<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28294
----------------
SILICON GAMING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 77-0357939
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
2800 W. BAYSHORE ROAD
PALO ALTO, CA 94303
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE: (650) 842-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
14,250,055 shares of Common Stock, $.001 par value, were outstanding as of
July 31, 1998.
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<PAGE>
SILICON GAMING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets--June 30, 1998 and December 31,
1997............................................................ 3
Consolidated Statements of Operations--Three months and six
months ended June 30, 1998 and June 30, 1997.................... 4
Consolidated Statements of Cash Flows--Six months ended June 30,
1998 and June 30, 1997.......................................... 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............. 20
Item 5. Other Information............................................... 20
Item 6. Exhibits and Reports on Form 8-K................................ 21
Signature....................................................... 22
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON GAMING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents.................................. $ 6,776 $ 16,352
Short-term investments................................ -- 4,705
Accounts receivable (net of allowances of $200 and
$50)................................................. 7,764 4,930
Inventories........................................... 13,866 6,335
Prepaids and other.................................... 1,192 1,334
-------- --------
Total current assets................................ 29,598 33,656
PROPERTY AND EQUIPMENT, NET............................. 8,888 8,844
PARTICIPATION UNITS, NET................................ 3,733 4,825
OTHER ASSETS, NET....................................... 1,464 1,713
-------- --------
$ 43,683 $ 49,038
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 5,168 $ 3,151
Accrued liabilities................................... 4,466 2,983
Deferred revenue...................................... 1,236 1,478
Current portion of long-term obligations.............. 1,089 285
-------- --------
Total current liabilities........................... 11,959 7,897
OTHER LONG-TERM LIABILITIES............................. 582 1,007
LONG-TERM OBLIGATIONS................................... 25,190 22,637
REDEEMABLE CONVERTIBLE PREFERRED STOCK--6,884,473 shares
authorized at June 30, 1998; shares outstanding: June
30, 1998--1,474,641; December 31, 1997--2,769,424...... 1,666 3,065
SHAREHOLDERS' EQUITY
Common Stock, $.001 par value; 50,000,000 shares
authorized; shares outstanding: June 30, 1998--
14,167,589; December 31, 1997--13,149,737............ 56,160 54,131
Warrants.............................................. 3,107 3,107
Notes receivable from shareholders.................... (189) (207)
Unrealized gain on investments........................ -- 1
Accumulated deficit................................... (54,792) (42,600)
-------- --------
Total shareholders' equity.......................... 4,286 14,432
-------- --------
$ 43,683 $ 49,038
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Hardware.............................. $ 5,462 $ 1,542 $ 7,886 $ 1,542
Software.............................. 1,941 31 2,661 31
Participation......................... 858 92 1,740 92
--------- -------- -------- --------
Total revenue....................... $ 8,261 $ 1,665 $ 12,287 $ 1,665
OPERATING EXPENSES:
Cost of sales and related
manufacturing expenses............... 5,836 2,321 9,026 3,262
Research and development.............. 2,838 2,429 5,554 4,436
Selling, general and administrative... 3,922 3,120 7,873 5,246
--------- -------- -------- --------
Total costs and expenses............ 12,596 7,870 22,453 12,944
--------- -------- -------- --------
Loss from operations.................. 4,335 6,205 10,166 11,279
Interest (income)/expense, net........ 1,093 $ (268) 2,026 $ (680)
--------- -------- -------- --------
NET LOSS................................ $ 5,428 $ 5,937 $ 12,192 $ 10,599
========= ======== ======== ========
Basic and diluted net loss per share.... $ 0.39 $ 0.58 $ 0.91 $ 1.06
========= ======== ======== ========
Shares used in computation.............. 13,755 10,195 13,417 9,995
========= ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SILICON GAMING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(12,192) $(10,599)
Reconciliation to net cash used in operating activities:
Depreciation and amortization........................... 2,351 741
Accrued interest........................................ 1,344 --
Accretion of debt discount.............................. 736 --
Deferred rent........................................... 106 92
Provision for bad debt.................................. 150 --
Gain from disposal of property.......................... (28) --
Changes in assets and liabilities:
Accounts receivable..................................... (2,984) (1,215)
Inventories............................................. (7,531) (5,631)
Prepaid and other....................................... 142 (805)
Participation units..................................... 668 --
Accounts payable........................................ 2,017 1,344
Accrued liabilities..................................... (392) 562
Deferred revenue........................................ (242) 371
-------- --------
Net cash used in operating activities................. (15,855) (15,140)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (1,816) (4,537)
Proceeds from disposal of property and equipment.......... 75 --
Purchase of short-term investments........................ -- (2,977)
Sales and maturities of short-term investments............ 4,704 5,730
Other Assets, net......................................... 47 (162)
-------- --------
Net cash provided by (used in) investing activities... 3,010 (1,946)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock, net of notes receivable............. 630 375
Collection of note receivable............................. 18 10
Proceeds from term loans.................................. 2,897 --
Repayment of term loans................................... (137) --
Repayment of capital lease obligations.................... (139) (88)
-------- --------
Net cash provided by financing activities............. 3,269 297
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS........................ (9,576) (16,789)
Beginning of period....................................... 16,352 25,583
-------- --------
End of period............................................. $ 6,776 $ 8,794
======== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 87 $ 51
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred stock to Common Stock............. $ 1,399 $ 531
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SILICON GAMING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 1998, the
consolidated statements of operations for the three and six months ended June
30, 1998 and 1997, and the consolidated statements of cash flows for the six
months ended June 30, 1998 and 1997, 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 dates
and for such periods. The unaudited information should be read in conjunction
with the audited consolidated financial statements of Silicon Gaming, Inc.
("Silicon Gaming" or the "Company") and the notes thereto for the year ended
December 31, 1997 included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Raw materials........................................ $ 4,469 $3,028
Work in process...................................... 866 468
Finished goods....................................... 8,531 2,839
------- ------
$13,866 $6,335
======= ======
</TABLE>
3. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-
term investments, and trade accounts receivable. The Company invests only in
high credit quality short-term debt. The Company performs ongoing credit
evaluations of its customers' financial condition and limits the amount of
credit extended when deemed necessary but generally requires no collateral.
The Company maintains reserves for estimated potential credit losses. As of
June 30, 1998, four customers accounted for 25%, 19%, 13% and 12% of accounts
receivable. As of December 31, 1997, two customers accounted for 32% and 21%
of accounts receivable. For the three months ended June 30, 1998, one customer
accounted for 19% of revenue and for the six months ended June 30, 1998, five
customers accounted for 26%, 17%, 13%, 10% and 10% of revenue. For both the
three and six months ended June 30, 1997, two customers accounted for 56% and
14% of revenue.
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Senior Discount Notes ($30 million principal
obligation)...................................... $23,013 $22,277
Capital lease obligations......................... 506 645
Other long-term obligation........................ 2,760 0
------- -------
26,279 22,922
Current obligation................................ (1,089) (285)
------- -------
Long-term portion................................. $25,190 $22,637
======= =======
</TABLE>
6
<PAGE>
SILICON GAMING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In April 1998, the Company entered into a $10 million secured revolving line
of credit agreement based on the Company's eligible accounts receivable, which
expires December 31, 1999. Borrowings bear interest at the bank's prime rate
(8.5% at June 30, 1998) plus 1%. There were no amounts outstanding under this
agreement as of June 30, 1998. The line of credit requires the Company to
comply with certain financial covenants, with which the Company was in
compliance as of June 30, 1998.
In March 1998, the Company entered into a secured equipment term loan with
available credit up to $2 million. Borrowings bear interest at 11% per annum
for a term of 36 months. As of June 30, 1998, the Company had $1,843,000
outstanding under this agreement. The agreement requires the Company to comply
with certain financial covenants, with which the Company was in compliance as
of June 30, 1998.
In June 1998, the Company entered into a secured equipment term loan with
available credit up to $3 million. Borrowings bear interest at 14% per annum
for a term of 42 months. As of June 30, 1998, the Company had $917,000
outstanding under this agreement. The agreement requires the Company to comply
with certain financial covenants, with which the Company was in compliance as
of June 30, 1998.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which requires
an enterprise to report, by major components and as a single total, the change
in net assets during the period from non-owner sources. Comprehensive loss,
which is comprised of the Company's net loss for the periods and unrealized
gains (losses) on investments, was $5,430,000 and $5,938,000 for the quarters
ended June 30, 1998 and 1997, respectively, and $12,193,000 and $10,576,000
for the six months ended June 30, 1998 and 1997, respectively.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of this statement
will not impact the Company's consolidated financial position, results of
operations or cash flows. The Company will adopt this statement in its
financial statements for the year ending December 31, 1998.
6. SUBSEQUENT EVENTS
On July 8, 1998, the Company completed the private placement of $17.25
million principal obligation Senior Discount Notes ("Notes") due September 30,
2002. Commencing January 1, 1999 the Notes bear interest at 12.5% per annum,
payable semi-annually. The Company is required to redeem $3 million in
principal on September 30, 2001. The Company is permitted to raise additional
proceeds from debt or equity securities of up to $40 million before mandatory
redemption of the Notes. The Notes are callable at the option of the Company
at any time, with an initial redemption price of 93.13% of the aggregate
amount, increasing to 100% over 9 months. In connection with the offering,
purchasers of the Notes were issued 5-year warrants to purchase 250,000 shares
of the Company's Common Stock at a per-share price of $8.00. Additionally, the
exercise price of the 375,000 warrants issued in connection with the September
1997 Senior Discount Notes was also adjusted from a per-share price of
$15.4375 to a per-share price of $8.00. The value ascribed to the warrants and
to the repricing of the September 1997 warrants was $1,466,000. The Company is
required, after approval is received by the necessary gaming regulatory
authorities, to register the Common Stock underlying the warrants with the
Securities and Exchange Commission, no later than January 1, 1999. Gross
proceeds to the Company before fees and other expenses were $14.95 million.
Offering costs of $50,000 will be included in other assets in July 1998 and
will be amortized as an adjustment to interest expense over the term of the
Notes.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS DISCUSSION INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH
REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES, INCLUDING THOSE REFERRED TO IN THE RISK FACTORS
SECTION BELOW AND ELSEWHERE HEREIN AND CONTAINED IN THE COMPANY'S PREVIOUSLY
FILED ANNUAL REPORT ON FORM 10-K, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS DISCUSSION,
THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE HEREOF.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I--Item 1
of this Report and the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
OVERVIEW
Silicon Gaming, Inc. ("SGI" or "the Company") is engaged in the design,
development, production, marketing and sale of what it believes will be the
next generation of interactive slot machines for use in casinos and other
gaming establishments. The Company's first product, Odyssey(R), combines an
advanced multimedia gaming platform with software-based games that the Company
believes to be more engaging and entertaining than other gaming devices
currently available and will, as a result, generate increased win per machine
for the casino operator. The Company recently announced its new product,
Quest(TM), which is designed as a lower-priced, single-game product to further
meet the needs of casino operators, add flexibility to the Company's product
line, and allow further penetration and expansion of new and existing markets.
Odyssey and Quest feature high-resolution video presented across the full
surface of a large touchscreen display. The games feature high-quality
animation, video clips, digital sound and a level of visual appeal and
interactivity that the Company believes is unattainable by the current
generation of slot machines. The majority of today's slot machines are
"hardware dominant", consisting of a fixed and unvarying game played on
spinning reels or a small video screen mounted within a large metal box. By
contrast, the Company's machines are "software dominant", in that the
attraction and entertainment value of its machines is created by software
programs that run SGI's games. Odyssey offers a selection of a suite of up to
six different games on a single machine, while Quest is designed as a single-
game machine. The Company expects that casino operators will be able to
quickly and easily upgrade SGI's machines simply by installing new software,
rather than replacing an entire slot machine.
The Company commenced commercial sale of Odyssey in May 1997, prior to which
it was in the development stage. Since introducing Odyssey the Company has
focused its efforts on entering new markets and jurisdictions, introducing its
product and ramping up its sales in such markets. As of June 30, 1998 the
Company had an installed base of over 2,700 machines. The Company shipped 818
machines to customers during the quarter ended June 30, 1998, increasing its
installed base by 35%. Odyssey is licensed for sale in Nevada, Missouri,
Mississippi, Indiana, Connecticut, Alberta-Canada and certain native American
tribes in Louisiana, Mississippi, and New Mexico. The Company has received its
corporate license in these jurisdictions as well as New Jersey, Minnesota, and
certain native American tribes in Michigan and is in the process of gaining
licenses in additional jurisdictions. The Company offers multiple denomination
machines to its customers and in June 1998 began operating its "game factory"
concept which intends to introduce new game titles to customers on a monthly
basis. In June the Company introduced Arabian Riches(TM), and has recently
introduced Riddle of the
8
<PAGE>
Sphinx(TM) and Banana-Rama(TM) into Nevada. The Company plans to introduce
these games into other jurisdictions pending regulatory approval.
The Company generates revenue from machine sales direct to customers as well
as from software license and participation revenue. The Company installs units
on casino floors through direct sales, as well as on a trial basis, consistent
with industry practice. The Company's initial sales of Odyssey include the
hardware platform bundled with a suite of six games, play stoppage
entertainment and the Machine Management System(TM). The Company recently
announced its new product Quest, which has been designed as a lower-priced,
single-game product. The Company offers two alternative purchase programs,
consisting of the sale of hardware bundled with either (1) a single-game or a
suite of games or (2) a renewable one-year software license, including access
to the Company's entire game library for the term of the license. In addition,
the Company offers a revenue participation plan that allows the Company to
share with casino operators the aggregate win generated by the machines, with
20% going to the Company. Under this plan, the casino accumulates credits that
may be applied to the purchase of the machines after a 90-day, minimum
evaluation period.
The Company was incorporated in California on July 27, 1993. Its principal
offices are located at 2800 W. Bayshore Road, Palo Alto, California 94303. The
Company also maintains sales and support offices in Las Vegas and Reno,
Nevada, and in Gulfport, Mississippi.
RESULTS OF OPERATIONS
The Company had a net loss of $5,428,000 in the quarter ended June 30, 1998,
a decrease of $509,000, or 9%, from $5,937,000 for the quarter ended June 30,
1997. Revenue increased to $8,261,000 in the quarter ended June 30, 1998, an
increase of $6,596,000, or 396%, from $1,665,000 for the quarter ended June
30, 1997. This increase in revenue was primarily due to the fact that the
Company commenced sale of its product in May 1997. Since that time the Company
has focused its efforts on entering new markets and jurisdictions, introducing
its product and ramping up its sales in such markets. This increase in revenue
is coupled with increases in resources the Company has devoted to
manufacturing development and production, research and development, building a
sales, support and administrative infrastructure, hiring additional
administrative staff, ramping up the Company's marketing activities, and
financing its operations. This resulted in an increase of costs, expenses and
net interest expense to $13,689,000 for the quarter ended June 30, 1998 from
$7,602,000 for the quarter ended June 30, 1997.
The Company had a net loss of $12,192,000 for the six months ended June 30,
1998, an increase of $1,593,000, or 15%, from $10,599,000 for the six months
ended June 30, 1997. The Company was in the development stage, without
revenue, until its first sales in May 1997. Accordingly, the Company recorded
only two months of revenue during the six moths ended June 30, 1997, and the
prior period may not be comparable to current or future periods. The Company
had revenue of $12,287,000 for the six months ended June 30, 1998, an increase
of $10,622,000, or 638%, from $1,665,000 for the six months ended June 30,
1997. This increase in revenue was offset by increases in costs, expenses and
net interest expense to $24,479,000 in the six months ended June 30, 1998 from
$12,264,000 for the six months ended June 30, 1997.
The Company sold its first machines in Nevada in May 1997. Since that time
the Company has been broadening the markets in which it sells its product and
expanding its game software library. The Company's quarterly and annual
operating results have been, and will continue to be, affected by a wide
variety of factors that could have a material adverse effect on revenue and
profitability during any particular period. This includes such factors as the
level of orders which are received and can be shipped in a quarter, the
rescheduling or cancellation of sales or trial orders by its customers, the
timing and/or ability of the Company to obtain the licenses necessary to
conduct its business, the Company's ability to introduce new software or
hardware products and technologies on a timely basis, new product
introductions by the Company's competitors, and the level of expenditures in
manufacturing, research and development, and sales, general and administrative
functions. Accordingly, it is not possible to estimate future revenue and
operating expenses based upon historical operating performance.
The Company's products, Odyssey and Quest, are significantly different from
the products offered by its competitors. Because sales of the Odyssey, Quest
and their related software will comprise the Company's only
9
<PAGE>
source of revenue for the foreseeable future, the Company's quarterly and
annual operating results will depend on the success of these single products
that are subject to the new product risks described in the preceding
paragraph. In addition, the success of Odyssey and Quest will also depend upon
the Company's ability to generate new and successful software-based games
which are readily accepted in the marketplace. Historically, the Company has
generally recognized a substantial portion of its revenue in the last month of
a given quarter. A significant portion of the Company's expenses are fixed in
the short term, and the timing of increases in expenses is based in large part
on the Company's forecast of future revenue. As a result, if revenue does not
meet the Company's expectations, it may be unable to quickly adjust expenses
to levels appropriate to actual revenue, which could have a material adverse
effect on the Company's business and results of operations.
As a result of the foregoing, the Company's operating results and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in net revenue or operating results from levels expected
by securities analysts could have an immediate and significant adverse effect
on the trading price of the Company's Common Stock.
The market price of the Company's Common Stock has fluctuated significantly
since its initial public offering in July 1996. The market price of the Common
Stock could be subject to significant fluctuations in the future based on
factors such as announcements of new products or game titles by the Company or
its competitors, quarterly fluctuations in the Company's financial results or
other gaming machine manufacturing companies' financial results, changes in
analysts' estimates of the Company's financial performance, general conditions
in the gaming or gaming machine manufacturing industries, conditions in the
financial markets and general conditions in the political or business
environment which might adversely affect the gaming industry. In addition, the
stock market in general has experienced extreme price and volume fluctuations,
which have particularly affected the market prices for many high technology
companies and which have often been unrelated to the operating performance of
the specific companies. The market price of the Company's Common Stock has
declined substantially from its historic highs and may continue to experience
significant fluctuations in the future.
Revenue
Revenue for the quarter ended June 30, 1998 was $8,261,000, an increase of
$6,596,000, or 396%, from $1,665,000 for the quarter ended June 30, 1997.
Revenue for the quarter ended June 30, 1998 consisted of $5,462,000, or 66%,
in hardware sales, $1,941,000, or 24%, in software license revenue and
$858,000, or 10%, in participation revenue. Revenue for the quarter ended June
30, 1997 consisted of $1,542,000, or 93%, in hardware sales, $31,000, or 2%,
in software license revenue and $92,000, or 5%, in participation revenue.
Revenue for the six months ended June 30, 1998 was $12,287,000, an increase
of $10,622,000, or 638%, from $1,665,000 for the six months ended June 30,
1997. Revenue for the six months ended June 30, 1998 consisted of $7,886,000,
or 64%, in hardware sales, $2,661,000, or 22%, in software license revenue and
$1,740,000, or 14%, in participation revenue. Revenue for the six months ended
June 30, 1997 consisted of $1,542,000, or 93%, in hardware sales, $31,000, or
2%, in software license revenue and $92,000, or 5%, in participation revenue.
As of June 30, 1998 the Company had an installed base of over 2,700
machines, as compared to 402 machines as of June 30, 1997. During the quarter
ended June 30, 1998, the Company shipped 818 machines, increasing its
installed base by 35%. Revenue was recognized on 606 and 235 units for the
quarters ended June 30, 1998 and 1997, respectively, with the remaining units
(net of returns) subject to an initial evaluation period. Revenue was
recognized on 916 and 235 units for the six-months ended June 30, 1998 and
1997, respectively. The Company had 732 units with customers under
participation arrangements as of June 30, 1998, compared to 96 units as of
June 30, 1997. As of June 30, 1998, the Company recognized revenue in seven
jurisdictions across the United States and Canada.
The large increases between the periods are primarily due to the fact that
the Company was in the development stage, without revenue, until its first
sales in May 1997. Since that time the Company has focused
10
<PAGE>
its efforts on entering new markets and jurisdictions, introducing its product
and ramping up its sales and broadening the markets in which it sells its
product. Because the Company was without revenue in four of the six months
ended June 30, 1997, the prior period differs from, and may not be comparable
to, current or future periods, and it is not possible to estimate future
revenue and operating expenses based upon historical data. Due to the early
stage of the Company's product cycle and its efforts to expand and enter new
markets, the Company believes the revenue generated from sales will increase
significantly in the current year. As the Company's base of installed units
continues to increase, the Company believes license revenue will increase and
participation revenue will decrease as a percentage of total revenue and in
absolute dollars. Anticipated increases in revenue, however, are subject to a
number of risks and uncertainties. See "Risk Factors Uncertain Market
Acceptance; Risk of Technical Errors; Single Product", "--Competition", "--
Rapidly Changing Technology" "--Slow Trend in Legalized Gambling", and "--
Regulatory Approval."
Cost of Sales and Related Manufacturing Expenses
Cost of sales and related manufacturing expenses include direct costs of
product sales, payroll and related costs for manufacturing personnel, overhead
costs and depreciation of participation units. Cost of sales and related
manufacturing expenses were $5,836,000, or 71% of revenue, as compared to
$2,321,000, or 139% of revenue, for the quarters ended June 30, 1998 and 1997,
respectively. Cost of sales and related manufacturing expenses were
$9,026,000, or 73% of revenue, as compared to $3,262,000, or 196% of revenue,
for the six months ended June 30, 1998 and 1997, respectively. Gross profits
for 1998 were 29% and 27% for the three and six months ended June 30, 1998,
respectively. The Company was in the development stage until May 1997, without
revenue, and manufacturing expenses did not include direct costs of product
sales. As such, the Company experienced negative gross profits in the three
and six months ended June 30, 1997. Increases in costs, as well as
improvements in gross profit between the periods are due primarily to the
increased value and cost of product sales as a direct result of increased
volume and revenue recognized in the same periods. The net increase between
periods is offset by decreases in per-unit product costs resulting from
reductions in cost of materials and buying efficiencies, as well as
efficiencies in manufacturing from tooling certain hardware components. Due to
significant reductions in cost of materials, cost of sales for inventory sold
in the six months ended June 30, 1998 are in excess of what the per-unit costs
are expected to be in future periods. As a result of these changes, the prior
periods differ from, and may not be comparable to, current or future periods.
Cost of sales and manufacturing expenses are expected to increase through
1998 as the Company increases sales of its product and expands its
manufacturing capacity and infrastructure to produce its product in greater
commercial quantities. The Company expects to achieve a further reduction in
per-unit manufacturing costs in future periods and improved gross profit in
those same periods. However, aggregate fixed manufacturing costs are expected
to increase as the Company's manufacturing volume increases. The anticipated
manufacturing efficiencies are subject to a number of risks and uncertainties.
See "Risk Factors--Limited Manufacturing Experience."
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 costs of supplies. To date, the Company has expensed all
costs associated with the research, design and development of its product. R&D
expenses were $2,838,000, or 34% of revenue, as compared to $2,429,000, or
146% of revenue, for the quarters ended June 30, 1998 and 1997, respectively.
R&D expenses were $5,554,000, or 45% of revenue, as compared to $4,436,000, or
266% of revenue for the six months ended June 30, 1998 and 1997, respectively.
Increases in R&D expenses over these periods have resulted from the
incremental hiring of personnel, development of new games and products,
including Quest and a wide area progressive system, increased use of
engineering consultants and license fees and similar costs associated with the
acquisition of outside technologies. The Company believes that a significant
level of R&D expense is required due to the technical nature of its product
and the elaborate requirements of the game development
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process. Accordingly, the Company anticipates devoting substantial resources,
including additional personnel, to R&D and expects that these costs will
increase in absolute dollars in future periods; however, these costs are
expected to decrease as a percentage of revenue and as a percentage of total
costs and expenses.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses include payroll and
related costs for administrative and executive personnel, sales and marketing
personnel, overhead costs, legal and associated costs, costs associated with
obtaining corporate and product licenses in various jurisdictions and fees for
professional services. SG&A expenses were $3,922,000, or 47% of revenue, as
compared to $3,120,000, or 187% of revenue, for the quarters ended June 30,
1998 and 1997, respectively. SG&A expenses were $7,873,000, or 64% of revenue,
as compared to $5,246,000, or 315% of revenue, for the six months ended June
30, 1998 and 1997, respectively. Increases in SG&A expenses over these periods
have resulted from the incremental hiring of personnel and expenses associated
with applying for corporate and product licensing in various jurisdictions and
costs associated with establishing a sales and marketing organization as the
Company commenced commercial production and distribution of its product. SG&A
expenses are expected to increase substantially in absolute dollars as the
Company invests in increased sales and marketing-related activities and in
administrative personnel to support its growing infrastructure; however, these
costs are expected to decrease as a percentage of revenue.
Interest Income and Expense
Net interest expense was $1,093,000 for the quarter ended June 30, 1998, as
compared to net interest income of $268,000 for the quarter ended June 30,
1997. Net interest expense was $2,026,000 for the six months ended June 30,
1998, as compared to net interest income of $680,000 for the six months ended
June 30, 1997. Included in these totals was interest income of $107,000 and
$300,000 for the quarter ended June 30, 1998 and 1997, respectively, and
$327,000 and $734,000 for the six months ended June 30, 1998 and 1997,
respectively. Decreases in interest income over these periods were primarily
due to lower average cash and investment balances held compared to prior
periods. Interest expense was $1,200,000 and $32,000 for the quarters ended
June 30, 1998 and 1997, respectively, and $2,353,000 and $54,000 for the six
months ended June 30, 1998 and 1997, respectively. The increases in interest
expense over these periods was primarily due to interest and amortized debt
costs recorded in the periods ended June 30, 1998 for Senior Discount Notes
(the "Notes") issued on September 30, 1997 and for interest expense associated
with the secured equipment term loans.
Income Taxes
The Company has not been required to pay income taxes due to its net
operating losses in each period since inception. As of December 31, 1997, the
Company had net operating loss carryforwards of approximately $40,800,000 and
$24,900,000 for federal and state income tax purposes, respectively. These
loss carryforwards will expire beginning in the year 2000, if not utilized. As
of December 31, 1997, the Company also has R&D credit carryforwards of
approximately $480,000 and $480,000 for federal and state purposes,
respectively, which expire beginning 2010. A valuation allowance has been
recorded for any deferred tax assets due to uncertainties regarding the
realization of these assets resulting from the lack of earnings history of the
Company. The Tax Reform Act of 1986 and the California Act of 1987 impose
restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" as defined by the Internal
Revenue Code. The Company's ability to utilize its net operating loss and tax
credit carryforwards is subject to limitation pursuant to these restrictions.
As of December 31, 1997, approximately $4 million of the Company's net
operating loss carryforwards was subject to such limitation and this
limitation is dependent on the Company's future profitability and the
utilization of its net operating loss carryforwards over a period of time.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $6,776,000 as of June
30, 1998, compared to $21,057,000 as of December 31, 1997. This decrease was
primarily due to an increase in cash used in operating
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activities as the Company ramped up manufacturing, marketing, and selling of
its product, as well as cash used for the purchase of property and equipment,
which was partially offset by increases in cash provided by investing and
financing activities.
Working capital was $17,639,000 and $25,759,000 at June 30, 1998 and
December 31, 1997, respectively. The decrease in working capital is primarily
due to the decrease in cash and investments offset partially by increases in
inventory, accounts receivable, accounts payable, accrued liabilities and
deferred revenue. These changes are primarily due to the fact that the Company
was ramping up operations, increasing sales, operations and accounts
receivable, as well as increasing inventory on hand to prepare for increased
sales volume in the latter part of the current year.
The Company's net cash used in operating activities was $15,855,000 and
$15,140,000 for the six months ended June 30, 1998 and 1997, respectively.
This increase was primarily due to increases in the Company's net losses,
depreciation and amortization, accrued interest, accretion of debt discount,
and increases in cash used for accounts receivable and inventory. These
changes resulted from increased sales and operations, as well as interest on
financing obtained in the current year.
Net cash provided by investing activities was $3,010,000 for the six months
ended June 30, 1998, as compared to the net cash used in investing activities
of $1,946,000 for the six months ended June 30, 1997. The change was primarily
due to decreases in the acquisition of fixed assets, primarily computer
equipment and software, decreases in other assets, and increases in the net
cash provided by the purchase, sale and maturity of short-term investments.
Net cash provided by financing activities was $3,269,000 and $297,000 for
the six months ended June 30, 1998 and 1997, respectively. The increase was
primarily due to proceeds from term loans and the sale of Common Stock, which
was partially offset by the repayment of capital lease and term loan
obligations.
In April 1998, the Company entered into a $10 million secured revolving line
of credit agreement based on the Company's eligible accounts receivable, which
expires December 31, 1999. Borrowings bear interest at the bank's prime rate
(8.5% at June 30, 1998) plus 1%. There were no amounts outstanding under this
agreement as of June 30, 1998. The line of credit requires the Company to
comply with certain financial covenants, with which the Company was in
compliance as of June 30, 1998.
In March 1998, the Company entered into a secured equipment term loan with
available credit up to $2 million. Borrowings bear interest at 11% per annum
for a term of 36 months. As of June 30, 1998, the Company had $1,843,000
outstanding under this agreement. The agreement requires the Company to comply
with certain financial covenants, with which the Company was in compliance as
of June 30, 1998.
In June 1998, the Company entered into a secured equipment term loan with
available credit up to $3 million. Borrowings bear interest at 14% per annum
for a term of 42 months. As of June 30, 1998, the Company had $917,000
outstanding under this agreement. The agreement requires the Company to comply
with certain financial covenants, with which the Company was in compliance as
of June 30, 1998.
On July 8, 1998, the Company completed the private placement of $17.25
million principal obligation Senior Discount Notes ("Notes") due September 30,
2002. Commencing January 1, 1999 the Notes bear interest at 12.5% per annum,
payable semi-annually. The Company is required to redeem $3 million in
principal on September 30, 2001. The Company is permitted to raise additional
proceeds from debt or equity securities of up to $40 million before mandatory
redemption of the Notes. The Notes are callable at the option of the Company
at any time, with an initial redemption price of 93.13% of the aggregate
amount, increasing to 100% over 9 months. In connection with the offering,
purchasers of the Notes were issued 5-year warrants to purchase 250,000 shares
of the Company's Common Stock at a per-share price of $8.00. Additionally, the
exercise price of the 375,000 warrants issued in connection with the September
1997 Senior Discount Notes was also adjusted from a per-share price of
$15.4375 to a per-share price of $8.00. The value ascribed to the warrants and
to the repricing
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<PAGE>
of the September 1997 warrants was $1,466,000. The Company is required, after
approval is received by the necessary gaming regulatory authorities, to
register the Common Stock underlying the warrants with the Securities and
Exchange Commission, no later than January 1, 1999. Gross proceeds to the
Company before fees and other expenses were $14.95 million. Offering costs of
$50,000 will be included in other assets in July 1998 and will be amortized as
an adjustment to interest expense over the term of the Notes.
At June 30, 1998 the Company's principal sources of liquidity included cash
and equivalents of $6,776,000 and the Company's $10 million line of credit.
Subsequent to June 30, 1998, the Company received $14.95 million in net
financing from the Notes. The Company believes its cash and equivalents, its
revolving line of credit and funds received from the Notes, together with
proceeds from additional financing sources which the Company believes are
available, will be sufficient to meet its anticipated cash needs for working
capital, capital expenditures and business expansion until the Company
generates positive cash flow from operations. However, there can be no
assurances that the Company will generate positive cash flow within the
currently anticipated time frame. In the future, the Company expects to
increase the cash used in operating activities in order to increase commercial
production and distribution of its product, enhance manufacturing
capabilities, expand sales and support operations, increase research and
development activities and add administrative infrastructure.
Cash flow from the Company's initial commercial sales has been negatively
affected by the revenue participation plan that the Company is offering to its
customers. Under this plan, a customer does not purchase the machine outright,
but pays the Company 20% of the win generated by such machine. The customer
also accumulates credits which may be applied to the purchase of the machines.
Although the Company expects that this plan will generate higher revenue per-
unit than conventional sales, the cash flow generated by sales under the plan
occurs over an extended period, as the aggregate win per day is earned.
The Company's capital requirements will depend on many factors, including,
but not limited to, the rate at which the Company can introduce its product,
the market acceptance and competitive position of such product, the extent to
which the customers choose the revenue participation plan, the response of
competitors to the Company's product, and the ability of the Company to
satisfy the licensing requirements in various jurisdictions applicable to the
Company, its product, and in some jurisdictions, its officers, directors,
employees or principal shareholders. In addition to financing recently
obtained, the Company may be required to seek additional financing before it
achieves positive cash flow. In that event, 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 the Company's short-term or long-term
capital requirements, the Company may be required to limit its operations
significantly.
YEAR 2000 ISSUES. The inability of computers and software programs to
recognize and properly process data fields containing a two-digit year is
commonly known as the Year 2000 issue. As the year 2000 approaches, such
computer systems may be unable to accurately process certain date-based
information. This could result in system failures or miscalculations causing
disruption of operations including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
During 1997 the Company implemented an enterprise-wide management
information system which supports all of the Company's major business
applications including sales and customer service, manufacturing and
distribution, and finance and accounting. Management has determined that the
Year 2000 issue will not pose significant operational problems for its
computer systems. As a result, any costs attributable to the purchase and
implementation of new software will be capitalized and any other costs
incurred in connection with Year 2000 compliance will be expensed as incurred.
The Company expects that any systems or application changes or upgrades
connected with Year 2000 compliance will be completed before December 31,
1998. The Company expects to use both internal and external resources to
replace and test software for Year 2000 compliance. The total cost to the
Company for these Year 2000 compliance activities has not been and is not
anticipated to be material to its financial position or results of operations.
These costs are not expected to be substantially different from normal costs
that are incurred for
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systems development and implementation, in part due to the reallocation of
internal resources. The total cost of Year 2000 compliance is not expected to
exceed $500,000, the majority of which will be spent on the purchase and
implementation of new software and upgrades during the third quarter of 1998.
These costs and the date by which management expects to complete the Year 2000
compliance are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the availability of
certain resources, third party product and modification programs and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
The Company is in the process of obtaining assurances from vendors that
timely updates will be made available to ensure that all purchased software
will be Year 2000 compliant. The Company is also in the process of initiating
formal communications with all of its significant suppliers to determine the
extent to which the Company is vulnerable to Year 2000 issues. However, there
can be no guarantee that if the systems of other companies on which the
Company's systems rely are not timely converted, or if another company fails
to convert, this would not have a material adverse effect on the Company.
The Company currently obtains a significant amount of its revenue from
relatively few customers. There can be no assurance that the Year 2000 issue
will not pose significant problems for the computer systems of these
customers, which could in turn affect the customers' ability to purchase
machines and generate revenue for the Company. Accordingly, there can be no
assurance revenue generated for the Company will not be affected by the Year
2000 issues that these customers might have. The Company cannot predict the
nature of any such changes or their impact on the Company.
RISK FACTORS
UNCERTAIN MARKET ACCEPTANCE; RISK OF TECHNICAL ERRORS; SINGLE PRODUCT. To
achieve commercial success, the Company's product must be accepted both by
casino operators and gaming patrons. Because acceptance of the product by
casino operators will ultimately depend on win per machine, the Company
believes that its ultimate success will depend on player acceptance. The
Company's first gaming platform, Odyssey, has only been installed in casinos
for a limited period and the Company has only limited market studies and
player data to support its belief that Odyssey or the Company's new product,
Quest, will be accepted by slot players. There can be no assurance that
Odyssey or Quest will be accepted by casino patrons. Initial player interest
in the product may be affected by its novel design in addition to any inherent
advantages it may have over competing platforms and may therefore not be
indicative of the long-term success of Odyssey or Quest in the marketplace.
Player preferences are highly subjective, vary substantially among geographic
and demographic markets and are subject to unpredictable change. Because the
Company's product offers features not found on traditional slot machines, it
may not appeal to players for whom familiarity and predictability are
important considerations.
The Company sells its machines at prices that are substantially higher than
the prices of most competing products. In light of these higher sale prices,
coupled with the Company's status as a new and relatively small entrant in a
market dominated by larger companies, the success of Odyssey and Quest will
require that it 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 a number of casinos have
purchased or installed the Company's product, any additional purchases of the
product by these casinos, or others that may conduct similar evaluations in
the future, will be subject to the superior performance of the product on the
casino floor. Because of the limited opportunity for the Company to test its
gaming platform under long-term play conditions, 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, installation and production delays or delays in product
licensing.
The Company's success currently depends on the success of a single product.
Because sales of its slot machine and related software will comprise the
Company's only source of revenue in the foreseeable future, any interruption
in these sales due to a technical problem will prevent the Company from
earning revenue unless and until the cause of such interruption can be
remedied. As the Company moves into new jurisdictions, including
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potential international markets, the Company may be required to make certain
modifications to its product to comply with local regulatory or market
conditions. There can be no assurance that such modifications will be
successful, or that these modifications will be performed in a timely or cost
effective manner. Moreover, should Odyssey or Quest fail to win broad
acceptance in the market, the Company's business, financial condition and
results of operations would be materially and adversely affected, and
investors would be exposed to the loss of all or a substantial portion of
their investment.
EXPECTATION OF LOSSES; NEGATIVE CASH FLOWS. As of June 30, 1998, the Company
has had net losses since inception, and the Company expects to continue to
incur operating losses and negative cash flows at least through the third
quarter of 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 and complications that may affect the Company's ability to
achieve profitable operations and the competitive and regulatory environment
in which the Company must operate. To date, the Company's operations have
focused primarily on product development, and the Company has had limited
experience in the areas of manufacturing, sales, product distribution and
customer support. Accordingly, it is not possible to estimate future revenue
and operating expenses based upon historical operating performance. Operating
results will depend, in part, on matters over which the Company has little or
no control, including, without limitation, the ability of the Company to
obtain the licenses necessary to conduct its business, competition, the actual
number of orders for its product, gaming regulations and taxes.
CAPITAL REQUIREMENTS. The Company believes that its cash and equivalents,
short-term investments, and its revolving line of credit, together with
proceeds from additional financing sources which the Company believes are
available, will be sufficient to fund its capital and operating requirements
until the Company generates positive cash flow from operations. The Company
recently obtained debt financings to fund its product rollout, expand
operations, and fund its revenue sharing plan and the development of its wide
area progressive system. The cash flow generated by sales under the revenue
sharing plan is recognized over an extended period, as the aggregate win per
day is earned, and therefore has an adverse effect on the Company's working
capital compared to other pricing options. In addition to the financings
recently obtained, the Company may be required to seek additional financing
before it achieves positive cash flow. 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, shareholders may experience
substantial dilution, and such securities may have rights or preferences
senior to those of Common Stock. Moreover, if adequate funds are not available
to satisfy the Company's short-term or long-term capital requirements, the
Company may be required to limit or discontinue its revenue sharing plan,
scale back its product rollout, or 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 introduces its product, the market
acceptance and competitive position of such product, the extent to which the
customers choose the revenue participation plan, the response of competitors
to the product and the ability of the Company's management and its product to
satisfy the corporate licensing and product licensing requirements in various
jurisdictions.
COMPETITION. The gaming machine industry is characterized by intense
competition that is based on, among other things, a device's ability to
generate win per machine through product appeal to players, and knowledge of
customer requirements such as ease of use, quality of service, support and
training, distribution, name recognition and price. In recent years, the
gaming machine market has been dominated by International Game Technology
("IGT") which, according to industry sources, captured approximately 75% of
the market in 1997. IGT's presence as a competitor is bolstered by its
extensive market presence, distribution capacity, player acceptance and
financial, technological and other resources. Several other companies,
including Bally Gaming International, Inc. ("Bally Gaming"), are established
in, or are 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. 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, any of
which could afford them a competitive advantage in developing multimedia-based
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gaming machines. Any success the Company might have may benefit existing
competitors and induce new competitors to enter the market. If Odyssey or
Quest displays a potential to capture a significant share of the gaming
machine market, the Company's competitors can be expected to employ a variety
of tactics to limit erosion of their market share, including price reductions,
acceleration of new product development or acquisition of new, competitive
technologies. In the face of such tactics, there can be no assurance that the
Company will be a successful competitor in the gaming machine industry.
SLOWING IN TREND TO LEGALIZE GAMING. Growth in demand for slot machines
historically has been driven by the opening of new casinos, including casinos
in jurisdictions where gaming has recently been legalized. However, in recent
years, the legalization of gaming in new jurisdictions has been significantly
reduced; therefore, demand based on new openings will be largely limited to
new projects in existing markets. Certain jurisdictions which currently permit
gaming are contemplating legislation to limit, reduce, or eliminate gaming. If
successful, such legislation could limit growth opportunities for the Company.
As a result of these factors, there can be no assurance that the slot machine
industry will sustain the rate of growth that was possible in the first half
of this decade.
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. Should
the Company's executives be 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.
Competition is intense for highly skilled product development employees in
particular. 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 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.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF LITIGATION. The
Company regards its product as proprietary and relies primarily on a
combination of patent, 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 to effectively 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 resemble the Company's games. At present, the Company's principal
proprietary technology consists of its game authentication algorithm, which is
designed to prevent tampering with the game software that is resident in its
product, 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, 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. Moreover, although the Company has applied for and received
certain patents and trademarks for its intellectual property, there can be no
assurance that such patents and trademarks 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
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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 upon 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, operating results and
financial condition.
RAPIDLY CHANGING TECHNOLOGY. The Company's product utilizes 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 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.
LIMITED MANUFACTURING EXPERIENCE. In order for the Company to be successful,
its product must be manufactured to meet high-quality standards in commercial
quantities at competitive prices. The Company has a limited history of
manufacturing Odyssey and Quest for commercial distribution and has had no
prior experience in large-scale manufacturing of gaming machines. The
transition to large-scale manufacturing of Odyssey and Quest 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 as the Company begins manufacturing in greater
volumes. 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.
DEPENDENCE ON SINGLE-SOURCE SUPPLIERS. The Company currently obtains a
number of its system's components from single-source suppliers. In particular,
the touchscreen and picture tube that comprise the video display are supplied
by MicroTouch Systems, Inc. and Philips Display Components Company,
respectively. The Company does not have long-term supply contracts with these
suppliers but rather obtains these components on a purchase order basis.
Although the design of these components is not unique or proprietary and the
Company believes that it could identify alternative sources of supply, if
necessary, there can be no assurance that the Company would be able to
procure, substitute or produce such components without a significant
interruption in its assembly process in the event that these single sources
were unable to supply these components. Even where the Company has multiple
sources of supply for a component, industry-wide component shortages, such as
those that have occurred with various computer components, could significantly
delay productivity, increase costs or both. The failure or delay by any
supplier to furnish the Company with required components would have a material
adverse effect on the Company's business, financial condition and results of
operations.
REGULATORY APPROVAL. The Company will be required to obtain and maintain the
necessary licenses, approvals, findings of suitability and product approvals
in all jurisdictions in which it intends to distribute its product. The
licensing and approval processes can involve extensive examination of the
Company and its officers, directors, employees, principal shareholders and
product and can require significant expenditures of time and resources by the
Company. Distribution of gaming devices in U.S. gaming jurisdictions generally
requires both corporate approval and product approval. In addition to the
initial product approval, the Company is required to submit all software and
hardware modifications to the various regulatory laboratories. These
modifications normally take between 30 and 45 days to process. 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.
18
<PAGE>
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 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
Company's Common Stock or prevent certain corporate transactions, including
mergers or other business combinations.
NO DIVIDENDS. The Company has not paid any cash dividends in the past and
does not expect to do so in the foreseeable future.
19
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Shareholders was held on May 26, 1998.
At the meeting the following seven persons nominated by management were
elected to serve as directors of the Company:
<TABLE>
<CAPTION>
SHARES
-------------------
NOMINEE VOTED FOR WITHHELD
------- ---------- --------
<S> <C> <C>
Donald J. Massaro...................................... 10,601,073 27,907
Andrew S. Pascal....................................... 10,606,097 22,883
William Hart........................................... 10,603,898 25,082
Kevin R. Harvey........................................ 10,605,247 23,733
David S. Morse......................................... 10,605,048 23,932
Joseph T. Piemont...................................... 10,597,248 31,732
Thomas J. Volpe........................................ 10,604,298 24,682
</TABLE>
The following additional items were voted upon at the meeting:
1. A proposal to adopt the Company's 1998 Employee Stock Purchase Plan,
to become effective on August 3, 1998, and to include 450,000 shares of
Common Stock reserved for issuance through six-month offerings, was
approved by a vote of 10,106,168 for, 484,324 shares against, 38,488 shares
abstaining and 0 broker non-votes.
2. A proposal to ratify the appointment of Deloitte & Touche LLP as
independent auditors of the Company for the fiscal year ending December 31,
1998 was approved by a vote of 10,593,590 shares for, 20,870 shares
against, 14,520 shares abstaining and 0 broker non-votes.
ITEM 5. OTHER INFORMATION
On July 8, 1998, the Company completed the private placement of $17.25
million principal obligation Senior Discount Notes ("Notes") due September 30,
2002. Commencing January 1, 1999 the Notes bear interest at 12.5% per annum,
payable semi-annually. The Company is required to redeem $3 million in
principal on September 30, 2001. The Company is permitted to raise additional
proceeds from debt or equity securities of up to $40 million before mandatory
redemption of the Notes. The Notes are callable at the option of the Company
at any time, with an initial redemption price of 93.13% of the aggregate
amount, increasing to 100% over 9 months. In connection with the offering,
purchasers of the Notes were issued 5-year warrants to purchase 250,000 shares
of the Company's Common Stock at a per-share price of $8.00. Additionally, the
exercise price of the 375,000 warrants issued in connection with the September
1997 Senior Discount Notes was also adjusted from a per-share price of
$15.4375 to a per-share price of $8.00. The value ascribed to the warrants and
to the repricing of the September 1997 warrants was $1,466,000. The Company is
required, after approval is received by the necessary gaming regulatory
authorities, to register the Common Stock underlying the warrants with the
Securities and Exchange Commission, no later than January 1, 1999. Gross
proceeds to the Company before fees and other expenses were $14.95 million.
Offering costs of $50,000 will be included in other assets in July 1998 and
will be amortized as an adjustment to interest expense over the term of the
Notes.
In connection with the Company's 1999 annual meeting of shareholders, under
the recently-amended Securities and Exchange Commission Rule 14a-4, management
may solicit proxies that confer discretionary authority to vote with respect
to any non-management proposal unless the Company has received notice of the
proposal not later than March 8, 1999.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<C> <S>
10.32 Loan and Security Agreement dated November 25, 1997, by and between
the Company and Silicon Valley Bank
10.33 Loan Modification Agreement dated April 23, 1998, by and between
the Company and Silicon Valley Bank
10.34 Pledge Agreement dated December 1997, by and between the Company
and Silicon Valley Bank
10.35* Intellectual Property Security Agreement dated November 25, 1997,
by and between the Company and Silicon Valley Bank
11.1 Statement Regarding Computation of Loss Per Share
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None.
- --------
* Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
21
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Silicon Gaming, Inc.
/s/ Thomas E. Carlson
By __________________________________
THOMAS E. CARLSON
VICE PRESIDENT--CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL AND CHIEF
ACCOUNTING OFFICER)
Date: August 14, 1998
22
<PAGE>
EXHIBIT 10.32
This LOAN AND SECURITY AGREEMENT is entered into as of November 25, 1997, by
and between SILICON VALLEY BANK ("Bank") and SILICON GAMING, INC., a California
corporation ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank desires
to extend credit to Borrower. This Agreement sets forth the terms on which Bank
will advance credit to Borrower, and Borrower will repay the amounts owing to
Bank.
AGREEMENT
The parties agree as follows:
1 DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms shall have
-----------
the following definitions:
"Accounts" means all presently existing and hereafter arising accounts,
contract rights, and all other forms of obligations owing to Borrower arising
out of the sale or lease of goods (including, without limitation, the licensing
of software and other technology) or the rendering of services by Borrower,
whether or not earned by performance, and any and all credit insurance,
guaranties, and other security therefor, as well as all merchandise returned to
or reclaimed by Borrower and Borrower's Books relating to any of the foregoing.
"Adjusted Net Income" means for any fiscal period of the Borrower on a
consolidated basis net income for such period plus, to the extent deducted in
----
determining such net income, all amortized expenses associated with the discount
notes referenced in Section 3.1(h). A reference to a minimum Adjusted Net
Income amount in parenthesis means that negative Adjusted Net Income (i.e., a
----
loss) shall not exceed that amount.
"Advance" means a loan advance under the Committed Line.
"Affiliate" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
"Bank Expenses" means all reasonable costs or expenses (including reasonable
attorneys' fees and expenses) incurred in connection with the preparation,
negotiation, administration, and enforcement of the Loan Documents; and Bank's
reasonable attorneys' fees and expenses incurred in amending, enforcing or
defending the Loan Documents, (including fees and expenses of appeal or review,
or those incurred in any Insolvency Proceeding) whether or not suit is brought.
-1-
<PAGE>
"Borrower's Books" means all of Borrower's books and records including,
without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
"Borrowing Base" means an amount equal to 75% of Eligible Accounts, as
determined by Bank with reference to the most recent Borrowing Base Certificate
delivered by Borrower.
"Business Day" means any day that is not a Saturday, Sunday, or other day on
which banks in the State of California are authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached hereto.
---------
"Committed Line" means a credit extension of up to $10,000,000.00.
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to (i)
any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided that the term "Contingent
--------
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided that such amount
--------
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
"Contract Limit" has the meaning set forth in Section 2.1.3.
"Copyrights" means any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held.
"Credit Extension" means each Advance or any other extension of credit by Bank
for the benefit of Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts that should, in
-2-
<PAGE>
accordance with GAAP, be included as current assets on the consolidated balance
sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, as at such date,
plus, to the extent not already included therein, all outstanding Credit
Extensions made under this Agreement, including all Indebtedness that is payable
upon demand or within one year from the date of determination thereof unless
such Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt and deferred software license revenue.
"Eligible Accounts" means those Accounts that arise in the ordinary course of
Borrower's business that comply with all of Borrower's representations and
warranties to Bank set forth in Section 5.4. Unless otherwise agreed to by Bank
in writing, Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within 90 days of
invoice date;
(b) Accounts with respect to an account debtor, 50% of whose Accounts the
account debtor has failed to pay within 90 days of invoice date;
(c) Accounts with respect to an account debtor, including Affiliates, whose
total obligations to Borrower exceed 25% of all Accounts, to the extent
such obligations exceed the aforementioned percentage, except as approved
in writing by Bank;
(d) Accounts with respect to which the account debtor does not have its
principal place of business in the United States, except as approved in
writing by Bank;
(e) Accounts with respect to which the account debtor is a federal, state, or
local governmental entity or any department, agency, or instrumentality
thereof, except as approved in writing by Bank;
(f) Accounts with respect to which Borrower is liable to the account debtor
but only to the extent of any amounts owing to the account debtor (sometimes
referred to as "contra" accounts, e.g. accounts payable, customer deposits,
credit accounts etc.);
(g) Accounts generated by demonstration or promotional equipment, or with
respect to which goods are placed on consignment, guaranteed sale, sale or
return, sale on approval, bill and hold, or other terms by reason of which
the payment by the account debtor may be conditional;
(h) Accounts with respect to which the account debtor is an Affiliate,
officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account debtor disputes liability or
makes any claim with respect thereto as to which Bank believes, in its sole
discretion, that there may be a basis for dispute (but only to the extent
of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
-3-
<PAGE>
(j) Accounts the collection of which Bank reasonably determines to be
doubtful;
"Eligible Balances" means the amount of net, unrestricted, collected, deposits
of Borrower maintained in operating and money market accounts with Bank as
determined after Bank deducts float and balances it requires under its normal
practices as compensation for maintaining such accounts.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"Exchange Contract" has the meaning set forth in Section 2.1.3.
"Foreign Exchange Reserve" has the meaning set forth in Section 2.1.3.
"GAAP" means generally accepted accounting principles as in effect in the
United States from time to time.
"Gaming Authorities" means, collectively, the Mississippi Gaming Commission,
the Nevada Gaming Commission, the Nevada State Gaming Control Board, and any
other Governmental Body that holds regulatory, licensing or permit authority
over gaming activities conducted by the Borrower or its Gaming Subsidiaries
within its jurisdiction.
"Gaming Laws" means, collectively, (a) the Nevada Gaming Control Act, as
codified in Chapter 463 of the Nevada Revised Statutes, as amended from time to
time, together with the regulations of the Nevada Gaming Commission promulgated
thereunder, as amended from time to time, (b) the Mississippi Gaming Control
Act, as codified in Chapter 76 of the Mississippi Code Annotated, as amended
from time to time, together with the regulations of the Mississippi Gaming
Commission promulgated thereunder, as amended from time to time, and (c) all
other laws and regulations pursuant to which any Gaming Authority possesses
regulatory, licensing or permit authority over gaming activities conducted by
the Borrower or its Gaming Subsidiaries within its jurisdiction.
"Gaming Subsidiaries" means Silicon Gaming-Nevada, Inc. Silicon Gaming-
Mississippi, Inc. and any other Subsidiary that is subject to the regulatory,
licensing or permit authority and jurisdiction of any Gaming Authority.
"Gaming Subsidiaries (Restricted)" means Silicon Gaming-Missouri, Inc. and any
other Subsidiary that Borrower, with the consent of Bank, shall designate to be
such a Subsidiary.
"Gaming Subsidiaries Stock Restrictions" means the negative pledge (e.g., the
agreement not to encumber pursuant to Section 7.5), and the restrictions on
transfers (e.g., pursuant to Section 7.1), of the capital stock of the
Borrower's Gaming Subsidiaries, but each case only to the extent such negative
pledge or restrictions require the approval of any Gaming
-4-
<PAGE>
Authority pursuant to the Gaming Laws.
"Gaming Subsidiaries Stock Restrictions Requisite Gaming Approvals" has the
meaning set forth in Section 13 hereof.
"Guarantor" means any present or future guarantor of the Obligations.
"Guaranty" means a guaranty of the Obligations in form and substance
satisfactory to Bank in its sole and absolute discretion.
"Indebtedness" means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against any
person or entity under any provision of the United States Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law, including assignments
for the benefit of creditors, formal or informal moratoria, compositions,
extension generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Intellectual Property Collateral" means
(a) Copyrights, Trademarks, Patents, and Mask Works;
(b) Any and all trade secrets, and any and all intellectual property rights
in computer software and computer software products now or hereafter existing,
created, acquired or held;
(c) Any and all design rights which may be available to Borrower now or
hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights, Patents,
Trademarks, or Mask Works, and all license fees and royalties arising from such
use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the Copyrights,
Trademarks, Patents, or Mask Works; and
(g) All proceeds and products of the foregoing, including without limitation
all payments under insurance or any indemnity or warranty payable in respect of
any of the foregoing.
"Intercreditor Agreement" means an written agreement between the holders of
the
-5-
<PAGE>
Senior Discount Notes and Bank, and acknowledged by Borrower, which agreement
shall be in form and substance satisfactory to Bank in Bank's sole and
absolute discretion and which shall contain, among other things, an absolute
subordination by the such holders of any Lien now or hereafter held by them as
such holders in the property of Borrower to the liens now or hereafter held by
the Bank, without regard to the order of perfection of such Liens.
"Inventory" means all present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service (including, without
limitation, pursuant to any revenue sharing agreement), of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as is
temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above.
"Inventory on Trial" means Inventory delivered to and maintained at a customer
location for a trial approval period not exceeding 60 days after the date of
such delivery; provided that such customer location is in one of the following
--------
states: California, Nevada, New Jersey, Mississippi, Missouri, and Colorado.
"Investment" means any beneficial ownership of (including stock, partnership
interest or other securities) of all or a portion of any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
"Letter of Credit" means a letter of credit or similar undertaking issued by
Bank pursuant to Section 2.1.2.
"Letter of Credit Reserve" has the meaning set forth in Section 2.1.2.
"Lien" means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower, and any other present or future agreement entered into
between Borrower and/or for the benefit of Bank in connection with this
Agreement, all as amended, extended or restated from time to time.
"Mask Works" means all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired.
"Material Adverse Effect" means a material adverse effect on (i) the business
operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means December 31, 1999.
-6-
<PAGE>
"Monthly Liquidity Coverage Ratio" has the meaning set forth in Section 6.11.
"Negotiable Collateral" means all of Borrower's present and future letters of
credit of which it is a beneficiary, notes, drafts, instruments, securities,
documents of title, and chattel paper.
"Nevada Gaming Authorities" means, collectively, the Nevada Gaming Commission,
the Nevada State Gaming Control Board, the Clark County Liquor and Gaming
Licensing Board, and any other Governmental Body that holds regulatory,
licensing or permit authority over gaming activities conducted by the Borrower
or its Gaming Subsidiaries within the State of Nevada.
"Obligations" means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.
"Patents" means all patents, patent applications and like protections
including without limitation improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same.
"Payment Date" means the last calendar day of each month commencing on the
first such date after the Closing Date and ending on the Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this Agreement or
any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the Schedule; and
(b) (i) marketable direct obligations issued or unconditionally guaranteed
by the United States of America or any agency or any State thereof maturing
within one (1) year from the date of acquisition thereof, (ii) commercial
paper maturing no more than one (1) year from the date of creation thereof and
currently having the highest rating obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., (iii) certificates of deposit
-7-
<PAGE>
maturing no more than one (1) year from the date of investment therein issued
by Bank, and (iv) any other Investments permitted under the written investment
policy of the Borrower as approved by its board of directors.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the Schedule or
arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by appropriate
proceedings and as to which adequate reserves are maintained on Borrower's
Books in accordance with GAAP, provided the same have no priority over any of
--------
Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by Borrower or any
of its Subsidiaries to secure the purchase price of (or lease rental
obligation respecting) such Equipment or indebtedness incurred solely for the
purpose of financing the acquisition of such Equipment, or (ii) existing on
such equipment at the time of its acquisition, provided that Lien is confined
--------
solely to the property so acquired and improvements thereon, and the proceeds
of such equipment;
(d) Liens securing the Senior Discount Notes provided that such Liens shall
--------
be subject to the provisions of the Intercreditor Agreement;
(e) Liens incidental to the conduct of its business or the ownership of its
property which (i) arise in the ordinary course of business, (ii) do not
secure indebtedness, and (iii) do not in the aggregate materially detract
from the value of its property or materially impair the use thereof in the
operation of its business; and
(f) Liens incurred in connection with the extension, renewal or refinancing
of the indebtedness secured by Liens of the type described in clauses (a)
through (d) above, provided that any extension, renewal or replacement Lien
--------
shall be limited to the property encumbered by the existing Lien and the
principal amount of the indebtedness being extended, renewed or refinanced
does not increase.
"Person" means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Pledged Securities Requisite Gaming Approvals" has the meaning set forth in
Section 13.
"Prime Rate" means the variable rate of interest, per annum, most recently
announced by Bank, as its "prime rate," whether or not such announced rate is
the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the consolidated cash, cash
equivalents, accounts receivable and investments of Borrower with maturities of
not more than one year determined in accordance with GAAP.
-8-
<PAGE>
"Responsible Officer" means each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if any.
"SGI-Nevada Pledged Shares" has the meaning set forth in Section 13 hereof.
"Security Agreement" means a security agreement securing the Obligations or a
Guaranty, which security agreement shall be in form and substance satisfactory
to Bank in its sole and absolute discretion.
"Senior Discount Notes" means the Senior Discount Notes of Borrower, due
September 30, 2002.
"Subordinated Debt" means (a) the Senior Discount Notes and (b) any debt
incurred by Borrower that is subordinated to the debt owing by Borrower to Bank
on terms acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation, partnership,
company association, joint venture, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by such Person or one or more Affiliates of such Person.
"Trademarks" means any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Assignor connected with
and symbolized by such trademarks.
1.2 Accounting and Other Terms. All accounting terms not specifically
--------------------------
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. The terms "including"/ "includes" shall always be read as
meaning "including (or includes) without limitation", when used herein or in
any other Loan Document.
2 LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in
-----------------
lawful money of the United States of America, the aggregate unpaid principal
amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower
shall also pay interest on the unpaid principal amount of such advances at
rates in accordance with the terms hereof.
2.1.1 Advances.
--------
(a) Subject to and upon the terms and conditions of this Agreement,
Bank agrees to make Advances to Borrower in an aggregate outstanding amount
not to exceed the Committed Line or the Borrowing Base, whichever is less.
Subject to the terms and conditions of this Agreement, amounts borrowed
pursuant to this Section 2.1 may be repaid and reborrowed at any time during
the term of this Agreement.
(b) Whenever Borrower desires an Advance, Borrower will notify Bank by
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<PAGE>
facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the
Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
- ---------
based upon instructions received from a Responsible Officer or a designee of a
Responsible Officer, or without instructions if in Bank's discretion such
Advances are necessary to meet Obligations which have become due and remain
unpaid. Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrower shall indemnify and hold Bank harmless for any damages
or loss suffered by Bank as a result of such reliance. Bank will credit the
amount of Advances made under this Section 2.1 to Borrower's deposit account.
(c) The Advances shall bear interest, on the average daily balance
thereof, at a per annum rate equal to 1.00 percentage point above the Prime
Rate.
(d) The Committed Line shall terminate on the Maturity Date, at which
time all Advances under this Section 2.1 and other amounts due under this
Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.
2.1.2 Letters of Credit.
-----------------
(a) Subject to the terms and conditions of this Agreement, Bank will
issue or cause to be issued Letters of Credit for the account of Borrower in
an aggregate outstanding face amount not to exceed the lesser of the Committed
Line or the Borrowing Base. Each Letter of Credit shall have an expiry date no
later than the Maturity Date. All Letters of Credit shall be, in form and
substance, acceptable to Bank in its sole discretion and shall be subject to
the terms and conditions of Bank's form of standard Application and Letter of
Credit Agreement.
(b) The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect, and hold Bank harmless from any
loss, cost, expense or liability, including, without limitation, reasonable
attorneys' fees, arising out of or in connection with any Letters of Credit.
(c) Borrower may request that Bank issue a Letter of Credit payable in
a currency other than United States Dollars. If a demand for payment is made
under any such Letter of Credit, Bank shall treat such demand as an Advance to
Borrower of the equivalent of the amount thereof (plus cable charges) in
United States currency at the then prevailing rate of exchange in San
Francisco, California, for sales of that other currency for cable transfer to
the country of which it is the currency.
(d) Upon the issuance of any letter of credit payable in a currency
other than United States Dollars, Bank shall create a reserve under the
Committed Line for letters of credit against fluctuations in currency exchange
rates, in an amount equal to 10% of the face amount of such letter of credit.
The amount of such reserve may be amended by Bank from time to time to account
for fluctuations in the exchange rate. The availability of funds under the
Committed Line shall be reduced by the amount of such reserve for so long as
such letter of credit remains outstanding].
2.1.3 Foreign Exchange Contract; Foreign Exchange Settlements.
-------------------------------------------------------
-10-
<PAGE>
(a) Subject to the terms of this Agreement, Borrower may enter into
foreign exchange contracts (the "Exchange Contracts") not to exceed an
aggregate amount equal to the Committed Line (the "Contract Limit"), pursuant
to which Bank shall sell to or purchase from Borrower foreign currency on a
spot or future basis. Borrower shall not request any Exchange Contracts at any
time it is out of compliance with any of the provisions of this Agreement. All
Exchange Contracts must provide for delivery of settlement on or before the
Maturity Date. The amount available under the Committed Revolving Line at any
time shall be reduced by the following amounts (the "Foreign Exchange
Reserve") on any given day (the "Determination Date"): (i) on all outstanding
Exchange Contracts on which delivery is to be effected or settlement allowed
more than two business days after the Determination Date, 10% of the gross
amount of the Exchange Contracts; plus (ii) on all outstanding Exchange
Contracts on which delivery is to be effected or settlement allowed within two
business days after the Determination Date, 100% of the gross amount of the
Exchange Contracts.
(b) Bank may, in its discretion, terminate the Exchange Contracts at
any time (a) that an Event of Default occurs or (b) that there is no
sufficient availability under the Committed Revolving Line and Borrower does
not have available funds in its bank account to satisfy the Foreign Exchange
Reserve. If Bank terminates the Exchange Contracts, and without limitation of
any applicable indemnities, Borrower agrees to reimburse Bank for any and all
fees, costs and expenses relating thereto or arising in connection therewith.
(c) Borrower shall not permit the total gross amount of all Exchange
Contracts on which delivery is to be effected and settlement allowed in any
two business day period to be more than $10,000,000 (the "Settlement Limit")
nor shall Borrower permit the total gross amount of all Exchange Contracts to
which Borrower is a party, outstanding at any one time, to exceed the Contract
Limit. Notwithstanding the above, however, the amount which may be settled in
any two (2) business day period may be increased above the Settlement Limit up
to, but in no event to exceed, the amount of the Contract Limit under either
of the following circumstances:
(i) if there is sufficient availability under the Committed Line in the amount
of the Foreign Exchange Reserve as of each Determination Date, provided that
Bank in advance shall reserve the full amount of the Foreign Exchange Reserve
against the Committed Line; or
(ii) if there is insufficient availability under the Committed Line, as to
settlements within any two (2) business day period, provided that Bank, in its
--------
sole discretion, may: (A) verify good funds overseas prior to crediting
Borrower's deposit account with Bank (in the case of Borrower's sale of foreign
currency); or (B) debit Borrower's deposit account with Bank prior to delivering
foreign currency overseas (in the case of Borrower's purchase of foreign
currency).
(d) In the case of Borrower's purchase of foreign currency, Borrower
in advance shall instruct Bank upon settlement either to treat the settlement
amount as an advance under the Committed Revolving Line, or to debit
Borrower's account for the amount settled.
(e) Borrower shall execute all standard form applications and
agreements of Bank which are not inconsistent with the terms of this Agreement
in connection with the Exchange Contracts and, without limiting any of the
terms of such applications and agreements, Borrower will pay all standard fees
and charges of Bank in connection with the Exchange Contracts.
-11-
<PAGE>
(f) Without limiting any of the other terms of this Agreement or any
such standard form applications and agreement of Bank, Borrower agrees to
indemnify Bank and hold it harmless, from and against any and all claims,
debts, liabilities, demands, obligations, actions, costs and expenses
(including, without limitation, attorneys' fees of counsel of Bank's choice),
of every nature and description which it may sustain or incur, based upon,
arising out of, or in any way relating to any of the Exchange Contracts or any
transactions relating thereto or contemplated thereby.
2.2 Overadvances. If, at any time or for any reason,(i) the sum of (A) the
------------
then outstanding principal balance of the Advances, (B) the aggregate
outstanding face amount of all outstanding Letters of Credit and (C) the
Foreign Exchange Reserve exceeds (ii) the lesser of the Committed Line or the
Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of
such excess.
2.3 Default Rate, Payments, and Calculations.
----------------------------------------
(a) Default Rate. All Obligations shall bear interest, from and after
------------
the occurrence of an Event of Default, at a rate equal to five percentage
points above the interest rate applicable immediately prior to the occurrence
of the Event of Default.
(b) Payments. Interest hereunder shall be due and payable on each
--------
Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank
for payments of principal and interest due on the Obligations and any other
amounts owing by Borrower to Bank. Bank will notify Borrower of all debits
which Bank has made against Borrower's accounts. Any such debits against
Borrower's accounts in no way shall be deemed a set-off. Any interest not paid
when due shall be compounded by becoming a part of the Obligations, and such
interest shall thereafter accrue interest at the rate then applicable
hereunder.
(c) Computation. In the event the Prime Rate is changed from time to
-----------
time hereafter, the applicable rate of interest hereunder shall be increased
or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed,
by an amount equal to such change in the Prime Rate. All interest chargeable
under the Loan Documents shall be computed on the basis of a 360-day year for
the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default,
------------------
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment, whether directed to Borrower's deposit
account with Bank or to the Obligations or otherwise, shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment in respect of the Obligations unless such payment is of immediately
available federal funds or unless and until such check or other item of
payment is honored when presented for payment. Notwithstanding anything to the
contrary contained herein, any wire transfer or payment received by Bank after
12:00 noon Pacific time shall be deemed to have been received by Bank as of
the opening of business on the immediately following Business Day. Whenever
any payment to Bank under the Loan Documents would otherwise be due (except by
reason of acceleration) on a date that is not a Business Day, such payment
shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of
such extension.
-12-
<PAGE>
2.5 Fees. Borrower shall pay to Bank the following:
----
(a) Financial Examination and Appraisal Fees. Bank's customary fees
----------------------------------------
and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for
each appraisal of Collateral and financial analysis and examination of
Borrower performed from time to time by Bank or its agents (provided that such
--------
audits and appraisals shall not be made (i) during any period the facilities
under this Agreement are not being and are not intended by the Borrower to be
utilized and (ii) more than once annually so long as no Event of Default has
occurred and is continuing; and
(b) Bank Expenses. Upon demand from Bank, including, without
-------------
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof not exceeding $5,000, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 Term. Bank shall have the right to terminate its obligation to make
----
Credit Extensions under this Agreement immediately and without notice upon
the occurrence and during the continuance of an Event of Default.
Notwithstanding termination of this Agreement, Bank's lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
2.7 Required Deposits. Until the Maturity Date Borrower will maintain
-----------------
Eligible Balances of at least $6,500,000. For any period in which such
Eligible Balances are not kept, Borrower, as Bank's sole and exclusive remedy
therefor, will pay a fee calculated at a rate of one percent (1%) per annum,
calculated based on the difference between the minimum Eligible Balance
requirement and the actual average daily Eligible Balances during the period.
The fee will be calculated quarterly and will be due within 15 days of each
quarter end.
3 CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Credit Extension. The effectiveness of
------------------------------------------------
this Agreement and the obligation of Bank to make the initial Credit Extension
is subject to the condition precedent that Bank shall have received, in form
and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to articles,
bylaws, incumbency and resolutions authorizing the execution and delivery
of this Agreement;
(c) an intellectual property security agreement covering intellectual
property for Borrower and each Guarantor;
(d) (i) financing statements (Forms UCC-1) for Borrower and each
Guarantor for such jurisdictions as Bank may request, together with a UCC-1
search reports for Borrower and each Guarantor from the secretary of state for
each jurisdiction in which the Borrower or any Guarantor is formed, has an
office, or otherwise does business, and (ii) all instruments constituting part
of the Collateral other than (A) certificated securities of Gaming
Subsidiaries (Restricted) and Gaming Subsidiaries as to which Pledge
Securities Requisite Gaming Approvals
-13-
<PAGE>
are required by the Gaming Laws but as yet have not been obtained and (B)
items held for deposit in the ordinary course of business;
(e) insurance certificate in form and substance satisfactory to Bank
(including a loss payable endorsement in favor of Bank);
(f) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;
(g) Certificate of Foreign Qualification (if applicable);
(h) a Guaranty and a Security Agreement by each Subsidiary of the
Borrower on Closing Date;
(i) the Intercreditor Agreement; and
(j) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank
---------------------------------------------
to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1;
(b) After giving effect to such Credit Extension, (i) the sum of (A)
the then outstanding principal balance of the Advances, (B) the aggregate
outstanding face amount of all outstanding Letters of Credit and (C) the
Foreign Exchange Reserve shall not exceed (ii) the lesser of the Committed
Line or the Borrowing Base; and
(c) the representations and warranties contained in Section 5 shall be
true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Credit Extension. The
making of each Credit Extension shall be deemed to be a representation and
warranty by Borrower on the date of such Credit Extension as to the accuracy
of the facts referred to in this Section 3.2(b).
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<PAGE>
4 CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Subject to the provisions of Section 13,
--------------------------
Borrower grants and pledges to Bank a continuing security interest in all
presently existing and hereafter acquired or arising Collateral in order to
secure prompt payment of any and all Obligations and in order to secure prompt
performance by Borrower of each of its covenants and duties under the Loan
Documents. Except as set forth in the Schedule, such security interest
constitutes a valid, first priority security interest in the presently
existing Collateral, and will constitute a valid, first priority security
interest in Collateral acquired after the date hereof. Borrower acknowledges
that Bank may place a "hold" on any Deposit Account pledged as Collateral to
secure the Obligations. Notwithstanding termination of this Agreement, Bank's
Lien on the Collateral shall remain in effect for so long as any Obligations
are outstanding.
4.2 Delivery of Additional Documentation Required. Borrower shall from time
---------------------------------------------
to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees, or
----------------
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to
make copies thereof and to check, test, and appraise the Collateral in order
to verify Borrower's financial condition or the amount, condition of, or any
other matter relating to, the Collateral.
5 REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is a
----------------------------------
corporation duly existing and in good standing under the laws of its state of
incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership
of property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound Borrower
is not in default under any agreement to which it is a party or by which it is
bound, which default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the
---------------------
Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
---------------------------
existing obligations. The service or property giving rise to such Eligible
Accounts has been performed or delivered to the account debtor or to the
account debtor's agent for immediate shipment to and unconditional acceptance
by the account debtor. Borrower has not received notice of actual or
-15-
<PAGE>
imminent Insolvency Proceeding of any account debtor whose accounts are
included in any Borrowing Base Certificate as an Eligible Account.
5.5 Merchantable Inventory. Except as set forth on the Schedule, all
----------------------
Inventory is in all material respects of good and marketable quality, free
from all material defects. Borrower will provide Bank with thirty (30) days'
prior notice before storing or otherwise locating any Inventory in any state
other than those states identified in the definition of "Inventory on Trial"
contained in Section 1.1.
5.6 Intellectual Property. Borrower is the sole owner of the Intellectual
---------------------
Property Collateral, except for non-exclusive licenses granted by Borrower to
its customers in the ordinary course of business. Each of the Patents is valid
and enforceable, and no part of the Intellectual Property Collateral has been
judged invalid or unenforceable, in whole or in part, and no claim has been
made that any part of the Intellectual Property Collateral violates the rights
of any third party. Except for and upon the filing with the United States
Patent and Trademark Office with respect to the Patents and Trademarks and the
Register of Copyrights with respect to the Copyrights and Mask Works necessary
to perfect the security interests created hereunder, and except as has been
already made or obtained, no authorization, approval or other action by, and
no notice to or filing with, any United States governmental authority or
United States regulatory body is required either (i) for the grant by Borrower
of the security interest granted hereby or for the execution, delivery or
performance of Loan Documents by Borrower in the United States or (ii) for the
perfection in the United States or the exercise by Bank of its rights and
remedies hereunder.
5.7 Name; Location of Chief Executive Office. Except as disclosed in the
----------------------------------------
Schedule, Borrower has not done business and will not without at least 30 days
prior written notice to Bank do business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.8 Litigation. Except as set forth in the Schedule, there are no actions
----------
or proceedings pending, or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary before any court or administrative agency in which
an adverse decision could have a Material Adverse Effect or a material adverse
effect on Borrower's interest or Bank's security interest in the Collateral
5.9 No Material Adverse Change in Financial Statements. All consolidated
--------------------------------------------------
financial statements related to Borrower and any Subsidiary that have been
delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank on or about the Closing Date.
5.10 Solvency. Borrower is able to pay its debts (including trade debts) as
--------
they mature.
5.11 Regulatory Compliance. Borrower and each Subsidiary has met the
---------------------
minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material
-16-
<PAGE>
Adverse Effect. Borrower is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940. Borrower is not engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations G, T
and U of the Board of Governors of the Federal Reserve System). Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act.
Borrower has not violated any statutes, laws, ordinances or rules applicable
to it, violation of which could have a Material Adverse Effect.
5.12 Environmental Condition. None of Borrower's or any Subsidiary's
-----------------------
properties or assets has ever been used by Borrower or any Subsidiary or, to
the best of Borrower's knowledge, by previous owners or operators, in the
disposal of, or to produce, store, handle, treat, release, or transport, any
material quantity hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste
or hazardous substance disposal site, or a candidate for closure pursuant to
any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the release, or other disposition of hazardous waste
or hazardous substances into the environment.
5.13 Taxes. Borrower and each Subsidiary has filed or caused to be filed
-----
all tax returns required to be filed on a timely basis, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein.
5.14 Subsidiaries. Borrower does not own any stock, partnership interest
------------
or other equity securities of any Person, except for Permitted Investments.
5.15 Government Consents. Borrower and each Subsidiary has obtained all
-------------------
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted.
5.16 Full Disclosure. No representation, warranty or other statement made
---------------
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained in such certificates or
statements not misleading.
6 AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all outstanding
Obligations, and for so long as Bank may have any commitment to make a Credit
Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse
-17-
<PAGE>
Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
could have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
---------------------
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to
-------------------------------------------
Bank: (a) as soon as available, but in any event within 30 days after the end
of each month during which any Advances are outstanding, a company prepared
consolidated balance sheet and income statement covering Borrower's
consolidated operations during such period, in a form and certified by an
officer of Borrower reasonably acceptable to Bank; (b) as soon as available,
but in any event within 45 days after the end of each fiscal quarter, a
company prepared consolidated balance sheet and income statement covering
Borrower's consolidated operations during such period, in a form and certified
by an officer of Borrower reasonably acceptable to Bank; (c) as soon as
available, but in any event within 90 days after the end of Borrower's fiscal
year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified
opinion on such financial statements of an independent certified public
accounting firm reasonably acceptable to Bank; (d) within five days of filing,
copies of all statements, reports and notices sent or made available generally
by Borrower to its security holders or to any holders of Subordinated Debt and
all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission; (e) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of $100,000 or more;
(f) prompt notice of any material change in the composition of the
Intellectual Property Collateral, including, but not limited to, any
subsequent ownership right of the Borrower in or to any Copyright, Patent or
Trademark not specified in any intellectual property security agreement
between Borrower and Bank or knowledge of an event that materially adversely
effects the value of the Intellectual Property Collateral; and (g) such
budgets, sales projections, operating plans or other financial information as
Bank may reasonably request from time to time.
Within 20 days after the last day of each month during any period that
Advances are outstanding, Borrower shall deliver to Bank a Borrowing Base
Certificate signed by a Responsible Officer in substantially the form of Exhibit
-------
C hereto, together with aged listings of accounts receivable and accounts
- -
payable.
With each of the financial statements required to be delivered
pursuant to Section 6.3 (a), (b), and (c), Borrower shall also deliver to Bank
a Compliance Certificate signed by a Responsible Officer in substantially the
form of Exhibit D hereto.
---------
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every 12 months unless an Event of Default has occurred and is
continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good and
------------------
marketable condition, free from all material defects. Returns and allowances,
if any, as between Borrower
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<PAGE>
and its account debtors shall be on the same basis and in accordance with the
usual customary practices of Borrower, as they exist at the time of the
execution and delivery of this Agreement. Borrower shall promptly notify Bank
of all returns and recoveries and of all disputes and claims, where the return,
recovery, dispute or claim involves more than $100,000.00.
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make,
-----
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute
and deliver to Bank, on demand, appropriate certificates attesting to the
payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not
limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon request, furnish Bank
with proof satisfactory to Bank indicating that Borrower or a Subsidiary has
made such payments or deposits; provided that Borrower or a Subsidiary need
not make any payment if the amount or validity of such payment is (i)
contested in good faith by appropriate proceedings , (ii) is reserved
against (to the extent required by GAAP) by Borrower and (iii) no lien other
than a Permitted Lien results.
6.6 Insurance.
---------
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain
insurance relating to Borrower's ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Bank. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional
loss payee thereof and all liability insurance policies shall show the Bank as
an additional insured, and shall specify that the insurer must give at least
20 days notice to Bank before canceling its policy for any reason. At Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain, and shall cause each of
--------------------
its Subsidiaries to maintain, its principal depository and operating accounts
with Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each
-----------
calendar quarter (and as of the last day of each calendar month when there
shall be outstanding any Obligation with respect to the Committed Line) a
ratio of (x) Quick Assets to (y) Current Liabilities of at least 2.0 to 1.0.
6.9 Registration of Intellectual Property Rights.
--------------------------------------------
6.9.1 Borrower shall register or cause to be registered (to
the extent not already registered) with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those intellectual
property rights listed on Exhibits A, B and C to the
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<PAGE>
Intellectual Property Security Agreement delivered to Bank by Borrower in
connection with this Agreement within 30 days of the date of this Agreement.
Borrower shall register or cause to be registered with the United States
Patent and Trademark Office or the United States Copyright Office, as
applicable, those additional intellectual property rights developed or
acquired by Borrower from time to time in connection with any product prior to
the sale or licensing of such product to any third party, including without
limitation revisions or additions to the intellectual property rights listed
on such Exhibits A, B, C, and D.
6.9.2 Borrower shall execute and deliver such additional instruments
and documents from time to time as Bank shall reasonably request to perfect
Bank's security interest in the Intellectual Property Collateral.
6.9.3 Borrower shall (i) protect, defend and maintain the validity
and enforceability of the Trademarks, Patents, Copyrights, and Mask Works,
(ii) use its best efforts to detect infringements of the Trademarks, Patents,
Copyrights and Mask Works and promptly advise Bank in writing of material
infringements detected and (iii) not allow any Trademarks, Patents,
Copyrights, or Mask Works to be abandoned, forfeited or dedicated to the
public without the written consent of Bank, which shall not be unreasonably
withheld, unless Bank determines that reasonable business practices suggest
that abandonment is appropriate.
6.9.4 Bank shall have the right, but not the obligation, to take, at
Borrower's sole expense, any actions that Borrower is required under this
Section 6.9 to take but which Borrower fails to take, after 15 days' notice to
Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs
and reasonable expenses incurred in the reasonable exercise of its rights
under this Section 6.9.
6.10 Subsidiary Guarantors. (a) With respect to any Subsidiary in
---------------------
existence on the Closing Date, Borrower shall (i) cause such Subsidiary to
become a Guarantor and a grantor under the Security Agreement on the Closing
Date, and (ii) (A) in the case of any Subsidiary which is not a Gaming
Subsidiary, grant to Bank on the Closing Date a security interest in 100% of
the equity interests of such Subsidiary pursuant to this Agreement and take
such steps to perfect such security interest as Bank may request and (B) in
the case of any Subsidiary which is a Gaming Subsidiary, but not a Gaming
Subsidiary (Restricted), grant to Bank within 180 days after the Closing Date
a security interest in 100% of the equity interests of such Subsidiary
pursuant to this Agreement and take such steps to perfect such security
interest as Bank may request, (b) upon any Person becoming a Subsidiary (other
than a Gaming Subsidiary (Restricted)) after the Closing Date, Borrower shall
immediately (i) cause such Subsidiary to become a Guarantor and a grantor
under the Security Agreement, and (ii) grant to Bank a security interest in
100% of the equity interests of such Subsidiary pursuant to this Agreement,
and (c) upon each Subsidiary becoming such a Guarantor and grantor, deliver or
cause such Subsidiary to deliver, to Bank such evidence of the due
authorization, execution and delivery of the Guaranty and Security Agreement
by such Subsidiary and take such steps to perfect such security interest as
Bank may request.
6.11 Further Assurances. At any time and from time to time Borrower shall
------------------
execute and deliver, and shall cause each of its Subsidiaries to execute and
deliver, such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
------------------
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<PAGE>
Borrower covenants and agrees that, so long as any Credit Extension hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, Borrower will
not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
------------
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than Transfers: (i) of
inventory in the ordinary course of business, (ii) of non-exclusive licenses
and similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business; (iii) that constitute payment
of normal and usual operating expenses in the ordinary course of business;; or
(iii) of worn-out or obsolete Equipment.
7.2 Changes in Business, Ownership, or Management, Business Locations.
-----------------------------------------------------------------
Without Bank's prior written consent, which consent shall not be unreasonably
withheld, engage in any business, or permit any of its Subsidiaries to engage
in any business, other than the businesses currently engaged in by Borrower
and any business substantially similar or related thereto (or incidental
thereto), or suffer a change in Borrower's ownership or management. Borrower
will not, and will not permit any of its Subsidiaries to, without at least 10
days prior written notification to Bank, relocate its chief executive office
or add any new offices or business locations.
7.3 Mergers or Acquisitions. Without Bank's prior written consent, which
-----------------------
consent shall not be unreasonably withheld, merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other
business organization, or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of another
Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with
------------
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution or
-------------
payment on account of or in redemption, retirement or purchase of any capital
stock other than stock repurchases made in connection with Borrower's stock
option plans not exceeding $100,000 in the aggregate in any fiscal year.
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into or
----------------------------
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Intellectual Property Agreements. Borrower shall not permit the
--------------------------------
inclusion in any material contract to which it becomes a party of any
provisions that could or might in any way
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<PAGE>
prevent the creation of a security interest in Borrower's rights and interests
in any property included within the definition of the Intellectual Property
Collateral acquired under such contracts, except to the extent that such
provisions are necessary in Borrower's exercise of its reasonable business
judgement.
7.10 Subordinated Debt. Make any payment in respect of any Subordinated
-----------------
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt and the Intercreditor
Agreement, or amend any provision contained in any documentation relating to
the Subordinated Debt without Bank's prior written consent.
7.11 Inventory. Store the Inventory with a bailee, warehouseman, or
---------
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and for Inventory on Trial and except for such other locations as
Bank may approve in writing, Borrower shall keep the Inventory only at the
location set forth in Section 10 hereof and such other locations of which
Borrower gives Bank prior written notice and as to which Borrower signs and
files a financing statement where needed to perfect Bank's security interest.
7.12 Compliance. Become an "investment company" or a company controlled by
----------
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose;
fail to meet the minimum funding requirements of ERISA; permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply
with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral; or permit any of its Subsidiaries to do any of the foregoing.
7.13 Profitability. Borrower shall not permit its Adjusted Net Income for
-------------
any fiscal quarter set forth below to be less than the correlative amount set
forth below:
Fiscal Quarter Ending Minimum Adjusted Net Income
--------------------- ---------------------------
09/30/97 $(6,468,000)
12/31/97 $(5,070,000)
03/31/98 $(4,018,000)
06/30/98 $(2,971,000)
09/30/98 $ (908,000)
12/31/98 $ 119,000
03/31/99 and thereafter -0-
8 EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
---------------
Obligations.
8.2 Covenant Default.
----------------
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<PAGE>
8.2.1 If Borrower fails to perform any obligation under Sections 6.3,
6.6, 6.8, 6.9, or 6.10 or violates any of the covenants contained in Article 7
of this Agreement, or
8.2.2 If Borrower fails or neglects to perform, keep, or observe any
other material term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default within ten days after the occurrence thereof;
provided that if the default cannot by its nature be cured within the ten day
period or cannot after diligent attempts by Borrower be cured within such ten-
day period, and such default is likely to be cured within a reasonable time,
then Borrower shall have an additional reasonable period (which shall not in
any case exceed 30 days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances will be required to be
made during such cure period);
8.3 Material Adverse Change. If there (i) occurs a material adverse change
-----------------------
in the business, operations, or condition (financial or otherwise) of the
Borrower, or (ii) is a material impairment of the prospect of repayment of any
portion of the Obligations or (iii) is a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is attached,
----------
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has
not been removed, discharged or rescinded within ten days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing
to conduct all or any material part of its business affairs, or if a judgment
or other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within ten days after Borrower receives notice thereof, provided that none of
the foregoing shall constitute an Event of Default where such action or event
is stayed or an adequate bond has been posted pending a good faith contest by
Borrower (provided that no Credit Extensions will be required to be made
during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is
commenced against Borrower and is not dismissed or stayed within 30 days
(provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to which
----------------
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity
of any Indebtedness in an amount in excess of $100,000.00 or that could have a
Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under the
Intercreditor Agreement or any subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money in an
---------
amount,
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<PAGE>
individually or in the aggregate, of at least $100,000.00 shall be rendered
against Borrower and shall remain unsatisfied and unstayed for a period of ten
days (provided that no Credit Extensions will be made prior to the
satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or material
------------------
misstatement exists now or hereafter in any warranty or representation set
forth herein or in any certificate or writing delivered to Bank by Borrower or
any Person acting on Borrower's behalf pursuant to this Agreement or to induce
Bank to enter into this Agreement or any other Loan Document.
8.10 Gaming Approval. (a) The Pledged Securities Requisite Gaming
---------------
Approvals and the Gaming Subsidiaries Stock Restrictions Requisite Gaming
Approvals have not both been obtained by April 30, 1998, or, at any time prior
thereto, Borrower (or any one acting on Borrower's behalf) notifies Bank that
either of such approvals will not be granted, or (b) any Gaming Authority
purports to order the rescission of any Loan Document or takes any action
which directly or indirectly materially impairs the validity, binding effect,
or enforceability of any Loan Document.
8.11 Guaranty. Any guaranty of all or a portion of the Obligations ceases
--------
for any reason to be in full force and effect, or any Guarantor fails to
perform any obligation under any guaranty of all or a portion of the
Obligations, or any material misrepresentation or material misstatement exists
now or hereafter in any warranty or representation set forth in any guaranty
of all or a portion of the Obligations or in any certificate delivered to Bank
in connection with such guaranty, or any of the circumstances described in
Sections 8.4, 8.5 or 8.8 occur with respect to any Guarantor.
9 BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. Upon the occurrence and during the continuance
-------------------
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
9.1.1 Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.5 all Obligations shall become immediately due and payable without any
action by Bank) ;
9.1.2 Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement or under any other agreement between Borrower
and Bank;
9.1.3 Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
9.1.4 Without notice to or demand upon Borrower, make such payments
and do such acts as Bank considers necessary or reasonable to protect its
security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank
as Bank may designate. Borrower authorizes Bank to enter the premises where
the Collateral is located, to take and maintain possession of the Collateral,
or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien which in Bank's determination appears to be prior
or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of Borrower's premises,
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<PAGE>
Borrower hereby grants Bank a license to enter such premises and to occupy the
same, without charge in order to exercise any of Bank's rights or remedies
provided herein, at law, in equity, or otherwise;
9.1.5 Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Bank;
9.1.6 Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this Section 9.1,
to use, without charge, Borrower's labels, patents, copyrights, mask works,
rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in completing production of, advertising for sale,
and selling any Collateral or otherwise to the extent reasonably necessary to
permit Bank to exercise its rights and remedies, and, in connection with
Bank's exercise of its rights under this Section 9.1, Borrower's rights under
all licenses and all franchise agreements shall inure to Bank's benefit;
9.1.7 Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to the
Obligations in whatever manner or order it deems appropriate;
9.1.8 Bank may credit bid and purchase at any public sale, or at any
private sale as permitted by law; and
9.1.9 Any deficiency that exists after disposition of the Collateral
as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during the
-----------------
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill
of lading relating to any Account, drafts against account debtors, schedules
and assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust
disputes and claims respecting the accounts directly with account debtors, for
amounts and upon terms which Bank determines to be reasonable; (f) to modify,
in its sole discretion, any intellectual property security agreement entered
into between Borrower and Bank without first obtaining Borrower's approval of
or signature to such modification to be limited to amending Exhibit A, Exhibit
B, Exhibit C, and Exhibit D, thereof, as appropriate, to include reference to
any right, title or interest in any Copyrights, Patents, Trademarks, Mask
Works acquired by Borrower after the execution hereof or to delete any
reference to any right, title or interest in any Copyrights, Patents,
Trademarks, or Mask Works in which Borrower no longer has or claims any right,
title or interest; (g) to file, in its sole discretion, one or more financing
or continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Borrower where permitted by law; and (h)
to transfer the Intellectual Property Collateral into the
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<PAGE>
name of Bank or a third party to the extent permitted under the California
Uniform Commercial Code provided Bank may exercise such power of attorney to
sign the name of Borrower on any financing statement regardless of whether an
Event of Default has occurred. The appointment of Bank as Borrower's attorney
in fact, and each and every one of Bank's rights and powers, being coupled
with an interest, is irrevocable until all of the Obligations have been fully
repaid and performed and Bank's obligation to provide advances hereunder is
terminated.
9.3 Accounts Collection. Upon the occurrence and during the continuance of
-------------------
an Event of Default, Bank may notify any Person owing funds to Borrower of
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in
trust all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any
-------------
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may, upon notice to Borrower, do any or
all of the following: (a) make payment of the same or any part thereof; (b)
set up such reserves under the Committed Line as Bank deems necessary to
protect Bank from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type discussed in Section 6.6 of this
Agreement, and take any action with respect to such policies as Bank deems
prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by
Bank to make similar payments in the future or a waiver by Bank of any Event
of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement,
-------------------
the Loan Documents, and all other agreements shall be cumulative. Bank shall
have all other rights and remedies not expressly set forth herein as provided
under the Code, by law, or in equity. No exercise by Bank of one right or
remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of protest,
---------------
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension,
or renewal of accounts, documents, instruments, chattel paper, and guarantees
at any time held by Bank on which Borrower may in any way be liable.
10 NOTICES
-------
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<PAGE>
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements
and other informational documents which may be sent by first-class mail,
postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: 2800 West Bayshore Road, Palo Alto, CA 94303
Attn: Tom Carlson FAX: (650) 842-9001
If to Bank: 1731 Embarcadero Road, Suite 220, Palo Alto, CA 94303
Attn: John China FAX: (650) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11 CHOICE OF LAW AND VENUE
-----------------------
The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to
the exclusive jurisdiction of the state and Federal courts located in the
County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12 GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement shall bind and inure to the
----------------------
benefit of the respective successors and permitted assigns of each of the
parties; provided that neither this Agreement nor any rights hereunder
--------
may be assigned by Borrower without Bank's prior written consent, which
consent may be granted or withheld in Bank's sole discretion. Bank shall have
the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder; provided that so long as no
--------
Event of Default has occurred and is continuing, Bank shall not sell or
assign any interest that would result in Bank holding less than a controlling
majority of the voting right respecting the credit facilities hereunder
without Borrower's prior consent, which consent shall not be unreasonably
withheld.
12.2 Indemnification. Borrower shall , indemnify ,defend, protect and
---------------
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential
-27-
<PAGE>
to transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
---------------
obligations set forth in this Agreement.
12.4 Severability of Provisions . Each provision of this Agreement shall
--------------------------
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be amended
----------------------------------
or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this
Agreement, if any, are merged into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in this
--------
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Bank with respect
to the expenses, damages, losses, costs and liabilities described in Section
12.2 shall survive until all applicable statute of limitations periods with
respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information of
---------------
Borrower, Bank shall exercise the same degree of care that it exercises with
respect to its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they
have entered into a comparable confidentiality agreement in favor of Borrower
and have delivered a copy to Borrower, (iii) as required by law, regulations,
rule or order, subpoena, judicial order or similar order, (iv) as may be
required in connection with the examination, audit or similar investigation of
Bank, and (v) as Bank may deem appropriate in connection with the exercise of
any remedies hereunder. Confidential information hereunder shall not include
information that either: (a) is in the public domain or in the knowledge or
possession of Bank when disclosed to Bank, or becomes part of the public
domain after disclosure to Bank through no fault of Bank; or (b) is disclosed
to Bank by a third party, provided Bank does not have actual knowledge that
such third party is prohibited from disclosing such information.
13 GAMING RESTRICTIONS
-------------------
13.1 Acknowledgement of Gaming Restrictions. The Bank acknowledges that
--------------------------------------
pursuant to the Gaming Laws:
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<PAGE>
(a) Approvals from the Gaming Authorities are required for the Bank to
acquire control (as defined in the Gaming Laws) of the Borrower.
(b) The disposition of collateral consisting of gaming devices,
including slot machines, cashless wagering systems and associated equipment
(as those terms are defined in Nevada Revised Statutes ("NRS") Sections
463.014, 463.0138, 463.0155 and 463.0181) is subject to the requirements of
the Nevada Gaming Laws, including the approval of the Nevada State Gaming
Control Board (the "Nevada Board"), before foreclosure on, taking possession
of, or other disposition of such devices.
(c) The pledge and disposition by the Borrower of the capital stock of
Silicon Gaming-Nevada, Inc. (the "SGI-Nevada Pledged Shares"), and any
restrictions on the transfer of and agreements not to encumber the SGI-Nevada
Pledged Shares, require the prior approval of the Nevada Gaming Commission
(the "Nevada Commission") upon the recommendation and the Nevada Board. Any
pledge or disposition of the SGI-Nevada Pledged Shares, and any restrictions
on transfer or agreements not to encumber such SGI-Nevada Pledged Shares, are
void without such prior approvals.
(d) Any foreclosure on or transfer of a possessory security interest
in or other disposition of the SGI-Nevada Pledged Shares, except a transfer
back to the Borrower, and before any other resort to the SGI-Nevada Pledged
Shares or other enforcement of the security interests herein, will require the
prior approvals of the Nevada Gaming Authorities and the licensing of the
Bank, unless such licensing requirement is waived by the Nevada Gaming
Authorities upon application of the Bank.
(e) The collateral agent must maintain stock certificates or other
instruments evidencing the SGI-Nevada Pledged Shares at all times physically
within the State of Nevada at a location designated to the Nevada Board, and
shall make such stock certificates or other instruments available for
inspection by agents of the Nevada Board immediately upon request during
normal business hours.
(f) The Borrower and Silicon Gaming-Nevada, Inc. must report the Loan,
and the transactions contemplated by the Loan and Security Agreement, to the
Nevada Board after the execution thereof. In addition, the Nevada Commission
may require rescission thereof if such transactions are inimical to public
health, safety, morals, good order or general welfare of the people of the
State of Nevada or would reflect, or tend to reflect, discredit upon the State
of Nevada or the gaming industry.
(g) The Bank is subject to being called forward by the Nevada
Authorities, in their discretion, for licensing or a finding of suitability as
a lender.
13.2 Cooperation with Gaming Authorities. The Bank agrees to cooperate with
-----------------------------------
the Gaming Authorities in connection with the administration of their
regulatory jurisdiction over the Borrower and its Gaming Subsidiaries,
including, without limitation, the provision of such documents or other
information as may be requested by any such Gaming Authority relating to the
Lender, or to the Borrower or its Gaming Subsidiaries, or to the Loan and
Security Agreement.
13.3 Gaming Laws; Requisite Gaming Approvals.
---------------------------------------
-29-
<PAGE>
(a) Notwithstanding anything to the contrary therein, the Loan and
Security Agreement and the exercise of all rights, powers and remedies
thereunder, are subject to all applicable provisions of the Gaming Laws.
(b) Notwithstanding anything to the contrary contained above or in the
Loan and Security Agreement, the Bank understands and agrees that (i) the
pledge of Capital Stock of the Gaming Subsidiaries requires the prior approval
of the Gaming Authorities under the Gaming Laws (the "Pledged Securities
Requisite Gaming Approvals"), and (ii) to become effective, the Gaming
Subsidiaries Stock Restrictions require the approvals described in the
definition thereof (the "Gaming Subsidiaries Stock Restrictions Requisite
Gaming Approvals"). On the Closing Date, the Borrower and its Gaming
Subsidiaries in good faith believe that they will be able to obtain all
Pledged Securities Requisite Gaming Approvals and Gaming Subsidiaries Stock
Restrictions Requisite Gaming Approvals within 180 days after the Closing
Date. Notwithstanding anything to the contrary contained above or in the Loan
and Security Agreement, unless and until (x) the relevant Pledged Securities
Requisite Gaming Approvals have been obtained with respect to the pledge of
the Capital Stock of the Gaming Subsidiaries, the pledge of such Capital Stock
will not be required, and (y) the relevant Gaming Subsidiaries Stock
Restrictions shall not apply or be effective. To the extent the relevant
Pledged Securities Requisite Gaming Approvals are obtained with respect to one
or more of the Gaming Subsidiaries, the Capital Stock of such entity shall
promptly (and in any event within 10 days after obtaining such approvals) be
pledged pursuant to the relevant pledge agreement. Furthermore, the Borrower
and its Gaming Subsidiaries agree to use their best effect or to obtain all
Pledged Securities Requisite Gaming Approvals and Gaming Subsidiaries Stock
Restrictions Requisite Gaming approvals as promptly as possible after the
Closing Date.
(c) Notwithstanding anything to the contrary contained in subparagraph
(b) above or otherwise in this Loan and Security Agreement, the Bank
understands and agrees that the provision of subparagraph (b) shall not apply
to any Gaming Subsidiary (Restricted), its stock, its license (if granted),
and the obtaining of the Gaming Subsidiaries Stock Restrictions Requisite
Gaming Approvals or the Pledged Securities Requisite Gaming Approvals
contemplated herein with respect to such Gaming Subsidiary (Restricted).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
SILICON GAMING, INC., a California corporation
By: /s/ Thomas E. Carlson
__________________________________________
Title: Vice President & CFO
_______________________________________
SILICON VALLEY BANK
By: /s/ John China
__________________________________________
Title: Vice President
_______________________________________
-30-
<PAGE>
SCHEDULE OF EXCEPTIONS
Permitted Indebtedness (Indebtedness on the Closing Date)
- ----------------------
None, other than as disclosed in the Agreement itself
Permitted Investments (Investments on the Closing Date)
- ---------------------
None, other than as disclosed in the Agreement itself
Permitted Liens (Liens on the Closing Date)
- ---------------
13.3(c).0.1 Lighthouse Capital Partners, LP, Greenbrae, CA
UCC Filing #s: 9534660054
9609260092
9615060410
9609260093
9605760386
9533860405
9533860401
9605760327
Leased equipment, computer equipment, business machinery & equipment.
13.3(c).0.2 Copelco Capital, Park Ridge, NJ
UCC Filing #: 9635160543
Leased equipment (copy machine)
Section 4.1 (Priority Exceptions)
- -----------
None
Section 5.7 (Trade and Other Names)
- -----------
None
Section 5.8 (Litigation)
- -----------
None
-31-
<PAGE>
EXHIBIT A
Debtor: Silicon Gaming, Inc.
Secured Party: Silicon Valley Bank
The Collateral shall consist of all right, title and interest of Borrower in and
to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, design rights,
income tax refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, investment property,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any
of the foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
SILICON GAMING, INC.
By: /s/ Thomas E. Carlson
________________________________________
Title: Vice President & CFO
_____________________________________
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ________________________
FAX#: (408) _____________________ TIME: _____________________
FROM: SILICON GAMING, INC.
_______________________________________________________________________
BORROWER'S NAME
FROM: _______________________________________________________________________
AUTHORIZED SIGNER'S NAME
_______________________________________________________________________
AUTHORIZED SIGNATURE
PHONE: _______________________________________________________________________
FROM ACCOUNT #________________________ TO ACCOUNT#___________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $ ______
PRINCIPAL PAYMENT (ONLY) $ ______
INTEREST PAYMENT (ONLY) $ ______
PRINCIPAL AND INTEREST (PAYMENT) $ ______
OTHER INSTRUCTIONS: _____
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Advance confirmed by this Advance
Request; provided that those representations and warranties expressly referring
--------
to another date shall be true, correct and complete in all material respects as
of such date.
BANK USE ONLY:
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
__________________________ _______________________
Authorized Requester
_____________________________________________
Authorized Signature (Bank)
Phone # _____________________________________
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: Silicon Gaming, Inc. Bank: Silicon Valley Bank
Commitment Amount: $10,000,000.00
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $_________
2. Additions (please explain on reverse) $_________
3. TOTAL ACCOUNTS RECEIVABLE $_________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $_________
5. Balance of 50% over 90 day accounts $_________
6. Concentration Limits $_________
7. Foreign Accounts $_________
8. Governmental Accounts $_________
9. Contra Accounts $_________
10. Promotion or Demo Accounts $_________
11. Intercompany/Employee Accounts $_________
12. Other (please explain on reverse) $_________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_________
14. Eligible Accounts (#3 minus #13) $_________
15. LOAN VALUE OF ACCOUNTS (75% of #14) $_________
BALANCES
16. Maximum Loan Amount $_________
17. Total Funds Available $_________
18. Present balance owing on Line of Credit $_________
19. RESERVE POSITION (#17 minus #18) $_________
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
BANK USE ONLY
Received By:____________________
Date:________________
Reviewed By:____________________
Compliance Status: Yes / No___________________________
By: _______________________
Authorized Signer
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: SILICON GAMING, INC.
The undersigned authorized officer of Silicon Gaming, Inc. hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in
complete compliance for the period ending ______________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by the Borrower at any time or date of
determination that Borrower is not in compliance with any of the terms of the
Agreement, and that such compliance is determined not just at the date this
certificate is delivered.
Please indicate compliance status by circling Yes/No under "Complies" column.
Reporting Covenant Required Complies
- ------------------ -------- --------
Monthly financial statements Monthly within 30 days/1/ Yes No
Quarterly financial statements FQE within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
10Q and 10K Within 5 days after filing with
the SEC Yes No
Borrowing Base Certificate and
A/R & A/P Agings (if an
Advance is outstanding) Monthly within 20 days/2/ Yes No
Financial Covenant Required Actual Complies
- ------------------ -------- ------ --------
Minimum Quick Ratio (FQE or 2.00:1.00 ___:1.00 Yes No
month-end if an
Advance is outstanding)
Minimum Adjusted Net Income
FQE - 09/30/97 $(6,468,000) $___________ Yes No
FQE - 12/31/97 $(5,070,000) $___________ Yes No
FQE - 03/31/98 $(4,018,000) $___________ Yes No
FQE - 06/30/97 $(2,971,000) $___________ Yes No
FQE - 09/30/98 $( 908,000) $___________ Yes No
FQE - 12/31/98 $ 119,000 $___________ Yes No
FQE - 03/31/99 and after $ - 0 - $___________ Yes No
_________________
/1/ Only required if any Advances are outstanding during such period.
/2/ Only required if any Advances are outstanding during such period.
<PAGE>
Sincerely,
_______________________ Date:_______________
SIGNATURE
________________________
TITLE
BANK USE ONLY
Received By:____________________
Date:________________
Reviewed By:____________________
Compliance Status: Yes / No
Comments Regarding Exceptions:
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Silicon Gaming, Inc. Bank: Silicon Valley Bank
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $10,000,000.00.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: _______________.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving Line
--------------
Amount paid to Borrower directly: $________
Undisbursed Funds $________
Principal $________
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $________
$________ Loan Fee
$________ Accounts Receivables Audit
Other Charges Paid in Cash: $________
$________ UCC Search Fees
$________ UCC Filing Fees
$________ Patent Filing Fees
$________ Trademark Filing Fees
$________ Copyright Filing Fees
$________ Outside Counsel Fees and Expenses
[ESTIMATE, DO NOT LEAVE BLANK]
Total Charges Paid in Cash $________
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered ______________ the amount of any loan payment.
If the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF ____________________, 19___.
BORROWER: SILICON GAMING, INC.
____________________________________
Authorized Officer
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
Grantor: Silicon Gaming, Inc. Bank: Silicon Valley Bank
INSURANCE REQUIREMENTS. __________________________________________
("Grantor") understands that insurance coverage is required in connection with
the extending of a loan or the providing of other financial accommodations to
Grantor by Bank. These requirements are set forth in the Loan Documents. The
following minimum insurance coverages must be provided on the following
described collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be cancelled or diminished without a minimum of 10 days prior
written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Bank. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of ____________________________, 19___, or earlier. Grantor
acknowledges and agrees that if Grantor fails to provide any required insurance
or fails to continue such insurance in force, Bank may do so at Grantor's
expense as provided in the Loan and Security Agreement. The cost of such
insurance, at the option of Bank, shall be payable on demand or shall be added
to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES
THAT IF BANK SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED
PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE
LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN
ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
<PAGE>
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
____________________________, 19___.
GRANTOR: SILICON GAMING, INC.
x______________________________
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
<PAGE>
EXHIBIT 10.33
This LOAN MODIFICATION AGREEMENT, dated as of April 23, 1998 (this
"Agreement"), is between SILICON GAMING, INC., a California corporation
("Borrower")and Silicon Valley Bank ("Bank") with reference to the Loan and
Security Agreement, dated as of November 25, 1997, (as may have been amended to
the date hereof, the "Loan Agreement") between Borrower and Bank.
The parties hereto hereby agree as follows:
1. Definitions. Terms defined in the Loan Agreement are used herein
-----------
with the same meanings unless otherwise defined herein. In addition, as used
herein (the following definitions being applicable in both the singular and
plural forms:
"Indebtedness" means all indebtedness, liability, and obligations
owing by Borrower to Bank under the Loan Documents.
"Loan Documents" means the Loan Agreement and all security agreements,
guaranties, subordination agreements, and any other agreement entered into under
or in connection with the Loan Agreement.
2. Amendments.
----------
(a) Section 6.8 of the Loan Agreement is hereby amended to change the
minimum required ratio from 2.0 to 1.0 to 1.0 to 1.0.
(b) Section 7.13 of the Loan Agreement is hereby amended and restated
in its entirety as follows:
7.13 Profitability. Borrower shall not permit its Adjusted Net
-------------
Income for any fiscal quarter set forth below to be less than the correlative
amount set forth below:
Fiscal Quarter Ending Minimum Adjusted Net Income
--------------------- ---------------------------
09/30/97 $(6,468,000)
12/31/97 $(5,070,000)
03/31/98 $(6,702,000)
06/30/98 $(4,440,000)
09/30/98 and thereafter $1
(c) A new Section 6.12 is hereby added to the Loan Agreement to read
in its
1
<PAGE>
entirety as follows:
6.12 Cash Coverage. The Borrower shall (a) maintain at all times
-------------
unrestricted demand deposits with Bank in an amount at least equal to the
outstanding principal balance of the Advances and (b) maintain as at the
end of each calendar month balance sheet net cash balances at least equal
to the outstanding principal balance of the Advances.
3. Continuing Validity. Borrower (and each guarantor and pledgor
-------------------
signing below) understands and agrees that in modifying the existing
Indebtedness, Bank is relying upon Borrower's representations, warranties, and
agreements, as set forth in the Loan Documents. Except as expressly modified
pursuant to this Agreement, the terms of the Loan Documents remain unchanged and
in full force and effect. Bank's agreement to modifications to the existing
Indebtedness pursuant to this Agreement in no way shall obligate Bank to make
any future modifications to the Indebtedness. Nothing in this Agreement shall
constitute a satisfaction of the Indebtedness. It is the intention of Bank and
Borrower to retain as liable parties all makers and endorsers of Loan Documents,
unless the party is expressly released by Bank in writing. No maker, endorser,
or guarantor will be released by virtue of this Agreement. The terms of this
paragraph apply not only to this Agreement, but also to all subsequent loan
modification agreements.
4. Effectiveness. This Agreement shall become effective when the
-------------
Bank has executed a counterpart hereof and has received an executed counterpart
from the Borrower.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
BORROWER: BANK:
SILICON GAMING, INC. SILICON VALLEY BANK
/s/ Thomas E. Carlson /s/ John China
By __________________________________ By _________________________________
Vice President & CEO President
Title: ______________________________ Title: _____________________________
2
<PAGE>
Consent
-------
Each of the undersigned does hereby consent to the modifications to the
Indebtedness pursuant to the above Loan Modification Agreement, hereby ratifies
all the provisions of the Guaranty of the Indebtedness executed by it and all
the provisions of all the other Loan Documents to which it is a party and
confirms that all provisions of such documents are in full force and effect.
Dated: April 23, 1998
GUARANTORS:
SILICON GAMING-COLORADO, INC.
By /s/ Donald J. Massaro
___________________________
Title: President
_______________________
SILICON GAMING-MISSISSIPPI, INC.
By /s/ Donald J. Massaro
___________________________
Title: President
_______________________
SILICON GAMING-MISSOURI, INC.
By /s/ Donald J. Massaro
___________________________
Title: President
_______________________
SILICON GAMING-NEVADA, INC.
By /s/ Donald J. Massaro
___________________________
Title: President
_______________________
SILICON GAMING-NEW JERSEY, INC.
By /s/ Donald J. Massaro
___________________________
Title: President
_______________________
3
<PAGE>
EXHIBIT 10.34
PLEDGE AGREEMENT
----------------
This PLEDGE AGREEMENT ("Agreement"), dated as of December __, 1997 is
---------
made by SILICON GAMING, INC., a California corporation, as Grantor, in favor of
and for the benefit of Silicon Valley Bank as Secured Party under the Loan and
Security Agreement hereafter referred to, with reference to the following facts:
RECITALS
--------
A. Pursuant to the Loan and Security Agreement dated as of November 25,
1997, among Silicon Gaming, Inc., a California corporation ("Borrower") and
--------
Silicon Valley Bank, (as such agreement may from time to time be extended,
modified, renewed, restated, supplemented or amended, the "Loan and Security
-----------------
Agreement"), the Secured Party has agreed to extend certain credit facilities to
- ---------
Borrower.
B. The Loan and Security Agreement provides, as a condition precedent to
the Secured Party's obligation to extend credit facilities to Borrower after the
Closing Date, that Grantor shall enter into this Agreement, and shall pledge
certain Pledged Collateral to Secured Party, all under the terms and conditions
set forth in this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in order to induce the Secured Party to extend credit
facilities to Borrower under the Loan and Security Agreement, and for other good
and valuable consideration, the receipt and adequacy of which hereby are
acknowledged, Grantor hereby represents, warrants, covenants, agrees, and
pledges as follows:
1. Definitions. The following terms shall have the meanings respectively
-----------
set forth after each:
"Agreement" means this Pledge Agreement, and any extensions,
---------
modifications, renewals, restatements, supplements or amendments hereof.
"Certificates" means all certificates, instruments or other documents
------------
now or hereafter representing or evidencing any Pledged securities.
"Gaming Authorities" means any Governmental Body that holds
------------------
regulatory, licensing or permit authority over gaming activities conducted by
the Borrower or its Gaming Subsidiaries within its jurisdiction.
"Gaming Laws" means all laws and regulations pursuant to which any
-----------
Gaming Authority possesses regulatory, licensing or
<PAGE>
permit authority over gaming activities conducted by the Borrower or its Gaming
Subsidiaries within its jurisdiction.
"Gaming Subsidiaries" means any Subsidiary that is subject to the
-------------------
regulatory, licensing or permit authority and jurisdiction of any Gaming
Authority.
"Gaming Subsidiaries Stock Restrictions" means the negative pledge
--------------------------------------
(e.g., the agreement not to encumber), and the restrictions on transfers of the
capital stock of the Borrower's Gaming Subsidiaries, but in each case only to
the extent such negative pledge or restrictions require the approval of any
Gaming Authority pursuant to the Gaming Laws.
"Gaming Subsidiaries Stock Restrictions Requisite Gaming Approvals"
-----------------------------------------------------------------
has the meaning set forth in Section 3.3 hereof.
"Obligations" has the meaning set forth in the Loan and Security
-----------
Agreement.
"Pledged Collateral" means any and all property of Grantor now or
------------------
hereafter pledged and delivered to Secured Party, and includes without
limitation the Pledged Securities, any Certificates representing or evidencing
the same, any and all proceeds and products of any of the foregoing, and any and
all collections, dividends, distributions, redemption payments, liquidation
payments, interest or premiums with respect to any of the foregoing.
"Pledged Securities" means (i) 100% of the shares of the issued and
------------------
outstanding capital stock of all existing Gaming Subsidiaries, which existing
Gaming Subsidiaries are listed on Schedule 1 hereto, except Silicon Gaming-
----------
Missouri, (ii) any and all securities now or hereafter issued in substitution,
exchange or replacement therefor, or with respect thereto, (iii) any and all
warrants, options or other rights to subscribe to or acquire any additional
capital stock of the existing Subsidiaries listed on Schedule 1 hereto, (iv) any
----------
and all additional capital stock of the existing Subsidiaries listed on Schedule
--------
1 hereto, and (v) any and all equity interests and the Certificates or other
- -
written evidence representing such equity interests and any interest of Grantor
in the entries on the books of any financial intermediary pertaining thereto
hereafter acquired by Grantor in any future Gaming Subsidiary.
"Secured Party" means Silicon Valley Bank.
-------------
"Pledged Shares" has the meaning set forth in Section 3.1(c) hereof.
--------------
-2-
<PAGE>
2. Incorporation of Representations, Warranties, Covenants and other
-----------------------------------------------------------------
Provisions of Loan Documents. This Agreement is one of the Loan Documents
- ----------------------------
referred to in the Loan and Security Agreement. All representations,
warranties, affirmative and negative covenants and other provisions contained in
any Loan Document that are applicable to Loan Documents generally are fully
applicable to this Agreement and are incorporated herein by this reference as
though set forth in full. Grantor further represents and warrants that, other
than as permitted under the Loan and Security Agreement, Grantor has full title
to the Pledged Collateral, free and clear of any Lien, security interest,
encumbrance or claim.
3. Intercreditor Agreement. Notwithstanding any contrary provision
-----------------------
contained herein, this Agreement is subject to that certain Intercreditor
Agreement dated as of December ___, 1997, by and between Silicon Valley Bank and
B III Capital Partners, L.P., a Delaware limited partnership.
4. Gaming Restrictions.
-------------------
4.1 Acknowledgement of Gaming Restrictions. The Secured Party
--------------------------------------
acknowledges that pursuant to the Gaming Laws:
(a) Approvals from the Gaming Authorities are required for the
Secured Party to acquire control (as defined in the Gaming Laws) of the Grantor.
(b) The disposition of collateral consisting of gaming devices,
including slot machines, cashless wagering systems and associated equipment (as
those terms are defined in the Gaming Laws) is subject to the requirements of
the Gaming Laws, before foreclosure on, taking possession of, or other
disposition of such devices.
(c) The pledge and disposition by the Borrower of the capital
stock of Silicon Gaming-New Jersey, Inc., Silicon Gaming-Missouri, Inc., Silicon
Gaming-Nevada, Inc., Silicon Gaming-Mississippi, Inc., and Silicon Gaming-
Colorado, Inc. (the "Pledged Shares"), and any restrictions on the transfer of
and agreements not to encumber the Pledged Shares, require the prior approval of
the appropriate Gaming Authorities. Any pledge or disposition of the Pledged
Shares, and any restrictions on transfer or agreements not to encumber such
Pledged Shares, are void without such prior approvals.
(d) Any foreclosure on or transfer of a possessory security
interest in or other disposition of the Pledged Shares, except a transfer back
to the Grantor, and before
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<PAGE>
any other resort to the Pledged Shares or other enforcement of the security
interests herein, will require the prior approvals of the appropriate Gaming
Authorities and the licensing of the Secured Party, unless such licensing
requirement is waived by the appropriate Gaming Authorities upon application of
the Secured Party.
(e) The collateral agents must maintain stock certificates or
other instruments evidencing the Pledged Shares at all times physically within
the various states in which the Gaming Subsidiaries are licensed, at a location
designated to the Gaming Authorities, and shall make such stock certificates or
other instruments available for inspection by agents of the Gaming Authorities
immediately upon request during normal business hours.
(f) The Grantor and Silicon Gaming, Inc. must report the Loan,
and the transactions contemplated by the Loan and Security Agreement, to the
Gaming Authorities after the execution thereof. In addition, the Gaming
Authorities may require rescission thereof if such transactions are inimical to
public health, safety, morals, good order or general welfare of the people of
the state or would reflect, or tend to reflect, discredit upon the state or the
gaming industry.
(g) The Secured Party is subject to being called forward by the
Gaming Authorities, in their discretion, for licensing or a finding of
suitability as a lender.
4.2 Cooperation with Gaming Authorities. The Secured Party agrees to
-----------------------------------
cooperate with the Gaming Authorities in connection with the administration of
their regulatory jurisdiction over the Borrower and its Gaming Subsidiaries,
including, without limitation, the provision of such documents or other
information as may be requested by any such Gaming Authority relating to the
Lender, or to the Borrower or its Gaming Subsidiaries, or to the Loan and
Security Agreement.
4.3 Gaming Laws; Requisite Gaming Approvals.
---------------------------------------
(a) Notwithstanding anything to the contrary therein, the Loan
and Security Agreement and the exercise of all rights, powers and remedies
thereunder, are subject to all applicable provisions of the Gaming Laws.
(b) Notwithstanding anything to the contrary contained above or
in the Loan and Security Agreement, the Secured Party understands and agrees
that (i) the pledge of, and grant of, a possessory security interest in the
Capital Stock of the Gaming Subsidiaries requires the prior approval of the
Gaming Authorities
-4-
<PAGE>
under the Gaming Laws (the "Pledged Securities Requisite Gaming Approvals"), and
(ii) to become effective, the Gaming Subsidiaries Stock Restrictions require the
approvals described in the definition thereof (the "Gaming Subsidiaries Stock
Restrictions Requisite Gaming Approvals"). On the Closing Date, the Borrower and
its Gaming Subsidiaries in good faith believe that they will be able to obtain
all Pledged Securities Requisite Gaming Approvals and Gaming Subsidiaries Stock
Restrictions Requisite Gaming Approvals within 180 days after the Closing Date.
Notwithstanding anything to the contrary contained above or in the Loan and
Security Agreement, unless and until (x) the relevant Pledged Securities
Requisite Gaming Approvals have been obtained with respect to the pledge of the
Capital Stock of the Gaming Subsidiaries, the pledge of such Capital Stock will
not be required, and (y) the relevant Gaming Subsidiaries Stock Restrictions
shall not apply or be effective. To the extent the relevant Pledged Securities
Requisite Gaming Approvals are obtained with respect to one or more of the
Gaming Subsidiaries, the Capital Stock of such entity shall promptly (and in any
event within 10 days after obtaining such approvals) be pledged pursuant to the
relevant pledge agreement. Furthermore, the Borrower and its Gaming Subsidiaries
agree to use their best efforts to obtain all Pledged Securities Requisite
Gaming Approvals and Gaming Subsidiaries Stock Restrictions Requisite Gaming
approvals as promptly as possible after the Closing Date.
(c) Notwithstanding anything to the contrary contained in
subparagraph (b) above in the Loan and Security Agreement, the Secured Party
understands and agrees that the provision of paragraph (b) shall not apply to
the Borrower's subsidiary, Silicon Gaming-Missouri, Inc., its stock, its license
(if granted), and the obtaining of the Gaming Subsidiaries Stock Restrictions
Requisite Gaming Approvals or the Pledge Securities Requisite Gaming Approvals
contemplated therein.
-5-
<PAGE>
4.4 Gaming Collateral. Subject to any release of any Pledged Shares,
-----------------
the Secured Party or any collateral agent acting on its behalf, shall, to the
extent required by the Gaming Laws, retain possession of all pledged collateral
consisting of the Pledged Shares within the state in which the Gaming Subsidiary
is licensed, at a location designated to the state Gaming Authorities.
5. Creation of Security Interest.
-----------------------------
5.1 Pledge of Pledged Collateral. Grantor hereby pledges an`d grants
----------------------------
to Secured Party a security interest in and to all Pledged Collateral for the
benefit of Secured Party as Security for the Obligations specified in Section 5
---------
below, together with all products, proceeds, dividends, redemption payments,
liquidation payments, instruments and other Property, and any and all rights,
titles, interests, privileges, benefits and preferences appertaining or
incidental to the Pledged Collateral. Grantor represents and warrants that the
security interests and pledge granted herein are in compliance with all
applicable Laws, including without limitation all Gaming Laws. The security
interest and pledge created by this Section 4.1 shall continue in effect so long
-----------
as any Obligation is owed to Secured Party or any commitment to extend credit to
Borrower remains outstanding from Secured Party.
5.2 Delivery of Certain Pledged Collateral. After the Closing Date,
--------------------------------------
Borrower shall deliver to the Secured Party the Certificates evidencing 100% of
the capital stock of the existing Subsidiaries listed on Schedule 1 hereto,
----------
except Silicon Gaming - Missouri, Inc. within 10 days after obtaining the
Requisite Gaming Approvals authorizing such delivery. Following the Closing
Date, subject to compliance with Gaming Laws, additional Pledged Collateral may
from time to time be delivered to Secured Party by agreement between Secured
Party and Borrower. All Certificates at any time delivered to Secured Party for
its benefit shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to Secured Party. Secured Party shall hold
all Certificates pledged hereunder pursuant to this Agreement unless and until
released in accordance with Section 4.3 of this Agreement.
-----------
5.3 Release of Pledged Collateral. Pledged Collateral that is
-----------------------------
required to be released from the pledge and security interest created by this
Agreement in order to permit Grantor to consummate any disposition of stock or
assets, merger, consolidation, amalgamation, acquisition, or dividend payment or
distribution that Grantor is entitled to consummate pursuant to
-6-
<PAGE>
the Loan Documents, if any, shall be so released by Secured Party at such times
and to the extent necessary to permit Grantor to consummate such permitted
transactions promptly following the Secured Party's receipt of written request
therefor by Grantor specifying the purpose for which release is requested and
such further certificates or other documents as Secured Party reasonably shall
request in its discretion to confirm that Grantor is permitted to consummate
such permitted transaction and to confirm Secured Party's replacement lien on
appropriate collateral. Any request for any permitted release shall be
transmitted to Secured Party. Subject to compliance with Gaming Laws, Secured
Party, at the expense of Grantor, promptly shall redeliver all certificates and
shall execute and deliver to Grantor all documents requested by Grantor that are
reasonably necessary to release Pledged Collateral of record whenever Grantor
shall be entitled to the release thereof in accordance with this Section 4.3.
-----------
-7-
<PAGE>
6. Security for Obligations. This Agreement and the pledge and security
------------------------
interests granted herein secure the prompt payment, in full in cash, and full
performance of, all Obligations, whether for principal, interest, fees, expenses
or otherwise, including, without limitation, all Obligations now or hereafter
existing under this Agreement, and all interest that accrues on all or any part
of any of the Obligations after the filing of any petition or pleading for a
proceeding under any insolvency law.
7. Further Assurances.
------------------
7.1 Subject to compliance with applicable Gaming Laws, Grantor agrees
that at any time, and from time to time, at its own expense Grantor will
promptly execute, deliver and file or record all further financing statements,
instruments and documents, and will take all further actions, including, without
limitation, causing the Gaming Subsidiaries whose capital stock or other
securities are pledged hereunder to so execute, deliver, file or take other
actions, that may be necessary or desirable, or that Secured Party reasonably
may request, in order to perfect and protect any pledge or security interest
granted hereby or to enable Secured Party to exercise and enforce its rights and
remedies hereunder with respect to any Pledged Collateral and to preserve,
protect and maintain the Pledged Collateral, including, without limitation,
payment of all taxes, assessments and other charges imposed on or relating to
the Pledged Collateral. Subject to compliance with applicable Gaming Laws,
Grantor hereby consents and agrees that the issuers of, or obligors on, the
Pledged Collateral, or any registrar or transfer agent or trustee for any of the
Pledged Collateral, shall be entitled to accept the provisions of this Agreement
as conclusive evidence of the right of Secured Party to effect any transfer or
exercise any right hereunder, notwithstanding any other notice or direction to
the contrary heretofore or hereafter given by Grantor or any other Person to
such issuers or such obligors or to any such registrar or transfer agent or
trustee.
7.2 Grantor agrees to assist Secured Party in obtaining all approvals
of any Gaming or other Governmental Authority that are required by law for or in
connection, with any action or transaction contemplated by this Agreement and,
at Secured Party's request after and during the continuance of an Event of
Default, to prepare, sign and file with the appropriate Gaming Authority the
transferor's portion of any application or applications for consent to the
transfer of control thereof necessary or appropriate under applicable Gaming
Laws for approval of any sale or transfer of the Pledged Collateral pursuant to
the exercise of Secured Party's remedies hereunder and under the Loan
-8-
<PAGE>
Documents.
8. Voting Rights; Dividends, etc. So long as no Event of Default under
------------------------------
the Loan and Security Agreement occurs and remains continuing:
8.1 Voting Rights. Grantor shall be entitled to exercise any and all
-------------
voting and other consensual rights pertaining to the Pledged Securities, or any
part thereof, for any purpose not inconsistent with the terms of this Agreement,
the Loan and Security Agreement, or the other Loan Documents.
8.2 Interest, Dividend and Distribution Rights. Grantor shall be
------------------------------------------
entitled to receive and to retain and use any and all interest, premiums,
dividends or distributions paid in respect of the Pledged Collateral; provided,
--------
however, that any and all such dividends or distributions received in the form
- -------
of capital stock shall be, and the Certificates representing such capital stock
forthwith shall be delivered to Secured Party to hold as Pledged Collateral and
shall, if received by Grantor, be received in trust for the benefit of Secured
Party, be segregated from the other property of Grantor, and forthwith be
delivered to Secured Party as Pledged Collateral in the same form as so received
(with any necessary endorsements). If Secured Party causes any Certificates to
be registered in the name of Secured Party, Secured Party agrees to grant
applicable proxies with respect to such Certificates in favor of Grantor.
9. Rights During Event of Default. Following the occurrence and during
------------------------------
the continuance of any Event of Default, but subject to compliance with Gaming
Laws:
9.1 Voting and Distribution Rights. At the option of Secured Party,
------------------------------
all rights of Grantor to exercise the voting and other consensual rights which
it would otherwise be entitled to exercise pursuant to Section 7.1 above, and to
-----------
receive the interest, premiums, dividends and distributions which it would
otherwise be authorized to receive and retain pursuant to Section 7.2 above,
-----------
shall cease, and all such rights shall thereupon become vested in Secured Party
who shall thereupon have the sole right to exercise such voting and other
consensual rights and to receive and to hold as Pledged Collateral such
dividends and distributions.
9.2 Distribution Held in Trust. All dividends and other
--------------------------
distributions which are received by Grantor contrary to the provisions of this
Agreement shall be received in trust for the benefit of Secured Party, shall be
segregated from other funds of Grantor, and forthwith shall be paid over to
Secured Party as
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<PAGE>
Pledged Collateral in the same form as so received (with any necessary
endorsements).
9.3 Irrevocable Proxy. Grantor hereby revokes all previous proxies
-----------------
with regard to the Pledged Securities and, to the extent allowable under
applicable Law (including, without limitation, applicable Gaming Laws), appoints
Secured Party as its proxy holder to attend and vote at any and all meetings of
the shareholders of the Gaming Subsidiaries whose capital stock or other
securities are pledged hereunder, and any adjournments thereof, held on or after
the date of the occurrence of an Event of Default and prior to the termination
of this proxy and to execute any and all written consents of shareholders of
such corporations executed on or after the date of the occurrence of an Event of
Default and prior to the termination of this proxy, with the same effect as if
Grantor had personally attended the meetings or had personally voted its shares
or had personally signed the written consents; provided, however, that the proxy
-------- -------
holder shall have rights hereunder only upon the occurrence and during the
continuance of an Event of Default under the Loan and Security Agreement and
that such rights shall be subject to compliance with all applicable Gaming Laws.
Grantor hereby authorizes Secured Party, following the occurrence of an Event of
Default and the acceleration of the Obligations under the Loan and Security
Agreement, to substitute another person as the proxy holder and, thereupon to
file this proxy and the substitution instrument with the secretary of the
appropriate corporation. This proxy is coupled with an interest and is
irrevocable until such time as no commitment to extend credit to Borrower
remains outstanding from Secured Party and until such time as all Obligations
have been paid and performed in full.
10. Transfers and Other Liens. Subject to compliance with Gaming Laws,
-------------------------
Grantor agrees that, except as specifically permitted under the Loan Documents,
it will not (i) sell, assign, exchange, transfer or otherwise dispose of, or
contract to sell, assign, exchange, transfer or otherwise dispose of, or grant
any option with respect to, any of the Pledged Collateral, (ii) create or permit
to exist any Lien upon, or with respect to, any of the Pledged Collateral, (iii)
take any action with respect to the Pledged Collateral which is inconsistent
with the provisions or purposes of this Agreement or any other Loan Document or
(iv) without the consent of Bank which consent will not be unreasonably
withheld, and at any time that an Event of Default shall have occurred and be
continuing, transfer the Pledged Securities between and among the Borrower and
its Subsidiaries.
11. Secured Party Appointed Attorney-In Fact. Subject to compliance with
----------------------------------------
Gaming Laws, Grantor hereby irrevocably appoints
-10-
<PAGE>
Secured Party as Grantor's attorney-in-fact, with full authority in the place
and stead of Grantor, and in the name of Grantor, or otherwise, from time to
time, in Secured Party's sole and absolute discretion to do any of the following
acts or things: (a) to do all acts and things and to execute all documents
necessary or advisable to perfect and continue perfected the security interests
created by this Agreement and to preserve, maintain and protect the Pledged
Collateral; (b) to do any and every act which Grantor is obligated to do under
this Agreement; (c) to prepare, sign, file and record, in Grantor's name, any
financing statement covering the Pledged Collateral; and (d) to endorse and
transfer the Pledged Collateral upon foreclosure by Secured Party; provided,
--------
however, that Secured Party shall be under no obligation whatsoever to take
- -------
any of the foregoing actions, and Secured Party shall not have any liability or
responsibility for any act (other than Secured Party's own gross negligence or
willful misconduct) or omission taken with respect thereto. Grantor hereby
agrees to repay immediately upon demand all reasonable costs and expenses
incurred or expended by Secured Party in exercising any right or taking any
action under this Agreement, together with interest as provided for in the Loan
and Security Agreement.
12. Secured Party May Perform Obligations. If Grantor fails to perform
-------------------------------------
any Obligation contained herein, Secured Party, subject to compliance with
applicable Gaming Laws, may, but without any obligation to do so and without
notice to or demand upon Grantor, perform the same and take such other action as
Secured Party may deem necessary or desirable to protect the Pledged Collateral
or Secured Party's security interests therein, Secured Party being hereby
authorized (without limiting the general nature of the authority hereinabove
conferred) to pay, purchase, contest and compromise any Lien which in the
reasonable judgment of Secured Party appears to be prior or superior to Secured
Party's security interests, and in exercising any such powers and authority to
pay necessary expenses, employ counsel and pay reasonable attorneys' fees.
Grantor hereby agrees to repay immediately upon demand all sums so expended by
Secured Party, together with interest from the date of expenditure at the rates
provided for in the Loan and Security Agreement. Secured Party shall not be
under any duty or obligation to (i) preserve, maintain or protect the Pledged
Collateral or any of Grantor's rights or interest therein, (ii) exercise any
voting rights with respect to the Pledged Collateral, or (iii) make or give any
notices of default, presentments, demands for performance, notices of
nonperformance or dishonor, protests, notices of protest or notice of any other
nature whatsoever in connection with the Pledged Collateral on behalf of Grantor
or any other Person having any interest therein; and Secured Party does not
assume and shall not be obligated to perform the obligations of Grantor, if any,
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<PAGE>
with respect to the Pledged Collateral.
13. Reasonable Care. Secured Party shall be deemed to have exercised
---------------
reasonable care in the custody and preservation of the Pledged Collateral in its
possession if the Pledged Collateral is accorded treatment substantially similar
to that which Secured Party accords its own property, it being understood that
Secured Party shall not have any responsibility for (i) ascertaining or taking
action with respect to maturities, calls, conversions, exchanges, tenders or
other matters relative to any Pledged Collateral, whether or not Secured Party
has or is deemed to have knowledge of such matters, or (ii) taking any necessary
steps to preserve rights against any Person with respect to any Pledged
Collateral. Secured Party shall comply with the conditions, if any, imposed by
any Gaming Authority in connection with the approvals of the security interest
granted hereunder by Grantor, including, without limitation, any conditions
requiring Secured Party to permit representatives of Gaming Authorities to
inspect such securities and Certificates. Secured Party shall not surrender
possession of any Pledged Collateral to any party other than Grantor without the
prior approval of the applicable Gaming Authority or as otherwise permitted by
applicable Gaming Laws.
14. Events of Default and Remedies.
------------------------------
14.1 Rights Upon Event of Default. Upon the occurrence and during the
----------------------------
continuance of an Event of Default under the Loan and Security Agreement,
Grantor shall be in default hereunder and, subject to compliance with applicable
Gaming Laws, Secured Party shall have in any jurisdiction where enforcement is
sought, in addition to all other rights and remedies that Secured Party may have
under this Agreement and under applicable law or in equity, all of its rights
and remedies as a secured party under the Uniform Commercial Code ("UCC") as
enacted in any such jurisdiction (irrespective of whether the UCC by its terms
applies to the affected items of collateral), and in addition, subject to
compliance with Gaming Laws, the following rights and remedies, all of which may
be exercised with or without further notice to Grantor:
(a) to notify any issuer of any Pledged Collateral that the same
has been pledged to Secured Party and that all dividends and other payments
thereon are to be made directly and exclusively to Secured Party; to renew,
extend, modify, amend, accelerate, accept partial payments on, make allowances
and adjustments and issue credits with respect to, release, settle, compromise,
compound, collect or otherwise liquidate, on terms acceptable to Secured Party,
in whole or in part, the Pledged Collateral and any amounts owing thereon to
-12-
<PAGE>
enter into any other agreement relating to or affecting the Pledged Collateral;
and to give all consents, waivers and ratification with respect to the Pledged
Collateral and exercise all other rights (including voting rights), powers and
remedies and otherwise act with respect thereto as if Secured Party were the
owner thereof;
(b) to enforce payment and prosecute any action or proceeding
with respect to any and all of the Pledged Collateral and take or bring, in
Secured Party's name(s) or in the name of Grantor, all steps, actions, suits or
proceedings deemed by Secured Party necessary or desirable to effect collection
of or to realize upon the Pledged Collateral;
(c) in accordance with applicable law (including, without
limitation, applicable Gaming Laws), to take possession of the Pledged
Collateral with or without judicial process;
(d) to endorse, in the name of Grantor, all checks, notes,
drafts, money orders, instruments and other evidences of payment relating to the
Pledged Collateral;
(e) to transfer any or all of the Pledged Collateral into the
name of Secured Party or its nominee or nominees: and
(f) in accordance with all applicable laws (including, without
limitation, applicable Gaming Laws), to foreclose the liens and security
interests created under this Agreement or under any other agreement relating to
the Pledged Collateral by any available judicial procedure or without judicial
process, and to sell, assign or otherwise dispose of the Pledged Collateral or
any part thereof, either at public or private sale or at any broker's board or
securities exchange, in lots or in bulk, for cash, on credit or on future
delivery, or otherwise, with or without representations or warranties, and upon
such terms as shall be acceptable to Secured Party;
all at the sole option of and in the sole discretion of Secured Party.
14.2 Notice of Sale. Secured Party shall give Grantor at least five
--------------
(5) days' written notice of sale of all or any part of the Pledged Collateral.
Subject to compliance with Gaming Laws, any sale of the Pledged Collateral shall
be held at such time or times and at such place or places as Secured Party may
determine in the exercise of its sole and absolute discretion. Secured Party
may bid (which bid may be, in whole or in part, in the form of cancellation of
Obligations) for, and purchase for the
-13-
<PAGE>
account of, Secured Party or any nominee of Secured Party the whole or any part
of the Pledged Collateral. Secured Party shall not be obligated to make any sale
of the Pledged Collateral if it shall determine not to do so regardless of the
fact that notice of sale of the Pledged Collateral may have been given. Secured
Party may, without notice or publication, adjourn the sale from time to time by
announcement at the time and place fixed for sale, and such sale may, without
further notice, be made at the time and place to which the same was so
adjourned.
14.3 Private Sales. Subject to compliance with Gaming Laws, upon the
-------------
occurrence and during the continuance of an Event of Default under the Loan and
Security Agreement, whether or not any of the Pledged Collateral has been
effectively registered under the Securities Act of 1933, as amended, or other
applicable laws, Secured Party may, in its sole and absolute discretion, sell
all or any part of the Pledged Collateral at private sale in such manner and
under such circumstances as Secured Party may deem necessary or advisable in
order that the sale may be lawfully conducted. Without limiting the foregoing,
Secured Party may (i) approach and negotiate with a limited number of potential
purchasers, and (ii) restrict the prospective bidders or purchasers to Persons
who will represent and agree that they are purchasing the Pledged Collateral for
their own accounts for investment and not with a view to the distribution or
resale thereof. In the event that any of the Pledged Collateral is sold at
private sale, Grantor agrees that if the Pledged Collateral is sold for a price
which Secured Party in good faith believes to be reasonable, then (A) the sale
shall not be deemed to be commercially unreasonable by reason of price, (B)
Grantor shall not be entitled to a credit against the Obligations in an amount
in excess of the purchase price, and (C) Secured Party shall not incur any
liability or responsibility to Grantor in connection therewith, notwithstanding
the possibility that a substantially higher price might have been realized at a
public sale. Grantor recognizes that a ready market may not exist for Pledged
Securities which are not regularly traded on a recognized securities exchange or
in another recognized market, and that a sale by Secured Party of any such
Pledged Securities for an amount substantially less than a pro rata share of the
fair market value of the issuer's assets minus liabilities may be commercially
reasonable in view of the difficulties that may be encountered in attempting to
sell a large amount of Pledged Securities or Pledged Securities that are
privately traded. To the maximum extent permitted by law, Grantor hereby waives
any claims against Secured Party arising because the price at which any
Collateral may have been sold at such a private sale was less than the price
that might have been obtained at a public sale, as may be commercially
reasonable.
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<PAGE>
14.4 Title of Purchasers. Subject to applicable requirements of law
-------------------
(including, without limitation, applicable Gaming Laws), upon consummation of
any sale of Pledged Collateral pursuant to this Section 13, Secured Party shall
have the right to assign, transfer and deliver to the purchaser or purchasers
thereof the Pledged Collateral so sold. Each such purchaser at any such sale
shall hold the Pledged Collateral sold absolutely free from any claim or right
on the part of Grantor, and Grantor hereby waives (to the extent permitted by
law) all rights of redemption, stay and appraisal which it now has or may at any
time in the future have under any rule of law or statute now existing or
hereafter enacted.
14.5 Disposition of Proceeds of Sale. The net cash proceeds resulting
-------------------------------
from the collection, liquidation sale or other disposition of the Pledged
Collateral shall be applied, first, to the reasonable costs and expenses
-----
(including reasonable attorneys' fees) of retaking, holding, storing, processing
and preparing for sale, selling, collecting and liquidating the Pledged
Collateral, and the like; second, to the satisfaction of all Obligations, with
------
application as to any particular Obligations to be in the order set forth in the
Loan and Security Agreement or other Loan Documents; third, to all other
-----
indebtedness secured hereby in such order and manner as Secured Party in its
sole and absolute discretion may determine, and fourth, if any balance remains,
------
to Grantor or Grantor's designee.
15. Regulatory Matters. Secured Party acknowledges and agrees that:
------------------
(a) In the event that Secured Party exercises one or more of the
remedies set forth in Section 13 of this Agreement, including but not limited to
registration of the Pledged Collateral pursuant to applicable Gaming Laws, such
exercise of remedies would be deemed a separate transfer of the Pledged
Collateral and would require the separate and prior approval of the applicable
Gaming Authority pursuant to applicable Gaming Laws as in effect on the date
hereof.
(b) The approval by the applicable Gaming Authority of this Agreement
shall not act or be construed as the approval, either express or implied, for
Secured Party to take any actions or steps provided for in this Agreement for
which prior approval of the Gaming Authority is required, without first
obtaining such prior and separate approval of the Gaming Authority to the extent
then required by applicable law.
16. Continuing Effect. This Agreement shall remain in full
-----------------
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<PAGE>
force and effect and continue to be effective should any petition be filed by or
against Grantor for liquidation or reorganization should Grantor become
insolvent or make an assignment for the benefit of creditors or should a
receiver or trustee be appointed for all or any significant part of Grantor's
assets.
17. Covenant Not to Issue Uncertified Securities. Grantor represents and
--------------------------------------------
warrants to Secured Party that all of the capital stock of each of the Gaming
Subsidiaries is and will be in certificated form (as contemplated by the Uniform
Commercial Code as enacted in the applicable jurisdiction), and, subject to
compliance with applicable Gaming Laws, covenants to Secured Party that it will
not cause or permit such Gaming Subsidiaries to issue any capital stock in
uncertificated form or seek to convert all or any part of its existing capital
stock into uncertificated form (as contemplated by the Uniform Commercial Code
as enacted in the applicable jurisdiction). The foregoing representations,
warranties and covenants shall survive the execution and delivery of this
Agreement.
18. Covenant Not to Dilute Interests of Secured Party in Pledged
------------------------------------------------------------
Securities. Subject to compliance with applicable Gaming Laws and except as
- ----------
otherwise permitted by the Loan and Security Agreement, Grantor represents,
warrants and covenants to Secured Party that it will not at any time cause or
permit the Gaming Subsidiaries to issue any additional capital stock, or any
warrants, options or other rights to acquire any additional capital stock, if
the effect thereof would be to dilute in any way the interests of Secured Party
in any Pledged Securities or any corporation whose securities constitute Pledged
Securities.
19. Indemnity. Grantor agrees to indemnify and hold harmless Secured
---------
Party, and each of them, from and against any and all claims, demands, losses,
judgments and liabilities (including without limitation liabilities for
penalties) of whatsoever kind or nature, and to reimburse Secured Party for all
costs and expenses, including without limitation reasonable attorneys' fees and
expenses and/or costs and expenses associated with obtaining required approvals
of any Gaming Authority, arising out of or in connection with this Agreement or
the exercise by Secured Party of any right or remedy granted to it hereunder or
under the Loan Documents, other than arising from the gross negligence or
willful misconduct of Secured Party. In no event shall Secured Party be liable
for any matter or thing in connection with this Agreement other than to account
for monies actually received by it in accordance with the terms hereof. If and
to the extent that the agreements of Grantor under this Section 18 are
----------
unenforceable for any reason, Grantor hereby agrees to make the maximum
contribution to the payment and satisfaction as such obligations which is
-16-
<PAGE>
permissible under applicable law.
20. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with and governed by the laws of the State of California and in
accordance with applicable Gaming Laws.
21. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which, taken
together, shall constitute one and the same agreement.
-17-
<PAGE>
22. Additional Powers and Authorization. Notwithstanding anything
-----------------------------------
contained herein to the contrary, the Secured Party may employ agents, trustees,
or attorneys-in-fact and, subject to compliance with applicable Gaming Laws, may
vest any of them with any property (including, without limitation, the Pledged
Collateral), title, right or power deemed necessary for the purposes of such
appointment.
IN WITNESS WHEREOF, Grantor has caused this Agreement to be duly
executed as of the date first above written.
SILICON GAMING, INC., a California corporation
/s/ Thomas E. Carlson
By ________________________________
President
Title: ____________________________
Address for Grantor:
Silicon Gaming, Inc.
2800 West Bayshore Road
Palo Alto, CA 94303
Telecopier: (650) 842-9001
Telephone: (650) 842-9000
ACCEPTED:
SILICON VALLEY BANK
as Secured Party
/s/ John China
By ________________________________
President
Title: ____________________________
-18-
<PAGE>
Schedule 1
----------
Gaming subsidiaries
Silicon Gaming-New Jersey, Inc., a New Jersey corporation
Silicon Gaming-Missouri, Inc., a Missouri corporation
Silicon Gaming-Nevada, Inc., a Nevada corporation
Silicon Gaming-Mississippi, Inc., a Mississippi corporation
Silicon Gaming-Colorado, Inc., a Colorado corporation
-19-
<PAGE>
Exhibit 10.35
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement is entered into as of
November 25, 1997 by and between SILICON VALLEY BANK ("Bank") and SILICON
GAMING, INC., a California corporation ("Grantor").
RECITALS
A. Bank has agreed to make certain advances of money and to extend
certain financial accommodation to Grantor (the "Loans") in the amounts and
manner set forth in that certain Loan and Security Agreement by and between Bank
and Grantor dated of even date herewith (as the same may be amended, modified or
supplemented from time to time, the "Loan Agreement"; capitalized terms used
herein are used as defined in the Loan Agreement). Bank is willing to make the
Loans to Grantor, but only upon the condition, among others, that Grantor shall
grant to Bank a security interest in certain Copyrights, Trademarks and Patents
to secure the obligations of Grantor under the Loan Agreement.
B. Pursuant to the terms of the Loan Agreement, Grantor has granted
to Bank a security interest in all of Grantor's right, title and interest,
whether presently existing or hereafter acquired, in, to and under all of the
Collateral.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, and intending to be legally bound, as collateral
security for the prompt and complete payment when due of its obligations under
the Loan Agreement, Grantor hereby represents, warrants, covenants and agrees as
follows:
AGREEMENT
To secure its obligations under the Loan Agreement, Grantor grants and
pledges to Bank a security interest in all of Grantor's right, title and
interest in, to and under its Intellectual Property Collateral (including
without limitation those Copyrights, Patents, Trademarks, Mask Works, and
pending applications for registration thereof, listed on Schedules A, B, C, and
D hereto), and including without limitation all proceeds thereof (such as, by
way of example but not by way of limitation, license royalties and proceeds of
infringement suits), the right to sue for past, present and future
infringements, all rights corresponding thereto throughout the world and all re-
issues, divisions continuations, renewals, extensions and continuations-in-part
thereof.
This security interest is granted in conjunction with the security
interest granted to Bank under the Loan Agreement. The rights and remedies of
Bank with respect to the security interest granted hereby are in addition to
those set forth in the Loan Agreement and the other Loan Documents, and those
which are now or hereafter available to Bank as a matter of law or equity. Each
right, power and remedy of Bank provided for herein or in the Loan Agreement or
any of the Loan Documents, or now or hereafter existing at law or in equity
shall be cumulative and concurrent and shall be in addition to every right,
power or remedy provided for herein and the exercise by Bank of any one or more
of the rights, powers or remedies provided for in this Intellectual Property
Security Agreement, the Loan Agreement or any of the other Loan Documents, or
now or hereafter existing at law or in
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-1-
<PAGE>
equity, shall not preclude the simultaneous or later exercise by any person,
including Bank, of any or all other rights, powers or remedies.
IN WITNESS WHEREOF, the parties have cause this Intellectual Property
Security Agreement to be duly executed by its officers thereunto duly authorized
as of the first date written above.
GRANTOR:
Address of Grantor: SILICON GAMING, INC., a California
Attn: Tom Carlson corporation
2800 West Bayshore Road
Palo Alto, CA 94303 /s/ Thomas E. Carlson
By:________________________________
Vice President & CFO
Title:_____________________________
BANK:
Address of Bank: SILICON VALLEY BANK
Attn: John China
1731 Embarcadero Road, Suite 220 /s/ John China
Palo Alto, CA 94303 By:________________________________
Vice President
Title:_____________________________
-2-
<PAGE>
EXHIBIT A
to
Security Agreements
U.S. Copyrights--Registrations:
None.
A-1
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patents Issued:
Patent Number Issue Date Title
- ------------- ---------- -----
5,643,086 July 1, 1997 Electronic Casino Gaming Apparatus
With Improved Play Capacity
B-1
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-2
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-3
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-4
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-5
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-6
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-7
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-8
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-9
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-10
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-11
<PAGE>
EXHIBIT B
to
Security Agreement
U.S. Patent Application:
Title: [*]
S/N: [*]
Filed: [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
B-12
<PAGE>
EXHIBIT C
to
Security Agreement
Trademarks (cont'd):
Trademarks:
Application Filing Registration Regn
Mark Country No. Date No. Date
- ---- ------- ----------- ------ ------------ ------
SILICON GAMING LOGO U.S. 74/727,910 9/12/95 2,076,279 7/1/97
THE SAINT JAMES CLUB U.S. 75/015,137 11/6/95
FORT KNOX U.S. 75/015,310 11/6/95
PHANTOM BELLE U.S. 75/015,319 11/6/95 2,072,704 6/17/97
RIDDLE OF THE SPHINX U.S. 75/015,136 11/6/95
BIG BUCKAROOS U.S. 75/015,313 11/6/95
SUPER SLEUTH U.S. 75/015,243 11/6/95
RADIO DAYS U.S. 75/015,141 11/6/95
SUPER SLUGGER U.S. 75/015,135 11/6/95
PENNANT FEVER U.S. 75,015,244 11/6/95
REEL RALLY U.S. 75,015,308 11/6/95
SLOT SAFARI U.S. 75,015,139 11/6/95
STRIKE IT RICH U.S. 75,015,314 11/6/95
THREE REEL ROUNDUP U.S. 75/045,730 1/17/96
RODEO ROUNDUP U.S. 75/044,903 1/18/96
ROARING ROULETTE U.S. 75/048,836 1/26/96
WIN-O-MATIC U.S. 75/138,727 17/23/96 2,098,386 9/16/97
C-1
<PAGE>
EXHIBIT C
to
Security Agreement
Trademarks (cont'd):
Application Filing Registration Regn
Mark Country No. Date No. Date
- ---- ------- ----------- ------ ------------ ------
DAZZLING DIAMONDS U.S. 75/139,982 7/23/96
KRAZY KENO U.S. 75/139,981 7/23/96 2,104,302 10/7/97
STAR SPANGLED KENO U.S. 75/157,831 8/28/96 2,094,973 9/9/97
ODYSSEY U.S. 75/165,365 9/13/96 2,113,843 11/18/97
SILICON GAMING U.S. 75/243,191 2/12/97
MORE FUN TO PLAY, U.S. 75/370,443 10/8/97
MORE FUN TO WIN
MISC. DESIGN MACHINE U.S. 75/272,009 4/9/97
CONFIGURATION
BUCCANEER GOLD U.S. 75/279,932 4/23/97
BANANA-RAMA U.S. 75/292,734 5/15/97
LADY OF FORTUNE U.S. 75/292,735 5/15/97
TOP HAT 21 U.S. 75/319,225 7/3/97
U.S. MINT U.S. 75/340,004 8/12/97
MISC. DESIGN U.S. 75/379,428 10/27/97
(VERTICAL SCREEN
CONFIGURATION)
ANCIENT TEMPLE OF U.S. not yet 12/10/97
MONEY assigned
ATM U.S. not yet 12/10/97
assigned
ARABIAN RICHES U.S. not yet 12/10/97
assigned
C-2
<PAGE>
EXHIBIT 11.1
SILICON GAMING, INC.
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net loss............................. $ 5,428 $ 5,937 $ 12,192 $ 10,599
========= ========= ======== ========
Weighted average common shares
outstanding......................... 14,159 10,979 13,866 10,837
Weighted average common shares
subject to repurchase............... (404) (784) (449) (842)
--------- --------- -------- --------
Weighted average common and
equivalent shares................. 13,755 10,195 13,417 9,995
========= ========= ======== ========
Net loss per share................. $ (0.39) $ (0.58) $ (0.91) $ (1.06)
========= ========= ======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,776
<SECURITIES> 0
<RECEIVABLES> 7,964
<ALLOWANCES> 200
<INVENTORY> 13,866
<CURRENT-ASSETS> 29,598
<PP&E> 13,390
<DEPRECIATION> 4,502
<TOTAL-ASSETS> 43,683
<CURRENT-LIABILITIES> 11,959
<BONDS> 23,013
0
1,666
<COMMON> 56,160
<OTHER-SE> (51,874)
<TOTAL-LIABILITY-AND-EQUITY> 43,683
<SALES> 12,287
<TOTAL-REVENUES> 12,287
<CGS> 9,026
<TOTAL-COSTS> 9,026
<OTHER-EXPENSES> 13,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,363
<INCOME-PRETAX> (12,175)
<INCOME-TAX> 17
<INCOME-CONTINUING> (12,192)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,192)
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
