify as an Outside Director but
subsequently becomes an Outside Director as a result of the termination of his
or her status as an Employee.
(b) ANNUAL OPTION. Each Outside Director (including any Director
of the Company who previously did not qualify as an Outside Director but who
subsequently becomes an Outside Director) shall be granted, on the date
immediately following the date of each annual meeting of the shareholders of the
Company (an "ANNUAL MEETING") following which such person remains an Outside
Director, an Option to purchase five thousand (5,000) shares of Stock (an
"ANNUAL OPTION"). Notwithstanding the foregoing, an Outside Director who has not
served continuously as a Director of the Company for at least six (6) months as
of the date immediately following such Annual Meeting shall not receive an
Annual Option on such date.
(c) RIGHT TO DECLINE OPTION. Notwithstanding the foregoing, any
person may elect not to receive an Option by delivering written notice of such
election to the Board no later than the day prior to the date such Option would
otherwise be granted. A person so declining an Option shall receive no payment
or other consideration in lieu of such declined Option. A person who has
declined an Option may revoke such election by delivering written notice of such
revocation to the Board no later than the day prior to the date such Option
would be granted pursuant to Section 6.1(a) or (b), as the case may be.
6.2 DISCRETION TO VARY OPTION SIZE. Notwithstanding any provision of
the Plan to the contrary, the Board may, in its sole discretion, increase or
decrease the number of shares of Stock that would otherwise be subject to one or
more Initial Options or Annual Options to be granted pursuant to Section 6.1 if,
at the time of such exercise of discretion, (a) the "disinterested
administration" provisions contained in paragraph (c)(2)(i) of Rule 16b-3 are no
longer applicable to any employee benefit plan maintained by a Participating
Company and (b) the exercise of such discretion would not otherwise preclude any
transaction in an equity security of the Company by an officer or Director of a
Participating Company from being exempt from Section 16(b) of the Exchange Act
pursuant to Rule 16b-3.
6.3 EXERCISE PRICE. The exercise price per share of Stock subject to
an Option shall be the Fair Market Value of a share of Stock on the date the
Option is granted.
6.4 EXERCISE PERIOD. Each Option shall terminate and cease to be
exercisable on the date ten (10) years after the date of grant of the Option
unless earlier terminated pursuant to the terms of the Plan or the Option
Agreement.
6.5 RIGHT TO EXERCISE OPTIONS. Except as otherwise provided in the
Plan or in the Option Agreement, an Option shall (a) first become exercisable on
the date which is one (1) month after the date on which the Option was granted
(the "INITIAL VESTING DATE"); and (ii) be exercisable on and after the Initial
Vesting Date and prior to the termination thereof
5
<PAGE>
in an amount equal to the number of shares of Stock initially subject to the
Option multiplied by the Vested Ratio as set forth below, less the number of
shares previously acquired upon exercise thereof. The Vested Ratio described in
the preceding sentence shall be determined as follows:
Vested Ratio
------------
Prior to Initial Vesting Date 0
On Initial Vesting Date, 1/36
provided the Optionee's Service
is continuous from the date of grant
of the Option until the
Initial Vesting Date
Plus
----
For each full month of 1/36
of the Optionee's continuous
Service from the Initial Vesting
Date until the Vested
Ratio equals 1/1, an additional
6.6 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value not less than the exercise price, (iii) by
the assignment of the proceeds of a sale or loan with respect to some or all of
the shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System) (a "CASHLESS EXERCISE"), or (iv) by any combination thereof.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
6
<PAGE>
6.7 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value equal to all or any part of the federal,
state, local and foreign taxes, if any, required by law to be withheld by the
Participating Company Group with respect to such Option or the shares acquired
upon exercise thereof. Alternatively or in addition, in its sole discretion,
the Company shall have the right to require the Optionee to make adequate
provision for any such tax withholding obligations of the Participating Company
Group arising in connection with the Option or the shares acquired upon exercise
thereof. The Company shall have no obligation to deliver shares of Stock until
the Participating Company Group's tax withholding obligations have been
satisfied.
7. STANDARD FORM OF OPTION AGREEMENT.
---------------------------------
7.1 INITIAL OPTION. Unless otherwise provided for by the Board at
the time an Initial Option is granted, each Initial Option shall comply with and
be subject to the terms and conditions set forth in the form of Nonstatutory
Stock Option Agreement for Outside Directors (Initial Option) adopted by the
Board concurrently with its adoption of the Plan and as amended from time to
time.
7.2 ANNUAL OPTION. Unless otherwise provided for by the Board at the
time an Annual Option is granted, each Annual Option shall comply with and be
subject to the terms and conditions set forth in the form of Nonstatutory Stock
Option Agreement for Outside Directors (Annual Option) adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
7.3 AUTHORITY TO VARY TERMS. Subject to the limitations set forth in
Section 3.2, the Board shall have the authority from time to time to vary the
terms of any of the standard forms of Option Agreement described in this Section
7 either in connection with the grant or amendment of an individual Option or in
connection with the authorization of a new standard form or forms; provided,
however, that the terms and conditions of any such new, revised or amended
standard form or forms of Option Agreement are not inconsistent with the terms
of the Plan. Such authority shall include, but not by way of limitation, the
authority to grant Options which are immediately exercisable subject to the
Company's right to repurchase any unvested shares of Stock acquired by the
Optionee upon the exercise of an Option in the event such Optionee's Service is
terminated for any reason. In no event, however, shall the Board be permitted to
vary the terms of any standard form of Option Agreement if such change would
cause the Plan to cease to qualify as a formula plan pursuant to Rule 16b-3 at
any such time as any class of equity security of the Company is registered
pursuant to Section 12 of the Exchange Act.
7
<PAGE>
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, any unexercisable or unvested portion of the outstanding
Options shall be immediately exercisable and vested in full as of the date ten
(10) days prior to the date of the Transfer of Control. The exercise or vesting
of any Option that was permissible solely by reason of this Section 8.2 shall be
conditioned upon the consummation of the Transfer of Control. In addition, the
surviving, continuing, successor, or purchasing corporation or parent
corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may
either assume the Company's rights and obligations under outstanding Options or
substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock. Any Options which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control shall terminate
and cease to be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Transfer of Control and any
8
<PAGE>
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of the Option
Agreement evidencing such Option except as otherwise provided in such Option
Agreement. Furthermore, notwithstanding the foregoing, if the corporation the
stock of which is subject to the outstanding Options immediately prior to an
Ownership Change Event described in Section 8.1(a)(i) constituting a Transfer of
Control is the surviving or continuing corporation and immediately after such
Ownership Change Event less than fifty percent (50%) of the total combined
voting power of its voting stock is held by another corporation or by other
corporations that are members of an affiliated group within the meaning of
Section 1504(a) of the Code without regard to the provisions of Section 1504(b)
of the Code, the outstanding Options shall not terminate.
9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
-----------------------------
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
10. INDEMNIFICATION. In addition to such other rights of indemnification
---------------
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
11. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend
--------------------------------
the Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
shareholders, there shall be (a) no increase in the total number of shares of
Stock that may be issued under the Plan (except by operation of the provisions
of Section 4.2), and (b) no expansion in the class of persons eligible to
receive Options. Furthermore, to the extent required by Rule 16b-3, provisions
of the Plan addressing eligibility to participate in the Plan and the amount,
price and timing of Options shall not be amended more than once every six (6)
months, other than to comport with changes in the Code, the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder. In any event,
no termination or amendment of the Plan may adversely affect any then
outstanding Option, or any unexercised portion thereof, without the consent of
the Optionee, unless such termination or amendment is necessary to comply with
any applicable law or government regulation.
9
<PAGE>
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing Silicon Gaming, Inc. 1996 Outside Directors Stock Option Plan was
duly adopted by the Board on May 28, 1996.
-----------------------------------------
Secretary
10
<PAGE>
SILICON GAMING, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(INITIAL OPTION)
THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (INITIAL
OPTION) (the "OPTION AGREEMENT") is made and entered into as of ___________,
199_, by and between Silicon Gaming, Inc. and ___________________________ (the
"OPTIONEE").
The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION").
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means ____________________ , 199_.
(b) "NUMBER OF OPTION SHARES" means fifteen thousand (15,000)
shares of Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ ____________ per share of Stock, as
adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the Initial Vesting Date.
(e) "INITIAL VESTING DATE" means the date occurring one (1)
month after the Date of Option Grant.
(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
Vested Ratio
------------
Prior to Initial Vesting Date 0
On Initial Vesting Date, provided 1/36
the Optionee's Service is continuous
from the Date of Option Grant until
the Initial Vesting Date
1
<PAGE>
Plus
----
For each full month of the 1/36
Optionee's continuous Service from
the Initial Vesting Date until the
Vested Ratio equals 1/1, an
additional
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" shall also mean such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(j) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted in the Plan, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by law.
(k) "COMPANY" means Silicon Gaming, Inc., a California
corporation, or any successor corporation thereto.
(l) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(n) "DISABILITY" means the permanent and total disability of the
Optionee within the meaning of Section 22(e)(3) of the Code.
(o) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2
<PAGE>
(q) "FAIR MARKET VALUE" means, as of any date, if there is then
a public market for the Stock, the closing price of the Stock (or the mean of
the closing bid and asked prices of the Stock if the Stock is so reported
instead) as reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") System, the NASDAQ National Market System or such other
national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date. If there is then no public market for
the Stock, the Fair Market Value on any relevant date shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.
(r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(t) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(u) "PLAN" means the Silicon Gaming, Inc. 1996 Outside Directors
Stock Option Plan.
(v) "RULE 16B-3" means Rule 16b-3 as promulgated under the
Exchange Act, as amended from time to time, or any successor rule or regulation.
(w) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(x) "SERVICE" means the Optionee's service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. The Optionee's Service shall be deemed
to have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.
(y) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
(z) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option
3
<PAGE>
Agreement. Except when otherwise indicated by the context, the singular shall
include the plural, the plural shall include the singular, and the term "or"
shall include the conjunctive as well as the disjunctive.
2. TAX STATUS OF THE OPTION. This Option is intended to be a
------------------------
nonstatutory stock option and shall not be treated as an incentive stock option
within the meaning of Section 422(b) of the Code.
3. ADMINISTRATION. All questions of interpretation concerning this
--------------
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the Number
of Option Shares multiplied by the Vested Ratio less the number of shares
previously acquired upon exercise of the Option. In no event shall the Option
be exercisable for more shares than the Number of Option Shares.
(b) Notwithstanding the foregoing, in the event that the
adoption of the Plan or any amendment of the Plan is subject to the approval of
the Company's shareholders in order for the Plan or the grant of the Option to
comply with the requirements of Rule 16b-3, the Option shall not be exercisable
prior to such shareholder approval.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased. The
Option shall be deemed to be exercised upon receipt by the Company of such
written notice and the aggregate Exercise Price.
4.3 PAYMENT OF EXERCISE PRICE.
4
<PAGE>
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value not less than the
aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in
Section 4.3(c), or (iv) by any combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
agrees to make adequate provision for any sums required to satisfy the federal,
state, local and foreign tax withholding obligations of the Participating
Company Group, if any, which arise in connection with the Option, including,
without limitation, obligations arising upon (i) the exercise, in whole or in
part, of the Option, (ii) the transfer, in whole or in part, of any shares
acquired upon exercise of the Option, or (iii) the lapsing of any restriction
with respect to any shares acquired upon exercise of the Option.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the
5
<PAGE>
Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED
UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT
BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED.
The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares subject to the Option
shall relieve the Company of any liability in respect of the failure to issue or
sell such shares as to which such requisite authority shall not have been
obtained. As a condition to the exercise of the Option, the Company may require
the Optionee to satisfy any qualifications that may be necessary or appropriate,
to evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be requested by the
Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option
6
<PAGE>
Expiration Date. The Optionee's Service shall be deemed to have terminated on
account of death if the Optionee dies within three (3) months after the
Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding
the foregoing, if a sale, within the applicable time periods set forth in
Section 7.1, of shares acquired upon the exercise of the Option would subject
the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
8. OWNERSHIP CHANGE AND TRANSFER OF CONTROL.
----------------------------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect
7
<PAGE>
beneficial ownership of more than fifty percent (50%) of the total combined
voting power of the outstanding voting stock of the Company or the corporation
or corporations to which the assets of the Company were transferred (the
"TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding
sentence, indirect beneficial ownership shall include, without limitation, an
interest resulting from ownership of the voting stock of one or more
corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one or
more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the date of
the Transfer of Control. Any exercise of the Option that was permissible solely
by reason of this Section 8.2 shall be conditioned upon the consummation of the
Transfer of Control. In addition, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and obligations
under the Option or substitute for the Option a substantially equivalent option
for the Acquiring Corporation's stock. The Option shall terminate and cease to
be outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded down to the nearest whole number, and in no event may the Exercise
Price be decreased to an amount less than the par value, if any, of the stock
subject to the Option.
8
<PAGE>
10. RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a
------------------------
shareholder with respect to any shares covered by the Option until the date of
the issuance of a certificate for the shares for which the Option has been
exercised (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company). No adjustment shall be
made for dividends, distributions or other rights for which the record date is
prior to the date such certificate is issued, except as provided in Section 9.
11. LEGENDS. The Company may at any time place legends referencing any
-------
applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this
Option Agreement. The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to carry out
the provisions of this Section.
12. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
13. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Option at any time; provided, however, that no such termination or
amendment may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation. No
amendment or addition to this Option Agreement shall be effective unless in
writing.
14. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Option Agreement shall survive any
exercise of the Option and shall remain in full force and effect.
15. APPLICABLE LAW. This Option Agreement shall be governed by the laws
--------------
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
SILICON GAMING, INC.
By:__________________________________
Title:_______________________________
9
<PAGE>
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement and hereby accepts the Option subject to all
of the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
OPTIONEE
Date:_______________________________ _________________________________________
10
<PAGE>
SILICON GAMING, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(ANNUAL OPTION)
THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (ANNUAL
OPTION) (the "OPTION AGREEMENT") is made and entered into as of ___________,
199_, by and between Silicon Gaming, Inc. and ___________________________ (the
"OPTIONEE").
The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION").
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means ____________________ , 199_.
(b) "NUMBER OF OPTION SHARES" means five thousand (5,000) shares
of Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ ____________ per share of Stock, as
adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the Initial Vesting Date.
(e) "INITIAL VESTING DATE" means the date occurring one (1)
month after the Date of Option Grant.
(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
Vested Ratio
------------
Prior to Initial Vesting Date 0
On Initial Vesting Date, provided 1/36
the Optionee's Service is continuous
from the Date of Option Grant until
the Initial Vesting Date
1
<PAGE>
Plus
----
For each full month of the 1/36
Optionee's continuous Service from
the Initial Vesting Date until the
Vested Ratio equals 1/1, an additional
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" shall also mean such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(j) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted in the Plan, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by law.
(k) "COMPANY" means Silicon Gaming, Inc., a California
corporation, or any successor corporation thereto.
(l) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(n) "DISABILITY" means the permanent and total disability of the
Optionee within the meaning of Section 22(e)(3) of the Code.
(o) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2
<PAGE>
(q) "FAIR MARKET VALUE" means, as of any date, if there is then
a public market for the Stock, the closing price of the Stock (or the mean of
the closing bid and asked prices of the Stock if the Stock is so reported
instead) as reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") System, the NASDAQ National Market System or such other
national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date. If there is then no public market for
the Stock, the Fair Market Value on any relevant date shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.
(r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(t) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(u) "PLAN" means the Silicon Gaming, Inc. 1996 Outside Directors
Stock Option Plan.
(v) "RULE 16B-3" means Rule 16b-3 as promulgated under the
Exchange Act, as amended from time to time, or any successor rule or regulation.
(w) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(x) "SERVICE" means the Optionee's service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. The Optionee's Service shall be deemed
to have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.
(y) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
(z) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option
3
<PAGE>
Agreement. Except when otherwise indicated by the context, the singular shall
include the plural, the plural shall include the singular, and the term "or"
shall include the conjunctive as well as the disjunctive.
2. TAX STATUS OF THE OPTION. This Option is intended to be a
------------------------
nonstatutory stock option and shall not be treated as an incentive stock option
within the meaning of Section 422(b) of the Code.
3. ADMINISTRATION. All questions of interpretation concerning this
--------------
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the Number
of Option Shares multiplied by the Vested Ratio less the number of shares
previously acquired upon exercise of the Option. In no event shall the Option
be exercisable for more shares than the Number of Option Shares.
(b) Notwithstanding the foregoing, in the event that the
adoption of the Plan or any amendment of the Plan is subject to the approval of
the Company's shareholders in order for the Plan or the grant of the Option to
comply with the requirements of Rule 16b-3, the Option shall not be exercisable
prior to such shareholder approval.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased. The
Option shall be deemed to be exercised upon receipt by the Company of such
written notice and the aggregate Exercise Price.
4.3 PAYMENT OF EXERCISE PRICE.
4
<PAGE>
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value not less than the
aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in
Section 4.3(c), or (iv) by any combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
agrees to make adequate provision for any sums required to satisfy the federal,
state, local and foreign tax withholding obligations of the Participating
Company Group, if any, which arise in connection with the Option, including,
without limitation, obligations arising upon (i) the exercise, in whole or in
part, of the Option, (ii) the transfer, in whole or in part, of any shares
acquired upon exercise of the Option, or (iii) the lapsing of any restriction
with respect to any shares acquired upon exercise of the Option.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the
5
<PAGE>
Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED
UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT
BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED.
The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares subject to the Option
shall relieve the Company of any liability in respect of the failure to issue or
sell such shares as to which such requisite authority shall not have been
obtained. As a condition to the exercise of the Option, the Company may require
the Optionee to satisfy any qualifications that may be necessary or appropriate,
to evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be requested by the
Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option
6
<PAGE>
Expiration Date. The Optionee's Service shall be deemed to have terminated on
account of death if the Optionee dies within three (3) months after the
Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding
the foregoing, if a sale, within the applicable time periods set forth in
Section 7.1, of shares acquired upon the exercise of the Option would subject
the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
8. OWNERSHIP CHANGE AND TRANSFER OF CONTROL.
----------------------------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect
7
<PAGE>
beneficial ownership of more than fifty percent (50%) of the total combined
voting power of the outstanding voting stock of the Company or the corporation
or corporations to which the assets of the Company were transferred (the
"TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding
sentence, indirect beneficial ownership shall include, without limitation, an
interest resulting from ownership of the voting stock of one or more
corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one or
more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the date of
the Transfer of Control. Any exercise of the Option that was permissible solely
by reason of this Section 8.2 shall be conditioned upon the consummation of the
Transfer of Control. In addition, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and obligations
under the Option or substitute for the Option a substantially equivalent option
for the Acquiring Corporation's stock. The Option shall terminate and cease to
be outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded down to the nearest whole number, and in no event may the Exercise
Price be decreased to an amount less than the par value, if any, of the stock
subject to the Option.
8
<PAGE>
10. RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a
------------------------
shareholder with respect to any shares covered by the Option until the date of
the issuance of a certificate for the shares for which the Option has been
exercised (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company). No adjustment shall be made
for dividends, distributions or other rights for which the record date is prior
to the date such certificate is issued, except as provided in Section 9.
11. LEGENDS. The Company may at any time place legends referencing any
-------
applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this
Option Agreement. The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to carry out
the provisions of this Section.
12. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
13. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Option at any time; provided, however, that no such termination or
amendment may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation. No
amendment or addition to this Option Agreement shall be effective unless in
writing.
14. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Option Agreement shall survive any
exercise of the Option and shall remain in full force and effect.
15. APPLICABLE LAW. This Option Agreement shall be governed by the laws
--------------
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
SILICON GAMING, INC.
By:__________________________________
Title:_______________________________
9
<PAGE>
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement and hereby accepts the Option subject to all
of the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
OPTIONEE
Date:_______________________________ ____________________________________
10
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<PERIOD-START> MAR-31-1995 JAN-01-1996
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